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FORM 10Q
UNITED STATES
SECURITITES 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, 2002
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 August 7, 2002
Common Stock, 6,967,339 Shares
-1-
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 19
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Page 41
Sensitive Instruments
Part II - Other Information
Item 3. Defaults Upon Senior Securities Page 42
Item 4. Submission of Matters to a Vote of Securities Holders Page 44
Item 5. Other Information Page 45
Item 6. Exhibits and Reports on Form 8-K Page 46
Signatures Page 47
-2-
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," "estimates," "will" 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 "Risk
Factors" 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-
Part I - Financial Information
Item 1. - Financial Statements
ALLIN CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
December 31, June 30,
2001 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,226 $ 3,058
Accounts receivable, net of allowance for
doubtful accounts of $124 and $96 3,359 1,232
Unbilled receivable 211 232
Inventory 75 32
Prepaid expenses 196 131
Assets held for sale 8 --
-------------- --------------
Total current assets 6,075 4,685
Property and equipment, at cost:
Leasehold improvements 471 471
Furniture and equipment 2,964 2,977
-------------- --------------
3,435 3,448
Less--accumulated depreciation (2,953) (3,174)
-------------- --------------
482 274
Goodwill, net of accumulated amortization of
$3,502 and $3,742 712 817
Other assets, net of accumulated amortization of
$912 and $759 1,789 1,597
-------------- --------------
Total assets $ 9,058 $ 7,373
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
ALLIN CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
December 31, June 30,
2001 2002
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,329 $ 1,132
Accrued liabilities:
Compensation and payroll taxes 298 238
Dividends on preferred stock 1,445 1,598
Other 307 240
Billings in excess of costs and
estimated gross margins 212 105
Deferred revenue 53 17
-------------- --------------
Total current liabilities 4,644 3,330
Non-current portion of notes payable 1,000 1,000
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 F convertible redeemable preferred stock,
designated, issued and outstanding
1,000 shares 1,000 1,000
Series G convertible redeemable preferred stock,
designated, issued and outstanding
150 shares 1,028 1,034
Common stock, par value $.01 per share - authorized
20,000,000 shares, outstanding 6,967,339 shares 70 70
Additional paid-in-capital 41,002 40,666
Warrants 1,017 1,017
Treasury stock at cost, 8,167 common shares (27) (27)
Retained deficit (45,328) (45,369)
-------------- --------------
Total shareholders' equity 3,414 3,043
-------------- --------------
Total liabilities and shareholders' equity $ 9,058 $ 7,373
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
ALLIN CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2002 2001 2002
-------------- -------------- -------------- --------------
Revenue:
Solution area consulting services $ 2,354 $ 1,624 $ 4,638 $ 2,988
Solution area integration services 932 1,412 2,460 2,363
Outsourced services 559 324 1,330 681
Ancillary services 231 17 369 36
Ancillary product sales 21 59 104 185
-------------- -------------- -------------- --------------
Total revenue 4,097 3,436 8,901 6,253
Cost of sales 2,161 1,811 4,745 3,286
-------------- -------------- -------------- --------------
Gross profit 1,936 1,625 4,156 2,967
Selling, general & administrative expenses:
Depreciation and amortization 503 152 1,017 301
Loss from impairment of assets 10,748 -- 10,748 --
Other selling, general & administrative expenses 1,896 1,292 4,444 2,694
-------------- -------------- -------------- --------------
Total selling, general & administrative expenses 13,147 1,444 16,209 2,995
-------------- -------------- -------------- --------------
Income (loss) from operations (11,211) 181 (12,053) (28)
Interest expense, net 37 10 85 9
-------------- -------------- -------------- --------------
Income (loss) from continuing operations (11,248) 171 (12,138) (37)
Loss from discontinued operations 473 12 581 5
-------------- -------------- -------------- --------------
Net income (loss) (11,721) 159 (12,719) (42)
Accretion and dividends on preferred stock 164 170 324 336
-------------- -------------- -------------- --------------
Net loss attributable to common shareholders $ (11,885) $ (11) $ (13,043) $ (378)
============== ============== ============== ==============
Income (loss) per common share from continuing operations
attributable to common shareholders -
basic and diluted $ (1.64) $ 0.00 $ (1.79) $ (0.05)
============== ============== ============== ==============
Income (loss) per common share from discontinued
operations - basic and diluted $ (0.07) $ 0.00 $ (0.08) $ 0.00
============== ============== ============== ==============
Net loss per common share attributable to common
shareholders - basic and diluted $ (1.71) $ 0.00 $ (1.87) $ (0.05)
============== ============== ============== ==============
Weighted average shares outstanding - basic and diluted 6,967,339 6,967,339 6,965,374 6,967,339
-------------- -------------- -------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
ALLIN CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2001 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (12,719) $ (42)
Adjustments to reconcile net loss to net cash flows
provided by (used for) operating activities:
Depreciation and amortization 1,050 308
Loss from impairment of assets 11,053 --
Loss from abandonment or sale of assets 23 --
Changes in certain assets and liabilities:
Accounts receivable 548 2,127
Unbilled receivable (296) (21)
Inventory 349 43
Prepaid expenses 73 65
Assets held for sale 36 8
Other assets 3 --
Accounts payable (1,623) (1,197)
Accrued liabilities (453) (127)
Billings in excess of costs and
estimated gross margins 1,747 (107)
Income taxes payable (1) --
Deferred revenues (2) (36)
-------------- --------------
Net cash flows (used for) provided by operating activities (212) 1,021
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of assets 2 --
Additional purchase consideration for
acquisition of subsidiary (60) --
Capital expenditures (62) (13)
-------------- --------------
Net cash flows used for investing activities (120) (13)
-------------- --------------
Cash flows from financing activities:
Net repayment on lines of credit (1,090) --
Payment of dividends on preferred stock (147) (176)
Repayment of capital lease obligations (1) --
-------------- --------------
Net cash flows used for financing activities (1,238) (176)
-------------- --------------
Net change in cash and cash equivalents (1,570) 832
Cash and cash equivalents, beginning of period 2,330 2,226
-------------- --------------
Cash and cash equivalents, end of period $ 760 $ 3,058
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
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, 2001 and 2002 should be read in
conjunction with the audited financial statements and notes for the years ended
December 31, 2000 and 2001, contained in Allin Corporation's (the "Company")
Annual Report on Form 10-K for the year ended December 31, 2001. The
accompanying unaudited Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States
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.
Discontinued Operations
During June 2001, the Company elected to discontinue the digital
imaging systems integration, technical support and product sales activities of
Allin Digital Imaging Corp. ("Allin Digital"). Accordingly, the results of
operations for Allin Digital for the periods presented in the Company's
Consolidated Statements of Operations have been reclassified to loss from
discontinued operations, which is presented after income or loss from continuing
operations. Also, the information related to the Company's revenue and gross
profit included in Note 6 - Industry Segment Information - excludes the
discontinued operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 materially from those
estimates.
Revenue and Cost of Sales Recognition
Allin Interactive Corporation's ("Allin Interactive") recognition
method for revenue and cost of sales for systems integration services is based
on the size and expected duration of the project and whether significant
software modification is required. For systems integration projects in excess of
$250,000 of revenue and expected to be of greater than 90 days duration, Allin
Interactive recognizes revenue and cost of sales based on percentage of
completion (if significant software modification is required) or proportional
performance. Allin Interactive utilizes the proportion of labor incurred to
expected total project labor as a quantitative factor in determining the
percentage of completion or proportional performance 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. For consulting engagements performed on a fixed-price
basis, revenue and cost of sales are recognized on a percentage of completion
basis. Time-based consulting revenue and cost of sales are recognized as
services are performed. Allin Interactive recognizes revenue and associated cost
from the sale of products at the time the products are shipped. Interactive
television transactional revenue and associated cost of sales were recognized as
the services were performed prior to cessation of these activities in December
2001. On the accompanying Consolidated Statements of Operations, systems
integration revenue is included in "Solution area integration services",
consulting revenue is included in "Solution area consulting services", product
sales are included in "Ancillary product sales." and interactive television
transactional revenue is included in "Other services."
-8-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Allin Corporation of California ("Allin Consulting-California") and
Allin Consulting of Pennsylvania, Inc. ("Allin Consulting-Pennsylvania") charge
consulting fees for their Technology Infrastructure and E-Business Solution Area
services. Allin Consulting-Pennsylvania also charges consulting fees for
outsourced services. The majority of engagements are billed on an hourly basis,
with revenue and related cost of sales recognized as services are performed.
Engagements are also performed on a fixed-price basis, with revenue and cost of
sales recognized based on percentage of completion based on the proportion of
labor expended through the end of the period to expected total project labor.
Revenue from Technology Infrastructure and E-Business Solution Area services is
included in "Solution area consulting services" on the accompanying Consolidated
Statements of Operations.
Allin Network Products, Inc. ("Allin Network") recognizes revenue and
associated cost from the sale of products at the time the products are shipped.
Allin Network also performs computer network monitoring and consulting services
for fixed monthly fees. Revenue is recognized when the period of service for the
fixed monthly fee elapses and associated cost of sales is recognized as services
are performed. Revenue from product sales is included in "Ancillary product
sales" and revenue from monitoring and consulting services is included in
"Solution area consulting services" on the accompanying Consolidated Statements
of Operations.
Allin Interactive and Allin Network recognize amounts billed to
customers for shipping charges as revenue at the time products are shipped.
Associated shipping costs are recorded as cost of sales.
During the three months ended June 30, 2002, three significant
customers accounted for approximately 25%, 24% and 11%, respectively, of the
revenue recognized by the Company. During the six months ended June 30, 2002,
these three customers accounted for approximately 23%, 18% and 17%,
respectively, of the revenue recognized by the Company. The segments included in
the revenue associated with these customers were Interactive Media Consulting,
Interactive Media Systems Integration, Information System Product Sales and
Other Services.
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.
The Company's outstanding stock options, warrants and the Company's Series D, F
and G convertible redeemable preferred stock could all be considered dilutive
securities under SFAS No. 128. However, since the Company recognized net losses
attributable to common shareholders in the three- and six-month periods ended
June 30, 2001 and 2002, these securities have not been included in the
calculation of diluted EPS, as their effect would be anti-dilutive. Furthermore,
no stock options or warrants to purchase shares would have been considered in
the calculation of diluted EPS in the three-month period ended June 30, 2001 or
either of the six-month periods ended June 30, 2001 and 2002 since the market
prices of the Company's common stock as of the beginning of the respective
periods or issuance of the securities did not exceed the exercise prices of
options and warrants outstanding during those periods. A total of 25,000 options
to purchase common shares would have been considered in the calculation of
diluted EPS, if the effect was not anti-dilutive, in the three-month period
ended June 30, 2002 since the market price of the Company's common stock as of
the beginning of the period exceeded the exercise price of the options. As of
June 30, 2001 and 2002, 968,270 and 786,570 options to purchase common shares
were outstanding, respectively, for which the option exercise prices exceeded
the average market price of the common shares for the three- and six-month
periods then ended. The additional shares that would have been included in the
diluted EPS calculation related to the convertible preferred stock, if the
effect was not anti-dilutive, were 4,024,663 and 2,559,129 for the three- and
six-month periods ended June 30, 2001, respectively, and 5,555,607 for both the
three- and six-month periods ended June 30, 2002.
Accounts Receivable and Unbilled Receivables
The Company's subsidiaries record accounts receivable based upon
billing for services and products. Unbilled receivables are recorded when
services have been provided prior to the end of the period and invoicing has not
occurred. The Company does not routinely charge interest on past due accounts
receivable. However, the Company will occasionally reach agreement with a
customer on a payment plan for accounts receivable that includes interest
charges if the Company believes this will facilitate collection. In these
instances, interest income is recognized as payments are received. Allowances on
accounts receivable are recorded when circumstances indicate collection is
-9-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
doubtful for particular accounts receivable or as a general reserve for all
accounts receivable. Accounts receivable are written off if reasonable
collection efforts prove unsuccessful.
As of June 30, 2002, two significant customers accounted for 20% and
10%, respectively, of the Company's accounts receivable.
Inventory
Inventory, consisting principally of interactive television equipment,
computer hardware, software and digital photography equipment, is stated at the
lower of cost (determined on the average cost method) or market.
Business Combinations, Goodwill and Intangible Assets
The Company implemented Statements of Financial Accounting Standards
No. 141, Business Combinations ("SFAS No. 141"), and No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142") on January 1, 2002. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS No. 142, goodwill and intangible assets are
reviewed annually for potential impairment, or more frequently if impairment
indicators arise. Separable intangible assets that are deemed to have definite
lives are amortized over their useful lives. Goodwill and separable intangible
assets with indefinite lives are no longer amortized. Transition testing and
annual testing for 2002 did not indicate impairment of the recorded values of
the Company's intangible assets, goodwill and customer list.
Billings in Excess of Costs and Estimated Gross Margins
Billings in excess of costs and estimated gross margins consists of
amounts billed for projects recognized on a percentage of completion or
proportional performance basis but not yet recognized as revenue, net of
unbilled receivables, costs not yet recognized as cost of sales and estimated
gross margins associated with these projects.
Deferred Revenue
Deferred revenue is recorded for amounts billed or received for which
services will be performed in future periods. Such amounts are recognized as
revenue when services are performed. As of June 30, 2001 and 2002, deferred
revenue represented amounts expected to be recognized as revenue within one year
of the applicable date.
Financial Instruments
As of June 30, 2002, 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
There were no cash payments for income taxes during either of the
three-month periods ended June 30, 2001 and 2002. Cash payments for interest
were approximately $39,000 and $18,000 during the three months ended June 30,
2001 and 2002, respectively. Cash payments for dividends were approximately
$88,000 and $87,000 during the three months ended June 30, 2001 and 2002,
respectively. Dividends on preferred stock of approximately $147,000 and
$153,000 were accrued but unpaid during the three months ended June 30, 2001 and
2002, respectively.
Cash payments for income taxes were approximately $3,000 during the six
months ended June 30, 2001. There were no cash payments for income taxes during
the six months ended June 30, 2002. Cash payments for interest were
approximately $91,000 and $37,000 during the six months ended June 30, 2001 and
2002, respectively. Cash payments for dividends were approximately $147,000 and
$176,000 during the six months ended June 30, 2001 and 2002, respectively.
Dividends on preferred stock of approximately $217,000 and $228,000 were accrued
but unpaid during the six months ended June 30, 2001 and 2002, respectively.
