<PAGE>
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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-21395
Allin 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.)
381 Mansfield Avenue, Suite 400,
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 26, 2000
Common Stock, 6,010,973 Shares
-1-
<PAGE>
Allin Corporation
Form 10-Q
Index
Forward-Looking Information Page 3
Part I - Financial Information
Item 1. Financial Statements Page 4
Item 2. Management's Discussion and Analysis of Financial Page 16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Page 39
Sensitive Instruments
Part II - Other Information
Item 1. Legal Proceedings Page 40
Item 4. Submission of Matters to a Vote of Securities Holders Page 41
Item 6. Exhibits and Reports on Form 8-K Page 42
Signatures Page 43
-2-
<PAGE>
Forward-Looking Information
Certain matters in this Form 10-Q, including, without limitation, certain
matters discussed under Part I - Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are typically identified by the words "believes,"
"expects," "anticipates," "intends," and similar expressions. In addition, any
statements that refer to expectations or other characterizations of future
events or circumstances are forward-looking statements. Readers are cautioned
that any such forward-looking statements are not guarantees of performance and
that matters referred to in such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause actual results,
performance or achievements of Allin Corporation to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, risks and
uncertainties discussed throughout Part I - Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and under the caption
"Special Note on Forward-Looking Statements" included therein. Allin Corporation
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
-3-
<PAGE>
Part I - Financial Information
Item 1. - Financial Statements
ALLIN CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,888 $ 1,538
Accounts receivable, net of allowance for
doubtful accounts of $274 and $106 4,134 3,938
Note receivable -- 23
Note receivable from employee -- 13
Inventory 741 1,103
Prepaid expenses 429 281
------- -------
Total current assets 7,192 6,896
Property and equipment, at cost:
Leasehold improvements 473 476
Furniture and equipment 2,684 2,952
On-board equipment 951 951
------- -------
4,108 4,379
Less--accumulated depreciation (2,607) (2,991)
------- -------
1,501 1,388
Assets held for resale 19 103
Costs in excess of billings -- 454
Notes receivable from employees 17 --
Software development costs, net of accumulated
amortization of $887 and $899 26 13
Goodwill, net of accumulated amortization of
$1,775 and $2,302 12,986 12,459
Other assets, net of accumulated amortization of
$522 and $646 2,285 2,161
------- -------
Total assets $ 24,026 $ 23,474
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
ALLIN CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
December 31, June 30,
1999 2000
------------ --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 2 $ 2
Bank lines of credit 650 1,995
Accounts payable 665 1,709
Accrued liabilities:
Compensation and payroll taxes 615 477
Dividends on preferred stock 865 1,014
Other 756 417
Billings in excess of costs 415 --
Deferred revenue 996 52
---------- ---------
Total current liabilities 4,964 5,666
Non-current portion of notes payable 1,002 1,001
Deferred income taxes 81 81
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share, authorized
100,000 shares:
Series C redeemable preferred stock, designated,
issued and outstanding 25,000 shares 2,500 2,500
Series D convertible redeemable preferred stock,
designated, issued and outstanding
2,750 shares 2,152 2,152
Series E convertible redeemable preferred stock,
designated 2,000 shares, issued and
outstanding 1,926 shares 1,926 1,926
Series F convertible redeemable preferred stock,
designated, issued and outstanding
1,000 shares 1,000 1,000
Common stock, par value $.01 per share - authorized
20,000,000 shares, issued 5,995,830 and
6,019,140 shares 60 60
Additional paid-in-capital 40,198 39,983
Warrants 598 598
Retained deficit (30,428) (31,466)
Treasury stock at cost, 8,167 common shares (27) (27)
---------- ---------
Total shareholders' equity 17,979 16,726
---------- ---------
Total liabilities and shareholders' equity $ 24,026 $ 23,474
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
ALLIN 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,
1999 2000 1999 2000
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ 6,628 $ 5,560 $ 12,762 $ 12,647
Cost of sales 4,426 3,750 8,248 7,848
----------- ----------- ----------- ----------
Gross profit 2,202 1,810 4,514 4,799
Selling, general & administrative 3,111 2,826 6,185 5,731
----------- ----------- ----------- ----------
Loss from operations (909) (1,016) (1,671) (932)
Interest (income) expense, net 68 43 144 108
----------- ----------- ----------- ----------
Loss before provision for income taxes (977) (1,059) (1,815) (1,040)
Provision for income taxes --- --- 19 ---
----------- ----------- ----------- ----------
Loss after provision for income taxes (977) (1,059) (1,834) (1,040)
(Income) loss from non-consolidated corporation 36 --- 36 ---
----------- ----------- ----------- ----------
Loss from continuing operations (1,013) (1,059) (1,870) (1,040)
(Gain) loss from discontinued operations 3 --- (2) ---
----------- ----------- ----------- ----------
Net loss (1,016) (1,059) (1,868) (1,040)
Accretion and dividends on preferred stock 294 154 394 307
----------- ----------- ----------- ----------
Net loss attributable to common shareholders $ (1,310) $ (1,213) $ (2,262) $ (1,347)
=========== =========== =========== ==========
Loss per common share from continuing operations
attributable to common shareholders -
basic and diluted $ (0.22) $ (0.20) $ (0.38) $ (0.22)
=========== =========== =========== ==========
Income (loss) per common share from discontinued
operations - basic and diluted $ -- $ -- $ -- $ --
=========== =========== =========== ==========
Net loss per common share attributable to common
shareholders - basic and diluted $ (0.22) $ (0.20) $ (0.38) $ (0.22)
=========== =========== =========== ==========
Weighted average shares outstanding - basic and diluted 5,969,162 6,010,973 5,969,162 6,006,746
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE>
ALLIN CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1999 2000
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (1,868) (1,040)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 1,247 1,067
Amortization of deferred compensation (17) --
(Gain) loss from writedown or sale of assets 86 (72)
(Income) loss from
non-consolidated corporation 36 --
Cost of fixed assets sold -- 237
Changes in certain assets and liabilities:
Accounts receivable (1,074) 148
Inventory (387) (367)
Prepaid expenses 21 148
Assets held for sale 15 (103)
Costs in excess of billings (260) (1,105)
Other assets 3 10
Accounts payable 926 1,045
Accrued liabilities 612 (473)
Income taxes payable (87) --
Deferred revenues 4 (927)
------------- ------------
Net cash flows from operating activities (743) (1,432)
------------- ------------
Cash flows from investing activities:
Proceeds from sale of assets 30 185
Proceeds from note receivable related to
sale of subsidiary 463 --
Capital expenditures (104) (289)
------------- ------------
Net cash flows from investing activities 389 (104)
------------- ------------
Cash flows from financing activities:
Net borrowing (repayment) on lines of credit (251) 1,345
Payment of dividends on preferred stock (82) (158)
Debt acquisition costs (3) --
Repayment of note payable (74) --
Repayment of capital lease obligations (2) (1)
------------- ------------
Net cash flows from financing activities (412) 1,186
------------- ------------
Net change in cash and cash equivalents (766) (350)
Cash and cash equivalents, beginning of period 2,510 1,888
------------- ------------
Cash and cash equivalents, end of period 1,744 1,538
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
<PAGE>
Allin 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, 1999 and 2000 should be read in
conjunction with the audited financial statements and notes for the years
ended December 31, 1998 and 1999, contained in Allin Corporation's (the
"Company") Annual Report on Form 10-K for the year ended December 31, 1999.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company is the sole shareholder of all of its
subsidiaries. It is the Company's policy to consolidate all majority-owned
subsidiaries where the Company has control. All significant intercompany
accounts and transactions have been eliminated.
Disposal of Segment
Adjustments to the gain on the September 1998 disposal of SportsWave, Inc.
were recorded during the three- and six-month periods ended June 30, 1999 and
are presented after net loss from continuing operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue and Cost of Sales Recognition
Allin Corporation of California ("Allin Consulting-California") and Allin
Consulting of Pennsylvania, Inc. ("Allin Consulting-Pennsylvania") charge
consulting fees to their clients for their technology consulting services.
The majority of fees are charged on an hourly basis with revenue and related
cost of sales recognized as services are performed. Revenue and cost of sales
for fixed price projects are recognized on a percentage of completion basis.
Allin Interactive Corporation's ("Allin Interactive") recognition method for
revenue and cost of sales for systems integration services is determined based
on the size and expected duration of the project. For systems integration
projects in excess of $250,000 of revenue and expected to be of greater than
90 days duration, the Company recognizes revenue and cost of sales based on
percentage of completion. Allin Interactive utilizes the proportion of labor
cost incurred to expected total project labor cost as a quantitative factor in
determining the percentage of completion recognized for projects when the
proportion of total project costs incurred to expected total project costs is
not representative of actual project completion status. For all other systems
integration projects, revenue and cost of sales are recognized upon completion
of the project. Revenue and cost of sales for fixed price consulting services
are recognized on a percentage of completion basis. Time based consulting
-8-
<PAGE>
revenue and cost of sales are recognized as services are performed.
Interactive television transactional revenue and management fees and any
associated cost of sales are recognized as the services are performed.
Allin Digital Imaging Corp. ("Allin Digital") recognizes revenue and cost of
sales for systems integration services upon completion of the respective
projects. Revenue and associated cost of sales for equipment and consumable
sales are recognized upon shipment of the product. Technology support fees
and associated cost of sales are recognized as services are performed.
Allin Network Products, Inc. ("Allin Network") recognizes revenue and
associated cost from the sale of products at the time the products are
shipped.
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
include the weighted average of the outstanding common shares of the Company,
excluding 18,901 shares of outstanding restricted stock for the three- and
six-month periods ended June 30, 1999. The restriction on these shares of
common stock lapsed in November 1999. The restricted stock, outstanding stock
options, a convertible note and the Company's Series D, E and F convertible
redeemable preferred stock 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 options and warrants to purchase shares that
would have been considered in the calculation of diluted EPS, if their effect
was not anti-dilutive, were 19,011 and -0- for the three-month periods ended
June 30, 1999 and 2000, respectively, and 19,142 and 7,713 for the six-month
periods ended June 30, 1999 and 2000, respectively.
Inventory
Inventory, consisting principally of digital photography equipment and
software, and computer hardware, software and communications equipment, is
stated at the lower of cost (determined on the average cost method) or market.
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.
Financial Instruments
As of June 30, 2000, the Company's Consolidated Balance Sheet includes a note
payable which relates to the acquisition of Allin Consulting-California. The
note payable is recorded at the face value of the instrument. The Company
accrues interest at fixed rates and makes interest payments in accordance with
the terms of the note. All other financial instruments are classified as
current and will be utilized within the next operating cycle.
Supplemental Disclosure Of Cash Flow Information
Cash payments for income taxes were approximately $74,000 and $1,000 during
the three-month periods ended June 30, 1999 and 2000, respectively. Cash
payments for interest were approximately $66,000 and $442,000 during the three
months ended June 30, 1999 and 2000, respectively. Cash payments for
dividends were approximately $40,000 and $87,000 during the three months ended
June 30, 1999 and 2000, respectively. Dividends on preferred stock of
approximately $104,000 and $141,000 were accrued but unpaid during the three-
month periods ended June 30, 1999 and 2000, respectively.
-9-
<PAGE>
Cash payments for income taxes were approximately $197,000 and $7,000 during
the six-month periods ended June 30, 1999 and 2000, respectively. Cash
payments for interest were approximately $124,000 and $443,000 during the six
months ended June 30, 1999 and 2000, respectively. Cash payments for
dividends were approximately $82,000 and $158,000 during the six months ended
June 30, 1999 and 2000, respectively. Dividends on preferred stock of
approximately $164,000 and $206,000 were accrued but unpaid during the six-
month periods ended June 30, 1999 and 2000, respectively.
2. Preferred Stock
The Company has the authority to issue 100,000 shares of preferred stock with
a par value of $.01 per share. Of the authorized shares, 40,000 have been
designated as Series A Convertible Redeemable Preferred Stock, 5,000 as Series
B Redeemable Preferred Stock, 25,000 as Series C Redeemable Preferred Stock,
2,750 as Series D Convertible Redeemable Preferred Stock, 2,000 as Series E
Convertible Redeemable Preferred Stock and 1,000 as Series F Convertible
Redeemable Preferred Stock. The order of liquidation preference of the series
of the Company's outstanding preferred stock, from senior to junior, is Series
E, Series F, Series D and Series C. As of June 30, 2000, the Company has
outstanding 25,000, 2,750, 1,926 and 1,000 shares of Series C, D, E and F
preferred stock, respectively. All previously outstanding shares of the
Company's Series A and B preferred stock were exchanged in May 1999 for a like
number of shares of Series C and D preferred stock, respectively.
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.
Reorganization charges of approximately $70,000 were recorded in February
2000 to establish a liability for severance costs associated with the
termination of services of two managerial personnel associated with the
staffing services provided by the Company's Business Operations Solution Area.
Associated expenses are reflected in selling, general & administrative
expenses on the Consolidated Statement of Operations during that period. As
of June 30, 2000, all of the amount accrued under the February 2000 charges
had been paid.
A reorganization charge of approximately $208,000 was recorded as of
January 12, 1999 to establish a liability for severance costs associated with
the termination of services of the Company's president. During the quarterly
period ended December 31, 1999, additional expense of approximately $18,000
was recorded to adjust the reorganization charge previously recorded.
Associated expenses are reflected in selling, general & administrative
expenses on the Consolidated Statement of Operations during these periods. As
of March 31, 2000, all of the amount accrued under the January 12, 1999 charge
had been paid.
