-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TS3azzHHkjd0woPln9v0CTuAO8FK8PqFh39ZWYStaxGTD9uNRDbzsTwGMm3KwmZn iufiCANeESKpIJ6KBjvF5g== 0000950132-96-000602.txt : 19961003 0000950132-96-000602.hdr.sgml : 19961003 ACCESSION NUMBER: 0000950132-96-000602 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19961002 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIN COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001020391 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 251795265 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-10447 FILM NUMBER: 96638479 BUSINESS ADDRESS: STREET 1: 300 GREENTREE COMMONS, STREET 2: 381 MANSFIELD AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15220 MAIL ADDRESS: STREET 1: 300 GREENTREE COMMONS STREET 2: 381 MANSFIELD AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15220 S-1/A 1 AMENDMENT #1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996 REGISTRATION NO. 333-10447 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ ALLIN COMMUNICATIONS CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 7389 25-1795265 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code Number) organization) 300 GREENTREE COMMONS 381 MANSFIELD AVENUE PITTSBURGH, PENNSYLVANIA 15220 (412) 928-8800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------ RICHARD W. TALARICO CHIEF EXECUTIVE OFFICER ALLIN COMMUNICATIONS CORPORATION 300 GREENTREE COMMONS 381 MANSFIELD AVENUE PITTSBURGH, PENNSYLVANIA 15220 (412) 928-8800 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------ COPIES TO: BRYAN D. ROSENBERGER, ESQ. PETER J. ROMEO, ESQ. ECKERT SEAMANS CHERIN & MELLOTT HOGAN & HARTSON L.L.P. 42ND FLOOR, 600 GRANT STREET 555 13TH STREET, N.W. PITTSBURGH, PA 15219 WASHINGTON, D.C. 20004 (412) 566-6000 (202) 637-5600 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER , 1996 2,000,000 SHARES ALLIN COMMUNICATIONS CORPORATION COMMON STOCK All of the shares of Common Stock, par value $.01 per share ("Common Stock"), offered hereby are being offered by Allin Communications Corporation (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. The Common Stock has been approved for quotation on the NASDAQ Stock Market's National Market under the symbol "ALLN." It is currently estimated that the initial public offering price will be between $14 and $16 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. ----------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 10. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNTS(1) COMPANY(2) - ------------------------------------------------------------------------------ Per Share........................... $ $ $ - ------------------------------------------------------------------------------ Total(3)............................ $ $ $ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities. See "Underwriting." (2) Before deducting estimated expenses of $ payable by the Company. (3) The Company has granted to the Underwriters a 30-day over-allotment option to purchase up to additional shares of Common Stock on the same terms and conditions as set forth above. If all such shares are purchased by the Underwriters, the total Price to Public, Underwriting Discount and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to their right to withdraw, modify, correct and reject orders in whole or in part. It is expected that delivery of the certificates representing the shares of Common Stock will be made against payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia, or in book entry form through the book entry facilities of the Depository Trust Company, on or about , 1996. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. THE DATE OF THIS PROSPECTUS IS , 1996. [GRAPHICS] IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary information is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should carefully consider all of the information in this Prospectus. The Company was formed to act as a holding company for four subsidiaries: SeaVision, Inc., PhotoWave, Inc., SportsWave, Inc. and Kent Consulting Group, Inc. See "Background." Simultaneously with the closing of the Offering, the Company will acquire the sports marketing business of International Sports Marketing, Inc., a Pennsylvania corporation ("ISM"), in exchange for cash and certain future contingent payments (the "ISM Acquisition"), and will change the name of ISM to SportsWave, Inc. Simultaneously with the closing of the Offering, the Company will also acquire the software design and network solutions business of Kent Consulting Group, Inc., a California corporation ("KCG"), in exchange for cash, shares of Common Stock and certain future contingent payments (the "KCG Acquisition"). See "Background--The Acquisitions." Unless the context otherwise requires, all references herein to the "Company" mean Allin Communications Corporation, a Delaware corporation, and its subsidiaries. Unless otherwise indicated, all information in this Prospectus assumes that (i) the over-allotment option granted to the Underwriters will not be exercised, (ii) the price to the public in the Offering will be $15.00 per share, the mid-point of the range set forth on the cover of this Prospectus, and (iii) prior to closing of the Offering, a 2,400:1 split of the Common Stock will occur. THE COMPANY Allin Communications Corporation (the "Company") provides customized interactive television ("ITV"), digital imaging and other communications and media services to users in the travel and leisure, sports marketing and promotion and other industries. These services are provided principally through the use of the Company's proprietary interactive communications platform which was created to run on the Microsoft Windows NT operating system. The platform includes a multimedia digital file server and Windows-based software applications, and features high resolution and animated graphics, compressed full motion video, superior quality audio and flexible input capacity. Unlike many other ITV platforms, the Company's platform features rapid response and real time interfacing with a variety of third party systems permitting the immediate execution and confirmation of transactions. The platform, which received an applications development award from Microsoft in 1995, can provide its media and imaging services over a variety of network architectures, including the Internet, telephone and cable television systems, and other public and private communications networks. The Company maintains a constant focus on creating ITV design features that emphasize ease of use and eye- catching graphics. THE INTERACTIVE TELEVISION SYSTEM The Company's ITV system offers customers a variety of interactive services through 18 separate system modules. Among the pay services that can be offered are video-on-demand, music-on-demand, shopping, games of chance, event ticketing and customized photographs using digital imaging technology. Free-to- user services include informational messages, account review and room service. While free services do not currently provide revenue, they enhance the usefulness of the system, afford the Company a competitive advantage in marketing its system, attract users to other services offered on the Company's system and provide potential sources of additional revenue from sponsorship of various services by advertisers and from transaction fees. The ITV system can also serve as a response-based marketing vehicle that can target specific audiences for potential advertisers and can make available to service providers a variety of other services, including activity reports and market research. The Company's ITV system permits a user to access the transactional and other services offered on the system by using a handheld television remote control to make selections from easy-to-use menus on a television 3 screen that may be located in a user's cruise ship cabin, hotel room or other individual station, or in a centrally located kiosk. Users can limit access to various pay services by utilizing lock out codes and password procedures. The system currently operates in six languages: English, Spanish, French, Italian, German and Portuguese. MARKETS AND APPLICATIONS Revenue from the domestic ITV service and advertising market increased from approximately $252 million in 1992 to $866 million in 1995. This revenue resulted primarily from the delivery of a limited number of interactive services, predominantly on-demand movies. The market for ITV services and advertising is projected to increase to $1 billion by 1997 and to $8 billion by 2001, driven by growth in the delivery of multiple interactive services, including on-demand movies, full-motion video-on-demand, games, educational products and transactional services. The Company believes that it is one of the first to market a fully operational ITV system which is capable of providing multiple interactive services. While the Company's ITV service and advertising market share is currently insubstantial, the Company believes that the capabilities of its ITV system, the existing contracts for the installation and operation of its ITV system and the proceeds to be realized from the Offering position the Company to participate in the projected growth in the market for ITV services and advertising. The Company initially marketed its ITV system to the travel and leisure industry, principally the international cruise ship industry, which the Company believes provides a substantial market opportunity for its ITV system and related services. Through its wholly owned subsidiary, SeaVision, Inc. ("SeaVision"), the Company has installed and operates its ITV system on three cruise ships operated by Celebrity Cruises Inc. ("Celebrity"), Carnival Cruise Lines ("Carnival") and Norwegian Cruise Lines ("NCL"), respectively. As of September 30, 1996, SeaVision had entered into contracts to install and operate its system on five additional Celebrity cruise ships, one additional NCL ship and two ships operated by Royal Caribbean Cruise Line ("RCCL"), and Carnival had exercised an option to have the Company's system installed on one additional ship. Based on its historical and projected installation schedules, the Company anticipates completion of six of these installations by December 31, 1996, which will result in the ITV system being operational on nine ships with approximately 8,200 cabins. The Company's contracts with Carnival, NCL and RCCL provide Carnival, NCL and RCCL with the option of having SeaVision install and operate its ITV system on up to eleven, four and two additional cruise ships, respectively, and the Company is currently pursuing negotiations with various other cruise lines to install its system on up to 26 additional vessels. Based on its historical and projected installation schedules, the Company believes that if it obtains firm contracts for 13 additional installations, either through the exercise of cruise line options or through the acquisition of additional contracts, the Company would have its systems installed and operational on 25 ships by December 31, 1997. There can be no assurance, however, that any option will be exercised or that any additional contracts will be acquired or, if additional firm contracts are secured, that unforeseen delays in installation will not occur. SeaVision's in-cabin ITV system provides cruise passengers with a variety of services, including casino video gaming, on-demand pay-per-view movies, shopping, shore excursion ticket purchasing and room service ordering. The system also can be used by passengers to preview and purchase photographs taken by the ship's photographers during their voyage, and to customize photos with special graphic overlays, borders and backgrounds. SeaVision and Eastman Kodak Company ("Kodak") have entered into a market trial agreement for the operation of this service on three ships fitted with SeaVision's ITV system. As of August 1, 1996, SeaVision's ITV system had been utilized on over 366,000 occasions, or an average of 5,000 sessions per week per ship, by passengers on board the three ships currently equipped with the system, resulting in what the Company believes represents a multiple service application of interactive television larger than any in the United States. SeaVision's system can also be utilized for advertising on behalf of retailers, corporate sponsors and other third parties and for gathering data and disseminating information by cruise operators. 4 The Company is actively seeking to market its services in other industries and niche markets in which its technology may afford a competitive advantage. Through SeaVision, the Company has begun to offer different types of services to the cruise industry and is currently providing shipboard systems integration services aboard the Queen Elizabeth 2 ("QE2") operated by Cunard Line Limited ("Cunard") and is also pursuing other shipboard systems integration contracts. SeaVision is also marketing to the hotel and resort industry an ITV system offering guest services that include not only on-demand pay-per-view movies but also other services not typically provided, including high-speed Internet access through the hotel's television system. Through its wholly owned subsidiary, PhotoWave, Inc. ("PhotoWave"), the Company intends to market a turnkey package of digital imaging services to industries dependent on conventional "wet" photography, including the real estate, insurance and commercial photography industries. The Company and District Photo, Inc. ("District Photo"), a major mail order photo finisher, have agreed in principle to certain cooperative arrangements with respect to the Company's digital imaging technology. The Company's wholly owned subsidiary, SportsWave, Inc. ("SportsWave"), intends to use the platform to expand the existing sports marketing capabilities of ISM, which has exclusive worldwide marketing rights with the Major League Baseball Players Alumni Association ("MLBPAA") and significant relationships with former athletes in other professional sports. The Company also intends to continue to operate KCG's software design and network solutions business. STRATEGY To achieve its goal of becoming a leader in the processing and distribution of ITV and digital imaging services, the Company's strategy is (i) to expand its presence in the travel and leisure industry by (a) completing the installation of ITV systems on ships for which the Company has firm contracts, (b) seeking additional commitments from cruise line operators for the installation and operation of ITV systems, (c) adding new applications to its platform to maintain its competitive position within the cruise industry, (d) expanding its shipboard systems integration business and (e) extending the use of its platform to other segments of the travel and leisure industry, including hotels and resorts; (ii) to develop its digital imaging business by marketing, through PhotoWave, digital imaging services to niche markets currently dependent on conventional photography; (iii) to expand the sports marketing business of ISM by marketing, through SportsWave, new applications for the Company's platform directed at promoters of sporting events and corporate sponsors and spectators at such events; (iv) to utilize KCG's technical and creative expertise to further develop the Company's digital platform and to provide third party software design and network solutions; (v) to engage from time to time in acquisitions of businesses and the development of joint venture relationships that offer opportunities to complement or expand the Company's ITV and other capabilities and the marketing of such capabilities; and (vi) to supply specialized software and creative program enhancements to mass market providers of interactive communications and digital imaging services, such as cable television and telephone companies. BACKGROUND The Company was formed in July 1996 to act as a holding company for SeaVision, PhotoWave, SportsWave and KCG. The Company's principal offices are located at 300 Greentree Commons, 381 Mansfield Avenue, Pittsburgh, Pennsylvania 15220, and its telephone number is (412) 928-8800. SEAVISION SeaVision was formed in June 1994 to focus on the development of an interactive digital platform and the installation and operation of interactive television systems in the travel and leisure industry. 5 Henry Posner, Jr. and Thomas D. Wright, who currently own more than ten percent of the outstanding Common Stock, Richard W. Talarico, a director and executive officer of the Company, and James C. Roddey, a director of the Company, were among the founding stockholders of SeaVision and are stockholders of the Company. They are affiliated with The Hawthorne Group, a private investment and management company whose principals have had investments in diversified media and communications businesses, including television and radio broadcasting, cable, outdoor advertising, paging and video production. Certain stockholders of SeaVision and an entity affiliated with such stockholders contributed to SeaVision certain intellectual property rights relating to the technology utilized by SeaVision. In addition, the founders of SeaVision were reimbursed for expenses incurred by them in forming and organizing SeaVision. See "Certain Transactions--Transactions Relating to the Formation and Organization of SeaVision." In August 1996, SeaVision became a subsidiary of the Company by merging into SeaVision Acquisition Corporation, a newly formed subsidiary of the Company which changed its name to SeaVision, Inc. See "Certain Transactions--Transactions Relating to the Formation and Organization of the Company." PHOTOWAVE In August 1996, PhotoWave was formed as a subsidiary of the Company to continue the development and marketing of the Company's digital imaging business. THE ACQUISITIONS Simultaneously with, and conditioned upon, the closing of the Offering, the Company will acquire the sports marketing business of ISM, which has been in operation since 1989 and which will change its name to SportsWave, Inc. following the acquisition, and the software design and network solutions business of KCG, which, including a predecessor business, has been in operation since 1983. ISM and SeaVision have been exploring and continue to explore applications of SeaVision's ITV system and interactive platform for the sports marketing and promotions industry and have cooperated in various sports marketing ventures. Since 1994, KCG has assisted SeaVision with many aspects of the development of its ITV system. The acquisitions of ISM and KCG by the Company present opportunities for these companies to combine their resources, talents and capabilities. ISM Acquisition The ISM Acquisition is being made pursuant to a stock purchase agreement (the "ISM Stock Purchase Agreement") providing for the acquisition by the Company of all of the issued and outstanding shares of capital stock of ISM. The ISM Stock Purchase Agreement provides for the payment of up to $4.8 million by the Company to the ISM stockholders, consisting of $2.4 million in cash at the time of closing of the ISM Acquisition and up to $2.4 million in contingent payments based on the operating income of ISM for the years 1997, 1998 and 1999, calculated as set forth in the ISM Stock Purchase Agreement, and paid pursuant to a formula more fully described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." At the closing of the ISM Acquisition, Henry Posner, Jr., Thomas D. Wright, Richard W. Talarico and James C. Roddey, each a stockholder of ISM as well as a stockholder, officer and/or director of the Company, will receive cash payments in amounts of approximately $1,273,000, $791,000, $48,000 and $120,000, respectively, and will be entitled to receive contingent payments up to the same approximate amounts (not including interest payable on any promissory note delivered in respect of the contingent payments). See "Certain Transactions," "Management" and "Principal Stockholders." 6 KCG Acquisition The KCG Acquisition is being made pursuant to an agreement and plan of merger (the "KCG Merger Agreement") providing for the merger of KCG with and into a wholly owned subsidiary of the Company. The KCG Merger Agreement provides for consideration to Les Kent, the sole stockholder of KCG, of up to $8.0 million, consisting of $2.0 million in cash at the time of closing of the KCG Acquisition, $3.2 million in Common Stock valued at the initial public offering price in the Offering and up to $2.8 million in contingent payments, the amount of which would be based on the operating income of KCG for the years 1997, 1998 and 1999, calculated as set forth in the KCG Merger Agreement, and paid in the manner more fully described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Additionally, certain restricted stock grants totaling $400,000, which will not vest until the third anniversary of the KCG Acquisition, will be made to various employees of KCG. The sole stockholder will have certain registration rights with respect to the shares of Common Stock issued in the merger. See "Certain Transactions--Registration Rights." THE OFFERING Common Stock Offered Hereby(1)............. 2,000,000 shares. Common Stock Currently Outstanding......... 2,400,000 shares. Common Stock to be Outstanding After this Offering(1)(2)....................... 4,884,065 shares. Use of Net Proceeds........................ To repay accrued interest on indebtedness, to acquire ISM and KCG and for capital expenditures. See "Use of Proceeds." NASDAQ Stock Market National Market symbol. "ALLN."
- -------- (1) Excludes 300,000 shares of Common Stock that may be issued pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Includes 213,333 shares to be issued as a portion of the consideration in the KCG Acquisition, 26,666 shares to be issued as restricted stock under the Company's 1996 Stock Plan (the "1996 Stock Plan") in connection with the KCG Acquisition (the "Restricted Grant Shares") and 244,066 shares to be issued in exchange for the extinguishment of certain loans by stockholders (the "Stockholder Loans"), but excludes 203,385 shares issuable on conversion of the Company's Series A Convertible Redeemable Preferred Stock, par value $100 per share (the "Convertible Preferred Stock"), and the remaining 239,334 shares issuable under the 1996 Stock Plan. See "Background--The Acquisitions--KCG Acquisition," "Certain Transactions--Stockholder Loans," "Certain Transactions--Sale of Convertible Preferred Stock" and "Management--1996 Stock Plan." RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Such risks include the Company's limited operating history, history of net losses, accumulated deficit and dependence on its proprietary technology and the risks inherent in development of new products and markets. See "Risk Factors" for a discussion of these and other risks attendant to an investment in the Common Stock. Purchasers of shares of Common Stock in the Offering will also experience immediate and substantial dilution. See "Dilution." 7 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) The historical financial data for each of the periods ended December 31, 1994 and 1995 and June 30, 1996 presented below have been derived from the audited consolidated financial statements of the Company. The pro forma consolidated financial data for each of the periods ended December 31, 1995 and June 30, 1996 have been derived from the unaudited pro forma condensed consolidated financial statements. The summary financial data should be read in conjunction with the Consolidated Financial Statements of the Company, Pro Forma Condensed Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Prospectus. The historical financial data for the interim period ended June 30, 1995 are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of such period. The pro forma consolidated financial data are provided for comparative purposes only and are not necessarily indicative of future results or the results that would be achieved if the transactions reflected therein had occurred at the beginning of the period. The pro forma consolidated statement of operations data and pro forma per share data give effect to (i) the acquisitions of ISM and KCG, (ii) the issuance of the Convertible Preferred Stock and (iii) the Offering and the application of the net proceeds therefrom, as if each had occurred as of January 1, 1995. The pro forma consolidated balance sheet data give effect to the transactions described above as if each had occurred as of June 30, 1996. For all periods presented, SeaVision, Inc. elected to be treated as an S Corporation and, as a result, the taxable loss has been reflected on the federal and state tax returns of the shareholders rather than the corporate returns. The pro forma net loss and pro forma net loss per share do not reflect any tax benefit, due to the uncertainty of realization.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------- ------------------------------ HISTORICAL PRO FORMA HISTORICAL PRO FORMA ------------- AS ADJUSTED --------------- AS ADJUSTED 1994 1995 1995 (2) 1995 1996 1996 (3) ----- ------ ----------- ------ ------- ------------- STATEMENT OF OPERATIONS DATA: Revenue................ $ -- $ 44 $ 6,212 $ -- $ 163 $ 3,287 Operating loss......... (588) (1,799) (3,172) (767) (2,044) (2,772) Interest (income) ex- 24 369 (33) 105 468 4 pense, net............ Net loss............... (612) (2,168) (3,139) (872) (2,512) (2,776) Pro forma net loss per $(0.75) $(0.55) common share (1)...... ========= ========== Weighted average number of common shares out- standing (1).......... 4,985,758 5,087,450 ========= ==========
AS OF JUNE 30, 1996 --------------------------------- PRO FORMA CONSOLIDATED PRO FORMA FOR AS HISTORICAL ACQUISITIONS ADJUSTED ---------- ------------ --------- BALANCE SHEET DATA: Working capital............................ $(4,843) $(6,746) $18,847 Total assets............................... 4,147 11,393 36,986 Total liabilities.......................... 9,437 11,033 7,226 Convertible, redeemable preferred stock.... -- 2,450 2,450(4) Stockholders' equity....................... (5,290) (2,090) 27,310(5)
- -------- [footnotes appear on next page] 8 (1) The weighted average number of shares of Common Stock used to calculate pro forma net loss per common share includes the assumed conversion of the Convertible Preferred Stock. The pro forma net loss available to common stockholders for the year ended December 31, 1995 used to compute pro forma net loss per common share has been increased for the charge related to the conversion of the Convertible Preferred Stock of $551,000 and accretion of $50,000 to stated value of the Convertible Preferred Stock. The charge of $661,000 related to the induced conversion of the Stockholder Loans is nonrecurring and directly attributable to the Offering. Therefore, this charge is not reflected in the pro forma net loss available to common stockholders. (2) Includes (a) elimination of intercompany profit of $253,000 capitalized as software development costs, (b) compensation expense of $134,000 related to the issuance of the Restricted Grant Shares to certain employees of KCG, (c) amortization of intangible assets of $1,764,000, (d) reduction of interest charges on the Stockholder Loans of $369,000 and (e) reduction of tax provision of $57,000. (3) Includes (a) elimination of intercompany profit of $40,000 capitalized as software development costs and $30,000 capitalized as equipment, (b) compensation expense of $66,000 related to the issuance of the Restricted Grant Shares to certain employees of KCG, (c) amortization of intangible assets of $882,000, (d) reduction of interest charges on the Stockholder Loans of $468,000 and (e) reduction of tax provision of $167,000. (4) Conversion of the Convertible Preferred Stock at $12.29 per share will result in a charge to accumulated deficit of $551,000 based upon an assumed public offering price of $15.00 per share. (5) Includes a charge of $661,000 related to the induced conversion of the Stockholder Loans into 244,066 shares of Common Stock (based upon an assumed public offering price of $15.00 per share). 9 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors in evaluating an investment in the Company. Additionally, this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. LIMITED OPERATING HISTORY The Company was not organized until July 1996 and will not, until the Offering is consummated, conduct any operations as a combined entity consisting of the businesses of SeaVision, ISM and KCG. Furthermore, SeaVision has been in operation only since 1994 and has concentrated on developing its digital platform and ITV system and on securing contracts to install and operate the ITV system on cruise ships. To date, SeaVision is operating its ITV system in only three installations, and as a result, revenue generated by the ITV system has not been significant. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although SeaVision, ISM and KCG have had prior relationships, and SeaVision and ISM have certain common owners, there can be no assurance that the Company will be able to integrate the businesses successfully. Because SeaVision has only a limited operating history and the Company has no operating history as a combined entity, there can be no assurance that the Company will succeed in implementing its strategy for development and growth or that it will obtain financial returns sufficient to justify its investment in the markets in which it participates. See "Business--Operating and Growth Strategy." RECENT NET LOSSES AND ACCUMULATED DEFICIT On a pro forma basis, the Company has sustained substantial net losses during the year ended December 31, 1995 and during the six months ended June 30, 1996 and, as of June 30, 1996, had an accumulated deficit of $5.0 million. SeaVision has recognized net losses since inception in 1994 primarily because of the limited revenue generated during its start-up phase, which have also impacted the pro forma net losses noted above. During the start-up phase, the Company has researched, developed and installed the only ITV system presently in use in the cruise industry, and has incurred substantial costs in doing so. The Company anticipates that it will continue to incur losses at least through 1996, and there can be no assurance that it will be able to achieve revenue growth or profitability on an ongoing basis in the future. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS INHERENT IN DEVELOPMENT OF NEW PRODUCTS AND MARKETS The Company's strategy includes developing new applications for its interactive entertainment and information technologies and entering new markets. This strategy presents risks inherent in assessing the value of development opportunities, in committing capital in unproven markets and in integrating and managing new technologies and applications. Within these new markets, the Company will encounter competition from a variety of sources. It is also possible that the Company will experience unexpected delays or setbacks in developing new applications of its technology. There can be no assurance that the Company's new products and applications will generate additional revenue for the Company or that the Company will successfully penetrate these additional markets. See "Business--Operating and Growth Strategy." DEPENDENCE ON PROPRIETARY TECHNOLOGY; ABSENCE OF PATENTS The Company's success is highly dependent upon its proprietary technology. The Company does not have patents on any of its technology and relies on a combination of copyright and trade secret laws and contractual restrictions to protect its technology. It is the Company's policy to require employees, consultants and clients to execute nondisclosure agreements upon commencement of a relationship with the Company, and to limit access 10 to and distribution of its software, documentation and other proprietary information. Nonetheless, it may be possible for third parties to misappropriate the Company's technology and proprietary information or independently to develop similar or superior technology. There can be no assurance that the legal protections afforded to the Company and the measures taken by the Company will be adequate to protect its technology. Any misappropriation of the Company's technology or proprietary information could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that other parties will not assert technology infringement claims against the Company, or that, if asserted, such claims will not prevail. In such event, the Company may be required to engage in protracted and costly litigation, regardless of the merits of such claims; discontinue the use of certain software codes or processes; develop non- infringing technology; or enter into license arrangements with respect to the disputed intellectual property. There can be no assurance that the Company would be able to develop alternative technology or that any necessary licenses would be available or that, if available, such licenses could be obtained on commercially reasonable terms. Responding to and defending against any of these claims could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Technology and Licensing." RISK OF TECHNOLOGICAL OBSOLESCENCE The ability of the Company to maintain a standard of technological competitiveness is a significant factor in the Company's strategy to maintain and expand its customer base, enter new markets and generate revenue. The Company's continued success will depend in part upon its ability to identify promising emerging technologies and to develop, refine and introduce high quality services in a timely manner and on competitive terms. There can be no assurance that future technological advances by direct competitors or other providers will not result in improved equipment or software systems that could adversely affect the Company's business, financial condition and results of operations. See "Business--Competition." NEED FOR MANAGEMENT OF GROWTH The Company's growth strategy will require its management to conduct operations and respond to changes in technology and the market, while substantially expanding operations and personnel. If the Company's management is unable to manage growth effectively, its business, financial condition and results of operations will be materially adversely affected. See "Business-- Operating and Growth Strategy." DEPENDENCE ON KEY PERSONNEL The Company's success is dependent on a number of key management, research and operational personnel for the management of operations, development of new products and timely installation of its systems. The loss of one or more of these individuals could have an adverse effect on the Company's business and results of operations. The Company has in place key person life insurance policies on certain of its key employees. The Company depends on its continued ability to attract and retain highly skilled and qualified personnel and to engage nonemployee consultants. There can be no assurance that the Company will be successful in attracting and retaining such personnel or contracting with such nonemployee consultants. See "Business--Technology and Licensing" and "Management." DEPENDENCE ON CRUISE INDUSTRY AND CONTINUED OPERATION OF CRUISE LINE CUSTOMERS A substantial portion of the Company's revenue is expected to be generated in the near term from its cruise industry operations, thereby making the Company's business dependent upon the cruise industry in general and the continued operations of the Company's current cruise line customers. A significant reduction in the operations of any of these customers could, depending on the extent of the reduction and the ships involved, have a material adverse effect on the Company. See "Business--Travel and Leisure Industry--International Cruise Industry." 11 CRUISE LINES' RIGHTS TO TERMINATE OR BUY OUT CONTRACTS WITH THE COMPANY Each of the Company's ITV system contracts with the cruise lines is subject to renewal by mutual consent of the parties at the expiration of the initial term. A decision by one or more of the cruise lines to discontinue its agreement with the Company at the contractual expiration date could have a material adverse effect on the Company. Under certain circumstances, following termination of the Company's ITV system contract with three of its cruise lines customers, the cruise line will have the right to purchase the hardware installed by the Company and to obtain a nontransferable license to use the software installed by the Company. Additionally, one cruise line will have the right to purchase such hardware and license such software from the Company, for a one-year period following such termination, to enable it to install the Company's system on other ships for an agreed upon aggregate purchase and license price. Any such purchase would eliminate the Company's ability to share in revenue produced by the purchased system. The loss or elimination of the Company's right to share in revenue produced by its systems resulting from any of the foregoing events could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Travel and Leisure Industry--International Cruise Industry--Customer Contracts." DEPENDENCE ON MAJOR LEAGUE SPORTS The Company's sports marketing and promotion business conducted through ISM is dependent on the success and continued popularity of major league sports. Factors which adversely affect major league sports could also adversely affect the Company's business and results of operations. For example, ISM's business was adversely impacted by the players' strike and owners' lockout during the 1994 and 1995 Major League Baseball seasons. There can be no assurance that there will be no strike or other event with a similar adverse impact in the future involving one or more of Major League Baseball, the National Football League, the National Basketball Association or the National Hockey League. See "Business--Sports Marketing Industry." FLUCTUATIONS IN OPERATING RESULTS The Company expects to experience significant fluctuations in its future quarterly operating results that may be caused by many factors, including the seasonal aspects of ISM's business. Accordingly, quarterly revenues and operating results will be difficult to forecast, and the Company believes that period-to-period comparisons of its operating results will not necessarily be meaningful and should not be relied upon as an indication of future performance. See "Management's Discussions and Analysis of Financial Condition and Results of Operations." POTENTIAL IMPACT OF PRIVACY CONCERNS One of the features of the Company's ITV system is the ability to develop and maintain information regarding usage of the system by cruise ship passengers and other parties. The perception by the users of substantial security and privacy concerns, whether or not valid, may cause users to resist providing the personal information that might be useful for demographic purposes and may inhibit market acceptance and usage of the Company's video systems. In the event such concerns are not adequately addressed, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business--Travel and Leisure Industry." COMPETITIVE MARKET CONDITIONS The market for interactive communications and digital imaging is new, rapidly evolving and highly competitive. Many of the Company's current and potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than the Company and therefore may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. There 12 can be no assurance that the Company will be able to compete effectively with current or future competitors or that the competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Operating and Growth Strategy" and "-- Competition." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Certificate of Incorporation and Bylaws contain a number of provisions that could inhibit a change in control of the Company by means of a tender offer, merger, proxy contest or otherwise, including advance notice provisions and provisions that enable the Board of Directors to issue "blank check" preferred stock. These provisions and the future issuance of shares of such preferred stock could adversely impact prevailing market prices for the Common Stock and could result in the Common Stock holders having to forego a transaction in which they may have received a substantial premium for their shares over then-current market prices. See "Description of Capital Stock-- Certain Anti-Takeover Effects of Certificate and Bylaws Provisions." LIMITATIONS ON DIRECTOR LIABILITY; INDEMNIFICATION As permitted by Delaware law, the Certificate of Incorporation of the Company contains provisions eliminating or limiting director liability to the Company and its stockholders for monetary damages arising from acts or omissions in the director's capacity as a director, subject to certain exceptions provided by law. As a result of these provisions, the directors generally will not be liable to the stockholders for negligence or even gross negligence in the performance of their duties as directors. The Certificate of Incorporation and By-Laws of the Company also provide that all directors and officers and certain other persons shall be indemnified to the fullest extent permitted by law in connection with each such person's service to the Company, with certain limited exceptions. See "Description of Capital Stock-- Limitations on Liability and Indemnification of Directors and Officers." ABSENCE OF TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained. The initial offering price for the Common Stock offered hereby will be determined by negotiation between the Company and the representative of the Underwriters and may not be indicative of the market price for the Common Stock after the Offering. After the Offering, the market price of the Common Stock could be subject to significant fluctuations in response to variations in results of operations, changes in earnings estimates by securities analysts, general economic and market conditions and other factors. See "Underwriting." ABSENCE OF DIVIDENDS The Company has not paid any dividends to its stockholders since its inception and does not anticipate paying any dividends on the Common Stock or the Convertible Preferred Stock in the foreseeable future. The Company intends to reinvest earnings, if any, in the development and expansion of its business. See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of the shares of Common Stock in the Offering will experience immediate and substantial dilution in net tangible book value per share of Common Stock from the initial public offering price. See "Dilution." 13 POSSIBLE ADVERSE MARKET IMPACT OF FUTURE SALES OF COMMON STOCK Sales of substantial amounts of Common Stock into the public market following the Offering, or the perception that such sales might occur, could adversely impact prevailing market prices for the Common Stock and the ability of the Company to raise equity capital. A substantial number of shares of Common Stock outstanding or issuable in the future pursuant to existing Company commitments could become eligible for future sale in the public market at varying times following the Offering. Included among these shares are 239,999 shares issuable upon the closing of the KCG Acquisition (including the 26,666 Restricted Grant Shares), 244,066 shares issuable upon the closing of the Offering in exchange for the extinguishment of the Stockholder Loans, the remaining 239,334 shares issuable under the 1996 Stock Plan, and 203,385 shares issuable upon conversion of the Convertible Preferred Stock. Holders of these shares of Common Stock which will be outstanding upon closing of the Offering (other than the Restricted Grant Shares) or issued upon conversion of the Convertible Preferred Stock have agreed or will agree not to sell their shares for twelve months following the closing of the Offering. See "Shares Eligible for Future Sale." GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES The Company is subject, both directly or indirectly, to various laws and governmental regulations relating to its business. As a result of rapid technology growth and other related factors, laws and regulations may be adopted which significantly impact the Company's business. See "Business-- Government Regulation." 14 USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be approximately $ million ($ million if the Underwriters' over- allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds of the Offering as follows: (i) $2.4 million to pay the cash portion of the consideration due at the closing of the ISM Acquisition; (ii) $2.0 million to pay the cash portion of the consideration due at the closing of the KCG Acquisition, (iii) approximately $1.0 million to pay the accrued interest on the Stockholder Loans; and (iv) the remainder (approximately $ if the Underwriters' overallotment option is not exercised) for planned capital expenditures through 1997. Pending such uses, the Company intends to invest the net proceeds in short-term, investment grade, interest- bearing securities. The Stockholder Loans were made during the years 1994, 1995 and 1996 by Henry Posner, Jr., Thomas D. Wright, Terence M. Graunke, James C. Roddey and Richard W. Talarico (the "Funding Stockholders"), stockholders of SeaVision, in the aggregate principal amount of $6.6 million to permit development and operation of SeaVision's business. All of the Funding Stockholders are stockholders, officers and/or directors of the Company. Currently, the principal amount outstanding is $3.0 million. The entire principal amount outstanding at the closing of the Offering will be extinguished at the closing in exchange for 244,066 shares of Common Stock. The accrued interest of approximately $1.0 million will be paid in cash at the closing of the Offering. See "Certain Transactions." DIVIDEND POLICY The Company has no dividend history and presently intends to retain earnings to finance the expansion of its business. Payment of future dividends, if any, on the Common Stock will be at the discretion of the Company's Board of Directors, after taking into account various factors, including the Company's earnings, capital requirements, financial position and other relevant business conditions, and there can be no assurance that dividends will be paid. Dividends on the Convertible Preferred Stock will be paid when and as declared by the Company's Board of Directors. See "Description of Capital Stock--Series A Convertible Redeemable Preferred Stock." The Company currently intends to defer payment of dividends on the Convertible Preferred Stock. 15 DILUTION The pro forma deficit in net tangible book value of the Company at June 30, 1996 was $(6,873,000) or $(2.38) per share of Common Stock, based upon 2,884,065 shares of Common Stock outstanding. Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities of the Company, divided by the number of shares of Common Stock outstanding. After giving effect to the sale of the 2,000,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $15.00 per share and after deduction of estimated underwriting discounts and commissions and offering expenses), the pro forma net tangible book value of the Company at June 30, 1996 would have been $19,527,000 or $4.00 per share. This represents an immediate increase in such net tangible book value of $6.38 per share to existing stockholders and an immediate dilution of $11.00 per share to new investors purchasing the shares in the Offering. Net tangible book value dilution per share represents the difference between the amount per share paid by new investors purchasing shares of Common Stock in the Offering and the pro forma net tangible book value per share of Common Stock immediately after completion of the Offering. The following table illustrates this per share dilution: Assumed public offering price....................................... $15.00 Net tangible book value before the Offering(1)(2).......... $(2.38) Increase attributable to new investors..................... 6.38 Pro forma net tangible book value after the Offering................ 4.00 Dilution to new investors........................................... $11.00 ------
The following table summarizes, on a pro forma basis as of June 30, 1996, the differences between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company, and the average consideration paid per share (based upon an assumed initial public offering price of $15.00 per share and before deduction of estimated underwriting discounts and commissions and offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION ----------------- ------------------- AVERAGE NUMBER PERCENT AMOUNT PERCENT PRICE --------- ------- ----------- ------- ------- Current Stockholders(1)(2)........ 2,884,065 59.1 $ 6,227,000 17.2 $ 2.16 New Investors..................... 2,000,000 40.9 30,000,000 82.8 15.00 --------- ----- ----------- ----- Total........................... 4,884,065 100.0 $36,227,000 100.0 ========= ===== =========== =====
- -------- (1) Includes (i) the effects of the 2,400 to 1 stock split, (ii) 244,066 shares issued in connection with the conversion of the Stockholder Loans, (iii) 213,333 shares issued as a portion of the consideration in the KCG Acquisition and (iv) 26,666 Restricted Grant Shares granted to certain employees of KCG under the 1996 Stock Plan. (2) Does not include (i) 25,000 shares of Convertible Preferred Stock, which are convertible into 203,385 shares of Common Stock six months after the closing of the Offering, and (ii) the remaining 239,334 shares of Common Stock reserved for awards under the 1996 Stock Plan. 16 CAPITALIZATION The following table sets forth, as of June 30, 1996, (a) the Company's actual capitalization, (b) the pro forma capitalization giving effect to the issuance of the Convertible Preferred Stock and the borrowings under the Company's senior revolving credit facility and (c) the pro forma capitalization adjusted to give effect to (i) the Offering, assuming an initial public offering price of $15.00 per share, and (ii) the application by the Company of the estimated net proceeds from the Offering to the Company as described under "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and other information included elsewhere in this Prospectus.