-10-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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, 1,000 as Series F Convertible
Redeemable Preferred Stock and 150 as Series G Convertible Redeemable Preferred
Stock. As of June 30, 2002, the Company has outstanding 25,000, 2,750, 1,000 and
150 shares of Series C, D, F and G preferred stock, respectively. The Company
will not issue any additional shares of any of its existing series of preferred
stock. The order of liquidation preference of the series of the Company's
outstanding preferred stock, from senior to junior, is Series F, Series G,
Series D and Series C.
3. Equity Transactions
During the three months ended June 30, 2002, vested and non-vested
options to purchase 360 and 880 shares, respectively, of common stock previously
awarded under the Company's 1998 Stock Plan were forfeited under the terms of
the Plan. There were no forfeitures of options during this period under the
terms of the Company's 1996, 1997 and 2000 Stock Plans. There were no grants of
options to purchase common stock under any of the Company's stock plans during
the three months ended June 30, 2002. Options granted under the 1996, 1997, 1998
and 2000 Stock Plans to purchase 204,800, 224,050, 245,720 and 137,000 shares,
respectively, of common stock remain outstanding as of June 30, 2002.
On March 14, 2002, the former sole shareholder of Allin
Consulting-California prior to its acquisition, who was also a shareholder of
the Company until this date and was also formerly President of the Company, sold
all of the 1,000 outstanding shares of the Company's Series F Convertible
Redeemable Preferred Stock, approximately $55,000 of accrued but unpaid
dividends related to the preferred stock, and 213,333 shares of the Company's
common stock to another shareholder of the Company. On April 15, 2002, the
purchaser sold certain amounts of the Series F preferred stock, accrued but
unpaid dividends related to the preferred stock, and common stock to other
parties related to the Company. See Note 8 - Related Party Transactions - for
additional information.
4. Note Payable
On March 14, 2002, the former sole shareholder of Allin
Consulting-California prior to its acquisition, who was also a shareholder of
the Company until this date and was also formerly President of the Company, sold
a note due from the Company, with a principal balance of $1,000,000 due on April
15, 2005 and approximately $73,000 of accrued but unpaid interest related to the
note to another shareholder of the Company. On April 15, 2002, the purchaser
sold certain amounts of the note and accrued but unpaid interest related to the
note to other parties related to the Company. See Note 8 - Related Party
Transactions - for additional information.
5. 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. The original term of the
revolving credit loan was one year and it was subsequently renewed for three
annual periods. The Company and S&T Bank have executed a renewal for a fourth
annual period which extends the expiration date of the revolving credit loan to
September 30, 2003. Borrowings may be made under the S&T Loan Agreement for
general working capital purposes. The maximum borrowing availability under the
revolving credit loan is the lesser of $5,000,000 or 80% 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, 2002, maximum borrowing availability under the revolving credit
loan was approximately $806,000. There was no outstanding balance as of June 30,
2002. Loans made under the revolving credit loan bear interest at the bank's
prime interest rate plus one percent. As of June 30, 2002, the rate of interest
on any outstanding borrowings under the revolving credit loan would have been
5.75%. There were no changes to the interest rate in the first half of 2002.
-11-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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. 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. The
Company was in compliance with the cash flow covenant for the fiscal quarter
ended June 30, 2002 and was also in compliance with all other covenants as of
June 30, 2002.
6. Industry Segment Information
Basis for Determining Segments
The Company follows Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
No. 131"), as the basis for determining its segments. SFAS No. 131 introduced 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 reported fall under two groups, Solution Area Services and Ancillary
Services & Product Sales.
The Company's operations and management's evaluations are primarily
oriented around three solution areas meeting customer needs for interactive
media and Microsoft-based technology services: Interactive Media, Technology
Infrastructure and E-Business. Solution area services comprise the substantial
majority of the Company's current activities and are most closely associated
with its strategic focus. Grouping the solution area services in segment
reporting emphasizes their commonality of purpose in meeting the core marketing
strategy of the Company. The reportable segments reflect aggregated solution
area activity across the Company's subsidiaries due to the similarity in nature
of services, processes, types of customers and distribution methods for each
solution area. Segments grouped as Solution Area Services include Interactive
Media Consulting, Interactive Media Systems Integration, Technology
Infrastructure Consulting, E-Business Consulting and Outsourced Services.
Outsourced Services was previously included in segment reporting as
Legacy Technology Consulting. Outsourced Services provides resources with varied
technical skill sets that customers utilize to complement and assist internal
staff in the execution of customer-managed projects. Prior to 2002, Outsourced
Services was primarily focused on legacy technologies including IBM mainframe
technology and Hogan IBA software applications. Due to a widespread transition
from mainframe to client/server network configurations among domestic
businesses, demand for services based on legacy technologies has declined
significantly over the last three years. During 2002, in order to preserve
customer relationships that had primarily utilized customer-managed resources,
the Company transitioned the technical resources dedicated to Outsourced
Services to a broader technical focus that includes technology and application
development based on Microsoft, Oracle and Informix software and products. The
change in segment name to Outsourced Services is intended to reflect the broader
array of technology skills now utilized in outsourced engagements. The Company's
Outsourced Services operations are grouped with Solution Area Services because
the services are overseen by executive management and support personnel in the
Company's Pittsburgh office with responsibility for all of the Pittsburgh-based
solution area operations.
Ancillary Services & Product Sales includes activities which are
ancillary to or outside of the Company's current strategic focus. Segments
grouped as Ancillary Services & Product Sales include Information System Product
Sales and Other Services. 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 customer satisfaction, the
Company maintains an ancillary capability to provide information system
products, including interactive television equipment and computer hardware,
software and supplies. The Company also occasionally performs ancillary services
resulting in revenue such as website hosting or placement fees. Until December
2001, the Company also operated two interactive television systems as a result
of a discontinued operating model. Information related to these operations for
the three and six
-12-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
months ended June 30, 2001 or as of June 30, 2001, which had been reported as
the segment Interactive Television Transactional Services in 2001, is reflected
as part of Other Services in all periods presented.
During June 2001, the Company elected to discontinue the
digital imaging systems integration and product sales activities of Allin
Digital. Accordingly, information presented related to the Company's revenue and
gross profit excludes the discontinued operations. Information about assets
related to Allin Digital's operations is captioned Discontinued
Operations-Digital Imaging.
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 Operations and Consolidated Balance Sheets. There are no
differences in measurement method.
Revenue
Information on revenue derived from external customers is as follows:
Revenue from External Customers
-------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(Dollars in thousands) 2001 2002 2001 2002
--------------------------------------------------------
Solution Area Services:
Interactive Media Consulting $ 908 $ 621 $ 1,695 $ 1,126
Interactive Media Systems Integration 932 1,412 2,460 2,363
Technology Infrastructure Consulting 806 478 1,742 840
E-Business Consulting 640 525 1,201 1,022
Outsourced Services 559 324 1,330 681
--------------------------------------------------------
Total Solution Area Services $ 3,845 $ 3,360 $ 8,428 $ 6,032
Ancillary Services & Product Sales:
Information System Product Sales $ 21 $ 59 $ 104 $ 185
Other Services 231 17 369 36
--------------------------------------------------------
Total Ancillary Services & Product Sales $ 252 $ 76 $ 473 $ 221
--------------------------------------------------------
Consolidated Revenue from External Customers $ 4,097 $ 3,436 $ 8,901 $ 6,253
========================================================
-13-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Certain of the Company's segments also perform 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:
Revenue from Related Entities
-----------------------------
(Dollars in thousands) Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2002 2001 2002
------------------------------------------------------
Solution Area Services $ -- $ 19 $ 1 $ 20
Ancillary Services & Product Sales 3 -- 34 3
------------------------------------------------------
Total Revenue from Related Entities in Other Segments $ 3 $ 19 $ 35 $ 23
======================================================
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:
Gross Profit
------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(Dollars in thousands) 2001 2002 2001 2002
-----------------------------------------------------
Solution Area Services:
Interactive Media Consulting $ 530 $ 408 $ 1,081 $ 725
Interactive Media Systems Integration 229 516 680 880
Technology Infrastructure Consulting 484 282 1,062 480
E-Business Consulting 363 301 658 598
Outsourced Services 135 88 343 183
-----------------------------------------------------
Total Solution Area Services $ 1,741 $ 1,595 $ 3,824 $ 2,866
Ancillary Services & Product Sales:
Information System Product Sales $ (2) $ 13 $ 33 $ 66
Other Services 197 17 299 35
-----------------------------------------------------
Total Ancillary Services & Product Sales $ 195 $ 30 $ 332 $ 101
-----------------------------------------------------
Consolidated Gross Profit $ 1,936 $ 1,625 $ 4,156 $ 2,967
=====================================================
-14-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Assets
Information on total assets attributable to segments is as follows:
(Dollars in thousands) Total Assets
------------
As of June 30 2001 2002
---------------------------
Solution Area Services:
Interactive Media Consulting $ 1,540 $ 281
Interactive Media Systems Integration 1,698 664
Technology Infrastructure Consulting 1,856 1,392
E-Business Consulting 807 1,035
Outsourced Services 1,982 1,279
---------------------------
Total Solution Area Services $ 7,883 $ 4,651
Ancillary Services & Product Sales:
Information System Product Sales $ 52 $ 30
Other Services 360 60
---------------------------
Total Ancillary Services & Product Sales $ 412 $ 90
Corporate 393 2,610
Discontinued Operations - Digital Imaging 603 22
---------------------------
Consolidated Total Assets $ 9,291 $ 7,373
===========================
7. Impairment of Assets
The operations of Allin Consulting-Pennsylvania and Allin
Consulting-California were acquired by the Company in August 1998 and November
1996, respectively. These subsidiaries represent a significant portion of the
Company's solution area consulting operations, including virtually all of the
Technology Infrastructure Consulting, E-Business Consulting and Outsourced
Services segment revenue and gross profit. The acquired businesses provided
consulting services and were not capital-intensive businesses. Consequently,
significant portions of the acquisition prices were attributed to intangible
assets, including client lists, assembled workforces and goodwill. In 1999 and
2000, the Company's strategic focus was on developing solutions-oriented
consulting revenue, including revenue derived from the activities of its
Technology Infrastructure and E-Business Solution Areas. During 1999 and 2000,
the Company was able to successfully grow revenue in these solution areas. Based
on this growth history and industry projections for continuing significant
increases in the demand for e-business and infrastructure technology consulting
services, in late 2000 the Company anticipated significant revenue and gross
profit increases in future periods for its Technology Infrastructure and
E-Business Solution Areas. During this time period, anticipated results
indicated sufficient expected cash flows to support the net unamortized values
of the intangible assets associated with the acquisitions of Allin
Consulting-Pennsylvania and Allin-Consulting-California. The downturn in the
domestic economy experienced in the first half of 2001 significantly lowered
technology-based spending in the United States, which negatively impacted the
demand for technology consulting services. Industry analysis as of mid-2001
indicated that any increase in the demand for technology consulting services was
not likely to occur until 2002 at the earliest. During the second quarter of
2001, due to the continuing variance in the rate of revenue and gross profit
growth from prior expectations and the growing perception among industry
analysts that the negative impact of the economic downturn on technology
consulting would continue at least until 2002, the Company completed new
projections for Allin Consulting-Pennsylvania and Allin Consulting-California.
These projections indicated the estimated fair values of the intangible assets
associated with the acquisitions of those operations were less than the net
unamortized values of the assets.
The negative impact of the economic downturn on Allin
Consulting-Pennsylvania was particularly pronounced since the slower than
anticipated growth in solutions-oriented Technology Infrastructure and
E-Business revenue during the first half of 2001 was accompanied by a continuing
decline in the level of outsourced services related to certain legacy
technologies. Solutions-oriented consulting had grown in significance and
outsourced services lessened in
-15-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
significance for Allin Consulting-Pennsylvania from its acquisition in August
1998 to mid-2001. Solutions-oriented revenue typically featured higher billing
rates and gross profit potential, but shorter duration of projects and more
volatility in results. Also, the significant impact of the economic downturn on
technology consulting indicated a likelihood of additional risk due to economic
cycles. Consequently, the period over which expected cash flows were projected
was shortened to ten years beyond 2001. The original expected useful lives for
goodwill and customer list had been thirty and fourteen years, respectively. The
Company's forecast for Allin Consulting-Pennsylvania included low expectations
of revenue and gross profit growth through 2003, as the level of outsourced
services was then expected to continue to decline throughout this period. The
Company estimated that growth rates for revenue and gross profit would increase
after 2003. Based on the Company's revised projections, a loss due to impairment
of approximately $9,530,000 was recorded in the second quarter of 2001 to reduce
the net unamortized value of goodwill recorded on Allin Consulting-Pennsylvania.
The impairment loss was included in Selling, general & administrative expenses
in the Company's Consolidated Statements of Operations during that period. The
remaining amortization periods for customer list and goodwill were adjusted
prospectively to equal the period of the Company's projection. Due to the
implementation of SFAS Nos. 141 and 142 on January 1, 2002, goodwill is no
longer amortized in 2002.
The economic downturn also negatively impacted the demand for
Technology Infrastructure and E-Business consulting services provided by Allin
Consulting-California. The Company's expectations of future revenue and gross
profit as of the beginning of 2001 had been based on growth achieved in 2000 and
industry analysis for expected future demand for technology consulting services.
Due to the economic downturn, during 2001, the Company has been unable to
sustain revenue growth that had been realized late in 2000. Prior to recording
the impairment loss, approximately 92% of the net unamortized value of Allin
Consulting-California's intangible assets related to goodwill associated with
its acquisition in November 1996. The original useful life was seven years.
Consequently, the projection for cash flows related to goodwill from the 1996
acquisition was based on the remaining useful life, with low expectations for
revenue and gross profit growth due to the likelihood that the negative impact
of the economic downturn would persist through a substantial portion of the
remaining useful life. Based on the Company's revised projections, a loss due to
impairment of approximately $1,097,000 was recorded in the second quarter of
2001 to reduce the net unamortized value of goodwill recorded on Allin
Consulting-California. The impairment loss was included in Selling, general &
administrative expenses in the Company's Consolidated Statements of Operations
during that period.