4. Sale of Assets of Erie Computer Company
On May 19, 2000, Allin Network sold certain assets utilized in its Erie,
Pennsylvania operations, which used the tradename Erie Computer Company ("Erie
Computer"), to Engage IT, Inc. ("Engage IT"). The assets sold included the
computer hardware and software, furnishings, office equipment and supplies
utilized in the Erie Computer operations, inventory consisting of computer-
related hardware, software and supplies, vehicles, customer lists, rights to
the name "Erie Computer Company" and other tangible and intangible assets
utilized in the Erie Computer operations. Engage IT assumed the Erie Computer
workforce and occupancy of the building utilized for the Erie Computer
operations through lease termination. The Company terminated the lease as of
June 30, 2000.
Purchase consideration consisted of a cash payment of $10,000 and a note
receivable for $30,000 payable over six months and accruing interest at 9% per
annum. The note receivable was reduced by the portion of customer prepaid
service contract fees applicable to the period subsequent to May 19, 2000. As
of June 30, 2000, the outstanding balance of the note receivable was
approximately $23,000.
-10-
<PAGE>
Allin Network had acquired certain assets utilized in the operations of Erie
Computer on February 3, 2000. Purchase consideration was the Company's
issuance of 23,310 shares of its common stock to Patterson-Erie Corporation,
based on a rate of $4.29 per share as specified in the acquisition agreement.
There were no terms for contingent consideration associated with the
agreement. The Company recorded the stock issuance based on the market price
on the date of closing of the acquisition. The Company recorded a loss on
disposal of the assets sold to Engage IT of approximately $69,000.
5. Sale of PhotoWave, Inc. Stock
On June 14, 2000, Allin Digital sold all of its 20 shares of common stock of
PhotoWave, Inc. ("PhotoWave"), a non-consolidated corporation. Allin Digital
recognized losses during 1998 and 1999 on its equity basis interest in the
results of operations of PhotoWave equal to its initial investment of
$100,000. Allin Digital recorded a gain of approximately $137,000 on the sale
of the PhotoWave stock.
6. Equity Transactions
During the three months ended June 30, 2000, vested options to purchase 3,684
shares and non-vested options to purchase 19,351 shares of common stock
previously awarded under the Company's 1998 Stock Plan were forfeited under
the terms of the Plan. Options granted under the 1998 Stock Plan to purchase
311,600 shares of common stock remain outstanding as of June 30, 2000.
During the three months ended June 30, 2000, vested options to purchase 8,300
shares and non-vested options to purchase 24,200 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
266,150 shares of common stock remain outstanding as of June 30, 2000.
During the three months ended June 30, 2000, vested options to purchase 10,400
shares and non-vested options to purchase 18,600 shares of common stock
previously awarded under the Company's 1996 Stock Plan were forfeited under
the terms of the Plan. Options granted under the 1996 Stock Plan to purchase
202,550 shares of common stock remain outstanding as of June 30, 2000.
7. Revolving Credit Loan
On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking
association, entered into a Loan and Security Agreement, under which S&T Bank
agreed to extend the Company a revolving credit loan. Borrowings may be made
under the S&T Loan Agreement for general working capital purposes. The current
expiration date of the revolving credit loan is September 30, 2000, but S&T
Bank recently notified the Company of its intent to renew the revolving credit
loan under terms substantially similar to those currently in effect for an
additional year which will extend the expiration date to September 30, 2001.
The Company anticipates documentation of the renewal will be completed in the
near future. The maximum borrowing availability under the revolving credit
loan is the lesser of $5,000,000 or eighty-five percent of the aggregate gross
amount of eligible trade accounts receivable aged sixty days or less from the
date of invoice. Accounts receivable qualifying for inclusion in the borrowing
base are net of any prepayments, progress payments, deposits or retention and
must not be subject to any prior assignment, claim, lien, or security
interest. As of June 30, 2000, maximum borrowing availability under the
revolving credit loan was approximately $2,206,000. The outstanding balance as
of June 30, 2000 was $1,995,000. Loans made under the revolving credit loan
bear interest at the bank's prime interest rate plus one percent. As of June
30, 2000, the rate of interest on the revolving credit loan was 10.50%.
-11-
<PAGE>
The revolving credit loan includes provisions granting S&T Bank a security
interest in certain assets of the Company including its accounts receivable,
equipment, lease rights for real property, and inventory of the Company and
its subsidiaries. The revolving credit loan also includes reporting
requirements regarding annual and monthly financial reports, accounts
receivable and payable statements, weekly borrowing base certificates and
audit reports. The revolving credit loan also includes various covenants
relating to matters affecting the Company including insurance coverage,
financial accounting practices, audit rights, prohibited transactions,
dividends and stock purchases. The covenants also include a cash flow to
interest ratio of not less than 1.0 to 1.0. Cash flow is defined as operating
income before depreciation, amortization and interest. The cash flow coverage
ratio is measured for each of the Company's fiscal quarters. S&T Bank waived
the cash flow covenant requirement for the fiscal quarter ended June 30, 2000,
which the Company would not have otherwise met. The Company anticipates a
waiver will also be extended for the fiscal quarter ended September 30, 2000.
The Company is in compliance with all other covenants as of June 30, 2000.
8. Industry Segment Information
Basis for Determining Segments
The Company follows Financial Accounting Standards Board Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") as the basis for determining its segments. SFAS No. 131 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. Segments to be reported will fall under two groups, Solution
Area Services and Ancillary Services & Product Sales. The Company's
operations and management's evaluations are primarily oriented around five
solution areas: Information Technology Infrastructure, Business Operations,
Knowledge Management, Electronic Business and Interactive Media. Solution
Area Services comprise the substantial majority of the Company's current
activities and are most closely associated with its strategic focus of being a
solutions-oriented information technology consulting company. Grouping the
solution area services in segment reporting emphasizes their commonality of
purpose in meeting the core marketing strategy of the Company. In connection
with its solutions-oriented services, clients will request that the Company
also provide technology-related products necessary for implementation or
ongoing use of technology solutions recommended and implemented by the
solution areas. To ensure client satisfaction, the Company maintains an
ancillary capability to provide product sales of information system hardware,
software and equipment and supplies utilized by interactive media systems.
The Company also continues to own and operate two interactive television
systems as a result of a discontinued operating model. The segment group
Ancillary Services & Product Sales will include these activities which are
ancillary to or outside of the Company's current strategic focus.
The reportable segments reflect aggregated solution area activity across the
Company's subsidiaries due to the similarity in nature of services, production
processes, types of customers and distribution methods for each solution area.
Segments grouped as Solution Area Services include Information Technology
Infrastructure, Business Operations, Knowledge Management, Electronic Business
and three segments related to the Interactive Media Solution Area:
Interactive Media Consulting, Interactive Media Systems Integration and
Digital Imaging Systems Integration. Segments grouped as Ancillary Services &
Product Sales include Interactive Television Transactional Revenue &
Management Fees, Digital Photography Product Sales, Information System Product
Sales and Other Services.
Measurement Method
The Company's basis for measurement of segment revenue, gross profit and
assets is consistent with that utilized for the Company's Consolidated
Statements of Income and Consolidated Balance Sheets. There are no
differences in measurement method.
-12-
<PAGE>
Revenue
Information on revenue derived from external customers is as follows:
<TABLE>
<CAPTION>
Revenue from External Customers
-----------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1999 2000 1999 2000
-----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Solution Area Services:
Information Technology Infrastructure $1,120 $ 693 $ 2,133 $ 1,639
Business Operations 3,152 1,902 6,802 3,962
Knowledge Management 205 338 205 694
Electronic Business 28 318 31 552
Interactive Media:
Interactive Media Consulting 401 240 464 503
Interactive Media Systems Integration 555 647 574 2,350
Digital Imaging Systems Integration 389 797 901 1,515
---------------------------------------------------------
Total Solution Area Services $5,850 $4,935 $11,110 $11,215
Ancillary Services & Product Sales:
Interactive Television Transactional Revenue
& Management Fees $ 363 $ 110 $ 1,025 $ 258
Digital Imaging Product Sales 128 311 225 628
Information System Product Sales 206 107 249 367
Other Services 81 97 153 179
---------------------------------------------------------
Total Ancillary Services & Product Sales $ 778 $ 625 $ 1,652 $ 1,432
---------------------------------------------------------
Consolidated Revenue from External Customers
$6,628 $5,560 $12,762 $12,647
=========================================================
</TABLE>
Certain of the Company's segments have also performed services for related
entities in other segments. All revenue recorded for these services is
eliminated in consolidation. The Company does not break down technology
consulting services performed for related entities into further segments.
Information on revenue derived from services for related entities in other
segments is as follows:
<TABLE>
<CAPTION>
Revenue from Related Entities
--------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1999 2000 1999 2000
----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Solution Area Services $ 88 $63 $146 $141
Ancillary Services & Product Sales 73 22 153 107
----------------------------------------------------------------------
Total Revenue from Related Entities in Other
Segments $161 $85 $299 $248
======================================================================
</TABLE>
-13-
<PAGE>
Gross Profit
Gross profit is the segment profitability measure that the Company's
management believes is determined in accordance with the measurement
principles most consistent with those used in measuring the corresponding
amounts in the Company's consolidated financial statements. Revenue and cost
of sales for services performed for related entities are eliminated in
calculating gross profit. Information on gross profit is as follows:
<TABLE>
<CAPTION>
Gross Profit
-------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1999 2000 1999 2000
-------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Solutions Area Services:
Information Technology Infrastructure $ 504 $ 420 $ 947 $ 908
Business Operations 884 534 2,003 1,108
Knowledge Management 83 126 83 299
Electronic Business 14 162 15 282
Interactive Media:
Interactive Media Consulting 221 131 257 294
Interactive Media Systems Integration 87 121 95 1,085
Digital Imaging Systems Integration 77 70 196 304
---------------------------------------------------------
Total Solution Area Services $1,870 $1,564 $3,596 $4,280
Ancillary Services & Product Sales:
Interactive Television Transactional Revenue
& Management Fees $ 291 $ 74 $ 886 $ 175
Digital Imaging Product Sales 17 62 31 88
Information System Product Sales 34 13 41 100
Other Services (10) 97 (40) 156
---------------------------------------------------------
Total Ancillary Services & Product Sales $ 332 $ 246 $ 918 $ 519
---------------------------------------------------------
Consolidated Gross Profit $2,202 $1,810 $4,514 $4,799
=========================================================
</TABLE>
-14-
<PAGE>
Assets
Information on total assets attributable to segments is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Total Assets
---------------------------
As of June 30 1999 2000
---------------------------
<S> <C> <C>
Solution Area Services:
Information Technology Infrastructure $ 7,578 $ 6,441
Business Operations 12,240 10,508
Knowledge Management 159 394
Electronic Business 277 560
Interactive Media:
Interactive Media Consulting 159 218
Interactive Media Systems Integration 1,154 1,291
Digital Imaging Systems Integration 575 1,509
---------------------------
Total Solution Area Services $22,142 $20,921
Ancillary Services & Product Sales:
Interactive Television Transactional Revenue & Management Fees $ 1,528 $ 331
Digital Imaging Product Sales 285 602
Information System Product Sales 274 93
Other Services 95 142
---------------------------
Total Ancillary Services & Product Sales $ 2,182 $ 1,168
Corporate 1,388 1,385
---------------------------
Consolidated Total Assets $25,712 $23,474
===========================
</TABLE>
-15-
<PAGE>
Item 2.
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, 2000 and 1999. This discussion
should be read in conjunction 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, 1999, as well as the
information discussed herein under "Special Note on Forward Looking Statements".
Unless the context otherwise requires, all references herein to the "Company"
refer to Allin Corporation and its subsidiaries.
In the following Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this quarterly report on
Form 10-Q, words such as "expects," "anticipates," "believes," and other similar
expressions, are intended to identify forward-looking information that involves
risks and uncertainties. In addition, any statements that refer to expectations
or other characterizations of future events or circumstances are forward-looking
statements. Actual results and outcomes could differ materially as a result of
important factors including, among other things, uncertainty as to the Company's
future profitability; fluctuations in operating results, accumulated deficit,
and liquidity; risks associated with the Company's limited operating history
under new marketing strategies, the need for management of growth and geographic
expansion; dependence on key personnel; the risks inherent in development of new
products and markets; competition in the Company's existing and potential future
lines of business and rapidly changing technology as well as other risks and
uncertainties. See "Special Note on Forward-Looking Statements" below.
Overview of Organization, Products & Markets
Allin Corporation is a solutions-oriented information technology consulting
company that teams with businesses to help them transform the promise of the
internet into practical business realities through five interrelated solution
areas: Information Technology Infrastructure, Business Operations, Knowledge
Management, Electronic Business and Interactive Media. The Company offers
Microsoft-focused technology consulting, application development and systems
integration services specializing in Windows NT-based and Windows 2000-based
software. The Company maintains a customer-oriented focus in its marketing
strategy and operations. The Company is intent on building long-term customer
relationships by providing value in the form of solutions that address specific
customer information technology needs. In both 1998 and 1999, the Company was a
Pittsburgh Technology 50 award recipient in recognition of its high rate of
revenue growth among technology-based businesses in the Pittsburgh region.
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, 2000, the
organizational legal structure consists of Allin Corporation, five wholly owned
operating subsidiaries and one wholly owned non-operating subsidiary. The
operating subsidiaries are Allin Corporation of California ("Allin Consulting-
California"), Allin Consulting of Pennsylvania, Inc. ("Allin Consulting-
Pennsylvania"), Allin Interactive Corporation ("Allin Interactive"), Allin
Digital Imaging Corp. ("Allin Digital Imaging") and Allin Network Products, Inc.
("Allin Network"). Allin Holdings Corporation ("Allin Holdings") is a non-
operating subsidiary that provides treasury management services to the Company.
Allin Consulting-California and Allin Network are California corporations, Allin
Consulting-Pennsylvania is a Pennsylvania corporation and Allin Interactive,
Allin Digital and Allin Holdings are Delaware corporations. The Company
utilizes the trade-names Allin Consulting, Allin Interactive, and Allin Digital
Imaging in its operations. The Company is headquartered in Pittsburgh,
Pennsylvania and operates additional offices in San Jose and Walnut Creek,
California and Ft. Lauderdale, Florida.
