<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-21395
ALLIN COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-1795265
(STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 GREENTREE COMMONS, 381 MANSFIELD AVENUE,
PITTSBURGH, PENNSYLVANIA 15220-2751
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(412) 928-8800
(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.
( X ) Yes ( ) No
Shares Outstanding of the Registrant's Common Stock
As of August 4, 1997
Common Stock, 5,184,067 Shares
<PAGE>
Allin Communications Corporation
Form 10-Q
Index
Part I - Financial Information
Item 1. Financial Statements Page 3
Item 2. Management's Discussion and Analysis of Financial Page 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Page 18
Sensitive Instruments
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders Page 19
Item 5. Other Information Page 20
Item 6. Exhibits and Reports on Form 8-K Page 21
Signatures Page 22
-2-
<PAGE>
Part I - Financial Information
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited at June 30, 1997)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,227 $ 7,164
Accounts receivable, net of allowance for doubtful
accounts of $-0- and $54 1,169 2,940
Inventory 53 39
Prepaid expenses 477 797
----------------- ------------------
Total current assets 17,926 10,940
Property and equipment, at cost:
Leasehold improvements 48 341
Furniture and equipment 1,227 1,804
On-board equipment 4,312 6,396
Construction-in-progress 2,329 2,427
----------------- ------------------
7,916 10,968
Less--accumulated depreciation (911) (1,745)
----------------- ------------------
7,005 9,223
Assets held for resale 624 ---
Other assets, net of accumulated amortization of
$728 and $1,832 7,122 6,603
----------------- ------------------
Total assets $ 32,677 $ 26,766
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 69 $ 59
Accounts payable 1,768 405
Accrued liabilities:
Compensation and payroll taxes 233 761
Other 601 1,112
Deferred revenues 509 1,404
Customer deposits 695 ---
----------------- ------------------
Total liabilities 3,875 3,741
Series A convertible, redeemable preferred stock, par
value $.01 per share - authorized 100,000 shares,
issued and outstanding 25,000 shares 2,480 2,500
Shareholders' equity:
Common stock, par value $.01 per share - authorized
20,000,000 shares, issued and
outstanding 5,184,067 shares 52 52
Additional paid-in-capital 37,905 37,905
Deferred compensation (377) (311)
Retained deficit (11,258) (17,121)
----------------- ------------------
Total shareholders' equity 26,322 20,525
----------------- ------------------
Total liabilities and shareholders' equity $ 32,677 $ 26,766
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
------------ ----------- ------------ -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 84 $ 2,543 $ 163 $ 6,625
Cost of sales 21 1,383 40 4,086
---------- --------- ----------- ----------
Gross profit 63 1,160 123 2,539
Selling, general & administrative 1,408 4,370 2,167 8,518
---------- --------- ----------- ----------
Loss from operations (1,345) (3,210) (2,044) (5,979)
Interest expense (income), net 267 (106) 468 (283)
---------- --------- ----------- ----------
Loss before provision for income taxes (1,612) (3,104) (2,512) (5,696)
Provision for income taxes --- 48 --- 48
---------- --------- ----------- ----------
Net loss (1,612) (3,152) (2,512) (5,744)
Accretion and dividends on preferred stock --- 55 --- 119
---------- --------- ----------- ----------
Net loss attributable to common shareholders $ (1,612) $ (3,207) $ (2,512) $ (5,863)
========== ========= =========== ==========
Net loss per common share $ (0.62) $ (0.62) $ (0.96) $ (1.13)
========== ========= =========== ==========
Weighted average common and common equivalent
shares outstanding during the period 2,603,385 5,184,067 2,603,385 5,184,067
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,512) $ (5,744)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 350 1,990
Accrued interest on shareholder notes payable 414 ---
Amortization of deferred compensation --- 67
Loss from sale of assets --- 13
Changes in certain assets and liabilities:
Accounts receivable (37) (1,771)
Related party receivable (10) ---
Inventory --- 14
Prepaid expenses (116) (320)
Software development costs (130) (469)
Other assets --- 483
Accounts and notes payable 402 (1,373)
Accrued liabilities 133 1,039
Deferred revenues --- 895
Customer deposits --- (695)
----------------- ------------------
Net cash flows from operating activities (1,506) (5,871)
----------------- ------------------
Cash flows from investing activities:
Proceeds from sale of assets --- 31
Capital expenditures (1,472) (3,223)
----------------- ------------------
Net cash flows from investing activities (1,472) (3,192)
----------------- ------------------
Cash flows from financing activities:
Proceeds from shareholder notes payable 2,128 ---
Proceeds from line of credit 4,850 ---
Payments on shareholder notes payable (3,621) ---
----------------- ------------------
Net cash flows from financing activities 3,357 ---
----------------- ------------------
Net change in cash and cash equivalents 379 (9,063)
Cash and cash equivalents, beginning of period 193 16,227
----------------- ------------------
Cash and cash equivalents, end of period $ 572 $ 7,164
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
Allin Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
---------------------
The information contained in these financial statements and notes for the
three and six month periods ended June 30, 1996 and 1997 should be read in
conjunction with the audited financial statements and notes for the years
ended December 31, 1995 and 1996, contained in Allin Communications
Corporation's (the "Company") Annual Report on Form 10-K for the year ended
December 31, 1996. The accompanying unaudited Consolidated Financial
Statements have been prepared in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission. These interim statements do not include all of the information
and footnotes required for complete financial statements. It is management's
opinion that all adjustments (including all normal recurring accruals)
considered necessary for a fair presentation have been made; however, results
for these interim periods are not necessarily indicative of results to be
expected for the full year.
Earnings Per Share
Earnings per share ("EPS") of common stock have been computed using the
weighted average number of common and common equivalent shares outstanding
during the period. In periods the Company has losses, common share
equivalents are not included as their inclusion would be anti-dilutive. For
periods presented prior to the Company's initial public offering, the weighted
average number of common and common equivalent shares include instruments
convertible into common stock, issued within one year of the initial public
offering. Fully diluted EPS is presented when it differs by more than three
percent.
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share"
("SFAS No. 128") was issued in February 1997 and is effective for fiscal years
beginning after December 15, 1997. This statement, upon adoption, will
require all prior-period EPS to be restated, to conform to the provisions of
the statement. This statement's objective is to simplify the computation of
EPS and to make the U.S. standard for EPS computations more compatible with
that of the International Accounting Standards Committee. The Company will
adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the statement
will have a significant impact on its reported EPS. There are no differences
in EPS calculated under SFAS No. 128 and that presented in the Consolidated
Statements of Operations for the three and six month periods ended June 30,
1996 and 1997, as calculated in accordance with Accounting Principals Bulletin
No. 15, "Earnings per Share."
Supplemental Disclosure Of Cash Flow Information
Cash payments for income taxes were $-0- and approximately $56,000 during the
three months ended June 30, 1996 and 1997, respectively. Cash payments for
interest were approximately $23,000 and $-0- during the three months ended
June 30, 1996 and 1997, respectively.
Cash payments for income taxes were $-0- and approximately $100,000 during the
six months ended June 30, 1996 and 1997, respectively. Cash payments for
interest were approximately $23,000 and $29,000 during the six months ended
June 30, 1996 and 1997, respectively.
Inventory
Inventory, consisting principally of computer system hardware, components and
technical supplies, is stated at the lower of cost (determined on the first-
in, first-out method) or market.
2. Accrual for Severance Costs
---------------------------
An accrual of approximately $300,000 has been recorded as of June 30, 1997 to
establish a liability for severance costs associated with workforce
reductions.
-6-
<PAGE>
3. Equity Transactions
-------------------
During the three months ended June 30, 1997, the Company's Board of Directors
approved the creation of the Company's 1997 Stock Plan under which up to
300,000 shares of common stock may be awarded as stock options, stock
appreciation rights, restricted shares and restricted units to officers, other
employees, consultants and advisors (including non-employee directors) of the
Company.
