<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 13, 1998
Allin Communications Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State of Other Jurisdiction of Incorporation)
0-21395 21-1795265
(Commission File Number) (IRS Employer Identification No.)
400 Greentree Commons, 381 Mansfield Avenue
Pittsburgh, Pennsylvania 15220-2751
(Address of Principal Executive Offices) (Zip Code)
(412) 928-8800
(Registrant's Telephone Number, Including Area Code)
<PAGE>
This filing by Allin Communications Corporation (the "Company") is an
amendment to the Company's current report on Form 8-K dated as of August 13,
1998 describing the Company's acquisition of all of the outstanding capital
stock of KCS Computer Services, Inc., a Pennsylvania corporation ("KCS"),
pursuant to a Stock Purchase Agreement among the Company and the shareholders of
KCS. KCS provides information technology consulting and custom development
services to its clients. This amendment provides certain financial information
concerning KCS, including audited financial statements for the years ended
December 31, 1996 and 1997, interim unaudited financial statements for the six
months ended June 30, 1997 and 1998, and pro forma condensed consolidated
financial information. The information contained in this filing on Form 8-K/A
should be read in conjunction with information set forth in the Company's
filings on Form 8-K dated as of August 13, 1998 describing the acquisition of
KCS and dated as of September 30, 1998 describing the Company's sale of its
sports marketing subsidiary, SportsWave, Inc. and the closure of a Loan and
Security Agreement with S&T Bank, a Pennsylvania banking association. The
information contained in this filing should also be read in conjunction with the
audited financial statements and notes for the years ended December 31, 1996 and
1997 contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, and the Company's filings on Form 10-Q for the quarterly
periods ended March 31, 1998 and June 30, 1998.
The audited financial statements of KCS included in this report were
prepared by Grossman, Yanak & Ford LLP, independent accountants for KCS. The
Company anticipates that the audit of KCS for the period ended December 31, 1998
will be conducted by the Company's independent accountants, Arthur Andersen LLP,
as part of its audit of the Company and its subsidiaries.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired:
Independent Auditors' Report
Audited Balance Sheets of KCS Computer Services, Inc. as of December
31, 1997 and 1996
Audited Statements of Operations and Retained Earnings of KCS Computer
Services, Inc. for the Years Ended December 31, 1997 and 1996
Audited Statements of Cash Flows of KCS Computer Services, Inc. for
the Years Ended December 31, 1997 and 1996
Notes to Audited Financial Statements of KCS Computer Services, Inc.
Unaudited Balance Sheets of KCS Computer Services, Inc. as of June 30,
1998 and 1997
Unaudited Statements of Operations and Retained Earnings of KCS
Computer Services, Inc. for the Six Months Ended June 30, 1998 and
1997
Unaudited Statements of Cash Flows of KCS Computer Services, Inc. for
the Six Months Ended June 30, 1998 and 1997
Notes to Unaudited Financial Statements of KCS Computer Services, Inc.
(b) Pro Forma Financial Information:
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1998
Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 1997
Pro Forma Condensed Consolidated Statement of Operations for the Six
Months Ended June 30, 1998
Notes to Pro Forma Condensed Consolidated Financial Statements
(c) Exhibits:
2.1 Stock Purchase Agreement dated August 13, 1998 among the Registrant, KCS
Computer Services, Inc. and the stockholders of KCS Computer Services,
Inc. (previously filed)
3(i)(a) Certificate of Designation for Series B Redeemable Preferred Stock
of the Registrant (previously filed)
3(i)(b) Certificate of Correction Relating to the Series B Redeemable
Preferred Stock of the Registrant (previously filed)
4.1 Preemptive Rights Agreement dated August 13, 1998 among the Registrant
and certain stockholders of the Registrant (previously filed)
<PAGE>
Item 7. (cont.)
4.2 Form of Warrant for purchasers of Series B Redeemable Preferred Stock
(previously filed)
4.3 Promissory Note dated August 13, 1998 in the principal amount of
$2,000,000 (previously filed)
10.1 Registration Rights Agreement dated August 13, 1998 among the Registrant
and certain stockholders of the Registrant (previously filed)
10.2 Promissory Note dated August 13, 1998 in the principal amount of
$6,200,000 (previously filed)
23 Consent of Grossman Yanak & Ford LLP
99 Press Release dated August 13, 1998 (previously filed)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and
Board of Directors of KCS Computer Services, Inc.
Pittsburgh, Pennsylvania
We have audited the accompanying balance sheets of KCS Computer Services, Inc.
