10-Q 1 a2048973z10-q.txt 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended March 31, 2001 Commission File Number 000-26977 LUMINANT WORLDWIDE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-2783690 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 13737 NOEL ROAD, SUITE 1400, DALLAS, TEXAS 75240-7367 (Address of principal executive offices and zip code) (972) 581-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Number of shares of common stock (including non-voting common stock) outstanding at May 8, 2001: 27,959,584 TABLE OF CONTENTS

-2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)

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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -4- LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts; Unaudited)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -5- LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands; Unaudited)

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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -7- LUMINANT WORLDWIDE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Luminant Worldwide Corporation ("Luminant" or the "Company"), a Delaware Corporation, was founded in August 1998 to create a leading single-source Internet service company that provides electronic commerce professional services to Global 1000 companies, Internet based companies and other organizations. Prior to September 1999, it did not conduct any material operations. On September 21, 1999, it completed its initial public offering of common stock and concurrently acquired seven operating businesses and the assets of Brand Dialogue-New York (the "Acquired Businesses"). Operating results for interim periods are not necessarily indicative of the results for full years. You should read these condensed consolidated financial statements together with the audited financial statements of the Company as of and for the year ended December 31, 2000, and the notes thereto, which are included on the Company's 2000 Form 10-K. 2. COMPREHENSIVE INCOME (LOSS) The Company follows the Financial Accounting Standards Board Statement No. 130 - Reporting Comprehensive Income, which establishes standards for reporting comprehensive income and its components within the financial statements. Comprehensive income is defined as all changes in the equity of a business enterprise from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. The Company's comprehensive income components are immaterial for the three months ended March 31, 2000 and 2001; therefore, comprehensive income (loss) is the same as net income (loss) for both periods. 3. SIGNIFICANT ACCOUNTING POLICIES The Company has not added to or changed its accounting policies significantly, since December 31, 2000. For a description of these policies, see Note 3 of the notes to the audited consolidated financial statements included on the Company's 2000 Form 10-K. 4. SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE On September 15, 1999, Luminant declared a 16,653-for-one stock split. All share and per-share amounts, including stock option information, have been restated to reflect this stock split. -8- The following table summarizes the number of shares (in thousands) of common stock we have used on a weighted average basis in calculating net income (loss) per share:

The computation of net loss and diluted net loss per share excludes common stock issuable upon exercise of certain employee stock options and upon exercise of certain other outstanding convertible debentures, warrants and other options, as their effect is anti-dilutive. 5. REVENUE RECOGNITION The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements," ("SAB 101") in December 1999. SAB 101 summarizes some of the SEC staff's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. The Company completed a thorough review of its revenue recognition policies and determined that its policies are consistent with SAB 101. 6. AGREEMENT WITH UNITED AIR LINES, INC. In September 1999, the Company entered into an agreement with United Air Lines, Inc. ("United") under which the Company has agreed to provide electronic commerce strategy, business planning, and design services to United until June 30, 2004; however, United has no obligation to purchase any services. Under this agreement, the Company has issued to United a warrant to purchase up to 300,000 shares of Luminant common stock at an exercise price of $18.00 per share, the initial public offering price. Under the warrant, United has the immediate right to purchase 50,000 shares of common stock. Over the five-year term of the agreement, United will have the right to purchase 5,000 shares of the 250,000 remaining available shares under the warrant for every $1 million of revenues the Company receives from United up to -9- $50 million of revenue. Selling, general, and administrative expenses for the three months ended March 31, 2000 and 2001 include charges of $42,000 and $1,000, respectively, related to the estimated fair market value of shares underlying the portion of this warrant earned during these periods. 7. SEGMENT REPORTING Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("SFAS 131") requires that companies report separately information about each significant operating segment reviewed by the chief operating decision maker. All segments that meet a threshold of 10% of revenues, reported profit or loss, or combined assets are defined as significant segments. During the three months ended March 31, 2001, the Company operated as one segment and all operations and long-lived assets were in the United States. 