-----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, NlsWsGkdysfU0iDHoTQoSwZNXTTcVLD6jrPcgqIKP7AUrla/IoJ0KA7G3AtusqOh 20AHu3vlvp9aUhFLpMJ44w== 0001047469-99-035739.txt : 19990915 0001047469-99-035739.hdr.sgml : 19990915 ACCESSION NUMBER: 0001047469-99-035739 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUMINANT WORLDWIDE CORP CENTRAL INDEX KEY: 0001087322 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 752783690 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-80161 FILM NUMBER: 99711527 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 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 1999 REGISTRATION NO. 333-80161 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ PRE-EFFECTIVE AMENDMENT NO. 7 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ LUMINANT WORLDWIDE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 7379 75-2783690 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
------------------------------ 4100 SPRING VALLEY ROAD, SUITE 750 DALLAS, TEXAS 75244 (972) 404-5167 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ GUILLERMO G. MARMOL CHIEF EXECUTIVE OFFICER AND PRESIDENT LUMINANT WORLDWIDE CORPORATION 4100 SPRING VALLEY ROAD, SUITE 750 DALLAS, TEXAS 75244 (972) 404-5167 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ WITH A COPY TO: JOHN B. WATKINS, ESQUIRE R.W. SMITH, JR., ESQUIRE WILMER, CUTLER & PICKERING PIPER & MARBURY L.L.P. 2445 M STREET, N.W. 36 SOUTH CHARLES STREET WASHINGTON, D.C. 20037 BALTIMORE, MARYLAND 21201 (202) 663-6000 (410) 539-2530
------------------------------ APPROXIMATE DATE THE REGISTRANT PROPOSES TO BEGIN SELLING SECURITIES TO THE PUBLIC: From time to time after the effective date of this registration statement. ------------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT IS TO BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON THE DATE THE SEC, ACTING UNDER SECTION 8(A), DETERMINES. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Subject to Completion, Dated September 14, 1999 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. [LOGO] 4,062,500 SHARES COMMON STOCK This is Luminant Worldwide Corporation's initial public offering. We are offering 4,062,500 shares of common stock. In addition to the 4,062,500 shares of common stock we are offering to the public, we are selling 937,500 shares of non-voting common stock, assuming an initial public offering price of $16.00 per share, directly to Young & Rubicam at the initial public offering price. We expect that the public offering price will be between $15 and $17 per share. Our common stock has been approved for quotation on the Nasdaq Stock Market's National Market System under the symbol "LUMT." INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PER SHARE TOTAL Public Offering Price...................................................... $ $ Underwriting Discounts and Commissions..................................... $ $ Proceeds, Before Expenses, to Luminant..................................... $ $
The proceeds to be received by Luminant do not include proceeds of approximately $ , net of placement fees, which we will receive from the direct sale of shares of non-voting common stock to Young & Rubicam. The underwriters will receive a placement fee equal to $ per share of non-voting common stock sold to Young & Rubicam. Luminant and the selling stockholders we describe in this prospectus have granted the underwriters the right to purchase up to an aggregate of 750,000 shares to cover any over-allotments, at any time until 30 days after the date of this prospectus. DEUTSCHE BANC ALEX. BROWN HAMBRECHT & QUIST SOUNDVIEW TECHNOLOGY GROUP THE DATE OF THIS PROSPECTUS IS , 1999 [graphics showing: old, digital business model with the following text: Under the old digital business model, firms typically provide services in either strategy consulting, creative solutions or technology solutions. new, Luminant integrated solution model with the following text: Under the new digital business model, Luminant provides services and client focus in all these disciplines.] THIS PROSPECTUS INCLUDES TRADEMARKS AND TRADE NAMES OF OTHER PARTIES. SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO LEARN ABOUT THIS OFFERING AND OUR BUSINESS YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS AND THE RELATED NOTES BEGINNING ON PAGE F-1. WE WERE FORMED IN AUGUST 1998 TO ACQUIRE EIGHT INTERNET AND ELECTRONIC COMMERCE BUSINESSES WITH THE PROCEEDS OF THIS OFFERING. PRIOR TO THE CLOSING OF THIS OFFERING AND THE SIMULTANEOUS ACQUISITION OF THE EIGHT COMPANIES, WE HAVE NOT CONDUCTED ANY OPERATIONS. SIMULTANEOUSLY WITH THE COMPLETION OF THIS OFFERING, WE WILL ACQUIRE EIGHT BUSINESSES IN EXCHANGE FOR CASH AND SHARES OF OUR COMMON STOCK. WE WILL REFER TO THE EIGHT BUSINESSES WE ARE ACQUIRING AS THE "COMPANIES" OR THE "EIGHT COMPANIES". IN THIS PROSPECTUS, WE SPEAK AS IF WE HAVE ALREADY ACQUIRED THESE COMPANIES. UNLESS OTHERWISE INDICATED: - ALL REFERENCES TO "LUMINANT WORLDWIDE CORPORATION," "LUMINANT," "US," "WE" AND "OUR" REFER TO LUMINANT WORLDWIDE CORPORATION AND THE EIGHT BUSINESSES THAT WE WILL ACQUIRE SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING; - ALL REFERENCES TO OUR COMMON STOCK ALSO INCLUDE OUR NON-VOTING COMMON STOCK, PAR VALUE $.01 PER SHARE; - ALL REFERENCES TO "THIS OFFERING" OR "THE OFFERING" ALSO INCLUDE OUR SALE OF 937,500 SHARES OF NON-VOTING COMMON STOCK TO YOUNG & RUBICAM, INC., OR YOUNG & RUBICAM, AT AN ASSUMED INITIAL PUBLIC OFFERING PRICE OF $16.00 PER SHARE; AND - THE INFORMATION PRESENTED ASSUMES: (1) THE UNDERWRITERS' OVERALLOTMENT IS NOT EXERCISED; (2) THE CLOSING OF THE ACQUISITIONS OF THE EIGHT COMPANIES SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING; AND (3) THE COMPLETION OF A 16,653-FOR-ONE STOCK SPLIT. LUMINANT WORLDWIDE CORPORATION OUR BUSINESS We provide professional services to Fortune 500 companies, Internet and electronic commerce-based companies and other organizations which use or want to use the Internet and electronic commerce in their business. We provide the following Internet and electronic commerce professional services: - strategy consulting, which helps clients understand how to use the Internet and electronic commerce to operate their businesses more competitively and interact with their customers and suppliers more effectively; - creative solutions, which involve web site designing, creating marketing programs for attracting customers to web sites, and developing a web site "look and feel" that projects a client's identity and serves a client's business goals; - technology solutions, which involve the actual building and installation of Internet and electronic commerce software applications, including web sites and interfaces to mainframes and existing systems; and - ongoing services, which are continuing services we provide that support and complement our clients' Internet and electronic commerce businesses, such as ongoing Internet site management. 3 We perform services for more than 100 clients diversified across many industries, including technology, financial, retailing, media and communications. We also work with companies that do business primarily over the Internet. As of August 15, 1999, our 689 employees were located throughout the United States in 17 different states. On a pro forma combined basis, we had $54.8 million of revenues for the year ended December 31, 1998 and $41.4 million of revenues for the six months ended June 30, 1999. As of June 30, 1999, the total retained deficit of Luminant and the eight companies was $19.0 million, without considering any pro forma adjustments. OUR MARKET OPPORTUNITY The Internet is continuing to develop as an interactive platform through which companies market, operate and manage their businesses and conduct transactions. The explosive growth of the Internet and its potential to create new opportunities and pose fundamental threats to the competitive positions of traditional businesses present enormous challenges for the managers of companies. This is leading to the rapid growth of, and demand for, professional services relating to the Internet and electronic commerce. The need for organizations to quickly and effectively act has led to the demand for coordinated strategic, creative and technology solutions. Many traditional professional services firms can typically provide expert services in strategy consulting, creative solutions or technology solutions. The need to integrate these disciplines exceeds the capabilities of most traditional service firms, however, especially given the rapid time frames needed for developing Internet and electronic commerce businesses. As a result, we believe there is great demand for professional services firms that can effectively and timely provide integrated services and client focus in all three disciplines. OUR STRATEGY We intend to expand our position as a leading provider of Internet and electronic commerce professional services to Fortune 500 companies, Internet-based companies and other organizations. Our strategy for achieving this objective is to: - Leverage our three main practice areas; - Expand long-term client relationships; - Operate as a single, fully-integrated firm; - Maintain leading edge professional capabilities and technologies; - Expand our breadth of services and geographic scope; and - Provide ongoing services. OUR OFFICES AND HISTORY We have leased offices located in: - Atlanta, Georgia - Chicago, Illinois - Dallas, Texas - Houston, Texas - Herndon, Virginia - Larchmont, New York - New York, New York - San Francisco, California - Seattle, Washington Our principal business office is currently located at 4100 Spring Valley Road, Suite 750, Dallas, Texas 75244, and our telephone number is 972-404-5167. We were incorporated in Delaware on August 21, 1998. 4 THE OFFERING The following table presents a summary of this offering. Following this offering and the acquisition of the eight companies, there will be outstanding options to purchase 7,005,107 shares of common stock, including options to purchase 3,417,310 shares that will be exercisable immediately following this offering and the acquisition of the eight companies. Stock offered by Luminant.................... 4,062,500 shares of common stock, assuming the underwriters do not exercise their over- allotment option, or 4,412,531 shares of common stock, assuming the underwriters exercise their over-allotment option in full. Stock offered by the selling stockholders.... No shares, assuming the underwriters do not exercise their over-allotment option, or 399,969 shares, assuming the underwriters exercise their over-allotment option in full. Stock outstanding after this offering........ 23,366,659 shares of common stock, assuming the underwriters do not exercise their over- allotment option, or 23,716,690 shares, assuming the underwriters exercise their over-allotment option in full. Use of proceeds.............................. We will use the proceeds of this offering to pay the cash portion of the purchase prices payable in the acquisitions of eight companies, repay indebtedness and for general corporate purposes, including working capital, as well as future acquisitions. Luminant will not receive any proceeds from the sale of shares of common stock by selling stockholders upon exercise of the underwriters' over-allotment option. Nasdaq symbol................................ "LUMT" Dividend policy.............................. We do not anticipate paying dividends on our common stock.
We are also selling 937,500 shares of non-voting common stock, based on an assumed initial public offering price of $16.00 per share, to Young & Rubicam directly at the initial public offering price simultaneously with the closing of this offering. 5 SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA We were incorporated in August 1998 and have not conducted any operations as yet, except for negotiating and documenting the acquisitions of the eight companies we will acquire simultaneously with the closing of this offering, preparing this prospectus and the related documents for this offering and developing our management team and corporate structure. Each of our eight companies has been operating for at least 18 months. We present below our summary unaudited pro forma combined financial data based on historical data for the year ended December 31, 1998 and the six months ended June 30, 1998 and 1999, considering our combined historical results and those of the companies we will acquire. We also present below the unaudited pro forma combined balance sheet data as of June 30, 1999 based on historical data and as adjusted for the eight acquisitions and this offering. The unaudited pro forma combined statement of operations data for the year ended December 31, 1998 and the six months ended June 30, 1998 and 1999 assume that the eight acquisitions and this offering were closed on January 1, 1998. The unaudited pro forma combined balance sheet data assume that the eight acquisitions and this offering were closed on June 30, 1999. The unaudited summary pro forma financial data do not necessarily indicate the operating results or financial position that would have resulted from our operation on a combined basis during the period presented, nor do these unaudited pro forma data necessarily represent any future operating results or financial position. In addition to these unaudited summary pro forma combined financial data, you should also refer to the more complete financial information included elsewhere in this prospectus, including more complete historical results for the eight companies that we will acquire and our unaudited pro forma combined financial statements and the accompanying notes.
SIX MONTHS ENDED JUNE 30, YEAR ENDED ---------------------------- DECEMBER 31, 1998 1998 1999 -------------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA: Revenues................................................ $ 54,846 $ 24,741 $ 41,437 Cost of services(1)..................................... 36,298 17,396 24,741 ----------- ------------- ------------- Gross profit............................................ 18,548 7,345 16,696 Selling, general and administrative expenses(1)(2)...... 26,014 11,966 16,115 Equity based compensation expense(3).................... 4,355 3,604 3,488 Intangibles amortization(4)............................. 94,732 47,366 47,341 ----------- ------------- ------------- Loss from operations.................................... (106,553) (55,591) (50,248) Interest and other income, net.......................... (33) (305) (440) ----------- ------------- ------------- Loss before income taxes................................ (106,586) (55,896) (50,688) Income taxes(5)......................................... -- -- -- ----------- ------------- ------------- Loss before nonrecurring charges(3)..................... $ (106,586) $ (55,896) $ (50,688) ----------- ------------- ------------- ----------- ------------- ------------- Loss before nonrecurring charges per share(3)........... $ (4.56) $ (2.39) $ (2.17) Shares used in computing pro forma loss before nonrecurring charges per share(6)(3).................. 23,366,659 23,366,659 23,366,659
JUNE 30, 1999 --------------------------- PRO FORMA PRO FORMA COMBINED AS ADJUSTED(7) ----------- -------------- (DOLLARS IN THOUSANDS) UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA: Cash and cash equivalents.......................................................... $ 1,771 $ 15,439 Working capital (deficit).......................................................... (51,930 (8) 16,055 Total assets....................................................................... 312,443 319,869 Long-term debt, net of current maturities.......................................... 1,468 1,468 Stockholders' equity............................................................... 233,682 301,667
6 - ------------------------ (1) Excludes compensation expense related to issuances of equity and equity appreciation rights of four of our companies. Compensation expense was reduced by $1.9 million for the year ended December 31, 1998, and $9.7 million for the six months ended June 30, 1999. (2) Includes adjustments to increase expenses related to additional compensation expense to our new corporate management and the estimated incremental costs associated with being a public company. Selling, general and administrative expense was increased by $5.5 million for the year ended December 31, 1998, $2.7 million for the six months ended June 30, 1998 and $2.7 million for the six months ended June 30, 1999. (3) Consists of compensation expense related to shares of common stock issued to the management of Luminant at less than fair market value and equity based compensation of Align Solutions Corp., or Align, the accounting acquiror. Upon consummation of our initial acquisitions, we will record an additional stock compensation charge of $9.6 million (after reduction for $1.0 million of consideration paid) related to 663,002 shares issued to management and non-employee directors of Luminant. We will record goodwill on the additional 252,898 shares issued to management of Luminant as these shares were issued for services related to the acquisitions. (4) Consists of amortization over a three-year period of $260.8 million of goodwill and $23.1 million of other intangible assets to be recorded as a result of the acquisitions of the eight companies and the granting of options. The amortization is computed on the basis described in the notes to the unaudited pro forma combined financial statements. No amounts have been included for contingent consideration that may be payable to the former owners of our eight companies. None of this contingent consideration is expected to be compensatory. (5) We have not demonstrated that we will generate future taxable income; therefore, a net deferred tax asset for the pro forma loss before income taxes has not been recognized. (6) Includes: - 16,534,859 shares of common stock we will issue to the former owners of the eight companies we are acquiring; - 1,831,800 shares issued to our initial stockholder and an executive officer; - 4,062,500 shares sold in this offering; and - 937,500 shares of non-voting common stock we are selling directly to Young & Rubicam simultaneously with this offering. (7) Adjusted to reflect the sale of the 4,062,500 shares of common stock offered by this prospectus and the 937,500 shares of non-voting common stock we are selling directly to Young & Rubicam simultaneously with this offering, in each case assuming an initial public offering price of $16.00 per share and the application of the estimated net proceeds of this offering and the sale of shares to Young & Rubicam. See "Use of Proceeds." (8) Includes the effect of liabilities in the amount of $53.1 million payable to the former owners of the eight companies for the acquisition of common equity, for other equity securities and the repayment of shareholder debt of a company, representing the cash portion of the initial purchase prices to be paid from a portion of the net proceeds of this offering. 7 RISK FACTORS YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. AN INVESTMENT IN OUR COMMON STOCK INVOLVES RISK. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. SOME OF OUR COMPANIES HAVE A HISTORY OF OPERATING LOSSES. IF THESE LOSSES CONTINUE, WE MAY NOT BE PROFITABLE IN THE FUTURE. If we do not consistently generate higher revenues, we may not be profitable in the future. Our companies incurred historical combined net losses of approximately $5.7 million for the year ended December 31, 1998 and $15.5 million for the six months ended June 30, 1999. After this offering and closing of the acquisitions, we will have significantly increased expenses compared to those of the individual companies. We expect to incur increasing sales and marketing, infrastructure development and general and administrative expenses until we have integrated the companies. As a result, we will need to generate substantially higher revenues to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase it in the future. See "Summary Unaudited Pro Forma Combined Financial Data," "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE EACH OF THE COMPANIES WE ACQUIRE, OUR FINANCIAL RESULTS WILL SUFFER. We will combine eight independent Internet and electronic commerce professional services providers into a single company. Our future profitability will depend heavily on our ability to integrate the operations and management of our eight companies. Failure to successfully integrate any of the companies we acquire may cause significant operating inefficiencies and adversely affect our profitability. Our professional services providers have generally not worked together before and in some cases have previously served the same clients and provided duplicative services and may have competed against each other. To the extent our companies have competed with each other in the past, we will need to, but may not be able to, redeploy our resources. To the extent we cannot effectively redeploy our resources, our revenues may suffer. We plan to spend substantial resources to integrate these businesses. In particular, to successfully integrate our newly acquired companies, we must: - install and standardize adequate operational, financial and control systems; - deploy common equipment and telecommunications facilities; - implement and integrate new and existing marketing and sales efforts; and - create a unified brand identity. We have no current plans or agreements to acquire any specific companies or businesses other than the eight businesses to be acquired in connection with this offering. If we acquire additional companies in the future as expected, however, we will face integration risks similar to those described above. In addition, during our beginning stage of development and operation, we may encounter expenses and difficulties that we may not expect or are beyond our control. We may not be able to achieve or maintain profitability for any of the companies we are acquiring or for ourselves as a whole. OUR ISSUANCE OF SHARES TO THE OWNERS OF THE EIGHT COMPANIES MAY BE INTEGRATED WITH THE OFFERING OF SHARES TO THE PUBLIC. IF THIS OCCURS, THOSE OWNERS MAY BE GRANTED THE RIGHT TO 8 RESCIND THE SALE OF SHARES TO THEM AND DEMAND THAT WE RETURN TO THEM THE SHARES OF THE APPLICABLE ACQUIRED COMPANY OR THE MONETARY EQUIVALENT OF THOSE SHARES. The owners of the eight companies may, depending on the circumstances described below, have a right to rescind the sale of shares of common stock made to them in connection with the acquisition of the eight companies and demand that we return to them the shares of the applicable acquired company or the monetary equivalent of those shares. Prior to the initial filing of the registration statement to which this prospectus relates, we entered into agreements to acquire the eight companies. On or about September 2, 1999, we amended the acquisition agreements to change what the owners of the eight companies will receive. It is possible that the owners of the eight companies who receive 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 under this prospectus, and that the offering and sale of shares to the owners of the eight companies 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 company or make a monetary claim for the value of those shares. This claim could be made for all of the 16,534,859 shares of common stock received by the owners of the acquired companies, which based upon the assumed offering price of $16.00 per share would represent a total potential claim of $264.6 million. The owners of the eight companies who received shares of our common stock as part of the acquisition were provided an opportunity, which each of them waived, to rescind or terminate their obligations under the acquisition agreements and we expect that all of these owners will, prior to the closing of the offering, enter into agreements under which they will agree to: - release and not to pursue any rescission or other claims which might be available; and - recontribute to us any consideration or other proceeds that they might receive based on a rescission or other claim. We cannot assure you that the former owners of the companies would fail in arguing that the offering of shares of common stock to them should be integrated with the public offering pursuant to this prospectus or that their agreement 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. Section 14 of the Securities Act provides that any provision requiring any person acquiring securities to waive compliance with the securities laws is void. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Pro Forma Combined Liquidity and Capital Resources." We intend to vigorously defend any rescission or other claim by the owners of the eight companies and will challenge any claim that the release and recontribution agreements entered into by these owners are not valid and binding. Nevertheless, it is possible that a claim could be made by one or more of the owners, and if a court were to hold that: - the private placement exemption is not available for the sale of common stock to the owners of the eight companies; - the owners of the eight companies are entitled to rescission rights; and - the release and recontribution agreements are not enforceable, 9 we could be forced to return shares of the acquired companies to the claiming owners or make significant monetary payments to the claiming owners. These claims, if successful, could significantly exceed our cash reserves and require us to borrow funds and would materially and adversely affect our results of operations and financial condition. WE MAY NOT BE ABLE TO HIRE, TRAIN AND RETAIN SKILLED EMPLOYEES, WHICH COULD IMPEDE OUR ABILITY TO COMPETE SUCCESSFULLY. As a services company, our future profitability and growth depends in large part on our ability to hire, train and retain skilled consulting, creative, technical and other professionals. If we cannot hire, train and retain a sufficient number of qualified employees, we may not be able to adequately staff projects, our expenses could increase and we may be unable to expand our business as quickly as we would like. Skilled personnel are in short supply and competition for these people is intense. In addition, to maintain our competitive position and to grow our business, we must make sure our employees maintain and develop their technical expertise and business skills to satisfy the increasingly sophisticated needs of our clients. This process could be time consuming and expensive and may not be successful. We plan to grant stock options to attract and retain qualified employees. The trading price of our stock after this offering will affect the incentive value of these stock options. We cannot determine whether prospective employees will consider our stock options a valuable incentive. If they do not, we may face more difficulty and expense in hiring qualified personnel. WE DEPEND ON THE SERVICES OF OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL. THE LOSS OF SENIOR MANAGERS OR OTHER KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS. The loss of management personnel, other key personnel or client relationships could seriously harm our business and adversely affect our growth. We believe that our ability to effectively serve our clients and expand our business in the future will depend on our continued employment of senior management and key strategic, creative and technical personnel. Competition for qualified management personnel and other key personnel is intense. In addition, personal relationships are critical in obtaining and maintaining client engagements in our industry. Our personnel could join with a competitor or start a new business and compete with us, which may result in the loss of client relationships or business opportunities. WE INTEND TO RECEIVE THE PROCEEDS OF THIS OFFERING BEFORE MAKING A PRELIMINARY QUANTIFIED BUSINESS STRATEGY. Luminant has not yet prepared a preliminary, quantified business plan which indentifies the specific working capital needs and other corporate purposes to which the net proceeds of this offering will be allocated. We intend to close this offering and receive the proceeds of this offering before making a preliminary quantified business strategy. See "Use of Proceeds" for a more detailed description of how management intends to apply the proceeds of this offering. IF WE HAVE TO PAY ADDITIONAL CONSIDERATION TO THE FORMER OWNERS OF OUR PROFESSIONAL SERVICES PROVIDERS, YOUR INVESTMENT IN US MAY BE DILUTED. We have agreed to pay the former owners of our professional services providers additional consideration upon satisfaction of certain financial and operational conditions. Payment of these obligations in cash may substantially deplete our cash reserves or require us to borrow funds. Payment of these obligations in our common stock will dilute the value of your investment in us. Regardless of the form of payment, the additional consideration will create additional goodwill and increase the related amortization expense. We cannot predict the amount of additional consideration that we will have to pay to the former owners of our eight companies, although the total amount of this additional consideration will not exceed $193.2 million. For a more 10 detailed discussion of these contingent consideration arrangements, see "About Luminant Worldwide Corporation." OUR REVENUES ARE DIFFICULT TO PREDICT AND WE MAY NOT BE ABLE TO REDUCE EXPENSES IF REVENUES DECLINE. Our operating expenses are relatively fixed and we incur costs based on our expectation of future revenues. We generally cannot reduce our expenses on short notice to compensate for unanticipated variations in the number or size of engagements in progress. As a result, our failure to accurately predict our revenues may result in unnecessary expenses and adversely affect our profitability and financial condition. Most of our client engagements are under short-term contracts. If a client defers, modifies or cancels an engagement or chooses not to retain us for additional phases of a project, we may not be able to rapidly redeploy our employees or other resources to other engagements. Under these engagements, the client can generally reduce the scope of or cancel our services without penalty and with little or no notice. A number of factors unrelated to our work product or the progress of the project, such as general business conditions or the client's financial state, could cause cancellations or delays. WE MAY LOSE MONEY ON FIXED FEE CONTRACTS IF WE MISCALCULATE THE RESOURCES REQUIRED TO COMPLETE A PROJECT. We have generally entered into contracts with our clients on a fixed-fee, fixed timeframe basis. A miscalculation of the resources or time needed to complete fixed-fee engagements could substantially reduce our profitability. The risk of these miscalculations for us is high because we work with complex technologies in compressed time frames. UNDERUTILIZATION OF OUR EMPLOYEE RESOURCES MAY ALSO ADVERSELY AFFECT OUR OPERATING REVENUES. We generally establish our personnel levels based on our expectations of client demand. If we hire more employees than our engagements require, or if we are unable to effectively redeploy our employees from project to project, our operating margins may decline and we may suffer losses. We have hired a large number of administrative and support personnel to support our anticipated growth. These personnel costs and expenses constitute the substantial majority of our operating expenses. WE MAY NOT SUCCESSFULLY DEVELOP BRAND AWARENESS OF OUR SERVICES, AND OUR BRAND REPUTATION MAY DEPEND UPON THE SUCCESS OR FAILURE OF OUR CLIENTS. Developing and maintaining widespread awareness of the "Luminant Worldwide Corporation" brand name is an important element of our business strategy. If we do not successfully promote and maintain our brand name without significant expense, our operating margins and growth may decline. We plan to increase our marketing expenses to promote our brand name, which may reduce our operating margins. In addition, our brand name will replace the current brand names of our eight companies, which may disrupt our business and adversely affect our revenues and profitability. The public may closely associate our brand with the business success or failure of some of our high-profile clients, many of whom are pursuing unproven business models in competitive markets. As a result, the failure or difficulties of one or more of our high-profile clients may damage our brand name. OUR LACK OF COMBINED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW THE COMBINED OPERATIONS OF OUR EIGHT COMPANIES WILL PERFORM IN THE FUTURE. We have no combined operating history upon which you can evaluate our business and prospects. We will combine the operations of eight businesses into a new company, and we may not be able to achieve or maintain profitability of any of our businesses or overall. The pro 11 forma financial information included in this prospectus is based on the separate pre-acquisition financial information of the eight companies. As a result, our historical results of operations and pro forma financial information may not give you an accurate indication of our future results of operations or prospects. In addition, companies like us in an early stage of development frequently encounter risks, expenses and difficulties associated with starting a new business, many of which may be unexpected or beyond our control. OUR PROFITABILITY MAY SUFFER IF SEASONAL FACTORS CAUSE OUR REVENUES TO FLUCTUATE AND WE ARE NOT ABLE TO ADJUST OUR EXPENSES ACCORDINGLY. Our industry is affected by seasonal factors. Our revenues and income are generally higher in the first and second calendar quarters, and lower during the third and fourth calendar quarters as a result of the summer and end-of-year holiday seasons. As a result of these factors, we believe that period-to-period comparisons of our results of operations will not reliably indicate our future performance. It is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors. These shortfalls may significantly affect the market price of our common stock. Several other factors may cause our revenues and operating results to vary from quarter-to-quarter, including: - the number, size and type of client engagements we commence and complete during a quarter; - modification or termination of material contracts; - the amount and timing of expenditures by our clients for Internet and electronic commerce professional services; - our ability to adequately staff our projects and effectively utilize our employees; - the fixed personnel and other costs we incur in advance of the quarter; - the number, type, timing and costs of acquisitions completed during a quarter; - our ability to manage costs, including personnel costs and support services costs; and - our introduction of new services. WE MAY INCUR UNEXPECTED OR UNQUANTIFIABLE LIABILITIES AND EXPENSES ARISING FROM THE OPERATION OF A COMPANY BEFORE WE ACQUIRED IT. When we acquire companies, we may acquire liabilities and expenses that we did not know about at the time we negotiated these acquisitions. We may also acquire contingent liabilities that become realized, or liabilities that prove to be larger than anticipated. Because our recourse against the former owners of the companies for these liabilities is limited as described below, the realization of any of these liabilities may increase our expenses and reduce our cash reserves. THE INDEMNIFICATION PROVISIONS OF THE ACQUISITION AGREEMENTS MAY NOT FULLY PROTECT US AND MAY RESULT IN UNEXPECTED LIABILITIES. Some of the former owners of the eight companies will be required to indemnify us against liabilities related to the operation of their company before we acquired it. The acquisition agreements include provisions for the indemnification of Luminant by the former owners of each company for breaches of their representations and warranties in the acquisition agreements, and inaccuracy of the information provided by them for use in this prospectus. These indemnities limit the liability of each former owner to the total amount of the purchase price, including contingent consideration, that each former owner receives. The liability of the former owners is 12 also subject to a deductible equal to one percent of the aggregate purchase price, excluding contingent consideration, paid to the former owners. Additionally, in some cases these former owners may not have the financial ability to meet their indemnification responsibilities. We have also agreed to indemnify the former owners of each company for liabilities arising out of breaches of each other party's representations and warranties, and inaccuracy of information provided by any other party for use in this prospectus and other matters traditionally covered under the indemnification terms of similar contracts. There is no assurance that any party will meet its obligations to indemnify any other party. In addition, the Securities and Exchange Commission's position is that indemnification for securities law violations is against public policy. WE INTEND TO EXPAND OUR BUSINESS ABROAD. INTERNATIONAL EXPANSION COULD RESULT IN FINANCIAL LOSSES DUE TO SEVERAL FACTORS, INCLUDING FAILURE TO COMPLY WITH FOREIGN REGULATORY REQUIREMENTS, CHANGES IN FOREIGN ECONOMIC CONDITIONS AND FLUCTUATIONS IN FOREIGN CURRENCIES. We intend to expand our business by providing Internet and electronic commerce professional services to companies operating outside of the United States. An inability to successfully establish and expand our international operations could seriously harm our growth and place us at a competitive disadvantage. We intend to acquire existing companies and open offices in foreign markets and otherwise market our business abroad. We may be unable to successfully market, sell, deliver and support our services internationally. In addition to other risks described in this section, international expansion poses additional risks, including: - intense competition for qualified personnel outside of the United States; - international legal and regulatory requirements; - problems in collecting accounts receivable and longer payment cycles; - the impact of recessions in economies outside the United States; - higher marketing costs; - fluctuations in currency exchange rates; - restrictions on the import and export of certain technologies; - reduced protection for intellectual property rights in some countries; - potentially adverse tax consequences; and - increases in tariffs, duties, price controls, restrictions on foreign currencies and other trade barriers. WE PROVIDE SERVICES THAT ARE OFTEN CRITICAL TO OUR CUSTOMERS' BUSINESSES; ANY DEFECTS IN OUR SERVICES COULD EXPOSE US TO SIGNIFICANT LIABILITY. We create, implement and maintain Internet and electronic commerce systems and other applications that are critical to our clients' businesses. Any defects or errors in these systems or applications or failure to meet clients' expectations could result in: - delayed or lost client revenues; - rendering additional services to a client at no charge; - negative publicity regarding us and our services; and - claims for substantial damages against us, regardless of fault. The successful assertion of a large claim against us could seriously harm our business, financial condition and operating results. Our contracts generally limit our damages arising from negligent acts, errors, mistakes or omissions in rendering services to our clients. However, we 13 cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. Our general liability insurance coverage may not cover one or more large claims, or the insurer may disclaim coverage as to any future claim. In addition, our general liability insurance coverage may not continue to be available on reasonable terms or at all. OUR FAILURE TO PROTECT OR MAINTAIN OUR INTELLECTUAL PROPERTY RIGHTS COULD COST US MONEY, PLACE US AT A COMPETITIVE DISADVANTAGE AND RESULT IN LOSS OF REVENUE AND HIGHER EXPENSES. The steps we have taken to protect our proprietary intellectual property rights may not prevent or deter someone else from using or claiming rights to our intellectual property. Third party infringement or misappropriation of our trade secrets, copyrights, trademarks or other proprietary information could seriously harm our business. We also cannot assure you that we will be able to prevent the unauthorized disclosure or use of our proprietary knowledge, practices and procedures if our senior managers or other key personnel leave us. In addition, although we believe that our proprietary rights do not infringe on the intellectual property rights of others, other parties may claim that we have violated their intellectual property rights. These claims, even if not true, could result in significant legal and other costs and may distract our management. OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING. Our management has significant flexibility in using the net proceeds we receive from this offering remaining after payment of the aggregate purchase price for the eight companies we will acquire. You cannot determine the propriety of management's use of the proceeds from this offering because the proceeds are not required to be allocated to any specific investment or transaction. See "Use of Proceeds" for a more detailed description of how management intends to apply the proceeds of this offering. WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS WHICH COULD REDUCE THE NUMBER OF OUR PROSPECTIVE CLIENTS. Many of the engagements we perform for clients are competitively sensitive. As a result, we sometimes agree not to perform services for our clients' competitors or in a particular field for limited periods of time. For example, Multimedia Resources, LLC, or Multimedia, has entered into (1) an agreement with MasterCard International Incorporated, or MasterCard International, which prohibits Multimedia from accepting assignments or conducting work for competitors of MasterCard International and (2) an agreement with Societe Europrenne des Satellites S.A. which prohibits Multimedia from providing consulting services to competing satellite-based network companies. Similarly, InterActive8, Inc., or InterActive8, has entered into (1) an agreement with BFC, Inc. (dba GetSmart.com) which prohibits InterActive8 from providing consulting services to any other competitive mortgage, debt consolidation, credit card or auto financing search sites that provide access to multiple lenders and (2) an agreement with Mars, Incorporated, or Mars, which prohibits InterActive8 from providing web site development services to companies that compete with the confectionery, pet care and rice/sauces divisions of Mars that engaged Interactive8 for the provision of services. We may enter into similar agreements in the future. These agreements could preclude or reduce opportunities from prospective clients and reinforce the importance of our client selection. IF OUR CASH FROM OPERATIONS IS NOT SUFFICIENT TO MEET OUR NEEDS, WE MAY NEED TO OBTAIN ADDITIONAL FINANCING IN THE FUTURE IN ORDER TO ACQUIRE ADDITIONAL COMPANIES OR TO MEET OUR WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all, which could adversely affect our ability to continue operations. We expect that the net proceeds from this offering, after paying the cash portion of the purchase price for our companies, will meet 14 our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds. Our lack of combined operating history makes it difficult to predict whether our future financial condition, revenues and profitability will be sufficient to obtain financing on reasonable terms or at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to acquire additional companies, open or expand offices in the United States and abroad, make capital expenditures, hire and train additional personnel or otherwise expand our business. A SIGNIFICANT PORTION OF OUR ASSETS ARE INTANGIBLE. WE MUST AMORTIZE OUR INTANGIBLE ASSETS OVER A FIXED PERIOD EVEN IF WE NEVER REALIZE THEIR FULL VALUE. THE AMORTIZATION CHARGES WE INCUR IN EACH PERIOD WILL REDUCE OUR NET INCOME. The acquisition of our companies simultaneously with the closing of this offering will create significant goodwill on our financial statements. We will amortize this goodwill over a period of three years, which will negatively affect our operating results in those periods. At June 30, 1999, after giving pro forma effect to the acquisition of our companies, we would have had goodwill net of accumulated amortization of approximately $259.5 million. We have agreed to pay the former owners of our companies additional consideration if specified conditions are met, payable in the form of cash and/or stock. Regardless of the form of payment, any additional consideration will create additional goodwill and increase the related amortization expense. WE MAY EXPERIENCE PROBLEMS RELATED TO THE YEAR 2000 ISSUE THAT COULD ADVERSELY AFFECT OUR BUSINESS. Many currently installed computer systems and software products are coded to accept only two-digit year entries in the date code field. Consequently, on January 1, 2000, many of these systems could fail or malfunction because they may not be able to distinguish 21st century dates from 20th century dates. Although we believe that our principal internal systems are Year 2000 compliant, some systems are not yet certified. We have relied on representations in the acquisition agreements for each of our eight companies for much of our assessment of our Year 2000 readiness. Because we depend substantially upon the proper functioning of our computer systems, a failure of our systems to correctly recognize dates beyond December 31, 1999 could materially disrupt our operations and seriously harm our ability to compete. The Year 2000 problem could also adversely affect our business by causing the systems of our clients, potential clients, vendors or other business partners to fail. The Year 2000 problem could result in systemic failures or miscalculations. The Year 2000 problem may also affect third parties that license software products which we incorporate into the business systems that we create for our clients. We generally discuss Year 2000 issues with these suppliers and sometimes perform internal testing on their products, but we cannot guarantee that the software licensed by these suppliers is Year 2000 compliant. Any failure on our part to provide Year 2000 compliant systems to our clients could result in financial loss, harm to our reputation and liability to others and could seriously harm our business, financial condition and operating results. For information on our efforts to handle the Year 2000 issue, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Readiness Disclosure Statement." PREPARATION FOR OR CORRECTION OF YEAR 2000 PROBLEMS COULD CAUSE CLIENTS TO DEFER OR REDUCE DEMAND FOR OUR SERVICES. Our clients and prospective clients may have to devote considerable time and resources in preparing for or correcting problems related to the Year 2000 issue. The demands posed by these Year 2000 problems may reduce the time and resources clients have to devote to the projects and services we offer and may reduce demand for our services. 15 THE SALE OR AVAILABILITY FOR SALE OF ADDITIONAL SHARES OF OUR COMMON STOCK AFTER THIS OFFERING COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. Sales of a substantial number of shares of common stock after this offering could adversely affect the market price of our common stock. A reduction in the price of our common stock could reduce the value of your investment in us, impair our ability to raise capital through the sale of additional equity securities or our ability to use shares as a currency to make acquisitions. For a description of the shares of our common stock that will be available for sale following this offering, see "Shares Eligible for Future Sale." Upon completion of this offering and the simultaneous acquisition of the eight companies, 23,366,659 shares of our common stock will be outstanding. The 4,062,500 shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless acquired by an "affiliate" of Luminant, as defined in Rule 144 under the Securities Act. See "Shares Available for Future Sale -- Rule 144." The 937,500 shares of non-voting common stock, assuming an initial public offering price of $16.00 per share, we are selling directly to Young & Rubicam simultaneously with this offering as well as the remaining 18,366,659 shares of our common stock will be available for resale at various dates beginning 180 days after the date of this prospectus, subject to expiration of applicable lock-up agreements and compliance with the volume, holding period and other limitations of Rule 144. 7,005,107 shares underlying options will also be outstanding as of the closing and will be available for resale at various dates after closing subject to expiration of applicable lock-up agreements, compliance with the volume, holding period and other limitations of Rule 144 and compliance with applicable vesting schedules. See "Shares Available for Future Sale--Rule 144" and "-- Lock-Up Agreements." Holders of the shares and options described in the preceding two sentences and the holder of the warrant described in the next paragraph also have the right to require us to register their shares under the Securities Act in specified circumstances. In addition, within 30 days after the closing of this offering, we intend to register under the Securities Act approximately 7,115,007 shares of common stock underlying stock options issued or reserved for issuance under our long-term incentive plan. Options for 5,205,107 of these shares will be outstanding upon the closing of this offering. In addition, as of the closing of this offering we will have issued to United Air Lines, Inc., or United, a warrant to purchase up to 300,000 shares of our common stock at the initial public offering price over a five year period. The right to purchase shares underlying this warrant will be subject to the satisfaction of specified vesting requirements, as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." We have agreed to pay the former owners of each of the companies contingent consideration in cash and stock if the companies achieve specified financial results. See "About Luminant Worldwide Corporation." We may pay up to 100% of this contingent consideration in stock, and we must pay at least 50% of the contingent consideration in stock. To the extent we pay the contingent consideration in stock and the market value of our stock when we make such payments is below the price per share you paid for your shares of our stock, you will be diluted. The lower the price of our common stock at the time we pay the contingent consideration, the more shares of common stock we will pay as contingent consideration. WE FACE INTENSE COMPETITION IN OUR INDUSTRY AND LOW BARRIERS TO ENTRY MAY ENCOURAGE ADDITIONAL COMPETITORS IN THE FUTURE, WHICH MAY NEGATIVELY IMPACT OUR OPERATING RESULTS. In light of the resources of our existing competitors and the likelihood that new competitors will enter the market, we cannot assure you that we will compete successfully in the Internet and electronic commerce services market. Our failure to compete successfully could reduce our revenues and our profitability. 16 Competition in the Internet and electronic commerce professional services market is intense. We expect competition to persist and intensify in the future. We compete against companies selling Internet and electronic commerce software and services, and the in-house development efforts of companies seeking to engage in electronic commerce. Our current competitors include, and may in the future include, the following: - Internet consulting firms and online agencies, including AGENCY.COM, AppNet, iXL Enterprises, Modem Media . Poppe Tyson, Organic Online, Proxicom, Razorfish, Scient, US Interactive, USWeb/CKS and Viant; - general management consulting firms, including Bain & Company, Boston Consulting Group, Booz Allen & Hamilton and McKinsey & Company, Inc.; - the professional services groups of computer equipment companies, including Compaq, Hewlett-Packard and IBM; - systems integrators, including Andersen Consulting, Cambridge Technology Partners, Sapient, and consulting arms of the "Big Five" accounting firms; and - internally developed solutions of current and potential clients. Because barriers to entry in our market are low, we also expect other companies to enter our market. In addition, current and potential competitors have established, or may establish, cooperative relationships among themselves or with vendors. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Most of our current competitors have longer operating histories than us. Many of our competitors have larger client bases, larger professional staffs, greater brand recognition and greater financial, technical, marketing and other resources than us. Many of our competitors also have well-established relationships with our current and potential clients and vendors and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Each of these factors may place us at a disadvantage in responding to our competitors' pricing strategies, technological advances, marketing campaigns, strategic partnerships and other initiatives. TECHNOLOGY IN THE INTERNET AND ELECTRONIC COMMERCE INDUSTRY CHANGES RAPIDLY. IF WE FAIL TO KEEP UP WITH THESE CHANGES, WE WILL NOT BE ABLE TO MEET OUR CLIENTS' NEEDS AND OUR BUSINESS WILL SUFFER. Rapid technological change and frequent introductions of new products and services characterize our market and the technologies our clients use. Our failure to successfully respond to these technological developments or to respond in a timely or cost-effective way could substantially reduce our revenues and adversely affect our profitability. Our success will depend on our ability to rapidly master and develop an evolving set of capabilities and to offer services that keep pace with continuing changes in technology, industry standards and client preferences. OUR GROWTH AND PROFITABILITY DEPEND ON CONTINUED AND EXPANDING DEMAND FOR OUR SERVICES. THE DEMAND FOR OUR SERVICES DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE INDUSTRY. If a viable and sustainable market for our Internet and electronic commerce services does not continue to develop, or if we cannot differentiate our services from those of our competitors, our revenue and operating margins may decline and we may experience losses. We cannot be certain that the market for Internet and electronic commerce services will continue to grow. Consumers and businesses may reject the Internet or electronic commerce as viable commercial mediums for a number of reasons, including: 17 - inadequate network infrastructure; - insufficiency of telecommunications services to support electronic commerce and the Internet; - delays in the development of technologies that facilitate use, and improve the security, of the Internet and electronic commerce; - delays in the development of new conventions to handle increased levels of Internet activity; - increased governmental regulation; - changes in sales tax laws; and - failure of companies to meet their customers' expectations and service requirements in delivering goods and services via electronic commerce and over the Internet. NEW LAWS OR REGULATIONS AFFECTING THE INTERNET, ELECTRONIC COMMERCE OR COMMERCE IN GENERAL COULD REDUCE OUR REVENUES AND ADVERSELY AFFECT OUR GROWTH. Congress and other domestic and foreign governmental authorities have adopted and are considering legislation affecting use of the Internet, including laws relating to the use of the Internet for commerce and distribution. The adoption or interpretation of laws regulating the Internet, or of existing laws governing such things as consumer protection, libel, property rights and personal privacy, could hamper the growth of the Internet and its use as a communications and commercial medium. If this occurs, companies may decide not to use our services and our business and operating results would suffer. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH MAY NOT PROVE TO BE ACCURATE OR COMPLETE. Some of the statements under "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. 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 achievements expressed or implied by such forward-looking statements. These forward-looking statements relate to future events 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 assumes 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 prospectus to conform such statements to actual results and do not intend to do so. 18 ABOUT LUMINANT WORLDWIDE CORPORATION We formed Luminant Worldwide Corporation in August 1998 for the purpose of acquiring a group of existing Internet and electronic commerce professional services businesses that provide a wide range of interactive services throughout the United States. Simultaneously with the closing of this offering, we will close the acquisitions of eight businesses as required by the terms of written agreements negotiated with the current owners of these businesses. Except in the case of Brand Dialogue-New York, the acquisitions have been structured as mergers with the companies surviving as our wholly-owned subsidiaries. We will acquire the assets of Brand Dialogue-New York at the closing of this offering and will immediately contribute those assets to a newly formed subsidiary. The acquisition consideration and the terms of the acquisition agreements have been negotiated at arms-length. The closings of the acquisitions of our eight companies are subject to customary closing conditions, including that: - this offering close by October 15, 1999; - the representations and warranties made by the parties in the acquisition agreements are accurate at the closing; - the parties perform all of their covenants and obligations under the terms of the acquisition agreements; - no material adverse change has occurred in the financial condition or business of the eight companies or in the financial condition, business or prospects of Luminant Worldwide Corporation; - employment agreements with the principal employees and owners of the eight companies have been entered into on terms acceptable to us; and - the initial public offering price is not less than the minimum price per share specified in the acquisition agreements. We cannot assure you that the conditions to the closing of the acquisition of all of the eight companies will be satisfied or waived or that each acquisition will close. If any of the acquisitions does not close for any reason, we will not close this offering on the terms described in this prospectus. OUR COMPANIES The purchase price for the eight companies will consist of an initial payment at the time of closing and the ability to earn contingent payments, as follows: PURCHASE PRICE The initial purchase price for each company we will acquire has been determined based upon a variety of factors, including that company's revenue and pre-tax income. The initial purchase price is based upon a fixed number of shares of common stock and a cash payment, except that the initial purchase price for Brand Dialogue-New York will consist entirely of stock. The aggregate purchase price for all of the eight companies, based on an assumed initial public offering price of $16.00 per share, will be $264.6 million, consisting of an aggregate of 16,534,859 shares of common stock and an aggregate of $53.1 million in cash. The cash portion of the purchase price will always be approximately 20% of the market value of the share portion of the purchase price as of the closing of this offering. In addition, at the closing of this offering and the simultaneous acquisition of the eight companies, we will grant to some former owners, employees and affiliates of Align, InterActive8 19 and Potomac Partners Management Consulting, LLC, or Potomac Partners, options to purchase an aggregate of 2,204,447 shares of Luminant common stock to replace currently outstanding options and participation rights issued by those companies. CONTINGENT CONSIDERATION The former owners of each company will be eligible to receive two payments of contingent consideration: one based on the financial results of the individual company and one based on the consolidated financial results of the eight companies. The contingent consideration for each company will be based on a percentage of the amount, if any, by which the actual revenues and actual pre-tax income excluding amortization of goodwill incident to our acquisition of the eight companies of the company for the period beginning July 1, 1999, and ending December 31, 1999, exceeds the targeted revenue and targeted pre-tax income excluding amortization of goodwill incident to our acquisition of the eight companies, respectively, of the company for that period. The contingent consideration based on the financial results of the combined companies will be a percentage of the amount, if any, by which the combined actual revenue and combined actual pre-tax income excluding amortization of goodwill incident to our acquisition of the eight companies for the period beginning January 1, 2000, and ending June 30, 2000, exceeds our targeted revenues and our targeted pre-tax income excluding amortization of goodwill incident to our acquisition of the eight companies, respectively, for that same period. The formula for calculating the first contingent consideration payment is the sum of (a) one half of the assigned revenue multiple, which is 3, for an individual company times the remainder of that company's actual revenues for the six-month period minus that company's targeted revenues for the six-month period plus (b) one half of that company's assigned pre-tax income multiple, which is 15, times the remainder of that company's actual pre-tax income excluding amortization of goodwill for the six-month period minus the company's targeted pre-tax income for the six-month period. The formula for calculating the second contingent consideration payment is the sum of (a) an individual company's assigned share of the combined company's revenue times one half that company's assigned revenue multiple times the remainder of Luminant's actual combined revenues for the six-month period minus Luminant's projected combined revenues for the six-month period plus (b) the individual company's assigned share of Luminant's combined pre-tax income times one half that company's assigned pre-tax income multiple times the remainder of Luminant's actual combined pre-tax income excluding amortization of goodwill incident to the acquisition of the eight companies minus Luminant's projected combined pre-tax income. The targeted revenues for the six months ending December 31, 1999 for purposes of calculating the individual company contingent considerations vary from company to company and on average represent an increase over revenues for the six months ended December 31, 1998 of 134%. The targeted pre-tax incomes for the six months ending December 31, 1999 on average represent an increase over pre-tax incomes for the six months ended December 31, 1998 of 334%. For purposes of calculating the combined company contingent consideration, the targeted revenues for the combined companies for the six months ending June 30, 2000 represent an 88% increase over revenues for the six months ended June 30, 1999. The targeted pre-tax income for the combined companies for the six months ending June 30, 2000 represents an increase of 218% over the pre-tax income for the six months ended June 30, 1999 and does not take into consideration the impact of corporate overhead charges or the additional costs of being a public company. 20 INDIVIDUAL COMPANY TARGETS: The following are the targets for individual company performance for the period July 1, 1999 to December 31, 1999 for purposes of calculating contingent consideration compared to the actual revenues and pre-tax income for the six months ended June 30, 1999:
COMPANY REVENUE PRE-TAX INCOME (LOSS)(1) - -------------------------------- ----------------------------------------- ------------------------------------ PERCENTAGE PERCENTAGE TARGETS ACTUALS DIFFERENTIALS TARGETS ACTUALS DIFFERENTIALS ----------- ----------- --------------- --------- ---------- ------------- (DOLLARS IN THOUSANDS) Align Solutions Corp............ $ 15,946 $ 10,793 32.3% $ 1,385 $ (4,196) 403.0% Brand Dialogue-New York......... $ 8,470 $ 6,004 29.1% $ 1,001 $ 1,169 (16.8)% Free Range Media, Inc........... $ 5,200 $ 4,817 7.4% $ 700 $ (648) 192.6% Integrated Consulting, Inc. dba i.con interactive............. $ 3,404 $ 1,907 44.0% $ 374 $ 182 51.3% InterActive8, Inc............... $ 5,500 $ 3,657 33.5% $ 1,566 $ (2,277) 245.4% Multimedia Resources, LLC....... $ 2,431 $ 1,629 33.0% $ 429 $ 460 (7.2)% Potomac Partners Management Consulting, LLC............... $ 7,980 $ 4,918 38.4% $ 1,476 $ (5,420) 467.2% RSI Group, Inc. and subsidiaries.................. $ 8,664 $ 6,639 23.4% $ 1,049 $ (790) 175.3% Average percentage differential.................. 30.1% 188.8%
(1) Excludes amortization of goodwill incident to our acquisition of the eight companies. The targets for the combined company's performance for the period from January 1, 2000 to June 30, 2000 are revenue of $75.2 million and pre-tax income of $13.8 million. Pre-tax income will be calculated excluding amortization of goodwill incident to our acquisition of the eight companies. The maximum aggregate contingent consideration that each company can earn for individual company contingent consideration and combined company contingent consideration is 50% of: the total cash and stock consideration for that company plus, in the case of Align, InterActive8 and Potomac Partners, the intrinsic value of Luminant options granted to option holders of those companies to replace outstanding vested options and participation rights issued by those companies, equaling total potential contingent consideration of $168.2 million. In addition, the former owners of Potomac Partners will be eligible to earn up to an additional $25.0 million in contingent consideration as described below. The payment of the contingent consideration based on each company's performance and on combined company performance will be made within 30 days after the contingent consideration amount is finally determined, using a combination of cash and stock. The portion of the contingent consideration to be paid in stock may constitute up to 100% of the total contingent consideration and will be determined by us, in our sole discretion, provided that stock must comprise at least 50% of the contingent consideration amount. The actual number of shares of common stock paid as contingent consideration will be determined based on the average closing price of our common stock for the 30 trading days prior to the day before these shares are issued. In addition to the contingent consideration described above, former owners of Potomac Partners will be eligible to receive contingent consideration based on revenues derived from contracts entered into by us or Potomac Partners with United after the date of the Potomac Partners' acquisition agreement. The former owners of Potomac Partners will receive amounts equal to 150% of the revenues received for electronic commerce strategy, business planning and 21 design services provided to United, excluding such revenues generated between July 1, 1999 and December 31, 1999, and 40% of the revenues received for other services, rendered pursuant to contracts entered into between July 1, 1999 and June 30, 2002, up to a maximum amount of $25.0 million. We will pay the contingent consideration within 30 days after completion of our annual audit for each of our fiscal years ending December 31, 1999, December 31, 2000, December 31, 2001 and December 31, 2002. For purposes of calculating the individual company contingent consideration as described above that may be earned by the former owners of Potomac Partners between July 1, 1999 and December 31, 1999, the revenues received by Potomac Partners for management consulting services pursuant to the United contracts referenced in the previous paragraph will be included in the actual revenue amounts used in that calculation. For purposes of calculating the portion of the combined company contingent consideration that may be earned by the former owners of Potomac Partners, we will not include any revenues earned from these contracts in determining Potomac Partners' portion of the combined company contingent consideration. In determining the portion of combined company contingent consideration that may be earned by the former owners of the other companies, we will include all revenues earned from these contracts. INDIVIDUAL COMPANY INFORMATION The following shows the consideration to be paid in stock and cash for each company based on an assumed initial public offering price of $16.00 per share:
MAXIMUM CONTINGENT REVENUES INITIAL PURCHASE PRICE CONSIDERATION ASSUMED FOR SIX -------------------------------------- ------------------------ DEBT MONTHS VALUE TOTAL COMPANY COMBINED AS OF JUNE ENDED JUNE NAME CASH OF STOCK CONSIDERATION PORTION PORTION 30, 1999 30, 1999 - ------------------------------- --------- ----------- -------------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Align Solutions Corp. $ 21,141 $ 74,450 $ 95,591 $ 25,859 $ 25,859 $ 1,911 $ 10,793 Brand Dialogue-New York -- 67,078 67,078 16,769 16,769 -- 6,004 Free Range Media, Inc. 4,320 23,392 27,712 7,752 7,752 3,298 4,817 Integrated Consulting, Inc. dba 2,427 11,242 13,669 3,417 3,417 195 1,907 i.con interactive InterActive8, Inc. 8,640 21,031 29,671 7,753 7,753 1,206 3,657 Multimedia Resources, LLC 2,240 8,470 10,710 2,678 2,678 -- 1,629 Potomac Partners Management 8,640 47,003 55,643 15,505 15,505 -- 4,918 Consulting, LLC RSI Group, Inc. and 5,653 11,892 17,545 4,386 4,386 1,058 6,639 subsidiaries --------- ----------- -------------- ----------- ----------- ----------- ----------- Total $ 53,061 $ 264,558 $ 317,619 $ 84,119 $ 84,119 $ 7,668 $ 40,364 --------- ----------- -------------- ----------- ----------- ----------- ----------- --------- ----------- -------------- ----------- ----------- ----------- ----------- HISTORICAL NET ASSETS AS OF JUNE 30, NAME 1999 - ------------------------------- ----------- Align Solutions Corp. $ 15,657 Brand Dialogue-New York 5,456 Free Range Media, Inc. (2,057) Integrated Consulting, Inc. dba 225 i.con interactive InterActive8, Inc. (2,523) Multimedia Resources, LLC 495 Potomac Partners Management (5,878) Consulting, LLC RSI Group, Inc. and 958 subsidiaries ----------- Total $ 12,333 ----------- -----------
In addition, the former owners of Potomac Partners are eligible to receive up to $25.0 million in additional contingent consideration, as described above. At the closing of this offering and the simultaneous acquisition of the eight companies, we will also grant to some former owners, employees and affiliates of Align, InterActive8 and Potomac Partners, options to purchase an aggregate of 2,204,447 shares of Luminant common stock to replace currently outstanding options and participation rights issued by those companies. The aggregate value of these options to purchase shares of Luminant common stock is $33.8 million, based on a valuation using a Black-Scholes pricing model with the following assumptions: volatility of 70%; risk-free interest rates ranging from 6.28% to 6.41%; a dividend yield of 0%; and exercise of options ten years from the date of grant of the currently outstanding options. 22 NEW OPTION GRANTS In addition to the options to purchase Luminant shares which we will issue to replace currently outstanding options at Align, InterActive8 and Potomac Partners, we intend to issue additional options before the closing of this offering. Preceding the trading of our common stock, we will grant to Young & Rubicam an immediately exercisable ten year option to purchase 1,800,000 shares of common stock at an exercise price equal to the initial public offering price. In addition, immediately preceding the trading of our common stock, we intend to grant options for an aggregate of 1,328,036 shares of common stock exercisable at the initial public offering price to employees and officers of the companies who will become our employees at the closing of the acquisitions. One-sixth of the options will become exercisable every six months over 36 months from the date of grant. We also intend to grant options for an aggregate of 1,672,625 shares of common stock to our current management, directors and a former officer. The options described in the preceding sentence will be exercisable at the initial public offering price, except for options for 15,625 shares issuable to a former officer which are exercisable at $.01 per share, and 541,375 of these options will be immediately exercisable, with one-sixth of the remainder becoming exercisable every six months over 36 months from the date of grant. As of the closing of this offering, we will also have issued to United a warrant to purchase up to 300,000 shares of our common stock at the initial public offering price over a five year period, subject to the satisfaction of specified vesting requirements. 23 USE OF PROCEEDS Assuming an initial public offering price of $16.00 per share, we estimate that we will receive approximately $67.0 million in net proceeds from this offering and the sale of 937,500 shares of non-voting common stock, assuming an initial public offering price of $16.00 per share, directly to Young & Rubicam, assuming no exercise of the underwriters' over-allotment option, or $72.2 million in net proceeds if the underwriters' over-allotment option is exercised in full. This amount reflects deductions from the gross proceeds of the offering and the sale of 937,500 shares of non-voting common stock directly to Young & Rubicam of approximately $5.0 million, which will be retained by the underwriters as discounts and commissions and as placement fees for the direct sale of shares of non-voting common stock to Young & Rubicam, and $8.0 million, representing our estimated expenses for this offering and the acquisition of our companies. We will not receive any of the proceeds from any sale of shares of common stock by selling stockholders upon exercise of the underwriters' over-allotment option. We expect to use approximately $4.5 million of the proceeds from the offering to repay advances made to us prior to closing by Commonwealth Principals to fund a portion of the estimated $7.0 million of expenses for this offering, $1.0 million of expenses related to the acquisition of the eight companies and $300,000 of general and administrative expenses. These advances earn interest at the prime rate, which was 7.75% at June 30, 1999. We expect to use approximately $53.1 million of the net proceeds from the offering to pay the cash portion of the purchase prices payable for the acquisition of our companies based on an assumed initial public offering price of $16.00 per share. We will assume $7.7 million of indebtedness in connection with closing of the acquisition of the eight companies, which we do not expect to repay immediately after the closing. We will use the remainder of the net proceeds of approximately $13.6 million for general corporate purposes. A major requirement will be working capital, the possible payment, if we elect to pay in cash, of a portion of any additional amounts payable to former owners of our eight companies under the contingent consideration provisions of the acquisition agreements, and possible future acquisitions. We have no current plans or agreements to acquire any specific companies or businesses, other than the eight businesses we are acquiring simultaneously with the closing of this offering. This use of proceeds does not include any net proceeds to Luminant from the exercise of the underwriters' over-allotment option. Until we use the net proceeds of this offering, we intend to invest these net proceeds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY We have not paid, and do not intend to pay, dividends on our common stock in the foreseeable future. Instead, we will retain our earnings to finance the expansion of our business and for general corporate purposes. Our Board of Directors will have the authority to declare and pay dividends on the common stock at any time, in its discretion, as long as there are funds legally available for that distribution. 24 CAPITALIZATION The following table shows our capitalization at June 30, 1999 on an actual basis, a pro forma combined basis and on a pro forma as adjusted basis assuming an initial public offering price of $16.00 per share. The pro forma combined presentation considers the combined historical balance sheets for Luminant and the eight companies we will acquire simultaneously with the closing of this offering, and applies pro forma adjustments to the historical information. The pro forma as adjusted presentation reflects the pro forma adjustments and also the closing of this offering, the sale of shares of non-voting common stock directly to Young & Rubicam, the acquisition of the eight companies simultaneously with this offering and the application of the estimated net proceeds we will receive in this offering and from the sale of shares of non-voting common stock directly to Young & Rubicam. The pro forma combined and pro forma as adjusted columns below assume that we will issue 16,534,859 shares of common stock in connection with the acquisition of our eight companies. See "Use of Proceeds," and "Summary Unaudited Pro Forma Combined Financial Data." For a description of the pro forma adjustments, you should refer to our unaudited pro forma combined financial statements and notes included elsewhere in this prospectus. The authorized common stock described below includes 5,000,000 authorized shares of non-voting common stock. The shares of common stock outstanding on a pro forma as adjusted basis, as set forth below, include 937,500 shares of non-voting common stock, assuming an initial public offering price of $16.00 per share, we are selling directly to Young & Rubicam simultaneously with the closing of this offering. The pro forma as adjusted column does not include 350,031 shares which will be issued by Luminant if the underwriters exercise their over-allotment option in full; 7,005,107 shares of common stock issuable on exercise of stock options to be outstanding at closing; and an indeterminable number of shares that may be issued in payment of contingent consideration under the acquisition agreements as described under "About Luminant Worldwide Corporation." See "Shares Available for Future Sale."
JUNE 30, 1999 ------------------------------------ PRO FORMA PRO FORMA ACTUAL COMBINED AS ADJUSTED --------- ----------- ------------ (DOLLARS IN THOUSANDS) Short-term debt and current portion of long-term debt...................... $ 2,448 $ 9,508 $ 7,060 Due to affiliates/stockholders and other acquisition-related obligations... -- 53,061 -- Long-term debt, less current portion....................................... -- 1,468 1,468 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value per share: 10,000,000 shares authorized; no shares issued and outstanding on an actual basis; no shares issued and outstanding on a pro forma combined basis; no shares issued and outstanding on a pro forma as adjusted basis.................................................................. -- -- -- Common stock, $0.01 par value per share: 100,000,000 shares authorized; 1,831,800 shares issued and outstanding on an actual basis; 18,366,659 shares issued and outstanding on a pro forma combined basis; 23,366,659 shares issued and outstanding on a pro forma as adjusted basis................................................ 18 184 234 Additional paid-in capital................................................. 3,164 270,003 337,938 Retained earnings (deficit)................................................ (3,515) (36,505) (36,505) --------- ----------- ------------ Total stockholders' equity............................................... $ (333) $ 233,682 $ 301,667 --------- ----------- ------------ Total capitalization................................................... $ 2,115 $ 297,719 $ 310,195 --------- ----------- ------------ --------- ----------- ------------
25 DILUTION Our pro forma net tangible book value at June 30, 1999 was a negative $49.0 million, or a negative $2.67 per share of common stock. Pro forma net tangible book value per share of common stock is calculated by dividing the pro forma net tangible book value of our company by the number of shares of common stock outstanding on a pro forma basis after giving effect to the acquisition of our companies. Our pro forma as adjusted net tangible book value at June 30, 1999 would have been $19.0 million, or $0.81 per share of common stock, based on an assumed initial public offering price of $16.00 per share, no exercise of the underwriters' over-allotment option, no payments under the contingent consideration provisions of the acquisition agreements for our companies, no exercise of stock options outstanding at closing and no changes in the pro forma net tangible book value of our company, other than to give effect to the sale of the shares of common stock offered by this prospectus, the sale of shares of non-voting common stock directly to Young & Rubicam and the application of the net offering proceeds as described under "Use of Proceeds." This pro forma as adjusted net tangible book value represents an immediate increase in net tangible book value of $3.48 per share to our existing stockholders, including the former owners of our companies who will receive shares of our common stock as partial payment for their equity interests in the companies upon completion of this offering, and an immediate dilution in pro forma as adjusted net tangible book value of $15.19 per share to new investors purchasing shares in this offering. The following table illustrates this pro forma per share dilution as of June 30, 1999: Assumed initial public offering price per share............ $ 16.00 Pro forma net tangible book value per share at June 30, 1999..................................................... $ (2.67) Pro forma increase per share attributable to investors who buy shares in this offering.............................. 3.48 --------- Pro forma as adjusted net tangible book value per share after the offering....................................... $ 0.81 --------- Pro forma dilution per share to investors who buy shares in this offering............................................ 15.19 --------- ---------
If all of the options to purchase 7,005,107 shares of common stock expected to be outstanding at closing of this offering and the simultaneous acquisition of the eight companies were exercised in accordance with their terms as of June 30, 1999, our pro forma net tangible book value, as adjusted, based on the assumptions described above, would have been $0.63 per share of common stock, representing immediate dilution of $15.37 per share to investors purchasing shares in this offering. The following table summarizes, as of June 30, 1999, on a pro forma as adjusted basis, based upon the above assumptions: - the number of shares of our common stock purchased by existing stockholders, including the former owners of the eight companies who will receive shares of common stock as a partial payment for their equity interests in the eight companies upon completion of this offering and the simultaneous acquisition of the eight companies; - the number of shares of common stock purchased by investors who buy shares in this offering, together with the number of shares of non-voting common stock which Young & Rubicam is purchasing directly from us simultaneously with this offering, assuming an initial public offering price of $16 per share; - the total consideration paid to us; 26 - the average price per share paid to us; and - the percentage ownership held by existing stockholders, including the former owners of the eight acquired companies, and by new investors who buy shares in this offering:
SHARES TOTAL PURCHASED CONSIDERATION AVERAGE ------------------------- --------------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE -------------- --------- ---------------- --------- ----------- Existing stockholders......................... 1,831,800 7.84% $ 200,001 .06% $ .11 Former owners of our companies................ 16,534,859 70.76 264,557,744 76.74 16.00 Investors who buy shares in this offering together with Young & Rubicam's direct purchase of shares simultaneously with this offering.................................... 5,000,000 21.40 80,000,000 23.20 16.00 -------------- --------- ---------------- --------- Total................................... 23,366,659 100.00% $ 344,757,745 100.00% -------------- --------- ---------------- --------- -------------- --------- ---------------- ---------
27 SELECTED HISTORICAL FINANCIAL DATA We will acquire eight companies simultaneously with and as a condition to the closing of this offering. Align Solutions Corp., or Align, one of the eight companies, has been identified as the accounting acquiror for financial statement presentation purposes. Our balance sheet data as of December 31, 1998 and the statement of operations data for the period from our inception on August 21, 1998 to December 31, 1998 have been derived from our audited financial statements included elsewhere in this prospectus. The selected historical financial data of our companies are derived in part from the more detailed historical financial statements and the related notes of our companies included elsewhere in this prospectus. The balance sheet data as of December 31, 1997 and 1998 and the statement of operations data for the years ended December 31, 1996, 1997 and 1998 for Free Range Media, Inc.; Integrated Consulting, Inc. dba i.con interactive; InterActive8, Inc.; Multimedia Resources, LLC; and RSI Group, Inc. and subsidiaries have been derived from the audited financial statements included elsewhere in this prospectus. The Selected Historical Financial Data for the years ended December 31, 1994, 1995 and the balance sheet data as of December 31, 1994, 1995 and 1996 have been derived from unaudited financial statements not included elsewhere in this Prospectus. These unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments and reclassifications necessary for a fair presentation of the financial position and results of operations for the periods presented. The balance sheet data as of December 31, 1997 and 1998 and the statement of operations data for the period from its inception on October 16, 1996 to December 31, 1996 and the years ended December 31, 1997 and 1998 for Align Solutions Corp. have been derived from the audited financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 1997 and 1998 and the statement of operations data for the period from its inception on November 10, 1997 to December 31, 1997 and the year ended December 31, 1998 for Potomac Partners Management Consulting, LLC, have been derived from the audited financial statements included elsewhere in this prospectus. The balance sheet data as of December 31, 1997 and 1998 and the statement of operations data for the period from its inception on April 1, 1996 to December 31, 1996 and the years ended December 31, 1997 and 1998 for Brand Dialogue-New York have been derived from the audited financial statements included elsewhere in this prospectus. 28 The following selected historical financial data should be read together with the historical financial statements and notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. All our companies have fiscal years ending December 31. The following table shows selected historical financial data for Luminant and our companies for the stated periods.