as of December 31, 1997 and 1996, and the related statements of operations and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KCS Computer Services, Inc. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/GROSSMAN YANAK & FORD LLP
Pittsburgh, Pennsylvania
September 22, 1998
<PAGE>
KCS COMPUTER SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- ------------------------------------------------
<TABLE>
<CAPTION>
ASSETS NOTES 1997 1996
- ------ ----- ----- -----
<S> <C> <C> <C>
CURRENT ASSETS:
Cash 1 $ 664,117 $ 230,304
Trade accounts receivable (net of allowance
for doubtful accounts of $3,110 at
December 31, 1997) 1,507,893 1,309,599
Employee advances - 5,646
Deferred income taxes 1,6 4,000 77,000
Prepaid expenses 101 7,401
----------- -----------
Total current assets 2,176,111 1,629,950
PROPERTY AND EQUIPMENT, NET 1,3 194,438 270,183
DEPOSITS 2,307 1,502
----------- -----------
TOTAL $ 2,372,856 $ 1,901,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 154,655 $ 130,411
Accrued payroll and payroll related expenses 311,170 272,812
Sales tax payable 8 17,684 11,229
Income taxes payable 1,6 346,090 -
Accrued expenses 14,850 -
Current portion of notes payable 4 256,125 265,057
Current portion of capital lease obligations 5 14,958 18,288
----------- -----------
Total current liabilities 1,115,532 697,797
----------- -----------
NOTES PAYABLE 4 320,156 576,281
----------- -----------
CAPITAL LEASE OBLIGATIONS 5 6,176 21,134
----------- -----------
DEFERRED INCOME TAXES 1,6 322,000 420,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - par value $1 per share;
500,000 shares authorized; 1,040 shares
issued and outstanding 1,040 1,040
Additional paid-in capital 43 43
Retained earnings 607,909 185,340
----------- -----------
Total stockholders' equity 608,992 186,423
----------- -----------
TOTAL $ 2,372,856 $ 1,901,635
=========== ===========
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
<PAGE>
KCS COMPUTER SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTES 1997 1996
----- ---- ----
<S> <C> <C> <C>
PROFESSIONAL FEES $12,842,297 $10,992,354
----------- -----------
EXPENSES:
Wages and salaries 6,721,973 6,494,066
Payroll taxes 532,451 568,885
Employee fringe benefits 196,503 217,092
Outside services 3,215,322 1,925,765
Cost of software resold 59,412 228,775
Travel and entertainment 416,777 578,502
Club dues 6,073 7,509
Rent 195,094 291,340
Repairs 1,267 -
Utilities 75,724 63,283
Auto expense 84,777 108,518
Professional services 203,795 89,198
Advertising 41,288 65,393
Seminars and training 5,414 10,023
Office expense 96,643 164,720
Licenses, fees, other taxes 11,364 758
Insurance 30,728 76,961
Dues and subscriptions 8,848 7,221
Bank charges 3,448 311
Depreciation and amortization 1 68,468 69,401
Bad debt expense 16,862 19,531
Miscellaneous 1,952 1,198
----------- -----------
Total 11,994,183 10,988,450
----------- -----------
OPERATING INCOME 848,114 3,904
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense 4 (77,015) (104,700)
Fines, penalties and other assessments (25,687) -
Loss on sale of assets (2,671) -
Other income 8,218 -
----------- -----------
Total (97,155) (104,700)
----------- -----------
INCOME (LOSS) BEFORE TAXES 750,959 (100,796)
INCOME TAX PROVISION 6 328,390 10,000
----------- -----------
NET INCOME (LOSS) 422,569 (110,796)
----------- -----------
RETAINED EARNINGS, BEGINNING -
AS PREVIOUSLY STATED 185,340 766,414
CORRECTION OF ERRORS 2 - (470,278)
----------- -----------
RETAINED EARNINGS, BEGINNING -
AS RESTATED 185,340 296,136
----------- -----------
RETAINED EARNINGS, ENDING $ 607,909 $ 185,340
=========== ===========
NET INCOME (LOSS) PER COMMON
SHARE BASIC AND FULLY DILUTED
(based on 1,040 shares outstanding
during 1997 and 1996) $ 406.32 $ (106.53)
=========== ===========
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
<PAGE>
KCS COMPUTER SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 422,569 $(110,796)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 68,468 69,401
Loss on sale of assets 2,671 -
Deferred income taxes (25,000) 10,000
(Increase) decrease in:
Accounts receivable and advances (192,648) 469,432
Prepaid expenses 7,300 (101)
Increase (decrease) in:
Accounts payable 24,244 77,277
Accrued liabilities 405,753 (103,810)
--------- ---------
Net cash provided by operating activities 713,357 411,403
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (9,394) (51,937)
Proceeds from sale of equipment 14,000 -
Increase in deposits (805) (1,052)
--------- ---------
Net cash provided (used) by investing activities 3,801 (52,989)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and
capital lease obligations (283,345) (299,211)
Short-term borrowings, net - 50,000
Proceeds from long-term debt - 40,538
--------- ---------
Net cash used by financing activities (283,345) (208,673)
--------- ---------
NET INCREASE IN CASH 433,813 149,741
CASH, BEGINNING 230,304 80,563
--------- ---------
CASH, ENDING $ 664,117 $ 230,304
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 77,015 $ 104,700
========= =========
Cash paid during the year for income taxes $ - $ -
========= =========
</TABLE>
During 1996, the Company refinanced $824,500 of notes payable and $200,000 of
short-term borrowings with a $1,024,500 term note. Also during 1996, the
Company acquired office equipment of $41,738 under capital leases of like
amount.
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
KCS COMPUTER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Presentation - KCS Computer Services, Inc. (the "Company")
is a national systems integration company that provides custom technical
solutions for client/server and legacy system environments. The Company was
incorporated in Pennsylvania on March 20, 1986. Effective December 31, 1996,
Information Technology Solutions, Inc., KCS Training and Temporary Services,
Inc. and KCS Personnel Services, Inc., which were affiliated companies also
controlled by the controlling stockholder, were merged into KCS Computer
Services, Inc. The merger was accounted for in a manner similar to a pooling
of interests. Accordingly, the financial statements as of December 31, 1996
and for the year then ended are presented on a combined basis.
On August 13, 1998, the Company's stockholders sold all of the outstanding
stock of the Company. In connection with this transaction, the Company is
now a wholly-owned subsidiary of Allin Communications Corporation.
Basis of Accounting - The accompanying financial statements have been
prepared on the accrual basis of accounting. Revenues are recognized when
earned and expenses are recognized when incurred.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Cash - The Company maintains at financial institutions cash which may at
times exceed federally insured amounts and which may at times exceed balance
sheet amounts due to outstanding checks.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation and amortization are provided for financial reporting purposes
using the straight-line method over the estimated useful lives of the assets
ranging from five to thirty-nine years. Maintenance and repairs are charged
to income as incurred. The cost of property sold or retired and the related
accumulated depreciation are eliminated from the accounts and the resulting
gain or loss is reflected in earnings. Net property and equipment includes
assets held under capital leases with a cost of $67,803 at December 31, 1997
and 1996 and accumulated amortization of $48,883 and $33,520 at December 31,
1997 and 1996, respectively.
<PAGE>
Income Taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of current taxes due plus
deferred taxes related primarily to differences between the bases of accrued
expenses and property and equipment for financial and income tax reporting
and the results of a change in accounting method for income tax purposes (see
Note 6) as well as the utilization of net operating loss carryforwards.