8. MATERIAL DEVELOPMENTS Amendment to Credit and Security Agreement In March 2001, Wells Fargo and Luminant entered into the Third Amendment to the Credit and Security Agreement, which waived all prior covenant violations and amended and modified those covenants. Among other terms, the Third Amendment replaced certain existing financial covenants with the requirements that (1) the Company maintains certain fixed charge coverage as specified therein, and (2) the Company does not incur more than $4.5 million in capital expenditures during the year ended December 31, 2001. The terms of the Third Amendment also prohibit the Company from, or permitting any controlled affiliates from consolidating or merging with or into any other person or acquiring all or substantially all of the assets of another person. Management of the Company believes that it can maintain compliance with the revised covenants through March 2002. 9. RESTRUCTURING CHARGE During the third and fourth quarters of 2000, Luminant recorded restructuring charges for severance and for cancellation or negotiated reductions of certain facility leases, cancellation of contracts for services that are not critical to the Company's core business strategy, and other related restructuring charges. These restructuring charges were to align Luminant's cost structure with the changing market conditions, decreased demand for Luminant's services and to create a more efficient organization. The plan resulted in headcount reductions of approximately 250 employees. Many of the positions that were eliminated related to planned office closures in Reston, Virginia, and Denver, Colorado, as well as office reductions in New York, New York, Seattle, Washington, and Washington, D.C. Total cash outlay for the restructuring charges was approximately $4.7 million in 2000. Of the remaining $3.0 million of restructuring charges, $650,000 was paid in during the first quarter of 2001. The remaining amounts will be paid throughout 2001 and primarily relate to severance payments. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with (1) the historical financial statements and related notes contained elsewhere in this Form 10-Q, and (2) the historical financial statements and related notes and management's discussion and analysis of financial condition and results -10- of operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") for the year ended December 31, 2000. This discussion contains or incorporates both historical and "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements. These forward-looking statements relate to future events and/or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform such statements to actual results and do not intend to do so. During the second half of 2000, the Company recorded a restructuring charge of approximately $7.7 million. This restructuring charge was taken to align the Company's cost structure with changing market conditions and to create a more efficient organization. The restructuring plan resulted in the termination of approximately 250 employees, cancellation or renegotiation of certain facility leases as a result of those employee terminations, and cancellation of contracts for services that are not critical to the Company's core business strategy. The Company was founded in August 1998. Prior to September 1999, it did not conduct any material operations. On September 21, 1999, Luminant completed its initial public offering and the acquisition of the Acquired Businesses. One of the Acquired Businesses, Align Solutions Corp., has been identified as the "accounting acquirer" for our financial statement presentation, and its assets and liabilities have been recorded at historical cost levels. Our customers generally retain us on a project-by-project basis. We typically do not have material contracts that commit a customer to use our services on a long-term basis. Revenues are recognized for time and materials arrangements as services are performed and for fixed fee arrangements using the percentage-of-completion method. Our use of the percentage of completion method of revenue recognition requires management to estimate the degree of completion of each project. To the extent these estimates prove to be inaccurate, the revenues and gross profits reported for periods during which work on the project is ongoing may not accurately reflect the actual financial results of the project. We make provisions for estimated losses on uncompleted contracts on a contract-by-contract basis and recognize these provisions in the period in which the losses are determined. We provide our services primarily on a time and materials basis. To a lesser extent, we also provide services on a fixed price-fixed time frame basis. In such cases, we use internally developed processes to estimate and propose fixed prices for our projects. The estimation process applies a standard billing rate to each project based upon the level of expertise and number of professionals required, the technology environment, the overall technical complexity of the project and whether strategic, creative or technology solutions or value-added services are being provided to the client. Our financial results may fluctuate from quarter to quarter based on such factors as the number, complexity, size, scope and lead time of projects in which we are engaged. More specifically, these fluctuations can result from the contractual terms and degree of completion of such projects, any delays incurred in connection with projects, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects and general economic conditions. In addition, revenue from a large customer or project