During the three months ended June 30, 1997, options to purchase 30,900 shares
of common stock previously awarded under the Company's 1996 Stock Plan were
forfeited under the terms of the Plan. There were no options awarded under
the 1996 Stock Plan during this period. Options to purchase 199,150 shares of
common stock remain outstanding as of June 30, 1997.
-7-
<PAGE>
Item 2.
Allin Communications Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis by management provides information
with respect to the Company's financial condition and results of operations for
the three and six month periods ended June 30, 1997 and 1996. This discussion
should be read in connection with the information in the consolidated financial
statements and the notes pertaining thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
Overview of Organization, Products & Markets
Allin Communications Corporation (the "Company") was organized under the
laws of the State of Delaware in July 1996 to act as a holding company for five
operating subsidiaries which focus on particular aspects of the Company's
business: SeaVision, Inc., a Delaware corporation ("SeaVision"), PhotoWave,
Inc., a Delaware corporation ("PhotoWave"), SportsWave, Inc., a Pennsylvania
corporation ("SportsWave"), Kent Consulting Group, Inc., a California
corporation ("KCG"), and Netright, Inc., a California corporation ("Netright").
All such subsidiaries, as well as Allin Holdings Corporation, a Delaware
corporation and non-operating subsidiary, are wholly owned by the Company.
Unless the context otherwise requires, all references herein to the "Company"
refer to Allin Communications Corporation and its subsidiaries.
Allin Communications Corporation is a media and technology company, which
combines advanced technology capabilities with focused marketing skills in a
variety of niche markets. The Company provides customized interactive
television ("ITV"), digital imaging and other communications, information and
media services to users in the travel and leisure and sports marketing and
promotion industries. Many of these services are provided through the use of
the Company's proprietary interactive media and information platform which was
created to run on the Microsoft Windows NT operating system. The platform
includes a multimedia digital file server and Windows-based software
applications, and features high resolution and animated graphics, compressed
full motion video, superior quality audio and flexible input capacity. The
Company's platform features rapid response and real time interfacing with a
variety of third party software and systems permitting the immediate execution
and confirmation of transactions. The platform, which received an applications
development award from Microsoft in 1995, can provide its media and imaging
services over a variety of network architectures, including the Internet,
telephone and cable television systems, and other public and private
communications networks.
The Company's ITV system offers customers a variety of interactive services
through separate system modules. The pay services currently offered are video-
on-demand, shopping and games of chance. Free-to-user services provided to date
include event ticketing, informational messages, account review and room
service. Free services have historically been provided to enhance the usefulness
of the system, afford the Company a competitive advantage in marketing its
system, and attract users to other services offered on the Company's system.
The Operating Subsidiaries. SeaVision was formed in June 1994 and focuses
on the travel and leisure industry. SeaVision became a subsidiary of the
Company in August 1996 through a merger. Its operations to date have involved
the development of an interactive media and information platform and the
installation and operation of ITV systems in the international cruise industry.
SeaVision has become a significant supplier of ITV systems to the cruise
industry. The Company has contracts in place to provide ITV services to each of
Carnival Cruise Lines ("Carnival"), Celebrity Cruises, Inc. ("Celebrity"),
Cunard Lines Limited, Norwegian Cruise Lines ("Norwegian") and Royal Caribbean
International ("Royal Caribbean"). At June 30, 1997, a total of nine systems
were in operation on cruise ships with an annual capacity of approximately
865,000 passengers. SeaVision also offers and performs shipboard systems
integration services.
PhotoWave was formed as a subsidiary of the Company in August 1996 to
pursue the development and marketing of digital imaging services, and currently
applies the Company's proprietary interactive media and information platform on
a limited basis in this emerging industry.
-8-
<PAGE>
SportsWave, formerly International Sports Marketing, Inc., was formed in
1989 and was acquired by the Company in November 1996. SportsWave provides a
full range of sports marketing and promotion services such as promotions,
premiums, corporate incentive programs and event marketing and licensing.
Additionally, SportsWave is currently seeking opportunities to develop
adaptations of the Company's interactive media and information platform for
possible use in sports venues and as a mobile media center for deployment to
sporting and other promotional events.
In November 1996, Kent Consulting Group, Inc., an entity formed in 1994,
but which had been operating through a predecessor since 1983, merged with and
into a wholly owned subsidiary of the Company, which then changed its name to
Kent Consulting Group, Inc. KCG provides varied software design and network
solution services to corporate clients worldwide and supports the development
and technology efforts of the Company.
Netright sells computer-related hardware and software, and was acquired by
the Company in November 1996 primarily to support the operations of the Company
through its purchasing capabilities and agreements with vendors. Netright's
operations are not material to the Company as a whole.
The Company's historical results of operations reflect the operations of
SeaVision for the three- and six-month periods ended June 30, 1996 and for all
companies for the three- and six-month periods ended June 30, 1997.
Overview of the Company's Operations for the Quarter Ended June 30,1997
- -----------------------------------------------------------------------
During the quarter ended June 30, 1997, the Company's management completed
a thorough evaluation of operating results, marketing efforts, technological
developments and the impact that external market forces have had on the
Company's operations. This evaluation resulted in significant changes in the
Company's operations including streamlining the Company's product focus, the
pace of technological development, workforce size, and marketing initiatives.
This overview section provides discussion of these changes. Certain of these
changes may affect the Company's future results of operations and financial
condition more significantly than they have to date; however, such effect, if
any, cannot be quantified at this time. Detailed comparisons of results of
operations for the three- and six-month periods ended June 30, 1997 and the same
periods of the prior year and discussion of liquidity and capital resources can
be found immediately following this overview.
SeaVision Operations and Cruise Line Contract Status
The number of SeaVision's installed and operating ITV systems had increased
from three at the time of the Company's initial public offering in November 1996
to nine as of June 30, 1997. The increase in both the number of systems
operating and the lengthening time periods for which historical results are
available have given management more comprehensive data for evaluating the ITV
systems' economic performance. Revenue and operating income have been less than
original expectations, in part because significant advertising revenue has not
been realized and revenue derived from the digital photography module to date
has been minimal. The Company continues to pursue negotiations with various
advertisers and, during the second quarter of 1997, engaged an agency
specializing in transportation industry media advertising in this regard.
Compensation for the advertising agency will be substantially on a commission
basis. There can be no assurance, however, that any contracts resulting in
advertising revenue will result from the Company's negotiations or the efforts
of its advertising agency.
SeaVision has implemented several initiatives designed to increase revenue
on operational cruise ship systems. Included have been price increases for pay-
per-view movies, improvements in and refinements to movie selections and
increases to the gaming minimum buy-in and wager default. Based on the limited
time period since implementation of these initiatives, results indicate an
incremental increase in pay-per-view and gaming revenues, although there can be
no assurance that these initiatives will continue to result in increased
revenue. SeaVision plans to implement additional initiatives to improve revenue
from pay-per-view movies and gaming during the third and fourth quarters of
1997, including additional changes to movie content and selections, additional
options for movie purchases, higher wagering options, the addition of a new game
of chance and promotional and usage incentives for the games of chance module.
There can be no assurance, however, that these initiatives will result in
increased revenue or operating income from the ship systems.
-9-
<PAGE>
During the quarter ended June 30, 1997, SeaVision began the process of
renegotiating its existing contracts with its clients Carnival, Celebrity,
Norwegian, and Royal Caribbean. Included in the discussions are methods for
enhancing SeaVision revenue such as transactional fees for cruise line services,
guaranteed in-cabin revenue targets, the sharing of system operation costs and
increased cruise line capital commitments for new system installations as well
as existing systems. SeaVision intends to discontinue new system installations
after completion of those under firm commitment pending the results of the
contract renegotiation initiatives. Two additional systems under firm
commitment are expected to be activated in the third quarter of 1997. This
approach has been adopted so that additional capital outlays for ship ITV
systems will only be made when the prospects for profitable system operation can
be more reasonably expected. While substantive discussions are currently
underway, there can be no assurance that SeaVision will be successful in
attaining revised contract terms with the cruise lines, or that revised terms
will result in the desired improvements to SeaVision revenue and operating
income.
