<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-21395
ALLIN COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-1795265
(STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 GREENTREE COMMONS, 381 MANSFIELD AVENUE,
PITTSBURGH, PENNSYLVANIA 15220-2751
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(412) 928-8800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
( X ) Yes ( ) No
Shares Outstanding of the Registrant's Common Stock
As of July 29, 1998
Common Stock, 5,182,267 Shares
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Allin Communications Corporation
Form 10-Q
Index
<TABLE>
<CAPTION>
Part I - Financial Information
<S> <C>
Item 1. Financial Statements Page 3
Item 2. Management's Discussion and Analysis of Financial Page 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Page 26
Sensitive Instruments
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders Page 27
Item 5. Other Information Page 28
Item 6. Exhibits and Reports on Form 8-K Page 29
Signatures Page 30
</TABLE>
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<PAGE>
Part I - Financial Information
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,802 $ 5,111
Accounts receivable, net of allowance for
doubtful accounts of $84 and $112 1,805 2,594
Inventory 687 1,858
Prepaid expenses 555 337
------------------ ------------------
Total current assets 9,849 9,900
Property and equipment, at cost:
Leasehold improvements 398 426
Furniture and equipment 2,126 2,197
On-board equipment 6,704 5,013
------------------ ------------------
9,228 7,636
Less--accumulated depreciation (2,597) (3,001)
------------------ ------------------
6,631 4,635
Assets held for resale --- 68
Notes receivable from employees 45 48
Software development costs, net of accumulated
amortization of $680 and $815 212 76
Other assets, net of accumulated amortization of
$2,051 and $2,919 4,916 4,111
------------------ ------------------
Total assets $ 21,653 $ 18,838
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------------ ------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 27 $ 11
Accounts payable 668 668
Accrued liabilities:
Compensation and payroll taxes 815 583
Dividends on Series A convertible,
redeemable preferred stock 288 400
Other 421 366
Current portion of deferred revenue 882 905
------------------ ------------------
Total current liabilities 3,101 2,933
Non-current portion of deferred revenue 543 424
Commitments and contingencies
Series A convertible, redeemable preferred stock, par
value $.01 per share - authorized 100,000 shares,
issued and outstanding 25,000 shares 2,500 2,500
Shareholders' equity:
Common stock, par value $.01 per share - authorized
20,000,000 shares, issued 5,184,067 shares 52 52
Additional paid-in-capital 37,652 37,540
Deferred compensation (228) (166)
Treasury stock at cost, 1,800 shares (6) (6)
Retained deficit (21,961) (24,439)
------------------ ------------------
Total shareholders' equity 15,509 12,981
------------------ ------------------
Total liabilities and shareholders' equity $ 21,653 $ 18,838
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 2,543 $ 3,918 $ 6,625 $ 7,089
Cost of sales 1,383 2,011 4,086 3,603
------------ ------------ ------------ ------------
Gross profit 1,160 1,907 2,539 3,486
Selling, general & administrative 4,370 2,690 8,518 6,079
------------ ------------ ------------ ------------
Loss from operations (3,210) (783) (5,979) (2,593)
Interest income, net (106) (51) (283) (121)
------------ ------------ ------------ ------------
Loss before provision for income taxes (3,104) (732) (5,696) (2,472)
Provision for income taxes 48 --- 48 6
------------ ------------ ------------ ------------
Net loss (3,152) (732) (5,744) (2,478)
Accretion and dividends on preferred stock 55 57 119 112
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (3,207) (789) $ (5,863) $ (2,590)
============ ============ ============ ============
Net loss per common share - basic $ (0.62) (0.15) $ (1.14) $ (0.50)
============ ============ ============ ============
Net loss per common share - diluted $ (0.62) (0.15) $ (1.14) $ (0.50)
============ ============ ============ ============
Weighted average shares outstanding - basic 5,157,399 5,157,399 5,157,399 5,157,399
------------ ------------ ------------ ------------
Weighted average shares outstanding - diluted 5,157,399 5,157,399 5,157,399 5,157,399
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
ALLIN COMMUNICATIONS CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (5,744) (2,478)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 1,990 1,912
Amortization of deferred compensation 67 62
Loss from disposal of assets 13 257
Changes in certain assets and liabilities:
Accounts receivable (1,771) (789)
Inventory 14 (156)
Prepaid expenses (320) 218
Software development costs (469) ---
Assets held for sale --- (68)
Other assets 483 (5)
Accounts and notes payable (1,373) (16)
Accrued liabilities 1,039 (289)
Deferred revenues 895 (97)
Customer deposits (695) ---
------------------ ------------------
Net cash flows from operating activities (5,871) (1,449)
------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of assets 31 9
Capital expenditures (3,223) (251)
------------------ ------------------
Net cash flows from investing activities (3,192) (242)
------------------ ------------------
Net change in cash and cash equivalents (9,063) (1,691)
Cash and cash equivalents, beginning of period 16,227 6,802
------------------ ------------------
Cash and cash equivalents, end of period 7,164 5,111
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE>
Allin Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
The information contained in these financial statements and notes for the
three- and six-month periods ended June 30, 1997 and 1998 should be read in
conjunction with the audited financial statements and notes for the years
ended December 31, 1996 and 1997, contained in Allin Communications
Corporation's (the "Company") Annual Report on Form 10-K for the year ended
December 31, 1997. The accompanying unaudited Consolidated Financial
Statements have been prepared in accordance with generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission. These interim statements do not include all of the
information and footnotes required for complete financial statements. It is
management's opinion that all adjustments (including all normal recurring
accruals) considered necessary for a fair presentation have been made;
however, results for these interim periods are not necessarily indicative of
results to be expected for the full year.
Revenue Recognition
Kent Consulting Group, Inc. ("KCG") charges consulting fees, typically on an
hourly basis, to its clients for its software design and network solution
services. Revenue is recognized as services are performed.
Netright, Inc. ("Netright") recognizes revenue from the sale of products at
the time the products are shipped.
The Allin Interactive Group recognizes revenue and costs related to
interactive television and digital photography systems when the services or
products are performed or delivered. Revenue from systems integration
services is recognized upon completion of the respective projects.
SportsWave, Inc. ("SportsWave") charges fixed fees for its event marketing
and promotional services. Revenue is recognized when the agreed upon
services are performed. SportsWave also licenses the usage of likenesses,
images and autographs of certain professional athletes. Licensing agreements
may be either on a fixed fee or earned royalty basis. Revenue for agreements
on a fixed fee basis is recognized when services required under the
agreement are performed. Revenue for agreements on an earned royalty basis
is recognized as the royalties are earned. Minimum guaranteed royalties are
recognized on a pro-rata basis over the lives of the respective agreements.
Earnings Per Share
Earnings per share ("EPS") of common stock have been computed in accordance
with Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share" ("SFAS No. 128"). The shares used in calculating basic and diluted
EPS includes the weighted average of the outstanding common shares of the
Company, excluding 26,668 and 24,868 shares of outstanding restricted stock
for the three- and six-month periods ended June 30, 1997 and 1998,
respectively. The restricted stock, outstanding stock options, and the
Company's Series A convertible, redeemable preferred stock, prior to
expiration of the conversion provision in December 1997, would all be
considered dilutive securities under SFAS No. 128; however, these securities
have not been included in the calculation of diluted EPS, for the applicable
periods, as their effect would be anti-dilutive. The additional shares that
would have been included in the diluted EPS calculation, if their effect was
not anti-dilutive, were 26,668 and 25,572 for the three-month periods ended
June 30, 1997 and 1998, respectively, and 26,668 and 24,938 for the six-
month periods ended June 30, 1997 and 1998, respectively.
Inventory
Inventory, consisting principally of computer system hardware, components
and technical supplies, is stated at the lower of cost (determined on the
first-in, first-out method) or market.
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Software Development Costs
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 internally developed software products and
systems is computed on a product-by-product basis over a three-year period.
Impairment of Long-Lived Assets
The Company follows the guidelines set forth in Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). In the
event that facts and circumstances indicate that the carrying value of an
asset may not be recoverable, fair value, or if not readily available,
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying value to determine if a writedown to market
value or discounted cash flow is required.
Supplemental Disclosure Of Cash Flow Information
Cash payments for income taxes were approximately $12,000 and $-0- during
the three months ended June 30, 1997 and 1998, respectively. There were no
cash payments for interest during either of the three-month periods ended
June 30, 1997 and 1998, respectively.
Cash payments for income taxes were approximately $56,000 and $6,000 during
the six months ended June 30, 1997 and 1998, respectively. Cash payments for
interest were approximately $29,000 and $-0- during the six months ended
June 30, 1997 and 1998, respectively.
Dividends of approximately $50,000 and $57,000 were accrued but unpaid
during the three-month periods ended June 30, 1997 and 1998, respectively,
on Series A convertible, redeemable preferred stock. Dividend accruals for
the six-month periods ended June 30, 1997 and 1998 were $99,000 and
$112,000, respectively.
2. Preferred Stock
The Company has authorized the issuance of 100,000 shares of preferred stock
with par value of $.01 per share. Of the authorized shares, 40,000 have been
designated as Series A convertible, redeemable preferred stock, while 60,000
shares remain undesignated. All of the 25,000 issued and outstanding shares
are Series A shares.
3. Liability for Employee Termination Benefits
The Company recognizes liabilities for involuntary employee termination
benefits in the period management approves the plan of termination if during
that period management has approved and committed to the plan of termination
and established the benefits to be received; communicated benefit plans to
employees; identified numbers, functions and locations of anticipated
terminations; and the period of time for the plan of termination indicates
significant changes are not likely.
A reorganization charge of approximately $491,000 was recorded as of
February 4, 1998 to establish a liability for separation costs associated
with a plan for reorganization of operations, including the resignations of
certain senior executives. Associated expenses are reflected in Selling,
general & administrative expenses on the Consolidated Statement of
Operations during that period. The plan included three positions including
the Company's president, chief operating officer and an administrative
assistant, all of whom have ceased employment with the Company. As of June
30, 1998, approximately $312,000 of the amount accrued under the February 4,
1998 charge had been paid. The remaining balance, approximately $179,000, is
included in
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<PAGE>
accrued compensation and payroll taxes on the Consolidated Balance Sheet. It
is anticipated that payments under this plan will be completed in 1999.
An accrual of approximately $300,000 was recorded as of June 30, 1997 to
establish a liability for severance costs associated with a plan for
involuntary employee terminations. During the quarterly period ended March
31, 1998, additional expense of approximately $15,000 was recorded to adjust
the severance accrual previously recorded. Associated expenses were
reflected in Selling, general & administrative expenses on the Consolidated
Statement of Operations during these periods. The plan included thirteen
proposed employee terminations. Included in the plan were financial and
marketing executive positions, marketing and administrative staff positions,
operational management, staff, and sales positions associated with digital
photography operations, and clerical support staff positions. Twelve of the
thirteen positions included in the plan were eliminated. The accrual for the
position not eliminated, approximately $2,000, was offset against the
accrual recorded for a second plan for involuntary employee terminations as
of September 30, 1997. As of June 30, 1998, approximately $285,000 of the
amount accrued under the June 30, 1997 plan had been paid. The balance
remaining, approximately $30,000 as adjusted, is included in accrued
compensation and payroll taxes on the Consolidated Balance Sheet. It is
anticipated that payments under this plan will be completed in 1998.
4. Termination of Interactive Television Contract
During March 1998, Allin Interactive Corp. and Royal Caribbean Cruises Ltd.
mutually agreed on termination of their contract for provision by the
Company of interactive television services aboard three cruise ships.
Operations on these ships ceased during May and June 1998. Allin Interactive
Corp. has lost transactional revenue, including pay-per-view movies and
gaming, and management fee revenue related to these ships subsequent to
cessation of operations.
5. Equity Transactions
A total of 117,500 and 100,000 options for common shares, exercisable at
prices of $4.38 and $4.50 per share, respectively, were awarded under the
Company's 1997 Stock Plan during the three months ended June 30, 1998. The
options will vest with respect to 20% of the shares subject to each grant on
each of the first through fifth anniversaries of the grant date. The right
to purchase shares expires seven years from the grant date or earlier for
certain of the options if the option holder ceases to be employed by the
Company or a subsidiary.