FOR THE SIX MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30, COMMENCED ----------------------------------------------------- -------------------- OPERATIONS 1994 1995 1996 1997 1998 1998 1999 ------------------ --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: LUMINANT WORLDWIDE CORPORATION August, 1998 Revenues...................... -- -- $ -- $ -- $ -- $ -- $ -- Gross profit.................. -- -- -- -- -- -- -- Operating loss................ -- -- -- -- (245) -- (3,269) ALIGN SOLUTIONS CORP. August, 1996 Revenues...................... -- -- $ 112 $ 3,268 $ 9,226 $ 2,997 $ 10,793 Gross profit.................. -- -- 32 1,485 4,098 1,192 4,421 Operating income (loss)....... -- -- (201) (149) 1 (506) (4,171) BRAND DIALOGUE-NEW YORK April, 1996 Revenues...................... -- -- $ 1,922 $ 4,011 $ 7,237 $ 3,057 $ 6,004 Operating income.............. -- -- 577 1,171 964 163 1,169 FREE RANGE MEDIA, INC. March, 1994 Revenues...................... $ 286 $ 1,870 $ 2,940 $ 1,982 $ 3,520 $ 1,212 $ 4,817 Gross profit (loss)........... 257 900 924 341 272 (66) 1,921 Operating loss................ (2) (129) (1,081) (2,644) (4,650) (2,464) (347) INTEGRATED CONSULTING, INC., DBA I.CON INTERACTIVE August, 1994 Revenues...................... $ 60 $ 127 $ 443 $ 849 $ 2,140 $ 949 $ 1,907 Gross profit.................. 23 59 311 582 1,424 682 1,313 Operating income (loss)....... 15 9 (4) 32 41 166 189 INTERACTIVE8, INC. October, 1994 Revenues...................... $ 19 $ 715 $ 1,713 $ 2,818 $ 4,097 $ 1,891 $ 3,657 Gross profit (loss)........... 4 71 657 1,184 2,064 370 (1,022) Operating income (loss)....... 1 27 197 (198) (355) (207) (2,277) MULTIMEDIA RESOURCES, LLC March, 1995 Revenues...................... -- $ 380 $ 1,928 $ 3,476 $ 2,068 $ 1,352 $ 1,629 Gross profit.................. -- 236 943 1,039 312 199 740 Operating income.............. -- 212 523 502 37 68 458 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC November, 1997 Revenues...................... -- -- $ -- $ 372 $ 4,886 $ 1,961 $ 4,918 Gross profit (loss)........... -- -- -- 82 (200) 391 (4,311) Operating loss................ -- -- -- (4) (1,076) (24) (5,393) RSI GROUP, INC. AND SUBSIDIARIES October, 1994 Revenues...................... $ 11,951 $ 12,119 $ 16,133 $ 15,724 $ 16,927 $ 8,461 $ 6,639 Gross profit.................. 3,361 3,569 4,470 4,074 4,656 2,320 1,836 Operating income (loss)....... 419 250 365 329 403 149 (764)
29
DECEMBER 31, COMMENCED ----------------------------------------------------- OPERATIONS 1994 1995 1996 1997 1998 ------------------ --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: August, 1998 LUMINANT WORLDWIDE CORPORATION Total assets............................... -- -- -- $ -- $ 162 Long-term debt............................. -- -- -- -- -- Total equity (deficit)..................... -- -- -- -- 162 ALIGN SOLUTIONS CORP. August, 1996 Total assets............................... -- -- 643 $ 1,328 $ 3,066 Long-term debt............................. -- -- -- 297 227 Total equity............................... -- -- 568 601 1,468 BRAND DIALOGUE-NEW YORK April, 1996 Total assets............................... -- -- $ 1,138 $ 1,449 $ 2,127 Long-term debt............................. -- -- -- -- -- Total equity............................... -- -- 443 833 1,058 FREE RANGE MEDIA, INC. March, 1994 Total assets............................... $ 209 $ 1,870 $ 1,244 $ 900 $ 1,696 Long-term debt............................. -- -- -- -- -- Total equity (deficit)..................... 158 (793) (2,401) 577 (2,583) INTEGRATED CONSULTING, INC., DBA I.CON INTERACTIVE August, 1994 Total assets............................... $ 17 $ 48 $ 132 $ 248 $ 498 Long-term debt............................. -- -- -- -- 64 Total equity............................... 15 32 29 63 103 INTERACTIVE8, INC. October, 1994 Total assets............................... $ 9 $ 235 $ 463 $ 793 $ 1,439 Long-term debt............................. -- -- -- 178 723 Total equity (deficit)..................... 1 20 199 (43) (246) MULTIMEDIA RESOURCES, LLC March, 1995 Total assets............................... -- $ 126 $ 642 $ 804 $ 346 Long-term debt............................. -- -- -- -- -- Total equity............................... -- 126 448 455 174 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC November, 1997 Total assets............................... -- -- -- $ 427 $ 2,072 Long-term debt............................. -- -- -- -- -- Total equity (deficit)..................... -- -- -- 297 (246) RSI GROUP, INC. AND SUBSIDIARIES October, 1994 Total assets............................... $ 2,709 $ 2,808 $ 3,194 $ 3,533 $ 3,936 Long-term debt............................. -- 64 54 89 98 Total equity............................... 1,062 869 1,218 1,076 1,098 JUNE 30, --------- 1999 --------- BALANCE SHEET DATA: LUMINANT WORLDWIDE CORPORATION Total assets............................... $ 7,321 Long-term debt............................. -- Total equity (deficit)..................... (333) ALIGN SOLUTIONS CORP. Total assets............................... $ 19,731 Long-term debt............................. 743 Total equity............................... 15,657 BRAND DIALOGUE-NEW YORK Total assets............................... $ 6,206 Long-term debt............................. -- Total equity............................... 5,456 FREE RANGE MEDIA, INC. Total assets............................... $ 2,659 Long-term debt............................. -- Total equity (deficit)..................... (2,057) INTEGRATED CONSULTING, INC., DBA I.CON INTERACTIVE Total assets............................... $ 879 Long-term debt............................. 120 Total equity............................... 225 INTERACTIVE8, INC. Total assets............................... $ 3,033 Long-term debt............................. 961 Total equity (deficit)..................... (2,523) MULTIMEDIA RESOURCES, LLC Total assets............................... $ 774 Long-term debt............................. -- Total equity............................... 495 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC Total assets............................... $ 3,530 Long-term debt............................. -- Total equity (deficit)..................... (5,878) RSI GROUP, INC. AND SUBSIDIARIES Total assets............................... $ 3,145 Long-term debt............................. 69 Total equity............................... 958
30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Historical Financial Data," "Summary Unaudited Pro Forma Combined Financial Data," our unaudited pro forma combined financial statements and the related notes and the historical financial statements and the related notes of our companies appearing elsewhere in this prospectus. A number of statements in this prospectus address activities, events or developments that we expect may occur in the future, including such matters as our strategy for internal growth; additional capital expenditures, including the amount and nature of the expenditures; acquisitions of assets and businesses; industry trends; and other similar matters. These statements are based on assumptions and analyses made in light of our perception of historical trends, current business and economic conditions, and expected future developments, as well as other factors we believe are reasonable or appropriate. Whether actual results and developments will conform with our expectations and predictions, however, is subject to a number of risks and uncertainties, including those set forth in "Risk Factors;" general economic, market or business conditions; the business opportunities we may pursue; changes in laws or regulations; and other factors, many of which are beyond our control. Consequently, we can not assure you that our actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, our business or operations. OVERVIEW Luminant was established to provide one source of integrated Internet and electronic commerce services to clients on a local and national level. Luminant was formed in August 1998 to consolidate the operations of eight Internet and electronic commerce businesses into a nationally recognized Internet and electronic commerce services firm. Prior to the closing of this offering and the simultaneous acquisition of the eight companies, we have not conducted any material operations. The information relating to our clients, business and other operations set forth under "Summary," "Management's Discussion and Analysis of Financial Conditions and Results of Operations," "Business" and other places in this prospectus assumes the closing of this offering and the acquisition of the eight companies. Our services focus on strategy consulting and creative and technology solutions. We also provide ongoing services that assist clients in establishing, developing and maintaining their Internet and electronic commerce-related businesses. Our companies and their principal business locations are: Align Solutions Corp. Houston, Texas Brand Dialogue-New York New York, New York Free Range Media, Inc. Seattle, Washington Integrated Consulting, Inc. dba i.con Dallas, Texas interactive InterActive8, Inc. New York, New York Multimedia Resources, LLC Larchmont, New York Potomac Partners Management Consulting, LLC Reston, Virginia RSI Group, Inc. and subsidiaries Dallas, Texas
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 final financial results of the project. We make 31 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 fixed-price, fixed-time frame basis. We use internally developed processes to estimate and propose fixed prices for our projects. The estimation process accounts for standard billing rates particular to each project based upon the level of expertise and number of consultants required, the technology environment, the overall technical complexity and whether strategic, creative or technology solutions or value-added services are being provided to the client. We also provide services on a time and materials basis. Align has been identified as the "accounting acquiror" for our financial statement presentation, and its assets and liabilities are being recorded at historical cost levels. Each of the remaining acquisitions of our companies will be accounted for using the purchase method of accounting. Accordingly, the purchase prices for those companies have been allocated based on preliminary estimates of the fair value of the tangible assets and liabilities to be assumed as of June 30, 1999. The excess of the fair value of the consideration paid over the fair value of the net assets to be acquired, other than those of Align, totals approximately $245.1 million and is recorded as goodwill on our pro forma balance sheet. 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 will be amortized on a straight line basis over three years, the estimated period of benefit. The pro forma impact of this amortization expense is approximately $81.7 million per year. See the notes to our unaudited pro forma combined financial statements. In addition, pro forma amortization expense includes approximately $7.7 million per year related to the estimated fair value of options to be granted to the owners of Brand Dialogue-New York. Subsequent to December 31, 1998, Align has acquired three businesses in exchange for Align common stock. The Align acquisitions will be accounted for using the purchase method of accounting. The excess of fair value of the consideration paid over the fair value of the net assets to be acquired for Fifth Gear Media Corporation, inmedia, inc. and Synapse Group, Inc. totals approximately $15.7 million and is recorded as goodwill on our pro forma balance sheet. Goodwill from the acquisitions will be amortized on a straight line basis over three years, the estimated period of benefit. The pro forma impact of amortization expense for Align's acquisitions is approximately $5.2 million per year. We have entered into an agreement in principle with 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 agreed to issue to United, as of September 16, 1999, a warrant to purchase up to 300,000 shares of our common stock at an exercise price per share equal to the initial offering price. Under the warrant, United will have the immediate right to purchase 50,000 shares of common stock. Over the five year term of the agreement, United will obtain the right to purchase 5,000 shares of the remaining shares under the warrant for every $1 million of revenues we receive from United up to $50 million of revenue. PRO FORMA COMBINED RESULTS OF OPERATIONS Our pro forma combined results of operations for the periods presented do not represent combined results of operations presented in accordance with generally accepted accounting principles, but are only a summation of the revenues, operating expenses and general and administrative expenses of our companies on a pro forma basis. The pro forma combined 32 results may not be comparable to, and may not be indicative of, our post-combination results of operations because: - our companies were not under common control or management during the periods presented; - we will incur incremental costs related to our new corporate management and the costs of being a public company; and - the combined data do not reflect potential benefits and cost savings we may realize when operating as a combined entity. The following discussion should be read in conjunction with our unaudited pro forma combined financial statements and the related notes and the historical financial statements and the related notes of the eight companies we will acquire appearing elsewhere in this prospectus. The following table sets forth the combined results of operations of the companies we will acquire on a pro forma basis:
YEAR ENDED SIX MONTHS ENDED JUNE DECEMBER 31, 30, ------------- ---------------------- 1998 1998 1999 ------------- ---------- ---------- (DOLLARS IN THOUSANDS) Revenues............................................... $ 54,846 $ 24,741 $ 41,437 Cost of services....................................... 36,298 17,396 24,741 ------------- ---------- ---------- Gross profit........................................... 18,548 7,345 16,696 Selling, general and administrative.................... 26,014 11,966 16,115 Equity based compensation expense...................... 4,355 3,604 3,488 Intangibles amortization............................... 94,732 47,366 47,341 ------------- ---------- ---------- Loss from operations................................... $ (106,553) $ (55,591) $ (50,248) ------------- ---------- ---------- ------------- ---------- ----------
LUMINANT WORLDWIDE CORPORATION--UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $16.7 million, or 67%. This increase resulted from an increase in the number and size of client projects offset by an approximate $1.8 million decline in revenues at RSI due to a decrease in staffing related to a decrease in business with First Data Resources. No client contributed in excess of 10% of our revenues during the period. COST OF SERVICES. Cost of services increased approximately $7.3 million, or 42%. The increase resulted from direct costs related to the increased number of client projects. Gross profit margins increased from 30% for the six months ended June 30, 1998 to 40% for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $4.1 million, or 35%. The increase resulted from additional expenses needed to support sales growth. Selling, general and administrative expenses as a percentage of revenues decreased from 48% for the six months ended June 30, 1998 to 39% for the six months ended June 30, 1999. EQUITY BASED COMPENSATION EXPENSE. Equity based compensation expense decreased approximately $116,000, or 3%. The June 30, 1998 expense is related to vested options granted at less than fair market value in connection with Align's 1999 acquisitions. A significant number of options immediately vested upon grant. The June 30, 1999 expense is related to the continued vesting of the options granted at less than fair market value in connection with Align's 1999 acquisitions. Included in the six months ended June 30, 1998, equity based compensation expense are provisions for stock issuances at less than fair market value to Luminant management. 33 LUMINANT WORLDWIDE CORPORATION--UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS FOR 1998 REVENUES. Pro forma consolidated revenues for the year ended December 31, 1998 were approximately $54.8 million and cost of services for the same period were approximately $36.3 million with a gross profit margin of 34%. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses were approximately $26 million for the year ended December 31, 1998, or 47% of revenues. EQUITY BASED COMPENSATION EXPENSE. Equity based compensation expense is comprised of charges related to vested options granted at less than fair market value related to Align's 1999 acquisitions and for stock issuances at less than fair market value to Luminant management. SEASONALITY AND CYCLICALITY; POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS We believe that the market for Internet and electronic commerce related professional services is influenced by general economic conditions and particularly by the level of technological change in the industry. Increased levels of technological change drive the need for professional services we provide. We also believe that the industry tends to experience periods of decline and recession during economic downturns. If the industry does experience sustained periods of economic recessions, any decline may have a material adverse effect on our operating results. We plan our operating expenditures based on revenue forecasts, and a revenue shortfall below forecasts in any quarter would likely adversely affect our operating results for that quarter. For other factors which could cause quarterly fluctuations and influence operating results, please see "Risk Factors--We are affected by seasonal factors that could cause our revenues to fluctuate from quarter to quarter." ALIGN SOLUTIONS CORP.--RESULTS OF OPERATIONS Align has offices in Houston and Dallas, Texas and Atlanta, Georgia and has 205 employees. The following table sets forth certain selected financial data for Align on a historical basis for the periods indicated:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------- -------------------- 1996(1) 1997 1998 1998 1999 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues....................................................... $ 112 $ 3,268 $ 9,226 $ 2,997 $ 10,793 Cost of services............................................... 80 1,783 5,128 1,805 6,372 --------- --------- --------- --------- --------- Gross profit................................................... 32 1,485 4,098 1,192 4,421 Selling, general and administrative............................ 233 1,634 4,097 1,698 8,592 --------- --------- --------- --------- --------- Operating income (loss)........................................ $ (201) $ (149) $ 1 $ (506) $ (4,171) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Inception - October 1996 ALIGN SOLUTIONS CORP.--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $7.8 million, or 260%. This increase resulted from an increase in the number and size of client projects. These increases were driven by the addition of 59 consultants to meet the increased demand for services in the six months ended June 30, 1999 from customers such as Enron Energy Services which contributed 12% of total revenues and Merrill Lynch which contributed 11% of total revenues. No other client contributed 10% or more of Align's revenues during the period. 34 COST OF SERVICES. Cost of services increased approximately $4.6 million, or 253%. The increase resulted from costs related to the addition of 59 consultants. Gross profit margin increased from 40% for the six months ended June 30, 1998 to 41% for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $6.9 million, or 406%. The increase resulted from compensation charges of $3.3 million for stock options issued below fair market value during the six months ended June 30, 1999 and an increase in personnel costs related to the addition of nine administrative employees. ALIGN SOLUTIONS CORP.--1997 COMPARED TO 1998 REVENUES. Revenues increased approximately $6.0 million, or 182%. This increase resulted from an increase in the number and size of client projects attributable to the addition of 51 consultants to meet the demand for services. For the year ended December 31, 1998, Enron Energy Services contributed 19% of total revenues and Administaff contributed 21% of total revenues. No other client contributed 10% or more of Align's revenues during the period. COST OF SERVICES. Cost of services increased approximately $3.3 million, or 188%. The increase resulted from costs related to the addition of 51 consultants due to the increased number of client projects. Gross profit margin decreased from 45% for the year ended December 31, 1997 to 44% for the same period in 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $2.5 million, or 151%. The increase resulted from the addition of personnel to support revenue growth targets. ALIGN SOLUTIONS CORP.--1996 COMPARED TO 1997 REVENUES. Revenues increased approximately $3.2 million, or 2,818%. Align was founded in October 1996 and thus 1996 reflects only three months of operations. For the period ended December 31, 1996, revenues from Chevron and Internet Commerce Corporation accounted for 60% of total revenues. For the year ended December 31, 1997, Nitro contributed 12% of total revenues and Chevron contributed 14% of total revenues. No other client accounted for 10% or more of Align's revenues in these periods. COST OF SERVICES. Cost of services increased approximately $1.7 million, or 2,129%. The increase resulted from a full year's operations and expenses in 1997 compared to three months of operations in 1996. Gross profit margin increased from 29% for the period ended December 31, 1996 to 45% for the same period in 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $1.4 million, or 601%. The increase resulted from 1997 being the first full year of Align's operations. ALIGN SOLUTIONS CORP.--LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, Align had approximately $48,167 in cash and cash equivalents compared to $0 at December 31, 1998. Cash used in operations was $243,000 for the year ended December 31, 1998 and $223,000 for the six months ended June 30, 1999. In all periods, the net cash used in operating activities was due to a net loss, offset by adjustments for non-cash equity related compensation charges, and growth in the business, resulting in increases in accounts receivable. 35 Cash used in investing activities was $767,000 for the year ended December 31, 1998 and $369,000 for the six months ended June 30, 1999. In all periods, cash used in investing activities was for capital expenditures for the purchase of computer equipment, furniture and fixtures and leasehold improvements. Cash provided by financing activities was $999,000 for the year ended December 31, 1998 and $640,000 for the six months ended June 30, 1999. Financing was provided by borrowings on Align's line of credit and long-term debt of $125,000 during the year ended December 31, 1998 and $686,000 for the six months ended June 30, 1999. Proceeds from the issuance of common stock were $944,000 during the year ended December 31, 1998. At June 30, 1999, the Company's revolving credit facilities provided for borrowings up to $1.2 million. At June 30, 1999, approximately $50,000 remained available for borrowing under the credit facilities. In February 1999, Align acquired all of the capital stock of Synapse Group, Inc., an Internet consulting company. The purchase was completed by the issuance of 805,736 shares of Align's stock and 472,744 options, and resulted in goodwill of approximately $9.6 million, which is being amortized on a straight-line basis over an estimated useful life of three years. In May 1999, Align acquired all of the capital stock of Fifth Gear Media Corporation, an Internet consulting company. The purchase was completed by the issuance of 300,000 shares of Align's stock and resulted in goodwill of approximately $3.7 million, which is being amortized on a straight-line basis over an estimated useful life of three years. In May 1999, Align acquired the assets and certain liabilities of inmedia, inc., an Internet consulting company. The purchase was completed by the issuance of 140,000 shares of Align's stock and resulted in goodwill of approximately $2.5 million, which is being amortized on a straight-line basis over an estimated useful life of three years. Unbilled revenues increased approximately $70,000 from approximately $11,000 on December 31, 1998 to $81,000 on June 30, 1999, due to the addition of new customer accounts. Accrued bonus increased to approximately $668,000 at December 31, 1998 from $0 at December 31, 1997. During 1998, Align accrued a monthly bonus based on each employee's performance and paid it during 1999. Align has an accrued bonus of approximately $677,000 at June 30, 1999. Total stockholders' equity increased approximately $14.2 million from $1.5 million on December 31, 1998 to $15.7 million on June 30, 1999, due to the additional paid-in capital from the purchase of Synapse Group, Inc. BRAND DIALOGUE-NEW YORK, THE NEW YORK BRANCH OF A YOUNG & RUBICAM DIVISION,--RESULTS OF OPERATIONS Brand Dialogue-New York, a wholly-owned business of Young & Rubicam Inc., is located in New York City and has approximately 70 employees. The following table shows certain selected financial data for Brand Dialogue-New York on a historical basis for the periods indicated:
YEAR ENDED DECEMBER SIX MONTHS ENDED 31, JUNE 30, -------------------- -------------------- 1996(1) 1997 1998 1998 1999 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues.................................................... $ 1,922 $ 4,011 $ 7,237 $ 3,057 $ 6,004 Compensation expense, including employee benefits........... 943 1,842 4,596 2,139 3,424 General and administrative expenses......................... 402 998 1,677 755 1,411 --------- --------- --------- --------- --------- Operating income............................................ $ 577 $ 1,171 $ 964 $ 163 $ 1,169 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Inception-April 1996 36 BRAND DIALOGUE-NEW YORK--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $2.9 million, or 96%. This increase resulted from an increase in the number and size of client projects. During the six months ended June 30, 1999, the United States Postal Service contributed 18% of total revenues, Citibank contributed 13% of total revenues, and the United States Army contributed 11% of total revenues. No other client contributed 10% or more of Brand Dialogue-New York's revenues during the period. COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense increased the approximately $1.3 million, or 60%. The increase resulted from the addition of 33 employees and employee-related costs associated with the overall growth in business. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by approximately $656,000, or 87%. This increase was a result of higher facility costs and corporate overhead allocated expenses including utilities and insurance necessary to support Brand Dialogue-New York's growth. BRAND DIALOGUE-NEW YORK--1997 COMPARED TO 1998 REVENUES. Revenues increased approximately $3.2 million, or 80%. This increase resulted from an increase in the number and size of client projects during 1998 including services performed for AT&T which contributed 29% of total revenues, Pfizer which contributed 13% of total revenues, the United States Postal Service which contributed 12% of total revenues and Citibank which contributed 11% of total revenues. No other client contributed 10% or more of Brand Dialogue-New York's revenues during the period. COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense increased approximately $2.8 million, or 150%. The increase resulted from the addition of 31 employees and employee-related costs associated with the overall growth in business. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by approximately $679,000, or 68%. The increase resulted from additional costs associated with an increase in personnel including facilities, utilities, and insurance. BRAND DIALOGUE-NEW YORK--1996 COMPARED TO 1997 REVENUES. Revenues increased approximately $2.1 million, or 109%. This increase was due to 1997 being the first full year of operations. Brand Dialogue-New York was started in April 1996. During 1997, there was also an increase in the number and size of projects including projects for AT&T which contributed 23% of total revenues, Cadbury Schweppes which contributed 15% of total revenues, Ford Motor Company which contributed 11% of total revenues and Whitehall which contributed 10% of total revenues. No other client contributed 10% or more of Brand Dialogue-New York's revenues during the period. COMPENSATION EXPENSE, INCLUDING EMPLOYEE BENEFITS. Compensation expense increased approximately $899,000, or 95%. The increase was proportionate with revenue growth and the result of the addition of 20 personnel. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by approximately $596,000, or 148%. The increase resulted from higher overhead associated with a 100% increase in personnel. Because of the substantial increase in the size of the business, a majority of general and administrative expense allocations, including rent, salaries, insurance and utilities increased. 37 BRAND DIALOGUE-NEW YORK--LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations was $724,000 for the year ended December 31, 1998 due to a growth in the business offset by fluctuations in working capital. Cash used in operations was approximately $3.5 million for the six months ended June 30, 1999 due primarily to an increase in accounts receivable of $3.0 million due to the increase in revenue for the six months coupled with a decrease in accounts payable and accrued expenses of $319,000 due to timing differences. Cash used in investing activities was $388,000 for the year ended December 31, 1998 and $228,000 for the six months ended June 30, 1999. In all periods, cash used in investing activities was for capital expenditures. Cash used in financing activities was $336,000 for the year ended December 31, 1998 due to the return of cash received from Young & Rubicam. Cash flows provided by financing activities was $3.7 million for the six months ended June 30, 1999 due to payments received from Young & Rubicam. FREE RANGE MEDIA, INC.--RESULTS OF OPERATIONS Free Range Media, Inc., or Free Range, is located in Seattle, Washington and has 80 employees. The following table shows certain selected financial data for Free Range on a historical basis for the periods indicated:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues.................................................. $ 2,940 $ 1,982 $ 3,520 $ 1,212 $ 4,817 Cost of services.......................................... 2,016 1,641 3,248 1,278 2,896 --------- --------- --------- --------- --------- Gross profit.............................................. 924 341 272 (66) 1,921 Selling, general and administrative....................... 2,005 2,985 4,922 2,398 2,268 --------- --------- --------- --------- --------- Operating loss............................................ $ (1,081) $ (2,644) $ (4,650) $ (2,464) $ (347) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
FREE RANGE MEDIA, INC.--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $3.6 million, or 297%. This increase resulted from the hiring of 18 consultants to meet the demand for increased size of client projects during the six months ended June 30, 1999. This includes services for Key Bank which contributed 29% of total revenues, USDA Amerischool and SMS Management which contributed 16% and 13% of total revenues, respectively. No other client contributed 10% or more of Free Range's revenues during the period. COST OF SERVICES. Cost of services increased approximately $1.6 million, or 127%. The increase resulted from costs associated with the hiring of 18 consultants due to the increase in number and size of client projects. Gross profit margin increased from a negative 5% for the six months ended June 30, 1998 to 40% for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses decreased by approximately $130,000, or 5%. The decrease resulted from a $730,000 reduction in the sales and marketing expenses due to the closure of field offices. This reduction is offset by an increase in the expenses of Free Range's wholly owned subsidiary incurred up to the date of disposition of $606,000. 38 FREE RANGE MEDIA, INC.--1997 COMPARED TO 1998 REVENUES. Revenues increased approximately $1.5 million, or 78%. This increase resulted from an increase in the number and size of client projects which was due to the hiring of 11 new consultants to meet the increased demand for services. No client contributed 10% or more of Free Range's revenues during the period. COST OF SERVICES. Cost of services increased approximately $1.6 million, or 98%. The increase resulted from costs associated with the hiring of 11 consultants. Gross profit margin decreased from 17% for the year ended December 31, 1997, to 8% for the same period in 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $1.9 million, or 65%. This increase resulted from opening sales offices throughout the United States to support anticipated growth. Selling, general and administrative expenses as a percentage of revenues decreased from 151% for the year ended December 31, 1997 to 140% for the year ended December 31, 1998. FREE RANGE MEDIA, INC.--1996 COMPARED TO 1997 REVENUES. Revenues decreased approximately $958,000, or 33%. No client accounted for 10% or more of Free Range's revenues in these periods. This decrease was due to Free Range stopping work for certain smaller clients so that Free Range could increase the number of repeat projects with larger clients. COST OF SERVICES. Cost of services decreased approximately $375,000, or 19%. The decrease resulted from a decrease in direct costs associated with fewer client projects. Gross profit margin decreased from 31% for the year ended December 31, 1996 to 17% for the same period in 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $980,000, or 49%. The increase was attributable to additional personnel necessary to support anticipated growth. FREE RANGE MEDIA, INC.--LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, Free Range had approximately $58,000 in cash and cash equivalents compared to $30,000 at December 31, 1998. Cash used in operations was $4.2 million and $1.1 million for the periods ended December 31, 1998 and June 30, 1999, respectively. In all periods, the net cash used in operating activities was due to a net loss. Cash used in investing activities was $247,000 for the year ended December 31, 1998 and $70,000 for the six months ended June 30, 1999. In all periods, cash used in investing activities was for capital expenditures for the purchase of computer equipment, furniture and fixtures and leasehold improvements. Additionally, in 1998, Free Range sold their interest in FreeZone, LLC for approximately $680,000. Cash provided by financing activities was $4.4 million for the year ended December 31, 1998 and $1.2 million for the six months ended June 30, 1999. In 1998, cash was provided by borrowings of $3.2 million and issuance of $1.2 million aggregate liquidation preference of preferred stock to a related party. In 1999, $1.2 million of cash was provided from borrowings on a note payable with a related party. 39 INTEGRATED CONSULTING, INC.--RESULTS OF OPERATIONS Integrated Consulting, Inc. dba i.con interactive, or i.con, is headquartered in Dallas, Texas, and has 36 employees. The following table sets forth certain selected financial data for i.con on a historical basis for the periods indicated:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues................................................... $ 443 $ 849 $ 2,140 $ 949 $ 1,907 Cost of services........................................... 132 267 716 267 594 --------- --------- --------- --------- --------- Gross profit............................................... 311 582 1,424 682 1,313 Selling, general and administrative........................ 315 550 1,383 516 1,124 --------- --------- --------- --------- --------- Operating income (loss).................................... $ (4) $ 32 $ 41 $ 166 $ 189 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INTEGRATED CONSULTING, INC.--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $958,000, or 101%. This increase resulted entirely from the revenues generated by the expansion in the number of consultants from 12 to 25 to meet the increased demands for services during the six months ended June 30, 1999, including services for the Texas Rangers Baseball Club and Dallas Stars Hockey Club. No client contributed 10% or more of i.con's revenues during the period. i.con earned a portion of its revenue under barter arrangements with certain customers in which i.con provided website development and maintenance services in exchange for advertising. Barter revenues increased approximately $59,000, or 39%, from $153,000 for the six months ended June 30, 1998 to $212,000 for the same period in 1999. This increase resulted primarily from an increase in web development services for the Texas Rangers Baseball Club and Dallas Stars Hockey Club. COST OF SERVICES. Cost of services increased approximately $327,000, or 122%. The increase resulted from costs associated with the hiring of 13 consultants due to the increased number of client projects. Gross profit margin decreased from 72% for the six months ended June 30, 1998 to 69% for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $608,000, or 118%. The increase was due to increases in executive compensation of $182,000, personnel costs of $123,000 due to the hiring of additional administrative personnel to support the increases in sales, a $67,000 increase in sales commissions, a $58,000 increase in legal and professional expenses related to the transaction with Luminant and increased personnel recruitment costs. INTEGRATED CONSULTING, INC.--1997 COMPARED TO 1998 REVENUES. Revenues increased approximately $1.3 million, or 152%. i.con earned a portion of its 1998 revenue under barter arrangements with certain customers for website development and maintenance services in exchange for advertising. Barter revenues were $425,000 for the year ended December 31, 1998 and were $0 for the year ended December 31, 1997. This increase related primarily to the recording of revenue for transactions with the Texas Rangers Baseball Club and Dallas Stars Hockey Club. Barter revenue was not recorded for the year ended December 31, 1997, as i.con had not entered into a formalized plan with the Texas Rangers or Dallas Stars and did not meet requirements for recording barter revenue in that period. The remaining amount of the increase in revenues was attributable to a 70% increase in the number of consultants in order to meet additional demand for services. For the year ended 40 December 31, 1998, the Dallas Stars contributed 12% of total revenues. No other client contributed 10% or more of i.con's revenues during the period. COST OF SERVICES. Cost of services increased approximately $449,000, or 168%. The increase resulted from costs associated with a 70% increase in the number of consultants. Gross profit margin decreased from 69% for the year ended December 31, 1997 to 67% for the same period in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by approximately $833,000, or 151%. The increase resulted from the addition of seven personnel. INTEGRATED CONSULTING, INC.--1996 COMPARED TO 1997 REVENUES. Revenues increased approximately $406,000, or 92%. During 1997, there was a 67% increase in the number of consultants in order to meet the demand caused by the increased number and size of client projects, which included services performed for S2 Systems which contributed 13% of total revenues and Alcatel Network Systems which contributed 10% of total revenues. No other client contributed 10% or more of i.con's revenues during the period. COST OF SERVICES. Cost of services increased approximately $135,000, or 102%. This increase was due to a 67% increase in the number of consultants. Gross profit margin decreased from 70% for the year ended December 31, 1996 to 69% for the same period in 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $235,000, or 75%. The increase resulted from salaries and benefit costs related to the addition of personnel. INTEGRATED CONSULTING, INC.--LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, i.con had approximately $108,000 in cash and cash equivalents compared to $9,000 at December 31, 1998. Cash provided by operations was $49,000 in 1998, which was due to net income and other working capital changes due to the overall growth in the Company. Cash provided by operations was $118,000 for the six months ended June 30, 1999, which was due to fluctuations in working capital changes due to the growth in the business. Cash used in investing activities was $147,000 for the year ended December 31, 1998 and $160,000 for the six months ended June 30, 1999. In all periods cash used in investing activities was for capital expenditures for the purchase of computer equipment, furniture and fixtures and leasehold improvements. In 1998, cash provided from financing activities was $64,000 from proceeds from long-term debt. For the six months ended June 30, 1999, cash of $141,000 was provided from financing activities by $140,000 of borrowings on i.con's line of credit and proceeds from long-term debt. At June 30, 1999, i.con's revolving credit facilities provided for borrowings up to $250,000. Borrowings of $175,000 were available under the credit facility as of June 30, 1999. 41 INTERACTIVE8, INC.--RESULTS OF OPERATIONS InterActive8, Inc., or InterActive8, is located in New York, New York, and has 68 employees. The following table sets forth certain selected financial data for InterActive8 on a historical basis for the periods indicated:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues.................................................. $ 1,713 $ 2,818 $ 4,097 $ 1,891 $ 3,657 Cost of services.......................................... 1,056 1,634 2,033 1,521 4,679 --------- --------- --------- --------- --------- Gross profit.............................................. 657 1,184 2,064 370 (1,022) Selling, general and administrative....................... 460 1,382 2,419 577 1,255 --------- --------- --------- --------- --------- Operating income (loss)................................... $ 197 $ (198) $ (355) $ (207) $ (2,277) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INTERACTIVE8, INC.--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $1.8 million, or 93%. This increase resulted from an increase in the number of consultants from 32 to 61 to meet the demand caused by additional client projects, including Maybelline. For the six months ended June 30, 1999, A&E Television Networks contributed 33% of total revenues and M&M/Mars contributed 16% of total revenues compared to 27% and 26%, respectively, during the six months ended June 30, 1998. No other client contributed 10% or more of InterActive8's revenues during the six months ended June 30, 1999. COST OF SERVICES. Cost of services increased approximately $3.2 million, or 208%. The increase resulted from direct costs related to the hiring of 29 consultants as well as the recognition of compensation expense for equity appreciation rights in the amount of $2.9 million. Gross profit margin decreased from 20% for the six months ended June 30, 1998 to a negative 28% for the same period in 1999. However, excluding equity related compensation expense, the gross profit margin would have been 51% for the six months ended June 30, 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $678,000, or 118%. The increase resulted from $284,000 of additional personnel costs, $98,000 of additional costs related to recruitment and temporary employees, an increase in depreciation expense of $82,000 and an increase of $214,000 in other costs to support the increase in revenues. INTERACTIVE8, INC.--1997 COMPARED TO 1998 REVENUES. Revenues increased approximately $1.3 million, or 45%. This increase was due to an increase in the number of consultants on staff to perform services. For the year ended December 31, 1998, A&E Television Networks contributed 35% of total revenues, which represented an increase of approximately $559,000 over 1997, and M&M/Mars contributed 10% of total revenues. No other client contributed 10% or more of InterActive8's revenues during the period. COST OF SERVICES. Cost of services increased approximately $399,000, or 24%. The increase resulted from costs related to the hiring of nine consultants due to the increased number of client projects. Gross profit margin increased from 42% for the year ended December 31, 1997 to 50% for the same period in 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $1.0 million, or 75%. Because of the 45% increase in revenues, and the related 42 increase in the number of personnel, a majority of general overhead costs including salaries, rent, utilities and insurance increased as well. INTERACTIVE 8, INC.--1996 COMPARED TO 1997 REVENUES. Revenues increased approximately $1.1 million, or 65%. This increase resulted from an increase in the number and size of client projects during the year ended December 31, 1997, including projects for A&E Television Networks which contributed 31% of total revenues, AT&T which contributed 14% of total revenues and M&M/Mars which contributed 21% of total revenues. No other client contributed 10% or more of InterActive8's revenues during the period. COST OF SERVICES. Cost of services increased approximately $578,000, or 55%. The increase resulted from the addition of professional consulting personnel. Gross profit margin increased from 38% for the year ended December 31, 1996 to 42% for the same period in 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $922,000, or 200%. Due to the $1.1 million increase in revenues, and the related changes in headcount, a substantial portion of general and administrative expenses increased as well. INTERACTIVE8, INC.--LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, InterActive8, Inc. had approximately $150,000 in cash and cash equivalents compared to $130,000 at December 31, 1998. Cash provided by operations was $668,000 for the six months ended June 30, 1999. Cash used in operations was $549,000 for the year ended December 31, 1998. In all periods, cash from/used in operations was due to InterActive8, Inc.'s net loss offset by working capital changes due to the growth of the business. Additionally, for the six months ended June 30, 1999, the net loss of $2.3 million was offset by a non-cash compensation charge of $2.9 million. Cash used in investing activities was $151,000 for the year ended December 31, 1998 and $898,000 for the six months ended June 30, 1999. In all periods, cash used in investing activities was for capital expenditures for the purchase of computer equipment and leasehold improvements. Cash provided by financing activities was $250,000 for the six months ended June 30, 1999 due to borrowings on InterActive8, Inc.'s credit facility and long-term debt. Cash provided by financing activities for the year ended December 31, 1998 was $738,000 due to borrowings on InterActive8, Inc.'s credit facility and long-term debt of $746,000 and the issuance of common stock for $50,000. At June 30, 1999, InterActive8, Inc.'s revolving credit facilities provided for borrowings up to $250,000. There was no borrowing available under the credit facility. MULTIMEDIA RESOURCES, LLC--RESULTS OF OPERATIONS Multimedia Resources, LLC, or Multimedia, is located in Larchmont, New York and has 14 employees. The following table sets forth certain selected financial data for Multimedia on a historical basis for the periods indicated:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues.................................................. $ 1,928 $ 3,476 $ 2,068 $ 1,352 $ 1,629 Cost of services.......................................... 985 2,437 1,756 1,153 889 --------- --------- --------- --------- --------- Gross profit.............................................. 943 1,039 312 199 740 Selling, general and administrative....................... 420 537 275 131 282 --------- --------- --------- --------- --------- Operating income (loss)................................... $ 523 $ 502 $ 37 $ 68 $ 458 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
43 MULTIMEDIA RESOURCES, LLC--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $277,000, or 20%. This increase resulted from an increase in the number of clients as well as growth in services to MasterCard International. For the six months ended June 30, 1999, MasterCard International contributed 31% of total revenue. No other client contributed 10% or more of Multimedia's revenues during the period. COST OF SERVICES. Cost of services decreased approximately $264,000, or 23%. The decrease resulted from lower outside consultant costs of $321,000, offset by an increase in in-house consultant wages. Gross profit margin increased from 15% for the six months ended June 30, 1998 to 45% for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $151,000, or 115%. Salaries and wages increased $85,000 due to the hiring of additional personnel. The remaining increase is the result of additional costs including insurance and utilities increasing to support revenue growth. MULTIMEDIA RESOURCES, LLC--1997 COMPARED TO 1998 REVENUES. Revenues decreased approximately $1.4 million, or 41%. This decrease resulted from the temporary loss of MasterCard International as a client. Multimedia resumed providing services to MasterCard International during the first quarter of 1999. For the year ended December 31, 1998, MasterCard International still contributed 34% of total revenues. No other client contributed 10% or more of Multimedia's revenues during the period. COST OF SERVICES. Cost of services decreased approximately $681,000, or 28%. The decrease resulted from the temporary loss of MasterCard International, a significant client. Gross profit margin decreased from 30% for the year ended December 31, 1997 to 15% for the same period in 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses decreased by approximately $262,000, or 49%. The decrease resulted from decreases in owner salaries as a result of a decrease in volume. 44 MULTIMEDIA RESOURCES, LLC--1996 COMPARED TO 1997 REVENUES. Revenue increased approximately $1.5 million, or 80%. This increase resulted from an increase in Internet development projects for MasterCard International of approximately $1.1 million and the Society of European Satellites, or SES, of approximately $400,000. For the year ended December 31, 1997, MasterCard International contributed 63% of total revenues and SES contributed 14% of total revenues. No other clients contributed 10% or more of Multimedia's revenues during the period. COST OF SERVICES. Cost of services increased approximately $1.5 million, or 147%. The increase resulted from additional personnel and $1.2 million for contract employees to support Internet development work for MasterCard International. Gross profit margin decreased from 49% for the year ended December 31, 1996 to 30% for the same period in 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $117,000, or 28%. This increase resulted directly from the increase in the volume of business. MULTIMEDIA RESOURCES, LLC--LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, Multimedia had approximately $340,000 in cash and cash equivalents compared to $121,000 at December 31, 1998. Cash provided by operations was $348,000 for the year ended December 31, 1998 and $362,000 for the six months ended June 30, 1999. In all periods, the net cash provided by operating activities was due to Multimedia generating net income and fluctuations in working capital changes due to the growth in the business. Cash used in investing activities was $4,000 for the year ended December 31, 1998 and the six months ended June 30, 1999 and was used for capital expenditures. Cash used in financing activities was $324,000 for the year ended December 31, 1998 and $139,000 for the six months ended June 30, 1999 representing distributions to members. POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--RESULTS OF OPERATIONS Potomac Partners Management Consulting, LLC, or Potomac Partners, is located in Reston, Virginia, has operations in eight states, and has 37 employees. The following table sets forth certain selected financial data for Potomac Partners on a historical basis for the periods indicated:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------- -------------------- 1997(1) 1998 1998 1999 ----------- ------------- --------- --------- (DOLLARS IN THOUSANDS) Revenues............................................ $ 372 $ 4,886 $ 1,961 $ 4,918 Cost of services.................................... 290 5,086 1,570 9,229 ----- ------------- --------- --------- Gross profit........................................ 82 (200) 391 (4,311) Selling, general and administrative................. 86 876 415 1,082 ----- ------------- --------- --------- Operating income (loss)............................. $ (4) $ (1,076) $ (24) $ (5,393) ----- ------------- --------- --------- ----- ------------- --------- ---------
- ------------------------ (1) Inception--November 1997 45 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues increased approximately $3.0 million, or 151%. This increase resulted from an increase in the number and size of client projects which was driven by the addition of 11 consultants to meet the increased demand for services. For the six months ended June 30, 1999, United contributed 36% of total revenues, Wells Fargo contributed 28% of total revenues, and Office Depot contributed 16% of total revenues. No other client contributed 10% or more of Potomac Partners' revenues during the period. COST OF SERVICES. Cost of services increased approximately $7.7 million, or 488%. Approximately $5.8 million, or 75%, of the increase was due to compensation expense for the value of equity participation rights. The remaining portion of the increase is attributable to the hiring of 11 consultants. Gross profit margin decreased from 20% for the six months ended June 30, 1998 to a negative 88% for the same period in 1999. However, excluding equity related compensation expense, the gross profit margin would have been 30% for 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $667,000, or 161%. The increase resulted from an increase in bad debt expense of $315,000, a $125,000 increase in personnel costs due to the hiring of additional personnel, a $91,000 increase in insurance costs, a $68,000 increase in travel and entertainment, and a $38,000 increase in professional fees due to the transaction with Luminant. POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--1997 COMPARED TO 1998 REVENUES. Revenues increased approximately $4.5 million, or 1,213%. The increase resulted from having a full year of operations for the year ended December 31, 1998, during which there was an increase in the number of clients. For the year ended December 31, 1998, Norwest contributed 18% of total revenues, United contributed 26% of total revenues, Japan Malls contributed 17% of total revenues and Western Development contributed 13% of total revenues. No other client contributed 10% or more of Potomac Partners' revenues during the period. COST OF SERVICES. Cost of services increased approximately $4.8 million, or 1,654%. Approximately $1.5 million of the increase was due to compensation expense related to the value of equity participation rights. The remaining increase resulted from costs associated with the hiring of 14 consultants due to the increased number of projects. Gross profit margin decreased from 22% for the year ended December 31, 1997 to a negative 4% for the same period in 1998. However, excluding equity related compensation expense, the gross profit margin would have been 27% for 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $790,000, or 919%. The increase was due to a full year's operations in 1998 compared with two months in 1997. POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC--LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, Potomac Partners had approximately $952,000 in cash and cash equivalents compared to $892,000 at December 31, 1998. Cash provided by operations was $278,000 for the year ended December 31, 1998 due to a fluctuation in working capital due to the growth of the business. Cash used in operations was $118,000 for the six months ended June 30, 1999 due to a net loss of $5.4 million offset by a $5.8 million non-cash compensation charge and other working capital changes due to the growth of the business. 46 Cash used in investing activities was $53,000 for the year ended December 31, 1998 and $34,000 for the six months ended June 30, 1999. In all periods, cash used in investing activities was for capital expenditures. Cash from financing activities was $502,000 for the year ended December 31, 1998 and $212,000 for the six months ended June 30, 1999 due to capital contributions by the members. In January 1999, Potomac Partners redeemed the interests of several members, resulting in a distribution of Potomac Partners' assets including cash of $184,000. RSI GROUP, INC. AND SUBSIDIARIES--RESULTS OF OPERATIONS RSI Group, Inc., or RSI, is headquartered in Dallas, Texas, and has four additional offices in Omaha, Nebraska; Poughkeepsie, New York; Herndon, Virginia and Research Triangle Park, North Carolina. RSI has 119 employees. The following table sets forth certain selected financial data for RSI on a historical basis for the periods indicated:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues................................................. $ 16,133 $ 15,724 $ 16,927 $ 8,461 $ 6,639 Cost of services......................................... 11,663 11,650 12,271 6,141 4,803 --------- --------- --------- --------- --------- Gross profit............................................. 4,470 4,074 4,656 2,320 1,836 Selling, general and administrative...................... 4,105 3,745 4,253 2,171 2,600 --------- --------- --------- --------- --------- Operating income (loss).................................. $ 365 $ 329 $ 403 $ 149 $ (764) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
RSI GROUP, INC. AND SUBSIDIARIES--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 REVENUES. Revenues decreased approximately $1.8 million, or 22%. This decrease resulted from a decrease in staffing related to a decrease in business with First Data Resources. During the period, RSI reduced the volume for services performed for First Data Resources in order to concentrate on a long-term strategy of focusing its business on more profitable services for other clients. First Data Resources was seeking a further reduction in rates for services which would have resulted in a decrease in the gross margins for the services. For the six months ended June 30, 1999, IBM contributed 43% of total revenues and National Association of Securities Dealers, Inc. contributed 10% of total revenues. No other client contributed 10% or more of RSI's revenues during the period. COST OF SERVICES. Cost of services decreased approximately $1.3 million, or 22%. The decrease resulted from a reduction of costs associated with a 32% decrease in the number of consultants. Gross profit margin remained unchanged at approximately 27% for the six months ended June 30, 1998 and the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased approximately $429,000, or 20%. The increase resulted from an equity based compensation charge in 1999. RSI GROUP, INC. AND SUBSIDIARIES--1997 COMPARED TO 1998 REVENUES. Revenues increased approximately $1.2 million, or 8%. This increase resulted from an increase in services performed for IBM. For the year ended December 31, 1998, IBM contributed 34% of total revenues and First Data Resources contributed 13% of total revenues. No other client contributed 10% or more of RSI's revenues during the period. 47 COST OF SERVICES. Cost of services increased approximately $621,000, or 5%. The increase resulted from a slight increase in the average number on staff in 1998. Gross profit margin increased from 26% for the year ended December 31, 1997 to 28% for the same period in 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by approximately $508,000, or 14%. The increase resulted from the addition of personnel necessary to support higher volume of business, and included increases in salaries, utilities and insurance. RSI GROUP, INC. AND SUBSIDIARIES--1996 COMPARED TO 1997 REVENUES. Revenues decreased approximately $409,000, or 3%. This decrease resulted primarily from a decline in staffing to First Data Resources. During the period RSI reduced the volume of services performed for First Data Resources in order to concentrate on a long-term strategy of focusing its business on more profitable services for other clients. First Data Resources was seeking a reduction in the fee arrangements for services which would have resulted in a negative impact on gross margins. For the year ended December 31, 1997, IBM contributed 28% of total revenues, First Data Resources contributed 17% of total revenues and Computer Associates contributed 10% of total revenues. No other client contributed 10% or more of RSI's revenues during the period. COST OF SERVICES. Cost of services decreased approximately $13,000, or less than 1%, which was a direct result of the slight decrease in the volume of business. Gross profit margin decreased from 28% for the year ended December 31, 1996 to 26% for the same period in 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses decreased by approximately $360,000, or 9%. The decrease was primarily due to a reduction in staffing. RSI GROUP, INC. AND SUBSIDIARIES--LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, RSI had approximately $36,000 in cash and cash equivalents compared to $30,000 at December 31, 1998. Cash provided by operations was $38,000 for the year ended December 31, 1998 and $885,000 for the six months ended June 30, 1999. In 1998, the net cash used in operating activities was due to fluctuations in working capital due to growth of the business. For the six months ended June 30, 1999, the cash provided by operating activities was due to a $811,000 reduction in accounts receivable. Cash used in investing activities was $199,000 for the year ended December 31, 1998 and $8,000 for the six months ended June 30, 1999. In all periods, cash used in investing activities was for capital expenditures for the purchase of computer equipment and furniture fixtures. Cash used in financing activities was $872,000 for the six months ended June 30, 1999 due to repayments on the line of credit of $762,000. Cash provided by financing activities was $179,000 in 1998 due to borrowing under the line of credit of $220,000. At June 30, 1999, RSI's revolving credit facilities provided for borrowings up to $2.4 million. At June 30, 1999, approximately $1.4 million remained available for borrowing under the credit facility. PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES On a historical basis the eight companies and Luminant used $3.3 million and $3.2 million of cash in its operations for the year ended December 31, 1998 and the six months ended June 30, 1999. Of the $3.3 million of cash used in operations on a historical basis for the year ended December 31, 1998, one company, Free Range, used $4.2 million. Exclusive of Free Range, the 48 other companies as a group provided cash flows from operations of $900,000 for the year ended December 31, 1998. The cash flow used in operating activities for Free Range relates primarily to the net loss incurred by the Company during the year ended December 31, 1998. Of the $3.2 million of cash used in operations on a historical basis for the six months ended June 30, 1999, Brand Dialogue-New York used $3.5 million and Free Range used $1.1 million. Exclusive of Brand Dialogue-New York and Free Range, the other companies as a group provided cash flows from operations of $1.7 million for the six months ended June 30, 1999. The cash flow used in operating activities for the six months ended June 30, 1999 was the first use of cash by Brand Dialogue-New York in any of the periods presented and is attributable to several factors. There has been an increase in accounts receivable and amounts due from related parties a result of the increase in revenues for the six months ended June 30, 1999. Amounts due from related parties represent receivables from Young & Rubicam. During the six months ended June 30, 1999, Free Range experienced a significant growth in accounts receivable, which increased to an approximate 70 day collection cycle as a result of the increase in the amount of revenue generated by Free Range. We believe the acceleration of cash receipts from customers to within normal terms of 30-45 days, management of the timing of additions of personnel and restricting other cash operating expenditures to those required to generate immediate revenue will reduce the uses of cash by Free Range to less than $1.0 million per year. Luminant intends to implement a unified budgetary system to ensure that unexpected uses of cash flows in operations are kept to a minimum. We initiated preliminary discussions with First Union Corporation in July 1999 to obtain a senior credit facility sufficient to provide working capital for all our companies and to finance potential acquisitions, but we cannot assure you that we will obtain a credit facility. If a credit facility can be obtained, it is likely that it would require us to comply with various loan covenants including maintenance of specified financial ratios; restrictions on additional indebtedness; and restrictions on liens, guarantees, advances and dividends. The facility would be used for working capital and general corporate purposes, including payment of the contingent consideration from the current acquisitions and any future acquisitions. We cannot assure you that we will obtain a credit facility on advantageous terms, if at all. If we are unable to obtain a credit facility, we may not be able to acquire additional companies, open or expand offices, make capital expenditures, hire and train additional personnel or otherwise expand our business. On a pro forma basis, we made capital expenditures of approximately $2.6 million during the year ended December 31, 1998 and approximately $1.8 million during the six months ended June 30, 1999. These capital expenditures were primarily for computer equipment, internally used software purchases and leasehold improvements. We expect to make capital expenditures of approximately $3.2 million for hardware, software, and leasehold improvements during the next 12 months. No assurance can be made with respect to the actual timing and amount of these expenditures. After the closing of this offering and the sale of shares of non-voting common stock directly to Young & Rubicam, Luminant will have approximately $15.4 million in cash and cash equivalents and approximately $8.5 million of indebtedness outstanding on a pro forma basis and expects to make capital expenditures of $3.2 million for hardware, software, and leasehold improvements in the next 12 months. Luminant intends to minimize the operating uses of cash by Free Range as described above; however, even if these improvements take longer than expected the available cash and cash equivalents are expected to be sufficient to finance capital expenditures, working capital and operations for the next 12 months. 49 As part of the acquisition agreements, targets were established that would provide additional purchase consideration. We have the discretion to pay anywhere from 0% to 50% of the contingent consideration in cash, with the balance to be paid in common stock. To the extent we elect to pay any portion of the contingent consideration in cash, we would be required to seek additional debt or equity financing if that portion of the contingent consideration would not be covered by the increased operating cash flows from meeting these targets and any remaining cash proceeds of this offering. Prior to the initial filing of the registration statement to which this prospectus relates, we entered into agreements to acquire the eight companies. On or about September 2, 1999, we amended the acquisition agreements to change what the owners of the eight companies will receive. It is possible that the owners of the eight companies who receive 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 under this prospectus, and that the offering and sale of shares to the owners of the eight companies 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 company or make a monetary claim for the value of those shares. This claim could be made for all of the 16,534,859 shares of common stock received by the owners of the acquired companies, which based upon the assumed offering price of $16.00 per share would represent a total potential claim of $264.6 million. We believe that the offer and sale of common stock to the owners of the eight companies should not be integrated with the offer and sale of the common stock to the public under this prospectus and qualifies for a private placement exemption. We also believe that the agreement by the owners of the eight companies 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 owners entered into the agreement 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 agreement. We cannot assure you, however, that the owners of the companies would fail in arguing that the offering of shares of common stock to them should be integrated with the public offering pursuant to this prospectus 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. We intend to pursue acquisition opportunities. The timing, size or success of any acquisition and the associated potential capital expenditures and commitments are unpredictable. We believe that cash flow from operations, borrowings under the proposed line of credit and the unallocated net proceeds of this offering will be sufficient to fund our capital requirements for at least the next 12 months, excluding potential acquisitions. 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, incurrence of indebtedness, or both. In addition, we cannot assure you that our working capital needs will not exceed anticipated levels or working capital generated will be sufficient to fund our operations. As a result, we may be required to obtain additional financing from bank borrowings or debt or equity offerings. YEAR 2000 READINESS DISCLOSURE STATEMENT The Year 2000 issue is the result of computer programs using two digits rather than four to define the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations 50 causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in similar business activities. Although we have discussed the Year 2000 readiness of each company with the management of the eight companies, we will not conduct an independent investigation of the Year 2000 readiness of the eight companies prior to the closing of the offering and the simultaneous acquisition of the eight companies. In connection with the acquisitions of our eight companies, however, we have received a representation from the former owners of each company that their company does not face material unresolved Year 2000 issues. To the extent these representations are breached and we suffer damages, our operating results and financial condition may be adversely affected. Additionally, many of our companies have contacted their major clients and vendors to assess their Year 2000 readiness. We depend on smooth and timely interactions with our vendors, clients and other third parties. Any unexpected costs or disruption in the operations or activities of such vendors, clients or other third parties as a result of Year 2000 compliance issues within such entities could materially adversely affect our business, operating results or financial condition. We intend to continue identifying Year 2000 problems related to our clients and vendors and to formulate a system of working with key third parties to understand their ability to continue providing services and products through the change to Year 2000. We intend to work directly with our key vendors, including financial institutions and utility providers, and partner with them if necessary, to avoid any business interruptions. We believe the most likely worst case scenario related to Year 2000 risks is a material business interruption that leads to client dissatisfaction and the termination of an engagement or engagements by dissatisfied clients. Such an interruption in services could occur due to a breakdown in any number of our computer systems and applications on other systems, or the systems of third parties. Examples are failures in our application software, computer chips embedded in equipment, supply of materials from our suppliers, or lack of adequate telecommunications, power, or other utilities. Any such failure could prevent us from being able to deliver our services as expected, which could materially adversely affect our business, operating results and financial condition. Based upon the representations made and information supplied by the former owners of the eight companies, we do not anticipate costs associated with the Year 2000 issue to have a material adverse financial impact on us. There may, however, be interruptions or other limitations of financial and operating systems' functionality, and we may incur additional costs to avoid these interruptions or limitations. Our expectations about future costs associated with the Year 2000 issue are limited by uncertainties that could cause actual results to have a greater financial impact than currently anticipated. Factors that could influence the amount and timing of future costs include: - our success in identifying systems and programs that contain two-digit year codes; - the nature and amount of programming required to upgrade or replace each of the affected programs; - the rate and magnitude of related labor and consulting costs; and - our success in addressing Year 2000 issues with our clients, vendors and other third parties with which we do business. RECENT ACCOUNTING PRONOUNCEMENT In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," or SOP 98-1. SOP 98-1 requires companies to capitalize qualifying computer software costs that are incurred during the application development stage and amortize them over the software's estimated useful life. The adoption of SOP 98-1 is not expected to have a material adverse impact on our financial position or results of operations. 51 BUSINESS OVERVIEW We provide professional services to Fortune 500 companies, Internet and electronic commerce-based companies and other organizations that use or want to use the Internet and electronic commerce in their businesses. We help traditional businesses incorporate the Internet and electronic commerce into their businesses. We also help primarily Internet-based businesses conduct their business more effectively. We provide the following Internet and electronic commerce professional services: - strategy consulting, which helps clients understand how to use the Internet and electronic commerce to operate their businesses more competitively and interact with their customers and suppliers more effectively; - creative solutions, which involve web site designing, creating marketing programs for attracting customers to web sites, and developing a web site "look and feel" that projects a client's identity and serves a client's business goals; - technology solutions, which involve the actual building and installation of Internet and electronic commerce software applications, including web sites and interfaces to mainframes and existing systems; and - ongoing services, which are continuing services we provide that support and complement our clients' Internet and electronic commerce businesses, such as ongoing Internet site management. Our services are designed to rapidly improve a client's competitive position in their field. We provide a wide range of services from assisting our clients conceive how to use the Internet and electronic commerce in their business, to building their Internet and electronic commerce applications. We believe that our approach, which integrates our strategy consulting services, creative solutions and technology solutions, allows us to deliver in a timely manner reliable, comprehensive, secure and expandable Internet and electronic commerce business solutions. We perform services for more than 100 clients, including the following, each of which contributed at least $1.0 million to, and accounted for at least one percent of, our pro forma combined revenues for the 18 months ended June 30, 1999: - A&E Television Networks - Bell Atlantic Network Services, Inc. - International Business Machines Corporation - MasterCard International Incorporated - Mars, Incorporated - United Air Lines Inc. - Wells Fargo Bank, N.A. Our clients are diversified across many industries, including technology, financial, retailing, media and communications. We also work with companies that do business primarily over the Internet. 52 As of August 15, 1999, our 689 employees were located throughout the United States in: - California - Colorado - the District of Columbia - Florida - Georgia - Illinois - Maryland - Massachusetts - Missouri - Nebraska - New York - North Carolina - Pennsylvania - Texas - Virginia - Washington - Wisconsin On a pro forma combined basis, we had $54.8 million of revenues for the year ended December 31, 1998 and $41.4 million of revenues for the six months ended June 30, 1999. OUR COMPANY Simultaneously with the closing of this offering we expect to acquire the following eight companies: ALIGN SOLUTIONS CORP.'S services include creating Internet site content and advertisements; multimedia presentations; Internet site design; document services, maintenance of databases and workflow automation; and systems integration services. Align has special expertise in the energy and financial services industries. BRAND DIALOGUE-NEW YORK is presently the New York branch of a Young & Rubicam division. The services offered by the Brand Dialogue-New York business that we intend to acquire include strategic consulting in the technology and marketing areas, Internet site development and on-going Internet site management, on-line media strategy and planning, on-line advertising campaigns and development of Internet-based branding applications. Brand Dialogue-New York has provided services to customers in the financial, pharmaceuticals, media and communications industries. FREE RANGE MEDIA, INC. provides strategic consulting and creative solutions that address a client's overall business objectives. Free Range has special expertise in the financial services, health care and communications industries. INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE, offers creative solutions, online brand development and ongoing maintenance of Internet site content. i.con has special expertise in the entertainment, hospitality, technology and telecommunications industries. INTERACTIVE8, INC.'S services include strategic consulting, development of Internet site content, applications development, database and electronic commerce integration, account management, Internet site hosting, tracking and analysis, and Internet marketing. InterActive8 has special expertise in the media and communications and consumer products industries. MULTIMEDIA RESOURCES, LLC'S services include strategic consulting, business development, and development of Internet marketing programs. Multimedia has special expertise in media, retailing and financial services industries. POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC'S professional services include the formulation of electronic commerce strategy, program management, development of strategic partnerships, and business process design. Potomac Partners has special industry expertise in the financial services, retailing, media, entertainment, communications and transportation industries. 53 RSI GROUP, INC. AND SUBSIDIARIES' services include the distribution and decentralization of computing systems, including the integration of electronic commerce systems, providing mission-critical Internet process services, application development, and professional staffing and technology support. RSI has special expertise in the technology, transportation, telecommunications, financial and consumer goods industries. INDUSTRY BACKGROUND The Internet is continuing its rapid development from primarily an information delivery medium to an interactive platform through which companies market, operate and manage their businesses and conduct transactions. As a result of its widespread adoption, the Internet has been the catalyst for an evolution of business to business, business to consumer and employer to employee relationships and communications. The explosive growth of the Internet and its potential to create new opportunities and pose fundamental threats to the competitive positions of traditional businesses presents enormous challenges for the managers of companies. This is leading to the rapid growth of, and demand for, professional services relating to the Internet and electronic commerce. Companies are using the Internet to restructure the way they conduct their businesses. The Internet provides new ways for companies to market their products and services, manage their operations and employees, and improve their financial results. Through the Internet, companies have the ability to improve their competitive positions; reduce operating, transaction and overhead costs; shorten product and marketing cycle times; create and strengthen business alliances; and improve and accelerate the flow of information both internally and externally. Through electronic commerce and the Internet, organizations are identifying, developing and expanding product and service offerings and creating new innovative strategies and operating models. This ability has led to the emergence of new businesses. The emergence of the Internet and electronic commerce creates significant challenges for virtually all companies regardless of industry or location. In many industries traditional barriers to entry, such as physical or capital assets, are becoming less important, and the traditional competitive advantages and business models that companies relied on to sustain their profitability are diminishing. The Internet and other technologies reduce the effect of geographic barriers, price discrimination and other factors and are changing the way many businesses have historically competed. Forrester Research, an industry research firm, estimates the revenues generated from Internet commerce will grow from $43 billion in 1998 to $1.4 trillion in 2003. This represents a compound annual growth rate of 91%. In order to successfully develop Internet businesses and conduct electronic commerce, companies need to understand how the Internet will fit in with their overall long and short term business plans, and how business over the Internet differs from conventional business operations to be successful. Internet sites must be distinctive, attractive, engaging and easy to use. Companies need to use the right tools to successfully achieve their goals and develop effective technology systems. Generally, companies do not have the internal resources necessary to establish an electronic commerce presence on the Internet in the rapid time frames needed to meet their business goals. We believe that companies will focus on their core competencies and will not make the time or financial commitment necessary to hire and train the professionals needed to build in-house capabilities. International Data Corporation, or IDC, an industry research firm, forecasts that the market for Internet and electronic commerce professional services worldwide will grow to $78.5 billion by 2003. 54 The need for organizations to act quickly and effectively has led to the demand for coordinated strategic, creative and technology services. Many traditional professional services firms can typically provide services in strategy consulting, creative solutions or in technology solutions. The need to integrate these disciplines is beyond the capabilities of most traditional service firms, however, especially given the rapid time frames for developing Internet and electronic commerce businesses. As a result, we believe there is great demand for professional services firms that can effectively provide services in all three disciplines in the rapid time frame and focus that the Internet and electronic commerce business environment demands. THE LUMINANT SOLUTION We are a provider of Internet and electronic commerce solutions for clients in diversified industries located throughout the United States and abroad. We are able to provide the combination of strategy consulting, creative solutions and technology solutions that clients need to create and expand their Internet and electronic commerce businesses. We also provide on-going services needed to manage and operate our clients' Internet businesses. We concentrate on providing clients with a broad range of capabilities which blend the disciplines of strategy consulting, creative solutions and technology solutions. Our work is focused on: - LEADING INDUSTRY SOLUTIONS. We believe that we provide clients with leading edge solutions critical to their success. Our strategy consulting practice helps clients develop and sharpen their strategic vision in order to capitalize on Internet and electronic commerce opportunities. Our creative solutions practice then provides web site design, marketing programs for attracting customers to web sites, and the development of a web site "look and feel" that projects a client's identity and serves a client's business goals. Our technology solutions practice builds and installs the Internet and electronic commerce software applications necessary to successfully operate Internet businesses. In addition, we provide ongoing services that support and complement our clients' Internet and electronic commerce businesses, including ongoing Internet site management. - INTEGRATED DELIVERY MODEL. We are able to deliver strategy consulting, creative solutions and technology solutions in an integrated, coordinated manner that addresses our clients' Internet and electronic commerce-related business challenges in rapid time frames. - LONG-TERM CLIENT RELATIONSHIPS. Our extensive understanding of our clients' needs and objectives allows us to provide integrated Internet and electronic commerce professional services that help our clients grow revenues and reduce costs. Our strategy consulting, creative and technology services and skills are geared to establishing multi-year and multi-project relationships with our clients. - STRONG MANAGEMENT TEAMS. We have a highly experienced group of Internet and electronic commerce professionals in each of our practice areas. These professionals combine to form a knowledgeable client management team with many years of professional experience. These teams offer seamless client solutions that address a client's strategic vision, sales and marketing objectives. Our breadth of experience and skills allows us to provide multifaceted assistance to our clients. STRATEGY We intend to strengthen our position as a provider of professional services to Fortune 500 companies, Internet and electronic commerce-based companies and other organizations who 55 use or want to use the Internet and electronic commerce in their business. Our strategy for achieving this objective is based on the following key elements: - LEVERAGE OUR THREE MAIN PRACTICE AREAS. Through our three main practice areas, strategy consulting, creative solutions and technology solutions, we are able to deliver valuable services to our clients. These practice areas allow us to fully capture our collective expertise and channel those skills to deliver our solutions to our clients in an effective, consistent, disciplined and integrated manner. In addition, given the need for rapid business development in the Internet arena, our ability to integrate our three main practices will be an important feature of our services and a key point of differentiation in the marketplace. - EXPAND LONG-TERM CLIENT RELATIONSHIPS. We have a number of established long-term client relationships and we intend to develop and sustain additional client relationships over time. Our client service teams are able to integrate strategic solutions, creative solutions and technology solutions at each stage of our client engagements. We believe that by offering our clients coordinated strategy consulting, creative and technology services we are able to help our clients grow revenues and reduce expenses. Furthermore, we believe that maintaining a reputation for being an innovative Internet and electronic commerce professional services firm will increase our ability to attract new clients, including by referral from our existing clients. - OPERATE AS A SINGLE, FULLY INTEGRATED FIRM. We are creating a strong, dynamic, united platform for our business based on an integrated firm concept. We intend to leverage our strong executive leadership to project a unified mission and integrated operating model. All of our businesses are adopting a single corporate vision, name, identity and brand. Our management and our employees will be provided incentives that are based on overall corporate performance. We believe it is critical to establish strong internal management systems and processes in order to maintain a high, consistent level of client service and efficient utilization of the skills of our people. The key management infrastructure will be centered on financial and management information, communications, incentives, recruiting, training and knowledge management. - MAINTAIN LEADING EDGE PROFESSIONAL CAPABILITIES AND TECHNOLOGY SOLUTIONS. In order to provide our clients with the industry's leading edge solutions and our integrated approach to their Internet and electronic commerce professional services needs, we place a strong focus on attracting, hiring, developing and retaining outstanding personnel. We focus on keeping the skills of our employees in-line with the industry's most current standards, and on developing management and leadership skills among a broad cross-section of our people. To facilitate ongoing professional development and innovation, we focus on several key skill sets: problem solving, analysis, communications, creativity, team work and effectiveness with our clients. - EXPAND OUR BREADTH OF SERVICE AND GEOGRAPHIC SCOPE. As our clients' needs broaden and expand, we intend to enhance our set of service capabilities, improve our geographic reach and strengthen our management team. We intend to build our capabilities through organic growth and through selective strategic acquisitions in the United States and internationally. - PROVIDE ONGOING SERVICES. As part of our comprehensive, integrated approach to our long-term client relationships, we provide clients with ongoing services which enhance a clients' ability to operate their Internet and electronic commerce businesses. Those services include managing the content of Internet sites and providing placement of advertising media. We believe that these ongoing services are critical to seamlessly 56 providing a client with the best possible Internet and electronic commerce professional services and are a principal factor that enables us to attract and retain our clients. SERVICES We offer a wide range of Internet and electronic commerce professional services to traditional businesses as well as new Internet-based businesses. These services fall into a number of categories, including strategy consulting, creative solutions, technology solutions and ongoing services, which involve the following activities: STRATEGY CONSULTING Strategy consulting includes services that help our clients understand how to use the Internet and electronic commerce to achieve operating efficiencies, open new and more effective ways to communicate with customers and suppliers, enhance competitive advantages and otherwise incorporate the Internet and electronic commerce into their businesses. Our strategy consulting practice area includes: - BUSINESS STRATEGY. We analyze the economic structures of industries and particular businesses and help our clients establish financial and non-financial goals. We also screen alliance and acquisition choices, analyze customers and markets, conduct competitive and pricing analyses and advise clients regarding pricing. - MARKETING STRATEGY. We provide profiles and advice about the make-up of our clients' markets and suggest ways to promote and distribute a client's products and services. We also identify and construct opportunities for partnering with other businesses, and develop ways to increase Internet site traffic. - TECHNOLOGY STRATEGY. We provide advice regarding technology systems, selection of tools for managing an Internet site, ways to communicate with customers and suppliers, and technology-related partnerships and alliances. - BRANDING AND IDENTITY. We identify branding goals and analyze market positioning for our clients and plan for the development, testing and establishment of their online brands. We also coordinate the Internet and non-Internet branding efforts of our clients, and develop plans for communicating to their customers. CREATIVE SOLUTIONS Creative solutions involve designing Internet sites that visually engage the targeted end-user and are consistent with a client's branding, identity and overall business strategy. Our creative practice area includes: - INTELLECTUAL PRODUCT DEVELOPMENT. We create designs, graphics and Internet site plans. We also help clients develop and install the content on their Internet sites. - INTERNET MARKETING. We create marketing programs for our clients' Internet sites which focus on increasing customers and improving revenues, market positions and profitability. - CUSTOMER DEVELOPMENT, MEASUREMENTS AND ANALYSIS. We develop methods for measuring and analyzing the effectiveness of the client's Internet enterprise. We design and install Internet and electronic commerce software applications to help clients target, acquire and retain customers, expand customer relationships and generate new business and demand for services. We also design and install Internet and electronic commerce software applications to measure sales cycles, manage the life cycle of a customer relationship, analyze pricing and tactics and evaluate sales force efficiency and effectiveness. 57 TECHNOLOGY SOLUTIONS We use leading technologies to deliver solutions that fulfill our clients' strategic objectives. We assist our clients in building new Internet and electronic commerce software applications and integrating these applications into our clients' existing systems. Our technology practice area includes: - TECHNOLOGY DEVELOPMENT. We build and install the Internet and electronic commerce software applications needed by our clients to achieve their marketplace goals. We help our clients identify all requirements for building and maintaining an Internet site. We also help our clients use Internet and electronic commerce technology to build flexible, adaptable systems. - INTERNET INTEGRATION. We integrate the Internet software applications with existing systems in other areas of the client's business. We integrate Internet software applications for back office systems relating to customer service, pricing, purchasing, shipping, inventory, order fulfillment and information systems. We also integrate corporate intranets and extranets. - ELECTRONIC COMMERCE MANAGEMENT. We help clients design and install Internet based software applications for handling electronic order management and transaction processing. - CONTENT AND PRODUCT DEVELOPMENT MANAGEMENT TOOLS. We help clients create, support and manage their Internet sites and electronic commerce systems, perform quality control on, and automatically update, electronic content, and develop databases to support current and archived electronic content. - SECURITY. We plan, implement and audit security practices to protect our clients' systems from unauthorized access and intrusion. ONGOING SERVICES Our clients engage us to perform ongoing services, which enables us to maintain long-term client relationships and to support their Internet and electronic commerce business operations. The ongoing services that we provide include: - CONTENT SERVICES. We manage some or all of the content on our clients' Internet sites, including static or continuously updated content for entire sites or subsections of sites. - RESEARCH SERVICES AND MARKET ANALYSIS. We prepare ongoing studies of the effectiveness of our clients' Internet sites. We provide focus groups, surveys, and analyses comparing our clients' sites with those of their competitors using sophisticated research and analysis techniques. - PLACEMENT OF ADVERTISING MEDIA. We help clients place their advertising media by designing and creating advertisements, identifying where to place advertisements and procuring space for the media. - BUSINESS PROCESSES. We assess the various business processes of an electronic enterprise and advise clients how the processes should be performed or improved. The areas we assess include order fulfillment, billing, human resources, customer order flow, public relations and warehousing. 58 EXAMPLES OF OUR SERVICES AND SOLUTIONS The following examples illustrate the kinds of services and solutions that we have developed for specific clients: M&M/MARS M&M/Mars is a leading candy and confectionery firm, and owns a number of established consumer brands. In 1996, M&M/Mars retained us to bring the M&M's brand to the World Wide Web. Since then, we have provided the company with a wide range of Internet solutions, cutting across multiple brands and divisions, that opened up new avenues of business. From creating brand-building sites that provide rich interactive media experiences, such as the M&M Studios site and the SKITTLES-Registered Trademark- Portal, to electronic commerce solutions like the newly relaunched M&M's Network Online Store, to online recruiting sites and beyond, we have helped M&M/Mars do business in countries around the world faster and more flexibly than before. As a result, M&M/Mars has discovered new business opportunities and new ways to communicate with the world, helping it to remain a world leader in a competitive industry. MASTERCARD INTERNATIONAL MasterCard International Incorporated retained us to help build its electronic commerce business. We have developed several new interactive programs, games and partnerships designed to increase site traffic for the MasterCard.com web site. We conceived and implemented a brand-building program entitled "See the Future Now" and an educational program called "Shopping Now? Here's How," to educate consumers about the benefits of shopping in stores and online with MasterCard. Features of the program include an "instant win game" that showcases MasterCard benefits that can be realized now and in the future, and a "ShopSmart" program that educates consumers how to shop effectively and safely on the Internet. We have also worked on MasterCard International's behalf with other sites to create custom-developed media partnerships. We worked with Excite, Inc. to create a "ShopSmart" decal awareness program. The program helped MasterCard secure decal participation relationships with over 100 merchants. We have also worked to develop media partnerships with key commerce merchants, including Preview Travel, Netscape, ZDNet's, NetBuyer and GolfWeb. STERLING SOFTWARE, INC. Sterling Software, Inc. engaged us late in 1998 to redesign their current Internet site. Sterling sought a site that pulled together all of its existing Internet sites into a common look and feel, offered common, shared databases among the sites, allowed for local content updates and reflected Sterling's quality and progressiveness. We began to redesign Sterling's Internet sites in early 1999. Over the span of several months, our team redesigned, reorganized and rebuilt thousands of pages from more than a dozen different product lines and international Internet sites. The look and feel of the revised site reflects the state-of-the-art technology that underlies Sterling's solution-based products. The site now features a consistent overall design and common navigation and data structures throughout all of its sections. Each main section in the site incorporates custom photography, marketing information and background color elements. Sterling's new site also incorporates state-of-the-art Web technology such as Dynamic HTML, Flash animation, a dynamic menu system, mechanisms for local content providers to input and 59 update dynamic content and a central administration system for reviewing and posting new content. CLIENTS Our companies have provided professional services for a variety of clients in many industries. The following is a partial list of our clients that we believe is representative of our overall client base:
MEDIA AND TRAVEL AND COMMUNICATIONS TECHNOLOGY FINANCIAL TRANSPORTATION - ----------------------- ----------------------- ----------------------------- ------------------------ A&E Television International Business First Data Resources United Air Lines Inc. Networks Machines Corporation MasterCard International AT&T Corp. Microsoft Corporation Incorporated Bell Atlantic Network Sterling Software, Inc. National Association of Services, Inc. Securities Dealers, Inc. MCI Worldcom, Inc. Wells Fargo
INTERACTIVE CONSUMER ENERGY - ------------------------------ -------------------- -------------------- JuniorNet Corporation Maybelline, Inc. Chevron U.S.A. Inc. Mars, Incorporated Enron Corp. Office Depot, Inc. Halliburton Company
For the year ended December 31, 1998, IBM, our largest client, accounted for approximately 12.4% of our pro forma combined revenues. No other client accounted for 10% or more of our pro forma combined revenues for the year ended December 31, 1998 and no client accounted for 10% or more of our pro forma combined revenues for the six months ended June 30, 1999. SALES AND MARKETING Our sales approach is based on developing long-term consultative relationships with our clients. We intend to integrate the sales and marketing functions of the companies we acquire to provide for client focused professional marketing organization targeted toward developing existing client relationships by expanding the services provided to those clients as well as adding new clients. In addition to our direct sales force which will market our service along those lines, our management will actively market to companies with which they have a relationship. We will employ a team selling approach, in which our sales people collaborate with our business unit professionals and management to identify prospects, conduct sales and manage client relationships, particularly at core client relationships. We and Young & Rubicam intend to cooperate in marketing our respective services to each others' clients in order to increase the range, breadth and depth of services available to these clients. In addition, we integrate the discipline of strategic, creative and technical solutions into our clients' sale processes. We assign senior executives to each account to ensure the multi-disciplinary sales approach. This process identifies major cross-disciplinary client issues early in the process, which saves the client time and money and allows us to provide more effective services to our clients. Most of our senior executives are involved in the sales process. COMPETITION The market for our services is highly fragmented and can be characterized by intense competition and rapid technological change. We have many competitors including large and well-established firms, new entrants attracted by low barriers to entry and prospective clients who have used their internal resources to develop an Internet presence. 60 Our current competitors include, and may in the future include, the following: - Internet consulting firms and online agencies, including AGENCY.COM, AppNet, iXL Enterprises, Modem Media . Poppe Tyson, Organic Online, Proxicom, Razorfish, Scient, US Interactive, USWeb/CKS and Viant; - general management consulting firms, including Bain & Company, Boston Consulting Group, Booz Allen & Hamilton and McKinsey & Company; - the professional services groups of computer equipment companies, including Compaq, Hewlett-Packard and IBM; - systems integrators, including Andersen Consulting, Cambridge Technology Partners, Sapient, and consulting arms of the "Big Five" accounting firms; and - internally developed solutions of current and potential clients. The principal competitive factors in the Internet professional services market include Internet expertise and talent, client references, integrated strategy, technology and creative design services, quality, pricing and speed of service delivery and vertical industry knowledge. We believe we compete favorably with respect to these factors and are in a good position to attract talent with our growth and entrepreneurial culture. We believe we have established ourselves as a leader in Internet-specific industry and domain expertise. Through our solutions and our attention to client satisfaction, we have created a strong track record of customer successes. We believe the market will continue to offer significant opportunity for multiple players on the short and medium-term. INTELLECTUAL PROPERTY We utilize intellectual property in our business, some of which we consider proprietary. We generally rely on trade secret law to protect our proprietary interests. We cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property, and we may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. If third parties infringe or misappropriate our trade secrets, copyrights, trademarks or other proprietary information, our business could be seriously harmed. In addition, although we believe that our proprietary rights do not infringe on the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights. These claims, even if not true, could result in significant legal and other costs and may be a distraction to management. Protection of intellectual property in many foreign countries is weaker and less reliable than in the United States, so if our business expands into foreign countries, risks associated with protecting our intellectual property will increase. EMPLOYEES As of August 15, 1999, we had a total of 689 employees, of which 47 were in management, 529 in professional services, 46 in sales and marketing and 67 in administration. Success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. None of our employees are represented by labor unions. We believe our relationship with our employees is good. To succeed, we must continue to hire, retain and train outstanding professionals. We believe that our success retaining these individuals will depend significantly on our ability to provide a rich learning environment, to provide a one-firm culture and to offer continued professional development as well as economic incentives. 61 We believe that developing our one-firm concept with a shared culture is critical to our ability to attract top management, strategic, technology, design, sales, marketing and support professionals. Our core values include a dedication to maintaining an innovative and team-based environment in order to achieve total client satisfaction and provide our employees with personal and professional growth opportunities. FACILITIES We lease offices located in Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; Houston, Texas; Herndon, Virginia; Larchmont, New York; New York City, New York; San Francisco, California; and Seattle, Washington. Our headquarters are located in Dallas, Texas at the facilities of RSI under a month to month lease. LEGAL PROCEEDINGS We and our companies are not parties to any pending material legal proceedings. 62 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors and their ages as of August 15, 1999 are as follows:
NAME AGE POSITION - ------------------------------------ --- ----------------------------------------------- Michael H. Jordan (1)(2)(3)......... 63 Chairman and Director Guillermo G. Marmol (4)............. 46 Chief Executive Officer, President and Director Derek R. Reisfield.................. 36 Vice Chairman and Executive Vice President Thomas G. Bevivino.................. 44 Vice President of Finance George P. Stamas.................... 48 Director Randolph Austin (2)(3)(5)........... 35 Director Michael J. Dolan (5)................ 52 Director James R. Corey (5).................. 45 Director Richard M. Scruggs (5).............. 43 Director
- ------------------------ (1) Mr. Jordan will be elected a director and Chairman effective on the closing of this offering. (2) Member of the Board of Directors' audit committee effective on the closing of this offering. (3) Member of the Board of Directors' compensation committee effective on the closing of this offering. (4) Mr. Marmol will serve as Chairman until the closing of this offering. Mr. Marmol will remain as a director following his resignation as Chairman. (5) Messrs. Austin, Dolan, Corey and Scruggs will be appointed as directors effective on the closing of this offering. MICHAEL H. JORDAN will be our Chairman effective upon the closing of this offering and the simultaneous acquisition of the eight companies, having served as an advisor to us since January 1, 1999. Mr. Jordan retired in December 1998 as Chairman and Chief Executive Officer of CBS Corporation, formerly Westinghouse Electric Corporation, positions he held since June 1993. Prior to joining Westinghouse, he was a principal with the investment firm of Clayton, Dubilier & Rice, Inc. from September 1992 through June 1993. From 1974 until 1992, Mr. Jordan held various management positions at PepsiCo, Inc., his last position being Chief Executive Officer of PepsiCo International. From 1964 to 1974, Mr. Jordan held various positions, including Partner at McKinsey & Company, Inc., an international management consulting firm. Mr. Jordan is also a member of the Boards of Directors of Aetna, Inc., Dell Computer Corp. and Marketwatch.com. Mr. Jordan is a member of the President's Export Council; is the Chairman of the U.S.-Japan Business Council; Chairman of The College Fund/UNCF; and Chairman of the Policy Board of the Americans for the Arts. GUILLERMO G. MARMOL has been our Chief Executive Officer and President since August 1998 and a director since June 1999. Previously, Mr. Marmol was a Vice President of Perot Systems, Inc., Chairman of its Operating Committee and responsible for corporate development from January 1996 to May 1998. Prior to joining Perot Systems, Mr. Marmol held a variety of positions during an 18-year career with McKinsey & Company, Inc. He was elected a director and senior partner in 1991 and most recently held leadership positions in the firm's senior partner election committee, its Dallas, Texas office and its global organization practice. DEREK R. REISFIELD has been our non-director Vice Chairman and Executive Vice President since April 1999, having served as an advisor since January 1999. Mr. Reisfield held a variety of positions with CBS Corporation, formerly Westinghouse Electric Corporation, from May 1996 to January 1999, where he held the positions of Vice President, Business Development and then President of the CBS New Media Group. While at CBS, Mr. Reisfield created CBS.Marketwatch.com and served as the Chairman of the Board of Marketwatch.com, LLC. He was also responsible for the development of CBS.Sportsline.com, and served on the Board of Directors of Sportsline USA, Inc. From May 1995 to April 1996, Mr. Reisfield was a Partner of 63 Mitchell Madison Group, a management consulting company, where he was a co-founder and co-leader of the firm's Media and Telecommunications Practice. From August 1987 to June 1995, Mr. Reisfield served in various capacities, including Senior Manager, at McKinsey & Company, Inc. Mr. Reisfield serves on the board of directors of Pictet & Cie. Global Leisure Fund, S.A., a Swiss based mutual fund. THOMAS G. BEVIVINO has been our Vice President of Finance since July 1999. In March, 1999, Mr. Bevivino formed ARC Group LLC, a specialist financial advisory and transactions support firm, and since that date he has been engaged full-time in supervising our financial due diligence efforts and preparing our financial statements. From June 1986 to June 1988, Mr. Bevivino served as a staff accountant at Kreischer Miller & Co., an accounting, auditing and financial advisory firm. After receiving his CPA in June 1988, Mr. Bevivino served as a Senior Accountant at Kreischer Miller from June 1988 to August 1990. From August 1990 to December 1991, Mr. Bevivino served as the corporate controller of Realen Homes, a real estate developer. In December, 1991, Mr. Bevivino rejoined Kreischer Miller where he worked until March 1999, departing as a Senior Engagement Manager. Mr. Bevivino is a member of the American Institute of Certified Public Accountants and the Pennsylvania Institute of Certified Public Accountants. GEORGE P. STAMAS has been a director since May 1999. Mr. Stamas is a partner with the law firm of Wilmer, Cutler & Pickering and Co-Chairman of that firm's Corporate Department. Prior to joining Wilmer, Cutler & Pickering as a partner in April 1996, he was a partner at Piper & Marbury L.L.P. since 1983. Mr. Stamas is counsel to, and a limited partner of, the Washington Capitals hockey team and the Baltimore Orioles baseball team. Mr. Stamas also serves on the Board of Directors of FTI Consulting, Inc., a provider of litigation support services. RANDOLPH AUSTIN will become a director effective upon the closing of this offering and the simultaneous acquisition of the eight companies. From January 1999 until present Mr. Austin has been an advisor to Bertelsmann Ventures. From January 1998 to December 1998, Mr. Austin was President and Chief Executive Officer of BOL, Bertelsmann Online, Bertelsmann's global electronic commerce business. From November 1995 to December 1997, Mr. Austin held various positions with Prodigy, Inc., his last position being Senior Vice President, Sales & Business Development. From September 1990 to November 1995, Mr. Austin served in various capacities, including Senior Engagement Manager, at McKinsey & Company, Inc. MICHAEL J. DOLAN will become a director effective upon the closing of this offering and the simultaneous acquisition of the eight companies. Since July 1996, Mr. Dolan has served as Vice Chairman, Chief Financial Officer and a director of Young & Rubicam Inc., an international marketing and communications services firm. From August 1991 to July 1996, Mr. Dolan was President and Chief Executive Officer of the joint venture, Snack Ventures Europe, between PepsiCo Foods International and General Mills. JAMES R. COREY will become a director effective upon the closing of this offering and the simultaneous acquisition of the eight companies. Mr. Corey has served as Managing Director of Potomac Partners since September 1997. Prior to joining Potomac Partners, Mr. Corey served as Co-Chief Operating Officer of AT&T Solutions and Managing Partner of their Consulting Division from June 1995 until September 1997. From June 1994 to June 1995, Mr. Corey served as President of the Worldwide Services Organization of Unisys Corporation. From December 1989 until June 1994 Mr. Corey was a partner in the Los Angeles office of McKinsey & Company, Inc. Previously, Mr. Corey was a Partner at Andersen Consulting in Chicago. RICHARD M. SCRUGGS will become a director effective upon the closing of this offering and the simultaneous acquisition of the eight companies. Mr. Scruggs has served as President, Chief Executive Officer and Chairman of the Board of Align since October 1996. From January 1996 until October 1996, Mr. Scruggs served as Chief Operating Officer of Rothwell Systems, which 64 was later purchased by Perot Systems, Inc. From May 1990 until January 1996, Mr. Scruggs served in a variety of capacities at BSG Alliance/IT, including Managing Director of Business Development and Managing Director of the Houston office. At the closing of this offering and the simultaneous acquisition of the eight companies, our Board of Directors will consist of seven directors, which number may be changed by the Board of Directors. Mr. Dolan is being appointed to our Board of Directors pursuant to an agreement between us and Young & Rubicam. If the size of the Board is increased to eleven or more, Young & Rubicam will have the right to nominate an additional director to our Board. Messrs. Corey and Scruggs are being appointed to our Board of Directors pursuant to the agreements we have entered into to acquire their companies. In addition, we currently expect that Mr. Corey will be appointed our President, and Mr. Scruggs will be appointed a Vice Chairman, following the closing of this offering and the simultaneous acquisition of the eight companies. KEY PRACTICE LEADERS The following persons held the positions indicated opposite their names in the companies that we will acquire:
NAME FORMER POSITION IN ACQUIRED COMPANY - ------------------------ --------------------------------------------------------- Lynn J. Branigan........ Managing Partner, Multimedia Calvin W. Carter........ President and Chief Executive Officer, i.con James R. Corey.......... Managing Director, Potomac Partners John B. Dimmer.......... President, Free Range Bruce D. Grant.......... President, RSI Henry Heilbrunn......... Managing Partner, Multimedia William Markel.......... Managing Partner, InterActive8 Andreas Panayi.......... President, Brand Dialogue-New York Douglas Rice............ President and Chief Executive Officer, InterActive8 Richard M. Scruggs...... President, Chief Executive Officer and Chairman of the Board, Align
LYNN J. BRANIGAN has served as Managing Partner of Multimedia since she co-founded the company with Henry Heilbrunn in 1993. Ms. Branigan specializes in marketing, media and business development at Multimedia. Prior to forming Multimedia, Ms. Branigan served as Director, Sales and Marketing for the commercial unit of Prodigy Services Company, Inc. from February 1985 until January 1993. CALVIN W. CARTER has served as the President and Chief Executive Officer of i.con since he co-founded the company in August 1994. From May 1993 until August 1994, Mr. Carter served as a management consultant for PricewaterhouseCoopers LLP. JAMES R. COREY will become a director of Luminant effective upon the closing of this offering and the simultaneous acquisition of the eight companies. Mr. Corey has served as Managing Director of Potomac Partners since September 1997. Prior to joining Potomac Partners, Mr. Corey served as Co-Chief Operating Officer of AT&T Solutions and Managing Partner of their Consulting Division from June 1995 until September 1997. From June 1994 to June 1995, Mr. Corey served as President of the Worldwide Services Organization of Unisys Corporation. From December 1989 until June 1994, Mr. Corey was a partner in the Los Angeles office of McKinsey & Company, Inc. Previously, Mr. Corey was a Partner at Andersen Consulting in Chicago. 65 JOHN B. DIMMER has served as President of Free Range since May 1998. From June 1995 until May 1998, Mr. Dimmer served as Vice President and Chief Financial Officer of Free Range. From March 1986 until June 1995, Mr. Dimmer served as Assistant Secretary and Manager of Commercial Surety at Reliance Surety Company. BRUCE D. GRANT has served as President of RSI since January 1999. From January 1997 until December 1998, Mr. Grant served as President of RSI East, and from January 1992 until December 1996, Mr. Grant served as Vice President of RSI East. From 1984 until January 1992, Mr. Grant served in various capacities with RSI and its affiliates. HENRY HEILBRUNN has served as Managing Partner of Multimedia since he co-founded the company with Ms. Branigan in 1993. Mr. Heilbrunn specializes in business planning and product development at Multimedia Resources. Prior to forming Multimedia, Mr. Heilbrunn served as Senior Vice President, Product Management and Retention Marketing at Prodigy Services Company, Inc. from September 1990 until January 1993, and in various other capacities with Prodigy from February 1984 until August 1990. WILLIAM MARKEL has served as Managing Partner of InterActive8 since 1998. From February 1995 until 1997, Mr. Markel provided business development consulting for InterActive8, and from 1994 until February 1995 he served as a sales executive for Harrington Righter and Parsons, a television sales division of Cox Broadcasting. ANDREAS PANAYI has served as President of Brand Dialogue-New York, Young & Rubicam's digital interactive branding unit, since 1998. From 1989 until 1998, Mr. Panayi worked in various capacities at Poppe Tyson, the global interactive marketing arm of True North, including most recently as Senior Partner, Director of International Operations. DOUGLAS RICE has served as InterActive8's President and Chief Executive Officer since he founded the company in 1994. From 1994 to 1997, Mr. Rice also served as the Creative Director for InterActive8. RICHARD M. SCRUGGS will become a director of Luminant effective upon the closing of this offering and the simultaneous acquisition of the eight companies. Mr. Scruggs has served as President, Chief Executive Officer and Chairman of the Board of Align since October 1996. From January 1996 until October 1996, Mr. Scruggs served as Chief Operating Officer of Rothwell Systems (which was later purchased by Perot Systems). From May 1990 until January 1996, Mr. Scruggs served in a variety of capacities at BSG Alliance/IT, including Managing Director of Business Development and Managing Director of the Houston office. COMMITTEES OF THE BOARD OF DIRECTORS Our Board of Directors intends to establish an audit committee which will be comprised solely of independent directors. The responsibilities of the audit committee will include: (1) recommending to our board of directors the independent public accountants to conduct the annual audit of our books and records; (2) reviewing the proposed scope of the audit; (3) approving the audit fees to be paid; (4) reviewing accounting and financial controls with the independent public accountants and our financial and accounting staff; and (5) reviewing and approving transactions between us and our directors, officers and affiliates. Messrs. Jordan and Austin will be members of the audit committee as of the closing of this offering and the simultaneous acquisition of the eight companies. Our Board of Directors also intends to establish a compensation committee to consist solely of non-employee directors. The compensation committee will (1) provide a general review of our compensation plans to ensure that they meet corporate objectives and (2) administer our stock 66 plans. Messrs. Jordan and Austin will be members of the compensation committee as of the closing of this offering and the simultaneous acquisition of the eight companies. DIRECTOR COMPENSATION Directors who are also our employees will not receive additional compensation for serving as directors. Each person serving or who has agreed to serve as a non-employee director as of the closing of this offering and the simultaneous acquisition of the eight companies will be automatically granted an option as of the effectiveness of the registration statement to which this prospectus relates, to purchase 9,000 shares of common stock under our long-term incentive plan at the price of the initial public offering. In addition, under the long-term incentive plan each non-employee director will be granted an annual option to purchase 6,000 shares at each annual meeting of our stockholders at which the director is re-elected or remains a director. Each of these options will have an exercise price equal to the market value per share of common stock on the date of grant. A director who receives formula options can generally exercise them beginning six months after receipt, as to one-sixth of the shares and as to an additional one-sixth every following six months. Directors will also be reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees of the Board of Directors, in their capacity as directors. Directors may also receive additional, discretionary option grants. Mr. Jordan will also be granted options to purchase 120,000 shares of common stock in consideration for services to be rendered exercisable at a price equal to the initial public offering price per share. The options will become exercisable one-sixth every six months over 36 months from the date of grant. Mr. Dolan, who is Vice Chairman, Chief Financial Officer and a director of Young & Rubicam, has agreed to serve on our Board of Directors at the request of Young & Rubicam. Mr. Dolan has assigned to Young & Rubicam the net proceeds received by him in connection with any exercise of options we grant to him for serving on our Board of Directors and sale by him of the underlying shares. EXECUTIVE COMPENSATION We were founded in August 1998, did not conduct any operations in 1998 and, accordingly, did not pay any compensation to our executive officers for the year ended December 31, 1998. The following table sets forth the annual base salary rates and other compensation expected to be paid in 1999 to our chief executive officer and our two most highly compensated officers. Joseph W. Autem served as our chief financial officer from January 1999 until July 1999 and has entered into an agreement to provide consulting services to us in the future. In 1999, we expect to pay Mr. Autem an aggregate of approximately $150,000 and grant options to purchase 15,625 shares of our common stock, assuming an initial offering price of $16.00 per share, exercisable at $.01 per share, for services rendered by Mr. Autem to us in 1999 as Chief Financial Officer and as a consultant. Each of the officers listed in the table below is entitled to an annual bonus up to an amount equal to his base salary based on our performance measured against annual objectives to be determined by the compensation committee of the Board of Directors. See "--Employment Agreements." 67 SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ---------------------------------------- ---------------------- OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS/SARS (#) COMPENSATION - ------------------------------------ ----------- ----------- -------------- ---------------------- -------------- Guillermo G. Marmol,................ $ 300,000 $ 300,000 $ -- 1,168,333 $ -- Chief Executive Officer and President Derek R. Reisfield,................. 250,000 250,000 -- 233,667 -- Vice Chairman and Executive Vice President Thomas G. Bevivino,................. 150,000 150,000 -- 60,000 -- Vice President of Finance
KEY PRACTICE LEADER HISTORICAL COMPENSATION AND DISTRIBUTIONS. Prior to our common stock offering, Luminant's business has been conducted by the eight individual, closely-held companies. Some of these companies are limited liability companies and S corporations. Amounts distributed by these eight companies to individuals who will become our key practice leaders include not only compensation but also returns on invested capital and return of capital. As a result, the historical amounts distributed to these key practice leaders do not provide meaningful individual compensation information for our key practice leaders based on the operation of Luminant as a combined, publicly-held company. The following tables set forth historical total distribution amounts and option grant information for our key practice leaders. The amounts set forth for Messrs. Scruggs and Heilbrunn and Ms. Branigan in the column titled "All Other Compensation" represents the dollar value of term life insurance premiums paid on their behalf by the companies during the covered fiscal year. The amount set forth for Mr. Carter in the column titled "All Other Compensation" represents profit-sharing plan contributions during the covered fiscal year. The amount set forth for Mr. Heilbrunn and Ms. Branigan in the column titled "Salary" represents limited liability company profit distributions. 68 KEY PRACTICE LEADER SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ---------------------------- ANNUAL COMPENSATION AWARDS -------------------------------------------- ---------------------------- OTHER SECURITIES ANNUAL RESTRICTED UNDER- COMPEN- STOCK LYING SALARY BONUS SATION AWARD(S) OPTIONS/ NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS (#) - ---------------------------------------------------- --------- --------- --------- ----------- --------------- ----------- Richard Scruggs, Chairman and Chief Executive Officer of Align.................................. 1998 191,667 -- -- -- 25,800 Andreas Panayi, President of Brand Dialogue-New York 1998 145,831 10,000 -- -- 15,000 John Dimmer, President of Free Range................ 1998 66,668 -- -- -- -- Calvin Carter, President and Chief Executive Officer of Icon Interactive............................... 1998 157,608 14,921 Doug Rice, President and Chief Executive Officer of InterActive8...................................... 1998 203,808 365,000 -- -- -- William Markel, Managing Partner InterActive8....... 1998 175,000 245,000 -- -- -- Lynn Branigan, Managing Partner of Multimedia....... 1998 228,570 -- -- -- -- Henry Heilbrunn, Managing Partner of Multimedia..... 1998 228,570 -- -- -- -- James Corey, Managing Director of Potomac Partners.......................................... 1998 340,000 178,750 -- -- -- Bruce Grant, President.............................. 1998 60,000 86,473 -- -- -- PAYOUTS ------------- LTIP ALL OTHER PAYOUTS COMPEN- NAME AND PRINCIPAL POSITION ($) SATION ($) - ---------------------------------------------------- ------------- ----------- Richard Scruggs, Chairman and Chief Executive Officer of Align.................................. -- 358 Andreas Panayi, President of Brand Dialogue-New York -- -- John Dimmer, President of Free Range................ -- -- Calvin Carter, President and Chief Executive Officer of Icon Interactive............................... Doug Rice, President and Chief Executive Officer of InterActive8...................................... -- -- William Markel, Managing Partner InterActive8....... -- -- Lynn Branigan, Managing Partner of Multimedia....... -- 635 Henry Heilbrunn, Managing Partner of Multimedia..... -- 1,090 James Corey, Managing Director of Potomac Partners.......................................... -- -- Bruce Grant, President.............................. -- --
In the table below, the value of the options granted to Mr. Scruggs in 1998 is based on a Black-Scholes pricing model with a volatility of 70%, a risk-free rate of return of 5.65%, a dividend yield of 0%, and exercise of options five years from date of grant. The value of the options granted to Mr. Scruggs in 1997 is based on a Black-Scholes pricing model with a volatility of 70%, a risk-free rate of return of 6.25%, a dividend yield of 0%, and exercise of options five years from date of grant. The number of shares underlying options is expressed in terms of Luminant shares, based on the number of Luminant shares to be issued for each outstanding share of Align's stock upon closing of the acquisition of Align. The value of the options granted to Mr. Panayi in 1998 is based on a Black-Scholes pricing model with a volatility of 0%, a risk-free rate of return of 6.25%, a dividend yield of 0%, and exercise of options ten years from date of grant. These options represent options to purchase shares of Young & Rubicam stock, and as a result the volatility assumption reflects the assumption used in the valuation of options under Young & Rubicam's incentive plan. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------------------------------------------------------------- NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS/SARS MARKET OPTIONS/ GRANTED TO EXERCISE OR PRICE ON SARS EMPLOYEES IN BASE PRICE DATE OF COMPANY NAME YEAR GRANTED (#) FISCAL YEAR ($/SHARE) GRANT - ----------------- ------------------ --------- ------------- ----------------- ------------- ----------- Align Richard Scruggs 1998 17,969 5% 1.33 1.33 1998 4,320 5% 1.33 1.33 1997 17,710 3% 0.22 0.22 Brand Dialogue Andreas Panayi 1998 15,000 100% 28.44 28.44 GRANT DATE EXPIRATION PRESENT VALUE COMPANY DATE $ - ----------------- --------------------- ------------- Align April 30, 2008 17,296 April 30, 2008 4,158 June 30, 2007 2,847 Brand Dialogue December 14, 2008 147,125
69 EMPLOYMENT AGREEMENTS On September 1, 1998, we entered into an employment agreement with Mr. Marmol as our Chief Executive Officer and President for a term of three years and four months. The agreement will automatically renew for successive one-year periods beginning January 1, 2002, unless we or Mr. Marmol provides the other with written notice that the Agreement will not renew within 90 days of the expiration date. This agreement provides that Mr. Marmol will devote substantially all of his time to the operation of our business. The agreement establishes the initial base salary set forth in the table above and eligibility for up to an equal annual bonus. We have also agreed to grant options immediately before trading begins to purchase 1,168,333 shares of common stock, at an exercise price equal to the initial public offering price, of which 25% will be immediately exercisable and the remainder will become exercisable at the rate of 25% on the first, second and third anniversaries of the date of grant and will remain exercisable for up to 10 years after the date of grant and that will permit exercise of exercisable options for up to 36 months after his employment ends. We may terminate the agreement for cause or upon death or disability. Cause means a final non-appealable conviction for, or plea of no contest to, a charge of commission of a felony, the good faith determination by the Board of Directors that Mr. Marmol has committed any act in the course of employment constituting fraud or dishonesty on 20 days' notice, or a determination by a court of competent jurisdiction that Mr. Marmol has breached his non-compete agreement; his confidentiality agreement; or interfered with our relationship with any client, supplier or other person. In the case of a termination due to disability we will continue to pay Mr. Marmol his salary and benefits for a period of six months. Mr. Marmol has the right to terminate his employment with us at any time for any reason. If we terminate Mr. Marmol's agreement for any reason other than for cause, or Mr. Marmol terminates his employment for good reason, Mr. Marmol will be entitled to receive severance pay equal to his base salary and maximum bonus for the period remaining under the term of the agreement, continuation of benefits for that period and automatic vesting of all stock options. Good reason includes a change of control; material breach of the employment agreement by us; relocation of our principal business office to more than 35 miles outside Dallas; or Mr. Marmol's duties are diminished or he is not elected Chairman, unless he consents otherwise. Mr. Marmol has consented in writing to the election of Michael H. Jordan as our Chairman and a director upon the closing of this offering and has further agreed that his ceasing to be President does not constitute good reason for his resignation. Mr. Marmol will be subject to covenants intended to bar his competition and solicitation of clients or employees through one year after his employment ends for any reason. As of June 28, 1999, we entered into an employment agreement with Thomas G. Bevivino as our Vice President, Finance for the period through June 28, 2002. Mr. Bevivino will receive an annual salary of $150,000 plus a bonus of up to the same amount. We will grant Mr. Bevivino options to acquire 60,000 shares of common stock under the long-term incentive plan, exercisable at the initial public offering price. The options will become exercisable in sixths every sixth months after the date we grant them and will remain exercisable for up to 10 years after the date of the grant. Mr. Bevivino will receive the same benefits as our other employees. We may terminate Mr. Bevivino's agreement for cause or upon death or disability. Cause includes a material breach of Mr. Bevivino's obligations or Mr. Bevivino's gross negligence, conviction for, or plea of no contest to, a charge of commission of a felony, a breach by Mr. Bevivino of his non-compete or confidentiality agreement, or if Mr. Bevivino interfered with our relationship with any client, supplier or other person. Mr. Bevivino may terminate his employment with us with or without good reason. Good reason means if we materially violate the employment agreement or if within the first anniversary of the initial public offering we relocate his primary office by more than 35 miles from Horsham, Pennsylvania. If Mr. Bevivino resigns or we terminate his employment with or without cause or because of death or disability, we will pay Mr. Bevivino 70 any unpaid portion of his salary pro-rated through the date of actual termination, reimburse business expenses, pay accrued vacation and pay health insurance premiums for that period. In addition, if we terminate Mr. Bevivino's employment without cause or he resigns for good reason, Mr. Bevivino will receive a severance payment equal to his base salary and the pro rata share of the bonus for the year of his termination, continuation of his benefits and acceleration of the next sixth of his options. Mr. Bevivino will be subject to covenants intended to bar his competition and solicitation of clients or employees during his employment and for one year after his employment ends for any reason. On July 23, 1999, we entered into an employment agreement with Derek Reisfield to serve as our Vice Chairman and Executive Vice President through July 23, 2002. Until the closing of this offering and the simultaneous acquisition of the eight companies, Mr. Reisfield is receiving a monthly salary of $20,000, with a special bonus at the closing equal to $333 per day between February 15, 1999 and closing plus reimbursement of limited expenses incurred during this period. Beginning with the closing of this offering, Mr. Reisfield will have an annual salary of $250,000 and be eligible for an annual bonus of up to the same amount. We have also agreed to grant options, immediately before trading begins, to purchase 1% of the shares of common stock outstanding immediately after the offering. The exercise price for the options will be the initial public offering price. The options will be immediately exercisable and will remain exercisable for up to 10 years after the date of grant or until we terminate all options under the long-term incentive plan if earlier than 10 years after the date of grant. During the term of his employment, Mr. Reisfield may not engage in activities that would interfere with the performance of his duties for us but may engage in other business ventures. We may terminate Mr. Reisfield's agreement for cause or upon death or disability. Cause includes a material breach of Mr. Reisfield's obligations, Mr. Reisfield's gross negligence, or his conviction for, or plea of no contest to a charge of commission of a felony. If we terminate Mr. Reisfield's agreement for any reason other than for cause or Mr. Reisfield terminates his employment for good reason, Mr. Reisfield will be entitled to receive severance pay for 18 months equal to his base salary as well as his pro rata share of his bonus for the year of his termination and health insurance premium for that period. Good reason includes a material breach of the employment agreement by us or relocation of his principal business location outside Dallas, Texas and surrounding counties or New York City, New York if Mr. Reisfield relocates back to New York City. Mr. Reisfield is subject to covenants that bar his competition and solicitation of clients or employees for the earliest of nine months after his employment ends, our failure to complete the initial public offering by December 31, 1999, and the date of termination of employment by disability. SEVERANCE AGREEMENT Joseph Autem resigned as our Chief Financial Officer effective as of July 23, 1999. In connection with Mr. Autem's resignation, we entered into a severance agreement with him effective July 23, 1999. Under the severance agreement, Mr. Autem is entitled to the following: - Mr. Autem will serve as a financial consultant to Luminant for a period of six years. He will be compensated at the rate of $13,888.89 per month. Mr. Autem will receive an acquisition fee if we acquire any company Mr. Autem refers to us as an acquisition candidate after July 23, 1999. - Upon the closing of this offering, we will grant Mr. Autem immediately exercisable and fully vested options for shares of our common stock in an amount equal to the quotient of $250,000 divided by the initial public offering price per share. The exercise price for these options will be $0.01 per share. These options will remain exercisable until the earlier of the tenth anniversary of the date of the grant or the termination date of all other options under our long-term incentive plan. 71 - Payment of $56,249.75 as reimbursement of Mr. Autem's fees and expenses incurred in furtherance of our business, and an additional $25,000 in deferred consulting fees is payable to Mr. Autem within 15 days of the closing of this offering provided that the closing occurs on or before June 30, 2000. 1999 LONG-TERM INCENTIVE PLAN We have adopted and our stockholders have approved a long-term incentive plan to promote our long-term growth and profitability, improve stockholder value, and attract, retain and reward highly motivated and qualified employees and directors. The compensation committee of our Board of Directors will administer the long-term incentive plan unless the Board of Directors specifies another committee of the Board of Directors or chooses to act itself as administrator. Under the long-term incentive plan, we can grant options for approximately 7,115,007 shares of common stock, which number will adjust automatically to be 30% of our outstanding common stock from time to time. We can grant options to employees in the form of incentive stock options for up to 6,000,000 shares, together with any shares required for replacement of incentive stock options held by Align optionees, but may choose not to do so. Any options we grant that are not incentive stock options will be nonqualified stock options. All of our employees, directors, and certain service providers are eligible to receive options under the long-term incentive plan. For tax reasons, the long-term incentive plan limits the number of shares covered by options that an individual can receive in a calendar year to 50% of the total initial pool. The administrator will determine the prices, exercise schedules, expiration dates, and other material conditions under which optionees other than non-employee directors may exercise their options. Except with respect to replacement options, which we grant to replace options at companies we acquire, the exercise price of these options after the initial public offering may not be less than the fair market value of the common stock on the date of grant. The long-term incentive plan also provides for formula option grants for 9,000 shares to each person serving or who has agreed to serve as a non-employee director as of the closing of this offering and for 6,000 shares annually thereafter at each annual meeting of our stockholders, that happens at least six months after the closing of the offering, at which the director is re-elected or remains a director. A director who receives formula options can generally exercise them beginning six months after receipt, as to one-sixth of the shares and as to an additional one-sixth every following six months. All options will become exercisable if we have a change of control, except as option agreements provide otherwise or as necessary to allow pooling of interest accounting. In general, we will have a change of control if, after our initial public offering: - anyone acquires or holds more than 50% of our voting securities, excluding holdings by our benefit plans and some other related parties; - we complete a merger or consolidation, unless, in general, our pre-merger shareholders own at least 50% of the voting securities of the merged companies; - our Board changes in specified ways in connection with proxy contents or as a result of adding new directors who are not approved by existing directors; or - if we complete a liquidation or dissolution or sell or otherwise dispose of all or substantially all of our assets. 72 In addition, unless we provide otherwise, or as necessary to allow pooling of interest accounting, the long-term incentive plan and all options will terminate in defined circumstances if: - we are not the surviving company in a merger, consolidation, or reorganization; - we complete a liquidation or dissolution or sell substantially all our assets; or - our board approves and we complete a transaction that results in a person or entity's owning all of our stock, unless the person or entity is related to us in specified ways. However, before the long-term incentive plan would terminate for one of those reasons, we would either agree that our successor would assume the options and/or the long-term incentive plan, allow optionees to exercise the options if these options were in-the-money, or cancel the options by paying the amount, if any, by which the value determined with respect to that transaction exceed the exercise price of the options. The long-term incentive plan limits the time during which an optionee can exercise an option to no more than 10 years. In addition, an optionee who leaves employment will generally have no more than 90 days to exercise an option, reduced to no days after employment in terminations for cause, and additional rules apply to death and disability. The compensation committee may, however, override the plan's rules, other than the 10 year limit. We cannot grant additional options under the long-term incentive plan after the tenth anniversary of its adoption. SENIOR BONUS PLAN We have adopted and obtained shareholder approval of a senior bonus plan. A special tax rule in Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the compensation that we can deduct for payments to our chief executive officer and the four other most highly compensated executive officers to $1 million per officer per year. We intend the senior bonus plan to provide incentive compensation that does not count against each executive's deduction limit. We may choose to use the senior bonus plan, or we may pay bonuses under some other future plan to which the tax deduction limits will apply, as long as we do not use the other payments to make up bonuses a participant loses under the senior bonus plan. Unless our Board of Directors selects another committee, the compensation committee will administer the senior bonus plan and select participants from our key employees and those of our subsidiaries, although we expect that most participants will be executive officers. When we refer to the "compensation committee" in discussing the senior bonus plan, we also mean any other committee that administers this plan. Only "outside directors" under the tax rules can determine the participants, set the performance goals, and certify that we or the participants have met those goals. The compensation committee will either consist solely of two or more outside directors or those members who do not satisfy the definition of an outside director will either abstain from voting or refrain from serving on a subcommittee that then administers this plan. The compensation committee has broad administrative authority to, among other things, designate participants, establish performance goals and performance periods, determine the effect of participant termination of employment and "change in control' transactions before paying an award, and generally interpret and administer the senior bonus plan. Neither we nor the Board has designated any participants or established any performance goals under the senior bonus plan. The compensation committee will select participants for any given time period based primarily on its judgment as to which executive officers are likely to be named in our proxy statement as the chief executive officer or one of our other four most highly compensated 73 executive officers as of the end of the performance period and that the compensation committee reasonably expects to have compensation in excess of $1 million. We do not expect any of our employees or those of our subsidiaries to exceed that limit in 1999. In setting performance goals, the compensation committee will specify the applicable performance criteria and targets it will use for such performance period, which may vary from participant to participant. The performance criteria and targets will measure one or more of the following Luminant, subsidiary, operating unit, or division financial performance measures: - pre-tax or after-tax net income; - operating income or gross revenue; - profit margin; - stock price; - cash flows; or - strategic business criteria consisting of one or more objectives based upon meeting specified revenue, market penetration, geographic business expansion goals, cost targets, and goals relating to acquisitions or divestitures. The compensation committee may set these goals (1) on an absolute or stand-alone basis, or on a relative basis in comparison to others, (2) based on internal targets, (3) based on comparison with prior performance, (4) based on comparison to capital, shareholders' equity, shares outstanding, assets or net assets, and/or (5) based on comparison to the performance of other companies. For example, the compensation committee could express an income-based performance measure in a number of ways, such as net earnings per share, or return on equity, or with reference to meeting or exceeding a specific target, or with reference to growth above a specified level, such as prior year's performance or peer group performance. The compensation committee can also ignore unusual or nonrecurring accounting effects. The senior bonus plan provides that achieving these goals must be substantially uncertain at the time the goals are established and are subject to the committee's right to reduce the amount of any award payable as a result of the performance as discussed below. The compensation committee may set a participant's target bonus, that is, the amount the participant will receive if the targets are met, as a dollar amount or in a formula, for example as a percentage share of a bonus pool, provided that, if the committee uses a pool approach, the total bonus opportunity for all participants who are part of the pool may not total more than 100% of the pool. The committee has the sole discretion to reduce, but not increase, the actual bonus awarded under the plan. The committee must determine the extent to which the performance goals are met and the participant becomes entitled to a bonus. The maximum bonus payable under the senior bonus plan to any one individual in any one calendar year is $3 million, although we have no plans or expectations at this time to pay bonuses of that size. Our Board or the committee may at any time amend the senior bonus plan, and our Board may terminate the plan. However, without a participant's written consent, no amendment or termination may materially adversely affect the annual bonus rights, if any, of any already designated participant for a given performance period after the participants and targets are set. Our Board may make any amendments necessary to comply with applicable regulatory requirements, including the tax deduction limit for senior executives. If necessary to preserve the intended tax treatment, the Board may submit future amendments of the senior bonus plan to our shareholders for approval. 74 CERTAIN TRANSACTIONS WITH RELATED PARTIES On August 22, 1998, we issued 1,665,273 shares of common stock to Commonwealth Principals II, LLC, a Virginia based merchant banking firm, in exchange for $1.00. Commonwealth Principals will own approximately 7.13% of Luminant after this offering, which shares are indirectly held by its members, including Messrs. Jordan, Marmol and Reisfield and their affiliates as described below. In September 1998, Guillermo G. Marmol, who is our Chief Executive Officer and President, acquired a limited liability company interest in Commonwealth Principals equating to an indirect pecuniary interest in 339,269 shares of Luminant for a purchase price of $1.00. In December 1998, Michael H. Jordan, who will be our Chairman and a director at the closing of this offering, acquired a limited liability company interest in Commonwealth Principals equating to an indirect pecuniary interest in 109,361 shares of Luminant for a purchase price of $400,000. In April 1999, Derek R. Reisfield, our Vice Chairman and Executive Vice President, acquired a limited liability company interest in Commonwealth Principals equating to an indirect pecuniary interest in 54,681 shares of Luminant for a purchase price of $200,000. In addition, in May 1999, R4 Venture Partners I, of which Mr. Reisfield is a general partner and holds a 31.25% pecuniary interest, acquired a limited liability company interest in Commonwealth Principals equating to an indirect pecuniary interest in 54,680 shares of Luminant for a purchase price of $200,000. The following table shows the number and percentage of outstanding shares of our common stock that were indirectly owned by our affiliates through other entities as of August 15, 1999 and that will be indirectly owned by our affiliates through other entities immediately following the closing of this offering and the simultaneous acquisition of the eight companies.
AFTER OFFERING (FULL EXERCISE AFTER OFFERING OF OVER- (NO EXERCISE OF OVER- ALLOTMENT ALLOTMENT BEFORE OFFERING OPTION) OPTION) ----------------------------- ------------------------------ --------------- NUMBER OF NUMBER OF NUMBER OF SHARES OWNED SHARES OWNED SHARES OWNED THROUGH ANOTHER PERCENTAGE THROUGH ANOTHER PERCENTAGE THROUGH ANOTHER NAME AND ADDRESS ENTITY OWNERSHIP ENTITY OWNERSHIP ENTITY - --------------------------------------------- --------------- ------------ --------------- ------------- --------------- Michael H. Jordan, Chairman and Director..... 109,361 5.97% 109,361 .47% 109,361 Guillermo G. Marmol, Chief Executive Officer, 339,269 18.52 339,269 1.45 339,269 President and Director...................... Derek R. Reisfield, Vice Chairman and 109,361 5.97 109,361 .47 109,361 Executive Vice President.................... PERCENTAGE NAME AND ADDRESS OWNERSHIP - --------------------------------------------- ------------- Michael H. Jordan, Chairman and Director..... .46% Guillermo G. Marmol, Chief Executive Officer, 1.43 President and Director...................... Derek R. Reisfield, Vice Chairman and .46 Executive Vice President....................
Commonwealth Principals secured, for our benefit, loans for an aggregate of $3.0 million to pay expenses of this offering and the acquisition of the eight companies. The loans secured by Commonwealth Principals accrue interest at the prime rate, which was 7.75% at June 30, 1999, are payable on demand and will be repaid from the proceeds of this offering. At June 30, 1999, Commonwealth Principals had advanced a total of $2,447,596. By closing of the offering and the simultaneous acquisition of the eight companies, Commonwealth Principals expects to advance a total of approximately $4.5 million, which includes the $3.0 million loan secured for our benefit, in order to pay expenses of this offering and the acquisition of the eight companies. In September 1998, we entered into a management services agreement with Commonwealth Principals to provide us with consulting and financial advisory services. The agreement terminates at the earlier of the closing of our initial public offering or 24 months after the date of the agreement. For the year ended December 31, 1998, we paid $49,000 to Commonwealth Principals under that agreement. For the six months ended June 30, 1999, $84,750 was paid to Commonwealth Principals under this agreement. 75 On September 1, 1998, Mr. Marmol purchased 166,527 shares of our common stock for a purchase price of $200,000 in cash. We have entered into employment agreements with each of Messrs. Marmol, Reisfield and Bevivino. For the details of these agreements, please refer to "Management--Employment Agreements." James R. Corey will be appointed a director effective on the closing of this offering and the simultaneous acquisition of the eight companies. Mr. Corey is a Managing Director and owner of Potomac Partners. We will acquire Potomac Partners simultaneously with the closing of this offering and the acquisition of the other seven companies. Mr. Corey will receive 1,697,402 shares of common stock and $5.0 million in cash, based on an assumed initial public offering price of $16.00 per share, for his ownership interest in Potomac Partners. On February 1, 1998, Potomac Partners loaned $150,000 to Mr. Corey pursuant to a note that bore interest at the rate of 6% per annum and was payable on demand. This note was paid in full on December 31, 1998. Richard M. Scruggs will be appointed a director effective on the closing of this offering and the simultaneous acquisition of the eight companies. Mr. Scruggs is President, Chief Executive Officer and Chairman of the Board of Align. We will acquire Align simultaneously with the closing of this offering and the acquisition of the other seven companies. Mr. Scruggs will receive 775,984 shares of common stock and $3.1 million in cash, based on an initial public offering price of $16.00 per share, for his ownership interest in Align. In addition, Mr. Scruggs will receive options to purchase 50,993 shares of our common stock at exercise prices ranging from $.25 to $2.86 per share in exchange for outstanding options for Align shares. Mr. Scruggs is the guarantor of $550,000 of indebtedness of Align under its bank line of credit. The line of credit is due on demand, matures in March 2000, and accrues interest at the rate of prime plus 1%, which was equal to 8.75% at June 30, 1999. Mr. Scruggs will be released from his guaranty upon the closing of this offering and the simultaneous acquisition of the eight companies. Mr. Corey and Scruggs are also eligible to receive an indeterminable number of shares of common stock and/or cash under the contingent consideration provisions of the acquisition agreement for their respective company. See "About Luminant Worldwide Corporation." We entered into an agreement with ARC Group LLC and Commonwealth Principals, dated March 8, 1999, under which ARC Group LLC agreed to provide consulting services to us in exchange for a payment of $80,000, an additional payment of $240,000 upon closing of our initial public offering and reimbursement of their fees and expenses. Commonwealth Principals agreed to guarantee our performance under this agreement. Mr. Bevivino, our Vice President of Finance, is a managing member of ARC Group LLC. Luminant has retained the law firm of Wilmer, Cutler & Pickering, Washington, D.C., as its outside legal counsel in connection with this offering and the acquisition of the eight companies. George P. Stamas, a director of Luminant, is a partner with Wilmer, Cutler & Pickering. YOUNG & RUBICAM Simultaneously with the closing of this offering and the acquisition of the other seven companies, we will acquire assets of Brand Dialogue-New York from Young & Rubicam for a purchase price of approximately $67.1 million, which will be paid through the issuance of 4,192,361 shares of common stock. We will also grant to Young & Rubicam an option immediately exercisable for 1,800,000 shares of our common stock at an exercise price equal to 76 the initial public offering price. Under the terms of the agreement by which we will acquire assets of Brand Dialogue-New York, Young & Rubicam is purchasing $15 million worth of shares of non-voting common stock directly from us at the initial public offering price simultaneously with the closing of this offering and the acquisition of the eight companies. Assuming an initial public offering price of $16.00 per share, Young & Rubicam will purchase 937,500 shares of non- voting common stock directly from us. Under the terms of a placement agreement we have entered into with the underwriters, the underwriters will receive a placement fee equal to $ per share of non-voting common stock sold directly to Young & Rubicam. Young & Rubicam will own approximately 21.95% of Luminant after this offering, or 27.54% if the Young & Rubicam option is exercised in full, in each case including the 937,500 shares of non-voting common stock, assuming an initial public offering price of $16.00 per share, we are selling directly to Young & Rubicam simultaneously with this offering. Michael J. Dolan will become a director effective upon the closing of this offering and the acquisition of the other seven companies under an agreement with Young & Rubicam. Mr. Dolan is Vice Chairman, Chief Financial Officer and a director of Young & Rubicam. We have entered into an agreement with Young & Rubicam to acquire some assets of Brand Dialogue-New York, the New York branch of a Young & Rubicam division. Young & Rubicam has agreed that it will ask AT&T, the United States Postal Service, Citigroup, Dr. Pepper/7-Up, Inc., Sony Corporation, Showtime Networks, Inc., Phillip Morris Companies Inc. and Pfizer Inc., as well as other clients who may be identified in the future by Luminant and Young & Rubicam together or by Young & Rubicam under the procedures set forth in the Brand Dialogue-New York acquisition agreement, to select us to perform services in connection with on-going engagements and future engagements substantially similar to the type of work performed by Brand Dialogue-New York prior to the closing of this offering and the acquisition of the assets of Brand Dialogue-New York. Young & Rubicam has the right not to recommend us or to terminate our involvement in an existing engagement if in its judgment recommending or retaining us is not in the best interests of its clients or if we fail to perform our obligations or default under the terms of any client engagement. A Young & Rubicam client can also cancel the engagement. We and Young & Rubicam intend to cooperate in marketing our respective services to each others' clients in order to increase the range, breadth and depth of services available to such clients. In addition, upon the closing of this offering and the acquisition of the assets of Brand Dialogue-New York, we will enter into a Transition Services Agreement with Young & Rubicam under which Young & Rubicam will grant us a license to use, for a term not to exceed 12 months, office space used by Brand Dialogue-New York prior to the closing of this offering and the acquisition of the assets of Brand Dialogue-New York. Young & Rubicam will also agree to provide us with specified services in connection with our use of this space. In consideration for providing the space, we will pay to Young & Rubicam $33,072 per month plus expenses. Additional fees will be paid to Young & Rubicam for the provision of specified services. 77 PRINCIPAL STOCKHOLDERS The table at the end of this section shows the number and percentage of outstanding shares of our common stock that were owned as of August 15, 1999 and that will be owned immediately following the closing of this offering, the sale of shares of non-voting common stock directly to Young & Rubicam and the simultaneous acquisition of the eight companies by: - all persons known by us to own beneficially more than 5% of the common stock; - each director, director nominee and executive officer; - all directors, director nominees and executive officers as a group; and - all of our stockholders who will sell shares of common stock to the underwriters in the over-allotment option, if exercised. As of August 15, 1999, there were 1,831,800 shares of common stock outstanding. Following the closing of this offering and the simultaneous acquisition of the eight companies, we will have outstanding 23,366,659 shares of common stock, including 16,534,859 shares of common stock we will issue as a portion of the initial purchase prices for the acquisitions of our companies, in each case assuming the underwriters do not exercise their over-allotment option, and 23,716,690 shares assuming the underwriters exercise their over-allotment option in full. At the time of the closing of this offering and the simultaneous acquisition of the eight companies we will also have outstanding options to purchase 7,005,107 shares of common stock, including options to purchase 3,417,310 shares of common stock which will be exercisable immediately following this offering. No other options, warrants or rights to acquire shares of common stock will become exercisable within 60 days of this offering. On August 22, 1998, Commonwealth Principals acquired 1,665,273 shares of our common stock, which are beneficially held by its members, including Messrs. Jordan, Marmol and Reisfield and their affiliates. The beneficial ownership of Commonwealth Principals shown in the table at the end of this section does not include the shares of Luminant that are held indirectly through Commonwealth Principals by Messrs. Jordan, Marmol and Reisfield and their affiliates, as those shares will be distributed to those individuals as soon as practicable after closing of this offering: - The number of shares of common stock owned by Mr. Jordan includes 109,361 shares of common stock indirectly owned through his ownership of a limited liability company interest in Commonwealth Principals. - The number of shares of common stock owned by Mr. Marmol includes 339,269 shares of common stock indirectly owned through his ownership of a limited liability company interest in Commonwealth Principals and options to purchase 292,083 shares that will be exercisable on the closing of this offering. - The number of shares of common stock owned by Mr. Reisfield includes options to purchase 233,667 shares of common stock, that will be exercisable on the closing of this offering; 54,680 shares indirectly owned through his ownership of a limited liability company interest in Commonwealth Principals; and 54,681 shares indirectly owned by R4 Venture Partners I through its ownership of a limited liability company interest in Commonwealth Principals. Mr. Reisfield is a general partner of R4 Venture Partners I. Other members of Commonwealth Principals who will indirectly own shares of Luminant through their ownership interest in Commonwealth Principals do not include any executive officers or directors of Luminant or any persons who would have an indirect ownership interest in Luminant after completion of the offering equal to 5% or more of its outstanding shares. The management committee of Commonwealth Principals, which has the power to vote and make 78 decisions regarding the disposition of the Luminant shares, consists of J. Marshall Coleman, Sean Coleman, and Santanu Sarkar. The number of shares of common stock owned by Young & Rubicam includes options for 1,800,000 shares of common stock that will be exercisable on the closing of this offering and the simultaneous acquisition of assets of Brand Dialogue-New York and also includes the 937,500 shares of non-voting common stock, assuming an initial public offering price of $16.00 per share, we are selling directly to Young & Rubicam simultaneously with the closing of this offering. We originally issued 1,831,800 shares of common stock to our initial stockholder and an executive officer after giving effect to the 16,653-for-one stock split. Following this offering, the former owners of our eight companies may be entitled to contingent consideration under the terms of the acquisition agreements that we entered into with them. The number of shares that could be issued as payment of contingent consideration are not now determinable and no assumptions regarding those issuances have been included in the pro forma financial statements included in this prospectus or in the table below. Assuming the underwriters exercise their over-allotment option in full, the selling stockholders will sell an aggregate of 399,969 shares of common stock to the underwriters at the initial public offering price, and Luminant will sell 350,031 shares of common stock to the underwriters at the initial public offering price. Each of the selling stockholders listed below, except for The 1996 Alice C. Alsup Trusts and The 1996 Whitney H. Alsup Trusts, are employees and stockholders of one of the eight companies. The trusts mentioned in the previous sentence are stockholders of Align. Unless otherwise indicated, the address for our officers, directors and selling stockholders is c/o Luminant Worldwide Corporation, 4100 Spring Valley Road, Suite 750, Dallas, Texas 75244. Luminant has granted to the underwriters a 30-day option to purchase up to 750,000 additional shares of common stock solely to cover over-allotments, if any. 79 An asterisk indicates ownership of less than 1%.
AFTER OFFERING AFTER OFFERING (NO EXERCISE OF OVER- (FULL EXERCISE OF OVER- BEFORE OFFERING ALLOTMENT OPTION) ALLOTMENT OPTION) ------------------------ ------------------------ ------------------------ NUMBER NUMBER NUMBER NUMBER OF SHARES OF SHARES OF SHARES OF SHARES BENEFICIALLY PERCENTAGE TO BE SOLD BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE NAME AND ADDRESS OWNED OWNERSHIP IN OFFERING OWNED OWNERSHIP OWNED OWNERSHIP - ---------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Michael H. Jordan........... 109,361 5.97% -- 109,361 * 109,361 * Guillermo G. Marmol......... 797,880 37.57 -- 797,880 3.37% 797,880 3.32% Derek R. Reisfield.......... 343,028 16.61 -- 343,028 1.45 343,028 1.43 Thomas G. Bevivino.......... -- -- -- -- -- -- -- George P. Stamas............ -- -- -- -- -- -- -- James R. Corey.............. -- -- -- 1,697,402 7.26 1,697,402 7.16 Richard M. Scruggs.......... -- -- -- 783,156 3.35 783,156 3.30 Randolph Austin............. -- -- -- -- -- -- -- Michael J. Dolan............ -- -- -- -- -- -- -- Young & Rubicam Inc. -- -- -- 6,929,861 27.54 6,929,861 27.16 285 Madison Avenue New York, New York 10017... Commonwealth Principals II, 915,900 50.00 -- 915,900 3.92 915,900 3.86 LLC 1650 Tysons Blvd. McLean, Virginia 22102..... All executive officers, 1,250,269 53.03 -- 3,730,827 15.62 3,730,827 15.39 directors and director nominees as a group (nine persons)................... SELLING STOCKHOLDERS: David Debbs............... -- -- 24,180 352,596 1.51 328,416 1.38 Scott Williamson.......... -- -- 18,487 130,421 * 111,934 * David Quackenbush......... -- -- 2,665 26,650 * 23,985 * Tod Knight................ -- -- 8,861 95,783 * 86,922 * Eric Reed................. -- -- 75,971 513,647 2.20 437,676 1.72 Michael Secor............. -- -- 8,394 55,960 * 47,566 * Michael Alsup............. -- -- 64,173 641,730 2.75 577,557 2.44 Norman Dawley............. -- -- 31,763 211,750 * 179,988 * Henry Heilbrunn........... -- -- 15,881 105,875 * 89,994 * Lynn Branigan............. -- -- 31,763 211,750 * 179,988 * Charles Harrison.......... -- -- 57,574 383,825 1.64 326,251 1.38 Carolyn Brown............. -- -- 31,619 210,791 * 179,172 * The 1996 Alice C. Alsup -- -- 10,633 70,889 * 60,256 * Trusts.................. The 1996 Whitney H. Alsup -- -- 10,633 70,889 * 60,256 * Trusts.................. Gail Alderson Smith....... -- -- 7,382 49,146 * 41,774 *
80 DESCRIPTION OF CAPITAL STOCK GENERAL Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share, of which 5,000,000 are shares of non-voting common stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. As of August 15, 1999, there were 1,831,800 shares of our common stock outstanding, held by two holders of record, no shares of non-voting common stock outstanding and no shares of preferred stock outstanding. Following the closing of this offering and the simultaneous acquisition of our eight companies, we will have outstanding 23,366,659 shares of common stock, assuming the underwriters do not exercise their over-allotment option. Of the 23,366,659 shares of common stock outstanding, 937,500 will be shares of non-voting common stock, assuming an initial public offering price of $16.00 per share. In addition, we may issue additional shares of common stock to the former owners of our companies as contingent consideration under the terms of the acquisition agreements that we entered into with them. The number of shares that could be issued as payment of contingent consideration are not now determinable and no assumptions regarding those issuances have been included in the pro forma financial statements included in this prospectus. Following completion of this offering, no shares of preferred stock will be outstanding. The following is a description of our capital stock. COMMON STOCK AND NON-VOTING COMMON STOCK We are authorized to issue, without further stockholder approval, up to 100,000,000 shares of common stock, including 5,000,000 shares of non-voting common stock. Holders of record of common stock, excluding the non-voting common stock unless otherwise required by law, are entitled to one vote for each share held on all matters properly submitted to a vote of stockholders. Holders of our common stock do not have cumulative voting rights. As a result, holders of a plurality of the shares of common stock, excluding non-voting common stock, entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock, including the non-voting common stock, are entitled ratably to any dividend declared by the Board of Directors out of funds legally available for this purpose, subject to any preferential dividend rights of any then-outstanding preferred stock. Upon our liquidation, dissolution or winding up, holders of common stock, including the non-voting common stock, are entitled to receive ratably our remaining net assets available after payment of or provision for all debts and other liabilities, subject the prior rights of any then-outstanding preferred stock. Holders of common stock, including the non-voting common stock, have no redemption or conversion rights and no preemptive right to subscribe for or purchase additional shares of any class of our capital stock. The outstanding shares of common stock, including the non-voting common stock, are, and the shares of common stock offered in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock, including the non-voting common stock, may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. See "--Preferred Stock." Each share of non-voting common stock will automatically convert to common stock on a share-for-share basis in the event the holder of a share of non-voting common stock sells or transfers that share to a person or entity who is not an affiliate of the holder. At the option of the holder of non-voting common stock each share of non-voting common stock may be converted on a share for share basis into common stock. 81 PREFERRED STOCK We are authorized to issue, without further stockholder approval, up to 10,000,000 shares of preferred stock in one or more series, which can have rights senior to those of the common stock. Our Board of Directors may fix or alter the powers, designation, dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption, including sinking fund provisions, redemption price or prices, liquidation and other preferences, and other special rights of any wholly unissued series of preferred stock, and the number of shares constituting any such series. Our issuance of preferred stock could adversely affect holders of common stock. These effects could include the following: - if dividends on the preferred stock have not been made, dividends on the common stock may be restricted; - to the extent the preferred stock has voting rights, the voting rights of the common stock will be diluted; - if holders of preferred stock are entitled to preferred dividends or liquidation preferences, the amount of earnings and assets available for distribution to holders of common stock may be reduced; and - the issuance of preferred stock could decrease the market price of the common stock. In addition, our issuance of preferred stock may have the effect of delaying or preventing a change in control. We currently have no plans to issue any shares of preferred stock. LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS As permitted by the Delaware General Corporation Law, our certificate of incorporation provides that our directors will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to us or our stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, relating to unlawful dividends or unlawful stock purchases or redemptions, or (4) for any transaction from which the director derives an improper personal benefit. As a result of this provision, we and our stockholders may be unable to obtain monetary damages from a director for breach of his or her duty of care. Our certificate of incorporation and by-laws provide for the indemnification of our directors and officers to the fullest extent authorized by the Delaware General Corporation Law, except that we will indemnify a director or officer in connection with an action initiated by that person only if the action was authorized by our Board of Directors. The indemnification provided under our certificate of incorporation and by-laws includes the right to be paid expenses in advance of any proceeding for which indemnification may be had, provided that such advance payment may be made only if the director or officer seeking such advance payment delivers to us an undertaking to repay all amounts paid in advance if it is ultimately determined that the director or officer is not entitled to be indemnified. Under our by-laws, if we do not pay a claim for indemnification within 60 days after we have received a written claim, the director or officer may bring an action to recover the unpaid amount of the claim and, if successful, the director or officer also will be entitled to be paid the expense of prosecuting the action to recover these unpaid amounts. Under our by-laws, we have the power to purchase and maintain insurance on behalf of any person who is or was one of our directors, officers, employees or agents, or is or was serving at 82 our request as a director, officer, employee, limited partner, general partner, manager, trustee or agent of another corporation or of a partnership, joint venture, limited liability company, trust or other enterprise, against any liability asserted against the person or incurred by the person in any of these capacities, or arising out of the person's fulfilling one of these capacities, and related expenses, whether or not we would have the power to indemnify the person against the claim under the provisions of the Delaware General Corporation Law. We intend to purchase director and officer liability insurance on behalf of our directors and officers. ANTI-TAKEOVER PROVISIONS Our certificate of incorporation and by-laws contain provisions that are intended to enhance the likelihood of continuity and stability in the composition of our Board of Directors and in the policies formulated by our Board of Directors. In addition, provisions of Delaware law may hinder or delay an attempted takeover of Luminant other than through negotiation with our Board of Directors. These provisions could have the effect of discouraging attempts to acquire us or remove incumbent management even if some or a majority of our stockholders believe this action to be in their best interest, including attempts that might result in the stockholders' receiving a premium over the market price for the shares of common stock held by stockholders. REMOVAL AND REPLACEMENT OF DIRECTORS. Under our by-laws, directors may only be removed, with or without cause, by the affirmative vote of two-thirds of the outstanding voting stock. In addition, a majority of the directors then in office can fill board vacancies and newly-created directorships resulting from any increase in the size of the Board of Directors, even if those directors do not constitute a quorum or only one director is left in office. These provisions could prevent stockholders, including parties who want to take over or acquire us, from removing incumbent directors without cause and filling the resulting vacancies with their own nominees. ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS OF DIRECTORS. The by-laws establish an advance notice procedure regarding stockholder proposals and nominations for director. The advance notice procedure will not apply to proposals by our Board of Directors or management. Any stockholder that wishes to make a proposal, or nominate a director for election, at an annual meeting must deliver us notice of the proposal or the nomination not less than 90 days nor more than 120 days before the first anniversary of the preceding year's annual meeting. The stockholder must put information in the notice regarding: - the stockholder and its holdings; - the background of any nominee for director; - any business desired to be brought before the meeting; - the reasons for conducting the business at the meeting; and - any material interest of the stockholder in the business proposed. SPECIAL MEETINGS OF STOCKHOLDERS. Our certificate of incorporation and by-laws permit special meetings of the stockholders to be called only by the Board of Directors, the Chairman of the Board or the President or holders of at least 75% of our securities that are outstanding and entitled to vote generally in an election of directors. This provision may make it more difficult for stockholders to take actions opposed by the Board of Directors. PROHIBITION ON STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of incorporation and by-laws prohibit stockholders from taking action by written consent. By requiring stockholders to take actions at an annual or special meeting, rather than by written consent, our certificate of 83 incorporation and by-laws may discourage stockholder actions that are opposed by our board of directors. AUTHORIZED BUT UNISSUED SHARES. Without further stockholder approval, we can issue shares of common stock and preferred stock up to the number of shares authorized for issuance in our certificate of incorporation, except as limited by Nasdaq rules. We could use these additional shares for a variety of corporate purposes. These purposes include future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. Our ability to issue these shares of common stock and preferred stock could make it more difficult or discourage an attempt to obtain control of Luminant by means of a proxy contest, tender offer, merger or otherwise. SECTION 203 OF DELAWARE LAW. In addition to the foregoing provisions of our certificate of incorporation and by-laws, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law. Section 203 prohibits publicly-held Delaware corporations from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. These provisions could have the effect of delaying, deferring or preventing a change in control of Luminant or reducing the price that investors might be willing to pay in the future for shares of our common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. SHARES AVAILABLE FOR FUTURE SALE Following the closing of this offering and the simultaneous acquisition of the eight companies, we will have 23,366,659 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option, or 23,716,690 shares, assuming the underwriters' over-allotment option is exercised in full. The 4,062,500 shares we sell in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our affiliates, as that term is defined in Rule 144, may generally only be sold in compliance with the limitations of Rule 144 described below. The 937,500 shares of non-voting common stock, assuming an initial public offering price of $16.00 per share, we are selling directly to Young & Rubicam simultaneously with this offering, as well as the remaining 18,366,659 shares of common stock outstanding following the closing of this offering and the simultaneous acquisition of the eight companies, including the 16,534,859 shares of common stock we issue to former owners of our companies under the acquisition agreements we entered into with them, will be "restricted securities" or shares held by affiliates under the terms of the Securities Act. Sales of a portion of the restricted shares to be outstanding upon completion of this offering will be limited by lock-up agreements with the underwriters and with us as described below. We may also issue an indeterminable number of shares of common stock under the contingent consideration provisions of the acquisition agreements which would be "restricted securities," and which may be resold if registered under applicable registration rights or if an exemption from registration is available. See "About Luminant Worldwide Corporation." 84 RULE 144 In general, under Rule 144, a stockholder who owns restricted shares that have been outstanding for at least one year is entitled to sell, within any three-month period, a number of these restricted shares that does not exceed the greater of: - one percent of the then outstanding shares of common stock, or approximately 233,667 shares immediately after this offering; or - the average weekly trading volume in the common stock on the Nasdaq National Market during the four calendar weeks preceding the sale. In addition, our affiliates must comply with the restrictions and requirements of Rule 144, other than the one-year holding period requirement, to sell shares of common stock which are not restricted securities unless we register those securities for resale by the affiliate. Under Rule 144(k), a stockholder who is not currently, and who has not been for at least three months before the sale, an affiliate of ours and who owns restricted shares that have been outstanding for at least two years may resell these restricted shares without compliance with the above requirements. The one- and two-year holding periods described above do not begin to run until the full purchase price is paid by the person acquiring the restricted shares from us or an affiliate of ours. REGISTRATION RIGHTS The former owners of the companies that we acquire at the closing of this offering and the simultaneous acquisition of the eight companies will have piggyback registration rights to register the shares of common stock that they receive pursuant to the acquisition agreements, including those issued as contingent consideration, whenever we propose to register any shares of common stock for our own or another's account under the Securities Act for a public offering, other than: - any shelf registration of shares of common stock to be used as consideration for acquisitions of additional businesses; - registrations relating to employee benefit plans; and - registrations relating to rights offerings made to our stockholders. Under a registration rights agreement we expect to enter into prior to the closing of this offering, Commonwealth Principals and Mr. Marmol will also have piggyback registration rights to register the shares of common stock which they hold or which they have a right to acquire under options granted in connection with this offering, whenever we propose to register any shares of common stock for our own or another's account under the Securities Act for a public offering, other than: - any shelf registration of shares of common stock to be used as consideration for acquisitions of additional businesses; - registrations relating to employee benefit plans; and - registrations relating to rights offerings made to our stockholders. In addition, Young & Rubicam will have the right, on one occasion that can be no earlier than 18 months after the closing of this offering and the simultaneous acquisition of the eight companies, to require that we register under the Securities Act any or all of the shares of common stock they receive in connection with their aquisition, including shares issued as contingent consideration and shares issued upon exercise of options granted to Young & 85 Rubicam. We have agreed to pay all costs of this registration and to keep the registration effective for at least 120 days, or whatever shorter period may be required to sell the registered shares. United will also have the right, on one occasion that can be no earlier than six months after the closing of this offering and the simultaneous acquisition of the eight companies, to require that we register under the Securities Act any or all of the shares of common stock United receives upon exercise of its warrant. We have agreed to pay all costs of this registration and to keep the registration effective for at least 120 days, or whatever shorter period may be required to sell the registered shares. United will also have piggyback registration rights to register the shares of common stock it receives upon exercise of the warrant, whenever we propose to register any shares of common stock for our own or another's account under the Securities Act, subject to the same exceptions that apply to the piggyback rights described in the preceding paragraphs. OPTIONS ISSUABLE AND OUTSTANDING Before the closing of this offering and the simultaneous acquisition of the eight companies, we will issue options to acquire 7,005,107 shares of common stock, of which options to purchase 3,417,310 shares will be immediately exercisable. Options to purchase 2,204,447 of these shares will be issued to replace currently outstanding options and participation rights issued by Align, InterActive8 and Potomac Partners. Options to purchase 1,800,000 of these shares will be issued to Young & Rubicam. Options to purchase 1,328,036 of these shares will be issued to employees and officers of the eight companies who will become our employees as of the closing of the acquisitions, and options to purchase 1,672,625 of these shares will be issued to our current management, directors and a former officer. All of the options described in this paragraph will be available for resale at various dates after closing subject to expiration of applicable lock-ups, compliance with the volume, holding period and other limitations of Rule 144 and compliance with applicable vesting schedules. In addition, we intend to file one or more registration statements under the Securities Act within 30 days after the closing of the initial public offering to register 7,115,007 shares of common stock underlying outstanding stock options issued or reserved for issuance under our long-term incentive plan. We expect these registration statements will become effective upon filing, and shares covered by these registration statements will be eligible for sale in the public market immediately after the effective dates of these registration statements. As of the closing of this offering we will have issued to United a warrant to purchase up to 300,000 shares of our common stock at the initial public offering price over a five year period. The right to purchase shares underlying this warrant will be subject to the satisfaction of specified vesting requirements, as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." LOCK-UP AGREEMENTS We have agreed with the underwriters that we will not issue any additional shares of common stock or securities convertible into, exercisable for or exchangeable for shares of common stock for 180 days following the date of this prospectus, except that we may grant options or warrants to purchase shares of common stock under the long-term incentive plan or in connection with the acquisitions of companies, and issue shares of common stock upon the exercise of outstanding options and warrants and in connection with the acquisition of companies. 86 Our executive officers, directors and specified significant stockholders have agreed with the underwriters that they will not offer, sell, contract to sell or otherwise dispose of or enter into any transaction which is designed to or could be expected to result in the disposition of any common stock for a period of 180 days after the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc. The agreements do not prevent any of them from exercising outstanding options or warrants. 87 UNDERWRITING The underwriters named below, through their representatives Deutsche Bank Securities Inc., Hambrecht & Quist LLC and SoundView Technology Group, Inc. have severally agreed to purchase from us the following numbers of shares of common stock at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus.