JUNE 30, 1996 (IN THOUSANDS) ------------------- PRO FORMA ACTUAL AS ADJUSTED ------ ----------- Cash and cash equivalents................................ $ 572 $24,470 ====== ======= Senior revolving credit facility......................... 4,850 5,000 Stockholder notes payable................................ 3,000 0 Preferred stock, par value $.01 per share, 100,000 shares authorized, 25,000 shares of Series A Convertible Redeemable Preferred Stock issued and outstanding....... 0 2,450 Stockholders' equity: Common Stock, par value $.01 per share, 20,000,000 shares authorized, 2,400,000 shares issued and outstanding (4,884,065 shares as adjusted) (1)...................... 24 49 Additional paid in capital............................... 3 33,639 Deferred compensation (3)................................ -- (400) Retained deficit......................................... (5,317) (5,978)(2) ------ ------- (5,290) 27,310 ------ ------- Total Capitalization..................................... $2,560 $34,760 ====== =======
- -------- (1) Includes the 26,666 Restricted Grant Shares granted to certain employees of KCG under the 1996 Stock Plan, but does not include the remaining 239,334 shares of Common Stock reserved for issuance under the 1996 Stock Plan, under which options to purchase a total of 198,000 shares at the initial public offering price will be granted upon the effective date of the Offering. See "Management--1996 Stock Plan." (2) Includes charges of $661,000 to be incurred upon the conversion of the Stockholder Loans into 244,066 shares of Common Stock (based upon an assumed public offering price of $15.00 per share). (3) Represents future compensation expense related to the issuance of the Restricted Grant Shares to certain employees of KCG to be incurred ratably over a 36-month period. 17 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) The historical financial data for each of the periods ended December 31, 1994 and 1995 and June 30, 1996 presented below have been derived from the audited consolidated financial statements of the Company. The pro forma consolidated financial data for each of the periods ended December 31, 1995 and June 30, 1996 have been derived from the unaudited pro forma condensed consolidated financial statements. The selected financial data should be read in conjunction with the Consolidated Financial Statements of the Company, Pro Forma Condensed Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Prospectus. The historical financial data for the interim period ended June 30, 1995 are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of such period. The pro forma consolidated financial data are provided for comparative purposes only and are not necessarily indicative of future results or the results that would be achieved if the transactions reflected therein had occurred at the beginning of the period. The pro forma consolidated statement of operations data and pro forma per share data give effect to (i) the acquisitions of ISM and KCG, (ii) the issuance of the Convertible Preferred Stock and (iii) the Offering and the application of the net proceeds therefrom, as if each had occurred as of January 1, 1995. The pro forma consolidated balance sheet data give effect to the transactions described above as if each had occurred as of June 30, 1996. For all periods presented, SeaVision, Inc. elected to be treated as an S Corporation and, as a result, the taxable loss has been reflected on the federal and state tax returns of the shareholders rather than the corporate returns. The pro forma net loss and pro forma net loss per share do not reflect any tax benefit, due to the uncertainty of realization.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA -------------- AS ADJUSTED -------------- AS ADJUSTED 1994 1995 1995 (2) 1995 1996 1996 (3) ----- ------- ----------- ----- ------- ----------- STATEMENT OF OPERATIONS DATA: Revenue................. $ -- $ 44 $ 6,212 $ -- $ 163 $ 3,287 Cost of sales........... -- 10 3,408 -- 40 1,828 ----- ------- --------- ----- ------- --------- Gross profit............ -- 34 2,804 -- 123 1,459 Depreciation & amortiza- 6 288 2,130 70 350 1,298 tion................... Selling, general & ad- 582 1,545 3,846 697 1,817 2,933 ministrative........... ----- ------- --------- ----- ------- --------- Operating loss.......... (588) (1,799) (3,172) (767) (2,044) (2,772) Interest (income) ex- 24 369 (33) 105 468 4 pense, net............. ----- ------- --------- ----- ------- --------- Net loss................ $(612) $(2,168) (3,139) $(872) $(2,512) (2,776) ===== ======= ===== ======= Premium on conversion of preferred stock........ (601) -- --------- --------- Pro forma net loss available to common stockholders (1)....... $(3,740) $(2,776) ========= ========= Pro forma net loss per $ (0.75) $ (0.55) common share (1)....... ========= ========= Weighted average number of common shares out- standing (1)........... 4,985,758 5,087,450 ========= =========
18
AS OF DECEMBER 31, AS OF JUNE 30, 1996 -------------------- ----------------------------------- HISTORICAL PRO FORMA -------------------- CONSOLIDATED FOR PRO FORMA 1994 1995 HISTORICAL ACQUISITIONS AS ADJUSTED --------- ---------- ---------- ------------ ----------- BALANCE SHEET DATA: Working capital....... $ 57 $(1,493) $(4,843) $(6,746) $18,847 Total assets.......... 146 2,353 4,147 11,393 36,986 Total liabilities..... 756 5,130 9,437 11,033 7,226 Convertible, redeemable preferred stock................ -- -- -- 2,450 2,450(4) Stockholders' equity.. (610) (2,777) (5,290) (2,090) 27,310(5)
- -------- (1) The weighted average number of shares of Common Stock used to calculate pro forma net loss per common share includes the assumed conversion of the Convertible Preferred Stock. The pro forma net loss available to common stockholders for the year ended December 31, 1995 used to compute pro forma net loss per common share has been increased for the charge related to the conversion of the Convertible Preferred Stock of $551,000 and accretion of $50,000 to stated value of the Convertible Preferred Stock. The charge of $661,000 related to the induced conversion of the Stockholder Loans is nonrecurring and directly attributable to the Offering. Therefore, this charge is not reflected in the pro forma net loss available to common stockholders. (2) Includes (a) elimination of intercompany profit of $253,000 capitalized as software development costs, (b) compensation expense of $134,000 related to the issuance of the Restricted Grant Shares to certain employees of KCG, (c) amortization of intangible assets of $1,764,000, (d) reduction of interest charges on the Stockholder Loans of $369,000 and (e) reduction of tax provision of $57,000. (3) Includes (a) elimination of intercompany profit of $40,000 capitalized as software development costs and $30,000 capitalized as equipment, (b) compensation expense of $66,000 related to the issuance of the Restricted Grant Shares to certain employees of KCG, (c) amortization of intangible assets of $882,000, (d) reduction of interest charges on the Stockholder Loans of $468,000 and (e) reduction of tax provision of $167,000. (4) Conversion of the Convertible Preferred Stock at $12.29 per share will result in a charge to accumulated deficit of $551,000 based upon an assumed public offering price of $15.00 per share. (5) Includes a charge of $661,000 related to the induced conversion of the Stockholder Loans into 244,066 shares of Common Stock (based upon an assumed public offering price of $15.00 per share). 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the information contained in Selected Financial Data and the Consolidated Financial Statements of the Company and the Financial Statements of ISM and KCG and the other financial information appearing elsewhere in this Prospectus. OVERVIEW The Company was formed in July 1996 to act as a holding company for four subsidiaries: SeaVision, Inc., PhotoWave, Inc., SportsWave, Inc. and Kent Consulting Group, Inc. Each of these subsidiaries will focus on a particular aspect of the Company's business plan. SeaVision was formed in June 1994 and focuses on the travel and leisure industry. Its operations to date have involved the development of an interactive digital platform and the installation and operation of ITV systems in the international cruise industry. In addition, SeaVision is providing shipboard systems integration services under an agreement to install and operate a new television distribution and broadcast system aboard the QE2. It seeks to expand its business in the international cruise industry and to extend the use of its platform to other segments of the travel and leisure industry, including hotels and resorts. See "Business--Travel and Leisure Industry." SeaVision became a subsidiary of the Company in August 1996 through a merger. See "Certain Transactions--Transactions Relating to Formation and Organization of the Company." PhotoWave was formed as a subsidiary of the Company in August 1996 to continue the development and marketing of the Company's digital imaging business. See "Business--Digital Imaging Industry." Concurrently with the closing of this Offering, the Company will acquire all of the capital stock of ISM, and the name of ISM will be changed to SportsWave, Inc. The Company, through SportsWave, will continue to operate ISM's traditional sports marketing business and intends to expand that business by marketing ITV systems to sports arenas and stadiums and applying interactive technology and digital imaging to corporate hospitality and promotions. See "Business--Sports Marketing Industry." Concurrently with the closing of this Offering, through a merger, KCG will become a wholly owned subsidiary of the Company. KCG, which has assisted the Company in the development of the Company's digital platform, will support the further development of the platform and will also continue to provide third party clients with software design and network solutions services. See "Business--Software Design and Network Solutions." The Company's historical results of operations (see "--Historical Results of Operations") reflect the operations of SeaVision since inception. The pro forma results of operations of the Company as a consolidated entity consisting of SeaVision, ISM and KCG for the year ended December 31, 1995 and the six months ended June 30, 1996 are discussed under "--Pro Forma Results of Operations." REVENUE SeaVision SeaVision was organized in June 1994, and until August 1995 its activities were limited to start-up operations, including developing its ITV system, recruiting key operating personnel and procuring contracts for the installation of the system. As a result, revenue generated by SeaVision to date has been limited. The Company currently operates three ITV systems that SeaVision installed on cruise ships in August 1995, December 1995 and July 1996, respectively. SeaVision currently generates revenue primarily through the use by cruise ship passengers of various "passenger pay" modules of the Company's ITV system. SeaVision's revenue 20 from the video wagering module is based upon the aggregate amount of net "drop" or loss by passengers playing video games of chance on SeaVision's system. SeaVision's revenue from video-on-demand consists of its share of the prices paid by passengers to view movies, and it is anticipated that revenue from music-on-demand and video games would be derived in a similar fashion. With respect to SeaVision's shopping module, SeaVision acts as either the retailer earning a markup on the wholesale cost of the goods sold through its ITV system or a distributor earning a portion of the retail price of the goods sold through its ITV system. SeaVision also anticipates generating revenue from the sale of advertising to retailers, corporate sponsors and other third parties. The Company is currently pursuing negotiations with various advertisers, but there can be no assurance that any contract will result from such negotiations. SeaVision has installed the PhotoPlaceSM digital imaging module of its system on one cruise ship. Under that contract, SeaVision is to receive the excess of the amount received by the cruise operator from the sales to passengers through the PhotoPlaceSM module over the operator's historical net revenue from traditional shipboard photography sales. In the digital imaging area, SeaVision is prepared to work with the cruise line photography concessionaire, act as a supplier to a cruise line if it operates this function in-house or provide turnkey photographic concessionaire services to its cruise line clients. In addition, the Company has recently commenced providing shipboard systems integration services under an agreement calling for contract payments to SeaVision of $1.24 million to install and operate a new television distribution and broadcast system aboard Cunard's QE2. The Company anticipates generating additional revenue from systems integration services, including the installation of shipboard media centers. The Company is currently pursuing negotiations with other cruise lines to act as a systems integrator, but there can be no assurance that any contract will result from such negotiations. SeaVision also anticipates generating revenue from the use of its system in the hotel and resort industry. The Company is currently pursuing negotiations with a resort operator to install its system, but there can be no assurance that any contract will result from such negotiations. The Company presently contemplates that contracts it might enter into with hotels and resorts would, like the Company's current cruise line contracts, provide for an arrangement whereby the Company shares with the operator a portion of the revenue from the sale to users of various pay services, as well as a portion of the revenue from the sale of advertising. The Company is also willing to offer other arrangements to cruise operators and hotels and resorts, such as the sale of the system coupled with an operation and maintenance contract. See "Business-- Travel and Leisure Industry." PhotoWave PhotoWave has had no significant operations to date, although the Company has developed digital imaging applications for use in the international cruise industry and is establishing digital imaging pilot sites which will serve to test the market for the services to be offered by PhotoWave to various industry segments. The Company anticipates that PhotoWave will generate revenue from user fees and transaction fees charged to businesses utilizing the Company's package of digital imaging services. See "Business--Digital Imaging Industry." SportsWave ISM currently generates revenue from payments under its contracts for the coordination of various events, including sports-themed premiums, promotions, sales incentives, games, clinics and personal appearances by athletes. The Company anticipates that SportsWave will continue to generate revenue from ISM's traditional sports marketing business. SportsWave also anticipates generating revenue from the installation and operation in sports arenas and stadiums of ITV systems using the Company's digital platform, and the Company has recently commenced marketing its system to these potential customers. In addition, SportsWave anticipates generating revenue from fees charged to corporate sponsors in connection with the mobile media center which the Company and Wolf Coach, Inc., ("Wolf Coach") a developer of truck or trailer mounted satellite communications and production centers, are currently developing. There can be no assurance, however, that such marketing and development efforts will result in the execution of contracts with customers or the generation of revenue for the Company. See "Business--Sports Marketing Industry." 21 KCG KCG currently generates revenue from fees under its contracts for software design and network solutions services. The Company anticipates that KCG will continue to generate revenue from providing such services to third party clients in addition to providing technical and creative support in the further development of the Company's digital platform. See "Business--Software Design and Network Solutions." EXPENSES The expenses associated directly with the revenue described above include (i) the cost of the goods or services provided through the Company's ITV system; (ii) the cost of administering and storing digital images at the Company's site on the Internet in connection with PhotoWave's package of digital imaging services; (iii) the cost of sports marketing events coordinated by SportsWave; (iv) staffing and other direct costs related to mobile media centers; (v) direct labor, costs of materials and travel associated with shipboard system integration contracts; and (vi) compensation costs directly related to KCG's revenue generation. Direct costs associated with the Company's ITV system include a percentage of the revenue generated from the sale of pay-per-view movies which is payable to the movie distributor, the cost of goods sold through the video shopping module and any commissions paid on advertising revenue realized through the system. The costs directly attributable to the sports marketing revenue include event costs, such as leasing a location, costs of promotional items, travel and meal expenses, licensing fees payable to the MLBPAA and appearance fees paid to retired professional athletes. Selling, general and administrative expenses include (i) compensation and related benefits; (ii) selling and marketing costs; (iii) rent; (iv) professional services and general overhead expenses; (v) contract payments made to customers (such as cruise line operators) with whom the Company has contracted to install and operate its ITV system; and (vi) costs incurred in operating the Company's ITV system, such as the cost of transporting supplies to the ship, travel expenses, credit card processing fees and the cost of promotions to increase awareness and usage of the system. Depreciation expense relates primarily to the cost of installation of the Company's ITV system on cruise ships to the extent borne by the Company under a particular contract, which are capitalized when incurred, and the cost of computers and other equipment. Amortization expense relates primarily to other intangible assets including trademarks, licensing fees paid for certain software rights, research and development costs, formation expenses of the Company and its subsidiaries, costs associated with this Offering and portions of the purchase prices of the ISM Acquisition and the KCG Acquisition. HISTORICAL RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS) SIX MONTHS PERIOD ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- ------------------- 1994 1995 1995 1996 ------------ ------------- ----------- ------- (UNAUDITED) Revenue....................... $ -- $ 44 $ -- $ 163 Direct expenses............... -- 10 -- 40 ----------- ------------- ----- ------- Gross profit.................. -- 34 -- 123 Selling, general & administrative................ 582 1,545 697 1,817 Depreciation & amortization... 6 288 70 350 ----------- ------------- ----- ------- Operating loss................ (588) (1,799) (767) (2,044) Interest expense.............. 24 369 105 468 ----------- ------------- ----- ------- Net loss...................... $(612) $(2,168) $(872) $(2,512) =========== ============= ===== =======
22 SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 As of June 30, 1996, SeaVision had installed its ITV system on two cruise ships with an annual passenger capacity of 155,272, based on their itineraries and passenger configurations at that time. SeaVision did not complete installation of its first system on a ship until August 1995 and thus did not record revenue or direct expenses for the six months ended June 30, 1995. Accordingly, a comparison of revenue and direct expenses for the six-month periods ended June 30, 1995 and June 30, 1996 is not meaningful. Revenue for the six months ended June 30, 1996 was $163,000, including $86,000 for pay-per-view movies and $75,000 for games of chance. Direct costs for the six months ended June 30, 1996 were $40,000 and related primarily to cost of sales for the video-on-demand module. Selling, general and administrative expenses during the six months ended June 30, 1996 increased to $1.8 million from $697,000 for the corresponding period in 1995. This increase is attributable primarily to the costs of additional personnel that were hired as the Company moved from the developmental stage to the implementation stage of its ITV system. Depreciation and amortization expense increased to $350,000 during the six months ended June 30, 1996 as compared to $70,000 in the corresponding period in 1995 because the Company had not completed installation of ITV systems during the earlier period. The Company's operating loss increased to $2.0 million for the six months ended June 30, 1996, from $767,000 for the six months ended June 30, 1995. This increase resulted from the continued growth of SeaVision's staff and operations as SeaVision moved from the developmental stage to the implementation stage of its ITV system. As SeaVision's installed base of ITV systems increases, the Company anticipates revenue growth from the systems will substantially outpace the growth of expenses. Interest expense increased from $105,000 to $468,000 for the periods ended June 30, 1995 and June 30, 1996, respectively. Most of the interest expense was accrued but unpaid during the period, and the increase reflected continued funding of the Company's operating losses by certain of its stockholders in the form of loans, and with respect to the six months ended June 30, 1996, one month of interest expense and guarantee fees relating to the borrowings under its line of credit with Integra Bank (now National City Bank). See "Certain Transactions--Stockholder Loans." The Company sustained a net loss of $2.5 million during the six months ended June 30, 1996, compared to a net loss of $872,000 for the six months ended June 30, 1995, as a result of the increased operating losses and interest expense discussed above. YEAR ENDED DECEMBER 31, 1995 COMPARED TO INCEPTION THROUGH DECEMBER 31, 1994 During the period from inception through December 31, 1994, SeaVision was in the development phase of its first ITV implementation. Because SeaVision did not complete installation of its first system on a ship until August 1995, it did not record revenue or direct expenses for the year ended December 31, 1994. Accordingly, a comparison of revenue and direct expenses for the year ended December 31, 1995 and the period ended December 31, 1994 is not meaningful. Revenue for the year ended December 31, 1995 was $44,000, primarily from pay-per-view movies and games of chance. Direct expenses for the year ended December 31, 1995 were $10,000, primarily representing costs of sales for pay- per-view movies. Selling, general and administrative expenses for the year ended December 31, 1995 increased to $1.5 million from $582,000 during the period ended December 31, 1994 as a result of additions to the staff and increased travel and other expenses as SeaVision entered the implementation phase for its ITV system. Depreciation and amortization expense increased to $288,000 during the year ended December 31, 1995 as compared to $6,000 for the period ended December 31, 1994 because the Company had not completed installation of ITV systems during the earlier period. The Company incurred an operating loss in the amount of $1.8 million for the year ended December 31, 1995, compared to an operating loss of $588,000 during the period ended December 31, 1994. Interest expense increased from $24,000 to $369,000 for the periods ended December 31, 1994 and 1995, respectively. All of the interest expense was accrued but unpaid during the period and the increase reflected continued funding of the 23 Company's operating losses by certain of its stockholders in the form of loans. See "Certain Transactions--Stockholder Loans." The Company sustained a net loss of $2.2 million during the year ended December 31, 1995, compared to a net loss of $612,000 for the period ended December 31, 1994, as a result of the increased operating losses and interest expense discussed above. PRO FORMA RESULTS OF OPERATIONS The following table sets forth certain pro forma consolidated financial data of the Company, expressed as a percentage of total consolidated revenue for the Company, for the year ended December 31, 1995 and the six months ended June 30, 1996, as if the Offering and the ISM Acquisition and the KCG Acquisition had been consummated as of January 1, 1995. The pro forma financial data may not be indicative of the results that would have been achieved if the transactions reflected herein had occurred at the beginning of the period for which the pro forma data is presented or of future results.