may constitute a significant portion of our total -11- revenue in a particular quarter. In the future, we anticipate that the general size of our individual client projects will grow and that a larger portion of total revenues in any given period may be derived from our largest customers. Although Luminant has previously experienced growth in revenues, we did experience a decline in revenue from the second quarter of 2000 to the third quarter of 2000, and from the third quarter of 2000 to the fourth quarter of 2000. We believe that the decline in revenues was primarily due to a general economic slowdown, an extension in the sales cycle for many of our customers and delays in the use of our services by Global 1000 companies and increased competition from traditional management consulting companies. Our cost of services is comprised primarily of salaries, employee benefits and incentive compensation of billable employees. Selling expenses consist of salaries, bonuses, commissions and benefits for our sales and marketing staff as well as other marketing and advertising expenses. General and administrative costs consist of salaries, bonuses and related employee benefits for executive, senior management, finance, recruiting and administrative employees, training, travel, recruiting, bad debt provisions and other corporate costs. General and administrative costs also include facilities costs including depreciation and computer and office equipment operating leases. RESULTS OF OPERATIONS The following table sets forth the percentage of revenues of certain items included in our consolidated statement of operations:

REVENUES For the three-month period ended March 31, 2001, revenues decreased $9.7 million, or 29%, to $23.9 million from $33.6 million for the three-month period ended March 31, 2000. This decrease is attributable to a general economic slowdown resulting in an extension in the sales cycle for many of our -12- customers and delays in the use of our services by Global 1000 companies. In addition, revenues decreased as a result of increased competition from traditional management consulting companies. COST OF SERVICES Cost of services consists primarily of salaries, associated employee benefits and incentive compensation for personnel directly assigned to client projects. Total cost of services decreased $3.6 million, or 20%, to $14.2 million for the three-month period ended March 31, 2001 from $17.8 million for the three-month period ended March 31, 2000. These decreases were due primarily to a decrease in billable professionals. Total billable professionals decreased by 233 persons from 722 billable professionals at March 31, 2000 to 489 billable professionals at March 31, 2001. This decrease in billable professionals was primarily the result of the restructuring actions taken in the third and fourth quarters of the year ended December 31, 2000. GROSS MARGINS Gross margin decreased $6.1 million, or 39%, to $9.7 million for the three-month period ended March 31, 2001, from $15.8 million for the three-month period ended March 31, 2000. As a percentage of revenue, gross margin declined from 47% to 41% for the three-month periods ended March 31, 2000, and March 31, 2001, respectively. The percentage decrease primarily resulted from a revenue growth slowdown due to an industry-wide decline in revenues, lengthened sales cycles, and delays in the use of our services by Global 1000 companies. The margin decrease was partially offset by general increases in billing rates, an increased portion of business revenues derived from high margin consulting projects, and an increase in the average size of projects performed for our largest clients. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses consist of salaries, bonuses, commissions, and benefits for our sales and marketing staff, as well as other marketing and advertising expenses. General and administrative costs consist of salaries, bonuses and related employee benefits for executive, senior management, finance, recruiting and administrative employees, training, travel, and other corporate costs. General and administrative costs also include facilities costs, depreciation, bad debt expenses, and computer and office equipment operating leases. Selling, general and administrative costs decreased $3.6 million, or 26%, from $14.0 million for the three-month period ended March 31, 2000, to $10.4 million for the three-month period ended March 31, 2001. This decrease was due primarily to the company-wide restructuring described in Note 9 to the financial statements. This restructuring has reduced costs associated with administrative personnel and facilities expenditures. Total non-billable professionals decreased by 24 persons from 183 non-billable professionals at March 31, 2000 to 159 non-billable professionals at March 31, 2001. In addition, we reduced our lease square footage commitments in New York, New York, Seattle, Washington, and Washington, D.C., subsequent to the quarter ended March 31, 2000. As a percentage of revenue, selling, general and administrative expenses increased from 42% for the three-month period ended March 31, 2000 to 44% for the three-month period ended March 31, 2001. The percentage increase primarily resulted from a larger decline in sequential growth in revenues through the first quarter of 2001 compared to the decline in selling, general and administrative costs for the same period. -13- EQUIY-RELATED COMPENSATION EXPENSE The Company has equity based compensation expense relating to the value of options granted at exercise prices below fair market value to employees of Align and certain employees of