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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________ .
Commission file number: 0-21395
ALLIN COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 25-1795265
(State or other jurisdiction of incorporation or organization) (I. R. S. Employer Identification No.)
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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)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value per Share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 20,
1997 as reported on the Nasdaq National Market tier of the Nasdaq Stock Market,
was approximately $45,900,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 20, 1997, the Registrant had outstanding 5,184,067 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Allin Communications Corporation
Form 10-K
December 31, 1996
Index
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Part I
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Item 1 - Business Page 3
Item 2 - Properties Page 16
Item 3 - Legal Proceedings Page 16
Item 4 - Submission of Matters to a Vote of Security Holders Page 16
Part II
Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters Page 17
Item 6 - Selected Financial Data Page 18
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations Page 19
Item 8 - Financial Statements and Supplementary Data Page 24
Item 9 - Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure Page 42
Part III
Item 10 - Directors and Executive Officers of the Registrant Page 43
Item 11 - Executive Compensation Page 45
Item 12 - Security Ownership of Certain Beneficial Owners and Management Page 48
Item 13 - Certain Relationships and Related Transactions Page 50
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K Page 54
Signatures Page 55
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Part I
Item 1 - Business
(a) General Development of Business
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 will 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"
mean Allin Communications Corporation and its subsidiaries.
Markets and Applications. Allin Communications Corporation is a media,
technology and creative services company, which combines advanced technology
capabilities with focused marketing skills in a variety of niche markets. The
Company's SeaVision subsidiary is a significant supplier of interactive
television ("ITV") systems to the cruise line industry. The Company has signed
contracts with Carnival Cruise Lines ("Carnival"), Celebrity Cruises, Inc.
("Celebrity"), Cunard Lines Limited ("Cunard"), Norwegian Cruise Lines ("NCL")
and Royal Caribbean Cruise Line ("RCCL"), and it currently has seven systems in
operation on cruise ships with an annual base of approximately one million
passengers. In addition to ITV, SeaVision offers customers a fully integrated
solution for the application of electronic systems and platforms throughout
their operations, at sea and on land. These include new build and retrofit
shipboard integration services; Internet solutions; literature and marketing
systems; management of shipboard broadcast and media functions; the development,
installation and operation of reservations systems; data base management and
operation of internal MIS functions. The Company's PhotoWave subsidiary applies
the Company's proprietary media and information platform to the emerging digital
imaging industry. The Company's SportsWave subsidiary, through its
International Sports Marketing division, provides its corporate clients with
unique sports-related marketing programs, utilizing exclusive rights with the
Major League Baseball Players Alumni Association and relationships with other
legends of professional hockey, basketball and football. SportsWave also
intends to pursue the development, installation and operation of wireless
interactive technology for sports venues; and the deployment of mobile
communications suites for corporate hospitality marketing opportunities at
sporting and other promotional events. The Company's KCG subsidiary provides
software design, engineering and network solutions for corporate clients
worldwide, and supports the development and technology efforts of the Company.
The Company's Netright subsidiary sells computer related hardware and software,
and was acquired primarily to support the operations of the Company through its
purchasing capabilities and agreements with vendors.
The Media and Information Platform. The Company provides customized ITV,
digital imaging and other communications, information and media services to
users in the travel and leisure, sports marketing and promotion and other
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. Unlike
many other ITV platforms, 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 maintains a
constant focus on creating ITV design features that emphasize ease of use and
eye-catching graphics.
The Company's ITV system offers customers a variety of interactive services
through 18 separate system modules. Among the pay services that can be offered
are video-on-demand, music-on-demand, shopping, games of
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chance, event ticketing and customized photographs using digital imaging
technology. Free-to-user services include informational messages, account review
and room service. While free services do not currently provide revenue, they
enhance the usefulness of the system, afford the Company a competitive advantage
in marketing its system, attract users to other services offered on the
Company's system and provide potential sources of additional recurring revenue
from sponsorship of various services by advertisers and from transaction fees.
The ITV system can also serve as a response-based marketing vehicle that can
target specific audiences for potential advertisers and can make available to
service providers a variety of other information, including activity reports and
market research.
The Company ITV System permits a user to access the transactional and other
services offered on the system by using a handheld television remote control to
make selections from easy-to-use menus on a television screen that may be
located in a user's cruise ship cabin, hotel room or other individual station,
or in a centrally located kiosk. Users can limit access to various pay services
by utilizing lock out codes and password procedures. The system currently
operates in six languages: English, Spanish, French, Italian, German and
Portuguese.
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
Celebrity, Carnival, NCL, RCCL and Cunard, and it currently has a total of seven
systems in operation on cruise ships with an annual base of approximately one
million passengers. In addition, SeaVision offers shipboard systems integration
services and in April 1997 expects to complete the installation of a new
television distribution and broadcast system aboard Cunard's Queen Elizabeth 2.
See "-- SeaVision - Travel and Leisure Industry."
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 in
this emerging industry, See " -- PhotoWave - Digital Imaging Industry."
SportsWave 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 developing
adaptations of the Company's interactive media and information platform for
possible use in sports venues and a mobile media center for deployment to
sporting and other promotional events. See "-- SportsWave - Sports Marketing
and Sporting Event Support."
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. See "-KCG -- Software Design and Network
Solutions."
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.
(b) Financial Information About Industry Segments
Financial information concerning the industry segments in which the Company
operates is included in Note 13 of the Notes to the Company's Consolidated
Financial Statements included herein in Item 8.
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(c) Narrative Description of Business
SeaVision - Travel and Leisure Industry
International Cruise Industry Overview. From its inception in 1994,
SeaVision identified the cruise industry as the initial market for its
interactive media and information platform. The cruise industry is the fastest
growing segment of the worldwide travel business. An industry trade group, using
information as of December 31, 1995, has indicated that approximately 120 cruise
ships with a capacity of more than 100,000 berths serve the North American
market. The increasing popularity of cruise excursions in both the United
States and abroad, combined with the high level of customer satisfaction, is
expected to foster continued growth in the industry. The Company believes that
it is the only company to date that has successfully operated digital ITV
systems on cruise ships.
Operations. Revenue from the domestic ITV service and advertising market
historically has resulted primarily from the delivery of a limited number of
interactive services, predominantly on-demand movies. The Company believes that
it is one of the first to market a fully operational ITV system which is capable
of providing multiple interactive services. Currently, the Company is a leading
provider of interactive media and information systems to the cruise line market.
Through SeaVision, the Company has installed and operates its ITV system on a
total of seven cruise ships operated by Celebrity, Carnival, NCL, RCCL.
Additionally, SeaVision has completed installation on an additional Celebrity
cruise ship and on the Cunard flagship, the Queen Elizabeth 2. The Company
expects both systems to be activated in April 1997. Presently, SeaVision has
entered into contracts to install and operate its system on two additional
Celebrity cruise ships, one additional NCL ship and one additional ship operated
by RCCL. The Company's contracts with Carnival, NCL and RCCL provide Carnival,
NCL and RCCL with the option of having SeaVision install and operate its ITV
system on up to eleven, four and two additional cruise ships, respectively, and
the Company is currently pursuing negotiations with various other cruise lines
to install its system on additional vessels. There can be no assurance, however,
that any option will be exercised or that any additional contracts will be
acquired or, if additional firm contracts are secured, that unforeseen delays in
installation will not occur.
SeaVision's in-cabin ITV system provides cruise passengers with a variety
of services, including casino video gaming, on-demand pay-per-view movies,
shopping, shore excursion ticket purchasing and room service ordering. The
system also can be used by passengers to preview and purchase photographs taken
by the ship's photographers during their voyage, and to customize photos with
special graphic overlays, borders and backgrounds. SeaVision and Eastman Kodak
Company have entered into a market trial agreement for the operation of this
service on three ships fitted with SeaVision's ITV system. This system, known
as PhotoPlace, is currently installed on the NCL Dreamward. SeaVision's ITV
system currently has an annualized viewer base of approximately one million
passengers. SeaVision's system can also be utilized for advertising on behalf
of retailers, corporate sponsors and other third parties and for gathering data
and disseminating information by cruise operators.
The Company is actively seeking to market its services in other industries
and niche markets in which its technology may afford a competitive advantage.
Through SeaVision, the Company has begun to offer additional services to the
cruise industry and is currently providing shipboard systems integration
services aboard the Queen Elizabeth 2 and is also pursuing other shipboard
systems integration contracts. The media and information platform and the ITV
system in particular offer significant opportunities to fully integrate
shipboard information systems including broadcast, publishing, hotel and
restaurant management, and reservations and marketing systems. The Company is
actively marketing this capability to cruise lines for shipboard as well as land
based needs.
For 1995 and 1996, respectively, SeaVision accounted for 100% and 48% of
the Company's total revenue. SeaVision's revenues are dependent upon a limited
number of customers. In 1995, all revenue was derived from two cruise lines.
In 1996, three SeaVision cruise line customers, Carnival, Celebrity and NCL,
accounted for 20%, 13% and 12%, respectively, of the Company's consolidated
revenues. The loss of any such customer could have a material adverse effect on
the Company's business, financial condition and results of operations.
All of the Company's current ITV system contracts with cruise lines involve
an arrangement under which the Company installs its ITV system on board and
operates the system as a concessionaire, bearing most of the costs
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of installation and operation. Under certain of the contracts, the cruise line
has agreed to purchase certain hardware components used in the ITV system. Under
all of its ITV system contracts with cruise lines, the Company, which retains
ownership of the system (other than components purchased by a cruise line),
shares with the host cruise line a portion of the revenue the system generates
from the sale to passengers of various pay services, as well as a portion of the
revenue from the sale of advertising to retailers, corporate sponsors and other
third parties. The terms of the revenue-sharing provisions were negotiated
individually with each cruise line and vary from contract to contract based upon
a number of factors, including the level of contribution of the cruise line to
initial and ongoing equipment costs, the number of ships covered by the
contract, whether the contract provides for exclusivity and the level of
services to be provided by the Company. Such formulas provide for the Company to
receive a greater portion of revenue until an amount attributed to the Company's
installation costs has been recovered, after which point the cruise line is
entitled to receive an increased share.
Each of the Company's ITV system contracts with the cruise lines is subject
to renewal by mutual consent of the parties at the expiration of the initial
term. A decision by one or more of the cruise lines to discontinue its agreement
with the Company at the contractual expiration date could have a material
adverse effect on the Company.
Marketing and Services Agreement with EDS
In January 1997, the Company and Electronic Data Systems, Inc. ("EDS")
announced a long-term agreement to market the Company's media and information
platform to key sectors of the travel and leisure industry, including
hospitality and gaming. Under the terms of the ten year contract, the Global
Travel and Services Division of EDS will 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. The Company believes that this alliance will significantly
enhance and broaden the geographic scope of the Company's installation and
operational capabilities and thus enable the Company to transfer its technology
more rapidly to other applications and key sectors of the hospitality and
leisure markets. The commitment of EDS to this long-term marketing agreement is
expected to significantly impact the Company's revenue, particularly as a result
of contracts expected to be procured in the global hospitality sector where EDS
already maintains a presence with major clients in the industry. However, given
the lead-time required to negotiate and fulfill any such contracts, significant
positive impact on earnings would not be expected until late in 1997. However
there can be no assurance that the Company will secure any such contract.
Allin Communications - Hotel and Resort Industry
Industry Overview. In 1995, the lodging market in the United States
consisted of over 3.4 million hotel rooms, of which approximately 1.9 million
were in hotels containing 100 or more rooms. Guest pay services were introduced
in the lodging market in the early 1970s and have since become a standard
amenity offered by many hotels to their guests. Virtually all hotels offer free-
to-guest services as well. In 1986, certain hotels began offering their guests
limited interactive services, and in 1991, on-demand movies became available.
Guest pay services are attractive to hotel operators because they provide an
additional amenity for their guests, as well as incremental revenue to their
establishments.
The Company is marketing to the hotel and resort industry an information
and media platform offering guest services that include not only on-demand pay-
per-view movies but also other services not typically provided, including high-
speed Internet access. The Company's strategy is to pursue contracts for the
installation and operation of its ITV system in hotels and resort properties
with more than 100 rooms. The Company and EDS have entered into a long-term
agreement to market the Company's interactive media and information platform to
key sectors of the travel and leisure industry, including hospitality and
gaming. The Company believes that the ITV system which the Company uses in
cruise industry applications can be used in essentially its present form to
provide digital interactive services to the hotel and resort industry. Given the
nature and configuration of the Company's platform, the Company anticipates
being able to offer services not generally available to hotels and resorts at
the present time, such as in-room Internet access at speeds much faster than the
typical home computer and a ticket
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purchasing system which would permit guests to reserve and purchase theater and
event tickets on the system in similar fashion that SeaVision has successfully
managed the sale of shore excursion tickets for passengers of its cruise line
customers. The Company intends to focus its hotel services on the needs of the
business traveler and plans to pursue the offering of airline ticketing and
rental car reservations, as well as e-mail access. The Company's system can be
fully integrated to provide a wide variety of services, beyond in-room
entertainment and ITV, including property management and inventory control
systems, digital photography, reservations and billing systems as well as
Internet access. Management anticipates that its relationship with EDS will
provide cruise lines, hotels and others in the leisure industry, with a single
source for these and other services, with EDS installing and providing technical
support for the Company's interactive media and information platform on land and
at sea.
In addition to the services described above, the Company intends to offer
similar entertainment options to hotel and resort guests as it does to cruise
passengers, including video-on-demand and shopping, at prices comparable to
those charged in the cruise industry. Games of chance cannot be offered in any
United States hotel rooms at this time. The Company is also exploring other
forms of revenue-generating entertainment as well as advertising opportunities.
The Company is currently negotiating with three major hotel chains to
install and operate its system on a trial basis. However, there can be no
assurance that those negotiations will be successful or that a successful trial
will result in a larger chain-wide contract.
PhotoWave - Digital Imaging
Industry Overview. Digital imaging involves the capture of images in or
conversion of images to a digital format, the storage of images in a computer
and the transmission of the images over electronic networks. Digital imaging
equipment has been developed which permits the capture of digital images
instantly without the need for film or the chemical development process. The
camera records the image on magnetic memory cards which can be removed and
inserted in any computer equipped with a standard slot for such cards.
Alternatively, digital imaging equipment can be connected directly to computers
through standard industry interfaces. Once an image is stored in a computer,
software can be used to manipulate and enhance the image in various ways such as
changing the size, rotating it or adding color.
Operations. Through PhotoWave, the Company intends to market a turnkey
package of digital imaging services to industries and markets dependent on
conventional wet photography, including the real estate, insurance, school
photography and commercial photography markets. PhotoWave currently operates one
mobile fully-equipped interactive digital photography studio. PhotoWave's
interactive system enables images to be viewed, customized and produced all
within the mobile vehicle. Furthermore, an on-board power source allows
PhotoWave's imaging to be executed at any site. The mobile unit also contains
equipment which allows PhotoWave to offer a wide range of ancillary imaging
products, such as t-shirts, mugs, posters and identification badges and tags.
The concept for the mobile unit emerged from two marketing realities: consumer
demand for instant gratification and convenience and the arrival of widespread
digital imaging applications. PhotoWave brings digital imaging services through
professional commercial photographers to niche markets, such as event
photography, currently dependent on conventional silver halide wet processing.
By integrating the media and information platform developed by the Company with
digital photography, PhotoWave creates an innovative method of bringing its
technology directly to the consumer. PhotoWave plans include the operation of
additional mobile digital imaging units during 1997, both company-owned and
through partnerships with local and regional professional photographers and
photographic suppliers.
In an effort to further take advantage of the anticipated shift in the
picture-making and delivery process created by the advent of digital imaging and
the personal computer, PhotoWave has expanded its marketing concept to include
an Internet website, which management believes, when fully implemented, will
enable consumers to remotely access, manipulate and purchase their images. The
PhotoWave Surfboard access card is expected to allow consumers to access their
photos at any PhotoWave Customer Viewing Station kiosk, none of which have yet
been deployed, or through their personal computer. Management anticipates that
consumers will also have the option to
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safely store their images through PhotoWave's digital archiving service,
currently under development, and accessible only with their unique personalized
membership number.
For 1996, PhotoWave accounted for 1% of the Company's total revenue.
PhotoWave was not dependent upon a limited number of customers.
SportsWave - Sports Marketing and Sporting Event Support
Industry Overview. Event marketing, often centering on a sports event, is
a growing sector of the worldwide advertising industry. The Company intends to
take advantage of this market by continuing the corporate promotion and
hospitality business of SportsWave's International Sports Marketing division
("ISM") and by expanding that business through the use of the Company's digital
platform in sports marketing applications. The Company believes that the demand
for interactive technology in sports venues as a means to enhance the impact of
advertising at sporting events will grow substantially in the next decade and
will present substantial opportunities for sports marketing services. The
Company has begun to develop a portable, hand held wireless interactive
terminal, the VuWIT, to operate at sports venues. The Company intends to pursue
initial marketing of the VuWIT technology to professional golf and car racing
segments of the sports industry.
Operations. SportsWave, through its ISM division, offers a full range of
sports marketing and promotion services including promotions and premiums,
corporate incentive programs, event marketing and licensing. Since 1989,
SportsWave has held a worldwide license with Major League Alumni Marketing,
Inc., with certain exclusive rights, to use the name "Major League Baseball
Players Alumni Association" ("MLBPAA") and certain related logotypes and
trademarks and the name "Major League Alumni Marketing" in connection with
certain marketing, merchandising and promotional activities. The MLBPAA is a
nonprofit organization, currently comprised of over 3,000 former players, that
was founded to, among other things, promote and encourage the sport of baseball
and to assist in charitable work. Management believes its relationship with
MLBPAA to be good.
The activities covered by the Company's license include (i) sponsorships
and events with former players, such as tours, exhibition games and autograph
and photograph sessions, (ii) creating and supplying products autographed by
former players and (iii) corporate and sales incentive programs including
fantasy camps and spring training trips. SportsWave pays royalties for the use
of such rights, and, subject to certain limitations, SportsWave is permitted to
sublicense such rights. The Company believes that this license from the MLBPAA
is important to its sports marketing and promotion business. The Company's
license currently expires on December 31, 1998 and automatically renews for
successive two-year terms unless either party gives notice of its election not
to renew at least one year prior to expiration of the then current term.
SportsWave has contracted with numerous corporate clients in the past
several years to provide or sublicense former players and baseball memorabilia
for varied events. SportsWave currently generates revenue from payments under
its contracts for the coordination of such events.
The traditional sports marketing aspect of SportsWave's business has
historically been seasonal, with the largest number of events and promotions
being staged during the Major League Baseball season. However, SportsWave also
contracts with former professional football, basketball and hockey players to
participate in events, promotions and incentive programs for SportsWave clients,
which reduces SportsWave's reliance on events held during the Major League
Baseball season.
SportsWave intends to use the Company's media and information platform
technology to expand the existing sports marketing capabilities of ISM. In
addition to ISM's traditional sports marketing business, through SportsWave, the
Company is adapting its platform to offer interactive services for use at sports
venues to enhance the impact of advertising messages. The Company is pursuing
opportunities to equip arenas, stadiums and other sports venues with interactive
capabilities which can be accessed through a customer hand held wireless
interactive terminal, the VuWIT, under development by the Company, or through
terminals located in luxury boxes or at central locations. The VuWIT would
enable patrons to retrieve sports scores, statistics and other data; view other
broadcast feeds, video replay and other camera perspectives; purchase team logo
and other concession items and
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view advertisements and special offers, within and in the vicinity of the sports
venue. To date the Company has not secured a contract to implement this
technology as described.
The Company also intends to support ISM's core business of corporate
hospitality and event promotion by providing innovative digital imaging products
to ISM's clients and expanding upon the services currently being offered by ISM.
The Company is developing a mobile media center that could be made available to
corporate sponsors for promotional purposes and corporate incentives. Among
other things, the center could be used to deliver prints of pictures taken with
major sports figures and to supply corporate sponsors of sporting events with
on-site venues for advertising and other promotional activities.
SportsWave's revenues (subsequent to acquisition), accounted for 17% of the
Company's total 1996 revenue. During this same period, one SportsWave customer ,
accounted for 13% of consolidated revenue. SportsWave has long-term
relationships with many clients. However, the customer base varies from year to
year and the Company does not anticipate that the loss of any one customer would
have a material adverse impact on the Company as a whole.
Kent Consulting Group - Software Engineering and Design and Network
Solutions
Industry Overview. As information technology has become increasingly
complex and important, businesses have used third party specialists to provide
various services in the design and implementation of electronic solutions. An
industry analyst has projected that the outsourcing market will increase
substantially in the next five years and that the market segments in which KCG
does business, providing services in the development of applications software
and solutions for the desktop and distributed environments and networking, will
increase as a percentage of the total outsourcing market.
Operations. KCG provides varied software design and network solutions to
businesses ranging from start-up to Fortune 500 companies. KCG currently
generates revenue from fees under its contracts for software design and network
solutions services. The Company anticipates that KCG will continue to generate
revenue from providing such services to third party clients in addition to
providing technical and creative support in the further development of the
Company's other business segments. The Company intends to utilize KCG, which
was responsible for much of the software design and programming for the
Company's proprietary digital information and media platform, to strengthen the
creative and technical foundation for the further development of the platform
and its adaptation to new markets.
KCG is authorized as a Microsoft Solutions Provider Partner and is also
authorized as a service provider for Pacific Bell, Lotus, IBM and Novell. KCG's
areas of expertise include ITV platforms, Internet applications (including
specialization in improving connectivity and access), groupware and e-mail
applications, networking products and database applications. Its services
include design of system architecture, installation and configuration of
software and hardware, custom software development, training, systems management
support and trouble-shooting. KCG enables its customers to tie new applications
and new technologies into existing information systems quickly and with minimal
disruption. It has been on the leading edge in developing structures for multi-
site computing to enhance the productivity of travelers, workers in remote and
field offices and the growing number of telecommuters.
KCG's revenue (subsequent to acquisition) accounted for 32% of the
Company's 1996 revenue. During this same period, one KCG customer accounted for
31% of KCG revenues, but did not account for more than 10% of the Company's
consolidated revenues.
Other Potential Markets
The Company believes that the activities of SeaVision, PhotoWave and
SportsWave, as well as the expertise and industry relationships provided by KCG,
will provide a basis for establishing relationships with mass market providers
of interactive communications and digital imaging services that could lead to
the Company becoming a supplier of specialized software products to such
providers. The Company plans to pursue opportunities to offer specialized
software from the Company's platform, such as software permitting immediate
processing of
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transactions, video server processing and other proprietary protocols to these
providers for use in other system architectures. The Company also intends to
pursue opportunities to provide creative program enhancements to telephone and
cable companies that are developing pilot programs to provide interactive
services to households.
Research and Development; Capital Expenditures
During 1996, the Company expensed approximately $949,000 and capitalized
$316,000 for research and development, principally for enhancement of the
Company's media and information platform, specifically, improvements to
SeaVision's ITV platform, PhotoWave's digital imaging technology and
SportsWave's prototype of a wireless interactive hand held terminal, the
VuWIT. Other development was focused on software and other product
applications to be presented to participants in other business markets.
The Company anticipates further capital expenditures for broadening
SeaVision's installed shipboard ITV base, for additional PhotoWave mobile
digital imaging units, for improvement and potential installation of
SportsWave's wireless interactive platforms at sports venues and for enhancement
and improvements to the Company's management information systems and leased
office facilities.
Employees
At December 31, 1996, the Company had approximately 100 employees. None of
these employees is covered by a collective bargaining agreement. The Company has
never experienced a strike or work stoppage and believes its relationship with
its employees to be good. During 1997, it is expected that some additional
staff will be needed for marketing and administration at the Company, operations
and marketing at PhotoWave and software engineering at KCG. Requirements for
additional personnel for installation and technical support of current and
scheduled shipboard systems for SeaVision and anticipated systems integration
projects will in great part be satisfied by contractual arrangements with EDS
and other subcontractors. Similar arrangements would also be utilized for hotel
and resort installations, if the Company were to successfully enter such
markets.
Suppliers
The Company does not manufacture the hardware components it uses and has
one or more sources of supply for all such components. The Company purchases
components through purchase orders and does not have long term supply contracts.
The Company believes that reasonable alternative sources of supply exist for all
components.
The Company has entered into a service agreement with EDS, under which EDS
will provide personnel for the installation and operation of the Company's
shipboard media and information platform as well as hotel and resort
installations, if the Company were to successfully enter such markets.