NUMBER OF UNDERWRITER SHARES - ------------------------------------------------------------------------------- ------------- Deutsche Bank Securities Inc................................................... Hambrecht & Quist LLC.......................................................... SoundView Technology Group, Inc................................................ ------------- Total........................................................................ 4,062,500 ------------- -------------
We have entered into an underwriting agreement with the underwriters which provides that the underwriters are obligated to purchase all of the shares of common stock we are offering to sell in this offering, other than shares covered by the over-allotment option described below, if any of the shares are purchased. We expect to issue these shares on , 1999. The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at a price that represents a concession not in excess of $ per share under the public offering price. The underwriters may allow, and dealers may re-allow, a concession not in excess of $ per share to other dealers. After the initial offering, the offering price and other selling terms may be changed by the representatives of the underwriters. Luminant and the selling stockholders we have described in this prospectus have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to an aggregate of 750,000 additional shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock in this offering. To the extent that the underwriters exercise this option, each of the underwriters will become obligated to purchase approximately the same percentage of additional shares of common stock as the number of shares of common stock to be purchased by it in the above table bears to 4,062,500. Luminant and the selling stockholders will be obligated to sell these shares to the underwriters to the extent they exercise the option. If any additional shares of common stock are purchased, the underwriters will offer these additional shares on the same terms as those on which the 4,062,500 shares are being offered. At our request the underwriters have reserved for sale at the initial public offering price up to shares of common stock for our officers, directors, employees, clients, friends and related persons who express an interest in purchasing these shares. The number of shares of our common stock available for sale to the general public will be reduced to the extent these persons purchase these reserved shares. The underwriters will offer any reserved shares not so purchased by these persons to the general public on the same basis as the other shares in this initial public offering. Under the terms of the agreement by which we will acquire assets of Brand Dialogue-New York, Young & Rubicam is purchasing $15 million worth of shares of non-voting common stock directly from us at the initial public offering price simultaneously with the closing of this offering and the acquisition of the eight companies. Assuming an initial public offering price of $16.00 per share, Young & Rubicam will purchase 937,500 shares of non-voting common stock directly from us. Under the terms of a placement agreement we have entered into with the underwriters, the underwriters will receive a placement fee equal to $ per share sold directly to Young & Rubicam. 88 We have agreed to indemnify the underwriters against liabilities in connection with this initial public offering, including liabilities under the Securities Act. We have agreed with the underwriters that we will not issue any additional shares of common stock or securities convertible into, exercisable for or exchangeable for shares of common stock for 180 days following the date of this prospectus, except that we may grant options or warrants to purchase shares of common stock under the long-term incentive plan or in connection with the acquisitions of companies, and issue shares of common stock upon the exercise of outstanding options and warrants, and in connection with the acquisition of companies. Each of our executive officers and directors and our large stockholders have agreed with the underwriters that they will not offer, sell, contract to sell or otherwise dispose of or enter into any transaction which is designed to or could be expected to result in the disposition of any common stock for a period of 180 days after the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc., except that nothing will prevent any of them from exercising outstanding options or warrants. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. To facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the common stock. Specifically, the underwriters may over-allot shares of the common stock in connection with this offering by creating a short position in the common stock for their own accounts. Additionally, to cover these over-allotments or to stabilize the market price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the representatives, on behalf of the underwriters, also may reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities and, if commenced, may end any of these activities at any time. PRICING OF THIS OFFERING Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined by negotiation between us and the representatives of the underwriters. Among the factors to be considered in determining the public offering price will be: - the history and prospects of our business and the industry in which we compete; - an assessment of our management and the present state of our development; - prevailing market conditions in the United States economy and the industry in which we compete; - our revenues, operating cash flow and earnings in recent periods; - the market capitalizations and stages of development of other companies which the representatives of the underwriters believe to be comparable to us; and - estimates of our business potential. LEGAL MATTERS The validity of the shares of our common stock offered by this prospectus will be passed upon for us by Wilmer, Cutler & Pickering, Washington, D.C. The underwriters have been represented by Piper & Marbury L.L.P., Baltimore, Maryland. 89 EXPERTS The audited financial statements and schedules of Luminant Worldwide Corporation; Align Solutions Corp.; Free Range Media Inc.; Integrated Consulting Inc.; InterActive8, Inc.; Multimedia Resources, LLC; Potomac Partners Management Consulting, LLC; RSI Group, Inc. and subsidiaries, Fifth Gear Media Corporation, inmedia, inc. and Synapse Group, Inc. included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of Arthur Andersen LLP as experts in giving these reports. The financial statements of Brand Dialogue-New York (a wholly-owned business of Young & Rubicam Inc.) as of December 31, 1997 and 1998 and for the period from April 1, 1996 (inception) through December 31, 1996, and for each of the two years in the period ended December 31, 1998 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION You may rely on the information contained in this prospectus. Neither we nor the underwriters has authorized anyone to provide information different from that contained in this prospectus. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus. Neither the delivery of this prospectus nor sale of common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares of our common stock in any circumstances under which the offer or solicitation is unlawful. We have filed with the Securities and Exchange Commission a registration statement, which includes exhibits, schedules and amendments. This prospectus is a part of the registration statement and includes all of the information which we believe is material to an investor considering whether to make an investment in our common stock. We refer you to the registration statement for additional information about Luminant, our common stock and this offering, including the full texts of the exhibits, some of which have been summarized in this prospectus. The registration statement is available for inspection and copying at Securities and Exchange Commission's following locations: 1. Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549; 2. New York Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048; and 3. Chicago Regional Officer, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511 You may obtain copies by mail from the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains an Internet site that contains the registration statement. The address of the Securities and Exchange Commission's Internet site is "http://www.sec.gov." We intend to furnish our stockholders annual reports containing financial statements audited by our independent accountants. 90 LUMINANT WORLDWIDE CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE --------- LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS Introduction to Unaudited Pro Forma Combined Financial Statements.................................... F-4 Unaudited Pro Forma Combined Balance Sheets.......................................................... F-6 Unaudited Pro Forma Combined Statements of Operations................................................ F-7 Unaudited Historical Balance Sheets.................................................................. F-10 Unaudited Historical Statements of Operations Excluding Align Solutions Corp......................... F-11 Notes to Unaudited Pro Forma Combined Financial Statements........................................... F-14 ALIGN SOLUTIONS CORP. UNAUDITED PRO FORMA FINANCIAL STATEMENTS Introduction to Unaudited Pro Forma Financial Statements............................................. F-21 Unaudited Pro Forma Statements of Operations......................................................... F-22 Notes to Unaudited Pro Forma Financial Statements.................................................... F-25 LUMINANT WORLDWIDE CORPORATION Report of Independent Public Accountants............................................................. F-26 Balance Sheets....................................................................................... F-27 Statements of Operations............................................................................. F-28 Statements of Stockholders' Equity................................................................... F-29 Statements of Cash Flows............................................................................. F-30 Notes to Financial Statements........................................................................ F-31 OUR EIGHT COMPANIES ALIGN SOLUTIONS CORP. Report of Independent Public Accountants............................................................. F-37 Balance Sheets....................................................................................... F-38 Statements of Operations............................................................................. F-39 Statements of Stockholders' Equity................................................................... F-40 Statements of Cash Flows............................................................................. F-41 Notes to Financial Statements........................................................................ F-42 BRAND DIALOGUE-NEW YORK Report of Independent Accountants.................................................................... F-50 Balance Sheets....................................................................................... F-51 Statements of Operations............................................................................. F-52 Statements of Cash Flows............................................................................. F-53 Notes to Financial Statements........................................................................ F-54 FREE RANGE MEDIA, INC. Report of Independent Public Accountants............................................................. F-59 Consolidated Balance Sheets.......................................................................... F-60 Consolidated Statements of Operations................................................................ F-61 Consolidated Statements of Stockholders' Equity...................................................... F-62 Consolidated Statements of Cash Flows................................................................ F-63 Notes to Consolidated Financial Statements........................................................... F-64
F-1 LUMINANT WORLDWIDE CORPORATION INDEX TO FINANCIAL STATEMENTS (CONTINUED)
PAGE --------- INTEGRATED CONSULTING, INC. dba I.CON INTERACTIVE Report of Independent Public Accountants............................................................. F-72 Balance Sheets....................................................................................... F-73 Statements of Operations............................................................................. F-74 Statements of Stockholders' Equity................................................................... F-75 Statements of Cash Flows............................................................................. F-76 Notes to Financial Statements........................................................................ F-77 INTERACTIVE8, INC. Report of Independent Public Accountants............................................................. F-83 Balance Sheets....................................................................................... F-84 Statements of Operations............................................................................. F-85 Statements of Stockholders' Equity................................................................... F-86 Statements of Cash Flows............................................................................. F-87 Notes to Financial Statements........................................................................ F-88 MULTIMEDIA RESOURCES, LLC Report of Independent Public Accountants............................................................. F-95 Balance Sheets....................................................................................... F-96 Statements of Operations............................................................................. F-97 Statements of Members' Equity........................................................................ F-98 Statements of Cash Flows............................................................................. F-99 Notes to Financial Statements........................................................................ F-100 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC Report of Independent Public Accountants............................................................. F-104 Balance Sheets....................................................................................... F-105 Statements of Operations............................................................................. F-106 Statements of Members' Equity........................................................................ F-107 Statements of Cash Flows............................................................................. F-108 Notes to Financial Statements........................................................................ F-109 RSI GROUP, INC. AND SUBSIDIARIES Report of Independent Public Accountants............................................................. F-117 Consolidated Balance Sheets.......................................................................... F-118 Consolidated Statements of Operations................................................................ F-119 Consolidated Statements of Stockholders' Equity...................................................... F-120 Consolidated Statements of Cash Flows................................................................ F-121 Notes to Consolidated Financial Statements........................................................... F-122 ACQUISITIONS OF ALIGN SOLUTIONS CORP. SUBSEQUENT TO DECEMBER 31, 1998 FIFTH GEAR MEDIA CORPORATION Report of Independent Public Accountants............................................................. F-128 Balance Sheets....................................................................................... F-129 Statements of Operations............................................................................. F-130 Statements of Stockholders' Equity................................................................... F-131 Statements of Cash Flows............................................................................. F-132 Notes to Financial Statements........................................................................ F-133
F-2 LUMINANT WORLDWIDE CORPORATION INDEX TO FINANCIAL STATEMENTS (CONTINUED)
PAGE --------- INMEDIA, INC. Report of Independent Public Accountants............................................................. F-139 Balance Sheets....................................................................................... F-140 Statements of Operations............................................................................. F-141 Statements of Stockholders' Equity................................................................... F-142 Statements of Cash Flows............................................................................. F-143 Notes to Financial Statements........................................................................ F-144 SYNAPSE GROUP, INC. Report of Independent Public Accountants............................................................. F-151 Balance Sheets....................................................................................... F-152 Statements of Operations............................................................................. F-153 Statements of Stockholders' Equity................................................................... F-154 Statements of Cash Flows............................................................................. F-155 Notes to Financial Statements........................................................................ F-156
F-3 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements give effect to the acquisitions by Luminant Worldwide Corporation ("Luminant") of the outstanding capital stock of Align Solutions Corp.; Free Range Media, Inc.; Integrated Consulting, Inc.; InterActive8, Inc; Multimedia Resources, LLC; Potomac Partners Management Consulting, LLC; and RSI Group, Inc. and the assets and certain liabilities of Brand Dialogue-New York (a wholly owned subsidiary of Young and Rubicam Inc.) (the "eight companies"). These acquisitions will occur simultaneously with the closing of this offering and will be accounted for using the purchase method of accounting. Align, one of the eight companies we will acquire, has been identified as the "accounting acquiror." Align is deemed to be the accounting acquiror since its shareholder group's voting rights of 4,653,101 shares, is the greatest portion of voting rights. Under APB 16, the shareholder group receiving the largest number of voting rights is presumptive evidence that it is the accounting acquiror. In addition, Align shareholders receive the largest portion of total consideration, have the largest revenue for the six months ended June 30, 1999, and Align and two other operating companies have three members of the board of directors. Subsequent to the combination, the historical financial statements before the combination will be those of Align. Since Align is the accounting acquiror, the 915,900 shares of outstanding common stock of Luminant owned by the sponsor of Luminant at the consummation of the acquisitions will be valued at the offering price and treated as $14.7 million of acquisition-related expenses and included in goodwill. The sponsor will not participate in the management of Luminant. One-half of the 505,796 shares owned directly or indirectly by the Luminant Chief Executive Officer, 252,898 shares, will be valued at the offering price and treated as $4.0 million of acquisition related expenses and included in goodwill. Luminant believes that the $4.0 million represents the fair value of the portion of the common shares issued to the Chief Executive Officer attributable to acquisition-related activities. The remaining 663,002 shares owned or indirectly owned by the management of Luminant including one-half of the Chief Executive Officer shares, will be valued at the offering price and accounted for, after reduction for the $1.0 million of consideration paid for the shares, as a $9.6 million nonrecurring equity based signing bonus. This nonrecurring charge will be recorded upon the consummation of the acquisitions in the historical financial statements. The amounts to be included in goodwill have been included in the pro forma combined financial statements. The nonrecurring charge has been included in the pro forma combined balance sheet but has been excluded from the pro forma statements of operations, as it is a nonrecurring charge. The unaudited pro forma combined balance sheet gives effect to the acquisitions, the offering, and the direct sale of shares of non-voting common stock to Young & Rubicam as if they had occurred on June 30, 1999. The unaudited pro forma combined statements of operations gives effect to these transactions as if they had occurred on January 1, 1998. Certain reclassifications to the historical statements of operations for Brand Dialogue-New York have been made in order to present information that is consistent with the Luminant statement of operations presentation. Luminant has preliminarily analyzed the savings or increases that it expects to realize from changes in salaries and certain benefits to the stockholders and management of the eight companies. To the extent the stockholders and management of the eight companies have agreed prospectively to reductions or increases in salary, bonuses and benefits, these changes have been reflected in the pro forma combined statements of operations. With respect to other potential cost savings, Luminant has not and cannot quantify these savings until completion of the acquisition of the eight companies. It is anticipated that these savings will be partially offset by the costs of being a publicly held company and the incremental increase in costs related to F-4 Luminant's new management. The anticipated savings have not been included in the unaudited pro forma combined financial statements of Luminant. The pro forma adjustments are based on estimates, available information and certain assumptions and may be revised as additional information becomes available. The pro forma financial data do not purport to represent what Luminant's financial position or results of operations would actually have been if such transactions in fact had occurred on those dates and are not necessarily representative of Luminant's financial position or results of operations for any future period. Since the eight companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance. The unaudited pro forma combined financial statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this prospectus. See "Risk Factors" included elsewhere in this prospectus. F-5 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED BALANCE SHEETS JUNE 30, 1999 (DOLLARS IN THOUSANDS)
PRO FORMA ACQUISITION PRO FORMA OFFERING PRO FORMA ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED HISTORICAL ----------- --------- ----------- ----------- TOTAL (SEE F-16) (SEE F-16) ---------- (SEE F-10) ASSETS CURRENT ASSETS: Cash and cash equivalents.................. $ 1,771 $ -- $ 1,771 $ 13,668(e)(f) $ 15,439 Accounts receivable, net................... 16,303 (100)(a) 16,203 -- 16,203 Unbilled revenues.......................... 548 -- 548 -- 548 Employee and other receivables............. 2,149 (1,933)(a) 216 -- 216 Deferred income taxes...................... 10 80(a) 90 -- 90 Deferred income tax valuation.............. -- (90)(a) (90) (90) Prepaid expenses and other assets.......... 7,625 (1,000)(a) 6,625 (6,242)(e) 383 ---------- ----------- --------- ----------- ----------- Total current assets..................... 28,406 (3,043) 25,363 7,426 32,789 PROPERTY AND EQUIPMENT, net.................. 4,151 -- 4,151 -- 4,151 OTHER ASSETS: Goodwill, net.............................. 14,415 245,129(a) 259,544 -- 259,544 Other Intangible........................... -- 23,094(d) 23,094 -- 23,094 Deferred income taxes...................... 15 3,213(a) 3,228 3,228 Deferred income tax valuation.............. -- (3,228)(a) (3,228) (3,228) Other...................................... 291 -- 291 -- 291 ---------- ----------- --------- ----------- ----------- Total assets............................. $ 47,278 $265,165 $312,443 $ 7,426 $319,869 ---------- ----------- --------- ----------- ----------- ---------- ----------- --------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................... $ 3,274 $ (100)(a) $ 3,174 $ -- $ 3,174 Payable for eight companies' stock and other acquisition-related obligations.... -- 53,061(b) 53,061 (53,061)(f) -- Customer deposits.......................... 209 -- 209 -- 209 Accrued liabilities........................ 21,364 (10,216)(b) 11,148 (5,050)(e) 6,098 Unearned revenues.......................... 193 -- 193 -- 193 Notes payable.............................. 2,477 2,477 -- 2,477 Related party notes payable................ 5,746 -- 5,746 (2,448)(e) 3,298 Current maturities of long-term debt....... 1,157 128(c) 1,285 -- 1,285 ---------- ----------- --------- ----------- ----------- Total current liabilities................ 34,420 42,873 77,293 (60,559) 16,734 LONG-TERM LIABILITIES: Long-term debt, net of current maturities............................... 736 732(c) 1,468 -- 1,468 Deferred income taxes...................... 21 (21)(a) -- -- -- ---------- ----------- --------- ----------- ----------- Total liabilities........................ 35,177 43,584 78,761 (60,559) 18,202 ---------- ----------- --------- ----------- ----------- MINORITY INTEREST............................ 101 (101) -- -- -- STOCKHOLDERS' EQUITY: Preferred stock............................ 3,728 (3,728)(b) -- -- -- Members' equity............................ (5,383) 5,383(a) -- -- -- Common stock............................... 3,026 (2,842)(a) 184 50(e) 234 Additional paid-in capital................. 24,550 245,453 ( (b)(c)(d 270,003 67,935(e) 337,938 Young & Rubicam Inc. investment............ 5,456 (5,456)(a) -- -- -- Retained deficit........................... (18,958) (17,547)(a)(b)(c) (36,505) -- (36,505) Treasury stock............................. (419) 419(a) -- -- -- ---------- ----------- --------- ----------- ----------- Total stockholders' equity............... $ 12,000 221,682 233,682 67,985 301,667 ---------- ----------- --------- ----------- ----------- Total liabilities and stockholders' equity................................. $ 47,278 $265,165 $312,443 $ 7,426 $319,869 ---------- ----------- --------- ----------- ----------- ---------- ----------- --------- ----------- -----------
F-6 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA PRO FORMA TOTAL W/O ACQUISITION PRO FORMA ALIGN ALIGN ADJUSTMENTS COMBINED ----------- -------------- -------------- ----------- (SEE F-22) (SEE F-11) (SEE F-17) REVENUES................................ $ 14,188 $ 40,877 $ (219)(e) $ 54,846 COST OF SERVICES........................ 8,582 29,297 (1,581)(c)(e) 36,298 ----------- -------------- -------------- ----------- GROSS PROFIT............................ 5,606 11,580 1,362 18,548 SELLING, GENERAL AND ADMINISTRATIVE..... 5,631 16,425 3,958(c)(e)(f)(g) 26,014 EQUITY BASED COMPENSATION EXPENSE....... 4,148 -- 207(g) 4,355 INTANGIBLES AMORTIZATION................ 5,289 35 89,408(a) 94,732 OTHER INCOME (EXPENSE): Interest income....................... -- 37 -- 37 Interest expense...................... (155) (351) -- (506) Gain on sale of affiliate............. -- 430 -- 430 Loss on disposition of assets......... (28) -- 5(e) (23) Other, net............................ 1 28 -- 29 ----------- -------------- -------------- ----------- LOSS BEFORE INCOME TAXES................ (9,644) (4,736) (92,206) (106,586) INCOME TAXES............................ -- 481 (481)(b) -- MINORITY INTEREST....................... -- 162 (162)(d) -- ----------- -------------- -------------- ----------- LOSS BEFORE NONRECURRING CHARGES........ $ (9,644) $ (5,379) $ (91,563) $ (106,586) ----------- -------------- -------------- ----------- ----------- -------------- -------------- ----------- LOSS BEFORE NONRECURRING CHARGES PER SHARE................................. $ (4.56) SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING CHARGES PER SHARE (see note 5):......................... 23,366,659
F-7 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA PRO FORMA TOTAL ACQUISITION PRO FORMA ALIGN W/O ALIGN ADJUSTMENTS COMBINED ----------- -------------- -------------- ----------- (SEE F-23) (SEE F-12) (SEE F-18) REVENUES................................ $ 12,042 $ 29,571 $ (176)(f)(i) $ 41,437 COST OF SERVICES........................ 7,199 26,366 (8,824)(c)(d)(f)(i) 24,741 ----------- -------------- -------------- ----------- GROSS PROFIT............................ 4,843 3,205 8,648 16,696 SELLING, GENERAL AND ADMINISTRATIVE..... 4,534 13,421 (1,840) )(d)(f)(g)(h) 16,115 EQUITY BASED COMPENSATION EXPENSE....... 544 -- 2,944(d)(h) 3,488 INTANGIBLES AMORTIZATION................ 2,619 18 44,704(a) 47,341 OTHER INCOME (EXPENSE): Interest income....................... 2 2 -- 4 Interest expense...................... (68) (226) -- (294) Other, net............................ 6 (156) -- (150) ----------- -------------- -------------- ----------- LOSS BEFORE INCOME TAXES................ (2,914) (10,614) (37,160) (50,688) INCOME TAXES............................ -- 477 (477)(b) -- MINORITY INTEREST....................... -- (22) 22(e) -- ----------- -------------- -------------- ----------- LOSS BEFORE NONRECURRING CHARGES........ $ (2,914) $ (11,069) $ (36,705) $ (50,688) ----------- -------------- -------------- ----------- ----------- -------------- -------------- ----------- LOSS BEFORE NONRECURRING CHARGES PER SHARE................................. $ (2.17) SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING CHARGES PER SHARE (see note 5):................... 23,366,659
F-8 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA HISTORICAL ACQUISITION PRO FORMA ALIGN TOTAL W/O ALIGN ADJUSTMENTS COMBINED --------- --------------- ----------- ----------- (SEE F-24) (SEE F-13) (SEE F-19) REVENUES......................................................... $ 5,870 $18,882 $ (11)(d) $ 24,741 COST OF SERVICES................................................. 3,486 13,965 (55)(d) 17,396 --------- --------------- ----------- ----------- GROSS PROFIT..................................................... 2,384 4,917 44 7,345 SELLING, GENERAL AND ADMINISTRATIVE.............................. 2,682 7,049 2,235(d)(e) 11,966 EQUITY BASED COMPENSATION EXPENSE................................ 3,604 -- -- 3,604 INTANGIBLES AMORTIZATION......................................... 2,644 18 44,704(a) 47,366 OTHER INCOME (EXPENSE): Interest income................................................ -- 10 -- 10 Interest expense............................................... (35) (122) -- (157) Other, net..................................................... (39) (119) -- (158) --------- --------------- ----------- ----------- LOSS BEFORE INCOME TAXES......................................... (6,620) (2,381) (46,895) (55,896) INCOME TAXES..................................................... -- 124 (124)(b) -- MINORITY INTEREST................................................ -- 12 (12)(c) -- --------- --------------- ----------- ----------- LOSS BEFORE NONRECURRING CHARGES................................. $ (6,620) $(2,517) $ (46,759) $ (55,896) --------- --------------- ----------- ----------- --------- --------------- ----------- ----------- LOSS BEFORE NONRECURRING CHARGES PER SHARE....................... $ (2.39) SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING CHARGES PER SHARE (see note 5):................................ 23,366,659
F-9 LUMINANT WORLDWIDE CORPORATION UNAUDITED HISTORICAL BALANCE SHEETS JUNE 30, 1999 (DOLLARS IN THOUSANDS)
BRAND ALIGN LUMINANT DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA --------- ----------- ----------- ----------- --------- ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents..... $ 48 $ 79 $ -- $ 58 $ 108 $ 150 $ 340 Accounts receivable, net...... 4,085 -- 3,712 1,443 360 1,582 354 Unbilled revenues............. 81 -- 3 352 29 -- -- Employee and other receivables................. -- -- 1,933 -- -- 110 -- Deferred income taxes......... -- -- -- -- 10 -- -- Prepaid expenses and other assets...................... 68 7,242 -- 56 -- 63 13 --------- ----------- ----------- ----------- --------- ------------- ----- Total current assets........ 4,282 7,321 5,648 1,909 507 1,905 707 PROPERTY AND EQUIPMENT, net..... 1,032 -- 543 750 365 1,056 54 OTHER ASSETS: Goodwill, net................. 14,396 -- -- -- -- -- -- Deferred income taxes......... -- -- 15 -- -- -- -- Other......................... 21 -- -- -- 7 72 13 --------- ----------- ----------- ----------- --------- ------------- ----- Total assets................ $ 19,731 $ 7,321 $ 6,206 $ 2,659 $ 879 $ 3,033 $ 774 --------- ----------- ----------- ----------- --------- ------------- ----- --------- ----------- ----------- ----------- --------- ------------- ----- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.............. $ 485 $ 156 $ 470 $ 145 $ 178 $ 455 $ 67 Customer deposits............. -- -- -- 209 -- -- -- Accrued liabilities........... 1,678 5,050 280 1,064 260 3,702 212 Unearned revenues............. -- -- -- -- -- 193 -- Notes payable................. 1,168 -- -- -- 75 245 -- Related party notes payable... -- 2,448 -- 3,298 -- -- -- Current maturities of long- term debt................... 534 -- -- -- 17 537 -- --------- ----------- ----------- ----------- --------- ------------- ----- Total current liabilities... 3,865 7,654 750 4,716 530 5,132 279 --------- ----------- ----------- ----------- --------- ------------- ----- LONG-TERM LIABILITIES: Long-term debt, net of current maturities.................. 209 -- -- -- 103 424 -- Deferred income taxes......... -- -- -- -- 21 -- -- --------- ----------- ----------- ----------- --------- ------------- ----- Total liabilities........... 4,074 7,654 750 4,716 654 5,556 279 --------- ----------- ----------- ----------- --------- ------------- ----- MINORITY INTEREST............... -- -- -- -- -- -- -- STOCKHOLDERS' EQUITY: Preferred stock............... -- -- -- 3,728 -- -- -- Members' equity............... -- -- -- -- -- -- 495 Common stock.................. 68 18 -- 2,894 10 1 -- Additional paid-in capital.... 20,235 3,164 -- -- 14 185 -- Young & Rubicam Inc. investment.................. -- -- 5,456 -- -- -- -- Retained earnings (deficit)... (4,646) (3,515) -- (8,467) 201 (2,709) -- Treasury stock................ -- -- -- (212) -- -- -- --------- ----------- ----------- ----------- --------- ------------- ----- Total stockholders' equity...................... 15,657 (333) 5,456 (2,057) 225 (2,523) 495 --------- ----------- ----------- ----------- --------- ------------- ----- Total liabilities and stockholders' equity........ $ 19,731 $ 7,321 $ 6,206 $ 2,659 $ 879 $ 3,033 $ 774 --------- ----------- ----------- ----------- --------- ------------- ----- --------- ----------- ----------- ----------- --------- ------------- ----- POTOMAC HISTORICAL PARTNERS RSI TOTAL ----------- --------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents..... $ 952 $ 36 $ 1,771 Accounts receivable, net...... 2,430 2,337 16,303 Unbilled revenues............. -- 83 548 Employee and other receivables................. -- 106 2,149 Deferred income taxes......... -- -- 10 Prepaid expenses and other assets...................... 75 108 7,625 ----------- --------- ----------- Total current assets........ 3,457 2,670 28,406 PROPERTY AND EQUIPMENT, net..... 73 278 4,151 OTHER ASSETS: Goodwill, net................. -- 19 14,415 Deferred income taxes......... -- -- 15 Other......................... -- 178 291 ----------- --------- ----------- Total assets................ $ 3,530 $ 3,145 $ 47,278 ----------- --------- ----------- ----------- --------- ----------- LIABILITIES AND STOCKHOLDERS' EQ CURRENT LIABILITIES: Accounts payable.............. $ 815 $ 503 $ 3,274 Customer deposits............. -- -- 209 Accrued liabilities........... 8,593 525 21,364 Unearned revenues............. -- -- 193 Notes payable................. -- 989 2,477 Related party notes payable... -- -- 5,746 Current maturities of long- term debt................... -- 69 1,157 ----------- --------- ----------- Total current liabilities... 9,408 2,086 34,420 ----------- --------- ----------- LONG-TERM LIABILITIES: Long-term debt, net of current maturities.................. -- -- 736 Deferred income taxes......... -- -- 21 ----------- --------- ----------- Total liabilities........... 9,408 2,086 35,177 ----------- --------- ----------- MINORITY INTEREST............... -- 101 101 STOCKHOLDERS' EQUITY: Preferred stock............... -- -- 3,728 Members' equity............... (5,878) -- (5,383) Common stock.................. -- 35 3,026 Additional paid-in capital.... -- 952 24,550 Young & Rubicam Inc. investment.................. -- -- 5,456 Retained earnings (deficit)... -- 178 (18,958) Treasury stock................ -- (207) (419) ----------- --------- ----------- Total stockholders' equity...................... (5,878) 958 12,000 ----------- --------- ----------- Total liabilities and stockholders' equity........ $ 3,530 $ 3,145 $ 47,278 ----------- --------- ----------- ----------- --------- -----------
F-10 LUMINANT WORLDWIDE CORPORATION UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS EXCLUDING ALIGN SOLUTIONS CORP. FOR THE YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
BRAND POTOMAC LUMINANT DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS RSI ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- REVENUES................ $ -- $ 7,237 $ 3,521 $ 2,140 $ 4,097 $ 2,068 $ 4,887 $ 16,927 COST OF SERVICES........ -- 4,186 3,248 716 2,033 1,756 5,087 12,271 ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- GROSS PROFIT (LOSS)..... -- 3,051 273 1,424 2,064 312 (200) 4,656 SELLING, GENERAL AND ADMINISTRATIVE........ 245 2,087 4,922 1,383 2,419 275 876 4,218 INTANGIBLES AMORTIZATION.......... -- -- -- -- -- -- -- 35 OTHER INCOME (EXPENSE): Interest income....... -- -- -- -- -- 6 31 -- Interest expense...... -- -- (182) -- -- -- -- (169) Gain on sale of affiliate........... -- -- 430 -- -- -- -- -- Other, net............ -- -- 28 -- -- -- -- -- ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.......... (245) 964 (4,373) 41 (355) 43 (1,045) 234 INCOME TAXES............ -- 403 -- 6 33 10 -- 29 MINORITY INTEREST....... -- -- -- -- -- -- -- 162 ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- NET INCOME (LOSS)....... $ (245) $ 561 $ (4,373) $ 35 $ (388) $ 33 $ (1,045) $ 43 ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- HISTORICAL TOTAL ----------- REVENUES................ $ 40,877 COST OF SERVICES........ 29,297 ----------- GROSS PROFIT (LOSS)..... 11,580 SELLING, GENERAL AND ADMINISTRATIVE........ 16,425 INTANGIBLES AMORTIZATION.......... 35 OTHER INCOME (EXPENSE): Interest income....... 37 Interest expense...... (351) Gain on sale of affiliate........... 430 Other, net............ 28 ----------- INCOME (LOSS) BEFORE INCOME TAXES.......... (4,736) INCOME TAXES............ 481 MINORITY INTEREST....... 162 ----------- NET INCOME (LOSS)....... $ (5,379) ----------- -----------
F-11 LUMINANT WORLDWIDE CORPORATION UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS EXCLUDING ALIGN SOLUTIONS CORP. FOR THE SIX MONTHS ENDED JUNE 30, 1999 (DOLLARS IN THOUSANDS)
BRAND POTOMAC LUMINANT DIALOGUE FREE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS ----------- ----------- ------------- --------- ------------- ------------- ----------- REVENUES.................... $ -- $ 6,004 $ 4,817 $ 1,907 $ 3,657 $ 1,629 $ 4,918 COST OF SERVICES............ -- 3,276 2,896 594 4,679 889 9,229 ----------- ----------- ------------- --------- ------------- ------------- ----------- GROSS PROFIT (LOSS)......... -- 2,728 1,921 1,313 (1,022) 740 (4,311) SELLING, GENERAL AND ADMINISTRATIVE............ 3,269 1,559 2,268 1,124 1,255 282 1,082 INTANGIBLES AMORTIZATION.... -- -- -- -- -- -- -- OTHER INCOME (EXPENSE): Interest income........... -- -- -- -- -- 2 -- Interest expense.......... -- -- (172) (7) -- -- -- Other, net................ -- -- (129) -- -- -- (27) ----------- ----------- ------------- --------- ------------- ------------- ----------- INCOME (LOSS) BEFORE INCOME TAXES..................... (3,269) 1,169 (648) 182 (2,277) 460 (5,420) INCOME TAXES................ -- 489 -- 70 -- 184 -- MINORITY INTEREST........... -- -- -- -- -- -- -- ----------- ----------- ------------- --------- ------------- ------------- ----------- NET INCOME (LOSS)........... $ (3,269) $ 680 $ (648) $ 112 $ (2,277) $ 276 $ (5,420) ----------- ----------- ------------- --------- ------------- ------------- ----------- ----------- ----------- ------------- --------- ------------- ------------- ----------- HISTORICAL RSI TOTAL --------- ----------- REVENUES.................... $ 6,639 $ 29,571 COST OF SERVICES............ 4,803 26,366 --------- ----------- GROSS PROFIT (LOSS)......... 1,836 3,205 SELLING, GENERAL AND ADMINISTRATIVE............ 2,582 13,421 INTANGIBLES AMORTIZATION.... 18 18 OTHER INCOME (EXPENSE): Interest income........... -- 2 Interest expense.......... (47) (226) Other, net................ -- (156) --------- ----------- INCOME (LOSS) BEFORE INCOME TAXES..................... (811) (10,614) INCOME TAXES................ (266) 477 MINORITY INTEREST........... (22) (22) --------- ----------- NET INCOME (LOSS)........... $ (523) $ (11,069) --------- ----------- --------- -----------
F-12 LUMINANT WORLDWIDE CORPORATION UNAUDITED HISTORICAL STATEMENTS OF OPERATIONS EXCLUDING ALIGN SOLUTIONS CORP. FOR THE SIX MONTHS ENDED JUNE 30, 1998 (DOLLARS IN THOUSANDS)
BRAND FREE POTOMAC LUMINANT DIALOGUE RANGE I.CON INTERACTIVE8 MULTIMEDIA PARTNERS ------------- ----------- --------- ----- ------------- ------------- ----------- REVENUES................... $ -- $ 3,057 $ 1,212 $ 949 $ 1,891 $ 1,351 $ 1,961 COST OF SERVICES........... -- 2,035 1,278 267 1,521 1,153 1,570 --- ----------- --------- ----- ------------- ------------- ----------- GROSS PROFIT (LOSS)........ -- 1,022 (66) 682 370 198 391 SELLING, GENERAL AND ADMINISTRATIVE........... -- 859 2,398 516 577 131 415 INTANGIBLES AMORTIZATION... -- -- -- -- -- -- -- OTHER INCOME (EXPENSE): Interest income.......... -- -- -- -- -- 5 5 Interest expense......... -- -- (53) -- -- -- -- Other, net............... -- -- (119) -- -- -- -- --- ----------- --------- ----- ------------- ------------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.................... -- 163 (2,636) 166 (207) 72 (19) INCOME TAXES............... -- 64 -- 32 -- 1 -- MINORITY INTEREST.......... -- -- -- -- -- -- -- --- ----------- --------- ----- ------------- ------------- ----------- NET INCOME (LOSS).......... $ -- $ 99 $ (2,636) $ 134 $ (207) $ 71 $ (19) --- ----------- --------- ----- ------------- ------------- ----------- --- ----------- --------- ----- ------------- ------------- ----------- HISTORICAL RSI TOTAL --------- ----------- REVENUES................... $ 8,461 $ 18,882 COST OF SERVICES........... 6,141 13,965 --------- ----------- GROSS PROFIT (LOSS)........ 2,320 4,917 SELLING, GENERAL AND ADMINISTRATIVE........... 2,153 7,049 INTANGIBLES AMORTIZATION... 18 18 OTHER INCOME (EXPENSE): Interest income.......... -- 10 Interest expense......... (69) (122) Other, net............... -- (119) --------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.................... 80 (2,381) INCOME TAXES............... 27 124 MINORITY INTEREST.......... 12 12 --------- ----------- NET INCOME (LOSS).......... $ 41 $ (2,517) --------- ----------- --------- -----------
F-13 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 1. GENERAL: Luminant was established to create a leading single-source Internet service company that provides electronic commerce professional services to Fortune 1000 companies, Internet based companies and other organizations. Luminant has conducted no operations to date and will acquire its eight companies concurrently with and as a condition to the closing of the offering. The historical financial statements reflect the financial position and results of operations of Luminant and the eight companies it will acquire on the consummation of this offering. The audited historical financial statements of Luminant and the eight companies are included elsewhere in this prospectus. 2. ACQUISITION OF THE EIGHT COMPANIES: Concurrent with and as a condition to the closing of the offering, Luminant will acquire eight companies. Seven companies will be acquired by merging each into newly formed subsidiaries of Luminant. In addition, Luminant will acquire the assets of Brand Dialogue-New York and will contribute those assets to a newly formed subsidiary. The acquisitions will be accounted for using the purchase method of accounting with Align Solutions Corp., the accounting acquiror. Accredited shareholders of Align common stock will receive cash and .7021 shares of Luminant common stock for each share of Align common stock they own. Unaccredited shareholders will receive only cash for each share of Align common stock they own. Since Align is the accounting acquiror, the 915,900 shares of outstanding common stock of Luminant owned by the sponsor of Luminant at the consummation of the acquisitions will be valued at the offering price and treated as $14.7 million of acquisition-related expenses and included in goodwill. The sponsor will not participate in the management of Luminant. One-half of the 505,796 shares owned directly or indirectly by the Luminant Chief Executive Officer, 252,898 shares, will be valued at the offering price and treated as $4.0 million of acquisition related expenses and included in goodwill. Luminant believes that the $4.0 million represents the fair value of the portion of the common shares issued to the Chief Executive Officer attributable to acquisition-related activities. The remaining 663,002 shares owned or indirectly owned by the management of Luminant, including one-half of the Chief Executive Officer shares, will be valued at the offering price and accounted for, after reduction for the $1.0 million of consideration paid for the shares, as a $9.6 million nonrecurring equity based signing bonus. This nonrecurring charge will be recorded upon the consummation of the acquisitions in the historical financial statements. The amounts to be included in goodwill have been included in the pro forma combined financial statements. The nonrecurring charge has been included in the pro forma combined balance sheet but has been excluded from the pro forma statements of operations, as it is a nonrecurring charge. The following table sets forth the consideration to be paid in cash and shares of common stock to the stockholders of each company. For purposes of computing the estimated purchase price, the value of shares is determined using the assumed initial public offering price of $16.00 per share. Adjusted net assets represent the stockholders equity of each company adjusted for: 1) distributions of $75,000 to be made to the shareholders of InterActive8 as part of the transaction, 2) the accrued liabilities of $2,887,000 at InterActive8 and $7,329,000 at Potomac funded as part of the transaction, 3) establishment of valuation allowances for historical deferred tax assets, and 4) the receivable from related parties at Brand Dialogue retained by the seller. F-14 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITION OF THE EIGHT COMPANIES: (CONTINUED) In addition to the purchase price, the purchase agreements include provisions for contingent consideration based on achievement of financial goals of the individual companies and consolidated results of the eight companies. Maximum contingent consideration is $193.2 million. Contingent consideration to any of the companies may not exceed 50% of the total consideration to the company. See page 20 for full details. This amount also includes the $25 million potentially payable to the members of Potomac Partners related to business with one of its clients. Payments made to the shareholders of Align will be treated as a return of capital. Payments to shareholders of the other companies will result in additional goodwill and will be amortized over the remaining life of goodwill associated with the acquisitions. The estimated purchase prices for the acquisitions are based upon preliminary estimates and are subject to certain purchase price adjustments at and following the closing. Luminant does not anticipate that the final allocation of purchase price between tangible assets and goodwill will differ significantly from that presented.
NUMBER VALUE OF VALUE OF TOTAL ADJUSTED CASH OF SHARES SHARES OPTIONS CONSIDERATION NET ASSETS GOODWILL LIFE --------- ----------- --------- ----------- -------------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) Align............. $ 21,141 4,653 $ 74,450 $ 25,530 $ 121,121 $ 15,657 N/A N/A Brand Dialogue.... -- 4,192 67,078 -- 67,078 3,508 $ 63,570 3 years Free Range........ 4,320 1,462 23,392 -- 27,712 (2,057) 29,769 3 years i.con............. 2,427 703 11,242 -- 13,669 236 13,433 3 years InterActive8...... 8,640 1,314 21,031 1,669 31,340 289 31,051 3 years Multimedia........ 2,240 529 8,470 -- 10,710 495 10,215 3 years Potomac Partners.. 8,640 2,938 47,003 6,611 62,254 1,451 60,803 3 years RSI............... 5,653 743 11,892 -- 17,545 958 16,587 3 years --------- ----------- --------- ----------- -------------- ----------- ----------- $ 53,061 16,534 $ 264,558 $ 33,810 $ 351,429 $ 20,537 225,428 --------- ----------- --------- ----------- -------------- ----------- --------- ----------- --------- ----------- -------------- ----------- Acquisition-related fees............ 1,000 Equity based acquisition fees to sponsor...... 18,701 ----------- $ 245,129 ----------- -----------
If the acquisitions had occurred on January 1, 1998 and the maximum amount of contingent consideration was earned, approximately $58.3 million of goodwill related to the individual company portion of the payment would have been recorded in the second half of 1998, and $58.3 million related to the combined company portion of the payment in the first quarter of 1999. Amounts to be paid to shareholders of Align are excluded as the payments are treated as dividends to the shareholders of the accounting acquiror. This additional goodwill would result in an increase in amortization expense of $11.7 million for the year ended December 31, 1998, and $26.2 million for the six months ended June 30, 1999. The Company will periodically assess long-lived assets, including goodwill or goodwill associated with such assets. Whenever circumstances suggest that an asset may be impaired, an analysis will be performed to compare the estimated future undiscounted cash flows associated with the asset to the asset's carrying value. If the carrying value is in excess of the undiscounted cash flow value, the asset will be written down to fair value. F-15 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS: The following table summarizes unaudited pro forma combined balance sheet adjustments:
OFFERING ADJUSTMENTS ACQUISITION ADJUSTMENTS PRO FORMA POST ------------------------------------------ ACQUISITION -------------------- ACQUISITION (A) (B) (C) (D) ADJUSTMENTS (E) (F) ADJUSTMENTS --------- --------- --------- --------- ------------ --------- --------- ------------ (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents.... $ -- $ -- $ -- $ -- $ -- $ 66,729 (53,061) $ 13,668 Accounts receivable, net..... (100) -- -- -- (100) -- -- -- Unbilled revenues............ -- -- -- -- -- -- -- -- Employee and other receivables................ (1,933) -- -- -- (1,933) -- -- -- Deferred income taxes........ 80 -- -- -- 80 -- -- -- Deferred income tax valuation.................. (90) -- -- -- (90) -- -- -- Prepaid expenses and other assets..................... (1,000) -- -- -- (1,000) (6,242) -- (6,242) --------- --------- --------- --------- ------------ --------- --------- ------------ Total current assets........... (3,043) -- -- -- (3,043) 60,487 (53,061) 7,426 PROPERTY AND EQUIPMENT, net.... -- -- -- -- -- -- -- -- OTHER ASSETS: Goodwill, net................ 245,129 -- -- -- 245,129 -- -- -- Other Intangible............. -- -- -- 23,094 23,094 -- -- -- Deferred income taxes........ 3,213 -- -- -- 3,213 -- -- -- Deferred income tax valuation.................. (3,228) -- -- -- (3,228) -- -- -- Other........................ -- -- -- -- -- -- -- -- --------- --------- --------- --------- ------------ --------- --------- ------------ Total assets................... $ 242,071 $ -- $ -- $ 23,094 $ 265,165 $ 60,487 $ (53,061) $ 7,426 --------- --------- --------- --------- ------------ --------- --------- ------------ --------- --------- --------- --------- ------------ --------- --------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............. $ (100) $ -- $ -- $ -- $ (100) $ -- $ -- $ -- Payable for eight companies' common stock and other acquisition-related obligations................ -- 53,061 -- -- 53,061 -- (53,061) (53,061) Customer deposits............ -- -- -- -- -- -- -- -- Accrued liabilities.......... -- (10,216) -- -- (10,216) (5,050) -- (5,050) Unearned revenues............ -- -- -- -- -- -- -- -- Notes payable................ -- -- -- -- -- -- -- -- Related party notes payable.... -- -- -- -- -- (2,448) -- (2,448) Current maturities of long- term debt.................. -- -- 128 -- 128 -- -- -- --------- --------- --------- --------- ------------ --------- --------- ------------ Total current liabilities...... (100) 42,845 128 -- 42,873 (7,498) (53,061) (60,559) LONG-TERM LIABILITIES: Long-term debt, net of current maturities......... -- -- 732 -- 732 -- -- -- Deferred income taxes........ (21) -- -- -- (21) -- -- -- --------- --------- --------- --------- ------------ --------- --------- ------------ Total liabilities.............. (121) 42,845 860 -- 43,584 (7,498) (53,061) (60,559) --------- --------- --------- --------- ------------ --------- --------- ------------ MINORITY INTEREST.............. (101) -- -- -- (101) -- -- -- STOCKHOLDERS' EQUITY: Preferred stock.............. (3,728) -- -- (3,728) -- -- -- Members' equity.............. 5,383 -- -- -- 5,383 -- -- -- Common stock................. (2,842) -- -- -- (2,842) 50 -- 50 Additional paid-in capital... 230,477 (17,976) 9,858 23,094 245,453 67,935 -- 67,935 Young & Rubicam Inc. investment................. (5,456) -- -- -- (5,456) -- -- -- Subscription receivable from officers................... -- -- -- -- -- -- -- -- Retained earnings (deficit).................. 14,312 (21,141) (10,718) -- (17,547) -- -- -- Treasury stock............... 419 -- -- -- 419 -- -- -- --------- --------- --------- --------- ------------ --------- --------- ------------ Total stockholders' equity..... 242,293 (42,845) (860) 23,094 221,682 67,985 -- 67,985 --------- --------- --------- --------- ------------ --------- --------- ------------ Total liabilities and stockholders' equity......... $ 242,071 $ -- $ -- $ 23,094 $ 265,165 $ 60,487 $ (53,061) $ 7,426 --------- --------- --------- --------- ------------ --------- --------- ------------ --------- --------- --------- --------- ------------ --------- --------- ------------
F-16 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED) - ------------------------ (a) Reflects the acquisitions of the eight companies and the elimination of equity balances of the companies. The purchase price, including deferred acquisition costs, in excess of estimated fair market value of assets acquired has been allocated to goodwill. The seller of Brand Dialogue is retaining the Young & Rubicam receivable of $1,933,000 that represents Brand Dialogue funds advanced to the seller. Deferred income taxes have been recorded for LLC and S Corporation entities and a valuation allowance has been increased due to the lack of history of combined income. Also reflects the elimination of accounts receivable and accounts payable related to transactions between two of the eight companies. (b) Records the liabilities for the cash portion of the consideration to be paid for the common stock of the eight companies in connection with the acquisitions, payments to Align shareholders of $21,141,000 (accounted for as a dividend from retained earnings), payments to redeem $3,728,000 of preferred stock related to Free Range, and elimination of the accrued liabilities related to equity compensation rights converted into Luminant options of Potomac Partners and one half of the options of Interactive8 of $7,329,000 and $1,444,000, respectively. Also reflects payments of $1,444,000 to retire the remaining one half of the InterActive8 options. (c) Records $9,608,000 as the effect of a non-cash, non-recurring compensation charge (after reduction for $1,000,000 of consideration paid) for 663,002 shares of Luminant common stock to be issued to officers in connection with the offering. Additionally records $250,000 as the effect of a non-cash, non-recurring compensation charge for the issuance of 15,625 options to a former officer and a liability and non-recurring charge of $860,000 related to an agreement to end the former officer's employment. (d) Represents the estimated value of stock options granted to Young & Rubicam, Inc. using the Modified Black-Scholes European Model. The following assumptions were used: exercise price of $16.00, ten-year life, 5.66% interest rate, and 70% volatility factor. (e) Records the cash proceeds from the issuance of shares of Luminant common stock net of estimated offering costs, acquisition costs and the repayment of advances from a stockholder (based on an assumed initial public offering price of $16.00 per share). Offering costs primarily consist of underwriting discounts and commissions, accounting fees, legal fees and printing expenses. (f) Records the cash portion of the acquisition consideration to be paid for the stock of the eight companies and acquisition-related obligations from proceeds of the offering as described in adjustment (b). 4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS: The following tables summarize unaudited adjustments to the pro forma combined statements of operations: For the year ended December 31, 1998:
(A) (B) (C) (D) (E) (F) --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) REVENUES.................................................. $ -- $ -- $ -- $ -- $ (219) $ -- COST OF SERVICES.......................................... -- -- (1,503) -- (78) -- SELLING, GENERAL AND ADMINISTRATIVE....................... -- -- (383) -- (924) 5,472 EQUITY BASED COMPENSATION EXPENSE......................... -- -- -- -- -- -- INTANGIBLES AMORTIZATION.................................. 89,408 -- -- -- -- -- --------- --------- --------- --------- --------- --------- INCOME (LOSS) FROM OPERATIONS............................. (89,408) -- 1,886 -- 783 (5,472) OTHER INCOME (EXPENSE): Interest expense.......................................... -- -- -- -- -- -- Loss on disposition of assets............................. -- -- -- -- 5 -- --------- --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES......................... (89,408) -- 1,886 -- 788 (5,472) INCOME TAXES.............................................. -- (481) -- -- -- -- MINORITY INTEREST......................................... -- -- -- (162) -- -- --------- --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE NONRECURRING CHARGES................. $ (89,408) $ 481 $ 1,886 $ 162 $ 788 $ (5,472) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PRO FORMA (G) ADJUSTMENTS --------- ------------ REVENUES.................................................. $ -- $ (219) COST OF SERVICES.......................................... -- (1,581) SELLING, GENERAL AND ADMINISTRATIVE....................... (207) 3,958 EQUITY BASED COMPENSATION EXPENSE......................... 207 207 INTANGIBLES AMORTIZATION.................................. -- 89,408 --------- ------------ INCOME (LOSS) FROM OPERATIONS............................. -- (92,211) OTHER INCOME (EXPENSE): Interest expense.......................................... -- -- Loss on disposition of assets............................. -- 5 --------- ------------ INCOME (LOSS) BEFORE INCOME TAXES......................... -- (92,206) INCOME TAXES.............................................. -- (481) MINORITY INTEREST......................................... -- (162) --------- ------------ INCOME (LOSS) BEFORE NONRECURRING CHARGES................. $ -- $ (91,563) --------- ------------ --------- ------------
- ------------------------------ (a) Reflects the amortization of goodwill and other intangible to be recorded as a result of these acquisitions over a period of three years. These amortization periods were determined based on an analysis of the characteristics of the combined company. F-17 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS: (CONTINUED) (b) Reflects the reversal of the eight companies' income tax provision. Luminant has not demonstrated that it will generate future taxable income; therefore, an asset for the pro forma loss before taxes has not been recorded. (c) Reflects the reduction in compensation expense related to the non-recurring, non-cash compensation charges of $248,000 and $1,503,000 recorded by Free Range and Potomac Partners, respectively, in the fourth quarter of 1998 related to equity appreciation rights issued to employees and owners of those entities and the non-recurring, non-cash charge of $135,000 recorded by InterActive8 related to the below fair market value issuance of equity. The rights become exercisable upon the consummation of the acquisitions. (d) Reflects elimination of minority interest in one of the eight companies. (e) Reflects the elimination of revenues and expenses related to a division of Free Range that will be distributed to Free Range's stockholders concurrent with the acquisitions. It is estimated that the assets distributed will equal the liabilities assumed. (f) Includes adjustments to increase expenses related to additional compensation expense of $1,996,000, board of directors' expense of $432,000, administrative and other expense of $2,044,000 and additional expense associated with being a public entity of $1,000,000. These adjustments were based on budgeted amounts that have been annualized. These additional costs are a direct result of the combination of these companies and the offering of the securities to the public. (g) Reflects the reclassification of compensation expense related to shares sold to Luminant management at less than fair market value in 1998. For the six months ended June 30, 1999:
(A) (B) (C) (D) (E) (F) (G) --------- --------- --------- --------- --- --------- --------- (DOLLARS IN THOUSANDS) REVENUES....................................... -- -- $ -- $ -- $ -- $ (76) $ -- COST OF SERVICES............................... -- -- (8,713) (2) -- (9) -- SELLING, GENERAL AND ADMINISTRATIVE............ -- -- (952) (167) -- (682) 2,736 EQUITY BASED COMPENSATION EXPENSE.............. -- -- -- 169 -- -- -- INTANGIBLES AMORTIZATION....................... 44,704 -- -- -- -- -- -- --------- --------- --------- --------- --- --------- --------- INCOME (LOSS) FROM OPERATIONS.................. (44,704) -- 9,665 -- -- 615 (2,736) OTHER INCOME (EXPENSE): Interest expense............................... -- -- -- -- -- -- -- --------- --------- --------- --------- --- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES.............. (44,704) -- 9,665 -- -- 615 (2,736) INCOME TAXES................................... -- (477) -- -- -- -- -- MINORITY INTEREST.............................. -- -- -- -- 22 -- -- --------- --------- --------- --------- --- --------- --------- INCOME (LOSS) BEFORE NONRECURRING CHARGES...................................... $ (44,704) $ 477 $ 9,665 $ -- $ (22) $ 615 $ (2,736) --------- --------- --------- --------- --- --------- --------- --------- --------- --------- --------- --- --------- --------- PRO FORMA (H) (I) ADJUSTMENTS --------- --------- ------------- REVENUES....................................... $ -- $ (100) $ (176) COST OF SERVICES............................... -- (100) (8,824) SELLING, GENERAL AND ADMINISTRATIVE............ (2,775) -- (1,840) EQUITY BASED COMPENSATION EXPENSE.............. 2,775 -- 2,944 INTANGIBLES AMORTIZATION....................... -- -- 44,704 --------- --------- ------------- INCOME (LOSS) FROM OPERATIONS.................. -- -- (37,160) OTHER INCOME (EXPENSE): Interest expense............................... -- -- -- --------- --------- ------------- INCOME (LOSS) BEFORE INCOME TAXES.............. -- -- (37,160) INCOME TAXES................................... -- -- (477) MINORITY INTEREST.............................. -- -- 22 --------- --------- ------------- INCOME (LOSS) BEFORE NONRECURRING CHARGES...................................... $ -- $ -- $ (36,705) --------- --------- ------------- --------- --------- -------------
- ------------------------------ (a) Reflects the amortization of goodwill and other intangible to be recorded as a result of these acquisitions over a period of three years. These amortization periods were determined based on an analysis of the characteristics of the combined company. (b) Reflects the reversal of the eight companies' income tax provision. Luminant has not demonstrated that it will generate future taxable income; therefore, a net deferred tax asset for the pro forma loss before taxes has not been recognized. (c) Reflects the reduction in 1999 compensation expense related to the non-recurring, non-cash charges of $222,000, $2,887,000 and $5,826,000 recorded by Free Range, InterActive8 and Potomac Partners, respectively, in the first and second quarters of 1999 related to equity appreciation rights issued to employees and owners of those entities and the non-recurring, non-cash compensation charge of $730,000 recorded by RSI in the first quarter of 1999 related to the issuance of additional minority interest. The rights become exercisable upon the consummation of the acquisitions. (d) Reflects the reclassification of compensation expense related to stock options granted at prices below fair market value for the accounting acquiror Align. (e) Reflects the elimination of minority interest in one of the eight companies. (f) Reflects the elimination of revenues and expenses related to a division of Free Range that will be distributed to Free Range's stockholders concurrent with the acquisitions. It is estimated that the assets distributed will equal the liabilities assumed. F-18 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS: (CONTINUED) (g) Includes adjustments to increase expenses related to additional compensation expense of $998,000, board of directors' expense of $216,000, administrative and other expense of $1,022,000 and additional expense associated with being a public entity of $500,000. These adjustments were based on budgeted amounts that have been annualized. These additional costs are a direct result of the combination of these companies and the offering of the securities to the public. (h) Reflects the reclassification of compensation expense related to shares sold to Luminant management at less than fair market value. (i) Reflects the elimination of revenues and cost of services resulting from transactions between two of the eight companies. For the six months ended June 30, 1998:
(A) (B) (C) (D) (E) --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) REVENUES.................................................................... $ -- $ -- $ -- $ (11) $ -- COST OF SERVICES............................................................ -- -- -- (55) -- SELLING, GENERAL AND ADMINISTRATIVE......................................... -- -- -- (501) 2,736 INTANGIBLES AMORTIZATION.................................................... 44,704 -- -- -- -- --------- --------- --------- --------- --------- INCOME (LOSS) FROM OPERATIONS............................................... (44,704) -- -- 545 (2,736) OTHER INCOME (EXPENSE): Interest expense............................................................ -- -- -- -- -- --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES........................................... (44,704) -- -- 545 (2,736) INCOME TAXES................................................................ -- (124) -- -- -- MINORITY INTEREST........................................................... -- -- (12) -- -- --------- --------- --------- --------- --------- INCOME (LOSS) BEFORE NONRECURRING CHARGES................................... $ (44,704) $ 124 $ 12 $ 545 $ (2,736) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PRO FORMA ADJUSTMENTS ------------- REVENUES.................................................................... $ (11) COST OF SERVICES............................................................ (55) SELLING, GENERAL AND ADMINISTRATIVE......................................... 2,235 INTANGIBLES AMORTIZATION.................................................... 44,704 ------------- INCOME (LOSS) FROM OPERATIONS............................................... (46,895) OTHER INCOME (EXPENSE): Interest expense............................................................ -- ------------- INCOME (LOSS) BEFORE INCOME TAXES........................................... (46,895) INCOME TAXES................................................................ (124) MINORITY INTEREST........................................................... (12) ------------- INCOME (LOSS) BEFORE NONRECURRING CHARGES................................... $ (46,759) ------------- -------------
- ------------------------------ (a) Reflects the amortization of goodwill and other intangible to be recorded as a result of these acquisitions over a period of three years. These amortization periods were determined based on an analysis of the characteristics of the combined company. (b) Reflects the reversal of the eight companies' income tax provision. Luminant has not demonstrated that it will generate future taxable income; therefore, an asset for the pro forma loss before taxes has not been recorded. (c) Reflects the elimination of minority interest in one of the eight companies. (d) Reflects the elimination of revenues and expenses related to a division of Free Range that will be distributed to Free Range's stockholders concurrent with the acquisitions. It is estimated that the assets distributed will equal the liabilities assumed. (e) Includes adjustments to increase expense related to additional compensation expense of $998,000, board of director's expense of $216,000, administrative and other expense of $1,022,000 and additional expense associated with being a public entity of $500,000. These adjustments were based on budgeted amounts that have been annualized. These additional costs are a direct result of the combination of these companies and the offering of the securities to the public. 5. SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING CHARGES PER SHARE: Includes (i) 1,831,800 shares issued to the initial stockholders and management of Luminant; (ii) 16,534,859 shares issued to the former owners of the eight companies; (iii) 937,500 shares of non-voting common stock we are selling directly to Young & Rubicam simultaneously with this offering; and (iv) 4,062,500 shares sold in the offering, without regard to exercise of underwriters' overallotment option and payment of any contingent consideration. Options for the purchase of 7,005,107 shares of common stock that are to be outstanding at the closing could potentially dilute basic earnings per share in the future. These options were not included in the computation of loss before nonrecurring charges per share because to do so would have been antidilutive for the periods presented. At the time of the closing of this offering and the simultaneous acquisition of the eight companies the Company will also have outstanding options to purchase 7,005,107 shares of common stock, including F-19 LUMINANT WORLDWIDE CORPORATION AND OUR EIGHT COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. SHARES USED IN COMPUTING PRO FORMA LOSS BEFORE NONRECURRING CHARGES PER SHARE: (CONTINUED) options to purchase 3,417,310 shares of common stock which will be exercisable immediately following this offering. With the exception of options to purchase 2,204,447 common shares that will be issued on the conversion of outstanding Align, InterActive8 and Potomac options and 15,625 options issued to the former Chief Financial Officer, all of the options will have an exercise price per share equal to the initial offering price. The 2,204,447 options will have exercise prices ranging from $0.15 to $8.62 per share. The weighted average remaining term of these options is 8.78 years. Of these options 1,075,936 are immediately exercisable. Those not immediately vested have a weighted average remaining vesting period of 2.1 years. 6. SUPPLEMENTAL PRO FORMA DATA The Company has excluded charges of $248,000 and $1,503,000 for the year ended December 31, 1998, reflected in the historical financial statements of Free Range and Potomac Partners, respectively, related to equity appreciation rights issued to employees and owners of those entities. The Company has excluded non-cash charges of $135,000 for the year ended December 31, 1998, related to the below fair market value issuance of equity, reflected in the historical financial statements of InterActive8. The Company has excluded charges of $222,000, $2,887,000, and $5,826,000 for the six months ended June 30, 1999, reflected in the historical financial statements of Free Range, InterActive8 and Potomac Partners, respectively, related to equity appreciation rights issued to employees and owners of those entities. The Company has excluded non-cash charges of $730,000 for the six months ended June 30, 1999, related to the issuance of additional minority interest, reflected in the historical financial statements of RSI. Before completion of the acquisitions, the Company will record a charge of $250,000 related to the issuance of 15,625 options to a former officer and a liability and non-recurring charge of $860,000 related to an agreement to end the former officer's employment. During 1998 and the six months ended June 30, 1999, the Company issued, either directly or indirectly through its largest shareholder, beneficial ownership of 915,900 shares of common stock to management and non-employee directors and recorded a stock compensation charge of $207,000 and $2.8 million, respectively, which has been recorded in the historical financial statements of Luminant during those periods. Upon consummation of the initial acquisitions, Luminant will record a stock compensation charge of $9.6 million (after reduction for $1.0 million of consideration paid) related to 663,002 shares issued to management and non-employee directors of Luminant. Luminant will record goodwill on the additional 252,898 shares issued to management of Luminant as these shares were issued for services related to the acquisitions. F-20 ALIGN SOLUTIONS CORP. UNAUDITED PRO FORMA FINANCIAL STATEMENTS The following unaudited pro forma financial statements give effect to the acquisitions by Align Solutions Corp. (Align) of the outstanding capital stock of Fifth Gear Media Corporation (Fifth Gear) and Synapse Group Inc. (Synapse), and the assets and certain liabilities of inmedia, inc. (inmedia) (the three companies). The acquisition of Synapse occurred on February 15, 1999, the acquisition of Fifth Gear occurred on May 26, 1999 and the acquisition of inmedia occurred on May 27, 1999. The acquisitions are included in Align's historical balance sheet at June 30, 1999. The unaudited pro forma statements of operations gives effect to the acquisitions as if they had occurred on January 1, 1998. The pro forma adjustments are based on estimates, available information and certain assumptions and may be revised as additional information becomes available. The pro forma financial data do not purport to represent what Align's financial position or results of operations would actually have been if such transactions in fact had occurred on those dates and are not necessarily representative of Align's financial position or results of operations for any future period. Since the companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance. The unaudited pro forma financial statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this prospectus. See "Risk Factors" included elsewhere in this prospectus. F-21 ALIGN SOLUTIONS CORP. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
HISTORICAL ----------------------------------------------------------- PRO FORMA ALIGN FIFTH GEAR INMEDIA SYNAPSE TOTAL ADJUSTMENTS PRO FORMA --------- ----------- ----------- ----------- --------- ------------ ----------- REVENUES............................ $ 9,226 $ 1,227 $ 1,195 $ 2,540 $ 14,188 $ -- $ 14,188 COST OF SERVICES.................... 5,128 603 943 1,908 8,582 -- 8,582 --------- ----------- ----------- ----------- --------- ------------ ----------- GROSS PROFIT........................ 4,098 624 252 632 5,606 -- 5,606 SELLING, GENERAL AND ADMINISTRATIVE..................... 4,047 402 512 670 5,631 -- 5,631 EQUITY BASED COMPENSATION EXPENSE... -- -- -- -- -- 4,148(a) 4,148 INTANGIBLES AMORTIZATION............ 50 -- -- -- 50 5,239(b) 5,289 OTHER INCOME (EXPENSE): Interest expense.................. (50) (6) (83) (16) (155) -- (155) Loss on disposition of assets..... (28) -- -- -- (28) -- (28) Other, net........................ -- -- -- 1 1 -- 1 --------- ----------- ----------- ----------- --------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES... (77) 216 (343) (53) (257) (9,387) (9,644) INCOME TAXES........................ -- 71 -- -- 71 (71)(c) -- --------- ----------- ----------- ----------- --------- ------------ ----------- NET INCOME (LOSS)................... $ (77) $ 145 $ (343) $ (53) $ (328) $ (9,316) $ (9,644) --------- ----------- ----------- ----------- --------- ------------ ----------- --------- ----------- ----------- ----------- --------- ------------ -----------
F-22 ALIGN SOLUTIONS CORP. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (DOLLARS IN THOUSANDS)
HISTORICAL ----------------------------------------------------------- PRO FORMA ALIGN FIFTH GEAR INMEDIA SYNAPSE TOTAL ADJUSTMENTS PRO FORMA --------- ----------- ----------- ----------- --------- ------------ ----------- REVENUES $ 10,793 $ 464 $ 506 $ 279 $ 12,042 $ -- $ 12,042 COST OF SERVICES................... 6,372 290 320 263 7,245 (46)(a) 7,199 --------- ----- ----------- ----- --------- ------------ ----------- GROSS PROFIT....................... 4,421 174 186 16 4,797 46 4,843 SELLING, GENERAL AND ADMINISTRATIVE................... 7,226 182 315 111 7,834 (3,300)(a) 4,534 EQUITY BASED COMPENSATION EXPENSE.......................... -- -- -- -- -- 544(a) 544 INTANGIBLES AMORTIZATION........... 1,366 -- -- -- 1,366 1,253(b) 2,619 OTHER INCOME (EXPENSE): Interest income.................. -- 2 -- -- 2 -- 2 Interest expense................. (25) (5) (37) (1) (68) -- (68) Other, net....................... -- 4 2 -- 6 -- 6 --------- ----- ----------- ----- --------- ------------ ----------- LOSS BEFORE INCOME TAXES........... (4,196) (7) (164) (96) (4,463) 1,549 (2,914) INCOME TAXES....................... -- (3) -- -- (3) 3(c) -- --------- ----- ----------- ----- --------- ------------ ----------- NET INCOME (LOSS).................. $ (4,196) $ (4) $ (164) $ (96) $ (4,460) $ 1,546 $ (2,914) --------- ----- ----------- ----- --------- ------------ ----------- --------- ----- ----------- ----- --------- ------------ -----------
F-23 ALIGN SOLUTIONS CORP. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (DOLLARS IN THOUSANDS)
HISTORICAL ----------------------------------------------------------- PRO FORMA ALIGN FIFTH GEAR INMEDIA SYNAPSE TOTAL ADJUSTMENTS PRO FORMA --------- ----------- ----------- ----------- --------- ------------ ----------- REVENUES..................... $ 2,997 $ 715 $ 796 $ 1,362 $ 5,870 $ -- $ 5,870 COST OF SERVICES............. 1,805 255 532 894 3,486 -- 3,486 --------- ----- ----- ----------- --------- ------------ ----------- GROSS PROFIT................. 1,192 460 264 468 2,384 -- 2,384 SELLING, GENERAL AND ADMINISTRATIVE............. 1,673 178 316 515 2,682 -- 2,682 EQUITY BASED COMPENSATION EXPENSE.................... -- -- -- -- -- 3,604(a) 3,604 INTANGIBLES AMORTIZATION..... 25 -- -- -- 25 2,619(b) 2,644 OTHER INCOME (EXPENSE): Interest expense........... (29) -- -- (6) (35) -- (35) Other, net................. -- -- (35) (4) (39) -- (39) --------- ----- ----- ----------- --------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES...................... (535) 282 (87) (57) (397) (6,223) (6,620) INCOME TAXES................. -- 94 -- -- 94 (94)(c) -- --------- ----- ----- ----------- --------- ------------ ----------- NET INCOME (LOSS)............ $ (535) $ 188 $ (87) $ (57) $ (491) $ (6,129) $ (6,620) --------- ----- ----- ----------- --------- ------------ ----------- --------- ----- ----- ----------- --------- ------------ -----------
F-24 ALIGN SOLUTIONS CORP. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS: The following summarizes the unaudited pro forma statements of operations adjustments: (a) Reflects a compensation charge for options granted to Fifth Gear, inmedia and Synapse at less than fair market value upon the consummation of the acquisition over the vesting periods of the options. The adjustment also changes the timing of the compensation charges recorded in the six months ended June 30, 1999 historical Align statement of operations for these option grants. (b) Reflects the amortization of goodwill to be recorded as a result of Align's acquisitions over a period of three years. These amortization periods were determined based on an analysis of the characteristics of the combined company. (c) Reflects the reversal of Fifth Gear's income tax provision. Align has not demonstrated that it will generate future taxable income; therefore, a net asset for the pro forma loss before taxes has not been recorded. F-25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Luminant Worldwide Corporation: We have audited the accompanying balance sheet of Luminant Worldwide Corporation as of December 31, 1998, and the related statements of operations, stockholders' equity, and cash flows for the period from inception (August 21, 1998), to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Luminant Worldwide Corporation as of December 31, 1998, and the results of its operations and its cash flows for the period from inception (August 21, 1998), to December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, September 3, 1999 F-26 LUMINANT WORLDWIDE CORPORATION BALANCE SHEETS
DECEMBER 31, JUNE 30, 1998 1999 ------------- -------------- (UNAUDITED) ASSETS CASH AND CASH EQUIVALENTS......................................................... $ 111,919 $ 78,617 DEFERRED COSTS.................................................................... 49,729 7,241,959 ------------- -------------- Total assets.................................................................. $ 161,648 $ 7,320,576 ------------- -------------- ------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY ACCOUNTS PAYABLE.................................................................. $ -- $ 156,072 ACCRUED OFFERING AND ACQUISITION COSTS............................................ -- 5,049,700 RELATED PARTY NOTES PAYABLE....................................................... -- 2,447,596 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock: $.01 par value, 100,000,000 shares authorized; 1,831,800 shares issued and outstanding as of 1998 and 1999 (unaudited)........................ 18,318 18,318 Additional paid-in capital...................................................... 388,683 3,163,683 Retained deficit................................................................ (245,353) (3,514,793) ------------- -------------- Total stockholders' equity.................................................... 161,648 (332,792) ------------- -------------- Total liabilities and stockholders' equity.................................... $ 161,648 $ 7,320,576 ------------- -------------- ------------- --------------
The accompanying notes are an integral part of these financial statements. F-27 LUMINANT WORLDWIDE CORPORATION STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION (AUGUST 21, 1998) SIX MONTHS TO ENDED DECEMBER 31, JUNE 30, 1998 1999 ----------------- -------------- (UNAUDITED) REVENUES....................................................................... $ -- $ -- COST OF SERVICES............................................................... -- -- ----------------- -------------- GROSS PROFIT................................................................... -- -- SELLING, GENERAL AND ADMINISTRATIVE............................................ 245,353 3,269,440 ----------------- -------------- LOSS BEFORE INCOME TAXES....................................................... (245,353) (3,269,440) INCOME TAXES................................................................... -- -- ----------------- -------------- NET LOSS....................................................................... $ (245,353) $ (3,269,440) ----------------- -------------- ----------------- --------------
The accompanying notes are an integral part of these financial statements. F-28 LUMINANT WORLDWIDE CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ----------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL DEFICIT ------------ --------- -------------- -------------- BALANCE, August 21, 1998 (inception).................... -- $ -- $ -- $ -- Issuance of common stock.............................. 1,831,800 18,318 181,683 -- Equity related compensation........................... -- -- 207,000 -- Net loss.............................................. -- -- -- (245,353) ------------ --------- -------------- -------------- BALANCE, December 31, 1998.............................. 1,831,800 18,318 388,683 (245,353) Equity related compensation (unaudited)............... -- -- 2,775,000 -- Net loss (unaudited).................................. -- -- -- (3,269,440) ------------ --------- -------------- -------------- BALANCE, June 30, 1999 (unaudited)...................... 1,831,800 $ 18,318 $ 3,163,683 $ (3,514,793) ------------ --------- -------------- -------------- ------------ --------- -------------- --------------
The accompanying notes are an integral part of these financial statements. F-29 LUMINANT WORLDWIDE CORPORATION STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION (AUGUST 21, 1998) SIX MONTHS TO ENDED DECEMBER 31, JUNE 30, 1998 1999 ----------------- -------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss..................................................................... $ (245,353) $ (3,269,440) Equity related compensation.................................................. 207,000 2,775,000 Adjustments to reconcile net loss to net cash used in operating activities- Changes in assets and liabilities- Accounts payable......................................................... -- 156,072 ----------------- -------------- Net cash used in operating activities.................................. (38,353) (338,368) ----------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of deferred offering costs.......................................... (49,729) (2,142,530) Proceeds from notes payable.................................................. -- 2,447,596 Proceeds from issuance of common stock....................................... 200,001 -- ----------------- -------------- Net cash provided by financing activities.............................. 150,272 305,066 ----------------- -------------- NET INCREASE (DECREASE) IN CASH................................................ 111,919 (33,302) CASH AND CASH EQUIVALENTS, beginning of period................................. -- 111,919 ----------------- -------------- CASH AND CASH EQUIVALENTS, end of period....................................... $ 111,919 $ 78,617 ----------------- -------------- ----------------- --------------
The accompanying notes are an integral part of these financial statements. F-30 LUMINANT WORLDWIDE CORPORATION NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Luminant Worldwide Corporation, a Delaware corporation (the "Company"), was founded in August 1998, to provide a new category of professional services called Internet-centric professional services, enabling businesses centered primarily or exclusively on the Internet to conduct their business. The Company's operations to date have consisted primarily of identifying and negotiating for the acquisition of existing Internet consulting companies. The Company plans to make an initial public offering and simultaneously exchange cash and shares of its common stock for the acquisition of eight Internet consulting companies (the "Companies"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. DEFERRED COSTS As of December 31, 1998, costs of $49,729 have been incurred in connection with this offering. Such costs will be recorded as a reduction to equity upon consummation of this offering. INCOME TAXES Income taxes are accounted for using an asset and liability approach which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefit that, based on available evidence, is not expected to be realized. Due to the uncertainty of the ability of the Company to generate future taxable income, the tax benefit of the Company's loss has been fully reserved. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTING FOR LONG-LIVED ASSETS The Company will periodically assess long-lived assets, including goodwill or goodwill associated with such assets. Whenever circumstances suggest that an asset may be impaired, an analysis will be performed to compare the estimated future undiscounted cash flows associated F-31 LUMINANT WORLDWIDE CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) with the asset to the asset's carrying value. If the carrying value is in excess of the undiscounted cash flow value, the asset will be written down to fair value. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to their relative short maturity and/or their variable interest rates. ACCOUNTING FOR EQUITY BASED COMPENSATION In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value based method of accounting for stock-based compensation or continuation under Accounting Principles Board opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to account for stock-based compensation using the intrinsic value based method prescribed in APB 25 and to provide the pro forma disclosure provision of SFAS 123. Accordingly, compensation cost for stock options and other equity related transactions is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the date of the grant. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 3. RELATED PARTY NOTES PAYABLE: The Company has a line of credit with a maximum availability of $3 million, with its largest stockholder, Commonwealth Principals II LLC ("Commonwealth"). Interest is at prime (7.75% at December 31, 1998), and the line of credit matures on the closing of this offering. There are no outstanding borrowings as of December 31, 1998. 4. EQUITY INCENTIVE PLANS: Under the terms of an employment agreement, the Company's Chief Executive Officer will be issued on the effective date of a public offering options to purchase 5% of the total outstanding shares of common stock at the offering price. One-fourth of the options will vest immediately and the remainder will vest at a rate of 25% per year. The options will have a term of six years. As of December 31, 1998, there are no options outstanding. F-32 LUMINANT WORLDWIDE CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. EQUITY INCENTIVE PLANS: (CONTINUED) In January 1999, under the terms of an employment agreement, the Company's former Chief Financial Officer was to be issued certain options to purchase common stock at $.01 per share (See Note 7). In February 1999, under the terms of an employment agreement, as of the effective date of the offering, the Company's Executive Vice President, will be issued options to purchase 1% of the total outstanding shares of common stock at the offering price. The options will become exercisable upon the Offering and have a term of ten years. 5. EQUITY: The Company intends to effect a stock split and increase the number of authorized common stock effective on the day preceding the completion of the offering. The effects of the common stock split and the increase in the shares of authorized common stock have been retroactively reflected in the balance sheet and the accompanying notes. In connection with the organization of the Company, 1,665,273 shares of common stock were issued to Commonwealth. Upon signing his employment agreement in September 1998, 166,527 shares of common stock were issued to the President of the Company for $200,000. The Board of Directors has determined that these shares were issued at fair market value. In addition in September 1998, Commonwealth transferred 339,269 shares to the President resulting in an equity related compensation expense of approximately $207,000. 6. RELATED-PARTY TRANSACTIONS: In September 1998, the Company entered into a management services agreement with Commonwealth to provide consulting and financial advisory services. The agreement terminates at the earlier of the closing of the offering or September 2000. For the year ended December 31, 1998, approximately $49,000 was paid to Commonwealth for providing services. These costs are related to the offering and are included in deferred costs in the accompanying balance sheet. In addition, Commonwealth has provided the Company with a line of credit as discussed in Note 3. 7. SUBSEQUENT EVENTS: The Company has signed definitive agreements to acquire all of the common stock and ownership interests of the Companies to be consummated simultaneously with the closing of the offering. The companies to be acquired are Align Solutions Corp., Brand Dialogue New York, Free Range Media, Inc., Integrated Consulting, Inc. (dba as i.con interactive), Interactive8, Inc., Multimedia Resources, LLC, Potomac Partners Management Consulting, LLC, and RSI Group, Inc. The following pro forma information shows the Company's revenues and net income as if the transaction referred to above had occurred on January 1, 1998.