During the three months ended June 30, 1998, non-vested options to purchase
1,100 shares of common stock previously awarded under the Company's 1997
Stock Plan were forfeited under the terms of the Plan. Options granted under
the 1997 Stock Plan to purchase 292,250 shares of common stock remain
outstanding as of June 30, 1998.
During the three months ended June 30, 1998, vested options to purchase
11,250 shares, and non-vested options to purchase 4,520 shares,
respectively, of common stock previously awarded under the Company's 1996
Stock Plan were forfeited under the terms of the Plan. There were no options
awarded under the 1996 Stock Plan during this period. Options granted under
the 1996 Stock Plan to purchase 102,380 shares of common stock remain
outstanding as of June 30, 1998.
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<PAGE>
Item 2.
Allin Communications Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis by management provides information
with respect to the Company's financial condition and results of operations for
the three- and six-month periods ended June 30, 1998 and 1997. This discussion
should be read in connection with the information in the consolidated financial
statements and the notes pertaining thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as well as the
information discussed under "Special Note on Forward Looking Statements".
Unless the context otherwise requires, all references herein to the "Company"
refer to Allin Communications Corporation and its subsidiaries.
Overview of Organization, Products & Markets
Allin Communications Corporation (the "Company") is a technology
development and services company that specializes in Windows NT-based software
development, engineering and network integration services, operation and
integration services focused on interactive television and digital photography
applications, and sports-related event-marketing and promotions. The Company
operates three business units which focus on common services and technologies
where the Company has core strengths and on markets where the Company believes
its products and services can be most competitive. The three business units are
Allin Consulting Services ("Allin Consulting"), Allin Interactive Group ("Allin
Interactive") and SportsWave.
Allin Consulting provides varied software design and network solutions,
assisting companies in planning, building, and managing Microsoft BackOffice
solutions including NT Server, SQL Server, SNA Server, Systems Management
Server, Exchange Server and Internet Information Server. Allin Consulting has
expertise in developing interactive television platforms, Internet applications,
groupware and e-mail applications, and networking and database applications.
Services include design of system architecture, installation and configuration
of software and hardware, custom software development, training, systems
management support and trouble-shooting. The Company believes that Allin
Consulting 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
virtual office environments. One of Allin Consulting's operating entities, Kent
Consulting Group, Inc. ("KCG"), is authorized as a Microsoft Solutions Provider
Partner and is also authorized as a service provider for Lotus, IBM and Novell.
Allin Consulting offers complete network systems solutions to its clients
including the provision of computer and communications network related hardware,
software and equipment. Allin Consulting has developed purchasing capabilities
and agreements with vendors providing it access to a wide spectrum of computer
related hardware, software and networking equipment at competitive prices.
Allin Consulting currently generates revenue from fees under its contracts
for software design and network solutions services for third party clients and
from hardware, software and equipment sales. Allin Consulting also provides
technical and creative support in the development and improvement of proprietary
interactive television and digital photography software for systems sold or
operated by the Allin Interactive business unit and provides general technical
support of all of the Company's operations.
Allin Interactive provides customized interactive television systems and
services as well as systems integration services specializing in interactive
television and digital photography applications. Allin Interactive's
proprietary interactive television platform utilizes a Windows NT operating
system, includes a multimedia digital file server and Windows-based software
applications, and features high resolution and animated graphics, compressed
full motion video, superior quality audio and flexible input capacity. The
resource sharing architecture of the platform can provide its interactive
services over a variety of network architectures, including the Internet,
telephone and cable television systems, and other public and private
communications networks. Allin Interactive
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has continually upgraded its interactive television capabilities, including the
1997 development of proprietary video server technology, which allows the system
to provide multiple concurrent streams of MPEG1 and MPEG2 digital video. The
centralized data processing features of Allin Interactive's interactive
television system allows for significant cost savings in end-user equipment,
offering what the Company's management believes to be a competitive advantage
over competitors' systems. The Company's interactive television operations have
historically been concentrated in the international cruise industry. The Company
believes that its technology can be readily adapted for on-demand video content
tailored to many industries. The Company's current marketing strategy is
centered on hospitals and educational institutions. Allin Interactive's strategy
for new industries, as well as for future activity in the cruise industry, is to
market systems and applications on a systems integration revenue basis, where
the customer will undertake the capital commitment for the system and Allin
Interactive will receive fees for installation and any subsequent involvement in
managing or operating systems. Allin Interactive has installed one system on a
cruise ship on this basis and is currently installing an interactive system in a
new Mayo Clinic hospital being built in Phoenix, Arizona. This system is
expected to be completed in the third quarter of 1998. There can be no assurance
that Allin Interactive will be successful in obtaining systems integration
contracts for new interactive television systems in the cruise industry or in
other industry markets it is attempting to enter, or that, if successful, such
installations will result in the desired improvements to the Company's results
of operations and financial condition.
Allin Interactive's historical operations primarily involved operation of
owned interactive television systems installed on cruise ships from which the
Company derived transactional revenue, mainly from pay-per-view movies and
gaming. Allin Interactive also earns management fees for operation of these
systems. While the business unit's marketing focus has changed, the majority of
revenue recognized during the second quarter of 1998 continued to be derived
from shipboard transactional revenue and management fees. During the second
quarter of 1998, Allin Interactive ceased providing interactive television
service aboard three Royal Caribbean Cruise Line, Ltd. ("RCCL") vessels.
Transactional revenue and management fees have been lost for these ships
following termination of services. The Company is currently seeking alternate
deployment of the equipment removed from ships. However, there can be no
assurance given that the Company will be successful in finding alternate usage
for these assets. If the Company is unsuccessful in doing so, valuation of
these assets could be negatively impacted. As of June 30, 1998, Allin
Interactive operated systems on eight ships with an annual passenger base of
approximately 739,000 operated by three cruise lines. The various cruise line
agreements allow certain lines to discontinue services or management fees after
specified notice periods, so there can be no assurance that transactional
revenue or management fees will be earned for all ship systems expected to
continue in operation throughout 1998 and any following periods.
Allin Interactive also offers systems integration services specializing in
digital photography systems for professional photography businesses. Services
include provision and installation of digital photography equipment, software
and operating systems, system and software training and technical support and
sale of equipment, consumables and supplies utilized in digital photography
operations. The second quarter of 1998 was the period during which the new
strategy for digital photography services was fully implemented. Allin
Interactive installed nine digital photography systems during the three-month
period ended June 30, 1998. Results under the new strategy make digital
photography operations a more significant component of Allin Interactive's
operations than under the previous strategy. However, there can be no assurance
that projects will continue to be obtained or that any carried out will result
in the desired financial results.
The SportsWave business unit ("SportsWave") offers a full range of sports
marketing and promotion services including promotions and premiums, corporate
incentive programs, event marketing, licensing and memorabilia. SportsWave
creates, designs, and executes fully integrated sports promotion programs based
on the client's business objectives. SportsWave provides concepts and creative
development of programs as well as implementation, administration and
management. SportsWave utilizes former professional baseball, football,
basketball and hockey players as the focal point of its programs. Programs
conducted have included sports fantasy camps, golf and fishing events, youth
sports clinics, sweepstakes prizes, appearances, and promotions utilizing
trading cards, autographed memorabilia, and image licensing for use on
customers' products. Management believes that sports marketing enables
businesses to capitalize on the popularity of professional sports and famous
athletes to motivate and inspire customers and sales forces, strengthen brand
loyalty, establish solid trade relationships, and maximize promotional impact
for their products. SportsWave charges fixed fees for its event marketing and
promotional services and earns licensing revenue under fixed fee or earned
royalty bases.
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SportsWave holds licenses under agreements with Major League Alumni
Marketing, Inc. ("MLAM") and National Football League Alumni, Inc. ("NFLA") to
use certain marks, logos, and the names "Major League Baseball Players Alumni
Association" and "National Football League Alumni", respectively, in connection
with its sports marketing and promotion services. SportsWave pays royalties for
its rights under the licenses. Licensing agreements with MLAM and NFLA expire
on December 31, 1998 and December 31, 2002, respectively. SportsWave is
currently in negotiations with MLAM concerning a new licensing agreement to
become effective after the expiration of the current agreement, although there
can be no assurance that SportsWave will be successful in obtaining such
agreement or that any agreement obtained will be on terms as favorable to
SportsWave as the existing agreement. SportsWave's business has traditionally
been seasonal, with the largest number of events and promotions being staged
during the Major League Baseball season. SportsWave believes that the rights
obtained under the agreement with NFLA, which was entered in January 1998, will
lessen its seasonality, although there can be no assurance that this result will
be obtained.
The Company was organized under the laws of the State of Delaware in July
1996 to act as a holding company for operating subsidiaries which focus on
particular aspects of the Company's business. As of June 30, 1998, the
organizational legal structure consists of the Company, five wholly owned
operating subsidiaries organized into three business units, and one non-
operating wholly owned subsidiary. The Allin Consulting business unit includes
the operations of KCG and Netright, Inc. ("Netright"), both California
corporations. The Allin Interactive business unit includes the operations of
Allin Interactive Corporation, formerly SeaVision, Inc., and Allin Digital
Imaging Corp. ("Allin Digital Imaging"), formerly PhotoWave, Inc., both Delaware
corporations. Allin Interactive Corporation continues to utilize the tradename
SeaVision in operations within the cruise industry. The SportsWave business
unit includes the operations of SportsWave, Inc., a Pennsylvania corporation.
This company utilizes the trade name International Sports Marketing in its
sports marketing operations. Allin Holdings Corporation, a Delaware
corporation, is a non-operating subsidiary providing treasury management
services to the Company.
Results of Operations:
- ---------------------
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenue
The Company's total revenue for the three months ended June 30, 1998 was
$3,918,000, an increase from total revenue of $2,543,000 for the three months
ended June 30, 1997. The increase of $1,375,000, or 54%, between periods is
attributable to several factors, including a $401,000 increase in revenue for
Allin Consulting's software development and network solutions operations, a
$400,000 increase in revenue from Allin Interactive's digital photography
operations, a $375,000 increase in management fees for operation of interactive
television systems, and a $236,000 increase in revenue from SportsWave's sports
marketing operations.
Allin Consulting recognized revenue, after elimination of intercompany
sales, of $1,236,000 during the three months ended June 30, 1998, including
$1,180,000 from software development, network solutions consulting and related
services and $56,000 from computer equipment and software sales. Comparable
amounts for the three months ended June 30, 1997 were total revenue of $797,000,
including $779,000 from software development, network solutions consulting and
related services and $18,000 from computer equipment and software sales. The
substantial increase in software development and network solutions consulting
revenue of $401,000, or 51%, is attributable to several factors. Allin
Consulting's areas of expertise, including the development of applications
software and solutions for the desktop and distributed environments and
networking, are growing segments of the overall computer services industry.
Allin Consulting's expertise with Microsoft operating systems and software,
which have and are expected to continue to increase in dominance, has
contributed to the growth as demand has increased for consultants capable of
developing specialized applications built around Microsoft products. Additional
factors contributing to the increase in revenue between the periods include
increased marketing efforts to obtain third-party engagements, particularly in
the Northern California area, the recruitment of additional consultants and the
obtaining of third-party engagements serviced from the Company's Pittsburgh,
Pennsylvania office, although the Pittsburgh revenue represents a small portion
of these activities. The increase in computer equipment and software sales of
$38,000, or 211%, is attributable to the addition of sales from the Company's
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Pittsburgh office between the periods and the addition of a dedicated sales and
operations employee in Oakland, California during 1998. Since there is
typically period to period variability among clients utilizing Allin
Consulting's services as well as the size and scope of projects undertaken,
there can be no assurance given that similar revenue increases will be realized
in future periods. The Company intends to pursue growth in consulting services
through continuing to increase marketing efforts, and the evaluation of
geographic expansion or the acquisition of existing businesses. There can be no
assurance, however, that the Company will be successful at expanding Allin
Consulting's level of revenue or gross profit, that it will be able to generate
or obtain the capital necessary for geographic expansion or acquisitions, or
that any expansion or acquisition undertaken would result in the desired
improvements to financial results.