Allin Interactive maintained an inventory of interactive television
equipment salvaged from ships on which it had previously operated interactive
television systems on an owner-operator model. The equipment had been removed
from ships on which operations under this model were discontinued in 1997 and
1998. The inventory values had been based on estimated salvage values after the
equipment was removed from the ships. Allin Interactive continued to own and
operate other ship-based systems utilizing similar equipment and, from 1999 to
2001, sold the remaining systems to two cruise lines. During this time period,
Allin Interactive sought to sell its inventory to these cruise lines for spare
parts for the systems that continued to be operated. While a portion of the
inventory was sold to these parties, it became apparent during the second
quarter of 2001 that neither cruise line was prepared to purchase significant
quantities of the inventoried equipment. The Company therefore believed the
estimated fair value of the remaining inventory was less than the value recorded
for the inventory. A loss due to impairment of approximately $121,000 was
recorded in the second quarter of 2001 to adjust the recorded value of Allin
Interactive's inventory to the revised estimate of fair value. The impairment
loss was included in Selling, general & administrative expenses in the Company's
Consolidated Statements of Operations during that period.
8. Related Party Transactions
On April 15, 2002, a shareholder of the Company sold portions of his
holdings in certain financial instruments related to the Company, including
Series F Convertible Redeemable Preferred Stock, related accrued but unpaid
dividends, common stock, and a note payable by the Company and related accrued
but unpaid interest to other parties related to the Company. An entity in which
another shareholder of the Company has an ownership interest purchased 250
shares of Series F preferred stock, approximately $15,000 of accrued but unpaid
dividends, 53,333 shares of common stock, a $250,000 portion of the note payable
and approximately $19,000 of accrued but unpaid interest. An entity in which a
director and shareholder of the Company has an ownership interest purchased
41.67 shares of Series F preferred stock, approximately $2,000 of accrued but
unpaid dividends, 8,889 shares of common stock, a $41,667 portion of the note
payable and approximately $3,000 of accrued but unpaid interest. A director,
executive officer and shareholder of the Company purchased 16.67 shares of
Series F preferred stock, approximately $1,000 of accrued but
-16-
Allin Corporation and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
unpaid dividends, 3,556 shares of common stock, a $16,667 portion of the note
payable and approximately $1,000 of accrued but unpaid interest. An executive
officer of the Company purchased 16.67 shares of Series F preferred stock,
approximately $1,000 of accrued but unpaid dividends, 3,555 shares of common
stock, a $16,667 portion of the note payable and approximately $1,000 of accrued
but unpaid interest.
-17-
Independent Accountants' Report
To the Shareholders of
Allin Corporation and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of Allin
Corporation (a Delaware corporation) and Subsidiaries as of June 30, 2002, the
related consolidated statements of operations for the three and six months ended
June 30, 2002, and the consolidated statement of cash flows for the six months
ended June 30, 2002. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with U.S. generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with U.S. generally accepted accounting principles.
The consolidated balance sheet for the year ended December 31, 2001 was audited
by other auditors whose report, dated February 8, 2002, expressed an unqualified
opinion on that statement. The consolidated statements of operations for the
three and six months ended June 30, 2001 and the consolidated statement of cash
flow for the six months ended June 30, 2001 were reviewed by other accountants
whose report dated July 24, 2001, indicated they were not aware of any material
modification that needed to be made for these statements to be in conformity
with U.S. generally accepted accounting principles.
/s/ Hill, Barth & King LLC
July 25, 2002
-18-
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, 2002 and 2001.
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, 2001,
the information in the consolidated financial statements and the notes
pertaining thereto contained in Item 1 - Financial Statements in this Report on
Form 10-Q and the information discussed herein under "Risk Factors". 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 "estimates," "expects," "anticipates," "believes,"
"intends," "will" 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, public market and trading issues, uncertainty as to the
Company's future profitability, fluctuations in operating results, the Company's
history of net losses and accumulated deficit, liquidity, and risks associated
with general economic conditions, world events, the decline in demand for legacy
technology consulting services, dependence on key personnel, competitive market
conditions in the Company's existing and potential future lines of business,
rapidly changing technology, risks of technological obsolescence, as well as
other risks and uncertainties. See Risk Factors below.
Overview of Organization, Products & Markets
The Company is a leading provider of solutions-oriented applications
development, technology infrastructure consulting and systems integration
services. The Company specializes in solutions based on interactive media and
technology from Microsoft Corporation ("Microsoft"). The Company's operations
center on three solution areas: Interactive Media, Technology Infrastructure and
E-Business. The Company leverages its experience in these areas through a
disciplined project framework to deliver technology solutions that address
customer needs on time and on budget. The Company is headquartered in
Pittsburgh, Pennsylvania with additional offices located in Ft. Lauderdale,
Florida and San Jose and Walnut Creek, California.
The Company was a recipient of Pittsburgh Technology 50 awards in 1998,
1999, 2000 and 2001. The award recognizes the highest three-year revenue growth
rates among technology-based businesses in the Pittsburgh region. The Company
was also a recipient of the Deloitte & Touche Technology Fast 500 award in 2001.
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, 2002, the
organizational legal structure consists of Allin Corporation and six
subsidiaries. Allin Interactive Corporation ("Allin Interactive"), formed in
June 1994, Allin Corporation of California ("Allin Consulting-California"),
acquired by the Company in November 1996, Allin Consulting of Pennsylvania, Inc.
("Allin Consulting-Pennsylvania"), acquired by the Company in August 1998, and
Allin Network Products, Inc. ("Allin Network"), acquired by the Company in
November 1996, are operating subsidiaries focusing on different aspects of the
applications development, technology infrastructure consulting and systems
integration services provided by the Company. Allin Consulting-Pennsylvania also
performs outsourced technology-based services. Allin Holdings Corporation
("Allin Holdings"), which was formed in October 1996, is a non-operating
subsidiary that provides treasury management services to the Company. In June
2001, the Company decided to discontinue the digital imaging technology-based
operations of Allin Digital Imaging Corp. ("Allin Digital"), which was formed in
August 1996. Allin Digital ceased performing services for customers in the
second quarter of 2002. Wrap-up of residual matters related to Allin Digital
continues. Information for the three- and six-month periods ended June 30, 2001
and 2002 reflects the results of Allin Digital's operations as loss from
discontinued operations. Allin Interactive, Allin Holdings and Allin Digital are
Delaware corporations, Allin Consulting-California and Allin Network are
California corporations and Allin Consulting-Pennsylvania is a Pennsylvania
corporation. The Company utilizes the trade-names Allin Interactive, Allin
Consulting and Allin
-19-
Corporation in its operations. All trade- and brand-names included in this
Report on Form 10-Q are the property of their respective owners.
The Interactive Media Solution Area focuses on the Company's expertise
in interactive media applications by providing interactive television solutions
that management believes enable customers to improve service and increase
productivity and revenue. Interactive Media enables customers to convert manual
and analog processes into interactive digital solutions. Management believes
that interactive television solutions are cost-effective because they leverage a
pooled set of advanced head-end equipment to deliver advanced applications
across digital networks or radio frequency distribution systems to end-user
monitors or televisions. The interactive television system architecture features
a centralized head-end that interfaces with the customer's other information
systems. The open architecture of the head-end operating systems, which are
based on Microsoft BackOffice products, allows for development of applications
in commonly used programming languages. Interactive Media solutions are Internet
accessible and support highly-functional applications and high-end graphics and
MPEG content. Interactive Media's customers have historically been concentrated
in the cruise industry. Among the applications developed for, and utilized by,
customers are shore excursion preview and ticketing, pay-per-view movies,
in-cabin gaming, meal service ordering, and distribution of activities and
informational content. Interactive Media's customers include some of the world's
largest cruise lines, Carnival Corporation ("Carnival") and Royal Caribbean
Cruise Lines, Ltd. ("Royal Caribbean") and its affiliate Celebrity Cruises
("Celebrity"). Interactive Media operational and marketing personnel have
extensive experience in the cruise industry. Committed services for cruise line
customers represent a majority of the Company's backlog of business as of June
30, 2002. Interactive Media activities are located in Ft. Lauderdale near the
most active concentration of cruise line operations in the United States.
The Technology Infrastructure Solution Area focuses on customers'
network and application architecture, messaging and collaboration systems and
security issues. Network and application architecture deals with network design,
local and remote access, Internet connectivity and the implementation of network
operating systems including protocol design, policies, profiles, desktop
standards, client installation/imaging and backup schemas. Effective messaging
systems are collaboration tools that enable development and decision-making
teams to reach a shared vision, make sound decisions and achieve greater
productivity. Security solutions provide combinations of firewalls, virus
protection and intrusion detection to protect Web servers, e-mail servers and
other network components. Technology Infrastructure designs and implements
enterprise-quality systems based on Microsoft technology that maximize network
availability and efficiency and enable customers to reduce costs and protect
vital resources. Technology Infrastructure solutions provide the underlying
platforms and operating systems necessary to take advantage of the latest
technology capabilities. Services include design, configuration, implementation,
evaluation of customer operating systems and database platforms, messaging
systems, information system security solutions such as firewalls and proxy
servers and application services such as message queing and transaction servers.
The ability of businesses to manage information has become a
prerequisite for their success. The E-Business Solution Area provides solutions
based on Microsoft technology that enable organizations to evaluate and optimize
business processes, streamline workflow and extend the accessibility of
corporate messages, products, services and processes. The impact of the Internet
is moving businesses to seek seamless access of employees, customers and
suppliers to business knowledge capital and transactional systems. E-Business
solutions emphasize Internet and intranet capabilities including company
portals, extranet-based supply chains and electronic commerce sites, data
warehousing, work flow, and interfaces with, or custom development for, business
operation transaction systems. E-Business delivers portal and business
intelligence solutions that automate and streamline information creation,
storage, sharing and retrieval. Management believes that E-Business solutions
enable customers to increase productivity by improving the flow and
accessibility of information, thereby eliminating inefficiencies and reducing
costs. Management believes E-Business solutions empower customer personnel with
business intelligence for fast and effective decision making.
The Technology Infrastructure and E-Business Solution Areas focus on
developing Microsoft-based technology solutions for customers in horizontal
markets, meaning organizations across a broad array of industries. The Company's
current target market for these solution areas is mid-market to Fortune 1000
companies 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 mid-market companies 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. Technology Infrastructure and E-Business consulting services are
provided from the Company's Northern California and Pittsburgh offices.
-20-
The Company's solution area-based organizational structure is designed
to complement the customer-oriented focus of the Company's marketing strategy.
Solution area sales and operational personnel must understand a customer's
business issues to provide a solution customized to meet the customer's
particular needs. The Company believes the customer-based focus of its solution
area organizational structure and marketing strategy promote the effective
delivery of customer-oriented technology solutions and 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 current strategy.
Management believes that the customer-oriented focus that is the fundamental
principal of its marketing strategy is firmly established throughout the
Company.
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 are the operating relationships with On
Command Corporation ("On Command") and Microsoft. On Command's end-user
components and computer hardware platforms and configurations are utilized by
the Company for its interactive television systems integration projects. On
Command is one of the world's largest providers of interactive television
services to the lodging industry. Through extensive research and development
efforts, On Command has developed specifications and configurations for computer
hardware and end-user components that facilitate efficient and reliable
interactive television operations. The Company has a Supplier Agreement with On
Command that grants it exclusivity in purchasing hardware and end-user
components for interactive television systems for the cruise line market. The
Supplier Agreement will expire on March 31, 2003. The Company and On Command are
currently negotiating the terms of a new agreement to replace the existing
agreement. The Company expects a new agreement to be completed prior to the
expiration of the current agreement. However, there can be no assurance that a
new agreement will be entered into prior to the expiration of the current
agreement, or that any new agreement will be on terms as favorable to the
Company as the current agreement. Failure to replace the existing agreement
could necessitate the usage of different hardware components and configurations
for interactive television systems integration projects. The Company's
Interactive Media operations could be negatively impacted if difficulty were to
be experienced in obtaining alternate components, or if any such components were
more costly or did not have similar functionality as the On Command equipment
currently utilized.
Both of the Company's Allin Consulting subsidiaries and Allin
Interactive are certified as Microsoft Solutions Provider Partners. During 2001,
both of the Allin Consulting subsidiaries were also designated as Microsoft Gold
Certified Partners in recognition of their attainment of rigorous certification
criteria and demonstrated technical competency in providing complex business
solutions. Allin Consulting-Pennsylvania was the first partner in the Pittsburgh
area awarded gold status. The Allin Consulting subsidiaries are also members of
Microsoft's Infrastructure and Collaborative Solutions Portal 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
shape Microsoft's channel-based strategy for delivering customer solutions and
services. The Company's role as a member of these Advisory Councils has
positioned it to quickly develop solutions expertise in new Microsoft
technologies. During 2001, Allin Consulting-Pennsylvania was also named to the
Microsoft Project Partner Program for demonstrated capabilities in developing
and deploying project management solutions. The Company intends to continue its
specialization in Microsoft-based technology products.
The Company has developed a solutions framework, the Allin Solutions
Framework, for guiding the planning and conduct of solutions-oriented projects.
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 developed through past projects. 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.
-21-
.. 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 Company's Interactive Media, Technology Infrastructure and
E-Business Media Solution Areas deliver solutions-oriented consulting services
that are either Allin-managed or co-managed with the customer. With the
Allin-managed delivery method, solution area managers and consultants fully
control the planning, development and implementation of turnkey solutions.
Client personnel function as sources of information concerning the business need
for which a solution is sought. With the co-managed delivery method, solution
area managers and consultants and customer technical staff members work on a
collaborative basis in planning, developing and implementing solutions. The
Company is fully or partially responsible for the development and implementation
of technology-based solutions under the Allin-managed or co-managed delivery
methods. These solutions-oriented services are viewed by management as being the
most consistent with the Company's marketing strategy and offering the potential
for higher billing rates and margins due to the Company's performance of high
level managerial tasks.
The Company's Outsourced Services operations provide resources with
varied technical skill sets that customers utilize to complement and assist
internal staff in the execution of customer-managed projects. Outsourced
Services was identified in the Company's previous financial reports as Legacy
Technology Consulting. Prior to 2002, Outsourced Services was primarily focused
on legacy technologies including IBM mainframe technology and Hogan IBA software
applications. Due to a widespread transition from mainframe to client/server
network configurations among domestic businesses, demand for services based on
legacy technologies declined significantly from 1999 through 2001. During 2002,
in order to preserve customer relationships that had primarily used
customer-managed resources, the Company transitioned the technical resources
dedicated to Outsourced Services to a broader array of technology, including
services and application development based on Microsoft, Oracle and Informix
software and products. The change in segment name to Outsourced Services is
intended to reflect the broader array of technology skills now utilized on
outsourced engagements. Outsourced Services is grouped with Solution Area
Services because the services are overseen by executive management and support
personnel in the Company's Pittsburgh office with responsibility for all of the
Pittsburgh-based solution area operations. Outsourced Services revenue has been
fairly consistent on a quarter-to-quarter basis over the third and fourth
quarters of 2001 and the first and second quarters of 2002. Management expects
Outsourced Services revenue to be realized over the full year 2002 will
represent a decline from that realized in 2001.