The Company has entered into agreements with distributors of motion
pictures for non-theatrical viewing under which the distributor licenses to the
Company the right to make pay-per-view movies available on the Company's ITV
system. Payment to the distributor is based on revenue derived from the sale of
such movies on the Company's ITV system. The distributor pays the associated
royalties to the motion picture studios and other third parties. Although a
specific title may be available from a single source, the Company does not
anticipate that it will experience difficulty in obtaining these products.
The retail offerings of merchandise on the Company's ITV system on cruise
ships are made pursuant to various electronic retail sales agreements between
the Company and individual vendors. The Company presently offers for sale items
from such vendors as Bobby Jones Sportswear, Wenger Swiss Army Brand and The
Nature Company. The Company is seeking other vendors in order to expand its
shopping service; it does not anticipate any difficulty in contracting with
vendors to offer and sell retail products on the Company's system.
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Marketing and Sales
The Company's marketing and sales efforts are directed toward several
distinct groups: customers (such as cruise and hotel operators) that will
contract for the installation and operation, or the sale, of the Company's media
and information platform and ITV system; advertisers and merchandisers who will
utilize the ITV system to deliver promotional messages of various kinds to
system users; retailers who will sell products on the Company's ITV shopping
service; and end users of the systems and services that generate revenue for the
Company.
The Company has a fourteen person sales and marketing staff. Four members
of this staff currently focus on the travel and leisure industry, three focus on
the Company's sports marketing business, five focus on the Company's digital
imaging business unit and two focus on software design and network solutions.
The Company additionally emphasizes the marketing of an integrated package of
its services in order to provide effective information and media solutions to
its clients. The Company also markets its products and services and seeks
advertisers and retailers through independent sales agencies.
The Company's shipboard representatives also market its services to end
users of its ITV system. Responsibilities of the shipboard representative
include implementing company-wide programs and policies to enhance revenue from
each service offered by the system. The Company may offer price reductions for
pay-per-view movies or merchandise, and free credits, prizes and sweepstakes for
video gaming.
The Company intends to pursue contractual arrangements with national
advertisers seeking to reach specific targeted audiences. However there can be
no assurances that the Company will be successful in this marketing effort. The
Company's ITV system has significant capability to report response and use
frequency.
Competition
The interactive services industry is in the early stages of its
development. The Company competes with numerous other companies utilizing
various technologies and marketing approaches, and the Company anticipates that
additional competition will develop in all of the markets that the Company is
targeting. A number of these companies are larger than the Company and have
greater financial and other resources. The Company is unable to predict the
level of competition that will actually develop and the time frame in which it
will develop.
In the cruise line market, although cruise operators have received many
proposals to develop and install ITV systems, to the Company's knowledge, no
system with features comparable to the Company's has been installed on a cruise
ship. The Company believes that the architecture of the Company's platform and
its adaptation to the cruise environment will be difficult to duplicate and that
its successful implementation of its system gives it a current competitive
advantage. However, there can be no assurance that competitors, some of which
may have greater financial resources than the Company, will not enter the field.
Two companies are the dominant providers of in-room entertainment and cable
television services to the lodging industry. These competitors are larger and
have greater resources than the Company. There are also a number of small
regional providers and a number of potential competitors such as cable
companies, telecommunications companies and direct-to-home and direct broadcast
satellite companies that could provide in-room entertainment to the lodging
industry. However, management believes that the Company has the opportunity to
effectively compete based upon the state of the art technology resident in its
information and media platform as well as the broad array of additional services
that can be offered through the Company's ITV platform. Unlike systems
currently operating in hotels which principally offer only in-room
entertainment, the Company can offer a fully integrated system to an individual
hotel or chain of hotels including, property management and inventory control
systems, digital photography, reservations and billing systems as well as
Internet access. Although the Company believes that its media and information
platform and ITV system include features that are not currently in use in the
lodging industry, there can be no assurance that the Company will be able to
penetrate this market.
The sports marketing and software design and network solutions services
industries are fragmented and highly competitive. A number of the companies and
sales agencies that provide such services are larger than the
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Company and have greater resources, both financial and otherwise. ISM generally
competes based on its specialized promotional and event marketing capabilities.
The business of ISM could be adversely affected if one or more large competitors
decide to directly focus their resources on providing the same services in the
same markets as ISM.
The digital imaging market is new and rapidly evolving. The Company expects
that a highly competitive market will develop and that many of the competitors
may have longer operating histories and greater resources than the Company.
Technology and Licensing
In the initial development of its system, the Company acquired a software
license from a developer of a hotel ITV system. The Company has made major
modifications to its system and its software since that time and now uses only
certain communications software from the licensed package. The Company intends
to develop communications software which does not make use of the licensed
rights. The Company also licenses from a software developer certain of the
software utilized in connection with the printing of digital images on cruise
ships.
The Company has used the services of third party software and graphics
designers in the development of its digital platform and ITV system. All
proprietary rights to the platform and system belong to the Company. KCG was the
principal software designer involved in software development for the platform.
While third party graphics designers have been important in developing the
visual amenities of the Company's system, if the Company should no longer have
access to their services, the Company believes that its in-house personnel are
capable of performing these functions or, if necessary, that it will be able to
engage other graphics designers and personnel capable of doing so.
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. 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. Also, 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. There
can be no assurance that the legal protections afforded to the Company and the
measures taken by it will be adequate to protect its 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. The Company has been
diligent wherever feasible in registering its trade marks and service marks in
order to best preserve its creative marketing position. The Company's
registered marks include: "Allin", "PhotoWave", "Customer Viewing Station",
"Surfboard", PhotoWave logo, "Photography on the Move", "SeaVision", SeaVision
design and logo, "SeaTV", "PhotoPlace", "Catch the Wave", "SportsWave", "VuWIT",
"International Sports Marketing", SportsWave design and logo, "Pro Football
Players Alumni", "Pro Hockey Players Alumni", "Pro Basketball Players Alumni".
Government Regulation
The Company's ITV system currently offers games of chance to cruise ship
passengers while operating in international waters. However, such gaming cannot
be offered while the ship is in any United States port and it cannot be offered
in any United States hotel room at this time. Such service is discontinued while
a cruise ship is in port and will not be offered to hotels.
12
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(d) General Development of Business
Certain statements in the preceding Item 1 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:
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 seven installations, and as
a result, 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, as
of December 31, 1996, had an accumulated deficit of $11.3 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.
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. It is also possible that the
Company will experience unexpected delays or setbacks in developing new
applications of its technology. There can be no assurance that the Company's new
products and applications will generate additional revenue for the Company or
that the Company will successfully penetrate these additional markets.
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
13
<PAGE>
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 continued 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.
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, while substantially expanding operations and personnel. 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.
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.
14
<PAGE>
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.
15
<PAGE>
Item 2 - Properties
Allin Communications Corporation's principal executive offices are located
at 300 Greentree Commons, 381 Mansfield Avenue, Pittsburgh, Pennsylvania 15220
in leased office space. This is also the location of the digital imaging and
marketing programs segments of the business performed by PhotoWave and
SportsWave, respectively. The interactive media and information platform and
systems integration segments operated by SeaVision are located in leased office
space in Miami, Florida. Consulting services are performed by Kent Consulting
Group from leased office space in Oakland, California. During 1996, SeaVision,
Inc. also maintained leased office space in Lisbon, Ohio. This lease terminated
in January 1997 and personnel, furnishings and equipment from the Lisbon office
were transferred to the Pittsburgh and Miami offices. All leased spaces were
suitable and adequate to meet the organization's needs as of December 31, 1996.
There were no encumbrances on any properties. All of the leased properties were
fully utilized as of December 31, 1996. It is anticipated that in 1997
additional leased space will be added in Pittsburgh and that Kent Consulting
Group will lease additional office space in San Jose, California. It is also
anticipated that the Miami office of SeaVision will be moved to leased office
space in Plantation, Florida in 1997.
Item 3 - Legal Proceedings
The Company from time to time is involved in litigation incidental to the
conduct of its business. There are no pending legal proceedings to which the
Company or any of its subsidiaries is a party, or to which any of their
respective properties is subject.
Item 4 - Submission of Matters to a Vote of Security Holders
a) The stockholders of the Company acted by written consent (the "Written
Consent") in lieu of a Joint Special Meeting of Stockholders dated October
10, 1996.
b) Not applicable.
c) The Written Consent was signed by the holders of all of the 1,000 shares of
common stock, par value $0.01 per share, of the Company (the "Common
Stock") then outstanding and by the holders of all of the 25,000 shares of
Series A Convertible Redeemable Preferred Stock, par value $0.01 per share,
of the Company (the "Convertible Preferred Stock") then outstanding. The
matter acted upon by the stockholders pursuant to the Written Consent was
the authorization of amendments to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock that the
Company is authorized to issue to 20,000,000 and to effect a 2,400-for-one
stock split of the then authorized Common Stock.
d) Not applicable.
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Part II
Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters
Allin Communications Corporation's Common Stock began trading on the Nasdaq
National Market tier of The Nasdaq Stock Market in November 1996 under the
symbol "ALLN". During the fourth quarter of 1996, the high and low closing
prices per share of the Common Stock as reported by Nasdaq were $20 and $15,
respectively. On March 26, 1997, there were approximately 96 record holders of
the Common Stock.
There have been no dividends declared on the Common Stock since the
inception of the Company. Although there are no restrictions on Allin
Communications Corporation's ability to declare dividends, the Company has no
intention to do so during the near future.
Two million shares of Common Stock were sold in the Company's initial
public offering in November 1996 and 300,000 additional shares were sold in
December 1996 in connection with the underwriter's exercise of its overallotment
option.
Sales of Unregistered Securities
All transactions listed below involved the issuance of equity securities of
the Company in reliance upon Section 4(2) of the Securities Act of 1933, as
amended.
On August 16, 1996, in connection with the merger of SeaVision, Inc. with
and into a wholly owned subsidiary of the Company, the Company issued an
aggregate of 1,000 shares of its Common Stock.
On August 16, 1996, the Company issued 25,000 shares of its Convertible
Preferred Stock. The aggregate consideration paid for such shares was
$1,000,000 in cash and the extinguishment of loans in the amount of $1,500,000.
During the seven-month period beginning on May 6, 1997, each holder of such
shares of Convertible Preferred Stock will have the right to convert all, but
not less than all, of the shares of Convertible Preferred Stock then owned by
such holder into shares of Common Stock at the rate of approximately 8.1 shares
of Common Stock for each share of Convertible Preferred Stock. Cash payments
will be made in lieu of the issuance of any fractional shares of Common Stock
upon any such conversion.
On November 6, 1996, in connection with the acquisition of Kent Consulting
Group, Inc. by the Company, the Company issued 213,333 shares of its Common
Stock to the sole shareholder of Kent Consulting Group, Inc.
On November 6, 1996, the Company issued an aggregate of 244,066 shares of
its Common Stock to five shareholders of the Company upon the conversion of
$3,000,000 aggregate principal amount of notes held by such persons (the
"Stockholder Loans").
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Item 6 - Selected Financial Data
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in thousands, except for per share data)
The selected financial data for each of the periods ended December 31, 1994,
1995 and 1996 presented below have been derived from the audited consolidated
financial statements of the Company. The selected financial data should be read
in conjunction with the Consolidated Financial Statements of the Company (Item
8), and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," (Item 7) included elsewhere in this Form 10K.
SeaVision, Inc. elected to be treated as an S Corporation through July 22,
1996 and, as a result, the taxable loss has been reflected on the federal and
state tax returns of the shareholders rather than the corporate returns through
that date.
<TABLE>
<CAPTION>
Period Ended December 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue............................... $ -- $ 44 $ 1,344
Cost of sales......................... -- 10 818
---------- ---------- ----------
Gross profit.......................... -- 34 526
Depreciation & amortization........... 6 288 1,365
Selling, general & administrative..... 582 1,545 6,684
---------- ---------- ----------
Loss from operations.................. (588) (1,799) (7,523)
Interest expense, net................. 24 369 797
---------- ---------- ----------
Loss before income tax expense........ (612) (2,168) (8,320)
Income tax expense.................... -- -- 27
---------- ---------- ----------
Net loss.............................. (612) (2,168) (8,347)
Accretion and dividends on preferred stock -- -- 106
---------- ---------- ----------
Net loss applicable to common
shareholders........................... $ (612) $ (2,168) $ (8,453)
========== ========== ==========
Net loss per common share............... $(0.24) $(0.83) $(2.81)
========== ========== ==========
Weighted average number of common
and common equivalent shares 2,603,385 2,603,385 3,008,498
outstanding............................ ========== ========== ==========
As of December 31,
------------------
1994 1995 1996
----------- ----------- -----------
Balance Sheet Data:
Working capital....................... $ 57 $ (1,493) $ 14,051
Total assets.......................... 146 2,353 32,677
Total liabilities..................... 756 5,131 3,875
Convertible, redeemable preferred -- -- 2,480
stock................................
Stockholders' equity................... (610) (2,778) 26,322(1)
</TABLE>
(1) Includes a charge of $661,000 related to the induced conversion of the
Stockholder Loans into 244,066 shares of Common Stock.
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<PAGE>
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
In the following Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this annual report on Form
10-K, the words "estimates," "expects," "anticipates," "believes," and other
similar expressions, are intended to identify forward-looking information that
involves risks and uncertainties. Actual results and outcomes could differ
materially as a result of such important factors including, among other things,
the Company's limited operating history and uncertainty as to the Company's
future profitability; the Company's history of net losses, accumulated deficit
and dependence on its proprietary technology; the risks inherent in development
of new products; competition in the Company's existing and potential future
lines of business; risks associated with the Company's management of growth;
dependence on key personnel; rapidly changing technology and a rapidly evolving
market for interactive applications; and fluctuations in operating results, as
well as other risks and uncertainties. See --"Special Note on Forward-Looking
Statements" in Item 1.
Overview
Allin Communications Corporation (the "Company") was formed 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., an operating
subsidiary, has been included in the full analysis of the years ended December
31, 1995 and 1996, and since inception for the period ended December 31, 1994.
PhotoWave, Inc., an operating subsidiary, has been included in the analysis of
the year ended December 31, 1996, including results of operations since
inception in August 1996. Kent Consulting Group, Inc., Netright, Inc. and
International Sports Marketing, Inc. (now SportsWave, Inc.), all operating
subsidiaries, were acquired in November 1996, ISM and Netright through purchase,
and KCG through a merger. Accordingly, their Balance Sheets and Results of
Operations, subsequent to acquisition, are included in the Consolidated
Financial Statements of the Company as of December 31, 1996. Allin Holdings
Corporation, an investment subsidiary, was formed in October 1996 and its
Balance Sheet and Results of Operations, since inception, are included in the
Consolidated Financial Statements as of December 31, 1996.
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 interactive
television (ITV) systems in the international cruise industry. In addition,
SeaVision is providing shipboard systems integration services under an agreement
to install and operate a new television distribution and broadcast system aboard
the Cunard Line Queen Elizabeth 2. Through December 31, 1996, SeaVision had
completed installation of nine ITV systems on cruise ships with six systems
having been activated by the cruise lines.
PhotoWave was formed as a subsidiary of the Company in August 1996 to
continue the development and marketing of the Company's digital imaging
business.
In November 1996, Kent Consulting Group, Inc. merged with and into a wholly
owned subsidiary of the Company, which then changed its name to Kent Consulting
Group, Inc. KCG currently generates revenue from fees under its contracts for
software design and network solutions services. The Company anticipates that KCG
will continue to generate revenue from providing such services to third party
clients in addition to providing technical and creative support in the further
development of the Company's other businesses. The Company intends to utilize
KCG, which was responsible for much of the software design and programming for
the Company's proprietary digital information and media platform, to strengthen
the creative and technical foundation for the further development of the
interactive media and information platform and its adaptation to new markets.
SportsWave (formerly International Sports Marketing, Inc.), was acquired in
November 1996. The Company intends to use its interactive media and information
platform technology to expand the existing sports marketing capabilities of
SportsWave's International Sports Marketing division. SportsWave currently
generates revenue from payments under its contracts for the coordination of
various events, including sports theme premiums, promotions, sales incentives,
games, clinics and personal appearances by sports legends. In addition to
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SportsWave's traditional sports marketing business, the Company is adapting its
platform to offer interactive services for use in sports arenas and stadiums to
enhance the impact of advertising messages.
Netright sells computer hardware and software and was acquired 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.
Allin Holdings Corporation was formed in October 1996 for the purpose of
financial management of the Company's cash and short-term investments.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue
The Company's total revenue for the year ended December 31, 1996 increased
to $1,344,000 from $44,000 for the year ended December 31, 1995. As of December
31, 1996, SeaVision had activated its ITV system on six cruise ships with an
approximate annual passenger capacity of 553,000, based on their itineraries and
passenger configurations at that time. At December 31, 1995, SeaVision had
installed and activated its ITV system on two cruise ships with approximate
annual passenger capacity of 151,000. Total revenue for SeaVision was $650,000
in 1996, including $195,000 from system integration contracts, as compared to
total revenue for SeaVision of $44,000 in 1995, principally from ITV system
related sources. For 1996 and 1995, revenue included $272,000 and $20,000,
respectively, for pay-per-view movies and $165,000 and $23,000, respectively,
for games of chance. PhotoWave in its first period of operation recognized
$7,000 in revenue for 1996 from the sale of digital photography services.
Sportswave, from the date of its acquisition in November 1996, recognized
revenue of $233,000 from corporate marketing programs and player appearance
fees. KCG, from the date of its acquisition in November 1996, realized revenue
of $425,000 from software engineering and related service fees. Netright, from
the date of its acquisition in November 1996, realized revenue of $29,000 from
hardware and software sales.
Cost of Sales and Operating Expenses
The Company's total cost of sales and operating expense for the year ended
December 31, 1996 increased to $8,867,000 from $1,843,000 for the year ended
December 31, 1995.
For SeaVision, cost of sales for the year ended December 31, 1996 totaled
$292,000, $117,000 of which related primarily to cost of sales for the video-on-
demand module and $174,000 of which related to systems integration contracts.
SeaVision's cost of sales for the year ended December 31, 1995 totaled $10,000
for ITV related expenses, primarily related to video-on-demand. Selling,
general and administrative expenses during the year ended December 31, 1996 for
SeaVision increased to $5.7 million from $1,883,000 for the year ended December
31, 1995. This increase is attributable primarily to the costs of additional
personnel as the Company continued to move from the developmental stage to the
implementation stage of its ITV system. A total of $939,000 was charged during
1996 to research and development expense for enhancements to SeaVision's media
and information platform and ITV technology. Research and development
expenditures during 1995 were capitalized. Depreciation and amortization
expense for SeaVision in 1996 increased to $990,000 from $288,000 in 1995,
principally as a result of the completed installation of additional ITV systems.
PhotoWave's cost of sales were immaterial during the year ended December
31, 1996. PhotoWave incurred total selling, general & administrative expenses
$429,000 in 1996, principally in personnel and other expenses related to the
development of its digital photography platform.
SportsWave, during the two months of operations following its acquisition
by the Company, realized cost of sales of $173,000 and incurred total selling,
general & administrative expenses of $217,000 related to its core sports
20
<PAGE>
marketing business. Included in this amount was depreciation expense of $7,000
and amortization expense of $20,000 related to the intangible assets acquired by
the Company.
KCG during the two months of operations following its acquisition by the
Company, realized cost of sales of $332,000 and incurred total selling, general
& administrative expenses of $428,000. Included in this amount was depreciation
expense of $31,000 and amortization expense of $269,000 related to the
intangible assets acquired by the Company.
The Company also incurred selling, general & administrative expenses of
$1,233,000 at the holding company level during the year ended December 31, 1996.
This amount includes non-recurring charges of $661,000 resulting from the
induced conversion of the Stockholder Loans into 244,066 shares of Common Stock,
$100,000 for legal and accounting fees, including an accrual for year-end audit
fees, and $315,000 for compensation, payroll taxes and benefits.
Loss from Operations
The Company's increase in gross profit to $526,000 in 1996 from $34,000 in
1995 was offset by increases in selling, general and administrative expenses,
including depreciation and amortization. The Company's operating loss increased
to $7.5 million for the year ended December 31, 1996, from $1.8 million for the
year ended December 31, 1995. This increase is attributable primarily to the
costs of additional personnel as the Company continued to move from the
developmental stage to the implementation stage of its media and information
platform, ITV and digital imaging systems.
Net Interest Expense
Net interest expense increased from $369,000 to $797,000 for the years
ended December 31, 1995 and 1996, respectively. Net interest expense of $29,000
related to the Company's line of credit with National City Bank Line accrued
during 1996 and was paid in 1997. For the year ended December 31, 1996, $323,000
of interest and guarantee fee expense was recorded relating to the borrowings
under the Company's line of credit with National City Bank. A total of $1
million in accrued interest on the Stockholders Loans was paid in November 1996.
Interest Income of $133,000 was realized in 1996, principally from short-term
investments funded from the proceeds of the Company's initial public offering.
Net Loss
The Company sustained a net loss of $8.3 million during the year-ended
December 31, 1996, compared to a net loss of $2.2 million for 1995, as a result
of the increased operating losses and interest expense discussed above.
Year Ended December 31, 1995 compared to Inception through December 31, 1994
During the period from inception through December 31, 1994, SeaVision was in
the development phase of its first ITV implementation. Because SeaVision did not
complete installation of its first system on a ship until August 1995, it did
not record revenue or direct expenses for the period ended December 31, 1994.
Accordingly, a comparison of revenue and direct expenses for the year ended
December 31, 1995 and the period ended December 31, 1994 is not meaningful.
Revenue for the year ended December 31, 1995 was $44,000, primarily from pay-
per-view movies and games of chance. Direct expenses for the year ended December
31, 1995 were $10,000, primarily representing costs of sales for pay-per-view
movies. Selling, general and administrative expenses for the year ended December
31, 1995 increased to $1.8 million from $588,000 during the period ended
December 31, 1994 as a result of additions to the staff and increased travel and
other expenses as SeaVision entered the implementation phase for its ITV system.
Depreciation and amortization expense increased to $288,000 during the year
ended December 31, 1995 as compared to $6,000 for the period ended December 31,
1994 because the Company had not completed installation of ITV systems during
the earlier period.
21
<PAGE>
The Company incurred an operating loss in the amount of $1.8 million for the
year ended December 31, 1995, compared to an operating loss of $588,000 during
the period ended December 31, 1994.
Interest expense increased from $24,000 to $369,000 for the periods ended
December 31, 1994 and 1995, respectively. All of the interest expense was
accrued but unpaid during both periods and the increase reflected continued
funding of the Company's operating losses by certain of its stockholders in the
form of loans. The Company sustained a net loss of $2.2 million during the year
ended December 31, 1995, compared to a net loss of $612,000 for the period ended
December 31, 1994, as a result of the increased operating losses and interest
expense 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, all of which was outstanding as of September 30, 1996.
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
Company's initial public offering on November 6, 1996 was $6 million, which was
repaid coincident with the closing of the offering. 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 Company was able to choose between two rates of interest
at each funding date, the Prime Rate or the Euro-Rate (as defined in the Amended
and restated Line of Credit Note dated October 28, 1996) plus one and one-half
percent. 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
expires 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 is
charged under the terms of the line of credit. There were no borrowings under
the line of credit at December 31, 1996 and no advances are permitted under that
agreement after that date. The Company is currently negotiating with National
City Bank and two other banks to provide a line of credit in an amount at or
greater than the line of credit described above. There are, however, no
assurances that these negotiations will result in an extension of credit to the
Company.
On August 16, 1996 the Company issued an aggregate of 25,000 shares of Series
A Convertible Redeemable Preferred Stock ("Convertible Preferred Stock") to
Henry Posner, Jr., Thomas D. Wright, Richard W. Talarico, James C. Roddey,
William C. Kavan and Mark Kottler, each of whom is also an officer, director
and/or holder of Common Stock of the Company. Messrs. Kavan and Kottler
converted stockholder loans aggregating $1.5 million for 15,000 shares of
Convertible Preferred Stock. These converted shares are included in the total
of 25,000 issued. The Company used the $2,450,000 net proceeds ($1.5 million
was initially received in the form of stockholder loans) from the issuance of
the Convertible Preferred Stock for general working capital purposes. The
holders of Convertible Preferred Stock are entitled to receive, when and as
declared by the Company's Board of Directors, cumulative quarterly dividends at
the rate of eight percent per annum. For a seven month period beginning May 6,
1997, each holder of Convertible Preferred Stock will have the right to convert
all, but not less than all, of the Convertible Preferred Stock then owned by
such holder into shares of Common Stock at the rate of approximately 8.1 shares
of Common Stock for each share of Convertible Preferred Stock. Shares of
Convertible Preferred Stock not converted into Common Stock during the
conversion period will remain outstanding until the earlier of the time such
shares are redeemed by the Company or June 30, 2006 .