The deferred tax assets and liabilities represent future tax consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
2. CORRECTION OF ERRORS
Effective January 1, 1996, the Company changed its methods of accounting for
property and liabilities to methods acceptable under generally accepted
accounting principles. In connection with the correction of these errors,
retained earnings at January 1, 1996 was reduced by $470,278 principally due
to the net effect of adjustments to property and equipment, accounts payable,
accrued expenses, capital lease obligations and deferred income taxes (See
Note 6) related to prior years. Adjustments to accounts payable and accrued
expenses of approximately $137,000 were considered in the computation of the
deferred tax liability at January 1, 1996 of $333,000 (see Note 6). These
adjustments to accounts payable and accrued expenses had served to reduce the
deferred tax liability at January 1, 1996 by approximately $56,000. The tax
effects of the remaining adjustments were immaterial.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Office furniture and equipment $ 365,246 $ 395,516
Leasehold improvements 54,326 54,326
--------- ---------
Total 419,572 449,842
Less accumulated depreciation (225,134) (179,659)
--------- ---------
Property and equipment, net $ 194,438 $ 270,183
========= =========
</TABLE>
<PAGE>
4. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Note payable to bank in monthly
principal installments of $21,344
plus interest at the prime rate plus
.75% through March 2000 $ 576,281 $ 832,406
Note payable to bank in monthly
principal installments of $3,378 plus
interest at the prime rate plus .75%
through February 1997 - $ 6,756
Note payable to financing company
in monthly installments of $332 including
interest at 5.0% through March 1997;
secured by automobile - 2,176
--------- ---------
$ 576,281 841,338
Less current portion (256,125) (265,057)
--------- ---------
Long-term debt $ 320,156 $ 576,281
========= =========
</TABLE>
Maturities of debt for years after December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 256,125
1999 256,125
2000 64,031
---------
Total $ 576,281
=========
</TABLE>
The Company also has a revolving line of credit agreement, which expires on
March 27, 1999, with maximum borrowings of $250,000 at December 31, 1997 and
1996 and interest on the line is payable monthly at the prime rate plus .75%.
The prime rate was 8.5% and 8.25% at December 31, 1997 and 1996,
respectively. There were not any outstanding borrowings on the line at
December 31, 1997 and 1996. In March 1998 the line was amended to increase
the maximum borrowings to $400,000 and to reduce the interest rate to prime
plus .5%.
The term note and line of credit are secured by all tangible and intangible
assets of the Company, are personally guaranteed by the majority stockholder,
and are subject to certain covenants which are ordinary to such credit
facilities and which include restrictions as to, among other things, debt
coverage ratios and tangible net worth.
<PAGE>
5. LEASES
The Company leases office space, automobiles and equipment under operating
leases that expire at various times through 2001. Total rental expense under
operating leases was $195,094 and $291,340 for the years ended December 31,
1997 and 1996, respectively. Minimum future annual rental commitments for
all non-cancellable operating leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $203,413
1999 185,426
2000 175,574
2001 27,682
--------
Total $592,095
========
</TABLE>
The Company leases other office equipment under capital leases which
expire at various times through 2001. The following represents the future
minimum lease payments under capital leases and their present value at December
31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $18,048
1999 2,712
2000 2,712
2001 2,261
-------
Total minimum lease payments 25,733
Less amount representing interest 4,599
-------
Present value of minimum lease payments
(including $14,958 classified as current) $21,134
=======
</TABLE>
6. INCOME TAXES
The components of the income tax provisions are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current income tax provision:
Federal $282,732 -
State 70,658 -
-------- -------
Total 353,390 -
-------- -------
</TABLE>
<PAGE>
Deferred income tax provision (benefit):
<TABLE>
<CAPTION>
<S> <C> <C>
Federal $(17,000) $ 10,000
State (8,000) -
-------- --------
Total (25,000) 10,000
-------- --------
Total $328,390 $ 10,000
======== ========
</TABLE>
The income tax provisions differ from the amounts computed using the federal
statutory income tax rates as follows:
<TABLE>
<S> <C> <C>
Provision (benefit) at federal statutory rates $255,326 $(34,270)
State taxes, net of federal benefit 49,563 (6,653)
Nondeductible expenses 27,774 49,200
Other (4,273) 1,723
-------- --------
Income tax provision $328,390 $ 10,000
======== ========
</TABLE>
The current federal and state provisions at December 31, 1997 reflect the
utilization in 1997 of federal and state net operating loss carryforwards of
$189,819 and $166,677, respectively. The current federal and state
provisions for the year ended December 31, 1996 reflect utilization of net
operating loss carryforwards of $362,484 and $338,484, respectively.
Deferred income taxes result from differences in timing of recognition of
income and expense items for tax and financial reporting purposes. The tax
effects of temporary differences that give rise to the Company's deferred tax
asset and liability are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current deferred tax asset:
Allowance for doubtful accounts $ 1,000
Accrued expenses 3,000 $ 1,000
Tax loss carryforwards - 76,000
-------- --------
Total $ 4,000 $ 77,000
======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Noncurrent deferred tax liability:
Accumulated depreciation $ 22,000 $ 20,000
Excess of accrual basis income
over cash basis income 300,000 400,000
-------- --------
Total $322,000 $420,000
======== ========
</TABLE>
<PAGE>
The Company changed its method of accounting for income tax purposes from the
cash basis to the accrual basis under Section 446 of the Internal Revenue
Code effective with the filing of the 1997 corporate income tax return.
Among the effects of this change was the recognition of approximately
$985,000 of taxable income evenly over a four year period beginning in 1997.
Accordingly, approximately $246,000 of taxable income was included in 1997
for purposes of calculating the current tax provision for the year ended
December 31, 1997.
Further, the deferred taxes related to the excess of income recognized under
the accrual basis as reflected in financial statements over the cash basis
income included in the corporate income tax returns through December 31, 1995
was not reflected in the accrual basis financial statements prior to January
1, 1996 as required by generally accepted accounting principles.
Accordingly, a deferred tax liability of $333,000 at January 1, 1996 was
included in the correction of errors discussed at Note 2.
7. PROFIT SHARING PLAN
The Company sponsors a 401(k) profit sharing plan covering substantially all
employees under which eligible employees may contribute a portion of their
eligible earnings to the plan. The Company may make discretionary
contributions as determined by the Board of Directors. No Company
contributions were recognized for the years ended December 31, 1997 and 1996.
8. OTHER COMMITMENTS AND CONTINGENCIES
The Pennsylvania Department of Revenue had presented KCS Computer Services,
Inc. and its prior affiliated companies (See Note 1) a tax assessment of
$193,212 plus penalties and interest of $63,238 as a result of a sales tax
audit. The Company filed timely appeals and vigorously contested the
assessment. During April 1998, the Pennsylvania Department of Revenue
reduced the assessment by $57,020 and abated penalties of $38,492. During
September 1998, the Pennsylvania Department of Revenue further reduced the
assessment to $9,345. Accordingly, the assessment, penalties and interest,
except for $10,837 of use tax, which was management's estimate of the
ultimate obligation, have not been reflected in these financial statements.