Marketing and Services Agreement with EDS
In December 1996 and January 1997, the Company and Electronic Data Systems
Corporation ("EDS") entered into marketing and services agreements. Under the
agreements, EDS was to assist the Company in the marketing of its media and
information platform to key sectors of the travel and leisure industry and EDS
would provide personnel for installing the Company's ITV system and media and
information platform in both shipboard and land-based applications as well as
providing technical support for the operational systems. Under these
agreements, target figures were set for annual revenue dollars to be obtained by
the Company as a result of joint marketing efforts and cost rates were
established for EDS personnel to work on shipboard systems and other projects.
Joint marketing efforts carried out during the first half of 1997 have not
resulted in the Company obtaining contracts for additional installations of its
ITV system and media and information platform. Furthermore, as of June 30,
1997, there was no substantive prospect that such joint marketing efforts would
lead to contracts being obtained during the second half of 1997 that would
approach the agreement targets. Under the services agreements, SeaVision began
to utilize EDS personnel for ITV system operation and installation in March
1997. The cost of EDS personnel was significantly higher than had been the
compensation and associated costs of SeaVision personnel who earlier had
fulfilled the same duties. Evaluation of ongoing activity under the agreements
with EDS led the Company's management to the conclusion during the second
quarter of 1997 that the lack of progress under the agreements was not resulting
in, and did not have any immediate prospect to result in, such additional
revenue as to warrant the increased cost of operation being borne by SeaVision.
Accordingly, the Company and EDS entered into a Termination Agreement, effective
as of July 1, 1997, which terminates the current services and marketing
agreements with EDS. Concurrently, the Company and EDS entered into an Amended
and Restated Joint Marketing Agreement. This amended agreement calls for each
of the parties to cooperate with the other to enhance their respective abilities
to market their respective businesses. The amended agreement does not set
targets for revenue dollars to be obtained and makes compensation of the Company
and EDS negotiable for each contract obtained by one of the parties through
joint marketing efforts.
Technological Development
During the quarter ended June 30, 1997, the Company's management evaluated
its plans for research and development activities for various applications of
its media and information platform and digital photography technologies.
Factors affecting this evaluation included the historical economic performance
of the installed systems, the financial results of the Company and external
market forces driving the valuation of the Company's publicly traded common
stock. Throughout the Company's first fiscal quarter of 1997 and early in the
Company's second fiscal quarter, considerable efforts and resources were
directed to research and development of a number of the Company's product lines
including, a) SeaVision activity for shore excursion ticketing software, video
server integration and hardware development to improve the integration of the
media and information platform with radio frequency broadcast and Internet
information sources, b) PhotoWave development of ship-based and mobile digital
photography systems and Internet-based digital image archival technology and c)
SportsWave development of the VuWit system, a handheld wireless interactive
terminal designed for use at sports venues.
-10-
<PAGE>
In addition to operational initiatives that the Company's management
instituted subsequent to a thorough review of its operations, management
evaluated research and development projects as to their ability to yield short
term economic benefits to the Company. Management determined that the interests
of the Company would best be served for the short term through conservation of
its liquid resources and a reduction of its non-essential development costs.
SeaVision has curtailed development projects related to its ITV systems with the
exception of certain hardware projects intended to result in short term cost
savings. PhotoWave research and development has been limited to that necessary
to facilitate basic operation of its mobile digital photography system and its
Internet based digital imaging archival system. SportsWave research and
development has similarly been curtailed until a contract for system
installation is obtained. KCG's software development and network systems
consultants had been responsible for a significant portion of ongoing research
and development activities. The majority of the consultants working on the
Company's various projects are being redeployed toward consulting projects for
third parties. If third-party business can be obtained, this should result in
improved revenue and operating income for the consulting services portion of the
Company's business, although no assurance can be given that additional third
party business will be obtained. KCG's compensation structure is production
based so compensation for the consultants in question will not be incurred
without corresponding third-party revenue.
Workforce Reductions
As part of the aforementioned management evaluation, the organizational
structures of all of the Company's entities were reviewed and positions were
identified that were closely related to curtailed research and development
projects, or that were related to activities with operating losses and/or slower
growth expectations. The Company eliminated positions representing in excess of
20% of its workforce during the Company's second fiscal quarter. An accrual of
approximately $300,000 has been recorded as of June 30, 1997 to establish a
liability for severance costs associated with the workforce reductions.
Results of Operations:
- ---------------------
Three Months Ended June 30, 1997 compared to Three Months Ended June 30, 1996
For the three-month period ended June 30, 1997, the Company reported
revenue of $2,543,000 versus $84,000 for the three months ended June 30, 1996.
PhotoWave was formed in August 1996, and SportsWave, KCG and Netright were
acquired in November 1996. Accordingly a comparison of revenue for those
companies for the periods ended June 30, 1997 and June 30, 1996 is not
meaningful.
As of June 30, 1997, SeaVision had installed its ITV system on ten cruise
ships and activated the system on nine ships with an annual passenger capacity
of approximately 865,000, based on their itineraries and passenger
configurations at that time. As of June 30, 1996, SeaVision had installed and
activated its ITV system on two cruise ships with an annual passenger capacity
of approximately 151,000.
Total revenue for SeaVision for the three months ended June 30, 1997 was
$560,000, including $197,000 for pay-per-view movies, $120,000 for games of
chance, $238,000 for systems integration contracts and $5,000 in other revenue.
For the three months ended June 30, 1996, total SeaVision revenue was $84,000,
including $45,000 for pay-per-view movies, $38,000 for games of chance and
$1,000 in other revenue.
Direct costs for SeaVision for the three-month period ended June 30, 1997
were $390,000, including $78,000 for pay-per-view movies and $312,000 for
systems integration contracts. The majority of the systems integration revenue
and direct costs recognized during this three-month period were associated with
one cruise line ITV services contract. Under the terms of the contract, the
cruise line had agreed to contribute toward the overall capital cost of the ITV
system by assuming ownership of certain installed in-cabin hardware integral to
the functioning of the ITV system at an agreed upon price. The actual cost of
this equipment was in excess of the agreed upon price, resulting in direct costs
for this systems integration component of the project being in excess of the
revenue. Under the terms of certain other contracts, SeaVision bears the full
cost of this essential hardware. Direct costs for SeaVision for the three
months ended June 30, 1996 were $21,000 and related primarily to cost of sales
for the video-on-demand module.
-11-
<PAGE>
For the three months ended June 30, 1997, SportsWave realized revenue of
$1,153,000 and direct costs of $480,000. KCG, during the same period,
recognized revenue of $776,000 with direct costs of $469,000. Netright had
sales totalling $18,000 with direct costs of $17,000. PhotoWave realized
$33,000 of revenue during the period with direct costs of $27,000.
During the three months ended June 30, 1997, selling, general and
administrative expenses, excluding depreciation and amortization, increased to
$3,253,000 from $1,146,000 for the corresponding period in 1996. This increase
is attributable primarily to the costs of additional personnel as the Company
moved from the developmental stage to the operational stage of its ITV system
between these periods, as well as the addition of PhotoWave, SportsWave, KCG and
Netright operations. This increase also reflects approximately $300,000 of
expense recognized during the three months ended June 30, 1997 for severance
costs related to workforce reductions. The workforce as of June 30, 1997 after
the reductions is still significantly larger than that at June 30, 1996.
Included in selling, general and administrative expenses for the three-month
period ended June 30, 1997 was $40,000 in research and development expense. For
the same period in 1996, $402,000 in research and development expense was
recognized. For the three months ended June 30, 1997, a total of $191,000 in
research and development relating to PhotoWave operations was capitalized.