-16-
<PAGE>
As noted previously, the Company's operations and marketing strategy are
oriented around five interrelated solution areas. A brief description of each
solution area is as follows:
. The Information Technology Infrastructure Solution Area focuses on the
underlying platforms and operating systems necessary to take advantage of the
latest technology capabilities and systems, including operating systems and
general platform principles such as total cost of ownership and thin-client
computing. Services include design, configuration, implementation, monitoring
and support of customer operating systems, management and maintenance of
database platforms, messaging systems, information system security solutions
such as firewalls and proxy servers, help desk support and application
services such as message queing and transaction servers.
. The Business Operations Solution Area focuses on an organization's core
information gathering processes including sales, finance, administration,
logistics and manufacturing. Business Operations solutions may involve custom
development or package implementation to improve operational efficiency or
information flow. The Company's Business Operations Solution Area also
provides consulting and development for mainframe systems and specialized
consulting services for the banking industry.
. Knowledge Management solutions focus on the flow and processing of
information within an organization. These solutions typically include data
warehousing or work flow systems requiring expertise in business processes as
well as the implementation of technology. These solutions will typically
interface with the business operation transaction systems to access
information from the captured data for wide accessibility within customer
organizations.
. The Electronic Business Solution Area delivers systems that enable an
organization to represent itself and its data electronically. Electronic
Business solutions help clients improve information exchange with their
customers, suppliers and other third parties. Electronic Business solutions
emphasize internet- and intranet-based services including company portals,
extranet-based value chains and electronic commerce sites.
. The Interactive Media Solution Area focuses on the Company's expertise in the
digital media applications including streaming video, interactive television
and digital imaging solutions. Interactive Media delivers business-to-
business and business-to-consumer E-Commerce platforms. Interactive Media
performs services on both a consulting and systems integration basis.
The operations of each solution area are discussed in more detail below in
this Overview of Organization, Products & Markets.
The solution area structure is defined more by a customer's use of the
services than the technological disciplines utilized in the engagement.
Management believes that this fosters a customer-oriented focus. The Company is
intent on building long-term customer relationships by providing value in the
form of solutions that address specific customer information technology needs.
Solution area sales and operational personnel must understand a customer's
business issues to provide a customized solution for their particular needs.
The ability of customers to manage information has become a prerequisite for
their success. A company's knowledge capital has become increasingly critical
in allowing it to react more quickly to customer needs, bring products to market
with greater speed and respond more completely and competitively to changing
business conditions. The growing influence of the Internet in the business
arena is also fundamentally changing how businesses interact with customers and
suppliers. The Company believes that the effective delivery of customer-
oriented technology solutions will foster the growth of long-term customer
relationships with ongoing service opportunities. There can be no assurance,
however, that the Company will realize revenue at current or increased levels in
future periods as a result of its strategy.
The Company's target market is emerging small and medium-sized businesses
seeking to achieve a competitive advantage through technology. The Company
believes that businesses with annual revenue ranging from $250 million to $1
billion afford the Company the best opportunities to offer solutions creating
value for the customers and to foster the development of long-term business
relationships. Management believes customers of this size are more likely to
utilize Microsoft-oriented information technology than larger organizations and
typically have less sophisticated internal technical resources. The Company
will not, however, limit its marketing and sales efforts solely to customers of
this size. A major marketing initiative for 2000 is building awareness among
businesses in the Company's target market that the Company is an organization
focused on the realities of the Internet and Internet-based business solutions.
The Information Technology Infrastructure, Business Operations, Knowledge
Management and Electronic Business Solution Areas target horizontal markets,
meaning businesses
-17-
<PAGE>
across a broad spectrum of industries. Interactive Media targets certain
vertical markets where the Company believes industry conditions are conducive to
acceptance of the Company's services, including the cruise, healthcare,
education and professional photography markets. Solution area services comprise
the substantial majority of the Company's current activities, are most closely
associated with its strategic focus and have a commonality of purpose in meeting
the core strategic objectives of the Company.
The solution areas described above deliver consulting services to customers
through three methods: managed, co-managed and staffing. With the managed
delivery method, the solution area assumes complete control of the consulting
process. Client personnel function as sources of information concerning the
business need for which a solution is sought. Solution area managers and
consultants fully control solution planning, development and implementation.
The managed delivery method delivers solutions on a turnkey basis. With the co-
managed delivery method, management of the solution is shared between the
solution area and customer personnel. Solution area managers and consultants
and customer technical staff members work on a collaborative basis in planning,
developing and implementing solutions. Project functions are distributed among
both solution area and customer personnel. With the staffing delivery method,
the solution area provides technical resources with specific technical skill
sets. The customer utilizes these resources to complement and assist its
technical staff in the execution of tasks or projects. The customer remains in
control of the tasks or projects and actively manages the work performed by the
Company's consultants. The Company will currently perform services under any of
these delivery methods. However, the managed and co-managed delivery methods
are viewed as offering the potential for higher billing rates and margins due to
the Company's performance of high-level managerial tasks required with these
delivery methods. The Company is seeking to gradually increase the proportion
of overall solution area services provided under the managed and co-managed
delivery methods.
Management views services delivered through the managed or co-managed
methods as being solutions-oriented services because the Company is fully or
partially responsible for development and implementation of technology-based
solutions to customers' business problems. Services delivered under the managed
or co-managed methods are viewed as the most consistent with the Company's
overall marketing strategy and business objectives. References in this report
to solutions-oriented services mean services delivered through the managed or
co-managed methods. Currently, virtually all of the services of the Knowledge
Management, Electronic Business and Interactive Media Solution Areas and a
substantial majority of the services of the Information Technology
Infrastructure Solutions Area are solutions-oriented services because they are
delivered on the managed or co-managed methods. The substantial majority of
current services performed by the Business Operations Solutions Area are
delivered on the staffing method. The Company's long-term marketing strategy
will seek development of additional solutions-oriented business in all solutions
areas. During 1999 and 2000, however, Knowledge Management, Electronic Business
and Interactive Media solutions-oriented services have received the strongest
marketing efforts because the Company's management believes they offer the best
short-term growth prospects and due to management's desire to broaden the
Company's service offerings.
The Company has developed a solutions framework, the Allin Solutions
Framework, for guiding the planning and conduct of solutions-oriented
engagements. The Allin Solutions Framework also assists customers in aligning
their business and technology objectives thereby maximizing the effectiveness of
the recommended solutions. The Allin Solutions Framework allows solution
planning to draw upon a knowledge base of resources containing iterative
information on technology architecture planning. It also provides a solution
development discipline focused on unique team and process models used for
organizing effective project teams and managing project lifecycles. The Allin
Solutions Framework provides a foundation for planning and controlling results-
oriented projects based on scope, schedule and resources. The adaptable process
includes four phases:
. The Solution Vision phase delivers a Vision document that articulates the
ultimate goals for the solution and provides clear direction to measure
success as well as defining the scope of the solution and the boundaries of
the project. The Solution Vision includes a risk/return assessment and a
project plan for the remaining phases.
. The Solution Design phase culminates in the delivery and acceptance of the
design specifications including functional specifications, system design
and quality assurance considerations, test plan and the project plan and
schedule for solution development.
. The Solution Development phase culminates in the initial delivery of a
functionally complete solution, ready for pilot usage.
-18-
<PAGE>
. The Solution Deployment phase begins with a pilot and culminates in the
production release of the installed system, training and documentation and
conversion of, or integration with, existing systems.
The iterative nature of the Allin Solutions Framework has led to the
development of standardized turnkey service products, the Allin Solution
Products, that are offered on a fixed-fee basis. Allin Solution Products allow
new or existing customers to leverage the Company's expertise for technology
assessments on a cost-controlled basis. The Company's management believes the
Allin Solution Products will be effective introductory products to establish
relationships with new customers. Many of the Allin Solution Products are
diagnostic in nature, allowing for demonstration of the Company's technological
expertise while identifying opportunities for implementation of more
comprehensive solutions.
The Company has established operating relationships with some of the
leading suppliers of information technology products to complement its solution
area services. Foremost among these is the operating relationship with
Microsoft Corporation ("Microsoft"). Both of the Company's Allin Consulting
subsidiaries are certified as Microsoft Solutions Provider Partners. Allin
Consulting is also a member of Microsoft's Infrastructure and Knowledge
Management Partner Advisory Councils. Council members are a select group of
Microsoft Solution Providers with a successful history of implementing Microsoft
information technology who work closely with Microsoft to provide guidance on
key issues that ultimately shapes Microsoft's channel-based strategy for
delivering customer solutions and services. The Company's role as a member of
these Advisory Councils has also positioned it to quickly develop solutions
expertise in new Microsoft technologies such as Windows 2000. The Company
intends to continue its specialization in Microsoft-based technology products.
Technology infrastructure is comprised of three significant components: the
physical network, the operating system and back-office applications. The
physical network component deals with network design, network security, local
and remote access and Internet connectivity. The operating system encompasses
all aspects of the design and implementation of a network operating system
including protocol design, policies, profiles, desktop standards, client
installation/imaging and backup schemas. Back-office operations encompass the
design and installation of communications servers, database servers and
application servers. Information Technology Infrastructure Solution Area
services focus on the proper selection, implementation and management of the
underlying platforms driving customers' information systems. Services include
design, configuration, implementation, monitoring and support of customer
operating systems, management and maintenance of database platforms, messaging
systems, information system security solutions, help desk support and
application services such as message queing and transaction servers. The
Information Technology Infrastructure Solution Area services for the
client/server environment maintain a focus on Microsoft BackOffice technology
including Windows 2000, Windows NT Server, SQL Server, SNA Server, Systems
Management Server, Exchange Server and Internet Information Server. This
solution area also creates network solutions that integrate Unix, Lotus, Oracle,
Novell and IBM mainframe systems with Windows NT-based networks.
The Business Operations Solution Area provides custom software development
services for the client/server environment, offering a full spectrum of services
including business requirements analysis, data modeling and design, project and
technical management, programming, documentation and support. The Business
Operations Solution Area also provides consulting and custom development for
mainframe systems, including application development, data base development and
administration, and data communications development for IBM proprietary
technology. Additionally, Business Operations provides specialized technology
consulting services for the banking industry, including conversions for mergers
and acquisitions, software product implementation, systems modification and
support. The banking industry services are focused on development,
implementation and management of Hogan IBA software applications, which are
specialized products for the banking industry.
The Knowledge Management Solution Area focuses on five knowledge services,
collaboration, content and document management, business intelligence, search
and delivery and workflow, which enhance an organization's ability to
disseminate knowledge. These services provide tools to empower customer
personnel with business intelligence for fast and effective decision making.
Knowledge Management designs and implements solutions establishing collaborative
systems that enable enterprise-wide users to innovate through threaded
decisions, document management and workflow. Knowledge Management's solutions
enable all functional areas of an enterprise to monitor key business indicators
such as sales orders, schedules and customer requests through a knowledge base
consisting of relational data, e-mail messages, files and dynamic web content.
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<PAGE>
The Electronic Business Solution Area provides solutions implementing
revenue-generating customer-accessible E-commerce applications, business-to-
business extranets and internally-focused intranets. Solutions are developed
that address E-business implementation issues such as cost, value, security,
integration and interoperability. Electronic Business develops solutions based
on Microsoft's Internet Explorer which allows software systems that support many
features of traditional client/server applications while reducing development
and deployment costs. Electronic Business utilizes the latest Microsoft web
development tools, such as Visual Studio to develop cost effective, scalable
solutions. Electronic Business solutions include company web sites, web
catalogues, web-based customer support information, commerce enabled web
storefronts, and intranet and extranet serving of corporate databases.
The Company's Interactive Media Solution Area utilizes the Company's
expertise in digital media applications to provide solutions based on streaming
of media, interactive television and digital imaging. These solutions utilize
advanced technology and can help customers utilize the power of the Internet to
differentiate products and services. Interactive Media delivers business-to-
business and business-to-consumer E-commerce platforms currently focused on four
vertical target markets: the cruise industry, healthcare, education and
professional photography. Interactive Media consulting services specialize in
interactive media design and specification and application development.
Management believes that the Interactive Media Solution Area is a leader in the
development of interactive television platforms. Interactive Media currently
offers systems integration services for installation of business-to-consumer E-
commerce platforms featuring new hardware configurations utilizing state of the
art equipment from On Command Corporation ("On Command"). The On Command
equipment offers substantial functionality improvements over end-user and head
end components previously used in the Company's interactive television systems.
The Interactive Media Solution Area also provides comprehensive systems
integration services in digital imaging technology to the professional
photography industry. The Company believes that the Internet will be a driving
force accelerating a market trend in the professional photography industry
toward digital imaging. The Company believes that its Interactive Media
Solution Area is on the forefront of developing Internet-based business-to-
business and business-to-consumer E-commerce solutions for the professional
photography industry. The Company's Portraits Online/TM/ proprietary Internet-
based portrait viewing and selling system allows photography customers to view
and order their portraits online at the studio following their portrait session.
In addition, the system gives the consumer the ability to access and order their
images via the studio's Portraits Online/TM/ Internet site. There can be no
assurance, however, that competing or superior digital imaging products or
systems may emerge which may adversely impact the Company.
Ancillary services and product sales are those revenue producing activities
carried out by the Company that, unlike the solution area services previously
described, are not viewed as key to, or completely aligned with, the Company's
overall strategic objectives and marketing plans. Ancillary services and
product sales are conducted either because they represent continuation of
operating activity that originated under an operating model that was
subsequently abandoned or because they meet client requests for products and
services recommended during the performance of solution area services or that
are necessary for continued operation of implemented solutions. Ancillary
services and product sales include the following types of activities:
. The Company continues to derive revenue for transactional interactive
services such as pay-per-view movies and video gaming from interactive
television operations on two cruise ships. Operations of this type originated
when the Company followed an owner-operator model from 1995 to 1997 for its
interactive television system operations. The Company expects that
interactive television transactional revenue to be realized in 2000 will be
significantly reduced from previous levels due to a reduction in the number
of systems operated on this basis.