- -------------------------------------------------------------------------------
<PAGE>
KCS COMPUTER SERVICES, INC.
BALANCE SHEETS (UNAUDITED)
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS NOTES 1998 1997
- ------ ----- ---- ----
<S> <C> <C> <C>
CURRENT ASSETS:
Cash 1 $ 214,615 $ 303,186
Trade accounts receivable (net of allowance
for doubtful accounts of $13,000 and
$1,000, respectively) 2,060,524 1,598,299
Deferred income taxes 1,5 16,000 8,000
Prepaid expenses 8,121 101
---------- ----------
Total current assets 2,299,260 1,909,586
PROPERTY AND EQUIPMENT, NET 1,2 189,762 216,777
DEPOSITS 3,513 2,455
---------- ----------
TOTAL $2,492,535 $2,128,818
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 210,259 $ 181,127
Accrued payroll and payroll related expenses 373,824 315,014
Accrued other taxes 7 16,456 13,975
Income taxes payable 1,5 132,613 176,285
Current portion of notes payable 3 481,125 256,125
Current portion of capital lease obligations 4 8,847 15,949
---------- ----------
Total current liabilities 1,223,124 958,475
---------- ----------
LONG-TERM LIABILITIES:
Notes payable 3 192,094 448,619
Capital lease obligation 4 5,272 14,121
Deferred income taxes 1,5 224,000 309,000
---------- ----------
Total long-term liabilities 421,366 771,740
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock - par value $1 per share;
500,000 shares authorized; 1,040 shares
issued and outstanding 1,040 1,040
Additional paid-in capital 43 43
Retained earnings 846,962 397,520
---------- ----------
Total stockholders' equity 848,045 398,603
---------- ----------
TOTAL $2,492,535 $2,128,818
========== ==========
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
<PAGE>
KCS COMPUTER SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTES 1998 1997
----- ---- ----
<S> <C> <C> <C>
PROFESSIONAL FEES $7,070,881 $6,101,057
---------- ----------
EXPENSES:
Wages and salaries 3,587,948 3,364,366
Payroll taxes 312,953 305,054
Employee fringe benefits 117,960 118,542
Outside services 1,865,499 1,352,248
Cost of software and computers resold 79,497 25,115
Travel and entertainment 272,332 197,211
Club dues 3,186 2,568
Rent 110,802 97,866
Repairs 708 534
Utilities 35,716 35,101
Auto expense 29,909 46,280
Professional services 7,904 6,455
Advertising 21,546 15,471
Seminars and training 12,596 2,746
Office expense 40,450 46,591
Other taxes 7,734 4,714
Insurance 17,979 17,881
Dues and subscriptions 2,760 5,753
Charitable contributions 150 -
Depreciation and amortization 33,447 36,735
Bad debt expense (7,918) (18,531)
Miscellaneous 3,191 5,318
---------- ----------
Total 6,556,349 5,668,018
---------- ----------
OPERATING INCOME 514,532 433,039
---------- ----------
OTHER EXPENSE:
Interest expense 3 32,626 39,562
Loss on sale of assets - 2,671
Miscellaneous 83,412 37,041
---------- ----------
- -
Total 116,038 79,274
---------- ----------
INCOME BEFORE TAXES 398,494 353,765
INCOME TAX PROVISION 5 159,441 141,585
---------- ----------
NET INCOME 239,053 212,180
---------- ----------
RETAINED EARNINGS, BEGINNING 607,909 185,340
---------- ----------
RETAINED EARNINGS, ENDING $ 846,962 $ 397,520
========== ==========
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
KCS COMPUTER SERVICES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 239,053 $ 212,180
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 33,447 36,735
Loss on sales of assets - 2,671
Deferred income taxes (110,000) (42,000)
(Increase) decrease in:
Accounts receivable (552,631) (283,053)
Prepaid expenses (8,020) 7,300
Increase (decrease) in:
Accounts payable 55,604 50,716
Accrued liabilities (166,901) 221,233
---------- ----------
Net cash provided by (used in) operating activities (509,448) 205,782
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (28,771) -
Proceeds from sale of equipment - 14,000
Increase in deposits (1,206) (953)
---------- ----------
Net cash provided by (used in) investing activities (29,977) 13,047
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and
capital lease obligations (210,077) (145,947)
Proceeds from borrowings 300,000 -
---------- ----------
Net cash provided by (used in) financing activities 89,923 (145,947)
---------- ----------
NET INCREASE (DECREASE) IN CASH (449,502) 72,882
CASH, BEGINNING 664,117 230,304
---------- ----------
CASH, ENDING $ 214,615 $ 303,186
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 32,626 $ 39,562
========== ==========
Income taxes $ 482,918 $ -
========== ==========
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
<PAGE>
KCS COMPUTER SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - KCS Computer Services, Inc. (the "Company") is a national
systems integration company that provides custom technical solutions for
client/server and legacy system environments. The Company was incorporated
in Pennsylvania on March 20, 1986. Effective December 31, 1996, Information
Technology Solutions, Inc., KCS Training and Temporary Services, Inc. and KCS
Personnel Services, Inc., which were affiliated companies also controlled by
the controlling stockholder, were merged into KCS Computer Services, Inc.
On August 13, 1998, the Company's stockholders sold all of the outstanding
stock of the Company. In connection with this transaction, the Company is
now a wholly-owned subsidiary of Allin Communications Corporation.
Basis of Accounting - The accompanying financial statements have been
prepared on the accrual basis of accounting. Revenues are recognized when
earned and expenses are recognized when incurred.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Cash - The Company maintains cash at financial institutions which may at
times exceed federally insured amounts and which may at times exceed balance
sheet amounts due to outstanding checks.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation and amortization are provided for financial reporting purposes
using the straight-line method over the estimated useful lives of the assets
ranging from five to thirty-nine years. Maintenance and repairs are charged
to income as incurred. The cost of property sold or retired and the related
accumulated depreciation are eliminated from the accounts and the resulting
gain or loss is reflected in earnings. Net property and equipment includes
assets held under capital leases with a cost of $67,803 and with accumulated
amortization of $55,207 and $42,559 as of June 30, 1998 and 1997,
respectively.