Depreciation and amortization expense increased to $1,117,000 during the
three months ended June 30, 1997 as compared to $262,000 in the corresponding
period in 1996, principally as a result of the completed installation of
additional ITV systems and corporate office leasehold improvements and $430,000
of amortization related to the November 1996 purchase of KCG and SportsWave.
The Company's operating loss was $3,210,000 for the three months ended June
30, 1997, as compared to $1,345,000 for the three months ended June 30, 1996.
This increase is attributable primarily to the costs of additional personnel and
infrastructure as the Company moved from the developmental stage to the
operational stage of its SeaVision ITV systems between these periods and it
reflects the operations of additional entities. The Company realized net
interest income of $106,000 for the three months ended June 30, 1997 as compared
to interest expense of $267,000 in the three months ended June 30, 1996 relating
to accrued interest on stockholder loans, which was accrued but unpaid during
the period. Provision for income taxes of $48,000 recognized during the three
month period ended June 30, 1997 reflects estimated state income tax expense for
certain subsidiaries. The Company sustained a net loss of $3,152,000 during the
three months ended June 30, 1997, compared to a net loss of $1,612,000 for the
three months ended June 30, 1996, as a result of the increased operating losses
discussed above.
Results of Operations:
- ---------------------
Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
For the six-month period ended June 30, 1997, the Company reported revenue
of $6,625,000 versus $163,000 for the six months ended June 30, 1996. As noted
above, PhotoWave was formed in August 1996, and SportsWave, KCG and Netright
were acquired in November 1996. Accordingly a comparison of revenue for those
companies for the six month periods ended June 30, 1997 and June 30, 1996 is not
meaningful.
Total revenue for SeaVision for the six months ended June 30, 1997 was
$3,145,000, including $372,000 for pay-per-view movies, $225,000 for games of
chance, $2,442,000 for systems integration contracts and $106,000 for
advertising and other revenue. For the period ended June 30, 1996, total
SeaVision revenue was $163,000, including $86,000 for pay-per-view movies,
$75,000 for games of chance and $2,000 in other revenue.
Direct costs for SeaVision for the six-month period ended June 30, 1997
were $2,092,000, including $146,000 for pay-per-view movies and $1,945,000 for
systems integration contracts. Direct costs for SeaVision for the six months
ended June 30, 1996 were $40,000 and related primarily to cost of sales for the
video-on-demand module.
For the six months ended June 30, 1997, SportsWave realized revenue of
$1,878,000 and direct costs of $987,000. KCG, during the same period,
recognized revenue of $1,469,000 with direct costs of $905,000. Netright had
sales totalling $83,000 with direct costs of $76,000. PhotoWave realized
$36,000 of revenue during the period with direct costs of $27,000.
-12-
<PAGE>
During the six months ended June 30, 1997, selling, general and
administrative expenses, excluding depreciation and amortization, increased to
$6,528,000 from $1,817,000 for the corresponding period in 1996. This increase
is attributable primarily to the costs of additional personnel as the Company
moved from the developmental stage to the operational stage of its ITV system
between the two periods, as well as the addition of PhotoWave, SportsWave, KCG
and Netright operations. The increase also reflects approximately $300,000 of
severance costs recorded in the 1997 period, as discussed above in the three-
month period analysis. Included in selling, general and administrative expenses
for the six-month period ended June 30, 1997 was $136,000 in research and
development expense. This amount reflects expenses for the six month period net
of a reallocation of an elimination entry for intercompany services which
recategorized $109,000 of expenses within the selling, general and
administrative category. For the same period in 1996, $401,000 of research and
development expense was recognized with $145,000 being capitalized. For the six
months ended June 30, 1997, a total of $463,000 in research and development
relating to PhotoWave operations was capitalized.
Depreciation and amortization expense increased to $1,990,000 during the
six months ended June 30, 1997 as compared to $350,000 in the corresponding
period in 1996, principally as a result of the completed installation of
additional ITV systems and corporate office leasehold improvements and $860,000
of amortization related to the November 1996 purchase of KCG and SportsWave.
The Company's operating loss was $5,979,000 for the six months ended June
30, 1997, as compared to $2,044,000 for the six months ended June 30, 1996.
This increase is attributable primarily to the costs of additional personnel and
infrastructure as the Company moved from the developmental stage to the
operational stage of its SeaVision ITV systems between the two periods and
supported the development of Photowave and SportsWave. It also reflects the
operations of additional entities. The Company realized net interest income of
$283,000 for the six months ended June 30, 1997 as compared to interest expense
of $468,000 in the six months ended June 30, 1996, relating to accrued interest
on stockholder loans, which was accrued but unpaid during the period. Provision
for income taxes of $48,000 recognized during the 1997 period reflects estimated
state income tax expense for certain subsidiaries. The Company sustained a net
loss of $5,744,000 during the six months ended June 30, 1997, compared to a net
loss of $2,512,000 for the six months ended June 30, 1996, as a result of the
increased operating losses discussed above.
Liquidity and Capital Resources
From its organization in June 1994 through May 31, 1996, the working
capital needs of the Company were funded through stockholder loans. On May 31,
1996, SeaVision entered into a line of credit with Integra Bank (now National
City Bank). The maximum amount of borrowing initially allowed under the line of
credit was $5 million. On October 28, 1996, the maximum amount of borrowing
allowed under the line of credit was increased to $7.5 million. The amount
outstanding at closing of the initial public offering on November 6, 1996 was $6
million, which was repaid coincident with the closing. The initial funding
under the line of credit occurred May 31, 1996 and was in the amount of $4.3
million, $3.6 million of which was used to repay a portion of the principal
amount of stockholder loans. The remaining amounts funded under the line of
credit were used as general working capital in the operation of the Company. The
line of credit expired on May 31, 1997 and was guaranteed by certain
stockholders of the Company. The guarantors were entitled to a guarantee fee
from the Company equal to the difference between 15% per annum and the rate
which the Company was charged under the terms of the line of credit. No
borrowings were permitted on the line of credit subsequent to December 31, 1996
and there was no balance outstanding under the line of credit at that date. The
Company is not currently in negotiation for a line of credit.
At June 30, 1997, the Company had cash and liquid cash equivalents of
$7,164,000 available to meet its working capital and operational needs.
-13-
<PAGE>
The Company recognized an operating loss during the six months ended June
30, 1997 of $5,979,000. Capital expenditures were $3.2 million during the six
months ended June 30, 1997. Given its resources in hand, its operating results
and the absence of in-place third party financing, the Company has taken steps
to reduce its cash expenditures significantly. These include a moratorium on
additional installations of shipboard ITV systems, curtailment of research and
development activities and significant workforce reductions, each as discussed
in detail above under the heading "Overview of the Company's Operations during
the Quarter Ended June 30,1997". These steps have reduced the Company's
anticipated capital expenditures to approximately $500,000 during the remainder
of the year ending December 31, 1997. The actual amount and timing of the
Company's capital expenditures will vary (and such variations could be material)
depending primarily upon the Company's success in obtaining renegotiated
contracts with cruise lines regarding operation and installation of ITV systems
and in obtaining contracts for the installation of SportsWave's VuWit system.
SeaVision currently is in the process of renegotiating its cruise line contracts
to include revenue from shore excursion ticket sales and other modifications
designed to improve SeaVision's ITV platform revenue. Pending the outcome of
these negotiations, the Company currently intends to limit its cruise line
installations to eleven ships, which are expected to be completed before the end
of the third quarter. If these negotiations are successful, the Company will
selectively continue cruise line installations. The Company intends to pursue
financing of the capital cost of additional installations collateralized by the
revised contract revenue stream for a given ship, although there can be no
assurance that such financing could be obtained. Furthermore, there can be no
assurances that the Company will be able to successfully renegotiate cruise line
contracts for more favorable terms. In addition to the moratorium on additional
cruise ship ITV system installations, the Company has sharply curtailed further
development in SportsWave beyond the current prototype of the VuWit project.