Allin Interactive recorded revenue of $1,293,000 during the three months
ended June 30, 1998, including $433,000 for activities in the digital
photography market, $351,000 for pay-per-view movies and video gaming, $375,000
for interactive system management fees from cruise line clients, $88,000 for
systems integration services provided to the cruise industry and $46,000 in
other revenue, primarily advertising. Comparable amounts for the three months
ended June 30, 1997, were total revenue of $593,000, including $33,000 for
digital photography operations, $317,000 for pay-per-view movies and video
gaming, $238,000 for systems integration services related to interactive
television applications and $5,000 for other revenue. The substantial revenue
increase of $700,000, or 118%, between the periods is attributable to increased
revenue from the new digital photography strategy and the addition of management
fees from cruise line clientsfor operation of interactive television systems
between the periods. Allin Interactive implemented a new strategy for digital
photography operations late in the first quarter of 1998. Under the new
strategy, Allin Interactive is offering systems integration services for
installation of digital photography systems as well as training and technical
support and the sale of equipment, consumables and supplies utilized in digital
photography operations. During the three months ended June 30, 1998, Allin
Interactive completed nine systems installations resulting in revenue of
$376,000. Allin Interactive also realized $57,000 in sales of ancillary
equipment and products and technical support fees.
The improvement in revenue realized from Allin Interactive's interactive
television operations between the second quarters of 1997 and 1998 was $450,000,
primarily attributable to the addition of management fees as a source of revenue
between the periods. Management fees were $375,000 during the three months
ended June 30, 1998, which represented an increase of $65,000 from the first
quarter of 1998. Management fees were terminated at various points in May and
June 1998 on three RCCL ships due to the termination of operations on those
ships. This decrease, however, was more than offset by a fee increase realized
under Allin Interactive's agreement with Celebrity Cruises, Inc. ("Celebrity").
Management fees expected to be earned during the remainder of 1998 would not
substantially differ from those realized during the first quarter of 1998,
assuming continuation of fees on all ships where the Company currently operates
its system. However, the various amendments and agreements allow certain of the
cruise lines to discontinue services or management fees after specified notice
periods, so there can be no assurance that transactional revenue or management
fees will be earned for all ship systems expected to continue in operation
throughout 1998 and any following periods. Movies and gaming revenue of
$351,000 during the second quarter of 1998 was an increase of $34,000 from the
comparable 1997 period. The number of ship systems in operation during the
quarters was similar. Management believes the increase in revenue is primarily
attributable to price increases and changes to wager defaults and buy-in amounts
between the periods. This increase was realized despite two months of dry dock
during the second quarter of 1998 for one of the ships on which Allin
Interactive operates a system. The $41,000 increase in other revenue was
attributable to implementation of advertising on the ship systems under an
agreement which will conclude in September 1998. Systems integration services
decreased by $150,000 between the second quarters of 1997 and 1998. The
decrease is primarily attributable to the inclusion of revenue related to
certain components of a ship system installation being realized during the
second quarter of 1997 while there were no comparable projects in the second
quarter of 1998.
SportsWave recognized revenue of $1,389,000 for its sports marketing
programs during the three months ended June 30, 1998, as compared to $1,153,000
in revenue during the three months ended June 30, 1997, an increase of 20%.
Management believes the increase is primarily attributable to the 1998 period's
inclusion of a program featuring large quantities of autographed baseball
memorabilia. There was no program of similar scope during the second quarter of
1997. Since there is typically period to period variability among clients
utilizing its services and specific sports themes of programs, there can be no
assurance given that similar increases will be realized in future periods. The
Company believes that the NFLA licensing agreement entered in January 1998 will
result in an increased level of football-themed programs in the future. The
sales cycle lead time for sports marketing
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programs is such, however, that increased revenue is not expected to be realized
until to the second half of 1998 or the first half of 1999. There can be no
assurance given, however, that the NFLA agreement will result in an increased
level of football-related marketing programs, or that any increase in programs
obtained will result in the desired improvement in financial condition or
results of operations.
Cost of Sales and Gross Profit
The Company recognized cost of sales of $2,011,000 during the three months
ended June 30, 1998 as compared to $1,383,000 during the three months ended June
30, 1997. Reasons for the increase in cost of sales of $628,000 between the
periods include substantial increases related to digital photography systems
integration projects and ancillary sales as compared to 1997's retail
photography operation and increases in sports marketing, network solutions
consulting and computer equipment cost of sales corresponding to revenue
increases in these areas. Gross profit of $1,907,000 was recognized during the
second quarter of 1998, as compared with $1,160,000 during the prior year
quarter. Significant contributors to the increase in gross profit realized
include the growth in Allin Consulting's software development and network
solutions services and Allin Interactive's addition of interactive television
management fees.
Allin Consulting recorded a total of $749,000 for cost of sales during the
three months ended June 30, 1998, including $698,000 related to software
development and network solutions consulting and $51,000 related to equipment
and software sales. Comparable second quarter 1997 cost of sales was $486,000
in total, including $469,000 for development and consulting and $17,000 for
equipment and software. Increases in cost of sales are also attributable to the
factors that resulted in increases in revenue for these services and products,
including enhanced marketing efforts and geographic expansion. Gross profit for
the three months ended June 30, 1998 was $487,000, including $482,000 related to
software development and network solutions consulting and $5,000 related to
equipment and software sales. Comparable second quarter 1997 gross profit
amounts were $311,000 in total, including $310,000 for software development and
consulting and $1,000 for equipment and software sales. Again, the substantial
increase in consulting revenue is principally responsible for the increase in
gross profit. The increase in gross profit was 57% for Allin Consulting in
total between the quarterly periods ended June 30, 1998 and 1997.
Allin Interactive recorded a total of $527,000 for cost of sales during the
three months ended June 30, 1998, including $391,000 related to digital
photography operations, $69,000 related to pay-per-view movies, and $67,000 for
systems integration services. Comparable second quarter 1997 cost of sales was
$418,000, including $27,000 for digital photography, $78,000 for movies and
$313,000 for systems integration services. Under the changed operating strategy
for digital photography operations, cost of sales on systems integration
projects include costs of digital photography system equipment and software,
installation contractor costs, travel, shipping and sales commissions. Digital
photography cost of sales also includes costs for equipment and photographic
supplies sold as ancillary products. While encouraged by the improved results
in digital photography operations under the new strategy, Management expects
that additional experience with operations under this strategy will allow Allin
Interactive to achieve efficiencies which will result in increased margin
percentage, although there can be no assurance that Allin Interactive will be
able to improve its margins in this area in the future. Cost of sales for pay-
per-view movies decreased in aggregate despite an overall revenue increase for
movies, declining as a percentage of movie revenue between the periods from 40%
to 34%. This improvement is due to the addition of some movie content with a
fixed cost per title rather than cost as a percentage of revenue. The
substantial decline in the level of systems integration cost of sales between
the periods was due to the inclusion of projects related to installation of
interactive television systems during the 1997 period. There were no comparable
projects during 1998. Gross profit recognized by Allin Interactive during the
three months ended June 30, 1998 was $766,000, including $375,000 from
interactive system management fees for which there are no associated cost of
sales, $283,000 from pay-per-view movies and gaming, $42,000 from digital
photography operations, $21,000 from interactive television systems integration
services, and $46,000 attributable to other revenue, primarily advertising.
Comparable gross profit amounts for the second quarter of 1997 were $175,000 in
total, including $239,000 from movies and gaming, $6,000 from digital
photography operations, $4,000 from other revenue, less a negative margin of
$74,000 from systems integration. The overall increase in gross profit between
the periods was $591,000, or 338%, while the increase in revenue was $700,000,
or 118%. The addition of management fees for the operation of interactive
systems is the primary reason for this margin increase.
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<PAGE>
SportsWave recorded cost of sales of $735,000 related to its sports
marketing programs for the three months ended June 30, 1998 as compared to
$480,000 during the comparable period of 1997. Gross profit of $654,000 and
$673,000 was realized on SportsWave's programs during the three months ended
June 30, 1998 and 1997, respectively. SportsWave's operations generated similar
margins between the quarters. The second quarter is typically one with a high
level of activity in what has historically been a seasonal business. The past
history of SportsWave's sports marketing programs, both before and after
acquisition by the Company in 1996, indicate substantially higher levels of
revenue and gross profit during the second and third quarters as compared to the
first. There can be no assurance, however, that financial results realized
during the remainder of 1998 will follow the historical pattern.
Selling, General & Administrative Expenses
The Company recorded $2,690,000 in selling, general & administrative
expenses during the three months ended June 30, 1998, as compared with
$4,370,000 during the three months ended June 30, 1997. The decrease of
$1,680,000, or 38% in selling, general & administrative expenses was realized
from the Company's expense reduction efforts implemented beginning in the second
quarter of 1997 and continuing through the second quarter of 1998. The second
quarter of 1997 also included an accrual for severance costs of approximately
$300,000 related to involuntary employee terminations.
Selling, general & administrative expenses during the second quarter of
1998 included $945,000 of depreciation and amortization expense as compared with
$1,117,000 in depreciation and amortization expense during the three months
ended June 30, 1997. Excluding these non-cash expenses and unusual costs such
as severance accruals, remaining selling, general & administrative expenses were
$1,745,000 for the three months ended June 30, 1998, as compared with $2,953,000
for the prior period, a reduction of 41%. The Company's cost reduction efforts
have included reductions in personnel, particularly in areas related to
prospective applications of the Company's interactive and digital imaging
technologies, in executive management, and administrative staff positions.
Other areas where the Company was able to realize significant expense savings
between the periods included generalized marketing expenses, legal and
consulting expenses, office rental costs, travel costs and shipboard operating
expenses.
As noted previously, depreciation and amortization expenses were $945,000
in the second quarter of 1998 as compared with $1,117,000 during the second
quarter of 1997. The 15% decrease between the periods is attributable to the
writedown of capitalized software development costs related to proprietary
digital imaging technology and reductions in on-board equipment due to writeoffs
of non-recoverable equipment from terminated ship interactive television
systems.
Research and development expense included in selling, general &
administrative expense was $37,000 during the second quarter of 1998 as compared
to $40,000 during the second quarter of 1997. Expense incurred during the
second quarter of 1998 related primarily to research of improvements to the
functionality of the in-cabin or end-user operating system and components of its
interactive technology applications, and continued video server technology
development. The Company expects research and development expenses to increase
during the remainder of 1998 related to these projects and certain projects
relating to its proprietary digital photography systems. See "Liquidity and
Capital Resources" following for additional information related to these
projects.
Loss from Operations
The Company's loss from operations decreased from $3,210,000 for the three
months ended June 30, 1997 to $783,000 for the three months ended June 30, 1998.
The $2,427,000, or 76%, improvement resulted from the $747,000 increase in gross
profit realized between the periods due to growth in software development and
network solutions consulting and the addition of interactive television
management fees, and the $1,680,000 reduction of selling, general &
administrative expenses between the periods resulting from management's cost
reduction efforts. The loss from operations recorded during the second quarter
of 1998 of $783,000 resulted from the inclusion of $945,000 of non-cash expenses
for depreciation and amortization. Exclusive of these non-cash expenses,
operating income would have been $162,000.
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<PAGE>
Net Loss
The Company's net loss for the three months ended June 30, 1998 was $732,000,
as compared to $3,152,000 for the three months ended June 30, 1997. The
decrease in net loss between the periods resulted from the improvements to gross
profit and reductions in selling, general & administrative expenses described
above, partially offset by a $55,000 decrease in interest income on cash
balances between the quarterly periods.
Results of Operations:
- ---------------------
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenue
The Company's total revenue for the six months ended June 30, 1998 was
$7,089,000, as compared to revenue of $6,625,000 recognized for the six months
ended June 30, 1997. The increase of $464,000, or 7%, between periods is
attributable to substantial increases in several types of revenue, including
Allin Consulting's software development and network solutions consulting, and
Allin Interactive's addition of interactive television system management fees
and increases in pay-per-view movies, video gaming and digital photography
services. These revenue increases more than offset a substantial reduction in
systems integration revenue for services to the cruise industry, with the net
result of a modest revenue gain.