- --------------------------------------------------------------------------------
<PAGE>
Income Taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of current taxes due plus
deferred taxes related primarily to differences between the
bases of accrued expenses and property and equipment for financial and income
tax reporting and the results of a change in accounting method for income tax
purposes (see Note 6).
The deferred tax assets and liabilities represent future tax consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
2. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1998 and 1997 consist of:
<TABLE>
<CAPTION>
1998 1997
-------------- --------
<S> <C> <C>
Office furniture and equipment $ 394,018 $355,853
Leasehold improvements 54,325 54,325
--------- --------
Total 448,343 410,178
Less accumulated depreciation
and amortization (258,581) 193,401
--------- --------
Property and equipment, net $ 189,762 $216,777
========= ========
3. NOTES PAYABLE
1998 1997
--------- --------
Notes payable consist of:
Note payable to bank in monthly
principal installments of $21,344
plus interest at the prime rate plus
.75% through March 2000 $ 448,219 $704,744
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note payable to bank in monthly
principal installments of $25,000
plus interest at prime rate plus
.5% from April 1998 through
March 1999 $225,000 -
-------- --------
Total 673,219 $704,744
Less current portion 481,125 256,125
-------- --------
Long-term debt $192,094 $448,619
======== ========
</TABLE>
Maturities of debt for years after June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999 $481,125
2000 192,094
--------
Total $673,219
========
</TABLE>
The Company also has a revolving line of credit agreement, which expires on
March 27, 1999, with maximum borrowings of $400,000. Interest on the line is
payable monthly at the prime rate plus .5% and .75% at June 30, 1998 and
1997, respectively. The prime rate was 8.5% at June 30, 1998 and 1997. There
were not any outstanding borrowings on the line at June 30, 1998 and 1997.
The term notes and line of credit are secured by all tangible and intangible
assets of the Company, are personally guaranteed by the majority stockholder,
and are subject to certain covenants which are ordinary to such credit
facilities and which include restrictions as to, among other things, debt
coverage ratios and tangible net worth.
4. LEASES
The Company leases office space, automobiles and equipment under operating
leases that expire at various times through 2002. Total rental expense
under operating leases for the six months ended June 30, 1998 and 1997 was
$110,802 and $97,866, respectively. Minimum future annual rental
commitments for all non-cancellable operating leases as of June 30, 1998
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $200,962
2000 179,054
2001 101,822
2002 13,647
--------
Total $495,485
========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
The Company leases other office equipment under capital leases which expire
at various times through 2002. The following represents the future minimum
lease payments under capital leases and their present value at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 10,380
2000 2,712
2001 2,712
2002 904
--------
Total minimum lease payments 16,708
Less amount representing interest 2,589
--------
Present value of minimum lease payments
(including $8,847 classified as current) $ 14,119
========
</TABLE>
5. INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current income tax provision:
Federal $ 209,114 $138,388
State 60,327 45,197
--------- --------
Total 269,441 183,585
--------- --------
Deferred income tax benefit:
Federal (83,000) (30,000)
State (27,000) (12,000)
--------- --------
Total (110,000) (42,000)
--------- --------
Total $ 159,441 $141,585
========= ========
</TABLE>
The Company changed its method of accounting for income tax purposes from the
cash basis to the accrual basis under Section 446 of the Internal Revenue
Code effective with the filing of the 1997 corporate income tax return. Among
the effects of this change will be the recognition of approximately $993,000
of taxable income evenly over a four year period beginning in 1997.
Accordingly, approximately $248,000 of taxable income was included in 1998
and 1997 for purposes of calculating the current tax provision for the six
months ended June 30, 1998 and 1997.
- --------------------------------------------------------------------------------
<PAGE>
The provision for income taxes for the six months ended June 30, 1998 and
1997 is more than that calculated at statutory rates principally due to
deductions recognized in the financial statements which are not deductible
for tax purposes, primarily consisting of penalties and nondeductible club
dues, meals and entertainment. Also, the federal and state provisions at
June 30, 1997 reflect the expected utilization in 1997 of federal and state
net operating loss carryforwards of $189,819 and $166,677, respectively.
The net deferred tax assets and liabilities at June 30, 1998 and 1997 consist
of $16,000 and $8,000 of current deferred tax assets related principally to
accrued expenses and $224,000 and $309,000, respectively, of noncurrent
deferred tax liabilities related principally to the Section 446 adjustment
discussed above and accumulated depreciation.
Further, the deferred taxes related to the excess of income recognized under
the accrual basis as reflected in financial statements over the cash basis
income included in the corporate income tax returns through December 31, 1996
was not reflected in the accrual basis financial statements prior to January
1, 1997 as required by generally accepted accounting principles.
Accordingly, a deferred tax liability of $343,000 at January 1, 1997 was
included in the prior period adjustment discussed at Note 2.
6. PROFIT SHARING PLAN
The Company sponsors a 401(k) profit sharing plan covering substantially all
employees under which eligible employees may contribute a portion of their
eligible earnings to the plan. The Company may make discretionary
contributions as determined by the Board of Directors. No Company
contributions were recognized for the six months ended June 30, 1998 and
1997.
7. OTHER COMMITMENTS AND CONTINGENCIES
The Pennsylvania Department of Revenue has presented KCS Computer Services,
Inc. and its prior affiliated companies (See Note 1) a tax assessment of
$193,212 plus penalties and interest of $63,238 as a result of a sales tax
audit. The Company had filed timely appeals and vigorously contested the
assessment. During April 1998, the Pennsylvania Department of Revenue reduced
the assessment by $57,020 and abated penalties of $38,492. During September
1998, the Pennsylvania Department of Revenue further reduced the assessment
to $9,345. Accordingly, the assessment, penalties and interest, except for
$10,837 of use tax that will not be contested, have not been reflected in
these financial statements.
- --------------------------------------------------------------------------------
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Financial Statements of Allin
Communications Corporation (the "Company") are based on its historical financial
statements, adjusted to give effect to the September 30, 1998 sale of its
wholly-owned subsidiary, SportsWave, Inc. ("SportsWave"), and its August 13,
1998 acquisition of all of the issued and outstanding capital stock of KCS
Computer Services, Inc. ("KCS"). The Pro Forma Condensed Consolidated Financial
Statements of Operations for the year ended December 31, 1997 and for the six
months ended June 30, 1998 assume that such disposition and acquisition had
occurred on January 1, 1997. The Pro Forma Condensed Consolidated Financial
Statements reflect the estimated gain on disposal of SportsWave as gain realized
on disposal of a segment since SportsWave's operations comprised the entirety of
the Company's sports marketing business. The Pro Forma Condensed Consolidated
Financial Statements also assume the that Company's August 13, 1998 issuance of
Series B preferred stock and warrants and its October 1 , 1998 closure of its
current revolving credit facility had occurred on January 1, 1997.