(IN THOUSANDS) SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1998 JUNE 30, 1999 ------------------- -------------- Pro forma revenues (unaudited)........................... $ 54,846 $ 41,437 Pro forma net loss (unaudited)........................... (106,586) (50,688)
F-33 LUMINANT WORLDWIDE CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. SUBSEQUENT EVENTS: (CONTINUED) In April and May 1999, the former Chief Financial Officer and a current officer of the Company purchased 191,382 shares and 109,361 shares of common stock for $500,000 and $400,000. The Board of Directors determined the fair market value of the shares to be $12.22 which was in excess of the grant price. The Company has recognized compensation expense of approximately $2,775,000 in 1999 related to these issuances. In July of 1999, the Company and the former Chief Financial Officer entered into an agreement to end the Chief Financial Officer's employment with the Company. The former Chief Financial Officer will receive options to purchase common stock at $.01 per share. The number of options will be determined by dividing $250,000 by the initial public offering price (15,625 assuming a price of $16.00 per share). The value of these options under the Black-Scholes method assuming a 10 year life, 70% volatility and a 5.66% interest rate would be $249,911. The options will become exercisable upon the Offering and have a term of ten years. In addition, the former Chief Financial Officer will be paid $1,000,000 over six years in equal monthly installments for financial consulting services. Mr. Autem's agreement requires no specific services and allows him to seek full time employment at other companies including competitors and provides compensation for acquisition targets identified. As such the Company is unsure as to any future benefits from these payments. The Company will record the liability for the net present value of these payments of $860,000 assuming a discount rate of 5.26%, and record a charge of the same amount in the third quarter of 1999. In July of 1999, the Company entered into an agreement in principle with United Air Lines, Inc. 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. Pursuant to this agreement, we have agreed to issue to United a warrant to purchase up to 300,000 shares of our common stock at an exercise price per share equal to the initial offering price. Under the warrant, United will have the immediate right to purchase 50,000 shares of common stock. Assuming an exercise price of $16.00, five year life, 5.26% interest rate and 70% volatility factor, the 50,000 rights with immediate vesting have a fair market value of $497,038 which the Company will record as a selling expense upon the granting of the warrants. Over the five year term of the agreement, United will obtain the right to purchase 5,000 shares of the remaining shares under the warrant for every $1 million of revenues we receive from United up to $50 million of revenue. Each portion of the warrant that becomes exercisable will expire three years from the date the right to purchase shares becomes exercisable. At each date that portions of the warrants become exercisable, the Company will determine the fair market value of that portion and record the amount as a selling expense. F-34 LUMINANT WORLDWIDE CORP. NOTES TO THE UNAUDITED JUNE 30, 1999 FINANCIAL STATEMENTS A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 1999, the results of its operations and its cash flows for the six month period ended June 30, 1999. These financial statements should be read in conjunction with the Company's audited 1998 financial statements, including the notes thereto. Operating results for the six month period ended June 30, 1999, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. B. DEFERRED COSTS: As of June 30, 1999, costs of approximately $7,242,000 have been incurred in connection with this offering. Such costs will be recorded as an increase to goodwill or reduction to equity upon consummation of this offering. C. EQUITY: In April and May 1999, the former Chief Financial Officer and a current officer of the Company purchased 191,382 shares and 109,361 shares of common stock for $500,000 and $400,000. The Board of Directors determined the fair market value of the shares to be $12.22 which was in excess of the grant price. The Company has recognized compensation expense of $2,775,000 in the six months ended June 30, 1999 related to these issuances. D. RELATED-PARTY TRANSACTIONS: In September 1998, the Company entered into a management services agreement with Commonwealth to provide consulting and financial advisory services. The agreement terminates at the earlier of the closing of the offering or September 2000. For the period ended June 30, 1999, approximately $84,750 was paid to Commonwealth for providing services. These costs are related to the offering and are included in deferred costs in the accompanying balance sheet. E. PAYABLE TO SHAREHOLDER: In addition to the advance made to Luminant, Commonwealth has paid approximately $1,998,000 on behalf of Luminant. Such amounts will be repaid upon the closing of this offering. F. SUBSEQUENT EVENTS: The Company has signed definitive agreements to acquire all of the common stock and ownership interests of the Companies to be consummated simultaneously with the closing of the offering. The companies to be acquired are Align Solutions Corp., Brand Dialogue New York, Free Range Media, Inc., Integrated Consulting, Inc. (dba as i.con interactive), Interactive8, Inc., Multimedia Resources, LLC, Potomac Partners Management Consulting, LLC, and RSI Group, Inc. F-35 LUMINANT WORLDWIDE CORP. NOTES TO THE UNAUDITED JUNE 30, 1999 FINANCIAL STATEMENTS (CONTINUED) F. SUBSEQUENT EVENTS: (CONTINUED) In July of 1999, the Company and the former Chief Financial Officer entered into an agreement to end the Chief Financial Officer's employment with the Company. The former Chief Financial Officer will receive options to purchase common stock at $.01 per share. The number of options will be determined by dividing $250,000 by the initial public offering price (15,625 assuming a price of $16.00 per share). The value of these options under the Black-Scholes Method assuming a 10 year life, 70% volatility and a 5.66% interest rate would be $249,911. The options will become exercisable upon the Offering and have a term of ten years. In addition, the former Chief Financial Officer will be paid $1,000,000 over six years in equal monthly installments for financial consulting services. Mr. Autem's agreement requires no specific services and allows him to seek full time employment at other companies including competitors and provides compensation for acquisition targets identified. As such the Company is unsure as to any future benefits from these payments. The Company will record the liability for the net present value of these payments of $860,000 assuming a discount rate of 5.26%, and record a charge of the same amount in the third quarter of 1999. In July of 1999, the Company entered into an agreement in principle with United Air Lines, Inc. 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. Pursuant to this agreement, we have agreed to issue to United a warrant to purchase up to 300,000 shares of our common stock at an exercise price per share equal to the initial offering price. Under the warrant, United will have the immediate right to purchase 50,000 shares of common stock. Assuming an exercise price of $16.00, five year life, 5.26% interest rate and 70% volatility factor, the 50,000 rights with immediate vesting have a fair market value of $497,038 which the Company will record as a selling expense upon the granting of the warrants. Over the five year term of the agreement, United will obtain the right to purchase 5,000 of the remaining shares under the warrant for every $1 million of revenues we receive from United up to $50 million of revenue. Each portion of the warrant that becomes exercisable will expire three years from the date the right to purchase shares becomes exercisable. At each date that portions of the warrants become exercisable, the Company will determine the fair market value of that portion and record the amount as a selling expense. F-36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Align Solutions Corp.: We have audited the accompanying balance sheets of Align Solutions Corp. (a Delaware S Corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1998, and for the period from inception (October 16, 1996), to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Align Solutions Corp. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1998, and for the period from inception (October 16, 1996), to December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 4, 1999 F-37 ALIGN SOLUTIONS CORP. BALANCE SHEETS
DECEMBER 31, ---------------------------- JUNE 30, 1997 1998 1999 ------------- ------------- -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................................ $ 10,977 $ -- $ 48,167 Accounts receivable, net of allowance for doubtful accounts of $71,229, $115,068, and $188,049 (unaudited).................... 880,085 2,161,521 4,085,156 Note receivable.................................................. -- -- -- Unbilled revenues................................................ 43,860 10,520 80,837 Prepaid expenses and other....................................... 37,778 74,219 67,602 ------------- ------------- -------------- Total current assets........................................... 972,700 2,246,260 4,281,762 PROPERTY AND EQUIPMENT, net........................................ 259,901 776,185 1,031,641 OTHER ASSETS: Goodwill, net of amortization of $58,333, $108,333, and $1,479,797 (unaudited)......................................... 91,667 41,667 14,396,207 Other............................................................ 3,500 1,673 20,942 ------------- ------------- -------------- Total assets................................................... $ 1,327,768 $ 3,065,785 $ 19,730,552 ------------- ------------- -------------- ------------- ------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, including cash overdraft of $0, $105,191, and $0 (unaudited)................................................. $ 144,994 $ 332,021 $ 484,974 Accrued liabilities.............................................. 85,343 713,842 1,678,437 Notes payable.................................................... 200,000 325,000 1,167,466 Current maturities of long-term debt............................. 64,191 70,870 534,168 ------------- ------------- -------------- Total current liabilities...................................... 494,528 1,441,733 3,865,045 LONG-TERM LIABILITIES: Long-term debt, net of current maturities........................ 232,573 155,791 208,548 ------------- ------------- -------------- Total liabilities.............................................. 727,101 1,597,524 4,073,593 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock: $.01 par value, 1,000,000 shares authorized, none issued and outstanding as of 1997, 1998 and 1999 (unaudited).................................................... -- -- -- Common stock: $.01 par value, 10,000,000 shares authorized, 4,875,000, 5,584,804 and 6,830,540 (unaudited) shares issued and outstanding as of 1997, 1998, and 1999..................... 48,750 55,848 68,305 Additional paid-in capital....................................... 926,250 1,863,192 20,235,194 Retained deficit................................................. (374,333) (450,779) (4,646,540) ------------- ------------- -------------- Total stockholders' equity..................................... 600,667 1,468,261 15,656,959 ------------- ------------- -------------- Total liabilities and stockholders' equity..................... $ 1,327,768 $ 3,065,785 $ 19,730,552 ------------- ------------- -------------- ------------- ------------- --------------
The accompanying notes are an integral part of these financial statements. F-38 ALIGN SOLUTIONS CORP. STATEMENTS OF OPERATIONS
FOR THE PERIOD FOR THE FROM INCEPTION FOR THE YEAR ENDED SIX MONTHS ENDED (OCTOBER 16, 1996) DECEMBER 31, JUNE 30, TO DECEMBER 31, ---------------------------- ----------------------------- 1996 1997 1998 1998 1999 ------------------ ------------- ------------- ------------- -------------- (UNAUDITED) REVENUES....................... $ 111,858 $ 3,268,071 $ 9,226,127 $ 2,997,211 $ 10,793,547 COST OF SERVICES............... 79,702 1,783,336 5,128,460 1,805,136 6,372,170 ---------- ------------- ------------- ------------- -------------- GROSS PROFIT................... 32,156 1,484,735 4,097,667 1,192,075 4,421,377 SELLING, GENERAL AND ADMINISTRATIVE............... 233,104 1,634,220 4,096,638 1,697,700 8,592,109 OTHER INCOME (EXPENSE): Interest expense............. -- (26,145) (49,825) (29,208) (25,029) Loss on disposition of assets..................... -- -- (27,650) -- -- Other income................. 399 1,846 -- -- -- ---------- ------------- ------------- ------------- -------------- NET LOSS....................... $ (200,549) $ (173,784) $ (76,446) $ (534,833) $ (4,195,761) ---------- ------------- ------------- ------------- -------------- ---------- ------------- ------------- ------------- -------------- PRO FORMA INCOME TAX (UNAUDITED).................. -- -- -- -- -- ---------- ------------- ------------- ------------- -------------- PRO FORMA NET LOSS (UNAUDITED).................. $ (200,549) $ (173,784) $ (76,446) $ (534,833) $ (4,195,761) ---------- ------------- ------------- ------------- -------------- ---------- ------------- ------------- ------------- -------------- Basic and diluted net loss per share........................ $ (0.11) $ (0.09) $ (0.03) $ (0.26) $ (1.81) ---------- ------------- ------------- ------------- -------------- ---------- ------------- ------------- ------------- -------------- Shares used in the calculation of basic and diluted net loss per share.................... 1,907,827 2,037,854 2,283,511 2,040,452 2,316,719 ---------- ------------- ------------- ------------- -------------- ---------- ------------- ------------- ------------- --------------
The accompanying notes are an integral part of these financial statements. F-39 ALIGN SOLUTIONS CORP. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ----------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL DEFICIT ------------ --------- -------------- -------------- BALANCE, October 16, 1996 (inception).................. -- $ -- $ -- $ -- Issuance of common stock............................. 3,845,200 38,452 730,588 -- Net loss............................................. -- -- -- (200,549) ------------ --------- -------------- -------------- BALANCE, December 31, 1996............................. 3,845,200 38,452 730,588 (200,549) Issuance of common stock............................. 1,029,800 10,298 195,662 -- Net loss............................................. -- -- -- (173,784) ------------ --------- -------------- -------------- BALANCE, December 31, 1997............................. 4,875,000 48,750 926,250 (374,333) Issuance of common stock............................. 709,804 7,098 936,942 -- Net loss............................................. -- -- -- (76,446) ------------ --------- -------------- -------------- BALANCE, December 31, 1998............................. 5,584,804 55,848 1,863,192 (450,779) Issuance of common stock (unaudited)................. 1,245,736 12,457 14,537,739 -- Equity related compensation (unaudited).............. -- -- 3,345,681 -- Value of stock options granted in acquisitions (unaudited)........................................ -- -- 488,582 -- Net loss (unaudited)................................. -- -- -- (4,195,761) ------------ --------- -------------- -------------- BALANCE, June 30, 1999 (unaudited)..................... 6,830,540 $ 68,305 $ 20,235,194 $ (4,646,540) ------------ --------- -------------- -------------- ------------ --------- -------------- --------------
The accompanying notes are an integral part of these financial statements. F-40 ALIGN SOLUTIONS CORP. STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION FOR THE (OCTOBER 16, 1996) FOR THE YEAR ENDED SIX MONTHS ENDED TO DECEMBER 31, JUNE 30, DECEMBER 31, ---------------------- ---------------------- 1996 1997 1998 1998 1999 ------------------ --------- ----------- --------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................. $ (200,549) $(173,784) $ (76,446) $(534,833) $(4,195,761) Equity related compensation.............. -- -- -- -- 3,345,681 Adjustments to reconcile net loss to net cash used in operating activities-- Depreciation and amortization.......... 14,816 129,184 272,588 106,419 1,592,105 Loss on disposition of assets.......... -- -- 27,650 -- -- Changes in assets and liabilities-- Accounts receivable.................. (60,615) (819,470) (1,281,436) (116,643) (1,044,428) Unbilled revenues.................... (43,288) (572) 33,340 (19,165) 105,331 Prepaid expenses and other........... (16,051) (21,727) (36,441) 8,910 26,224 Other assets......................... -- (3,500) 1,827 (2,897) (183,035) Accounts payable, including cash overdraft.......................... 17,351 127,643 187,027 26,634 (444,406) Accrued liabilities.................. 8,862 76,481 628,499 146,621 575,073 ---------- --------- ----------- --------- ----------- Net cash used in operating activities....................... (279,474) (685,745) (243,392) (384,954) (223,216) ---------- --------- ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash received from acquisition........... -- -- -- -- 27,525 Note receivable.......................... -- -- -- -- (35,000) Capital expenditures..................... (122,072) (158,211) (766,522) (362,165) (361,103) ---------- --------- ----------- --------- ----------- Net cash used in investing activities....................... (122,072) (158,211) (766,522) (362,165) (368,578) ---------- --------- ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable.............. 48,602 151,398 125,000 894,039 686,190 Proceeds from long-term debt............. -- 300,000 -- -- 39,619 Payments on long-term debt............... -- (18,521) (70,103) (44,664) (85,848) Proceeds from issuance of common stock... 569,040 205,960 944,040 -- -- ---------- --------- ----------- --------- ----------- Net cash provided by financing activities....................... 617,642 638,837 998,937 849,375 639,961 ---------- --------- ----------- --------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 216,096 (205,119) (10,977) 102,256 48,167 CASH AND CASH EQUIVALENTS, beginning of period...................... -- 216,096 10,977 10,977 -- ---------- --------- ----------- --------- ----------- CASH AND CASH EQUIVALENTS, end of period............................ $ 216,096 $ 10,977 $ -- $ 113,233 $ 48,167 ---------- --------- ----------- --------- ----------- ---------- --------- ----------- --------- ----------- SUPPLEMENTAL INFORMATION: Cash paid for interest..................... $ -- $ 24,931 $ 48,813 $ 29,514 $ 25,228 ---------- --------- ----------- --------- ----------- ---------- --------- ----------- --------- ----------- NON-CASH TRANSACTIONS: Common stock issued for tangible and intangible assets........................ $ 200,000 $ -- $ -- $ -- $ -- ---------- --------- ----------- --------- ----------- ---------- --------- ----------- --------- ----------- Capital expenditures financed with long-term debt........................... $ -- $ 15,285 $ -- $ -- $ -- ---------- --------- ----------- --------- ----------- ---------- --------- ----------- --------- ----------- Acquisition through issuance of common stock.................................... $ -- $ -- $ -- $ -- $15,043,029 ---------- --------- ----------- --------- ----------- ---------- --------- ----------- --------- -----------
The accompanying notes are an integral part of these financial statements. F-41 ALIGN SOLUTIONS CORP. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Align Solutions Corp. (the "Company") is an interactive services and information technology consulting firm focused on helping companies achieve their Internet and e-commerce business objectives through the use of enabling technologies. The areas of focus include Internet and intranet applications, document management, system integration, and creative/new media. The Company was incorporated in the State of Delaware in October 1996. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using a straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses are reflected in the statements of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance and repairs are expensed as incurred. GOODWILL Goodwill represents the excess of the aggregate consideration paid by the Company over the fair value of assets acquired. Goodwill is amortized on a straight-line basis over three years. Amortization expense totaled $8,667, $50,000, and $50,000 for the periods ended December 31, 1996, 1997, and 1998, respectively. INCOME TAXES As an S corporation, the Company pays no federal income tax but rather the stockholders are taxed individually on the Company's taxable income or loss. Accordingly, no provisions for federal income taxes are reflected in the accompanying financial statements. The unaudited pro forma tax information included in the accompanying statements of operations reflect estimates of the Company's tax provision or benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998. In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax benefit was reflected due to the Company's recurring losses and the uncertainty related to the realization of any tax assets. REVENUE RECOGNITION Revenues are recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Unbilled revenues on contracts are comprised of labor costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. F-42 ALIGN SOLUTIONS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) COST OF SERVICES Cost of services is comprised primarily of salaries, employee benefits, incentive compensation of billable employees, and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. ACCOUNTING FOR STOCK BASED COMPENSATION In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value based method of accounting for stock-based compensation or continuation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to account for stock-based compensation using the intrinsic value based method prescribed in APB 25 and provide the pro forma disclosure provision of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the date of the grant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to their relative short maturity and/or their variable interest rates. ACCOUNTING FOR LONG-LIVED ASSETS The Company will periodically assess long-lived assets, including goodwill or goodwill associated with such assets. Whenever circumstances suggest that an asset may be impaired, an analysis will be performed to compare the estimated future undiscounted cash flows associated with the asset to the asset's carrying value. If the carrying value is in excess of the undiscounted cash flow value, the asset will be written down to fair value. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME" which is required to be adopted in the period ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. F-43 ALIGN SOLUTIONS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SIGNIFICANT CUSTOMERS: During the year ended December 31, 1997, sales to the Company's two largest customers accounted for 14% and 12% of revenues. During the year ended December 31, 1998, sales to the Company's two largest customers accounted for 21% and 19% of revenues. As of December 31, 1998, accounts receivable from two customers accounted for 17% and 30% of total accounts receivable. 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ----------- ----------- ------------- Furniture and fixtures....................................................... 5-7 $ 55,656 $ 140,781 Computers and equipment...................................................... 2-4 289,912 781,505 Leasehold improvements....................................................... 3-4 -- 63,497 Construction-in-progress..................................................... -- -- 75,278 ----------- ------------- 345,568 1,061,061 Less--Accumulated depreciation............................................... (85,667) (284,876) ----------- ------------- Property and equipment, net.................................................. $ 259,901 $ 776,185 ----------- ------------- ----------- -------------
Depreciation expense was $6,483, $79,184 and $222,588 for the years ended December 31, 1996, 1997, and 1998, respectively. 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 --------- ----------- Accrued bonus............................................................................ $ -- $ 667,870 Accrued salaries......................................................................... 33,775 -- Accrued legal............................................................................ 4,602 38,822 Accrued property and sales taxes......................................................... 9,610 7,150 Other.................................................................................... 37,356 -- --------- ----------- Accrued liabilities...................................................................... $ 85,343 $ 713,842 --------- ----------- --------- -----------
6. DEBT: NOTES PAYABLE The Company has a bank line of credit with a maximum availability of $550,000. Interest is at prime plus 1% (8.75% at December 31, 1998), and is payable monthly. The line of credit is due on demand, matures in July 1999, and is secured by accounts receivable and the personal guarantees of certain stockholders. The terms of the line of credit agreement include customary covenants that limit the Company's ability to incur further debt and require the Company to maintain certain minimum levels of tangible net worth and liquidity ratios. Subsequent to year-end, the Company renewed the line of credit with a new maturity date of March 2000. F-44 ALIGN SOLUTIONS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. DEBT: (CONTINUED) LONG-TERM DEBT Long-term debt is comprised of the following as of December 31, 1997 and 1998:
1997 1998 ----------- ----------- Note payable to a bank bearing interest at prime plus 1% (8.75% at December 31, 1998), payable in monthly installments of principal and interest of $7,557, maturing October 2001; secured by accounts receivable, equipment, and the personal guarantees of certain stockholders.................................................................. $ 284,489 $ 217,982 Equipment financing, non-interest bearing, payable in monthly installments of $384, maturing February 2001, secured by certain equipment 12,275 8,679 ----------- ----------- 296,764 226,661 Less--Current portion................................................................... (64,191) (70,870) ----------- ----------- Long-term debt.......................................................................... $ 232,573 $ 155,791 ----------- ----------- ----------- -----------
Maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, - --------------------------------------------------------------------------------- 1999......................................................................... $ 70,870 2000......................................................................... 84,085 2001......................................................................... 71,706 ----------- $ 226,661 ----------- -----------
7. COMMITMENTS AND CONTINGENCIES: The Company leases office space in Houston and Dallas, Texas, under operating lease agreements. Future minimum annual lease payments under these leases are as follows:
OPERATING LEASES ----------- 1999......................................................................... $ 182,739 2000......................................................................... 181,241 2001......................................................................... 120,827 2002......................................................................... -- 2003 and thereafter.......................................................... -- ----------- Total future minimum lease payments.......................................... $ 484,807 ----------- -----------
Rent expense for the years ended December 31, 1996, 1997, and 1998 under these agreements was $7,898, $42,130 and $107,194, respectively. In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on financial position or results of operations. F-45 ALIGN SOLUTIONS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. EQUITY INCENTIVE PLANS: Effective August 26, 1997, the Company approved the 1997 Stock Option Plan (the "1997 Plan") authorizing the Board of Directors to grant incentive or nonqualified options to purchase common stock of the Company. The total number of shares of common stock that may be issued under the 1997 Plan is 2,500,000. The 1997 Plan is administered by the Compensation Committee of the Board of Directors which determines the number of stock options to be granted, the exercise or purchase price, vesting terms, and expiration date. Nonqualified stock options may be granted at exercise prices which are greater than or equal to 80% of the fair market value of the common stock on the grant date. The exercise price of options qualifying as incentive stock options under Section 422 of the Internal Revenue Code may not be less than the fair market value of the common stock on the grant date. Incentive stock options granted to any 10% stockholder may not be less than 110% of the fair market value of the common stock on the grant date. Stock options granted under the 1997 Plan are nontransferable and generally expire ten years after the date of grant, except in the case of a 10% stockholder whose incentive stock options shall expire five years from the date of grant. Upon certain events in which all of the outstanding shares of common stock of the Company are acquired by an unrelated party, the optionee's schedule shall be accelerated to provide that optionee with immediate exercisability of the unexercisable options granted. All options granted become exercisable over a five-year period of continued employment. Options outstanding at December 31, 1996, 1997, and 1998, and granted, exercised and cancelled during those years were as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- ------------------- Options outstanding at December 31, 1996......................................... -- $ -- Granted........................................................................ 613,000 .20 Exercised...................................................................... -- -- Canceled....................................................................... -- -- ----------- Options outstanding at December 31, 1997......................................... 613,000 .20 Granted........................................................................ 393,800 1.19 Exercised...................................................................... -- -- Canceled....................................................................... (53,200) .25 ----------- Options outstanding at December 31, 1998......................................... 953,600 $ .61 ----------- -----------
Following is summary information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- -------------------------------- WEIGHTED AVERAGE RANGE OF NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE - ----------------- ----------- --------------------- ------------------- --------------- --------------- $0.20 to $0.22 622,000 9.00 $ 0.20 -- $ -- $1.33 to $2.50 331,600 9.45 $ 1.37 -- $ --
F-46 ALIGN SOLUTIONS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. EQUITY INCENTIVE PLANS: (CONTINUED) Pro forma information regarding net income has been determined as if the Company has accounted for its stock options under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions used for 1997: an exercisable event occurring in five years; a risk-free interest rate of 6.25%; a dividend yield of 0%; and an expected option life with graded vesting. The assumptions used to price options granted during 1998 were: an exercisable event occurring in four years; risk-free interest rates ranging from 4.38% to 5.72%; a dividend yield of 0%; and an expected option life with graded vesting. The average Black-Scholes fair values at date of grant for options granted during the years ended December 31, 1997 and 1998, were $0.05 and $0.25 per option, respectively. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net loss would have been as follows:
1997 1998 ------------ ---------- Net loss--as reported............................................... $ (173,784) $ (76,446) Net loss--pro forma................................................. (176,734) (90,143)
9. RELATED-PARTY TRANSACTIONS: The Company uses a third party to administer the Company's payroll and related benefits. The Company also provides consulting services to its payroll and benefits provider. The Company provided services of $1,908,278 to this entity during the year ended December 31, 1998 (included in revenues for the year ended December 31, 1998). The Company believes these services are stated at fair market value. The Company has an outstanding accounts receivable balance of $375,008 at December 31, 1998, from its payroll and benefits provider for services provided. 10. SUBSEQUENT EVENTS: On February 16, 1999, the Company acquired Synapse Group, Inc. ("Synapse") in a business combination accounted for as a purchase. Synapse engages in Internet consulting and was purchased by the Company through the issuance of 805,736 shares of the Company's common stock. On April 30, 1999, the Company signed a letter of intent to acquire Fifth Gear Media Corporation ("Fifth Gear") for 300,000 shares of common stock. Fifth Gear engages in Internet consulting. The Company anticipates this transaction will be completed by May 31, 1999. On April 28, 1999, the Company signed a letter of intent to acquire inmedia, inc ("inmedia") for 140,000 shares of common stock and approximately $660,000 in cash. inmedia is a provider of interactive multimedia training. The Company anticipates this transaction will be completed by May 31, 1999. The Company has entered into an agreement to be acquired by Luminant. This acquisition is subject to successful completion of an initial public offering of the common stock of Luminant. F-47 ALIGN SOLUTIONS CORP. NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS: A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions from Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 1999, the results of its operations and its cash flows for the six months ended June 30, 1998 and 1999. These financial statements should be read in conjunction with the Company's audited 1998 financial statements, including the notes thereto. Operating results for the six months ended June 30, 1999, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. B. BUSINESS COMBINATION: On February 16, 1999, the Company acquired Synapse in a business combination accounted for as a purchase. Synapse engages in Internet consulting and was purchased by the Company through the issuance of 805,736 shares of the Company's common stock. The estimated fair market value of the shares of common stock used to purchase Synapse was $11.68. The Company issued 472,744 options, all with an exercise price of $2.50, to Synapse option holders as part of the consideration of this acquisition. Goodwill of approximately $9,560,000 was recorded in connection with this transaction, and is being amortized on a straight-line basis with a useful life of three years. On May 26, 1999, the Company acquired Fifth Gear Media Corporation ("Fifth Gear") in a business combination accounted for as a purchase. Fifth Gear engages in Internet consulting and was purchased by the Company through the issuance of 300,000 shares of the Company's common stock. The estimated fair market value of each share of common stock used to purchase Fifth Gear was $11.68. The Company estimates that goodwill of approximately $3,700,000 will be recorded in connection with this transaction, and will be amortized on a straight-line basis with a useful life of three years. On May 27, 1999, the Company acquired inmedia, inc. ("inmedia") in a business combination accounted for as a purchase. inmedia engages in Internet consulting and the assets were purchased and certain liabilities assumed by the Company through the issuance of 140,000 shares of the Company's common stock. The estimated fair market value of each share of common stock used to purchase inmedia was $11.68. The Company estimates that goodwill of approximately $2,456,000 will be recorded in connection with this transaction, and will be amortized on a straight-line basis with a useful life of three years. C. DEBT: The Company renewed its bank line of credit during the first quarter. The bank line of credit has a maximum availability of $1,200,000, is due on demand, and matures in March 2000. Interest is at prime plus 1% (8.75% at June 30, 1999) and is payable monthly. F-48 ALIGN SOLUTIONS CORP. NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS: (CONTINUED) D. EQUITY INCENTIVE PLANS: Options outstanding at June 30, 1999, granted, exercised and cancelled during this period were as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ------------ ------------------- Options outstanding at December 31, 1998........................................ 953,600 $ 0.61 Granted......................................................................... 962,276 2.65 Exercised....................................................................... -- -- Canceled........................................................................ (6,212) 2.50 ------------ Options outstanding at June 30, 1999............................................ 1,909,664 $ 1.63 ------------ ------------
Options granted during the six months ended June 30, 1999, had exercise prices less than the fair market value on the date of grant. Total compensation expense to be recognized over the vesting period of these options is approximately $8,503,700. Align recognized $3,345,681 of compensation expense in the six months ended June 30, 1999, for stock options that vested during this period. Of this amount, approximately $3,100,000 related to options granted to shareholders of Synapse that vested immediately. F-49 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Young & Rubicam Inc. In our opinion, the accompanying balance sheets and related statements of operations and of cash flows present fairly, in all material respects, the financial position of Brand Dialogue - New York (a wholly owned business of Young & Rubicam Inc.), at December 31, 1997 and 1998 and the results of its operations and its cash flows for the period April 1, 1996 (inception) through December 31, 1996, and for the years ended December 31, 1997 and 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of Brand Dialogue - New York's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Brand Dialogue - New York is a wholly owned business of Young & Rubicam Inc., and as further described in the notes to the financial statements, has extensive transactions with Young & Rubicam Inc., its subsidiaries, affiliates, and clients. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York May 24, 1999, except for Note 8 which is as of June 3, 1999 F-50 BRAND DIALOGUE - NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, -------------------- JUNE 30, 1997 1998 1999 --------- --------- ------------ (UNAUDITED) ASSETS Accounts receivable............................................................ $ 645 $ 683 $ 3,712 Costs billable to clients...................................................... 21 17 3 Due from related parties, net.................................................. 546 973 1,933 --------- --------- ------------ TOTAL CURRENT ASSETS....................................................... 1,212 1,673 5,648 --------- --------- ------------ Computer equipment, net of accumulated depreciation of $109, $288, and $415, respectively................................................................. 233 442 543 Deferred income taxes.......................................................... 4 12 15 --------- --------- ------------ TOTAL ASSETS............................................................... $ 1,449 $ 2,127 $ 6,206 --------- --------- ------------ --------- --------- ------------ LIABILITIES AND INVESTMENT Accounts payable............................................................... $ 206 $ 820 $ 470 Accrued expenses............................................................... 410 249 280 --------- --------- ------------ TOTAL CURRENT LIABILITIES.................................................. 616 1,069 750 --------- --------- ------------ Young & Rubicam Inc. Investment................................................ 833 1,058 5,456 --------- --------- ------------ TOTAL LIABILITIES AND YOUNG & RUBICAM INC. INVESTMENT...................... $ 1,449 $ 2,127 $ 6,206 --------- --------- ------------ --------- --------- ------------
The accompanying notes are an integral part of these financial statements. F-51 BRAND DIALOGUE-NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED FOR THE SIX MONTHS PERIOD FROM ENDED APRIL 1, 1996 DECEMBER 31, JUNE 30, (INCEPTION) THROUGH -------------------- -------------------- DECEMBER 31, 1996 1997 1998 1998 1999 ------------------- --------- --------- --------- --------- (UNAUDITED) Revenues........................................... $ 1,922 $ 4,011 $ 7,237 $ 3,057 $ 6,004 Compensation expense, including employee benefits.......................................... 943 1,842 4,596 2,139 3,424 General and administrative expenses................ 402 998 1,677 755 1,411 ------- --------- --------- --------- --------- OPERATING EXPENSES................................. 1,345 2,840 6,273 2,894 4,835 ------- --------- --------- --------- --------- Income before income taxes......................... 577 1,171 964 163 1,169 Income tax provision............................... 243 492 403 64 489 ------- --------- --------- --------- --------- NET INCOME......................................... $ 334 $ 679 $ 561 $ 99 $ 680 ------- --------- --------- --------- --------- ------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-52 BRAND DIALOGUE - NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS PERIOD FROM FOR THE YEAR ENDED ENDED APRIL 1, 1996 DECEMBER 31, JUNE 30, (INCEPTION) THROUGH --------------------- --------------------- DECEMBER 31, 1996 1997 1998 1998 1999 ------------------- --------- ---------- --------- ---------- (UNAUDITED) Cash flows from operating activities: Net income..................................... $ 334 $ 679 $ 561 $ 99 $ 680 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation................................. 26 83 179 45 127 Change in assets and liabilities: Accounts receivable.......................... (548) (97) (38) (846) (3,029) Costs billable to clients.................... (132) 111 4 (88) 14 Due from related parties, net................ (327) (219) (427) (184) (960) Accounts payable and accrued expenses........ 695 (79) 453 914 (319) Deferred income taxes........................ (1) (3) (8) (5) (3) ------ --------- ---------- --------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................... 47 475 724 (65) (3,490) ------ --------- ---------- --------- ---------- Cash flows from investing activities: Purchases of computer equipment.............. (156) (186) (388) -- (228) ------ --------- ---------- --------- ---------- NET CASH USED IN INVESTING ACTIVITIES...... (156) (186) (388) -- (228) ------ --------- ---------- --------- ---------- Cash flows from financing activities: Cash receipts and cash disbursements, net...... (165) (808) (1,232) (323) 2,777 Amounts paid by Young & Rubicam Inc............ 274 519 896 388 941 ------ --------- ---------- --------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............................... 109 (289) (336) 65 3,718 ------ --------- ---------- --------- ---------- Net change in cash............................... -- -- -- -- -- Cash at beginning of year........................ -- -- -- -- -- ------ --------- ---------- --------- ---------- Cash at end of year.............................. $ -- $ -- $ -- $ -- $ -- ------ --------- ---------- --------- ---------- ------ --------- ---------- --------- ----------
The accompanying notes are an integral part of these financial statements F-53 BRAND DIALOGUE - NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION Brand Dialogue - New York (a wholly owned business of Young & Rubicam Inc.) (the "Company") was organized on April 1, 1996 and provides digital interactive branding services and digital commerce solutions to its clients. The Company's primary offerings consist of: - Web advertising, including the design, creation and production of websites, banners, home pages and comprehensive interactive campaigns; - Digital commerce applications; - The development of corporate intranets to improve communications and productivity within and among a defined set of users; and - Interactive marketing consulting services. The accompanying financial statements include the accounts of Brand Dialogue - - New York and reflect the historical results of operations, financial position and cash flows of Brand Dialogue - New York. These financial statements, however, may not be indicative of the results that would have occurred if Brand Dialogue - New York operated as a stand-alone entity during the periods presented, the future results of Brand Dialogue - New York or the costs which may be incurred by an unaffiliated entity to achieve similar results. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues earned and expenses incurred during the reporting period. While actual results could differ from these estimates, management believes that the estimates are reasonable. The significant estimates that affect the financial statements include, but are not limited to, revenues earned pursuant to Young & Rubicam Inc. multi-disciplinary global client contracts and corporate overhead allocations. INTERIM FINANCIAL INFORMATION (UNAUDITED) In the opinion of management, the unaudited interim financial statements as of June 30, 1998 and 1999 and for the six months then ended include all adjustments, which are normal recurring adjustments, necessary for a fair presentation of such financial statements. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. REVENUE RECOGNITION Revenues from interactive branding and digital commerce solutions are derived from billings to clients for media and production activities, generally on the basis of negotiated fees. Revenues are recognized in the period when the underlying services are rendered. F-54 BRAND DIALOGUE - NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION Depreciation is computed using the straight-line method over the estimated useful life of three years. During the period from April 1, 1996 (inception) through December 31, 1996, and for the years ended December 31, 1997 and 1998, depreciation expense amounted to $26, $83, and $179, respectively. FINANCIAL INSTRUMENTS The fair values of accounts receivable, trade accounts payable and accrued expenses are equal to their carrying amounts as reported at December 31, 1996, 1997, and 1998. CONCENTRATION OF CREDIT RISK The Company's clients are engaged in various businesses and the Company performs ongoing credit evaluations of its clients. Additionally, consistent with the Young & Rubicam Inc. strategy, the Company is dependent upon a relatively small number of clients who purchase services under short-term contracts and contribute a significant percentage of revenues. Significant client revenues as a percentage of total Company revenues are as follows:
FOR THE YEARS ENDED PERIOD FROM APRIL 1, 1996 DECEMBER 31, (INCEPTION) THROUGH -------------------- DECEMBER 31, 1996 1997 1998 --------------------- --------- --------- Client A......................................... 33% 23% 29% Client B......................................... 0% 0% 13% Client C......................................... 0% 5% 12% Client D......................................... 0% 5% 11% Client E......................................... 28% 15% 6% Client F......................................... 16% 10% 5% Client G......................................... 0% 11% 0% ----- --------- --------- 77% 69% 76% ----- --------- --------- ----- --------- ---------
SEGMENT REPORTING The Company is centrally managed and operates in one business segment: digital interactive branding services and digital commerce solutions. 3. CORPORATE OVERHEAD ALLOCATIONS Young & Rubicam Inc. and its subsidiaries and affiliates provide certain administrative and corporate services which have been charged to Brand Dialogue - - New York and are included in the results of operations for the periods presented. Such services include executive management, information technology, facilities and key client account management. Costs are allocated on a proportionate basis as a function of revenues or headcount. These corporate F-55 BRAND DIALOGUE - NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. CORPORATE OVERHEAD ALLOCATIONS (CONTINUED) overhead allocations do not necessarily reflect the amount of expenses that would have been incurred by Brand Dialogue - New York on a stand-alone basis. The costs of certain financing activities, administrative, and other corporate functions, which did not benefit Brand Dialogue - New York, were absorbed by Young & Rubicam Inc. Management believes that the methodologies used to allocate charges for the services described above from Young & Rubicam Inc. are reasonable. However, it is impractical to determine whether such costs are comparable to those that would have been incurred by the Company on a stand-alone basis. Charges allocated to Brand Dialogue - New York are summarized as follows:
FOR THE YEARS ENDED PERIOD FROM APRIL 1, 1996 DECEMBER 31, (INCEPTION) THROUGH -------------------- DECEMBER 31, 1996 1997 1998 --------------------- --------- --------- Compensation, including employee benefits.............. $ 64 $ 133 $ 269 General and administrative............................. 210 386 627 ----- --------- --------- $ 274 $ 519 $ 896 ----- --------- --------- ----- --------- ---------
4. YOUNG & RUBICAM INC. INVESTMENT Brand Dialogue - New York participates in Young & Rubicam Inc.'s centralized treasury and cash management system. Cash generated from operations is transferred to Young & Rubicam Inc. on a daily basis. Cash disbursements for operations are funded as needed from Young & Rubicam Inc. No interest was charged or earned on the Company's outstanding balance with Young & Rubicam Inc. An analysis of the Young & Rubicam Inc. investment activity is as follows:
FOR THE YEARS ENDED PERIOD FROM APRIL 1, 1996 DECEMBER 31, (INCEPTION) THROUGH -------------------- DECEMBER 31, 1996 1997 1998 ------------------- --------- --------- Balance at the beginning of the period............. $ -- $ 443 $ 833 Net income......................................... 334 679 561 Corporate overhead allocations..................... 274 519 896 Cash receipts and cash disbursements, net.......... (165) (808) (1,232) ------ --------- --------- Balance at the end of the period................... $ 443 $ 833 $ 1,058 ------ --------- --------- ------ --------- ---------
5. EMPLOYEE BENEFITS Substantially all employees of Brand Dialogue - New York are eligible to participate in the Young & Rubicam Inc. Career Cash Balance Plan (the "Plan"). The benefits under the Plan are F-56 BRAND DIALOGUE - NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 5. EMPLOYEE BENEFITS (CONTINUED) based on, among other things, age at retirement, years of service and salary levels. Upon retirement, these benefits will be based upon the benefit formula of the Plan. Benefits are generally paid from funds previously provided to trustees. Funds are contributed to a trustee as necessary to provide for current service and for any unfunded projected benefit obligation. To the extent that these requirements are fully covered by assets on hand, a contribution may not be made in a particular year. At December 31, 1996, 1997 and 1998, assets were held in equity securities and fixed income-type securities. The Plan's net periodic pension cost and the Plan's funded status and related amounts recognized are determined on a consolidated basis by Young & Rubicam Inc. and allocated to its subsidiaries and affiliates based on the number of participants as determined by an actuary. As a result, the components of the Plan's net periodic pension cost and the actuarial present value of benefit obligations are not determinable on a subsidiary or affiliate basis and, therefore, not disclosed separately. The difference between the fair value of the Plan assets and the projected benefit obligation was ($446), ($615), and $784 at December 31, 1996, 1997 and 1998, respectively. The Plan's net periodic pension cost was $5,920, $2,779, and $4,127 for the years ended December 31, 1996, 1997 and 1998, respectively. The Company provides healthcare benefits to certain active employees. The cost of providing these benefits, compiled by Young & Rubicam Inc. on an aggregate basis, is recognized when incurred and has been allocated to Brand Dialogue - New York as a function of headcount. Employees of Brand Dialogue - New York participate in an employee savings plan, sponsored by Young & Rubicam Inc., that qualifies as a defined contribution plan under section 401(k) of the Internal Revenue Code. Under the plan, participating employees may defer a portion of their pre-tax earnings up to the Internal Revenue Service annual contribution limits. The Company matches 100% of each employee's contribution up to a maximum of 5% of the employee's earnings up to $150. Certain employees of Brand Dialogue - New York participate in various stock compensation programs sponsored by Young & Rubicam Inc. Young & Rubicam Inc. measures compensation cost using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock plans as the exercise price on the date of grant approximated the fair value of the common stock. Charges associated with employee benefits, which are included as a component of compensation expense, are summarized as follows:
FOR THE YEARS ENDED PERIOD FROM APRIL 1, 1996 DECEMBER 31, (INCEPTION) THROUGH -------------------- DECEMBER 31, 1996 1997 1998 --------------------- --------- --------- Medical and dental................................. $ 29 $ 58 $ 153 Employee savings plan.............................. 29 58 118 Career cash balance plan........................... 9 17 53 Other.............................................. 25 49 86 ----- --------- --------- $ 92 $ 182 $ 410 ----- --------- --------- ----- --------- ---------
F-57 BRAND DIALOGUE - NEW YORK (A WHOLLY OWNED BUSINESS OF YOUNG & RUBICAM INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. INCOME TAXES Brand Dialogue--New York has been included in the consolidated federal income tax returns and certain state and local income tax returns filed by Young & Rubicam Inc. or its subsidiaries. Income taxes have been provided on a separate return basis for all periods presented. Income taxes payable of $243, $653, and $1,186 as of December 31, 1996, 1997, and 1998, respectively, are included in due from related parties, net. The reconciliation of the United States statutory rate to the effective tax rate is as follows:
PERIOD FROM FOR THE YEARS ENDED APRIL 1, 1996 DECEMBER 31, (INCEPTION) THROUGH -------------------- DECEMBER 31, 1996 1997 1998 ------------------- --------- --------- Percent of Income Before Income Taxes United States statutory rate............... 35.0% 35.0% 35.0% State and local income taxes............... 7.0 7.0 7.0 Travel, entertainment and other non-deductible expenses.................. 0.3 0.3 0.7 Excess of book over tax depreciation expense..................... (0.2) (0.4) (0.8) ------ --------- --------- Effective tax rate............................. 42.1% 41.9% 41.9% ------ --------- ---------
Brand Dialogue - New York's deferred income tax asset arises from temporary differences which represent the cumulative deductible or taxable amounts recorded in the financial statements in different years than recognized in the tax returns and relate to the excess book over tax depreciation of computer equipment. 7. ACCRUED EXPENSES The components of accrued expenses are as follows:
FOR THE YEARS ENDED PERIOD FROM APRIL 1, 1996 DECEMBER 31, (INCEPTION) THROUGH -------------------- DECEMBER 31, 1996 1997 1998 --------------------- --------- --------- Compensation, including benefits............... $ 21 $ 131 $ 165 Information technology services................ -- 35 -- Professional services.......................... -- 118 -- Travel expenses................................ 40 20 -- Deferred income................................ 136 -- -- Other.......................................... -- 106 84 ----- --------- --------- $ 197 $ 410 $ 249 ----- --------- --------- ----- --------- ---------
8. SUBSEQUENT EVENT The Company has agreed upon the terms of a transaction whereby Young & Rubicam Inc. will sell certain net assets, as defined, to Luminant Worldwide Corporation. This transaction is subject to the successful completion of an initial public offering of the common stock of Luminant. F-58 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Free Range Media, Inc.: We have audited the accompanying consolidated balance sheets of Free Range Media, Inc. (a Washington corporation) and subsidiary as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Free Range Media, Inc. and subsidiary as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 7, 1999 F-59 FREE RANGE MEDIA, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ JUNE 30, 1997 1998 1999 -------------- -------------- -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents....................................... $ 5,963 $ 30,397 $ 57,694 Accounts receivable, net of allowance for doubtful accounts of $47,008, $0, and $60,360 (unaudited).......................... 294,232 734,416 1,442,683 Unbilled revenues............................................... 31,713 96,753 352,252 Prepaid expenses and other...................................... 121,541 36,479 56,092 -------------- -------------- -------------- Total current assets.......................................... 453,449 898,045 1,908,721 PROPERTY AND EQUIPMENT, net....................................... 446,389 798,234 750,356 -------------- -------------- -------------- Total assets.................................................. $ 899,838 $ 1,696,279 $ 2,659,077 -------------- -------------- -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................ $ 207,627 $ 118,682 $ 144,739 Customer deposits............................................... 76,061 335,038 209,642 Accrued liabilities............................................. 38,777 613,159 1,064,207 Notes payable................................................... -- 3,212,273 3,297,645 -------------- -------------- -------------- Total liabilities............................................. 322,465 4,279,152 4,716,233 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock: $2.75 par value, 2,400,000 shares authorized, 908,923, 1,359,460, and 1,359,460 (unaudited) shares issued and outstanding as of 1997, 1998, and 1999.................... 2,488,538 3,727,514 3,727,514 Common stock, voting: no par value, 6,400,000 shares authorized, 6,400,000 shares issued as of 1997 and 1998 and 6,243,408, 6,238,808, and 6,282,208 (unaudited) shares outstanding as of 1997, 1998, and 1999.......................................... 2,424,760 2,672,536 2,894,098 Retained deficit................................................ (4,116,186) (8,759,879) (8,466,574) Less--Treasury stock at cost, 152,192, 156,792 and 156,792 (unaudited) shares as of 1997, 1998 and 1999.................. (219,739) (223,044) (212,194) -------------- -------------- -------------- Total stockholders' equity.................................... 577,373 (2,582,873) (2,057,156) -------------- -------------- -------------- Total liabilities and stockholders' equity.................... $ 899,838 $ 1,696,279 $ 2,659,077 -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these consolidated financial statements. F-60 FREE RANGE MEDIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- ----------------------------- 1996 1997 1998 1998 1999 -------------- -------------- -------------- -------------- ------------- (UNAUDITED) REVENUES.......................... $ 2,939,746 $ 1,982,288 $ 3,520,514 $ 1,212,301 $ 4,816,942 COST OF SERVICES.................. 2,016,218 1,641,493 3,248,161 1,277,825 2,896,342 -------------- -------------- -------------- -------------- ------------- GROSS PROFIT...................... 923,528 340,795 272,353 (65,524) 1,920,600 SELLING, GENERAL AND ADMINISTRATIVE.................. 2,005,332 2,984,957 4,922,329 2,397,947 2,268,433 OTHER INCOME (EXPENSE): Loss on investment.............. -- -- -- (153,032) -- Interest expense................ (45,196) (107,475) (181,673) (53,206) (172,080) Gain on sale of affiliate....... -- -- 429,996 -- -- Other (expense) income.......... (48,792) (34,581) 28,422 33,901 (128,435) -------------- -------------- -------------- -------------- ------------- LOSS BEFORE INCOME TAXES.......... (1,175,792) (2,786,218) (4,373,231) (2,635,808) (648,348) INCOME TAXES...................... -- -- -- -- -- -------------- -------------- -------------- -------------- ------------- NET LOSS.......................... $ (1,175,792) $ (2,786,218) $ (4,373,231) $ (2,635,808) $ (648,348) -------------- -------------- -------------- -------------- ------------- -------------- -------------- -------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-61 FREE RANGE MEDIA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK --------------------------- --------------------------- RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT DEFICIT STOCK ------------ ------------- ------------ ------------- -------------- -------------- BALANCE, December 31, 1995............ -- $ -- 3,700,000 $ 240,000 $ (154,176) $ (2,487,149) Issuance of common stock............ -- -- 3,073,940 2,079,759 -- 3,126,357 Exercise of stock options........... -- -- 4,800 (5,506) -- 9,570 Purchase of treasury stock.......... -- -- (533,332) -- -- (850,665) Equity related compensation......... -- -- -- 10,797 -- -- Net loss............................ -- -- -- -- (1,175,792) -- ------------ ------------- ------------ ------------- -------------- -------------- BALANCE, December 31, 1996............ -- -- 6,245,408 2,325,050 (1,329,968) (201,887) Issuance of preferred stock......... 908,923 2,488,538 -- -- -- -- Exercise of stock options........... -- -- 2,400 (6,674) -- 8,932 Purchase of treasury stock.......... -- -- (4,400) -- -- (26,784) Equity related compensation......... -- -- -- 106,384 -- -- Net loss............................ -- -- -- -- (2,786,218) -- ------------ ------------- ------------ ------------- -------------- -------------- BALANCE, December 31, 1997............ 908,923 2,488,538 6,243,408 2,424,760 (4,116,186) (219,739) Issuance of preferred stock......... 450,537 1,238,976 -- -- -- -- Purchase of treasury stock.......... -- -- (4,600) -- -- (3,305) Equity related compensation......... -- -- -- 247,776 -- -- Dividends........................... -- -- -- -- (270,462) -- Net loss............................ -- -- -- -- (4,373,231) -- ------------ ------------- ------------ ------------- -------------- -------------- BALANCE, December 31, 1998............ 1,359,460 3,727,514 6,238,808 2,672,536 (8,759,879) (223,044) Capital contribution (unaudited).... -- -- -- -- 1,113,746 -- Exercise of stock options (unaudited)....................... -- -- 43,400 -- -- 10,850 Equity related compensation (unaudited)....................... -- -- -- 221,562 -- -- Dividends (unaudited)............... -- -- -- -- (172,093) -- Net loss (unaudited)................ -- -- -- -- (648,348) -- ------------ ------------- ------------ ------------- -------------- -------------- BALANCE, June 30, 1999 (unaudited).... 1,359,460 $ 3,727,514 6,282,208 $ 2,894,098 $ (8,466,574) $ (212,194) ------------ ------------- ------------ ------------- -------------- -------------- ------------ ------------- ------------ ------------- -------------- --------------
The accompanying notes are an integral part of these consolidated financial statements. F-62 FREE RANGE MEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss..................................... $(1,175,792) $(2,786,218) $(4,373,231) $(2,635,808) $ (648,348) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation............................... 119,271 210,064 324,982 179,174 117,850 Equity related compensation................ 10,797 106,384 247,776 61,944 221,562 Gain on sale of affiliate.................. -- -- (429,996) -- -- Changes in assets and liabilities- Accounts receivable...................... (61,879) 176,562 (440,184) 310,388 (708,267) Unbilled revenues........................ 73,519 3,835 (65,040) (246,646) (255,499) Prepaid expenses and other............... 5,990 235,604 85,061 (79,952) (19,613) Accounts payable......................... (13,120) 76,342 (88,944) (15,292) 26,057 Customer deposits........................ 6,268 (108,186) 258,977 271,784 (125,396) Accrued liabilities...................... (597,289) (23,111) 303,920 36,726 278,955 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities.... (1,632,235) (2,108,724) (4,176,679) (2,117,682) (1,112,699) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of capital equipment...... -- -- -- -- 34,216 Capital expenditures......................... (187,003) (282,085) (676,827) (471,609) (104,188) Investment in affiliate (disposed of in 1998)...................................... -- -- (250,000) -- -- Proceeds from disposition of affiliate....... -- -- 679,996 -- -- ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities.... (187,003) (282,085) (246,831) (471,609) (69,972) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: (Repayments on) proceeds from notes payable.. (2,534,413) (73,104) 3,212,273 2,583,328 1,199,118 Proceeds from issuance of preferred stock.... -- 2,488,538 1,238,976 -- -- Proceeds from issuance of common stock....... 2,074,253 -- -- -- -- Proceeds from issuance of treasury stock..... 3,135,927 2,258 -- -- 10,850 Purchases of treasury stock.................. (850,665) (26,784) (3,305) -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities............................. 1,825,102 2,390,908 4,447,944 2,583,328 1,209,968 ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 5,864 99 24,434 (5,963) 27,297 CASH AND CASH EQUIVALENTS, beginning of period....................................... -- 5,864 5,963 5,963 30,397 ----------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period....... $ 5,864 $ 5,963 $ 30,397 $ -- $ 57,694 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL INFORMATION: Cash paid for interest....................... $ 935 $ 101,667 $ 179,032 $ 42,631 $ -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NON-CASH FINANCING Capital contribution from disposition of subsidiaries............................... $ -- $ -- $ -- $ -- $ 1,113,746 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-63 FREE RANGE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Free Range Media, Inc. and its subsidiary (the "Company") specializes in the design of World Wide Web pages on the Internet. The Company is a full service developer of Internet and intranet sites, offering services in four areas: website design and implementation, hosting, consulting, and maintenance. The Company's wholly owned subsidiary is Lariat, Inc. The Company was incorporated in the State of Washington in March 1994. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using a straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses reflected in the consolidated statements of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance and repair costs are expensed as incurred. INCOME TAXES Income taxes are accounted for using an asset and liability approach that requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, is not expected to be realized. REVENUE RECOGNITION Revenues are recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Unbilled revenues on contracts are comprised of labor costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. COST OF SERVICES Cost of services is comprised primarily of salaries, employee benefits, and incentive compensation of billable employees and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. F-64 FREE RANGE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) GAIN ON SALE OF AFFILIATE On September 17, 1998, the Company sold its interest in Free Zone, LLC ("Free Zone") to an unrelated third party for $679,996 and recognized a gain of $429,996. ACCOUNTING FOR STOCK BASED COMPENSATION In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value based method of accounting for stock-based compensation or continuation under Accounting Principles Board Option No. 25, "Accounting for Stock Issued to Employees ("APB 25")." The Company has chosen to account for stock-based compensation using the intrinsic value based method prescribed in APB 25 and provides the pro forma disclosure provision of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the date of the grant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to their relatively short maturity and/or their variable interest rates. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. An investment in a company that is 50% owned is accounted for using the equity method. All significant intercompany transactions and balances have been eliminated. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. F-65 FREE RANGE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ------ ------------ ------------- Computers and equipment................................. 3 $ 646,966 $ 1,253,290 Furniture and fixtures.................................. 5 195,678 256,777 Leasehold improvements.................................. 5 20,108 29,512 ------------ ------------- 862,752 1,539,579 Less- Accumulated depreciation.......................... (416,363) (741,345) ------------ ------------- Property and equipment, net...................... $ 446,389 $ 798,234 ------------ ------------- ------------ -------------
Depreciation expense was $119,271, $210,064, and $324,982 for the years ended December 31, 1996, 1997, and 1998, respectively. 4. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 --------- ----------- Accrued compensation................................................. $ 36,587 $ 141,385 Accrued dividends.................................................... -- 270,462 Accrued interest..................................................... -- 179,844 Other................................................................ 2,190 21,468 --------- ----------- Accrued liabilities.................................................. $ 38,777 $ 613,159 --------- ----------- --------- -----------
5. DEBT: The Company has two notes payable of $3,212,273 as of December 31, 1998, with related parties with interest at 9.25% and prime plus 1% (8.75% at December 31, 1998). The notes payable are due on demand, have an "open ended" maturity, and are general obligations of the Company. 6. INCOME TAXES: The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to the effective income tax rate is as follows:
1996 1997 1998 ----- ----- ----- Tax at U.S. statutory rates....................................... (35)% (35 )% (35 )% Meals and entertainment........................................... 1% 1% 1% Net operating loss carryforward................................... 34% 34% 34% -- -- -- Effective income tax rate......................................... --% --% --% -- -- -- -- -- --
F-66 FREE RANGE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES: (CONTINUED) Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1998, are shown below.