PhotoWave will emphasize operational improvement of revenue from both its mobile
digital platform as well as fixed site event digital photography and curtail
further development of its technology until the revenue streams are proven.
The Company believes, in light of the modifications to its business plan
discussed in the preceding paragraph, that the remaining proceeds from its
initial public stock offering, together with available funds and cash flows
expected to be generated by operations, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next 18 months. If cash generated by operations, together with the
remaining proceeds of the offering, were insufficient to satisfy the Company's
cash requirement, the Company would be required to consider other financing
alternatives, such as selling additional equity or debt securities or obtaining
long or short-term credit facilities, although no assurance can be given that
the Company could obtain such financing. Any sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
shareholders.
SportsWave has been notified by the Major League Baseball Players Alumni
("MLBPA"), that MLBPA does not wish to renew its present contract with
SportsWave, which expires on December 31, 1998. MLBPA has indicated, however,
that it is willing to negotiate a contract for the period beginning January 1,
1999. The Company intends to pursue negotiations with MLBPA for a contract
renewal, although there can be no assurance that the Company will be successful
or that the terms of any contract renewal will be favorable to the Company. The
Company does not believe this matter will have a material adverse effect on the
Company's business, financial condition or results of operations.
Special Note on Forward-Looking Statements
Certain statements in the preceding discussion and analysis constitute
"forward-looking statements" within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance, or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things:
-14-
<PAGE>
Limited Operating History. The Company was not organized until July 1996
and did not until November 1996 conduct any operations as a combined entity
consisting of the businesses of SeaVision, PhotoWave, SportsWave and KCG.
Furthermore, SeaVision has been in operation only since 1994 and has
concentrated on developing its media and information platform and ITV system and
on securing contracts to install and operate the ITV system on cruise ships. To
date, SeaVision is operating its ITV system in only nine installations, and
revenue generated by the ITV system has not been significant. Although
SeaVision, SportsWave and KCG have had prior relationships, there can be no
assurance that the Company will be able to integrate the businesses
successfully. Because SeaVision has only a limited operating history and the
Company has only a limited operating history as a combined entity, there can be
no assurance that the Company will succeed in implementing its strategy for
development and growth or that it will obtain financial returns sufficient to
justify its investment in the markets in which it participates.
Recent Net Losses and Accumulated Deficit. The Company has sustained
substantial net losses during the years ended December 31, 1995 and 1996 and the
six months ended June 30, 1997 and, as of June 30, 1997, had an accumulated
deficit of $17.1 million. SeaVision has recognized net losses since inception in
1994 primarily because of the limited revenue generated during its start-up
phase. During the start-up phase, the Company has researched, developed and
installed the only ITV system presently in use in the cruise industry, and has
incurred substantial costs in doing so. The Company anticipates that it will
continue to incur losses at least through 1997, and there can be no assurance
that it will be able to achieve revenue growth or profitability on an ongoing
basis in the future.
Contract Renegotiations. The Company is currently attempting to
renegotiate the economic terms of its ITV system contracts with each of
Carnival, Celebrity, Norwegian, and Royal Caribbean to make such terms more
favorable to the Company. Included in the discussions are methods for enhancing
SeaVision revenue such as transactional fees for cruise line services,
guaranteed in-cabin revenue targets, sharing of system operation costs and
increased cruise line capital commitments for new system installations as well
as for existing systems. Pending satisfactory outcome of such renegotiations,
the Company has determined to discontinue new system installations after
completion of two additional installations under firm commitment. There can be
no assurance that the Company will be successful in renegotiating its contracts
with the cruise lines to obtain terms more favorable to the Company or that, if
successful, that the revised terms will result in the desired improvements to
SeaVision's revenue and operating income. In the event such negotiations are
not successful, additional cruise ship ITV installations may not be undertaken
on such cruise lines' ships. There can also be no assurance that negotiations
could be concluded with other cruise lines for ITV system contracts on terms
more favorable than the existing contracts. Additionally, the Company may
determine to re-evaluate the ongoing operation of ITV systems currently in
place. Any such event could have an adverse effect on the Company's business,
financial condition and results of operations.
Risks Inherent in Development of New Products and Markets. The Company's
strategy includes developing new applications for its interactive entertainment
and media and information technologies and entering new markets. This strategy
presents risks inherent in assessing the value of development opportunities, in
committing capital in unproven markets and in integrating and managing new
technologies and applications. Within these new markets, the Company will
encounter competition from a variety of sources. Additionally, management has
evaluated its plans for research and development activities for various
applications of its media and information platform and digital photography
technologies and has determined that the interests of the Company would best be
served for the short term through conservation of its liquid resources and a
reduction of its non-essential development costs. SeaVision has curtailed
development projects related to its ITV systems with the exception of certain
hardware projects. PhotoWave research and development has been limited to that
necessary to facilitate basic operation of its mobile digital photography system
and its Internet-based digital imaging archival system. SportsWave research and
development has similarly been curtailed until a contract for system
installation has been obtained, and there can be no assurance that any such
contract will be obtained. . KCG's software development and network systems
consultants had been responsible for a significant portion of ongoing research
and development activities. The majority of the KCG consultants are being
redeployed toward consulting projects for third parties, although no assurance
can be given that additional third-party business will be obtained. It is also
possible that the Company will experience delays or setbacks in developing new
applications of its technology. There can be no assurance that the Company's new
products and applications, if any, will generate additional revenue for the
Company or that the Company will successfully penetrate these additional
markets.
-15-
<PAGE>
Dependence on Proprietary Technology; Absence of Patents. The Company's
success is highly dependent upon its proprietary technology. The Company does
not have patents on any of its technology and relies on a combination of
copyright and trade secret laws and contractual restrictions to protect its
technology. It is the Company's policy to require employees, consultants and
clients to execute nondisclosure agreements upon commencement of a relationship
with the Company, and to limit access to and distribution of its software,
documentation and other proprietary information. Nonetheless, it may be possible
for third parties to misappropriate the Company's technology and proprietary
information or independently to develop similar or superior technology. There
can be no assurance that the legal protections afforded to the Company and the
measures taken by the Company will be adequate to protect its technology. Any
misappropriation of the Company's technology or proprietary information could
have a material adverse effect on the Company's business, financial condition
and results of operations.
There can be no assurance that other parties will not assert technology
infringement claims against the Company, or that, if asserted, such claims will
not prevail. In such event, the Company may be required to engage in protracted
and costly litigation, regardless of the merits of such claims; discontinue the
use of certain software codes or processes; develop non-infringing technology;
or enter into license arrangements with respect to the disputed intellectual
property. There can be no assurance that the Company would be able to develop
alternative technology or that any necessary licenses would be available or
that, if available, such licenses could be obtained on commercially reasonable
terms. Responding to and defending against any of these claims could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risk of Technological Obsolescence. The ability of the Company to maintain
a standard of technological competitiveness is a significant factor in the
Company's strategy to maintain and expand its customer base, enter new markets
and generate revenue. The Company's success will depend in part upon its ability
to identify promising emerging technologies and to develop, refine and introduce
high quality services in a timely manner and on competitive terms. However, as
discussed above, the Company has significantly curtailed research and
development activity which limits the Company's ability to so identify and
develop technologies and services. There can be no assurance that future
technological advances by direct competitors or other providers will not result
in improved equipment or software systems that could adversely affect the
Company's business, financial condition and results of operations.
Need for Management of Growth. The Company's growth strategy will require
its management to conduct operations and respond to changes in technology and
the market. If the Company's management is unable to manage growth effectively,
its business, financial condition and results of operations will be materially
adversely affected.
Dependence on Key Personnel. The Company's success is dependent on a
number of key management, research and operational personnel for the management
of operations, development of new products and timely installation of its
systems. The loss of one or more of these individuals could have an adverse
effect on the Company's business and results of operations. The Company has in
place key person life insurance policies on certain of its key employees. The
Company depends on its continued ability to attract and retain highly skilled
and qualified personnel and to engage non-employee consultants. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel or contracting with such non-employee consultants.