PRO FORMA AS ADJUSTED CONSOLIDATED FINANCIAL DATA ---------------------------------------- (UNAUDITED) (IN THOUSANDS) ---------------------------------------- YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ------------------- ------------------- REVENUE SeaVision............................ $ 44 0.7% $ 163 5.0% SportsWave (ISM)..................... 4,878 78.5 1,793 54.5 KCG.................................. 1,995 32.1 1,792 54.5 Less: Intercompany eliminations..... (705) (11.3) (461) (14.0) --------- ------- --------- ------- TOTAL REVENUE......................... 6,212 100.0 3,287 100.0 Direct costs.......................... 3,408 54.9 1,828 55.6 --------- ------- --------- ------- Gross margin.......................... 2,804 45.1 1,459 44.4 Selling, general & administrative..... 3,846 61.9 2,933 89.2 Depreciation & amortization........... 2,130 34.3 1,298 39.5 --------- ------- --------- ------- Operating loss........................ (3,172) (51.1) (2,772) (84.3) Interest income (expense)............. 33 0.5 (4) (.1) --------- ------- --------- ------- Net loss.............................. $(3,139) (50.6)% $(2,776) (84.4)% ========= ======= ========= =======
PRO FORMA RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND THESIX MONTHS ENDED JUNE 30, 1996 On a pro forma consolidated basis, the Company recognizes revenue from three sources: SeaVision's ITV system, sports marketing revenue generated by ISM and software design and network solutions fees generated by KCG. The Company, ISM and KCG have had various business relationships during the periods covered by this discussion. For the purposes of the consolidated pro forma numbers presented above and the following discussion, all such intercompany transactions have been eliminated. Revenue Revenue, net of intercompany eliminations, for the year ended December 31, 1995 totaled $6.2 million, with 0.7% being generated by SeaVision, 78.5% by ISM and 20.8% by KCG. Revenue for the six months ended June 30, 1996 totaled $3.3 million, with 5.0% being generated by SeaVision, 54.5% by ISM and 40.5% by KCG. SeaVision completed the installation of its system on its first ship in August 1995 and on its second ship in December 1995, and therefore reported only $44,000 of revenue for the year ended December 31, 1995 and $163,000 of revenue for the six months ended June 30, 1996. SeaVision completed the installation of its ITV system on its third ship in July 1996 and holds firm contracts for the installation of its system on nine additional 24 ships, six of which it expects to complete by December 31, 1996. Accordingly, SeaVision anticipates a significant increase in revenue from its ITV system as these installations are completed. SeaVision also holds contracts under which cruise lines have the option to request SeaVision to install its system on an aggregate of 17 additional vessels. In addition, SeaVision is pursuing negotiations with various other cruise lines to install its system on up to 26 additional vessels. The Company believes, based on its historical installations and its projections of installations for which it has firm contracts, that, if the Company receives firm contracts for 13 additional installations (either through the exercise of cruise line options or through the execution of additional contracts), the Company could complete such installations and, accordingly, have its ITV system in operation on a total of 25 ships by December 31, 1997. The Company believes that the installations which might result from exercise of the cruise line options and from these negotiations represent a significant market opportunity for the installation and operation of numerous additional systems. There can be no assurance, however, that any option will be exercised or that any additional contracts will result from the current negotiations or, if additional firm contracts are secured, that unforeseen delays in installation will not occur. Subsequent to June 30, 1996, SeaVision has added an Onboard Promotions Manager to its staff, added a blackjack game to its video games of chance module and continues to add content to the video shopping module to broaden the selections available to users. The Company expects that these additions will have a positive impact on the revenue derived from the ships on which the Company's ITV system is installed. In addition, in September 1996, SeaVision entered into its first shipboard systems integration contract pursuant to which it is installing and will operate a new television distribution and broadcast system aboard Cunard's QE2. This contract calls for payments of $1.24 million to the Company. Installation is expected to be completed during November 1996. ISM reported revenue of $4.9 million for the year ended December 31, 1995 and $1.8 million for the six months ended June 30, 1996. Revenue is generated by contract payments as sports-themed events occur. For the year ended December 31, 1995, ISM's revenue was negatively affected because publicity resulting from a 232-day baseball players' strike and owners' lockout between Major League Baseball and its players union caused certain key customers to cancel their promotions with ISM and the MLBPAA. ISM has established relationships with retired pro football, basketball and hockey players to minimize its reliance on any one sport in the future. SportsWave is projecting a decline in revenue for the year ending December 31, 1996 compared to the same period of the prior year because management believes that ISM's traditional customers utilized a substantial portion of their sports marketing budgets on the summer Olympic games held in the United States. Based on firm contracts and discussions with current and past customers, management expects that revenue for ISM for the year ending December 31, 1997 will increase compared to the year ending December 31, 1996. KCG reported revenue of $2.0 million for the year ended December 31, 1995 and $1.8 million for the six months ended June 30, 1996. Revenue for the period ended June 30, 1996 increased 134.3% compared to the same period of the prior year. KCG's software design work on SeaVision's ITV platform was recognized when the platform received an applications development award from Microsoft in 1995. Successful marketing efforts associated with this award plus the addition of a number of new clients were primarily responsible for the substantial increase in revenue recognized during this period. Expenses Direct costs were $3.4 million and $1.8 million for the periods ended December 31, 1995 and June 30, 1996, respectively. SeaVision's direct costs for the year ended December 31, 1995 and the six months ended June 30, 1996 are discussed above under "--Historical Results of Operations." ISM's direct costs were $2.7 million for the year ended December 31, 1995 and $1.1 million for the six months ended June 30, 1996. Gross margin realized by ISM traditionally ranges from 42.5% to 43.8%. Gross margin for the year ended December 31, 1995 was 43.7%. Gross margin for the six months ended June 30, 1996, 25 at 39.2%, was below this range because of the replacement of several higher margin contracts with contracts at lower margin. KCG's direct costs were $989,000 for the year ended December 31, 1995 and $937,000 for the six months ended June 30, 1996. Gross margin for KCG was 50.4% for the year ended December 31, 1995 and 47.7% for the six months ended June 30, 1996. Selling, general and administrative expenses of $3.8 million and $2.9 million for the periods ended December 31, 1995 and June 30, 1996, respectively, were equal to 61.9% and 89.2% expressed as a percentage of total revenue. The increase in selling, general and administrative expenses as a percentage of sales resulted from additions to SeaVision's staff, the seasonal nature of ISM's revenue base and the decline in revenue discussed above. Depreciation and amortization expense for the year ended December 31, 1995 and the six months ended June 30, 1996 were $2.1 million and $1.3 million, respectively. The increases in depreciation and amortization expense have resulted almost entirely from the continued installation of SeaVision's ITV system. The Company realized operating losses of $3.2 million and $2.8 million for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. The operating losses were primarily attributable to losses incurred by the Company relating to the growth of SeaVision's staff and operations and the decrease in ISM's revenue, both of which are described above. Interest income for the year ended December 31, 1995 was $33,000, and interest expense was $4,000 for the period ended June 30, 1996. Interest expense of $369,000 and $468,000 for the periods ended December 31, 1995 and June 30, 1996, respectively, was eliminated because, on a pro forma basis, the obligations on which such interest accrued are treated as having been extinguished in connection with the Offering. The Company incurred net losses of $3.1 million and $2.8 million for the periods ended December 31, 1995 and June 30, 1996, respectively, for the reasons discussed above. Based on scheduled installations for ITV systems by SeaVision, firm contracts for ISM's services and trends in KCG's revenue, management expects that the Company's combined revenue will increase after the acquisition of these entities and as the Company develops. LIQUIDITY AND CAPITAL RESOURCES From its organization in June 1994 through May 31, 1996, the working capital needs of SeaVision were funded through stockholder loans. See "Certain Transactions--Stockholder Loans." On May 31, 1996, SeaVision entered into a line of credit with Integra Bank (now National City Bank). The maximum amount of borrowing allowed under the line of credit is $5 million, all of which was outstanding as of August 1, 1996. The initial funding under the line of credit occurred May 31, 1996 and was in the amount of $4.3 million, $3.6 million of which was used to repay a portion of the principal amount of the Stockholder Loans. The Company may choose between two rates of interest at each funding date, the Prime Rate or the Euro-Rate (as defined in the Line of Credit Note dated May 31, 1996) plus one and one-half percent. The remaining amounts funded under the line of credit have been used as general working capital in the operation of the Company. The line of credit expires on May 31, 1997 and is guaranteed by certain stockholders of the Company. The guarantors are entitled to a guarantee fee from the Company equal to the difference between 15% per annum and the rate which the Company is charged under the terms of the line of credit. On August 16, 1996 the Company issued an aggregate of 25,000 shares of Convertible Preferred Stock to certain stockholders of the Company. The Company intends to use the $2,450,000 net proceeds from the sale of the Convertible Preferred Stock for general working capital purposes. 26 The Company recognized an operating loss for the year ended December 31, 1995, and the Company's business will require substantial capital investment on an ongoing basis to finance its expansion in the travel and leisure industry and for the implementation of its business plans for PhotoWave and SportsWave. Capital expenditures were $1.6 million during the year ended December 31, 1995 and $1.6 million for the six months ended June 30, 1996. The Company expects to incur capital expenditures of approximately $6 million during the full year ended December 31, 1996 and approximately $17 million for the year ending December 31, 1997. The actual amount and timing of the Company's capital expenditures will vary (and such variations could be material) depending primarily upon the number of new contracts for installation of its ITV systems and shipboard systems integration entered into by the Company, the costs of the installations and the rate of implementation of the PhotoWave and SportsWave business plans. The Company may also become obligated to make up to $2.4 million and $2.8 million, respectively, in contingent payments pursuant to the ISM Stock Purchase Agreement and the KCG Merger Agreement. Under the ISM Stock Purchase Agreement, an interim contingent payment must be made in an amount (the "ISM Interim Earn-Out Amount") equal to the amount by which six times the sum of operating income of ISM for 1997 and 1998 divided by three exceeds $2.4 million. A final payment must be made in an amount equal to the amount by which six times the sum of operating income of ISM for 1997, 1998 and 1999 divided by three exceeds the sum of $2.4 million plus the ISM Interim Earn-Out Amount. One-half of such contingent payments, if any, will consist of promissory notes bearing interest at seven percent per annum. In connection with the contingent payments under the KCG Merger Agreement, at the closing of the KCG Acquisition, the sole stockholder of KCG will receive a $2.8 million contingent promissory note (the "KCG Note") of the surviving corporation in the merger. If KCG's average annual operating income for the years 1997, 1998 and 1999 ("Average KCG Operating Income") exceeds $1.862 million, the entire $2.8 million principal amount of the KCG Note will be payable. If the Average KCG Operating Income is less than $1.862 million, the principal amount of the KCG Note will be reduced according to a scale whereby the amount of reduction increases as the Average KCG Operating Income decreases. The entire KCG Note will be cancelled if Average KCG Operating Income is less than or equal to $1.4 million. The principal amount of the KCG Note (as adjusted) plus interest at a rate of 7% per annum on such principal amount (as adjusted) will be payable in two installments, the first of which will be paid 15 days after the date of determination of the Average KCG Operating Income and the second of which will be paid six months after such date of determination. The Company believes that the net proceeds from this Offering, together with available funds and cash flows expected to be generated by operations, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 24 months. If cash generated by operations, together with the net proceeds of the Offering, were insufficient to satisfy the Company's cash requirements, the Company would be required to consider other financing alternatives, such as selling additional equity or debt securities or obtaining long or short-term credit facilities, although no assurance can be given that the Company could obtain such financing. Any sale of additional equity or convertible debt securities would result in additional dilution to the Company's shareholders. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121), was issued in March 1995 and is effective for fiscal years beginning after December 15, 1995. This statement will be applied prospectively and requires that impairment losses on long-lived assets be recognized when the book value of the asset exceeds its expected undiscounted cash flows. The Company adopted SFAS No. 121 on January 1, 1996, and adoption at that time did not have a material impact on the Company's financial position or results of operations. 27 BUSINESS The Company provides customized ITV, digital imaging and other communications and media services to users in the travel and leisure, sports marketing and promotion and other industries. The Company initially marketed its ITV system to the travel and leisure industry, principally international cruise lines, and expects to expand its presence in the cruise industry. The Company anticipates installing ITV systems in hotels and resorts and intends to adapt its system to other industries and niche markets in which its technology may afford a competitive advantage, including the commercial photography and sports marketing and promotion industries. The Company also will operate KCG's software design and network solutions business to support the Company's other businesses and to serve third party clients. OPERATING AND GROWTH STRATEGY The Company's goal is to become a leader in the processing and distribution of interactive television and digital imaging services. To achieve this goal, the Company's strategy is: . To expand the Company's presence in the travel and leisure industry by (i) completing the installation of ITV systems on ships for which the Company has firm contracts, (ii) seeking additional commitments from cruise line operators for the installation and operation of ITV systems, (iii) adding new applications to its platform to maintain its competitive position within the cruise industry, (iv) expanding its shipboard systems integration business and (v) extending the use of its platform to other segments of the travel and leisure industry, including hotels and resorts; . To develop the Company's digital imaging business by marketing, through PhotoWave, a turnkey package of digital imaging services to niche markets currently dependent on conventional photography; . To expand the sports marketing business of ISM by marketing, through SportsWave, new applications for the Company's platform directed at promoters of sporting events and spectators and corporate sponsors at such events; . To utilize KCG's software design and creative expertise to further develop the Company's digital platform and continue KCG's third party software design and network solutions business; . To engage from time to time in acquisitions of businesses and the development of joint venture relationships that offer opportunities to complement or expand the Company's ITV and other capabilities and the marketing of such capabilities; and . To supply specialized software and creative program enhancements to mass market providers of interactive communications and digital imaging services, such as cable television and telephone companies. Expand Presence in the Travel and Leisure Industry The Company intends to expand its presence in the travel and leisure industry through a number of initiatives. In addition to completing the installation of ITV systems in ships for which it has firm contracts, it is seeking additional commitments for the installation and operation of its ITV system on cruise ships. Three of SeaVision's ITV system contracts give the cruise operators the option to have SeaVision's system installed on an aggregate of 17 additional ships. Additionally, during the term of its contract with NCL, the Company has the right to be afforded the opportunity to match any third-party offer that NCL may receive with respect to the provision of on-board ITV and video entertainment services. The Company is currently negotiating with various other cruise lines regarding contracts to install its system on up to 26 additional ships. There can be no assurance, however, that any option will be exercised or that any additional contracts will result from the current negotiations. The Company also intends to continue to develop new applications for SeaVision's ITV system for the purpose of enhancing the system's appeal to cruise operators. For example, the Company, working with Kodak, 28 recently developed a cost-effective digital imaging application that the Company believes will significantly improve the delivery of photography services on cruise ships by providing passengers with the ability to preview, customize and purchase photos on the ITV system. The Company also is seeking to utilize its platform as a media center for various shipboard systems, including the ship's information systems, broadcast studio, print shop and photography department. In addition, the Company has commenced providing shipboard integration services pursuant to a contract under which it is installing and will operate a new television distribution and broadcast system aboard Cunard's QE2 and is pursuing additional contractual arrangements under which the Company would act as a systems integrator for ships that are under construction or being retrofitted. In the hotel market, the Company is currently marketing an ITV system to hotels and resorts that would make available to guests not only on-demand pay- per-view movies, but also other services that most current hotel movie operators do not provide, such as high speed Internet access, e-mail access and direct airline ticketing and rental car reservations. Develop the Digital Imaging Business Through PhotoWave, the Company plans to market a turnkey package of digital imaging services to businesses currently dependent on conventional "wet" photography. The Company's services include a data processing and image archival center that permits storage and transmission of digital images at the Company's site on the Internet and other private networks and feature high-end content and graphics, photo enhancement tools and customized business management reporting tools to support users. The Company and District Photo have agreed in principle to certain cooperative arrangements with respect to the Company's digital imaging technology. The Company believes that its digital imaging applications will make digital imaging technology available on a cost effective basis to users with only minimal training, which may provide the basis for broad acceptance of the Company's services by current users of conventional photography. Expand ISM's Sports Marketing Business Through SportsWave, the Company is adapting its platform to offer interactive services for use in sports arenas and stadiums to enhance the impact of advertising messages. This program envisions equipping arenas and stadiums with interactive capabilities which can be accessed through a handheld device or through terminals located at a patron's seat, in luxury boxes or at central locations, which would enable patrons to retrieve sports data, purchase team logo and other concession items and view advertisements and special offers. The Company also intends to support ISM's core business of corporate hospitality and event promotion by providing innovative digital imaging products to ISM's clients and expanding upon the services currently being offered by ISM. The Company is developing a mobile media center that could be made available to corporate sponsors for promotional purposes and corporate incentives. Among other things, the center could be used to deliver prints of pictures taken with major sports figures and to supply promoters of sporting events with on-site office services, such as copying, information processing and communications. Utilize KCG's Technical and Creative Expertise The Company intends to utilize KCG, which was responsible for much of the software design and programming for the Company's proprietary digital platform, to strengthen the creative and technical foundation for the further development of the platform and its adaptation to new markets. The Company, through KCG, also intends to continue to provide software design and network solutions services to third parties. Acquire Complementary Businesses and Develop Joint Venture Relationships The Company intends to continue to identify businesses which are available for acquisition and which offer opportunities to complement and expand the Company's ITV and other capabilities and the marketing of such capabilities. The Company will also seek to develop joint venture relationships with other businesses in order to further the marketing of the Company's system for existing or additional applications. In addition, if and as new 29 applications for the Company's system are identified, the Company may find it desirable to seek acquisitions of technologies which could enhance the capabilities of its system in respect of such applications. There can be no assurance, however, that the Company will be able to identify suitable and available acquisition or joint venture opportunities or that it will be able to reach agreement with any identified candidate. Supply Specialized Software and Creative Program Enhancements to Mass Market Providers The Company believes that the activities of SeaVision, PhotoWave and SportsWave, as well as the expertise and industry relationships provided by KCG, will provide a basis for establishing relationships with mass market providers of interactive communications and digital imaging services that could lead to the Company becoming a supplier of specialized software to such providers. The Company plans to offer specialized software from the Company's platform, such as software permitting immediate processing of transactions, to these providers for use in other system architectures. The Company also intends to provide creative program enhancements to telephone and cable companies that are developing pilot programs to provide interactive services to households. The Company is pursuing discussions with a telephone company regarding the possible use of the Company's digital file server and software for a mass market ITV trial. TRAVEL AND LEISURE INDUSTRY The Company's initial development and marketing efforts for its ITV system have been directed at the international cruise industry. The Company is seeking additional contracts for the installation and operation of its system on cruise ships and intends to add new applications to its platform for cruise operators. The Company also intends to extend the use of its platform to other segments of the travel and leisure industry, including hotels and resorts. International Cruise Industry Industry Overview. From its inception in 1994, SeaVision identified the cruise industry as an ideal initial market for its interactive communications platform. The cruise industry is the fastest growing segment of the worldwide travel business. An industry trade group, using information as of December 31, 1995, has indicated that approximately 120 cruise ships with a capacity of more than 100,000 berths serve the North American market. The industry has experienced steady and rapid growth, with passenger volume increasing from 500,000 North American passengers in 1970 to 4.4 million passengers in 1995, and expected to reach 7.0 million in 2000. An industry trade group has estimated that the market for the cruise industry will grow to more than $50 billion over the next five years. The increasing popularity of cruise excursions in both the United States and abroad, combined with the high level of customer satisfaction, is expected to foster continued growth in the industry. To meet this anticipated demand, the cruise lines are investing in new ships, with 20 new luxury liners set to enter service from 1997 through 1999. According to an industry trade group, the average cruise passenger in the past five years was approximately 50 years old and had a household income of approximately $63,000. Approximately eleven percent of such cruise passengers had an annual household income of $100,000 or more. The Company believes that it is the only company to date that has successfully operated digital ITV systems on cruise ships. Use of the Company's ITV System in the Cruise Industry. The Company's cruise industry business began in March 1995 with a single contract to install its ITV system on NCL's m/s Dreamward. The Company has now installed its ITV system on two additional cruise ships, one owned and operated by each of Celebrity and Carnival, and provides service to approximately 2,500 cabins. Recently, the Company's contract with Celebrity was expanded to provide for the installation and operation of the Company's system on board the five additional ships in Celebrity's fleet, the Company's contract with NCL was expanded to provide for the installation and operation of the Company's system on board one additional ship in NCL's fleet and the Company entered into a contract with RCCL to provide for the installation and operation of the Company's system on board two ships in RCCL's fleet. In addition, Carnival has exercised an option to have the Company's system installed on its new ship, the m/s Destiny, which will be the largest cruise ship in the world upon its launch scheduled in 1996. 30 Upon completion of these nine additional installations, SeaVision's ITV system will be operational in 12 ships with a total of approximately 10,600 cabins and a total estimated annual passenger carry of approximately 1.0 million. These twelve installations will represent approximately 10% of all existing cruise ships, 21% of total cabins in the industry and 20% of total passenger carry in 1995. Part of the Company's strategy in expanding its presence in the cruise industry involves the development of new features which the Company believes will enhance the value of the system to cruise operators. As a part of this strategy, SeaVision has developed PhotoPlaceSM, an on-board digital photography service which the Company is marketing as a cost-effective alternative to shipboard photography which presently relies on conventional photography. See "--Services for Passengers--Shipboard Photography." SeaVision has also recently begun installation of a new television distribution and broadcast system aboard Cunard's QE2 under SeaVision's first shipboard systems integration contract and is pursuing negotiations for additional systems integration contracts. The Company is also developing a media center which will use the Company's platform to support various shipboard systems. See "-- Services for Cruise Operators." Services for Passengers. The Company's ITV system offers various services to passengers, some of which currently generate revenue to the Company and some of which are currently offered free to passengers. Passenger Pay Services. SeaVision's revenue from its cruise ship operations is derived primarily from fees paid by passengers for in-cabin ITV services. Video Wagering. On cruise ships, the Company's ITV system allows passengers, from their cabins, to play games of chance, presently including video slots, video poker and blackjack, using credits charged to their cabin accounts. The Company's video wagering module provides photo quality, high resolution graphics, unlike video games of chance offered in casinos, but still has the speed of play of casino games. The Company intends to add more modules to the three modules currently available for gaming purposes, including one providing a sports book whereby passengers can place wagers on major sporting events. Video-On-Demand. Through the Company's ITV system, a passenger can choose from a large number of movie selections and individually start the selected film at the passenger's convenience. In contrast to other video-on-demand providers, the Company's system allows on-demand selection and viewing of full motion previews of movies offered on the system. SeaVision is the only company providing the cruise industry with digitally formatted pay-per-view movies from Walt Disney Pictures and Metro-Goldwyn-Mayer. The Company currently offers on-demand movies on a pay-per-view basis at prices established by the Company ranging from $5.95 to $9.95. Shipboard Photography. The Company, working with Kodak, has developed PhotoPlaceSM which offers on-board digital photography services to cruise passengers through a digital imaging system tied to the Company's ITV system. Currently, the on-board photography market is serviced by concessionaires utilizing conventional "wet" photography, which requires the processing and developing of all photographs taken (regardless of the number of photographs sold) and generally limits the passenger's choice of size and number of prints. With PhotoPlaceSM, shipboard photographers using digital cameras take passenger photos and upload the images for viewing on the Company's ITV system. Guests are able to preview, customize and purchase their photographs through their cabin television. The Company believes that this convenience will result in additional sales of photographs. In addition, since photographs are processed in accordance with passenger purchases, there is a substantial reduction in the number of photographs processed. While the per unit cost of processing is higher for digital images than for conventional photographs, the Company believes that the PhotoPlaceSM system will be cost-effective as a result of the reduction in the number of photographs processed. Consequently, the Company believes that PhotoPlaceSM should gain wide acceptance in the travel and leisure industry, and that it could become a significant source of revenue. The Company has installed PhotoPlaceSM on NCL's Dreamward, and will begin installing it on two other ships in the fall of 1996. 31 Management believes that the Company should be able to develop improved capabilities for storing, displaying and distributing digital images. The Company is already actively working on applying its existing digital imaging capabilities elsewhere in the operation of cruise ships, including the printing of crew identification badges and passenger identification cards, the publishing of the ship's daily newspaper in four-color output, the printing of daily menus and television programming guides and the reproduction of on-board promotional materials. There can be no assurance that the Company will be able to apply its existing digital imaging capabilities as anticipated or develop improved digital imaging capabilities as quickly as expected. Shopping. The Company's shopping service provides passengers with the ability to preview and purchase products through their cabin ITV system. The Company acts as either the retailer earning a markup on the wholesale cost of the goods sold or a distributor earning a portion of the retail price of the goods sold. The Company presently offers for sale items from such vendors as Bobby Jones Sportswear, Wenger Swiss Army Brand and The Nature Company. The Company is currently negotiating contracts with a number of other high quality, name-brand manufacturers and retailers and anticipates that revenue from in-cabin shopping will increase as more vendors are added. Additional Passenger Services. The Company's ITV system also includes various services for which the Company does not currently receive direct revenue but which enhance the usefulness of the system to customers, afford the Company a competitive advantage in marketing its system, attract users to other services offered on the Company's system and provide a potential source of additional revenue. The Company anticipates that these services will represent a source of future revenue through the use, for example, of corporate sponsorships of particular modules and transaction fees paid either by the cruise operator or the passenger using the service. Shore Excursion Preview and Ordering. The Company's ITV system includes what the Company believes to be the world's first interactive shore excursion preview and ordering system which features on-demand full-motion videos illustrating the entertainment options available in each port-of-call. The Company's shore excursion system can interface with the ship's excursion inventory control system and also makes available to cruise operators SEROS (Shore Excursion Reservation and Ordering System)(TM), a proprietary inventory control system. This module increases shipboard productivity by reducing the need for staff to market and answer questions about shore tours and by automating the inventory control system and ticket sales. The shore excursion service has been well-received by passengers as evidenced by its extensive usage. As of August 1, 1996, passengers on Celebrity's m/v Century had used it on more than 33,500 occasions, or an average of approximately 1,340 occasions per cruise, and passengers on NCL's m/s Dreamward had used it on more than 54,500 occasions, or an average of approximately 1,185 occasions per cruise. Wine Ordering; Room Service. Through the Company's ITV system, a passenger can review the ship's wine menu, order wine for dinner, pay for it and have it waiting upon arrival in the restaurant. The Company is currently pursuing discussions with advertisers to sponsor a full motion informational interactive video using a sponsor's wines to explain the appropriate wine selections for various meals. A passenger can also order room service through a series of easy-to-use menus, avoiding the need, for example, for ship personnel to collect and process breakfast orders manually. Personal Account Review; Free Television. The Company's ITV system permits a passenger to view the status of his account and also provides access to free television programs on closed-loop channels and through satellite-received cable programming. Other Services Under Development. The Company is developing modules to make other services available to passengers, such as a module that will interface with a ship's Global Positioning System, allowing passengers to follow their itinerary and receive current weather information. 32 Services for Cruise Operators. The Company makes several kinds of services available to cruise operators. Management Information. The Company's digital platform provides various management information services. The system can generate detailed activity reports and reports on usage of the system. Cruise operators can also use the system for various types of surveys, from user satisfaction questionnaires to sophisticated market research. Systems Integration--Media Centers. In September 1996 the Company entered into a contract with Cunard pursuant to which the Company is installing and will operate a new television distribution and broadcast system aboard the QE2, which is currently being retrofitted. Installation is expected to be completed in November 1996. The Company is also pursuing negotiations with other cruise lines to act as the systems integrator for ships that are under construction or being retrofitted. The Company's shipboard media center is being jointly developed with Wolf Coach, a developer of truck or trailer mounted satellite communications and production centers. The integrated shipboard media center would use the Company's digital platform to support various shipboard systems, such as shipboard information systems, the broadcast studio, the print shop and the photography department. The Company believes that no other company has gone beyond integration of components within a department to integrating these shipboard systems. Although the Company anticipates that its media center design and software will be available for installation on cruise ships prior to the end of 1996, there can be no assurance that the Company will be successful with efforts to obtain media center contracts or additional systems integration contracts. Crew Entertainment. To assist in maintaining crew morale, the Company's system offers a product marketed as Backstage PassSM which provides a number of staff entertainment options, including foreign language programming. Advertising and Marketing. The demographic profile of cruise passengers, including their age and high average income, make them desirable to advertisers. Before the Company's ITV system, vehicles to access this audience were limited. The Company's system offers advertisers and merchandisers a broad range of options for reaching this audience including a flexible system able to handle a variety of interactive applications to entertain, inform and gather data; placement of corporate logos on individual interactive screens; sponsorship of free programming; interactive commercials of interest to a particular audience; and special event marketing. Furthermore, the Company's system may be used as a test platform for advertisers interested in obtaining invaluable knowledge and experience with interactive television now, before such systems are generally available ashore. The Company's ITV system allows advertisers and merchandisers to design a wide variety of applications, experiment with them in a number of ways and analyze the results of their efforts. Following installation of the Company's system on all ships for which it currently has firm contracts, the Company's system will be operational on 12 ships having an estimated annual passenger carry of approximately 1.0 million. The Company believes the revenue potential from advertisers and merchandisers to be substantial, and the Company is actively pursuing discussions with advertisers, although the Company has only one advertising contract at the present time. The Company believes that a recent demonstration of its shopping module at a Microsoft-sponsored symposium for on-line merchandising will assist it in attracting advertisers. Customer Contracts. As of September 30, 1996, the Company had entered into contractual arrangements with each of Celebrity, Carnival, NCL and RCCL relating to the installation and operation of the Company's ITV system on board certain of each cruise line's ships, as indicated in the following table: 33
SHIPS ON WHICH SHIPS ON WHICH SHIPS UNDER FIRM CRUISE OPERATOR SYSTEMS ARE IN CONTRACT FOR CAN ELECT TO HAVE CRUISE LINE OPERATION SYSTEM INSTALLATION SYSTEMS INSTALLED - ------------ -------------- -------------------- ------------------ Celebrity................ 1 5 -- Carnival................. 1 1 11 NCL...................... 1 1 4 RCCL..................... -- 2 2 --- --- --- Total.................. 3 9 17