. Customers' operation of digital imaging systems involves the continual usage
of consumables such as photographic paper, photographic ribbons and compact
discs. Studios will also from time to time purchase additional equipment to
enhance the capabilities of systems already installed or in response to
increasing business volume. The Company views being a source of digital
consumable supplies and ongoing equipment upgrades as an aid in maintaining
the relationships it establishes with its digital imaging systems integration
customers.
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<PAGE>
. The Company's information system product sales historically have been
primarily obtained in connection with technology consulting engagements
carried out by the Company's solution areas. The Company views being a source
of information system products as a complementary service to solution area
customers and as an aid in maintaining established relationships.
. Other services include several types of revenue not included in solution area
revenue due to a lack of consistency with core solution area objectives, but
which derive from activities peripheral to solution area activity. Examples
of the types of revenue included are placement fees and Internet hosting
fees.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenue
The Company's total revenue for the three months ended June 30, 2000 was
$5,560,000, a decrease from total revenue of $6,628,000 for the three months
ended June 30, 1999. The decrease of $1,068,000, or 16%, is attributable
primarily to a $915,000, or 15%, decrease in revenue for the Company's solution
area operations. The Business Operations Solution Area experienced a decline in
revenue of $1,250,000 during the three months ended June 30, 2000 as compared to
the three months ended June 30, 1999 due to an industry-wide decline in the
demand for staffing-based services and the Company's strategic shift to
emphasize the development of solutions-oriented services. Information
Technology Infrastructure also experienced a decline in revenue of $427,000
during the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999. Significant revenue increases of $762,000 were realized
collectively among the Company's Knowledge Management, Electronic Business and
Interactive Media Solution Areas, which offset a significant portion of the
declines in revenue for the Business Operations and Information Technology
Infrastructure Solution Areas. The Company's management believes that the
second quarter 2000 revenue is consistent with the Company's strategic emphasis
on promoting solutions-oriented services. The Knowledge Management, Electronic
Business and Interactive Media Solution Areas primarily perform solutions-
oriented services provided on a managed or co-managed delivery method. These
solution areas have also been the most strongly promoted in sales and marketing
efforts during 2000.
The Company's solution areas recognized revenue, after elimination of
intercompany sales, of $4,935,000 during the three months ended June 30, 2000,
including $693,000 for Information Technology Infrastructure, $1,902,000 for
Business Operations, $338,000 for Knowledge Management, $318,000 for Electronic
Business and $1,684,000 in Interactive Media. Comparable solution area revenue
for the three months ended June 30, 1999 was $5,850,000 in total, including
$1,120,000 from Information Technology Infrastructure, $3,152,000 from Business
Operations, $28,000 from Electronic Business, $205,000 from Knowledge Management
and $1,345,000 from Interactive Media.
Information Technology Infrastructure revenue decreased $427,000, or 38%,
in the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999. The decline is attributable to several factors. Allin
Consulting-California experienced a significant decline in its technical
workforce of close to 10% during 2000 due to a client hiring its employees in
violation of the terms of the agreement between Allin Consulting-California and
the client. This loss in workforce reduced the Company's capacity for
Information Technology Infrastructure engagements. Over the last year, the
Company has also strategically reoriented its solutions-oriented consulting
offerings from primarily Information Technology Infrastructure to a broader
array of services. The sales staff most strongly emphasized development of
Knowledge Management, Electronic Business and Interactive Media revenue during
this time in order to broaden the Company's revenue base. The Company's
management believes several market forces will offer opportunities for recovery
of some of the decline in Information System Infrastructure sales during the
remainder of 2000, including the introduction of Windows 2000 and the need for
companies to improve their technical infrastructure to support Internet-driven
business capabilities. There can be no assurance, however, that the Company
will realize increases in, or maintain current levels of, revenue in the
Information Technology Infrastructure Solution Area in the future.
The substantial decrease in Business Operations revenue of $1,250,000, or
39%, in the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999 is attributable to significant declines experienced due to
industry trends for staffing-based services and from the Company's strategic
shift to emphasizing
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<PAGE>
the development of solutions-oriented operations under the managed or co-managed
delivery methods. The majority of Business Operations consulting has
historically been delivered through the staffing model including most of
Business Operations' mainframe computer services and specialized banking
industry consulting services. As was discussed in the Industry Overview -
Technology Consulting Services section in Item 1 - Business of the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, the Year 2000
issue negatively impacted demand for technology consulting services industry-
wide throughout 1999. The largest declines in demand for technology consulting
services were noted for technology staffing operations. Business Operations
revenue has not recovered from this industry trend in the first half of 2000, as
the level of demand for staffing services continued to be low. The Company's
shift in strategy toward solutions-oriented services has also increased the
emphasis placed by the sales staff on revenue development in other solution
areas.
The Knowledge Management Solution Area experienced an increase in revenue
of $133,000, or 64%, in the three months ended June 30, 2000 as compared to the
three months ended June 30, 1999. The second quarter of 1999 was the initial
period of operations for the Knowledge Management Solution Area. Management
believes the performance of this solution area since initiation of operations
confirms that a market exists for solutions based on key knowledge services
including collaboration, content and document management, business intelligence,
search and delivery and workflow. Management believes the business
opportunities obtained to date for Knowledge Management services have been
consistent with the Company's solutions-oriented strategy and have contributed
to the increase in solutions-oriented revenue realized in the second quarter of
2000 as compared to the second quarter of 1999. There can be no assurance,
however, that the Company will realize increases in, or maintain current levels
of, Knowledge Management revenue in the future.
The Electronic Business Solution Area recorded a revenue increase of
$290,000, or 1,035% for the three months ended June 30, 2000 as compared with
the three months ended June 30, 1999. As was discussed in the Industry Overview
- Technology Consulting Services section in Part 1 - Business of the Company's
Annual Report on Form 10-K, the Internet is viewed by industry analysts as the
next significant wave of technological and business innovation, with Internet-
related business activity expected to grow significantly over the early years of
the 2000's. Internet-based technology consulting is also expected to share in
the rapid growth. The Company's management believes that the compelling market
forces represent an opportunity for growth in Electronic Business. The Company
is committed to further development of this solution area in 2000 with
additional technical and sales resources. There can be no assurance, however,
that the Company will realize revenue equal to or greater than current levels
for its Electronic Business Solution Area in the future.
Interactive Media Solution Area revenue totaled $1,684,000 for the three
months ended June 30, 2000, including $240,000 for interactive media consulting,
$647,000 for interactive media systems integration and $797,000 for digital
imaging systems integration. Comparable Interactive Media revenue for the three
months ended June 30, 1999 was $1,345,000 in total, including $401,000 for
interactive media consulting, $555,000 for interactive media systems
integration, and $389,000 for digital imaging systems integration. The increase
in revenue for this solution area was 25% comparing the second quarter of 2000
to the second quarter of 1999.
Revenue for Interactive Media consulting services decreased by $161,000, or
40%, comparing the second quarter of 2000 to the second quarter of 1999.
Services provided include application design and development for business-to-
consumer E-business platforms. The majority of the consulting revenue derived
in the second quarter of 1999 related to application development for the
interactive television system for the Royal Caribbean Cruise Lines, Ltd. ("Royal
Caribbean") ship Voyager of the Seas. This was the first system utilizing the
On Command hardware platform, which resulted in a large engagement for
applications development. The Company's management believes the growth of
interactive media technology in the markets targeted by the Interactive Media
Solution Area and the Company's extensive experience with interactive technology
continue to offer the opportunity for revenue growth. There can be no assurance,
however, that the Company's Interactive Media Solution Area will realize
consulting revenue equal to or greater than current levels in the future.
Revenue for Interactive Media systems integration services increased by
$92,000, or 16%, in the three months ended June 30, 2000 as compared to the
three months ended June 30, 1999. The most significant source of revenue during
the second quarter of 2000 was the interactive television system being installed
on the Celebrity Cruises, Inc. ("Celebrity") ship Millennium.
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<PAGE>
Digital imaging systems integration revenue increased by $408,000, or 104%,
in the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999. The Company's management believes the increase in revenue
resulted from the efforts of a larger internal sales force and greater industry
recognition of the Company's services as a result of advertising and trade show
presentations.
The Company recognized revenue for ancillary services and product sales of
$625,000 during the three months ended June 30, 2000, including $110,000 for
interactive television transactional revenue, $311,000 for digital imaging
product sales, $107,000 for information system product sales and $97,000 for
other services. Ancillary services and product sales revenue of $778,000 was
recognized during the three months ended June 30, 1999, including $363,000 for
interactive television transactional revenue & management fees, $128,000 for
digital imaging product sales, $206,000 for information system product sales and
$81,000 for other services.
Interactive television transactional revenue & management fees decreased by
$253,000, or 69%, in the three months ended June 30, 2000 as compared to the
three months ended June 30, 1999. The revenue decrease is attributable to the
Company's transition from an owner-operator model for interactive television
systems to a systems integration and consulting services model. The Company
began 1999 operating interactive television systems on eight ships and ended the
year operating two of the systems. Management fees were not earned during 2000
on the systems remaining in operation. The Company believes the transactional
revenue realized from these remaining systems justifies their continued
operation. Digital imaging product sales increased by $183,000, or 142%, in the
second quarter of 2000 as compared to the second quarter of 1999. The Company
derives the majority of this revenue from the sale of consumable products and
equipment utilized in the digital photography process to customers for which the
Company had previously installed a digital imaging system. The increase in
revenue in 2000 resulted from a substantially larger base of customers with
installed systems than had been present in 1999. Information system product
sale revenue decreased by $99,000, or 48%, in the three months ended June 30,
2000 as compared to the three months ended June 30, 1999. The most significant
factor contributing to the decrease was the inclusion of several unusually large
equipment sales to technology consulting clients in the second quarter of 1999.
Revenue from other services increased by $16,000 in the second quarter of 2000
as compared to the second quarter of 1999 due to a higher level of placement
fees recorded in 2000.
Cost of Sales and Gross Profit
The Company recognized cost of sales of $3,750,000 during the three months
ended June 30, 2000 as compared to $4,426,000 during the three months ended June
30, 1999. The decrease in cost of sales of $676,000 resulted primarily from a
$900,000 decrease in cost of sales for the Company's Business Operations
Solution Area, which was attributable to the substantial revenue decrease in
this solution area comparing the second quarter of 2000 to the second quarter of
1999. Gross profit of $1,810,000 was recognized for the three months ended June
30, 2000 as compared to $2,202,000 for the three months ended June 30, 1999, a
decrease of $392,000, or 18%.
The Company's solution areas recorded a total of $3,371,000 for cost of
sales during the three months ended June 30, 2000, including $273,000 for
Information Technology Infrastructure, $1,368,000 for Business Operations,
$212,000 for Knowledge Management, $156,000 for Electronic Business and
$1,362,000 for Interactive Media. Comparable cost of sales for the three months
ended June 30, 1999 was $3,980,000 in total, including $616,000 for Information
Technology Infrastructure, $2,268,000 for Business Operations, $122,000 for
Knowledge Management, $14,000 for Electronic Business and $960,000 for
Interactive Media. Increases or decreases in cost of sales are also
attributable to the factors that resulted in changes in revenue for these
services, including growth in the solutions-oriented consulting and systems
integration services provided by the Knowledge Management, Electronic Business
and Interactive Media Solution Areas, the decline in Business Operations
services provided on a staffing delivery method and the decline in Information
Technology Infrastructure consulting due to a loss in workforce capacity and
broadening of marketing focus. Gross profit for the Company's solution areas
for the three months ended June 30, 2000 was $1,564,000, including $420,000 for
Information Technology Infrastructure, $534,000 for Business Operations,
$126,000 for Knowledge Management, $162,000 for Electronic Business and $322,000
for Interactive Media. Comparable gross profit for the three months ended June
30, 2000 was $1,870,000 in total, including $504,000 for Information Technology
Infrastructure, $884,000 for Business Operations, $83,000 for Knowledge
Management, $14,000 for Electronic Business and $385,000 for Interactive Media.
The primary factor in the decrease in solution area gross profit of $306,000 in
the second quarter of 2000 as compared to the second quarter of 1999 was the
substantial decline in gross profit of $350,000 from Business Operations
consulting.
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Information Technology Infrastructure gross profit decreased $84,000 in the
three months ended June 30, 2000 as compared to the three months ended June 30,
1999. The Company experienced a 17% decline in gross profit in the second
quarter of 2000 as compared to the second quarter of 1999 despite a 38% revenue
decline. The increase in gross profit as a percentage of revenue was realized
through growth in high-margin solutions-oriented projects for Allin Consulting-
Pennsylvania.
The Business Operations Solution Area experienced a decrease in gross
profit of $350,000 in the three months ended June 30, 2000 as compared to the
three months ended June 30, 1999. The Company attributes the decline to
lessened demand for mainframe-oriented technology services and the Company's
specialized bank consulting services consistent with an overall industry trend
away from technology consulting services provided on a staffing model. The
Company is also emphasizing other solutions-oriented services more strongly in
its sales and marketing efforts.
The Knowledge Management Solution Area realized a gross profit increase of
$43,000, or 52%, in the three months ended June 30, 2000 as compared to the
three months ended June 30, 1999. Knowledge Management services are being
actively marketed by the Company consistent with the Company's strategy of
developing solutions-oriented consulting services. The Company's Management
believes the growth in gross profit is a result of the marketing effort for
solutions-oriented services, although there can be no assurance that increases
in gross profit will continue to be realized for the Knowledge Management
Solution Area.