businesses acquired by Align. As all these options continue to vest, equity based compensation expense in a given period relating to these options will decline. Equity based compensation expense incurred with respect to these options was approximately $0.2 million, for the three months ended March 31, 2001. The Company will be required to issue up to a total of 152,583 shares in two equal installments on each of the first two anniversary dates of the closing of the acquisition of New York Consulting Partners, subject to the former members of New York Consulting Partners achieving certain revenue targets or operational metrics. These payments will be recorded as equity-based compensation in the event all requirements for issuance are met. INTANGIBLES AMORTIZATION As a result of acquisitions made in 1999 by Align, the purchase of our Acquired Businesses, and contingent consideration totaling approximately $47.2 million paid to former owners of the Acquired Businesses in 2000, we recorded approximately $368.3 million of goodwill. On June 22, 2000, the Company acquired certain assets and liabilities of New York Consulting Partners and recorded additional goodwill of approximately $7.7 million. These amounts are being amortized over a period of three years. Certain former owners of one of the Acquired Businesses are still eligible to receive additional contingent consideration through June 30, 2002, based upon the amount of certain types of revenues we receive from a particular client. During the periods from January 1, 2000 through December 31, 2000, the amount of contingent consideration earned by these former owners totaled approximately $3.3 million. This contingent consideration is payable no later than thirty days after completion of our audit for the fiscal year 2000. We currently intend to pay all of the contingent consideration earned in shares of Luminant common stock. The number of shares to be issued will be determined based on the average trading price of our common stock during the thirty-day period preceding issuance of the shares and is expected to be issued in the second quarter of 2001. In connection with the goodwill recorded as a result of the acquisition of the Acquired Businesses and subsequent payment of contingent consideration, we recorded amortization expense of approximately $30.8 and $15.3 million for three months ended March 31, 2000 and 2001, respectively. Management of the Company has continually reviewed the impairment and potential recoverability of the goodwill, as events and changes in circumstances have warranted, determining whether or not any of the goodwill associated with the acquisitions described above has been impaired. In the fourth quarter of 2000, as part of the Company's restructuring plan, the Company exited certain lines of business of four of the Acquired Businesses and $114.5 million of unamortized goodwill was written off. LIQUIDITY AND CAPITAL RESOURCES Luminant Worldwide Corporation is a holding company that conducts its operations through its subsidiaries. Accordingly, its principal sources of liquidity are the cash flows of its subsidiaries, unallocated proceeds from the issuance of warrants and convertible debentures and cash available from its line of credit. Net cash used in operations for the three months ended March 31, 2000 was approximately $14.5 million, as compared to net cash used in operations of approximately $3.3 million for the three months ended March 31, 2001. The net use of cash by operations during the first quarter of 2001 was primarily the -14- result of payments of certain accounts payable and accrued liabilities totaling $11.1 million, offset by collections of certain accounts receivable and related party receivables totaling $9.4 million. The decrease in cash used in operations from the quarter ended March 31, 2000 compared to the quarter ended March 31, 2001, was a result of a decrease in the net loss incurred in the first quarter of 2000 as compared to the net loss incurred in the first quarter of 2001. The difference also resulted from a decrease in depreciation and amortization expenses in the first quarter of 2000 compared to the first quarter of 2001. Net cash used in investing activities decreased from approximately $5.6 million for the three months ended March 31, 2000 as compared to approximately $1.3 million for the three months ended March 31, 2001. The use of cash during the first quarter of 2001 was a result of capital expenditures for leasehold improvements relating to the relocation of our Houston, Texas facility. We have committed to approximately $0.6 million in additional leasehold improvements during the second quarter of 2001 relating this relocation. We expect capital expenditures to remain consistent with capital expenditures in the first quarter of 2001 for the remainder of the year due to provisions of the Wells Fargo line of credit that limit our total capital expenditures for the year 2001 to $4.5 million. Net cash used in financing activities was approximately $1.0 million for the three months ended March 31, 2000, compared to net cash used in financing activities of approximately $0.4 million for the three months ended March 31, 2001. The cash used in financing activities during the first quarter of 2001 primarily consisted of repayments of our Wells Fargo line of credit, as well as repayments of other long-term debt. On September 21, 2000, the Company entered into a convertible debentures purchase agreement with Montrose Investments Ltd., Strong River Investments, Inc. and James R. Corey, our Chief Executive Officer, President and Director. Under the terms of the