Allin Consulting recognized revenue, after elimination of intercompany
sales, of $2,903,000 during the six months ended June 30, 1998, including
$2,748,000 from software development, network solutions consulting and related
services and $155,000 from computer equipment and software sales. Comparable
amounts for the six months ended June 30, 1997 were total revenue of $1,558,000,
including $1,475,000 from software development, network solutions consulting and
related services and $83,000 from computer equipment and software sales. The
substantial increase in software development and network solutions consulting
revenue of $1,273,000, or 86%, is attributable to the factors discussed
previously in the three month analysis, including growing demand for specialized
Microsoft consulting and increased marketing efforts. The increase in computer
equipment and software sales of $72,000, or 87%, is attributable to the addition
of sales from the Company's Pittsburgh office between the periods and the
addition of a dedicated sales and operations employee in Oakland, California
during 1998. The Company intends to pursue growth in consulting services
through continuing to increase marketing efforts, and the evaluation of
geographic expansion or the acquisition of existing businesses. There can be no
assurance, however, that the Company will be successful in expanding Allin
Consulting's level of revenue or gross profit, that it will be able to generate
or obtain the capital necessary for geographic expansion or acquisitions, or
that any expansion or acquisition undertaken would result in the desired
improvements to financial results.
Allin Interactive recorded revenue of $2,125,000 during the six months
ended June 30, 1998, including $830,000 for pay-per-view movies and video
gaming, $685,000 for interactive system management fees, $449,000 for activities
in the digital photography market, $111,000 for systems integration services
provided to the cruise industry and $50,000 in other revenue, primarily
advertising. Comparable amounts for the six months ended June 30, 1997, were
total revenue of $3,180,000, including $596,000 for pay-per-view movies and
video gaming, $2,442,000 for systems integration services, $36,000 for digital
photography operations and $106,000 for other revenue. The revenue decrease of
$1,055,000 between the periods is attributable substantially to the decrease in
systems integration services related to the cruise industry, which declined by
$2,331,000. During the first half of 1997, revenue of $1,240,000 was recognized
related to a project for retrofit of the ship broadcast center aboard the Cunard
Line Limited ship Queen Elizabeth 2, and revenues were also recorded related to
the sale of significant components of several interactive television systems in
connection with interactive television installations. There were no comparable
projects conducted during 1998. Allin Interactive was able to offset
approximately 45% of this revenue decline through the addition of new sources of
revenue such as interactive television system management fees and by
substantially increasing revenue from digital photography operations due to the
change in strategy from a retail photography operation to a provider of
specialized digital imaging systems integration services and products to the
photography marketplace. These areas represent revenue increases of $685,000
and $413,000 between the periods, respectively. Management fees were terminated
at various points in May and June 1998 on three RCCL ships due to the
termination of operations on those ships. This decrease, however, is offset by
a fee increase realized under its agreement with Celebrity. Management fees
expected to be earned during the remainder of 1998 would
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<PAGE>
not substantially differ from those realized during the first quarter of 1998,
assuming continuation of fees on all ships where the Company currently operates
its system. The various amendments and agreements allow certain of the cruise
lines to discontinue services or management fees after specified notice periods,
so there can be no assurance that transactional revenue or management fees will
be earned for all ship systems expected to continue in operation throughout 1998
and any following periods. Allin Interactive also realized revenue growth of
$234,000 between the periods in pay-per-view movies and video gaming due to a
larger fleet size during most of the first half of 1998, movie price increases,
and changes to wagering default and buy-in amounts.
SportsWave recognized revenue of $2,061,000 for its sports marketing
programs during the six months ended June 30, 1998, as compared to $1,887,000 in
revenue during the six months ended June 30, 1997, an increase of 10%. The
increase is primarily attributable to the 1998 period's inclusion of a program
featuring large quantities of autographed baseball memorabilia. There was no
program of similar scope during the first half of 1997. Since there is
typically period to period variability among clients utilizing its services and
specific sports themes of programs, there can be no assurance given that similar
increases will be realized in future periods.
Cost of Sales and Gross Profit
The Company recognized cost of sales of $3,603,000 during the six months
ended June 30, 1998 as compared to $4,086,000 during the six months ended June
30, 1997. Reasons for the decrease in cost of sales of $483,000 between the
periods include a substantial decrease in cost of sales for systems integration
services partially offset by substantial increases related to digital
photography systems integration projects and ancillary sales and increases in
sports marketing, network solutions consulting and computer equipment cost of
sales corresponding to revenue increases in these areas. Gross profit of
$3,486,000 was recognized during the first half of 1998, as compared with
$2,539,000 during the first half of 1997. Significant contributors to the
increase in gross profit realized include the growth in Allin Consulting's
software development and network solutions services and Allin Interactive's
addition of interactive television management fees.
Allin Consulting recorded a total of $1,770,000 for cost of sales during
the six months ended June 30, 1998, including $1,630,000 related to software
development and network solutions consulting and $140,000 related to equipment
and software sales. Comparable first half 1997 cost of sales was $980,000 in
total, including $905,000 for development and consulting and $75,000 for
equipment and software. Increases in cost of sales are attributable to the
factors that resulted in increases in revenue for these services and products,
including growing demand for Microsoft specialization, enhanced marketing
efforts and geographic expansion. Gross profit for the six months ended June
30, 1998 was $1,133,000, including $1,118,000 related to software development
and network solutions consulting and $15,000 related to equipment and software
sales. Comparable first half 1997 gross profit amounts were $578,000 in total,
including $570,000 for software development and consulting and $8,000 for
equipment and software sales. Again, the substantial increase in consulting
revenue is principally responsible for this increase in gross profit. The
increase in gross profit was 96% for Allin Consulting in total between the six-
month periods ended June 30, 1998 and 1997.
Allin Interactive recorded a total of $642,000 for cost of sales during the
six months ended June 30, 1998, including $405,000 related to digital
photography operations, $158,000 related to pay-per-view movies, and $79,000 for
systems integration services. Comparable first half 1997 cost of sales was
$2,119,000, including $27,000 for digital photography, $147,000 for movies and
$1,945,000 for systems integration services. As noted previously in the
discussion of six month revenue, there were several large systems integration
projects carried out for cruise lines during the first half of 1997. There were
no comparable projects in 1998, resulting in the substantial reduction in cost
of sales for systems integration. The increase in cost of sales related to
digital photography operations corresponds to the substantial increase in
revenue under the new digital photography strategy. Cost of sales for pay-per-
view movies increased by $11,000 between the periods, or 8%. However, movie
revenue increased 30% between the six-month periods. The increasing margin on
pay-per-view movies has resulted from the addition of movie content priced under
a fixed cost rather than percentage of revenue basis. Gross profit recognized
by Allin Interactive during the six months ended June 30, 1998 was $1,483,000,
including $685,000 from interactive system management fees for which there are
no associated cost of sales, $672,000 from pay-per-view movies and gaming,
$44,000 from digital photography operations, $32,000 from interactive
television systems integration services, and $50,000 attributable to other
revenue, primarily advertising. Comparable gross profit amounts for the first
half of 1997 were $1,061,000 in total, including $449,000 from movies and
gaming, $9,000 from digital photography
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<PAGE>
operations, $497,000 from interactive television systems integration, and
$106,000 from other revenue. The overall increase in gross profit between the
periods was $422,000, or 40%, despite a decrease in revenue of $1,055,000, or
50%. The addition of management fees for the operation of interactive systems is
the primary reason for this margin increase.
SportsWave recorded cost of sales of $1,191,000 related to its sports
marketing programs for the six months ended June 30, 1998 as compared to
$987,000 during the comparable period of 1997. Gross profit of $870,000 and
$900,000 was realized on SportsWave's programs during the six months ended June
30, 1998 and 1997, respectively. SportsWave's operations generated similar
margins between the periods.
Selling, General & Administrative Expenses
The Company recorded $6,079,000 in selling, general & administrative
expenses during the six months ended June 30, 1998, as compared with $8,518,000
during the six months ended June 30, 1997. The decrease of $2,439,000, or 29%
in selling, general & administrative expenses was realized from the Company's
expense reduction efforts implemented beginning in the second quarter of 1997
and continued through the second quarter of 1998. Both periods included unusual
charges. Severance accruals for employee terminations were recorded in both
periods, approximately $300,000 during the first half of 1997 and $491,000
during the first half of 1998. During the six months ended June 30, 1998, the
Company also recorded losses from writedown or disposal of equipment of
approximately $257,000, primarily from writedown of the non-recoverable portions
of interactive television system equipment for the three systems formerly
operated on RCCL ships.
Selling, general & administrative expenses during the first half of 1998
included $1,912,000 of depreciation and amortization expense as compared with
$1,990,000 in depreciation and amortization expense during the six months ended
June 30, 1997. Excluding the unusual costs noted above and non-cash expenses,
remaining selling, general & administrative expenses were $3,419,000 for the six
months ended June 30, 1998, as compared with $6,228,000 for the prior period, a
reduction of 82%. The Company's cost reduction efforts have included reductions
in personnel, particularly associated with prospective applications of the
Company's interactive and digital imaging technologies, in executive management,
and administrative staff positions. The Company implemented significant
reductions in research and development of prospective rather than operational
applications of the Company's technologies between the periods. Other areas
where the Company was able to realize significant expense savings between the
periods included generalized marketing expenses, consulting expenses, office
rental costs, travel costs and shipboard operating expenses.
Research and development expense included in selling, general &
administrative expense was $60,000 during the first half of 1998 as compared to
$136,000 during the comparable period of 1997. Expense incurred during the
first half of 1998 related primarily to research of improvements to the
functionality of the in-cabin or end-user operating system and components of its
interactive technology applications, and continued video server technology
development. The Company expects research and development expenses to increase
during the remainder of 1998 related to these projects and certain projects
relating to its proprietary digital photography systems. See "Liquidity and
Capital Resources" following for additional information related to these
projects.
Loss from Operations
The Company's loss from operations decreased from $5,979,000 for the six
months ended June 30, 1997 to $2,593,000 for the six months ended June 30, 1998.
The $3,386,000, or 57%, improvement resulted from the $947,000 increase in gross
profit realized between the periods due to growth in software development and
network solutions consulting and the addition of interactive television
management fees, and the $2,439,000 reduction of selling, general &
administrative expenses between the periods resulting from management's cost
reduction efforts.
Net Loss
The Company's net loss for the six months ended June 30, 1998 was $2,478,000,
as compared to $5,744,000 for the six months ended June 30, 1997. The decrease
in net loss between the periods resulted from the improvements to gross profit
and reductions in selling, general & administrative expenses described above,
partially offset by a $162,000 decrease in interest income on cash balances
between the periods.
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<PAGE>
Liquidity and Capital Resources
At June 30, 1998 the Company had cash and liquid cash equivalents of
$5,111,000 available to meet its working capital and operational needs. The net
change in cash from December 31, 1997 was a decrease of $1,691,000. The net
change during the three months ended June 30, 1998 was a decrease of $147,000.
The Company recognized a net loss for the six months ended June 30, 1998 of
$2,478,000. Included in the operating loss were non-cash expenses of $2,231,000
including depreciation, amortization of software development costs and other
intangible assets, amortization of deferred compensation and losses from
writedown or disposal of assets. Cash flows from operating activities during
the period resulted in an outflow of $1,449,000 during the six months ended June
30, 1998. In addition to the $247,000 used by current operations, there were
also working capital adjustments impacting the cash flow, including an accounts
receivable increase of $789,000. The increase is primarily attributable to
SportsWave's operational seasonality. SportsWave's accounts receivable
increased $750,000 between December 31, 1997 and June 30, 1998. The increase
occurs due to the substantial increase in program activity in the second quarter
of 1998 and advance billings for third quarter projects as compared to the level
of activity and advance billings as of the fourth quarter of 1997. The Company
also experienced working capital adjustments from a decrease of $386,000 in its
current liabilities and deferred revenue, and an increase in inventory of
$156,000 during the first half of 1998 due to the purchase of equipment and
supplies to utilized by Allin Interactive for digital photography systems
integration projects and ancillary sales. The Company does not believe working
capital adjustments will have as significant an impact on cash flow during the
remainder of 1998, although there can be no assurance of this. The expectation
for a decreased impact from working capital adjustments is consistent with the
Company's experience during the second quarter of 1998, however, as 87% of the
net decline in cash for the six-month period occurred in the first rather than
the second quarter of 1998.
Another significant factor affecting first half 1998 cash flow was $251,000
of capital expenditures. Significant areas of expenditure included computer
hardware, software and communications equipment for Allin Consulting due to
periodic upgrading to state of the art technology, buildout and equipment
expenditures related to relocation of Allin Interactive's office in Fort
Lauderdale, Florida and the expansion of virtual office capabilities for the
Florida operations.