The Company also provides certain ancillary services and information
system product sales, which are those revenue producing activities 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. In connection with its solutions-oriented services, customers
will occasionally 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 customer
satisfaction, the Company maintains an ancillary capability to provide
information system products, including interactive television equipment and
computer hardware, software and supplies. The Company also occasionally performs
ancillary services resulting in revenue such as website hosting or placement
fees. Until December 2001, the Company also operated two interactive television
systems as a result of a discontinued operating model.
Certain Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 2
in the Notes to Consolidated Financial Statements included in Item 8 - Financial
Statements and Supplementary Data in the Company's Report on Form 10-K for the
year ended December 31, 2001. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions to apply certain of these
critical accounting policies. These estimates and assumptions affect the
reported amounts of assets and liabilities and the reported amounts of revenue
and expenses during the reporting periods. In applying policies requiring
estimates and assumptions, management uses its judgment based on historical
experience, terms of existing contracts, industry practices and trends,
information available from customers, publicly available information and other
factors deemed reasonable under the circumstances. Actual results may differ
materially from estimates. Critical accounting policies requiring the use of
estimates and assumptions include the following.
Revenue and Cost of Sales Recognition. The Company's recognition method
for revenue and cost of sales for the Interactive Media Solution Area's systems
integration services is based on the size and expected duration of the project
and whether significant software modification is required. For systems
integration projects in excess of
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$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,
if significant software modification is required, or proportional performance.
Software modification is typically involved with these projects, including
loading of proprietary applications developed by the Company for the customer,
so the percentage of completion method is normally used for these significant
projects. The Company utilizes the proportion of labor incurred to expected
total project labor as a quantitative factor in determining the percentage of
completion when the proportion of total project costs incurred to expected total
project costs is not representative of actual project completion status. The
majority of the equipment for systems integration projects is typically ordered,
and associated costs are incurred, in the early stages of a project.
Consequently, the proportion of labor incurred to expected total project labor
is more frequently representative of percentage of completion than the
proportion of total project costs incurred to expected total project costs. The
labor factor is therefore most often used to determine the percentage of
completion. For systems integration projects of this type, management must
estimate expected total labor hours and costs and expected total non-labor costs
at the beginning of the project. Management reviews the status of projects
monthly, including labor and other costs incurred to date and expected for
completion of the project, project timing, and any issues impacting project
performance. Any changes to expected labor hours or expected costs for project
completion are factored into the monthly estimate of project cumulative
percentage of completion, which is used to determine current revenue and cost of
sales recognition. For consulting engagements performed by Allin Interactive,
Allin Consulting-California and Allin Consulting-Pennsylvania on a fixed-price
basis, revenue and related cost of sales are recognized on a percentage of
completion basis. Management must estimate expected labor for project completion
at the beginning of each project. Fixed price consulting projects are reviewed
monthly, with any changes to expected project labor factored into the
determination of cumulative percentage of completion, which is used to determine
current revenue and cost of sales recognition. Revenue recognized on the
percentage of completion or proportional performance bases was approximately 37%
and 46% of the Company's total revenue for the three-month periods ended June
30, 2001 and 2002, respectively, and approximately 34% and 44% of the Company's
total revenue for the six-month periods ended June 30, 2001 and 2002,
respectively. Usage of the percentage of completion or proportional performance
methods can result in unwarranted acceleration of or delay in recognition of
revenue and cost of sales if management's estimates of certain critical factors
such as expected total project labor or total project costs are materially less
than or greater than actual project requirements. The Company believes its
monthly reviews of project status, including expected total project labor and
costs, mitigate the potential for inappropriate revenue or cost of sales
recognition since the reviews result in revenue and cost of sales recognition
based on the latest available information. Management's estimates and
assumptions also impact the Company's assets and liabilities as revenue and cost
of sales recognition for these projects may also impact the carrying value, if
any, of unbilled revenue, costs and estimated gross margins in excess of
billings, billings in excess of costs and estimated gross margins, accrued
liabilities and deferred revenue on the Company's Consolidated Balance Sheets.
Impairment of Assets. During June 2001, the Company recorded
significant losses for impairment of assets totaling $10,748,000. The
calculation of the losses, as well as the timing of their recording, resulted
from management's judgments and estimates. Significant portions of the
acquisition prices for Allin Consulting-Pennsylvania and Allin
Consulting-California, which were acquired by the Company in August 1998 and
November 1996, respectively, were attributed to intangible assets, including
client lists, assembled workforces and goodwill. Based on the growth in
Technology Infrastructure and E-Business revenue experienced in 1999 and 2000
and industry projections for continuing significant increases in the demand for
e-business and infrastructure technology consulting services, in late 2000, the
Company anticipated significant revenue and gross profit increases in future
periods for its Technology Infrastructure and E-Business Solution Areas. During
this time period, anticipated results indicated sufficient expected cash flows
to support the net unamortized values of the intangible assets associated with
the acquisitions of Allin Consulting-Pennsylvania and
Allin-Consulting-California. The downturn in the domestic economy experienced in
the first half of 2001 significantly lowered technology-based spending in the
United States, which negatively impacted the demand for technology consulting
services. Industry analysis as of mid-2001 indicated that any increase in the
demand for technology consulting services was not likely to occur until 2002 at
the earliest. During June 2001, due to the continuing variance in the rate of
revenue and gross profit growth from prior expectations and the growing
perception among industry analysts that the negative impact of the economic
downturn on technology consulting would continue at least until 2002, the
Company completed new projections for Allin Consulting-Pennsylvania and Allin
Consulting-California. These projections indicated the estimated fair values of
the intangible assets associated with the acquisitions of those operations were
less than the net unamortized values of the assets.
The negative impact of the economic downturn on Allin
Consulting-Pennsylvania was particularly pronounced since the slower than
anticipated growth in Technology Infrastructure and E-Business revenue during
the first half of 2001 was accompanied by a continuing decline in the level of
outsourced services provided related to certain legacy technologies.
Solutions-oriented Technology Infrastructure and E-Business consulting had grown
in significance and
-23-
outsourced services lessened in significance for Allin Consulting-Pennsylvania
from its acquisition in August 1998 until the end of 2000. Solutions-oriented
revenue typically featured higher billing rates and gross profit potential, but
shorter duration of projects and more volatility in results. Also, the
significant impact of the economic downturn on technology consulting indicated a
likelihood of additional risk due to economic cycles. Consequently, the period
over which expected cash flows were projected was shortened to ten years beyond
2001. The original expected useful life for goodwill and customer list had been
thirty and fourteen years, respectively. The Company's forecast for Allin
Consulting-Pennsylvania included low expectations of revenue and gross profit
growth through 2003, as the level of outsourced services was then expected to
continue to decline throughout this period. At that time, the Company estimated
that growth rates for revenue and gross profit would increase after 2003. Based
on the Company's revised projections, a loss due to impairment of approximately
$9,530,000 was recorded in June 2001 to reduce the net unamortized value of
goodwill recorded on Allin Consulting-Pennsylvania. The impairment loss was
included in Selling, general & administrative expenses in the Company's
Consolidated Statements of Operations during that period. The remaining
amortization periods for customer list and goodwill were adjusted prospectively
to equal the period of the Company's projection. Due to the implementation of
Statements of Financial Accounting Standards No. 141 Business Combinations
("SFAS No. 141") and No. 142 Goodwill and Other Intangible Assets ("SFAS No.
142") on January 1, 2002, goodwill is no longer amortized in 2002.
The economic downturn also negatively impacted the demand for
Technology Infrastructure and E-Business consulting services provided by Allin
Consulting-California. The Company's expectations of future revenue and gross
profit as of the beginning of 2001 had been based on growth achieved in 2000 and
industry analysis for expected future demand for technology consulting services.
Due to the economic downturn, during 2001, the Company was unable to sustain
revenue growth that had been realized late in 2000. Prior to recording the
impairment loss, approximately 92 % of the net unamortized value of Allin
Consulting-California's intangible assets related to goodwill associated with
its acquisition in November 1996. The original useful life was seven years.
Consequently, the projection for cash flows related to goodwill from the 1996
acquisition was based on the remaining useful life, with low expectations for
revenue and gross profit growth due to the likelihood that the negative impact
of the economic downturn would persist through a substantial portion of the
remaining useful life. Based on the Company's revised projections, a loss due to
impairment of approximately $1,097,000 was recorded in June 2001 to reduce the
net unamortized value of goodwill recorded on Allin Consulting-California. The
impairment loss was included in Selling, general & administrative expenses in
the Company's Consolidated Statements of Operations during that period.
Allin Interactive maintained an inventory of interactive television
equipment salvaged from ships on which it had previously operated interactive
television systems on an owner-operator model. The equipment had been removed
from ships on which operations under this model were discontinued in 1997 and
1998. The inventory values had been based on estimated salvage values after the
equipment was removed from the ships. Allin Interactive continued to own and
operate other ship-based systems utilizing similar equipment and, from 1999 to
2001, sold the remaining systems to two cruise lines. During this time period,
Allin Interactive sought to sell its inventory to these cruise lines for spare
parts for the systems that continued to be operated. While a portion of the
inventory was sold to these parties, it became apparent during the second
quarter of 2001 that neither cruise line was prepared to purchase significant
quantities of the inventoried equipment. The Company therefore believed the
estimated fair value of the remaining inventory was less than the value recorded
for the inventory. A loss due to impairment of approximately $121,000 was
recorded in the second quarter of 2001 to adjust the recorded value of Allin
Interactive's inventory to the revised estimate of fair value. The impairment
loss was included in Selling, general & administrative expenses in the Company's
Consolidated Statements of Operations during that period.
Management's assumptions and estimates resulted in the calculation of
impairment losses that significantly, negatively impacted the Company's reported
results of operations for the three- and six-month periods ended June 30, 2001.
The impairment losses also significantly reduced the reported amounts of assets
on the Company's Consolidated Balance Sheet as of June 30, 2001. In applying
accounting standards applicable to impairment of assets in 2001, management used
its judgment based on historical experience, industry analysis and expectations
of future trends, and other factors deemed reasonable under the circumstances.
Certain Related Party Transactions
During the three- and six-month periods ended June 30, 2001 and 2002,
the Company engaged in transactions with related parties, including sale of
services and products, purchases of services and leases for office space.
Services and products sold represented less than 1% of the Company's revenue in
each of these periods. The charges for services and products sold to related
parties were comparable to charges for similar services and products sold to
non-related
-24-
entities. Purchased services represented less than 1% of cost of sales or
selling, general & administrative expenses in each of these periods. Management
believes the cost of these services is similar to that which could have been
obtained from non-related entities.
The Company's office space in Pittsburgh, Pennsylvania is leased from
an entity in which beneficial holders of greater than five percent of the
Company's common stock, as well as certain of family members of one of the
holders, have equity interests. Rental expense related to this lease was
approximately $73,000 and $35,000 during the three-month periods and
approximately $145,000 and $81,000 during the six-month periods ended June 30,
2001 and 2002, respectively. This represented 1% and 2%, respectively, of
selling, general and administrative expenses during the three-month periods
ended June 30, 2001 and 2002, and 1% and 3%, respectively, of selling, general
and administrative expenses during the six-month periods then ended. The
Company's management believes that the rental rates for the lease that expired
January 31, 2002 were competitive with the marketplace for similar commercial
real estate at the time the lease was entered in 1997. Management believed the
Company's Pittsburgh-based operations could effectively utilize a smaller space
at the conclusion of the lease due to staff reductions in 2001. The Company's
landlord agreed to permit the Company to continue to occupy its present space on
a month-to-month basis until such time as the landlord identifies an alternate
tenant for the Company's space. At that time, the Company will likely move to
smaller space within the same building more commensurate with its needs. The
Company's rent expense was reduced by approximately 51% under the new
arrangement reflecting both its reduced requirements for space and current real
estate market conditions. Management believes the new arrangement benefits both
parties as the Company has benefited from a rent reduction while deferring the
cost and inconvenience of moving while the landlord has deferred the costs
associated with buildout of new space for the Company.
The Company has an outstanding note payable, with a principal balance
of $1,000,000 and interest fixed at 7% per annum. The note is associated with
the 1996 acquisition of Allin Consulting-California and was originally held by
Allin Consulting-California's former sole shareholder prior to its acquisition,
who was also a former President of the Company and was a beneficial holder of
greater than five percent of the Company's common stock until March 14, 2002. On
that date the note, including accrued interest of approximately $73,000, was
sold to another person who is a beneficial holder of greater than five percent
of the Company's common stock. On April 15, 2002, the new noteholder sold
certain interests in the note payable and related accrued interest to other
parties related to the Company. An entity in which another shareholder of the
Company has an ownership interest purchased a $250,000 portion of the note
payable and approximately $19,000 of accrued but unpaid interest. An entity in
which a director and shareholder of the Company has an ownership interest
purchased a $41,667 portion of the note payable and approximately $3,000 of
accrued but unpaid interest. A director, executive officer and shareholder of
the Company purchased a $16,667 portion of the note payable and approximately
$1,000 of accrued but unpaid interest. An executive officer of the Company
purchased a $16,667 portion of the note payable and approximately $1,000 of
accrued but unpaid interest. Interest expense related to the note was
approximately $18,000, during both of the three-month periods and approximately
$37,000 during both of the six-month periods ended June 30, 2001 and 2002,
respectively.
See Liquidity and Capital Resources following in this Part I, Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 4 - Note Payable and 8 - Related Party Transactions in the
Notes to Consolidated Financial Statements included in Part I, Item 1 -
Financial Statements of this Report on Form 10-Q and the Liquidity and Capital
Resources section of Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Notes 17 - Related Party Transactions and
18 - Subsequent Events in the Notes to Consolidated Financial Statements
included in Item 8 - Financial Statements and Supplementary Data, Item 11 -
Executive Compensation and Item 13- Certain Relationships and Related
Transactions of the Company's Report of Form 10-K for the year ended December
31, 2001 for additional information concerning related party transactions.