The Electronic Business Solution Area realized an increase in gross profit
of $148,000 in the second quarter of 2000 as compared to the second quarter of
1999. The second quarter 2000 gross profit represented 51% of the Electronic
Business Solution Area second quarter 2000 revenue. The Company has added
technical and sales resources to this solution area in 2000 because of
management's belief that there will be substantial market-driven growth in the
demand for Internet-based technology services in the early years of the 2000's.
Management believes that the second quarter 2000 results indicate the continued
progress of the Electronic Business Solution Area toward becoming a significant
source of high-margin growth for the Company. There can be no assurance,
however, that the Company will be able to realize continued growth in revenue or
gross profit from its Electronic Business Solution Area services.
Cost of sales for the Interactive Media Solution Area was $1,362,000 in
total for the three months ended June 30, 2000, including $109,000 for
interactive media consulting, $526,000 for interactive media systems integration
and $727,000 for digital imaging systems integration. Interactive Media cost of
sales for the three months ended June 30, 1999 was $960,000 in total, including
$180,000 for interactive media consulting, $468,000 for interactive media
systems integration and $312,000 for digital imaging systems integration.
Interactive Media Solution Area gross profit was $322,000 for the three months
ended June 30, 2000, including $131,000 for interactive media consulting,
$121,000 for interactive media systems integration and $70,000 for digital
imaging systems integration. Interactive Media gross profit was $385,000 for
the three months ended June 30, 1999, including $221,000 for interactive media
consulting, $87,000 for interactive media systems integration and $77,000 for
digital imaging systems integration. The decrease in gross profit is
attributable to the lower proportion of consulting revenue to overall solution
area revenue in the second quarter of 2000. Systems integration activities
include a significant equipment component in cost of sales which generally
offers a lower margin potential than the consulting component.
Cost of sales for the Company's ancillary services and product sales was
$379,000 for the three months ended June 30, 2000, including $36,000 for pay-
per-view movies associated with interactive television transactional revenue,
$249,000 for digital imaging product sales and $94,000 for information system
product sales. Cost of sales for ancillary services and product sales was
$446,000 for the three months ended June 30, 1999, including $72,000 for pay-
per-view movies, $111,000 for digital imaging product sales, $172,000 for
information system product sales and $91,000 for other services. Gross profit
on ancillary services and product sales was $246,000 for the three months ended
June 30, 2000, including $74,000 for interactive television transactional
revenue and management fees, $62,000 for digital imaging product sales, $13,000
for information system product sales and $97,000 for other services. Gross
profit for ancillary services and product sales was $332,000 for the three
months ended June 30, 1999, including $291,000 for interactive television
transactional revenue and management fees, $17,000 for digital imaging product
sales, $34,000 for information system product sales and a gross loss of $10,000
for other services.
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The decline in gross profit of $217,000 on interactive television transactional
revenue and management fees was attributable to the reduction in the number of
operating ship systems from seven to two.
Selling, General & Administrative Expenses
The Company recorded $2,826,000 in selling, general & administrative
expenses during the three months ended June 30, 2000 as compared to $3,111,000
during the three months ended June 30, 1999, a decrease of $285,000, or 9%.
Significant factors contributing to the decline in selling, general and
administrative expenses were lower expenses related to the management and
administration of the Company's staffing-oriented consulting services and
interactive television transactional operations, lower depreciation and
amortization and the inclusion of a significant accrual for estimated lease
termination costs in the three months ended June 30, 1999.
Despite the decline in overall selling, general & administrative expenses,
the Company has continued to invest in sales and delivery resources for its
solutions-oriented operations. These investments were offset by reductions in
selling, general & administrative expenses related to areas of declining revenue
such as staffing-oriented consulting services and interactive television
transactional services. The Company plans to continue investments in those
segments of its business that management believes are most closely aligned with
the Company's strategic objectives.
During the second quarter of 1999, the Company recorded an accrual of
approximately $116,000 for estimated lease termination costs for office space
formerly occupied by Allin Consulting-Pennsylvania in Pittsburgh, Pennsylvania.
There was no comparable expense during the second quarter of 2000.
There were several unusual items impacting selling, general &
administrative expenses in the three months ended June 30, 2000. The Company
incurred expenses of approximately $111,000 in connection with an abandoned
acquisition candidate. A loss of approximately $67,000 was recorded on the sale
of assets related to Allin Network's Erie, Pennsylvania based operations which
used the Erie Computer Company tradename. Partially offsetting these losses and
overall selling, general & administrative expenses was a gain of approximately
$137,000 related to Allin Digital's sale of stock held in PhotoWave, Inc., a
non-consolidated corporation.
Depreciation and amortization were $545,000 for the three months ended June
30, 2000 as compared to $621,000 for the three months ended June 30, 1999. The
decline is due to the inclusion of depreciation expense during the second
quarter of 1999 for four shipboard interactive television systems subsequently
sold to Celebrity.
Research and development expense included in selling, general &
administrative expenses was $8,000 for the three months ended June 30, 2000 as
compared to $13,000 for the three months ended June 30, 1999. Research and
development activity during the second quarter of 2000 was carried out by the
Interactive Media Solution Area and included continuing development of the
Portraits Online/TM/ Internet-based E-Commerce platforms and development
activities associated with On Command's equipment platform, which is utilized by
the Company for interactive media systems integration projects.
Net Income or Loss
For the three months ended June 30, 2000, the Company recorded a net loss
of $1,059,000, as compared to a net loss of $1,016,000 for the three months
ended June 30, 1999. While the Company experienced significant declines in
revenue and gross profit in the second quarter of 2000 as compared to the second
quarter of 1999, the decrease in selling, general & administrative expenses from
period-to-period largely offset the decrease in gross profit, resulting in an
overall profitability decline of $43,000, or 4%.
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Results of Operations
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue
The Company's total revenue for the six months ended June 30, 2000 was
$12,647,000, as compared to total revenue of $12,762,000 for the six months
ended June 30, 1999, a decrease of $115,000, or 1%. Revenue held relatively
steady in comparing the six-month periods as a result of an offsetting effect
between substantial revenue increases or decreases for certain solution areas
and other segments of the Company's operations. The Interactive Media Solution
Area recorded a revenue increase of $2,429,000 during the first half of 2000 as
compared to the first half of 1999 due to substantial revenue increases from
sales of shipboard interactive television systems and digital photography
systems integration projects. The Electronic Business and Knowledge Management
Solution Areas collectively recorded a revenue increase of $1,010,000 in
comparing the six months ended June 30, 2000 to the six months ended June 30,
1999. The Company's Management believes these results are consistent with the
Company's strategy to promote development of solutions-oriented technology
consulting services. The revenue increases realized by these solution areas
were offset by declines in other solution areas and in ancillary services. The
Business Operations Solution Area experienced a decline in revenue of $2,840,000
during the six months ended June 30, 2000 as compared to the six months ended
June 30, 2000 due to an industry-wide decline in the demand for staffing-based
services and the Company's strategic shift to emphasize the development of
solutions-oriented services. Information Technology Infrastructure also
experienced a decline in revenue of $494,000 during the six months ended June
30, 2000 as compared to the six months ended June 30, 1999. A substantial
revenue decrease of $767,000 was also noted in comparing Interactive Television
Transactional Revenue & Management Fees for the six months ended June 30, 1999
to the six months ended June 30, 2000 due to a reduction in the number of
operating ship systems.
The Company's solution areas recognized revenue, after elimination of
intercompany sales, of $11,215,000 during the six months ended June 30, 2000,
including $1,639,000 for Information Technology Infrastructure, $3,962,000 for
Business Operations, $694,000 for Knowledge Management, $552,000 for Electronic
Business and $4,368,000 in Interactive Media. Comparable solution area revenue
for the six months ended June 30, 1999 was $11,110,000 in total, including
$2,133,000 from Information Technology Infrastructure, $6,802,000 from Business
Operations, $205,000 from Knowledge Management, $31,000 from Electronic
Business, and $1,939,000 from Interactive Media.
Information Technology Infrastructure revenue decreased $494,000, or 23%,
in the six months ended June 30, 2000 as compared to the six months ended June
30, 1999. The decline is attributable to several factors. Allin Consulting-
California experienced a significant decline in its technical workforce of close
to 10% during the second quarter of 2000 due to a client hiring several of Allin
Consulting-California's consultants in violation of the terms of the agreement
between Allin Consulting-California and the client. This loss in workforce
reduced the Company's capacity for Information Technology Infrastructure
engagements during the second quarter, when the majority of the decline was
realized. Over the last year, the Company has also strategically reoriented its
solutions-oriented consulting offerings from primarily Information Technology
Infrastructure to a broader array of services. The solutions-oriented sales
staff emphasized development of Knowledge Management and Electronic Business
revenue during this time in order to broaden the Company's revenue base. The
Company's management believes several market forces will offer opportunities for
recovery of some of the decline in Information System Infrastructure sales
during the remainder of 2000, including the introduction of Windows 2000 and the
need for companies to improve their technical infrastructure to support
Internet-driven business capabilities. There can be no assurance, however, that
the Company will realize increases in, or maintain current levels of, revenue in
the Information Technology Infrastructure Solution Area in the future.
The substantial decrease in Business Operations revenue of $2,840,000, or
42%, in the six months ended June 30, 2000 as compared to the six months ended
June 30, 1999 is attributable to significant declines experienced due to the
impact of the Year 2000 computer problem and from the Company's strategic shift
to emphasizing the development of solutions-oriented operations under the
managed or co-managed delivery methods. The majority of Business Operations
consulting has historically been delivered through the staffing model including
most of
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Business Operations' mainframe computer services and specialized banking
industry consulting services. As was discussed in the Industry Overview -
Technology Consulting Services section in Item 1 - Business of the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, the Year 2000
problem negatively impacted demand for technology consulting services industry-
wide throughout 1999. The largest declines in demand for technology consulting
services were noted for technology staffing operations. Business Operations
revenue has not recovered from this industry trend in the first half of 2000, as
the level of demand for staffing services continued to be low. The Company's
shift in strategy toward solutions-oriented services has also increased the
emphasis placed by the sales staff on revenue development in other solution
areas.
The Knowledge Management Solution Area experienced an increase in revenue
of $489,000, or 239%, in the six months ended June 30, 2000 as compared to the
six months ended June 30, 1999. The second quarter of 1999 was the initial
period of operations for the Knowledge Management Solution Area, so 1999 revenue
included only three months' activity as compared to six months' activity during
2000. Management believes the performance of this solution area in its
operations to date confirms that a market exists for solutions based on key
knowledge services including collaboration, content and document management,
business intelligence, search and delivery and workflow. Management believes
the business opportunities obtained to date for Knowledge Management services
have been consistent with the Company's solutions-oriented strategy and have
contributed to the increase in solutions-oriented revenue realized in the first
half of 2000 as compared to the first half of 1999. There can be no assurance,
however, that the Company will realize increases in, or maintain current levels
of, Knowledge Management revenue in the future.
The Electronic Business Solution Area recorded a revenue increase of
$521,000, or 1,681%, for the six months ended June 30, 2000 as compared with the
six months ended June 30, 1999. The Company's management believes that growth
of Internet-related business activity is creating compelling market forces
driving an opportunity for growth in the types of Internet-based technology
consulting services offered by the Electronic Business Solution Area. The
Company is committed to further development of this solution area during the
remainder of 2000 with additional technical and sales resources. There can be
no assurance, however, that the Company will realize revenue equal to or greater
than current levels for its Electronic Business Solution Area in the future.
Interactive Media Solution Area revenue totaled $4,368,000 for the six
months ended June 30, 2000, including $503,000 for interactive media consulting,
$2,350,000 for interactive media systems integration and $1,515,000 for digital
imaging systems integration. Comparable Interactive Media revenue for the six
months ended June 30, 1999 was $1,939,000 in total, including $464,000 for
interactive media consulting, $574,000 for interactive media systems
integration, and $901,000 for digital imaging systems integration. The increase
in revenue was 125% for this solution area comparing the first half of 2000 to
the first half of 1999.
Revenue for Interactive Media consulting services increased by $39,000
comparing the first half of 2000 to the first half of 1999. Services provided
include application design and development for business-to-consumer E-business
platforms. The majority of the consulting revenue derived in the first half of
1999 related to application development for the interactive television system
for the Royal Caribbean ship Voyager of the Seas. This was the first system
utilizing the On Command hardware platform, which resulted in a large engagement
for applications development. Revenue recorded in the first half of 2000 has
come from a more diverse base of projects including development for cruise and
healthcare industry interactive media applications and from maintenance and
support for previously installed interactive systems. The Company's management
believes the growth of interactive media technology in the markets targeted by
the Interactive Media Solution Area and the Company's extensive experience with
interactive technology continue to offer the opportunity for revenue growth.
There can be no assurance, however, that the Company's Interactive Media
Solution Area will realize consulting revenue equal to or greater than current
levels in the future.
Revenue for Interactive Media systems integration services increased by
$1,776,000, or 309%, in the six months ended June 30, 2000 as compared to the
six months ended June 30, 1999. A substantial portion of the increase in
revenue in the first half of 2000 was the result of continuing revenue
recognition from the 1999 sale of four shipboard interactive television systems
to Celebrity. The Celebrity ship systems had been installed from 1995 to 1997
on an owner-operator model followed by the Company at that time. Revenue from
the Celebrity system sales was recognized over the minimum period of a related
maintenance obligation for the systems, which ended March 17, 2000. The revenue
increase is also attributable to the inclusion of interactive media systems
integration
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<PAGE>
projects for healthcare and educational institutions in the first half of 2000.
There were no comparable projects in these targeted industries in the first half
of 1999.