As was noted earlier during the discussion of research and development
expenses, the Company plans to increase the scope of research and development
activities during the remainder of 1998. The Company has undertaken a project
expected to reduce the cost of and improve the functionality and processing
speed of the in-cabin or end-user portion of the Company's interactive
television system. Historically, Allin Interactive has utilized proprietary
interfaces with certain third party software for communication of interactive
commands and responses between the end users and centralized processing servers.
This feature of the system architecture has dictated the usage of certain
specialized end-user hardware. The Company's research to date indicates the
feasibility of development of proprietary end-user operating and communication
systems that will enable the configuration of hardware from commonly available
standard hardware components. Use of these systems could result in a
significant reduction in the cost of the end-user equipment for its interactive
television systems. The Company believes that Allin Interactive's system is
currently the low cost alternative for interactive systems offering its level of
features and functionality. Successful development of the new end-user
operating system could improve Allin Interactive's cost advantages over
competitors. The Company's marketing efforts indicate that while Allin
Interactive's system is a lower cost solution than competitors' systems, the
current cost of systems is still significant enough to preclude a system sale in
some cases. The Company believes that successful completion of this project
will result in a system cost reduction that will make the system cost effective
for a larger user market. There can be no assurance, however, that the Company
will be successful in developing the new end-user systems, or that, if
developed, such systems will result in the desired cost reductions for and
increased sales of interactive systems. In addition to opportunities for cost
reductions, if developed successfully, the new operating system will utilize
hardware configurations allowing an end user functional connections for
keyboard, mouse, printer, modem and other standard peripherals that would
utilize the system's centralized information processing capabilities,
substantially increasing the functionality of the system for Internet and other
applications, without the cost of smartboxes or processors for each end-user.
Again, there can be no assurance that the Company will successfully develop end-
user operating systems with this level of increased functionality or that any
developed will result in the desired increase
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<PAGE>
in sales of interactive systems. The Company estimates the remaining cost of
development for this project at approximately $473,000 for completion during the
first half of 1999.
The Company is also undertaking a smaller development project related to
Allin Interactive's proprietary digital imaging technology to make its
interactivity features and Internet-based image archival and retrieval systems
compatible with the digital photography hardware and software configurations
currently offered to customers. The Company believes that the addition of these
interactive features will represent a value-added feature to Allin Interactive's
digital photography services that will offer Allin Interactive a competitive
advantage and the opportunity for enhanced margins. There can be no assurance,
however, that if the Company successfully completes this project, it will result
in sales of additional digital photography systems integration services, or
improvements to Allin Interactive's operating margin. Estimated remaining
project costs are approximately $49,000 with expected project completion during
the third quarter of 1998.
The Company believes these software development projects will constitute
the majority of its capital expenditure requirements for the remainder of 1998.
Although the combined remaining estimated cost of $522,000 is significant given
the Company's cash resources and prospects for available financing, the Company
believes both projects are prudent because, if successful, they will enhance
Allin Interactive's position as the low cost provider of interactive television
systems with its type of functionality and features, make its interactive
television system more cost effective for potential customers thereby
potentially increasing demand for the system, reinforce the advanced nature of
the technological features of the Company's systems, and create a value-added
feature for its digital photography services thereby affording a competitive
advantage. The Company will monitor the progress of these projects and expects
to capitalize costs subsequent to the projects achieving technical feasibility
and prior to market introduction. Costs will be expensed prior to technological
feasibility and subsequent to market introduction. All costs recorded through
June 30, 1998 have been expensed. Amounts noted above are the expected total
costs of the projects and include both portions that would be capitalized and
portions to be expensed. The Company expects that capital expenditures of all
types for the remainder of 1998 will be approximately $675,000, including the
software development projects described above. Business conditions and
management's plans may change during the remainder of 1998, so there can be no
assurance that the Company's actual amount of capital expenditures will not
exceed the planned amount. Management will evaluate development projects on an
ongoing basis and may reduce or eliminate projects if alternate technologies or
products become available or if changing business conditions warrant.
The Company does not currently have lines of credit or other credit
facilities in place with any banks or other lenders. There can be no assurance
that any credit facilities will be able to be obtained in the future.
The Company has outstanding $2,500,000 of Series A Convertible, Redeemable
Preferred Stock as of June 30, 1998. Accrued but unpaid dividends on the
preferred stock were approximately $400,000 as of June 30, 1998. Dividends are
payable at a rate of eight percent and are cumulative. The Company's obligation
for dividends will remain through the maturity of the preferred stock in June
2006, unless redeemed earlier by the Company.
The acquisition of KCG in November 1996 included terms for a contingent
payment of up to $2,800,000 based on KCG's average annual operating income (as
defined in the agreement) for the three years 1997, 1998, and 1999 (the "Average
KCG Operating Income"). At the closing of the acquisition, the former sole
shareholder of KCG, Les D. Kent, received a $2,800,000 contingent promissory
note (the "KCG Note") of KCG. If the Average KCG Operating Income exceeds
$1.862 million, the entire $2.8 million principal amount of the KCG Note will be
payable. If the Average KCG Operating Income is less than $1.862 million, the
principal amount of the KCG Note will be reduced according to a scale whereby
the amount of reduction increases as the Average KCG Operating Income decreases.
The entire KCG Note will be cancelled if Average KCG Operating income is less
than or equal to $1.4 million. The principal amount of the KCG Note (as
adjusted) plus interest at a rate of 7% per annum on such principal amount (as
adjusted) will be payable in two installments, the first of which will be paid
15 days after the date of determination of the Average KCG Operating Income and
the second of which will be paid six months after such date of determination.
KCG's annual operating income for 1997 for purposes of the agreement was
approximately $1,320,000. KCG's operating income, as defined in the agreement,
for the six months ended June 30, 1998, was approximately $695,000.
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The acquisition of SportsWave in November 1996 included terms for
contingent payments of up to $2,400,000. An interim contingent payment must be
made in an amount (the "Interim Amount") equal to the amount by which six times
the sum of SportsWave's operating income (as defined in the agreement) for 1997
and 1998 divided by three exceeds $2,400,000. A final payment must be made in
an amount equal to the amount by which six times the sum of SportsWave's
operating income for 1997, 1998 and 1999 divided by three exceeds the sum of
$2,400,000 plus the Interim Amount. One-half of such contingent payments, if
any, will consist of promissory notes bearing interest at seven percent per
annum. SportsWave's operating income for 1997 for purposes of the agreement was
approximately $579,000. SportsWave had operating income for purposes of the
agreement of approximately $292,000 during the six months ended June 30, 1998.
The Company believes, in light of its current operations as discussed in
the preceding paragraphs, that available funds and cash flows expected to be
generated by its current operations, will be sufficient to meet its anticipated
cash needs for working capital and capital expenditures for its existing
operations for at least the next twenty-four months. If currently available
funds and cash generated by operations were insufficient to satisfy the
Company's ongoing cash requirements, or if the Company identified an attractive
acquisition candidate in the consulting industry, the Company would be required
to consider other financing alternatives, such as selling additional equity or
debt securities, obtaining long or short-term credit facilities, or selling
other operating assets, although no assurance can be given that the Company
could obtain such financing. Any sale of additional equity or convertible debt
securities would result in additional dilution to the Company's shareholders.
Year 2000 Issue
The Company has undertaken a program to evaluate the impact of potential
costs, uncertainties and disruption to its business arising from the year 2000
issue. Failures of computer programs to recognize dates beginning with the year
2000 may produce erroneous results or a cessation of operations when dates after
1999 are encountered. As reported in its Report on Form 10-K for the year ended
December 31, 1997, the Company has conducted a comprehensive evaluation of its
internal systems, hardware and software in light of the year 2000 threats. The
Company utilizes predominantly recent technology in its operations, which
utilize Microsoft Windows NT, Windows 95, and BackOffice operating systems. At
this time, the Company believes that the hardware and software utilized in the
provision of the Company's services and products are substantially year 2000
compliant. However, the Company's ongoing examination of Year 2000 issues will
offer additional information which Management will evaluate. At this time, the
Company does not expect to incur material costs to make any of its hardware,
software, or operating systems year 2000 compliant. Furthermore, the Company
does not expect any significant business disruption to its internal operations
to occur as a result of year 2000 issues. The Company also believes its
accounting systems to be year 2000 compliant and does not expect any significant
costs or business disruption in this area.
The Company is currently continuing its examination of the potential for
Year 2000 problems, including a survey of significant customers and suppliers as
to the potential for year 2000 threats related to their operating systems.
Management and consulting personnel from KCG with a high level of technological
expertise and experience have been assigned to oversee this project. The
Company will give special emphasis to its interactive system customers because
of the direct connections of the interactive television systems with its
customers' accounting, inventory and property management systems. Based on the
information being gathered, the Company will evaluate the threat of business
disruption posed by customers' or suppliers' year 2000 problems.
Special Note on Forward Looking Statements
The Management's Discussion and Analysis and other sections of the Report
on Form 10-Q contain forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. Theses statements constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and are subject to the safe harbors created thereby.
These statements are based on a number of assumptions that could ultimately
prove inaccurate and, therefore, there can be no assurance that they will prove
to be accurate. Factors that could affect performance include those listed
below, which are representative of factors which could affect the outcome of
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the forward-looking statements. In addition, such statements could be affected
by general industry and market conditions and growth rates, and general domestic
and international economic conditions. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Limited Operating History Under Reorganization of Operations and New
Marketing Strategies. The Company implemented a reorganization of its
operations during February 1998 into three business units, Allin Consulting,
Allin Interactive, and SportsWave. Furthermore, the Company fundamentally
changed the marketing strategies of Allin Interactive with respect to its
interactive television operations during mid-1997 and with respect to its
digital photography operations in February 1998. Allin Interactive now seeks to
sell customized applications and installations of its interactive television
systems on a systems integration basis where the customer bears the capital cost
of the system. To date, Allin Interactive has completed one system installation
on a cruise ship under this model and is currently installing a system for a
hospital. Allin Digital Imaging has moved from a retail digital photography
strategy to providing systems integration services specializing in the
installation of digital photography systems for professional photography
businesses. Because the Company has only a limited history of operations in the
present configuration of business units and with the current marketing
strategies for Allin Interactive, there can be no assurance that the Company
will succeed under these strategies, 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, 1996 and 1997 and for
the six months ended June 30, 1998 and, as of June 30, 1998, had an accumulated
deficit of $24,439,000. Allin Interactive has recognized net losses since
inception in 1994 primarily because of the limited revenue generated from its
interactive television operations. The Company has researched, developed and
installed the only ITV system that to its knowledge is in use in the cruise
industry presently, other than one system currently being tested, and has
incurred substantial costs in doing so. The Company anticipates that it will
continue to incur net losses at least through 1998, 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 Markets. The Company's strategy
includes attempting to enter new markets for new applications for its
interactive platform and other technologies on a systems integration basis. This
strategy presents risks inherent in assessing the value of development
opportunities, in committing resources 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 delays or setbacks in developing new
applications of its technology for new markets. There can be no assurance that
the Company will be successful at penetrating new markets for alternative
applications of its interactive platform, or that any contracts obtained will
generate improvements to the Company's profitability or cash flow. During 1998,
the Company is entering a new market by offering systems integration services to
professional photography businesses. There can be no assurance that the Company
will achieve ongoing success within this market, or that any business obtained
will generate improvements to the Company's profitability or cash flow.
Risks Inherent in Development of New Products. The Company is currently
proceeding with technological improvements, which it believes could result in
fundamental improvements to the functionality of the in-cabin or end-user system
components, substantial reductions in the required cost for in-cabin or end-user
hardware, and the addition of value-added capabilities for its digital imaging
systems integration services. There can be no assurance, however, that such
projects will result in improved functionality of the interactive system, cost
reductions to end-user equipment, improved marketability of digital imaging
services, or will result in additional revenue or improved profitability for the
Company. It is also possible that the Company will experience delays or
setbacks in the areas in which it operates. There can be no assurance that the
Company's new products and applications, if any, will generate additional
revenue or improved profitability for the Company. There can also be no
assurance that competitors will not develop systems and products with superior
functionality or cost advantages over the Company's new products and
applications.