The pro forma condensed consolidated financial information reflects the
purchase method of accounting for the acquisition of KCS, and accordingly is
based on estimated purchase accounting adjustments that are subject to further
revision depending upon completion of any appraisals or other studies of the
fair value of assets and liabilities. Final purchase accounting adjustments
will differ from the pro forma adjustments presented herein and described in the
accompanying notes due to the results of operations of KCS from June 30, 1998 to
the date of acquisition. The final purchase accounting adjustments are not
expected to differ significantly from the estimates used herein.
There were no intercompany sales or expenses recorded between the Company and
KCS during the periods presented.
The pro forma condensed consolidated financial information reflects certain
assumptions described above and in Notes to Pro Forma Condensed Consolidated
Financial Statements of Operations below. The pro forma financial information
does not purport to present what the Company's results of operations would
actually have been if the disposal of SportsWave and the acquisition of KCS had
occurred on the assumed date, as specified above, or to project the Company's
financial condition or results of operations for any future period.
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
Allin
Consolidated Pro Forma Communications
Allin Adjustments Corporation after
Communications for Sale of Sale of
Corporation SportsWave, Inc. SportsWave, Inc.
Note
<S> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 5,111 $ 2,944 (1) $ 8,055
Accounts receivable 2,594 (982) (2) 1,612
Notes receivable - 500 500
Inventory 1,858 1,858
Deferred Income Taxes - -
Prepaid Expenses 337 (162) (2) 175
---------------- ------------
Total current assets 9,900 12,200
Property and equipment, net 4,635 (70) (2) 4,565
Other assets 4,303 (2,022) (2) 2,281
---------------- ------------
Total assets $ 18,838 $ 19,046
================ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 668 $ (78) (2) $ 590
Accrued liabilities 1,349 (98) (2) 1,251
Income taxes payable - -
Current portion of notes payable 11 600 (4) 611
Current portion of deferred revenue 905 (724) (2) 181
---------------- ------------
Total current liabilities 2,933 2,633
Non-current portion of deferred revenue 424 (424) (2) -
Notes payable - -
Deferred income taxes - -
Other liabilities - -
Series A convertible, redeemable
preferred stock 2,500 2,500
Series B preferred stock and
warrants - -
Shareholder's equity 12,981 932 (3) 13,913
---------------- ------------
Total liabilities and shareholders' equity $ 18,838 $ 19,046
================ ============
<CAPTION>
Pro Forma
Adjustments
for Acquisition
KCS of KCS
Computer Computer Pro Forma
Services, Inc. Services, Inc. Consolidated
Note
<S> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 215 $ (384)(5)(10) $ 7,886
(11)(12)
Accounts receivable 2061 3,673
Notes receivable - 500
Inventory - 1,858
Deferred Income Taxes 16 (16) (7) -
Prepaid Expenses 8 183
--------------- ---------
Total current assets 2,300 14,100
Property and equipment, net 189 4,754
Other assets 4 13,408 (6) 15,693
--------------- ---------
Total assets $ 2,493 $ 34,547
=============== =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 210 $ $ 800
Accrued liabilities 400 142 (8) 1,793
Income taxes payable 133 133
Current portion of notes payable 481 5,719 (5)(10) 6,811
Current portion of deferred revenue - 181
--------------- ---------
Total current liabilities 1,224 9,718
Non-current portion of deferred revenue - -
Notes payable 192 1,808 (5)(10) 2,000
Deferred income taxes 224 (93) (7) 131
Other liabilities 5 5
Series A convertible, redeemable
preferred stock - 2,500
Series B preferred stock and
warrants - 2,750 (11) 2,750
Shareholder's equity 848 2,682 (5)(9) 17,443
--------------- ---------
Total liabilities and shareholders' equity $ 2,493 $ 34,547
=============== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Allin
Consolidated Pro Forma Communications
Allin Adjustments Corporation after KCS
Communications for Sale of Sale of Computer
Corporation SportsWave, Inc. SportsWave, Inc. Services, Inc.
Note
<S> <C> <C> <C> <C>
Revenue $ 13,187 $ (3,590) (1) $ 9,597 $ 12,842
Cost of sales 8,103 (2,115) (1) 5,988 -
----------- ------------- --------
Gross profit 5,084 3,609 12,842
Selling, general & administrative 16,164 (1,647) (1) 14,517 12,014
----------- ------------- --------
Loss from operations (11,080) (10,908) 828
Interest expense (income), net (425) (7)(1) (3) (432) 77
----------- ------------- --------
Loss before income tax expense (10,655) (10,476) 751
Income tax expense 48 (3) (1) 45 328
----------- ------------- --------
Loss before disposal of segment (10,703) (10,521) 423
Gain on disposal of segment - 907 (2) 907 -
----------- ------------- --------
Net income (loss) $ (10,703) $ (9,614)$ 423
=========== ============= ========
Net loss per common share - basic
and diluted $ (2.08) (1.86)
----------- -------------
Weighted average shares outstanding -
basic and diluted 5,157,399 5,157,399
----------- -------------
<CAPTION>
Pro Forma
Adjustments
for Acquisition
of KCS
Computer Pro Forma
Services, Inc. Consolidated
Note
<S> <C> <C>
Revenue $ $ 22,439
Cost of sales 8,748 (10) 14,736
-----------
Gross profit 7,703
Selling, general & administrative (8,173) (4)(10) 18,358
-----------
Loss from operations (10,655)
Interest expense (income), net 289 (5)(6)(7) (66)
-----------
(8)(9)
Loss before income tax expense (10,589)
Income tax expense 373
-----------
Loss before disposal of segment (10,962)
Gain on disposal of segment 907
-----------
Net income (loss) $ (10,055)
===========
Net loss per common share - basic
and diluted $ (1.69)
-----------
Weighted average shares outstanding -
basic and diluted 5,962,594
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Allin
Consolidated Pro Forma Communications
Allin Adjustments Corporation after KCS
Communications for Sale of Sale of Computer
Corporation SportsWave, Inc. SportsWave, Inc. Services, Inc.