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenue
The Company's total revenue for the three months ended June 30, 2002
was $3,436,000, a decrease of $661,000, or 16%, from total revenue of $4,097,000
for the three months ended June 30, 2001. The Company's Technology
Infrastructure and E-Business Solution Areas and Outsourced Services operations
all experienced revenue declines which management attributes to a softening of
demand for technology consulting services throughout 2001 and the early part of
2002 due to the downturn in the domestic economy.
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The Company's solution area revenue, after elimination of intercompany
sales, was $3,360,000 for the three months ended June 30, 2002, including
$2,033,000 for Interactive Media, $478,000 for Technology Infrastructure,
$525,000 for E-Business and $324,000 for Outsourced Services. Comparable
solution area revenue for the three months ended June 30, 2001 was $3,845,000 in
total, including $1,840,000 for Interactive Media, $806,000 for Technology
Infrastructure, $640,000 for E-Business and $559,000 for Outsourced Services.
Revenue for the Interactive Media Solution Area for the three months
ended June 30, 2002 included $621,000 for interactive media consulting and
$1,412,000 for interactive media systems integration. Comparable Interactive
Media revenue for the three months ended June 30, 2001 included $908,000 for
interactive media consulting and $932,000 for interactive media systems
integration. The increase in revenue for the Interactive Media Solution Area
from the second quarter of 2001 to the second quarter of 2002 was 10%. The
Interactive Media Solution Area's consulting and systems integration services
have historically been highly concentrated, predominantly with customers in the
cruise industry. During the second quarters of both 2001 and 2002, over 99% of
Interactive Media revenue was derived from Carnival, Royal Caribbean and
Celebrity. The majority of the revenue in both periods related to consulting and
systems integration projects for the design, configuration and installation of
interactive television systems aboard cruise ships. These projects are of many
months' duration, but a project will typically experience a period of peak
activity coincident with the majority of the on-site labor at the shipyard for
newly built ships or on the ship for ships in service. The timing of the peak
activity is dependent on many factors including shipyard construction schedules
for system installations on new ships and itinerary considerations and cabin
availability for installations on ships already in service. Since the Company
has limited control of these factors, the degree of activity on shipboard
installations can vary substantially from quarter to quarter resulting in
significant variation in revenue. Systems integration services increased
$480,000, or 52%, from the second quarter of 2001 to the second quarter of 2002.
The second quarter of 2002 included periods of peak activity for two ship
systems while the second quarter of 2001 included only portions of the peak
activity periods for several systems. This was the most significant factor in
the increase in revenue from the second quarter of 2001 to the second quarter of
2002. Interactive Media consulting revenue declined $287,000, or 32%, from the
second quarter of 2001 to the second quarter of 2002, partially offsetting the
increase in systems integration revenue. A significant factor in the decline in
consulting revenue was a higher level of applications development in the second
quarter of 2001 related to a major applications development project for Carnival
under a contract entered in February 2001. This project was in a late phase of
activity in the second quarter of 2002, with a considerably lower level of
activity than in the second quarter of 2001. Unanticipated schedule changes may
result in project delays that could negatively impact revenue expected to be
realized in any of the remaining fiscal quarters of 2002. Another factor is that
cruise line passenger levels and revenue declined following the September 2001
incidents of terrorism in the United States. If the recovery of passenger levels
and revenue experienced to date in 2002 is not sustained, the cruise lines could
potentially seek to delay projects currently expected to be performed in 2002.
Due to these factors and other considerations such as general economic
conditions, there can be no assurance that the Company's Interactive Media
Solution Area will continue to realize consulting or systems integration revenue
equal to or greater than the levels realized in the second quarter of 2002 or
that any increases realized will result in the desired improvement to the
Company's financial condition or results of operations.
Technology Infrastructure revenue decreased $328,000, or 41%, in the
three months ended June 30, 2002 as compared to the three months ended June 30,
2001. Management attributes the decline in period-to-period Technology
Infrastructure revenue to a softening of demand for technology consulting
services throughout 2001 and the early part of 2002 due to the downturn in the
domestic economy. In addition to the cost of the consulting services, Technology
Infrastructure solutions will frequently recommend or require significant
upgrades in customers' hardware, software and networking equipment. The economic
downturn has resulted in a decrease in spending on technology-related services
and equipment throughout 2001 and early 2002, which has negatively impacted the
demand for the services offered by the Technology Infrastructure Solution Area.
However, management believes that certain industry trends, as discussed in the
Company's Report on Form 10-K for the year ended December 31, 2001 in Item 1,
Business under the caption "Industry Overview - Technology Consulting Services",
including increasing security concerns and expected growth in wireless access to
distributed networks will foster growth in long-term demand for Technology
Infrastructure services. There can be no assurance, however, that these trends
will result in the realization of future revenue equal to or greater than
current levels for the Technology Infrastructure Solution Area or that any
increases realized will result in the desired improvements to the Company's
financial condition or results of operations.
The E-Business Solution Area realized a revenue decrease of $115,000,
or 18%, for the three months ended June 30, 2002 as compared with the three
months ended June 30, 2001. Management believes the decline in revenue is
primarily attributable to the negative impact of the economic downturn on demand
for technology-based services.
-26-
While E-Business activity has been negatively affected by the economic downturn,
management believes the continuing growth of Internet-based business has
mitigated the impact on E-Business as compared to Technology Infrastructure.
Management believes the impact of the Internet continues to move businesses to
seek seamless access of employees, customers and suppliers to business knowledge
capital and transactional systems through company portals, extranet-based supply
chains and electronic commerce sites. Management believes the Internet will
continue to drive opportunities for E-Business consulting for the custom
development of applications and interfaces with business transaction systems.
There can be no assurance, however, that the Company will realize future revenue
equal to or greater than current levels for the E-Business Solution Area or that
any increases realized will result in the desired improvements to the Company's
financial condition or results of operations.
Revenue from Outsourced Services declined $235,000, or 42%, for the
three months ended June 30, 2002 as compared to the three months ended June 30,
2001. The Company ceased performing services associated with Hogan IBA software
products in July 2001. Hogan IBA-based services accounted for approximately 40%
of the Company's Outsourced Services revenue in the second quarter of 2001.
The Company recognized revenue for ancillary services & product sales,
after elimination of intercompany sales, of $76,000 during the three months
ended June 30, 2002, including $59,000 for information system product sales and
$17,000 for other services. Ancillary services & product sales revenue of
$252,000 was recognized during the three months ended June 30, 2001, including
$21,000 for information system product sales and $231,000 for other services.
The increase in information system product sales is due primarily to increased
sales of interactive television equipment and spare parts to the Company's
cruise line customers. Management attributes the increase in demand primarily to
a larger base of installed interactive television systems in the cruise industry
in the second quarter of 2002 as compared to the second quarter of 2001. The
decline in revenue for other services was due to the inclusion of placement fee
revenue of $124,000 and interactive television transactional services revenue of
$89,000 in the second quarter of 2001. The placement fee resulted from a
litigation settlement with a former customer who had hired three of the
Company's consultants during the client engagement, which was prohibited under
the letter of engagement. Interactive television transactional services ceased
in December 2001 after the transfer of systems operation on two ships to
Carnival following the sale of the systems to Carnival earlier in 2001.
Cost of Sales and Gross Profit
The Company recognized cost of sales of $1,811,000 during the three
months ended June 30, 2002 as compared to $2,161,000 during the three months
ended June 30, 2001. The decrease in cost of sales of $350,000 was consistent
with the declines in revenue experienced in the Company's operations. Gross
profit of $1,625,000 was recognized for the three months ended June 30, 2002 as
compared to $1,936,000 for the three months ended June 30, 2001, a decrease of
$311,000, or 16%. Gross profit as a percentage of revenue remained steady at 47%
during both periods.
The Company's solution areas recorded a total of $1,765,000 for cost of
sales during the three months ended June 30, 2002, including $1,109,000 for
Interactive Media, $196,000 for Technology Infrastructure, $224,000 for
E-Business and $236,000 for Outsourced Services. Comparable cost of sales for
the three months ended June 30, 2001 was $2,104,000 in total, including
$1,081,000 for Interactive Media, $322,000 for Technology Infrastructure,
$277,000 for E-Business and $424,000 for Outsourced Services. Gross profit for
the Company's solution areas for the three months ended June 30, 2002 was
$1,595,000, including $924,000 for Interactive Media, $282,000 for Technology
Infrastructure, $301,000 for E-Business and $88,000 for Outsourced Services.
Comparable gross profit for the three months ended June 30, 2001 was $1,741,000
in total, including $759,000 for Interactive Media, $484,000 for Technology
Infrastructure, $363,000 for E-Business and $135,000 for Outsourced Services.
Cost of sales for the Interactive Media Solution Area for the three
months ended June 30, 2002 included $213,000 for interactive media consulting
and $896,000 for interactive media systems integration. Interactive Media cost
of sales for the three months ended June 30, 2001 included $378,000 for
interactive media consulting and $703,000 for interactive media systems
integration. Interactive Media Solution Area gross profit for the three months
ended June 30, 2002 included $408,000 for interactive media consulting and
$516,000 for interactive media systems integration. Interactive Media gross
profit for the three months ended June 30, 2001 included $530,000 for
interactive media consulting and $229,000 for interactive media systems
integration. The period-to-period decreases in consulting cost of sales and
gross profit were primarily attributable to a higher level of applications
development in the second quarter of 2001 related to a major applications
development project for Carnival. This project was in a late phase of activity
in the second quarter of 2002, with a considerably lower level of activity than
in the second quarter of 2001. Increases in
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systems integration cost of sales and gross profit resulted from normal
variations in activity due to scheduling considerations related to shipboard
interactive television system installations, with a higher level of activity
realized in the second quarter of 2002. As discussed above under Revenue, there
will continue to be significant quarter-to-quarter variation in the level of
Interactive Media services, which will result in significant variation in the
levels of cost of sales and gross profit recognized.
Technology Infrastructure gross profit decreased $202,000, or 42%, for
the three months ended June 30, 2002 as compared to the three months ended June
30, 2001. Management attributes the decline in period-to-period Technology
Infrastructure gross profit to the economic downturn throughout 2001 and the
early part of 2002, which has curtailed technology spending for consulting
services or the equipment and software upgrades that will frequently accompany
infrastructure solutions.
E-Business gross profit decreased $62,000, or 17%, in the second
quarter of 2002 as compared to the second quarter of 2001. Management believes
the decline in gross profit is also attributable to the negative impact of the
economic downturn on demand for technology-based services.
Gross profit realized on Outsourced Services declined $47,000 from the
second quarter of 2001 to the second quarter of 2002. Management attributes the
decline primarily to the July 2001 cessation of services related to Hogan
IBA-based technology. Gross profit as a percentage of revenue increased from 24%
in the second quarter of 2001 to 27% in the second quarter of 2002, which
management attributes to the transitioning of Outsourced Services resources to a
broader array of technical skills.
Cost of sales for the Company's ancillary services and product sales
was $46,000 for the three months ended June 30, 2002, with all of the cost of
sales attributable to information system product sales. Cost of sales for
ancillary services and product sales was $57,000 for the three months ended June
30, 2001, including $23,000 for information system product sales and $34,000 for
other services, related to the cost of pay-per-view movies associated with the
operation of interactive television systems. Gross profit on ancillary services
and product sales was $30,000 for the three months ended June 30, 2002,
including $13,000 for information system product sales and $17,000 for other
services. Gross profit for ancillary services and product sales was $195,000 for
the three months ended June 30, 2001, the net result of a $2,000 loss from
information system product sales and $197,000 in gross profit from other
services. The decline in gross profit for other services was due to the
inclusion of a large placement fee in the second quarter of 2001 and the
cessation of interactive television transactional services between the periods..
Selling, General & Administrative Expenses
The Company recorded $1,444,000 in selling, general & administrative
expenses during the three months ended June 30, 2002, including $152,000 for
depreciation and amortization and $1,292,000 for other selling, general &
administrative expenses. Selling, general & administrative expenses were
$13,147,000 during the three months ended June 30, 2001, including $503,000 for
depreciation and amortization, $10,748,000 in losses from impairment of assets
and $1,896,000 for other selling, general & administrative expenses.
The most significant factor in the period-to-period decrease in
selling, general & administrative expenses was the inclusion of $10,748,000 of
losses from impairment of assets in the second quarter of 2001 related to
goodwill associated with the acquisitions of Allin Consulting-Pennsylvania and
Allin Consulting-California and inventory held by Allin Interactive. See the
discussion under the caption Impairment of Assets under Certain Critical
Accounting Policies and Estimates and Note 7 - Impairment of Assets - in the
Notes to Consolidated Financial Statements included in Item 1 - Financial
Statements above for additional information concerning the impairment losses. No
losses due to impairment of assets were recorded in the second quarter of 2002.
The downturn in the domestic economy experienced beginning late in 2000
significantly lowered technology-based spending in the United States, which
negatively impacted the demand for technology services. Consequently, since late
in the first quarter of 2001, management has moved to reduce the cost of
personnel resources in its Technology Infrastructure and E-Business Solution
Areas as well as in its corporate marketing and financial departments. As a
result of these actions, the expense associated with personnel resources was
substantially lower in the second quarter of 2002 than that incurred in the
second quarter of 2001. Management also implemented cost savings efforts
throughout the final three quarters of 2001 and the first two quarters of 2002
which have resulted in reductions in other expenses such as travel and
entertainment and communications costs. Another factor contributing to the
decrease in selling, general & administrative expenses was a reduction in
expenses for rent and facilities. The
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Company's lease for its office space in Pittsburgh expired January 31, 2002.
Management believed the Company's Pittsburgh-based operations could effectively
utilize a smaller space due to the 2001 staff reductions. The Company's landlord
agreed to permit the Company to continue to occupy its present space on a
month-to-month basis until such time as the landlord identifies an alternate
tenant for the Company's space. The Company's rent expense for its Pittsburgh
office was reduced by approximately 51% under the new arrangement reflecting
both its reduced requirements for space and current real estate market
conditions.
During the three months ended June 30, 2001, restructuring charges of
approximately $44,000 was recorded to increase a liability for severance costs
originally recorded in March 2001 associated with the termination of services of
a managerial executive associated with the Company's Technology Infrastructure
and E-Business Solution Areas. The Company's severance obligation was of
variable duration up to six months depending upon the executive's ability to
obtain replacement employment. The Company's original accrual had been based on
an estimate of the most likely duration of the severance period. The original
accrual has been exceeded, requiring an additional accrual in the second
quarter. There were no similar restructuring charges recorded during the second
quarter of 2002.