Additional Interactive Television System Installations. The Company is
currently marketing its interactive system to various cruise lines, hospitals
and educational institutions. There can be no assurance that the Company will
be successful in obtaining contracts with these parties for system installation,
or that for any contracts obtained,
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the terms will be favorable to the Company or will result in the desired
improvements to Allin Interactive revenue and operating income.
Cruise Lines' Rights to Terminate Operations or Management Fees. Certain
cruise lines have the right to terminate the Company's operations on such cruise
lines' ships, or to discontinue payment of management fees, upon notice. Any
such termination of operations would eliminate the Company's ability to share in
revenue produced by the affected interactive television system. Any such
discontinuation of management fees would eliminate the Company's ability to
charge management fees for operation of the system. The loss or elimination of
the Company's rights to any of these sources of revenue resulting from any of
the foregoing events could have a material adverse effect on the Company's
business, financial condition, and results of operations. The second quarter
1998 termination of operations aboard three RCCL ships is expected to materially
reduce transactional revenue such as pay-per-view movies and gaming and
previously anticipated management fee revenue in 1998. The impact may be
mitigated if the Company is successful in obtaining agreements for new system
installations, although there can be no assurance the Company will be successful
in obtaining agreements for new installations, or that any obtained will be on
terms as favorable as with RCCL.
Dependence on Proprietary Technology; Absence of Patents. The Company's
success is highly dependent upon its proprietary technology. The Company does
not have patents on any of its technology and relies on a combination of
copyright and trade secret laws and contractual restrictions to protect its
technology. It is the Company's policy to require employees, consultants and
clients to execute nondisclosure agreements upon commencement of a relationship
with the Company, and to limit access to and distribution of its software,
documentation and other proprietary information. Nonetheless, it may be possible
for third parties to misappropriate the Company's technology and proprietary
information or independently to develop similar or superior technology. There
can be no assurance that the legal protections afforded to the Company and the
measures taken by the Company will be adequate to protect its technology. Any
misappropriation of the Company's technology or proprietary information could
have a material adverse effect on the Company's business, financial condition
and results of operations.
There can be no assurance that other parties will not assert technology
infringement claims against the Company, or that, if asserted, such claims will
not prevail. In such event, the Company may be required to engage in protracted
and costly litigation, regardless of the merits of such claims; discontinue the
use of certain software codes or processes; develop non-infringing technology;
or enter into license arrangements with respect to the disputed intellectual
property. There can be no assurance that the Company would be able to develop
alternative technology or that any necessary licenses would be available or
that, if available, such licenses could be obtained on commercially reasonable
terms. Responding to and defending against any of these claims could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risk of Technological Obsolescence. The ability of the Company to maintain
a standard of technological competitiveness is a significant factor in the
Company's strategy to maintain and expand its customer base, enter new markets
and generate revenue. The Company's success will depend in part upon its ability
to develop, refine and introduce high quality improvements in the functionality
and features of its systems 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 and Geographic Expansion. The Company's
growth strategy will require its management to conduct operations and respond to
changes in technology and the market. If the Company's management is unable to
manage growth, if any, effectively, its business, financial condition and
results of operations will be materially adversely affected. The Company
intends to pursue continued geographic growth of its operations, particularly in
software development and network solutions consulting. Allin Consulting has
expanded its operations to Pittsburgh, Pennsylvania and Fort Lauderdale,
Florida. It has also experienced a growth in the geographic scope of
engagements serviced by personnel based in northern California. Allin
Consulting is evaluating further geographic expansion of operations through
acquisition or investment. Allin Interactive is marketing interactive
television and digital photography services nationally and will undertake
installations throughout the United State, if obtained. If the Company's
management is unable to manage growth, if any, effectively, its business,
financial condition and results of operations will be materially adversely
affected.
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<PAGE>
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 markets and products and timely installation
of its systems. The Company's recent reorganization of operations has also
resulted in certain key executives assuming additional responsibilities for the
Company's operations, some of which duties may differ from their prior duties.
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 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,
lockout 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 addition or conclusion of significant
consulting engagements, and 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 interactive television 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. The information systems
consulting industry is very fragmented with a large number of participants due
to growth of the overall market for services and low capital barriers to entry.
There are a few large national or multinational firms competing in this market,
although the larger firms are believed to have a better reputation in product
sales generally than in services. There can be no assurance that the Company
will be able to compete effectively with current or future competitors or that
the competitive pressures faced by the Company will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Government Regulation and Legal Uncertainties. The Company is subject,
both directly or indirectly, to various laws and governmental regulations
relating to its business. As a result of rapid technology growth and other
related factors, laws and regulations may be adopted which significantly impact
the Company's business.
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which introduces a new
model for segment reporting called the "management approach". The management
approach is based on the way the chief operating decision maker organizes
segments within a company for making decisions and assessing performance. SFAS
No. 131 is effective for fiscal years beginning after December 31,
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1997. Management believes that its recent reorganization of operations will be
both consistent with and conducive to the new model. The Company will adopt SFAS
No. 131 as of December 31, 1998.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS No. 132"), which revises certain
footnote disclosure requirements related to pension and other retiree benefits.
The new standard will not have a financial impact on the Company. The Company
will adopt SFAS No. 132 in 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). The Statement establishes accounting
and reporting standards requiring reporting of all derivative instruments,
including certain derivative instruments embedded in other contracts, in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999, although
earlier adoption as of the beginning of any fiscal quarter after issuance is
permitted. The Company plans to adopt SFAS No. 133 during 1999. Since the
Company does not invest excess funds in derivative financial instruments or
other market rate sensitive instruments currently, adoption of the new standard
is not anticipated to have a financial impact on the Company.
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Part I Financial Information
Item 3. Quantitative and Qualitative Disclosure about Market Risk Sensitive
Instruments
The Company currently does not invest excess funds in derivative financial
instruments or other market rate sensitive instruments for the purpose of
managing its foreign currency exchange rate risk or for any other purpose.
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<PAGE>
Part II - Other Information
Item 4. Matters Submitted to a Vote of Security Holders.
(a) The Annual Meeting of the Stockholders of the Company was held on
Thursday, May 8, 1998.
(b) Not applicable.
(c) The following matters were voted on by the Stockholders of the
Company by votes submitted through proxy or in person at the
Annual Meeting:
(1) Election of Directors for one year terms to hold office until
the next annual meeting of the Stockholders following
election and until their successors are duly elected and
qualified. Results were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Against Votes Abstaining
<S> <C> <C> <C>
Richard W. Talarico 3,855,494 0 3,300
Brian K. Blair 3,846,694 0 12,100
William C. Kavan 3,855,494 0 3,300
Paul J. Pasquarelli 3,846,886 0 11,908
James C. Roddey 3,855,494 0 3,300
</TABLE>
(2) Ratification of the Board of Directors' selection of Arthur
Andersen LLP to serve as the independent public accountants
to examine the financial statements of the Company and its
subsidiaries for the year ending December 31, 1998. Votes
cast were 3,852,494 for ratification, 1,700 against
ratification, and 4,600 abstaining.
There were a total of 5,182,267 shares of the Company's Common
Stock eligible to vote at the Annual Meeting.
(d) Not applicable.
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Part II - Other Information
Item 5. Other Information
Appointment of Director
On August 6, 1998, The Company's Board of Directors appointed Anthony L.
Bucci as a director of the Company to hold office until the next annual meeting
of the Stockholders following appointment and until his successor is duly
elected and qualified. Since 1992, Mr. Bucci has served as chairman and chief
executive officer of MARC Advertising, a Pittsburgh, Pennsylvania based
marketing communications company. Prior to 1992, Mr. Bucci served in various
capacities at MARC Advertising since 1970.
Amendment of By-laws
On August 6, 1998, the Company's Board of Directors approved amendments
to the Company's By-laws establishing advance notice and informational
requirements for submission of nominations of candidates for election as
directors and any other new business to be voted on by stockholders at any
annual meeting of stockholders. Notice requirements established for submission
of nominations or new business are 90 days in advance of the anniversary date of
the immediately preceding annual meeting. Therefore, any nomination or other
proposal intended to be presented at the 1999 Annual Meeting of Stockholders
must be received by the Company no later than February 7, 1999. Such nominations
and proposals must also meet the requirements set forth in the Company's
By-laws. The amendments to the Company's By-laws are included in their entirety
as Exhibit 3(ii) to this filing on Form 10-Q for the period ended June 30, 1998.
Such amendments do not change the date for submission of any proposals for
inclusion in the Company's proxy materials for the 1999 Annual Meeting of
Stockholders. Such proposals must be received by the Company no later than
December 1, 1998, to be included in the proxy materials.
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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description of Exhibit
- ------ ----------------------
3(ii) Amendment to By-laws of the Registrant
10 Employment Agreement dated June 15, 1998 by and between the
Registrant and Richard W. Talarico
11 Computation of Earnings per Share.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the quarter
ended June 30, 1998.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIN COMMUNICATIONS CORPORATION
(Registrant)
Date: August 6, 1998 By: /s/ Richard W. Talarico
--------------------------
Richard W. Talarico
Chairman and Chief Executive Officer
Date: August 6, 1998 By: /s/ Dean C. Praskach
----------------------
Dean C. Praskach
Vice President-Finance and Chief Accounting Officer
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Allin Communications Corporation
Form 10-Q
June 30, 1998
Exhibit Index
Exhibit
Number Description of Exhibit
- ------ ----------------------
3(ii) Amendment to By-laws of the Registrant
10 Employment Agreement dated June 15, 1998 by and between the Registrant
and Richard W. Talarico
11 Computation of Earnings per Share
27 Financial Data Schedule
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Exhibit 3(ii)
Amendment to By-Laws of Allin Communications Corporation
Section 2.9. Nominations of Directors. Nominations of candidates for
election as directors at any annual meeting of stockholders may be made (i) by,
or at the direction of, a majority of the Board of Directors or (ii) by any
stockholder of record entitled to vote at such annual meeting. Only persons
nominated in accordance with procedures set forth in this Section 2.9 shall be
eligible for election as a director at an annual meeting.
Nominations, other than those made by, or at the direction of, a majority
of the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation as set forth in this Section 2.9. To be
timely, a stockholder's notice shall be delivered to, or mailed and received at,
the principal executive offices of the Corporation not later than ninety (90)
days in advance of the anniversary date of the immediately preceding annual
meeting. Such stockholder's notice shall be set forth (i) as to each person
whom the stockholder proposes to nominate as a director (a) the name, age,
business address and residence address of such person, (b) the principal
occupation or employment of such person, (c) the class and number of shares of
the Corporation's equity securities which are Beneficially Owned (as defined
below) by such person on the date of such stockholder notice and (d) and any
other information relating to such person that would be required to be disclosed
pursuant to Regulation 13D under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), in connection with the acquisition of shares, and pursuant
to Regulation 14A under the Exchange Act, in connection with the solicitation of
proxies with respect to nominees for election as directors, regardless of
whether such person is subject to the provisions of such regulations, including,
but not limited to, information required to be disclosed by items 4(b) and 6 of
Schedule A of Regulation 14A and information which would be required to be filed
on Schedule B of Regulation 14A with the Securities and Exchange Commission (as
such Items and Schedules are in effect on the date hereof and such additional
information as may required by those provisions or successor provisions adopted
after the date thereof): and (ii) as to the stockholder giving the notice (a)
the name and address, as they appear on the Corporation's books, of such
stockholder and any other stockholder who is a record or Beneficial Owner of any
equity securities of the corporation and who is known by such stockholder to be
supporting such nominee(s) and (b) the class and number of shares of the
Corporation's equity securities which are Beneficially Owned and owned of record
by such stockholder on the date of such stockholder notice and the number of
shares of the Corporation's equity securities Beneficially Owned and owned of
record by any Person known by such stockholder to be supporting such nominee(s)
on the date of such stockholder notice. At the request of a majority of the
Board of Directors any person nominated by, or at the direction of, the Board of
Directors for election as a director at an annual meeting shall furnish to the
Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. Ballots
bearing the names of all the persons who have been nominated for election as
directors at an annual meeting in accordance with procedures set forth in this
Section 2.9 shall be provided for use at the annual meeting.