1997 1998 -------------- -------------- Deferred tax assets- Book depreciation in excess of tax depreciation............. $ 12,293 $ 40,883 Accruals.................................................... 26,268 26,268 Net operating loss carryforward............................. 1,332,143 2,832,630 -------------- -------------- Total deferred tax assets..................................... 1,370,704 2,899,781 Deferred tax liabilities- Other....................................................... (9,293) (9,293) -------------- -------------- Net deferred tax assets....................................... 1,361,411 2,890,488 Valuation allowance........................................... (1,361,411) (2,890,488) -------------- -------------- Net deferred tax assets....................................... $ -- $ -- -------------- -------------- -------------- --------------
The Company's net operating loss carryforwards expire in years 2009 through 2018. Management periodically reviews the expected realization of the Company's deferred tax assets and records a valuation allowance, as appropriate, when existing conditions impact the probability of ultimate realization of the deferred tax asset. Due to the Company's recurring losses before income taxes, management believes it is more likely than not that the Company will not realize the net deferred tax asset. Accordingly, the Company has recorded a valuation allowance to reflect uncertainties associated with the ultimate realization of certain deferred tax assets. 7. COMMITMENTS AND CONTINGENCIES: The Company sponsors 401(k) cash or deferred retirement plans that cover substantially all of its ongoing employees. The Company has not made matching contributions. The Company leases its office facilities under noncancelable operating leases that expire in January 2005. The leases require the payment of property taxes, insurance, and maintenance. The Company also has operating lease agreements related to certain equipment which expire at various dates. F-67 FREE RANGE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Future minimum lease payments under these leases are as follows:
OPERATING LEASES ------------- 1999........................................................................... $ 263,994 2000........................................................................... 274,860 2001........................................................................... 288,512 2002........................................................................... 294,216 2003........................................................................... 297,570 Thereafter..................................................................... 338,834 ------------- Total future minimum lease payments............................................ $ 1,757,986 ------------- -------------
Rent expense for the years ended December 1996, 1997, and 1998 totaled $146,212, $255,285, and $279,510, respectively. In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on the Company's financial condition or results of operations. 8. EQUITY INCENTIVE PLANS: Effective November 1, 1995, the Company approved the 1995 Stock Option Plan (the "Plan") authorizing the Board of Directors to grant incentive or nonqualified options to purchase common stock of the Company. Effective April 1, 1998, the Plan was converted into a nonqualified option plan. The Board of Directors has authorized shares to be issued under the Plan. The Plan is administered by the Board of Directors, which determines the number of stock options to be granted, the exercise or purchase price, exercise schedule, and expiration date of such options. The exercise price of options qualifying as incentive stock options under Section 422 of the Internal Revenue Code may not be less than the grant date fair market value of the common stock. Incentive stock options granted to any 10% stockholder may not be less than 110% of the fair market value of the common stock on the grant date. Stock options granted under the Plan are nontransferable and generally expire ten years after the date of grant. Upon the event that all of the outstanding shares of common stock of the Company are acquired by an unrelated party, the optionee's exercise schedule shall be accelerated to provide that optionee with immediate exercisability of fifty percent of the options granted. All options granted become exercisable over a five-year period of continued employment. F-68 FREE RANGE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EQUITY INCENTIVE PLANS: (CONTINUED) Options outstanding at December 31, 1996, 1997, and 1998, were as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- --------------------- Options outstanding at December 31, 1995..................... 135,550 $ .25 Granted.................................................... 181,750 .25 Exercised.................................................. (4,800) .25 Canceled................................................... (49,250) .25 ----------- --- Options outstanding at December 31, 1996..................... 263,250 .25 Granted.................................................... 336,250 .25 Exercised.................................................. (2,400) .25 Canceled................................................... (205,750) .25 ----------- --- Options outstanding at December 31, 1997..................... 391,350 .25 Granted.................................................... 465,250 .25 Exercised.................................................. -- -- Canceled................................................... (279,450) .25 ----------- --- Options outstanding at December 31, 1998..................... 577,150 $ .25 ----------- --- ----------- ---
The following is summary information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------- ------------------------------ WEIGHTED AVERAGE NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE - ----------------- ----------- ------------------------- --------------------- ----------- ----------------- $ .25 577,150 5 $ .25 4,890 $ .25
Additionally, the Company had 680 and 1,260 options exercisable at December 31, 1996 and 1997. Included in the above options granted during the three years ended December 31, 1998, were options granted with an exercise price less than fair market value on the grant date. The Company recognized $10,797, $106,384, and $247,776 in connection with these stock option grants in compensation expense for 1996, 1997, and 1998, respectively. Pro forma information regarding net income has been determined as if the Company accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions used for 1996: an exercisable event occurring in five years; risk-free interest rates ranging from 5.42% to 6.71%; a dividend yield of 0%; a volatility factor of zero; a weighted-average expected life of five years; and an average Black-Scholes fair value at the date of grant of $2.44 per option. The assumptions used to price options granted during 1997 were: an exercisable event occurring in five years; risk-free interest rates ranging from 5.42% to 5.83%; dividend yield of 0%; a volatility factor of zero; a weighted-average expected life of five years; and average Black-Scholes fair value at the date of grant of $2.56 per option. The assumptions used to price options granted during 1998 were: an exercisable event occurring in five years; risk-free interest rates ranging from 4.68% to 5.63%; a dividend yield of 0%; a F-69 FREE RANGE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EQUITY INCENTIVE PLANS: (CONTINUED) volatility factor of zero; a weighted-average expected life of five years; and an average Black-Scholes fair value at the date of grant of $2.56 per option. Had compensation cost for the Company's stock option plan been determined based on the fair value at the date of grant consistent with SFAS 123, the Company's net loss would have been as follows:
1996 1997 1998 -------------- -------------- -------------- Net loss--As reported......................... $ (1,175,792) $ (2,786,218) $ (4,373,231) Net loss--Pro forma........................... (1,237,468) (2,819,098) (4,417,297)
9. EQUITY: PREFERRED STOCK The Company's Articles of Incorporation, as amended, authorize the Company to issue 2,400,000 shares of convertible Class A Preferred Stock ("Preferred Stock"). In the event of liquidation, each holder of Preferred Stock will be entitled to receive, as a preferential distribution, $2.75 for each outstanding share and an amount equal to the accumulated but unpaid dividends, if any, on such share. If the assets of the Company are insufficient to permit the payment of full preferential amounts previously described, then all assets of the Company legally available for distribution to its stockholders will be distributed ratably among the holders of Preferred Stock. The holders of Preferred Stock will be entitled to receive, when declared by the Board of Directors, cumulative preferred dividends in the amount of a percentage which is equal to the prime lending rate for Key Bank of Washington multiplied by the par value per year on each share. Each share of Preferred Stock is convertible into the number of shares of Common Stock which is equal to $2.75 divided by the conversion price in effect at the time of the conversion. The Company has recognized cumulative dividends for the Preferred Stock in the amount of $270,462. COMMON STOCK The Company's Articles of Incorporation, as amended, authorize the Company to issue 6,400,000 shares of Common Stock having no par value. 10. RELATED-PARTY TRANSACTIONS: At December 31, 1998, the Company had notes payable to two stockholders totaling $3,212,273 at December 31, 1998. The notes payable are "open-ended" loans without set maturity dates. 11. AGREEMENT TO MERGE WITH LUMINANT: The Company intends to enter into an agreement to be acquired by Luminant. This acquisition is subject to successful completion of an initial public offering of the common stock of Luminant. F-70 FREE RANGE MEDIA, INC. NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 1999, the results of its operations and its cash flows for the six months ended June 30, 1998 and 1999. These financial statements should be read in conjunction with the Company's audited 1998 financial statements, including the notes thereto. Operating results for the six months ended June 30, 1999, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. B. DEBT: The Company has notes payable amounting to $3,297,645 as of June 30, 1999, with related parties, with interest at 9.25%. The notes payable are due on demand, have an "open-ended" maturity, and are general obligations of the Company. C. RELATED-PARTY TRANSACTIONS: In the six months ended June 30, 1999, approximately 31% of the Company's revenues were with a customer of which the Company's Chairman of the Board is a director. D. DISPOSITION OF SUBSIDIARY: On June 11, 1999, the Company distributed all the outstanding shares of its wholly-owned subsidiary, Lariat, Inc., to the Company's shareholders. This distribution has been treated as a $1.1 million capital contribution to the Company for the amount of liabilities in excess of assets assumed by the Company's shareholders. Revenues of Lariat, Inc. for the year ended December 31, 1998 were $216,454 and for the six months ended June 30, 1999 were $67,580. F-71 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Integrated Consulting, Inc.: We have audited the accompanying balance sheets of Integrated Consulting, Inc., dba i.con interactive (a Texas corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Integrated Consulting, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 7, 1999 F-72 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE BALANCE SHEETS
DECEMBER 31, ------------------------ JUNE 30, 1997 1998 1999 ----------- ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................................... $ 42,566 $ 8,968 $ 107,800 Accounts receivable, net of allowance for doubtful accounts of $0, $9,000, and $17,000 (unaudited)....................................... 39,842 209,198 359,545 Deferred income taxes................................................... 11,609 11,886 29,138 Prepaid expenses and other.............................................. 10,677 10,992 10,200 ----------- ----------- ------------ Total current assets.................................................. 104,694 241,044 506,683 PROPERTY AND EQUIPMENT, net............................................... 135,453 239,382 364,818 OTHER ASSETS.............................................................. 7,622 17,367 7,367 ----------- ----------- ------------ Total assets.......................................................... $ 247,769 $ 497,793 $ 878,868 ----------- ----------- ------------ ----------- ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, including cash overdraft of $0, $74,810, and $0 (unaudited)........................................................... $ 10,762 $ 145,979 $ 178,197 Customer deposits....................................................... 83,164 57,946 -- Accrued liabilities..................................................... 86,240 119,872 259,713 Notes payable........................................................... -- -- 75,428 Current maturities of long-term debt.................................... -- 7,568 16,971 ----------- ----------- ------------ Total current liabilities............................................. 180,166 331,365 530,309 LONG-TERM LIABILITIES: Long-term debt, net of current maturities............................... -- 56,453 102,917 Deferred income taxes................................................... 4,970 7,034 20,968 ----------- ----------- ------------ Total liabilities..................................................... 185,136 394,852 654,194 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, Class A, voting: $.01 par value, 10,000,000 shares authorized, 900,000, 1,000,000, and 1,000,000 (unaudited) issued and outstanding as of 1997, 1998 and 1999................................. 9,000 10,000 10,000 Common stock, Class B, nonvoting: $.01 par value, 10,000,000 and 0 shares authorized, no shares issued and outstanding as of 1997, 1998 and 1999.............................................................. -- -- -- Additional paid-in capital.............................................. -- 14,000 14,000 Subscription receivable from officers................................... -- (10,000) -- Retained earnings....................................................... 53,633 88,941 200,674 ----------- ----------- ------------ Total stockholders' equity............................................ 62,633 102,941 224,674 ----------- ----------- ------------ Total liabilities and stockholders' equity............................ $ 247,769 $ 497,793 $ 878,868 ----------- ----------- ------------ ----------- ----------- ------------
The accompanying notes are an integral part of these financial statements. F-73 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- ---------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ------------- ------------- ------------- (UNAUDITED) REVENUES: Trade revenues......................... $ 442,924 $ 848,584 $ 1,715,591 $ 796,314 $ 1,695,803 Barter revenues........................ -- -- 424,900 152,971 211,713 ----------- ----------- ------------- ------------- ------------- Total revenues....................... 442,924 848,584 2,140,491 949,285 1,907,516 COST OF SERVICES......................... 132,172 266,774 716,209 267,321 594,050 ----------- ----------- ------------- ------------- ------------- GROSS PROFIT............................. 310,752 581,810 1,424,282 681,964 1,313,466 SELLING, GENERAL AND ADMINISTRATIVE...... 314,829 550,312 1,382,744 516,420 1,124,350 OTHER INCOME (EXPENSE): Interest expense....................... -- -- -- -- (6,919) Other income........................... -- 8,563 -- -- -- ----------- ----------- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES........ (4,077) 40,061 41,538 165,544 182,197 INCOME TAXES............................. (612) 6,009 6,230 31,801 70,464 ----------- ----------- ------------- ------------- ------------- NET INCOME (LOSS)........................ $ (3,465) $ 34,052 $ 35,308 $ 133,743 $ 111,733 ----------- ----------- ------------- ------------- ------------- ----------- ----------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-74 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ----------------------- ADDITIONAL SUBSCRIPTION NUMBER OF PAR PAID-IN RECEIVABLE RETAINED SHARES VALUE CAPITAL FROM OFFICERS EARNINGS ------------ --------- ----------- ------------- ----------- BALANCE, December 31, 1995..................... 900,000 $ 9,000 $ -- $ -- $ 23,046 Net loss..................................... -- -- -- -- (3,465) ------------ --------- ----------- ------------- ----------- BALANCE, December 31, 1996..................... 900,000 9,000 -- -- 19,581 Net income................................... -- -- -- -- 34,052 ------------ --------- ----------- ------------- ----------- BALANCE, December 31, 1997..................... 900,000 9,000 -- -- 53,633 Issuance of common stock..................... 100,000 1,000 14,000 (10,000) -- Net income................................... -- -- -- -- 35,308 ------------ --------- ----------- ------------- ----------- BALANCE, December 31, 1998..................... 1,000,000 10,000 14,000 (10,000) 88,941 Repayment of subscription receivable (unaudited)................................ -- -- -- 10,000 -- Net income (unaudited)....................... -- -- -- -- 111,733 ------------ --------- ----------- ------------- ----------- BALANCE, June 30, 1999 (unaudited)............. 1,000,000 $ 10,000 $ 14,000 $ -- $ 200,674 ------------ --------- ----------- ------------- ----------- ------------ --------- ----------- ------------- -----------
The accompanying notes are an integral part of these financial statements. F-75 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------- ----------------------- 1996 1997 1998 1998 1999 --------- ---------- ----------- ---------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................................. $ (3,465) $ 34,052 $ 35,308 $ 133,743 $ 111,733 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization.................... 14,890 28,696 43,547 21,767 34,945 Equity related compensation...................... -- -- 5,000 -- -- Deferred income taxes............................ (7,605) 966 1,787 17,037 15,620 Changes in assets and liabilities- Accounts receivable............................ 9,597 (38,173) (169,356) 24,719 (150,347) Prepaid expenses and other..................... (1,093) (1,119) (315) (2,701) 10,992 Other assets................................... (6,222) -- (9,745) (30,235) (19,138) Accounts payable, including cash overdraft..... 9,309 (2,464) 135,217 (7,139) 32,218 Customer deposits.............................. 63,711 19,453 (25,218) (83,164) (57,946) Accrued liabilities............................ 18,454 62,111 33,632 30,428 139,841 --------- ---------- ----------- ---------- ----------- Net cash provided by (used in) operating activities................................. 97,576 103,522 49,857 104,455 117,918 --------- ---------- ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................... (69,569) (81,745) (147,476) (27,425) (160,380) --------- ---------- ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayments on) notes payable........ -- -- -- -- 75,428 Proceeds from long-term debt....................... -- -- 64,021 -- 64,136 Payments on long-term debt......................... -- -- -- 5,000 (8,270) Proceeds from subscription receivable.............. -- -- -- -- 10,000 --------- ---------- ----------- ---------- ----------- Net cash provided by financing activities.... -- -- 64,021 5,000 141,294 --------- ---------- ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 28,007 21,777 (33,598) 82,030 98,832 CASH AND CASH EQUIVALENTS, beginning of period....... (7,218) 20,789 42,566 42,566 8,968 --------- ---------- ----------- ---------- ----------- CASH AND CASH EQUIVALENTS, end of period............. $ 20,789 $ 42,566 $ 8,968 $ 124,596 $ 107,800 --------- ---------- ----------- ---------- ----------- --------- ---------- ----------- ---------- ----------- SUPPLEMENTAL INFORMATION: Cash paid for income taxes......................... $ 7,500 $ 6,500 $ 3,800 $ -- $ -- --------- ---------- ----------- ---------- ----------- --------- ---------- ----------- ---------- ----------- Cash paid for interest............................. $ -- $ -- $ -- $ -- $ -- --------- ---------- ----------- ---------- ----------- --------- ---------- ----------- ---------- ----------- NON-CASH TRANSACTIONS: Issuance of stock for notes receivable............. $ -- $ -- $ 10,000 $ -- $ -- --------- ---------- ----------- ---------- ----------- --------- ---------- ----------- ---------- -----------
The accompanying notes are an integral part of these financial statements. F-76 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Integrated Consulting, Inc. ("i.con") specializes in electronic marketing on the Internet under the trade name "i.con interactive." i.con is a full service Internet and multimedia development firm focusing on the corporate market specializing in Internet, extranet, and intranet solutions, corporate communications, marketing and sales tools, computer-based training, and on-line marketing. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS i.con considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses reflected in the statements of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance and repairs are expensed as incurred. INCOME TAXES Income taxes are accounted for using an asset and liability approach that requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in i.con's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated. REVENUE RECOGNITION Revenues are recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Customer deposits represent the amount of customer payments received in advance of services being performed. Revenues associated with hosting services are recognized when the services are performed. The Company earned a portion of its 1998 revenue under barter arrangements with certain customers for website development and maintenance services in exchange for advertising. The barter transactions are valued at the normal rates per hour including a minimal discount provision in some instances and with consideration of the costs of advertising and promotion that would have been paid to the customers in an ordinary cash transaction. Advertising F-77 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) expense equal to the amount of barter revenue is recorded in selling, general and administrative expense. COST OF SERVICES Cost of services are comprised primarily of salaries, employee benefits, and incentive compensation of billable employees, and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS i.con's financial instruments have carrying amounts which approximate fair value due to the relatively short maturity of these instruments. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 3. SIGNIFICANT CUSTOMERS: During the year ended December 31, 1996, sales to five customers accounted for approximately 19%, 19%, 16%, 14%, and 14% of revenues. During the year ended December 31, 1997, sales to two customers accounted for approximately 13% and 10% of revenues. During the year ended December 31, 1998, sales to one customer accounted for approximately 12% of revenues. As of December 31, 1997, accounts receivable from four customers accounted for approximately 52%, 18%, 13%, and 12% of accounts receivable. As of December 31, 1998, accounts receivable from three customers accounted for approximately 12%, 10%, and 10% of accounts receivable. F-78 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ----------- ----------- ----------- Computers and equipment.................................... 3-5 $ 145,520 $ 191,149 Furniture and fixtures..................................... 7 28,040 54,248 Autos...................................................... 5 -- 64,021 Leasehold improvements..................................... 7 -- 9,000 Other equipment............................................ 5-7 10,768 13,386 ----------- ----------- 184,328 331,804 Less--Accumulated depreciation............................. (48,875) (92,422) ----------- ----------- Property and equipment, net.............................. $ 135,453 $ 239,382 ----------- ----------- ----------- -----------
Depreciation expense was $14,890, $28,696, and $43,547 for the years ended December 31, 1996, 1997, and 1998, respectively. 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 --------- ----------- Sales tax payable.................................................... $ 15,134 $ 59,374 Franchise tax payable................................................ -- 1,097 Accrued compensation................................................. -- 57,062 Other................................................................ 71,106 2,339 --------- ----------- Total accrued liabilities.......................................... $ 86,240 $ 119,872 --------- ----------- --------- -----------
6. DEBT: Long-term debt is comprised of the following as of December 31, 1997 and 1998:
1997 1998 --------- --------- Note payable bearing interest at 10.05%, payable in monthly installments of principal and interest of $1,138 with a balloon payment of $40,007, maturing December 2001.................................................. $ -- $ 64,021 Less--Current maturities.................................................. -- (7,568) --------- --------- Long-term debt............................................................ $ -- $ 56,453 --------- --------- --------- ---------
F-79 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. DEBT: (CONTINUED) Maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, - ----------------------------------------------------------------------------------- 1999............................................................................... $ 7,568 2000............................................................................... 8,357 2001............................................................................... 48,096 --------- $ 64,021 --------- ---------
7. INCOME TAXES: Significant components of the provision for income taxes attributable to continuing operations are as follows:
1996 1997 1998 --------- --------- --------- Current........................................................ $ 6,993 $ 5,043 $ 4,443 Deferred....................................................... (7,605) 966 1,787 --------- --------- --------- Total current and deferred..................................... $ (612) $ 6,009 $ 6,230 --------- --------- --------- --------- --------- ---------
i.con's effective tax rate is equivalent to the statutory tax rate. Significant components of i.con's deferred tax liabilities and assets as of December 31, 1997 and 1998, are shown below:
1997 1998 --------- --------- Deferred tax assets-- Accruals and reserves.................................................................... $ 11,609 $ 11,886 --------- --------- Deferred tax liabilities-- Tax depreciation in excess of book value................................................. 4,970 7,034 --------- --------- Net deferred tax assets.................................................................... $ 6,639 $ 4,852 --------- --------- --------- ---------
8. COMMITMENTS AND CONTINGENCIES: i.con sponsors a 401(k) profit sharing plan that covers eligible employees. Company discretionary contributions to the plan were $22,575, $31,747, and $39,732 during 1996, 1997, and 1998, respectively. On January 1, 1999, i.con amended the plan to provide for Company matching of employee 401(k) contributions in the amount of 50% of employee contributions up to 6% of an employee's salary. In addition, employees now participate in the plan after six months of service and vest over a period of four years. i.con leases its office facility under a noncancelable operating lease which expires in January 2003. The lease requires the payment of property taxes, insurance, and maintenance. F-80 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES: (CONTINUED) i.con also has operating lease agreements related to certain equipment which expire at various dates. Future minimum lease payments under operating leases are as follows:
OPERATING LEASES ----------- 1999............................................................................. $ 180,180 2000............................................................................. 180,000 2001............................................................................. 186,000 2002............................................................................. 186,000 2003............................................................................. 7,000 Thereafter....................................................................... -- ----------- Total future minimum lease payments.............................................. $ 739,180 ----------- -----------
Rent expense for the years ended December 1996, 1997, and 1998 totaled $18,213, $87,234, and $121,669, respectively. In the ordinary course of business, i.con may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on financial position or results of operations. 9. EQUITY INCENTIVE PLAN: In March 1998, an officer of i.con purchased 100,000 shares of common stock for $10,000 cash or $.10 per share. At the time of the purchase, i.con determined the fair market value of the stock to be $.15 per share. A compensation charge of $5,000 was recorded in conjunction with the purchase of the common stock. 10. RELATED-PARTY TRANSACTIONS: At December 31, 1998, i.con had a $5,000 receivable included in prepaid expenses and other, from one of its stockholders. This receivable bears no interest and has no stated maturity. 11. AGREEMENT TO MERGE WITH LUMINANT WORLDWIDE CORPORATION: i.con intends to enter into an agreement to be acquired by Luminant Worldwide Corporation. This acquisition is subject to successful completion of an initial public offering of the common stock of Luminant Worldwide Corporation. F-81 INTEGRATED CONSULTING, INC. DBA I.CON INTERACTIVE NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Rule10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of i.con's financial condition as of June 30, 1999, the results of its operations, and its cash flows for the six months ended June 30, 1998 and 1999. These financial statements should be read in conjunction with i.con's audited 1998 financial statements, including the notes thereto. Operating results for the six months ended June 30, 1999, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. B. DEBT: NOTES PAYABLE i.con has a bank line of credit with a maximum availability of $100,000, upon which $75,428 was outstanding at June 30, 1999. Interest is at prime plus 1.25% (9.0% at June 30, 1999), and is payable monthly. The line of credit is automatically renewable annually and is not restricted by any covenants, but is guaranteed by certain stockholders. LONG-TERM DEBT Long-term debt is comprised of the following:
JUNE 30, 1999 ----------- Note payable bearing interest at 10.05%, payable in monthly installments of principal and interest of $1,138 with a balloon payment of $40,007, maturing December 2001.................................................................. $ 59,962 Note payable bearing interest at 8.80%, payable in monthly installments of principal and interest of $1,227 with a balloon payment of $34,322, maturing January 2002................................................................... 59,926 ----------- 119,888 Less--Current portion............................................................ (16,971) ----------- Long-term debt................................................................... $ 102,917 ----------- -----------
F-82 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To InterActive8, Inc.: We have audited the accompanying balance sheets of InterActive8, Inc. (a New York S corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InterActive8, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 14, 1999 F-83 INTERACTIVE8, INC. BALANCE SHEETS
DECEMBER 31, -------------------------- JUNE 30, 1997 1998 1999 ----------- ------------- -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................... $ 90,321 $ 129,573 $ 150,021 Accounts receivable, net of allowance for doubtful accounts of $30,000, $80,000, and $74,250 (unaudited)........................ 403,949 724,963 1,581,560 State and local tax receivables.................................... 23,000 110,300 110,319 Prepaid expenses and other......................................... 15,296 88,315 63,174 ----------- ------------- -------------- Total current assets............................................. 532,566 1,053,151 1,905,074 PROPERTY AND EQUIPMENT, net.......................................... 252,710 314,533 1,056,431 OTHER ASSETS: Deposits and other................................................. 8,072 71,806 71,850 ----------- ------------- -------------- Total assets..................................................... $ 793,348 $ 1,439,490 $ 3,033,355 ----------- ------------- -------------- ----------- ------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................... $ 91,122 $ 183,698 $ 454,931 Accrued liabilities................................................ 567,011 500,970 3,702,421 Customer deposits.................................................. -- 45,130 -- Notes payable...................................................... -- 232,505 244,756 Current maturities of long-term debt............................... 164,080 700,709 537,394 Deferred Revenue................................................... -- -- 193,303 ----------- ------------- -------------- Total current liabilities........................................ 822,213 1,663,012 5,132,805 LONG-TERM LIABILITIES: Long-term debt, net of current maturities.......................... 13,968 22,599 423,873 ----------- ------------- -------------- Total liabilities................................................ 836,181 1,685,611 5,556,678 ----------- ------------- -------------- COMMITMENT AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, voting: $0.001 par value, 2,000,000 shares authorized, 641,567, 962,350 and 962,350 (unaudited) shares issued and outstanding as of 1997, 1998 and 1999................. 642 962 962 Additional paid-in capital......................................... 358 185,038 185,038 Retained deficit................................................... (43,833) (432,121) (2,709,323) ----------- ------------- -------------- Total stockholders' equity....................................... (42,833) (246,121) (2,523,323) ----------- ------------- -------------- Total liabilities and stockholders' equity....................... $ 793,348 $ 1,439,490 $ 3,033,355 ----------- ------------- -------------- ----------- ------------- --------------
The accompanying notes are an integral part of these financial statements. F-84 INTERACTIVE8, INC. STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ----------------------------- 1996 1997 1998 1998 1999 ------------- ------------- ------------- ------------- -------------- (UNAUDITED) REVENUES............................ $ 1,713,303 $ 2,817,894 $ 4,097,448 $ 1,891,275 $ 3,657,094 COST OF SERVICES.................... 1,056,158 1,633,538 2,033,451 1,521,253 4,679,596 ------------- ------------- ------------- ------------- -------------- GROSS PROFIT........................ 657,145 1,184,356 2,063,997 370,022 (1,022,502) SELLING, GENERAL AND ADMINISTRATIVE.................... 460,300 1,381,853 2,418,844 576,892 1,254,700 ------------- ------------- ------------- ------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES... 196,845 (197,497) (354,847) (206,870) (2,277,202) STATE AND LOCAL INCOME TAXES........ 18,063 43,900 33,441 -- -- ------------- ------------- ------------- ------------- -------------- NET INCOME (LOSS)................... $ 178,782 $ (241,397) $ (388,288) $ (206,870) $ (2,277,202) ------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- ------------- -------------- PRO FORMA INCOME TAXES (UNAUDITED)....................... 52,975 (52,975) -- -- -- ------------- ------------- ------------- ------------- -------------- PRO FORMA NET INCOME (LOSS) (UNAUDITED)....................... $ 125,807 $ (188,422) $ (388,288) $ (206,870) $ (2,277,202) ------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- ------------- --------------
The accompanying notes are an integral part of these financial statements. F-85 INTERACTIVE8, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED ---------------------- PAID-IN EARNINGS NUMBER AMOUNT CAPITAL (DEFICIT) --------- ----------- ----------- -------------- BALANCE, December 31, 1995.................................... 641,567 $ 642 $ 358 $ 18,782 Net income.................................................. -- -- -- 178,782 --------- ----- ----------- -------------- BALANCE, December 31, 1996.................................... 641,567 642 358 197,564 Net loss.................................................... -- -- -- (241,397) --------- ----- ----------- -------------- BALANCE, December 31, 1997.................................... 641,567 642 358 (43,833) Net loss.................................................... -- -- -- (388,288) Issuance of Common Stock.................................... 320,783 320 184,680 -- --------- ----- ----------- -------------- BALANCE, December 31, 1998.................................... 962,350 962 185,038 (432,121) Net loss (unaudited)........................................ -- -- -- (2,277,202) --------- ----- ----------- -------------- BALANCE, June 30, 1999 (unaudited)............................ 962,350 $ 962 $ 185,038 $ (2,709,323) --------- ----- ----------- -------------- --------- ----- ----------- --------------
The accompanying notes are an integral part of these financial statements. F-86 INTERACTIVE8, INC. STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- ---------------------------- 1996 1997 1998 1998 1999 ------------ ------------ ------------ ------------ -------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................. $ 178,782 $ (241,397) $ (388,288) $ (206,870) $ (2,277,202) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization................ 59,598 125,765 178,001 66,455 156,269 Equity related compensation.................. -- -- 135,000 135,000 2,888,659 Changes in assets and liabilities- Accounts receivable........................ 12,998 (293,714) (321,014) (287,635) (856,598) State and local tax receivable............. (23,000) -- (87,300) -- -- Prepaid expenses and other................. (47,025) 31,729 (73,019) (4,337) 25,142 Deposits and other......................... (9,413) 1,341 (63,734) (11,542) (44) Accounts payable........................... (1,846) 24,625 92,576 50,529 271,233 Accrued liabilities........................ (35,581) 551,979 (66,041) 58,173 312,792 Customer deposits.......................... -- -- 45,130 -- (45,130) Deferred Revenue........................... -- -- -- -- 193,303 ------------ ------------ ------------ ------------ -------------- Net cash provided by (used in) operating activities............................... 134,513 200,328 (548,689) (200,227) 668,424 ------------ ------------ ------------ ------------ -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................... (233,722) (70,620) (150,875) (68,446) (898,186) ------------ ------------ ------------ ------------ -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable.................... -- -- 232,505 -- 12,251 Proceeds from long-term debt................... 64,392 (37,246) 514,471 287,215 401,274 Payments on long-term debt..................... (16,570) (32,176) (58,160) (16,523) (163,315) Proceeds from issuance of common stock......... -- -- 50,000 50,000 -- ------------ ------------ ------------ ------------ -------------- Net cash provided by (used in) financing activities............................... 47,822 (69,422) 738,816 320,692 250,210 ------------ ------------ ------------ ------------ -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (51,387) 60,286 39,252 52,019 20,448 CASH AND CASH EQUIVALENTS, beginning of period............................ 81,422 30,035 90,321 90,321 129,573 ------------ ------------ ------------ ------------ -------------- CASH AND CASH EQUIVALENTS, end of period.................................. $ 30,035 $ 90,321 $ 129,573 $ 142,340 $ 150,021 ------------ ------------ ------------ ------------ -------------- ------------ ------------ ------------ ------------ -------------- SUPPLEMENTAL INFORMATION: Cash paid for state and local income taxes..... $ 40,796 $ 44,225 $ 120,741 $ 19,688 $ -- ------------ ------------ ------------ ------------ -------------- ------------ ------------ ------------ ------------ -------------- Cash paid for interest......................... $ 2,392 $ 4,112 $ 7,457 $ -- $ 13,646 ------------ ------------ ------------ ------------ -------------- ------------ ------------ ------------ ------------ -------------- NONCASH TRANSACTIONS: Capital expenditures financed with long-term debt......................................... $ 39,768 $ 63,838 $ 88,949 $ 93,569 $ 404,226 ------------ ------------ ------------ ------------ -------------- ------------ ------------ ------------ ------------ -------------- Noncash ownership donation..................... $ -- $ -- $ 135,000 $ -- $ -- ------------ ------------ ------------ ------------ -------------- ------------ ------------ ------------ ------------ --------------
The accompanying notes are an integral part of these financial statements. F-87 INTERACTIVE8, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: InterActive8, Inc. (the "Company") was formed in 1994 for the purpose of developing and maintaining Internet websites. The Company is a full-service interactive marketing agency providing strategy, creative, technical, and media services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired or disposed of are removed from the accounts and any gains or losses reflected in the statements of operations. Expenditures for major acquisitions and improvements are capitalized, while expenditures for maintenance and repairs are expensed as incurred. INCOME TAXES As a S corporation, the Company pays no federal income tax, but rather the stockholders are taxed individually on the Company's taxable income or loss. Accordingly, no provisions for federal income taxes are reflected in the accompanying financial statements. Provision has been made for state and local income taxes. The unaudited pro forma tax information included in the accompanying statements of operations reflects estimates of the Company's tax provision or benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998. In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma benefit was reflected in 1998 due to the Company's losses and the uncertainty related to the realization of any tax assets. REVENUE RECOGNITION Revenues are recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. COST OF SERVICES Cost of services is comprised primarily of salaries, employee benefits and incentive compensation of billable employees and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-88 INTERACTIVE8, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to their relative short maturity and/or their variable interest rates. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME," which is required to be adopted in the period ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 3. SIGNIFICANT CUSTOMERS: During the year ended December 31, 1996, sales to three customers accounted for 26%, 16%, and 12% of revenue. During the year ended December 31, 1997, sales to three customers accounted for 31%, 21%, and 14% of revenue. During the year ended December 31, 1998, sales to two customers accounted for 35% and 10% of revenue. At December 31, 1998, four customers accounted for 43%, 11%, 11%, and 11% of accounts receivable. 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ----------- ----------- ----------- Computers and equipment.................................... 3-7 $ 326,930 $ 494,049 Leasehold improvements..................................... 10 140,455 213,160 ----------- ----------- 467,385 707,209 Less--Accumulated depreciation............................. (214,675) (392,676) ----------- ----------- Property and equipment, net.............................. $ 252,710 $ 314,533 ----------- ----------- ----------- -----------
Depreciation and amortization expense was $59,599, $135,499, and $178,001 for the years ended December 31, 1996, 1997, and 1998, respectively. F-89 INTERACTIVE8, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 ----------- ----------- Accrued payroll..................................................... $ 37,679 $ -- Accrued payroll taxes............................................... 15,658 1,414 Consulting agreement................................................ 478,442 414,650 Accrued bonuses..................................................... 2,025 -- Accrued vacation.................................................... 15,825 29,906 Accrued professional fees........................................... 15,751 -- Accrued interest.................................................... -- 55,000 Other............................................................... 1,631 -- ----------- ----------- Accrued liabilities............................................... $ 567,011 $ 500,970 ----------- ----------- ----------- -----------
6. DEBT: NOTES PAYABLE As of December 31, 1998, the Company has available a $250,000 revolving line of credit (of which $232,505 has been drawn) with a bank. The agreement provides for interest at a rate of prime plus 1% (8.75% at December 31, 1998). The line of credit is secured by certain defined assets of the stockholders, including all personal property and fixtures, and matures during November 1999. In the event that the line of credit is not renewed, it converts at maturity into an installment note with a two-year maturity. At December 31, 1998, the Company negotiated for a term loan of $300,000 to help finance construction. The term loan has a fixed rate of 8% per annum. There were no borrowings against this loan as of December 31, 1998. The term loan will be repayable in 48 monthly installments commencing January 30, 2000. The term loan is secured by certain defined assets of the stockholders, including all personal property and fixtures. LOANS PAYABLE TO STOCKHOLDERS Loans payable to stockholders are demand obligations and bear interest at 8% per annum. Long-term debt is comprised of the following at December 31, 1997 and 1998:
1997 1998 ----------- ----------- Loans payable to stockholders....................................... $ 123,188 $ 637,659 Equipment financing, non-interest bearing payable in monthly installments ranging from $175 to $1,695, maturing March 1999 through March 2001, secured by certain equipment.................. 54,860 85,649 ----------- ----------- 178,048 723,308 Less--Current maturities............................................ (164,080) (700,709) ----------- ----------- $ 13,968 $ 22,599 ----------- ----------- ----------- -----------
F-90 INTERACTIVE8, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. DEBT: (CONTINUED) Maturities of long-term debt are as follows: 1999.................................................. $ 700,709 2000.................................................. 22,599 --------- $ 723,308 ---------
7. COMMITMENTS AND CONTINGENCIES: The Company adopted a 401(k) plan during 1997. The Company matches employees contributions up to 2%. During 1998, the Company contributed $23,287. No contributions were made during 1997. At December 31, 1998, the Company had entered into a noncancelable operating lease, expiring October 2008, to lease new office facilities. The leases require the payment of property taxes, insurance, and maintenance. Future minimum lease payments are as follows:
OPERATING LEASES ------------- 1999........................................................................... $ 184,000 2000........................................................................... 252,000 2001........................................................................... 231,000 2002........................................................................... 252,000 2003........................................................................... 232,500 Thereafter..................................................................... 1,428,750 ------------- Total future minimum lease payments........................................ $ 2,580,250 ------------- -------------
Rent expense for the years ended December 1996, 1997, and 1998 totaled $47,274, $39,132, and $49,007, respectively. In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on its financial condition or results of operations. 8. EQUITY INCENTIVE PLANS: Effective July 1, 1998, the Company approved the 1998 Nonqualified Stock Option Plan (the "1998 Plan"), authorizing the Board of Directors to grant nonqualified options to purchase common stock of the Company. The total number of shares of common stock which may be issued under the 1998 Plan is 237,650. Under the terms of the 1998 Plan, the Company can offer certain non-stockholder employees the right to share in the Company's value in the event the Company goes public or is sold to a third party. These are effectively, appreciation rights (the "Rights") that do not represent ownership or voting interests in the Company. Employees, officers, and directors become eligible to receive Rights six months after the commencement of their employment with the Company. Rights vest 50% after six months from the grant date and a further 50% after twelve months from the grant date. Upon a defined event, such as an initial public offering of stock or a F-91 INTERACTIVE8, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. EQUITY INCENTIVE PLANS: (CONTINUED) sale of the Company, Rights will be converted into a new combination of cash and/or stock dependent upon the structure of the defined event. Prior to such an event, the holders of the Rights cannot exercise the appreciation right. The Rights are nontransferable, and will be forfeited immediately upon an employee's departure from the Company prior to any defined event. No Rights were issued prior to 1998. Rights outstanding during 1998, were as follows:
GRANT NUMBER OF PRICE RIGHTS --------- ----------- Rights outstanding at December 31, 1997................................. -- Granted............................................................... $ 2.50 94,500 Exercised............................................................. -- Canceled.............................................................. -- ----------- Rights outstanding at December 31, 1998................................. 94,500 ----------- -----------
The Rights are considered compensatory equity instruments. As the Rights will be exercisable only upon the occurrence of a defined event, compensation expense is deferred under fixed plan accounting. The date the event is first considered likely to occur, a compensation charge for the cumulative appreciation in the Rights should be recognized. The Company believes that the condition for recognition has been met but has not recognized a charge during 1998 as the fair market value of the Company stock as determined by capital transactions in 1998 at year-end was less than the grant price. In February 1998, the Company issued 320,783 shares of common stock to a new stockholder, for cash consideration of $50,000. The Company estimated the fair value of this stock at the date of the transaction and recorded compensation expense of $135,000 for the excess of the fair value over the consideration received, with a corresponding increase to additional paid-in capital. 9. RELATED-PARTY TRANSACTIONS: The Company has a consulting agreement with a former stockholder that provides for monthly payments of $7,000 commencing July 1, 1997, and ending June 30, 2005. 10. AGREEMENT TO MERGE WITH LUMINANT: The Company intends to enter into an agreement to be acquired by Luminant. This acquisition is subject to successful completion of an initial public offering of the common stock of Luminant. F-92 INTERACTIVE8, INC. NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 1999, the results of its operations and its cash flows for the six months ended June 30, 1998 and 1999. These financial statements should be read in conjunction with the Company's audited 1998 financial statements, including the notes thereto. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. The following discussions may contain forward-looking statements, which are subject to the risk factors set forth in "Risk Factors" contained in Item 2. B. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following:
JUNE 30, 1999 ------------- Accrued payroll................................................................ $ 121,334 Accrued payroll taxes.......................................................... 8,426 Consulting agreement........................................................... 382,754 Accrued participation rights................................................... 2,888,659 Accrued vacation............................................................... 54,272 Accrued interest............................................................... 82,499 Other.......................................................................... 164,477 ------------- Accrued liabilities.......................................................... $ 3,702,421 ------------- -------------
C. DEBT: The Company has a term loan of $300,000 which bears interest at a fixed rate of 8% per annum payable monthly. Borrowing against this loan was $300,000 at June 30, 1999. The loan will be repayable in 48 monthly installments commencing January 2000. The loan is secured by certain defined assets of the stockholders, including all personal property and fixtures. D. EQUITY INCENTIVE PLANS: Effective July 1, 1998, the Company approved the 1998 Nonqualified Stock Option Plan (the "1998 Plan"), authorizing the Board of Directors to grant nonqualified options to purchase common stock of the Company. The total number of shares of common stock that may be issued under the 1998 Plan is 237,650. Under the terms of the 1998 Plan, the Company can offer certain non-stockholder employees the right to share in the Company's value in the event the Company goes public or is sold to a third party. These are effectively, appreciation rights (the "Rights") that do not represent F-93 INTERACTIVE8, INC. NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS (CONTINUED) D. EQUITY INCENTIVE PLANS: (CONTINUED) ownership or voting interests in the Company. Employees, officers, and directors become eligible to receive Rights grants six months after the commencement of their employment with the Company. Rights vest 50% after six months from the grant date and a further 50% after twelve months from the grant date. Upon a defined event, such as an initial public offering of stock or a sale of the Company, these rights will be converted into a new combination of cash and/or stock dependent upon the structure of the defined event. Prior to such an event, the holders of the Rights cannot exercise the appreciation right. The Rights are nontransferable, and will be forfeited immediately upon an employee's departure from the Company prior to any defined event. Rights outstanding were as follows:
GRANT NUMBER OF PRICE RIGHTS --------- ----------- Rights outstanding at December 31, 1998................................. 94,500 Granted............................................................... $ 7.00 25,600 Exercised............................................................. -- Canceled.............................................................. 8,050 ----------- Rights outstanding at June 30, 1999..................................... 112,050 ----------- -----------
The Rights are considered compensatory equity instruments. As the Rights will be exercisable only upon the occurrence of a defined event, compensation expense is deferred under fixed plan accounting. The date the event is first considered likely to occur, a compensation charge for the cumulative appreciation in the Rights should be recognized. The Company believes that the condition for recognition has been met and has recognized a $2,888,659 cost of services charge during the six months ended June 30, 1999, for the cumulative appreciation in the Rights. Compensation expense recognized during the six months ended June 30, 1999, is equal to the difference between the estimated fair market value of the Company stock at June 30, 1999, and the exercise price. The estimated fair market value is based on the per share value to be received from the Luminant transaction. F-94 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Multimedia Resources, LLC: We have audited the accompanying balance sheets of Multimedia Resources, LLC (a New York limited liability company) as of December 31, 1997 and 1998, and the related statements of operations, members' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Multimedia Resources, LLC as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, April 30, 1999 F-95 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) BALANCE SHEETS
DECEMBER 31, ------------------------ JUNE 30, 1997 1998 1999 ----------- ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................................... $ 100,824 $ 120,903 $ 339,751 Accounts receivable..................................................... 581,346 125,998 353,957 Unbilled revenues....................................................... 21,450 22,502 -- Prepaid expenses and other.............................................. 16,293 5,044 12,906 ----------- ----------- ------------ Total current assets.................................................. 719,913 274,447 706,614 PROPERTY AND EQUIPMENT, net............................................... 72,206 58,886 54,284 OTHER ASSETS.............................................................. 12,315 13,045 13,045 ----------- ----------- ------------ Total assets.......................................................... $ 804,434 $ 346,378 $ 773,943 ----------- ----------- ------------ ----------- ----------- ------------ LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................................ $ 118,652 $ 17,136 $ 66,944 Accrued liabilities..................................................... 231,021 155,202 212,193 Customer deposits....................................................... -- -- -- ----------- ----------- ------------ Total liabilities......................................................... 349,673 172,338 279,137 COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY........................................................... 454,761 174,040 494,806 ----------- ----------- ------------ Total liabilities and members' equity................................. $ 804,434 $ 346,378 $ 773,943 ----------- ----------- ------------ ----------- ----------- ------------
The accompanying notes are an integral part of these financial statements. F-96 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ---------------------------- 1996 1997 1998 1998 1999 ------------- ------------- ------------- ------------- ------------- (UNAUDITED) REVENUES............................. $ 1,928,189 $ 3,476,221 $ 2,068,255 $ 1,351,514 $ 1,628,501 COST OF SERVICES..................... 985,282 2,437,132 1,755,896 1,152,830 888,730 ------------- ------------- ------------- ------------- ------------- GROSS PROFIT......................... 942,907 1,039,089 312,359 198,684 739,771 SELLING, GENERAL AND ADMINISTRATIVE..................... 420,406 536,503 275,199 131,287 282,352 INTEREST INCOME...................... 737 4,576 6,319 5,039 2,305 ------------- ------------- ------------- ------------- ------------- NET INCOME........................... $ 523,238 $ 507,162 $ 43,479 $ 72,436 $ 459,724 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- PRO FORMA INCOME TAX (UNAUDITED)..... 209,295 202,865 9,847 1,389 183,890 ------------- ------------- ------------- ------------- ------------- PRO FORMA NET INCOME (UNAUDITED)..... $ 313,943 $ 304,297 $ 33,632 $ 71,047 $ 275,834 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-97 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF MEMBERS' EQUITY BALANCE, December 31, 1995....................................................... $ 125,626 Distributions to members....................................................... (201,265) Net income..................................................................... 523,238 --------- BALANCE, December 31, 1996....................................................... 447,599 Distributions to members....................................................... (500,000) Net income..................................................................... 507,162 --------- BALANCE, December 31, 1997....................................................... 454,761 Distributions to members....................................................... (324,200) Net income..................................................................... 43,479 --------- BALANCE, December 31, 1998....................................................... 174,040 Distributions to members (unaudited)........................................... (138,958) Net income (unaudited)......................................................... 459,724 --------- BALANCE, June 30, 1999 (unaudited)............................................... $ 494,806 --------- ---------
The accompanying notes are an integral part of these financial statements. F-98 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------ ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ---------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................... $ 523,238 $ 507,162 $ 43,479 $ 72,436 $ 459,724 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation.............................. 4,939 10,521 17,496 8,748 8,748 Changes in assets and liabilities- Accounts receivable..................... (516,353) (11,784) 455,348 176,934 (227,959) Unbilled revenues....................... -- 2,118 (1,052) 21,450 22,502 Prepaid expenses and other.............. (2,720) (13,573) 11,249 13,583 (7,862) Other assets............................ (5,045) (6,875) (730) -- -- Accounts payable........................ 131,311 (12,659) (101,516) 47,251 49,808 Accrued liabilities..................... 62,882 167,477 (75,819) 75,486 56,991 Customer deposits....................... -- -- -- -- -- ----------- ----------- ---------- ----------- ----------- Net cash provided by operating activities............................ 198,252 642,387 348,455 415,888 361,952 ----------- ----------- ---------- ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures.......................... (13,212) (68,732) (4,176) -- (4,146) ----------- ----------- ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to members...................... (201,265) (500,000) (324,200) (184,998) (138,958) ----------- ----------- ---------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... (16,225) 73,655 20,079 230,890 218,848 CASH AND CASH EQUIVALENTS, beginning of period........................... 43,394 27,169 100,824 100,824 120,903 ----------- ----------- ---------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period........ $ 27,169 $ 100,824 $ 120,903 $ 331,714 $ 339,751 ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-99 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Multimedia Resources, LLC (the "Company"), a New York limited liability company, was organized effective March 31, 1995. Using the Internet as its primary platform, the company specializes in business development, relationship building, development and implementation of marketing and media programs, and technology innovation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using a straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses reflected in the statements of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance and repairs are expensed as incurred. INCOME TAXES As a limited liability company, the Company pays no federal income tax, but rather its members are taxed individually on the Company's taxable income or loss. Accordingly, no provisions for federal income taxes are reflected in the accompanying financial statements. The unaudited pro forma tax information included in the accompanying statements of operations reflects estimates of the Company's tax provision or benefit as if it had been a C corporation in fiscal years 1996, 1997, and 1998. REVENUE RECOGNITION Revenues are recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Unbilled revenues on contracts are comprised of labor costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. COST OF SERVICES Cost of services is comprised primarily of salaries, employee benefits, and incentive compensation of billable employees and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. F-100 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts that approximate fair value due to their relative short maturity and/or their variable interest rates. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 3. SIGNIFICANT CUSTOMERS: During the year ended December 31, 1996, sales to one customer accounted for 52% of revenues. During the year ended December 31, 1997, sales to two customers accounted for 77% of revenues. During the year ended December 31, 1998, sales to one customer accounted for 34% of revenues. 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 --------- ---------- ---------- Computers and equipment....................................................... 3-5 $ 47,930 $ 52,106 Furniture and fixtures........................................................ 5-7 41,301 41,301 ---------- ---------- 89,231 93,407 Less--Accumulated depreciation................................................ (17,025) (34,521) ---------- ---------- Property and equipment, net................................................. $ 72,206 $ 58,886 ---------- ---------- ---------- ----------
Depreciation expense was $4,939, $10,521, and $17,496 for the years ended December 31, 1996, 1997, and 1998, respectively. F-101 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 ----------- ----------- Profit sharing plan contribution........................................................ $ 116,010 $ 150,344 Accrued bonuses......................................................................... 104,400 -- Other................................................................................... 10,611 4,858 ----------- ----------- Accrued liabilities................................................................... $ 231,021 $ 155,202 ----------- ----------- ----------- -----------
6. COMMITMENTS AND CONTINGENCIES: The Company sponsors a profit sharing and money purchase plan that covers employees who are at least 21 years old and have at least one year of service with the Company. Contributions to the profit sharing plan are at the discretion of the Company. The Company contributes 4.8% of employees' compensation to the money purchase plan. Contributions to the plans were $63,744, $116,010, and $150,344 during 1996, 1997, and 1998, respectively. The Company leases its office facilities under noncancelable operating leases which expire in January 2002. The leases require the payment of property taxes, insurance, and maintenance. The Company also has operating lease agreements related to certain equipment which expire at various dates. Rent expense for the years ended December 1996, 1997, and 1998, totaled $2,945, $54,939, and $77,468, respectively. Future minimum lease payments are as follows:
OPERATING LEASES ----------- 1999............................................................................. $ 78,401 2000............................................................................. 82,242 2001............................................................................. 85,538 2002............................................................................. 7,203 2003............................................................................. -- Thereafter....................................................................... -- ----------- Total future minimum lease payments.............................................. $ 253,384 ----------- -----------
In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on its financial condition or results of operations. 7. AGREEMENT TO MERGE WITH LUMINANT: The Company intends to enter into an agreement to be acquired by Luminant. This acquisition is subject to successful completion of an initial public offering of the common stock of Luminant. F-102 MULTIMEDIA RESOURCES, LLC (A LIMITED LIABILITY COMPANY) NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions from Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 1999, the results of its operations and its cash flows for the six months ended June 30, 1998 and 1999. These financial statements should be read in conjunction with the Company's audited 1998 financial statements, including the notes thereto. Operating results for the six months ended June 30, 1999, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. F-103 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Potomac Partners Management Consulting, LLC: We have audited the accompanying balance sheets of Potomac Partners Management Consulting, LLC (a Delaware limited liability company) as of December 31, 1997 and 1998, and the related statements of operations, members' equity, and cash flows for the period from inception (November 10, 1997), to December 31, 1997, and for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Potomac Partners Management Consulting, LLC as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from inception (November 10, 1997), to December 31, 1997, and for the year ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 5, 1999 F-104 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) BALANCE SHEETS
DECEMBER 31, -------------------------- JUNE 30, 1997 1998 1999 ----------- ------------- -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................... $ 164,503 $ 892,336 $ 951,795 Accounts receivable, net of allowance for doubtful accounts of $37,400, $132,400, and $225,880 (unaudited)...................... 51,437 683,797 2,430,354 Unbilled revenues.................................................. 185,300 420,353 -- Prepaid expenses and other......................................... 934 24,015 74,886 ----------- ------------- -------------- Total current assets............................................. 402,174 2,020,501 3,457,035 PROPERTY AND EQUIPMENT, net.......................................... 24,523 51,288 72,735 ----------- ------------- -------------- Total assets..................................................... $ 426,697 $ 2,071,789 $ 3,529,770 ----------- ------------- -------------- ----------- ------------- -------------- LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................... $ -- $ 175,170 $ 815,423 Accrued liabilities................................................ 129,699 2,142,854 8,592,752 ----------- ------------- -------------- Total liabilities................................................ 129,699 2,318,024 9,408,175 COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY...................................................... 296,998 (246,235) (5,878,405) ----------- ------------- -------------- Total liabilities and members' equity............................ $ 426,697 $ 2,071,789 $ 3,529,770 ----------- ------------- -------------- ----------- ------------- --------------
The accompanying notes are an integral part of these financial statements. F-105 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION FOR THE (NOVEMBER 10, 1997) FOR THE SIX MONTHS ENDED TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------------- 1997 1998 1998 1999 -------------------- -------------- ------------- -------------- (UNAUDITED) REVENUES.................................... $ 372,600 $ 4,886,543 $ 1,961,200 $ 4,917,498 COST OF SERVICES............................ 290,360 5,086,176 1,569,678 9,228,718 ---------- -------------- ------------- -------------- GROSS PROFIT................................ 82,240 (199,633) 391,522 (4,311,220) SELLING, GENERAL AND ADMINISTRATIVE......... 86,239 876,226 414,958 1,081,956 OTHER INCOME (EXPENSE)...................... 997 30,618 4,740 (27,284) ---------- -------------- ------------- -------------- NET INCOME (LOSS)........................... $ (3,002) $ (1,045,241) $ (18,696) $ (5,420,460) ---------- -------------- ------------- -------------- ---------- -------------- ------------- -------------- PRO FORMA INCOME TAX (UNAUDITED)............ -- -- -- -- ---------- -------------- ------------- -------------- PRO FORMA NET INCOME (LOSS) (UNAUDITED)..... $ (3,002) $ (1,045,241) $ (18,696) $ (5,420,460) ---------- -------------- ------------- -------------- ---------- -------------- ------------- --------------
The accompanying notes are an integral part of these financial statements. F-106 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF MEMBERS' EQUITY BALANCE, November 10, 1997 (inception)......................................... $ -- Capital contributions- Issuance of member units at stated value................................... 600,000 Members' notes in lieu of cash contributions............................... (300,000) ----------- Net capital contributions................................................ 300,000 Net loss..................................................................... (3,002) ----------- BALANCE, December 31, 1997..................................................... 296,998 Capital contributions- Issuance of member units at stated value................................... 337,500 Members' notes in lieu of cash contributions............................... (100,000) Payments on notes from members............................................. 300,000 ----------- Net capital contributions................................................ 537,500 Redemption of member units................................................... (35,492) Net loss..................................................................... (1,045,241) ----------- BALANCE, December 31, 1998..................................................... (246,235) Capital contributions- Issuance of member units at stated value (unaudited)....................... 382,300 Members' notes in lieu of cash contributions (unaudited)................... (85,900) Payments on notes from members (unaudited)................................. 100,000 ----------- Net capital contributions (unaudited).................................... 396,400 Redemption of member units (unaudited)....................................... (608,112) Net loss (unaudited)......................................................... (5,420,460) ----------- BALANCE, June 30, 1999 (unaudited)............................................. $(5,878,407) ----------- -----------
The accompanying notes are an integral part of these financial statements. F-107 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION FOR THE (NOVEMBER 10, 1997) FOR THE SIX MONTHS ENDED TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, --------------------------- 1997 1998 1998 1999 -------------------- -------------- ----------- -------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................... $ (3,002) $ (1,045,241) $ (18,694) $ (5,420,460) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization............. 205 25,528 12,860 12,823 Equity related compensation............... -- 1,503,000 -- 5,825,590 Changes in assets and liabilities- Accounts receivable..................... (51,437) (632,360) (826,481) (2,211,752) Unbilled revenues....................... (185,300) (235,053) 170,300 420,353 Prepaid expenses and other.............. (934) (23,082) (44,259) (64,995) Accounts payable........................ -- 175,170 37,364 687,973 Accrued liabilities..................... 129,699 510,155 477,917 632,086 ---------- -------------- ----------- -------------- Net cash provided by (used in) operating activities................ (110,769) 278,117 (190,993) (118,382) ---------- -------------- ----------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................ (24,728) (52,292) (34,630) (34,270) ---------- -------------- ----------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions....................... 300,000 537,500 238,562 396,402 Redemption of member units.................. -- (35,492) -- (184,291) ---------- -------------- ----------- -------------- Net cash provided by financing activities.......................... 300,000 502,008 238,562 212,111 ---------- -------------- ----------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS..... 164,503 727,833 12,939 59,459 CASH AND CASH EQUIVALENTS, beginning of period...................................... -- 164,503 164,503 892,336 ---------- -------------- ----------- -------------- CASH AND CASH EQUIVALENTS, end of period...... $ 164,503 $ 892,336 $ 177,442 $ 951,795 ---------- -------------- ----------- -------------- ---------- -------------- ----------- -------------- SUPPLEMENTAL INFORMATION: Issuance of member units for notes receivable.................................. $ 300,000 $ 100,000 $ -- $ 85,900 ---------- -------------- ----------- -------------- ---------- -------------- ----------- --------------
The accompanying notes are an integral part of these financial statements. F-108 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Potomac Partners Management Consulting, LLC (the "Company") specializes in electronic commerce and Internet related consulting services. The Company offers consulting services in three primary areas: business and strategy, program management, and application design. The Company was formed in the State of Delaware on November 10, 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using a straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses are reflected in the statement of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance and repairs are expensed as incurred. INCOME TAXES As a limited liability company, the Company pays no federal income tax, but rather the members are taxed individually on the Company's taxable income. Accordingly, no provisions for federal income taxes are reflected in the accompanying financial statements. The unaudited pro forma tax information included in the accompanying statements of operations reflect estimates of the Company's tax provision or benefit as if it had been a C corporation in fiscal years 1997 and 1998. In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax benefit was reflected due to the Company's recurring losses and the uncertainty related to the realization of any tax assets. REVENUE RECOGNITION Revenues are recognized on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Unbilled revenues on contracts are comprised of labor costs incurred, plus earnings on certain contracts which have not been billed. Provisions for losses are recorded in the period such items are identified. COST OF SERVICES Cost of services are comprised primarily of salaries, employee benefits, and incentive compensation of billable employees and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. ACCOUNTING FOR PARTICIPATION APPRECIATION RIGHTS AND MEMBER APPRECIATION RIGHTS In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows F-109 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) either adoption of a fair value based method of accounting for stock-based compensation or continuation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to account for stock-based compensation using the intrinsic value based method prescribed in APB 25 and to provide the pro forma disclosure provision of SFAS 123. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to the relatively short maturity of these instruments. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 3. SIGNIFICANT CUSTOMERS: During the period from inception (November 10, 1997) through December 31, 1997, sales to two customers accounted for 48% and 46% of revenue. During the year ended December 31, 1998, sales to the Company's four largest customers accounted for 26%, 18%, 17%, and 13% of revenue. As of December 31, 1998, accounts receivable from the Company's four largest customers accounted for 26%, 24%, 17%, and 15% of total accounts receivable. F-110 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ----------- --------- --------- Computers and equipment........................................................... 1-3 $ 24,728 $ 76,342 Furniture and fixtures............................................................ 3 -- 679 --------- --------- 24,728 77,021 Less- Accumulated depreciation.................................................... (205) (25,733) --------- --------- Property and equipment, net................................................ $ 24,523 $ 51,288 --------- --------- --------- ---------
Depreciation expense was $205 and $25,528 for the years ended December 31, 1997 and 1998. 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 ----------- ------------- Member bonus payable.............................................. $ 72,300 $ 485,332 Employee bonus payable............................................ 3,100 100,000 Participation appreciation rights................................. -- 1,503,000 Other............................................................. 54,299 54,522 ----------- ------------- Accrued liabilities........................................... $ 129,699 $ 2,142,854 ----------- ------------- ----------- -------------
6. COMMITMENTS AND CONTINGENCIES: The Company sponsors a profit sharing plan (the "Plan") that covers employees who are at least 21 years old and have at least one hour of service with the Company. Contributions to the Plan are at the discretion of the Company. There were no contributions to the Plan during 1997 and 1998. In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on financial position or results of operations. 7. EQUITY INCENTIVE PLANS: PARTICIPATION APPRECIATION RIGHTS The Company offers all non-member professionals the right to share in the Company's value in the event the Company consummates an initial public offering or is sold to a third party. These appreciation rights (the "Non-Member Rights") do not represent ownership or voting interests or membership in the Company. The Non-Member Rights are awarded at the time an employee signs an employment offer letter from the Company and at various points during employment based on performance. Upon a defined event, such as an initial public offering of stock or a sale of the Company, these rights will be converted into a new combination of cash F-111 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. EQUITY INCENTIVE PLANS: (CONTINUED) and/or securities (options, stock, restricted stock) dependent upon the structure of the defined event. Prior to such an event, the holders of the rights have no rights to exercise the instruments. The Non-Member Rights are nontransferable, and will be forfeited immediately upon an employee's departure from the Company prior to any defined event.
RANGE OF NUMBER OF GRANT PRICES RIGHTS --------------- ----------- Rights outstanding at inception (November 10, 1997)................................ -- Granted.......................................................................... $0.33 90,000 Exercised........................................................................ -- Canceled......................................................................... -- ----------- Rights outstanding at December 31, 1997............................................ 90,000 Granted.......................................................................... $1.00-$4.05 223,500 Exercised........................................................................ -- Canceled......................................................................... -- ----------- Rights outstanding at December 31, 1998............................................ 313,500 ----------- -----------
The Non-Member Rights are considered compensatory equity instruments. As the Non-Member Rights will be exercisable only upon the occurrence of a defined event, compensation expense is deferred under fixed plan accounting. The date the event is first considered likely to occur, a compensation charge for the cumulative appreciation in the Non-Member Rights should be recognized. The Company believes that the condition for recognition has been met and has recognized a $1,503,000 cost of services charge during 1998 for the cumulative appreciation in the Non-Member Rights. Compensation expense recognized during 1998 is equal to the increase in the estimated fair market value of the Company's units since date of grant multiplied by the total number of rights outstanding. The estimated fair market value was based upon capital transactions during 1998. MEMBER APPRECIATION RIGHTS The Company grants member appreciation rights ("Member Rights") to its members upon the acquisition of a membership interest in the Company and during the year based on performance. The Member Rights vest ratably over a three-year period. The grant price of each Member Right is equal to the estimated fair market value of each member unit on the date of grant. Upon a defined event, such as an initial public offering of stock or a sale of the Company, these Member Rights will be converted into a new combination of cash and/or securities (options, stock, restricted stock) dependent upon the structure of the defined event. Prior to such an event, the holders of the rights have no rights to exercise the instruments. The Member Rights are nontransferable, and will be forfeited upon a member's departure from the Company prior to any defined event. F-112 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. EQUITY INCENTIVE PLANS: (CONTINUED) Member Rights outstanding during 1997 and 1998, were as follows:
RANGE OF NUMBER OF GRANT PRICES RIGHTS ------------- ----------- Rights outstanding at inception (November 10, 1997)................ -- Granted.......................................................... -- Exercised........................................................ -- Canceled......................................................... -- ----------- Rights outstanding at December 31, 1997............................ -- Granted.......................................................... $ 6.50 33,716 Exercised........................................................ -- Canceled......................................................... -- ----------- Rights outstanding at December 31, 1998............................ 33,716 ----------- -----------
The Member Rights are considered compensatory equity instruments. As the vested Member Rights will be exercisable only upon the occurrence of a defined event, compensation expense is deferred under fixed plan accounting. The date the event is first considered likely to occur, a compensation charge for the cumulative appreciation in the Member Rights should be recognized. The Company recognized no charge during 1998 as these Member Rights were granted in December 1998 and none were vested. 8. RELATED-PARTY TRANSACTIONS: At December 31, 1997, the Company had interest-bearing notes receivable from two of its members totaling $150,000 each. At December 31, 1998, the Company had a $100,000 interest-bearing note receivable from one of its members. All notes bear interest at 6% annually and have a term of twelve months. All notes were related to members' capital contributions and have been recorded as an offset to members' equity. The Company recognized interest income of $18,000 during 1998. At December 31, 1997 and 1998, the Company's accrued expenses included employee expenses of $53,236 and $4,646, respectively. 9. SUBSEQUENT EVENTS: Effective January 1, 1999, certain of the Company's Members (the "Exiting Members") dissolved their interest in the Company to form a new Limited Liability Company called Potomac Ventures, LLC. Their interest was dissolved by the transfer of 45% of the aggregate net assets of the Company to the Exiting Members in exchange for the Exiting Member's units in the Company. There is no co-ownership between the companies; however, they share the same Advisory Board (as defined). The Company and Potomac Ventures, LLC, entered into a cross services agreement during 1999, whereby the two companies agree to share certain administrative services. 10. AGREEMENT TO MERGE WITH LUMINANT: The Company intends to enter into an agreement to be acquired by Luminant. This acquisition is subject to the successful completion of an initial public offering of the common stock of Luminant. F-113 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to and Rule10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 1999, the results of its operations and its cash flows for the six months ended June 30, 1998 and 1999. These financial statements should be read in conjunction with the Company's audited 1998 financial statements, including the notes thereto. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. B. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following:
JUNE 30, 1999 ------------- Member bonus payable........................................................... $ 734,250 Employee bonus payable......................................................... 302,633 Participation appreciation rights.............................................. 7,328,590 Other.......................................................................... 227,279 ------------- Accrued liabilities........................................................ $ 8,592,752 ------------- -------------
C. EQUITY INCENTIVE PLANS: PARTICIPATION APPRECIATION RIGHTS The Company offers all non-member professionals the right to share in the Company's value in the event the Company consummates an initial public offering or is sold to a third party. These appreciation rights (the "Non-Member Rights") do not represent ownership or voting interests or membership in the Company. The Non-Member Rights are awarded at the time an employee signs an employment offer letter from the Company and at various points during employment based on performance. Upon a defined event, such as an initial public offering of stock or a sale of the Company, these rights will be converted into a new combination of cash and/or securities (options, stock, restricted stock) dependent upon the structure of the defined event. Prior to such an event, the holders of the rights have no rights to exercise the F-114 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS C. EQUITY INCENTIVE PLANS: (CONTINUED) instruments. The Non-Member Rights are nontransferable, and will be forfeited immediately upon an employee's departure from the Company prior to any defined event.
RANGE OF NUMBER OF GRANT PRICES RIGHTS -------------- ----------- Rights outstanding at December 31, 1998.......................... 313,500 Granted........................................................ $ 6.84-$7.58 23,932 Exercised...................................................... -- Canceled....................................................... $ 1.00-$2.85 (144,000) -------------- ----------- Rights outstanding at June 30, 1999.............................. 193,432 ----------- -----------
The Non-Member Rights are considered compensatory equity instruments. As the Non-Member Rights will be exercisable only upon the occurrence of a defined event, compensation expense is deferred under fixed plan accounting. The date the event is first considered likely to occur, a compensation charge for the cumulative appreciation in the Non-Member Rights should be recognized. The Company believes that the condition for recognition has been met and has recognized $4,369,335 as a cost of services charge during 1999 for the cumulative appreciation in the Non-Member Rights. Compensation expense recognized during 1999 is equal to the increase in the estimated fair market value of the Company's units since date of grant multiplied by the total number of rights outstanding. The estimated fair market value is based on the per share value to be received from the Luminant transaction. MEMBER APPRECIATION RIGHTS The Company grants member appreciation rights ("Member Rights") to its members on admission into the Company ownership and during the year based on performance. The Member Rights vest ratably over a three-year period. The grant price of each Member Right is equal to the estimated fair market value of each member unit on the date of grant. Upon a defined event, such as an initial public offering of stock or a sale of the Company, these Member Rights will be converted into a new combination of cash and/or securities (options, stock, restricted stock) dependent upon the structure of the defined event. Prior to such an event, the holders of the rights have no rights to exercise the instruments. The Member Rights are nontransferable, and will be forfeited immediately upon a member's departure from the Company prior to any defined event.
RANGE OF NUMBER OF GRANT PRICES RIGHTS -------------- ----------- Rights outstanding at December 31, 1998.............................................. 33,716 Granted............................................................................ $ 6.50-$7.58 171,422 Exercised.......................................................................... -- Canceled........................................................................... -- ----------- Rights outstanding at June 30, 1999.................................................. 205,138 ----------- -----------
F-115 POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC (A LIMITED LIABILITY COMPANY) NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS C. EQUITY INCENTIVE PLANS: (CONTINUED) The Member Rights are considered compensatory equity instruments. As the vested Member Rights will be exercisable only upon the occurrence of a defined event, compensation expense is deferred under fixed plan accounting. The date the event is first considered likely to occur, a compensation charge for the cumulative appreciation in the Member Rights should be recognized. The Company believes that the condition for recognition has been met and has recognized $1,456,255 cost of service charge during 1999 for the cumulative appreciation in Member Rights. Compensation expense recognized during 1999 is equal to the increase in the estimated fair market value of the Company's units since the date of the grant multiplied by the total number of rights outstanding. The estimated fair market value is based on the per share value to be received from the Luminant transaction. D. EQUITY: Effective January 1, 1999, certain of the Company's members (the "Exiting Members") dissolved their interest in the Company to form a new Limited Liability Company called Potomac Venturers LLC. Their interest was dissolved by the transfer of 45% of the aggregate net assets of the Company (approximately $600,000) to the Exiting Members in exchange for the Exiting Members' units in the Company. There is no co-ownership between the companies; however, they share the same Advisory Board (as defined). The Company and Potomac Ventures, LLC entered into a cross services agreement during 1999, whereby the two companies agree to share certain administrative services. E. RELATED-PARTY TRANSACTIONS: At June 30, 1999, the Company had a $85,900 interest-bearing note receivable from one of its members. The note bears interest at 6% annually and has a term of 12 months. The note relates to members' capital contributions and has been recorded as an offset to members' equity. F-116 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To RSI Group, Inc.: We have audited the accompanying consolidated balance sheets of RSI Group, Inc. (a Texas S corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RSI Group, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 8, 1999 F-117 RSI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- JUNE 30, 1997 1998 1999 ------------- ------------- ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents......................................... $ 13,726 $ 30,495 $ 35,819 Accounts receivable, net of allowance for doubtful accounts of $129,978, $199,065, and $191,460 (unaudited).................... 2,880,383 3,147,714 2,336,999 Unbilled revenues................................................. 40,868 76,542 82,629 Employee and other receivables.................................... 83,860 58,047 106,408 Prepaid expenses and other........................................ 99,773 112,739 107,929 ------------- ------------- ------------- Total current assets............................................ 3,118,610 3,425,537 2,669,784 PROPERTY AND EQUIPMENT, net......................................... 248,942 325,377 277,761 OTHER ASSETS: Goodwill, net of accumulated amortization of $2,950, $38,250 and $47,100 (unaudited)............................................. 67,671 36,967 19,267 Other............................................................. 97,549 148,280 177,754 ------------- ------------- ------------- Total assets.................................................... $ 3,532,772 $ 3,936,161 $ 3,144,566 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, including cash overdraft of $299,751, $429,461, and $270,960 (unaudited)........................................ $ 492,088 $ 540,866 $ 503,369 Accrued liabilities............................................... 254,403 279,997 524,566 Notes payable..................................................... 1,530,990 1,750,712 988,482 Current maturities of long-term debt.............................. 82,512 62,184 68,880 ------------- ------------- ------------- Total current liabilities....................................... 2,359,993 2,633,759 2,085,297 LONG-TERM LIABILITIES: Long-term debt, net of current maturities......................... 6,693 36,259 -- ------------- ------------- ------------- Total liabilities............................................... 2,366,686 2,670,018 2,085,297 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST................................................... 90,183 168,310 100,970 STOCKHOLDERS' EQUITY: Common stock, voting: $.20 par value, 175,000 shares authorized and issued, 162,351 shares outstanding as of 1997, 1998 and 1999 (unaudited)..................................................... 35,000 35,000 35,000 Additional paid-in capital........................................ 222,268 222,268 952,268 Retained earnings................................................. 1,026,028 1,047,958 178,424 Less--Treasury stock; at cost, 12,649 shares at 1997, 1998 and 1999 (unaudited)................................................ (207,393) (207,393) (207,393) ------------- ------------- ------------- Total stockholders' equity...................................... 1,075,903 1,097,833 958,299 ------------- ------------- ------------- Total liabilities and stockholders' equity...................... $ 3,532,772 $ 3,936,161 $ 3,144,566 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-118 RSI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- ---------------------------- 1996 1997 1998 1998 1999 -------------- -------------- -------------- ------------- ------------- (UNAUDITED) REVENUES......................... $ 16,133,004 $ 15,723,685 $ 16,926,779 $ 8,460,573 $ 6,638,707 COST OF SERVICES................. 11,663,140 11,649,968 12,271,093 6,141,247 4,802,973 -------------- -------------- -------------- ------------- ------------- GROSS PROFIT..................... 4,469,864 4,073,717 4,655,686 2,319,326 1,835,734 SELLING, GENERAL AND ADMINISTRATIVE................. 4,104,567 3,744,606 4,252,682 2,170,776 2,599,947 INTEREST EXPENSE................. 122,043 142,773 169,178 69,012 47,320 MINORITY INTEREST................ -- 108,767 161,896 11,886 (21,999) -------------- -------------- -------------- ------------- ------------- NET INCOME (LOSS)................ $ 243,254 $ 77,571 $ 71,930 $ 67,652 $ (789,534) -------------- -------------- -------------- ------------- ------------- -------------- -------------- -------------- ------------- ------------- PRO FORMA INCOME TAXES (BENEFIT) (UNAUDITED).................... 87,109 27,716 28,477 26,783 (265,994) -------------- -------------- -------------- ------------- ------------- PRO FORMA NET INCOME (UNAUDITED).................... $ 156,145 $ 49,855 $ 43,453 $ 40,869 $ (523,540) -------------- -------------- -------------- ------------- ------------- -------------- -------------- -------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-119 RSI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK --------- ----------- ------------- ------------ BALANCE, December 31, 1995.................................. $ 35,000 $ 50,083 $ 1,015,203 $ (196,370) Purchase of treasury stock................................ -- -- -- (11,023) Equity related compensation............................... -- 172,185 -- -- Dividends................................................. -- -- (90,000) -- Net income................................................ -- -- 243,254 -- --------- ----------- ------------- ------------ BALANCE, December 31, 1996.................................. 35,000 222,268 1,168,457 (207,393) Dividends................................................. -- -- (220,000) -- Net income................................................ -- -- 77,571 -- --------- ----------- ------------- ------------ BALANCE, December 31, 1997.................................. 35,000 222,268 1,026,028 (207,393) Dividends................................................. -- -- (50,000) -- Net income................................................ -- -- 71,930 -- --------- ----------- ------------- ------------ BALANCE, December 31, 1998.................................. 35,000 222,268 1,047,958 (207,393) Dividends (unaudited)..................................... -- -- (80,000) -- Equity related compensation (unaudited)................... -- 730,000 -- -- Net loss (unaudited)...................................... -- -- (789,534) -- --------- ----------- ------------- ------------ BALANCE, June 30, 1999 (unaudited).......................... $ 35,000 $ 952,268 $ 178,424 $ (207,393) --------- ----------- ------------- ------------ --------- ----------- ------------- ------------
The accompanying notes are an integral part of these consolidated financial statements. F-120 RSI GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- -------------------------- 1996 1997 1998 1998 1999 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................... $ 243,254 $ 77,571 $ 71,930 $ 67,652 $ (789,534) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization........... 56,754 84,884 158,148 81,699 73,227 Minority interest, net of payments made.................................. -- 108,767 78,127 19,477 (67,340) Equity related compensation............. 172,185 -- -- -- 730,000 Changes in assets and liabilities- Accounts receivable................... (270,359) (137,137) (267,331) 168,830 810,715 Unbilled revenues..................... 13,364 (11,085) (35,674) (7,258) (6,087) Employee and other receivables........ 8,969 (37,701) 25,813 15,709 (48,361) Prepaid expenses and other............ (48,644) 30,276 (12,966) (30,193) 4,810 Other assets.......................... (27,481) (47,186) (55,327) (19,811) (29,474) Accounts payable, including cash overdraft........................... 174,865 96,991 48,778 (8,100) (37,497) Accrued liabilities................... 10,473 81,795 25,594 2,111 244,569 ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities........................ 333,380 247,175 37,092 290,116 885,028 ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................... (66,472) (178,754) (199,283) (139,003) (7,911) ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (repayments) from notes payable, net..................................... (59,548) 176,857 219,722 (163,164) (762,230) Proceeds from long-term debt.............. -- -- 124,403 88,619 -- Payments on long-term debt................ (64,260) (53,629) (115,165) (42,373) (29,563) Purchases of treasury stock............... (11,023) -- -- -- -- Dividends................................. (90,000) (220,000) (50,000) -- (80,000) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities.............. (224,831) (96,772) 178,960 (116,918) (871,793) ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 42,077 (28,351) 16,769 34,195 5,324 CASH AND CASH EQUIVALENTS, beginning of period.................................... -- 42,077 13,726 13,726 30,495 ------------ ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period.... $ 42,077 $ 13,726 $ 30,495 $ 47,921 $ 35,819 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL INFORMATION: Cash paid for interest.................... $ 122,043 $ 130,773 $ 170,229 $ 89,418 $ 58,269 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-121 RSI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: RSI Group, Inc. (the "Company") is a professional data processing services company incorporated in the State of Texas on October 26, 1984. The primary activity of the Company is to provide data processing personnel to other companies on a consulting and contract staffing basis. The Company is an S corporation for federal income tax purposes and, accordingly, acts as a flow-through entity for the Company's stockholders. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. At December 31, 1998, the Company owns 80% of a Texas limited liability company, Resource Solutions International ("RSI") East, LLC, and has three other wholly owned subsidiaries. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the assets' estimated useful lives. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses reflected in the consolidated statements of operations. Repair and maintenance costs that do not extend the useful life of the asset are charged to expense as incurred. GOODWILL Goodwill represents the excess of the aggregate consideration paid by the Company in excess of the carrying value of the minority interests acquired. Goodwill is amortized on a straight-line basis over two years. Amortization expense totaled $2,950 and $35,300 in 1997 and 1998, respectively. INCOME TAXES As an S corporation, the Company pays no federal income tax, but rather the stockholders are taxed individually on the Company's taxable income or loss. Accordingly, no provision for federal income tax is reflected in the accompanying consolidated financial statements. The unaudited pro forma federal income tax information included in the accompanying consolidated statements of operations reflect estimates of the Company's tax provision as if it had been a C corporation in fiscal years 1996, 1997, and 1998. F-122 RSI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) MINORITY INTEREST Minority interest represents the accumulated undistributed earnings attributable to the minority owners of consolidated subsidiaries. REVENUE RECOGNITION Revenue for professional services is recognized at the time such services are rendered. COST OF SERVICES Cost of services are comprised primarily of salaries, employee benefits, and incentive compensation of billable employees. ACCOUNTING FOR EQUITY BASED COMPENSATION The Company has granted minority interests in its consolidated subsidiaries to certain management personnel. At the time of grant, the Company recorded compensation expense for the fair value of the minority interest with corresponding credits to additional paid-in capital. In addition, in 1996 the Company had an equity participation plan, which has been replaced with the minority interest participation discussed above. Compensation expense was recorded in 1996 for the appreciation in equity value under this plan. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to their relative short maturity and/or their variable interest rates. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130"), "REPORTING COMPREHENSIVE INCOME," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. F-123 RSI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SIGNIFICANT CUSTOMERS: During 1996, sales to two customers accounted for 21% and 18% of revenues. During 1997, sales to three customers accounted for 28%, 17%, and 10% of revenues. During 1998, sales to two customers accounted for 34% and 13% of revenues. As of December 31, 1998, two customers accounted for approximately 39% and 11% of trade accounts receivable. 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ------ ------------ ------------ Computers and equipment...................................................... 3 $ 366,261 $ 544,743 Furniture and fixtures....................................................... 5 356,511 377,312 ------------ ------------ 722,772 922,055 Less- Accumulated depreciation............................................... (473,830) (596,678) ------------ ------------ Property and equipment, net........................................... $ 248,942 $ 325,377 ------------ ------------ ------------ ------------
Depreciation expense during 1996, 1997, and 1998 was $56,754, $81,934, and $122,848, respectively. 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 ----------- ----------- Accrued vacation.................................................... $ 153,851 $ 184,076 Other............................................................... 100,552 95,921 ----------- ----------- Accrued liabilities........................................... $ 254,403 $ 279,997 ----------- ----------- ----------- -----------
6. DEBT: The Company's note payable consists of a bank line of credit, in the amount of $2,400,000, upon which $1,530,990 and $1,750,712 was drawn at December 31, 1997 and 1998. The line of credit is renewable annually on June 15, and contains several restrictive covenants, the most restrictive of which requires the Company to maintain certain financial ratios related to total debt, tangible net worth, and working capital. At December 31, 1998, the Company was in compliance with or had obtained waivers for all debt covenants. Management believes that the Company will be able to refinance the line of credit under similar terms. Advances on the line of credit are limited to 75% of the accounts receivable that are less than 90 days past the invoice date, and are secured by accounts receivable and other assets of the Company. Certain stockholders have guaranteed the line of credit. Interest is payable monthly at 1.25% above prime, or 9.0% at December 31, 1998. Commitment fees of one-half of one percent (.5%) per annum of the average unused line of credit for the preceding quarter are paid quarterly. F-124 RSI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DEBT: (CONTINUED) The Company's long-term debt consists of a term loan from a bank and debt payable to a former minority interest holder. The term loan was obtained on July 8, 1998, to finance certain equipment and furniture purchases. The note is secured by all equipment and furniture owned by the Company and is guaranteed by certain stockholders. Principle and interest is payable monthly with the final payment due on July 8, 2000. Interest is at 1.25% above prime, or 9.0% at December 31, 1998. Debt related to the former minority interest holder originated on November 30, 1997, in connection with the repurchase of a minority interest in a subsidiary by the Company. The debt was non-interest bearing and was paid in 1998. Debt at December 31, 1997 and 1998, are comprised of the following:
1997 1998 --------- --------- Term loan.............................................................. $ -- $ 98,443 Loan from former minority interest holder.............................. 89,205 -- --------- --------- Total debt....................................................... 89,205 98,443 Less- Current maturities............................................... (82,512) (62,184) --------- --------- Long-term debt................................................... $ 6,693 $ 36,259 --------- --------- --------- ---------
7. COMMITMENTS AND CONTINGENCIES: The Company maintains a defined contribution retirement plan for employees who have at least one year of continuous service. The Plan entitles employees to make pre-tax contributions to the Plan and the Company to make contributions at the discretion of the Board of Directors. No Company contributions were made in 1996, 1997, or 1998. The Company leases office space and equipment under several different operating lease arrangements for terms ranging from one to five years. At December 31, 1998, the Company was committed under noncancelable operating leases which extend beyond 1998 as follows: 1999............................................................. $ 230,298 2000............................................................. 173,088 2001............................................................. 69,345 2002............................................................. 40,337 2003............................................................. 25,496 Thereafter....................................................... -- --------- Total future minimum lease payments.............................. $ 538,564 --------- ---------
Rental expense related to operating leases was $192,238, $272,567, and $295,351 in 1996, 1997, and 1998, respectively. In the ordinary course of business the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on the financial position or results of operations. F-125 RSI GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EQUITY INCENTIVE PLANS: During 1996, certain management personnel participated in the Company's Equity Sharing Unit Plan (the "Equity Plan"). Under the Equity Plan employees were given the opportunity to participate in the earnings and appreciation of the Company through periodic cash distributions and increases in the value of their equity units. In 1996, the Company recorded expense related to the plan of $273,435. The non-cash portion of this expense related to the appreciation of the equity units was recorded as a credit to additional paid-in capital. The Equity Plan was terminated on December 31, 1996, and the participants exchanged their units in the Equity Plan for minority interests in the Company's subsidiaries. In 1997, the Company reacquired certain minority interests in exchange for a loan payable in the amount of $89,205. In 1998, the Company reacquired certain minority interests for $7,400. 9. SUBSEQUENT EVENT: In January 1999, the Company merged all of its subsidiaries into a single legal entity and provided a minority shareholder and employee with a 20% interest in the resulting subsidiary. The Company recorded compensation expense of approximately $730,000 related to this event in 1999. Concurrent with the minority interest grant, the buyout provisions of the minority interest agreement were amended such that upon a sale of the Company, the minority owner will exchange his minority interest for 20% of the sale proceeds. 10. AGREEMENT TO MERGE WITH LUMINANT: The Company intends to enter into an agreement to be acquired by Luminant. This acquisition is subject to the successful completion of an initial public offering of the common stock of Luminant. F-126 RSI GROUP, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED JUNE 30, 1998 AND 1999 FINANCIAL STATEMENTS A. BASIS OF PRESENTATION: The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions from Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 1999, the results of its operations and its cash flows for the six months ended June 30, 1998 and 1999. These financial statements should be read in conjunction with the Company's audited 1998 financial statements, including the notes thereto. Operating results for the six months ended June 30, 1999, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1999. B. SIGNIFICANT CUSTOMERS: During the six months ended June 30, 1999, sales to two customers accounted for 44% and 11% of revenues. C. DEBT: The Company's note payable consists of a bank line of credit, in the amount of $2,400,000, upon which $988,482 was drawn at June 30, 1999. The line of credit is renewable annually on June 15, and contains several restrictive covenants, the most restrictive of which requires the Company to maintain certain financial ratios related to total debt, tangible net worth, and working capital. At June 30, 1999, the Company was in compliance with or had obtained waivers for all debt covenants. Management believes that the Company will be able to refinance the line of credit under similar terms. Advances on the line of credit are limited to 75% of the accounts receivable that are less than 90 days past the invoice date, and are secured by accounts receivable and other assets of the Company. Certain stockholders have guaranteed the line of credit. Interest is payable monthly at 1.25% above prime, or 9.0% at June 30, 1999. Commitment fees of one-half of one percent (.5%) per annum of the average unused line of credit for the preceding quarter are paid quarterly. D. EQUITY INCENTIVE PLANS: In January 1999, the Company merged all of its subsidiaries into a single legal entity and provided a minority shareholder and employee with a 20% interest in the resulting subsidiary. The Company recorded compensation expense of approximately $730,000 related to this event in 1999. Concurrent with the minority interest grant, the buyout provisions of the minority interest agreement were amended such that upon a sale of the Company, the minority owner will exchange his minority interest for 20% of the sale proceeds. F-127 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Fifth Gear Media Corporation: We have audited the accompanying balance sheets of Fifth Gear Media Corporation (a Delaware corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fifth Gear Media Corporation as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 21, 1999 F-128 FIFTH GEAR MEDIA CORPORATION BALANCE SHEETS
DECEMBER 31, ------------------------ 1997 1998 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................................. $ 22,796 $ 153,031 Accounts receivable, net of allowance for doubtful accounts of $5,694 and $12,283..... 39,074 202,120 Deferred income taxes................................................................. 1,936 4,176 ----------- ----------- Total current assets.............................................................. 63,806 359,327 PROPERTY AND EQUIPMENT, net............................................................. 22,649 77,723 DEFERRED INCOME TAXES................................................................... 19,641 -- OTHER ASSETS............................................................................ 3,004 3,020 ----------- ----------- Total assets...................................................................... $ 109,100 $ 440,070 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable...................................................................... $ 535 $ 2,692 Customer deposits..................................................................... 12,000 -- Accrued liabilities................................................................... 27,837 168,927 Current portion of long-term debt..................................................... 98,662 59,070 ----------- ----------- Total current liabilities......................................................... 139,034 230,689 LONG-TERM DEBT, net of current portion.................................................. -- 83,214 DEFERRED INCOME TAXES................................................................... -- 10,818 ----------- ----------- Total liabilities................................................................. 139,034 324,721 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock: $.001 par value, 5,000,000 shares authorized, 1,942,293 shares issued and outstanding as of December 31, 1997 and 1998.................................... 1,942 1,942 Retained (deficit) earnings........................................................... (31,876) 113,407 ----------- ----------- Total liabilities and stockholders' equity........................................ $ 109,100 $ 440,070 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-129 FIFTH GEAR MEDIA CORPORATION STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, -------------------------- 1997 1998 ----------- ------------- REVENUES.............................................................................. $ 289,450 $ 1,226,989 COST OF SERVICES...................................................................... 138,784 602,572 ----------- ------------- GROSS PROFIT.......................................................................... 150,666 624,417 SELLING, GENERAL AND ADMINISTRATIVE................................................... 127,012 401,688 OTHER INCOME (EXPENSE): Interest expense.................................................................... (6,077) (6,103) Interest income..................................................................... -- -- Other income........................................................................ -- -- ----------- ------------- INCOME BEFORE INCOME TAXES............................................................ 17,577 216,626 INCOME TAXES.......................................................................... 5,994 71,343 ----------- ------------- NET INCOME............................................................................ $ 11,583 $ 145,283 ----------- ------------- ----------- -------------
The accompanying notes are an integral part of these financial statements. F-130 FIFTH GEAR MEDIA CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------------- RETAINED NUMBER OF (DEFICIT) SHARES PAR VALUE EARNINGS ------------ ----------- ----------- BALANCE, December 31, 1996................................................. 1,899,901 $ 1,900 $ (43,459) Issuance of stock........................................................ 42,392 42 -- Net income............................................................... -- -- 11,583 ------------ ----------- ----------- BALANCE, December 31, 1997................................................. 1,942,293 1,942 (31,876) Net income............................................................... -- -- 145,283 ------------ ----------- ----------- BALANCE, December 31, 1998................................................. 1,942,293 $ 1,942 $ 113,407 ------------ ----------- ----------- ------------ ----------- -----------
The accompanying notes are an integral part of these financial statements. F-131 FIFTH GEAR MEDIA CORPORATION STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................................ $ 11,583 $ 145,283 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation...................................................................... 5,320 25,460 Deferred income taxes............................................................. 5,994 28,219 Changes in assets and liabilities-- Accounts receivable............................................................. (39,074) (163,046) Other assets.................................................................... (3,004) (16) Accounts payable................................................................ 535 2,157 Customer deposits............................................................... 12,000 (12,000) Accrued liabilities............................................................. 21,691 141,090 ---------- ------------ Net cash provided by operating activities....................................... 15,045 167,147 ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................................................................. (19,687) (80,534) ---------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock............................................................ 42 -- Payments on long-term debt............................................................ (19,737) (56,378) Proceeds from long-term debt.......................................................... 14,000 100,000 ---------- ------------ Net cash (used in) provided by financing activities............................. (5,695) 43,622 ---------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (10,337) 130,235 CASH AND CASH EQUIVALENTS, beginning of period.......................................... 33,133 22,796 ---------- ------------ CASH AND CASH EQUIVALENTS, end of period................................................ $ 22,796 $ 153,031 ---------- ------------ ---------- ------------ SUPPLEMENTAL INFORMATION: Cash paid for income taxes............................................................ $ -- $ 7,500 ---------- ------------ ---------- ------------ Cash paid for interest................................................................ $ 8,546 $ 6,103 ---------- ------------ ---------- ------------
The accompanying notes are an integral part of these financial statements. F-132 FIFTH GEAR MEDIA CORPORATION NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Fifth Gear Media Corporation (the "Company"), a Delaware corporation, was organized effective May 17, 1995. Using the Internet as its primary platform, the Company designs, develops, and maintains complex electronic commerce websites. The areas of focus include business-to-consumer and business-to-business applications. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses reflected in the statement of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance repairs are expensed as incurred. INCOME TAXES Income taxes are accounted for using an asset and liability approach which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. REVENUE RECOGNITION Revenues are recognized for time and materials based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Customer deposits represent the amount of customer payments received in advance of services being performed. COST OF SERVICES Cost of services are comprised primarily of salaries, employee benefits, and incentive compensation of billable employees, and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. ACCOUNTING FOR STOCK BASED COMPENSATION In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value based method of accounting for stock-based compensation or F-133 FIFTH GEAR MEDIA CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) continuation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to account for stock-based compensation using the intrinsic value based method prescribed in APB 25 and provide the pro forma disclosure provision of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the date of the grant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to their relative short maturity and/or their variable interest rates. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") "Reporting Comprehensive Income," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 3. SIGNIFICANT CUSTOMERS: During the year ended December 31, 1997, sales to three customers accounted for approximately 53%, 21%, and 11% of revenues. During the year ended December 31, 1998, sales to one customer accounted for approximately 67% of revenues. As of December 31, 1998, accounts receivable from two customers accounted for 70% and 14% of accounts receivable. F-134 FIFTH GEAR MEDIA CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ----------- --------- ----------- Computers and equipment..................................... 3-5 $ 27,414 $ 105,808 Furniture and fixtures...................................... 5 1,623 3,763 --------- ----------- 29,037 109,571 Less-- Accumulated depreciation............................. (6,388) (31,848) --------- ----------- Property and equipment, net............................. $ 22,649 $ 77,723 --------- ----------- --------- -----------
Depreciation expense was $5,320 and $25,460 for the years ended December 31, 1997 and 1998. 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 --------- ----------- Payroll tax payable.................................................. $ 4,517 $ 14,631 Sales tax payable.................................................... 2,603 18,688 Employee payable..................................................... 10,397 49,632 Accrued payroll...................................................... -- 35,273 Accrued bonuses...................................................... -- 10,213 Other................................................................ 10,320 40,490 --------- ----------- Total accrued liabilities........................................ $ 27,837 $ 168,927 --------- ----------- --------- -----------
6. DEBT: Long-term debt is comprised of the following as of December 31, 1997 and 1998:
DECEMBER 31, ----------------------- 1997 1998 ---------- ----------- Note payable to a stockholder, bearing interest at 6%, due on demand............................................................ $ 98,662 $ 43,444 Note payable to a bank bearing interest at prime plus 1.25%, (9% at December 31,1998) payable in monthly installments of principal and interest of $2,085, maturing December 2003; secured by personal guaranty of the majority owner.................................... -- 98,840 ---------- ----------- 98,662 142,284 Less-- Current maturities........................................... (98,662) (59,070) ---------- ----------- Long-term debt...................................................... $ -- $ 83,214 ---------- ----------- ---------- -----------
F-135 FIFTH GEAR MEDIA CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. DEBT: (CONTINUED) Maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, - --------------------------------------------------------------------------------- 1999............................................................................. $ 59,070 2000............................................................................. 18,404 2001............................................................................. 20,130 2002............................................................................. 22,019 2003............................................................................. 22,661 ----------- Total............................................................................ $ 142,284 ----------- -----------
Total interest expense on the debt obligations was $6,077 and $6,103 for the years ended December 31, 1997 and 1998, respectively. 7. INCOME TAXES: Significant components of the provision for income taxes attributable to continuing operations are as follows:
1997 1998 --------- --------- Current................................................................. $ -- $ 43,124 Deferred................................................................ 5,994 28,219 --------- --------- Total current and deferred.............................................. $ 5,994 $ 71,343 --------- --------- --------- ---------
The Company's effective tax rate is equivalent to the statutory tax rate. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1998, are shown below:
1997 1998 --------- ---------- Deferred tax assets-- Bad debt reserve.................................................... $ 1,936 $ 4,176 Net operating loss carryforward..................................... 19,641 -- --------- ---------- Total deferred tax assets............................................. 21,577 4,176 Deferred tax liabilities-- Tax depreciation in excess of book.................................. -- (10,818) --------- ---------- Net deferred tax assets (liabilities)................................. $ 21,577 $ (6,642) --------- ---------- --------- ----------
8. COMMITMENTS AND CONTINGENCIES: The Company leases its office facility under a noncancelable operating lease which expires in September 1999. The Company also has operating lease agreements related to certain F-136 FIFTH GEAR MEDIA CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES: (CONTINUED) equipment which expire at various dates. Rent expense for the years ended December 1997 and 1998, totaled $18,968 and $46,603, respectively. Future minimum lease payments are as follows:
OPERATING LEASES ----------- 1999.............................................................................. $ 45,741 2000.............................................................................. 19,362 2001.............................................................................. 10,182 2002.............................................................................. 3,366 2003.............................................................................. 1,964 Thereafter........................................................................ -- ----------- Total minimum lease payments...................................................... $ 80,615 ----------- -----------
In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on the Company's financial condition or results of operations. 9. EQUITY INCENTIVE PLAN: Effective January 1, 1998, the Company authorized the Board of Directors to grant incentive options to purchase common stock of the Company. The Board of Directors determines the number of stock options to be granted, the exercise or purchase price, vesting schedule, and expiration date of such options. The exercise price of options qualifying as Incentive Stock Options under Section 422 of the Internal Revenue Code may not be less than the grant date fair market value of the common stock. Incentive Stock Options granted to any 10% stockholder may not be less than 110% of the grant date fair market value of the common stock. Stock options granted during 1998, are immediately exercisable and have a maximum term of ten years from the date of grant, subject to earlier termination following the optionee's cessation of service with the Company. Shares purchased under each option shall be subject to repurchase by the Company, at the original exercise price paid per share, upon the optionee's cessation of service prior to vesting in those shares. Such repurchase rights shall lapse as the options vest over a specified period up to four years. No options were granted prior to January 1, 1998. Options outstanding at December 31, 1997 and 1998, were as follows:
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE SHARES PER SHARE EXERCISE PRICE ----------- -------------- --------------------- Options outstanding at December 31, 1997..... -- $ -- $ -- Granted.................................... 479,925 .001-.11 .09 Exercised.................................. -- -- -- Canceled................................... (20,000) .04 .04 ----------- Options outstanding at December 31, 1998..... 459,925 $ .09 ----------- -----------
F-137 FIFTH GEAR MEDIA CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. EQUITY INCENTIVE PLAN: (CONTINUED) The following is summary information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ----------------------------------------------- WEIGHTED WEIGHTED OPTIONS VESTED AVERAGE AVERAGE --------------------------- NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE PRICES SHARES CONTRACT LIFE PRICE SHARES EXERCISE PRICE - --------------- ----------- ------------------- ------------- ----------- -------------- .001-.11 459,925 5 $ .09 201,300 .02-.11
Pro forma information regarding net income has been determined as if the Company accounted for its stock options under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: an exercisable event occurring in five years; risk-free interest rates ranging from 4.66% to 5.66%; dividend yield of 0%; a volatility factor of zero; and a weighted average expected life of five years. The average fair value at date of grant for options granted during the year ended December 31, 1998, was $0.02 per option. Had compensation cost for the Company's stock option plan been determined based on the fair value at the date of grant consistent with SFAS 123, the Company's net income would have been as follows:
1997 1998 --------- ----------- Net income--as reported.............................................. $ 11,583 $ 145,283 Net income--pro forma................................................ $ 11,583 $ 142,101
11. RELATED-PARTY TRANSACTIONS: The Company has notes payable with a stockholder totaling $98,662 and $43,444 as of December 31, 1997 and 1998. 12. AGREEMENT TO MERGE WITH ALIGN SOLUTIONS CORP.: The Company has signed a letter of intent to merge with Align Solutions Corp. F-138 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To inmedia, inc.: We have audited the accompanying balance sheets of inmedia, inc. (a Texas corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of inmedia, inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, is in default on a significant portion of its debt and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 12. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Dallas, Texas, May 21, 1999 (except with respect to the matter discussed in Note 12, as to which the date is May 27, 1999) F-139 INMEDIA, INC. BALANCE SHEETS
DECEMBER 31, -------------------------- 1997 1998 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents........................................................... $ 13,377 $ -- Accounts receivable................................................................. 189,103 177,179 Unbilled revenue.................................................................... -- 14,180 Prepaid expenses and other.......................................................... -- 24,868 ------------ ------------ Total current assets.............................................................. 202,480 216,227 PROPERTY AND EQUIPMENT, net........................................................... 93,924 84,266 OTHER ASSETS.......................................................................... 4,169 11,851 ------------ ------------ Total assets...................................................................... $ 300,573 $ 312,344 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, including cash overdraft of $0 and $25,700........................ $ 64,418 $ 230,010 Accrued liabilities................................................................. 57,194 103,992 Customer deposits................................................................... 99,005 250,938 Current maturities of long-term debt................................................ 383,250 456,358 ------------ ------------ Total current liabilities......................................................... 603,867 1,041,298 LONG-TERM LIABILITIES: Long-term debt, net of current maturities........................................... 88,801 5,712 ------------ ------------ Total liabilities................................................................. 692,668 1,047,010 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock; no par value, 1,000,000 shares authorized, 787,032 shares issued and outstanding as of 1997 and 1998 respectively...................................... 1,000 1,000 Additional paid-in capital.......................................................... -- -- Retained deficit.................................................................... (393,095) (735,666) ------------ ------------ Total stockholders' equity........................................................ (392,095) (734,666) ------------ ------------ Total liabilities and stockholders' equity........................................ $ 300,573 $ 312,344 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-140 INMEDIA, INC. STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------- 1997 1998 ------------- ------------- REVENUES............................................................................ $ 1,531,561 $ 1,194,961 COST OF SERVICES.................................................................... 1,283,810 943,027 ------------- ------------- GROSS PROFIT........................................................................ 247,751 251,934 SELLING, GENERAL AND ADMINISTRATIVE................................................. 464,649 511,785 OTHER INCOME (EXPENSE): Interest income................................................................... 4 99 Interest expense.................................................................. (82,943) (82,906) Other income...................................................................... 51 87 ------------- ------------- INCOME LOSS BEFORE INCOME TAXES..................................................... (299,786) (342,571) INCOME TAXES........................................................................ -- -- ------------- ------------- NET INCOME LOSS..................................................................... $ (299,786) $ (342,571) ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-141 INMEDIA, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL -------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL DEFICIT --------- --------- ----------- ------------ BALANCE, December 31, 1996....................................... 787,032 $ 1,000 $ -- $ (93,309) Net loss....................................................... -- -- -- (299,786) --------- --------- ----------- ------------ BALANCE, December 31, 1997....................................... 787,032 1,000 -- (393,095) Net loss....................................................... -- -- -- (342,571) --------- --------- ----------- ------------ BALANCE, December 31, 1998....................................... 787,032 1,000 -- (735,666) --------- --------- ----------- ------------ --------- --------- ----------- ------------
The accompanying notes are an integral part of these financial statements. F-142 INMEDIA, INC. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, -------------------- 1997 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................................... $(299,786) $(342,571) Depreciation and amortization...................................... 62,086 44,957 Equity related compensation........................................ -- -- Adjustments to reconcile net loss to net cash (used in) provided by operating activities-- Changes in assets and liabilities-- Accounts receivable............................................ (69,325) 11,924 Unbilled revenue............................................... -- (14,180) Prepaid expenses and other..................................... -- (24,868) Other assets................................................... (1,503) (7,682) Accounts payable, including cash overdraft..................... 49,842 165,592 Accrued liabilities............................................ (1,594) 46,798 Customer deposits.............................................. 49,905 151,933 --------- --------- Net cash (used in) provided by operating activities............ (210,375) 31,903 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................................... (33,721) (35,299) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt....................................... 142,509 69,954 Payments on long-term debt......................................... (15,066) (79,935) Proceeds from issuance of common stock............................. -- -- --------- --------- Net cash provided by (used in) financing activities............ 127,443 (9,981) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................ (116,653) (13,377) CASH AND CASH EQUIVALENTS, beginning of period....................... 130,030 13,377 --------- --------- CASH AND CASH EQUIVALENTS, end of period............................. $ 13,377 $ -- --------- --------- --------- --------- SUPPLEMENTAL INFORMATION: Cash paid for interest............................................. $ 78,684 $ 74,188 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-143 INMEDIA, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: inmedia, inc. (the "Company") specializes in electronic marketing on the Internet. The Company is a full service developer of Internet and intranet sites, offering services in three areas: website design, promotion, and training. The Company was incorporated in the state of Texas in November 1992. 2. GOING CONCERN MATTERS: The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements during the years ended December 31, 1997 and 1998, the Company incurred losses of $299,786 and $342,571, respectively, and is in default on a significant portion of its debt. These factors among others indicate that the Company may be unable to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. As described in Note 7, the Company is currently in default of its installment note payable. As a result of the default, the Company has classified the balance of its installment note payable ($413,343 at December 31, 1998) as a current liability. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using a straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses reflected in the statements of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance and repair costs are expensed as incurred. INCOME TAXES Income taxes are accounted for using an asset and liability approach that requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. F-144 INMEDIA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) REVENUE RECOGNITION Revenues are recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Unbilled revenues on contracts are comprised of labor costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. COST OF SERVICES Cost of services is comprised primarily of salaries, employee benefits, and incentive compensation of billable employees, and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. ACCOUNTING FOR STOCK BASED COMPENSATION In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value based method of accounting for stock-based compensation or continuation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to account for stock-based compensation using the intrinsic value based method prescribed in APB 25 and provides the pro forma disclosure provision of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the date of the grant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to their relative short maturity and/or their variable interest rates. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS 130"), "Reporting Comprehensive Income" which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately F-145 INMEDIA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 4. SIGNIFICANT CUSTOMERS: During the year ended December 31, 1997, sales to three customers accounted for approximately 14%, 14%, and 11% of revenues. During the year ended December 31, 1998, sales to four customers accounted for approximately 35%, 24%, 18%, and 10% of revenues. As of December 31, 1998, accounts receivable from two customers accounted for approximately 41% and 28% of accounts receivable. 5. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ------ ------------ ------------ Computers and equipment.................................. 3 $ 216,938 $ 239,873 Furniture and fixtures................................... 5 13,235 14,025 Leasehold improvements................................... 5 -- 11,574 ------------ ------------ 230,173 265,472 Less- Accumulated depreciation........................... (136,249) (181,206) ------------ ------------ Property and equipment, net.............................. $ 93,924 $ 84,266 ------------ ------------ ------------ ------------
Depreciation expense was $62,086 and $44,957 for the years ended December 31, 1997 and 1998. 6. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 --------- ----------- Accrued sales tax.................................................... $ 57,194 $ 67,980 Accrued salaries..................................................... -- 36,012 --------- ----------- Accrued liabilities.................................................. $ 57,194 $ 103,992 --------- ----------- --------- -----------
7. DEBT: The Company has an installment note with equal installment payments due each month. All interest on the note is accrued and capitalized into the note balance. As of December 31, 1998, the Company has not made the required monthly payments and is currently in default of this loan. As a result of the default, the Company has classified the balance of its installment note payable as a current liability. Additionally, the Company has a term loan, amount not to exceed $70,000, from a bank with interest at 1% over the bank's borrowing rate (9.25% at December 31, 1998), not to exceed F-146 INMEDIA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. DEBT: (CONTINUED) 10%. The loan has a maturity of October 1, 1999, is secured by accounts receivable of the Company, and is guaranteed by certain stockholders. Debt at December 31, 1997 and 1998, is comprised of the following:
DECEMBER 31, -------------------------- 1997 1998 ------------ ------------ Installment note, bearing interest at 16%, payable in monthly installments of $8,089, maturing January 1, 2001, secured by all assets of the Company and guaranteed by certain stockholders................................................................ $ 343,889 $ 413,343 Loan from a related party, bearing interest at 18%, due on demand and guaranteed by certain stockholders................................................................ 20,117 20,617 Term loan............................................................................. 65,467 4,776 Equipment financing, bearing interest at rates ranging from 13% to 16%, payable in monthly installments ranging from $85 to $485, maturing January 1999 through January 2001, secured by certain equipment.................................................. 42,578 23,334 ------------ ------------ 472,051 462,070 Less--Current maturities.............................................................. (383,250) (456,358) ------------ ------------ Long-term debt........................................................................ $ 88,801 $ 5,712 ------------ ------------ ------------ ------------
Maturities on long-term debt at December 31, 1998, are as follows: 1999............................................................. $ 456,358 2000............................................................. 5,619 2001............................................................. 93 2002............................................................. -- 2003............................................................. -- --------- $ 462,070 --------- ---------
8. INCOME TAXES: The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to the effective income tax is as follows:
1997 1998 ----- ----- Tax at U.S. statutory rates.................................................. (35)% (35 )% Meals and entertainment...................................................... 1% 1% Net operating loss carryforward.............................................. 34% 34% -- -- Effective income tax rate.................................................... --% --% -- -- -- --
F-147 INMEDIA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES: (CONTINUED) Significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1998, are shown below.