All of the Company's current ITV system contracts with cruise lines involve an arrangement under which the Company installs its ITV system on board and operates the system as a concessionaire, bearing most of the costs of installation and operation. The Company, which retains ownership of the system, shares with the host cruise line a portion of the revenue the system generates from the sale to passengers of various pay services, as well as a portion of the revenue from the sale of advertising to retailers, corporate sponsors and other third parties. Each of the Company's ITV system contracts with the cruise lines is subject to renewal by mutual consent of the parties at the expiration of the initial term. A decision by one or more of the cruise lines to discontinue its agreement with the Company at the contractual expiration date could have a material adverse effect on the Company. Three of the Company's existing ITV system cruise line contracts grant to the cruise line the right, under certain circumstances, following termination of its agreement with the Company, to purchase the hardware installed by the Company on the subject ship and to obtain a nontransferable license to use the software installed by the Company on the subject ship. One contract grants the cruise line the right to purchase such hardware and license such software from the Company, for a one-year period thereafter, to enable the operator to install the Company's system on other ships in its fleet. In September 1996, the Company entered into a shipboard systems integration contract with Cunard providing for the Company to install and operate a television distribution and broadcast system aboard the QE2. This contract calls for payments to the Company of $1.24 million relating to installation of the system and monthly payments for operation of the system. Upon completion of installation, Cunard will obtain title to the system. Hotels and Resorts Industry Overview. In 1995, the lodging market in the United States consisted of over 3.4 million hotel rooms, of which approximately 1.9 million were in hotels containing 100 or more rooms. Guest pay services were introduced in the lodging market in the early 1970's and have since become a standard amenity offered by many hotels to their guests. Virtually all hotels offer free-to-guest services as well. In 1986 certain hotels began offering their guests limited interactive services, and in 1991 on-demand movies became available. Guest pay services are attractive to hotel operators because they provide an additional amenity for their guests, as well as incremental revenue to their establishments. The Company's strategy is to pursue contracts for the installation and operation of its ITV system in hotels and resort properties with more than 100 rooms. Use of the Company's ITV System in the Hotel and Resort Industry. The Company believes that the ITV system which the Company uses in cruise industry applications can be used in essentially its present form to provide digital interactive services to the hotel and resort industry. Given the nature and configuration of the Company's platform, the Company will be able to offer services not generally available to hotels and resorts at the present time, such as in-room Internet access at speeds much faster than the typical home computer and a ticket purchasing system which permits guests to reserve and purchase theater and event tickets on the system. The Company intends to focus its hotel services on the needs of the business traveler and plans to offer airline ticketing and rental car reservations, as well as e-mail access. For resorts, the Company intends to offer video games for children and instructional videos for adults on subjects such as golf and tennis. 34 In addition to the services described above, the Company intends to offer similar entertainment options to hotel and resort guests as it does to cruise passengers, including video-on-demand and shopping, at prices comparable to those charged in the cruise industry. Games of chance cannot be offered in any United States hotel rooms at this time. The Company is also exploring other forms of revenue-generating entertainment. The Company is currently negotiating with a resort operator to install and operate its system. There can be no assurance, however, that these negotiations will result in a firm contract. Advertising and Marketing. The Company's advertising strategy for hotels and resorts will focus on both local advertisers who wish to make guests aware of their presence and large national campaigns that recognize the value of reaching these guests beyond in-room magazines and traditional television commercials. To reach local advertisers in a cost-effective manner, the Company anticipates developing revenue-sharing relationships with other local media such as in-room hotel magazines. Several of such companies have expressed an interest in working with the Company to expand their media offerings. While management believes that such relationships would provide a low-cost stream of revenue for the Company, no definitive arrangements have been entered into, and there can be no assurance that such relationships will materialize. DIGITAL IMAGING INDUSTRY Industry Overview Digital imaging involves the capture of images in or conversion of images to a digital format, the storage of images in a computer and the transmission of the images over electronic networks. Digital imaging equipment such as cameras and scanners has been developed which permits the capture of digital images instantly without the need for film or the chemical development process. The camera records the image on magnetic memory cards which can be removed and inserted in any computer equipped with a standard slot for such cards. Alternatively, digital imaging equipment can be connected directly to computers through standard industry interfaces. Once an image is stored in a computer, software can be used to manipulate and enhance the image in various ways such as changing the size, rotating it or adding color. Use of the Company's Platform in the Digital Imaging Industry Through PhotoWave, the Company intends to market a turnkey package of digital imaging services to commercial markets that currently depend on conventional photography. The Company's digital imaging services, which can be used with minimal training, include storage and transmission of digital images at the Company's site on the Internet and other private networks, high-end content and graphics, photo enhancement tools and customized business management reporting tools. The Company intends initially to market its digital imaging services to real estate, school portrait and insurance companies. These companies are ideal candidates for digital imaging technology because of their need to transmit and store a large number of images. The Company is pursuing discussions with a large photography company to jointly establish an independent dealer network using digital imaging technology and the Company's package of digital imaging storage, retrieval, transmission and processing services. The Company also intends to use PhotoWave's digital imaging applications to support its other businesses, such as sports marketing. See "Sports Marketing Industry-- Corporate Promotion and Hospitality." The Company and District Photo, a major mail order photo finisher, have agreed in principle to cooperative arrangements whereby District Photo would fill third party orders for prints of digital photographs taken by PhotoWave and would scan third party images to be stored on PhotoWave's archive service. The Company also established digital imaging pilot sites in Lisbon, Ohio in May 1996 and in Pittsburgh, Pennsylvania in September 1996 which make the Company's package of digital imaging services available to independent business owners in those areas. The Company believes that these pilot sites will serve as the basis for a program to offer businesses such as local commercial photographers the ability to offer digital imaging services to other local businesses. 35 Potential Commercial Applications The Company intends to commence marketing of digital imaging services in the markets described below. Independent Businesses. The Company's strategic plan includes the aggressive implementation of a digital imaging program to enable independent business owners to offer digital imaging services to businesses within a given geographic territory. These local independent business owners could provide digital imaging services to youth and school athletic programs, promoters of community and civic events and other local businesses for use, for example, for corporate identification badges and restaurant menus. The Company's digital imaging data center would support this network by providing high-end creative and graphic content services through high-speed digital phone circuits over the Internet. The Company has launched digital imaging test sites which would serve as pilots in developing products and services of interest to the local customer base. Real Estate. Photographs play a significant role in the marketing of real estate. It has been estimated that over 50 million photographs were taken in the real estate industry in the United States in 1995. Real estate companies were among the first to use the Internet to disseminate information and photographs to potential customers. However, the existing limited capacity to store such information and images in a standard format and centralized location has limited the expansion of such application. Using its proprietary central file server platform, the Company plans to make available to real estate companies a central hub for data and image storing. Insurance. It has been estimated that over 27 million photographs were taken in the insurance industry in the United States in 1995. Accessible digital imaging would provide the insurance industry with the ability to process claims more efficiently. Digital imaging equipment would enable an insurance adjuster to capture the image at a claim site to determine the extent of the insurance company's obligation to pay the claim. The insurance adjuster could transmit the image on the Company's network and store it on the Company's file server. The claims examiner could then download the image and the accompanying report. School Photographs. School photography represents a major portion of the commercial photography industry. It has been estimated that school photographs of over 46 million students were taken in the United States in 1995. School photography companies must take, archive, store and have ready access to a large number of photographs. Additionally, the product offering is rather narrow and the costs are substantial as photographs must be processed into proofs for customers to view and purchase. A combination of digital imaging and the Company's transmission and storage capabilities would enable the photographer to offer a wider variety of products, enhance or alter images and archive and instantly retrieve images. Customers would also be able to view the images on a high resolution screen, thereby eliminating the need to actually print the photograph in all cases unless the customer decides to purchase it. The Company anticipates offering this service to commercial photographers for an annual membership fee plus additional fees for individual services such as archiving software, storage and image enhancement tools. SPORTS MARKETING INDUSTRY Industry Overview According to the 1996 Sports Almanac, Major League Baseball, the National Football League, the National Basketball Association and the National Hockey League play in approximately 116 arenas and stadiums in the United States. The current seating capacity of such arenas and stadiums has been estimated at approximately 4.5 million, and it has been estimated that as much as $7 billion has been spent or committed over the past three years to construct or renovate 30 major sports facilities in the United States and that such expenditures are likely to increase in the future. The Company believes that the demand for interactive technology in sports venues to 36 enhance the impact of advertising at sporting events will grow substantially in the next decade and will present substantial opportunities for sports marketing services. The Company plans to begin marketing prior to the end of 1996 an ITV system tailored to operate in sports venues. Event marketing, often centering on a sports event, is a growing sector of the worldwide advertising industry. The Company intends to take advantage of this market by continuing the corporate promotion and hospitality business of ISM and by expanding that business through the use of the Company's digital platform in sports marketing applications. ISM's Activities SportsWave was formed to develop and market applications of the Company's digital platform in the sports industry and to operate the existing business of ISM, which is to be acquired by the Company concurrently with the closing of the Offering. ISM, which was formed in 1989, offers a full range of sports marketing and promotion services. The principal focus of ISM's operations has traditionally been in the areas of promotions and premiums, corporate incentive programs, event marketing and licensing. Since 1989, ISM has held a worldwide license with Major League Alumni Marketing, Inc., with certain exclusive rights, to use the name "Major League Baseball Players Alumni Association" ("MLBPAA") and certain related logotypes and trademarks and the name "Major League Alumni Marketing" in connection with certain marketing, merchandising and promotional activities. The MLBPAA is a nonprofit organization, currently comprised of over 3,000 former players, that was founded to, among other things, promote and encourage the sport of baseball and to assist in charitable work. Management believes its relationship with MLBPAA to be good. The activities covered by the Company's license include (i) sponsorships and events with former players, such as tours, exhibition games and autograph and photograph sessions, (ii) creating and supplying products autographed by former players and (iii) corporate and sales incentive programs including fantasy camps and spring training trips. ISM pays royalties for the use of such rights, and, subject to certain limitations, ISM is permitted to sublicense such rights. The Company believes that this license from the MLBPAA is important to its sports marketing and promotion business. The Company's license currently expires on December 31, 1998 and automatically renews for successive two-year terms unless either party gives notice of its election not to renew at least one year prior to expiration of the then-current term. ISM has contracted with numerous corporate clients in the past several years to provide or sublicense former players and baseball memorabilia for varied events. ISM has contracted to provide similar services in 1996 to corporate clients such as American Airlines, MCI Telecommunications Corporation, Nabisco Biscuit Company, Campbell Soup Company and Pennzoil Products Company. The traditional sports marketing aspect of ISM's business has historically been seasonal, with the largest number of events and promotions being staged during the Major League Baseball season. However, ISM also contracts with former professional football, basketball and hockey players to participate in events, promotions and incentive programs for ISM clients, which reduces ISM's reliance on events held during the Major League Baseball season. Potential Commercial Applications Advertising Enhancements at Sporting Events. Arena owners and operators have begun experimenting with new media technology in an effort to enhance advertising at sporting events. An example is the Rose Garden, the home arena of the Portland Trailblazers franchise of the National Basketball Association, which is equipped with acoustic clouds and wired with miles of fiber optic cable capable of delivering advertising and other information instantly to over 750 television monitors throughout the arena. 37 The Company plans to begin marketing prior to the end of 1996 a system which includes a central interactive digital file server which can be accessed through a handheld device or through terminals located at a patron's seat, in luxury boxes or at central locations. Such a system could be configured to permit attendees at sports events to watch instant replays during the game and order team merchandise and other stadium products. The system could also be used for a number of advertising applications, including enhancing ad messages through fan interaction with promotion campaigns seen on scoreboard video screens during the event. The actual services offered would be determined by the arena owner or operator in conjunction with the Company and its clients. The Company does not currently have any contractual arrangement with respect to placement of an interactive system in any sports venue. Corporate Promotion and Hospitality. The existing business of ISM is expected to be a key component in the Company's development of corporate promotion and hospitality programs. In addition to the current services provided by ISM, the Company intends to expand its sports promotion and hospitality offerings by developing new applications of its digital platform, such as the development of a mobile media center. The Company and Wolf Coach are working to use the Company's digital platform as a base to develop such a mobile media center for use at sporting events and by event managers and corporate sponsors. The mobile media center would contain an office suite and a multimedia customer area which could be deployed on behalf of clients to their sports-related hospitality events. The center could be fitted with necessary office services (such as copying, information processing and communications) and a variety of interactive and digital imaging applications tailored to the needs of the client, including quick and economical delivery of prints of pictures taken with a major sports figure for a corporate sponsor's customers and sales personnel. The Company intends to commence marketing of the mobile media center prior to the end of 1996. Currently, no contractual arrangements exist with respect to building a mobile media center. Customer Contracts ISM's business generally results from large contracts relating to a particular event, series of events or promotion. Although a significant portion of ISM's revenue in any particular year is often attributable to a small number of customers, such customers differ from year to year. SOFTWARE DESIGN AND NETWORK SOLUTIONS Industry Overview As information technology has become increasingly complex and important, businesses have used third party specialists to provide various services in the design and implementation of electronic solutions. The worldwide outsourcing market in 1995 has been estimated at over $18 billion, of which more than 40% relates to market segments in which KCG does business, that is, providing services in the development of applications software and solutions for the desktop and distributed environments and networking. An industry analyst has projected that the outsourcing market will increase substantially in the next five years and that the market segments in which KCG does business will increase as a percentage of the total outsourcing market. KCG's Activities The Company intends to acquire the existing business of KCG concurrently with the closing of the Offering. The KCG Acquisition is expected to strengthen the technical and creative foundation for the continued evolution of the Company's proprietary digital platform and to enable the Company to provide third party clients with software design and network solutions services. KCG was formed in 1994, but has been operating through a predecessor entity since 1983. KCG provides varied software design and network solutions services to businesses ranging from startup companies to Fortune 500 companies, such as Chevron, Clorox, Intuit, National Semiconductor, Pacific Bell, Pacific Telesis, VISA and Wells Fargo Bank. KCG has also provided software design services to the Company in the development of the 38 proprietary software for the Company's digital platform. KCG is authorized as a Microsoft Solutions Provider Partner and is also authorized as a service provider for Pacific Bell, Lotus, IBM and Novell. KCG's areas of expertise include ITV platforms, Internet applications (including specialization in improving connectivity and access), groupware and e-mail applications, networking products and database applications. Its services include design of system architecture, installation and configuration of software and hardware, custom software development, training, systems management support and trouble- shooting. KCG enables its customers to tie new applications and new technologies into existing information systems quickly and with minimal disruption. It has been on the leading edge in developing structures for multi-site computing to enhance the productivity of travelers, workers in remote and field offices and the growing number of telecommuters. During the year ended December 31, 1995 and the six months ended June 30, 1996, SeaVision accounted for 35% and 26%, respectively, of KCG's revenue. Other significant customers during the year ended December 31, 1995 were Read- Rite Corporation and Watkins-Jonson International which accounted for 15% and 10%, respectively, of KCG's revenue. After the KCG Acquisition, KCG will continue to provide technical and creative support in the further development of the Company's digital platform and third party services. Historically, KCG has served customers primarily in the San Francisco Bay area. The Company may seek to expand its operations into other geographic areas in which the Company does business and expects that KCG's software design and network solutions business will benefit from referrals from the Company's other businesses. The Company also expects to benefit from KCG's relationships with major computer software and hardware companies. SUPPLIERS The Company does not manufacture the hardware components it uses, but has one or more sources of supply for all such components. The Company purchases components through purchase orders and does not have long term supply contracts. The Company believes that reasonable alternative sources of supply exist for all components. The Company has entered into agreements with distributors of motion pictures for nontheatrical viewing under which the distributor licenses to the Company the right to make pay-per-view movies available on the Company's ITV system. Payment to the distributor is based on revenue derived from the sale of such movies on the Company's ITV system. The distributor pays the associated royalties to the motion picture studios and other third parties. Although a specific title may be available from a single source, the Company does not anticipate that it will experience difficulty in obtaining these products. The retail offerings of merchandise on the Company's ITV system are made pursuant to various electronic retail sales agreements between the Company and individual vendors. The Company has also entered into a consulting agreement with a third party for the provision of consulting services related to retail marketing and assistance in contracting with vendors for the sale of merchandise on the Company's system. The Company pays such consultant a fixed consulting fee and, after recapturing such fee, a portion of the revenue generated from the sale of merchandise by a vendor introduced to the Company by the consultant or with which the consultant assisted in contracting. The Company presently offers for sale items from such vendors as Bobby Jones Sportswear, Wenger Swiss Army Brand and The Nature Company. The Company is seeking other vendors in order to expand its shopping service; it does not anticipate any difficulty in contracting with vendors to offer and sell retail products on the Company's system. The Company currently plans to offer user-pay video games and music-on- demand on its ITV system; however, it has not entered into any contract with a distributor or other source of supply of the product for such services. Although there can be no assurance, management does not anticipate any difficulty in securing such sources of video games and music-on-demand product. MARKETING AND SALES The Company's marketing and sales efforts are directed toward several distinct groups: customers (such as cruise and hotel operators) that will contract for the installation and operation, or the sale, of the Company's 39 digital platform and ITV system; advertisers and merchandisers who will utilize the ITV system to deliver promotional messages of various kinds to system users; retailers who will sell products on the Company's ITV shopping service; and end users of the system (such as cruise passengers and hotel guests) who utilize pay services that generate revenue for the Company. The Company has a 15 person sales and marketing staff. Three members of this staff currently focus on the travel and leisure industry, ten focus on the Company's sports marketing business and two focus on software design and network solutions. The Company, however, intends to emphasize the marketing of an integrated package of its services in order to provide effective marketing solutions to its clients. The Company also markets its products and services and seeks advertisers and retailers through independent sales agencies. The Company's shipboard representatives also market its services to end users of its ITV system. Responsibilities of the shipboard representative include implementing company-wide programs and policies to enhance revenue from each service offered by the system. The Company may offer price reductions for pay-per-view movies or merchandise, and free credits, prizes and sweepstakes for video gaming. The Company intends to pursue contractual arrangements with national advertisers seeking to reach specific targeted audiences. The Company's ITV system has significant capability to report response and use frequency. COMPETITION The interactive services industry is in the early stages of its development. The Company competes with numerous other companies utilizing various technologies and marketing approaches, and the Company anticipates that additional competition will develop in all of the markets that the Company is targeting. A number of these companies are larger than the Company and have greater financial and other resources. The Company is unable to predict the level of competition that will actually develop and the time frame in which it will develop. In the cruise line market, although cruise operators have received many proposals to develop and install ITV systems, to the Company's knowledge, no system with features comparable to the Company's has been installed on a cruise ship. The Company believes that the architecture of the Company's platform and its adaptation to the cruise environment will be difficult to duplicate and that its successful implementation of its system gives it a competitive advantage. However, there can be no assurance that competitors, some of which may have greater financial resources than the Company, will not enter the field. Two companies are the dominant providers of interactive and cable television services to the lodging industry. These competitors are larger and have greater resources than the Company. There are also a number of small regional providers and a number of potential competitors such as cable companies, telecommunications companies and direct-to-home and direct broadcast satellite companies that could provide in-room entertainment to the lodging industry. Although the Company believes that its ITV system includes features that are not currently available to the lodging industry, there can be no assurance that the Company will be able to penetrate this market. The sports marketing and software design and network solutions services industries are fragmented and highly competitive. A number of the companies and sales agencies that provide such services are larger than the Company and have greater resources, both financial and otherwise. ISM generally competes based on its specialized promotional and event marketing capabilities. The business of ISM could be adversely affected if one or more large competitors decide to directly focus their resources on providing the same services in the same markets as ISM. The digital imaging market is new and rapidly evolving. The Company expects that a highly competitive market will develop and that many of the competitors may have longer operating histories and greater resources than the Company. 40 TECHNOLOGY AND LICENSING In the initial development of its system, the Company acquired a software license from a developer of a hotel ITV system. The Company has made major modifications to its system and its software since that time and now uses only certain communications software from the licensed package. The Company intends to develop communications software which does not make use of the licensed rights. The Company also licenses from a software developer certain of the software utilized in connection with the printing of digital images on cruise ships. The Company has used the services of third party software and graphics designers in the development of its digital platform and ITV system. All proprietary rights to the platform and system belong to the Company. KCG was the principal software designer involved in software development for the platform. While third party graphics designers have been important in developing the visual amenities of the Company's system, if the Company should no longer have access to their services, the Company believes that its in- house personnel are capable of performing these functions or, if necessary, that it will be able to engage third party graphics designers and personnel capable of doing so. See "Risk Factors--Dependence on Key Personnel." The ability of the Company to maintain a standard of technological competitiveness is a significant factor in the Company's strategy to maintain and expand its customer base, enter new markets and generate revenue. There can be no assurance that future technological advances by direct competitors or other providers will not result in improved equipment or software systems that could adversely affect the Company's business. Also, the Company does not have patents on any of its technology and relies on a combination of copyright and trade secret laws and contractual restrictions to protect its technology. There can be no assurance that the legal protections afforded to the Company and the measures taken by it will be adequate to protect its technology. GOVERNMENT REGULATION The Company's ITV system currently offers games of chance to cruise ship passengers while operating in international waters. However, such gaming cannot be offered while the ship is in any United States port and it cannot be offered in any United States hotel room at this time. Such service is discontinued while a cruise ship is in port and will not be offered to hotels. LEGAL PROCEEDINGS The Company from time to time is involved in litigation incidental to the conduct of its business. There are no pending legal proceedings to which the Company or any of its subsidiaries is a party, or to which any of their respective properties is subject. EMPLOYEES As of July 31, 1996, the Company had 57 employees. None of these employees is covered by a collective bargaining agreement. The Company has never experienced a strike or work stoppage and believes its relationship with its employees to be good. PROPERTIES The Company's executive offices are located in leased premises in Pittsburgh, Pennsylvania. The Company also leases premises for the operations of SeaVision in Lisbon, Ohio, for the operations of ISM in Pittsburgh and for the operations of KCG in Oakland, California and sales and marketing offices for SeaVision and ISM in Miami, Florida and New York City, respectively. The Company believes that its properties are adequate for its operations. 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning each of the directors and executive officers of the Company. Ages are given as of August 1, 1996.
NAME AGE POSITION WITH THE COMPANY - ---- --- -------------------------------------- Richard W. Talarico.................. 41 Chairman of the Board and Chief Executive Officer R. Daniel Foreman.................... 33 President and Director Brian K. Blair....................... 34 Chief Operating Officer, Secretary and Director Jon E. VanAmringe.................... 47 Chief Financial Officer and Treasurer William C. Kavan(1)(2)............... 45 Director James C. Roddey(1)................... 63 Director Richard S. Trutanic(1)............... 44 Director
- -------- (1) Member of Compensation Committee. Richard S. Trutanic, who will become a director of the Company after the closing of the Offering, will also serve as a member of the Compensation Committee. (2) Member of Audit Committee. It is contemplated that at least one additional independent director will be appointed to serve on the Audit Committee following the Offering. Richard W. Talarico became Chairman of the Board and Chief Executive Officer of the Company in July 1996. He has served as a director of SeaVision since October 1994 and as Chairman of the Board and Chief Executive Officer of SeaVision since June 1996. Mr. Talarico has served SeaVision in various other capacities, including Vice President of Finance from October 1994 to October 1995, President from October 1995 to June 1996 and Chief Financial Officer, Secretary and Treasurer from October 1994 to June 1996. Since 1991, Mr. Talarico has been a partner in The Hawthorne Group ("THG"), where he has been involved in numerous business ventures and has served in various financial and operating capacities. THG is a private investment and management company which invests through affiliates primarily in media and communications companies. R. Daniel Foreman became a director and President of the Company in July 1996. He has served as a director of SeaVision since October 1994 and as President since June 1996. Mr. Foreman also served as Vice President of Technology of SeaVision from October 1994 to June 1996. Since May 1989, Mr. Foreman has served as Executive Vice President of Blair Haven Entertainment, Inc., which operates under the name Commercial Downlink ("Commercial Downlink"), a company founded to serve the needs of the satellite communications industry, where he has been responsible for technology development and implementation. Since 1992, Mr. Foreman has been Executive Vice President of ComTek Printing & Graphics Inc. ("ComTek"), a commercial printing company. He also serves as President of Digital Media Corp., a company which provides closed-circuit video to racetracks. Since the formation of SeaVision in June 1994, Mr. Foreman has devoted substantially all of his time to its operations. Brian K. Blair became a director, Chief Operating Officer and Secretary of the Company in July 1996. Mr. Blair has served as a director of SeaVision since October 1994. Mr. Blair also served as Vice President of Administration and Operations of SeaVision from October 1994 until June 1996. Since May 1989, Mr. Blair has been President of Commercial Downlink where he is responsible for the day-to-day activity of such company. Mr. Blair also serves as Secretary and Treasurer of Digital Media Corp. Since the formation of SeaVision in June 1994, Mr. Blair has devoted substantially all of his time to its operations. Jon E. VanAmringe joined the Company as Chief Financial Officer and Treasurer in September 1996. From November 1995 until joining the Company, he served as Vice President of MED3000 Group, Inc., a physician practice management company involved in the development and management of integrated health care delivery systems. From 1993 to 1995 he served as Vice President and Chief Financial Officer of Strategic Advisory 42 Group, Inc., a firm involved in providing consulting and management services to physician groups and others in the healthcare industry which later merged into MED3000 Group, Inc., and as President of Strategic Capital Group, a firm which provided financial and management services. Mr. VanAmringe served as Managing Director of Corporate Finance of Mid Atlantic Capital Group from 1989 to 1993 and was employed by Spectrum Control, Inc., a publicly traded electronic component manufacturer, from 1982 to 1989, most recently as Senior Vice President and Chief Financial Officer. William C. Kavan became a director of the Company in July 1996 and has served as a director of SeaVision since October 1994. Since 1980, Mr. Kavan has been president of Berkely-Arm, Inc. ("Berkely"), the largest provider of revenue generating passenger insurance programs for the cruise industry. Berkely serves twenty-five cruise line clients, including Carnival, Costa, Cunard, Epirotiki, NCL, P&O, Princess, Radisson and Royal Caribbean. James C. Roddey became a director of the Company in July 1996 and has served as a director of SeaVision since October 1994. Mr. Roddey served as President of ISM from 1992 to 1996 and currently serves as Chairman and a director of ISM. He has served as Chairman or as President of various other entities affiliated with THG, including President of Star Cable Associates, a cable television operator in various states, since 1991. He served as President of Turner Communications Corporation from 1968 to 1971, and as President of Rollins Communications Corporation from 1971 to 1979. Mr. Roddey currently serves as a Trustee of the University of Pittsburgh. Richard S. Trutanic will become a director of the Company after the closing of the Offering as discussed in "Underwriting." He has been President and Managing Director of The Somerset Group, a financial advisory firm, since 1990 and senior advisor to Friedman, Billings, Ramsey & Co., Inc., an investment banking firm, since 1993. Mr. Trutanic was, from 1985 to 1990, a director and member of the Executive Committee of Telecom U.S.A. (formerly SouthernNet, Inc.), a telecommunications company. He is a Trustee of the New York Life Mainstay Funds and a director of several private companies. COMPENSATION OF DIRECTORS Pursuant to the 1996 Stock Plan, the non-employee directors of the Company will be entitled, following the Offering, to receive at the conclusion of each year of service, an automatic grant of an immediately exercisable option to acquire 5,000 shares of Common Stock at an exercise price per share equal to the closing price of the Common Stock as reported by NASDAQ for the date on which the option is granted. Non-employee directors of the Company will also be entitled to receive $2,500 for each Board of Directors meeting attended and $500 for each separate committee meeting attended on a date on which no full board meeting is held. Directors of the Company who are also employees will not receive additional compensation for attendance at Board and committee meetings, except that all directors will be reimbursed for out-of-pocket expenses in connection with attendance at Board and committee meetings. For additional information concerning the 1996 Stock Plan, see "-- 1996 Stock Plan." COMPENSATION OF EXECUTIVE OFFICERS During the year ended December 31, 1995, Richard W. Talarico, Chief Executive Officer of the Company, was employed by The Hawthorne Group, Inc. ("Hawthorne") which received payments from SeaVision under a consulting agreement. See "Certain Transactions." No separate allocation of the compensation paid to Mr. Talarico by Hawthorne was made for services performed by Mr. Talarico on behalf of SeaVision during 1995. Under employment agreements with the Company, Mr. Talarico, R. Daniel Foreman, President of the Company, and Brian K. Blair, Chief Operating Officer of the Company, will earn salaries of $62,500 each during 1996 and Jon E. VanAmringe, Chief Financial Officer of the Company, will earn a salary of $40,833 during 1996. See "-- Employment Agreements" for additional information regarding these employment arrangements. 43 EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Richard W. Talarico, R. Daniel Foreman, Brian K. Blair and Jon E. VanAmringe. Each such employment agreement contains restrictive covenants prohibiting such officer from competing with the Company for a period of three years after the end of the employment term in the case of Messrs. Talarico, Foreman and Blair, and for a period of two years after the end of the employment term in the case of Mr. VanAmringe. The terms of the employment agreements with Messrs. Talarico, Foreman and Blair commenced as of August 1, 1996 and will continue through December 31, 1999. The term of the employment agreement with Mr. VanAmringe commenced as of September 16, 1996 and will continue through December 31, 1998. The annual salaries as set forth in the employment agreements are $150,000 for each of Messrs. Talarico, Foreman and Blair and $140,000 for Mr. VanAmringe. Pursuant to the employment agreements, options to acquire shares of Common Stock granted to Messrs. Talarico, Foreman, Blair and VanAmringe under the 1996 Stock Plan will, if not already vested, vest on the date of a change in control of the Company, defined as a sale of all or substantially all of the Company's assets, a merger in which the Company is not the surviving corporation or when a person or group, other than the stockholders of SeaVision as of August 1, 1996, owns 50% or more of the outstanding Common Stock. The employment agreements also provide that each of Messrs. Talarico, Foreman, Blair and VanAmringe will be entitled to receive for one year following such person's termination of employment by the Company without cause or contemporaneously with the occurrence of a change in control, semi-monthly severance payments equal to the semi-monthly base salary payment which such person was receiving immediately prior to such termination. Mr. VanAmringe will be entitled to receive such payments for only six months if a termination without cause, other than by change of control, occurs after December 31, 1997. If Mr. VanAmringe voluntarily resigns prior to December 31, 1997, he will be entitled to receive semi-monthly payments equal to the semi-monthly base salary payment he was receiving immediately prior to his resignation for six months or, if earlier, until such time that he begins other full-time employment. 1996 STOCK PLAN Immediately prior to the effectiveness of the Registration Statement of which this Prospectus is a part, the Board of Directors will adopt the 1996 Stock Plan. The 1996 Stock Plan provides for awards of stock options, stock appreciation rights, restricted shares and restricted units to officers and other executive employees of the Company and to consultants and advisors (including non-employee directors) of the Company. An aggregate of 266,000 shares of Common Stock has been reserved for issuance under the 1996 Stock Plan. The 1996 Stock Plan will be administered by the Board of Directors which has broad discretion to determine the individuals entitled to participate in the 1996 Stock Plan and to prescribe conditions (such as the completion of a period of employment with the Company following an award) that must be satisfied before awards vest. Awards under the 1996 Stock Plan may be made in the form of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and options that are non-qualified for federal income tax purposes. Participants in the 1996 Stock Plan may also receive stock appreciation rights ("SARs"), which may be awarded separately from or in tandem with any option granted under the 1996 Stock Plan. In addition, the Board of Directors may, in its discretion, award restricted shares or restricted units under the 1996 Stock Plan. Effective upon the closing of the Offering, the Board of Directors will award options to purchase an aggregate of 198,000 shares of Common Stock at the initial public offering price. Of this amount, Richard W. Talarico and all executive officers as a group will receive options to purchase 21,000 and 77,000 shares, respectively, of Common Stock. There will be a five-year vesting period for grantees who are employees of the Company. All of these options will be non-qualified options for federal income tax purposes. Effective upon the closing of the KCG Acquisition, the Board of Directors will grant 26,666 shares of restricted stock under the 1996 Stock Plan to various employees of KCG. 44 PRINCIPAL STOCKHOLDERS The following table sets forth certain information as to the ownership of Common Stock as of the effective date of the Registration Statement, and after giving effect to the sale of the shares of Common Stock offered hereby by (i) each person who is known to the Company to own beneficially more than five percent of the outstanding shares of Common Stock, (ii) each director and (iii) all executive officers and directors as a group. Except as indicated below, the persons named have sole voting and investment power with respect to all shares shown as being beneficially owned by them.