A majority of the directors may reject any nomination by a stockholder not
timely made in accordance with the requirements of this Section 2.9. If a
majority of the directors determines that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section 2.9 in any material respect, the Secretary of the Corporation shall
promptly notify such stockholder of the deficiency in the notice. The
stockholder shall have an opportunity to cure the deficiency by providing
additional information to the Secretary within such period of time, not to
exceed five (5) days, from the date such deficiency notice is given to the
stockholder, as a majority of the directors shall reasonably determine. if the
deficiency is not cured within such period, or if a majority of the directors
reasonably determine that the additional information provided by the
stockholder, together with the information previously provided, does not satisfy
the requirements of this Section 2.9 in any material respect, then a majority of
the directors may reject such stockholder's nomination. The Secretary of the
Corporation shall notify a stockholder in writing whether his nomination has
been made in accordance with the time and informational requirements of this
Section 2.9. Notwithstanding the procedure set forth in this Section 2.9, if
the majority of the directors does not make a determination as to the validity
of any
-1-
<PAGE>
nominations by a stockholder, the presiding officer of the annual meeting shall
determine and declare at the annual meeting whether a nomination was not made in
accordance with the terms of this Section 2.9. If the presiding officer
determines that a nomination was not made in accordance with the terms of this
Section 2.9, he shall so declare at the annual meeting and the defective
nomination shall be disregarded.
For the purposes of this Section 2.9 and Section 2.10, a person shall be
considered the "Beneficial Owner" of any security (whether or not owned of
record):
(a) with respect to which such person or any affiliate or associate (as
those terms are defined under Rule 12b-2 of the General Rules and Regulation
under the Exchange Act) of such person directly or indirectly has shares (i)
voting power, including the power to vote or to direct the voting of such
securities and/or (ii) investment power, including the power to dispose of or to
direct the disposition of such security;
(b) which such person or any affiliate or associate of such person has (i)
the right or obligation to acquire (whether such right or obligation is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, and/or (ii) the right to vote pursuant to any agreement, arrangement
or understanding (whether or not in writing and whether or not such right is
exercisable immediately or only after the passage of time); or
(c) which is Beneficially Owned with the meaning of (a) or (b) of this
paragraph by any other person with which such first-mentioned person or any of
its affiliates or associates has any agreement, arrangement or understanding
(whether or not in writing), with respect to (x) acquiring, holding, voting or
disposing or such security or any security convertible into or exchangeable or
exercisable for such security, or (y) acquiring, holding or disposing of all or
substantially all of the assets or businesses of the Corporation or a subsidiary
of the Corporation.
Section 2.10. New Business. At the annual meeting of stockholders, only
such new business shall be conducted, and only such proposals shall be acted
upon, as shall have been brought before the annual meeting (a) by, or at the
direction of, the majority of the Board of Directors or (b) by any stockholder
of the Corporation who complies with the notice procedures set forth in this
Section 2,10. For the proposal to be properly brought before an annual meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal executive
offices of the Corporation not later than ninety (90) days in advance of the
anniversary date of the immediately preceding annual meeting. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (a) a brief description of the
proposal desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business and any other stockholder who is the record or Beneficial Owner of any
equity security of the Corporation known by such stockholder to be supporting
such proposal, (c) the class and number of shares of the Corporation's equity
securities which are Beneficially Owned and owned of record by the stockholder
giving the notice and by any other record or Beneficial Owners of the
Corporation's equity securities known by such stockholder to be supporting such
proposal on the date of such stockholder notice, and (d) any financial or other
interest of the stockholder in such proposal.
A majority of the directors may reject any stockholder proposal not timely
made in accordance with the terms of this Section 2.10. If a majority of the
directors determine that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 2.10 in any material
respect, the Secretary of the Corporation shall promptly notify such stockholder
of the deficiency in the notice. The stockholder shall have an opportunity to
cure the deficiency by providing additional information to the Secretary within
such period of time, not to exceed five (5) days from the date such deficiency
notice is given to the stockholder, as the majority of the directors shall
reasonably
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<PAGE>
determine. If the deficiency is not cured within such period, or if the majority
of the directors determines that the additional information provided by the
stockholder, together with information previously provided, does not satisfy the
requirements of this Section 2.10 in any material respect, then a majority of
directors may reject such stockholder's proposal. The Secretary of the
Corporation shall notify a stockholder in writing whether his or her proposal
has been made in accordance with the time and information requirements of this
Section 2.10. Notwithstanding the procedures set forth in this paragraph, if a
majority of the directors does not make a determination as to the validity of
any stockholder proposal, the presiding officer of the annual meeting shall
determine and declare at the annual meeting whether the stockholder proposal was
made in accordance with the terms of this Section 2.10. If the presiding officer
determines that a stockholder proposal was not made in accordance with the terms
of this Section 2.10, he or she shall so declare at the annual meeting and any
such proposal shall not be acted upon at the annual meeting.
-3-
<PAGE>
Exhibit 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of this 15th day of
June, 1998, and effective as of June 1, 1998, by and between Allin
Communications Corporation, a Delaware corporation ("Employer"), and Richard W.
Talarico ("Employee"), a resident of Pennsylvania.
WITNESSETH:
----------
WHEREAS, Employer and Employee entered into that certain Employment Agreement
as of August 1, 1996 (the "Prior Employment Agreement") pursuant to which
Employee was employed as Chief Executive Officer of the Employer on the terms
and conditions contained in the Prior Employment Agreement; and
WHEREAS, Employer desires to continue to employ Employee as its Chief
Executive Officer on a full-time basis and Employee is willing to continue to
serve on a full-time basis but Employer and Employee desire to replace the Prior
Employment Agreement with this Employment Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements herein
contained and intending to be legally bound hereby, the parties agree as
follows:
Section 1 Employment. Subject to the terms and conditions of this Agreement,
--------- ----------
Employer agrees to employ Employee as Chief Executive Officer of Employer, and
Employee accepts such employment. Employee will diligently and faithfully and
in conformity with the directions of the Board of Directors of Employer perform
the duties of his employment hereunder, and he will devote his best efforts and
attention on a full-time basis to the performance of said duties.
Notwithstanding the foregoing, Employee may devote his time to various personal
endeavors provided such activities and services do not materially interfere or
conflict with the performance of his duties hereunder and provided further that
such activities as are consistent with the Employee's past practices will not be
deemed to materially interfere or conflict with the performance of his duties
hereunder.
Section 2. Employment Period. The term of Employee's employment hereunder
--------- -----------------
shall begin on May 15, 1998 and shall continue through May 15, 2001 unless
sooner terminated in accordance with the terms of this Section 2 ("Employment
Period"). The Employment Period shall terminate upon (i) Employee's death or,
unless waived by Employer, his disability, either physical or mental (as
determined by Employer's physician) which may reasonably be anticipated to
render him unable, for a period of at least three (3) months, effectively to
perform the obligations, duties and responsibilities of Employee's employment
with Employer; or (ii) the termination of Employee's employment by the Board of
Directors with cause (as hereinafter defined); or (iii) the passage of one
hundred and eighty (180) days from the date of delivery by either party to the
other of his or its election to terminate this Agreement. As used herein,
"cause" shall mean (i) dishonest, fraudulent or illegal conduct; (ii)
misappropriation of Employer funds; (iii) conviction of a felony; (iv) excessive
use of alcohol; (v) use of controlled substances or other addictive behavior;
(vi) unethical business conduct; (vii) breach of any statutory or common law
duty of loyalty to Employer; and (viii) action by Employee which is prejudicial
or injurious to the business or goodwill of Employer or a material breach of
this Agreement.
Section 3. Employment Compensation and Other Benefits.
--------- ------------------------------------------
(a) Salary. For services performed by Employee during the
--- ------
Employment Period, Employer will pay to Employee a salary of One Hundred Seventy
Five Thousand Dollars ($175,000) per annum, payable in equal semi-monthly
installments of $7,291.76, prorated for any partial period of employment. At
such time as Allin Communications achieves positive EBITDA for two
-1-
<PAGE>
consecutive quarters, Employee's salary will be increased to $225,000 per annum.
Future increases or decreases in salary during the term of this Agreement will
be subject to Section 3(f).
(b) Benefits. During the term of his employment hereunder,
--- --------
Employee will be entitled to the following:
(i) payment by Employer of the premiums for medical
insurance coverage for himself and his family consistent
with programs from time to time in effect for the
employees of Employer;
(ii) four weeks of paid vacation each year of employment; and
(iii) such other benefits as are available to other employees
of Employer generally.
(c) Business Expenses. Employer will reimburse Employee for
--- -----------------
reasonable out-of-pocket expenses incurred by him, in accordance with Employer's
policies as in effect from time to time, for entertainment, travel, lodging and
similar items in connection with the business of Employer, provided that
Employee properly accounts for and promptly submits appropriate supporting
documentation with respect to all such expenses.
(d) Discretionary Bonus. During the Employment Period, the
--- -------------------
Employee shall have the opportunity to earn an annual bonus in accordance with a
Company annual bonus program to be established by the Compensation Committee and
approved by the Board of Directors of the Company. The payment of any annual
bonus under any such program shall be contingent upon the achievement of certain
corporate and/or individual performance goals established by the Board in its
sole discretion and shall not exceed an amount equal to the Employee's base
salary for years 1998 and 1999 and one and one half times base salary for
calendar year 2000. In general, annual bonuses shall be based on goals which
enhance shareholder value. One or more of the following may be established as
acceptable performance goals: Company revenues, pre-tax income, earnings before
income taxes, interest, depreciation and amortization, return on equity, total
shareholder return, or other measures of corporate performance which would be in
the best interests of the shareholders.
Further, for calendar year 1998, up to 50% of any bonus awarded under this
Section (d) may be deferred at the option of the Board of Directors. Any
deferred amount will be paid no later than May 15, 2001 and will accrue interest
at 7% per annum, compounded monthly until paid. A discretionary bonus earned
for a particular calendar year will be payable to the Employee only if the
Employee is employed on the last day of the calendar year for which the bonus is
earned unless (i) cessation of employment prior to year end is due to his death
or disability or follows (for any reason) a Change in Control (as defined in
subsection 3(e)) during that calendar year or (ii) agreed upon goals were
already attained for that calendar year prior to cessation of his employment
unless the Employee is terminated for "cause" (as defined in Section 2).
(e) Stock Option Plan. Employee will be entitled to participate
--- -----------------
in Employer's 1996 and 1997 Stock Option Plans and any future plans established
by Employer (the "Stock Option Plans"). Employee will be granted Incentive Stock
Options for 100,000 shares upon signing of this Agreement. The Exercise Price
will be the closing price of the Company's Common Stock on the effective date of
the agreement. Employee will be entitled to Incentive Stock Options for 100,000
shares of the Employer's Common Stock on each of January 1, 1999 and January 1,
2000. The Exercise Price will be the closing price of the Company's Common Stock
on the date of the award. If options are not then currently available under any
Stock Option Plans, the Board of Directors will propose an alternative
compensation arrangement to Employee for consideration. All Incentive Stock
Options shall vest upon the earlier to occur of (a) May 15, 2001, and (b) the
date on which (i) the termination of this Agreement without cause occurs, (ii)
the Company sells all or substantially all of its assets, (iii) merges with
another entity in a transaction in which the Company is not the surviving
corporation, or (iv) any person (as that term is used in Section 13 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than the
shareholders of Allin Communications Corporation (as existing on the date
hereof) becomes the
-2-
<PAGE>
Beneficial Owner (as that term is used in Section 13(d) of the Exchange Act)
directly or indirectly of 50% or more of the common stock of Employer
(collectively, an event described in (ii) (iv) is referred to as a "Change in
Control"). Notwithstanding the foregoing, vested options will be immediately
forfeited, and will no longer be exercisable, upon the termination of the
Employee for "cause," as defined in Section 2.
(f) Annual Merit Review. Annually, on or before June 1 of each
--- -------------------
year Employer will conduct an annual review of Employee's performance under this
Agreement and, if deemed appropriate, implement adjustments to this Section 3
for such year.