Dependence on Major League Sports. The Company's sports marketing and
promotion business conducted through SportsWave is dependent on the success and
continued popularity of major league sports. Factors which adversely affect
major league sports could also adversely affect the Company's business and
results of operations. For example, SportsWave's business was adversely impacted
by the players' strike and owners' lockout during the 1994 and 1995 Major League
Baseball seasons. There can be no assurance that there will be no strike or
other event with a similar adverse impact in the future involving one or more of
Major League Baseball, the National Football League, the National Basketball
Association or the National Hockey League.
Fluctuations in Operating Results. The Company expects to experience
significant fluctuations in its future quarterly operating results that may be
caused by many factors, including the seasonal aspects of SportsWave's business.
Accordingly, quarterly revenues and operating results will be difficult to
forecast, and the Company believes that period-to-period comparisons of its
operating results will not necessarily be meaningful and should not be relied
upon as an indication of future performance.
-16-
<PAGE>
Potential Impact of Privacy Concerns. One of the features of the
Company's ITV system is the ability to develop and maintain information
regarding usage of the system by cruise ship passengers and other parties. The
perception by the users of substantial security and privacy concerns, whether or
not valid, may cause users to resist providing the personal information that
might be useful for demographic purposes and may inhibit market acceptance and
usage of the Company's video systems. In the event such concerns are not
adequately addressed, the Company's business, financial condition and results of
operations could be materially adversely affected.
Competitive Market Conditions. The market for interactive communications
and digital imaging is new, rapidly evolving and highly competitive. Many of the
Company's current and potential competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company and therefore may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. There can be no assurance
that the Company will be able to compete effectively with current or future
competitors or that the competitive pressures faced by the Company will not have
a material adverse effect on the Company's business, financial condition and
results of operations.
Government Regulation and Legal Uncertainties. The Company is subject,
both directly or indirectly, to various laws and governmental regulations
relating to its business. As a result of rapid technology growth and other
related factors, laws and regulations may be adopted which significantly impact
the Company's business.
Effect of Recently Issued Accounting Standards
Financial Accounting Standards Board Statement No.128, "Earnings Per Share"
("SFAS No. 128") was issued in February 1997 and is effective for fiscal years
beginning after December 15, 1997. This statement, upon adoption, will require
all prior-period earnings per share ("EPS") data to be restated, to conform to
the provisions of the statement. This statement's objective is to simplify the
computation of EPS and to make the U.S. standard for EPS computations more
compatible with that of the International Accounting Standards Committee. The
Company will adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its reported EPS. There are no
differences in EPS calculated under SFAS No. 128 and that presented in the
Consolidated Statements of Operations for the three and six month periods ended
June 30, 1996 and 1997, as calculated in accordance with Accounting Principals
Bulletin No. 15, "Earnings per Share."
Financial Accounting Standards Board Statement No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129"), was issued in February
1997 and is effective for periods ending after December 15, 1997. This
statement, upon adoption, will require all companies to provide specific
disclosure regarding the entity's capital structure. SFAS No. 129 will specify
the disclosures, for all companies, including descriptions of the securities
comprising the capital structure and the contractual rights of the holders of
such securities. The Company will adopt SFAS No. 129 in fiscal 1997 and does
not anticipate that the statement will have a significant impact on its
disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Currently there are no
components of comprehensive income which apply to the Company.
-17-
<PAGE>
Part I Financial Information
Item 3. Quantitative and Qualitative Disclosure about Market Risk Sensitive
Instruments
The Company currently does not invest excess funds in derivative financial
instruments or other market rate sensitive instruments for the purpose of
managing its foreign currency exchange rate risk or for any other purpose.
-18-
<PAGE>
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of the Stockholders of the Company was held on Thursday,
May 8, 1997.
(b) Not Applicable.
(c) The following matters were voted on by the Stockholders of the Company by
votes submitted through proxy or in person at the Annual Meeting:
(1) Election of Directors for one year terms to hold office until the
next annual meeting of the Stockholders following election and
until their successors are duly elected and qualified. Results were
as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Against Votes Abstaining
<S> <C> <C> <C>
Richard W. Talarico 4,164,677 0 54,690
R. Daniel Foreman 4,164,677 0 54,690
Brian K. Blair 4,164,677 0 54,690
William C. Kavan 4,164,677 0 54,690
Paul J. Pasquarelli 4,206,917 0 12,450
James C. Roddey 4,164,677 0 54,690
Richard S. Trutanic 4,164,677 0 54,690
</TABLE>
(2) Approval of the Company's 1997 Stock Plan which reserves an
aggregate of 300,000 shares of the Company's Common Stock to be
awarded as stock options, stock appreciation rights, restricted
shares and restricted units to officers and other employees of the
Company and its subsidiaries and to consultants and advisors
(including non-employee directors) of the Company and its
subsidiaries. Votes cast were 3,518,445 for approval, 169,990
against approval and 10,180 abstaining.
(3) Ratification of the Board of Directors' selection of Arthur
Andersen LLP to serve as the independent public accountants to
examine the financial statements of the Company and its
subsidiaries for the year ending December 31, 1997. Votes cast were
4,209,367 for ratification, 100 against ratification, and 9,900
abstaining.
There were a total of 5,184,067 shares of the Company's Common Stock
eligible to vote at the Annual Meeting.
(d) Not applicable.
-19-
<PAGE>
Part II Other Information
Item 5. Other Information
-----------------
Resignation of Director
On May 9, 1997, Richard S. Trutanic submitted his resignation as a
Director of the Company. The Board of Directors has begun the process of
identifying qualified candidates to replace Mr. Trutanic.
Resignation of Chief Financial Officer
In June 1997, Jon E. VanAmringe resigned as the Company's Chief
Financial Officer. This decision was jointly reached by the Company's Executive
Management and Mr. VanAmringe. Severance costs associated with Mr. VanAmringe's
departure have been included in the accrual noted above in Item 2 under
Workforce Reductions.
Dean C. Praskach has been promoted to Vice President-Finance and will
assume the duties previously administered by Mr. VanAmringe.
-20-
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.21 Termination Agreement dated as of July 1, 1997 by and between
Allin Communications Corporation and Electronic Data Systems
Corporation.
10.22 Amended and Restated Joint Marketing Agreement dated as of July 1,
1997 by and between Allin Communications Corporation and
Electronic Data Systems Corporation.
11 Computation of Earnings per Share.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the quarter
ended June 30, 1997.
-21-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIN COMMUNICATIONS CORPORATION
(Registrant)
Date: August 11, 1997 By: /s/ Richard W. Talarico
--------------------------
Richard W. Talarico
Chairman and Chief Executive Officer
Date: August 11, 1997 By: /s/ Dean C. Praskach
----------------------
Dean C. Praskach
Vice President-Finance and
Chief Accounting Officer
-22-
<PAGE>
Allin Communications Corporation
Form 10-Q
June 30, 1997
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.21 Termination Agreement dated as of July 1, 1997 by and between
Allin Communications Corporation and Electronic Data Systems
Corporation.
10.22 Amended and Restated Joint Marketing Agreement dated as of July
1, 1997 by and between Allin Communications Corporation and
Electronic Data Systems Corporation.
11 Computation of Earnings per Share
27 Financial Data Schedule
<PAGE>
Exhibit 10.21
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT (the "Agreement") dated as of July 1, 1997 (the
"Effective Date"), is between Electronic Data Systems Corporation ("EDS") and
--------------
Allin Communication Corporation ("Allin").