Depreciation and amortization were $152,000 for the three months ended
June 30, 2002 as compared to $503,000 for the three months ended June 30, 2001.
The decrease of $351,000, or 70%, is due to several factors. The most
significant was the Company's implementation of SFAS Nos. 141 and 142 as of
January 1, 2002. Under the new standards, goodwill is no longer amortized. Also,
intangible asset values previously recorded for assembled workforces in
connection with the acquisitions of Allin Consulting-California in 1996 and
Allin Consulting-Pennsylvania in 1998 were reclassified to goodwill. During the
three months ended June 30, 2001, approximately $283,000 of amortization expense
had been recorded related to goodwill and assembled workforces. Another factor
contributing to the period-to-period reduction in depreciation and amortization
was significant levels of fixed assets reaching full depreciation in June and
December 2001.
Income (Loss) from Continuing Operations
The Company recorded income from continuing operations of $171,000 for
the three months ended June 30, 2002, as compared to a loss from continuing
operations of $11,211,000 for the three months ended June 30, 2001. The
substantial improvement resulted primarily from the inclusion of a loss from
impairment of assets of $10,748,000 in selling, general & administrative
expenses in the second quarter of 2001 while no comparable loss was recorded in
2002. The Company also realized a period-to-period decrease of $955,000 in
depreciation and amortization and other selling, general & administrative
expenses, the benefit of which was partially offset by a reduction in gross
profit from operations of $311,000.
Loss from Discontinued Operations
During the three months ended June 30, 2002, the Company recorded a
loss of $12,000 from its discontinued digital imaging operations as compared to
a loss of $473,000 during the three months ended June 30, 2001. The loss
recognized in the second quarter of 2001 included an impairment loss of
approximately $327,000 related to Allin Digital's inventory of digital imaging
equipment and consumable supplies, assets utilized in certain photography
concessionaire operations and capitalized hardware, software and equipment. The
fair value estimated for the inventory was significantly reduced since the
Company would no longer be utilizing the equipment as components of completely
configured and installed digital imaging systems. Allin Digital also recorded a
provision of approximately $28,000 in the second quarter of 2001 to increase its
allowance for doubtful accounts. Activity in the second quarter of 2002 included
continuing sales of remaining inventory, fulfillment of technical support
obligations and website hosting services. All remaining obligations for
technical support services were completed in the second quarter of 2002.
Responsibility for website hosting has been transferred to Allin Interactive.
Management expects future revenue to be derived from this activity to be
immaterial. The remaining inventory balance for digital imaging equipment was
approximately $5,000 as of June 30, 2002 so any future sales will be immaterial.
Net Income (Loss)
The Company realized net income of $159,000 for the three months ended
June 30, 2002 as compared to a net loss of $11,721,000 for the three months
ended June 30, 2001. The most significant factors in the profitability
improvement were the inclusion of significant losses due to impairment of assets
in the second quarter of 2001 and substantial period-to-period decreases in
depreciation and amortization and other selling, general & administrative
expenses, as discussed above.
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Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenue
The Company's total revenue for the six months ended June 30, 2002 was
$6,253,000, a decrease of $2,648,000, or 30%, from total revenue of $8,901,000
for the six months ended June 30, 2001. All of the Company's solution area
services experienced revenue declines for various reasons as discussed below.
The Company's solution area revenue, after elimination of intercompany
sales, was $6,032,000 for the six months ended June 30, 2002, including
$3,489,000 for Interactive Media, $840,000 for Technology Infrastructure,
$1,022,000 for E-Business and $681,000 for Outsourced Services. Comparable
solution area revenue for the six months ended June 30, 2001 was $8,428,000 in
total, including $4,155,000 for Interactive Media, $1,742,000 for Technology
Infrastructure, $1,201,000 for E-Business and $1,330,000 for legacy technology
consulting services.
Revenue for the Interactive Media Solution Area for the six months
ended June 30, 2002 included $1,126,000 for interactive media consulting and
$2,363,000 for interactive media systems integration. Comparable Interactive
Media revenue for the six months ended June 30, 2001 included $1,695,000 for
interactive media consulting and $2,460,000 for interactive media systems
integration. The decrease in revenue for the Interactive Media Solution Area
from the first half of 2001 to the first half of 2002 was 16%. The most
significant factor in the decline in consulting revenue was a higher level of
applications development in the first half of 2001 related to a major
applications development project for Carnival under a contract entered in
February 2001. This project was in later stages in the first half of 2002, with
a considerably lower level of activity than in the first half of 2001. The
period-to-period decline in systems integration revenue was only 4%. As
discussed above in the analysis of quarterly results, systems integration
projects experience periods of peak activity coincident with the majority of the
on-site labor at the shipyard for newly built ships or on the ship for ships in
service. The timing of the peak activity is dependent on many factors including
shipyard construction schedules for system installations on new ships and
itinerary considerations and cabin availability for installations on ships
already in service. While activity on shipboard installations can vary
substantially from quarter to quarter, results over longer time periods are more
comparable. Despite the negative impact of the September 2001 incidents of
terrorism in the United States on cruise line passenger levels and revenue, the
Company has only experienced a slight period-to-period decline in systems
integration revenue. If the recovery of passenger levels and revenue experienced
to date in 2002 is not sustained, the cruise lines could potentially seek to
delay projects currently expected to be performed in 2002. Accordingly, there
can be no assurance that the Company's Interactive Media Solution Area will
continue to realize consulting or systems integration revenue equal to or
greater than the levels realized in the first half of 2002 or that any increases
realized will result in the desired improvement to the Company's financial
condition or results of operations.
Technology Infrastructure revenue decreased $902,000, or 52%, in the
six months ended June 30, 2002 as compared to the six months ended June 30,
2001. Management attributes the decline in period-to-period Technology
Infrastructure revenue to a softening of demand for technology consulting
services throughout 2001 and the early part of 2002 due to the downturn in the
domestic economy. Since Technology Infrastructure solutions will frequently
recommend or require significant upgrades in customers' hardware, software and
networking equipment, the decline in demand for services has been particularly
pronounced.
The E-Business Solution Area realized a revenue decrease of $179,000,
or 15%, for the six months ended June 30, 2002 as compared with the six months
ended June 30, 2001. Management believes the decline in revenue is primarily
attributable to the negative impact of the economic downturn on demand for
technology-based services.
Revenue from Outsourced Services declined $649,000, or 49%, for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001.
The Company ceased performing services associated with Hogan IBA software
products in July 2001. Hogan IBA-based services accounted for approximately 42%
of the Company's Outsourced Services revenue in the first half of 2001.
The Company recognized revenue for ancillary services & product sales,
after elimination of intercompany sales, of $221,000 during the six months ended
June 30, 2002, including $185,000 for information system product sales and
$36,000 for other services. Ancillary services & product sales revenue of
$473,000 was recognized during the six months ended June 30, 2001, including
$104,000 for information system product sales and $369,000 for other services.
The increase in information system product sales is due primarily to increased
sales of interactive television equipment
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and spare parts to the Company's cruise line customers related to a larger base
of installed interactive television systems in the cruise industry in the first
half of 2002 as compared to the first half of 2001. The decline in revenue for
other services was due to the inclusion of placement fee revenue of $124,000 and
interactive television transactional services revenue of $184,000 in the first
half of 2001. As discussed above with the analysis of quarterly results, the
placement fee resulted from a litigation settlement and interactive television
transactional services ceased in December 2001.
Cost of Sales and Gross Profit
The Company recognized cost of sales of $3,286,000 during the six
months ended June 30, 2002 as compared to $4,745,000 during the six months ended
June 30, 2001. The decrease in cost of sales of $1,459,000 was consistent with
the declines in revenue experienced in the Company's operations. Gross profit of
$2,967,000 was recognized for the six months ended June 30, 2002 as compared to
$4,156,000 for the six months ended June 30, 2001, a decrease of $1,189,000, or
29%. Gross profit as a percentage of revenue remained steady at 47% during both
periods.
The Company's solution areas recorded a total of $3,166,000 for cost of
sales during the six months ended June 30, 2002, including $1,884,000 for
Interactive Media, $360,000 for Technology Infrastructure, $424,000 for
E-Business and $498,000 for Outsourced Services. Comparable cost of sales for
the six months ended June 30, 2001 was $4,604,000 in total, including $2,394,000
for Interactive Media, $680,000 for Technology Infrastructure, $543,000 for
E-Business and $987,000 for Outsourced Services. Gross profit for the Company's
solution areas for the six months ended June 30, 2002 was $2,866,000, including
$1,605,000 for Interactive Media, $480,000 for Technology Infrastructure,
$598,000 for E-Business and $183,000 for Outsourced Services. Comparable gross
profit for the six months ended June 30, 2001 was $3,824,000 in total, including
$1,761,000 for Interactive Media, $1,062,000 for Technology Infrastructure,
$658,000 for E-Business and $343,000 for Outsourced Services.
Cost of sales for the Interactive Media Solution Area for the six
months ended June 30, 2002 included $401,000 for interactive media consulting
and $1,483,000 for interactive media systems integration. Interactive Media cost
of sales for the six months ended June 30, 2001 included $614,000 for consulting
and $1,780,000 for systems integration. Interactive Media Solution Area gross
profit for the six months ended June 30, 2002 included $725,000 for consulting
and $880,000 for systems integration. Interactive Media gross profit for the six
months ended June 30, 2001 included $1,081,000 for consulting and $680,000 for
systems integration. The period-to-period decreases in consulting cost of sales
and gross profit are primarily attributable to a higher level of applications
development in the first half of 2001 related to a major applications
development project for Carnival. The Interactive Media Solution Area
experienced an increase in period-to-period gross profit from systems
integration services despite a slight decline in period-to-period revenue.
Management attributes the improvement to enhanced operational efficiency and the
reduction of incidental project costs such as shipping.
Technology Infrastructure gross profit decreased $582,000, or 55%, for
the six months ended June 30, 2002 as compared to the six months ended June 30,
2001. As discussed above, management attributes the decline to the economic
downturn throughout 2001 and the early part of 2002, which has curtailed
technology spending.
E-Business gross profit decreased $60,000, or 9%, in the first half of
2002 as compared to the first half of 2001, despite a 15% period-to-period
decline in revenue. Management believes the decline in gross profit is also
attributable to the negative impact of the economic downturn on demand for
technology-based services.
Gross profit realized on Outsourced Services declined $160,000 from the
first half of 2001 to the first half of 2002. Management attributes the decline
primarily to the July 2001 cessation of services related to Hogan IBA-based
technology.
Cost of sales for the Company's ancillary services and product sales
was $120,000 for the six months ended June 30, 2002, including $119,000 for
information system product sales and $1,000 for other services. Cost of sales
for ancillary services and product sales was $141,000 for the six months ended
June 30, 2001, including $71,000 for information system product sales and
$70,000 for other services, related to the cost of pay-per-view movies
associated with the operation of interactive television systems. Gross profit on
ancillary services and product sales was $101,000 for the six months ended June
30, 2002, including $66,000 for information system product sales and $35,000 for
other services. Gross profit for ancillary services and product sales was
$332,000 for the six months ended June 30, 2001, including $33,000 from
information system product sales and $299,000 in gross profit from other
services. The decline in gross profit for other services was due to the
inclusion of a large placement fee in the first half of 2001 and the cessation
of interactive television transactional services between the periods..
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Selling, General & Administrative Expenses
The Company recorded $2,995,000 in selling, general & administrative
expenses during the six months ended June 30, 2002, including $301,000 for
depreciation and amortization and $2,694,000 for other selling, general &
administrative expenses. Selling, general & administrative expenses were
$16,209,000 during the six months ended June 30, 2001, including $1,017,000 for
depreciation and amortization, $10,748,000 in losses from impairment of assets
and $4,444,000 for other selling, general & administrative expenses.
The most significant factor in the period-to-period decrease in
selling, general & administrative expenses was the inclusion of $10,748,000 of
losses from impairment of assets in the first half of 2001 related to goodwill
associated with the acquisitions of Allin Consulting-Pennsylvania and Allin
Consulting-California and inventory held by Allin Interactive. See the
discussion under the caption Impairment of Assets under Certain Critical
Accounting Policies and Estimates and Note 7 - Impairment of Assets - in the
Notes to Consolidated Financial Statements included in Item 1 - Financial
Statements above for additional information concerning the impairment losses. No
losses due to impairment of assets were recorded in the first half of 2002.
The downturn in the domestic economy experienced beginning late in 2000
significantly lowered technology-based spending in the United States, which
negatively impacted the demand for technology services. Consequently, since late
in the first quarter of 2001, management has moved to reduce the cost of
personnel resources in its Technology Infrastructure and E-Business Solution
Areas as well as in its corporate marketing and financial departments. As a
result of these actions, the expense associated with personnel resources was
substantially lower in the first half of 2002 than that incurred in the first
half of 2001. The Company has also realized period-to-period reductions in other
expenses such as rent, travel and entertainment and communications costs, as
discussed above.
During the six months ended June 30, 2001, restructuring charges of
approximately $118,000 were recorded as a result of the termination of services
of two managerial personnel associated with the Company's Technology
Infrastructure and E-Business Solution Area services. There were no similar
restructuring charges recorded during the first half of 2002.
The decrease in depreciation and amortization of $716,000, or 70%, is
due to the discontinuation of amortization of goodwill and assembled workforces
in 2002 and significant levels of fixed assets reaching full depreciation in
June and December 2001. During the six months ended June 30, 2001, approximately
$566,000 of amortization expense had been recorded related to goodwill and
assembled workforces.
Loss from Continuing Operations
The Company recorded a loss from continuing operations of $37,000 for
the six months ended June 30, 2002, as compared to a loss from continuing
operations of $12,138,000 for the six months ended June 30, 2001. The
substantial improvement resulted primarily from the inclusion of a loss from
impairment of assets of $10,748,000 in selling, general & administrative
expenses in the first half of 2001 while no comparable loss was recorded in
2002. The Company also realized a period-to-period decrease of $2,466,000 in
depreciation and amortization and other selling, general & administrative
expenses, the benefit of which was partially offset by a reduction in gross
profit from operations of $1,189,000.