NUMBER OF SHARES OF COMMON STOCK PERCENT OF BENEFICIALLY OWNED COMMON STOCK -------------------- ----------------- BEFORE AFTER BEFORE AFTER NAME OFFERING OFFERING OFFERING OFFERING - ---- --------- ---------- -------- -------- Henry Posner, Jr. (1)................... 964,800 1,111,240 40.2% 22.7% 500 Greentree Commons 381 Mansfield Avenue Pittsburgh, PA 15220 Thomas D. Wright (1).................... 241,200 277,810 10.1% 5.7% 500 Greentree Commons 381 Mansfield Avenue Pittsburgh, PA 15220 Terence M. Graunke (1).................. 241,200 277,810 10.1% 5.7% 400 West Erie Suite 504 Chicago, IL 60610 Richard W. Talarico (1)................. 80,400 92,603 3.4% 1.9% R. Daniel Foreman....................... 198,000 198,000 8.3% 4.1% Brian K. Blair.......................... 198,000 198,000 8.3% 4.1% William C. Kavan (1).................... 100,800 100,800 4.2% 2.1% James C. Roddey......................... 80,400 92,603 3.4% 1.9% All executive officers and directors as a group (6 persons) (1)................ 657,600 682,006 27.4% 14.0%
- -------- (1) Ownership of shares following the Offering for Messrs. Posner, Wright, Graunke, Talarico and Roddey and for all executive officers and directors as a group include the shares of Common Stock to be issued upon conversion of the Stockholder Loans into Common Stock. See "Certain Transactions-- Stockholder Loans." Ownership of shares for Messrs. Posner, Wright, Talarico, Kavan and Roddey and for all executive officers and directors as a group does not include the shares of Common Stock that may be issued upon conversion of the shares of Convertible Preferred Stock owned by such persons. See "Certain Transactions--Sale of Convertible Preferred Stock." 45 CERTAIN TRANSACTIONS CONSULTING AGREEMENTS SeaVision and Berkely were parties to a Consulting Agreement, entered into in June 1994 and terminated as of June 30, 1996, which required Berkely to provide certain marketing, sales and consulting services to SeaVision, including the design and development of marketing strategies for the cruise ship industry. William C. Kavan, a principal of Berkely, is a director of the Company. The consulting agreement provided for the payment of a consulting fee of $10,000 per month to Berkely, which was reduced to $2,000 per month in January 1996. SeaVision was also obligated to pay $200 per hour for services rendered by certain professional personnel of Berkely. During the fiscal years ended December 31, 1994 and 1995, SeaVision paid $97,229 and $181,228, respectively, and as of June 30, 1996 SeaVision was obligated to pay $12,000, to Berkely under the consulting agreement, including out-of-pocket expenses. SeaVision and Hawthorne were parties to a Consulting Agreement, entered into in June 1994 and terminated as of June 30, 1996, which required Hawthorne to provide SeaVision certain accounting and financial services, including the preparation of financial models and plans, the design and implementation of accounting systems and controls and assistance in acquiring third party financing. Henry Posner, Jr. and Thomas D. Wright, each of whom owns more than ten percent of the outstanding Common Stock, and two of Mr. Posner's sons are shareholders of Hawthorne, and Messrs. Posner and Wright and Richard W. Talarico, a director and executive officer of the Company, and James C. Roddey, a director of the Company, were shareholders of Hawthorne Media Group, Inc. ("HMG"), the original party to the agreement which assigned its rights and obligations thereunder to Hawthorne. The consulting agreement provided for the payment of a consulting fee of $18,000 per month. During the fiscal years ended December 31, 1994 and 1995, SeaVision paid an aggregate of $149,437 and $205,252, respectively, and as of June 30, 1996, SeaVision was obligated to pay $143,138, to Hawthorne and HMG under the consulting agreement, including out-of-pocket expenses. AGREEMENTS WITH COMMERCIAL DOWNLINK AND AFFILIATE SeaVision and Commercial Downlink were parties to an agreement entered into in June 1994 and terminated as of July 31, 1996, which required Commercial Downlink to act as a general contractor for the installation of ITV systems on cruise ships, and to devote its full-time efforts to the business of SeaVision. Brian K. Blair and R. Daniel Foreman, principals of Commercial Downlink, are executive officers and directors of the Company and currently own more than five percent of the outstanding Common Stock. SeaVision reimbursed Commercial Downlink, at cost, for construction services and materials provided in connection with the installation of SeaVision systems on cruise ships. SeaVision also paid Commercial Downlink a monthly management fee. During the fiscal years ended December 31, 1994 and 1995 and the six months ended June 30, 1996, SeaVision paid $147,000, $322,000 and $91,600, respectively, to Commercial Downlink under the consulting agreement in addition to reimbursing Commercial Downlink for construction services and materials provided in connection with the installation of ITV systems on cruise ships. As of August 1, 1996, SeaVision and Commercial Downlink entered into a sublease agreement relating to facilities in Lisbon, Ohio owned by Comtek, a majority owned subsidiary of Commercial Downlink, and including provisions pursuant to which Commercial Downlink will provide certain administrative services for an aggregate monthly payment of $3,700. Such agreement is terminable on 30 days' prior notice by either party. The Company believes that such payments are on terms as favorable to the Company as could be obtained from an unaffiliated party. During the fiscal years ended December 31, 1994 and 1995 and the six months ended June 30, 1996, SeaVision made payments to ComTek in the amounts of approximately $7,000, $25,000 and $40,000, respectively, for commercial printing services. The Company believes that such payments were on terms as favorable to the Company as could have been obtained from an unaffiliated third party. The Company expects to continue to conduct business with ComTek in the future. 46 In 1996, SeaVision made advances in the aggregate amount of $53,730 to Commercial Downlink. These advances have been repaid. TRANSACTIONS RELATING TO FORMATION AND ORGANIZATION OF SEAVISION Brian K. Blair and R. Daniel Foreman (the "Commercial Downlink Shareholders"), Henry Posner, Jr., Thomas D. Wright, Terence M. Graunke, James C. Roddey and Richard W. Talarico (the "Hawthorne Shareholders"), and William C. Kavan, Mark Kottler and David F. Gould (the "Kavan Shareholders") were the founders of SeaVision. Each group of founders received from SeaVision the amount of expenses incurred by it in forming and organizing SeaVision in 1994. The Hawthorne Shareholders received reimbursement of expenses in the amount of $21,437, the Commercial Downlink Shareholders received reimbursement of expenses in the amount of $109,083, and the Kavan Shareholders received reimbursement of expenses in the amount of $17,871. Pursuant to an Assignment of Intellectual Property Rights dated October 3, 1994, Commercial Downlink, Brian K. Blair and R. Daniel Foreman contributed to SeaVision, intellectual property rights relating to the technology utilized by SeaVision. TRANSACTIONS RELATING TO FORMATION AND ORGANIZATION OF THE COMPANY In August 1996, a merger (the "Formation Merger") occurred in which SeaVision, Inc., a Delaware corporation ("Old SeaVision"), merged with and into SeaVision Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Company, with SeaVision Acquisition Corporation surviving the Formation Merger and changing its name to SeaVision, Inc. In the Formation Merger, each share of common stock of Old SeaVision was converted into one share of Common Stock. All shares of Common Stock currently outstanding were issued in the Formation Merger. In connection with the Formation Merger, the holders of shares of Common Stock of the Company were granted certain registration rights. See "--Registration Rights". STOCKHOLDER LOANS In each of fiscal years 1994, 1995 and 1996, the Funding Stockholders made various Stockholder Loans to SeaVision. Each Stockholder Loan, represented by a promissory note which requires the principal amount outstanding under the note to be paid in full on the third anniversary of the date of the note, bears interest at a rate of 15% per annum, compounded quarterly. Stockholder Loans were made in the following aggregate principal amounts: Mr. Posner-- $4,166,014; Mr. Wright--$1,041,506; Mr. Graunke --$718,800; Mr. Roddey-- $347,165; and Mr. Talarico--$347,165. Mr. Graunke owns more than ten percent of the outstanding Common Stock. Stockholder Loans in an aggregate amount up to $1.5 million are guaranteed by each of Brian K. Blair, R. Daniel Foreman and William C. Kavan. Such guarantees are secured by a pledge of the shares of Common Stock owned by Messrs. Blair, Foreman and Kavan. On May 31, 1996, the Company used $3.6 million of the $5.0 million available under its line of credit from Integra Bank (now National City Bank) (the "Integra Loan") to repay a portion of the principal amount of the Stockholder Loans, leaving Stockholder Loans in the following aggregate principal amounts outstanding: Mr. Posner--$1,800,000; Mr. Wright--$450,000; Mr. Graunke-- $450,000; Mr. Roddey--$150,000; and Mr. Talarico $150,000. The Company intends to use approximately $1.0 million of the net proceeds of the Offering to pay the accrued interest on the Stockholder Loans. See "Use of Proceeds." The Funding Stockholders have agreed, contingent upon the completion of the Offering, to convert the remaining principal balance of the Stockholder Loans into shares of Common Stock at a rate of approximately 8.1 shares of Common Stock for each $100 principal amount outstanding, or approximately $12.29 per share. The conversion rate was determined after consultation with the Underwriters and is based upon an assumed value of the Company without giving effect to the Offering. Cash payments will be made in lieu of the issuance of fractional shares of Common Stock upon such conversion. The Funding Stockholders will receive the following number of shares of Common Stock upon conversion of the Stockholder Loans: Mr. Posner--146,440 shares; Mr. Wright-- 36,610 shares; Mr. Graunke--36,610 shares; Mr. Roddey--12,203 shares and Mr. Talarico--12,203 shares. The holders of these shares will have certain registration rights with respect to these shares. See "--Registration Rights." 47 On July 19, 1996, William C. Kavan made a loan in the amount of $1.0 million to SeaVision at the interest rate of 8% per annum. Such loan was converted into 10,000 shares of Convertible Preferred Stock following the Formation Merger. INTEGRA LOAN GUARANTEE The Integra Loan was personally guaranteed by each of Messrs. Posner, Wright, Roddey and Talarico and by Lyndhurst Associates, a Pennsylvania limited partnership ("Lyndhurst"), for which such guarantors receive a guarantee fee from time to time based on a percentage of the outstanding principal balance of the Integra Loan. Such percentage is the difference between 15%, the interest rate on the Stockholder Loans, and the interest rate on the Integra Loan. Mr. Posner is the Managing General Partner of Lyndhurst. LEGAL SERVICES During each of the fiscal years ended December 31, 1995 and 1994, SeaVision retained the law firm of Eckert Seamans Cherin & Mellott ("Eckert Seamans") to represent SeaVision on various matters. During each of the fiscal years ended December 31, 1995, 1994 and 1993, ISM retained Eckert Seamans to represent ISM on various matters. Thomas D. Wright is a partner and chairman of the Operations Committee of Eckert Seamans. SALE OF CONVERTIBLE PREFERRED STOCK On August 16, 1996, the Company issued 10,000 shares of Convertible Preferred Stock to William C. Kavan in exchange for the extinguishment of a $1.0 million loan to SeaVision. Additionally, on August 16, 1996, the Company sold approximately 7,059, 1,765, 588 and 588 shares of Convertible Preferred Stock to Henry Posner, Jr., Thomas D. Wright, Richard W. Talarico and James C. Roddey, respectively, for an aggregate purchase price of $1.0 million. During the seven-month period beginning six months after the closing of the Offering (the "Conversion Period"), each holder of Convertible Preferred Stock will have the right to convert all, but not less than all, of the Convertible Preferred Stock then owned by such holder into shares of Common Stock at the rate of approximately 8.1 shares of Common Stock for each share of Convertible Preferred Stock, or approximately $12.29 per share (as adjusted for stock dividends, stock splits, reverse stock splits and any other stock combination or division). Cash payments will be made in lieu of the issuance of any fractional shares of Common Stock upon any such conversion. If all of the shares of Convertible Preferred Stock held by Messrs. Posner, Wright, Talarico, Roddey and Kavan are converted into Common Stock during the Conversion Period, Messrs. Posner, Wright, Talarico, Roddey and Kavan will receive 57,427, 14,365, 4,785, 4,785 and 81,355 shares, respectively, of Common Stock. See "Description of Capital Stock--Series A Convertible Redeemable Preferred Stock." The holders of these shares will have certain registration rights with respect to these shares. See "-- Registration Rights." REGISTRATION RIGHTS If the Company issues shares of Common Stock upon conversion of the Convertible Preferred Stock (the "Conversion Shares"), the holders of Conversion Shares will have certain rights to require the Company to register the Conversion Shares under the Securities Act. Under the terms of the registration rights agreement relating to the Conversion Shares, the holders of Conversion Shares and their transferees holding at least the number of Conversion Shares into which 5,000 shares of Convertible Preferred Stock have been converted will have the right, until the third anniversary of the last date on which the Convertible Preferred Stock may be converted into Common Stock (the "Commencement Date"), to require the Company, on one occasion, to register the Conversion Shares for public offering and sale on Form S-3 in a "shelf" registration pursuant to Rule 415 under the Securities Act. If any holder requests a shelf registration, all Conversion Shares will be registered thereunder unless a holder requests that all or a portion of his Conversion Shares be excluded. Holders of a majority of the Conversion Shares will also have the right on one occasion to elect to have their Conversion Shares which are registered on the shelf registration statement sold in an underwritten offering. In addition, the holders of Conversion Shares and their transferees will have the right to participate in any registration of 48 Common Stock for an underwritten offering initiated by the Company or any other stockholder of the Company prior to the third anniversary of the Commencement Date, subject to certain limitations. The Company will pay all out-of-pocket expenses of any such registrations, including fees and expenses of one counsel for the holders of Conversion Shares and their transferees, but not including underwriting discounts and commissions, and will indemnify the holders of Conversion Shares and their transferees against certain liabilities under the federal securities laws, in connection therewith. The current holders of Common Stock will also have certain rights under a registration rights agreement to require the Company to register under the Securities Act such shares and the shares of Common Stock to be issued upon conversion of the Stockholder Loans. Such rights are substantially similar to the rights granted to holders of Conversion Shares. However, holders of such shares and their transferees holding at least ten percent of the shares covered are required to cause the Company to register the shares for public offering and sale on Form S-3 in a shelf registration pursuant to Rule 415 under the Securities Act. The sole stockholder of KCG will have the right, subject to certain limitations, to have the shares of Common Stock that he receives upon consummation of the KCG Acquisition included in any registration statement that includes shares to be registered at the request of the current stockholders under such registration rights agreement. The holders of Convertible Preferred Stock, the existing stockholders and the individual receiving Common Stock in connection with the KCG Acquisition have agreed, or will agree, not to sell any Conversion Shares or other shares of Common Stock owned by them and subject to the registration rights agreements described above for a period of twelve months following the closing of the Offering. See "Shares Eligible for Future Sale." VIDEO PRODUCTION PAYMENTS During the fiscal years ended December 31, 1994 and 1995 and the six months ended June 30, 1996, SeaVision made payments to Production Masters, Inc. ("PMI") in the amounts of approximately $10,000, $137,000 and $118,000, respectively, for the production of videos and other visual media for use with the Company's ITV system. Messrs. Posner, Wright, Roddey and Talarico are shareholders of PMI. The Company believes that such payments were on terms as favorable to the Company as could have been obtained from an unaffiliated party. The Company expects to continue to conduct business with PMI in the future. ARRANGEMENTS INVOLVING ISM The Company, ISM and the ISM stockholders have entered into the ISM Stock Purchase Agreement pursuant to which the Company will acquire all of the issued and outstanding shares of capital stock of ISM from the ISM stockholders promptly following, and conditioned upon, the closing of the Offering. See "Background--The Acquisitions--ISM Acquisition." The aggregate purchase price to be paid to the ISM stockholders by the Company in the ISM Acquisition is a maximum of $4.8 million, consisting of $2.4 million in cash at the time of closing of the Acquisition and up to $2.4 million in contingent payments. One-half of the contingent payments, if any, is to be paid by delivery to the ISM stockholders of promissory notes bearing interest at seven percent per annum. Henry Posner, Jr., Thomas D. Wright, Richard W. Talarico and James C. Roddey are ISM stockholders. At the closing of the ISM Acquisition, Messrs. Posner, Wright, Talarico and Roddey will receive cash payments in the amounts of approximately $1,273,000, $791,000, $48,000 and $120,000, respectively, and will be entitled to receive contingent payments up to the same approximate amounts (not including interest payable on any promissory note delivered in respect of the contingent payments). ISM and Hawthorne are parties to an oral management arrangement pursuant to which Hawthorne provides general, administrative, accounting and tax planning and preparation services to ISM for an aggregate of $5,000 per month. During the fiscal years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996, ISM made payments in the aggregate amounts of $60,000, $60,000, $60,000 and $30,000, respectively, to Hawthorne under this agreement. The Company intends to terminate this arrangement within 90 days of the closing of this Offering. 49 JOINT PROMOTIONAL ACTIVITIES SeaVision, ISM, PMI and other entities affiliated with THG have engaged in various joint promotional marketing activities and have shared the revenue and expenses of such activities. Examples of such activity in 1996 are ISM sports marketing events at which SeaVision supplied digital imaging services. The Company believes that such activities involving SeaVision or ISM have been conducted on terms as favorable to SeaVision and ISM as could have been obtained from an unaffiliated party. LEASES During the fiscal years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996, ISM made payments pursuant to a lease agreement in the amount of $39,524, $53,777, $76,774 and $39,832, respectively, to Executive Office Associates ("EOA") for the lease of office space. Henry Posner, Jr., Thomas D. Wright and two of Mr. Posner's sons and his spouse each own an indirect equity interest in EOA. The Company believes that such payments were on terms as favorable to the Company as could have been obtained from an unaffiliated third party. The Company anticipates that it will maintain this lease. As of each of May 1, 1996 and September 1, 1996, the Company entered into a four-month lease for office space with EOA. The aggregate rental payment under these leases is $68,508. The Company believes that such payment is on terms as favorable to the Company as could have been obtained from an unaffiliated third party. The Company intends to continue to lease office space from EOA. KCG TRANSACTIONS During the year ended March 31, 1994, and the nine months ended December 31, 1994, KCG's predecessor ("Predecessor") leased a building from its principal shareholders. Rental payments made in accordance with the lease agreement were approximately $102,000 and $76,000, respectively. During the year ended December 31, 1995 and the six months ended June 30, 1996, KCG leased office and other space and an automobile from its shareholder. Rental payments made under these arrangements were approximately $69,000 and $40,000, respectively. The Company intends to continue leasing such space and automobile on a month- to-month basis for an aggregate of $5,600 per month. The Company believes that such payments are on terms as favorable to the Company as could be obtained from an unaffiliated party. KCG had a marketing commission agreement with Predecessor under which commissions of $100,000 were paid during the year ended December 31, 1995. This agreement provided for certain rights of Predecessor to be used by KCG, including customer lists and employment agreements with employees. This agreement was terminated and the related rights were acquired by KCG, effective November 1, 1995, for $150,000, of which $65,000 was paid during the year ended December 31, 1995. The remaining $85,000 was in the form of a bank loan assumption. Additionally, approximately $88,000 under a separate bank loan was assumed in exchange for certain tangible assets. KCG had notes receivable from Predecessor and another affiliated entity of approximately $25,000 and $18,000 as of December 31, 1995. KCG had a shareholder note payable of $79,964 as of December 31, 1995. Predecessor had a note receivable from one of its principal shareholders of approximately $14,000 as of December 31, 1994. During the year ended December 31, 1995 and the six months ended June 30, 1996, KCG purchased equipment for approximately $50,000 and $122,000, respectively, from affiliated entities. The Company believes that such payments were on terms as favorable to the Company as could be obtained from an unaffiliated party. 50 DESCRIPTION OF CAPITAL STOCK The following is a description of certain provisions of the Company's Certificate of Incorporation (the "Certificate"), Certificate of Designation relating to the Convertible Preferred Stock (the "Designation") and By-Laws (the "By-Laws)." See "Additional Information" as to how to obtain a copy of these documents. GENERAL Prior to the closing of the Offering, the Company intends to amend the Certificate to permit the Company to issue up to 20,000,000 shares of Common Stock, par value $0.01 per share, and 100,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The Designation provides that 40,000 shares of the authorized Preferred Stock have been designated, and may be issued as, Series A Convertible Redeemable Preferred Stock, par value $100 per share. Following the Offering, there will be 4,884,065 shares of Common Stock issued and outstanding and 25,000 shares of Series A Convertible Redeemable Preferred Stock having a liquidation value of $100 per share issued and outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters to be submitted to a vote of the stockholders. The Certificate does not provide for cumulative voting for the election of directors. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors of the Company out of funds legally available therefor. See "Dividend Policy." The holders of Common Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All outstanding shares of Common Stock are, and the Common Stock to be sold in the Offering, when issued and paid for, will be, fully paid and nonassessable. In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock will be entitled to share ratably in the assets of the Company remaining after payment or provision for payment of all of the Company's debts and obligations and liquidation payments to holders of outstanding shares of Preferred Stock. UNDESIGNATED PREFERRED STOCK The Board of Directors of the Company is authorized, without further action of the stockholders, to issue up to 100,000 shares of Preferred Stock in one or more classes or series and to fix the designations, powers, preferences and the relative participating, optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereon. Of such authorized shares, 40,000 shares have been designated as Convertible Preferred Stock. Any Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring or seeking to acquire, a significant portion of the outstanding Common Stock. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK The holders of Convertible Preferred Stock are entitled to receive, when and as declared by the Company's Board of Directors, cumulative compounded quarterly dividends at the rate of eight percent of the liquidation value thereof per annum. If the Company has not consummated an initial public offering of Common Stock on or before December 31, 1996, the dividend rate will increase to 12% of the liquidation value thereof per annum from and after such date. The holders of Convertible Preferred Stock have no voting rights except as provided by the Delaware General Corporation Law (the "DGCL") and except with respect to actions which affect adversely the rights and preferences of the Convertible Preferred Stock set forth in the Designation. The Convertible Preferred Stock is senior in right of payment and on liquidation to the Common Stock. 51 During the seven-month period beginning six months after the closing of the Offering (the "Conversion Period"), each holder of Convertible Preferred Stock will have the right to convert all, but not less than all, of the Convertible Preferred Stock then owned by such holder into shares of Common Stock at the rate of approximately 8.1 shares of Common Stock for each share of Convertible Preferred Stock, or approximately $12.29 per share (as adjusted for stock dividends, stock splits, reverse stock splits and any other stock combination or division). Cash payments will be made in lieu of the issuance of any fractional shares of Common Stock upon any such conversion. In connection with, and upon such conversion, the holders of Convertible Common Stock will have no right to receive any accrued and unpaid dividends. Shares of Convertible Preferred Stock which are not converted to Common Stock during the Conversion Period will remain outstanding until the earlier of the time such shares are redeemed by the Company or June 30, 2006. If the Company, prior to the end of the Conversion Period, issues Common Stock or warrants or options exercisable for Common Stock (other than pursuant to any employee stock option plan or director stock plan approved by the Board of Directors of the Company), and the price per share at which such shares, warrants or options are issued (the "New Share Price") multiplied by the aggregate number of issued and outstanding shares of Common Stock (determined on a fully diluted basis, but excluding shares then being issued or which are issuable pursuant to warrants or options then being issued) is less than $35.0 million, then the outstanding shares of Convertible Preferred Stock will become convertible into such additional number of shares of Common Stock equal to a fraction, the numerator of which is the number of outstanding shares of Convertible Preferred Stock multiplied by 100 and the denominator of which is the New Share Price. The Company has the right at any time after the Conversion Period but prior to maturity, to redeem the outstanding shares of Convertible Preferred Stock at $100 per share, plus accrued and unpaid dividends, if any. Unless earlier redeemed or converted into Common Stock, the outstanding shares of Convertible Preferred Stock are to be redeemed by the Company at $100 per share, plus accrued and unpaid dividends, if any, on June 30, 2006. CERTAIN ANTI-TAKEOVER EFFECTS OF CERTIFICATE AND BY-LAWS PROVISIONS Certain provisions of the Certificate and By-Laws summarized in the following paragraphs may be deemed to have anti-takeover effects. These provisions may have the effect of discouraging a future takeover attempt which is not approved by the Board of Directors but which individual Company stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then-current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of the current Board of Directors more difficult. Number of Directors; Removal; Filling Vacancies The Certificate and By-Laws provide that the number of directors will be fixed from time to time with the consent of two-thirds of the Board of Directors. Moreover, the Certificate provides that directors may only be removed with cause by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Company then entitled to vote at an election of directors. This provision prevents stockholders from removing any incumbent director without cause and allows two-thirds of the incumbent directors to add additional directors without approval of stockholders until the next annual meeting of stockholders at which directors are elected. Advance Notice of Nominations and Stockholder Proposals The By-Laws contain a provision requiring at least 60 but no more than 90 days' advance notice by a stockholder of a proposal or director nomination that such stockholder desires to present at any annual or special meeting of stockholders, which would prevent a stockholder from making a proposal or a director nomination at a stockholder meeting without the Company having advance notice of the proposal or director nomination. This provision could make a change in control more difficult by providing the directors of the Company with more time to prepare an opposition to a proposed change in control. 52 Vote Requirement for Calling Special Meeting The By-Laws also contain a provision requiring the vote of the holders of two-thirds of the outstanding Common Stock in order to call a special meeting of stockholders. This provision would prevent a stockholder with less than a two-thirds interest from calling a special meeting to consider a merger unless such stockholder had first obtained adequate support from a sufficient number of other stockholders. Statutory Business Combination Provision. Upon completion of the Offering, the Company will be subject to the provisions of Section 203 ("Section 203") of the DGCL. Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person, or an affiliate or associate of such person, who is an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder; (ii) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes it an interested stockholder (excluding shares owned by persons who are both officers and directors of the corporation, and shares held by certain employee stock ownership plans); or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66 2/3% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Under Section 203, an "interested stockholder" is defined (with certain limited exceptions) as any person that is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. A corporation may, at its option, exclude itself from the coverage of Section 203 by amending its certificate of incorporation or by-laws by action of its stockholders to exempt itself from coverage, provided that such by-law or charter amendment does not become effective until 12 months after the date it is adopted. Neither the Certificate nor the By-Laws contains any such exclusion. LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS Limitations on Liabilities Consistent with the DGCL, the Certificate contains a provision eliminating or limiting liability of directors to the Company and its stockholders for monetary damages arising from acts or omissions in the director's capacity as a director. The provision does not, however, eliminate or limit the personal liability of a director (i) for any breach of such director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful dividends or unlawful stock purchases or redemptions as provided in Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. This provision offers persons who serve on the Board of Directors of the Company protection against awards of monetary damages resulting from breaches of their duty of care, except as indicated above. As a result of this provision, the ability of the Company or a stockholder thereof to successfully prosecute an action against a director for a breach of his duty of care is limited. However, the provision does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his duty of care. The Securities and Exchange Commission has taken the position that the provision will have no effect on claims arising under the federal securities laws. Indemnification The Certificate and By-Laws provide for mandatory indemnification rights to the maximum extent permitted by applicable law, subject to limited exceptions, to any director or officer of the Company who, by reason of the 53 fact that he is a director or officer of the Company, is involved in a legal proceeding of any nature. Such indemnification rights include reimbursement for expenses incurred by such director or officer in advance of the final disposition of such proceeding in accordance with the applicable provisions of the DGCL. The Company may also maintain directors' and officers' liability insurance. TRANSFER AGENT AND REGISTRAR The Company has selected ChaseMellon Shareholder Services as the transfer agent and registrar for the Common Stock. 54 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no public market for the Common Stock. Sales of substantial amounts of Common Stock into the public market after the Offering, or the perception that such sales could occur, could adversely affect the prevailing market price for the Common Stock and the ability of the Company to raise equity capital. The Company can make no prediction as to the effect, if any, that the sale or availability for future sale of shares of additional Common Stock will have on the market price of the Common Stock prevailing from time to time. Upon completion of the Offering, the Company will have 4,884,065 shares of Common Stock outstanding (assuming no exercise of options). These shares will consist of 2,400,000 shares of Common Stock currently issued and outstanding and held by the existing stockholders of the Company, 2,000,000 shares of Common Stock sold in the Offering, 244,066 shares of Common Stock to be issued upon conversion of the Stockholder Loans and 239,999 shares to be issued upon consummation of the KCG Acquisition (including the 26,666 Restricted Grant Shares). See "Certain Transactions--Stockholder Loans." The 2,000,000 shares of Common Stock sold in the Offering will immediately be freely tradable, except that any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act of 1933, as amended ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 ("Rule 144") under the Securities Act, as described below. The 2,400,000 shares of Common Stock held by the existing stockholders, the 244,066 shares of Common Stock to be issued upon conversion of the Stockholder Loans and the 239,999 shares of Common Stock to be issued upon consummation of the KCG Acquisition (including the 26,666 Restricted Grant Shares) have not been registered under the Securities Act, and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration. In addition, the existing stockholders and the persons receiving Common Stock in connection with the KCG Acquisition have agreed, or will agree, not to sell any shares of Common Stock owned by them for a period of twelve months following the closing of the Offering. After the expiration of such twelve-month period, all of such shares, other than the 26,666 Restricted Grant Shares, may be sold in accordance with Rule 144, subject to the applicable volume, holding period and other limitations of Rule 144 as described below. In addition, the holders of these shares, other than the 26,666 Restricted Grant Shares, will have certain rights to require the Company to register such shares under the Securities Act for public offering and sale. See "Certain Transactions--Registration Rights." Up to 203,385 additional shares could be issued upon conversion of the Convertible Preferred Stock, which become convertible into shares of Common Stock 180 days after the closing of the Offering. These Conversion Shares will not be registered under the Securities Act, and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration. In addition, the holders of Convertible Preferred Stock have agreed not to sell any Conversion Shares owned by them for a period of twelve months following the closing of the Offering. After the expiration of such twelve-month period, all of such shares may be sold in accordance with Rule 144, subject to the applicable volume, holding period and other limitations of Rule 144 as described below. In addition, the holders of Conversion Shares will have certain rights to require the Company to register such Conversion Shares under the Securities Act for public offering and sale. See "Certain Transactions--Registration Rights." In addition to the shares described above, 239,334 additional shares of Common Stock have been reserved for issuance as restricted stock or upon exercise of options that may be granted under the Company's 1996 Stock Plan. As of the closing of the Offering and the KCG Acquisition, an aggregate of 26,666 shares of restricted stock granted under 1996 Stock Plan and options granted under the 1996 Stock Plan to acquire an aggregate of 198,000 shares of Common Stock will be outstanding. The Company intends to file one or more registration statements on Form S-8 under the Securities Act to register all of these shares of Common Stock, which registration statements will become effective immediately upon filing. Shares covered by these registration statements will be eligible for sale in the public markets upon the effectiveness of such registration statements (unless such shares are held by an Affiliate). 55 Any shares of Common Stock that have not been registered under the Securities Act could be sold under Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the Offering, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years, including a person who may be deemed an Affiliate, is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of one percent of the then-outstanding shares of Common Stock or the average weekly reported trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are subject to certain restrictions relating to manner of sale, notice, and the availability of current public information about the Company. A person who is not an Affiliate at any time during the three months preceding a sale, and who has beneficially owned shares for at least three years, would be entitled to sell such shares immediately following the Offering without regard to the volume limitations, manner of sale provisions, or notice or other requirements of Rule 144. The Securities and Exchange Commission has published a notice of proposed rulemaking that, if adopted as proposed, would shorten the applicable holding periods under Rule 144(d) and Rule 144(k) to one and two years, respectively (from the current two- and three-year periods). The Company cannot predict whether such amendments will be adopted or the effect thereof on the trading market for its Common Stock. 56 UNDERWRITING The Underwriters named below, represented by Friedman, Billings, Ramsey & Co., Inc. (the "Representative"), have severally agreed to purchase, subject to the terms and conditions of the underwriting agreement (the "Underwriting Agreement"), and the Company has agreed to sell, the number of shares of Common Stock set forth opposite the name of each Underwriter.
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Friedman, Billings, Ramsey & Co., Inc.......................... Total........................................................