Digital imaging systems integration revenue increased by $614,000, or 68%,
in the six months ended June 30, 2000 as compared to the six months ended June
30, 1999. The Company's management believes the increase in revenue resulted
from the efforts of a larger internal sales force and greater industry
recognition of the Company's services as a result of advertising and trade show
presentations, which the Company's management believes are creating brand
awareness for Allin Digital in the portrait photography industry.
The Company recognized revenue for ancillary services and product sales of
$1,432,000 during the six months ended June 30, 2000, including $258,000 for
interactive television transactional revenue, $628,000 for digital imaging
product sales, $367,000 for information system product sales and $179,000 for
other services. Ancillary services and product sales revenue of $1,652,000 was
recognized during the six months ended June 30, 1999, including $1,025,000 for
interactive television transactional revenue & management fees, $225,000 for
digital imaging product sales, $249,000 for information system product sales and
$153,000 for other services.
Interactive television transactional revenue decreased by $767,000, or 75%,
in the six months ended June 30, 2000 as compared to the six months ended June
30, 1999. The revenue decrease is attributable to the Company's transition from
an owner-operator model for interactive television systems to a systems
integration and consulting services model. The Company began 1999 operating
interactive television systems on eight ships and ended the year operating two
of the systems. Management fees were not earned during 2000 on the systems
remaining in operation. The Company believes the transactional revenue realized
from these remaining systems justifies their continued operation. Digital
imaging product sales increased by $403,000, or 179%, in the first half of 2000
as compared to the first half of 1999. The Company derives the majority of this
revenue from the sale of consumable products and equipment utilized in the
digital photography process to customers for which the Company had previously
installed a digital imaging system. The increase in revenue in the 2000 period
resulted from a substantially larger base of customers with installed systems
than had been present in the 1999 period. Information system product sale
revenue increased by $118,000, or 47%, in the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. The most significant factor
contributing to the increase was the inclusion of approximately four months'
operating activity in 2000 for the Company's Erie Computer operations, prior to
the sale of assets related to these operations in May 2000. A substantial
portion of Erie Computer's revenue was derived from information system product
sales. Revenue from other services increased by $26,000 in the first half of
2000 as compared to the first half of 1999 due to a higher level of placement
fees recorded in 2000.
Cost of Sales and Gross Profit
The Company recognized cost of sales of $7,848,000 during the six months
ended June 30, 2000 as compared to $8,248,000 during the six months ended June
30, 1999. The decrease in cost of sales of $400,000, or 5%, resulted from a
combination of significant increases or decreases among the Company's solution
areas. The rate of decrease in cost of sales of 5% exceeded the rate of
decrease in revenue, which was 1%. The Company's management attributes this to
the strategic shift in emphasis from lower-margin services based on a staffing
delivery model to higher-margin solutions-oriented services. Gross profit of
$4,799,000 was recognized for the six months ended June 30, 2000 as compared to
$4,514,000 for the six months ended June 30, 1999, an increase of $285,000, or
6%.
The Company's solution areas recorded a total of $6,935,000 for cost of
sales during the six months ended June 30, 2000, including $731,000 for
Information Technology Infrastructure, $2,854,000 for Business Operations,
$395,000 for Knowledge Management, $270,000 for Electronic Business and
$2,685,000 for Interactive Media. Comparable cost of sales for the six months
ended June 30, 1999 was $7,514,000 in total, including $1,186,000 for
Information Technology Infrastructure, $4,799,000 for Business Operations,
$122,000 for Knowledge Management, $16,000 for Electronic Business and
$1,391,000 for Interactive Media. Increases or decreases in cost of sales are
also attributable to the factors that resulted in changes in revenue for these
services, including growth in the solutions-oriented consulting and systems
integration services provided by the Knowledge Management, Electronic Business
and Interactive Media Solution Areas, the decline in Business Operations
services provided on a staffing delivery method and the decline in Information
Technology Infrastructure consulting due to a loss in workforce capacity and
broadening of marketing focus. Gross profit for the Company's solution areas
for the six months ended
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<PAGE>
June 30, 2000 was $4,280,000, including $908,000 for Information Technology
Infrastructure, $1,108,000 for Business Operations, $299,000 for Knowledge
Management, $282,000 for Electronic Business and $1,683,000 for Interactive
Media. Comparable gross profit for the six months ended June 30, 2000 was
$3,596,000 in total, including $947,000 for Information Technology
Infrastructure, $2,003,000 for Business Operations, $83,000 for Knowledge
Management, $15,000 for Electronic Business and $548,000 for Interactive Media.
The primary factor in the increase in solution area gross profit of $684,000 in
the first half of 2000 as compared to the first half of 1999 was the strategic
transition toward higher-margin solutions-oriented services. The Company
experienced substantial growth in revenue from solutions-oriented services
provided by the Knowledge Management, Electronic Business and Interactive Media
solution areas, which replaced substantial lost revenue in staffing-oriented-
services provided by the Business Operations Solutions Area. The net result of
the transition was a 19% increase in solution area gross profit for the first
half of 2000 as compared to the first half of 1999 while the increase in
solution area revenue was 1%.
Information Technology Infrastructure gross profit decreased $39,000 in the
six months ended June 30, 2000 as compared to the six months ended June 30,
1999. The Company experienced a 4% decline in gross profit in the first half of
2000 as compared to the first half of 1999 despite a 23% revenue decline. The
increase in gross profit as a percentage of revenue was realized through growth
in high-margin solutions-oriented projects for Allin Consulting-Pennsylvania.
The Business Operations Solution Area experienced a decrease in gross
profit of $895,000 in the six months ended June 30, 2000 as compared to the six
months ended June 30, 1999. The Company attributes the decline to lessened
demand for mainframe-oriented technology services and the Company's specialized
bank consulting services consistent with an overall industry trend away from
technology consulting services provided on a staffing model. The Company is
also emphasizing other solutions-oriented services more strongly in its sales
and marketing efforts.
The Knowledge Management Solution Area realized a gross profit increase of
$216,000, or 260%, in the six months ended June 30, 2000 as compared to the six
months ended June 30, 1999. Knowledge Management operations were initiated by
the Company in the second quarter of 1999, so the gross profit for 2000
represents six months' activity as compared to three months' activity for 1999.
Knowledge Management services are being actively marketed by the Company
consistent with the Company's strategy of developing solutions-oriented
consulting services. The Company's Management believes the growth in gross
profit is a result of the marketing effort for solutions-oriented services,
although there can be no assurance that increases in gross profit will continue
to be realized for the Knowledge Management Solution Area.
The Electronic Business Solution Area realized an increase in gross profit
of $267,000 for the first half of 2000 as compared to the first half of 1999.
The first half 2000 gross profit represented 51% of the Electronic Business
Solution Area first half 2000 revenue. The Company has added technical and
sales resources to this solution area in 2000 because of management's belief
that there will be substantial market-driven growth in the demand for Internet-
based technology services in the early years of the 2000's. Management believes
that the first half 2000 results indicate the continued progress of the
Electronic Business Solution Area toward becoming a significant source of high-
margin growth for the Company. There can be no assurance, however, that the
Company will be able to realize continued growth in revenue or gross profit from
its Electronic Business Solution Area services.
Cost of sales for the Interactive Media Solution Area was $2,685,000 in
total for the six months ended June 30, 2000, including $209,000 for interactive
media consulting, $1,265,000 for interactive media systems integration and
$1,211,000 for digital imaging systems integration. Interactive Media cost of
sales for the six months ended June 30, 1999 was $1,391,000 in total, including
$207,000 for interactive media consulting, $479,000 for interactive media
systems integration and $705,000 for digital imaging systems integration.
Interactive Media Solution Area gross profit was $1,683,000 for the six months
ended June 30, 2000, including $294,000 for interactive media consulting,
$1,085,000 for interactive media systems integration and $304,000 for digital
imaging systems integration. Interactive Media gross profit was $548,000 for
the six months ended June 30, 1999, including $257,000 for interactive media
consulting, $95,000 for interactive media systems integration and $196,000 for
digital imaging systems integration. The increase in gross profit is primarily
attributable to the inclusion of gross profit from the sale of the four
shipboard interactive television systems to Celebrity in the first half of 2000.
The
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four systems had been depreciated during the period they were owned and operated
by the Company, resulting in relatively low carrying values for the systems upon
their sale and relatively high gross profit recognition on the sales.
Cost of sales for the Company's ancillary services and product sales was
$913,000 for the six months ended June 30, 2000, including $83,000 for pay-per-
view movies associated with interactive television transactional revenue,
$540,000 for digital imaging product sales, $267,000 for information system
product sales and $23,000 for other services. Cost of sales for ancillary
services and product sales was $734,000 for the six months ended June 30, 1999,
including $139,000 for pay-per-view movies, $194,000 for digital imaging product
sales, $208,000 for information system product sales and $193,000 for other
services. Gross profit on ancillary services and product sales was $519,000 for
the six months ended June 30, 2000, including $175,000 for interactive
television transactional revenue, $88,000 for digital imaging product sales,
$100,000 for information system product sales and $156,000 for other services.
Gross profit for ancillary services and product sales was $918,000 for the six
months ended June 30, 1999, including $886,000 for interactive television
transactional revenue and management fees, $31,000 for digital imaging product
sales, $41,000 for information system product sales and a gross loss of $40,000
for other services. The decline in gross profit of $711,000 on interactive
television transactional revenue was attributable to the reduction in the number
of operating ship systems from eight to two.
Selling, General & Administrative Expenses
The Company recorded $5,731,000 in selling, general & administrative
expenses during the six months ended June 30, 2000 as compared to $6,185,000
during the six months ended June 30, 1999, a decrease of $454,000, or 7%.
Significant factors contributing to the decline in selling, general and
administrative expenses were lower expenses related to the management and
administration of the Company's staffing-oriented consulting services and
interactive television transactional operations, lower depreciation and
amortization and the inclusion of significant accruals for estimated severance
costs, lease termination costs and a significant writedown of assets related to
Allin Consulting-Pennsylvania's former office in Pittsburgh in the six months
ended June 30, 1999.
Despite the decline in overall selling, general & administrative expenses,
the Company has continued to invest in sales and delivery resources for its
solutions-oriented operations. These investments were offset by reductions in
selling, general & administrative expenses related to areas of declining revenue
such as staffing-oriented consulting services and interactive television
transactional services. The Company plans to continue investments in those
segments of its business that management believes are most closely aligned with
the Company's strategic objectives.
During the six months ended June 30, 2000, a severance accrual of
approximately $70,000 was recorded as a result of the termination of services of
two managerial personnel associated with the staffing services provided by the
Company's Business Operations Solution Area. During the six months ended June
30, 1999, a severance accrual of approximately $208,000 was recorded due to the
Company's termination of the employment contract for its then President.
During the six months ended June 30, 1999, the Company recorded a writedown
of approximately $101,000 related to leasehold improvements, furniture and
equipment from Allin Consulting-Pennsylvania's former office in Pittsburgh.
Allin Consulting-Pennsylvania's Pittsburgh staff moved to the Company's
corporate headquarters office during this period. The assets written down were
disposed of or were not utilized subsequent to the move. During the first half
of 1999, the Company also recorded an accrual of approximately $116,000 for
estimated lease termination costs for office space formerly occupied by Allin
Consulting-Pennsylvania.
There were also several unusual items impacting selling, general &
administrative expenses in the six months ended June 30, 2000. The Company
incurred expenses of approximately $111,000 in connection with an abandoned
acquisition candidate. A loss of approximately $67,000 was recorded on the sale
of assets related to the operations of Erie Computer Company. Partially
offsetting these losses and overall selling, general & administrative expenses
was a gain of approximately $137,000 related to Allin Digital's sale of stock
held in PhotoWave, Inc., a non-consolidated corporation.
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Depreciation and amortization were $1,067,000 for the six months ended June
30, 2000 as compared to $1,247,000 for the six months ended June 30, 1999. The
decline is due to the inclusion of depreciation expense during the first half of
1999 for four shipboard interactive television systems subsequently sold to
Celebrity.
Research and development expense included in selling, general &
administrative expenses was $21,000 for the six months ended June 30, 2000 as
compared to $19,000 for the six months ended June 30, 1999. Research and
development activity during the first half of 2000 was carried out by the
Interactive Media Solution Area and included continuing development of the
Portraits Online/TM/ Internet-based E-Commerce platform and development
activities associated with On Command's equipment platform, which is utilized by
the Company for interactive media systems integration projects.
Net Income or Loss
For the six months ended June 30, 2000, the Company recorded a net loss of
$1,040,000, as compared to a net loss of $1,870,000 for the six months ended
June 30, 1999. An improvement in the Company's profitability of $830,000 was
realized despite a $115,000 decline in revenue. The primary factors in the
profitability improvement were the reduction in selling, general &
administrative expenses of $454,000, as discussed above, and the increase in
gross profit of $285,000 resulting from the Company's ongoing transition to
predominantly being a provider of high-margin solutions-oriented technology
consulting services.
Liquidity and Capital Resources
At June 30, 2000 the Company had cash and liquid cash equivalents of
$1,538,000 available to meet its working capital and operational needs. The net
change in cash from December 31, 1999 was a decrease of $350,000. The net cash
used during the six months ended June 30, 2000 resulted primarily from working
capital adjustments related to operations, partially funded by increased
borrowings on the Company's line of credit.
The Company recognized a net loss for the six months ended June 30, 2000 of
$1,040,000. The Company recorded non-cash expenses of $1,304,000 for
depreciation, amortization of software development costs and other intangible
assets and cost of fixed assets sold, net of a $72,000 gain on sale of assets,
resulting in net cash provided of $192,000 related to the income statement.