(g) Severance Pay. If Employee's employment is terminated by
--- -------------
Employer, during the Employment Period, (a) without cause, or (b)
contemporaneously with or within ninety (90) days prior to the occurrence of a
Change in Control, Employee shall receive semi-monthly severance payments equal
to the semi-monthly base salary payment which Employee was receiving immediately
prior to the termination, until the later to occur of: i) the one-year
anniversary of the date of termination or ii) the expiration of the term of this
Agreement. For so long as Employee is entitled to receive severance payments,
the Employer will continue, at its expense, coverage for the Employee (and his
eligible dependents) under the Employer's group health plan. The period of time
Employer continues Employee's coverage will not reduce the period of time
Employee may continue coverage at his expense under COBRA.
Section 4. Conditions of Continued Employment. As conditions of his
--------- ----------------------------------
continued employment, Employee covenants and agrees as follows:
(a) that, during the Employment Period, he will devote his full
time, services and attention and best efforts to the performance of his duties
and to the promotion of the business and interests of Employer except as
permitted in Section 1;
(b) that, during the Employment Period, and for a period of two
(2) years thereafter, he will not, without the prior written consent of the
Board of Directors of Employer, directly or indirectly, as a stockholder (except
as a stockholder owning beneficially or of record less than five percent (5%) of
the outstanding shares of any class of stock of any issuer listed on a national
securities exchange), or as an officer, director, manager, member, employee,
partner, joint venturer, proprietor or otherwise, engage in, become interested
in, consult with, lend to or borrow from, advise or negotiate for or on behalf
of, any business which is of the type in which Employer or any affiliate or
subsidiary of Employer engages during the Employment Period;
(c) that, during the Employment Period, and for a period two (2)
years thereafter, he will not solicit any customer of Employer or any customer
of any affiliate of subsidiary of Employer, directly or indirectly, for the
purpose of enticing such customers to do business with anyone other than
Employer;
(d) that, during the Employment Period, and for a period of two
(2) years thereafter, he will not solicit (or employ or cause to be employed
other than by Employer) other employees of Employer or any affiliate or
subsidiary of Employer, directly or indirectly, for the purpose of enticing them
to leave their employment with Employer or any affiliate or subsidiary of
Employer;
(e) that, during the Employment Period and for a period of two (2)
years thereafter, he will make full and complete disclosure of the existence of
this Agreement and the content of this Section 4 to all prospective employers
with whom he may discuss possible employment;
(f) that, he will refrain from directly or indirectly disclosing,
making available or using or causing to be used in any manner whatsoever, any
information of Employer of a proprietary or confidential nature (including
without limitation, information regarding inventions, processes, formulas,
systems, plans, programs, studies, techniques, "know-how," trade secrets, income
or earnings, tax data, customer lists and contracts to which Employer is a
party, but excluding any such information which may be in the public domain
through proper means) and, upon termination of his
-3-
<PAGE>
employment, such information, to the extent that it has been reduced to writing
(including any and all copies thereof), together with all copies of all forms,
documents and materials of every kind, whether confidential or otherwise, shall
forthwith be returned to the Employer and shall not be retained by Employee or
furnished to any third party, either by sample, facsimile or by verbal
communication;
(g) that, he will refrain from any disparagement, direct or
indirect, through innuendo or otherwise, of Employer or any of its employees,
agents, officers, directors, shareholders or affiliates;
(h) that, during the Employment Period, he will not, without the
prior written consent in each case of the Board of Directors of Employer: (i)
participate actively in any other business interests or investments which would
conflict with his responsibilities under this Agreement except as permitted in
Section 1, or (ii) borrow money from, or lend to, customers (except those
commercial institutions whose business it is to lend money) or individuals or
firms from which Employer or any affiliate or subsidiary of Employer buys
services, materials, equipment or supplies, or with whom Employer or any
affiliate or subsidiary does business;
(i) that, during the Employment Period, he will not, without the
prior written consent in each case of the Board of Directors of Employer (i)
exchange goods, products or services of Employer in return for goods, products
or services of any individual or firm or (ii) accept gifts or favors from any
outside organization or agency which, individually or collectively, may cause
undue influence in his selection of goods, products or services for Employer;
(j) that, after the termination of his employment, he will not
secure, or attempt to secure, from any employee or former employee of Employer
or any affiliate or subsidiary of Employer, any information relating to Employer
or any affiliate or subsidiary of Employer or their business operations; and
(k) that he will promptly and voluntarily advise the Board of
Directors of Employer of any activities which might result in a conflict of
interest with his duties to Employer hereunder, and, further, will make such
other and further disclosures as Employer may reasonably request from time to
time.
Employee represents and warrants to Employer that, notwithstanding the
operation of the covenants contained in this Section 4, upon the termination of
his employment hereunder, Employee will be able to obtain employment for the
purpose of earning a livelihood.
Section 5. Injunctive Relief. Because the services to be performed
--------- -----------------
by Employee hereunder are of a special, unique, unusual, confidential
extraordinary and intellectual character which character renders such services
unique and because Employee will acquire by reason of his employment and
association with Employer an extensive knowledge of Employer's trade secrets,
customers, procedures, and other confidential information, the parties hereto
recognize and acknowledge that, in the event of a breach or threat of breach by
Employee of any of the terms and provisions contained in Section 4 or Section 6
of this Agreement, monetary damages alone to Employer would not be an adequate
remedy for a breach of any of such terms and provisions. Therefore, it is
agreed that in the event of a beach or threat of a breach of any of the
provisions of Section 4 or Section 6 of this Agreement by Employee, Employer
shall be entitled to an immediate injunction from any court of competent
jurisdiction restraining Employee, as well as any third parties including
successor employers of Employee whose joinder may be necessary to effect full
and complete relief, from committing or continuing to commit a breach of such
provisions without the showing or proving of actual damages. Any preliminary
injunction or restraining order shall continue in full force and effect until
any and all disputes between the parties to such injunction or order regarding
this Agreement have been finally resolved. Employee hereby agrees to pay all
costs of suit incurred by Employer, including but not limited to reasonable
attorneys' fees, in obtaining any such injunction or order. Employee hereby
waives any right he may have to require Employer to post a bond or other
security with respect to obtaining or continuing any such injunction or
temporary restraining order and, further, hereby releases Employer, its
officers, directors, employees and agents from and waives any claim for damages
-4-
<PAGE>
against them which he might have with respect to Employer obtaining in good
faith any injunctions or restraining order pursuant to this Agreement.
Section 6. Absence of Restrictions. Employee will promptly submit to
--------- -----------------------
Employer written disclosures of all inventions, improvements, discoveries,
technological innovations and new ideas, relating to Employer's business,
whether or not patentable (hereinafter called "Inventions"), which are directly
or indirectly made, conceived, created or prepared by Employee, alone or jointly
with others, during the Employment Period. Worldwide right, title and interest
in and to the intellectual property rights (including but not limited to
copyrights created in, patents to, or any other form of legal protection as may
be obtained or obtainable in the United States of America or any foreign
country), relating to all such Inventions that shall be within the existing or
contemplated scope of Employer's business at the time such inventions are made
or conceived or which result from or are suggested by any work Employee or
others may do for or on behalf of Employer, shall belong to Employer. Employee
will assign all right, title and interest in and to such intellectual property
rights to Employer, and upon request of Employer, will at any time during the
Employment Period and after termination of Employee's employment for any reason,
execute all proper papers for use in applying for, obtaining, maintaining and
enforcing such copyrights, patents or other legal protection as Employer may
desire and will execute and deliver all proper assignments thereof, when so
requested, without remuneration but at the expense of Employer.
Section 7. General.
--------- -------
(a) Interpretation. If the provisions of subsections 4(b), 4(c)
--- --------------
or 4(d) of this Agreement should be held to be invalid, illegal or unenforceable
by a court of competent jurisdiction because of time limitation or geographical
area therein provided, such provisions shall nevertheless be effective and
enforceable for such period of time and/or such geographical area as may be held
to be reasonable by such court. Any provision of this Agreement that is invalid,
illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability
without invalidating or rendering unenforceable the remaining provisions of this
Agreement, any such invalidity, illegality or unenforceability shall not, of
itself, affect the validity, legality or enforceability of such provision in any
other jurisdiction.
(b) Notices. In any case where any notice or other communications
--- -------
is to be given or made pursuant to any provision of this Agreement, such notice
or communication shall be deemed to be delivered when actually received on the
date specified in the return receipt for a notice or communication mail by
registered or certified mail, postage prepaid, addressed as follows:
If to Employer:
--------------
Allin Communications Corporation
400 Greentree Commons
381 Mansfield Avenue
Pittsburgh, PA 15220
with copies to:
Bryan D. Rosenberger, Esq.
Eckert Seamans Cherin & Mellott
600 Grant Street, 42nd Floor
Pittsburgh, PA 15219
-5-
<PAGE>
If to Employee:
--------------
Richard W. Talarico
1324 Bethel Green Drive
Bethel Park, PA 15102
or such other address or addresses as any party may specify by notice to the
other party given as herein provided.
(c) Headings. The headings in this Agreement are inserted for
--- --------
convenience and identification and in no way describe, interpret, define or
limit the scope, extent or intent of this Agreement or any provision hereof.
(d) No Presumption on Interpretation. Nothing herein shall be
--- --------------------------------
construed more strongly against or more favorably toward either party by reason
of either party having drafted this Agreement or any portion hereof.
(e) Binding Effect. This Agreement shall be binding upon, and
--- --------------
inure to the benefit of, the parties hereto and their respective heirs,
beneficiaries, executors, administrators, personal representatives, successors
and permissible assigns.
(f) Integration. This Agreement constitutes and contains the
--- -----------
entire Agreement and understanding between the parties with respect to the
subject matter hereof and supersedes any all prior agreements (including the
Prior Employment Agreement), understandings and negotiations relating thereto.
No promise, understanding, representation, inducement, condition or warranty not
set forth herein has been made or relied upon by any party hereto.
(g) Waivers: Modification. This Agreement, or any provision
--- ---------------------
hereof, may be amended, supplemented or modified only by a writing signed by
both parties and may be waived only by a writing signed by the party to be bound
thereby. A written waiver of any provision shall be valid only in the instance
for which given and shall not be deemed to be a continuing waiver or construed
as a waiver of any other provisions.
(h) Governing Law. This Agreement shall be construed in
--- -------------
accordance with and governed in all respects by the laws of the Commonwealth of
Pennsylvania (without giving effect to the conflicts of laws provisions
thereof).
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
ALLIN COMMUNICATIONS CORPORATION
/s/ Dean C. Praskach
---------------------------------
By: Dean C. Praskach
Name Printed: Dean C. Praskach
Title: Vice President -- Finance
WITNESS:
/s/ Denise Smith /s/ Richard W. Talarico
- --------------------------- ---------------------------------
Richard W. Talarico
-7-
<PAGE>
Exhibit 11
ALLIN COMMUNICATIONS CORPORATION
CALCULATION OF NET LOSS PER COMMON SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (3,152) (732) (5,744) (2,478)
Accretion and dividends on preferred stock 55 57 119 112
------------ ---------- ---------- ----------
Net loss attributable to common shareholders $ (3,207) (789) (5,863) (2,590)
============ ========== ========== ==========
Net loss per common share - basic and diluted $ (0.62) (0.15) (1.14) (0.50)
============ ========== ========== ==========
Weighted average common shares outstanding
during the period 5,184,067 5,182,267 5,184,067 5,182,267
Effect of restricted common stock (26,668) (24,868) (26,668) (24,868)
============ ========== ========== ==========
Shares used in calculating net loss per common
share 5,157,399 5,157,399 5,157,399 5,157,399
============ ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
DATA FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,111
<SECURITIES> 0
<RECEIVABLES> 2,594
<ALLOWANCES> 112
<INVENTORY> 1,858
<CURRENT-ASSETS> 9,900
<PP&E> 7,636
<DEPRECIATION> 3,001
<TOTAL-ASSETS> 18,838
<CURRENT-LIABILITIES> 2,933
<BONDS> 0
0
2,500
<COMMON> 52
<OTHER-SE> 12,929
<TOTAL-LIABILITY-AND-EQUITY> 18,838
<SALES> 7,089
<TOTAL-REVENUES> 7,089
<CGS> 3,603
<TOTAL-COSTS> 3,603
<OTHER-EXPENSES> 6,079
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (121)
<INCOME-PRETAX> (2,472)
<INCOME-TAX> 6
<INCOME-CONTINUING> (2,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,478)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