1997 1998 ------------ ------------ Deferred tax assets-- Net operating loss carryforward................................. $ 114,576 $ 102,646 Accrual to cash difference...................................... 9,571 124,902 ------------ ------------ Total deferred tax assets......................................... 124,147 227,548 Valuation allowance............................................... (124,147) (227,548) ------------ ------------ Net deferred tax assets........................................... $ -- $ -- ------------ ------------ ------------ ------------
The Company's net operating loss carryforward expires in years 2010 through 2018. Management periodically reviews the expected realization of the Company's deferred tax assets and records a valuation allowance, as appropriate, when existing conditions impact the probability of ultimate realization of the deferred tax asset. Due to the Company's recurring losses before income taxes, management believes it is more likely than not that the Company will not realize the net deferred tax asset. Accordingly, the Company has recorded a valuation allowance to reflect uncertainties associated with the ultimate realization of certain deferred tax assets. 9. COMMITMENTS AND CONTINGENCIES: The Company leases its office facility under a noncancelable operating lease which expires in November 2003. The lease requires the payment of property taxes, insurance, and maintenance. The Company also has operating lease agreements related to certain equipment which expire at various dates. Future minimum lease payments under operating leases are as follows:
OPERATING LEASES ----------- 1999............................................................................. $ 108,189 2000............................................................................. 108,189 2001............................................................................. 106,935 2002............................................................................. 100,669 2003............................................................................. 83,891 Thereafter....................................................................... -- ----------- $ 507,873 ----------- -----------
Rent expense for the years ended 1997 and 1998 totaled $49,580 and $57,855, respectively. In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on the Company's financial condition or results of operations. F-148 INMEDIA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. EQUITY INCENTIVE PLANS: Effective May 9, 1996, the Company approved the inmedia, inc. Stock Compensation Plan (the "Plan") authorizing the Board of Directors to grant incentive or nonqualified options to purchase common stock of the Company. The Board of Directors has authorized shares to be issued under the Plan. The Plan is administered by the Board of Directors, which determines the number of stock options to be granted, the exercise or purchase price, exercise schedule, and expiration date of such options. The exercise price of options qualifying as incentive stock options under Section 422 of the Internal Revenue Code may not be less than the grant date fair market value of the common stock. Incentive stock options granted to any 10% stockholder may not be less than 110% of the fair market value of the common stock on the grant date. Stock options granted under the Plan are nontransferable and generally expire ten years after the date of grant. Upon the event that all of the outstanding shares of common stock of the Company are acquired by an unrelated party, the optionee's exercise schedule shall be accelerated to provide that optionee with exercisability of 100% of the options granted. All options granted become exercisable over a four-year period of continued employment. Options outstanding at December 31, 1997 and 1998, were as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- --------------------- Options outstanding at December 31, 1996..................... 80,000 $ .50 Granted.................................................... 40,000 .50 Exercised.................................................. -- -- Canceled................................................... -- -- ----------- --- Options outstanding at December 31, 1997..................... 120,000 .50 Granted.................................................... -- -- Exercised.................................................. -- -- Canceled................................................... -- -- ----------- --- Options outstanding at December 31, 1998..................... 120,000 $ .50 ----------- --- ----------- ---
The following is summary information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING --------------------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED AVERAGE ------------------------------ NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF EXERCISE PRICES SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE - ----------------- ----------- --------------------------- --------------------- ----------- ----------------- $ .50 120,000 8 $ .50 50,000 $ .50
Pro forma information regarding net income has been determined as if the Company accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions used for 1997: an exercisable event occurring in five years; risk-free interest rates ranging from 4.90% to 5.10%; dividend yield of 0%; a volatility factor of zero and a weighted average expected life of 5 years. The weighted average fair value at date of grant for F-149 INMEDIA, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. EQUITY INCENTIVE PLANS: (CONTINUED) options granted during the year ended December 31, 1997, was $.11 per option. There were no additional options granted during the year ended December 31, 1998. Had compensation cost for the Company's stock option plan been determined based on the fair value at the date of grant consistent with SFAS 123, the Company's net loss would have been as follows:
1997 1998 ------------ ------------ Net loss--As reported............................................. $ (299,786) $ (342,571) Net loss--Pro forma............................................... (301,458) (344,763)
11. RELATED-PARTY TRANSACTIONS: The Company has a loan payable to a related party totaling $20,117 and $20,617 as of December 31, 1997, and 1998, respectively. The loan payable is due on demand and is guaranteed by certain stockholders. 12. SUBSEQUENT EVENTS: On May 27, 1999, the Company entered into an asset purchase agreement with Align Solutions Corp. ("Align") whereby the Company will receive Align stock in exchange for substantially all the assets and certain liabilities of the Company. The agreement provides that the Company will retain a portion of the installment note, certain accounts payable and the office facility lease obligation. F-150 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Synapse Group, Inc.: We have audited the accompanying balance sheets of Synapse Group, Inc. (a Texas S corporation) as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Synapse Group, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 28, 1999 F-151 SYNAPSE GROUP, INC. BALANCE SHEETS
DECEMBER 31, ------------------------ 1997 1998 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................................. $ 23,944 $ -- Accounts receivable, net of allowance for doubtful accounts of $7,200 and $9,003...... 463,646 368,502 Unbilled revenues..................................................................... 10,731 171,512 Prepaid expenses and other............................................................ 25,784 13,993 ----------- ----------- Total current assets.............................................................. 524,105 554,007 PROPERTY AND EQUIPMENT, net............................................................. 189,774 139,519 OTHER ASSETS............................................................................ 13,665 13,800 ----------- ----------- Total assets...................................................................... $ 727,544 $ 707,326 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, including cash overdraft of $0 and $33,733.......................... $ 86,544 $ 100,606 Customer deposits..................................................................... 154,589 122,091 Accrued liabilities................................................................... 115,410 21,893 Notes payable......................................................................... 32,900 159,093 Current maturities of long-term debt.................................................. 13,062 3,558 ----------- ----------- Total current liabilities......................................................... 402,505 407,241 ----------- ----------- LONG-TERM LIABILITIES: Long-term debt, net of current maturities............................................. 1,907 4,773 ----------- ----------- Total liabilities................................................................. 404,412 412,014 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock: $.01 par value, 10,000,000 shares authorized, 692,700 and 715,000 shares issued and outstanding as of 1997 and 1998.......................................... 6,927 7,150 Additional paid-in capital............................................................ 102,377 126,837 Retained earnings..................................................................... 213,828 161,325 ----------- ----------- Total liabilities and stockholders' equity........................................ $ 727,544 $ 707,326 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-152 SYNAPSE GROUP, INC. STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------- 1997 1998 ------------- ------------- REVENUES............................................................................ $ 2,086,172 $ 2,540,402 COST OF SERVICES.................................................................... 1,532,652 1,907,913 ------------- ------------- GROSS PROFIT........................................................................ 553,520 632,489 SELLING, GENERAL AND ADMINISTRATIVE................................................. 766,163 669,531 OTHER INCOME (EXPENSE): Interest expense.................................................................. (5,812) (16,039) Other income...................................................................... 7,317 578 ------------- ------------- NET LOSS............................................................................ $ (211,138) $ (52,503) ------------- ------------- ------------- ------------- PRO FORMA INCOME TAXES (UNAUDITED).................................................. -- -- ------------- ------------- PRO FORMA NET LOSS (UNAUDITED)...................................................... $ (211,138) $ (52,503) ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-153 SYNAPSE GROUP, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL -------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS --------- --------- ----------- ------------ BALANCE, December 31, 1996...................................... 692,700 $ 6,927 $ 102,377 $ 547,917 Distributions................................................. -- -- -- (122,951) Net loss...................................................... -- -- -- (211,138) --------- --------- ----------- ------------ BALANCE, December 31, 1997...................................... 692,700 6,927 102,377 213,828 Issuance of common stock...................................... 22,300 223 24,460 -- Net loss...................................................... -- -- -- (52,503) --------- --------- ----------- ------------ BALANCE, December 31, 1998...................................... 715,000 $ 7,150 $ 126,837 $ 161,325 --------- --------- ----------- ------------ --------- --------- ----------- ------------
The accompanying notes are an integral part of these financial statements. F-154 SYNAPSE GROUP, INC. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, -------------------------- 1997 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................................................ $ (211,138) $ (52,503) Adjustments to reconcile net loss to net cash provided by (used in) operating activities-- Depreciation and amortization................................................... 135,072 138,669 Loss on disposition of assets................................................... -- 856 Changes in assets and liabilities-- Accounts receivable........................................................... (35,989) 95,144 Unbilled revenues............................................................. (10,731) (171,512) Prepaid expenses and other.................................................... (4,306) 11,791 Other assets.................................................................. 6,556 (135) Accounts payable, including cash overdraft.................................... (32,853) 14,062 Customer deposits............................................................. 125,093 (21,768) Accrued liabilities........................................................... 60,331 (93,517) ------------ ------------ Net cash provided by (used in) operating activities......................... 32,035 (78,913) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................................................................ (55,060) (89,269) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayments on) notes payable......................................... 27,075 126,193 Proceeds from issuance of common stock.............................................. -- 24,683 Proceeds from long-term debt........................................................ -- 8,158 Payments on long-term debt.......................................................... (20,418) (14,796) Distributions to owners............................................................. (122,951) -- ------------ ------------ Net cash provided by (used in) financing activities......................... (116,294) 144,238 NET DECREASE IN CASH AND CASH EQUIVALENTS............................................. (139,319) (23,944) CASH AND CASH EQUIVALENTS, beginning of period................................................................. 163,263 23,944 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period....................................................................... $ 23,944 $ -- ------------ ------------ ------------ ------------ SUPPLEMENTAL INFORMATION: Cash paid for interest.............................................................. $ 5,812 $ 16,039 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-155 SYNAPSE GROUP, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Synapse Group, Inc. (the "Company") performs Internet and intranet consulting services, Internet hosting, and related hardware sales for a variety of customers utilizing the Internet for on-line marketing. The Company was incorporated in the state of Texas in April 1995. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using a straight-line method over the estimated useful lives of the assets. The costs and related accumulated depreciation of property and equipment sold, retired, or disposed of are removed from the accounts and any gains or losses are reflected in the statements of operations. Expenditures for major acquisitions and improvements are capitalized while expenditures for maintenance and repairs are expensed as incurred. INCOME TAXES As an S corporation, the Company pays no federal income tax but rather the stockholders are taxed individually on the Company's taxable income or loss. Accordingly, no provisions for federal income taxes are reflected in the accompanying financial statements. The unaudited pro forma tax information included in the accompanying statements of operations reflect estimates of the Company's tax provision or benefit as if it had been a C corporation in fiscal years 1997 and 1998. In accordance with SFAS No. 109, "Accounting for Income Taxes," no pro forma tax benefit was reflected due to the Company's recurring losses and the uncertainty related to the realization of any tax assets. REVENUE RECOGNITION Revenues are recognized for time and materials-based arrangements as services are performed and fixed fee arrangements on the percentage-of-completion method. Under this approach, revenues and gross profit are recognized as the work is performed, based on the ratio of costs incurred to total estimated costs. Unbilled revenues on contracts are comprised of labor costs incurred, plus earnings on certain contracts which have not been billed. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Customer deposits represent the amount of customer payments received in advance of services being performed. COST OF SERVICES Cost of services is comprised primarily of salaries, employee benefits, incentive compensation of billable employees, and a proportionate share of depreciation and facilities costs based on the ratio of billable employees to total employees. F-156 SYNAPSE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) ACCOUNTING FOR EQUITY BASED COMPENSATION In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value based method of accounting for stock-based compensation or continuation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to account for stock-based compensation using the intrinsic value based method prescribed in APB 25 and provides the pro forma disclosure provision of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock over the exercise price at the date of the grant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments have carrying amounts which approximate fair value due to the relative short maturity of these instruments and/or their variable interest rates. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130") "Reporting Comprehensive Income," which is required to be adopted in the year ended December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the Statement of Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the Company's financial statements as the Company does not have any elements of comprehensive income other than net income. 3. SIGNIFICANT CUSTOMERS: During the year ended December 31, 1997, sales to two customers accounted for approximately 51% and 11% of revenue. During the year ended December 31, 1998, sales to three customers accounted for approximately 53%, 15%, and 10% of revenue. As of December 31, 1998, accounts receivable from two customers accounted for 63% and 10% of total accounts receivable. F-157 SYNAPSE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following as of December 31, 1997 and 1998:
USEFUL LIFE 1997 1998 ----------- ------------ ------------ Furniture and fixtures................................... 5 $ 53,189 $ 58,173 Computers and equipment.................................. 2-5 340,856 415,710 Leasehold improvements................................... 1-5 10,224 18,273 ------------ ------------ 404,269 492,156 Less--Accumulated depreciation........................... (214,495) (352,637) ------------ ------------ Property and equipment, net.......................... $ 189,774 $ 139,519 ------------ ------------ ------------ ------------
Depreciation expense was $135,072 and $138,669 for the years ended December 31, 1997 and 1998. 5. ACCRUED LIABILITIES: Accrued liabilities is comprised of the following as of December 31, 1997 and 1998:
1997 1998 ----------- --------- Accrued bonus........................................................ $ 58,750 $ -- Accrued benefits..................................................... 26,046 -- Accrued payroll taxes................................................ 17,410 -- Accrued legal........................................................ -- 3,661 Accrued property and sales taxes..................................... 9,624 13,307 Accrued other........................................................ 3,580 4,925 ----------- --------- Total accrued liabilities........................................ $ 115,410 $ 21,893 ----------- --------- ----------- ---------
6. DEBT: NOTES PAYABLE The Company has a bank line of credit with a maximum availability of $300,000. Interest is at the 30-day commercial paper rate plus 3.5% (8.37% at December 31, 1998), and is payable monthly. The agreement is collateralized by a security interest in substantially all of the assets of the Company and is personally guaranteed by two of the Company's stockholders. F-158 SYNAPSE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. DEBT: (CONTINUED) LONG-TERM DEBT Long-term debt is comprised of the following as of December 31, 1997 and 1998:
1997 1998 ---------- --------- Equipment financing, bearing interest at 10%, payable in monthly installments of $278, maturing March 2002, secured by certain equipment........................................................... $ -- $ 6,424 Equipment financing, bearing interest at 13%, payable in monthly installments of $656, maturing March 1999, secured by certain equipment........................................................... 8,709 1,907 Equipment financing, bearing interest at 11%, payable in monthly installments of $660, maturing March 1998, secured by certain equipment........................................................... 1,940 -- Equipment financing, bearing interest at 11%, payable in monthly installments of $758, maturing June 1998, secured by certain equipment........................................................... 4,320 -- ---------- --------- 14,969 8,331 Less--Current portion................................................. (13,062) (3,558) Long-term debt........................................................ $ 1,907 $ 4,773 ---------- --------- ---------- ---------
Maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31, - ------------------------------------------------------------------------------------ 1999................................................................................ $ 3,558 2000................................................................................ 1,919 2001................................................................................ 2,214 2002................................................................................ 640 --------- $ 8,331 --------- ---------
7. COMMITMENTS AND CONTINGENCIES: The Company leases office space in Dallas, Texas, and computer hardware equipment with lease terms through September 2001. Future minimum annual lease payments under these leases are as follows:
OPERATING LEASES ----------- 1999............................................................................. $ 101,124 2000............................................................................. 83,612 2001............................................................................. 56,880 2002 and thereafter.............................................................. -- ----------- Total minimum lease payments..................................................... $ 241,616 ----------- -----------
F-159 SYNAPSE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Rent expense for the years ended December 31, 1997 and 1998, under these agreements was $118,791 and $157,432, respectively. In the ordinary course of business, the Company may be subject to legal actions and claims. Management does not believe litigation or claims will have a material effect on the Company's financial condition or results of operations. 8. RETIREMENT PLAN: During the year ended December 31, 1996, the Company established a discretionary 401(k) plan (the "Plan") that covers all full-time employees. Contributions to the Plan are discretionary. The Company made no contributions to the Plan for the year ended December 31, 1997 or 1998. 9. EQUITY INCENTIVE PLANS: Effective August 20, 1998, the Company approved the 1998 Stock Option Plan ("the 1998 Plan") authorizing the Board of Directors to grant incentive or nonqualified options to purchase common stock of the Company. The total number of shares of common stock which may be issued under the 1998 Plan is 70,100. The 1998 Plan is administered by the Compensation Committee of the Board of Directors which determines the number of stock options to be granted, the exercise or purchase price, exercise schedule and expiration date of such options. Nonqualified stock options may be granted at exercise prices which are greater than or equal to 80% of the grant date fair market value of the common stock. The exercise price of options qualifying as incentive stock options under Section 422 of the Internal Revenue Code may not be less than the grant date fair market value of the common stock. Incentive stock options granted to any 10% stockholder may not be less than 110% of the fair market value of the common stock on the grant date. Stock options granted under the 1998 Plan are nontransferable and generally expire ten years after the date of grant. Upon the event that all of the outstanding shares of common stock of the Company are acquired by an unrelated party, the optionee's exercise schedule shall be accelerated to provide that optionee with immediate exercisability of the unvested options granted. All options granted become exercisable over a five-year period of continued employment. Options outstanding at December 31, 1997 and 1998 and granted, exercised, and canceled during those years were as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- ------------------- Options outstanding at December 31, 1997..................... -- $ -- Granted...................................................... 29,325 7.00 Exercised.................................................... -- -- Canceled..................................................... (800) 7.00 ----------- Options outstanding at December 31, 1998..................... 28,525 $ 7.00 ----------- -----------
F-160 SYNAPSE GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. EQUITY INCENTIVE PLANS: (CONTINUED) Following is summary information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING - ------------------------------------------------ WEIGHTED AVERAGE WEIGHTED OPTIONS EXERCISABLE NUMBER OF SHARES REMAINING EXERCISE ------------------------ UNDER OPTION CONTRACT LIFE PRICE NUMBER AMOUNT - ------------------ --------------- ----------- ----------- ----------- 28,525 9.94 $ 7.00 -- $ --
Pro forma information regarding net income has been determined as if the Company accounted for its stock options under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions used for 1998: an exercisable event occurring in five years; risk-free interest rate of 4.38%; dividend yield of 0%; a volatility factor of zero; and a weighted average expected life of five years. The average Black-Scholes fair value at date of grant for options granted during the year ended December 31, 1998 was $7.02 per option. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net loss for the year ended December 31, 1998, would have been as follows: Net loss--as reported............................................ $ (52,503) Net loss--pro forma.............................................. (54,837)
10. RELATED PARTY TRANSACTIONS: A stockholder of the Company is a partner in a law firm which the Company uses for legal services. There were approximately $30,000 in legal fees paid to this law firm for each of the years ended December 31, 1997 and 1998. 11. AGREEMENT TO MERGE WITH ALIGN SOLUTIONS CORP.: On February 15, 1999, the Company was acquired by Align Solutions Corp. F-161 YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER WE NOR ANY OF THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WHEN YOU MAKE A DECISION ABOUT WHETHER TO INVEST IN OUR COMMON STOCK, YOU SHOULD NOT RELY UPON ANY INFORMATION OTHER THAN THE INFORMATION IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL. TABLE OF CONTENTS
PAGE --------- Summary......................................... 3 Summary Unaudited Pro Forma Combined Financial Data.......................................... 6 Risk Factors.................................... 8 About Luminant Worldwide Corporation............ 19 Use of Proceeds................................. 24 Dividend Policy................................. 24 Capitalization.................................. 25 Dilution........................................ 26 Selected Historical Financial Data.............. 28 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 31 Business........................................ 52 Management...................................... 63 Certain Transactions With Related Parties....... 75 Principal Stockholders.......................... 78 Description of Capital Stock.................... 81 Shares Available for Future Sale................ 84 Underwriting.................................... 88 Legal Matters................................... 89 Experts......................................... 90 Where You Can Find Additional Information....... 90 Index to Financial Statements................... F-1
DEALER PROSPECTUS DELIVERY OBLIGATIONS: Until , 1999 (25 days after the commencement of this offering), all dealers that buy, sell or trade these shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. [LOGO] 4,062,500 SHARES COMMON STOCK DEUTSCHE BANC ALEX. BROWN HAMBRECHT & QUIST SOUNDVIEW TECHNOLOGY GROUP Prospectus , 1999 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all fees and expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the common stock being registered. All amounts shown are estimates, except for the Hart-Scott-Rodino filing fee, the registration fee, the NASD filing fee and the Nasdaq National Market listing fee. Hart-Scott-Rodino filing fee................................... $ 45,000 Securities and Exchange Commission registration fee............ 52,820 NASD filing fee................................................ 18,000 Nasdaq National Market listing fee............................. 90,000 Accounting fees and expenses................................... 3,000,000 Legal fees and expenses........................................ 2,750,000 Printing and engraving expenses................................ 600,000 Transfer agent and registrar fees.............................. 50,000 Miscellaneous expenses......................................... 439,180 ---------- Total........................................................ $7,045,000 ---------- ----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Certificate of Incorporation and By-laws of the Registrant provide for the indemnification of the Registrant's directors and officers to the fullest extent authorized by, and subject to the conditions set forth in the General Corporation Law of the State of Delaware (the "DGCL"), except that the Registrant will indemnify a director or officer in connection with a proceeding (or part thereof) initiated by the person only if the proceeding (or part thereof) was authorized by the Registrant's Board of Directors. The indemnification provided under the Certificate of Incorporation and By-laws includes the right to be paid by the Registrant the expenses (including attorneys' fees) in advance of any proceeding for which indemnification may be had in advance of its final disposition, provided that the payment of such expenses (including attorneys' fees) incurred by a director or officer in advance of the final disposition of a proceeding may be made only upon delivery to the Registrant of an undertaking by or on behalf of the director or officer to repay all amounts so paid in advance if it is ultimately determined that the director or officer is not entitled to be indemnified. As permitted by the DGCL, the Registrant's Certificate of Incorporation, as amended, restated and supplemented, provides that directors of the Registrant shall not be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, relating to unlawful payment of dividends or unlawful stock purchase or redemption or (iv) for any transaction from which the director derived an improper personal benefit. As a result of this provision, the Registrant and its stockholders may be unable to obtain monetary damages from a director for breach of his or her duty of care. Under the By-laws, the Registrant has the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Registrant, or is II-1 or was serving at the request of the Registrant as a director, officer, employee, partner (limited or general) or agent of another corporation or of a partnership, joint venture, limited liability company, trust or other enterprise, against any liability asserted against the person or incurred by the person in any such capacity, or arising out of the person's status as such, and related expenses, whether or not the Registrant would have the power to indemnify the person against such liability under the provisions of the DGCL. The Registrant intends to purchase director and officer liability insurance on behalf of its directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth certain information as to all securities sold by us within the last three years that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). On August 22, 1998, Commonwealth Principals II, LLC purchased 1,665,273 shares of common stock for an aggregate purchase price of $1.00. An exemption is claimed under Section 4(2) of the Securities Act. On September 1, 1998, we sold 166,527 shares to Guillermo G. Marmol, our Chief Executive Officer and President, for an aggregate purchase price of $200,000. An exemption is claimed under Section 4(2) of the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 4,653,101 shares of common stock to certain former owners of Align Solutions Corp. for their respective interests in that company. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 4,192,361 shares of common stock to the former owner of Brand Dialogue-New York for certain assets of Brand Dialogue. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 1,461,983 shares of common stock to certain former owners of Free Range Media, Inc. for their respective interests in that company. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 702,636 shares of common stock to certain former owners of Integrated Consulting, Inc., dba i.con interactive, for their respective interests in that company. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 1,314,416 shares of common stock to certain former owners of InterActive8, Inc. for their respective interests in that company. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 529,393 shares of common stock to certain former owners of II-2 Multimedia Resources, LLC for their respective interests in that company. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 2,937,699 shares of common stock to certain former owners of Potomac Partners Management Consulting, LLC for their respective interests in that company. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the seven other companies, we will issue 743,270 shares of common stock to certain former owners of RSI Group, Inc. for their respective interests in that company. An indeterminate number of shares of common stock may be issued in payment of contingent consideration, if earned. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. We will grant options exercisable for a total of 1,670,317 shares of common stock under our 1999 Long-Term Incentive Plan to former option holders of Align to replace outstanding options of Align. We have relied on no sale to grant those options. We will grant options exercisable for a total of 110,260 shares of common stock under our 1999 Long-Term Incentive Plan to former option holders of InterActive8 to replace outstanding options of InterActive8. We have relied on no sale to grant those options. We will grant options exercisable for a total of 423,869 shares of common stock under our 1999 Long-Term Incentive Plan to former holders of participation rights of Potomac Partners to replace outstanding participation rights of Potomac Partners. We have relied on no sale to grant those options. Before completion of the offering and the acquisition of the eight companies, we will grant options exercisable for a total of 1,672,625 shares of common stock under our 1999 Long-Term Incentive Plan to our current management and directors and a former officer. An exemption is claimed under Section 4(2) of the Securities Act. Before completion of the offering and the acquisition of the eight companies we will grant options exercisable for a total of 1,800,000 shares of common stock to Young & Rubicam outside of the 1999 Long-Term Incentive Plan. An exemption is claimed under Section 4(2) of the Securities Act. Before completion of the offering and the acquisition of the eight companies we will grant options exercisable for a total of 1,328,036 shares of common stock under our 1999 Long-Term Incentive Plan to persons who will become our employees upon the closing of the offering. We have relied on no-sale to grant those options. Before completion of the offering and the acquisition of the eight companies, we will grant to United Air Lines, Inc. a warrant for up to 300,000 shares of common stock at the initial public offering price. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. Simultaneously with the completion of the offering and the acquisition of the eight companies, we are selling $15 million worth of shares of non-voting common stock directly to Young & Rubicam, Inc. at the initial public offering price. An exemption is claimed under Rule 506 of Regulation D promulgated under the Securities Act. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1.1+ Form of Underwriting Agreement 3.1+ Certificate of Incorporation of Registrant 3.2+ Amendment to Certificate of Incorporation of Registrant 3.3+ Second Amendment to Certificate of Incorporation of Registrant 3.4+ Third Amendment to Certificate of Incorporation of Registrant 3.5+ Fourth Amendment to Certificate of Incorporation of Registrant 3.6+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be in effect upon closing of the offering made under this Registration Statement, as amended from the Form of Amended and Restated Certificate of Incorporation filed as Exhibit 3.6 to Amendment No. 1 to this Registration Statement. 3.7+ By-Laws of Registrant 3.8+ Form of Amended and Restated By-Laws of the Registrant to be in effect upon closing of the offering made under this Registration Statement 4.1+ Form of Common Stock Certificate 5.1 Opinion of Wilmer, Cutler & Pickering, as amended from the opinion filed as Exhibit 5.1 to Amendment No. 4 to this Registration Statement. 10.1+ 1999 Long-Term Incentive Plan, as amended from the form filed as Exhibit 10.1 to Amendment No. 1 to this Registration Statement. 10.2+ Employment Agreement of Guillermo G. Marmol 10.3+ Form of Transition Services Agreement by and among Clarant Worldwide Corporation and Young & Rubicam Inc. 10.4+ Agreement and Plan of Reorganization by and among Clarant, Inc., Align Solutions Acquisition Corp., Align Solutions Corp. and the Stockholders named therein, dated as of June 2, 1999. 10.5+ Agreement and Plan of Reorganization by and among Clarant, Inc., Free Range Media Acquisition Corp., Free Range Media, Inc., John C. Dimmer, John B. Dimmer and Andrew L. Fry, dated as of June 2, 1999. 10.6+ Agreement and Plan of Reorganization by and among Clarant, Inc., Icon Acquisition Corp., Integrated Consulting, Inc. (d/b/a i.con interactive), Calvin W. Carter, Elliot W. Hawkes and David Todd McGee, dated as of June 2, 1999. 10.7+ Agreement and Plan of Reorganization by and among Clarant, Inc. InterActive8 Acquisition Corp., InterActive8, Inc. and the Stockholders named therein, dated as of June 1, 1999. 10.8+ Agreement and Plan of Reorganization by and among Clarant, Inc., Multimedia Acquisition Corp., Multimedia Resources, LLC, Henry Heilbrunn, Lynn J. Branigan and Norman L. Dawley, dated as of June 2, 1999. 10.9+ Agreement and Plan of Reorganization by and among Clarant, Inc., Potomac Partners Acquisition LLC, Potomac Partners Management Consulting, LLC and the Members named therein, dated as of June 1, 1999. 10.10+ Agreement and Plan of Reorganization by and among Clarant, Inc., RSI I Acquisition Corp., RSI Group, Inc., Resource Solutions International, LLC, Charles Harrison, Carolyn Brown and Bruce Grant, dated as of June 1, 1999. 10.11+ Contribution Agreement by and between Clarant Worldwide Corporation and Young & Rubicam Inc., dated as of June 7, 1999. 10.12+ Credit Agreement by and between Integrated Interacitve, Inc. and Commonwealth Principals II, LLC, dated as of September 2, 1998.
II-4 10.13+ Form of Registration Rights Agreement by and among Luminant Worldwide Corporation, Commonwealth Principals II, LLC and Guillermo G. Marmol. 10.14+ Management Services Agreement by and between Webone, Inc. and Commonwealth Principals II, LLC, dated as of September 2, 1998. 10.15+ Employment Agreement of Derek Reisfield 10.16+ Luminant Worldwide Corporation Senior Bonus Plan, as amended from the form filed as Exhibit 10.17 to Amendment No. 1 to this Registration Statement 10.17+ Employment Agreement of Thomas G. Bevivino 10.18+ Agreement by and among Commonwealth Principals II, LLC, Integrated Interactive, Inc., Chris Meshginpoosh and Tom Bevivino, dated as of March 8, 1999. 10.19 Amendment to Agreement and Plan of Reorganization by and among Luminant Worldwide Corporation, Align Solutions Acquisition Corp., Align Solutions Corp. and the Stockholders named therein, dated as of September 2, 1999. 10.20 Amendment to Agreement and Plan of Reorganization by and among Luminant Worldwide Corporation, Free Range Media Acquisition Corp., Free Range Media, Inc., John C. Dimmer, John B. Dimmer and Andrew L. Fry, dated as of September 2, 1999. 10.21 Amendment to Agreement and Plan of Reorganization by and among Luminant Worldwide Corporation, Icon Acquisition Corp., Integrated Consulting, Inc. (d/b/a i.con interactive), Calvin W. Carter, Elliot W. Hawkes and David Todd McGee, dated as of September 2, 1999. 10.22 Amendment to Agreement and Plan of Reorganization by and among Luminant Worldwide Corporation, InterActive8 Acquisition Corp., InterActive8, Inc. and the Stockholders named therein, dated as of September 2, 1999. 10.23 Amendment to Agreement and Plan of Reorganization by and among Luminant Worldwide Corporation, Multimedia Acquisition Corp., Multimedia Resources, LLC, Henry Heilbrunn, Lynn J. Branigan and Norman L. Dawley, dated as of September 2, 1999. 10.24 Amendment to Agreement and Plan of Reorganization by and among Luminant Worldwide Corporation, Potomac Partners Acquisition LLC, Potomac Partners Management Consulting, LLC and the Members named therein, dated as of September 2, 1999. 10.25 Amendment to Agreement and Plan of Reorganization by and among Luminant Worldwide Corporation, RSI I Acquisition Corp., RSI Group, Inc., Resource Solutions International, LLC, Charles Harrison, Carolyn Brown and Bruce Grant, dated as of September 2, 1999. 10.26 Amendment to Contribution Agreement by and between Luminant Worldwide Corporation and Young & Rubicam Inc, dated as of September 2, 1999. 10.27+ Form of Release Agreement 10.28+ Form of Recontribution Agreement 10.29 Form of Amendment to Employment Agreement of Guillermo G. Marmol. 10.30 Form of Common Stock Purchase Warrant to be issued to United Air Lines, Inc., as of 9 a.m., September 16, 1999. 10.31 Form of Registration Rights Agreement by and between Luminant Worldwide Corporation and United Air Lines, Inc. 21.1+ Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP 23.2 Consent of PricewaterhouseCoopers LLP 23.3 Consent of Wilmer, Cutler & Pickering (included in Exhibit 5.1) 23.4+ Consent of Michael H. Jordan to be named in Registration Statement. 23.5+ Consent of Randolph Austin to be named in Registration Statement. 23.6+ Consent of Michael Dolan to be named in Registration Statement.
II-5 23.7+ Consent of Lynn J. Branigan to be named in Registration Statement. 23.8+ Consent of Calvin W. Carter to be named in Registration Statement. 23.9+ Consent of James R. Corey to be named in Registration Statement. 23.10+ Consent of John B. Dimmer to be named in Registration Statement. 23.11+ Consent of Bruce D. Grant to be named in Registration Statement. 23.12+ Consent of Henry Heilbrunn to be named in Registration Statement. 23.13+ Consent of Morris W. Markel to be named in Registration Statement. 23.14+ Consent of Andreas Panayi to be named in Registration Statement. 23.15+ Consent of Douglas Rice to be named in Registration Statement. 23.16+ Consent of Richard M. Scruggs to be named in Registration Statement. 24.1+ Power of Attorney (included on signature page to this Registration Statement) 27.1 Financial Data Schedule
- ------------------------ + Previously filed. (b) Financial Statement Schedules None. II-6 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as may be required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Pre-Effective Amendment No. 7 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the District of Columbia, on the 14(th) day of September 1999. LUMINANT WORLDWIDE CORPORATION By: /s/ GUILLERMO G. MARMOL ----------------------------------------- Guillermo G. Marmol CHIEF EXECUTIVE OFFICER AND PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 7 to the Registration Statement has been signed by the following persons in the capacities and on the date indicated.