The Company successfully completed its initial public stock offering in 1996,
selling 2.3 million common shares. The Company realized $30,669,000, net of
underwriting fees and related costs of the offering
The Company recognized an operating loss during the year ended December 31,
1996, and the Company's business will require substantial capital investment on
an ongoing basis to finance its expansion in the travel and leisure industry and
for the implementation of its business plans for PhotoWave and the businesses
acquired in November 1996. Capital expenditures were $6.6 million during the
year ended December 31, 1996 compared to $1.5 million for 1995 and $16,000 in
1994. The Company expects to incur capital expenditures of approximately
22
<PAGE>
$7.0 million for 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 number of new contracts, if any, for
installation of its ITV systems and shipboard systems integration entered into
by the Company, the costs of such installations and the rate of implementation
of the PhotoWave and SportsWave business plans. Additionally, any accelerated
implementation of the Company's initiatives in the hotel and resort industry
could require substantial capital investment for installation of the Company's
media and information platform and ITV system. The Company is exploring various
alternative sources of capital to fund needs in the hotel and resort industry
including sale of hardware, licensing of software and other forms of investment
participation with customers and suppliers.
The Company believes that the net 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 24 months. If cash
generated by operations, together with the net proceeds of the offering, are
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.
If such financing alternatives were not available, the Company would revise its
capital expenditure plans accordingly. Any sale of additional equity or
convertible debt securities would result in dilution to the Company's
stockholders.
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.
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 period 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
disclosure.
23
<PAGE>
Item 8 - Financial Statements and Supplementary Data
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, December 31,
1995 1996
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 193 $ 16,227
Accounts receivable 43 1,169
Inventory --- 53
Prepaid expenses 9 477
--------------- ----------------
Total current assets 245 17,926
Property and equipment, at cost:
Leasehold improvements 42 48
Furniture and equipment 189 1,227
On-board equipment 1,313 4,312
Construction-in-progress --- 2,329
--------------- ----------------
1,544 7,916
Less--accumulated depreciation (153) (911)
--------------- ----------------
1,391 7,005
Assets held for resale --- 624
Other assets, net of accumulated amortization of
$141 and $728 717 7,122
--------------- ----------------
Total assets $ 2,353 $ 32,677
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ --- $ 69
Shareholder notes payable 1,493 ---
Accounts payable 152 1,768
Accrued liabilities:
Compensation and payroll taxes --- 233
Other 93 601
Deferred revenues --- 509
Customer deposits --- 695
--------------- ----------------
Total current liabilities 1,738 3,875
Long-term liabilities:
Accrued interest 393 ---
Shareholder notes payable 3,000 ---
Series A convertible, redeemable preferred stock, par
value $.01 per share - authorized 100,000 shares
issued and outstanding 25,000 shares --- 2,480
Shareholder's equity:
Common stock, par value $.01 per share - authorized
20,000,000 shares, issued and outstanding
2,400,000 and 5,184,067 shares, respectively --- 52
Additional paid-in-capital 2 37,905
Deferred compensation --- (377)
Retained deficit (2,780) (11,258)
--------------- ----------------
Total shareholders' equity (2,778) 26,322
--------------- ----------------
Total liabilities and shareholders' equity $ 2,353 $ 32,677
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Period Year Year
Ended Ended Ended
December 31, December 31, December 31,
1994 1995 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenue $ --- $ 44 $ 1,344
Cost of sales --- 10 818
---------------- ---------------- -----------------
Gross profit --- 34 526
Selling, general & administrative 588 1,833 8,049
---------------- ---------------- -----------------
Loss from operations (588) (1,799) (7,523)
Interest expense, net 24 369 797
---------------- ---------------- -----------------
Loss before income tax expense (612) (2,168) (8,320)
Income tax expense --- --- 27
---------------- ---------------- -----------------
Net loss (612) (2,168) (8,347)
Accretion and dividends on preferred stock --- --- 106
---------------- ---------------- -----------------
Net loss applicable to common shareholders $ (612) $ (2,168) $ (8,453)
=============== =============== ================
Net loss per common share $ (0.24) $ (0.83) $ (2.81)
=============== =============== ================
Weighted average common and common equivalent
shares outstanding during the period 2,603,385 2,603,385 3,008,498
--------------- --------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands)
Common Stock Additional
------------------------------ Paid-In Deferred
Shares Par Value Capital Compensation
------------- ------------ ------------ ---------------
Balance, June 8, 1994 --- $ --- $ --- $ ---
Issuance of common stock 2,400,000 --- 2 ---
Net loss --- --- --- ---
----------- ------------- ------------ ---------------
Balance, December 31, 1994 2,400,000 $ --- $ 2 $ ---
Net loss --- --- --- ---
----------- ------------- ------------ ---------------
Balance, December 31, 1995 2,400,000 $ --- $ 2 $ ---
Initial Capitalization (Note 1) --- 24 1 ---
Net proceeds from issuance of common stock in initial
public offering 2,300,000 23 30,646 ---
Conversion of shareholder notes payable to common
stock 244,066 3 3,658 ---
Issuance of common stock in acquisition 213,333 2 3,198 ---
Issuance of restricted common stock 26,668 --- 400 (400)
Amortization of deferred compensation --- --- --- 23
Accretion of Series A convertible, redeemable
preferred stock --- --- --- ---
Accrual of dividends on Series A convertible,
redeemable preferred stock --- --- --- ---
Net loss --- --- --- ---
----------- ------------- ------------ ---------------
Balance December 31, 1996 5,184,067 $ 52 $ 37,905 $ (377)
=========== ============= =========== =============
<CAPTION>
Total
Retained Shareholders
Deficit Equity
------------ ------------
<S> <C> <C>
Balance, June 8, 1994 $ --- $ ---
Issuance of common stock --- 2
Net loss (612) (612)
----------- ------------
Balance, December 31, 1994 $ (612) $ (610)
Net loss (2,168) (2,168)
----------- ------------
Balance, December 31, 1995 $ (2,780) $ (2,778)
Initial Capitalization (Note 1) (25) ---
Net proceeds from issuance of common stock in initial
public offering --- 30,669
Conversion of shareholder notes payable to common
stock --- 3,661
Issuance of common stock in acquisition --- 3,200
Issuance of restricted common stock --- ---
Amortization of deferred compensation --- 23
Accretion of Series A convertible, redeemable
preferred stock (30) (30)
Accrual of dividends on Series A convertible,
redeemable preferred stock (76) (76)
Net loss (8,347) (8,347)
----------- ------------
Balance December 31, 1996 $ (11,258) $ 26,322
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Period Year Year
Ended Ended Ended
December 31 December 31 December 31
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (612) $ (2,168) $ (8,347)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 6 288 1,370
Accrued interest on shareholder notes payable 24 369 ---
Premium on conversion of shareholder notes payable
to common stock --- --- 661
Amortization of deferred compensation --- --- 23
Changes in certain assets and liabilities:
Accounts receivable --- (43) 88
Inventory --- --- (53)
Prepaid expenses (26) 17 (241)
Software development costs --- (753) (216)
Other assets (77) (28) ---
Accounts payable 2 150 1,254
Accrued liabilities --- 93 34
Deferred revenues --- --- 59
Customer deposits --- --- 695
----------- ----------- ---------
Net cash flows from operating activities (683) (2,075) (4,673)
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures (16) (1,528) (6,610)
Acquisition of subsidiaries --- --- (3,921)
----------- ----------- ---------
Net cash flows from investing activities (16) (1,528) (10,531)
----------- ----------- ----------
Cash flows from financing activities:
Borrowings under shareholder notes payable 730 3,763 3,628
Payments on shareholder notes payable --- --- (3,621)
Payments of accrued interest on shareholder notes payable --- --- (393)
Issuance of common stock 2 --- 30,669
Issuance of preferred stock --- --- 950
Borrowings under notes payable --- --- 10
Payments on notes payable --- --- (5)
----------- ------------ ----------
Net cash flows from financing activities 732 3,763 31,238
----------- ------------ ----------
Net change in cash and cash equivalents 33 160 16,034
Cash and cash equivalents, beginning of period --- 33 193
----------- ------------ ---------
Cash and cash equivalents, end of period $ 33 $ 193 $ 16,227
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
27
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations:
Allin Communications Corporation (ACC or the Company) was formed as a wholly
owned subsidiary of SeaVision, Inc. (SeaVision) on July 23, 1996. Effective
August 16, 1996, ACC consummated a transaction pursuant to an agreement whereby
SeaVision became a wholly owned subsidiary of ACC. Prior to this date, ACC had
no operations. SeaVision was formed on June 8, 1994 for the purpose of
designing, developing, selling and installing interactive entertainment and
communications systems for cruise ships. Revenue is derived from passengers
aboard the cruise ships through usage of pay-per-view, gaming and video shopping
services. Revenue is also derived from the cruise lines from sales of and
services related to shipboard communications systems. During 1995 and 1996,
SeaVision completed installation of and the respective cruise lines activated
two and four, respectively, interactive systems on cruise ships.
PhotoWave, Inc. (PhotoWave) was formed as a wholly owned subsidiary of ACC on
August 15, 1996 for the purpose of developing and marketing digital imaging
applications and services. PhotoWave generates revenue from user fees and
transaction fees charged to individuals and businesses utilizing the Company's
package of digital imaging services.
All of the outstanding stock of International Sports Marketing, Inc. (ISM) was
acquired by ACC on November 6, 1996 and the name of the corporation was changed
to SportsWave, Inc. (SportsWave). SportsWave continued to operate a division
under the ISM name. SportsWave currently generates revenue under its contracts
for the coordination of various events, including sports-themed premiums,
promotions, sales incentives, games, clinics and personal appearances by
athletes. ACC anticipates that SportsWave will continue to generate revenue from
ISM's traditional sports marketing business. SportsWave is also developing
applications for portable interactive television systems at sports related
venues.
In November 1996, Kent Consulting Group, Inc. (KCG) merged with and into a
wholly owned subsidiary of the Company, Kent Acquisition Corporation, which then
changed its name to Kent Consulting Group, Inc. KCG generates revenue from fees
under its contracts for software design and network solutions services. In
addition to providing such services to third party clients, KCG also provides
technical and creative support in the further development of the SeaVision's
digital platform and PhotoWave's digital photography applications.
ACC also acquired all of the outstanding stock of Netright, Inc. (Netright) on
November 6, 1996. Netright generates revenue from sales of computer related
hardware and software.
Allin Holdings Corporation (AHC) was formed as a wholly owned subsidiary of
ACC on October 21, 1996. AHC provides treasury management services to ACC and
its subsidiaries.
The Company is subject to a number of risks, including its limited operating
history and uncertainty as to future profitability; history of net losses,
accumulated deficit and dependence on its proprietary technology; development of
new products; competition in its current and future lines of business;
management of growth; dependence on key personnel; rapidly changing technology
and a rapidly evolving market for interactive applications; and fluctuations in
operating results.
2. Summary of Significant Accounting Policies:
The following is a summary of the significant accounting policies affecting
the consolidated financial statements of ACC.
Principals of Consolidation
The consolidated financial statements include the accounts of ACC and its
subsidiaries. ACC is the sole shareholder of all of its subsidiaries. It is
ACC's policy to consolidate all majority-owned subsidiaries where ACC has
control. All significant intercompany accounts and transactions have been
eliminated.
28
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consolidated financial statements for the period ended December 31, 1996
include the financial position and results of operations of ACC, SeaVision,
PhotoWave, SportsWave, KCG, Netright and AHC for the portion of 1996 for which
the company had operations or that was subsequent to acquisition. The prior
periods presented reflect solely the financial postion and results of operations
of SeaVision.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all certificates of deposit with an original maturity of
three months or less and money market funds to be cash equivalents.
Accounts Receivable and Revenue Recognition
Revenue and related costs are recognized when the services or products are
rendered for usage of interactive television systems under cruise line
contracts, marketing and promotional services, software and network consulting
and equipment sales. SeaVision recognizes revenue from sales of shipboard
communications systems upon completion of system installation.
SportsWave recognizes revenues from events and appearances when earned.
Revenue received in advance is recorded as deferred revenues in the accompanying
consolidated balance sheet and will be recognized in the next fiscal year.
As of December 31, 1996, two significant customers comprised 22% and 14%,
respectively, of ACC's accounts receivable. Four significant customers
accounted for 20%, 13%, 13%, and 12%, respectively, of ACC's 1996 revenues.
Two significant customers accounted for all of 1995 revenues.
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.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation on the straight-line method over the estimated useful lives of the
assets. In the year of acquisition, the Company takes a full year of
depreciation if the asset was purchased in the first six months of the year, and
half a year of depreciation if the asset was purchased in the last six months of
the year. The estimated useful lives of property and equipment range from three
to five years. Expenditures for ordinary maintenance and repairs which do not
extend the lives of the applicable assets are charged to expense as incurred,
while renewals and betterments that materially extend the lives of the
applicable assets are capitalized and depreciated.
29
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assets Held for Resale
Assets held for resale consist of equipment installed on certain ships either
completed or in-process as of year-end that will be sold to their respective
cruise lines during the next fiscal year.
Other Assets
Certain expenditures related to the organization and start-up of the Company
and certain of its subsidiaries have been capitalized in the accompanying
consolidated financial statements. Organizational and start-up costs included in
this balance are being amortized over a five-year period.
Costs of software development are capitalized subsequent to the project
achieving technological feasibility and prior to market introduction. Prior to
the project achieving technological feasibility and after market introduction,
development costs are expensed as incurred. Amortization of capitalized software
costs, for both internally developed and purchased software products, is
computed on a product-by-product basis over a three-year period. Software
development expense was approximately $173,000, $216,000 and $949,000 for the
periods ended December 31, 1994, 1995, and 1996, respectively.
Other intangible assets include values assigned in recording the acquisitions
of ISM and KCG under Accounting Principals Board Opinion No. 16, "Accounting for
Business Combinations" (APB No. 16). Portions of the purchase price for ISM
have been attributed to the Major League Alumni Marketing Agreement, assembled
work force, customer list, tradename and goodwill, with useful lives of twenty,
seven, five, forty and twenty years, respectively. Portions of the purchase
price for KCG have been attributed to an employment agreement, assembled work
force, customer list, tradename and goodwill, with useful lives of two, seven,
five, forty and seven years, respectively. Other intangible asset balances were
recorded based on appraised values and are being amortized on a straight line
basis over their respective estimated economic useful lives.
Advertising and Promotional
Expenditures for advertising and promotion were approximately $262,000 and
$420,000, respectively, for the periods ended December 31, 1995 and 1996. Such
expenditures were insignificant for the period ended December 31, 1994.
Expenditures for advertising and promotions are expensed as incurred.
Income Taxes
The shareholders of SeaVision had elected to file under Subchapter S for both
state and federal income tax purposes prior to July 23, 1996. Accordingly, no
provision for income taxes has been reflected in the financial statements
through that date as the taxable income or loss is reflected on the individual
income tax returns of the shareholders. Certain events, including the
transactions described in Note 1, have automatically terminated the S
corporation status of SeaVision as of July 22, 1996. Income earned subsequent to
the termination of SeaVision's S corporation status will be subject to federal
and state income taxes at the corporate level.
ACC will file federal corporate income tax returns on a consolidated basis for
1996, including the results of operations of the various entities from their
incorporation dates, dates of termination of S corporation status, or dates of
acquisition, as appropriate. Required state filings will be on a consolidated
or individual company basis as appropriate for the applicable time periods.
30
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACC records current and deferred provisions for federal and state income tax
and deferred tax assets and liabilities, as appropriate, in accordance with the
requirements of Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" (SFAS No. 109). Valuation allowances will reduce
deferred tax assets recorded if there is material uncertainty as to the ultimate
realization of the deferred tax benefits.
Financial Instruments
It was not practicable to estimate the fair value of the shareholder notes
payable reflected on the Balance Sheet as of December 31, 1995. These notes were
reflected at their outstanding face value, excluding unpaid interest accrued at
15% annually. As no ready market existed for these instruments, comparable
instruments available from outside SeaVision were not available.
All shareholder notes have been either repaid, converted to Series A
Convertible Redeemable Preferred Stock or converted to common stock during 1996.
Accrued interest on shareholder notes payable was paid in 1996.
All other financial instruments are classified as current and will be utilized
within the next operating cycle.
Earnings Per Share
Earnings per share (EPS) have been computed using the weighted average number
of common and common equivalent shares outstanding during the period. When the
effect is dilutive, common equivalent shares include the options for both the
primary and fully diluted computations calculated using the treasury stock
method. For all periods presented, the weighted average number of common and
common equivalent shares include the effect of the conversion of the convertible
preferred stock issued within one year of the initial public offering. Fully
diluted EPS is presented when it differs by more than three percent.
Recently Issued Accounting Standards
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121), was issued in March 1995 and is effective for fiscal years
beginning after December 15, 1995. This statement requires that impairment
losses on long-lived assets be recognized when the book value of the asset
exceeds its expected undiscounted cash flows. ACC adopted SFAS No. 121 on
January 1, 1996, and adoption at that time did not have a material impact on the
Company's financial position or results of operations.
The Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) was issued in October 1995. This
statement establishes a "fair value based method" of financial accounting and
related reporting standards for stock-based employee compensation plans, such as
the plan established as of October 25, 1996. SFAS No. 123 provides for adoption
in the income statement or through disclosure only. ACC accounts for stock-based
compensation plans under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) as permitted by SFAS No. 123, but has provided the
disclosure in the notes to the financial statements. See Note 5.
Supplemental Disclosure of Cash Flow Information
There were no cash payments for income taxes during the periods presented.
Cash payments for interest were approximately $1,123,000 during the year ended
December 31, 1996.
31
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The noncash investing and financing activities for the year ended December 31,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Issuance of common stock in $3,200,000
connection with acquisition of KCG
Conversion of shareholder notes 3,000,000
payable to common stock
Conversion of shareholder notes 1,500,000
payable to preferred stock
Grant of restricted shares 400,000
</TABLE>
3. Initial Public Offering and Other Equity Transactions
On November 6, 1996, ACC closed its initial public offering of 2,000,000
shares of common stock at a price of $15 per share. ACC received total net
proceeds, after deduction of expenses payable and underwriting discounts, of
approximately $27 million. On the closing date, ACC used a portion of the
proceeds to repay outstanding borrowings under its line of credit, to pay
accrued interest under the shareholder notes payable, and for the acquisitions
described in Note 6.
Coincident with the closing of the initial public offering, $3,000,000 of
shareholder notes payable were converted into 244,066 shares of common stock at
a conversion rate of $12.29 per share. A charge of approximately $661,000 has
been reflected in the financial statements for the difference between the
conversion rate and the initial public offering price.
A total of 213,333 shares of common stock were issued as part of the
acquisition consideration for KCG, also on November 6, 1996. Additionally,
26,668 restricted shares of common stock were issued to employees and associates
of KCG. The shares will vest three years after date of grant. KCG has recorded
deferred compensation for the restricted shares and will record amortization
over three years on a straight line basis.
On December 4, 1996, the underwriters of the initial public offering closed on
their exercise of their over-allotment option and purchased 300,000 additional
shares of common stock under the same terms as the initial public offering. Net
proceeds received were approximately $4.2 million.
A stock split of 2,400 shares for each common share outstanding occurred in
October 1996. The split has been reflected retroactively in the accompanying
consolidated financial statements.
4. Series A Convertible Redeemable Preferred Stock
At December 31, 1996, ACC has issued and outstanding 25,000 shares of Series A
Convertible Redeemable Preferred Stock having a liquidation value of $100 per
share. The holders of the preferred shares are entitled to receive cumulative
quarterly dividends, when and as declared by the Board of Directors, at the rate
of 8% of the liquidation value thereof per annum. The 25,000 shares issued are
convertible into an aggregate of 203,385 common shares, an approximate $12.29
per common share conversion rate, at the option of the holder, not earlier than
six months after the date of the closing of ACC's initial public offering.
Holders of preferred shares may convert to common stock at any time between six
and thirteen months after the closing of ACC's initial public offering. In
connection with, and upon such conversion, the holders will have no right to
receive any accrued and unpaid dividends. After the expiration of the
conversion period, preferred shares may not be converted into common shares.
Preferred stock is redeemable by ACC at any time after the conversion period but
prior to maturity. Preferred Stock will mature June 30, 2006, unless converted
or redeemed earlier.
32
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate value of the preferred shares issued, $2,500,000, was recorded
net of $50,000 to reflect transaction costs related to the preferred stock
issuance. As of December 31, 1996, $30,000 of accretion has been recorded
related to the transaction costs. Accretion will continue at the rate of $5,000
per month from January to April 1997. Any conversion of preferred stock to
common shares will result in a charge to retained earnings equal to the
difference between market and conversion prices times the number of shares
converted.
5. Stock Based Compensation and Restricted Stock Award
On October 25, 1996, ACC adopted the "1996 Stock Plan" (the Plan) for
executive management, non-employee directors, employees and consultants of ACC
and its subsidiaries. The plan provides for the issuance of up to 266,000
shares of common stock to be awarded as stock options, stock appreciation
rights, restricted shares and restricted units. Awards are based on the market
value at the date of the grant.
During November 1996, ACC awarded options for 202,550 common shares under
the Plan. The options are exercisable based on market prices at the grant dates
and will vest at 20% of the award per year for five years on the anniversaries
of the grant date, except for 21,000 options which vested on grant date.
Approximately 98% of the options were awarded with grant dates and option prices
as of the initial public offering. The right to purchase shares expires seven
years from the date of grant or earlier if an option holder ceases to be
employed by or ceases to provide consulting services to ACC or a subsidiary for
any reason, except for 21,000 shares which do not include an early expiration
provision. ACC also granted 26,668 restricted shares under the Plan to
employees and consultants of KCG during November 1996. The restricted shares
will vest three years after grant date.
SFAS No. 123 establishes a "fair value based method" of financial accounting
and related reporting standards for stock-based employee compensation plans.
SFAS No. 123 provides for adoption in the income statement or through
disclosure only. ACC has elected to account for stock-based compensation plans
under APB No. 25, as permitted by SFAS No. 123. Had compensation costs for the
Plan been determined consistent with SFAS No. 123, the pro forma effect on net
income and earnings per share during fiscal year 1996 would have been
insignificant. Among other things, the SFAS No. 123 computation assumes the
recognition of compensation expense on a straight-line basis for the two month
period ended December 31, 1996.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1996.
<TABLE>
<CAPTION>
<S> <C>
Risk free interest rate 6.2 %
Expected dividend yield 0.0 %
Expected life of options 6 yrs.
Expected volatility rate 48.0 %
</TABLE>
33
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Summary of Stock Options
- ------------------------
<S> <C>
Outstanding at December 31, 1995 ---
Granted 202,550
Forfeitures ---
Exercised ---
---------
Outstanding at December 31, 1996 202,550
=========
Options exercisable at December 31, 1996 21,000
Weighted average fair value of options
granted during the year $8.19
</TABLE>
There were 36,782 shares reserved for future grants under the Plan at December
31, 1996. See Note 12 for information regarding 1996 Stock Plan options awarded
subsequent to December 31, 1996.
6. Acquisitions
Coincident with the closing of the initial public offering, ACC closed an
agreement for acquisition of all issued and outstanding shares of ISM, an entity
in which certain shareholders of ACC had an ownership interest. The acquisition
provided for cash payments of $2.4 million upon closing and contingent payments
up to $2.4 million based upon future operating income. The acquisition price
has been allocated to the Major League Alumni Marketing Agreement, assembled
work force, customer list, tradename, goodwill and other net assets of ISM.
ISM's name has been changed to SportsWave, Inc.
An agreement was closed coincident with the initial public offering providing
for the merger of KCG into Kent Acquisition Corp., a wholly owned subsidiary of
ACC with no previous history of operations. Following the merger, the subsidiary
changed its name to Kent Consulting Group, Inc. and carries on KCG's operations.
The consideration included $2.0 million in cash and $3.2 million in ACC common
stock, valued at the initial public offering price of $15 per share. The
agreement also provides for contingent payments up to $2.8 million based upon
future operating income. The acquisition price has been allocated to an
employment agreement, assembled work force, customer list, tradename, goodwill
and other net assets of KCG.