Note
<S> <C> <C> <C> <C>
Revenue $ 7,089 $ (2,061) (1) $ 5,028 $ 7,071
Cost of sales 3,603 (1,191) (1) 2,412 -
------------ ------------- ------------
Gross profit 3,486 2,616 7,071
Selling, general & administrative 6,079 (599) (1) 5,480 6,640
------------ ------------- ------------
Loss from operations (2,593) (2,864) 431
Interest expense (income), net (121) 8 (1) (113) 33
------------ ------------- ------------
Loss before income tax expense (2,472) (2,751) 398
Income tax expense 6 6 159
------------ ------------- ------------
Net loss $ (2,478) $ (2,757) $ 239
============ ============= ============
Net loss per common share - basic
and diluted $ (0.48) $ (0.53) $
------------ -------------
Weighted average shares outstanding -
basic and diluted 5,157,399 5,157,399
------------ -------------
<CAPTION>
Pro Forma
Adjustments
for Acquisition
of KCS
Computer Pro Forma
Services, Inc. Consolidated
Note
<S> <C> <C>
Revenue $ $ 12,099
Cost of sales 4,828 (10) 7,240
-------------
Gross profit 4,859
Selling, general & administrative (4,541) (4)(10) 7,579
-------------
Loss from operations (2,720)
Interest expense (income), net 143 (6)(7) 63
-------------
(8)(9)
Loss before income tax expense (2,783)
Income tax expense 165
-------------
Net loss $ (2,948)
=============
Net loss per common share - basic
and diluted $ (0.49)
-------------
Weighted average shares outstanding -
basic and diluted 5,962,594
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The pro forma adjustments to the condensed consolidated balance sheets are as
follows:
(1) To record the sale proceeds received from Lighthouse Holdings, Inc.
("Lighthouse") for all of the issued and outstanding shares of SportsWave
as if the proceeds had been received as of June 30, 1998. Proceeds include
receipt of cash in the amount of $2,944 and a note receivable in the amount
of $500.
(2) To remove the assets and liabilities of SportsWave, as of June 30, 1998,
which were included in the Company's consolidated balance sheet as of that
date, but which are assumed to be transferred to Lighthouse. Assets
assumed transferred to Lighthouse include SportsWave's accounts receivable,
prepaid expenses, property and equipment, net of accumulated depreciation,
and other asset balances. Other assets consists primarily of intangible
assets related to the Company's purchase of SportsWave, net of accumulated
amortization, and the long-term portion of prepaid expenses. Liabilities
assumed transferred to Lighthouse include accounts payable, accrued
expenses and the current and long-term portions of deferred revenue.
SportsWave's cash balance as of June 30, 1998 is assumed to have been
utilized to repay a portion of the intercompany balance due the Company.
(3) To adjust shareholder's equity to reflect an estimated gain on the disposal
of SportsWave of $932. The pro forma balance sheet presentation assumes
that the sale of SportsWave occurred as of June 30, 1998. The assumed gain
was estimated by comparing the sale proceeds, as identified in Note (1)
above, less a liability to the former shareholders of SportsWave, as
discussed in Note (4), to the Company's recorded investment in SportsWave.
The recorded investment reflects the Company's original purchase at cost,
an adjustment for its equity-basis ownership interest in SportsWave's
results of operations from acquisition through June 30, 1998, plus the
Company's intercompany receivable balance from SportsWave, net of
SportsWave's June 30, 1998 cash which is assumed to have been utilized to
repay a portion of the intercompany balance. The Company had sufficient
federal and state net operating loss carryforwards as of the actual date of
sale of SportsWave, September 30, 1998, to offset the estimated gain to be
recorded on disposal. Consequently, no provision for income taxes is
expected to be recorded in connection with the gain and therefore no
provision for income taxes related to the gain on disposal has been
reflected in the pro forma condensed consolidated financial statements.
(4) To record a liability of $600 to reflect the Company's settlement of any
contingent liability owed the former shareholders of SportsWave related to
the earn-out provisions of the original stock purchase agreement pursuant
to which the Company acquired SportsWave in 1996.
(5) To record the purchase price consideration for the Company's acquisition of
KCS, including a cash payment of $2,443, the issuance of 805,195 shares of
the Company's common stock to certain selling KCS shareholders valued at
$4.406 per share resulting in a credit to shareholder's equity of $3,548,
the issuance of a note payable to a selling KCS shareholder of $6,200 with
an assumed maturity of approximately 4.5 months, and the issuance of a
second note payable to a selling KCS shareholder of $2,000 with an assumed
maturity of two years. The number of shares and valuation placed on the
common stock issued corresponds to that utilized in the actual acquisition.
The assumed maturities of the notes payable correspond with the time
periods from issuance to maturity of the actual notes payable.
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
(6) To record the estimated excess purchase price of approximately $13,408
assigned to intangible assets. The intangible assets identified, based
upon an independent appraisal, along with the assigned values and the
estimated useful lives, are as follows:
<TABLE>
<CAPTION>
Estimated Useful
-----------------
Assets Assumed Values Lives in Years
------ -------------- --------------
<S> <C> <C>
Assembled Work Force $ 257 5
Customer List 2,230 14
Goodwill 10,921 30
</TABLE>
The agreement governing the acquisition of KCS includes provisions for
contingent payments of up to $1,200 in cash and up to $400 in the Company's
common stock based on the Adjusted Operating Income, as defined in the
agreement, of KCS for the year ended December 31, 1998. Future contingent
payments, if any, made to the selling shareholders of KCS will be reflected
as additional cost of the acquired entity. These additional costs of the
affected assets will be capitalized and amortized over the remaining useful
life of the assets.
(7) To record the reversal of certain deferred tax liabilities of $93 and
deferred tax assets of $16 in connection with the estimated purchase
accounting.
(8) To record an estimated liability for professional, legal and accounting
fees incurred or expected to be incurred in connection with the
acquisition. Such fees have been added to the Company's estimated
investment in KCS in estimating the excess purchase price.
(9) To reflect elimination of KCS equity balance as of June 30, 1998.
(10) To record assumed repayment by the Company of certain notes payable due
from KCS to a bank. Assumed cash disbursement is $673 to retire notes with
current portion due of $481 and non-current portion due of $192 as of June
30, 1998.