Loss from Discontinued Operations
During the six months ended June 30, 2002, the Company recorded a loss
of $5,000 from its discontinued digital imaging operations as compared to a loss
of $581,000 during the six months ended June 30, 2001. The loss recognized in
the first half of 2001 included an impairment loss of approximately $327,000
related to Allin Digital's inventory of digital imaging equipment and consumable
supplies, assets utilized in certain photography concessionaire operations and
capitalized hardware, software and equipment. Allin Digital also recorded a
provision of approximately $28,000 in the first half of 2001 to increase its
allowance for doubtful accounts.
Net Loss
The Company recognized a net loss of $42,000 for the six months ended
June 30, 2002 as compared to a net loss of $12,719,000 for the six months ended
June 30, 2001. The most significant factors in the profitability
-32-
improvement were the inclusion of significant losses due to impairment of assets
in the first half of 2001 and substantial period-to-period decreases in
depreciation and amortization and other selling, general & administrative
expenses, as discussed above.
Liquidity and Capital Resources
At June 30, 2002, the Company had cash and liquid cash equivalents of
$3,058,000 available to meet its working capital and operational needs. The net
change in cash from December 31, 2001 was an increase of $832,000, which
resulted primarily from collection of accounts receivable, partially offset by
cash used for reduction of accounts payable, reduction of accrued liabilities,
project costs on interactive media systems integration projects and payment of
dividends on preferred stock.
The Company recognized a net loss for the six months ended June 30,
2002 of $42,000. The Company recorded non-cash expenses of $308,000 for
depreciation of property and equipment and amortization of intangible assets,
resulting in net cash provided of $266,000 related to the income statement.
Working capital adjustments resulted in net cash provided of $755,000. The major
working capital adjustment resulting in cash provided was a decrease in accounts
receivable of $2,127,000. This was substantially offset by working capital
adjustments using cash, including decreases in accounts payable, accrued
liabilities and billings in excess of costs and estimated gross margins of
$1,197,000, $127,000 and $107,000, respectively. The net result of the income
statement activity and working capital adjustments was net cash provided of
$1,021,000 related to operating activities.
Investing activities resulted in a net cash use of $13,000 for the six
months ended June 30, 2002 for capital expenditures relating to the periodic
upgrading of the Company's computer hardware. Financing activities resulted in a
net cash use of $176,000 during the six months ended June 30, 2002 for preferred
stock dividends.
The Company does not rely on off-balance sheet financing and does not
have non-consolidated special purpose entities.
The Company's common stock has been quoted on the OTC Bulletin Board
since May 9, 2001. The Company's common stock was previously listed on The
Nasdaq Stock Market's ("Nasdaq") National Market from the time of the Company's
initial public offering of its common stock in November 1996 until the common
stock was delisted from the National Market as of the opening of business on May
9, 2001. The Company was unable to maintain compliance with Nasdaq's criteria
for continued designation of the common stock as a National Market security. At
the time of the delisting, the common stock was not eligible for listing on
Nasdaq's SmallCap Market. Should quotation of the common stock on the OTC
Bulletin Board cease for any reason, the liquidity of the common stock and the
Company's ability to raise equity capital would likely decrease further.
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. The S&T Loan Agreement has subsequently been renewed in each of the
four succeeding years. The Company and S&T Bank have executed a renewal which
extends the expiration date of the S&T Loan Agreement to September 30, 2003. The
maximum borrowing availability under the S&T Loan Agreement is the lesser of
$5,000,000 or 80% 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, 2002, maximum
borrowing availability under the S&T Loan Agreement was approximately $806,000.
There was no outstanding balance as of June 30, 2002 and there have been no
borrowings under the S&T Loan Agreement subsequent to that date. As of August 2,
2002, maximum borrowing availability under the S&T Loan Agreement was
approximately $636,000.
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. The interest rate in effect as of
the beginning of 2002, 5.75%, was unchanged during the first half of the year
and has remained unchanged as of August 2, 2002. 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 did not record any interest expense related to this revolving credit
loan during the six months ended June 30, 2002. If additional borrowings are
made under the revolving credit loan, the principal will be due at maturity,
although any outstanding principal balances may be repaid in whole or part at
any time without penalty.
-33-
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. 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, as amended, 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 Exhibit 4 to the Company's Current Report on Form 8-K filed
on October 9, 1998, 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 and the Change in Terms Agreement and Letter
Agreement filed as Exhibits 4.1 and 4.2 to this Report on Form 10-Q. 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,
F and G preferred shares. 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. The Company was in
compliance with the cash flow covenant for the fiscal quarter ended June 30,
2002. The Company was in compliance with all other covenants as of June 30, 2002
and currently remains in compliance with all other covenants. 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, 2002, the Company had outstanding 25,000 shares of the
Company's Series C Redeemable Preferred Stock, having a liquidation preference
of $100 per share. There is no mandatory redemption date for the Series C
preferred stock; however, the Company may redeem shares of Series C preferred
stock at any time. There are no sinking fund provisions applicable to the Series
C preferred stock; however, the Company may redeem shares of Series C preferred
stock at any time. Accrued but unpaid dividends on the Series C preferred stock
were approximately $1,482,000 as of June 30, 2002 and approximately $1,520,000
as of August 13, 2002. 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.
As of June 30, 2002, the Company had outstanding 2,750 shares of the
Company's Series D Convertible Redeemable Preferred Stock having a liquidation
preference of $1,000 per share. There is no mandatory redemption date for the
Series D preferred stock; however, the Company may redeem shares of Series D
preferred stock after August 13, 2003. There are no sinking fund provisions
applicable to 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 276 shares of common stock, the
number of shares determined by dividing 1,000 by $3.6125, which is 85% of the
$4.25 closing price of the common stock on the 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 if unpaid. Dividends on Series D
preferred stock are payable quarterly in arrears as of the last day of January,
April, July and October, subject to legally available funds. Accrued but unpaid
dividends on Series D preferred stock were approximately $28,000 as of June 30,
2002 and approximately $6,000 as of August 13, 2002. Holders of the Series D
preferred stock who exercise the conversion right will have the right to receive
any accrued and unpaid dividends through the date of conversion.
As of June 30, 2001, the Company had outstanding 1,000 shares of the
Company's Series F Convertible Redeemable Preferred Stock having a liquidation
preference of $1,000 per share. There is no mandatory redemption date for the
Series F preferred stock; however, the Company may redeem shares of Series F
preferred stock at any time. There are no sinking fund provisions applicable to
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, if any. Each share of Series F
preferred stock is convertible into 508 shares of common stock, the number of
shares obtained by dividing 1,000 per preferred share 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
-34-
preferred stock. Series F preferred stock earns dividends at the rate of 7% of
the liquidation value thereof per annum. Dividends are payable quarterly in
arrears on the 15th of the first month of the following calendar quarter,
subject to legally available funds. Dividends accrued for seven months during
1999 of approximately $41,000 are not required to be paid prior to redemption or
conversion, if any. Dividends not paid at scheduled dates will compound
quarterly thereafter. Accrued but unpaid dividends on Series F preferred stock
were approximately $59,000 as of June 30, 2002 and approximately $49,000 as of
August 13, 2002. Holders of the Series F preferred stock who exercise the
conversion right will have the right to receive any accrued and unpaid dividends
through the date of conversion.
On March 14, 2002, Les D. Kent sold all of the 1,000 outstanding shares
of the Series F preferred stock, with accrued dividends of approximately
$55,000, a note due from the Company, as discussed below, with a principal
balance of $1,000,000, approximately $73,000 of accrued interest, and 213,333
shares of the Company's common stock, held by him to Henry Posner, Jr., a
beneficial owner of greater than five percent of the Company's common stock both
before and after the sale. Prior to the sale, Mr. Kent was also a beneficial
owner of greater than five percent of the Company's common stock.
On April 15, 2002, Mr. Posner sold certain portions of the financial
instruments related to the Company acquired from Mr. Kent in March 2002 to other
parties related to the Company. Rosetta Capital Partners, LP, an entity in which
Thomas D. Wright, a beneficial holder of greater than five percent of the
Company's common stock, has an ownership interest purchased 250 shares of Series
F preferred stock, approximately $15,000 of accrued but unpaid dividends, 53,333
shares of common stock, a $250,000 portion of the note payable and approximately
$19,000 of accrued but unpaid interest. Churchill Group LLC, an entity in which
William C. Kavan, a director and beneficial holder of greater than five percent
of the Company's common stock, has an ownership interest purchased 41.67 shares
of Series F preferred stock, approximately $2,000 of accrued but unpaid
dividends, 8,889 shares of common stock, a $41,667 portion of the note payable
and approximately $3,000 of accrued but unpaid interest. Richard W. Talarico,
the Company's Chairman and Chief Executive Officer and a beneficial holder of
greater than five percent of the Company's common stock, purchased 16.67 shares
of Series F preferred stock, approximately $1,000 of accrued but unpaid
dividends, 3,556 shares of common stock, a $16,667 portion of the note payable
and approximately $1,000 of accrued but unpaid interest. Dean C. Praskach, the
Company's Chief Financial Officer, Secretary and Treasurer, purchased 16.67
shares of Series F preferred stock, approximately $1,000 of accrued but unpaid
dividends, 3,555 shares of common stock, a $16,667 portion of the note payable
and approximately $1,000 of accrued but unpaid interest.
As of June 30, 2002, the Company had outstanding 150 shares of the
Company's Series G Convertible Redeemable Preferred Stock having a liquidation
preference of $10,000 per share. There is no mandatory redemption date for the
Series G preferred stock; however, the Company may redeem Series G shares after
December 29, 2005. The redemption price for each share of Series G preferred
stock will be the liquidation value of such share, plus an amount that would
result in an aggregate 25% compounded annual return on such liquidation value to
the date of redemption after giving effect to all dividends paid on such share
through the date of redemption. There are no sinking fund provisions applicable
to the Series G preferred stock. Each share of Series G preferred stock is
convertible into 28,571 shares of common stock at any time prior to redemption
by the Company, if any. The conversion price was set on December 29, 2001, the
first anniversary of the issuance of the Series G preferred stock, at the
minimum permissible price of $0.35 per common share. The minimum price became
effective since it exceeded 85% of the average closing price of the common stock
for the five trading days prior to December 29, 2001. Holders of the Series G
preferred stock who exercise the conversion right will have the right to receive
any accrued and unpaid dividends through the date of conversion. Any shares of
Series G preferred stock which are not converted to common stock will remain
outstanding until converted or until redeemed. Unless redeemed or converted to
common stock sooner, Series G preferred earns cumulative quarterly dividends at
the rate of 8% of the liquidation value thereof per annum until December 29,
2005. Thereafter, the dividend rate will increase to 12% of the liquidation
value until the earlier of the date of any redemption or the date of conversion
into common stock. Dividends are payable quarterly in arrears on the first day
of each calendar quarter, subject to legally available funds. Accrued but unpaid
dividends on the Series G preferred stock were approximately $30,000 as of June
30, 2002 and approximately $14,000 as of August 13, 2002.
The order of liquidation preference of the Company's outstanding
preferred stock, from senior to junior, is Series F, Series G, 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, F and G
preferred stock. Each of the Certificates of Designation governing the Series C,
D, F and G 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
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distribution as to the junior securities are paid or are declared and funds are
set aside for payment. In the event that the number of shares of outstanding
common stock is changed by any stock dividend, stock split or combination of
shares at any time shares of Series D, F or G preferred stock are outstanding,
the number of shares of common stock that may be acquired upon conversion will
be proportionately adjusted.
In connection with the Company's December 29, 2000 sale of Series G
Convertible Redeemable Preferred Stock, the purchasers of Series G preferred
stock also received warrants to purchase an aggregate of 857,138 shares of
common stock which have an exercise price of $1.75 per share. 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 or Series D Convertible
Redeemable Preferred Stock.
In connection with the Company's original sale of Series B Redeemable
Preferred Stock in August 1998, which was subsequently exchanged for Series D
Convertible Redeemable Preferred Stock, the purchasers of Series B preferred
stock 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 closing for the acquisition
of Allin Consulting-Pennsylvania. 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 an outstanding amended note payable 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
Convertible Redeemable Preferred Stock, 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% per annum. Interest is payable
quarterly in arrears on the 15th of the first month of the following calendar
quarter. Any unpaid interest is compounded quarterly. Accrued interest of
approximately $58,000 applicable to the period June 1, 1999 to December 31, 1999
is not due prior to the maturity of the loan principal. Accrued but unpaid
interest was approximately $76,000 as of June 30, 2002 and approximately $66,000
as of August 12, 2002.
Capital expenditures during the six months ended June 30, 2002 were
approximately $13,000 and included computer hardware for the Company's periodic
upgrading of technology. Management forecasts capital expenditures of
approximately $50,000 for 2002, primarily for computer hardware, software and
communications equipment for the Company's periodic upgrading of technology.
Business conditions and management's plans may change during 2002, so there can
be no assurance that the Company's actual amount of capital expenditures will
not exceed the planned amount.
The Company believes that available funds and cash flows expected to be
generated by 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, the S&T Loan Agreement
expires September 30, 2003. If currently available funds and cash generated by
operations were insufficient to satisfy the Company's ongoing cash requirements
or if the Company was unable to renew or replace the current credit facility
after its expiration in September 2003, 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. Any sale of
additional common or convertible equity securities or convertible debt
securities would result in additional dilution to the Company's stockholders.
Risk Factors
Certain matters in this quarterly Report on Form 10-Q, including,
without limitation, certain matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and other sections
of this report 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. Forward-looking statements are typically identified by the
words "believes," "expects," "anticipates," "intends," "estimates," "will" and
similar expressions. In addition, any statements that refer to expectations or
other characterizations of future events or circumstances are forward-looking
statements. 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. 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
the Company to be
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materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Among the factors that
could affect performance are those risks and uncertainties discussed 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, general domestic and
international economic conditions and future incidents of terrorism or other
events that may negatively impact the markets where the Company competes. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
General Economic Conditions. Management attributes the decreases in
Technology Infrastructure and E-Business revenue to a softening of the demand
for technology consulting services due to the downturn in the domestic economy
beginning late in 2000. In addition to the cost of the consulting services,
Technology Infrastructure solutions will frequently recommend or require
significant upgrades in customers' hardware, software and networking equipment,
which has compounded the negative impact of the economic downturn on this
solution area. A number of customers or potential customers have postponed
projects or delayed consideration of new technology initiatives pending
improvement to the domestic economic outlook or their financial results.