ACC also acquired all of the issued and outstanding shares of Netright, as of
the initial public offering date, for a nominal price of $1. Netright had
previously been owned by the same individual as KCG. Netright's net assets and
results of operations are considered to be immaterial to the consolidated
balance sheets and results of operations.
These acquisitions were accounted for using the purchase method.
34
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued
7. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
-------- ----------
<S> <C> <C>
Software development costs, net of
accumulated amortization of
$125,542 and $414,485................... $627,710 $ 535,249
Organizational and start-up costs, net
of accumulated amortization of
$14,976 and $24,782..................... 34,050 24,523
Employment agreement, net of
accumulated amortization of $-0- and
$223,333................................ --- 2,456,667
Major League Alumni Marketing
Agreement, net of accumulated
amortization of $-0- and
$1,042.................................. --- 123,958
Assembled work force of acquired
entities, net of accumulated
amortization of $-0- and
$2,691.................................. --- 110,309
Customer lists of acquired entities,
net of accumulated amortization of $-0-
and $6,500.............................. --- 188,500
Tradenames of acquired entities , net
of accumulated amortization of $-0- and
$1,069.................................. --- 255,529
Goodwill, net of accumulated
amortization of $-0- and
$53,422................................. --- 3,334,121
Long term loan
receivable.............................. --- 42,951
Other assets, net of accumulated 55,615 50,205
amortization of $534 and $944........... -------- ----------
$717,375 $7,122,012
======== ==========
</TABLE>
Other assets included in the table above include $25,000 for a software
license utilized in connection with the shipboard interactive systems. Upon
completion of an additional shipboard system, this amount will be transferred to
onboard equipment. Also included is $20,000 for software licenses related to
shipboard digital photography systems. Once these systems are further developed
for installation on all ships, the license value will be amortized over its
remaining life.
8. Line of Credit and Notes Payable:
SeaVision entered into a financing agreement with a bank on May 31, 1996 which
provided for a line of credit that permitted maximum allowable borrowings of $5
million. Borrowings bear interest at either prime or Euro-rate plus 1-1/2% and
are payable upon demand. Line of credit availability was increased to $7.5
million on October 28, 1996. The outstanding balance on the line of credit, $6
million, was repaid coincident with the closing of ACC's initial public offering
on November 6, 1996, utilizing proceeds from the offering. The maturity date of
the line of credit is May 31, 1997, and borrowings are guaranteed by certain
shareholders of ACC (See Note 11). Under the terms of the agreement, no
advances are permitted on the line subsequent to December 31, 1996. There was
no balance outstanding on the line at December 31, 1996.
SeaVision recorded a note payable to a vendor for the purchase of a telephone
system during January 1996 for approximately $10,000. The note bears interest
at 13% and is payable over twenty-four months. The balance outstanding at
December 31, 1996 is approximately $5,000. In addition, Netright has a note
payable to a shareholder of ACC (See Note 11).
35
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued
9. License and Royalty Agreements:
License Agreements
SeaVision has an agreement with a vendor which provides for a software license
fee of $25,000 per installation and includes specified prices for various
hardware components. This agreement expires in October 1999, and payments for
license fees under this arrangement were $25,000, $75,000 and $75,000 for the
periods ended December 31, 1994, 1995 and 1996, respectively. These fees are
included with on-board equipment upon installation of the interactive systems.
See Note 7.
SportsWave has a license agreement with Major League Alumni Marketing, Inc.
(MLAM), a wholly owned subsidiary of the Major League Players Alumni
Association, which provides SportsWave with certain exclusive rights and
provides for, among other things, royalty payments based upon a specified
percentage of its Annual Gross Revenues, as defined, related to the use,
exploitation, and sublicensing of the rights acquired from MLAM. Royalties paid
to MLAM were $20,000 during the portion of 1996 subsequent to ACC's acquisition
of ISM. As of December 31, 1996, the future minimum commitment under the
agreement is $240,000. The current expiration date of the agreement is December
31, 1998. The agreement contains automatic renewal options for successive two-
year periods until termination, which may be accomplished by either party
providing written notice of termination at least one year prior to the
expiration of the then current term. The agreement may also be terminated by
either party in the event a material breach of the agreement remains unresolved
for sixty days following written notice.
Royalty Agreements
The contracts with the cruise lines provide for specified royalty payments
based upon adjusted gross revenue, as defined in the respective agreements.
These royalty payments are adjusted upon reaching specified milestones for
cumulative revenue generated by the interactive systems installations. Royalty
expenses of approximately $2,000, and $16,000 are included with selling, general
and administrative expenses in the accompanying consolidated statements of
operations for the years ended December 31, 1995, and 1996, respectively.
10. Income Taxes
ACC accounts for income taxes in accordance with the provisions of SFAS No.
109. As discussed in Note 2, SeaVision elected Subchapter S corporation status
for income tax purposes. Accordingly, the income of SeaVision was reported on
the individual income tax returns of its shareholders. The financial
statements, therefore, do not include a provision for income taxes prior to the
change in status.
The components of the deferred tax assets and liabilities, as of December 31,
1996, are as follows:
<TABLE>
<CAPTION>
Assets (liabilities)
(Dollars in thousands)
<S> <C>
Net operating loss carryforward $ 2,191
Prepayments 368
Intangible asset differences (68)
Restricted stock grant 9
Valuation allowance (2,500)
---------
Net deferred income taxes $ ---
=========
</TABLE>
36
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1996, ACC had available for federal and state income tax
purposes, net operating loss carry forwards from 1996 of approximately
$5,500,000 which are scheduled to expire in 2011.
The realization of the above tax benefit depends on ACC's ability to generate
future taxable income. ACC has established a valuation allowance to offset this
deferred tax benefit.
The fiscal 1996 income tax provision consists of currently payable state
income taxes.
11. Related Party Transactions:
Shareholder Notes Payable
These obligations represented numerous individual notes due to certain
shareholders, each with an original three-year maturity. These notes bore
interest at 15%, payable at maturity, and had scheduled original maturity at
various dates from July 1997 through December 1998. Repayment of a portion of
the notes of approximately $3.6 million was made in connection with SeaVision's
initial draw on its line of credit entered into on May 31, 1996. Borrowings
under this line of credit were guaranteed by certain shareholders for which they
have received a guarantee fee equal to the difference between the 15% accrued
under the shareholder notes payable and the rate accrued on borrowings under
this line of credit.
During August 1996, notes due to two shareholders, in the aggregate amount of
$1.5 million were converted to Series A Convertible Redeemable Preferred Stock.
See Note 4.
Shareholder notes payable in the aggregate amount of $3.0 million were
converted into 244,066 shares of Common Stock, effective in November 1996 upon
the closing of ACC's initial public offering.
Netright has a note payable due to a shareholder of ACC of approximately
$64,000 at December 31, 1996.
Management Services
Certain shareholders of ACC own interests in three separate entities which
perform installation, marketing, consulting and administrative services and made
purchases for ACC and its subsidiaries. Fees related to these services and
reimbursements for expenditures incurred on behalf of ACC and its subsidiaries
were approximately as follows:
<TABLE>
<CAPTION>
Period Ended Fees Reimbursements
- ------------------- -------- --------------
<S> <C> <C>
December 31, 1994 $343,000 $ 287,000
December 31, 1995 644,000 1,668,000
December 31, 1996 232,000 419,000
</TABLE>
During 1996, ACC hired a management team that reduced its need for the
services provided by these entities. Accordingly, the fees and reimbursements
paid under these arrangements have declined. Management agreements with two of
the entities were terminated in July 1996. The third management agreement was
converted into a lease agreement effective August 1, 1996. The lease agreement
included the rental of office space and certain administrative services to be
provided to SeaVision. This agreement provides for monthly fees of $3,700 and
was terminable by either party upon 30 days notification. Rental expense under
this agreement was approximately $15,000 in 1996. The agreement was terminated
effective January 31, 1997.
37
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACC leases office space from an entity in which certain shareholders have an
ownership interest. Rental expense under this arrangement was approximately
$78,000 for the year ended December 31, 1996. The office lease expired on
December 31, 1996. ACC is currently negotiating lease terms and conditions for
a long term lease of office space in the same building.
PhotoWave sublet office space from an entity in which certain shareholders
have an ownership interest. Rental expense under this arrangement was
approximately $12,000 during the year ended December 31, 1996. The term of the
sublet arrangement was on a month by month basis and was terminated in March
1997.
SportsWave received consulting and administrative services under an
arrangement with an entity in which certain ACC shareholders maintain ownership
interests. Fees related to these services totalled $10,000 during the period
for which SportsWave's results of operations are included in the consolidated
statements of operations. This arrangement was terminated in December 1996.
SportsWave leases office space from an entity in which certain shareholders
have an ownership interest. Rental expense under this arrangement was
approximately $13,000 during the period from acquisition to December 31, 1996.
The office lease expires on June 30, 1997, with commitments for rental payments
of approximately $40,000 in 1997.
Professional Services
A shareholder of ACC is a member in an entity which performs legal services
for ACC and its subsidiaries. Fees for these services were approximately
$25,000, $71,000 and $749,000 for the periods ended December 31, 1994, 1995, and
1996, respectively.
Other Services
Certain shareholders of ACC have an equity interest in an entity which
performs services for ACC and its subsidiaries related to visual media. Charges
for these services were approximately $10,000, $137,000 and $147,000 for the
periods ended December 31, 1994, 1995 and 1996, respectively.
Another entity in which certain shareholders of ACC have an equity interest
performed commercial printing services for ACC and its subsidiaries. Charges for
these services were approximately $7,000, $25,000 and $143,000 for the periods
ended December 31, 1994, 1995 and 1996, respectively.
12. Subsequent Events:
Additional options to purchase 27,500 shares of common stock are being awarded
under the 1996 Stock Plan during the first quarter 1997. Option prices are
based on market prices at the various grant dates.
13. Industry Segment Information
ACC and its subsidiaries provide customized interactive television, digital
imaging, systems integration, and other communications and media services to
users in the travel and leisure, sports marketing and promotion and other
industries. ACC and its subsidiaries maintained offices and facilities in
Pennsylvania, Florida, California, and Ohio during 1996. There were no foreign
offices. Revenue is derived principally from markets located in the United
States, although interactive television revenues are derived from cruise ship
installations that operate in international waters. ACC and its subsidiaries
consider this revenue to be related to its Florida location.
38
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Revenue Gross Profit
Periods ended December 31 1994 1995 1996 1994 1995 1996
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interactive Television $ --- $ 44 $ 441 $ --- $ 34 $ 323
Systems Integration --- --- 195 --- --- 21
Digital Imaging --- --- 7 --- --- 7
Marketing Programs --- --- 233 --- --- 60
Consulting --- --- 425 --- --- 93
Other --- --- 43 --- --- 22
-------------------------------------------------------
Total $ --- $ 44 $ 1,344 $ --- $ 34 $ 526
=======================================================
<CAPTION>
Total Assets Property & Equipment (net)
December 31 1994 1995 1996 1994 1995 1996
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interactive Television $ 146 $ 2,353 $ 8,105 $ 15 $ 1,391 $6,021
Systems Integration --- --- 351 --- --- 351
Digital Imaging --- --- 238 --- --- 182
Marketing Programs --- --- 2,793 --- --- 97
Consulting --- --- 5,368 --- --- 278
Other --- --- 15,822 --- --- 76
------------------------------------------------------
Total $ 146 $ 2,353 $32,677 $ 15 $ 1,391 $7,005
=======================================================
</TABLE>
14. Unaudited Pro Forma Information
The unaudited pro forma statement of operations data in the following table
gives effect to the occurrence of the Company's initial public offering (Note 3)
as if it had occurred on January 1, 1996. Proceeds from the initial public
stock offering were utilized to repay outstanding borrowings under the line of
credit, pay accrued interest due on the shareholder notes payable and the
acquisitions of ISM and KCG. The unaudited pro forma statement of operations
data does not purport to represent what the Company's results of operations
actually would have been if the foregoing had in fact occurred on such date.
39
<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Dollars in thousands except ---------------------------------------
per share data Actual Adjustments Pro Forma
---------------------------------------
<S> <C> <C> <C>
Loss from operations $ (7,353) $(1,280) $ (8,803)
Interest expense, net 797 (651) 146
---------------------------------------
Loss before income tax expense (8,320) (629) (8,949)
Income tax expense 27 --- 27
---------------------------------------
Net loss $ (8,347) $ (629) $ (8,976)
Accretion and dividends on preferred 106 --- 106
stock
---------------------------------------
Net loss applicable to common $ (8,453) $ (629) $ (9,082)
shareholders
=======================================
Net loss per common share $ (2.81) $ (1.69)
============ =============
Weighted average number of common
and common equivalent shares 3,008,498 5,387,450
============ =============
</TABLE>
The adjustments reflect the additional revenue associated with the acquired
entities and the reduction of interest expense due to the assumed repayment of
borrowings. These adjustments are offset by the increased amortization expense
related to the intangible assets attributable to the acquisitions.
15. Unaudited Quarterly Financial Information
The unaudited quarterly financial information data in the following table
reflects the data presented in the Company's initial Form 10-Q, as well as the
comparable data for the three months ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
(Dollars in thousands, except
for per share data)
Three Months Ended
-------------------------------------------
1995 1996
-------------------- --------------------
Sept. 30, Dec. 31, Sept. 30, Dec. 31,
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ --- $ 44 $ 133 1,048
Loss from Operations (128) (905) (1,766) (3,710)
Net loss $ (317) $ (979) $ (2,096) $ (3,738)
========== ======== ========= =========
Net loss applicable to common
shareholder $ (317) $ (979) $ (2,096) $ (3,844)
========== ======== ========= =========
Net loss per common share $ (0.13) $ (0.38) $ (0.81) $ (0.91)
========== ======== ========= =========
</TABLE>
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Allin Communications Corporation:
We have audited the accompanying consolidated balance sheets of Allin
Communications Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three periods
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allin Communications
Corporation and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the three periods ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 7, 1997
41
<PAGE>
Item 9 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
42
<PAGE>
Part III
Item 10 - Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning each of the
directors and executive officers of the Company. Ages are given as of March 20,
1997.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- ----------------------------------------------
<S> <C> <C>
Richard W. Talarico........ 41 Chairman of the Board and Chief
Executive Officer
R. Daniel Foreman.......... 34 President and Director
Brian K. Blair............. 34 Chief Operating Officer, Secretary and
Director
Jon E. VanAmringe.......... 48 Chief Financial Officer, Treasurer and
Assistant Secretary
William C. Kavan(1)(2)..... 46 Director
Paul J. Pasquarelli(2) 45 Director
James C. Roddey(1)......... 64 Director
Richard S. Trutanic(1)..... 47 Director
- --------------
</TABLE>
(1) Member of Compensation Committee.
(2) Member of Audit Committee. Paul J. Pasquarelli was appointed to the Audit
Committee in January 1997.
Richard W. Talarico became Chairman of the Board and Chief Executive Officer
of the Company in July 1996. He has served as a director of SeaVision since
October 1994 and as Chairman of the Board and Chief Executive Officer of
SeaVision since June 1996. Mr. Talarico has served SeaVision in various other
capacities, including Vice President of Finance from October 1994 to October
1995, President from October 1995 to June 1996 and Chief Financial Officer,
Secretary and Treasurer from October 1994 to June 1996. Since 1991, Mr. Talarico
has been a partner in The Hawthorne Group ("THG"), where he has been involved
in numerous business ventures and has served in various financial and operating
capacities. THG is a private investment and management company which invests
through affiliates primarily in media and communications companies.
R. Daniel Foreman became a director and President of the Company in July 1996.
He has served as a director of SeaVision since October 1994 and as President
since June 1996. Mr. Foreman also served as Vice President of Technology of
SeaVision from October 1994 to June 1996. Since May 1989, Mr. Foreman has served
as Executive Vice President of Blair Haven Entertainment, Inc., which operates
under the name Commercial Downlink ("Commercial Downlink"), a company founded
to serve the needs of the satellite communications industry, where he has been
responsible for technology development and implementation. Since 1992, Mr.
Foreman has been Executive Vice President of ComTek Printing & Graphics Inc.
("ComTek"), a commercial printing company. He also serves as President of
Digital Media Corp., a company which provides closed-circuit video to
racetracks. Since the formation of SeaVision in June 1994, Mr. Foreman has
devoted substantially all of his time to its operations.
Brian K. Blair became a director, Chief Operating Officer and Secretary of the
Company in July 1996. Mr. Blair has served as a director of SeaVision since
October 1994. Mr. Blair also served as Vice President of Administration and
Operations of SeaVision from October 1994 until June 1996. Since May 1989, Mr.
Blair has been President of Commercial Downlink where he is responsible for the
day-to-day activity of such company. Mr. Blair also serves as Secretary and
Treasurer of Digital Media Corp. Since the formation of SeaVision in June 1994,
Mr. Blair has devoted substantially all of his time to its operations.
Jon E. VanAmringe joined the Company as Chief Financial Officer and Treasurer
in September 1996, and became Assistant Secretary in December 1996. From
November 1995 until joining the Company, he served as Vice President of MED3000
Group, Inc., a physician practice management company involved in the development
and
43
<PAGE>
management of integrated health care delivery systems. From 1993 to 1995 he
served as Vice President and Chief Financial Officer of Strategic Advisory
Group, Inc., a firm involved in providing consulting and management services to
physician groups and others in the healthcare industry which later merged into
MED3000 Group, Inc., and as President of Strategic Capital Group, a firm which
provided financial and management services. Mr. VanAmringe served as Managing
Director of Corporate Finance of Mid Atlantic Capital Group from 1989 to 1993
and was employed by Spectrum Control, Inc., a publicly traded electronic
component manufacturer, from 1982 to 1989, most recently as Senior Vice
President and Chief Financial Officer.
William C. Kavan became a director of the Company in July 1996 and has served
as a director of SeaVision since October 1994. Since 1980, Mr. Kavan has been
president of Berkely-Arm, Inc. ("Berkely"), the largest provider of revenue
generating passenger insurance programs for the cruise industry. Berkely serves
twenty-five cruise line clients, including Carnival, Costa, Cunard, Epirotiki,
NCL, P&O, Princess, Radisson and Royal Caribbean.
Paul J. Pasquarelli became a director of the Company in January 1997. Mr.
Pasquarelli has been Vice President of Buena Vista Home Video, a Walt Disney
Company, since 1994, where he has managed over $1 billion in retail sales of
video products. From 1992 to 1994, he served as President of Visual
Expressions, Inc., and from 1987 to 1992, as President and Chief Executive
Officer of Video Channels/Rank Retail Services America. Mr. Pasquarelli founded
both of these companies which were engaged in the video entertainment business.
James C. Roddey became a director of the Company in July 1996 and has served
as a director of SeaVision since October 1994. Mr. Roddey served as President of
International Sports Marketing, Inc. (now SportsWave) from 1992 to 1996. He has
served as Chairman or as President of various other entities affiliated with
THG, including President of Star Cable Associates, a cable television operator
in various states, since 1991. He served as President of Turner Communications
Corporation from 1968 to 1971, and as President of Rollins Communications
Corporation from 1971 to 1979. Mr. Roddey currently serves as a Trustee of the
University of Pittsburgh.
Richard S. Trutanic became a director of the Company in January 1997. He has
been President and Managing Director of The Somerset Group, a financial advisory
firm, since 1990 and senior advisor to Friedman, Billings, Ramsey & Co., Inc.
("FBR"), an investment banking firm, since 1993. Mr. Trutanic was, from 1985 to
1990, a director and member of the Executive Committee of Telecom U.S.A.
(formerly SouthernNet, Inc.), a telecommunications company. He is a Trustee of
the New York Life Mainstay Funds and a director of several private companies.
FBR provided investment banking services to the Company in 1996, including
acting as underwriter of the Company's initial public offering. In connection
with such transaction, the Company agreed to appoint Mr. Trutanic as a Director
of the Company.
There are no family relationships among the directors and executive officers.
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors.
44
<PAGE>
Item 11 - Executive Compensation
Summary Compensation Table
The following table sets forth information concerning 1996 compensation of the
Chief Executive Officer and the other executive officers of the Company
(collectively the "Named Executives").
<TABLE>
<CAPTION>
Long Term
---------
Annual Compensation Compensation
------------------- -----------
Other Annual Securities Underlying
------------ ---------------------
Name and Principal Position Year Salary ($) Compensation ($) Options (#)(2)
- --------------------------- ---- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Richard W. Talarico 1996 $ 75,000 $ --- 21,000
Chief Executive Officer
R. Daniel Foreman 1996 $124,875 $ --- 21,000
President
Brian K. Blair 1996 $124,875 $ 15,596(1) 21,000
Chief Operating Officer
Jon E. VanAmringe 1996 $ 40,833 $ --- 14,000
Chief Financial Officer
</TABLE>
(1) During 1996, Mr. Blair accepted an assignment to manage the Miami, Florida
based operations of SeaVision. The expected duration of the assignment was a
minimum of one year, but was not expected to e a permanent transfer. Because
of the temporary nature of the assignment at a remote office, SeaVision has
leased housing and an automobile for Mr. Blair's usage. Expense for housing
and automobile were $12,500 and $3,096.
(2) Common Stock options were awarded under the 1996 Stock Plan approved by the
Board of Directors and in accordance with the terms of the respective
executive's employment agreements. See "--Employment Agreements" and
"--1996 Stock Plan" below.
Employment Agreements
The Company has entered into employment agreements with each of the Named
Executives. Each such employment agreement contains restrictive covenants
prohibiting such officer from competing with the Company for a period of three
years after the end of the employment term in the case of Messrs. Talarico,
Foreman and Blair, and for a period of two years after the end of the employment
term in the case of Mr. VanAmringe. The terms of the employment agreements with
Messrs. Talarico, Foreman and Blair commenced as of August 1, 1996 and will
continue through December 31, 1999. The term of the employment agreement with
Mr. VanAmringe commenced as of September 16, 1996 and will continue through
December 31, 1998. The annual salaries as set forth in the employment agreements
are $150,000 for each of Messrs. Talarico, Foreman and Blair and $140,000 for
Mr. VanAmringe.
Pursuant to the employment agreements, options to acquire shares of Common
Stock granted to Messrs. Talarico, Foreman, Blair and VanAmringe under the
Company's 1996 Stock Plan will, if not already vested, vest on the date of a
change in control of the Company, defined as a sale of all or substantially all
of the Company's assets, a merger in which the Company is not the surviving
corporation or when a person or group, other than the stockholders of SeaVision
as of August 1, 1996, owns 50% or more of the outstanding Common Stock. The
employment agreements also provide that each of Messrs. Talarico, Foreman, Blair
and VanAmringe will be entitled to receive for one year following such person's
termination of employment by the Company without cause or contemporaneously with
the occurrence of a change in control, semi-
45
<PAGE>
monthly severance payments equal to the semi-monthly base salary payment which
such person was receiving immediately prior to such termination. Mr. VanAmringe
will be entitled to receive such payments for only six months if a termination
without cause, other than by change of control, occurs after December 31, 1997.
If Mr. VanAmringe voluntarily resigns prior to December 31, 1997, he will be
entitled to receive semi-monthly payments equal to the semi-monthly base salary
payment he was receiving immediately prior to his resignation for six months or,
if earlier, until such time that he begins other full-time employment.
1996 Stock Plan
In October 1996, the Board of Directors adopted the 1996 Stock Plan, which
provides for awards of stock options, stock appreciation rights, restricted
shares and restricted units to officers and other employees of the Company and
to consultants and advisors (including non-employee directors) of the Company.
An aggregate of 266,000 shares of Common Stock has been reserved for issuance
under the 1996 Stock Plan. The 1996 Stock Plan is administered by the Board of
Directors which has broad discretion to determine the individuals entitled to
participate in the 1996 Stock Plan and to prescribe conditions (such as the
completion of a period of employment with the Company following an award) that
must be satisfied before awards vest.
During the fourth quarter of 1996, the Board of Directors awarded options to
purchase an aggregate of 202,550 shares of Common Stock under the 1996 Stock
Plan. The grant date of the option awards for the Named Executives was the
closing date of the initial public offering and the exercise price equals the
initial public offering price of $15 per share. Messrs. Talarico, Foreman and
Blair individually recieved options to purchase 21,000 shares of Common Stock,
while Mr. VanAmringe received options to purchase 14,000 shares of Common Stock.
Except under the conditions noted above in the discussion of their employment
agreements, there will be a five-year vesting period for these options with
vesting of 20% of the award at each of the first five anniversaries of the grant
date. All of the options granted under the 1996 Stock Plan will be non-qualified
options for federal income tax purposes.