Working capital adjustments resulted in a net cash use of $1,624,000. Foremost
among the working capital adjustments resulting in net cash use were decreases
of $927,000 in deferred revenue related to revenue recognition for the Celebrity
system sales and $473,000 in accrued liabilities primarily due to payment of
accrued interest on the a note payable related to the acquisition of Allin
Consulting-California and an increase in inventory of $367,000. An increase of
$1,105,000 in costs in excess of billings was recorded, primarily for equipment
purchased for Interactive Media systems integration projects, but this was
offset by a $1,045,000 increase in accounts payable. The net result of the
income statement activity and working capital adjustments was a net cash use of
$1,432,000 related to operating activities.
The net cash provided from financing activities of $1,186,000 during the
six months ended June 30, 2000 resulted from borrowings on the Company's line of
credit, offset by payments for preferred stock dividends and capital lease
obligations. The net cash used of $104,000 for investing activities during the
six months ended June 30, 2000 was for capital expenditures, net of proceeds
from the sale of assets.
On October 1, 1998, the Company and S&T Bank, a Pennsylvania banking
association, entered into a Loan and Security Agreement (the "S&T Loan
Agreement"), under which S&T Bank agreed to extend the Company a revolving
credit loan. S&T Bank recently notified the Company of its intent to renew the
S&T Loan Agreement under terms substantially similar to those currently in
effect for an additional year thereby extending the expiration date to September
30, 2001. The Company anticipates documentation of the renewal will be
completed in the near future. The maximum borrowing availability under the S&T
Loan Agreement is the lesser of $5,000,000 or eighty-five percent of the
aggregate gross amount of eligible trade accounts receivable aged sixty days or
less from the date of invoice. Accounts receivable qualifying for inclusion in
the borrowing base are net of any prepayments, progress payments, deposits or
retention and must not be subject to any prior assignment, claim, lien, or
security interest. As of June 30, 2000, maximum borrowing availability under
the S&T Loan Agreement was approximately $2,206,000. The outstanding balance as
of June 30, 2000 was $1,995,000.
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Borrowings may be made under the S&T Loan Agreement for general working
capital purposes. Loans made under the S&T Loan Agreement bear interest at the
bank's prime interest rate plus one percent. During 2000, the applicable
interest rate ranged from 9.50% to 10.50%, which was in effect at June 30, 2000.
The interest rate increases or decreases from time to time as S&T Bank's prime
rate changes. Interest payments on any outstanding loan balances are due
monthly on the first day of the month. The Company recorded approximately
$28,000 in interest expense related to this revolving credit loan for the six
months ended June 30, 2000. The principal will be due at maturity, anticipated
to be September 30, 2001 based on S&T Bank's recent renewal notification,
although any outstanding principal balances may be repaid in whole or part at
any time without penalty
The S&T Loan Agreement includes provisions granting S&T Bank a security
interest in certain assets of the Company including its accounts receivable,
equipment, lease rights for real property, and inventory of the Company and its
subsidiaries. The Company and its subsidiaries, except for Allin Consulting-
California and Allin Holdings, are required to maintain depository accounts with
S&T Bank, in which accounts the bank has a collateral interest.
The S&T Loan Agreement includes various covenants relating to matters
affecting the Company including insurance coverage, financial accounting
practices, audit rights, prohibited transactions, dividends and stock purchases,
which are disclosed in their entirety in the text of the S&T Loan Agreement
filed as an exhibit to the Company's Current Report on Form 8-K filed on October
9, 1998 and the Second Amendment to Note and Loan and Security Agreement filed
as Exhibit 4.1 to the Company's Report on Form 10-Q for the quarterly period
ended September 30, 1999. The covenant concerning dividends and purchases of
stock prohibits the Company from declaring or paying cash dividends or
redeeming, purchasing or otherwise acquiring outstanding shares of any class of
the Company's stock, except for dividends payable in the ordinary course of
business on the Company's Series D, E and F preferred shares or such
distributions made from time to time to compensate the Company's shareholders
for income taxes attributed to them with respect to the Company's financial
performance. The covenants also include a cash flow to interest ratio of not
less than 1.0 to 1.0. Cash flow is defined as operating income before
depreciation, amortization and interest. The amendment between S&T Bank and the
Company renewing the revolving credit facility as of October 1, 1999 changed the
measurement period for this covenant. The cash flow coverage ratio is now
measured for each of the Company's fiscal quarters. S&T Bank waived the cash
flow covenant requirement for the fiscal quarter ended June 30, 2000, which the
Company would not have otherwise met. The Company anticipates a waiver will
also be extended for the fiscal quarter ended September 30, 2000. The Company
is in compliance with all other covenants as of June 30, 2000. The S&T Loan
Agreement also includes reporting requirements regarding annual and monthly
financial reports, accounts receivable and payable statements, weekly borrowing
base certificates and audit reports.
As of June 30, 2000, the Company had outstanding $2,500,000 in liquidation
preference of Series C Redeemable Preferred Stock. On May 31, 1999, the holders
of all of the 25,000 then outstanding shares of the Company's Series A preferred
stock, which had been issued in August 1996, exchanged their shares for a like
number of shares of the Company's Series C preferred stock, having a liquidation
preference of $100 per share. There is no mandatory redemption date for the
Series C preferred stock. Accrued but unpaid dividends on the Series C
preferred stock were approximately $899,000 as of June 30, 2000 and
approximately $929,000 as of August 10, 2000. Series C preferred stock earns
dividends at the rate of 8% of the liquidation value thereof per annum,
compounded quarterly, until June 30, 2006, when the Company will be obligated to
pay accrued dividends, subject to legally available funds. Any accrued
dividends on the Series C preferred stock not paid by this date will compound
thereafter at a rate of 12% of the liquidation value thereof per annum. After
June 30, 2006, dividends on the Series C preferred stock will accrue and
compound at a rate of 12% per annum and will be payable quarterly, subject to
legally available funds. The Company's current credit agreement with S&T Bank
prohibits payment of dividends on Series C preferred stock during the term of
the agreement.
On May 31, 1999, the holders of all of the 2,750 outstanding shares of the
Company's Series B preferred stock, which had been issued in August 1998,
exchanged their shares for a like number of shares of the Company's Series D
Convertible Redeemable Preferred Stock having a liquidation preference of $1,000
per share. All of the 2,750 shares of Series D preferred stock remained
outstanding as of June 30, 2000. There is no mandatory redemption date for the
Series D preferred stock. Series D preferred stock is convertible into the
Company's common stock until August 13, 2003. Each share of Series D preferred
stock is convertible into the number of shares of common stock determined by
dividing 1,000 by $3.6125, which is 85% of the $4.25 per share price on the
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last trading day prior to the date of closing of the acquisition of Allin
Consulting-Pennsylvania. Series D preferred stock earns dividends at the rate of
6% of the liquidation value thereof per annum, compounded quarterly. Dividends
on Series D preferred stock are payable quarterly in arrears as of the last day
of October, January, April and July, subject to legally available funds. Accrued
but unpaid dividends on Series D preferred stock were approximately $28,000 as
of June 30, 2000 and approximately $5,000 as of August 10, 2000.
On May 31, 1999, the holder of a promissory note issued by the Company in
connection with the acquisition of Allin Consulting-Pennsylvania, with an
outstanding principal balance of approximately $1,926,000 exchanged the
promissory note for 1,926 shares of the Company's Series E Convertible
Redeemable Preferred Stock having a liquidation preference of $1,000 per share.
All of the 1,926 shares of Series E preferred stock remained outstanding as of
July 31, 2000. There is no mandatory redemption date for the Series E preferred
stock. Series E preferred stock is convertible to the Company's common stock.
If not redeemed by the Company earlier, outstanding Series E preferred stock
will automatically convert as of August 13, 2000 into the number of shares of
the Company's common stock equal to the amount obtained by dividing the
liquidation preference of the outstanding shares of Series E preferred stock
plus accrued and unpaid dividends by the average of the bid and asked prices of
the common stock for the thirty days preceding August 13, 2000, subject to a
$2.00 minimum price. Series E preferred stock earns dividends at the rate of 6%
of the liquidation value thereof per annum, payable quarterly in arrears on the
first business day of each calendar quarter, subject to legally available funds.
The Company will not redeem the Series E preferred stock prior to August 13,
2000. Accrued but unpaid dividends on Series E preferred stock were
approximately $29,000 as of June 30, 2000 and approximately $13,000 as of August
10, 2000.
On May 31, 1999, the holder of a promissory note issued by the Company in
connection with the acquisition of Allin Consulting-California, with an
outstanding principal balance of $2,000,000 agreed to a reduction in the
principal amount of the promissory note by $1,000,000 in exchange for 1,000
shares of the Company's Series F Convertible Redeemable Preferred Stock having a
liquidation preference of $1,000 per share. All of the 1,000 shares of Series F
preferred stock remained outstanding as of June 30, 2000. There is no mandatory
redemption date for the Series F preferred stock. Series F preferred stock is
convertible to the Company's common stock until the earlier of May 31, 2004 or
the Company's redemption of the Series F preferred shares. Until and including
May 31, 2004, Series F preferred stock will be convertible into the number of
shares of the Company's common stock equal to the amount obtained by dividing
1,000 by $1.966, 85% of the closing price of the common stock as reported by
Nasdaq on the last trading date prior to the first anniversary of the date of
issuance of the Series F preferred stock. Series F preferred stock earns
dividends at the rate of 7% of the liquidation value thereof per annum.
Dividends are payable quarterly on the 15th of the first month of each calendar
quarter subject to legally available funds, beginning April 15, 2000. Any unpaid
dividends will compound quarterly. Accrued but unpaid dividends on Series F
preferred stock were approximately $58,000 as of March 31, 2000 and
approximately $49,000 as of August 10, 2000.
The order of liquidation preference of the Company's outstanding preferred
stock, from senior to junior, is Series E, Series F, Series D and Series C. The
S&T Loan Agreement prohibits the Company from declaring or paying dividends on
any shares of its capital stock, except for current dividends payable in the
ordinary course of business on the Company's Series D, E and F preferred stock.
Each of the Certificates of Designation governing the Series C, D, E and F
preferred stock prohibits the Company from declaring or paying dividends or any
other distribution on the common stock or any other class of stock ranking
junior as to dividends and upon liquidation unless all dividends on the senior
series of preferred stock for the dividend payment date immediately prior to or
concurrent with the dividend or distribution as to the junior securities are
paid or are declared and funds are set aside for payment.
In connection with the Company's original sale of Series B Redeemable
Preferred Stock in August 1998, the purchasers of Series B shares also received
warrants to purchase an aggregate of 647,059 shares of common stock which have
an exercise price of $4.25 per share, the price of the common stock as of the
last trading day prior to the Allin Consulting-Pennsylvania closing. The
exercise price may be paid in cash or by delivery of a like value, including
accrued but unpaid dividends, of Series C Redeemable Preferred Stock.
The Company has outstanding an amended note payable to Les D. Kent related
to the November 1996 acquisition of Allin Consulting-California. After the May
1999 conversion of a portion of the note principal to the Company's Series F
preferred stock, as discussed previously, the outstanding principal balance of
the note is $1,000,000. The principal balance of the note is due April 15,
2005. The note provides for interest at the rate of 7%
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per annum from the acquisition date of November 6, 1996. In accordance with the
terms of the note, accrued interest as of May 31, 1999 of approximately $390,000
was paid on April 1, 2000. Quarterly interest payments began April 15, 2000.
Approximately $76,000 of interest is accrued, but unpaid, as of June 30, 2000.
The agreement for the Company's November 1998 acquisition of MEGAbase, Inc.
("MEGAbase") provides for contingent payments of up to $800,000, to be
determined on the basis of Allin Consulting-California's Development Practice
Gross Margin (as provided in the stock purchase agreement for the acquisition)
for the period beginning January 1, 1999 and ending December 31, 1999. The
former MEGAbase sole shareholder, Mark Gerow ("Gerow"), is entitled to receive
an aggregate contingent payment equal to $1.00 for each dollar by which Allin
Consulting-California's Development Practice Gross Margin exceeded $500,000,
subject to a maximum contingent payment of $800,000. Any contingent payment due
may be made, at the Company's sole option, (a) all in cash, (b) 50% in cash and
50% in the Company's common stock based on a per share amount equal to the
average of the bid and asked prices for the five trading days preceding
contingent payment, or (c) 50% in cash and 50% in the form of a promissory note
bearing interest at a rate of 8% per annum to be due one year from the date of
such note. Any contingent payment due was originally to have been paid no later
than March 31, 2000, unless the Company selected (c) above, under which 50% of
the payment due was due one year later.
On or about November 22, 1999, the Company commenced an action in the Court
of Common Pleas of Allegheny County, Pennsylvania, against Gerow. The Company
is seeking declaratory relief pertaining to certain claims made by Gerow under
the stock purchase agreement pursuant to which the Company acquired all of the
stock of MEGAbase. Gerow filed Preliminary Objections challenging the Court's
jurisdiction over him. The Court overruled the Preliminary Objections on June
15, 2000. The Company and Gerow have not been able to reach agreement on the
calculation of the Development Practice Gross Margin due to disagreement over
interpretation of its definition per the purchase agreement. Gerow has not to
date filed a claim for a specific dollar amount. The Company is seeking the
Court's assistance in determining the amount, if any, of contingent purchase
consideration to be paid.
Emerging Issues Task Force Issue 95-8: Accounting for Contingent
Consideration Paid to the Shareholders of an Acquired Company in a Purchase
Business Combination ("EITF 95-8") describes five factors that must be
considered in evaluating the proper treatment of contingent consideration,
including the terms of continuing employment, the components of the shareholder
group, the reasons for contingent payment provisions, the formula for
determining contingent consideration and other agreements and issues. The
Company's analysis of these factors indicates that any contingent payments
determined to be due as a result of the ongoing litigation or agreement between
the Company and Gerow will be recorded as additional cost of the acquired
enterprise. Key factors in the evaluation include the Company's ability to
control the form of principal payments and the similarity of the development
practice to the pre-acquisition MEGAbase organization.