Management believes the economic uncertainty will likely negatively impact the
Technology Infrastructure and E-Business Solution Areas for at least the
remainder of 2002. There can be no assurance that the effects of the economic
uncertainty will not worsen or extend beyond 2002, which would negatively impact
the Company's results of operations and financial condition.
World Events. Interactive Media consulting and systems integration
services accounted for approximately 56% of the Company's revenue for the year
ended December 31, 2001 and the six months ended June 30, 2002, respectively,
and 51% and 54%, respectively, of the Company's gross profit for these periods.
Interactive Media projects also represent a substantial majority of the
Company's committed backlog for the remainder of 2002. Interactive Media
services are provided predominantly to customers in the cruise industry.
Following the terrorist attacks which occurred in the United States in September
2001, the cruise industry experienced declines in passenger occupancy and
revenue. To date in 2002, passenger occupancy and revenue have partially
recovered from these declines. However, should the recent events or any future
world events cause further negative economic impact to the cruise industry,
customers may seek to delay or cancel projects. Any such delays or cancellations
could have a negative impact on the Company's future results of operations. Any
events which negatively impact the cruise industry may also negatively impact
the Interactive Media Solution Area's ability to obtain additional future
business. To the extent that any future incidents of terrorism or other events
negatively impact the economy in general or any businesses that are current or
potential Technology Infrastructure, E-Business or Outsourced Services
customers, the Company's future results of operations may also be negatively
impacted.
Supplier Agreement. The Company utilizes end-user component and
computer hardware platforms and configurations developed by On Command for its
interactive television systems integration projects. The Company has developed
software interfaces and modifications for the On Command components and hardware
platforms. The Company believes its application development expertise and the On
Command hardware platform offer cost-effective, flexible solutions with a broad
range of functionality. There can also be no assurance, however, that
competitors will not develop systems and products with superior functionality or
cost advantages over the Company's products and applications. The Company has a
Supplier Agreement with On Command that grants it exclusivity in purchasing
hardware and end-user components for interactive television systems for the
cruise line market. The Supplier Agreement will expire on March 31, 2003. The
Company and On Command are currently negotiating the terms of a new agreement to
replace the existing agreement. The Company expects a new agreement to be
completed prior to the expiration of the current agreement. However, there can
be no assurance that a new agreement will be entered prior to the expiration of
the current agreement, or that any new agreement will be on terms as favorable
to the Company as the current agreement. Failure to complete a new agreement
could necessitate the usage of different hardware components and configurations
for interactive television systems integration projects. The Company's
Interactive Media operations could be negatively impacted if difficulty were to
be experienced in obtaining alternate components, or if any such components were
more costly or did not have similar functionality as the On Command equipment
currently utilized.
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 scheduling, or the addition or conclusion,
of significant consulting or systems integration engagements. 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.
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Historical Net Losses and Accumulated Deficit. The Company sustained
substantial net losses during the years from 1996 through 2000, the first half
of 2001 and the first quarter of 2002. As of June 30, 2002, the Company had a
retained deficit of $45,369,000. Although net income was recognized for the
third and fourth quarters of 2001 and the second quarter of 2002, the Company
anticipates that net losses may be incurred in future periods. There can be no
assurance that the Company 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 is mitigated
somewhat by the Company's current revolving credit facility, which permits
borrowings for general working capital needs. The Company's revolving credit
facility expires September 30, 2003. Failure of the Company to renew its
existing credit facility beyond September 30, 2003 or replace it with another
facility with similar terms may adversely impact the Company's operations in the
future.
Stock Market Requirements. The Company's common stock was delisted from
Nasdaq's National Market as of the opening of business on May 9, 2001. At the
time of the delisting, the common stock was not eligible for listing on Nasdaq's
SmallCap Market. Losing the designation of the common stock as a Nasdaq listed
security reduced the liquidity of the common stock and could limit the Company's
ability to raise equity capital. Quotation of the common stock on the OTC
Bulletin Board commenced on May 9, 2001. Should quotation of the common stock on
the OTC Bulletin Board cease for any reason, the liquidity of the common stock
and the Company's ability to raise equity capital would likely decrease further.
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. Since the delisting of the Company's
common stock from Nasdaq's National Market, trading volume has been further
reduced. 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.
Competitive Market Conditions. The technology consulting industry
remains fragmented with a large number of smaller-sized participants despite a
recent trend toward consolidation in the industry. 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 consulting and systems integration services is new and rapidly
evolving. The types of interactive television 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 may 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.
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 and systems integration operations, development of new markets and
timely installation of systems. The loss of one or more of these individuals
could have an adverse effect on the Company's business and results of
operations. The Company depends on its continued ability to attract and retain
highly skilled and qualified personnel. There can be no assurance that the
Company will be successful in attracting and retaining such personnel.
Decline in Outsourced Services Related to Legacy Technologies. The
Company has experienced a substantial decline in demand for Outsourced Services
resources for projects related to mainframe systems and specialized Hogan IBA
software products for the banking industry. The Company completed its final
Hogan IBA-based project in July
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2001 and does not anticipate further provision of services related to this
legacy technology. In order to preserve its customer relationships that had
primarily utilized customer-managed resources, the Company has transitioned its
remaining Outsourced Services consultants to a broader array of technology,
including services and applications development based on Microsoft, Oracle and
Informix technology. Revenue and gross profit derived from Outsourced Services
declined steadily during 1999, 2000 and the first half of 2001. The decline is
attributable to both industry trends and the Company's marketing focus on
solutions-oriented services over that period. Recently, Outsourced Services have
stabilized, with similar levels of revenue and gross profit realized in the
third and fourth quarters of 2001 and the first and second quarters of 2002.
However, management expects Outsourced Services revenue to be realized over the
full year 2002 will represent a decline from that realized in 2001. There can be
no assurance that the Company will be successful on an ongoing basis in
transitioning its Outsourced Services resources to a broader array of technology
skills, or that any such initiative will result in the realization of revenue
and gross profit from these activities in future periods equal to or greater
than current levels.
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 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 the Company's or
customers' 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 to independently 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 and the ability of key suppliers to develop, refine and introduce high
quality improvements in the functionality and features of their 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 July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations
("SFAS No. 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed annually, or more frequently if impairment indicators arise, for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives, but with no maximum
life. The amortization provisions of SFAS No. 142 were required to be
implemented for any goodwill and intangible assets acquired after June 30, 2001
immediately upon acquisition. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, adoption of the new standards was required as of
the beginning of fiscal years starting after December 15, 2001. The Company
implemented SFAS Nos. 141 and 142 effective as of January 1, 2002. The Company
completed required transition testing as of that date and determined that the
Company's recognized values for customer list and goodwill were not impaired.
The Company also elected to complete the annual testing
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requirement for 2002 as of the beginning of the fiscal year. Information
utilized for transition testing was also utilized for the 2002 annual test with
the same conclusion that the recognized values for customer list and goodwill
were not impaired. Amortization expense of approximately $566,000 had been
recognized in the first six months of 2001 related to goodwill and assembled
workforces recorded in connection with the acquisitions of Allin
Consulting-California, MEGAbase, Inc. and Allin Consulting-Pennsylvania. An
impairment loss recorded in June 2001 reduced recorded balances for goodwill.
Following this, amortization expense related to goodwill and assembled
workforces of approximately $340,000 would have been recorded in 2002 had the
former accounting standards remained in place. Under the new standards,
amortization expense related to these assets is no longer recorded effective
January 1, 2002.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, and Committee on Accounting Procedure Accounting
Research Bulletin No. 51, Consolidated Financial Statements. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company adopted SFAS No. 144 effective January 1,
2002. The Company does not believe SFAS No. 144 will have a significant effect
on its results of operations and financial position.
In December 2001, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 01-6, Accounting by Certain Entities (Including Entities With Trade
Receivables) That Lend to or Finance the Activities of Others ("SOP 01-6"). SOP
01-6 eliminates differences in accounting established by certain
industry-specific Audit and Accounting Guides previously issued by the AICPA
that had primarily related to financial institutions. However, the standards
related to trade receivables included in SOP 06-1 are applicable to the Company.
SOP 01-6 is effective for fiscal years beginning after December 15, 2001 The
Company adopted SOP 01-6 effective January 1, 2002. The Company does not believe
SOP 01-6 will have a significant effect on its results of operations and
financial position as the standards related to trade receivables primarily
specify disclosure requirements.
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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.
-41-
Part II
Item 3. Defaults Upon Senior Securities
To date, the Company has paid all dividends required and legally
permissible under the terms of each of the Certificates of Designation governing
the Company's Series C, D, F and G preferred stock. Significant arrearages of
dividends have accrued on certain of these series, as discussed following,
because dividends accrued to date or for certain periods of time are not
required to be paid until a future date or until redemption of the preferred
stock, if any. Each of the Certificates of Designation 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. The order of liquidation preference of the Company's
outstanding preferred stock, from senior to junior, is Series F, Series G,
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, F and G preferred stock.
As of June 30, 2002, the Company had outstanding 25,000 shares of the
Company's Series C Redeemable Preferred Stock, having a liquidation preference
of $100 per share. Accrued but unpaid dividends on the Series C preferred stock
were approximately $1,482,000 as of June 30, 2002 and approximately $1,520,000
as of August 13, 2002. 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. There is no mandatory
redemption date for the Series C preferred stock; however, the Company may
redeem shares of Series C preferred stock at any time.
As of June 30, 2002, the Company had outstanding 2,750 shares of the
Company's Series D Convertible Redeemable Preferred Stock having a liquidation
preference of $1,000 per share. Series D preferred stock earns dividends at the
rate of 6% of the liquidation value thereof per annum, compounded quarterly if
unpaid. Dividends on Series D preferred stock are payable quarterly in arrears
as of the last day of January, April, July and October, subject to legally
available funds. To date, all required payments of dividends on Series D
preferred stock have been made. Accrued but unpaid dividends on Series D
preferred stock were approximately $28,000 as of June 30, 2002 and approximately
$6,000 as of August 13, 2002. There is no mandatory redemption date for the
Series D preferred stock; however, the Company may redeem shares of Series D
preferred stock after August 13, 2003.
As of June 30, 2002, the Company had outstanding 1,000 shares of the
Company's Series F Convertible Redeemable Preferred Stock having a liquidation
preference of $1,000 per share. Series F preferred stock earns dividends at the
rate of 7% of the liquidation value thereof per annum. Dividends are payable
quarterly in arrears on the 15th of the first month of the following calendar
quarter, subject to legally available funds. Dividends accrued for seven months
during 1999 of approximately $41,000 are not required to be paid prior to
redemption or conversion, if any. Dividends not paid at scheduled dates will
compound quarterly thereafter. To date, all required payments of dividends on
Series F preferred stock have been made. Accrued but unpaid dividends on Series
F preferred stock were approximately $59,000 as of June 30, 2002 and
approximately $49,000 as of August 13, 2002. There is no mandatory redemption
date for the Series F preferred stock; however, the Company may redeem shares of
Series F preferred stock at any time.
As of June 30, 2002, the Company had outstanding 150 shares of the
Company's Series G Convertible Redeemable Preferred Stock having a liquidation
preference of $10,000 per share. Unless redeemed or converted to common stock
sooner, Series G preferred stock earns cumulative quarterly dividends at the
rate of 8% of the liquidation value thereof per annum until December 29, 2005.
Thereafter, the dividend rate will increase to 12% of the liquidation value
until the earlier of the date of any redemption or the date of conversion into
common stock. Dividends are payable quarterly in arrears on the first day of
each calendar quarter, subject to legally available funds. To date, all required
payments of dividends on Series G preferred stock have been made. Accrued but
unpaid dividends on the Series G preferred stock were approximately $30,000 as
of June 30, 2002 and approximately $14,000 as of August 13, 2002.
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There is no mandatory redemption date for the Series G preferred stock; however,
the Company may redeem Series G shares after December 29, 2005.
-43-
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 16 2002.
(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:
Nominee Votes Votes Votes Votes
For Against Abstaining Withheld
Richard W. Talarico 6,559,532 0 0 12,002
Brian K. Blair 6,559,732 0 0 11,802
Anthony L. Bucci 6,559,632 0 0 11,902
William C. Kavan 6,559,832 0 0 11,702
James S. Kelly, Jr. 6,559,832 0 0 11,702
Anthony C. Vickers 6,559,832 0 0 11,702
(2) Ratification of the Board of Directors' selection of
Hill, Barth & King LLC to serve as the independent
public accountants to examine the financial
statements of the Company and its subsidiaries for
the year ending December 31, 2002. Votes cast were
6,562,514 for ratification, 6,100 against
ratification, and 2,920 abstaining.
There were a total of 6,967,339 shares of the Company's
common stock and 150 shares of the Company's Series G
preferred stock (having voting rights equivalent to a total
of 794,250 shares of common stock) eligible to vote at the
Annual Meeting.
(d) Not applicable.
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Item 5. Other Information
On May 16, 2002, the Company's Board of Directors appointed
Richard W. Talarico as President of the Company. Mr. Talarico will also continue
to serve as Chairman of the Board of Directors and Chief Executive Officer of
the Company.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description of Exhibit
4.1 Change in Terms Agreement dated as of July 19, 2002 by and
between Allin Corporation and S&T Bank, a Pennsylvania banking
association
4.2 Letter Agreement dated as of July 24, 2002 by and between Allin
Corporation and S&T Bank, a Pennsylvania banking association
11 Computation of Earnings per Share
99 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K.
On April 5, 2002, Allin Corporation filed with the Securities and
Exchange Commission a Current Report of Form 8-K (date of earliest
event reported - March 29, 2002) to report that the Company had
dismissed Arthur Andersen LLP and engaged Hill, Barth & King LLC as
independent accountants for the fiscal year ending December 31,
2002.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIN CORPORATION
(Registrant)
Date: August 13, 2002 By: /s/ Richard W. Talarico
-------------------------
Richard W. Talarico
Chairman and Chief Executive Officer
Date: August 13, 2002 By: /s/ Dean C. Praskach
----------------------
Dean C. Praskach
Chief Financial Officer and Chief
Accounting Officer
-47-
Allin Corporation
Form 10-Q
June 30, 2002
Exhibit Index
Exhibit
Number Description of Exhibit
4.1 Change in Terms Agreement dated as of July 19, 2002 by and between
Allin Corporation and S&T Bank, a Pennsylvania banking association
4.2 Letter Agreement dated as of July 24, 2002 by and between Allin
Corporation and S&T Bank, a Pennsylvania banking association
11 Computation of Earnings per Share
99 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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