(11) To record the net proceeds of $2,750 from the issuance of 2,750 shares of
the Company's Series B preferred stock and warrants. Such proceeds were
utilized in connection with the acquisition of KCS.
(12) To record disbursements of $18 to regulatory agencies in connection with
the Company's issuance of additional common shares.
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
The pro forma adjustments to the condensed consolidated statements of operations
are as follows:
(1) To remove the revenue, cost of sales, selling, general & administrative
expenses, interest income and income tax expenses applicable to the
operations of SportsWave for the periods presented.
(2) To reflect an assumed gain on disposal of SportsWave of $907 as of the
beginning of the income statement periods presented. The gain is reflected
as if the sale had occurred as of January 1, 1997. The assumed gain was
estimated by comparing the sale proceeds, less a liability to the former
shareholders of SportsWave, as discussed in Note (4) to pro forma balance
sheet, to the Company's recorded investment in SportsWave. The recorded
investment reflects the Company's original purchase at cost, an adjustment
for its equity basis ownership interest in SportsWave's results of
operations from its acquisition by the Company in November 1996 through
December 31, 1996, plus the Company's intercompany receivable balance from
SportsWave, net of SportsWave's January 1, 1997 cash balance which is
assumed to be utilized to repay a portion of the intercompany balance. As
discussed above in Note (3) to pro forma balance sheet, no provision for
income taxes has been reflected for the gain on disposal because the
Company has sufficient federal and state net operating loss carryforwards
as of actual date of disposal to offset the estimated gain.
(3) To reflect interest income based on estimated money market rates for the
assumed cash receipt of $2,944 at the closing of the sale of SportsWave for
approximately 1.5 months. The majority of the proceeds from the sale of
SportsWave, were utilized to repay a note payable incurred by the Company
in connection with the Company's acquisition of KCS. The note retirement
occurred approximately 1.5 months after the KCS acquisition. Therefore,
for the pro forma statements of operations, it is also assumed that the
note was retired approximately 1.5 months after the assumed date of
acquisition of KCS, January 1, 1997. Assumed additional interest income
is $19 for the year ended December 31, 1997.
(4) To record estimated amortization expense related to intangible assets
recorded in connection with the acquisition of KCS, including assembled
work force, customer list and goodwill. Estimated amortization expense is
$575 for the year ended December 31, 1997 and $287 for the six months ended
June 30, 1998.
(5) To record interest expense of $38 for a $6,200 note payable related to the
acquisition of KCS. As discussed above under Note (3) to pro forma
statements of operations, such note is assumed to have been outstanding
approximately 1.5 months.
(6) To record interest expense of $122 for the year ended December 31, 1997 and
$61 for the six months ended June 30, 1998 for a $2,000 note payable
related to the acquisition of KCS.
(7) To record interest expense of $83 for the year ended December 31, 1997 and
$48 for the six months ended June 30, 1998 related to the borrowing of
$1,000 under the Company's revolving credit line with S&T Bank. The
borrowing is assumed to have occurred to repay a portion of a note payable
due a selling KCS shareholder approximately 1.5 months after the assumed
date of KCS acquisition, January 1, 1997. The interest expense is based on
estimated prime interest rates during the periods and the premium to prime
rate specified in the Company's loan agreement.
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)
(8) To reflect foregone interest income at estimated money market rates on
$2,355 of the Company's working capital assumed to have been utilized in
connection with repayment of the $6,200 note payable related to the KCS
acquisition. Interest income is estimated to have been foregone for 10.5
and 6 months, respectively, for the yearly and six-month 1997 and 1998
periods presented. Foregone interest income is estimated at $111 for
the year ended December 31, 1997 and $64 for the six months ended
June 30, 1998.
(9) To reflect reduced interest expense resulting from the assumed January 1,
1997 repayment of notes payable due from KCS to a bank. The estimated
reduction in interest expense is based on average principal balances
outstanding during the respective periods, estimated prime interest rates
during the periods and the premium to prime rate applicable under the KCS
notes. Reduced interest expense reflected in the pro forma statements of
operations are $65 for the year ended December 31, 1997, and $30 for the
six months ended June 30, 1998.
(10) To reclassify estimated cost of sales applicable to KCS' operations during
the periods presented in the pro forma statements of operations. Such
costs were not segregated from other selling, general & administrative
expenses in KCS financial statements. Cost of sales was estimated based on
rates consistent with historical KCS operational analysis of billing rates
and consultant costs. The reclassification makes the presentation
consistent with the Company's classifications of cost of sales and selling,
general & administrative expenses for its technology consulting business.
Amounts reclassified to cost of sales were $8,748 for the year ended
December 31, 1997 and $4,828 for the six months ended June 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ALLIN COMMUNICATIONS CORPORATION
Date: October 9, 1998 By: /s/ Richard W. Talarico
-----------------------
Richard W. Talarico
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT INDEX
2.1 Stock Purchase Agreement dated August 13, 1998 among the Registrant,
KCS Computer Services, Inc. and the stockholders of KCS Computer
Services, Inc. (previously filed)
3(i)(a) Certificate of Designation for Series B Redeemable Preferred Stock
of the Registrant (previously filed)
3(i)(b) Certificate of Correction Relating to the Series B Redeemable
Preferred Stock of the Registrant (previously filed)
4.1 Preemptive Rights Agreement dated August 13, 1998 among the Registrant
and certain stockholders of the Registrant (previously filed)
4.2 Form of Warrant for purchasers of Series B Redeemable Preferred Stock
(previously filed)
4.3 Promissory Note dated August 13, 1998 in the principal amount of
$2,000,000 (previously filed)
10.1 Registration Rights Agreement dated August 13, 1998 among the
Registrant and certain stockholders of the Registrant (previously
filed)
10.2 Promissory Note dated August 13, 1998 in the principal amount of
$6,200,000 (previously filed)
23 Consent of Grossman Yanak & Ford LLP
99 Press Release dated August 13, 1998 (previously filed)
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Allin Communications Corporation
We consent to the inclusion in this Amended Current Report on Form 8-K/A
of Allin Communications Corporation of our report dated September 22,
1998, relating to the balance sheets of KCS Computer Services, Inc. as of
December 31, 1997 and 1996 and the related statements of operations and
Retained earnings and of cash flows for the years then ended.
/s/GROSSMAN YANAK & FORD LLP
Pittsburgh, Pennsylvania
October 7, 1998