Upon closing of the Company's initial public offering in November 1996,
Richard S. Trutanic, who subsequently became a non-employee director of the
Company, received an immediately exercisable option to purchase 21,000 shares of
Common Stock at the initial public offering price of $15 per share under the
Company's 1996 Stock Plan.
Option Grants in Last Fiscal Year
The following table provides information concerning stock option grants to the
Named Executives during 1996.
<TABLE>
<CAPTION>
Grant Date
Individual Grants ----------
----------------- Value
Number of -----
--------
Securities
----------
Underlying % of Total Options Grant Date
--------- ----------------- ----------
Options Granted to Employees Exercise or Base Expiration Present
------- -------------------- ---------------- ---------- -------
Name Granted in Fiscal Year Price ($/Sh) Date Value $(1)
---- ------- -------------- ----------- ---- ----------
<S> <C> <C> <C> <C> <C>
Richard W. Talarico 21,000 10.4% $15.00 11/6/03 $171,990
R. Daniel Foreman 21,000 10.4% $15.00 11/6/03 $171,990
Brian K. Blair 21,000 10.4% $15.00 11/6/03 $171,990
Jon E. VanAmringe 14,000 6.9% $15.00 11/6/03 $114,660
</TABLE>
46
<PAGE>
(1) The fair value of each option, $8.19, is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants in 1996.
<TABLE>
<CAPTION>
<S> <C>
Risk free interest rate 6.2 %
Expected dividend yield 0.0 %
Expected life of options 6 yrs.
Expected volatility rate 48.0 %
</TABLE>
No adjustments were made for non-transferability or risk of forfeiture. See
"--1996 Stock Plan" above for information concerning the terms of the foregoing
options.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table provides information concerning stock options held by the
Named Executives at December 31, 1996. No options were exercised in 1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-the-
------------------- ----------------------------
Underlying Unexercised Options Money Options at Fiscal Year
------------------------------ ----------------------------
at Fiscal Year End End (1)
------------------ -------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------- ------------- ---------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Richard W. Talarico --- --- --- 21,000 --- $94,500
R. Daniel Foreman --- --- --- 21,000 --- $94,500
Brian K. Blair --- --- --- 21,000 --- $94,500
Jon E. VanAmringe --- --- --- 14,000 --- $63,000
</TABLE>
(1) Valued based on the December 31, 1996 closing price per share of Common
Stock of $19.50, as reported by the Nasdaq National Market tier of the
Nasdaq Stock Market, less the option exercise price of $15.00 per share.
The Company does not have any long-term incentive or defined benefit plans.
Compensation of Directors
The non-employee directors of the Company are entitled, following the
Company's initial public offering, to receive at the conclusion of each year of
service, an automatic grant of an immediately exercisable option to acquire
5,000 shares of Common Stock at an exercise price per share equal to the closing
price of the Common Stock as reported by NASDAQ for the date on which the option
is granted. Grants for the initial year of service will be made under the 1996
Stock Plan. Non-employee directors of the Company will also be entitled to
receive $2,500 for each Board of Directors meeting attended and $500 for each
separate committee meeting attended on a date on which no full board meeting is
held. Directors of the Company who are also employees will not receive
additional compensation for attendance at Board and committee meetings, except
that all directors will be reimbursed for out-of-pocket expenses in connection
with attendance at Board and committee meetings.
47
<PAGE>
Item 12.
(a) Security Ownership of Certain Beneficial Owners
The following table presents certain information as of March 20, 1997
regarding each person or entity who is known to the Company to beneficially own
more than five percent of the outstanding Common Stock of the Company. Except
as indicated, the persons named have sole voting and investment power with
respect to all shares shown as being beneficially owned by them.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent
Name and Address of Stockholder Ownership (1) of Class (1)
------------------------------- ------------- ------------
<S> <C> <C>
Henry Posner, Jr. (2) 1,157,667 22.09%
500 Greentree Commons
381 Mansfield Avenue
Pittsburgh, Pennsylvania 15220
Mellon Bank Corporation (3) 293,000 5.65%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Thomas D. Wright (4) 285,825 5.50%
500 Greentree Commons
381 Mansfield Avenue
Pittsburgh, Pennsylvania 15220
Terence M. Graunke 277,810 5.14%
400 West Erie Street #504
Chicago, Illinois 60610
</TABLE>
(1) The number of shares and the percent of the class have been calculated
in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(2) Includes 105,000 shares held in various trusts and a family foundation
of which Mr. Posner and/or his wife are trustees, and with respect to
which shares, Mr. Posner shares voting and investment power. Also
includes 57,427 shares of Common Stock that may be acquired within 60
days of March 20, 1997 upon the conversion of shares of Convertible
Preferred Stock owned by Mr. Posner, which shares represent
approximately 28.2% of the Convertible Preferred Stock currently
outstanding.
(3) Includes shares beneficially owned by Mellon Bank, N.A. and The
Dreyfus Corporation as of December 31, 1996, as reported on Schedule
13G filed by Mellon Bank Corporation with the Securities and Exchange
Commission on January 24, 1997. The number of shares shown assumes
that there has been no change in the number of shares beneficially
owned since December 31, 1996.
(4) Includes 5,000 shares owned by Mr. Wright's wife. Also includes
14,365 shares of Comon Stock that may be acquired within 60 days of
March 20, 1997 upon the conversion of shares of Convertible Preferred
Stock owned by Mr. Wright, which shares represent approximately 7.1%
of the Convertible Preferred Stock currently outstanding.
48
<PAGE>
(b) Security Ownership of Management
The following table presents certain information as of March 20, 1997 as to
the beneficial ownership of the Common Stock of the Company by (i) each director
and Named Executive and (ii) all directors and executive officers as a group.
Except as indicated, the persons named have sole voting and investment power
with respect to all shares shown as being beneficially owned by them.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent
Name and Address of Stockholder Ownership (1) of Class (1)
- ------------------------------- ------------- ------------
<S> <C> <C>
Richard W. Talarico (2) 97,388 1.88%
R. Daniel Foreman 198,000 3.82%
Brian K. Blair 198,000 3.82%
Jon E. VanAmringe 6,000 0.12%
William C. Kavan (3) 182,155 3.46%
Paul J. Pasquarelli - 0 - 0.00%
James C. Roddey (4) 97,388 1.88%
Richard S. Trutanic (5) 21,000 0.40%
All directors and executive 799,931 15.10%
officers, as a group (8 persons)
</TABLE>
(1) The number of shares and the percent of the class have been calculated
in accordance with Rule 13d-3 under the Exchange Act.
(2) Includes 4,785 shares of Common Stock that may be acquired within 60
days of March 20, 1997 upon the conversion of 588 shares of
Convertible Preferred Stock owned by Mr. Talarico, which shares
represent approximately 2.4% of the Convertible Preferred Stock
currently outstanding.
(3) Includes 81,355 shares of Common Stock that may be acquired within 60
days of March 20, 1997 upon the conversion of 10,000 shares of
Convertible Preferred Stock owned by Mr. Kavan, which shares represent
40.0% of the Convertible Preferred Stock currently outstanding.
(4) Includes 4,785 shares of Common Stock that may be acquired within 60 days
of March 20, 1997 upon the conversion of 588 shares of Convertible
Preferred Stock owned by Mr. Roddey, which shares represent approximately
2.4% of the Convertible Preferred Stock currently outstanding. Also
includes 2,000 shares owned by Mr. Roddey's wife.
(5) Represents 21,000 shares issuable upon exercise of a currently exercisable
option.
49
<PAGE>
Item 13 - Certain Relationships and Related Transactions
Consulting Agreement
SeaVision and The Hawthorne Group ("Hawthorne") were parties to a Consulting
Agreement, entered into in June 1994 and terminated as of June 30, 1996, which
required Hawthorne to provide SeaVision certain accounting and financial
services, including the preparation of financial models and plans, the design
and implementation of accounting systems and controls and assistance in
acquiring third party financing. Henry Posner, Jr. and Thomas D. Wright, each of
whom owns more than five percent of the outstanding Common Stock, and two of Mr.
Posner's sons are shareholders of Hawthorne, and Messrs. Posner and Wright and
Richard W. Talarico, a director and executive officer of the Company, and James
C. Roddey, a director of the Company, were shareholders of Hawthorne Media
Group, Inc. ("HMG"), the original party to the agreement which assigned its
rights and obligations thereunder to Hawthorne. The consulting agreement
provided for the payment of a consulting fee of $18,000 per month. During the
fiscal year ended December 31, 1996, SeaVision paid an aggregate of $126,000 to
Hawthorne and HMG under the consulting agreement.
Agreements with Commercial Downlink and Affiliate
SeaVision and Blair Haven Entertainment, Inc., doing business as Commercial
Downlink ("Commercial Downlink") were parties to an agreement entered into in
June 1994 and terminated as of July 31, 1996, which required Commercial Downlink
to act as a general contractor for the installation of ITV systems on cruise
ships, and to devote its full-time efforts to the business of SeaVision. Brian
K. Blair and R. Daniel Foreman, principals of Commercial Downlink, are executive
officers and directors of the Company. SeaVision reimbursed Commercial Downlink,
at cost, for construction services and materials provided in connection with the
installation of SeaVision systems on cruise ships. SeaVision also paid
Commercial Downlink a monthly management fee. During the fiscal year ended
December 31, 1996, SeaVision paid $92,000 to Commercial Downlink under the
consulting agreement in addition to reimbursing Commercial Downlink $419,000 for
construction services and materials provided in connection with the installation
of ITV systems on cruise ships.
As of August 1, 1996, SeaVision and Commercial Downlink entered into a
sublease agreement relating to facilities in Lisbon, Ohio owned by Com-Tek
Printing & Graphics, Inc. ("Com-Tek"), a majority owned subsidiary of Commercial
Downlink, which included provisions pursuant to which Commercial Downlink would
provide certain administrative services for an aggregate monthly payment of
$3,700. During the fiscal year ended December 31, 1996, SeaVision paid $19,000
to Commercial Downlink under the sublease agreement. Such agreement was
terminated as of January 31, 1997. The Company believes that such payments are
on terms as favorable to the Company as could be obtained from an unaffiliated
party.
During the fiscal year ended December 31, 1996, SeaVision made payments to
ComTek in the amounts of approximately $143,000 for commercial printing
services. The Company believes that such payments were on terms as favorable to
the Company as could have been obtained from an unaffiliated third party. The
Company expects to continue to conduct business with ComTek in the future.
In 1996, SeaVision made advances in the aggregate amount of $53,730 to
Commercial Downlink. These advances have been repaid.
Transactions Relating to Formation and Organization of the Company
In August 1996, a merger (the "Formation Merger") occurred in which
SeaVision, Inc., a Delaware corporation ("Old SeaVision"), merged with and
into SeaVision Acquisition Corporation, a Delaware corporation and wholly owned
subsidiary of the Company, with SeaVision Acquisition Corporation surviving the
Formation Merger and changing its name to SeaVision, Inc. In the Formation
Merger, each share of common stock of Old SeaVision was converted into one share
of Common Stock of the Company. In connection with the Formation Merger, the
holders of the Common Stock of the Company. In connection with the Formation
Merger, the then holders of Common Stock of the Company were granted certain
registration rights. See "--Registration Rights."
50
<PAGE>
Stockholder Loans
In each of fiscal years 1994, 1995 and 1996, Henry Posner, Jr., Thomas D.
Wright, Terence M. Graunke, James C. Roddey and Richard W. Talarico (the
"Funding Stockholders") made various Stockholder Loans to SeaVision. Each
Stockholder Loan, represented by a promissory note which requires the principal
amount outstanding under the note to be paid in full on the third anniversary of
the date of the note, bears interest at a rate of 15% per annum, compounded
quarterly. Stockholder Loans were made in the following aggregate principal
amounts: Mr. Posner--$4,166,014; Mr. Wright--$1,041,506; Mr. Graunke --$718,800;
Mr. Roddey--$347,165; and Mr. Talarico--$347,165. The portions of the
Stockholder Loans noted above that were made during the fiscal year ended
December 31, 1996 were: Mr. Posner--$1,464,814; Mr. Wright--$366,206; Mr.
Roddey--$131,065; and Mr. Talarico--$122,065. Mr. Graunke owns more than five
percent of the outstanding Common Stock of the Company. Stockholder Loans in an
aggregate amount up to $1.5 million were guaranteed by each of Brian K. Blair,
R. Daniel Foreman and William C. Kavan. Such guarantees were secured by a pledge
of the shares of Common Stock owned by Messrs. Blair, Foreman and Kavan.
On May 31, 1996, the Company used $3.6 million of the $5.0 million then
available under its line of credit from Integra Bank (now National City Bank)
(the "Integra Loan") to repay a portion of the principal amount of the
Stockholder Loans, leaving Stockholder Loans in the following aggregate
principal amounts outstanding as of that date: Mr. Posner--$1,800,000; Mr.
Wright--$450,000; Mr. Graunke--$450,000; Mr. Roddey--$150,000; and Mr.Talarico
$150,000. In November 1996, the Company used approximately $1.0 million of the
net proceeds of its intiial public offering to pay the accrued interest on the
Stockholder Loans. The Funding Stockholders converted the principal balances of
the Stockholder Loans in November 1996 (which were identical to the principal
balances as of May 31, 1996 as described above) into shares of Common Stock at a
rate of approximately 8.1 shares of Common Stock for each $100 principal amount
outstanding, or approximately $12.29 per share. The conversion rate was
determined after consultation with the Underwriters of the initial public
offering and is based upon an assumed value of the Company without giving effect
to the initial public offering. Cash payments were made in lieu of the issuance
of fractional shares of Common Stock upon such conversion. The Funding
Stockholders received the following number of shares of Common Stock upon
conversion of the Stockholder Loans: Mr. Posner--146,440 shares; Mr. Wright--
36,610 shares; Mr. Graunke--36,610 shares; Mr. Roddey--12,203 shares and Mr.
Talarico--12,203 shares. The holders of these shares were granted certain
registration rights with respect to these shares. See "--Registration Rights."
On July 19, 1996, William C. Kavan made a loan in the amount of $1.0 million
to SeaVision at the interest rate of 8% per annum. Such loan was converted into
10,000 shares of Convertible Preferred Stock following the Formation Merger.
Integra Loan Guarantee
The availability under the Integra Loan was increased to $7.5 million on
October 28, 1996. The Integra Loan is personally guaranteed by each of Messrs.
Posner, Wright, Roddey and Talarico and by Lyndhurst Associates, a Pennsylvania
limited partnership ("Lyndhurst"), for which such guarantors receive a
guarantee fee from time to time based on a percentage of the outstanding
principal balance of the Integra Loan. Such percentage is the difference between
15%, the interest rate on the Stockholder Loans, and the interest rate on the
Integra Loan. Mr. Posner is the Managing General Partner of Lyndhurst.
Guarantee fees paid during the fiscal year ended December 31, 1996 were
approximately $120,000.
51
<PAGE>
Legal and Investment Banking Services
During the fiscal year ended December 31, 1996, the Company retained the law
firm of Eckert Seamans Cherin & Mellott, LLC for representation on various
matters. Thomas D. Wright is a member and chairman of the Operations Committee
of such firm.
Richard S. Trutanic, a director of the Company, is a Senior Advisor to FBR,
which during 1996, provided investment banking services to the Company,
including in connection with the Company's initial public offering. Upon the
closing of such offering, Mr. Trutanic received an immediately exercisable
option to purchase 21,000 shares of Common Stock at the initial public offering
price of $15 per share. Services provided by FBR have been on terms and
conditions as are customary and competitive.
Sale of Convertible Preferred Stock
On August 16, 1996, the Company issued 10,000 shares of Convertible Preferred
Stock to William C. Kavan in exchange for the extinguishment of a $1.0 million
loan to SeaVision. Additionally, on August 16, 1996, the Company sold
approximately 7,059, 1,765, 588 and 588 shares of Convertible Preferred Stock to
Henry Posner, Jr., Thomas D. Wright, Richard W. Talarico and James C. Roddey,
respectively, for an aggregate purchase price of $1.0 million. During the seven-
month period beginning six months after the closing of the initial public
offering (the "Conversion Period"), each holder of Convertible Preferred Stock
will have the right to convert all, but not less than all, of the Convertible
Preferred Stock then owned by such holder into shares of Common Stock at the
rate of approximately 8.1 shares of Common Stock for each share of Convertible
Preferred Stock, or approximately $12.29 per share (as adjusted for stock
dividends, stock splits, reverse stock splits and any other stock combination or
division). Cash payments will be made in lieu of the issuance of any fractional
shares of Common Stock upon any such conversion. If all of the shares of
Convertible Preferred Stock held by Messrs. Posner, Wright, Talarico, Roddey and
Kavan are converted into Common Stock during the Conversion Period, Messrs.
Posner, Wright, Talarico, Roddey and Kavan will receive 57,427, 14,365, 4,785,
4,785 and 81,355 shares, respectively, of Common Stock. The holders of these
shares will have certain registration rights with respect to these shares. See
"--Registration Rights."
Registration Rights
If the Company issues shares of Common Stock upon conversion of the
Convertible Preferred Stock (the "Conversion Shares"), the holders of
Conversion Shares will have certain rights to require the Company to register
the Conversion Shares under the Securities Act. Under the terms of the
registration rights agreement relating to the Conversion Shares, the holders of
Conversion Shares and their transferees holding at least the number of
Conversion Shares into which 5,000 shares of Convertible Preferred Stock have
been converted will have the right, until the third anniversary of the last date
on which the Convertible Preferred Stock may be converted into Common Stock (the
"Commencement Date"), to require the Company, on one occasion, to register the
Conversion Shares for public offering and sale on Form S-3 in a "shelf"
registration pursuant to Rule 415 under the Securities Act. If any holder
requests a shelf registration, all Conversion Shares will be registered
thereunder unless a holder requests that all or a portion of his Conversion
Shares be excluded. Holders of a majority of the Conversion Shares will also
have the right on one occasion to elect to have their Conversion Shares which
are registered on the shelf registration statement sold in an underwritten
offering. In addition, the holders of Conversion Shares and their transferees
will have the right to participate in any registration of Common Stock for an
underwritten offering initiated by the Company or any other stockholder of the
Company prior to the third anniversary of the Commencement Date, subject to
certain limitations. The Company will pay all out-of-pocket expenses of any such
registrations, including fees and expenses of one counsel for the holders of
Conversion Shares and their transferees, but not including underwriting
discounts and commissions, and will indemnify the holders of Conversion Shares
and their transferees against certain liabilities under the federal securities
laws, in connection therewith.
The holders of Common Stock following the Formation Merger also have certain
rights under a registration rights agreement to require the Company to register
under the Securities Act such shares and the shares of Common Stock issued upon
conversion of the Stockholder Loans. Such rights are substantially similar to
the rights granted to holders of Conversion Shares. However, holders of such
shares and their transferees holding at least ten percent of the shares covered
are required to cause the Company to register the shares for public offering and
sale on Form S-3 in a shelf registration pursuant to Rule 415 under the
Securities Act.
The holders of Convertible Preferred Stock and the stockholders following the
Formation Merger have agreed not to sell any Conversion Shares or other shares
of Common Stock owned by them and subject to the registration rights agreements
described above for a period of twelve months following the closing of the
Company's initial public offering.
52
<PAGE>
Video Production Payments
During the fiscal year ended December 31, 1996 SeaVision made payments to
Production Masters, Inc. ("PMI") in the amounts of approximately $147,000 for
the production of videos and other visual media for use with the Company's ITV
system. Messrs. Posner, Wright, Roddey and Talarico are shareholders of PMI. The
Company believes that such payments were on terms as favorable to the Company as
could have been obtained from an unaffiliated party. The Company expects to
continue to conduct business with PMI in the future.
Arrangements Involving ISM
The Company acquired all of the issued and outstanding shares of capital stock
of ISM from the stockholders of ISM in November 1996. The purchase price paid at
the closing of the sale was $2.4 million in cash. In addition, the stock
purchase agreement governing the sale provides for up to $2.4 million in
contingent payments. One-half of the contingent payments, if any, is to be paid
by delivery to the ISM stockholders of promissory notes bearing interest at
seven percent per annum.
Henry Posner, Jr., Thomas D. Wright, Richard W. Talarico and James C. Roddey
were ISM stockholders. At the closing of the acquisition of ISM, Messrs. Posner,
Wright, Talarico and Roddey received cash payments in the amounts of
approximately $1,273,000, $791,000, $48,000 and $120,000, respectively, and will
be entitled to receive contingent payments up to the same approximate amounts
(not including interest payable on any promissory note delivered in respect of
the contingent payments).
ISM and Hawthorne were parties to an oral management arrangement pursuant to
which Hawthorne provided general, administrative, accounting and tax planning
and preparation services to ISM for an aggregate of $5,000 per month. During the
fiscal year ended December 31, 1996, ISM made payments in the aggregate amount
of $60,000 to Hawthorne under this agreement. Payments subsequent to the
acquisition of ISM aggregated $10,000. This arrangement was terminated as of
December 31, 1996.
Joint Promotional Activities
SeaVision, ISM, PMI and other entities affiliated with THG have engaged in
various joint promotional marketing activities and have shared the revenue and
expenses of such activities. Examples of such activity in 1996 are ISM sports
marketing events (prior to the acquisition of ISM) at which SeaVision supplied
digital imaging services. The Company believes that such activities involving
SeaVision or ISM have been conducted on terms as favorable to SeaVision and ISM
as could have been obtained from an unaffiliated party.
Leases
During the fiscal year ended December 31, 1996, ISM made payments pursuant to
a lease agreement in the amount of $80,266 to Executive Office Associates
("EOA") for the lease of office space. Payments subsequent to the acquisition
of ISM aggregated $13,478. Henry Posner, Jr., Thomas D. Wright and two of Mr.
Posner's sons and his spouse each own an indirect equity interest in EOA. The
Company believes that such payments were on terms as favorable to the Company as
could have been obtained from an unaffiliated third party. The Company does not
anticipate continuing the lease agreement beyond its current expiration date of
June 30, 1997.
As of each of May 1, 1996 and September 1, 1996, the Company entered into a
four-month leases for office space with EOA. The aggregate rental payment under
these leases was $77,773. The Company believes that such payment was on terms as
favorable to the Company as could have been obtained from an unaffiliated third
party. The Company intends to continue to lease office space from EOA.
53
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements - See Part II, Item 8 hereof on page 24.
2. Financial Statement Schedule and Auditor's Report
Schedule I - Condensed financial information of registrant
This schedule is not applicable.
Schedule II - Valuation and qualifying accounts
See Schedule II on page Sch. II-A.
The auditors' report of Arthur Andersen LLP with respect to the Financial
Statement Schedule is located at page Sch. II-B.
3. Exhibits - See Exhibit Index following on page Exh-A.
4. Reports on Form 8-K
No report on form 8-K was filed by Allin Communications
Corporation during the quarter ended December 31, 1996.
54
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Allin Communications Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
March 26, 1997
ALLIN COMMUNICATIONS CORPORATION
By:
/s/ Richard W. Talarico
-----------------------------------
Richard W. Talarico
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Allin
Communications Corporation and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- ----------------------------------- --------------
<S> <C> <C>
/s/ Richard W. Talarico Chairman of the Board and Chief
- --------------------------- Executive Officer (Principal March 26, 1997
Richard W. Talarico Executive Officer)
/s/ Jon E. VanAmringe Chief Financial Officer (Principal
- --------------------------- Financial and Accounting Officer) March 26, 1997
Jon E. VanAmringe
/s/ R. Daniel Foreman
- --------------------------- President and Director March 26, 1997
R. Daniel Foreman
/s/ Brian K. Blair Chief Operating Officer, Secretary
- --------------------------- and Director March 26, 1997
Brian K. Blair
/s/ William C. Kavan
- --------------------------- Director March 26, 1997
William C. Kavan
/s/ Paul Pasquarelli
- --------------------------- Director March 26, 1997
Paul Pasquarelli
/s/ James C. Roddey March 26, 1997
- --------------------------- Director
James C. Roddey
/s/ Richard S. Trutanic March 26, 1997
- --------------------------- Director
Richard S. Trutanic
</TABLE>
55
<PAGE>
Schedule II
ALLIN COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions
---------- ---------
Beginning of Charged to Balance at End
------------ ---------- --------------
(Dollars in thousands) Period Expense Deductions of Period
------ ------- ---------- ---------
<S> <C> <C> <C> <C>
Period Ended December 31, 1994 $ --- $ --- $ --- $ ---
Year ended December 31, 1995 --- --- --- ---
Year ended December 31, 1996 --- 2,500 --- 2,500
</TABLE>
56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Allin Communications Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in this Form 10-K, and have issued
our report thereon dated March 7, 1997. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedule listed in the index in Item 14 (a) 2 of the Form 10-K is
the responsibility of the Company's management and is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material aspects the financial data required to be set forth in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 7, 1997
57
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
2.1 Stock Purchase Agreement dated August 14, 1996 by and among International
Sports Marketing, Inc., Henry Posner, Jr., Thomas D. Wright, Michael J.