agreement, we sold to Montrose and Strong River warrants, exercisable through September 21, 2005, to purchase up to 1,373,626 shares of our common stock at $2.73 per share, as well as 6% convertible debentures, due September 21, 2003, in an aggregate principal amount equal to $15 million, convertible into a total of 6,000,000 shares of our common stock. Under the same agreement, we sold to Mr. Corey warrants, exercisable through September 21, 2005, to purchase up to 183,150 shares of our common stock at $2.73 per share, as well as 6% convertible debentures, due September 21, 2003, in an aggregate principal amount equal to $2 million, convertible into a total of 800,000 shares of our common stock. The number of shares into which the debentures may be converted, the exercise price of the warrants and in some cases the number of warrants, will be adjusted if we issue shares of common stock at a price lower than the conversion price or exercise price, as applicable, or if we conduct a stock split, stock dividend or similar transaction. The holders of the debentures have the right to put to us, on September 21, 2001 and on a quarterly basis thereafter, all or any portion of the outstanding debentures, including any interest or other amounts outstanding thereunder, in return for cash or, up to the limit described below, our common stock, at our election, at the lower of (1) the then prevailing conversion price of the debentures, or (2) the average closing price of our common stock for the five trading days preceding the date such right is exercised. The holder of such debentures is, among other things, prohibited from using them to acquire shares of our common stock to the extent that such acquisition would result in such holder, together with any affiliate thereof, beneficially owning in excess of 4.999% of the outstanding shares of our common stock following such acquisition. This restriction may be waived by a holder upon not less than 60 days prior notice to us. If the debenture holders do not waive such restriction upon conversion of the debentures, the debenture holders could choose to require us to retain for future conversion any principal amount tendered for conversion in excess of the 4.999% restriction or require us to return to such debenture holder the excess principal amount of the outstanding debentures to the debenture holder. Of the $17.0 million in gross proceeds from the issuance of the debentures and warrants, $3.5 million was allocated to the warrants. The debt is recorded on the Company's consolidated balance sheet at March 31, 2001, as a current liability of $14.0 million. As a result of the put option applicable to the -15- debentures, all of the debt is categorized as a current liability. Amortization of the original issue discount on the debt, using an effective interest rate of 16.90%, resulted in an additional interest expense of $0.3 million during the three months ended March 31, 2001. The accretion of original issue discount on the debt will cause an increase in indebtedness from March 31, 2001 to September 21, 2003 of $3.0 million. Under the debentures, a default by Luminant under certain credit agreements and certain other, similar agreements which results in the amounts owed thereunder becoming due and payable prior to maturity, also triggers a default under the debentures, and gives the holders of the debentures the right to require Luminant to pay 107% of the principal amount plus all other amounts outstanding under the debentures, in cash or stock at the debenture holder's election. If Wells Fargo causes the amounts owed by Luminant under the Wells Fargo credit agreement to become due and payable as a result of a default under the credit agreement, the holders of the debentures would have the right to require Luminant to pay or issue stock in the amounts described above. In March 2000, we entered into a $15 million revolving credit agreement with Wells Fargo Business Credit, Inc. ("Wells Fargo") for a senior secured credit facility. The initial term of the credit agreement extends until March 31, 2003 and is automatically renewable for successive one-year terms thereafter, unless Luminant provides Wells Fargo with ninety days written notice of its election not to renew the credit facility. Borrowings under this credit agreement accrue interest at a rate of, at our option, either (1) the prime rate of Wells Fargo Bank, N.A.-San Francisco, or (2) the rate at which U.S. Dollar deposits are offered to major banks in the London interbank Eurodollar market (as adjusted to satisfy the reserve requirements of the Federal Reserve System) plus 250 basis points. The credit agreement also contains representations, warranties, covenants and other terms and conditions typical of credit facilities of such size, including financial covenants, and restriction on certain acquisitions. As of March 31, 2001, borrowings of $6.8 million were outstanding under this revolving credit agreement. The weighted average interest rate on these obligations as of such date was 8.5%. In March 2001, Wells Fargo and Luminant entered into the Third Amendment to the Credit and Security Agreement. Among other terms, the Third Amendment replaced certain existing financial covenants with the requirements that (1) we maintain certain fixed charge coverage as specified therein, and (2) we do not incur more than $4.5 million in capital expenditures during the year ended December 31, 2001. The terms of the Third Amendment also prohibit us from, or permitting any of our controlled affiliates from, consolidating or merging with or into any other person or acquiring all or substantially all of