NAME TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ GUILLERMO G. MARMOL Chief Executive Officer, - ------------------------------ President and director September 14, 1999 Guillermo G. Marmol (chief executive officer) * - ------------------------------ Vice Chairman and Executive September 14, 1999 Derek R. Reisfield Vice President Vice President of Finance /s/ THOMAS G. BEVIVINO (principal financial - ------------------------------ officer and principal September 14, 1999 Thomas G. Bevivino accounting officer) * - ------------------------------ Director September 14, 1999 George P. Stamas
* By power of attorney /s/ GUILLERMO G. MARMOL - ------------------------------ Guillermo G. Marmol Attorney-in-Fact
II-8 EX-5.1 2 EXHIBIT 5.1 Exhibit 5.1 WILMER, CUTLER & PICKERING 2445 M Street, N.W. Washington, D.C. 20037-1420 Telephone (202) 663-6000 Facsimile (202) 663-6363 September 14, 1999 Luminant Worldwide Corporation 4100 Spring Valley Road Suite 750 Dallas, Texas 75244 Gentlemen: As counsel for Luminant Worldwide Corporation, a Delaware corporation (the "Company"), we are familiar with the Company's Registration Statement on Form S-1, first filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, (the "Act") on June 8, 1999, as amended and supplemented (the "Registration Statement"), with respect to the offering of up to 4,062,500 shares of the Company's common stock, par value $.01 by the Company (the "Firm Shares") and up to an additional 750,000 shares of common stock by the Company (the "Option Shares") subject to an Underwriters' over-allotment option. The Firm Shares and the Option Shares are hereafter collectively referred to as the "Shares." In connection with the foregoing, we have examined (1) the form of Amended and Restated Certificate of Incorporation of the Company filed as Exhibit 3.6 to the Registration Statement, to be filed with the Secretary of State of Delaware on or prior to the closing of the offering of the Firm Shares, (2) the form of Amended and Restated Bylaws of the Company filed as Exhibit 3.6 to the Registration Statement, to be filed with the Secretary of State of Delaware on or prior to the closing of the offering of the Firm Shares, (3) the proposed form of Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement with respect to the Shares (the "Underwriting Agreement"), (4) the form of stock certificate for common stock of the Company, and (5) such records of the corporate proceedings of the Company, such certificates of public officials and such other documents as we deem necessary to render this opinion. In our examination of the Underwriting Agreement and the aforesaid certificates, records and documents, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all original documents and the conformity to authentic original documents of all documents submitted to us as copies (including telecopies). This opinion is given, and all statements herein are made, in the context of the foregoing. This opinion letter is based as to matters of law solely on the General Corporation Law of the State of Delaware. We express no opinion herein as to any other laws, statutes, regulations or ordinances. Based on such examination and assumption, we are of the opinion that: 1. The Company is a corporation duly incorporated and existing under the laws of the State of Delaware. 2. The Shares have been duly authorized and when sold, issued and paid for pursuant to the duly executed Underwriting Agreement (in substantially the form filed as an exhibit to the Registration Statement), the duly filed Amended and Restated Certificate of Incorporation of the Company (in substantially the form filed as an exhibit to the Registration Statement), and the duly adopted Amended and Restated Bylaws of the Company (in substantially the form filed as an exhibit to the Registration Statement) will be validly issued, fully paid and nonassessable. We assume no obligation to advise you of any changes in the foregoing subsequent to the delivery of this opinion letter. This opinion letter has been prepared solely for your use in connection with the filing of the Registration Statement on the date of this opinion letter and should not be quoted in whole or in part or otherwise be referred to, nor filed with or furnished to any governmental agency or other person or entity, without the prior written consent of this firm. We hereby consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the prospectus constituting a part of the Registration Statement. In giving this consent, we do not thereby admit that we are an "expert" within the meaning of the Act. Very truly yours, By: /s/ John B. Watkins -------------------------------------- John B. Watkins, Esq., a partner EX-10.19 3 EXHIBIT 10.19 Exhibit 10.19 EXECUTION COPY AMENDMENT TO AGREEMENT AND PLAN OF ORGANIZATION THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Organization, dated as of June 2, 1999 (the "Agreement"), by and among Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant, Inc. and referred to herein as "Luminant"), Align Solutions Acquisition Corp., a Delaware corporation ("Newco"), Align Solutions Corp., a Delaware corporation (the "Company"), and the stockholders of the Company (the "Stockholders"), is made and entered into as of September 2, 1999. RECITALS A. Luminant, Newco, the Company and the Stockholders have determined that it is in their best interests to revise the Agreement. B. Luminant, Newco, the Company and the Stockholders desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies have simultaneously agreed to amend the Other Agreements. NOW, THEREFORE, in consideration of the premises, the mutual agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. The term "Initial Holdings" means, with respect to each Stockholder, the number of Shares issued to the Stockholder at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions of this Amendment, the provisions of this Amendment shall control and shall supersede such inconsistent provisions. 3. Article 7 is hereby amended by adding the following new section 7.15: 7.15 EXERCISE OF OPTIONS BEFORE IPO. The Stockholders shall not themselves, and shall use their commercially reasonable best efforts to cause other holders of Options and Convertible Securities, if any, not to, exercise such Options and Convertible Securities prior to the Closing that are currently exercisable or that will become exercisable prior to Closing. 4. Article 10 is hereby amended by adding the following new Section 10.9: 10.9 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant agrees to file a registration statement on Form S-8 pursuant to which eligible Persons holding options to purchase Shares will be permitted to sell Shares to the public. Persons holding the "Vested Options" in Luminant identified on EXHIBIT 2.1(a) shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 5. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the sixth line, and replacing it with "October 15, 1999." 6. Section 17.1 is hereby amended by deleting the third sentence in its entirety and replacing it with the following: "In addition, if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of Shares offered by any Persons (including Luminant) is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Stockholders and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Stockholders and the members and stockholders of the Other Founding Companies; provided however that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; further provided that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced; provided, further, that the reduction in the Shares offered by Luminant and the Stockholders and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; provided that to the extent that a member or stockholder of a Founding Company has sold (in that or one or more previous offerings), fifteen percent (15%) or more of his or her Initial Holdings pursuant to any registration under this Section 17.1, such holder's rights to be included in the offering shall be subordinate to the rights of Luminant and the other members and stockholders of the Founding Companies." 7. Article 17 of the Agreements is hereby amended by adding the following new Section 17.6: 17.6 SALE IN OVER-ALLOTMENT. The managing underwriter of the IPO has requested an over-allotment option relating to the IPO (the "Green Shoe"). Luminant will provide the opportunity to each of the Stockholders to sell up to fifteen percent (15%) of the Stockholder's Initial Holdings pursuant to the Green Shoe; provided however that Luminant may reduce pro rata the number of Shares to be sold by the Stockholder, the other Stockholders and the other members and stockholders of the Other Founding Companies pursuant to the Green Shoe if (a) Luminant determines that the inclusion of all or any portion of the Stockholder's Shares or the aggregate number of Shares proposed to be sold pursuant to the Green Shoe by all members and stockholders of the Founding Companies could adversely affect the "tax free" status of the transactions contemplated in the Agreement and the Luminant Plan of Organization; or (b) in the aggregate stockholders and members of the respective Founding Companies have subscribed to sell more Shares pursuant to the Green Shoe than the total number of Shares that may be sold pursuant to the Green Shoe. Any Stockholder desiring to sell Shares pursuant to the Green Shoe must execute the underwriting agreement relating to the IPO and otherwise comply with customary procedures for selling shareholders. Luminant agrees to pay the underwriting commissions and discounts payable in respect of Shares sold pursuant to the Green Shoe by the Stockholders. 8. EXHIBIT 2.1(a) is hereby amended by deleting it in its entirety and replacing it with the EXHIBIT 2.1(a) attached hereto. 9. EXHIBIT 3.3 is hereby amended by deleting it in its entirety and replacing it with the EXHIBIT 3.3 attached hereto. 10. SCHEDULE 10.8 of the Agreement is hereby amended by deleting it in its entirety and replacing it with the SCHEDULE 10.8 attached hereto. If the actual IPO per Share price varies from the examples reflected on SCHEDULE 10.8, the number of options and the exercise prices will be adjusted using the same method of calculation that was applied to arrive at the values reflected in the examples. 11. The Company shall provide copies of resolutions of the Board of Directors and Stockholders of the Company to Luminant approving this Amendment promptly following its execution. 12. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. [Signature Pages Follow] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE CORPORATION By: /s/ Guillermo G. Marmol ------------------------------------------ Name: Guillermo G. Marmol Title: Chief Executive Officer and President ALIGN SOLUTIONS ACQUISITION CORP. By: /s/ Guillermo G. Marmol ------------------------------------------ Name: Guillermo G. Marmol Title: President ALIGN SOLUTIONS CORP. By: /s/ Richard M. Scruggs ------------------------------------------ Name: Richard M. Scruggs Title: President Stockholders' Representative --------------------------------------------- Stockholders: /s/ Richard M. Scruggs --------------------------------------------- Richard M. Scruggs /s/ David Scruggs, Trustee --------------------------------------------- Heather Christine Scruggs 1999 GST Trust /s/ David Scruggs, Trustee --------------------------------------------- Julia Katerina Scruggs 1999 GST Trust /s/ Eric Reed --------------------------------------------- Eric Reed /s/ W. David Debbs --------------------------------------------- W. David Debbs /s/ Kristie J. Trice --------------------------------------------- Kristie J. Trice /s/ John R. Crabb --------------------------------------------- John R. Crabb /s/ Scott Williamson --------------------------------------------- Scott Williamson /s/ Amy Looper --------------------------------------------- Amy Looper /s/ Elizabeth B. Carls --------------------------------------------- Elizbeth B. Carls /s/ Tod E. Knight --------------------------------------------- Tod E. Knight /s/ John Perry Scroggie --------------------------------------------- John Perry Scroggie --------------------------------------------- Michael R. Alsup /s/ Kay Mayberry, Trustee --------------------------------------------- The 1996 Alice C. Alsup Trust /s/ Kay Mayberry, Trustee --------------------------------------------- The 1996 Whitney H. Alsup Trust /s/ Nancy S. Bratic --------------------------------------------- Nancy S. Bratic /s/ Wylie W. McDonald --------------------------------------------- Wylie W. McDonald /s/ Michael J. Secor --------------------------------------------- Michael J. Secor /s/ J.B. Mayberry --------------------------------------------- J. Benton Mayberry /s/ J.B. Mayberry --------------------------------------------- Kasey Thomas Mayberry 1999 Trust /s/ Larry D. Pierce --------------------------------------------- Larry D. Pierce /s/ K. David Quackenbush --------------------------------------------- K. David Quackenbush /s/ Judy Cloninger --------------------------------------------- Judy Cloninger /s/ Tim Phillips --------------------------------------------- Tim Phillips /s/ Benjamin R. McLemore, IV --------------------------------------------- Benjamin R. McLemore, IV --------------------------------------------- Michael J. Marolda --------------------------------------------- Stephen P. Crozier --------------------------------------------- Edward W. Wagner /s/ B. Reagan McLemore, III --------------------------------------------- B. Reagan McLemore, III /s/ David A. Ayers --------------------------------------------- David A. Ayers /s/ Ralph Perri --------------------------------------------- Ralph Perri /s/ Todd Perri --------------------------------------------- Todd Perri /s/ Mark Smith --------------------------------------------- Mark Smith --------------------------------------------- Brian Stone --------------------------------------------- Joe Claborn --------------------------------------------- Kevin Hyman --------------------------------------------- Joe Ochoa /s/ Gail A. Smith --------------------------------------------- Gail Alderson Smith /s/ James Wes Wright --------------------------------------------- James Wes Wright EX-10.20 4 EXHIBIT 10.20 EXHIBIT 10.20 EXECUTION COPY AMENDMENT TO AGREEMENT AND PLAN OF ORGANIZATION THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Organization, dated as of June 2, 1999 (the "Agreement"), by and among Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant, Inc. and referred to herein as "Luminant"), Free Range Media Acquisition Corp., a Washington Corporation ("Newco"), Free Range Media Inc., a Washington Corporation (the "Company"), and John C. Dimmer, John B. Dimmer, and Andrew L. Fry and (the "Stockholders"), is made and entered into as of September 2, 1999. RECITALS A. Luminant, Newco, the Company and the Stockholders have determined that it is in their best interests to revise the Agreement. B. Luminant, Newco, the Company and the Stockholders desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies have simultaneously agreed to amend the Other Agreements. NOW, THEREFORE, in consideration of the premises, the mutual agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. The term "Initial Holdings" means, with respect to each Accredited Stockholder, the number of Shares issued to the Accredited Stockholder at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." All references to the term "Redemption" in the Agreement are hereby deleted. 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions of this Amendment, the provisions of this Amendment shall control and shall supersede such inconsistent provisions. 3. EXHIBIT 2.1(a) of the Agreement is deleted in its entirety and replaced with the EXHIBIT 2.1(a) attached hereto. 4. EXHIBIT 2.1(e) of the Agreement is deleted in its entirety and replaced with the EXHIBIT 2.1(e) attached hereto. 5. Section 2.1(e) of the Agreement is hereby deleted in its entirety and replaced with the following: (e) At the Closing, Clarant shall withhold from Cash Consideration payable to the Accredited Stockholders and Non-Accredited Stockholders as follows: (i) The amount of set forth on EXHIBIT 2.1(e) necessary to satisfy in full the broker fee obligation ("Broker Fee") set forth on SCHEDULE 5.33; (ii) The amount of cash the Preferred Stockholder (the sole holder of preferred stock of the Company of record as of the date hereof) is entitled to receive for dividends declared and accrued with respect to his preferred stock of the Company in accordance with the Charter Documents as of the date of the Conversion ("Accrued Dividends") pursuant to the terms set forth on EXHIBIT 2.1(e); (iii) The amount of cash the Lender is entitled to receive immediately prior to the Effective Time, as determined according to the formula set forth on EXHIBIT 2.1(e), in satisfaction of all interest accrued as of the Closing Date ("Accrued Interest") owed to the Lender pursuant to that certain Master Borrowing Agreement by and between Free Range Media, Inc. and John C. Dimmer (the "Lender") dated March 4, 1997 (the "Promissory Note"). The Broker Fee, Accrued Dividends, and Accrued Interest are referred to collectively as the "Payment Obligations". At or prior to the Closing, the Company may reallocate the amounts withheld from the Cash Consideration among the categories specified in clauses (i) - (iii) of this Section 2.1(e) as necessary; PROVIDED, HOWEVER, that the Broker Fee and the Accrued Interest shall be paid in full; PROVIDED FURTHER, HOWEVER, that in no event shall any changes to the application of the Cash Consideration increase the amount of the Cash Consideration. 6. The chapeau of Section 3.1 is deleted in its entirety and replaced with the following: 2 3.1 MERGER CONSIDERATION; TENDER. At the Closing, Luminant shall deliver to the stockholders of the Company and holders of Options of the Company the consideration (the "Merger Consideration") in accordance with EXHIBIT 2.1(a), less the amount of cash to be withheld in satisfaction of the Payment Obligations in accordance with the formulas set forth on EXHIBIT 2.1(e) as follows: 7. EXHIBIT 3.3 is deleted in its entirety and replaced with the EXHIBIT 3.3 attached hereto. 8. Section 3.4 is deleted in its entirety and replaced with the following: 3.4 SATISFACTION OF THE PAYMENT OBLIGATIONS. The Payment Obligations shall be paid by the Surviving Corporation immediately after the Effective Time by wire transfer to the Preferred Stockholder, the Lender, and the Broker respectively pursuant to wire instructions to be provided to Luminant no later than fifteen (15) days before the Closing. Upon receipt of funds in satisification of the obligation to pay the Accrued Dividends, the Preferred Stockholder shall deliver to the Surviving Corporation, with a copy to Luminant, the acknowledgement referred to in Section 7.14. Upon receipt of funds in satisfaction of the obligation to pay the Accrued Interest, the Lender shall deliver to the Surviving Corporation, with a copy to Luminant, a written release of any and all obligations with respect to the Accrued Interest. The Stockholders shall cause the Broker, upon receipt of funds in satisfication of the Broker Fee, to deliver to the Surviving Corporation, with a copy to Luminant, a written release of any and all obligations under the Broker Agreement. In the event that the Cash Consideration is not sufficient to satisfy in full the Payment Obligations, the Stockholders shall pay any and all remaining amounts owed under such Payment Obligations. 9. Section 7.14 is deleted in its entirety and replaced with the following: 7.14 CONVERSION OF PREFERRED STOCK. Prior to the Pre-Closing Date, the Company shall convert, and the Stockholders shall cause to be converted, all issued and outstanding preferred stock of the Company before the Pre-Closing Date into an equal number of common stock of the Company (the "Conversion"). Such Conversion shall be in accordance with the Charter Documents of the Company. The Preferred Stockholder shall execute and deliver (i) all proper documents to cause such Conversion in accordance with the Charter Documents and (ii) a full waiver of any of his rights under the Charter Documents of the Company or other instruments or agreements relating to his preferred stock of the Company. As of the date of the Conversion, the Preferred Stockholder shall cease to accrue dividends or hold any other rights associated with the preferred stock and the Preferred Stockholder shall only be entitled to receive shares of common 3 stock of the Company in accordance with the conversion formulas set forth in the Charter Documents, such conversion shall be one share of common stock of the Company in exchange for each share of preferred stock of the Company. The Preferred Stockholder and the Company shall execute a written acknowledgement of the Conversion which (A) sets forth the specified number of shares of preferred stock of the Company converted to a specified number common stock of the Company, (B) acknowledges the cancellation and extinguishment thereby of all issued and outstanding shares of preferred stock, and (C) sets forth the amount of any Accrued Dividends as of the date of Conversion and acknowledge and agree that such Accrued Dividends will be payable by the Surviving Corporation immediately after the Closing in accordance with the terms of EXHIBIT 2.1(e). Upon the Conversion of the preferred stock of the Company, (1) the preferred stock shall thereby be automatically cancelled and extinguished and no longer deemed outstanding for any purpose, and (2) there shall be no other issued and outstanding capital stock of the Company other than the common stock of the Company. 10. Article 7 is hereby amended by adding the following new section 7.17: 7.17 EXERCISE OF OPTIONS BEFORE IPO. The Stockholders agree to use their commercially reasonable best efforts to cause holders of Options, Convertible Securities and participation rights, if any, that are currently exercisable or that will become exercisable prior to Closing to refrain from exercising such Options and Convertible Securities prior to the Closing. 11. Article 7 is hereby amended by adding the following new section 7.18: 7.18 LOAN AGREEMENT. Prior to the Closing, the Company, Lender, and Luminant shall enter into a loan agreement (the "Loan Agreement") to modify the Promissory Note substantially in accordance with the term sheet attached hereto as EXHIBIT 7.18. Simultaneous with the execution and delivery of such Loan Agreement, Company shall issue to Lender a promissory note in connection with such Loan Agreement. The obligations of the Company under Loan Agreement and related documents shall be assumed by the Surviving Corporation and survive the Closing. 12. Section 9.19 is deleted in its entirety and replaced with the following: 9.19 CONVERSION OF PREFERRED STOCK AND CONTRIBUTIONS OF CAPITAL. The Company shall deliver to Luminant (i) evidence of the Conversion in accordance with Section 7.14; (ii) written acknowledgement by the Preferred Stockholder of the Conversion and cancelation and waiver in full of his rights as a preferred 4 stockholder of the Company in accordance with Section 7.14; and (iii) evidence of the contribution to the capital of the Company made by the Lender, if any, in accordance with EXHIBIT 2.1(e). 13. Section 10.8 is deleted in its entirety and replaced with the following: 10.8 SATISFACTION OF CERTAIN PAYMENT OBLIGATIONS. Immediately after the Effective Time, the Surviving Corporation shall pay in full, pursuant to Section 3.4, the amount set forth on EXHIBIT 2.1(e) in satisfaction of the Accrued Dividends, Accrued Interest and the Broker Fee. All obligations of the Company with respect to the Accrued Dividends shall be released in full by the Preferred Stockholder upon receipt of such payment. The Preferred Stockholder upon receipt of such payment shall immediately deliver to the Surviving Corporation, with a copy to Luminant, a written release of all obligations of the Company with respect to such Accrued Dividends. All obligations of the Company with respect to the Accrued Interest shall be released in full by the Lender upon receipt of such payment. The Lender upon receipt of such payment shall immediately deliver to the Surviving Corporation, with a copy to Luminant, a written release of all obligations of the Company with respect to Accrued Interest. All obligations of the Company under the Broker Agreement described on SCHEDULE 5.33 shall be released in full by the Broker upon receipt of such payment. The Stockholders shall cause the Broker, upon receipt of his respective payment, to immediately deliver to the Surviving Corporation, with a copy to Luminant, a written release of all obligations of the Company under the Broker Agreement. 14. Article 10 is hereby amended by adding the following new Section 10.9: 10.9 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant agrees to file a registration statement on Form S-8 pursuant to which eligible Persons holding options to purchase Shares will be permitted to sell Shares to the public. Persons holding the "Vested Options" in Luminant identified on EXHIBIT 2.1(a) shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 15. Article 17 is hereby amended by adding the following new Section 17.6: 17.6 SALE IN OVER-ALLOTMENT. The managing underwriter of the IPO has requested an over-allotment option relating to the IPO (the "Green Shoe"). Luminant will provide the opportunity to each of the Accredited Stockholders to sell up to fifteen percent (15%) of the Stockholder's Initial Holdings pursuant to the Green Shoe; provided however that Luminant may reduce pro rata the number of Shares to be sold by the Accredited Stockholder, the other Accredited 5 Stockholders and the other members and stockholders of the Other Founding Companies pursuant to the Green Shoe if (a) Luminant determines that the inclusion of all or any portion of the Accredited Stockholder's Shares or the aggregate number of Shares proposed to be sold pursuant to the Green Shoe by all members and stockholders of the Founding Companies could adversely affect the "tax free" status of the transactions contemplated in the Agreement and the Luminant Plan of Organization; or (b) in the aggregate stockholders and members of the respective Founding Companies have subscribed to sell more Shares pursuant to the Green Shoe than the total number of Shares that may be sold pursuant to the Green Shoe. Any Accredited Stockholder desiring to sell Shares pursuant to the Green Shoe must execute the underwriting agreement relating to the IPO and otherwise comply with customary procedures for selling shareholders. Luminant agrees to pay the underwriting commisions and discounts payable in respect of Shares sold pursuant to the Green Shoe by the stockholders. 16. The third sentence of Section 17.1 is hereby deleted in its entirety and replaced with the following: "In addition, if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of Shares offered by any Persons (including Luminant) is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Accredited Stockholders and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Accredited Stockholders and the members and stockholders of the Other Founding Companies; provided however that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; further provided that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced. Subject to the foregoing, the reduction in the Shares offered by Luminant and the Accredited Stockholders and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; provided that to the extent that a member or stockholder of a Founding Company has sold (in that or a previous offering), or is being provided the right to sell, fifteen percent (15%) or more of his or her Initial Holdings pursuant to any registration under this Section 17.1, such holder's rights to be included in the offering shall be subordinate to the rights of Luminant and the other members and stockholders of the Founding Companies." 17. Resolutions of the Board of the Company and the resolutions of the stockholders of the Company approving this Amendment shall be adopted substantially the form attached hereto as EXHIBIT 17 as soon as practicable after the date hereof. 6 18. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the 6th line, and inserting "October 15, 1999." 19. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. [Signature Page Follows] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE CORPORATION By: /s/ Guillermo G. Marmol --------------------------------------------- Name: Guillermo G. Marmol Title: Chief Executive Officer FREE RANGE MEDIA ACQUISITION CORP. By: /s/ Guillermo G. Marmol --------------------------------------------- Name: Guillermo G. Marmol Title: President FREE RANGE MEDIA, INC. By: /s/ John B. Dimmer --------------------------------------------- Name: John B. Dimmer Title: President STOCKHOLDERS: /S/ John C. Dimmer --------------------------------------------- John C. Dimmer /S/ John B. Dimmer --------------------------------------------- John B. Dimmer /S/ Andrew L. Fry --------------------------------------------- Andrew L. Fry EX-10.21 5 EXHIBIT 10.21 Exhibit 10.21 EXECUTION COPY AMENDMENT TO AGREEMENT AND PLAN OF ORGANIZATION THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Organization, dated as of June 2, 1999 (the "Agreement"), by and among Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant, Inc. and referred to herein as "Luminant"), Icon Acquisition Corp., a Texas corporation ("Newco"), Integrated Consulting, Inc., a Texas corporation (the "Company"), and the stockholders of the Company (the "Stockholders"), is made and entered into as of September 2, 1999. RECITALS A. Luminant, Newco, the Company and the Stockholders have determined that it is in their best interests to revise the Agreement. B. Luminant, Newco, the Company and the Stockholders desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies have simultaneously agreed to amend the Other Agreements. NOW, THEREFORE, in consideration of the premises, the mutual agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. The term "Initial Holdings" means, with respect to each Stockholder, the number of Shares issued to the Stockholder at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions of this Amendment, the provisions of this Amendment shall control and shall supersede such inconsistent provisions. 3. Article 7 is hereby amended by adding the following new section 7.15: 1 7.15 EXERCISE OF OPTIONS BEFORE IPO. The Stockholders shall not themselves, and shall use their commercially reasonable best efforts to cause other holders of Options and Convertible Securities, if any, not to, exercise such Options and Convertible Securities prior to the Closing that are currently exercisable or that will become exercisable prior to Closing. 4. Article 10 is hereby amended by adding the following new Section 10.8: 10.8 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant agrees to file a registration statement on Form S-8 pursuant to which eligible Persons holding options to purchase Shares will be permitted to sell Shares to the public. Persons holding the "Vested Options" in Luminant identified on EXHIBIT 2.1(a) shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 5. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the sixth line, and replacing it with "October 15, 1999." 6. Section 17.1 is hereby amended by deleting the third sentence in its entirety and replacing it with the following: "In addition, if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of Shares offered by any Persons (including Luminant) is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Stockholders and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Stockholders and the members and stockholders of the Other Founding Companies; provided however that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; further provided that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced; provided, further, that the reduction in the Shares offered by Luminant and the Stockholders and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; provided that to the extent that a member or stockholder of a Founding Company has sold (in that or one or more previous offerings), fifteen percent 2 (15%) or more of his or her Initial Holdings pursuant to any registration under this Section 17.1, such holder's rights to be included in the offering shall be subordinate to the rights of Luminant and the other members and stockholders of the Founding Companies." 7. Article 17 of the Agreements is hereby amended by adding the following new Section 17.6: 17.6 SALE IN OVER-ALLOTMENT. The managing underwriter of the IPO has requested an over-allotment option relating to the IPO (the "Green Shoe"). Luminant will provide the opportunity to each of the Stockholders to sell up to fifteen percent (15%) of the Stockholder's Initial Holdings pursuant to the Green Shoe; provided however that Luminant may reduce pro rata the number of Shares to be sold by the Stockholder, the other Stockholders and the other members and stockholders of the Other Founding Companies pursuant to the Green Shoe if (a) Luminant determines that the inclusion of all or any portion of the Stockholder's Shares or the aggregate number of Shares proposed to be sold pursuant to the Green Shoe by all members and stockholders of the Founding Companies could adversely affect the "tax free" status of the transactions contemplated in the Agreement and the Luminant Plan of Organization; or (b) in the aggregate stockholders and members of the respective Founding Companies have subscribed to sell more Shares pursuant to the Green Shoe than the total number of Shares that may be sold pursuant to the Green Shoe. Any Stockholder desiring to sell Shares pursuant to the Green Shoe must execute the underwriting agreement relating to the IPO and otherwise comply with customary procedures for selling shareholders. Luminant agrees to pay the underwriting commissions and discounts payable in respect of Shares sold pursuant to the Green Shoe by the Stockholders. 8. EXHIBIT 2.1(a) is hereby amended by deleting it in its entirety and replacing it with the EXHIBIT 2.1(a) attached hereto. 9. EXHIBIT 3.3 is hereby amended by deleting it in its entirety and replacing it with the EXHIBIT 3.3 attached hereto. 10. The Company shall provide copies of resolutions of the Board of Directors and Stockholders of the Company to Luminant approving this Amendment promptly following its execution. 11. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. [Signature Pages Follow] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE CORPORATION By: /s/ Guillermo G. Marmol ------------------------- Name: Guillermo G. Marmol ------------------------- Title: President and CEO ------------------------- ICON ACQUISITION CORP. By: /s/ Guillermo G. Marmol ------------------------- Name: Guillermo G. Marmol ------------------------- Title: President and CEO ------------------------- INTEGRATED CONSULTING, INC. By: /s/ Calvin W. Carter ------------------------- Name: Calvin W. Carter ------------------------- Title: President ------------------------- Stockholders: /s/ Calvin W. Carter ------------------------- Calvin W. Carter /s/ Elliott W. Hawkes ------------------------- Elliott W. Hawkes /s/David Todd McGee ------------------------- David Todd McGee 4 EX-10.22 6 EXHIBIT 10.22 EXHIBIT 10.22 EXECUTION COPY AMENDMENT TO AGREEMENT AND PLAN OF ORGANIZATION This AMENDMENT (the "Amendment") to the Agreement and Plan of Organization, dated as of June 1, 1999 (as in effect on the date hereof, but without giving effect to this Amendment, the "Agreement"), by and among Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant, Inc. and referred to herein as "Luminant"), Interactive8 Acquisition Corp., a New York corporation ("Newco"), Interactive8, Inc., a New York corporation (the "Company") and the stockholders named therein (the "Stockholders"), is made and entered into as of September 2, 1999. RECITALS A. Luminant, Newco, the Company and Stockholders have determined that it is in their best interests to revise the Agreement. B. Luminant, Newco, the Company and Stockholders desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies have simultaneously agreed to amend the Other Agreements. NOW, THEREFORE, in consideration of the agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. The term "Initial Holdings" means the number of Shares issued to the Stockholders at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions of this Amendment, the provisions of this Amendment shall control and shall supersede such inconsistent provisions. 3. Section 3.1 is hereby deleted in its entirety and replaced with the following: 3.1 MERGER CONSIDERATION; TENDER. At the Closing, Luminant shall deliver to the Stockholders of the Company the consideration allocable pro rata to each such holder (the "Merger Consideration") as follows: (a) upon the surrender by each of the Company's Stockholders of his or her certificates for shares of Company Stock each of the Accredited Stockholders shall receive (A) the number of shares of Luminant Common Stock allocable to such Accredited Stockholder pursuant to EXHIBIT 2.1(a) and (B) the amount of cash allocable to such Accredited Stockholder pursuant to EXHIBIT 2.1(a); and (b) The cash portion of the Merger Consideration allocable to each Accredited Stockholder of the Company shall be paid by wire transfer to the accounts of each such holder pursuant to the wire transfer instructions given on EXHIBIT 16(f)(iii). 4. Article 7 is hereby amended by adding the following new Section 7.15: 7.15 EXERCISE OF OPTIONS BEFORE IPO. The Stockholders agree to use their commercially reasonable best efforts to cause holders of Options and Convertible Securities, if any, that are currently exercisable or that will become exercisable prior to Closing to refrain from exercising such Options and/or Convertible Securities prior to the Closing. 5. Article 10 is hereby amended by adding the following new Sections 10.7 and 10.8: 10.7 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant agrees to file a registration statement on Form S-8 pursuant to which eligible Persons holding options to purchase Shares will be permitted to sell Shares to the public. Persons holding the "Vested Options" in Luminant identified on EXHIBIT 2.1(a) shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 10.8 OPTIONS AND CONVERTIBLE SECURITIES. At the Closing, all Options (as shown on EXHIBIT 5.3) shall be treated as set forth on SCHEDULE 10.8; provided, however, that fifty percent (50%) of the vested Options shall be terminated in consideration for cash consideration, the amount of which will be determined in accordance with SCHEDULE 10.8, the effect of which the parties intend to be expense items for the Company without corresponding income items for income tax purposes. 6. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the sixth line and inserting "October 15, 1999." 7. The third sentence of Section 17.1 is hereby deleted in its entirety and replaced with the following: 2 In addition, if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of Shares offered by any Persons (including Luminant) is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Stockholders and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Stockholders and the members and stockholders of the Other Founding Companies; provided however that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; further provided that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced. Subject to the foregoing, the reduction in the Shares offered by Luminant and the Stockholders and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; provided that to the extent that a member or stockholder of a Founding Company has sold (in that or a previous offering), or is being provided the right to sell, fifteen percent (15%) or more of his or her Initial Holdings pursuant to any registration under this Section 17.1, such holder's rights to be included in the offering shall be subordinate to the rights of Luminant and the other members and stockholders of the Founding Companies. 8. Article 17 is hereby amended by adding the following new Section 17.6: 17.6 SALE IN OVER-ALLOTMENT. The managing underwriter of the IPO has requested an over-allotment option relating to the IPO (the "Green Shoe"). Luminant will provide the opportunity to each of the Stockholders to sell up to fifteen percent (15%) of the Stockholder's Initial Holdings pursuant to the Green Shoe; provided however that Luminant may reduce pro rata the number of Shares to be sold by the Stockholder, the other Stockholder and the other members and stockholders of the Other Founding Companies pursuant to the Green Shoe if: (a) Luminant determines that the inclusion of all or any portion of the Stockholder's Shares or the aggregate number of Shares proposed to be sold pursuant to the Green Shoe by all members and stockholders of the Founding Companies could adversely affect the "tax free" status of the transactions contemplated in the Agreement and the Luminant Plan of Organization; or (b) in the aggregate, stockholders and members of the respective Founding Companies have subscribed to sell more Shares pursuant to the Green Shoe than the total number of Shares that may be sold pursuant to the Green Shoe. Any Stockholder desiring to sell Shares pursuant to the Green Shoe must execute the underwriting agreement relating to the IPO and otherwise comply with customary procedures for selling shareholders. Luminant agrees to pay the underwriting commissions and discounts payable in respect of Shares sold pursuant to the Green Shoe by the Stockholders. 3 9. Article 18 is hereby amended by deleting the definition of "Fully-Diluted." 10. EXHIBIT 2.1(a) of the Agreement is deleted in its entirety and replaced with the EXHIBIT 2.1(a) attached hereto. 11. EXHIBIT 3.3 is deleted in its entirety and replaced with the EXHIBIT 3.3 attached hereto. 12. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. [Signature Page Follows] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE CORPORATION By: /s/ Guillermo G. Marmol ----------------------------------------- Name: Guillermo G. Marmol Title: Chief Executive Officer INTERACTIVE8 ACQUISITION CORP. By: /s/ Guillermo G. Marmol ----------------------------------------- Name: Guillermo G. Marmol Title: President INTERACTIVE8, INC. By: /s/ Douglas M. Rice ----------------------------------------- Name: Douglas M. Rice Title: President STOCKHOLDERS: /S/ Douglas M. Rice ----------------------------------------- Douglas M. Rice /s/ Morris William Markel ----------------------------------------- Morris William Markel 5 EX-10.23 7 EXHIBIT 10.23 Exhibit 10.23 AMENDMENT TO AGREEMENT AND PLAN OF ORGANIZATION THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Organization, dated as of June 2, 1999 (as in effect on the date hereof, but without giving effect to this Amendment, the "Agreement"), by and among Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant, Inc. and referred to herein as "Luminant"), Multimedia Acquisition LLC, a New York limited liability company ("Newco"), Multimedia Resources, LLC, a New York limited liability company (the "Company"), Henry Heilbrunn, Lynn J. Branigan and Norman L. Dawley, (collectively, the "Members"), is made and entered into as of September 3, 1999. RECITALS A. Luminant, Newco, the Company and the Members have determined that it is in their best interests to revise the Agreement. B. Luminant, Newco, the Company and the Members desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies have simultaneously agreed to amend the Other Agreements on substantially similar terms as those set forth herein. NOW, THEREFORE, in consideration of the premises, the mutual agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. The term "Initial Holdings" means, with respect to each Member, the number of Shares issued to the Member at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions of this Amendment, the provisions of this Amendment shall control and shall supersede such inconsistent provisions. 1 3. EXHIBIT 2.1(a) of the Agreement is deleted in its entirety and replaced with the EXHIBIT 2.1(a) attached hereto. 4. Article 17 is hereby amended by adding the following new Section 17.6: 17.6 SALE IN OVER-ALLOTMENT. The managing underwriter of the IPO has requested an over-allotment option relating to the IPO (the "Green Shoe"). Luminant will provide the opportunity to each of the Members to sell up to fifteen percent (15%) of the Member's Initial Holdings pursuant to the Green Shoe; provided however that Luminant may reduce pro rata the number of Shares to be sold by the Member, the other Members and the other members and stockholders of the Other Founding Companies pursuant to the Green Shoe if (a) Luminant determines that the inclusion of all or any portion of the Member's Shares or the aggregate number of Shares proposed to be sold pursuant to the Green Shoe by all members and stockholders of the Founding Companies could adversely affect the "tax free" status of the transactions contemplated in the Agreement and the Luminant Plan of Organization; or (b) in the aggregate stockholders and members of the respective Founding Companies have subscribed to sell more Shares pursuant to the Green Shoe than the total number of Shares that may be sold pursuant to the Green Shoe. Any Member desiring to sell Shares pursuant to the Green Shoe must execute the underwriting agreement relating to the IPO and otherwise comply with customary procedures for selling shareholders. Luminant agrees to pay the underwriting commissions and discounts payable in respect of Shares sold pursuant to the Green Shoe by the Members. 5. The third sentence of Section 17.1 is hereby deleted in its entirety and replaced with the following: "In addition, if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of Shares offered by any Persons (including Luminant) is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Members and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Members and the members and stockholders of the Other Founding Companies; provided however that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; further provided that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced. Subject to the foregoing, the reduction in the Shares offered by Luminant and the Members and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; 2 provided that to the extent that a member or stockholder of a Founding Company has sold (in that or a previous offering), or is being provided the right to sell, fifteen percent (15%) or more of his or her Initial Holdings pursuant to any registration under this Section 17.1, such holder's rights to be included in the offering shall be subordinate to the rights of Luminant and the other members and stockholders of the Founding Companies." 6. Article 10 is hereby amended by adding the following new Section 10.5: 10.5 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant agrees to file a registration statement on Form S-8 covering, among other things, Shares issuable upon exercise of options to be granted to employees of the Luminant group of companies. Persons holding the "Vested Options" in Luminant identified on EXHIBIT 2.1(a) shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 7. Section 7.3(c) of the Agreement is deleted and replaced with the following revised Section 7.3(c): (c) declare or pay any dividend, or make any distribution in respect of its capital interests whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any interests or engage in any transaction that will significantly affect the cash reflected on the Balance Sheet of the Company; except that the Company may make distributions to the Members in the Ordinary Course of Business up to the amount of the Company's earnings provided that the aggregate amount of such distributions does not create a working capital deficit for the Company of greater than $75,000; 8. EXHIBIT 3.3 is deleted in its entirety and replaced with the EXHIBIT 3.3 attached hereto. 9. Attached hereto as EXHIBIT 8 are resolutions of the Members approving this Amendment. 10. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the fifth and sixth line, and inserting "October 15, 1999." 11. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. 3 [Signature Page Follows] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE CORPORATION By: /s/ Guillermo G. Marmol _________________________ Name: Guillermo G. Marmol _________________________ Title: President and CEO _________________________ MULTIMEDIA ACQUISITION LLC By: /s/ Guillermo G. Marmol _________________________ Name: Guillermo G. Marmol _________________________ Title: President and CEO _________________________ MULTIMEDIA RESOURCES, LLC By: /s/ Henry Heilbrunn _________________________ Name: Henry Heilbrunn _________________________ Title: Member _________________________ MEMBERS: /s/ Henry Heilbrunn __________________________________ Henry Heilbrunn /s/ Lynn J. Branigan __________________________________ Lynn J. Branigan /s/ Norman L. Dawley __________________________________ Norman L. Dawley 5 EX-10.24 8 EXHIBIT 10-24 Exhibit 10.24 AMENDMENT TO AGREEMENT AND PLAN OF ORGANIZATION THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Organization, dated as of June 1, 1999 (the "Agreement"), by and among Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant, Inc. and referred to herein as "Luminant"), Potomac Partners Acquisition LLC, a Delaware limited liability company ("Newco"), Potomac Partners Management Consulting, LLC, a Delaware limited liability company (the "Company"), and Simon J. Blanks, James R. Corey, Robert J. Kacergis, Paul Wedeking, Brian D. Methvin, Donald S. Perkins, Ellen R. Marram, John M. Richman, Thomas Puglisi and Michael Smith (the "Members"), is made and entered into as of September 2, 1999. RECITALS A. Luminant, Newco, the Company and the Members have determined that it is in their best interests to revise the Agreement. B. Luminant, Newco, the Company and the Members desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies have simultaneously agreed to amend the Other Agreements. NOW, THEREFORE, in consideration of the premises, the mutual agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. The term "Initial Holdings" means, with respect to each Member, the number of Shares issued to the Member at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions of this Amendment, the provisions 1 of this Amendment shall control and shall supersede such inconsistent provisions. 3. EXHIBIT 2.1(a) of the Agreement is deleted in its entirety and replaced with the EXHIBIT 2.1(a) attached hereto. 4. Article 17 is hereby amended by adding the following new Section 17.6: 17.6 SALE IN OVER-ALLOTMENT. The managing underwriter of the IPO has requested an over-allotment option relating to the IPO (the "Green Shoe"). Luminant will provide the opportunity to each of the Members to sell up to fifteen percent (15%) of the Member's Initial Holdings pursuant to the Green Shoe; provided however that Luminant may reduce pro rata the number of Shares to be sold by the Member, the other Members and the other members and stockholders of the Other Founding Companies pursuant to the Green Shoe if (a) Luminant determines that the inclusion of all or any portion of the Member's Shares or the aggregate number of Shares proposed to be sold pursuant to the Green Shoe by all members and stockholders of the Founding Companies could adversely affect the "tax free" status of the transactions contemplated in the Agreement and the Luminant Plan of Organization; or (b) in the aggregate stockholders and members of the respective Founding Companies have subscribed to sell more Shares pursuant to the Green Shoe than the total number of Shares that may be sold pursuant to the Green Shoe. Any Member desiring to sell Shares pursuant to the Green Shoe must execute the underwriting agreement relating to the IPO and otherwise comply with customary procedures for selling shareholders. Luminant agrees to pay the underwriting commissions and discounts payable in respect of Shares sold pursuant to the Green Shoe by the Members. 5. The third sentence of Section 17.1 is hereby deleted in its entirety and replaced with the following: "In addition, if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of Shares offered by any Persons (including Luminant) is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Members and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Members and the members and stockholders of the Other Founding Companies; provided however that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; further provided that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced. Subject to the foregoing, the 2 reduction in the Shares offered by Luminant and the Members and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; provided that to the exten that a member or stockholder of a Founding Company has sold (in that or a previous offering), or is being provided the right to sell, fifteen percent (15%) or more of his or her Initial Holdings pursuant to any registration under this Section 17.1, such holder's rights to be included in the offering shall be subordinate to the rights of Luminant and the other members and stockholders of the Founding Companies." 6. Article 10 is hereby amended by adding the following new Section 10.6: 10.6 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant agrees to file a registration statement on Form S-8 pursuant to which eligible Persons holding options to purchase Shares will be permitted to sell Shares to the public. Persons holding the "Vested Options" in Luminant identified on EXHIBIT 2.1(a) shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 7. EXHIBIT 3.3 is deleted in its entirety and replaced with the EXHIBIT 3.3 attached hereto. The Additional Contingent Consideration shall be paid in the same mixture of cash and Shares as provided for payment of the Contingent Consideration under EXHIBIT 3.3. 8. Article 7 is hereby amended by adding the following new section 7.16: 7.16 EXERCISE OF OPTIONS BEFORE IPO. The Members agree to use their commercially reasonable best efforts to cause holders of Options, Convertible Securities and participation rights, if any, that are currently exercisable or that will become exercisable prior to Closing to refrain from exercising such Options and Convertible Securities prior to the Closing. 9. Section 10.5(a) of the Agreement is hereby deleted in its entirety and restated as follows: each of the holders of participation rights shall receive the number of Luminant Options set forth beside his or her name on EXHIBIT 9. 10. Attached hereto as EXHIBIT 10 are resolutions of the Members approving this Amendment. 11. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the sixth line, and inserting "October 15, 1999." 3 12. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. [signatures on following page] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE POTOMAC PARTNERS ACQUISITION LLC CORPORATION By: /s/ Guillermo G. Marmol By: /s/ Guillermo G. Marmol ------------------------- ------------------------- Name: /s/ Guillermo G. Marmol Name: /s/ Guillermo G. Marmol ------------------------- ------------------------- Title: President and CEO Title: President and CEO ------------------------- ------------------------- POTOMAC PARTNERS MANAGEMENT CONSULTING, LLC By: /s/ James R. Corey ------------------------- Name: James R. Corey ------------------------- Title: Managing Director ------------------------- MEMBERS: /s/ Simon J. Blanks /s/ Paul Wedeking - ----------------------------- --------------------------- Simon J. Blanks Paul Wedeking /s/ James R. Corey /s/ Ellen R. Marram - ----------------------------- --------------------------- James R. Corey Ellen R. Marram /s/ Robert J. Kacergis /s/ Donald S. Perkins - ----------------------------- --------------------------- Robert J. Kacergis Donald S. Perkins /s/ Brian D. Methvin /s/ John M. Richman - ----------------------------- --------------------------- Brian D. Methvin John M. Richman /s/ Thomas Puglisi /s/ Michael Smith - ----------------------------- --------------------------- Thomas Puglisi Michael Smith 5 /s/ Simon J. Blanks, Trustee - ---------------------------------------- SIMON J. BLANKS GRAT DATED June 18, 1999 /s/ James R. Corey, Trustee - ---------------------------------------- JAMES R. COREY GRAT DATED July 9, 1999 /s/ Brian Methvin, Trustee - ---------------------------------------- BRIAN METHVIN GRAT DATED July 28, 1999 /s/ Robert J. Kacergis, Trustee - ---------------------------------------- ROBERT J. KACERGIS GRAT DATED July 22, 1999 6 EX-10.25 9 EXHIBIT 10-25 Exhibit 10.25 AMENDMENT TO AGREEMENT AND PLAN OF ORGANIZATION THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Organization, dated as of June 1, 1999 (as in effect on the date hereof, but without giving effect to this Amendment, the "Agreement"), by and among Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant, Inc. and referred to herein as "Luminant"), RSI I Acquisition Corp., a Texas corporation ("Newco"), RSI Group, Inc., a Texas corporation (the "Company") Resource Solutions International, LLC, a Texas limited liability company ("the Subsidiary"), and Charles Harrison, Carolyn Brown, and Bruce D. Grant (each individually a "Stockholder" and collectively, the "Stockholders"), is made and entered into as of September 2, 1999. RECITALS A. Luminant, Newco, the Company and the Stockholders have determined that it is in their best interests to revise the Agreement. B. Luminant, Newco, the Company and the Stockholders desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies have simultaneously agreed to amend the Other Agreements. NOW, THEREFORE, in consideration of the premises, the mutual agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. The term "Initial Holdings" means, with respect to each Stockholder, the number of Shares issued to the Stockholder at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions 1 of this Amendment, the provisions of this Amendment shall control and shall supersede such inconsistent provisions. 3. EXHIBIT 2.1(a) of the Agreement is deleted in its entirety and replaced with the EXHIBIT 2.1(a) attached hereto. 4. Article 17 is hereby amended by adding the following new Section 17.6: 17.6 SALE IN OVER-ALLOTMENT. The managing underwriter of the IPO has requested an over-allotment option relating to the IPO (the "Green Shoe"). Luminant will provide the opportunity to each of the Stockholders to sell up to fifteen percent (15%) of the Stockholder's Initial Holdings pursuant to the Green Shoe; provided however that Luminant may reduce pro rata the number of Shares to be sold by the Stockholder, the other Stockholders and the other members and stockholders of the Other Founding Companies pursuant to the Green Shoe if (a) Luminant determines that the inclusion of all or any portion of the Stockholder's Shares or the aggregate number of Shares proposed to be sold pursuant to the Green Shoe by all members and stockholders of the Founding Companies could adversely affect the "tax free" status of the transactions contemplated in the Agreement and the Luminant Plan of Organization; or (b) in the aggregate stockholders and members of the respective Founding Companies have subscribed to sell more Shares pursuant to the Green Shoe than the total number of Shares that may be sold pursuant to the Green Shoe. Any Stockholder desiring to sell Shares pursuant to the Green Shoe must execute the underwriting agreement relating to the IPO and otherwise comply with customary procedures for selling shareholders. Luminant agrees to pay the underwriting commissions and discounts payable in respect of Shares sold pursuant to the Green Shoe by the Stockholders. 5. The third sentence of Section 17.1 is hereby deleted in its entirety and replaced with the following: "In addition, if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of Shares offered by any Persons (including Luminant) is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Stockholders and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Stockholders and the members and stockholders of the Other Founding Companies; provided however that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; further provided that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced. Subject to the foregoing, the 2 reduction in the Shares offered by Luminant and the Stockholders and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; provided that to the extent that a member or stockholder of a Founding Company has sold (in that or a previous offering), or is being provided the right to sell, fifteen percent (15%) or more of his or her Initial Holdings pursuant to any registration under this Section 17.1, such holder's rights to be included in the offering shall be subordinate to the rights of Luminant and the other members and stockholders of the Founding Companies." 6. Article 10 is hereby amended by adding the following new Section 10.6: 10.6 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant agrees to file a registration statement on Form S-8 pursuant to which eligible Persons holding options to purchase Shares will be permitted to sell Shares to the public. Persons holding the "Vested Options" in Luminant identified on EXHIBIT 2.1(A) shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 7. EXHIBIT 3.3 is deleted in its entirety and replaced with the EXHIBIT 3.3 attached hereto. 8. Attached hereto as EXHIBIT 8 are resolutions of the Stockholders and the Board of Directors of the Company approving this Amendment. 9. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the sixth line of the paragraph, and inserting "October 15, 1999." 10. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. [Signature Page Follows] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE RSI I ACQUISITION CORP., CORPORATION By: /s/ Guillermo G. Marmol By: /s/ Guillermo G. Marmol _________________________ _________________________ Name: Guillermo G. Marmol Name: Guillermo G. Marmol _________________________ _________________________ Title: President and CEO Title: President and CEO _________________________ _________________________ RSI GROUP, INC. RESOURCE SOLUTIONS INTERNATIONAL, LLC By: /s/Charles Harrison By: /s/Charles Harrison _________________________ _________________________ Name: Charles Harrison Name: Charles Harrison _________________________ _________________________ Title: CEO Title: Manager _________________________ _________________________ STOCKHOLDERS: /s/ Charles Harrison /s/ Carolyn Brown - ----------------------------- ------------------------------- Charles Harrison Carolyn Brown /s/ Bruce D. Grant - ----------------------------- Bruce D. Grant 4 EX-10.26 10 EXHIBIT 10.26 EXHIBIT 10.26 EXECUTION COPY AMENDMENT TO CONTRIBUTION AGREEMENT This AMENDMENT (the "Amendment") to the Contribution Agreement, dated as of June 7, 1999 (as in effect on the date hereof, but without giving effect to this Amendment, the "Agreement"), by and between Luminant Worldwide Corporation, a Delaware corporation (f/k/a Clarant Worldwide Corporation and referred to herein as "Luminant"), and Young & Rubicam Inc., a Delaware corporation (the "Contributor"), is made and entered into as of September 2, 1999. RECITALS A. Luminant and Contributor have determined that it is in their best interests to revise the Agreement. B. Luminant and Contributor desire to amend the Agreement on the terms and subject to the conditions set forth herein. C. All of the Other Founding Companies and their stockholders or members have simultaneously executed and delivered amendments to each of their respective Other Agreements. NOW, THEREFORE, in consideration of the agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The term "Shares" means shares of Luminant Common Stock. "Non-Voting Shares" means shares of Luminant non-voting Common Stock and "Voting Shares" means shares of Luminant voting Common Stock. The term "Initial Holdings" means the number of Shares issued to Contributor at the Closing. All defined terms in the Agreement using the word "Clarant" are hereby revised to use the word "Luminant." 2. The Agreement is amended to provide that the references in the Agreement to "this Agreement" or "the Agreement" (including indirect references such as "hereunder," "hereby," "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. To the extent that any provisions of the Agreement as in effect prior to the effectiveness of this Amendment conflict with or contradict the provisions of this Amendment, the provisions of this Amendment shall control and shall supersede such inconsistent provisions. 3. Article 3 is hereby amended by adding a new Section 3.4 and Section 3.5 to read as follows: 3.4 SALE AND PURCHASE OF NON-VOTING SHARES AT IPO. At the closing of the IPO, Luminant agrees to sell to Contributor and Contributor agrees to purchase from Luminant, in a private placement, Non-Voting Shares, at the IPO price per share, with an aggregate value equal to fifteen million dollars ($15,000,000). The placement fee for the transaction described in this Section 3.4 shall not exceed four percent (4.0%) and shall be paid by Luminant. The demand and piggyback registration rights provided for in Section 17.1 shall apply to the shares described in this Section 3.4; PROVIDED, THAT, in addition to the Demand Registration right provided to Contributor in Section 17.1(b), Contributor shall have the additional right to effect one Demand Registration solely with respect to the shares described in this Section 3.4 at any time during the six-month period beginning on the date that is twelve (12) months after the Closing Date, and any shares described in this Section 3.4 that are not included in such Demand Registration may be included in a Demand Registration that occurs after the date that is eighteen (18) months after the Closing Date as described in Section 17.1(b) or in any other registration as permitted by Section 17.1(a). In the event Contributor is required at any time to file a notification and report form under the HSR Act with respect to the Shares acquired pursuant to the Agreement, as amended hereby, Luminant shall pay the applicable filing fee for Contributor and Contributor's reasonable expenses in connection with such filing. 3.5 ISSUANCE OF NON-VOTING COMMON STOCK; CONVERSION OF VOTING SHARES AND NON-VOTING SHARES. (a) Except as specifically provided for in Sections 3.4, 3.5(b) and 3.5(d) hereof, all shares of Luminant Common Stock issued or transferred to the Contributor pursuant to this Agreement, or in connection with the transactions contemplated hereunder, shall be Voting Shares. (b) To the extent that any issuance or transfer of Shares hereunder (including any issuance or transfer pursuant to Section 3.1 or 3.3 hereof, or any issuance upon the exercise of the option described in Section 10.8(i) hereof) would cause Contributor to directly or indirectly own in excess of eighteen percent (18%) of the issued and outstanding Voting Shares, Luminant shall, in lieu of issuing that number of Voting Shares which would result in such excess, issue to Contributor an equal number of NonVoting Shares. (c) Luminant hereby agrees to notify Contributor if Luminant, or if, to Luminant's knowledge, any other Person, takes any action or fails to take any action which would (i) cause Contributor to own in excess of eighteen percent (18%) of the issued and outstanding Voting Shares or (ii) if Contributor at the time owns Non-Voting Shares, 2 cause Contributor to own less than eighteen percent (18%) of the issued and outstanding Voting Shares. (d) Contributor shall have the option to convert at any time, on a one-to-one basis, (i) any number of its Voting Shares into Non-Voting Shares and (ii) any number of its Non-Voting Shares into Voting Shares; PROVIDED, HOWEVER, Contributor shall not have the right to convert any Non-Voting Shares into Voting Shares if such conversion would result in Contributor owning in excess of eighteen percent (18%) of the issued and outstanding Voting Shares. (e) Except for voting rights, the Non-Voting Shares shall have the same rights, entitlements and preferences as any other class of Luminant Common Stock. The parties acknowledge and agree that the value of each Non-Voting Share is equal to the value of each Voting Share, and that any Non-Voting Shares issued to Contributor in lieu of Voting Shares pursuant to this Section 3.5, or converted from Voting Shares pursuant to this Section 3.5, shall be treated as Voting Shares for all other purposes under this Agreement and the transactions contemplated hereby. (f) Prior to the closing of the IPO, Luminant shall have amended Article IV of its Articles of Incorporation by adding the following provision: "At the option of the holder of Non-Voting Common Stock, each share of NonVoting Common Stock held by such holder may be converted at any time on a share for share basis into Common Stock." 5. Article 5 is hereby amended by adding the following new Section 5.3: Section 5.3 ACCREDITED INVESTOR. Contributor is an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated under the 1933 Act. 6. Section 10.3(b) is hereby amended by deleting "ten (10)" on the third line and inserting "eleven (11)." 7. Section 10.8(i) is amended to provide that Luminant shall grant to Contributor, in consideration for this Section 10.8, at the Closing, an option to purchase one million eight hundred thousand (1,800,000) shares of Luminant Common Stock at an exercise price equal to the IPO price per share of Luminant Common Stock. Further, EXHIBIT 10.8(i) is hereby amended to reflect such increase in the shares of Luminant Common Stock subject to the option. 8. Article 10 is hereby amended by adding the following new Section 10.10: 3 10.10 FORM S-8 FILING. Within thirty (30) days after the Closing, Luminant shall file a registration statement on Form S-8 pursuant to which the issuance of Shares upon the exercise of options will be registered. Persons holding the "Vested Options" in Luminant identified on Addendum A and Addendum B to EXHIBIT 3.1 shall be prohibited from exercising the Vested Options for a period of thirty (30) days following the Closing. 9. Section 12.1(b) is hereby amended by deleting "December 31, 1999" on the fourth line and inserting "October 15, 1999." 10. The third sentence of Section 17.1(a) is hereby deleted in its entirety and replaced with the following: In addition, subject to Section 17.1(b)(v), if Luminant is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1(a) that the number of Shares offered by any Persons is greater than the number of Shares that can be offered without adversely affecting the offering, Luminant may reduce the number of Shares to be offered by first reducing the number of Shares to be offered by Persons other than Luminant, the Contributor and the members and stockholders of the Other Founding Companies, and second by reducing pro rata the number of Shares to be offered by Luminant, the Contributor and the members and stockholders of the Other Founding Companies; PROVIDED HOWEVER that in no event shall the Shares to be offered by Luminant be reduced to less than fifty percent (50%) of the offering; FURTHER PROVIDED that if the number of Shares to be offered by Luminant is already less than or equal to fifty percent (50%) of the offering, then the number of Shares to be offered by Luminant shall not be reduced. Subject to the foregoing, the reduction in the Shares offered by Luminant and the Contributor and the stockholders and members of the Other Founding Companies shall be effected on a pro rata basis; provided that to the extent that the Contributor or a member or stockholder of a Founding Company has sold (in that or a previous offering), or is being provided the right to sell, fifteen percent (15%) or more of its, his or her Initial Holdings pursuant to any registration under this Section 17.1(a), such holder's rights to be included in the offering shall be subordinate to the rights of Luminant, the Contributor and the members and stockholders of the Other Founding Companies. 11. Section 17.1(b) is hereby amended by adding the following new subsection 17.1(b)(v): (v) Notwithstanding any other provision contained in this Article 17 or any provision contained in any of the Other Agreements, any Shares sought to be registered by Contributor shall not be subject to reduction under Section 17.1(a) in any underwritten offering resulting from the exercise by Contributor of its Demand Registration rights under either Section 3.4 or this Section 17.1(b). 4 12. Section 17.1(b)(iii) is hereby amended in its entirety and replaced with the following: Luminant shall be obligated to effect one Demand Registration for Contributor pursuant to this Section 17.1(b) and one Demand Registration for Contributor pursuant to Section 3.4. 13. EXHIBIT 3.1 is deleted in its entirety and replaced with the EXHIBIT 3.1 attached hereto. 14. EXHIBIT 3.3 is deleted in its entirety and replaced with the EXHIBIT 3.3 attached hereto. 15. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. [Signature Page Follows] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or representatives, as of the date first above written. LUMINANT WORLDWIDE CORPORATION By: /s/ Guillermo G. Marmol ------------------------------------------ Name: Guillermo G. Marmol Title: Chief Executive Officer YOUNG & RUBICAM INC. By: /s/ Steve Blondy ------------------------------------------ Name: Steve Blondy Title: Authorized Signatory 6 EX-10.29 11 EXHIBIT 10.29 EXHIBIT 10.29 EXECUTION COPY |__| Employee's Copy |__| Company's Copy LUMINANT WORLDWIDE CORPORATION AMENDMENT ONE TO EMPLOYMENT AGREEMENT To GUILLERMO G. MARMOL: This amendment to your existing employment agreement establishes the terms of your continued employment with Luminant 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. This Agreement amends your employment agreement (the "1998 EMPLOYMENT AGREEMENT") dated as of September 1, 1998 with WebOne, Inc., the Company's former name, which agreement remains in place in all respects not amended below. EMPLOYMENT AND DUTIES You and the Company agree to your employment as Chief Executive Officer (and, until the IPO, as President) of the Company on the terms contained herein. (You agree that ceasing to serve as President does not give you any rights under your employment agreement.) In such position, you will report directly to the Company's Board of Directors (the "BOARD"). You agree to perform whatever duties the Board may assign you from time to time, consistent with your position as Chief Executive Officer. During your employment, you agree to devote your primary business time, attention, and energies to performing those duties (except as you and the Board otherwise agree from time to time). You agree to comply with the noncompetition, secrecy, and other provisions of Exhibit A to this Agreement. OPTIONS As of the date the Company's underwriters price the IPO, the Company will grant options to you under the Company's 1999 Equity Incentive Plan (the "EQUITY PLAN"), exercisable at the IPO price, to acquire 5% of the shares of common stock that will be outstanding immediately after the IPO (including for that purpose any shares subject to the underwriters' overallotment but excluding Page 1 of 14 any shares subject to options, whether or not then exercisable). 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 option agreement will provide that such options will be one-quarter exercisable when granted and that an additional quarter will become exercisable on and after each anniversary of the date of grant so long as either you are then employed or the option agreement provides for additional exercisability. The Company will permit cashless exercises of the options, subject to any applicable lockups and securities law restrictions. The options will have a term of up to 10 years (subject to early expiration upon termination for Cause or as otherwise provided under the Equity Plan or the option agreement), provided that the Company agrees you will have the lesser of the remainder of the 10 years or 36 months after your termination of employment for any reason (other than for Cause or your own resignation other than for Good Reason) to exercise any options that are already exercisable or that become exercisable under another agreement with the Company. You agree that this OPTIONS provision is in lieu of the Stock Options provision in Section 2.3 of the 1998 Employment Agreement. 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 any such permitted assignment or transfer does not entitle you to severance. This Page 2 of 14 Agreement binds and benefits the Company, its successors or assigns, and your heirs and the personal representatives of your estate. Without the Board'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 enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. If you accept the terms of this Agreement, please sign in the space indicated below. We encourage you to consult with any advisers you choose. LUMINANT WORLDWIDE CORPORATION By: ------------------------------ George P. Stamas, Director I accept and agree to the terms of employment set forth in this Agreement: - --------------------------- Guillermo G. Marmol Dated: --------------------- Page 3 of 14 EXHIBIT A NO COMPETITION You agree to the provisions of this Exhibit A in consideration of (i) your employment by the Company and salary and benefits under this Agreement and the training you will receive in connection with such employment and (ii) the Company's granting of options to you, and you agree that Exhibit A should be considered ancillary to the option agreement. YOU AGREE THAT THIS EXHIBIT WILL CONTINUE TO APPLY FOR TERMS IT SPECIFIES, WITHOUT REGARD TO ANY PROVISION IN YOUR WEBONE AGREEMENT THAT PROVIDED FOR TERMINATION OF OBLIGATIONS IN CERTAIN CIRCUMSTANCES. 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 good faith Page 4 of 14 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. 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. Page 5 of 14 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 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 Page 6 of 14 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 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 properly in the Page 7 of 14 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 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, Page 8 of 14 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. 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: Page 9 of 14 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. 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 Page 10 of 14 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 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. Page 11 of 14 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, including any predecessor employment agreements, 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 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 ARBITRATION parties 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 PRINCIPLES laws 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 Page 12 of 14 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 EVIDENCE; expedite the resolution of disputes and to PRESUMPTIONS reduce the costs and 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 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. Page 13 of 14 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 prevent the Company from immediately seeking in court an injunction or other remedy with respect to Exhibit A. Page 14 of 14 EX-10.30 12 EX-10.30 Exhibit 10.30 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS. Luminant Worldwide Corporation Common Stock Purchase Warrant Expiring June 30, 2007 Washington, D.C. 9:00 a.m., September 16, 1999 No. W-001 Luminant Worldwide Corporation, a Delaware corporation (the "Company"), for value received, hereby certifies that United Air Lines, Inc., a Delaware corporation (the "Purchaser"), or its permitted assigns (each of the Purchaser and its permitted assigns is referred to herein as a "Holder"), is entitled to purchase from the Company up to THREE HUNDRED THOUSAND (300,000) shares of Common Stock, par value $.01 per share, of the Company (the "Common Stock"), at such times after the date hereof and on or before 5:00 p.m., Washington, D.C. time, on June 30, 2007 (the "Exercise Period"), at the exercise price per share set forth in Section 1 hereof and subject to the terms, conditions and adjustments set forth below. As applicable, references to Common Stock contained herein shall also refer to any other securities of the Company that may become covered by this Warrant under Section 4. SECTION I EXERCISE PRICE The exercise price at which shares of Company Common Stock may be acquired pursuant to this Warrant shall be the price per share of Common Stock in the Company's initial public offering (the "Exercise Price"), subject to any adjustment pursuant to Section 4. SECTION II EXERCISE OF WARRANT 2.1 NUMBER OF SHARES OF COMMON STOCK FOR WHICH WARRANT IS EXERCISABLE. This Warrant shall be exercisable for shares of Common Stock, not to exceed 300,000 shares, upon the terms and conditions stated below: (a) The Holder's right to purchase shares of Common Stock under this Warrant shall terminate if the Company's initial public offering ("IPO") of shares of Common Stock has not been consummated within ninety (90) days of the date hereof; (b) At any time during the period that is three (3) years following the later to occur of the date of this Warrant or the date of the closing of the Company's IPO, the Holder shall be entitled to exercise this Warrant to purchase up to 50,000 shares of Common Stock at the Exercise Price. Holder's right to exercise this Warrant under this Section 2.1(b) shall expire at 5:00 p.m., Washington, D.C. time, on the date that is the third anniversary following the later of the date of this Warrant or the date of the closing of the Company's IPO; (c) On the end date of the second fiscal quarter of the Company following the later to occur of the date of this Warrant or the closing of the Company's IPO (such end date, the "First Vesting Date"), and, on the end date of every second fiscal quarter of the Company thereafter until June 30, 2004 (such dates, including the First Vesting Date, being "Vesting Dates"), the Holder shall become entitled to exercise this Warrant to purchase that number of shares of Common Stock that is equal to 250,000 times a fraction, the numerator of which is the gross revenue received by the Company from the Purchaser, its affiliates, joint venture partners and Star Alliance Members (such parties collectively, the "United Parties" and the gross revenues received from the United Parties being the "United Revenue") during the two fiscal quarters preceding each Vesting Date and the denominator of which is fifty million dollars ($50,000,000). Any right to purchase shares of Common Stock that Holder may obtain under this Section 2.1(c) must be exercised by 5:00 p.m., Washington, D.C. time on the date that is three (3) years after the date that the Purchaser's right to purchase such shares of Common Stock becomes exercisable under this Section 2.1(c), or such right shall terminate as of such time and date. Notwithstanding the foregoing, in no event shall Holder exercise this Warrant following the end of the Exercise Period; (d) At the election of Holder, which election may be made at any time after the First Vesting Date, the Vesting Dates described in Section 2.1(c) may be changed to be the end date of each fiscal quarter of the Company. If Holder makes the election permitted by this Section 2.1(d), at each Vesting Date following such election, the Holder shall become entitled to exercise this Warrant to purchase that number of shares that is equal to 250,000 times a fraction, the numerator of which is the United Revenue during the fiscal quarter ending on such Vesting Date and the denominator of which is fifty million dollars ($50,000,000). Any right to purchase shares of Common Stock that Holder may obtain under this Section 2.1(d) must be exercised by 5:00 p.m., Washington, D.C. time on the date that is three (3) years after the date that the Holder's right to purchase such shares of Common Stock becomes exercisable under this Section 2.1(d), or such right shall terminate as of such time and date. Notwithstanding the foregoing, in no event may Holder exercise this Warrant to purchase any shares of Common Stock following the end of the Exercise Period; and (e) This Warrant shall be exercisable for a maximum of THREE HUNDRED THOUSAND (300,000) shares of Common Stock. If the United Revenue does not equal or exceed fifty million dollars ($50,000,000) prior to the end of the Exercise Period, the number of shares of Common Stock that Holder may purchase from the Company pursuant to this Warrant shall not exceed the greater of (x) THREE HUNDRED THOUSAND (300,000) times a fraction, the numerator of which is the aggregate United Revenue and the denominator of which is fifty million dollars ($50,000,000) or (y) 50,000. 2.2 PROCEDURE FOR EXERCISE OF WARRANT. At any time during the Exercise Period, the Holder may exercise all or any part of this Warrant that is then exercisable by delivering to the Company at its principal office or at such other office or agency in the United States as the Company may designate by notice in writing to the Holder the following: (a) this Warrant, (b) the purchase form provided for herein duly executed by the Holder or by the Holder's duly authorized attorney-in-fact, and (c) payment in full of the Exercise Price for the number of shares of Common Stock to be purchased under this Warrant in cash, bank cashier's check, certified check payable to the order of the Company, or by requesting that the Company cancel a portion of this Warrant representing the Holder's exercisable right to purchase a number of shares of Common Stock and/or other securities having a value (which value shall be measured by the difference between the Exercise Price and the Market Price of the Common Stock or other securities) equal to the aggregate Exercise Price for the shares of Common Stock or other securities being purchased. "Market Price" means the average closing price of the Common Stock or other securities on the Nasdaq Stock Market for the ten-trading day period ending the day before the date that Holder exercises this Warrant. Any replacement warrant issued to Holder under Section 4 following a "cashless exercise" as described in this Section 2.2 shall reflect an appropriate reduction in the number of shares of Common Stock and/or other securities then exercisable under such warrant. 2.3 TRANSFER RESTRICTION LEGEND. Unless at the time of exercise the shares being purchased under this Warrant are registered under the Securities Act of 1933, as amended (the "Act"), the face of each certificate for shares of Common Stock issued under this Warrant shall bear the following legend (and any additional legend required by any securities exchange upon which such shares may, at the time of such exercise, be listed): "The securities represented by this certificate have not been registered under the Securities Act of 1933 or the securities laws of any state and may not be sold or otherwise disposed of except pursuant to an effective registration statement under such act and applicable state securities laws or an applicable exemption to the registration requirements of such act or such laws." 2.4 ACKNOWLEDGMENT OF CONTINUING OBLIGATION. If the Holder exercises this Warrant in part, the Company will (i) acknowledge in writing the Company's continuing obligation to the Holder under the portion of this Warrant that was not exercised; PROVIDED, HOWEVER, that the Company's obligations under the unexercised portion of the Warrant shall continue even if the Holder makes no request; and (ii) issue to the Holder a revised Warrant reflecting any modifications to the Warrant resulting from the exercise subject to the reasonable approval of the Holder and its counsel. 2.5 TERMINATION OF WARRANT. If the Holder fails to exercise this Warrant during the Exercise Period, or the Company has not consummated its IPO within ninety (90) days of the date hereof, then this Warrant shall terminate and thereafter be null and void. SECTION III OWNERSHIP OF THIS WARRANT 3.1 DEEMED HOLDER. The Company may deem and treat the person in whose name this Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until the deemed Holder presents this Warrant for registration of transfer as provided in this Section 3. 3.2 EXCHANGE, TRANSFER AND REPLACEMENT. Except as provided in the third sentence of this Section 3.2, the portion of this Warrant that has not yet become exercisable may not be sold, transferred, pledged, hypothecated or otherwise assigned (any such action, a "transfer") without the prior written consent of the Company, which consent may be withheld in the sole discretion of the Company. Subject to the requirements of the third sentence of this Section 3.2, the portion of this Warrant that has become exercisable may be sold, transferred, pledged, hypothecated or otherwise assigned (any such action, a "transfer") without the prior written consent of the Company; provided that such transfer is not prohibited by applicable state and federal securities laws. If the Holder elects to transfer this Warrant to any subsidiary of the Purchaser, to any entity that beneficially owns a majority of the Purchaser or to any subsidiary of an entity that beneficially owns a majority of the Purchaser, the Holder may do so without the prior consent of the Company provided that the Holder transfers the entirety of this Warrant to such entity. At the time of any transfer of the Warrant, the Company may require the transferee to make such representations as may be reasonably required in the opinion of counsel to the Company to permit a transfer without a registration under applicable Federal and state securities laws. Upon the Company's receipt of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in case of loss, theft or destruction, an indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new warrant of like tenor, in lieu of this Warrant; PROVIDED, HOWEVER, that if the Holder of this Warrant is the original Holder, an affidavit of lost Warrant shall be sufficient for all purposes of this Section 3.2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange, transfer or replacement. The Company shall pay all reasonable expenses, taxes (other than stock transfer taxes and income taxes) and other charges payable by it in connection with the issuance of a new warrant pursuant to Section 2.4 or 3.2 or the preparation, execution and delivery of shares of Common Stock issued upon the exercise of the Warrant pursuant to this Section 3.2. SECTION IV ADJUSTMENT TO THE TERMS OF THE WARRANT 4.1 SUBDIVISIONS AND COMBINATIONS. If, after the date of issuance, the Company: (a) pays a dividend or makes a distribution on its Common Stock in shares of its capital stock (including Common Stock); (b) subdivides its outstanding shares of Common Stock into a greater number of shares; (c) combines its outstanding shares of Common Stock into a smaller number of shares; or (d) issues by reclassification of its Common Stock any shares of its capital stock or other securities (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each such case, an appropriate and proportionate adjustment shall be made in the number of shares of Common Stock or other securities of the Company covered by this Warrant so that upon exercising this Warrant immediately after such action, the Holder would be entitled to re ceive the number of shares of Common Stock or other securities of the Company that such Holder would have owned immediately following such action if such Holder had exercised this Warrant immediately prior to such action. The adjustment shall become effective immediately after the earlier of (i) the record date or the distribution date in the case of a dividend or distribution and (ii) the record date or the effective date in the case of a subdivision, combination or reclassification. Whenever the number of shares of Common Stock purchasable upon the exercise of this Warrant is adjusted, as herein provided, the per share Exercise Price shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately prior to such adjustment, and the denominator of which shall be the number of shares of Common Stock so purchasable immediately thereafter. 4.2 OTHER SECURITIES. If at any time, as a result of an adjustment made pursuant to this Section 4, the Holder becomes entitled to purchase other securities of the Company or the stock or other securities of any other person, corporate or otherwise, thereafter the number of such other securities so purchasable upon exercise of this Warrant and the Exercise Price of such securities shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in this Section 4, and the provisions of this Warrant with respect to the shares of Common Stock shall apply on like terms to any such other shares, capital stock or other securities. 4.3 CONSOLIDATIONS MERGERS AND OTHER TRANSACTIONS. In case of any consolidation of the Company with or merger of the Company into another corporation or other entity, or in case of any sale or conveyance to another corporation or other entity of the property of the Company as an entirety or substantially as an entirety, proper provision shall be made so that the Holder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of this Warrant the kind and amount of other securities and property which the Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had this Warrant been exercised immediately prior to such action. The Company shall give notice to each Holder of such provision. Such provision shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. 4.4 NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the kind or amount of securities purchasable upon the exercise of this Warrant shall be adjusted pursuant to any of the provisions of this Warrant, the Company shall forthwith thereafter cause to be sent to the Holder a certificate setting forth the adjustments in the Exercise Price and/or in said number of shares, and also setting forth in detail the facts requiring such adjustments. 4.5 NOTICE OF CERTAIN EVENTS. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than any regular quarterly dividend paid by the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, or any reclassification or recapitalization of the capital stock of the Company, or any transfer of all or substantially all of the assets of the Company to, or consolidation or merger of the Company with or into, any other person, or (c) any voluntary or involuntary dissolution or liquidation of the Company, then, and in each such event, the Company will mail or cause to be mailed to the Holder a notice specifying: (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and stating the amount and character of such dividend, distribution or right, or (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the proposed record date or the proposed closing date, as applicable, therein specified. 4.6 FRACTIONAL INTEREST; ROUNDING. In computing adjustments under this Section 4 or the number of shares that may be purchased upon exercise of the Warrant under Section 2.1 and 2.2, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share, and adjustments in the Exercise Price shall be made to the nearest $.01. SECTION V SPECIAL AGREEMENTS OF THE COMPANY The Company covenants and agrees that: 5.1 RESERVATION OF SHARES OF COMMON STOCK. The Company will reserve and set apart and have at all times, free from preemptive rights, a number of shares of authorized but unissued Common Stock deliverable upon the exercise of this Warrant or of any other rights or privileges provided for therein sufficient to enable the Company at any time to fulfill all its obligations hereunder. 5.2 NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, or any other similar voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant. 5.3 NO ASSIGNMENT. The Company may not assign this Warrant or any rights or obligations hereunder without the prior written consent of the Holder, which consent shall not be unreasonably withheld, delayed or conditioned; provided that nothing in this Section 5.3 shall be construed to give the Holder any right to consent to any consolidation, merger or other transaction of any kind contemplated by the Company. SECTION VI NOTICES Any notice required or permitted by or in connection with this Warrant shall be in writing and shall be made by facsimile, or by hand delivery, or by overnight delivery service, or by certified mail, return receipt requested, postage prepaid, addressed to the parties at the appropriate address set forth below or to such other address as may be hereafter specified by written notice by the parties to each other. Notice shall be considered given as of the earlier of the date of actual receipt or the date of the facsimile or hand delivery, one (1) business day after delivery to an overnight delivery service, or three (3) business days after the date of mailing, independent of the date of actual delivery or whether delivery is ever in fact made, as the case may be, provided the giver of notice can establish that notice was given as provided herein. If to Purchaser: United Air Lines, Inc. World Headquarters -- WHQLD 1200 East Algonquin Road Elk Grove Township, Illinois 60007 Attention: General Counsel Fax: 847-700-4683 with a copy to: Skadden, Arps, Slate, Meagher & Flom, LLP 525 University Avenue Suite 220 Palo Alto, California 94301 Attention: Kenton J. King Fax: 650-470-4570 If to the Company: 4100 Spring Valley Road Suite 750 Dallas, Texas 75244-3699 Attention: Guillermo G. Marmol Fax: (972) 387-8917 with copies to: Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20037 Attention: George P. Stamas, Esq. Fax: (202) 663-6363 SECTION VII GOVERNING LAW This Warrant shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Delaware, without giving effect to its conflicts of laws provisions. SECTION VIII BINDING EFFECT ON THE COMPANY'S SUCCESSOR This Warrant shall be binding upon any corporation or entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. SECTION IX MISCELLANEOUS 9.1 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained in the Warrant shall be construed as conferring upon the Holder hereof any rights as a stockholder of the Company or as imposing any liabilities on such Holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. 9.2 AMENDMENT; WAIVER; ETC. The Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. The agreements of the Company contained in the Warrant other than those applicable solely to the Warrant and the Holder thereof shall inure to the benefit of and be enforceable by any Holder or Holders at the time of any shares of Common Stock issued upon the exercise of the Warrant, whether so expressed or not. 9.3 HEADINGS. The section headings in the Warrant are for purposes of convenience only and shall not constitute a part hereof. [signature on following page] IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and dated as of the date first hereinabove set forth. LUMINANT WORLDWIDE CORPORATION By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- Signature Page to Warrant W-001 ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IF IT DESIRES AND IS PERMITTED TO TRANSFER THE WARRANT OF LUMINANT WORLDWIDE CORPORATION) FOR VALUE RECEIVED ___________________________________ hereby sells, assigns and transfers unto __________________________ the right to purchase shares of Common Stock evidenced by the within Warrant, and does hereby irrevocably constitute and appoint ________________________________________ Attorney to transfer the said Warrant on the books of the Company (as defined in said Warrant) with full power of substitution. The undersigned represents and warrants to the Company that this assignment has been effected in compliance with all applicable provisions of said Warrant. Signature: (SEAL) ------------------------------- Address: ------------------------------- ------------------------------- Dated: -------------------- In the presence of - ------------------------------ ------------------------------------ (Witness) (Signature of Witness) NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. PURCHASE FORM (TO BE EXECUTED ONLY UPON EXERCISE OF WARRANT) The undersigned registered owner of this Warrant irrevocably exercises this Warrant for and purchases Shares of Common Stock of LUMINANT WORLDWIDE CORPORATION purchasable with this Warrant, and herewith makes payment therefor: (circle the following as applicable) 1. By cash in the amount of $________. 2. By bank cashier's check in the amount of $_________. 3. By certified check in the amount of $_________. 4. By request for cancellation of the right to purchase ______ shares of Common Stock or other securities under the Warrant having a value (net of the applicable Exercise Price) equivalent to the aggregate Exercise Price for the shares of Common Stock or other securities being purchased. all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to __________________________, whose address is _________________________________ and, if such shares shall not include all of the shares issuable as provided in this Warrant that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable thereunder be delivered to the undersigned. Dated: - ------------------------------------- (Signature of Registered Owner) - --------------------------------------- (Street Address) - --------------------------------------- (City) (State) (Zip Code) EX-10.31 13 EX-10.31 Exhibit 10.31 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of September 16, 1999, by and among LUMINANT WORLDWIDE CORPORATION, a Delaware corporation (the "Company"), and UNITED AIR LINES, INC., a Delaware corporation ("UAL"). RECITALS A. The Company has issued to UAL a warrant dated of even date herewith (the "Warrant") to purchase up to 300,000 shares of the common stock of the Company (the "Company Common Stock"). B. The Company and UAL desire to provide certain registration rights to UAL with respect to the shares of Company Common Stock that UAL may acquire under the Warrant. NOW THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Company and UAL agree as follows: 1. DEFINITIONS. For purposes of this Agreement, in addition to terms defined elsewhere herein, the following terms when used herein shall have the following meanings: "Code" means the U.S. Internal Revenue Code of 1986, as amended. "Company Common Stock" means shares of the Company's common stock, $.01 par value per share. "Founding Companies" means Align Solutions Corp., a Delaware corporation, Free Range Media, Inc., a Washington corporation, Young & Rubicam, Inc., a Delaware corporation (with respect to Brand Dialogue, a business division of Young & Rubicam), Multimedia Resources, LLC, a New York limited liability company, Potomac Partners Management Consulting, LLC, a Delaware limited liability company, RSI Group, Inc., a Texas corporation, Integrated Consulting, Inc., d/b/a i.con interactive, a Texas corporation, and Interactive8, Inc., a New York corporation. "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government body. "Shares" means shares of Company Common Stock that have been issued to UAL or its permitted assigns thereunder upon its exercise of the Warrant (or any successor Warrant) as of the date of a notice from UAL to the Company that it intends to exercise its rights under Section 2 or a notice from the Company to UAL that the Company intends to conduct an offering identified in Section 3. "UAL Group" means collectively, UAL, any subsidiary of UAL, any entity that beneficially owns a majority of UAL or any subsidiary of an entity that beneficially owns a majority of the UAL. 2. DEMAND REGISTRATION RIGHT. (a) At any time after the date that is six (6) months after the later to occur of the date of this Agreement or the date of the closing of the Company's initial public offering of Company Common Stock registered pursuant to the 1933 Act (the "IPO"), UAL may request in writing that the Company file a registration statement under the 1933 Act covering the registration of Shares then held by UAL (a "Demand Registration"). Within sixty (60) days after the date on which the Company receives such a request, the Company shall file a registration statement under the 1933 Act covering all Shares that UAL has requested to be included in the registration. The Company shall use its commercially reasonable best efforts to cause such registration statement to become effective within ninety (90) days after the filing referenced in the preceding sentence. The Company will keep the Demand Registration current and effective for at least one hundred twenty (120) days (or a shorter period during which the UAL shall have sold all Shares covered by the Demand Registration). (b) The Company shall be obligated to effect no more than one Demand Registration for the UAL Group. (c) Notwithstanding the provisions of Section 2(a), if the Company is requested to file any registration under Section 2(a): (i) The Company shall not be obligated to effect the filing of a registration statement relating to a Demand Registration during the ninety (90) days following the effective date of any other registration statement pertaining to an underwritten public offering of securities for the account of the Company; or (ii) if the Company delivers to UAL a certificate signed by the president of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would not be in the best interests of the Company and its stockholders generally for a registration statement relating to a Demand Registration to be filed, (A) the Company shall have the right to defer the filing for a period of not more than ninety (90) days after receipt of UAL's request; or (B) if such a certificate is delivered to UAL after a registration statement relating to a Demand Registration has already been filed, the Company may cause the registration statement to be withdrawn and its effectiveness to be terminated or may postpone amending or supplementing the registration statement until the Board of Directors determines that the circumstances requiring the withdrawal or postponement no longer exist, but in no event for more than ninety (90) days. (d) Notwithstanding anything herein to the contrary, UAL may not sell, assign or in any respect transfer the right to the Demand Registration to any party other than a member of the UAL Group. 3. PIGGYBACK REGISTRATION RIGHTS. At any time following the closing of the IPO, whenever the Company proposes to register any Company Common Stock for its own or others' account under the 1933 Act for a public offering, other than (i) any shelf registration of shares of Company Common Stock to be used as consideration for acquisitions of additional businesses by the Company (unless other shareholders of the Company are permitted to exercise piggyback rights to sell shares of Company Common Stock pursuant to such registration), (ii) registrations relating to employee benefit plans and (iii) registrations relating to rights offerings made to the stockholders of the Company, the Company shall give UAL written notice of its intent to conduct an offering prior to filing an applicable registration statement. If UAL gives the Company written notice within ten (10) days of receiving a notice from the Company that an offering (other than an offering identified in (i), (ii), or (iii) above) is intended, the Company shall cause to be included in such registration all of the Shares that UAL requests, SUBJECT, HOWEVER, TO THE FOLLOWING PROVISOS: (a) the Company shall have the right to reduce the number of Shares to be included in the offering if the Company is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 3 that the number of shares of Company Common Stock to be sold by Persons other than the Company is greater than the number of shares of Company Common Stock that can be offered without adversely affecting the offering, in which case, the Company may reduce pro rata the number of shares of Company Common Stock offered for the accounts of such Persons (based upon the number of shares of Company Common Stock proposed to be sold by each such Person and including the Shares) to a number deemed satisfactory by the managing underwriter; and (b) for each offering made by the Company after the IPO, a reduction of the number of shares of Company Common Stock to be included in the offering by Persons who have requested their shares of Company Common Stock to be included in the offering shall be made first by reducing the number of shares of Company Common Stock to be sold by Persons other than the Company, UAL, Commonwealth Principals II, LLC, Guillermo G. Marmol, and the stockholders of the Founding Companies who have been granted registration rights (the stockholders of the Founding Companies are hereafter referred to as the "Founding Stockholders") under the transactions associated with the IPO, next, if a further reduction is required, by reducing the number of shares of Company Common Stock to be sold by UAL, next if a further reduction is required, by reducing the number of shares of Company Common Stock to be sold by Commonwealth Principals II, LLC and Guillermo G. Marmol, and thereafter, if a further reduction is required, by reducing the number of shares of Company Common Stock to be sold by the Founding Stockholders. No registration effected under this Section 3 shall relieve the Company of its obligation to effect a demand registration under Section 2, nor shall any registration under this Section 3 be deemed to have been effected under Section 2. 4. REGISTRATION PROCEDURES. All expenses incurred in connection with any registration under this Agreement (including all registration, filing, qualification, legal, printer, and accounting fees, but excluding underwriting commissions and discounts) shall be borne by the Company and underwriting commissions or discounts shall be borne pro rata by the holders of Company Common Stock under such registration statement. In connection with registrations under Section 3, the Company shall (i) use its commercially reasonable best efforts to prepare and file with the Securities and Exchange Commission as soon as reasonably practicable, a registration statement with respect to the Company Common Stock and use its commercially reasonable best efforts to cause such registration statement to promptly become and remain effective for a period of at least one hundred twenty (120) days (or such shorter period during which the UAL shall have sold all Shares registered on such registration statement); (ii) use its commercially reasonable best efforts to register or qualify the Company Common Stock covered by a registration statement under such applicable state securities laws as the holders shall reasonably request; and (iii) take such other actions as are reasonable and necessary to comply with the requirements of the 1933 Act and the regulations thereunder. 5. UNDERWRITING AGREEMENT. In connection with each registration pursuant to Sections 2 and 3 covering an underwritten registered public offering, the Company and UAL agree to enter into a written agreement with the managing underwriters in such form and containing such provisions as are customary in the securities business for such an arrangement between such managing underwriters and companies of the Company's size and investment stature, including indemnification provisions, PROVIDED THAT such agreement shall not provide for indemnification by UAL of any other party except with respect to (a) title to the Shares, and/or (b) losses, claims, damages or liabilities (or actions in respect thereof) that arise out of or are based upon any untrue statement or alleged untrue statement of any material fact provided by UAL contained in any registration statement, preliminary prospectus or final prospectus, or any amendment or supplement thereof, for such registration, or that arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. If UAL does not execute and deliver the written agreement with the managing underwriter, the Company shall have no obligation to include any Shares in the registration. 6. AVAILABILITY OF RULE 144. The Company shall not be obligated to register any of the Shares under Section 2 or Section 3 at any time when the resale provisions of Rule 144(k) (or any successor provision) promulgated under the 1933 Act are available to UAL for such Shares. 7. FORM OF REGISTRATION STATEMENT. Registrations under Section 2 and Section 3 shall be on such appropriate registration forms (i) as shall be selected by the Company and (ii) as required by the 1933 Act. If, in connection with any registration under Section 2 or Section 3 that is proposed to be on any short form registration statement, the managing underwriters , if any, shall advise the Company in writing that in their opinion the inclusion of additional information would be appropriate, then such registration shall include such additional information. 8. FURNISH INFORMATION. With respect to the registration of Shares under Section 2 or Section 3, it shall be a condition precedent to the obligations of the Company that UAL shall deliver to the Company such information regarding itself and the intended method of disposition of the Shares to be registered as the Company shall request and is required under the 1933 Act and regulations promulgated thereunder to effect the registration of the Shares to be registered. 9. MARKET STANDOFF. In consideration of the granting to UAL of the registration rights under this Agreement, UAL agrees that it will not sell, transfer or otherwise dispose of Shares (including without limitation through put or short sale arrangements) in the ten (10) days prior to the anticipated effectiveness of any registration of Company Common Stock for sale to the public and for up to ninety (90) days following the effectiveness of such registration. As soon as practicable under the circumstances, the Company will deliver a notice to UAL no later than ten (10) days prior to the anticipated effective date of a registration of Company Common Stock for sale to the public that such effectiveness is anticipated. Notwithstanding the foregoing, if UAL consummates a sale, transfer or other disposition of Shares within ten (10) days prior to the effectiveness of a registration of Company Common Stock for sale to the public but prior to receipt of the notice required hereunder, such sale, transfer or other disposition shall not be deemed a violation of this Section 9. 10. RULES 144 AND 144A. The Company covenants that following the registration of Shares it will file any reports required to be filed by it under the 1933 Act and the 1934 Act in order to enable UAL to sell Shares without registration under the 1933 Act within the limitation of the exemptions provided by (a) Rules 144 and 144A under the 1933 Act, as each such Rule may be amended from time to time, or (b) any similar rule or rules. Upon the request of UAL, the Company will deliver to UAL a written statement regarding its compliance with such requirements. 11. NO WAIVER OF RIGHTS. No failure or delay on the part of any party in the exercise of any power or right hereunder shall operate as a waiver of that power or right. No single or partial exercise of any right or power hereunder shall operate as a waiver of that right or power or of any other right or power. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other or subsequent breach hereunder. Except as otherwise expressly provided herein, all rights and remedies existing under this Agreement are cumulative with, and not exclusive of, any rights or remedies otherwise available. 12. AMENDMENT. Except as otherwise expressly set forth in this Agreement, this Agreement may be amended or supplemented only by the written agreement of the Company and UAL. 13. ENTIRE AGREEMENT; SUCCESSORS; THIRD PARTIES. This Agreement and the Warrant contain the entire agreement among the parties with respect to the transactions contemplated hereby and supersedes all prior arrangements or understandings with respect thereto, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors, heirs, executors, administrators and permitted assigns. Except as specifically set forth herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities. The Company shall not assign its obligations under this Agreement. 14. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally, by facsimile or sent by overnight express or by registered or certified mail, postage prepaid, addressed as follows: If to the Company to: Luminant Worldwide Corporation 4100 Spring Valley Road Suite 750 Dallas, Texas 75244 Attention: Guillermo G. Marmol Tel: (972) 404-5167 Fax: (972) 387-8917 with a copy to: Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20037 Attention: George P. Stamas Tel: (202) 663-6000 Fax: (202) 663-6363 If to UAL: United Air Lines, Inc. World Headquarters -- WHQLD 1200 East Algonquin Road Elk Grove Township, Illinois 60007 Attention: General Counsel Fax: 847-700-4683 with a copy to: Skadden, Arps, Slate, Meagher & Flom, LLP 525 University Avenue Suite 220 Palo Alto, California 94301 Attention: Kenton J. King Fax: 650-470-4570 All deliveries of notice shall be deemed effective when received by the persons entitled to such receipt or when delivery has been attempted but refused by such person or persons. 15. CAPTIONS. The captions contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 16. COUNTERPARTS; FACSIMILES. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. This Agreement may be executed and delivered by facsimile transmission. 17. GOVERNING LAW AND VENUE. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware applicable to agreements made and entirely to be performed within such jurisdiction. The party bringing any action under this Agreement shall only be entitled to choose the federal or local courts in the District of Columbia or Delaware as the venue for such action, and each party consents to the jurisdiction of the court chosen in such manner for such action. 18. SEVERABILITY. The provisions of this Agreement are severable, and the unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. The parties acknowledge that it is their intention that if any provision of this Agreement is determined by a court to be invalid, illegal or unenforceable as drafted, that provision should be construed in a manner designed to effectuate the purpose of that provision to the greatest extent possible under applicable law. 19. SPECIFIC PERFORMANCE. The rights of the parties under this Agreement are unique and the failure of a party to perform its obligations hereunder would irreparably harm the other parties hereto. Accordingly, the parties shall, in addition to such other remedies as may be available at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law. 20. FURTHER ASSURANCES. Each of the parties hereto agrees to execute all such further instruments and documents and to take all such further action as any other party may reasonably require in order to effectuate the terms and purposes of this Agreement. [Execution Pages Follow] Signature Page to Registration Rights Agreement IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Agreement to be executed as of the day and year first above written. LUMINANT WORLDWIDE CORPORATION, a Delaware corporation By: ---------------------------- Guillermo G. Marmol Chief Executive Officer and President UNITED AIR LINES, INC., a Delaware corporation By: ---------------------------- Name: -------------------------- Title: ------------------------- Signature Page to Registration Rights Agreement EX-23.1 14 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Dallas, Texas September 13, 1999 EX-23.2 15 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated May 24, 1999, except for Note 8 which is as of June 3, 1999, relating to the financial statements of Brand Dialogue - New York, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PricewaterhouseCoopers LLP New York, New York September 13, 1999 EX-27.1 16 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF LUMINANT WORLDWIDE CORPORATION AS OF JUNE 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. YEAR 6-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 JUN-30-1999 0 15,439 0 0 0 16,203 0 0 0 0 0 32,789 0 4,151 0 0 0 319,869 0 16,734 0 1,468 0 0 0 0 0 234 0 301,433 0 319,869 0 0 54,846 41,437 (36,298) (24,741) (160,955) (91,681) 29 (150) 0 0 (506) (294) (106,586) (50,688) 0 0 (106,586) (50,688) 0 0 0 0 0 0 (106,586) (50,688) (4.56) (2.17) (4.56) (2.17)
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