Fetchko, James C. Roddey, Richard W. Talarico, John F. Hensler and Allin
Communications Corporation (incorporated by reference to Exhibit 2.1 to
Allin Communications Corporation's Registration Statement No. 333-10447 on
Form S-1).
2.2 Agreement and Plan of Merger dated August 16, 1996 by and among Kent
Consulting Group, Inc., Les Kent and Allin Communications Corporation
(incorporated by reference to Exhibit 2.2 to Allin Communications
Corporation's Registration Statement No. 333-10447 on Form S-1).
3(i)(a) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3(i)(a) to Allin Communications
Corporation's Registration Statement No. 333-10447 on Form S-1).
3(i)(b) Certificate of Designation of the Registrant relating to the Series A
Convertible Redeemable Preferred Stock (incorporated by reference to
Exhibit 3(i)(b) to Allin Communications Corporation's Registration
Statement No. 333-10447 on Form S-1).
3(i)(c) Certificate of Amendment to Certificate of Designation of the
Registrant relating to the Series A Convertible Redeemable Preferred Stock
(incorporated by reference to Exhibit 3(i)(c) to Allin Communications
Corporation's Registration Statement No. 333-10447 on Form S-1).
3(ii) Amended and Restated By-laws of the Registrant (incorporated by reference
to Exhibit 3(ii) to Allin Communications Corporation's Registration
Statement No. 333-10447 on Form S-1).
4 Certificate of Designation of Registrant relating to Series A Convertible
Redeemable Preferred Stock and Certificate of Amendment relating thereto
(incorporated by reference to Exhibits 3(i)(b) and 3(i)(c) to Allin
Communications Corporation's Registration Statement No. 333-10447 on Form
S-1).
10.1 Sublease Agreement dated August 1, 1996 between SeaVision, Inc. and Blair
Haven Entertainment, Inc. (incorporated by reference to Exhibit 10.1 to
Allin Communications Corporation's Registration Statement No. 333-10447 on
Form S-1).
10.2 Assignment of Intellectual Property Rights dated October 3, 1994 by Brian
K. Blair and R Daniel Foreman in favor of SeaVision, Inc. (incorporated by
reference to Exhibit 10.2 to Allin Communications Corporation's
Registration Statement No. 333-10447 on Form S-1).
10.3 Registration Rights Agreement dated July 23, 1996 by and among the
Registrant and certain of its stockholders (incorporated by reference to
Exhibit 10.3 to Allin Communications Corporation's Registration Statement
No. 333-10447 on Form S-1).
10.4 Registration Rights Agreement dated July 23, 1996 by and among the
Registrant and certain of its stockholders (incorporated by reference to
Exhibit 10.4 to Allin Communications Corporation's Registration Statement
No. 333-10447 on Form S-1).
10.5 Note Conversion Agreement dated July 23, 1996 by and among the Registrant,
Henry Posner, Jr., Thomas D. Wright, Terence M. Graunke, James C. Roddey
and Richard W. Talarico (incorporated by reference to Exhibit 10.5 to Allin
Communications Corporation's Registration Statement No. 333-10447 on Form
S-1).
</TABLE>
58
<PAGE>
Exhibit Index (cont.)
----------------------
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
10.6 License Agreement dated December 1, 1993 between Major League Alumni
Marketing, Inc. and Hawthorne Sports Marketing, Inc. (incorporated by
reference to Exhibit 10.6 to Allin Communications Corporation's
Registration Statement No. 333-10447 on Form S-1).
10.7 Amended and Restated Line of Credit Note, dated October 28, 1996, made by
SeaVision, Inc. in favor of Integra Bank (incorporated by reference to
Exhibit 10.7 to Allin Communications Corporation's Registration Statement
No. 333-10447 on Form S-1).
10.8* 1996 Stock Plan of the Registrant (incorporated by reference to Exhibit
10.8 to Allin Communications Corporation's Registration Statement No. 333-
10447 on Form S-1).
10.9* Employment Agreement dated August 1, 1996 by and between the Registrant
and Richard W. Talarico (incorporated by reference to Exhibit 10.9 to Allin
Communications Corporation's Registration Statement No. 333-10447 on Form
S-1).
10.10* Employment Agreement dated August 1, 1996 by and between the Registrant
and R. Daniel Foreman (incorporated by reference to Exhibit 10.10 to Allin
Communications Corporation's Registration Statement No. 333-10447 on Form
S-1).
10.11* Employment Agreement dated August 1, 1996 by and between the Registrant
and Brian K. Blair (incorporated by reference to Exhibit 10.11 to Allin
Communications Corporation's Registration Statement No. 333-10447 on Form
S-1).
10.12* Employment Agreement dated September 16, 1996 by and between the
Registrant and Jon E. VanAmringe (incorporated by reference to Exhibit
10.17 to Allin Communications Corporation's Registration Statement No. 333-
10447 on Form S-1).
10.13 First Amended and Restated Agreement dated June 1, 1996 between
SeaVision, Inc. and Celebrity Cruises Inc. (subject to confidential
treatment) (incorporated by reference to Exhibit 10.12 to Allin
Communications Corporation's Registration Statement No. 333-10447 on Form
S-1).
10.14 Agreement dated February 6, 1996 between SeaVision, Inc. and Carnival
Corporation (subject to confidential treatment) (incorporated by reference
to Exhibit 10.13 to Allin Communications Corporation's Registration
Statement No. 333-10447 on Form S-1).
10.15 Agreement dated August 8, 1996 by and between SeaVision, Inc. and
Norwegian Cruise Line Limited (subject to confidential treatment)
(incorporated by reference to Exhibit 10.14 to Allin Communications
Corporation's Registration Statement No. 333-10447 on Form S-1).
10.16 Installation Agreement dated September 9, 1996 by and between SeaVision,
Inc. and Cunard Line Limited (subject to confidential treatment)
(incorporated by reference to Exhibit 10.15 to Allin Communications
Corporation's Registration Statement No. 333-10447 on Form S-1).
10.17 Concession Agreement dated September 17, 1996 by and between SeaVision,
Inc. and Royal Caribbean Cruise Line (subject to confidential treatment)
(incorporated by reference to Exhibit 10.16 to Allin Communications
Corporation's Registration Statement No. 333-10447 on Form S-1).
</TABLE>
___________
* Management contract or management compensatory plan or arrangement.
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index (cont.)
----------------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
10.18 Master Agreement dated December 16, 1996 by and between Allin
Communications Corporation and Electronic Data Systems Corporation.
10.19 Joint Marketing Agreement dated December 16, 1996 by and between Allin
Communications Corporation and Electronic Data Systems Corporation.
10.20 Authorization Letter dated December 16, 1996 by and between Allin
Communications Corporation and Electronic Data Systems Corporation.
11 Computation of Earnings per Share.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
60
<PAGE>
Exhibit 10.18
MASTER AGREEMENT
THIS MASTER AGREEMENT is dated December 16, 1996 by and between Electronic Data
Systems Corporation, a Delaware corporation ("EDS"), and Allin Communications
Corporation, a Delaware corporation ("Customer").
WITNESSETH:
-----------
WHEREAS, Customer desires to obtain from EDS, and EDS desires to provide to
Customer, certain services and resources as may be mutually agreed upon by
Customer and EDS from time to time and documented in separate authorization
letters; and
WHEREAS, Customer and EDS desire to establish a mechanism for the execution of
such authorization letters and to agree upon certain standard provisions that
will govern each such authorization letter;
NOW, THEREFORE, EDS and Customer agree as follows:
1. Scope of Master Agreement. This Master Agreement establishes the standard
-------------------------
provisions that will apply to services and resources provided by EDS to
Customer as mutually agreed upon from time to time by Customer and EDS and
confirmed in a written authorization letter (an "Authorization Letter")
entered into by Customer and EDS pursuant to the provisions of this Master
Agreement.
2. Term. The term of this Master Agreement will commence on the date hereof
----
and will continue for an indefinite period thereafter subject to the right of
either party to terminate this Master Agreement as provided herein.
Notwithstanding the termination of this Master Agreement for any reason, each
Authorization Letter entered into prior to the effective date of such
termination will remain in full force and effect in accordance with the
provisions thereof, including each of the provisions of this - Master
Agreement incorporated by reference into such Authorization Letter, unless
such Authorization Letter is also terminated in accordance with the terms of
this Master Agreement or the Authorization Letter, as applicable.
3. Authorization Letters. All services and resources provided to Customer by
---------------------
EDS pursuant to this Master Agreement will be provided in accordance with
Authorization Letters entered into by Customer and EDS from time to time
during the term of this Master Agreement, each of which will include the
following:
(c) A reference to this Master Agreement, which reference will be deemed to
incorporate all applicable provisions of this Master Agreement.
(b) The date as of which the provisions of the Authorization Letter will be
effective and, if applicable, the term or period of time during which EDS
will provide services or resources to Customer pursuant to the
Authorization Letter.
(c) A description of the services, deliverables, or resources to be provided
by EDS to Customer pursuant to the Authorization Letter, including the
location or locations at which such services, deliverables or resources
are to be provided.
(d) A description of the responsibilities of Customer relating to the
Authorization Letter, including any facilities, equipment or other support
to be provided to EDS by Customer in connection with the Authorization
Letter.
(e) A designation of the individuals who will have management responsibility
for EDS and for Customer, respectively, in connection with the
Authorization Letter.
1
<PAGE>
(f) A description of the charges to be paid by Customer for the services or
resources provided by EDS pursuant to the Authorization Letter and the
schedule on which such amounts will be invoiced to Customer by EDS.
(g) Any additional provisions applicable to the services or resources to be
provided pursuant to the Authorization Letter that are not otherwise set
forth in this Master Agreement or that are exceptions to the provisions
set forth in this Master Agreement.
No Authorization Letter will become effective until it has been executed by
authorized representatives of Customer and EDS. A form of Authorization
Letter is attached as Schedule B. In connection with each Authorization
----------
Letter, Customer and EDS will enter into separate written work orders (each a
"Work Order", and collectively, the "Work Orders") as more particularly
described in the applicable Authorization Letter.
4. Conflicts. In the event of any express conflict or inconsistency between
---------
the provisions of an Authorization Letter or Work Order and the provisions of
this Master Agreement, the provisions of the Authorization Letter or Work
Order will control with respect to the interpretation of that Authorization
Letter or Work Order; provided, however, that the provisions of the
Authorization Letter or Work Order will be so construed to give effect to the
applicable provisions of this Master Agreement to the fullest extent
possible.
5. Payment Terms. All amounts payable to EDS under each Authorization Letter
-------------
for which a time of payment is not otherwise specified will be due and
payable within thirty days after invoice date. Any amount not paid when due
will thereafter bear interest until paid at a rate of interest per annum
equal to the lesser of the then current prime rate of interest as established
from time to time by Citibank, N.A., or the maximum rate of interest allowed
by applicable law.
6. Ownership Rights. Unless otherwise agreed upon by the parties in writing,
----------------
each party will continue to own all information, documentation, materials,
products, services, patents, copyrights and trade secrets (the latter of
which includes, for example, all confidential proprietary software, software
development tools, know-how, methodologies, processes, technologies, or
algorithms) used in the performance of such party's obligations under this
Master Agreement any Authorization Letter or any Work Order and which were
owned or licensed by such party as of the date of this Master Agreement or
are acquired or licensed independently of this Master Agreement or any
Authorization Letter or Work Order subsequent to the date hereof, and no
licenses are granted hereunder to the other party except as needed by the
other party to perform its obligations under this Master Agreement, any
Authorization Letter or Work Order. All inventions and works, including
software, developed in connection with this Master Agreement any
Authorization Letter or Work Order and the worldwide intellectual property
rights therein, which are made or conceived through any efforts paid for by
Customer will be the property of Customer. EDS will promptly disclose to
Customer in writing all such inventions and works, including software,
(whether patentable, subject of copyright protection or not) and EDS will
provide that its employees and those of any subcontractor engaged on or after
the date hereof (or advised in writing of existing subcontractors who are not
similarly obligated) are under obligation to assign such intellectual
property rights so that, upon the request of Customer, such worldwide
intellectual property rights will be assigned to Customer. Each party (a)
will be free to use the ideas, concepts and know-how which are developed by a
party in the course of performing its obligations under this Agreement to the
extent the same do not constitute "Confidential Information" as defined in
Section 9 and are retained by such party's employees solely in intangible
form, and (b) each party may, subject to Section 9 and Section 6, acquire,
license, develop for itself or others, or have others develop for it, similar
technology performing the same or similar functions as the technology that
may result from the performance of such party's obligations under this Master
Agreement or any Authorization Letter (and any Work Order issued under any
Authorization Letter), and may market and distribute such technology. EDS
agrees that during the term of this Master Agreement, EDS will not use any of
its own employees who have performed services under this Master Agreement or
any Authorization Letter (and any Work Order issued under any Authorization
Letter) on any other projects involving interactive television or digital
commercial or consumer photography within the Global Travel Services Industry
Strategic Business Unit and, furthermore, without the prior written consent
of Customer, EDS will not reverse engineer or have others reverse engineer
any software owned or licensed by Customer at any time during the term of
this Master Agreement or thereafter. The provisions of this Section shall
survive the expiration or termination of this Master Agreement and all
Authorization Letters and Work Orders.
2
<PAGE>
7. Personnel. The personnel resources being made available to Customer by EDS
---------
under any Authorization Letter will be and remain employees of EDS, at all
times during the term of that Authorization Letter and thereafter. EDS will
provide for and pay all compensation, and other employee-related benefits to
which such personnel resources may be entitled from time to time as a result
of their employment with EDS together with all applicable employment taxes in
connection therewith. EDS at its sole expense shall maintain all reasonably
necessary insurance coverage in respect of all personnel assigned to perform
work under any Authorization Letter or Work Order, all as specified in the
particular Authorization Letter or Work Order. During the term of each
Authorization Letter and for a period of two years thereafter, neither party
will, without the prior written consent of the other, offer employment to or
employ any person employed then or within the preceding twelve months by the
other. To the extent reasonably-possible, EDS will maintain continuity in
the EDS personnel assigned to perform work under this Mater Agreement. In
the event that Customer is not satisfied with the performance of any EDS
personnel Customer will discuss its concerns directly with the EDS account
manager, who will promptly investigate the matter and take such action as
such EDS account manager deems appropriate in accordance with EDS policies
and procedures. EDS hereby agrees to indemnify, defend and hold Customer,
its successors and assigns harmless from and against any and all liabilities,
suits, damages, judgments, awards, penalties, and any other liabilities
(including reasonable attorneys' fees, costs and expenses in connection
therewith) suffered or incurred by Customer by reason of, arising out of or
in connection with the employment status (or purported employment status) of,
and all compensation, benefits and other amounts claimed to be payable to or
in respect of, any personnel assigned by EDS to perform services for Customer
under this Master Agreement, any Authorization Letter or any Work Order. The
provisions of this Section shall survive the expiration or termination of
this Master Agreement and all Authorization Letters and Work Orders.
8. Relationship of Parties. EDS, in furnishing services and resources to
-----------------------
Customer pursuant to any Authorization Letter, is acting only as an
independent contractor and does not undertake by such Authorization Letter or
otherwise to perform any obligation of Customer, whether regulatory or
contractual, or to assume any responsibility for Customer's business or
operations. Customer acknowledges and agrees that EDS' sole responsibility
and obligation under each Authorization Letter is to make available to
Customer the EDS services and resources as provided therein and to assure
that the delivery and performance of such services and resources conforms
with the standards of performance applicable to such Authorization Letter and
each Work Order thereunder, and that Customer will have sole responsibility
for the management and performance of all Customer services and projects for
which the EDS services and resources are being made available thereunder or
otherwise may be utilized.
9. Confidentiality. Except as otherwise provided in a particular Authorization
---------------
Letter, EDS and Customer each agree that all confidential information
communicated by one party to the other (including, without limitation, the
terms of this Master Agreement and each Authorization Letter and Work Order),
whether before, or after the effective date of that Authorization Letter or
Work Order, will be received in strict confidence, will be disclosed only to
those having a need to know under the applicable Authorization Letter or Work
Order, will be used only for purposes of that Authorization Letter or Work
Order, and, except as otherwise provided in that Authorization Letter or Work
Order, will not be disclosed by the recipient party to any others without the
prior written consent of the other. Each party will take all reasonable
precautions to prevent the disclosure to other parties of such information.
For purposes of this Section 9, "Confidential Information" will not include
information which is (i) already known by the recipient party without an
obligation of confidentiality to the other, (ii) publicly known or becomes
publicly known through no unauthorized act of the recipient party, (iii)
rightfully received by the recipient party from a third party without an
obligation of confidentiality to the other, (iv) independently developed by
the recipient party by persons without access to or use of, in whole or in
part, the other's confidential information, (v) disclosed without similar
restriction to a third party by the party owning the confidential
information; or (vi) 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 promptly upon becoming aware thereof,
and if possible, prior to any such disclosure. The provisions of this
Section will survive the expiration or termination of the Master Agreement
and all Authorization Letters and Work Orders. EDS and Customer will each
use best efforts to ensure that all tangible for of Confidential Information,
including all copies, will be returned to the owner or destroyed upon the
expiration or termination of this Master Agreement, any Authorization Letter
or Work Order.
3
<PAGE>
10. WARRANTY OF PERFORMANCE/DISCLAIMER OF WARRANTIES. EDS represents, warrants,
------------------------------------------------
and covenants to Customer that all services and resources provided by EDS
pursuant to an applicable Authorization Letter or Work Order will be
delivered and performed in conformance with the standards of performance set
forth in such Authorization Letter or Work Order if any. EXCEPT AS EXPRESSLY
PROVIDED IN A PARTICULAR AUTHORIZATION LETTER, EDS DISCLAIMS ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, IN FACT OR BY OPERATION OF LAW OR OTHERWISE,
CONTAINED IN OR DERIVED FROM THIS MASTER AGREEMENT, ANY AUTHORIZATION
LETTER, ANY OTHER DOCUMENTS REFERENCED IN THIS MASTER AGREEMENT OR ANY
AUTHORIZATION LETTER, OR ANY OTHER MATERIALS OR COMMUNICATIONS WHETHER ORAL
OR WRITTEN, INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
11. Limitation of Liability. If EDS is held liable to Customer for any matter
-----------------------
arising out of, under, or in connection with this Master Agreement and/or
any Authorization Letter (and/or any Work Order issued under any
Authorization Letter), based on any theory of legal or equitable liability
(including contract, equity, tort, negligence, breach of warranty or
otherwise), the amount of damages recoverable against EDS for any events,
acts, omissions under this Master Agreement and all Authorization Letters
(and any Work Order issued under any Authorization Letter), will not exceed,
in the aggregate for all events giving rise to liability of EDS, the amounts
payable to EDS under this Master Agreement, all Authorization Letters, and
all Work Orders for the six month period prior to the month in which the
event giving rise to the liability occurred (the "Aggregate Damages Limit");
provided, however, that for the period from the Effective Date to the date
twelve months from the Effective Date for all events giving rise to
liability of EDS, EDS' aggregate liability to Customer will be limited to an
amount equal to the greater of (a) the Aggregate Damages Limit, or (b)
$500,000. Subject to the Aggregate Damages Limit and the limit described in
the preceding sentence, damages payable by EDS to Customer will include
direct actual damages of Customer, which direct actual damages may include
amounts payable by Customer to third parties and may include amounts for
Customer's lost revenue attributable to a particular installation with
respect to which EDS' liability arose. In no event will the measure of
damages payable by EDS to Customer include, nor will EDS be liable for, any
amounts for loss of savings: or indirect, consequential, or punitive damages
of any kind. No claim and demand for arbitration or cause of action which
arose out of an event or events which occurred more than two years prior to
the filing of a demand for arbitration or suit alleging a claim or cause of
action may be asserted by either party against the other party. EDS and
Customer each acknowledge that the limitations and exclusions contained in
this Section have been the subject of active and complete negotiation
between the parties and represent the parties' agreement based upon the
level of risk to EDS and Customer associated with their respective
obligations and the payments to be provided to EDS for performance of its
obligations. The limitations set forth in this Section will not apply with
respect to damages occasioned by the gross negligence or willful misconduct
of EDS or its employees or to claims by Customer under the indemnity
provision of Section 7 of this Master Agreement. The provisions of this
Section will survive the expiration or termination: of this Master
Agreement, all Authorization Letters, and all Work Orders.
12. Informal Dispute Resolution. In the event of any dispute or controversy
---------------------------
between the parties hereto of any kind or nature, upon the written request
of either party, each of the parties will appoint a designated
representative who is one of its officers or senior managers whose task it
will be to meet for the purpose of resolving such dispute or controversy.
Such representatives will discuss the dispute or controversy and negotiate
in good faith in an effort to resolve the dispute or controversy without the
necessity of any formal proceeding relating thereto. Except where temporary
injunctive relief is sought, no formal proceedings for the resolution of
such dispute or controversy may be commenced until either or both of the
designated representatives conclude in good faith that amicable resolution
through continued negotiation of the matter in issue is not likely to occur.
13. Arbitration. If the parties are unable to resolve any dispute or
-----------
controversy in accordance with the provisions of Section 12, the parties
agree as follows: any dispute, controversy or claim that in any way relates
to this Master Agreement or any Authorization Letter or Work Order will, on
the written demand of either party to the other, be determined and settled
by a panel of one or more arbitrators in accordance with the procedures
described in this Section and the Commercial Arbitration Rules of the
American Arbitration Association. Each party will be
4
<PAGE>
entitled to seek temporary injunctive relief from any court having
jurisdiction regardless of whether arbitration proceedings have been
initiated under this Section, but the final resolution of any such dispute,
controversy or claim will be determined by arbitration in accordance with
this Section. Any award rendered will be final and conclusive and any
judgment thereon may be enforced in any court having jurisdiction. The
following procedures will be followed in, connection with an arbitration
proceeding under this Section: (a) the American Arbitration Association will
allow reasonable discovery pursuant to the rules then in effect under the
Federal Rules of Civil Procedure for a period not to exceed 60 days, but
only to the extent deemed appropriate in light of the purposes of
arbitration in accomplishing fair, speedy and cost effective resolution of
disputes; (b) the parties shall share equally the fees, costs, and expenses
of the arbitrators, unless the arbitrators modify the allocation of fees,
costs, and expenses because they have determined that fairness dictates
other than an equal allocation between the parties. To the extent that a
dispute over payment is the subject of an arbitration proceeding hereunder,
Customer shall pay such disputed payments up to an aggregate of $200,000 for
all such disputed payments at any one time, into an escrow account,
structured by agreement of the parties, or as ordered by the arbitrators if
agreement cannot be reached, for distribution in accordance with the
arbitrators' award. Notwithstanding the foregoing, the fact that arbitration
has or may be invoked will not impair the exercise of any termination rights
under this Master Agreement or any Authorization Letter or the right of any
party to seek injunctive or other equitable relief from a court of competent
jurisdiction. The provisions of this Section will survive the expiration or
termination of this Master Agreement, all Authorization Letters and all Work
Orders.
14. Termination for Cause. If either party defaults in the performance of any
---------------------
of its material obligations under any Authorization Letter or under any Work
Order entered into pursuant to any such Authorization Letter (other than
Customer's payment obligations) and fails to cure, in all material respects,
such default within thirty days after receipt of written notice of such
default, then the party not in default may terminate that Authorization
Letter or Work Order, as applicable, together with, at its option, any or
all other Authorization Letters or Work Orders then in effect and this
Master Agreement, by written notice to the other setting forth the date on
which such termination will be effective.
15. Termination for Nonpayment. If Customer fails to pay to EDS any amounts
--------------------------
when due and payable under any Authorization Letter or Work Order, as
applicable, and fails to cure such nonpayment within thirty days after
receipt of written notice thereof, EDS may terminate that Authorization
Letter or Work Order, as applicable, together with, at its option, any or
all other Authorization Letters or Work Orders then in effect and this
Master Agreement, by written notice to Customer setting forth the date on
which such termination will be effective; provided, however, that if
Customer has disputed a payment and such dispute is in the informal dispute
resolution or arbitration process described above, EDS may not terminate
until such payment dispute has been resolved in accordance with such
informal dispute resolution or arbitration process.