the assets of another person. The Company's management believes that cash flows from operations, cash on hand, and amounts available under the Wells Fargo credit agreement will be sufficient to finance operations through March 31, 2002. To finance its operations as described in the preceding sentence and avoid future violations of the credit facility covenants, the Company in 2001 expects to substantially reduce its cash expenditures from the levels incurred during the year 2000. During the second half of 2000, the Company terminated approximately 250 employees. The Company has also canceled or renegotiated certain facility leases, restricted discretionary expenditures and canceled certain contracts not critical to the Company's core business strategy, to conserve cash. Management believes that with the actions taken and the business plan being pursued, the Company will be able to fund its operations from cash flows, cash on hand, and cash available under the Wells Fargo credit agreement. However, the success of the plans described above is dependent on the ability of the Company to execute its business plan and achieve the planned cost reductions. In addition, whether the Company's operating revenues will exceed operating expenses depends on a wide variety of factors, including general business trends and the development of our markets. To the extent we are unable to fund our operations from cash flows, cash on hand, and cash available under the Wells Fargo credit agreement, we may need to obtain financing in the form of either additional equity or indebtedness. Additional financing may not be available on terms acceptable to us, if at all. -16- As a result of the acquisitions of the Acquired Businesses, we assumed current and long-term debt of $5.7 million and $3.7 million, respectively. Of those amounts, $1.4 million current debt and $2.6 million long-term debt were repaid from proceeds of our initial public offering or from operations and $2.8 was repaid from borrowings under our Wells Fargo credit facility. As of March 31, 2001, we had a total of $3.1 million in outstanding current and long-term indebtedness (excluding obligations under our revolving credit facility with Wells Fargo and the convertible debentures issued September 21, 2000). The weighted average interest rate on these obligations at March 31, 2001 was 10.3%. Certain of our notes payable contain restrictive covenants. At March 31, 2001, we were in compliance with, or had obtained waivers for, all debt covenants. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential change in an instrument's value caused by, for example, fluctuations in interest and currency exchange rates. We have not purchased any futures contracts, nor have we purchased or held any derivative financial instruments for trading purposes during the three months ended March 31, 2001. Our primary market risk exposure is the risk that interest rates on our outstanding borrowings may increase. We currently have various debentures, lines of credit, and notes payable with aggregate maximum borrowings totaling approximately $23.9 million. An increase in the prime rate (a benchmark pursuant to which interest rates applicable to borrowings under the credit facilities may be set) equal to 10% of the prime rate, for example, would have increased our consolidated interest by less than $16,000 for the quarter ended March 31, 2001. Based on maximum borrowing levels under the Wells Fargo line of credit, a 10% increase in the line of credit would increase annual interest expense by approximately $10,000. We have not entered into any interest rate swaps or other hedging arrangements with respect to the interest obligations under these lines of credit. We are exposed to interest rate risk on our convertible debentures. The fair value of this fixed rate debt is sensitive to changes in interest rates. If market rates decline, the required payments will exceed those based on current market rates. Under our current policy, we do not use interest rate derivative instruments to manage our risk of interest rate fluctuations. We do not believe such risk is material to our results of operations. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Unregistered Sales of Securities None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES In March 2001, Wells Fargo notified us that we were in default of the covenant in our credit agreement with them which requires us to maintain a minimum tangible net worth of $30 million, as well as the covenant which prohibited us from incurring, for the year ended December 31, 2000, a loss (before -17- interest, income taxes, depreciation and amortization) in excess of $12.5 million. Wells Fargo agreed to waive these defaults and amend certain terms of the credit agreement, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," in exchange for consideration of $200,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 10.1 Third Agreement to Credit and Security Agreement dated as of April 5, 2000, by and among Wells Fargo Business Credit, Inc., Luminant Worldwide Corporation and the subsidiaries of Luminant named therein, dated as of March 30, 2001. (b) Reports on Form 8-K: None. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. LUMINANT WORLDWIDE CORPORATION Date: May 11, 2001 By: /S/ JAMES R. COREY ------------------------------------ James R. Corey Chief Executive Officer, President, and Director Date: May 11, 2001 By: /S/ THOMAS G. BEVIVINO ------------------------------------ Thomas G. Bevivino Chief Financial Officer & Secretary (Principal Accounting and Chief Financial Officer) -19-

LUMINANT WORLDWIDE CORP 10-Q