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all of the shares of Common Stock if any shares are purchased. The Representative has advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. After the initial offering, the public offering price and such concession may be changed. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Representative has informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority in excess of five percent of the number of shares of Common Stock offered hereby. The Company has granted the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to an aggregate of 300,000 additional shares of Common Stock at the public offering price less the underwriting discount shown on the cover of this Prospectus. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the 2,000,000 shares of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 2,000,000 shares of Common Stock are being offered. Prior to the Offering, there has been no public market for the Common Stock. The offering price will be determined by negotiation among the Company and the Representative. In determining such price, consideration will be given to the financial and operating history and trends of the Company, the experience of its management, the position of the Company in its industry, the Company's prospects and the Company's financial results. Additionally, consideration will be given to the status of the securities markets, market conditions for new offerings of securities and the prices of similar securities of comparable companies. The Common Stock has been approved for quotation on the NASDAQ Stock Market's National Market under the symbol "ALLN." The Company, its directors, executive officers and certain other stockholders who, immediately following the Offering, will hold 2,857,399 shares have agreed not to offer, sell or otherwise dispose of any such shares of Common Stock or any Conversion Shares for a period of one year after the closing of the Offering without the prior written consent of the Representative. See "Shares Eligible for Future Sale." The Company has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company also has agreed to reimburse the Representative for its actual out-of-pocket legal expenses incurred in connection with the offering of the Common Stock. The Company has also given the Representative the right to act as the exclusive financial advisor, placement agent and underwriter to the Company in connection with certain financings, sales, transfers, mergers, consolidations or other similar transactions involving the Company during the period ending 18 months after the closing of the Offering. The Representative has agreed to provide such services to the Company on terms and conditions as are customary and competitive. The Representative will also have a right to 7.0% of the proceeds from any sale by the Company of securities within 12 months after closing of the Offering to an individual identified to the Company by the Representative prior to closing. 57 The Company has agreed that Richard Trutanic will serve on the Board of Directors after closing of the Offering. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of Common Stock offered hereby will be passed upon for the Company by Eckert Seamans Cherin & Mellott, Pittsburgh, Pennsylvania. Thomas D. Wright, a partner and chairman of the Operations Committee of such firm, currently owns more than ten percent of the outstanding Common Stock of the Company. Certain legal matters related to the Offering will be passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C. EXPERTS The consolidated financial statements and schedule of Allin Communications Corporation as of December 31, 1994 and 1995 and June 30, 1996, for the period from June 8, 1994 to December 31, 1994, the year ended December 31, 1995 and the six-month period ended June 30, 1996; the financial statements of International Sports Marketing, Inc. as of December 31, 1994 and 1995 and June 30, 1996, for the three years ended December 31, 1995 and the six-month period ended June 30, 1996; and the financial statements of Kent Consulting Group, Inc. as of December 31, 1994 and 1995 and June 30, 1996, for the year ended March 31, 1994, the nine months ended December 31, 1994, the year ended December 31, 1995 and the six-month period ended June 30, 1996 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm in accounting and auditing in giving said reports. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all the information set forth in the Registration Statement and in the exhibits and schedules thereto. For further information concerning the Company and the Common Stock offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. The Registration Statement, including the exhibits and schedules thereto, may be inspected, without charge, at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of each such document may be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file such materials electronically with the Commission. The Company intends to distribute to its stockholders annual reports containing audited financial statements and quarterly reports containing unaudited financial information for each of the first three quarters of its fiscal year. 58 INDEX TO FINANCIAL STATEMENTS ----------------
PAGE ---- PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Introduction.............................................................. F-2 Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996 (unaudited).............................................................. F-3 Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1995 (unaudited)...................................... F-4 Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 1996 (unaudited)................................... F-5 Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited).............................................................. F-6 ALLIN COMMUNICATIONS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................................. F-8 Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996..................................................................... F-9 Consolidated Statements of Operations for the period from June 8, 1994 (date of inception) to December 31, 1994, for the year ended December 31, 1995 and for the six months ended June 30, 1995 (unaudited) and 1996................................................................. F-10 Consolidated Statements of Shareholders' Equity for the period from June 8, 1994 (date of inception) to December 31, 1994, for the year ended December 31, 1995 and for the six months ended June 30, 1996............. F-11 Consolidated Statements of Cash Flows for the period from June 8, 1994 (date of inception) to December 31, 1994, for the year ended December 31, 1995 and for the six months ended June 30, 1995 (unaudited) and 1996..... F-12 Notes to Consolidated Financial Statements................................ F-13 INTERNATIONAL SPORTS MARKETING, INC. FINANCIAL STATEMENTS Report of Independent Public Accountants.................................. F-18 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996......... F-19 Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 (unaudited) and 1996......... F-20 Statements of Shareholders' Equity for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996..................... F-21 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 (unaudited) and 1996......... F-22 Notes to Financial Statements............................................. F-23 KENT CONSULTING GROUP, INC. FINANCIAL STATEMENTS Report of Independent Public Accountants.................................. F-27 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996......... F-28 Statements of Operations for the year ended March 31, 1994, the nine months ended December 31, 1994, the year ended December 31, 1995 and the six months ended June 30, 1995 (unaudited) and 1996 ................................................................ F-29 Statements of Shareholders' Equity for the year ended March 31, 1994, the nine months ended December 31, 1994, the year ended December 31, 1995 and the six months ended June 30, 1996 ...................................... F-30 Statements of Cash Flows for the year ended March 31, 1994, the nine months ended December 31, 1994, the year ended December 31, 1995 and the six months ended June 30, 1995 (unaudited) and 1996 ................................................................ F-31 Notes to Financial Statements............................................. F-33
F-1 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following Pro Forma Condensed Consolidated Financial Statements of Allin Communications Corporation (the Company) are based on the historical financial statements of SeaVision, Inc. (SeaVision), International Sports Marketing, Inc. (ISM) and Kent Consulting Group, Inc. (KCG), adjusted to give effect to the acquisitions of ISM and KCG by the Company. The Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1995 and for the six months ended June 30, 1996 assumes that such acquisitions, the issuance of Convertible Preferred Stock and the offering of Common Stock by the Company pursuant to the Prospectus of which the following Pro Forma Condensed Consolidated Financial Statements are part (the "Offering") had occurred on January 1, 1995. The pro forma condensed consolidated financial information reflects the purchase method of accounting for the acquisitions of ISM and KCG, and accordingly is based on estimated purchase accounting adjustments that are subject to further revision depending upon completion of any appraisals or other studies of the fair value of assets and liabilities. Final purchase accounting adjustments will differ from the pro forma adjustments presented herein and described in the accompanying notes due to the results of operations of ISM and KCG from June 30, 1996 to the date of closing. The final purchase accounting adjustments are not expected to differ significantly from the estimates used herein. The pro forma condensed consolidated financial information reflects certain assumptions described above and in Notes to Pro Forma Condensed Consolidated Statement of Operations below. The pro forma financial information does not purport to present what the Company's results of operations would actually have been if the acquisitions of ISM and KCG, the issuance of Convertible Preferred Stock and the Offering had occurred on the assumed dates, as specified above, or to project the Company's financial condition or results of operations for any future period. F-2 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 (UNAUDITED) (DOLLARS IN THOUSANDS)
INTERNATIONAL SPORTS KENT OFFERING PRO SEAVISION, MARKETING, CONSULTING PRO FORMA PRO FORMA FORMA PRO FORMA INC. INC. GROUP, INC. ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AS ADJUSTED ---------- ------------- ----------- ----------- ------------ ------------ ----------- ASSETS: Current Assets: Cash................... $ 572 $ 63 $ 42 $(1,800)(1)(2) $(1,123) $25,593 (3) $24,470 Investments............ -- 420 -- 420 420 Accounts receivable.... 90 113 646 849 849 Prepaid expenses and other current assets.. 125 203 6 334 334 ------- ---- ---- ------- ------- Total current assets.. 787 799 694 480 26,073 Property and equipment, net.................... 2,665 116 174 2,955 2,955 Other Assets............ 695 28 97 7,138 (1) 7,958 7,958 ------- ---- ---- ------- ------- $ 4,147 $943 $965 $11,393 $36,986 ======= ==== ==== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities.... $ 5,630 $812 $634 $ 150 (1) $ 7,226 $ 7,226 Long-term debt......... 3,807 -- -- 3,807 (3,807)(3)(4) -- Redeemable preferred stock................. -- -- -- 2,450 (2) 2,450 2,450 Shareholders' equity .. (5,290) 131 331 2,738 (1) (2,090) 29,400 (3)(4) 27,310 ------- ---- ---- ------- ------- $ 4,147 $943 $965 $11,393 $36,986 ======= ==== ==== ======= =======
The accompanying notes are an integral part of these financial statements. F-3 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTERNATIONAL SPORTS KENT OFFERING PRO SEAVISION, MARKETING, CONSULTING PRO FORMA PRO FORMA FORMA PRO FORMA INC. INC. GROUP, INC. ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AS ADJUSTED ---------- ------------- ----------- ----------- ------------ ------------ ----------- Revenue................. $ 44 $4,878 $1,995 $(705)(5) $ 6,212 $ 6,212 Cost and expenses: Cost of revenue........ 10 2,747 989 (338)(5) 3,408 3,408 Selling, general and administrative........ 1,833 1,647 712 1,784 (5)(6)(7) 5,976 5,976 Interest expense, net.. 369 (37) 4 336 (369)(8) (33) --------- ------ ------ ------- --------- Total cost and expenses............. 2,212 4,357 1,705 9,720 9,351 --------- ------ ------ ------- --------- Income (loss) before taxes.................. (2,168) 521 290 (3,508) (3,139) Provision for income taxes.................. -- -- 57 (57)(9) -- -- --------- ------ ------ ------- --------- Income (loss) before nonrecurring charges (10)................... (2,168) $ 521 $ 233 $(3,508) (3,139) ====== ====== ======= Premium on conversion of preferred stock (10)... -- (601) --------- ========= Loss before nonrecurring charges available to common shareholders (11)................... $ (2,168) $(3,740) ========= ========= Loss before nonrecurring charges per common share (10)............. $ (0.90) $(0.75) ========= ========= Weighted average number of common shares outstanding............ 2,400,000 4,985,758 --------- ---------
The accompanying notes are an integral part of these financial statements. F-4 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTERNATIONAL SPORTS KENT OFFERING PRO SEAVISION, MARKETING, CONSULTING PRO FORMA PRO FORMA FORMA PRO FORMA INC. INC. GROUP, INC. ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AS ADJUSTED ---------- ------------- ----------- ----------- ------------ ------------ ----------- Revenue................. $ 163 $1,793 $1,792 $(461)(5) $ 3,287 $ 3,287 Cost and expenses: Cost of revenue........ 40 1,091 937 (240)(5) 1,828 1,828 Selling, general and administrative........ 2,167 830 437 797 (5)(7) 4,231 4,231 Interest expense, net.. 468 1 3 472 (468)(8) 4 --------- ------ ------ ------- --------- Total cost and expenses............. 2,675 1,922 1,377 6,531 6,063 --------- ------ ------ ------- --------- Income (loss) before taxes.................. (2,512) (129) 415 (3,244) (2,776) Provision for income taxes ................. -- -- 167 (167)(9) -- -- --------- ------ ------ ------- --------- Net income (loss)....... $ (2,512) $ (129) $ 248 $(3,244) $ (2,776) ========= ====== ====== ======= ========= Net loss per common share.................. $ (1.05) $ (0.55) ========= ========= Weighted average number of common shares outstanding............ 2,400,000 5,087,450 --------- ---------
The accompanying notes are an integral part of these financial statements. F-5 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following pro forma adjustments are based upon the assumption of the closing of the Offering with the sale of 2,000,000 shares of common stock at $15.00 per share. The pro forma adjustments to the condensed consolidated balance sheet are as follows: (1) To record the acquisitions of ISM and KCG, for which the estimated excess purchase price of approximately $7,138 has been assigned to intangible assets. Along with these acquisitions, the remaining available borrowings of $150 under the line of credit have been reflected. The intangible assets identified, based upon an independent appraisal, along with the assigned values and the estimated useful lives, are as follows:
ESTIMATED ASSIGNED USEFUL LIVES ASSETS VALUES IN YEARS ------ -------- ------------ Employment agreement............................... $2,680 2 Customer lists..................................... 195 5 Assembled work force............................... 113 7 Goodwill........................................... 3,768 7-20 Marketing agreement................................ 125 20 Trade names........................................ 257 40 ------ $7,138 ======
The agreements which provide for these acquisitions include provisions for contingent payments of up to $2,400 and $2,800, respectively, based upon future operating income of ISM and KCG for the years 1997, 1998 and 1999. Future contingent payments, if any, made to the selling shareholders of ISM and KCG will be reflected as additional cost of the acquired entities. These additional costs of the affected assets will be capitalized and amortized over the remaining life of the assets. (2) To record the net proceeds of $2,450 from the issuance of 25,000 shares of Series A Convertible Redeemable Preferred Stock with a par value of $100 per share. (3) To record the receipt of the net proceeds of the Offering of $26,400 and the application of these proceeds, primarily for the payment of accrued interest on shareholder notes of $807 and the acquisitions of ISM and KCG. (4) To record the conversion of $3,000 of shareholder loans to 244,066 shares of common stock. The pro forma adjustments to the condensed consolidated statements of operations are as follows: (5) To eliminate the effects of transactions between the companies including intercompany profit capitalized as software development costs of $253 for the year ended December 31, 1995, and $40 as software development costs and $30 as onboard equipment for the six-month period ended June 30, 1996. (6) To record compensation expense related to the issuance of the Restricted Grant Shares to certain employees of KCG of $134 for the year ended December 31, 1995 and $66 for the six-month period ended June 30, 1996. F-6 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (7) To record amortization of excess purchase price of $1,764 for the year ended December 31, 1995 and $882 for the six-month period ended June 30, 1996. (8) To reduce interest expense on borrowings of $369 for the year ended December 31, 1995 and $468 for the six-month period ended June 30, 1996. The interest accrued during these respective periods was based upon the outstanding borrowings under the shareholder loans (15%), the line of credit (7%) and the guarantee fee due certain shareholders based upon borrowing under the line of credit (8%). The weighted average borrowing under the shareholder loans was approximately $2,464 and $5,577 for the year ended December 31, 1995 and the six-month period ended June 30, 1996, respectively. The weighted average borrowings under the line of credit was approximately $738 for the six- month period ended June 30, 1996. (9) To reduce the tax provision recorded by KCG of $57 for the year ended December 31, 1995 and $167 for the six-month period ended June 30, 1996. (10) The weighted average number of shares of common stock used to calculate pro forma loss before nonrecurring charges per share includes the shares to be issued in connection with the Offering, the acquisition of KCG, the conversion of the shareholder loans, and the assumed conversion of the Convertible Preferred Stock and the Restricted Grant Shares. The stock options issued at the time of consummation of the Offering are not included with the weighted average outstanding number of common shares, as the effect is antidilutive. The Convertible Preferred Stock is assumed to be converted during the seven-month period beginning six months after the closing of the Offering due to the inducement feature whereby the holders of such preferred stock will receive common shares with a value of $3,051 in return for such preferred stock with a stated value of $2,500. This transaction will be treated in a manner similar to the treatment of dividends paid to holders of the preferred stock. Accordingly, the conversion premium of $551 and accretion of $50 from the net proceeds from the issuance of Convertible Preferred Stock to stated value will increase the loss attributable to common shareholders. (11) A charge of $661 related to the induced conversion of the shareholder loans is nonrecurring and directly attributable to the Offering and, therefore, not reflected in the accompanying pro forma statement of operations for the year ended December 31, 1995. This charge will be recognized in the fiscal quarter in which the Offering is consummated. F-7 After the proposed stock split in connection with the initial public offering of the Company, as discussed in Note 7 to the Notes to Consolidated Financial Statements, is effected, we expect to be in a position to render the following audit report. Arthur Andersen LLP Pittsburgh, Pennsylvania October 2, 1996 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Allin Communications Corporation: We have audited the accompanying consolidated balance sheets of Allin Communications Corporation (a Delaware corporation) as of December 31, 1994 and 1995 and June 30, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the period from June 8, 1994 (date of inception), to December 31, 1994, the year ended December 31, 1995 and the six-month period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allin Communications Corporation as of December 31, 1994 and 1995 and June 30, 1996, and the results of its operations and its cash flows for the period from June 8, 1994 (date of inception), to December 31, 1994, the year ended December 31, 1995 and the six-month period ended June 30, 1996, in conformity with generally accepted accounting principles. Pittsburgh, Pennsylvania, October 2, 1996 F-8 ALLIN COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 -------- ---------- ---------- ASSETS Current assets: Cash and cash equivalents................... $ 32,852 $ 192,995 $ 571,961 Accounts receivable......................... -- 42,692 79,730 Related party receivable.................... -- -- 10,000 Prepaid expenses............................ 25,668 8,765 124,646 -------- ---------- ---------- Total current assets....................... 58,520 244,452 786,337 -------- ---------- ---------- Property and equipment, at cost: Leasehold improvements...................... -- 42,450 47,836 Furniture and equipment..................... 16,404 188,897 337,587 On-board equipment.......................... -- 1,313,206 1,540,837 Construction-in-progress.................... -- -- 1,090,464 -------- ---------- ---------- 16,404 1,544,553 3,016,724 Less--accumulated depreciation.............. (1,093) (153,648) (351,483) -------- ---------- ---------- 15,311 1,390,905 2,665,241 Other assets, net of accumulated amortization of $5,295, $141,052 and $293,379, respectively..................... 72,238 717,375 695,110 -------- ---------- ---------- $146,069 $2,352,732 $4,146,688 ======== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit.............................. $ -- $ -- $4,850,000 Shareholder notes payable................... -- 1,493,000 -- Accounts payable............................ 1,600 151,436 553,269 Accrued liabilities: Management fees............................ -- 45,000 84,000 Guarantee fees............................. -- -- 30,000 Other...................................... -- 47,849 111,989 -------- ---------- ---------- Total current liabilities................. 1,600 1,737,285 5,629,258 -------- ---------- ---------- Long-term liabilities: Accrued interest............................ 24,080 393,138 807,284 Shareholder notes payable................... 730,000 3,000,000 3,000,000 -------- ---------- ---------- 754,080 3,393,138 3,807,284 -------- ---------- ---------- Shareholders' equity (Notes 1 and 7): Preferred stock, authorized 100,000 shares.. -- -- -- Common stock, par value $.01 per share- authorized, 20,000,000 shares; issued and outstanding, 2,400,000 shares.............. 10 10 24,000 Additional paid-in capital.................. 1,990 1,990 3,000 Retained deficit............................ (611,611) (2,779,691) (5,316,854) -------- ---------- ---------- Total shareholders' equity................. (609,611) (2,777,691) (5,289,854) -------- ---------- ---------- $146,069 $2,352,732 $4,146,688 ======== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-9 ALLIN COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ---------------------------- 1994 1995 1995 1996 ------------ ------------ ---------------------------- (UNAUDITED) Revenue................. $ -- $ 44,413 $ -- $ 163,000 Cost of sales........... -- 10,000 -- 40,045 --------- ----------- ----------- ------------- Gross profit............ -- 34,413 -- 122,955 Selling, general & administrative......... 587,531 1,833,435 766,603 2,167,456 --------- ----------- ----------- ------------- Loss from operations.... (587,531) (1,799,022) (766,603) (2,044,501) Interest expense, net... 24,080 369,058 105,311 467,662 --------- ----------- ----------- ------------- Net loss................ $(611,611) $(2,168,080) $ (871,914) $ (2,512,163) ========= =========== =========== ============= PRO FORMA INFORMATION-- UNAUDITED (NOTE 8): Net loss............... $(2,168,080) $ (871,914) $ (2,512,163) Pro forma income taxes. -- -- -- ----------- ----------- ------------- Pro forma net loss..... $(2,168,080) $ (871,914) $ (2,512,163) =========== =========== ============= Pro forma net loss per common share.......... $ (.90) $ (.36) $ (1.05) =========== =========== ============= Weighted average common shares outstanding during the period............. 2,400,000 2,400,000 2,400,000
The accompanying notes to financial statements are an integral part of these statements. F-10 ALLIN COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL ------------------- PAID-IN SHAREHOLDERS' SHARES PAR VALUE CAPITAL RETAINED DEFICIT EQUITY --------- --------- ---------- ---------------- ------------- Balance, June 8, 1994... $ -- $ -- $ -- $ -- $ -- Issuance of common stock................. 2,400,000 10 1,990 -- 2,000 Net loss............... -- -- -- (611,611) (611,611) --------- ------- ------ ----------- ----------- Balance, December 31, 1994................... 2,400,000 10 1,990 (611,611) (609,611) Net loss............... -- -- -- (2,168,080) (2,168,080) --------- ------- ------ ----------- ----------- Balance, December 31, 1995................... 2,400,000 10 1,990 (2,779,691) (2,777,691) Initial capitalization (Note 1).............. -- 23,990 1,010 (25,000) -- Net loss............... -- -- -- (2,512,163) (2,512,163) --------- ------- ------ ----------- ----------- June 30, 1996........... 2,400,000 $24,000 $3,000 $(5,316,854) $(5,289,854) ========= ======= ====== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-11 ALLIN COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED PERIOD ENDED YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------- 1994 1995 1995 1996 ------------ ------------ ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss................... $(611,611) $(2,168,080) $(871,914) $(2,512,163) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization............. 6,388 288,312 69,780 350,162 Accrued interest on shareholder notes payable.................. 24,080 369,058 104,162 414,146 Changes in certain assets and liabilities: Accounts receivable....... -- (42,692) -- (37,038) Related party receivable.. -- -- -- (10,000) Prepaid expenses.......... (25,668) 16,903 19,303 (115,881) Software development costs.................... - (753,252) (355,629) (130,062) Other assets.............. (77,533) (27,642) (26,597) -- Accounts payable.......... 1,600 149,836 366,455 401,833 Accrued liabilities....... -- 92,849 -- 133,140 --------- ----------- --------- ----------- Net cash flows from operating activities..... (682,744) (2,074,708) (694,440) (1,505,863) --------- ----------- --------- ----------- Cash flows from investing activities: Capital expenditures....... (16,404) (1,528,149) (709,857) (1,472,171) --------- ----------- --------- ----------- Cash flows from financing activities: Proceeds from shareholder loans..................... 730,000 3,763,000 1,607,950 2,127,650 Proceeds from line of credit.................... -- -- -- 4,850,000 Payments on shareholder loans..................... -- -- -- (3,620,650) Issuance of common stock... 2,000 -- -- -- --------- ----------- --------- ----------- Net cash flows from financing activities..... 732,000 3,763,000 1,607,950 3,357,000 --------- ----------- --------- ----------- Net change in cash and cash equivalents................. 32,852 160,143 203,653 378,966 Cash and cash equivalents, beginning of period......... -- 32,852 32,852 192,995 --------- ----------- --------- ----------- Cash and cash equivalents, end of period............... $ 32,852 $ 192,995 $ 236,505 $ 571,961 ========= =========== ========= ===========
The accompanying notes to financial statements are an integral part of these statements. F-12 ALLIN COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS: Allin Communications Corporation (the Company) was formed as a wholly owned subsidiary of SeaVision, Inc. (SeaVision) on July 23, 1996. Effective August 16, 1996, the Company consummated a transaction pursuant to an agreement whereby SeaVision became a wholly owned subsidiary of the Company. Prior to this date, the Company had no operations. SeaVision was formed on June 8, 1994 for the purpose of designing, developing, selling and installing interactive entertainment and communications systems for cruise ships. Revenues are derived from passengers aboard the cruise ships through usage of pay-per-view, gaming and video shopping services. During 1995, SeaVision completed installation of two interactive systems on cruise ships. The discussion under the heading "Risk Factors" contained in this Registration Statement is incorporated herein by reference. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following is a summary of the significant accounting policies affecting the consolidated financial statements of the Company. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all certificates of deposit with an original maturity of three months or less to be cash equivalents. Accounts Receivable and Revenue Recognition Revenue and related costs are recognized when the services are rendered. The Company's revenue and receivables result from contracts with cruise lines. As of June 30, 1996, two cruise lines account for all of the Company's revenue and the resulting receivables. Property and Equipment The Company provides for depreciation on the straight-line method over the estimated useful lives of the assets. In the year of acquisition, the Company takes a full year of depreciation if the asset was purchased in the first six months, and half a year of depreciation if the asset was purchased in the last six months of the year. The estimated useful lives of property and equipment range from three to five years. Expenditures for ordinary maintenance and repairs which do not extend the lives of the applicable assets are charged to expense as incurred, while renewals and betterments that materially extend the lives of the applicable assets are capitalized and depreciated. Other Assets Certain expenditures related to the organization and start-up of SeaVision have been capitalized in the accompanying consolidated financial statements. Organizational and start-up costs included in this balance are being amortized over a five-year period. F-13 ALLIN COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Costs of software development are capitalized and amortized subsequent to the project achieving technological feasibility and prior to market introduction. Prior to the project achieving technological feasibility and after market introduction, development costs are expensed as incurred. Amortization of capitalized software costs, for both internally developed and purchased software products, is computed on a product-by-product basis over a three-year period. Software development expense, net of amortization of capitalized costs, was approximately $173,000, $216,000 and $387,000 for the periods ended December 31, 1994 and 1995, and June 30, 1996 respectively. Advertising and Promotional Expenditures for advertising and promotions are expensed as incurred due to the short duration of the periods benefited. Income Taxes The shareholders of SeaVision had elected to file under Subchapter S for both state and federal income tax purposes. Accordingly, no provision for income taxes has been reflected in the financial statements as the taxable income or loss is reflected on the individual income tax returns of the shareholders. Certain events, including the transactions described in Notes 1 and 7, will automatically terminate the S corporation status of SeaVision, thereby subjecting future income to federal and state income taxes at the corporate level. See Note 8 for information concerning certain pro forma adjustments for income taxes. Financial Instruments It was not practicable to estimate the fair value of the shareholder notes payable. These notes are reflected at their outstanding face value, excluding unpaid interest accrued at 15% annually. As no ready market exists for these instruments, comparable instruments available from outside the Company are not available. Based upon the closely held nature of these instruments and the Company itself, it is not practicable to estimate the fair value of these notes. All other financial instruments are classified as current and will be utilized within the next operating cycle. Recently Issued Accounting Standards Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121), was issued in March 1995 and is effective for fiscal years beginning after December 15, 1995. This statement will be applied prospectively and requires that impairment losses on long-lived assets be recognized when the book value of the asset exceeds its expected undiscounted cash flows. The Company adopted SFAS No. 121 on January 1, 1996, and adoption at that time did not have a material impact on the Company's financial position or results of operations. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) in October 1995. This statement establishes a "fair value based method" of financial accounting and related reporting standards for stock- based employee compensation plans, such as the plans that will be established, subsequent to June 30, 1996 (see Note 7). SFAS No. 123 becomes effective in 1996 and provides for adoption in the income statement or through disclosure only. The Company anticipates accounting for any adopted plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No. 123, but will provide the disclosure in the notes to the 1996 financial statements. F-14 ALLIN COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Unaudited Interim Financial Statements The consolidated statements of operations and cash flows for the six-month period ended June 30, 1995, are unaudited and are not covered by the report of independent public accountants. However, in the opinion of management, these interim financial statements include all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the results of operations and cash flows of the Company for the interim period and are prepared on the same basis as the audited financial statements. Supplemental Disclosure of Cash Flow Information There were no cash payments for income taxes during the periods presented. Cash payments for interest were approximately $23,000 during the six months ended June 30, 1996. 3. RELATED PARTY TRANSACTIONS: The following summarizes related party information. The discussion under the heading "Certain Transactions" contained in this Registration Statement is incorporated herein by reference. Shareholder Notes Payable These obligations represent numerous individual notes due to certain shareholders, each with a three-year maturity. These notes bear interest at 15%, payable at maturity, and mature at various dates from July 1997 through December 1998. That portion of the notes paid in connection with the Company's line of credit entered into on May 31, 1996 (Note 4) has been included with current liabilities in the accompanying consolidated balance sheets as of December 31, 1995. The remaining outstanding balance of $3.0 million will be converted into 244,066 shares of Common Stock, effective upon the closing of the initial public offering (Note 7). Management Services Certain shareholders of the Company own interests in three separate entities which perform installation, marketing, consulting and administrative services and made purchases for the Company. Fees related to these services and reimbursements for expenditures incurred on behalf of the Company were approximately as follows:
PERIOD ENDED FEES REIMBURSEMENTS ------------ -------- -------------- December 31, 1994 $343,000 $ 287,000 December 31, 1995 644,000 1,668,000 June 30, 1996 230,000 213,000
During 1996, the Company hired a management team that reduced its need for the services provided by these entities. Accordingly, the fees and reimbursements paid under these arrangements have declined. Management agreements with two of the entities were terminated in July 1996. The third management agreement has been converted to a lease agreement effective August 1, 1996. The lease agreement includes the rental of office space and certain administrative services to be provided to the Company. This agreement provides for monthly fees of $3,700 and can be terminated by either party upon 30 days notification. In addition, the Company leases office space from an entity in which certain shareholders have an ownership interest. Rental expense under this arrangement was approximately $21,000 for the six months ended June 30, 1996. The future commitment under this arrangement is approximately $21,000. Professional Services A shareholder of the Company is a partner in an entity which performs legal services for the Company. Fees for these services were approximately $25,000, $71,000 and $41,000 for the periods ended December 31, 1994 and 1995, and June 30, 1996, respectively. F-15 ALLIN COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Other Services Certain shareholders of the Company have an equity interest in an entity which performs services for the Company related to visual media. Charges for these services were approximately $10,000, $137,000 and $118,000 for the periods ended December 31, 1994 and 1995, and June 30, 1996, respectively. Another entity in which certain shareholders of the Company have an equity interest performed commercial printing services for the Company. Charges for these services were approximately $7,000, $25,000 and $40,000 for the periods ended December 31, 1994 and 1995, and June 30, 1996, respectively. Related Party Receivable This balance represents noninterest-bearing advances made to an entity in which certain shareholders of the Company own an interest. 4. LINE OF CREDIT: The Company entered into a financing agreement which provides for a line of credit that permits maximum allowable borrowings of $5 million. Borrowings bear interest at either prime or Euro-rate plus 1-1/2% and are payable upon demand. The maturity date is May 31, 1997, and borrowings are guaranteed by certain shareholders of the Company, for which they will receive a guarantee fee. This fee will be equal to the difference between the 15% accrued under the shareholder notes payable and the rate accrued on borrowings under the line of credit. As of July 17, 1996, $5 million has been borrowed under this agreement. 5. OTHER ASSETS: Other assets consist of the following:
DECEMBER 31, ---------------- JUNE 30, 1994 1995 1996 ------- -------- -------- Software development costs, net of accumulated amortization of $-0-, $125,542 and $272,761....... $ -- $627,710 $610,553 Organizational and start-up costs, net of accumulated amortization of $5,171, $14,976 and $19,879........................................... 43,855 34,050 29,147 Other assets, net of accumulated amortization of $124, $534 and $739............................... 28,383 55,615 55,410 ------- -------- -------- $72,238 $717,375 $695,110 ======= ======== ========
6. COMMITMENTS: License Agreement The Company has an agreement with a vendor which provides for a software license fee of $25,000 per installation and includes specified prices for various hardware components. This agreement expires October 1999, and payments for license fees under this arrangement were $25,000 and $75,000 for the periods ended December 31, 1994 and 1995, respectively. These fees are included with on-board equipment upon installation of the interactive systems. Royalty Agreements The contracts with the cruise lines provide for specified royalty payments based upon adjusted gross revenue, as defined in the respective agreements. These royalty payments are adjusted upon reaching specified milestones for cumulative revenue generated by the interactive systems installations. Royalty payments of approximately $2,000 and $6,000 are included with selling, general and administrative expenses in the accompanying consolidated statements of operations for the periods ended December 31, 1995, and June 30, 1996, respectively. F-16 ALLIN COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. SUBSEQUENT EVENTS: In connection with the proposed initial public offering (the Offering) by the Company, subsequent to June 30, 1996, the following transactions have occurred or are anticipated to occur: (i) Designation of 40,000 shares of authorized preferred stock as Series A Convertible Redeemable Preferred Stock with a par value of $100 per share. (ii) Receipt of $1.5 million in the form of loans from two shareholders. These loans bear interest at 8%, increasing to 12% if the Offering is not consummated on or before December 31, 1996, and are convertible into an aggregate 15,000 shares of Convertible Redeemable Preferred Stock of the Company. (iii) Conversion of the shareholder loans referred to above into 15,000 shares of Convertible Redeemable Preferred Stock and the issuance of an additional 10,000 shares of Convertible Redeemable Preferred Stock. These shares are entitled to cumulative compounded quarterly dividends, when and as declared by the Board of Directors, of 8%, increasing to 12% if the Offering is not consummated on or before December 31, 1996. Additionally, the 25,000 shares issued are convertible into 203,385 common shares, at the option of the holder, not earlier than six months after the date of the Offering. (iv) A stock split of 2,400 common shares for each common share outstanding effective as the date of the Offering. This split has been reflected retroactively in the accompanying financial statements. (v) Entry into an agreement for the acquisition of all issued and outstanding shares of International Sports Marketing, Inc. (ISM), an entity in which certain shareholders of the Company have an ownership interest. This acquisition is conditioned upon the closing of the Offering and provides for cash payments of $2.4 million upon closing and contingent payments up to $2.4 million based upon future operating income. (vi) Entry into an agreement for the merger of Kent Consulting Group, Inc. (KCG) into a wholly owned subsidiary of the Company. This merger is conditioned upon the closing of the Offering. The consideration includes $2.0 million in cash and $3.2 million in common stock valued at the Offering price at the closing and contingent payments up to $2.8 million based upon future operating income. (vii) Creation of the 1996 Stock Plan which provides up to 266,000 shares for Common Stock to be awarded as stock options, stock appreciation rights, restricted shares and restricted units to officers, other executive employees, consultants and advisors (including non-employee directors) of the Company. As of the closing of the Offering, 26,666 shares of common stock were granted in connection with the acquisition of KCG. Additionally, options to purchase 198,000 shares of common stock at the offering price were granted. 8. PRO FORMA INFORMATION (UNAUDITED): The pro forma adjustments for income taxes included in the accompanying statements of operations are based upon statutory rates in effect for C corporations during the periods presented. Due to uncertainty as to the realizability of the tax benefit attributable to the net operating losses, a valuation allowance has been established that offsets this benefit. The weighted average outstanding shares used to calculate the pro forma earnings per share reflect the capital structure of the Company and give effect to the stock split discussed in Note 7. F-17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To International Sports Marketing, Inc.: We have audited the accompanying balance sheets of International Sports Marketing, Inc. (a Pennsylvania corporation) as of December 31, 1994 and 1995 and June 30, 1996, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and the six-month period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International Sports Marketing, Inc. as of December 31, 1994 and 1995 and June 30, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and the six-month period ended June 30, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Pittsburgh, Pennsylvania, October 2, 1996 F-18 INTERNATIONAL SPORTS MARKETING, INC. BALANCE SHEETS
DECEMBER 31, ------------------ JUNE 30, 1994 1995 1996 -------- -------- -------- ASSETS Current assets: Cash............................................ $436,859 $ 70,636 $ 62,767 Investments..................................... -- 395,022 420,426 Accounts receivable............................. 74,448 116,850 112,780 Prepaid expenses................................ 57,424 212,496 202,805 -------- -------- -------- Total current assets........................... 568,731 795,004 798,778 -------- -------- -------- Equipment, at cost............................... 107,505 159,494 170,114 Less--Accumulated depreciation.................. (21,679) (41,844) (54,032) -------- -------- -------- 85,826 117,650 116,082 Long-term receivable............................. 6,145 12,038 27,673 Intangible assets, net of accumulated amortization of $184,412, $275,716 and $309,955, respectively.......................... 125,543 34,239 -- -------- -------- -------- $786,245 $958,931 $942,533 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities........ $276,283 $ 88,233 $162,338 Deferred revenues............................... 189,224 408,250 649,625 -------- -------- -------- Total current liabilities...................... 465,507 496,483 811,963 -------- -------- -------- Shareholders' equity: Common stock, par value $1 per share-- Authorized, 1,000 shares; issued and outstanding, 100 and 105 shares, respectively................................... 100 105 105 Additional paid-in capital...................... 99,900 99,900 99,900 Retained earnings............................... 220,738 357,587 28,873 Net unrealized gains on investments............. -- 4,856 1,692 -------- -------- -------- Total shareholders' equity..................... 320,738 462,448 130,570 -------- -------- -------- $786,245 $958,931 $942,533 ======== ======== ========
The accompanying notes to financial statements are an integral part of these financial statements. F-19 INTERNATIONAL SPORTS MARKETING, INC. STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ----------- ---------- (UNAUDITED) Revenue: Events................. $2,770,993 $5,671,042 $4,807,763 $3,213,640 $1,603,537 Appearances............ 121,942 135,150 46,850 16,500 82,240 Licensing.............. 91,618 135,855 22,902 17,234 107,417 ---------- ---------- ---------- ---------- ---------- 2,984,553 5,942,047 4,877,515 3,247,374 1,793,194 Cost of sales: Event costs............ 1,566,702 3,288,230 2,714,516 1,726,881 1,058,085 Appearance fees........ 96,536 63,800 25,450 8,900 32,267 Licensing costs and expenses.............. 11,267 68,480 6,536 4,724 474 ---------- ---------- ---------- ---------- ---------- Gross profit.......... 1,310,048 2,521,537 2,131,013 1,506,869 702,368 Operating expenses: Payroll and benefit costs................. 451,290 630,439 711,518 393,950 407,108 General and administrative........ 214,237 287,766 338,935 130,791 146,040 Royalty fee............ 132,383 295,250 165,948 116,064 60,000 Rent................... 39,524 69,217 99,485 46,002 55,010 Airfare, lodging and meals................. 73,412 73,096 91,404 36,510 48,629 Advertising and promotional........... 82,563 67,409 68,493 20,371 37,392 Administrative service fee................... 60,000 60,000 60,000 30,000 30,000 Depreciation and amortization.......... 97,313 103,932 111,469 53,810 46,427 ---------- ---------- ---------- ---------- ---------- Operating income (loss)............... 159,326 934,428 483,761 679,371 (128,238) Net investment income (expense).............. 23,507 13,564 28,791 9,795 (496) Other nonoperating income................. -- 7,584 8,299 2,399 20 ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ 182,833 $ 955,576 $ 520,851 $ 691,565 $ (128,714) ========== ========== ========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-20 INTERNATIONAL SPORTS MARKETING, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL NET UNREALIZED ---------------- PAID-IN RETAINED GAINS ON SHARES PAR VALUE CAPITAL EARNINGS INVESTMENTS ------ --------- ---------- --------- -------------- December 31, 1992........ 100 $100 $99,900 $(189,723) $ -- Net income.............. -- -- -- 182,833 -- --- ---- ------- --------- ------ December 31, 1993........ 100 100 99,900 (6,890) -- Distributions to shareholders........... -- -- -- (727,948) -- Net income.............. -- -- -- 955,576 -- --- ---- ------- --------- ------ December 31, 1994........ 100 100 99,900 220,738 -- Exercise of options..... 5 5 -- -- -- Unrealized gains on investments............ -- -- -- -- 4,856 Distributions to shareholders........... -- -- -- (384,002) -- Net income.............. -- -- -- 520,851 -- --- ---- ------- --------- ------ December 31, 1995........ 105 105 99,900 357,587 4,856 Unrealized losses on investments............ -- -- -- -- (3,164) Distributions to shareholders........... -- -- -- (200,000) -- Net loss................ -- -- -- (128,714) -- --- ---- ------- --------- ------ June 30, 1996............ 105 $105 $99,900 $ 28,873 $1,692 === ==== ======= ========= ======
The accompanying notes to financial statements are an integral part of these statements. F-21 INTERNATIONAL SPORTS MARKETING, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------- --------------------------- 1993 1994 1995 1995 1996 --------- --------- --------- ------------- -------------- (UNAUDITED) Cash flows from operating activities: Net income (loss)...... $ 182,833 $ 955,576 $ 520,851 $ 691,565 $ (128,714) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization......... 97,313 103,932 111,469 53,810 46,427 Assumption of Major League Alumni Marketing Program's net liabilities...... (308,150) -- -- -- -- Changes in certain assets and liabilities: Accounts receivable... 115,434 (2,398) (42,402) (594,665) 4,070 Prepaid expenses...... (29,415) (28,009) (155,072) (19,793) 9,691 Long-term receivable.. -- (6,145) (5,893) (5,893) (15,635) Accounts payable and accrued liabilities.. (97,360) 178,302 (188,050) 89,875 74,105 Deferred revenues..... 131,518 57,706 219,026 (210,407) 241,375 --------- --------- --------- ------------ ------------ Net cash flows from operating activities. 92,173 1,258,964 459,929 4,492 231,319 --------- --------- --------- ------------ ------------ Cash flows from investing activities: Capital expenditures... (28,655) (54,817) (51,989) (22,754) (10,620) Investments............ -- -- (390,166) -- (28,568) --------- --------- --------- ------------ ------------ Net cash flows from investing activities. (28,655) (54,817) (442,155) (22,754) (39,188) --------- --------- --------- ------------ ------------ Cash flows from financing activities: Distribution paid to shareholders.......... -- (727,948) (384,002) -- (200,000) Exercise of options.... -- -- 5 -- -- Repayment of shareholder loans payable............... (113,648) (222,052) -- -- -- --------- --------- --------- ------------ ------------ Net cash flows from financing activities. (113,648) (950,000) (383,997) -- (200,000) --------- --------- --------- ------------ ------------ Net change in cash...... (50,130) 254,147 (366,223) (18,262) (7,869) Cash, beginning of period................. 232,842 182,712 436,859 436,859 70,636 --------- --------- --------- ------------ ------------ Cash, end of period..... $ 182,712 $ 436,859 $ 70,636 $ 418,597 $ 62,767 ========= ========= ========= ============ ============
The accompanying notes to financial statements are an integral part of these statements. F-22 INTERNATIONAL SPORTS MARKETING, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS: International Sports Marketing, Inc. (ISM) was organized for the purpose of marketing, licensing and operating sports-related promotions and rights. ISM has arrangements with various organizations that represent former professional athletes. ISM's revenue results primarily from the coordination of various events, including the production of sports-themed premiums and promotions, sales incentives, licensing, games, clinics and personal appearances. The discussion under the heading "Risk Factors" contained in this Registration Statement is incorporated herein by reference. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following is a summary of the significant accounting policies affecting the financial statements of ISM: Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable ISM grants credit to customers based upon management's assessment of their creditworthiness. Sales to sponsors account for virtually all of ISM's receivables as of December 31, 1994 and 1995 and June 30, 1996. Two significant customers individually accounted for 51% and 15% of 1993 sales and 42% and 19% of 1994 sales. One other significant customer accounted for 17% of 1995 sales. Four significant customers accounted for 15%, 12%, 12% and 11% of sales for the six-month period ended June 30, 1996. Depreciation Depreciation is provided using the straight-line method which allocates the cost of equipment over estimated useful lives ranging from five to ten years. Long-Term Receivable This represents premiums paid under a split-dollar life insurance policy arrangement with a key employee of ISM. This balance is repayable upon termination of the employee or from the proceeds of the insurance policy. Deferred Revenue Revenue received in advance, such as deposits on events and appearances, is deferred and recognized as revenue during the period earned. Stock Options In accordance with an employment agreement, a key employee of ISM exercised options to purchase approximately five shares of common stock. The exercise price was $1.00 per share which was deemed to F-23 INTERNATIONAL SPORTS MARKETING, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) approximate fair value as of the date of grant. Accordingly, no compensation expense has been recognized in connection with this transaction. Income Taxes The shareholders of ISM have elected to file under Subchapter S for both state and federal income tax purposes. No provision for income taxes has been reflected in the financial statements as the taxable income or loss is reflected on the individual income tax returns of the shareholders. Upon completion of the transaction discussed in Note 6, ISM's S Corporation status will automatically terminate. Recently Issued Accounting Standards Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121), was issued in March 1995 and is effective for fiscal years beginning after December 15, 1995. This statement will be applied prospectively and requires that impairment losses on long-lived assets be recognized when the book value of the asset exceeds its expected undiscounted cash flows. ISM adopted SFAS No. 121 on January 1, 1996, and adoption at that time did not have a material impact on ISM's financial position or results of operations. Unaudited Interim Financial Statements The statements of operations and cash flows for the six-month period ended June 30, 1995 are unaudited and are not covered by the report of independent public accountants. However, in the opinion of management, these interim financial statements include all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the results of operations and cash flows of ISM for the interim period and are prepared on the same basis as the audited financial statements. Supplemental Disclosure of Cash Flow Information There were no cash payments for interest or taxes during the periods presented. Reclassifications Certain prior year balances have been reclassified to conform to the current year presentation. 3. LICENSE AGREEMENT: ISM has a license agreement with Major League Alumni Marketing, Inc. (MLAM, Inc.), a wholly owned subsidiary of the Major League Baseball Players Alumni Association (the Agreement) dated December 1, 1993, effective January 1, 1993. The Agreement supersedes the Management Agreement dated May 15, 1989, between ISM and MLAM, Inc. Pursuant to the Agreement, the Major League Alumni Marketing Program, a project formed between ISM and MLAM, Inc., was terminated and ISM assumed all of the assets and liabilities of the project. The excess of liabilities over assets assumed is reflected as an intangible asset in the accompanying balance sheets and is being amortized over the initial term of the Agreement on the straight-line basis. This Agreement provides ISM with certain exclusive rights and provides for, among other things, the following: F-24 INTERNATIONAL SPORTS MARKETING, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Royalty Payment ISM is required to make a royalty payment to MLAM, Inc. based upon a specified percentage of its Annual Gross Revenues, as defined, related to the use, exploitation and sublicensing of the rights acquired from MLAM, Inc. As of June 30, 1996, the future minimum commitment under the Agreement is $300,000. Royalties paid to MLAM, Inc. were $132,383, $295,250 and $165,948 for the years ended December 31, 1993, 1994 and 1995, and $60,000 for the six- month period ended June 30, 1996, respectively. Term of the Agreement The Agreement provides for an initial term of 40.5 months and contains automatic renewal options for successive two-year periods until termination. ISM or MLAM, Inc. may terminate the Agreement with a written notification to the other party at least one year prior to the expiration of the then current term. As neither party elected to terminate this Agreement within the notification period, the Agreement has automatically been extended effective May 15, 1996, through December 31, 1998. The Agreement may also be terminated by either party if a material breach of the Agreement occurs which remains unresolved for 60 days following a written notification of the breach to the other party. 4. INVESTMENTS: ISM's investments represent securities classified as available for sale and are stated at market value. These investments consist primarily of debt securities which are actively traded on open markets. Unrealized gains or losses are recorded in shareholders' equity. Realized gains and losses on dispositions are computed by the specific identification method and are included in the accompanying statements of operations. The cost and estimated market value of investments in securities available for sale are summarized below:
DECEMBER 31, JUNE 30, 1995 1996 ------------ -------- Debt securities available for sale, at cost........... $390,166 $418,734 Gross unrealized gains................................ 4,856 1,692 -------- -------- Estimated market value................................ $395,022 $420,426 ======== ========
5. RELATED PARTY TRANSACTIONS: The following summarizes related party information. The discussion under the heading "Certain Transactions" contained in this Registration Statement is incorporated herein by reference. Administrative Service Fee Certain shareholders of ISM own an interest in the entity which performs general, administrative and accounting services for ISM. Fees related to these services were $60,000 for each of the years ended December 31, 1993, 1994 and 1995, and $30,000 for the six-month period ended June 30, 1996. Lease Expense ISM leases office space from an entity in which certain shareholders own an indirect interest. Lease expense related to this office space was $39,524, $53,777 and $76,774 for the years ended December 31, 1993, 1994 and 1995, and $39,832 for the six-month period ended June 30, 1996, respectively. Professional Services A shareholder of ISM is a partner in the entity which performs legal services for ISM. These fees amounted to $45,078, $97,831 and $20,499 for the years ended December 31, 1993, 1994 and 1995, and $12,190 for the six-month period ended June 30, 1996, respectively. F-25 INTERNATIONAL SPORTS MARKETING, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. SUBSEQUENT EVENT: Effective August 14, 1996, the shareholders of ISM entered into an agreement with Allin Communications Corporation to sell all of the outstanding shares of the Company. The sales price is approximately $2.4 million. The agreement includes a provision whereby the price will be increased in accordance with a specified formula based upon average earnings over a three-year period, as defined. The maximum additional payment would be approximately $2.4 million payable over a three-year period. This sale is conditioned upon the closing of an initial public offering being undertaken by Allin Communications Corporation. F-26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kent Consulting Group, Inc.: We have audited the accompanying balance sheets of Kent Consulting Group, Inc. (a California corporation) as of December 31, 1994 and 1995 and June 30, 1996, and the related statements of operations, shareholders' equity and cash flows for the year ended March 31, 1994, the nine months ended December 31, 1994, the year ended December 31, 1995 and the six months ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kent Consulting Group, Inc. as of December 31, 1994 and 1995 and June 30, 1996, and the results of its operations and its cash flows for the year ended March 31, 1994, the nine months ended December 31, 1994, the year ended December 31, 1995 and the six months ended June 30, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Pittsburgh, Pennsylvania, October 2, 1996 F-27 KENT CONSULTING GROUP, INC. BALANCE SHEETS
DECEMBER 31, ------------------ JUNE 30, 1994 1995 1996 -------- -------- -------- ASSETS Current assets: Cash and cash equivalents..................... $ 3,613 $ 904 $ 42,303 Accounts receivable........................... 222,630 341,678 645,846 Notes receivable.............................. 14,332 42,720 -- Inventory..................................... 20,761 -- -- Deferred income taxes......................... 7,000 -- -- Other assets.................................. 1,149 3,757 6,065 -------- -------- -------- Total current assets......................... 269,485 389,059 694,214 Property and equipment, net.................... 131,708 73,786 174,133 Note receivable................................ -- -- 43,300 Shareholder receivable......................... 20,759 -- -- Deferred income taxes.......................... -- 56,000 54,000 -------- -------- -------- $421,952 $518,845 $965,647 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of notes payable........... $108,983 $ 50,417 $ 40,000 Line of credit................................ 165,000 -- -- Shareholder note payable...................... -- 79,964 -- Accounts payable.............................. 131,442 60,805 128,730 Accrued liabilities: Payroll related.............................. 10,241 95,628 171,984 Income taxes................................. -- 42,000 158,000 Other........................................ 6,086 1,637 15,527 Deferred income taxes......................... -- 71,000 120,000 -------- -------- -------- Total current liabilities.................... 421,752 401,451 634,241 Notes payable.................................. -- 34,583 -- Shareholders' equity: Common stock, no par value per share-- Authorized, 1,500 shares; issued and outstanding, 1,000 shares................... 1,000 1,000 1,000 Retained earnings............................. (800) 81,811 330,406 -------- -------- -------- Total shareholders' equity................... 200 82,811 331,406 -------- -------- -------- $421,952 $518,845 $965,647 ======== ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-28 KENT CONSULTING GROUP, INC. STATEMENTS OF OPERATIONS
NINE MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED JUNE 30, MARCH 31, DECEMBER 31, DECEMBER 31, ---------------------- 1994 1994 1995 1995 1996 ---------- ------------ ------------ ----------- ---------- (UNAUDITED) Revenue................. $1,945,818 $1,467,975 $1,994,791 $764,922 $1,791,886 Cost of revenue......... 1,328,830 831,401 989,279 354,032 936,834 ---------- ---------- ---------- -------- ---------- Gross profit.......... 616,988 636,574 1,005,512 410,890 855,052 Selling, general and administrative......... 901,202 472,688 712,069 210,341 436,851 ---------- ---------- ---------- -------- ---------- (Loss) income from operations............. (284,214) 163,886 293,443 200,549 418,201 Interest expense, net... 26,897 24,531 3,832 3,219 2,606 ---------- ---------- ---------- -------- ---------- (Loss) income before income taxes........... (311,111) 139,355 289,611 197,330 415,595 Income taxes............ (74,495) 56,000 57,000 80,000 167,000 ---------- ---------- ---------- -------- ---------- Net (loss) income....... $ (236,616) $ 83,355 $ 232,611 $117,330 $ 248,595 ========== ========== ========== ======== ==========
The accompanying notes to financial statements are an integral part of these statements. F-29 KENT CONSULTING GROUP, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
RETAINED TOTAL COMMON EARNINGS SHAREHOLDERS' STOCK (DEFICIT) EQUITY -------- --------- ------------- March 31, 1993............................... $123,041 $ 21,427 $144,468 Net loss.................................... -- (236,616) (236,616) -------- -------- -------- March 31, 1994............................... 123,041 (215,189) (92,148) Acquisition and retirement of shares........ (12,766) -- (12,766) Net income.................................. -- 83,355 83,355 Capital contribution........................ (109,275) 131,034 21,759 -------- -------- -------- December 31, 1994............................ 1,000 (800) 200 Net income.................................. -- 232,611 232,611 Distribution to shareholders................ -- (150,000) (150,000) -------- -------- -------- December 31, 1995............................ 1,000 81,811 82,811 Net income.................................. -- 248,595 248,595 -------- -------- -------- June 30, 1996................................ $ 1,000 $330,406 $331,406 ======== ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-30 KENT CONSULTING GROUP, INC. STATEMENTS OF CASH FLOWS
NINE MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED JUNE 30, MARCH 31, DECEMBER 31, DECEMBER 31, -------------------- 1994 1994 1995 1995 1996 ---------- ------------ ------------ ----------- -------- (UNAUDITED) Cash flows from operating activities: Net (loss) income..... $(236,616) $ 83,355 $232,611 $117,330 $248,595 Adjustments to reconcile net (loss) income to net cash flows from operating activities: Depreciation and amortization....... 22,168 12,000 18,417 9,000 27,530 Deferred income taxes.............. (74,495) 56,000 15,000 61,000 51,000 Changes in certain assets and liabilities-- Accounts receivable.. 237,232 41,975 (285,966) (177,087) (304,168) Notes receivable..... 203,757 (14,332) (42,720) (18,172) (580) Shareholder receivable.......... -- (20,759) -- -- -- Inventory............ 54,154 23,923 -- -- -- Other assets......... 1,882 325 (3,478) (2,748) (2,308) Accounts payable..... (76,336) (105,216) 60,805 31,352 67,925 Accrued liabilities.. (82,432) 2,105 139,116 70,575 206,246 --------- -------- -------- -------- -------- Net cash flows from operating activities........ 49,314 79,376 133,785 91,250 294,240 --------- -------- -------- -------- -------- Cash flows from investing activities: Capital expenditures, net.................. (2,692) (33,330) (60,069) (31,884) (127,877) --------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from notes payable.............. 187,000 -- 164,732 84,768 -- Principal payments on notes payable........ (226,575) (58,550) (172,544) (104,943) (124,964) Acquisition and retirement of shares. -- (12,766) -- -- -- Distribution to shareholders......... -- -- (65,000) -- -- Capital contribution.. -- 21,759 -- -- -- --------- -------- -------- -------- -------- Net cash flows from financing activities........ (39,575) (49,557) (72,812) (20,175) (124,964) --------- -------- -------- -------- -------- Net change in cash and cash equivalents 7,047 (3,511) 904 39,191 41,399 Cash and cash equivalents, beginning of period............. 77 7,124 -- -- 904 --------- -------- -------- -------- -------- Cash and cash equivalents, end of period................ $ 7,124 $ 3,613 $ 904 $ 39,191 $ 42,303 ========= ======== ======== ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-31 KENT CONSULTING GROUP, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED JUNE 30, MARCH 31, DECEMBER 31, DECEMBER 31, ------------------ 1994 1994 1995 1995 1996 ---------- ------------ ------------ ----------- ------ (UNAUDITED) Supplemental disclosure of cash flow information: Cash paid for-- Interest............. $32,000 $24,000 $6,000 $4,000 $6,000 ======= ======= ====== ====== ====== Income taxes......... $18,000 $ -- $1,000 $ -- $1,000 ======= ======= ====== ====== ======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: The net liabilities of Vision Network Systems, Inc., the Predecessor, as of December 31, 1994 (reflected as a shareholder receivable on the balance sheet) consist of the following (see Note 2): Cash.......................................................... $ 3,613 Accounts receivable........................................... 222,630 Notes receivable.............................................. 14,332 Inventory..................................................... 20,761 Other assets.................................................. 800 Deferred tax asset............................................ 7,000 Property and equipment, net................................... 131,708 Accounts payable.............................................. (131,442) Accrued liabilities........................................... (16,178) Notes payable/line of credit.................................. (273,983) --------- $ (20,759) =========
During the year ended December 31, 1995, the Company assumed $172,776 of long-term debt from Vision Network Systems, Inc., the Predecessor, and received in exchange the following (see Note 4): Accounts receivable............................................ $ 55,712 Computer equipment............................................. 32,064 Buyout of marketing agreement.................................. 85,000 -------- $172,776 ========
The accompanying notes to financial statements are an integral part of these statements. F-32 KENT CONSULTING GROUP, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS: Kent Consulting Group, Inc. (KCG) is engaged in the performance of professional services related to the design and operation of custom business network systems for microcomputers. KCG was incorporated on November 23, 1994, and commenced operations on January 1, 1995. Prior to December 31, 1994, Vision Network Systems, Inc. (VNS or the Predecessor) was engaged in the same business. KCG and VNS are deemed to be entities under common control as the sole shareholder of KCG and his spouse own 96% of VNS. KCG was formed to acquire substantially all of the assets of VNS. KCG provides the same services to the same customers with the same employees as VNS had previously. Therefore, due to factors described above, VNS is deemed to be a predecessor. VNS is currently involved with litigation arising from the conduct of its business. This liability was not assumed by KCG. In the opinion of management, based upon its discussion with counsel, any liability associated with these matters would be the obligation of VNS. The matters affecting the Predecessor relate to an alleged usurpation of a division of VNS's business by a former employee. VNS has filed a lawsuit against the former employee who, in turn, has cross-complained against VNS for damages to his reputation. The Predecessor is represented by its insurance carrier in defense of the cross-complaint. Also related to the matter described above, two claims against VNS remain outstanding which were filed by former vendors for amounts due. VNS contends these balances relate to purchases made by the former employee in a capacity where he was not authorized to do so. Accordingly, these claims should be directed to this individual. As a result of the matters discussed above, KCG was formed to continue the business. Subsequent to January 1, 1995, VNS's operations have been limited to completion of projects previously commenced as well as efforts to resolve the outstanding matters. The discussion under the heading "Risk Factors" contained in this Registration Statement is incorporated herein by reference. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following is a summary of the significant accounting policies affecting the financial statements of KCG and the Predecessor. Basis of Presentation As KCG and VNS represent entities under common control, the accompanying financial statements present the financial position and results of operations and cash flows of KCG and VNS as if they were combined from inception in a manner similar to a pooling of interests. The financial position, results of operations and related disclosures as of and prior to December 31, 1994, represent that of the Predecessor. This information is provided due to the similarities in ownership and operations. The accompanying statements of shareholders' equity reflect the net liabilities of VNS as of December 31, 1994, and the initial capitalization of KCG as a contribution of capital. Comparable information for VNS subsequent to January 1, 1995, has not been provided as that portion of the business was not acquired by the Company and is not included as part of the transaction discussed in Note 9. VNS used a fiscal year-end of March 31. The results of operations for the nine-month period ended December 31, 1994, are provided for comparability. F-33 KENT CONSULTING GROUP, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Certain assets and liabilities of VNS were acquired and assumed by KCG. The purchase method of accounting was not used as KCG and the Predecessor represent entities under common control. VNS's cost basis in the assets acquired and liabilities assumed has been reflected in the accompanying 1995 financial statements. Therefore, the purchase price in excess of the Predecessor's cost basis has been reflected as a distribution to shareholders in the accompanying statement of shareholders' equity (Note 4). Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents KCG considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents. Accounts Receivable KCG grants credit to customers based upon management's assessment of their creditworthiness. Three significant customers accounted for approximately 35%, 15% and 10% of 1995 sales, respectively. One customer accounted for approximately 26% of sales for the six months ended June 30, 1996. Trade accounts receivable are due from approximately 30 customers located primarily in the greater San Francisco Bay area. Property and Equipment KCG provides for depreciation on its property and equipment using accelerated methods over estimated useful lives of 5 years. The Predecessor provided for depreciation on its property and equipment using straight-line and accelerated methods over useful lives ranging from 5 to 31.5 years. Expenditures for ordinary maintenance and repairs which do not extend the lives of the applicable assets are charged to expense as incurred, while renewals and betterments that materially extend the lives of the applicable assets are capitalized and depreciated. Financial Instruments Notes payable are reflected at their outstanding face value, excluding unpaid interest. As no ready market exists for these instruments, comparable instruments available from outside KCG are not available. Based upon the nature of these instruments and KCG itself, it is not practicable to estimate the fair value of these notes. All other financial instruments are classified as current and will be utilized within the next operating cycle. Recently Issued Accounting Standards Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121), was issued in March 1995 and is effective for fiscal years beginning after December 15, 1995. This statement will be applied prospectively and requires that impairment losses on long-lived assets be recognized when the book value of the asset exceeds its expected undiscounted cash flows. KCG adopted SFAS No. 121 on January 1, 1996, and adoption at that time did not have a material impact on KCG's financial position or results of operations. F-34 KENT CONSULTING GROUP, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Unaudited Interim Financial Statements The statements of operations and cash flows for the six-month period ended June 30, 1995 are unaudited and are not covered by the report of independent public accountants. However, in the opinion of management, these interim financial statements include all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the results of operations and cash flows of KCG for the interim period and are prepared on the same basis as the audited financial statements. 3. PROPERTY AND EQUIPMENT: Property and equipment is comprised of the following:
DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ----------------- ------------- Furniture, fixtures and equipment................... $126,815 $ 92,133 $220,010 Automobile................... 37,556 -- -- Leasehold improvements....... 52,731 -- -- -------- -------- -------- 217,102 92,133 220,010 Accumulated depreciation..... (85,394) (18,347) (45,877) -------- -------- -------- $131,708 $ 73,786 $174,133 ======== ======== ========