16. Other Termination Rights. At any time following an election by EDS or Allin
------------------------
to terminate that certain Joint Marketing Agreement dated the date hereof by
and between Allin and EDS (the "Joint Marketing Agreement") pursuant to the
provisions of Sections 8(a), (b) or (d) of the Joint Marketing Agreement,
Customer may terminate this Master Agreement and any or all Authorization
Letters or Work Orders then in effect by providing written notice to EDS
setting forth the date on which such termination will be effective.
Notwithstanding anything set forth in this Master Agreement or the Joint
Marketing Agreement to the contrary, if Customer terminates the Joint
Marketing Agreement for convenience as permitted under Section 8(c) thereof,
such termination shall not cause a Deficiency Event hereunder and Customer
may not terminate this Master Agreement or any Authorization Letter based
upon such termination for convenience. In addition, EDS shall be obligated
to promptly provide to Customer any information related to EDS products and
services with respect to interactive television and digital commercial, or
consumer photography which (i) appear in an EDS Corporate Announcement or
(ii) is known or reasonably should be known by a Division Vice President of
the Global Travel Services Industry Strategic Business Unit, which
information is not restricted from disclosure to Customer (the information
described in (i) and (ii) shall be collectively referred to as the
"Disclosed Information"). Upon receipt of the Disclosed Information or upon
receipt of information otherwise obtained by Customer, if Customer
reasonably concludes that the products and services of EDS set forth in the
Disclosed Information or in information otherwise obtained by Customer,
directly compete with Customer's existing business products and services,
including products and services which Customer is then actively marketing
even though not yet in operation or application, then Customer may elect to
terminate this Master Agreement and any
5
<PAGE>
or all Authorization Letters or Work Orders then in effect by providing
written notice to EDS setting forth the date on which such termination will
be effective. Notwithstanding anything set forth in this Master Agreement or
the Joint Marketing Agreement to the contrary, Customer's sole and exclusive
remedy for EDS' failure to satisfy the Allin Targets under the Joint
Marketing Agreement or a breach by EDS of the provisions of this Section 16,
shall be Customer's right to terminate this Master Agreement and any or all
Authorization Letters or Work Orders then in effect.
17. Transition Assistance. Commencing on the date of any notice of termination
---------------------
under this Master Agreement or any Authorization Letter or Work Order, EDS
will provide such termination assistance as Customer reasonably requests to
facilitate the transfer of responsibility for the services to Customer.
Notwithstanding the foregoing, EDS will not be obligated to provide the
foregoing transition assistance if EDS terminates this Master Agreement or
any Authorization Letter or Work Order for cause or for Customer's
nonpayment. Unless the services are being transitioned to a third party
vendor, EDS will assist Customer in the preparation and implementation of a
transition plan. If the services are being transferred to a third party
vendor, EDS will reasonably cooperate with and assist such third party
vendor in connection with the preparation and implementation of a transition
plan by such third party vendor. EDS will charge Customer for termination
assistance in accordance with the resources utilized at the rates in effect
under each particular Authorization Letter or Work Order which has been
terminated. Such termination charges will be due on the first day of each
month following the Termination Date and as a condition to EDS' obligation
to provide termination assistance to Customer during that month an amount
equal to EDS' reasonable estimate of the total amount if any, payable to EDS
under this Section for such termination assistance for the month. In each
subsequent month the EDS and Customer will equitably adjust the termination
assistance charges to account for any overpayment or underpayment.
18. Subcontractors. To the extent that EDS desires to subcontract any of its
--------------
obligations under this Master Agreement, it will specify to Customer the
identity, background and qualifications of the proposed subcontractor and
the specific components of the services to be subcontracted. Customer will
have the right to approve the use of each proposed subcontractor.
Notwithstanding the foregoing, EDS may, in the ordinary course of business,
subcontract for third party services or products that (a) are not solely
dedicated to Customer, (b) are not material to any material function
constituting a part of the services and (c) do not result in a material
change in the way EDS conducts its business. EDS will not disclose any
Confidential Information of Customer to any subcontractor unless and until
such subcontractor has agreed in writing to protect the confidentiality of
such Confidential Information in a manner substantially equivalent to that
required of EDS under this Master Agreement and then only to the extent
necessary for such subcontractor to perform those Services subcontracted to
it. EDS will remain responsible for the obligations performed by any of its
subcontractors to the same extent as if such obligations were performed by
EDS employees.
19. Force Majeure. Each party will be excused from the performance of its
-------------
obligations under any Authorization Letter (other than payment obligations)
for any period and to the extent that it is prevented from performing, in
whole or in part, as a result of delays caused by the other or any act of
God, civil disturbance, court order, labor dispute, third party
nonperformance, or other cause beyond its reasonable control, and such
nonperformance will not be a default thereunder or grounds for termination
thereof.
20. Notices. All notices, requests, claims, demands, designations, approvals,
-------
consents, acceptances and other communications under this Master Agreement
or any Authorization Letter 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, set forth in Schedule A.
----------
Any notice and other communication under this Master Agreement or
any Authorization Letter that is given as provided in this Section 20, (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
6
<PAGE>
giving the other party notice of the new address, facsimile number, or
designee and the date upon which it will become effective.
21. Binding, Nature and Assignment. This Master Agreement and each
------------------------------
Authorization Letter Will be binding on the parties hereto and their
respective successors and assigns; provided, however, that neither party
may, nor will it have the power to, assign this Master Agreement or any
Authorization Letter without the prior written consent of the other, except
that Customer may assign to any wholly owned subsidiary of Customer the
benefits but not the payment obligations of this Master Agreement or any
Authorization Letter or Work Order.
22. Headings. The section headings used in this Master Agreement and each
--------
Authorization Letter are for reference and convenience only and will not
enter into the interpretation hereof or thereof.
23. No Third Party Beneficiaries. The parties agree that this Master Agreement
----------------------------
and each Authorization Letter are for the benefit of the parties hereto and
are not intended to confer any rights or benefits on any third party,
including any employee or customer of either party hereto, and that there
are no third party beneficiaries, as to this Master Agreement or any
Authorization Letter or any part or specific provision of this Master
Agreement or any Authorization Letter.
24. Severability. If any provision of this Master Agreement or any
------------
Authorization Letter is declared or found to be illegal, unenforceable or
void, then both parties will be relieved of all obligations arising under
such provision, but only to the extent that such provision is illegal,
unenforceable or void, it being the intent and agreement of the parties that
this Master Agreement or that Authorization Letter, as applicable, will be
deemed amended by modifying such provision to the extent necessary to make
it legal and enforceable while preserving its intent or, if that is not
possible, by substituting therefor another provision that is legal and
enforceable and achieves the same objectives.
25. Attorneys' Fees. If any legal action or other proceeding is brought for the
---------------
enforcement of an arbitration award pursuant to this Master Agreement or any
Authorization Letter, or because of an alleged dispute, breach or default in
connection with any of the provisions of this Master Agreement or any
Authorization Letter, the prevailing party will be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
26. Entire Agreement. This Master Agreement and each Authorization Letter,
----------------
including any schedules or exhibits referred to herein or therein and
attached hereto or thereto, each of which is incorporated herein or therein,
as applicable, for all purposes, constitutes, as of the effective date of
this Master Agreement or that Authorization Letter, as applicable, the
entire agreement between the parties hereto as it relates to the subject
matter hereof or thereof, and there are no representations, understandings
or agreements relative hereto or thereto which are not fully expressed
herein or therein. No change, waiver or discharge of this Master Agreement
or any Authorization Letter will be valid unless in writing and executed by
the party against whom such change, waiver or discharge is sought to be
enforced. This Master Agreement and each Authorization Letter may be amended
only by an amendment in writing signed by the parties.
27. Governing Law. This Master Agreement, each Authorization Letter, and each
-------------
Work Order will be governed by and construed in Accordance with the laws,
other than choice of law rules, of the Commonwealth of Pennsylvania.
7
<PAGE>
IN WITNESS WHEREOF, EDS and Customer each have caused this Master Agreement to
be signed and delivered by its duly authorized representative.
ELECTRONIC DATA SYSTEMS ALLIN COMMUNICATIONS
CORPORATION CORPORATION
By: /s/ D. L. Stolkey By: /s/ Richard W. Talarico
--------------------------------- -------------------------------
Printed Printed
Name: D. L. Stolkey Name: Richard W. Talarico
------------------------------- ----------------------------
Date: 12/20/96 Date: 12/16/96
------------------------------- ----------------------------
8
<PAGE>
MASTER AGREEMENT
SCHEDULE A
----------
1. Notice Addresses:
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
A-1
<PAGE>
SCHEDULE B
FORM OF AUTHORIZATION LETTER
[EDS LETTERHEAD]
[Date]
Allin Communications Corporation
300 Greentree Commons
381 Mansfield Avenue
Pittsburgh, Pennsylvania 15220
Attention: R. Daniel Foreman
Re: Authorization Letter No. [ ]
Dear Mr. Foreman:
This letter will confirm the mutual understanding and agreement of Allin
Communications Corporation ("Customer") and Electronic Data Systems Corporation
("EDS") as to the terms on which EDS will provide to Customer the services and
resources described in this letter, which terms are as follows:
1. This letter is entered into under the provisions of the Master Agreement,
dated effective as of December 16, 1996, between Customer and EDS (the
"Master Agreement"), and, except as otherwise provided in this letter, all
applicable provisions of the Master Agreement are incorporated into this
letter by this reference.
2. The term of this letter will commence on [ ] (the "AL Effective
Date"), and, unless earlier terminated as provided in this letter or in the
Master Agreement, will continue thereafter until [ ]. The term of
this letter may be extended by the mutual written agreement of the parties.
3. During the term of this letter, EDS will provide to Customer the services
and resources described in the attached Exhibit I. The specific allocation
of the services and resources will be set forth in separate written work
orders (each a "Work Order") entered into from time to time by the parties
during the term of this Authorization Letter. Each Work Order shall contain
the following: (a) a Statement of Work describing the services to be
performed, resources to be allocated by EDS, specified performance criteria,
and a list of appropriate deliverables with delivery dates; (b) a price
schedule setting out both the amount and schedule for payment and any
modifications from the payment terms as listed in Exhibit III; (c) a
designation of the Team Leader, as appropriate, and the Customer Team
Leader, each of whom shall function as the point of contact for the
respective parties for the services and resources identified in the Work
Order; (d) any other terms and conditions appropriate to the services and
resources provided under a given Work Order. The EDS individual who will
have management responsibility for EDS in connection with this letter is
also designated in the attached Exhibit I.
4. In connection with the provision of those EDS services and resources,
Customer will provide to EDS the Customer support services and resources
described in the attached Exhibit II. The specific Customer support services
and resources will be set forth in the applicable Work Order. The Customer
individual who will have management responsibility for Customer in
connection with this letter is also designated in the attached Exhibit II.
B-1
<PAGE>
5. For the services and resources provided by EDS to Customer under this
letter, Customer will pay to EDS the amounts specified in the attached
Exhibit III. The specific compensation to be paid to EDS by Customer, for
the services or resources provided by EDS pursuant to a Work Order, will be
expressly set forth in the Work Order.
6. The services and resources provided to Customer by EDS under this letter
will also be subject to the additional provisions set forth in the attached
Exhibit IV.
7. In the event of any express conflict or inconsistency between the provisions
of a Work Order and the provisions of this Authorization Letter, the
provisions of the Work Order will control with respect to the interpretation
of that Work Order; provided, however, that the provisions of the Work Order
will be so construed to give effect to the applicable provisions of the
applicable Authorization Letter and Master Agreement to the fullest extent
possible.
Please indicate your agreement to the foregoing by signing both copies of
this letter and returning one fully-executed copy to EDS.
Sincerely,
Electronic Data Systems Corporation
By: _______________________________
Name: _____________________________
Title: ______________________________
Date: ______________________________
ACCEPTED AND AGREED:
- -------------------
Allin Communications Corporation
By: __________________________________
Name: _______________________________
Title: _________________________________
Date: _________________________________
B-2
<PAGE>
Exhibit 10.19
JOINT MARKETING AGREEMENT
THIS JOINT MARKETING AGREEMENT, dated as of January 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 SYSTEMS CORPORATION ("EDS"), a Delaware corporation
with offices at 5400 Legacy Drive, Plano, Texas 75024.
WHEREAS, EDS is in the business of providing a full range of information
technology services, including consulting, systems development, systems
integration, systems installation and implementation and systems management
("EDS Services") for a variety of industries; and
WHEREAS, Allin is in the business of providing interactive television,
information technology, infrastructure, video entertainment systems, digital
imaging systems and other services (the " Allin Services") for a variety of
industries, including the travel and leisure industry, sports industry, and
commercial and event photography industry; and
WHEREAS, EDS 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 by jointly marketing the Allin Services and EDS
Services and promoting transactions all in the manner and on the terms and
provisions herein provided.
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 by 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. In connection with the
joint marketing of Allin Services and EDS Services described above, the
parties intend to promote transactions in which EDS and Allin will work
jointly in evolving new application extensions, and integrating existing
third party applications for the Allin Platform to integrate additional
services for the markets served by the GTSI Business Unit. Allin's suite of
extensions include: ITV, ticketing, imaging, video server, and Internet
access. Future services that EDS and Allin may look to integrate, include,
financial systems, purchasing/payables, marketing systems, reservations,
property management, point of sale, automated check-in/boarding, data
warehousing/on-line analytical processing, and travel agent/consumer product
preview and purchasing.
2. Agreement. During the term of this Agreement, EDS and Allin will have the
---------
respective rights and obligations set out in this Agreement.
3. Term. The term of this Agreement will commence on the date of this 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 intends to market the Allin
--------------------
Platform during the term of this Agreement as its preferred technology
platform for interactive television prospects and corporate and consumer
digital photography prospects in the travel services industries and agrees to
propose the Allin Platform to all such prospects for whom the GTSI Business
Unit believes that the Allin Platform is appropriate. In connection with any
sales of the Allin Platform by Allin or in connection with this
1
<PAGE>
Agreement, Allin hereby affords EDS an exclusive right of first offer to
provide the installation services for all such transactions. EDS and Allin
agree to negotiate in good faith relating to the terms and conditions for
such installation services. If EDS notifies Allin in writing that EDS is not
interested in pursuing such opportunity for installation services then Allin
will not be subject to any further restrictions under this Section 4 and will
be free to offer such opportunity to a third-party. In addition, the GTSI
Business Unit will actively promote and educate other EDS strategic business
units, strategic service units, and other divisions with respect to the
functionality and uses of the Allin Platform for interactive television
prospects and corporate and consumer digital photography prospects.
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. In such cases, the GTSI Business Unit will notify Allin of the
opportunity with any such third party, subject to confidentiality
restrictions applicable to EDS and Allin, and shall advise Allin of the basis
for the GTSI Business Unit not proposing the Allin Platform for such
interactive television prospect or corporate and consumer digital photography
prospect as the technology Platform for such third party. Except as set forth
in the immediately preceding sentence, EDS will have no duty or obligation
under this Agreement to Allin with respect to such transactions including,
without limitation, any duty or obligation to compensate Allin in connection
with such transactions.
5. Revenue Targets/Incentive Payments. The parties anticipate that, during each
----------------------------------
consecutive 12-month period (each an "Allin Target Period") during the term
of this Agreement commencing with the date hereof, directly as a result of
the marketing relationship established hereunder, Allin will enter into one
or more binding agreements providing for an aggregate of not less than
$80,000,000 in payments to Allin by third parties during the term of such
agreement or agreements (for each Allin Target Period, the "Allin Target").
In addition, EDS and Allin anticipate that during the term of this Agreement
commencing with the date hereof, as a result of marketing efforts by Allin
and/or marketing efforts by Allin and other third parties, Allin will enter
into one or more binding agreements providing for payments to Allin by such
third-party customers in the global travel services industry during the term
of such agreement or agreements and any such revenues will be counted towards
EDS' satisfaction of the applicable Allin Target. In connection with the
activities described above resulting in payments to Allin or its affiliates
by third parties, Allin will pay EDS the following incentive payments
(collectively, the "Incentive Payments"): (i) for those activities resulting
in binding agreements with an aggregate contract value of greater than
$60,000,000 but less than $80,000,000, Allin will pay EDS an amount equal to
1% of the aggregate value of those agreements in excess of $60,000,000, up to
$80,000,000 and (ii) for those activities resulting in binding agreements
with an aggregate contract value of greater than $80,000,000, Allin will pay
to EDS an amount equal to 1.15% of the aggregate value of those agreements in
excess of $80,000,000. The attainment or non-attainment of an Allin Target
and the corresponding value attributed to such agreement will be subject to
the reasonable determination of Allin based upon the nature of each third-
party agreement, the number of units and/or services which are the subject of
such agreement or agreements and reasonable projections based upon Allin's
prior experience with similar projects. The Incentive Payments will be
remitted to EDS within sixty days of Allin's execution of the third party
agreements resulting in the satisfaction of the Incentive Payment thresholds
described above. Subject to the provisions of Section 7 of this Agreement,
Allin will provide to EDS reasonable detail regarding its calculation of
amounts in respect of each Allin Target and copies of the subject third-party
agreements. In addition, Allin agrees to provide EDS and its auditors
reasonable access to the books and records of Allin and its affiliates to
enable them to conduct audits of Allin in connection with Allin's obligations
under this Agreement, including verifying the accuracy of (i) the value Allin
attributes to each third party agreement and (ii) the amount of the Incentive
Payments. Within ninety (90) days of the Effective Date and annually
thereafter, the parties will attempt, in good faith, to formulate a marketing
and sales strategy for the EDS Services and Allin Services.
2
<PAGE>
6. Marketing Support.
-----------------
(a) Marketing Plan. Within ninety (90) days of the Effective Date, EDS and
--------------
Allin will, in good faith, attempt to establish a plan to market the
Allin Services and EDS Services under a joint marketing plan (the
"Marketing Plan"). The Marketing Plan will:
(i) identify possible business opportunities for Allin Services and EDS
Services as identified by either EDS or Allin, as well as any other
mutual business opportunities;
(ii) set forth the responsibilities of EDS and- Allin with respect to
business opportunities and the development of such opportunities;
(iii) set forth a marketing and sales strategy with respect to business
opportunities;
(iv) identify trade shows and exhibits which will enhance the
abilities of EDS and Allin and their respective personnel to
market the Allin Services and the EDS Services to potential
customers; and
(v) provide for a means to promote effectiveness and to avoid
duplication of sales efforts in the marketplace between ED S and
Allin.
The Marketing Plan as finally adopted by EDS and Allin may be modified
from time to time by the mutual agreement of EDS and Allin.
(a) Joint Price Modeling. EDS and Allin agree to cooperate in the development
--------------------
of joint price modeling for the provision of the Allin Services and EDS
Services.
(b) Promotional Materials. EDS and Allin shall cooperate with each other in
---------------------
preparing materials to promote the Allin Services and EDS Services,
including, but not limited to, brochures, slides and other presentation
materials ("Promotional Materials"). In preparing Promotional Materials,
each party agrees, in describing the relationship between the parties
hereto, to use a term such as "marketing relationship" but not to use
terms such as "partnership," "joint venture," "affiliate," "agent,"
"representative," or similar terms that suggest either (a) a formal
business organization or structure of any kind has been created by the
parties, or (b) that one party has the power or authority to bind or
commit the other. Allin hereby grants to EDS a limited, non-exclusive,
non-transferable license to use the names "Allin Communications
Corporation," and any existing or future Allin trademarks and service
marks including, for example, "SeaVision" and "Allin" (collectively the
"Allin Marks") solely in such Promotional Materials. This license shall
continue until termination of this Agreement. Allin further grants EDS
the right to copy or reproduce as many copies of these materials as
necessary to promote the solicitation of proposals. EDS will submit a
copy of each item of Promotional Material to Allin for its reasonable
approval before initial use by EDS, including initial use of revisions or
updates to previously, approved materials. EDS understands and agrees
that (i) nothing herein shall give EDS any right, title or interest in and
to the Allin Marks, except the limited use rights set forth in this
Section, and (ii) the Allin Marks are and shall at all times remain the
sole and exclusive property of Allin and all use of the Allin Marks by EDS
shall inure to the benefit of Allin. EDS agrees that Allin shall have the
right to examine EDS' use of the Allin Marks to determine whether EDS is
in compliance with the use of such marks pursuant to the terms of this
Section. EDS hereby grants to Allin a limited, non-exclusive, non-
transferable license to use the names "Electronic Data Systems
Corporation," "EDS," and any existing or future EDS trademarks and service
marks (collectively the "EDS Marks") solely in such Promotional Materials.
This license shall continue until termination of this Agreement. EDS
further grants Allin the right to copy or reproduce as many copies of
these materials as necessary to promote the solicitation of proposals.
Allin will submit a copy of each item of Promotional Material to EDS for
its reasonable approval before initial use by Allin, including initial use
of revisions or updates to previously approved materials. Allin
understands
3
<PAGE>
and agrees that (i) nothing herein shall give Allin any right,
title or interest in and to the EDS Marks, except the limited use rights
set forth in this Section, and (ii) the EDS Marks are and shall at all
times remain the sole and exclusive property of EDS and all use of the EDS
Marks by Allin shall inure to the benefit of EDS. Allin agrees that EDS
shall have the right to examine Allin's use of the EDS Marks to determine
whether Allin is in compliance with the use of such marks pursuant to the
terms of this Section.
(c) Expenses. In consideration of the mutual benefits anticipated from a
--------
successful proposal, each party shall bear its own respective costs and
expenses incurred in preparing any proposal hereunder.
2. 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 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 it 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 party 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.
3. Termination.
-----------
(g) For Default. Except as otherwise provided herein, either party may
-----------
terminate this Agreement if the other commits any material breach of its
obligations hereunder (except for a default for EDS' failure to satisfy
the revenue targets set forth herein, which will be governed by subsection
(d) below) and fails within thirty (30) days after receipt of notice
describing such breach to initiate appropriate action and to diligently
pursue the cure of such breach.
(h) Elective Termination by EDS. EDS shall be entitled to terminate this
---------------------------
Agreement at any time upon one hundred twenty (120) days prior written
notice to Allin.
(i) Elective Termination by Allin. Allin shall be entitled to terminate this
-----------------------------
Agreement at any time upon one hundred twenty (120) days prior written
notice to EDS.
(j) Revenue Target Deficiency. Upon determination by Allin that an Allin
-------------------------
Target has not been attained for any Allin Target Period, whether by
reason of force majeure or otherwise, Allin will provide to EDS written
notice of such non-attainment (a "Non-Attainment Notice"). During the
period of 90 days following the giving of a Non-Attainment Notice, at the
request of EDS, Allin will attempt, to the extent it deems appropriate
under the circumstances, to develop with EDS (i) a business plan whereby
EDS will be permitted an additional period of time to attain the Allin
Target
4
<PAGE>
or (ii) a revision of the then applicable revenue targets. If EDS
and Allin are unable to agree to a mutually acceptable business plan or
mutually acceptable revised revenue targets within such ninety (90) day
period following the giving of a Non-Attainment Notice, at any time after
the expiration of such ninety day period, at its sole and absolute
discretion, Allin may, as its sole and exclusive remedy, terminate this
Agreement by providing written notice to EDS setting forth the date on
which such termination will be effective.
1. Steering Committee. Within ninety (90) days of the Effective Date, each of
------------------
EDS and Allin will provide the other with the names of the three members of
its management staff who will serve on a steering committee (the "Steering
Committee"), with the chairman of the Steering Committee being designated by
Allin from one of its committee members. The Steering Committee will be
responsible for (a) generally overseeing the performance of each party's
obligations under this Agreement, and (b) making, and providing continuity
for making, strategic decisions with respect to the marketing obligations set
forth in Section 4, above. Either EDS or Allin may change representatives
from time to time. In addition, EDS and Allin may mutually agree to increase
or decrease the size, purpose or composition of the Steering Committee.
2. Media Releases. All media releases, public announcements and public
--------------
disclosures by Allin or EDS or their respective employees or agents relating
to this Agreement or that certain Master Agreement, dated December 16, 1996
by and between EDS and Allin, or their respective subject matter, 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.
3. 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.
4. 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.