RECITALS
WHEREAS, EDS and Allin entered into (i) that certain Master Agreement dated
December 16, 1996 (the "Master Agreement"), (ii) that certain Joint Marketing
----------------
Agreement dated effective as of January 1, 1997 (the "Marketing Agreement");
-------------------
Whereas, pursuant to the Master Agreement, Allin and EDS entered into that
certain Authorization Letter No. 1996-01 (the "Authorization Letter"), dated
---------------------
December 16, 1996, pursuant to which EDS agreed to provide Allin with certain
services and resources, as more particularly described therein, in consideration
for the payments set forth therein;
WHEREAS, Allin has requested that EDS accommodate Allin by entering into
this Agreement providing for the early termination of the Authorization Letter;
and
WHEREAS, EDS is willing to make such accommodation to Allin upon the terms
and conditions of this Agreement.
NOW, THEREFORE, in consideration of the promises contained in this
Agreement and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Allin and EDS agree as follows:
1. Definitions. Capitalized terms used in this Agreement, to the extent not
------------
otherwise defined in this Agreement, shall have the same meaning as in the
Master Agreement.
2. Services. EDS and Allin agree that the Authorization Letter, will terminate
---------
on July 1, 1997 (the "Termination Date"). On and after the Termination Date,
----------------
Allin will have no further obligations under the Authorization Letter and EDS
will have no further obligation to provide any of the services or resources set
forth in the Authorization Letter. In addition, on or after the Termination
Date, EDS will be under no obligation to provide the Transition Assistance more
particularly described in Section 17 of the Master Agreement of any other
service or resource set forth in the Master Agreement.
3. Transition of Personnel. As of the Termination Date, Allin will offer
-----------------------
employment to those EDS employees listed in Schedule 3 (each, an "Employee
----------
Offeree") in accordance with Allin's normal employment policies; provided,
however, that Allin acknowledges and agrees that EDS may, in its sole and
absolute discretion, offer employment to any such Employee Offeree. In
connection with the making of such offers of employment, it is the expectation
of Allin and EDS that Allin will recognize and give credit for the respective
years of service at EDS of each of the Employee Offerees for purposes of
establishing the following benefits for the Employee Offerees at Allin; (i)
Vacation; (ii) Eligibility for early retirement; (iii) Vesting in Allin's
Retirement Plan, but not for determining the value of any Employee Offeree's
accrued benefits under Allin's Retirement Plan, which value will be based upon
the period of time that Allin actually employs an Employee Offeree; and (iv)
Short-term and long-term disability. EDS will cooperate with Allin in
connection with the making by EDS of the offers of employment contemplated by
this Section 3 and the distribution of employment information to the Employee
---------
Offerees. Allin and EDS each agree to indemnify and defend the other and to
hold the other harmless from any and all claims, actions, damages, liabilities,
costs and expenses, including but not limited to reasonable attorneys' fees and
expenses (collectively, "Claims"), arising out of, under or in connection with
an
<PAGE>
act or omission of the indemnitor in its capacity as an employer of a person
and arising out of or relating to (A) federal, state or other laws or
regulations for the protection of persons who are members of a protected class
or category of persons, (B) sexual discrimination or harassment, (C) work
related injury or death, (D) accrued employee benefits not expressly assumed by
the indemnitee and (E) any other aspect of the employment relationship or its
termination (including but not limited to claims for breach of an express or
implied contract of employment) and which, in all such cases, arose when the
person asserting the claim, demand, charge, actions, cause of action or other
proceeding was or purported to be an employee of the indemnitor.
4. Amendment of Marketing Agreement. Allin and EDS acknowledge and agree that
---------------------------------
as a condition precedent to the effectiveness of this Agreement, the parties
will enter into an amended and restated Marketing Agreement substantially in the
form of the Amended and Restated Marketing Agreement attached hereto as
Exhibit A.
- ---------
5. No Third Party Beneficiary. This Agreement is intended to benefit only the
--------------------------
parties hereto and their respective successors and permitted assigns and shall
not confer upon any other person or entity any rights or remedies.
6. Counterparts. This Agreement may be executed in several counterparts, all
------------
of which taken together shall constitute a single agreement between the parties.
IN WITNESS WHEREOF, EDS and Allin have executed and delivered this Agreement
on the dates set forth below to be effective as of the Effective Date.
ELECTRONIC DATA SYSTEMS ALLIN COMMUNICATIONS CORPORATION
CORPORATION
By: /s/ William Richard By: /s/ Richard W. Talarico
------------------------------ ---------------------------------
Title: Division Vice President Title: Chief Executive Officer
--------------------------- -------------------------------
Date: August 11, 1997 Date: July 1, 1997
---------------------------- -------------------------------
<PAGE>
Exhibit 10.22
AMENDED AND RESTATED JOINT MARKETING AGREEMENT
THIS AMENDED AND RESTATED JOINT MARKETING AGREEMENT (the "Agreement"), dated as
of July 1, 1997 is between ALLIN COMMUNICATIONS CORPORATION ("Allin"), a
Delaware corporation with its principal offices at 300 Greentree Commons, 381
Mansfield Avenue, Pittsburgh, Pennsylvania 15220, and ELECTRONIC DATA SYSTMES
CORPORATION ("EDS"), a Delaware corporation with offices at 5400 Legacy Drive,
Plano, Texas 75024.
WHEREAS, Allin and EDS entered into that certain Joint Marketing Agreement
dated January 1, 1997 (the "Original Marketing Agreement"); and
WHEREAS, Allin and EDS desire to amend and restate the Original Marketing
Agreement in its entirety as set forth below; and
NOW, THEREFORE, Allin and EDS hereby agree as follows:
1. Intent of Parties. EDS' Global Travel Services Industry Strategic
------------------
Business Unit ("GTSI Business Unit") and Allin desire to establish an
arrangement whereby each party will cooperate with the other to enhance
their respective abilities to market their respective businesses which may
include jointly marketing the Allin Media and Information Platform (the
"Allin Platform"), which platform is a client/server environment and resides
upon the Windows NT operating system and utilizes the Microsoft SQL server
database engine and Allin's interactive television and digital imaging
applications are designed as direct extensions of the Microsoft BackOffice
suite.
2. Agreement. During the term of this Agreement, EDS and Allin will have the
---------
rights and obligations set out in this Agreement.
3. Term. The term of this Agreement will commence of the date of this
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Agreement (the "Effective Date"), and will end on the ten year anniversary
of the Effective Date, unless earlier terminated in accordance with the
provisions of this Agreement.
4. Marketing Activities. The GTSI Business Unit may market the Allin Platform
--------------------
during the term of this Agreement for interactive television prospects and
corporate and consumer digital photography prospects in the travel services
industries and may propose the Allin Platform to all such prospects for whom
the GTSI Business Unit believes that the Allin Platform is appropriate.
5. Payments. If EDS identifies a potential prospect for the Allin Platform,
---------
the parties will meet to discuss, in good faith, appropriate compensation
for EDS, and related software licensing, service and maintenance agreements.
If Allin identifies a potential prospect for EDS services, the parties will
meet to discuss, in good faith, appropriate compensation for Allin.
Notwithstanding the foregoing, Allin recognizes that EDS is in the business
of providing information technology services to its customers and the
parties agree and acknowledge that the requirements of certain third-party
customers may necessitate use of a media and information platform other than
the Allin Platform.
6. Confidentiality. Each party agrees that during the term of this Agreement
----------------
and for a period of two (2) years thereafter, such party shall use the same
means it uses to protect its own confidential proprietary information, but
in any event not less than reasonable means, to prevent the disclosure and
to protect the confidentiality of both (i) written information received from
the other party which is marked or identified as confidential, and (ii) oral
or visual information identified as confidential at the time of disclosure
which is summarized in writing and provided to the other party in such
written form promptly after such oral or visual disclosure ("Confidential
<PAGE>
Information"). The foregoing shall not prevent either party from disclosing
Confidential Information which belongs to such party or is (i) already known
by the recipient party without an obligation of confidentiality other than
under this Agreement, (ii) publicly known or becomes publicly known through
no unauthorized act of the recipient party, (iii) rightfully received from a
third party, (iv) independently developed by the recipient party by persons
without access to or use of the other party's Confidential Information, (v)
disclosed without similar restrictions to a third party by the party owning
Confidential Information, (vi) approved by the other party for disclosure,
or (vii) required to be disclosed pursuant to a requirement of a
governmental agency or law so long as the disclosing party provides the
other party with notice of such requirement prior to any such disclosure.