The Company incurred approximately $21,000 in research and development
expense for the six months ended June 30, 2000. The Interactive Media Solution
Area's research and development activity included ongoing development of
functional and graphical improvements to the Portraits Online/TM/ Internet-based
E-Commerce platform and development activities associated with On Command's
equipment platform, which is utilized by the Company for interactive media
systems integration projects. Forecasts for the remainder of 2000 indicate
expected research and development expenditures related to these Interactive
Media research and development projects to be at or below levels expended in the
first half of 2000. Management intends to evaluate any development projects on
an ongoing basis and may reduce or eliminate projects if alternate technologies
or products become available or if changing business conditions so warrant.
Capital expenditures during the six months ended June 30, 2000 were
approximately $289,000 and included furniture and leasehold improvements related
to the opening of the Company's Walnut Creek, California office, the purchase of
enterprise resource planning software and computer hardware, software and
communications equipment for the Company's periodic upgrading of technology.
Forecasts for the remainder of 2000 indicate expected capital expenditures of
approximately $125,000. The Company anticipates remaining 2000 capital
expenditures will include hardware, software and networking equipment for the
Company's ongoing upgrading of technology. Business conditions and management's
plans may change during the remainder of 2000, so there can be no assurance that
the Company's actual amount of capital expenditures will not exceed the planned
amount.
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The Company believes 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 twelve months. As discussed above, S&T Bank
has given the Company verbal notification of its intent to renew the S&T Loan
Agreement through September 30, 2001. 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 on terms favorable to the Company or at all. The Company is currently
evaluating the sale of convertible equity securities, subject to approval of the
holders of the common stock, in order to improve the Company's liquidity
position. Any sale of additional common or convertible equity or convertible
debt securities would result in additional dilution to the Company's
shareholders.
Special Note on Forward Looking Statements
The Management's Discussion and Analysis and other sections of this 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,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 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 New Marketing Strategies. The Company
fundamentally changed the marketing strategies for its technology consulting
operations in early 1999 to emphasize a customer-oriented marketing approach and
the delivery of services oriented around solution areas meeting customer needs
for information technology infrastructure, business operations, knowledge
management, electronic business and interactive media solutions. The Company is
seeking to develop additional solutions-oriented business for all of these
solution areas and seeks to reposition its operations away from the staffing-
oriented model formerly predominant in Allin Consulting-Pennsylvania. The
majority of the Company's current Business Operations solution area revenue is
derived from services provided under the staffing model. The Company has
experienced a decline in demand for Business Operations services during 1999 and
the first half of 2000, particularly for staffing for mainframe computer systems
and its specialized banking industry services. Business Operations activity in
future periods under the staffing model is expected to continue to decline as a
result of both industry trends and the Company's marketing focus on solutions-
oriented projects. While the Company obtained revenue growth in the first half
of 2000 from the solutions-oriented operations of the Knowledge Management,
Electronic Business and Interactive Media Solution Areas, there can be no
assurance that the Company will be successful at growing solutions-oriented
revenue in any of its solution areas in the future or that any growth obtained
will offset or exceed the expected declines in Business Operations revenue.
There can also be no assurance that any growth achieved for solutions-oriented
projects will result in the desired improvements to gross profit. Because the
Company has only a limited history of operations with the current marketing
strategies, 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.
Loss of Interactive Television Transactional Revenue and Management Fees.
As a result of the Company's reorientation of its marketing strategy for Allin
Interactive's operations in mid-1997, the operation of ship-based interactive
television systems under an owner-operator model was deemphasized. The
transition toward provision of systems integration and consulting services has
also resulted in a decline in transactional revenue and the elimination of
management fee revenue derived from interactive television systems owned and
operated by Allin Interactive. A significant decline in revenue has been
realized in the first half of 2000 and is expected to continue in
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the third quarter of 2000 as compared to the same periods of 1999 due to the
transitioning of operational responsibility to Celebrity for five interactive
systems on its ships.
Completion of Revenue Recognition for Celebrity Interactive Television
System Sales. During August 1999, Allin Interactive entered an agreement with
Celebrity providing for Celebrity's purchase for approximately $2,400,000 of the
four interactive television systems previously owned by Allin Interactive and
operated on Celebrity ships. Two ship system sales were completed in each of
August and September 1999. Allin Interactive and Celebrity also entered related
agreements providing for operation and maintenance of the interactive systems
sold. Under the maintenance agreement between Allin Interactive and Celebrity,
Allin Interactive was obligated to provide ongoing technical support for the
four interactive television systems sold to Celebrity, as well as a fifth system
previously sold to Celebrity, for a minimum period of six months following
completion of all system sales and transfers of operational responsibility. The
minimum maintenance period ended March 17, 2000. Revenue for the four
interactive television system sales was recognized over the minimum period of
the maintenance agreement concurrent with Allin Interactive's minimum technical
maintenance obligation. These system sales reflected unusually high gross profit
since the related equipment cost had been depreciated during the period that
Allin Interactive owned and operated the systems. Allin Interactive experienced
declines in revenue and gross profit during the second quarter of 2000 and may
continue to experience reduced revenue and gross profit during the remainder of
2000 as compared to the first quarter due to completion of revenue and gross
profit recognition from the Celebrity sale.
Need for Management of Growth and Geographic Expansion. The Company's
growth strategy will require its management to conduct operations, evaluate
acquisitions and respond to changes in technology and the market. The Company
intends to evaluate continued geographic growth of its operations, particularly
in technology consulting. The Company is evaluating further geographic
expansion of operations through acquisition or investment. There can be no
assurance, however, that the Company will be successful in identifying or
acquiring other businesses, or that any business that may be acquired will
result in the desired improvements to financial results. There can also be no
assurance that the Company would be able to successfully integrate any business
acquired with the other businesses of the Company. The Company markets
interactive media projects and its specialized bank consulting services
nationally and undertakes projects throughout the United States as obtained. If
the Company's management is unable to manage growth, if any, effectively, the
Company's business, financial condition and results of operations will be
materially adversely affected.
Dependence on Key Personnel. The Company's success is dependent on a
number of key management, technical and operational personnel for the management
of consulting operations, development of new markets and products and timely
installation of its systems. The Company's reorientation of marketing
strategies and operations during 1999 has also resulted in certain key
executives assuming different or additional responsibilities for the Company's
operations. 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.
Competitive Market Conditions. The technology 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 also large
national or multinational firms competing in this market. Rapid rates of change
in the development and usage of computer hardware, software, Internet
applications and networking capabilities will require continuing education and
training of the Company's technical consultants and a sustained effort to
monitor developments in the technology industry to maintain services that
provide value to the Company's customers. The Company's competitors may have
resources to develop training and industry monitoring programs that are superior
to the Company's. There can also 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.
The market for interactive media and digital imaging systems integration
services is new and rapidly evolving. The types of interactive media systems
and applications offered by the Company are significant capital expenditures for
potential customers and do not have proven markets. Some 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.
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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 or systems integration engagements or the acquisition of businesses.
Accordingly, quarterly revenue 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.
Historical Net Losses and Accumulated Deficit. The Company sustained
substantial net losses during the years ended December 31, 1996, 1997, 1998 and
1999, and the six months ended June 30, 2000. As of June 30, 2000, the Company
had an accumulated deficit of $31,466,000. The Company anticipates that it may
incur net losses at least through all or a portion of the remainder of 2000, and
there can be no assurance that it will be able to achieve revenue growth or
improvements to profitability on an ongoing basis in the future.
Liquidity Risk. The Company's cash resources and cash flow generated from
operations have been adequate to meet its needs to date, but there can be no
assurance that a prolonged downturn in operations or business setbacks to the
Company's operating entities will not result in working capital shortages which
may adversely impact the Company's operations. The liquidity risk has been
mitigated somewhat by the Company obtaining a line of credit facility for its
short term working capital needs. The Company has received verbal notification
of its lender's intention to extend the line of credit facility through
September 30, 2001. Failure of the Company to renew its existing credit
facility as anticipated or beyond September 30, 2001 or replace it with another
facility with similar terms may adversely impact the Company's operations in the
future.
Public Market and Trading Issues. Following the Company's initial public
offering in November 1996, a public market for the Company's common stock did
develop. However, trading of the common stock has been sporadic and the trading
volume has generally been low. Even a small trading volume on a particular day
or over a few days may affect the market price of the common stock. The market
price of the common stock could also be subject to fluctuations in response to
variations in results of operations, changes in earnings estimates by securities
analysts, announcements by competitors, general economic and market conditions
and other factors. These market fluctuations may adversely affect the market
price of the common stock. Additionally, the Company is required to maintain
certain financial and other criteria for continued listing of the common stock
on The Nasdaq Stock Market's National Market, including a net tangible assets
requirement of $4,000,000 and a minimum bid price requirement of $2.00. There
can be no assurance the Company will be able to meet the National Market listing
criteria on an ongoing basis.
Risks Inherent in Development of New Markets. The Company's strategy
includes attempting to develop an ongoing business base for its interactive
media systems integration and consulting services in the healthcare and
education industries. 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.
There can be no assurance that the Company will be successful at establishing an
ongoing base of revenue in these new markets, or that any contracts obtained
will generate improvements to the Company's profitability or cash flow.
Risks Inherent in Development of New Products. The Company recently
developed software interfaces and modifications for end-user operating
components from On Command to be utilized in interactive system installations,
which the Company believes could result in fundamental improvements to the
functionality of the end-user system components. The Company also intends to
conduct research and development activities in other areas to improve its
applications and systems or to extend their availability to additional types of
communication networks. There can be no assurance, however, that such projects
will result in improved functionality of the Company's interactive or digital
imaging systems 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 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.
Proprietary Technology; Absence of Patents. The Company does not have
patents on any of its system configurations, designs or applications and relies
on a combination of copyright and trade secret laws and
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<PAGE>
contractual restrictions for protection. 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 system configurations, designs or applications 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 system
configurations, designs or applications. Any misappropriation of the Company's
system configurations, designs or applications 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 system configurations, designs and
applications 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 technology systems and applications that
could adversely affect the Company's business, financial condition and results
of operations.
Government Regulation and Legal Uncertainties. The Company is subject,
both directly and 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 1998, the Financial Accounting Standards Board ("FASB") 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. The FASB has approved Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the effective date of FASB
Statement No. 133, which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (that is January 1,
2001 for companies with calendar years). Had the Company applied this standard
currently, the effect on the Company's results of operations for the period
ended June 30, 2000 would be immaterial.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB No. 101"), to
provide guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB No. 101 explains the SEC's general framework for
revenue recognition. SAB No. 101 does not change existing literature on revenue
recognition, but rather clarifies the SEC's position on preexisting literature.
SAB No. 101 must be adopted by the company by December 31, 2000. While the
company has not completed its review of the effects of SAB No. 101 management
does not presently believe that its adoption will have a significant impact on
financial position or results of operations.
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<PAGE>
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
Item 1. Legal Proceedings
On June 14, 2000, Allin Consulting-California filed a Complaint for Breach
of Contract against Exodus Communications, Inc. ("Exodus") in the Superior Court
of California, County of Santa Clara. The complaint seeks damages in excess of
$270,000 due to Exodus' recruitment and hiring of three of Allin Consulting-
California's technology consultants in violation of the non-solicitation terms
of the respective agreements for services between Allin Consulting-California
and Exodus. Exodus has not yet responded to the Complaint.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
-
(a) The Annual Meeting of the Stockholders of the Company was held on
Thursday, May 11, 2000.
(b) Not applicable.
(c) The following matters were voted on by the Stockholders of the
Company by votes submitted through proxy or in person at the
Annual Meeting:
(1) Election of Directors for one year terms to hold office until
the next annual meeting of the Stockholders following
election and until their successors are duly elected and
qualified. Results were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Against Votes Abstaining
<S> <C> <C> <C>
Richard W. Talarico 4,700,584 0 229,450
Brian K. Blair 4,693,984 0 236,050
Anthony L. Bucci 4,693,584 0 236,450
William C. Kavan 4,693,584 0 236,450
James S. Kelly, Jr. 4,694,084 0 235,950
Anthony C. Vickers 4,694,084 0 235,950
</TABLE>
(2) Adoption of the 2000 Stock Plan of Allin Corporation. Votes
cast were 4,832,250 for adoption, 95,284 against adoption,
and 2,500 abstaining.
(3) Ratification of the Board of Directors' selection of Arthur
Andersen LLP to serve as the independent public accountants
to examine the financial statements of the Company and its
subsidiaries for the year ending December 31, 2000. Votes
cast were 4,913,034 for ratification, 8,100 against
ratification, and 8,900 abstaining.
There were a total of 6,010,973 shares of the Company's Common
Stock eligible to vote at the Annual Meeting.
(d) Not applicable.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description of Exhibit
------ ----------------------
10.1* Employment Agreement dated June 23, 2000 by and between the Registrant
and Dean C. Praskach
11 Computation of Earnings per Share.
27 Financial Data Schedule
_____________
* Management contract or management compensatory plan or arrangement.
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the quarter
ended June 30, 2000.
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<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIN CORPORATION
(Registrant)
Date: August 11, 2000 By: /s/ Richard W. Talarico
--------------------------
Richard W. Talarico
Chairman and Chief Executive Officer
Date: August 11, 2000 By: /s/ Dean C. Praskach
--------------------------
Dean C. Praskach
Chief Financial Officer and
Chief Accounting Officer
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<PAGE>
Allin Corporation
Form 10-Q
June 30, 2000
Exhibit Index
Exhibit
Number Description of Exhibit
------ ----------------------
10.1* Employment Agreement dated June 23, 2000 by and between the Registrant
and Dean C. Praskach
11 Computation of Earnings per Share
27 Financial Data Schedule
__________
* Management contract or management compensatory plan or arrangement.
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