5. Binding Nature and Assignment. This Agreement shall be 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.
6. Employees. Unless otherwise agreed to in writing, the parties hereto 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.
7. No Third Party Beneficiary. Nothing in this Agreement may be relied upon or
---------------------------
shall benefit any party other than the parties hereto.
8. 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, pooling
arrangement, contractor arrangement or other formal
5
<PAGE>
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 of Allin or EDS under this
Agreement.
9. Notices. All notices, requests, claims, demands, designations, approvals,
-------
consents, acceptances 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
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.
10. Entire Agreement. 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 expressed 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.
6
<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 first set forth
above.
ELECTRONIC DATA SYSTEMS CORPORATION ALLIN COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Dennis S. Stolkey By: /s/ Richard W. Talarico
------------------------------- ----------------------------------
Title: President GTSI Title: Chairman/CEO
------------------------------- ----------------------------------
Date: 12-20-96 Date: 12-16-96
------------------------------- ----------------------------------
</TABLE>
7
<PAGE>
Exhibit 10.20
(EDS LETTERHEAD)
December 16, 1996
Allin Communications Corporation
300 Greentree Commons
381 Mansfield Avenue
Pittsburgh, Pennsylvania 15220
Attention: R. Daniel Foreman
Re: Authorization Letter No. 1996-01
Dear Mr. Foreman:
This letter will confirm the mutual understanding and agreement of Allin
Communications Corporation ("Customer") and Electronic Data Systems Corporation
("EDS") as to the terms on which EDS will provide to Customer the services and
resources described in this letter, which terms are as follows:
1. This letter is entered into under the provisions of the Master Agreement,
dated effective as of December 16, 1996, between Customer and EDS (the
"Master Agreement"), and, except as otherwise provided in this letter, all
applicable provisions of the Master Agreement are incorporated into this
letter by this reference.
2. The term of this letter will commence on January 6, 1997. (the "AL
Effective Date"), and, unless earlier terminated as provided in this letter
or in the Master Agreement, will continue thereafter until the tenth
anniversary of the AL Effective Date. The term of this letter may be
extended by the mutual written agreement of the parties.
3. During the term of this letter, EDS will provide to Customer the services
and resources described in the attached Exhibit I. The specific allocation
of the services and resources will be set forth in separate written work
orders (each a "Work Order") entered into from time to time by the parties
during the term of this Authorization Letter. Each Work Order shall contain
the following: (a) a Statement of Work describing the services to be
performed, resources to be allocated by EDS, specified performance criteria,
and a list of appropriate deliverables with delivery dates; (b) a price
schedule setting forth any modifications to the payment terms set forth on
Exhibit III; (c) a designation of the Team Leader, as appropriate, and the
Customer Team Leader, each of whom shall function as the point of contact
for the respective parties for the services and resources identified in the
Work Order; (d) any other terms and conditions appropriate to the services
and resources provided under a given Work Order. The EDS individual who
will have management responsibility for EDS in connection with this letter
is also designated in the attached Exhibit II.
4. In connection with the provision of those EDS services and resources,
Customer will provide to EDS the Customer support services and resources
described in the attached Exhibit II. The specific Customer support
services and resources will be set forth in the applicable Work Order.
The Customer individual who will
1
<PAGE>
have management responsibility for Customer in connection with this letter
is also designated in the attached Exhibit II.
5. For the services and resources provided by EDS to Customer under this
letter, Customer will pay to EDS the amounts specified in the attached
Exhibit III.
6. The services and resources provided to Customer by EDS under this letter
will also be subject to the additional provisions set forth in the attached
Exhibit IV.
7. In the event of any express conflict or inconsistency between the provisions
of a Work Order and the provisions of this Authorization Letter or the
Master Agreement, the provisions of the Work Order will control with respect
to the interpretation of that Work Order; provided, however, that the
provisions of the Work Order will be so construed to give effect to the
applicable provisions of the applicable Authorization Letter and Master
Agreement to the fullest extent possible.
Please indicate your agreement to the foregoing by signing both copies of this
letter and returning one fully-executed copy to EDS.
Sincerely,
Electronic Data Systems Corporation
By: /s/ D. L. Stolkey
-------------------------------------
Name: D. L. Stolkey
-------------------------------------
Title: President GTSI
-------------------------------------
Date: 12-20-96
ACCEPTED AND AGREED:
- --------------------
Allin Communications Corporation
By: /s/ Richard W. Talarico
----------------------------------------
Name: Richard W. Talarico
----------------------------------------
Title: Chairman/CEO
----------------------------------
Date: 12-16-96
2
<PAGE>
EXHIBIT I
EDS SERVICES AND RESOURCES
--------------------------
A. Installation of new and existing ships, consisting of the following
components, and in conformance with the standards of performance set forth in
Exhibit V.
1. Shipboard control center, including the following:
a. Deployment Document
b. Power requirements
c. HVAC capabilities
d. Hardware
e. Software interface development
2. Cabin
a. Television Control Module ("TCM")
3. Plant
a. Radio Frequency (RF) Cabling
b. Network cabling
4. Post Assembly Testing
B. Ongoing Support of Installed Ship-based Operations
I-1
<PAGE>
EXHIBIT II
CUSTOMER SUPPORT SERVICES AND RESOURCES
---------------------------------------
1. Make available to EDS, as reasonably requested by EDS, management decisions,
personnel, information, approvals, acceptances and access to Customer's
premises, as required by EDS to perform the services stated in the terms of
this agreement and their related activities.
2. Supply training and support for installation and post-installation shipboard
personnel, as required by EDS to perform the services stated in the terms of
this agreement and their related activities, until such time that both
parties agree how and when such support shall be reduced.
3. Supply EDS personnel with on-going support and training for new development
services and critical problem resolution, as required by EDS to perform the
services stated in the terms of this agreement and their related activities.
4. Supply EDS with copies of Customer's operating processes and procedures as
required by EDS to perform the services stated in the terms of this
agreement and their related activities.
5. Provide EDS personnel access to Customer's systems as required for EDS to
perform the services stated in the terms of this agreement and their related
activities.
6. Cooperate with EDS in providing EDS personnel located at Customer's
facilities access to all of EDS' internal systems via the methodologies
requested by EDS. EDS will reimburse Customer for any additional costs
reasonably incurred by Customer as a result of providing EDS' employees with
access to EDS' internal systems.
7. Supply EDS with all pertinent documentation for the current platform and
system for installation troubleshooting, problem resolution and post-
installation activities required to perform the services stated in the terms
of this agreement and their related activities.
8. Provide the EDS Account Manager with facilities and related services (i.e.,
office space, telephones, electric, water, temperature control, office
supplies, etc.) equivalent to a Customer director.
9. Provide EDS employees with facilities and related services (i.e., office
space, telephones, electric, water, temperature control, office supplies,
etc.) equivalent to individual performers employed by Customer.
10. Make provisions for the EDS Account Manager to attend and participate on
regular staff meetings that regard sales, operations and other activities
that affect his/her responsibilities and abilities to deliver services to
Customer and/or Customer's customers, as stated in the terms of this
agreement and their related activities.
11. Provide all travel and other transportation expenses required to provide the
services set forth in this Authorization Letter and their related
activities. Travel would be in accordance with Customer's current travel
policy and guidelines for its employees. All such travel will be acquired by
Customer through its vendors. Expense reports for travel and travel related
expenses will be submitted directly to Customer for payment in accordance
with Customer's existing policies; provided, however, that Customer would be
required to reimburse EDS for such expenses within ten (10) days from the
date EDS submits a request for reimbursement.
12. Supply EDS employees shipboard access, room, board and other reasonable
accommodations and facilities as required to execute installation and post-
implementation activities as required by EDS to perform the services stated
in the terms of this agreement and their related activities.
13. Subject to Customer's discretion, supply EDS, to the extent that they are
made available to Customer by its cruise line customers, with complimentary
cruise passes.
II-1
<PAGE>
EXHIBIT III
PAYMENTS TO EDS
---------------
A. Monthly Fee.
-----------
1. Beginning on the AL Effective Date, for a period of six months from the AL
Effective Date (the "Initial Monthy Fee Period"), for each month during
such period, Customer will pay to EDS an amount based upon the following
rates for the following job categories as applicable (each such monthly
fee shall be referred to herein as an "Initial Monthly Fee") and as
adjusted pursuant to the applicable provisions of Exhibit IV:
<TABLE>
<CAPTION>
Monthly
Job Category Billing
Rate Per
Person
- --------------------------------------------------------------
<S> <C>
Account Manager $13,412
- --------------------------------------------------------------
Administrative Assistant $ 3,815
- --------------------------------------------------------------
Trainer/Documentation Mgr. $ 5,194
- --------------------------------------------------------------
Project Manager $10,519
- --------------------------------------------------------------
Site Survey Engineer $ 8,617
- --------------------------------------------------------------
Radio Frequency Installer $ 8,617
- --------------------------------------------------------------
Labor Technician $ 5,914
- --------------------------------------------------------------
Software Engineer $ 8,321
- --------------------------------------------------------------
Software/Interface Engineer $ 5,914
- --------------------------------------------------------------
Project Engineer $ 7,236
- --------------------------------------------------------------
Shipboard Operator $ 6,266
- --------------------------------------------------------------
</TABLE>
2. Beginning on the first day following the conclusion of the Initial Monthly
Fee Period, and for each month during the remaining term of this
Authorization Letter (and any termination assistance period), Customer
will pay to EDS the following amounts, as applicable (each, a " Base
Monthly Fee"):
<TABLE>
<CAPTION>
Base Monthly Fee Contract
(in $ per month) Month
- ----------------------------------
<S> <C>
To be determined 1-6
- ----------------------------------
244,481 7-12
- ----------------------------------
299,559 13-24
- ----------------------------------
369,987 25-36
- ----------------------------------
471,289 37-48
- ----------------------------------
203,453 49-60
- ----------------------------------
197,528 61-72
- ----------------------------------
156,132 73-84
- ----------------------------------
152,526 85-96
- ----------------------------------
148,084 97-108
- ----------------------------------
143,771 109-120
- ----------------------------------
</TABLE>
EDS may adjust the Base Monthly Fee for any additional resources that
Customer utilizes in any applicable month. Such adjustments will be based
upon the rates and job categories described above. The Initial Monthly Fee
and the Base Monthly Fee will be due and payable within 30 days after
receipt of the invoice
III-1
<PAGE>
by Customer. From time to time, but no more often than once each calendar
year, Customer and EDS agree to meet to discuss merit adjustments to each
job category comprising the Base Monthly Fee, which merit adjustments will
be no more than three percent (3%) per year.
B. Adjustment to the Base Monthly Fee. Customer may permanently adjust the
----------------------------------
Base Monthly Fee by requesting an adjustment to the staff resources
allocated hereunder by providing EDS, in the event of an increase in the
staff resources allocated with one hundred twenty (120) days prior written
notice of the adjustment, and in the case of a decrease in the staff
resources allocated with ninety (90) days prior written notice of the
adjustment, (each a "Resource Adjustment Notice"); provided, however, that
(i) only one Resource Adjustment Notice may be in effect at any time, and
(ii) Customer may provide EDS with no more than two Resource Adjustment
Notices in any calendar year. The Base Monthly Fee will be adjusted to
reflect Customer's request set forth in the Resource Adjustment Notices as
follows: (i) in the case of a Resource Adjustment Notice requesting
additional staff, the Base Monthly Fee will be adjusted on the date the
additional staff are performing services; (H) in the case of a Resource
Adjustment Notice requesting a reduction in staff, the Base Monthly Fee,
will be adjusted on the earlier to occur of (a) the redeployment of the
personnel by EDS or (b) ninety days from the date of the Resource Adjustment
Notice. If during the term of this Authorization Letter, the Customer's use
of the services and/or resources described on Exhibit 1, for any three (3)
consecutive months, varies by an amount equal to or greater than 30% and any
unutilized services and resources cannot reasonably be allocated pursuant to
paragraph C below, then EDS shall have the option to either (i) terminate
this Authorization Letter. or (ii) Customer and EDS shall mutually agree
upon an adjustment to the services or resources allocated to Customer with a
corresponding adjustment to the applicable charges.
C. Other Resource Utilization. Notwithstanding anything contained herein to
--------------------------
the contrary, to the extent the parties have not entered into an
Authorization Letter with respect to a specific industry, Customer and EDS
may mutually agree to allocate the services and resources set forth herein
to projects outside of the cruise line industry.
III-2
<PAGE>
EXHIBIT IV
OTHER PROVISIONS
----------------
Cost of Living Adjustment. If the Consumer Price Index for all Urban Consumers,
- -------------------------
U.S. City Average, for All Items (1982-84 = 100), as published in the Bureau of
Labor Statistics of the Department of Labor (the "CPI"), is at any anniversary
of the AL Effective Date (the "Current Index") higher than the CPI at the
previous anniversary of the AL Effective Date or at the AL Effective Date, as
the case may be (the "Base Index"), then, effective as of such anniversary, all
charges under this Authorization Letter will be increased by the percentage that
the Current Index increased from the Base Index; provided, that in any such
twelve month period, Customer will pay increases in the charges for any increase
of the Current Index over the Base Index up to and including 4% and provided
further that during such period, Customer will not be charged for any increases
of the Current Index over the Base Index which are greater than 4%. In the
event that the Bureau of Labor Statistics should stop publishing the CPI or
should substantially change the content or format thereof, the parties will
substitute therefor another comparable measure published by a mutually agreeable
source; provided, however, that if such change is merely to redefine the base
-----------------
year for the CPI from 1982-84 to some other year, the parties will continue to
use the CPI but will if necessary, convert either the Base Index or the Current
Index to the same basis as the other by multiplying such index by the
appropriate conversion factor.
Taxes. Customer will pay all Taxes (as defined below) to EDS at the same time
- -----
and in the same manner that it pays those amounts due to EDS under this
Authorization Letter to which the Taxes relate, and EDS will remit such Taxes to
the appropriate taxing authority. EDS and Customer will cooperate to minimize
and properly calculate any applicable Taxes and, in connection therewith,
Customer will provide any applicable direct pay certificates, resale
certificates, information regarding out-of-state use of materials, services or
sales or other exemption certificates or information reasonably requested by
EDS. EDS will notify Customer of, and will coordinate with Customer, the
response to and settlement of any claims for Taxes that may be asserted by
applicable taxing authorities, it being understood that with respect to any
claim for Taxes arising out of a form or return signed (or which should have
been signed) by a party, such party will have the right to elect to control the
response to and settlement of the claim, but the other party will have the right
to participate in the responses and settlements that are appropriate to its
potential responsibilities or liabilities. If Customer requests EDS to
challenge the imposition of any Tax, Customer will reimburse EDS for the
reasonable legal fees and expenses, including additional tax, penalty and
interest if assessed, that EDS incurs. Customer will be entitled to any refunds
or rebates of Taxes (including additional tax, penalty, and interest) granted to
the extent such refunds or rebates are of Taxes (including additional tax,
penalty, and interest) that were paid by Customer. For purposes of this
Authorization Letter, "Taxes" means any taxes, however designated or levied,
based upon amounts payable to EDS pursuant to this Authorization Letter, upon
this Authorization Letter or upon the services, resources, equipment or other
property provided pursuant to this Authorization Letter, including state and
local taxes, use taxes and any taxes or amounts in lieu thereof paid or payable
by EDS in respect of the foregoing, exclusive in each case, however, of any tax
(including additional tax, penalty, and interest) in respect of any salary,
wage, pension, retirement benefit, or other compensation, or fringe benefit paid
by EDS, of EDS' franchise taxes and taxes based upon the net worth, or any loan,
of EDS, property owned or leased by EDS or gross or net receipts or the net
income of EDS. For purposes of this paragraph, EDS shall include EDS and its
affiliates.
Significant Changes. The charges set forth in Exhibit III are based on there
- -------------------
being no significant changes to the services or resources contemplated by this
Authorization Letter. Without limitation of the foregoing, a significant change
to such services or resources would be deemed to occur upon (i) a significant
decrease in the number of installations [ships], (ii) a significant increase in
the amount of personnel resources necessary to complete an installation as
described in Exhibit 1, or (iii) significant change to the nature of Customer's
business or operations. With respect to any such significant change, EDS and
Customer would meet to discuss a reasonable adjustment to charges. Any
adjustment win require the consent of the other party, which consent may not be
unreasonably withheld.
IV-1
<PAGE>
Insurance Requirements.
- ----------------------
Subject to review and confirmation by Allin, EDS will provide the following:
General Liability Insurance.
Longshoreman's and Harbor Workers Compensation Insurance (USL&H).
IV-2
<PAGE>
EXHIBIT V
PERFORMANCE CRITERIA
--------------------
EDS and Customer agree that the performance criteria set forth below are subject
to additional due diligence by EDS during the six month start-up period.
Accordingly, EDS and Customer agree that the performance criteria set forth
below may be amended during such six month period by EDS, provided such
adjustments do not adversely impact on-going service agreements or commitments
to Customer's clients or customers and thereafter by mutual agreement. The
following key criteria shall be used as performance standards by which a
Customer will be able to gauge the timeliness, quality and reliability of the
services and resources provided by EDS. These key criteria are guidelines for
levels of timeliness, quality and reliability and are not all inclusive. The
complete list of performance criteria are based upon the entire Customer
documentation library listed as part of this Exhibit as well as any Customer
Client shipboard policies and procedures.
A. Installation
Technical Site Survey - The Technical Site Survey (the "Survey") should
commence within 2 weeks of contract signing and be performed by a qualified
RF Engineer and Project Engineer. The Survey should be 100% complete within
one (1) week of the Survey start date. The Site Survey document and technical
sections of the Deployment document, including all design drawings should be
completed within two (2) weeks of completion of the Survey. The Customer
shall receive five (5) hard copies and one (1) secure electronic copy of
these documents within two (2) days of completion of the documents received
by Customer personnel.
RF Network Installation - The RF Network Installation (RF) should be
completed by the contractually agreed-to completion date. The RF, including
shipboard TV and ITV System RF components, combining network, amps, TCMs,
TVs, connectors and cabling should be properly installed to provide
distortion-free video and audio quality through the complete RF network.
Acceptable signal levels, as agreed to for each design effort, should exist
at each amp input, amp output, and TV RF connector. The initial signal level
values for each amp input and output, at a working low band, midband and the
highest working superband channel and at each TV tap should be provided as
proof of completion as well as being used as the baseline values for
maintenance efforts.
ITV System Installation - The ITV System Installation (ITV) should be
completed by the contractually agreed-to completion date. The ITV should have
all components in proper working condition, including verification that the
RF components of the system satisfy the RF Network Installation quality
levels. RF and digital networking connections, including hubs, cables and
interface cards and connectors should have a greater than 99% rate of
successful packet communications between ITV network devices.
ITV System Interfaces - The ITV System Interfaces (Interfaces), to non-ITV
computers and networks, should be completed by the contractually agreed-to
completion date. The Interfaces should have greater than a 99% rate of
successful packet communications between network devices, with the ability to
100% reliably receive guest information and communicate transaction
information between ITV and non-ITV systems.
Operational Software Installation - Operational Software Installation should
be completed by the contractually agreed-to completion date. All ITV software
should be operational, with all ship specific content installed, including
all operational software, audio, video, graphics and database files.
Installation Specific Documentation - All Installation Specific Documentation
(Specifics) should be completed within one (1) week of the ITV installation.
The Specifics should include all information unique to the ITV installation,
including but not limited to, as built drawings for the RF combining and ship
networks, ITV system rack elevations, layouts, trunk and channel
configurations, channel lineup, and initial RF readings.
V-1
<PAGE>
B. Operations
Operator Boarding - The Operator responsible for maintaining proper operation
of the ITV System should have successfully completed the landbased portion of
the ITV System Training and board the ship no later than two (2) weeks prior
to the go-live date of the ITV System. The Operator should become an integral
part of the installation team and completely understand the unique aspects of
the ITV installation before the go-live date.
Operator Answers to Master of the Ship - The Operator is under the authority
of the Master of the Ship and the officers designated to oversee the
operation of the Systems and Services. The Operator shall use his/her best
efforts to comply with the operations manual and other shipboard guidelines
set forth by the Customer Client.
Operational Procedures - The Operator shall understand and effectively
execute the Operational Procedures required to run the ITV system maintaining
a greater than 90% level of guest satisfaction, based upon random guest
surveys initiated by the Customer.
System Operation - Through proper maintenance and servicing, the ITV System
shall be maintained at a 98% average uptime for Interactive Services, with a
98% average rate of equipment operation within each month of operation.
Maintenance Procedures - The Operator shall perform all on-going maintenance
procedures and record the results of maintenance procedures in the Ship's
Log. The maintenance procedures shall include, but not be limited to, RF
amplifier input and output readings at specified low, mid and superband
channels, ITV System audio and video quality levels, proper component
operations, backups, reporting and reconciliation.
Service and Notification Procedures - The Operator shall immediately begin
the investigation of any guest reported problems, or any problems discovered
during normal system operation or maintenance. Problems and resolutions
should be recorded as part of the Ship's Log. Any ITV System failure should
be resolved or reported to Level 2 - Landside Technical Support personnel
within a specified time frame, based upon the following ITV System failure
levels:
. Disabling more than 10% of the ITV System I hour
. Between I and 10% of the ITV System 2 hours
. Less than 1% of the ITV System 24 hours
Decorum and Professionalism - The Operator shall maintain a high level of
decorum and professionalism as the representative of both EDS and the
Customer at each installation.
Other Shipboard System Installations and Operations - For any other type of
shipboard installations, including but not limited to Broadcast Centers,
Information Systems, Property Management Systems, Point of Sale Systems,
Kiosks, Digital Photography Systems, similar levels of timeliness, quality
and reliability apply.
Standards and Practices - All work shall be done in compliance with standards
set forth by the Society of CATV Engineers, Society of Broadcast Engineers,
Electronic Industries Association, and SOLAS maritime regulations.
V-2
<PAGE>
Exhibit 11
ALLIN COMMUNICATIONS CORPORATION
CALCULATION OF NET LOSS PER COMMON SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Period Year Year
Ended Ended Ended
December 31, December 31, December 31,
1994 1995 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss $ (612) $ (2,168) $ (8,347)
Accretion and dividends on preferred stock --- --- 106
--------------- ---------------- ----------------
Net loss applicable to common shareholders $ (612) $ (2,168) $ (8,453)
=============== ================ ===============
Net loss per common share $ (0.24) $ (0.83) $ (2.81)
=============== ================ ===============
Weighted average common shares outstanding
during the period (1) 2,400,000 2,400,000 2,839,010
Effect of common stock equivalents --- --- ---
Effect of conversion of preferred stock
issued within one year of the offering 203,385 203,385 169,488
---------------- ---------------- ---------------
Shares used in calculating net loss per common
share 2,603,385 2,603,385 3,008,498
=============== ================ ===============
</TABLE>
(1) The weighted average common shares outstanding has been retroactively
restated for the effect of the 2,400 for 1 stock split.
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Allin Communications Corporation wholly owns the following subsidiaries:
<TABLE>
<CAPTION>
Name of Subsidiary Additional Names under which
State of Incorporation Subsidiary Conducts Business
- -----------------------------------------------------------------------------------------
<S> <C> <C>
SeaVision, Inc. Delaware
PhotoWave, Inc. Delaware
SportsWave, Inc. Pennsylvania International Sports Marketing
Kent Consulting Group, Inc. California
Netright, Inc. California
Allin Holdings Corporation Delaware
</TABLE>
Except as noted above, each subsidiary does business exclusively under its
corporate name, with or without the corporate indicator.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
DATA FOR THE YEAR ENDED DECEMBER 31, 1996 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,227
<SECURITIES> 0
<RECEIVABLES> 1,169
<ALLOWANCES> 0
<INVENTORY> 53
<CURRENT-ASSETS> 17,926
<PP&E> 7,916
<DEPRECIATION> 911
<TOTAL-ASSETS> 32,677
<CURRENT-LIABILITIES> 3,875
<BONDS> 0
0
2,480
<COMMON> 52
<OTHER-SE> 26,270
<TOTAL-LIABILITY-AND-EQUITY> 32,677
<SALES> 1,344
<TOTAL-REVENUES> 1,344
<CGS> 818
<TOTAL-COSTS> 818
<OTHER-EXPENSES> 8,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 797
<INCOME-PRETAX> (8,320)
<INCOME-TAX> 27
<INCOME-CONTINUING> (8,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,347)
<EPS-PRIMARY> (2.81)
<EPS-DILUTED> (2.81)
</TABLE>