Each party represents that is has the right to disclose information that it
has made and will make available to the other hereunder. All tangible forms
of Confidential Information owned by a part will be returned to the owner or
destroyed upon expiration or termination of this Agreement. In addition to
the foregoing, EDS and Allin acknowledge and agree that all strategies,
techniques, concepts, materials, and ideas developed jointly or individually
by either party in connection with this Agreement shall be deemed "Joint
Confidential Information" if so designated by either party. Such Joint
Confidential Information shall be subject to the terms of this Section 7
unless otherwise agreed to by the parties in writing.
7. Termination. Either party shall be entitled to terminate this Agreement
------------
at any time upon thirty (30) days prior written notice to the other party.
8. Media Releases. All media releases, public announcements and public
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disclosures by Allin or EDS or their respective employees or agents relating
to this Agreement including without limitation promotional or marketing
material (but not including any announcement intended solely for internal
distribution at Allin or EDS, as the case may be) shall be coordinated with
and approved by Allin and EDS prior to the release thereof. In addition, any
information regarding EDS or describing the relationship between EDS and
Allin to be included in any offering materials, registration statements, or
other related materials is subject to EDS' written approval prior to its
use.
9. Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws, other than choice of law rules, of the
Commonwealth of Pennsylvania.
10. Force Majeure. Each party shall be excused from performance hereunder for
--------------
any period and to the extent that it is prevented from performing pursuant
hereto, in whole or in part, as a result of delays caused by the other or
third parties or an act of God, war, civil disturbance, court order, labor
dispute, or other cause beyond its reasonable control, including failures or
fluctuations in electrical power, heat, light, air conditioning or
telecommunications equipment.
11. Binding Nature and Assignment. This Agreement shall be held binding on the
------------------------------
parties hereto and their respective successors and assigns, but neither
party may, nor shall have the power to, assign this Agreement without the
prior written consent of the other.
12. Employees. Unless otherwise agreed to in writing, the parties hereto
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agree that during the term of this Agreement and for a period of two (2)
years after the expiration or termination of this Agreement, neither party
shall employ nor solicit for employment any person or persons employed by
the other, working under the Agreement or any contract and/or subcontract
that may be awarded as a result of this Agreement.
13. No Third Party Beneficiary. Nothing in this Agreement may be relied upon or
---------------------------
shall benefit any party other than the parties hereto.
14. Relationship of Parties. Each of the parties will act as, and will be,
------------------------
independent in all aspects of their performance of this Agreement. Neither
party will act or have authority to act as an agent for the other party for
any purpose whatsoever. Except as expressly provided in this Agreement,
nothing will constitute either party as agent for the other or either party
the authority to make representations or agreements on behalf of the other,
and each party covenants not to make any representations or to take any
actions inconsistent with the foregoing. Nothing in this Agreement will be
deemed to constitute or create a joint venture, partnership,
<PAGE>
pooling arrangement, contractor arrangement or other formal business entity
or fiduciary relationship between EDS and Allin, and nothing in this
Agreement shall be construed as providing for the sharing of profits or
losses arising out of the efforts of either Allin or EDS under this
Agreement.
15. Notices. All notices, requests, claims, demands, designations, approvals,
--------
consents, acceptance and other communications under this Agreement will be
in writing and will be deemed to have been duly given if (a) delivered
personally, (b) sent by express delivery services or certified mail, postage
prepaid, or (c) sent by facsimile, together with a hard copy by express
delivery service, to the parties at the addresses or facsimile numbers, as
the case may be, as follows:
If to EDS:
Electronic Data Systems Corporation
5400 Legacy Drive
Mailstop H3-6C-71
Plano, Texas 75024
Attention: Division Vice President - Operations
Global Travel Services Industry
Facsimile Number: (972) 605-2060
If to Customer:
Allin Communications Corporation
300 Greentree Commons
381 Mansfield Avenue
Pittsburgh, Pennsylvania 15220
Attention: President
Facsimile Number: (412) 928-0887
All notices and other communications under this Agreement that are given as
provided in this Section, (a) if delivered personally, will be deemed given on
the date it is delivered, (b) if sent by express delivery service or certified
mail, will be deemed given on the date it is received and (c) if sent by
facsimile, will be deemed given on the date it is sent (so long as the sender
receives confirmation of transmission and a hard copy is sent by express
delivery service or certified mail, postage prepaid, in the manner herein
provided). Either party from time to time may change its address, facsimile
number or designee for notification purposes by giving the other party notice of
the new address, facsimile number, or designee and the date upon which it will
become effective.
16. Entire Agreement. This Agreement amends and restates the Original Marketing
-----------------
Agreement in its entirety. This Agreement, including any Schedules or
Exhibits referred to herein and attached hereto, each of which is
incorporated in this Agreement for all purposes, constitutes the entire
agreement between the parties with respect to the subject matter of this
Agreement and there are no representations, understandings or agreements
relating to this Agreement which are not fully expresses herein. No change,
waiver, or discharge hereof shall be valid unless in writing and signed by
an authorized representative of the party against which such change, waiver,
or discharge is sought to be enforced.
<PAGE>
IN WITNESS WHEREOF, EDS and Allin have each caused this Agreement to be signed
and delivered by its duly authorized officer, all as of the date set forth
above.
ELECTRONIC DATA SYSTEMS ALLIN COMMUNICATIONS
CORPORATION CORPORATION
By: /s/ William Richard By: /s/ Richard W. Talarico
-------------------------------- ----------------------------------
Title: Division Vice President Title: Chief Executive Officer
--------------------------- ------------------------------
Date: August 11, 1997 Date: July 18, 1997
---------------------------- -------------------------------
<PAGE>
Exhibit 11
ALLIN COMMUNICATIONS CORPORATION
CALCULATION OF NET LOSS PER COMMON SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (1,612) $ (3,152) $ (2,512) $ (5,744)
Accretion and dividends on preferred stock --- 55 --- 119
---------- --------- ---------- ----------
Net loss attributable to common shareholders $ (1,612) $ (3,207) $ (2,512) $ (5,863)
========== ========= ========== ==========
Net loss per common share $ (0.62) $ (0.62) $ (0.96) $ (1.13)
========== ========= ========== ==========
Weighted average common and common equivalent
shares outstanding during the period 2,400,000 5,184,067 2,400,000 5,184,067
Effect of conversion of preferred stock
issued within one year of the offering 203,385 --- 203,385 ---
---------- --------- ---------- ----------
Shares used in calculating net loss per common
share 2,603,385 5,184,067 2,603,385 5,184,067
========== ========= ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
data for the three month period ended June 30, 1997 and is qualified in its
entirety by reference to such financial statements. Dollar amounts in thousands,
except earnings per share.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,164
<SECURITIES> 0
<RECEIVABLES> 2,994
<ALLOWANCES> (54)
<INVENTORY> 39
<CURRENT-ASSETS> 10,940
<PP&E> 10,968
<DEPRECIATION> 1,745
<TOTAL-ASSETS> 26,766
<CURRENT-LIABILITIES> 3,741
<BONDS> 0
0
2,500
<COMMON> 52
<OTHER-SE> 20,473
<TOTAL-LIABILITY-AND-EQUITY> 26,766
<SALES> 2,543
<TOTAL-REVENUES> 2,543
<CGS> 1,383
<TOTAL-COSTS> 1,383
<OTHER-EXPENSES> 4,370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (106)
<INCOME-PRETAX> (3,104)
<INCOME-TAX> 48
<INCOME-CONTINUING> (3,152)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,152)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