4. RELATED PARTY TRANSACTIONS: The following summarizes related party information. The discussion under the heading "Certain Transactions" contained in this Registration Statement is incorporated herein by reference. During the year ended December 31, 1995 and the six months ended June 30, 1996, KCG leased certain space and an automobile from its shareholder under three agreements. These rental agreements expire at various times through May 1997. Rental payments made under these arrangements were approximately $69,000 and $40,000. The future minimum commitment under these agreements is approximately $58,000 as of June 30, 1996. KCG had a marketing commission agreement with VNS under which commissions of $100,000 were paid during the year ended December 31, 1995. This agreement provided for certain rights of VNS to be used by KCG, including customer lists and employment agreements with employees. This agreement was terminated and the related rights were acquired by KCG, effective November 1, 1995, for $150,000, of which $65,000 was paid during the year ended December 31, 1995. The remaining $85,000 in consideration was in the form of a bank loan assumption. Additionally, approximately $88,000 under a separate bank loan was assumed in exchange for certain tangible assets. The assumption of these obligations has been reflected as noncash investing and financing activities in the accompanying statement of cash flows. KCG purchased equipment of approximately $50,000 and $122,000 from affiliated entities during the year ended December 31, 1995 and the six months ended June 30, 1996. KCG had notes receivable from VNS and another affiliated entity of approximately $25,000 and $18,000 as of December 31, 1995. KCG had a shareholder note payable of $79,964 as of December 31, 1995. This note bears interest at prime plus 4%, with monthly principal payments of $6,664 plus interest. This note is secured by the Company's accounts receivable and fixed assets. F-35 KENT CONSULTING GROUP, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) During the year ended March 31, 1994, and the nine months ended December 31, 1994, VNS leased a building from its principal shareholders. Rental payments made in accordance with the lease agreement were approximately $102,000 and $76,000, respectively. VNS had a note receivable from one of its principal shareholders of approximately $14,000 as of December 31, 1994. This note bears interest at 8%. 5. LINE OF CREDIT: VNS had an agreement with a bank which provided for a $175,000 revolving line of credit. Borrowings under this agreement accrued interest at 4% over the bank's prime rate. These borrowings were secured by substantially all of the assets of VNS, and were personally guaranteed by VNS's principal shareholders. The amount outstanding under this line was $165,000 as of December 31, 1994. 6. NOTES PAYABLE: KCG and VNS had the following long-term debt obligations outstanding:
DECEMBER 31, DECEMBER 31, JUNE 30, 1994 1995 1996 ------------ ------------ -------- Note payable to a bank, interest at prime plus 4%, monthly principal payments of $4,583 plus interest, maturity August 1997, secured by accounts receivable and general intangibles and guaranteed by KCG's shareholders....................... $ -- $ 85,000 $ 40,000 Note payable to a bank, interest at 10.5%, monthly principal and interest payments of $4,026, maturity June 1997, secured by personal residences of the principal shareholders of VNS...................... 90,961 -- -- Note payable to a bank, interest at 9.25%, monthly principal and interest payments of $575, maturity December 1997, secured by automobile............................ 18,022 -- -- -------- -------- -------- 108,983 85,000 40,000 Less current maturities................... (108,983) (50,417) (40,000) -------- -------- -------- $ -- $ 34,583 $ -- ======== ======== ========
7. EMPLOYEE BENEFIT PLANS: KCG provides a 401(k) plan for its employees. The terms of the plan provide for KCG to assume the cost of plan administration. No contributions by KCG are required or have been made to date. 8. INCOME TAXES: Deferred income taxes are provided on all significant temporary differences between tax and financial reporting based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The provision for income taxes represents the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. F-36 KENT CONSULTING GROUP, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The provision for income taxes includes the following components:
NINE MONTHS SIX MONTHS YEAR ENDED ENDED YEAR ENDED ENDED MARCH 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1994 1994 1995 1996 ---------- ------------ ------------ ---------- Current taxes-- Federal........................ $ -- $ -- $35,700 $100,300 State.......................... -- -- 6,300 17,700 -------- ------- ------- -------- -- -- 42,000 118,000 -------- ------- ------- -------- Deferred taxes-- Federal........................ (63,500) 47,600 12,750 41,650 State.......................... (10,995) 8,400 2,250 7,350 -------- ------- ------- -------- (74,495) 56,000 15,000 49,000 -------- ------- ------- -------- Total........................... $(74,495) $56,000 $57,000 $167,000 ======== ======= ======= ========
The effective tax rate for the year ended December 31, 1995, differs from the statutory rates due to the deductibility of the amortization of the intangible assets purchased from VNS. The accompanying financial statements reflect this transaction as a distribution to shareholders. KCG's deferred tax liability results primarily from differences arising from the use of the cash method of accounting for federal and state income tax purposes. Deferred income taxes are comprised of the following:
DECEMBER 31, DECEMBER 31, JUNE 30, 1994 1995 1996 ------------ ------------ --------- Deferred tax assets: Accruals................................. $ -- $ 63,000 $ 136,000 Net operating loss carryforward.......... 67,000 -- -- Intangible asset......................... -- 60,000 58,000 Deferred tax liabilities: Accounts receivable...................... -- (137,000) (258,000) Other.................................... -- (1,000) (2,000) Valuation allowance....................... (60,000) -- -- -------- --------- --------- Net asset (liability)..................... $ 7,000 $ (15,000) $ (66,000) ======== ========= =========
VNS recorded a valuation allowance against a portion of the net deferred tax asset. The benefit of the deferred tax asset will be recognized in the years in which it is realized. 9. SUBSEQUENT EVENTS: Effective August 16, 1996, KCG and its shareholder entered into an agreement providing for a merger into a wholly owned subsidiary of Allin Communications Corporation (Allin). Consideration related to this transaction is approximately $5.2 million, consisting of $2.0 million in cash and $3.2 million in common stock of Allin. The agreement includes provisions whereby the purchase price will be increased in accordance with a specified formula based upon average earnings over a three-year period, as defined. The maximum additional payment would be approximately $2.8 million. The agreement also provides for grants of $400,000 in common stock of Allin to be made to certain employees of KCG. This merger is conditioned upon the closing of an initial public offering being undertaken by Allin. F-37 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DE- LIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANC- ES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. ------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................................................... 3 Risk Factors............................................................... 10 Use of Proceeds............................................................ 15 Dividend Policy............................................................ 15 Dilution................................................................... 16 Capitalization............................................................. 17 Selected Financial Data.................................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. 20 Business................................................................... 28 Management................................................................. 42 Principal Stockholders..................................................... 45 Certain Transactions....................................................... 46 Description of Capital Stock............................................... 51 Shares Eligible for Future Sale............................................ 55 Underwriting............................................................... 57 Legal Matters.............................................................. 58 Experts.................................................................... 58 Additional Information..................................................... 58 Index to Financial Statements.............................................. F-1
------------ UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT- MENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,000,000 SHARES ALLIN COMMUNICATIONS CORPORATION COMMON STOCK ------------ PROSPECTUS , 1996 ------------ FRIEDMAN, BILLINGS, RAMSEY & CO., INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Securities and Exchange Commission filing fee................... $ 12,690 National Association of Securities Dealers, Inc. filing fee..... 29,420* Printing expenses............................................... 82,000* Accounting fees and expenses.................................... 190,000* Legal fees and expenses......................................... 325,000* Blue Sky fees and expenses...................................... 5,000* Transfer agent fees............................................. 2,000* Miscellaneous................................................... 10,000* -------- TOTAL....................................................... 656,110* ========
- -------- *Estimate. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a corporation to indemnify any person who was or is a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 of the DGCL also empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless, and only to the extent that, the Court of Chancery or the court in which such action was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 of the DGCL further provides that, to the extent that a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 of the DGCL shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation is empowered to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liabilities under Section 145 of the DGCL. II-1 Consistent with the DGCL, the Registrant's Certificate of Incorporation contains a provision eliminating or limiting liability of directors to the Registrant and its stockholders for monetary damages arising from acts or omissions in the director's capacity as a director. The provision does not, however, eliminate or limit the personal liability of a director (i) for any breach of such director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful dividends or unlawful stock purchases or redemptions as provided in Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. This provision offers persons who serve on the Board of Directors of the Registrant protection against awards of monetary damages resulting from breaches of their duty of care, except as indicated above. The Securities and Exchange Commission has taken the position that the provision will have no effect on claims arising under the federal securities laws. The Registrant's Certificate of Incorporation and By-Laws provide for mandatory indemnification rights to the maximum extent permitted by applicable law, subject to limited exceptions, to any director or officer of the Registrant who, by reason of the fact that he is a director or officer of the Registrant, is involved in a legal proceeding of any nature. Such indemnification rights include reimbursement for expenses incurred by such director or officer in advance of the final disposition of such proceeding in accordance with the applicable provisions of the DGCL. The Registrant intends to purchase and maintain insurance to protect persons entitled to indemnification pursuant to the Registrant's Certificate of Incorporation and By-laws and the DGCL against expenses, judgments, fines and amounts paid in settlement, to the fullest extent permitted by the DGCL. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On August 16, 1996, in connection with the merger of SeaVision, Inc. with and into a wholly owned subsidiary of the Registrant, the Registrant issued an aggregate of 1,000 shares of its Common Stock. As no public offering was involved, the issuance of such shares was exempt from registration under Section 4(2) of the Securities Act. On August 16, 1996, the Registrant issued 25,000 shares of its Series A Convertible Redeemable Preferred Stock that is not convertible into Common Stock until at least six months have elapsed from the closing of the Offering. The aggregate consideration paid for such shares was $1,000,000 in cash and the extinguishment of loans in the amount of $1,500,000. As no public offering was involved, the issuance of such shares was exempt from registration under Section 4(2) of the Securities Act. Concurrently with or immediately following the closing of the Offering, in connection with the closing of the KCG Acquisition, the Registrant will issue to the sole shareholder of KCG $3.2 million in Common Stock valued at the initial public offering price in the Offering. As no public offering is involved, the issuance of such shares will be exempt from registration under Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1 Form of Underwriting Agreement.* 2.1 Stock Purchase Agreement dated August 14, 1996 by and among International Sports Marketing, Inc., Henry Posner, Jr., Thomas D. Wright, Michael J. Fetchko, James C. Roddey, Richard W. Talarico, John F. Hensler and the Registrant.*
II-2
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 2.2 Agreement and Plan of Merger dated August 16, 1996 by and among Kent Consulting Group, Inc., Les Kent and the Registrant.* 3(i)(a) Certificate of Incorporation of the Registrant.* 3(i)(b) Certificate of Designation of the Registrant relating to Series A Convertible Redeemable Preferred Stock.* 3(i)(c) Certificate of Amendment to Certificate of Designation of the Registrant relating to the Series A Convertible Redeemable Preferred Stock. 3(ii) By-laws of the Registrant.* 4 Certificate of Designation of the Registrant relating to Series A Convertible Redeemable Preferred Stock and Certificate of Amendment relating thereto (filed as Exhibits (3)(i)(b) and 3(i)(c)). 5 Opinion of Eckert Seamans Cherin & Mellott. 10.1 Sublease Agreement dated August 1, 1996 between SeaVision, Inc. and Blair Haven Entertainment, Inc.* 10.2 Assignment of Intellectual Property Rights dated October 3, 1994 by Brian K. Blair and R. Daniel Foreman in favor of SeaVision, Inc.* 10.3 Registration Rights Agreement dated July 23, 1996 by and among the Registrant and certain of its stockholders.* 10.4 Registration Rights Agreement dated July 23, 1996 by and among the Registrant and certain of its stockholders.* 10.5 Note Conversion Agreement dated July 23, 1996 by and among the Registrant, Henry Posner, Jr., Thomas D. Wright, Terence M. Graunke, James C. Roddey and Richard W. Talarico.* 10.6 License Agreement dated December 1, 1993 between Major League Alumni Marketing, Inc. and Hawthorne Sports Marketing, Inc.* 10.7 Line of Credit Note, dated May 31, 1996, made by SeaVision, Inc. in favor of Integra Bank.* 10.8 Form of 1996 Stock Plan of the Registrant.* 10.9 Employment Agreement dated August 1, 1996 by and between the Registrant and Richard W. Talarico.* 10.10 Employment Agreement dated August 1, 1996 by and between the Registrant and R. Daniel Foreman.* 10.11 Employment Agreement dated August 1, 1996 by and between the Registrant and Brian K. Blair.* 10.12 First Amended and Restated Agreement dated June 1, 1996 between SeaVision, Inc. and Celebrity Cruises Inc. (subject to request for confidential treatment).* 10.13 Agreement dated February 6, 1996 between SeaVision, Inc. and Carnival Corporation (subject to request for confidential treatment).* 10.14 Agreement dated August 8, 1996 by and between SeaVision, Inc. and Norwegian Cruise Line Limited (subject to request for confidential treatment).* 10.15 Installation Agreement dated September 9, 1996 by and between SeaVision, Inc. and Cunard Line Limited (subject to request for confidential treatment). 10.16 Concession Agreement dated September 17, 1996 by and between SeaVision, Inc. and Royal Caribbean Cruise Line (subject to request for confidential treatment).
II-3
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.17 Employment Agreement dated as of September 16, 1996 by and between the Registrant and Jon E. VanAmringe. 11 Computation of Earnings per Share. 21 Subsidiaries of the Registrant.* 23.1 Consent of Eckert Seamans Cherin & Mellott (included in its opinion filed herewith as Exhibit 5). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Richard S. Trutanic. 24 Power of Attorney (included in the Signature Page).* 27 Financial Data Schedule.
- -------- * Previously filed. (b) Financial Statement Schedules. The following financial statement schedule is included in Part II of this Registration Statement and should be read in conjunction with the Financial Statements and notes thereto included elsewhere herein. II. Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling person of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registration of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment no. 1 to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh, Commonwealth of Pennsylvania on October 2, 1996. ALLIN COMMUNICATIONS CORPORATION By: /s/ Richard W. Talarico ----------------------------- Richard W. Talarico Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amendment no. 1 to registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Richard W. Talarico Chairman of the Board and October 2, 1996 - ------------------------- Chief Executive Officer Richard W. Talarico (principal executive officer) /s/ Jon E. VanAmringe Chief Financial Officer and October 2, 1996 - ------------------------- Treasurer (principal Jon E. VanAmringe financial and accounting officer) /s/ R. Daniel Foreman President and Director October 2, 1996 - ------------------------- R. Daniel Foreman /s/ Brian K. Blair Chief Operating Officer, October 2, 1996 - ------------------------- Secretary and Director Brian K. Blair * Director October 2, 1996 - ------------------------- William C. Kavan * Director October 2, 1996 - ------------------------- James C. Roddey *By: /s/ Richard W. Talarico ----------------------- Richard W. Talarico Attorney-in-Fact II-5 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Allin Communications Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Allin Communications Corporation (a Delaware corporation) and subsidiaries, included in this registration statement and have issued our report thereon dated October 2, 1996. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II, which is the responsibility of the Company's management, is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material aspects the financial data required to be set forth in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Pittsburgh, Pennsylvania October 2, 1996 S-1 SCHEDULE II ALLIN COMMUNICATIONS CORPORATION VALUATION AND QUALIFYING ACCOUNTS
BALANCE ADDITIONS BALANCE AT CHARGED AT END BEGINNING TO OF OF PERIOD EXPENSES DEDUCTIONS PERIOD --------- --------- ---------- ------- KENT CONSULTING GROUP, INC. Deferred tax asset valuation Year Ended March 31, 1994................ $ -- $60,000 $ -- $60,000 Period Ended December 31, 1994........... 60,000 -- -- 60,000 Year Ended December 31, 1995............. 60,000 -- 60,000 -- Six Months Ended June 30, 1996........... -- -- -- --
S-2 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 1 Form of Underwriting Agreement.* 2.1 Stock Purchase Agreement dated August 14, 1996 by and among International Sports Marketing, Inc., Henry Posner, Jr., Thomas D. Wright, Michael J. Fetchko, James C. Roddey, Richard W. Talarico, John F. Hensler and the Registrant.* 2.2 Agreement and Plan of Merger dated August 16, 1996 by and among Kent Consulting Group, Inc., Les Kent and Allin Communications Corporation.* 3(i)(a) Certificate of Incorporation of the Registrant.* 3(i)(b) Certificate of Designation of the Registrant relating to Series A Convertible Redeemable Preferred Stock.* 3(i)(c) Certificate of Amendment to Certificate of Designation relating to the Series A Convertible Redeemable Preferred Stock. 3(ii) By-laws of the Registrant.* 4 Certificate of Designation of the Registrant relating to Series A Convertible Redeemable Preferred Stock and Certificate of Amendment relating thereto (filed as Exhibits (3)(i)(b) and 3(i)(c)). 5 Opinion of Eckert Seamans Cherin & Mellott. 10.1 Sublease Agreement dated August 1, 1996 between SeaVision, Inc. and Blair Haven Entertainment, Inc.* 10.2 Assignment of Intellectual Property Rights dated October 3, 1994 by Brian K. Blair and R. Daniel Foreman in favor of SeaVision, Inc.* 10.3 Registration Rights Agreement dated July 23, 1996 by and among the Registrant and certain of its stockholders.* 10.4 Registration Rights Agreement dated July 23, 1996 by and among the Registrant and certain of its stockholders.* 10.5 Note Conversion Agreement dated July 23, 1996 by and among the Registrant, Henry Posner, Jr., Thomas D. Wright, Terence M. Graunke, James C. Roddey and Richard W. Talarico.* 10.6 License Agreement dated December 1, 1993 between Major League Alumni Marketing, Inc. and Hawthorne Sports Marketing, Inc.* 10.7 Line of Credit Note, dated May 31, 1996, made by SeaVision, Inc. in favor of Integra Bank.* 10.8 Form of 1996 Stock Plan of the Registrant.* 10.9 Employment Agreement dated August 1, 1996 by and between the Registrant and Richard W. Talarico.* 10.10 Employment Agreement dated August 1, 1996 by and between the Registrant and R. Daniel Foreman.* 10.11 Employment Agreement dated August 1, 1996 by and between the Registrant and Brian K. Blair.* 10.12 First Amended and Restated Agreement dated June 1, 1996 between SeaVision, Inc. and Celebrity Cruises Inc. (subject to request for confidential treatment).* 10.13 Agreement dated February 6, 1996 between SeaVision, Inc. and Carnival Corporation (subject to request for confidential treatment).*
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.14 Agreement dated August 8, 1996 by and between SeaVision, Inc. and Norwegian Cruise Line Limited (subject to request for confidential treatment).* 10.15 Installation Agreement dated September 9, 1996 by and between SeaVision, Inc. and Cunard Line Limited (subject to request for confidential treatment). 10.16 Concession Agreement dated September 17, 1996 by and between SeaVision, Inc. and Royal Caribbean Cruise Line (subject to request for confidential treatment). 10.17 Employment Agreement dated as of September 16, 1996 by and between the Registrant and Jon E. VanAmringe. 11 Computation of Earnings per Share. 21 Subsidiaries of the Registrant.* 23.1 Consent of Eckert Seamans Cherin & Mellott (included in its opinion filed herewith as Exhibit 5). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Richard S. Trutanic. 24 Power of Attorney (included in the Signature Page).* 27 Financial Data Schedule.
- -------- * Previously filed. EX-3.IC 2 CERTIFICATE OF VOTING POWERS Exhibit 3(i)(c) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF VOTING POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER RIGHTS, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF, OF THE SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK OF ALLIN COMMUNICATIONS CORPORATION Allin Communications Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That a resolution was duly adopted by the Board of Directors of said ----- corporation by unanimous written consent setting forth proposed technical amendments to the Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions thereof, of the Series A Convertible Redeemable Preferred Stock of said corporation, and declaring said amendments to be advisable. The resolution setting forth such proposed amendments is as follows: RESOLVED, that it is advisable that paragraphs 1 and 3(a) of the Certificate of Designation relating to the Series A Convertible Redeemable Preferred Stock of the Corporation be amended to replace references therein to the par value of such Series A Preferred Stock with references to the liquidation value of such Series A Preferred Stock and to be restated to provide as follows: 1. Designation. Forty thousand (40,000) shares of the Preferred Stock ----------- are hereby designated Series A Convertible Redeemable Preferred Stock with a liquidation value of One Hundred Dollars ($100) per share (the "Series A Preferred Stock"). 3. Dividends. --------- (a) The holders of shares of Series A Preferred Stock shall be entitled to receive, when and as declared out of funds legally available for the payment of dividends by the Board of Directors, cash dividends on each share of the Series A Preferred Stock (referred to as a "Share") at a rate per annum of 8% of the liquidation value thereof, from and including the date of issuance of such Share to and including the date on which the Redemption Price of such Share is paid. If the corporation has not consummated an initial public offering of its common stock ("Initial Public Offering") on or before December 31, 1996, the dividend rate provided for in the preceding paragraph of this Section shall increase from 8% to 12% of the liquidation value of a share of Series A Preferred Stock, from and after December 31, 1996. Such dividends, to the extent declared by the Board of Directors, will be payable quarterly in arrears on each October 31, January 31, April 30 and July 31 (hereinafter referred to as "Dividend Payment Dates"). To the extent that dividends are not paid on a particular Dividend Payment Date, all such dividends will accrue and compound on a quarterly basis and will be paid on or before the Redemption Date. SECOND: That written consent in lieu of a joint special meeting of the ------ holders of the Corporation's common stock and the holders of the Corporation's Series A Convertible Redeemable Preferred Stock has been given in accordance with Section 228 of the General Corporation Law of the State of Delaware, and that the amendments described above were approved by such stockholders. Third: That said amendments were duly adopted in accordance with the ----- provisions of Section 228 and 242 of the General Corporation Law of the State of Delaware. In accordance with Section 103(a)(2) and Section 103(b)(2) of the General Corporation Law of the State of Delaware, this corporation hereby executes and acknowledges this Certificate of Amendment of its Certificate of Voting Powers, Designations, Preferences and Relative, Participating, Optional or Other Rights, and the Qualifications, Limitations or Restrictions thereof, of the Series A Convertible Redeemable Preferred Stock this 30th day of September, 1996. ALLIN COMMUNICATIONS CORPORATION By /s/ Richard W. Talarico ____________________________________________ Richard W. Talarico, Chief Executive Officer -2- EX-5 3 OPINION OF ESC&M Exhibit 5 October 2, 1996 Allin Communications Corporation 300 Greentree Commons 381 Mansfield Avenue Pittsburgh, PA 15220 Gentlemen: We are acting as counsel for Allin Communications Corporation, a Delaware corporation (the "Company"), in connection with the registration by the Company under the Securities Act of 1933, as amended, of up to 2,300,000 shares of Common Stock, par value $0.01 per share, of the Company (the "Common Stock"), to be offered to the public under Registration Statement No. 333-10447 on Form S-1, as amended, relating to the offering (the "Registration Statement"). We have examined originals and copies certified or otherwise identified to our satisfaction of such records of the Company, agreements and other instruments, certificates of public officials and of officers of the Company and such other documents as we have deemed necessary for the basis for the opinions hereinafter expressed. On the basis of the foregoing, we are of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; and 2. The Common Stock, when issued and delivered as contemplated by the Registration Statement, will be duly authorized and validly issued, fully paid and nonassessable. We hereby consent to being named in the Registration Statement and in the Prospectus which constitutes a part thereof as counsel for the Company who have passed upon legal matters in connection with the Common Stock to which the Registration Statement and the Prospectus relate. We further consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Eckert Seamans Cherin & Mellott ECKERT SEAMANS CHERIN & MELLOTT EPM/VMK/blk EX-10.15 4 INSTALLATION AGREEMENT Exhibit 10.15 INSTALLATION AGREEMENT THIS INSTALLATION AGREEMENT (this "Agreement") is made and entered into as of the 9th day of September, 1996, by and between CUNARD LINE LIMITED, an English corporation with its registered office located at 52 Berkeley Street, London W1X 5FP England ("Cunard"), and SEAVISION, INC., a Delaware corporation having offices located at 300 Greentree Commons, 381 Mansfield Avenue, Pittsburgh, PA 15220 ("SeaVision"). RECITALS: A. Cunard has requested that SeaVision replace the existing television distribution and broadcast system onboard the Queen Elizabeth 2, a ship owned and operated by Cunard (the "QE2"). B. Cunard has also requested that, during such replacement, SeaVision operate and maintain the television distribution and broadcast system onboard the QE2. C. SeaVision has agreed to provide such requested services upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties, intending to be legally bound hereby, agree as follows: 1. Replacement of Existing Television Distribution and Broadcast ------------------------------------------------------------- System. - ------ SeaVision agrees to replace the existing television distribution and broadcast system onboard the QE2 as of the date hereof with a new television distribution and broadcast system comprised of the hardware components listed on Exhibit A attached hereto (collectively, the "Hardware"). The installation of the replacement system will be undertaken and completed for the fixed price set forth in Section 5(a) in accordance with the installation schedule attached hereto as Exhibit B (the "Installation Schedule"). TIME IS OF THE ESSENCE OF THIS AGREEMENT. Cunard acknowledges that the QE2 contains asbestos in certain of its structural components, and agrees that Cunard is responsible, at its own cost and expense, for undertaking all asbestos abatement and removal occasioned by SeaVision's installation of the replacement system, which abatement and removal will be undertaken in accordance with all applicable laws, rules and regulations and on a schedule that will permit SeaVision to perform its obligations hereunder in a timely manner. If SeaVision is delayed in its performance of its installation obligations under this Section 1 as a result of any delay by Cunard in the abatement or removal of asbestos onboard the QE2, SeaVision's obligations under the Installation Schedule shall likewise be delayed. 2. Scope of Operation and Maintenance Services to be Provided by ------------------------------------------------------------- SeaVision. - --------- (a) Commencing on October 20, 1996 and continuing for the balance of the term of this Agreement, and in accordance with the terms of this Agreement, SeaVision shall operate the television distribution and broadcast system onboard the QE2, as those activities are described in Exhibit C attached hereto, and shall provide such maintenance services as are required to keep the related broadcast equipment in good operating order and repair. Such operation will initially involve the existing television distribution and broadcast system onboard the QE2 and will involve the new television distribution and broadcast system as the same is installed onboard the QE2. In connection with SeaVision's performance of the foregoing operation and maintenance obligations, SeaVision shall provide all personnel reasonably necessary to fulfill such operation and maintenance obligations, including one broadcast control manager (the "Manager") who will remain onboard the QE2 on an on-going basis for so long as this Agreement is in effect. SeaVision acknowledges that the Manager and any other of its personnel from time to time onboard the QE2 shall at all times be employees of SeaVision. SeaVision understands and agrees that, while onboard the QE2, its personnel will be subject to the authority of the Master of the QE2 and the officer(s) designated to oversee the operation of the broadcast activities. SeaVision shall use its best efforts to ensure that its personnel will at all times while onboard the QE2 comply with the operations manual of Cunard, in the form then in effect. (b) SeaVision's personnel serving onboard the QE2 shall promptly be removed from such service, upon Cunard's request to SeaVision, in the event of: (i) intoxication while onboard the QE2; (ii) failure to comply with standards of professional and personal conduct expected by Cunard of its own employees and the employees of concessionaires onboard the QE2; and (iii) failure to abide by safety rules and regulations applicable to persons onboard the QE2. 3. Cunard Support. -------------- So long as SeaVision is providing the foregoing services to Cunard, Cunard shall: -2- (a) Make available to SeaVision: (i) the QE2 to the extent necessary for SeaVision's installation of the replacement distribution and broadcast television system and for SeaVision's operation and maintenance of the then-existing system in operation onboard the QE2, including but not limited to granting SeaVision personnel unlimited access to the television studio and video distribution system on board the QE2; (ii) such personnel as are reasonably necessary or appropriate to assist SeaVision in the successful installation of such replacement system and the successful operation and maintenance of such existing system; (iii) all necessary storage and work space onboard the QE2 for SeaVision's performance of its obligations hereunder; and (iv) appropriate single-cabin accommodations onboard the QE2 for SeaVision personnel who are engaged in such installation, operation and maintenance activities. The grade of such accommodations shall be at Cunard's discretion. It is understood that SeaVision personnel occupying such accommodations will, at all times while onboard the QE2, be subject to Cunard's policies regarding onboard contractors, including those concerning dress, decorum and personal behavior; and (b) Furnish accommodations onboard the QE2 on mutually-agreeable dates, to allow SeaVision senior personnel to monitor the on-going installation of such replacement system onboard the QE2, the on-going operation and maintenance of the then-existing system onboard the QE2 and the performance of SeaVision's personnel. Cunard shall also provide the Manager with all other perquisites that it provides to its employees of similar rank. 4. Term. ---- The initial term of this Agreement shall commence on the date hereof and shall expire on December 13, 1996. Thereafter, the term of this Agreement shall continue indefinitely, unless and until either party shall, at any time and for any reason, provide sixty (60) days' prior written notice to the other of the termination hereof. Notwithstanding the foregoing, Cunard may, at any time after SeaVision's completion of the installation of the Hardware onboard the QE2, terminate this Agreement upon fourteen (14) days' prior notice in the event QE2 is sold, bareboat chartered or time chartered to any third party for a period longer than one (1) month. -3- 5. Payments. -------- In consideration of SeaVision's performance under this Agreement, Cunard agrees to pay to SeaVision the following amounts: (a) for SeaVision's provision and installation of the replacement television distribution and broadcast system, Cunard shall pay to SeaVision the aggregate amount of One Million Two Hundred Forty Thousand U.S. Dollars (U.S. $1,240,000.00) (the "Purchase Price"), which amount shall be payable in accordance with the installation payment schedule attached hereto as Exhibit D. (b) for SeaVision's operation and maintenance of the then existing television distribution and broadcast system onboard the QE2, Cunard shall: (i) pay to SeaVision, commencing on October 20, 1996, the monthly amount of [Redacted-Confidential treatment requested] (prorated for any partial month) for any period in which the QE2 is being used to perform passenger service, which monthly amounts shall be paid in arrears on or before the fifth day of each calendar month for the previous calendar month (no such monthly payment being due for any month in which the QE2 is out of service); and (ii) [Redacted-Confidential treatment requested] (c) Notwithstanding the foregoing, SeaVision understands and agrees that all payments made under this Agreement are conditioned upon timely progress and completion of the work in accordance with the Installation Schedule set forth in Exhibit B. In addition the final payment scheduled to be made on November 10, 1996 shall be conditioned upon prior completion of the installation and ensuring that the system is fully operational and in good working order. Should the contract work not be progressed or completed in a timely manner, Cunard shall have the right to withhold payment for all incomplete contract work always provided that Cunard shall submit to SeaVision within five (5) days after payment is otherwise due, a written notification specifying the cause for withholding payment. Should the parties fail to reach agreement on the manner in which the specified issues are to be resolved, then such dispute shall be resolved in accordance with Section 15. -4- 6. [Intentionally Omitted] 7. Insurance/Waiver of Subrogation. ------------------------------- (a) Cunard hereby warrants, represents and covenants that it has, and shall maintain for the term of this Agreement, at its sole expense, its normal insurance coverages for the QE2 and the equipment thereon. (b) So long as their respective insurers so permit, neither party hereto shall be liable to the other, or to the insurer of the other, claiming by way of subrogation through or under such other party with respect to any loss or damage, in whole or in part, to the extent that such other party shall be reimbursed out of that party's insurance coverage carried for such other party's protection with respect to such loss or damage. If so permitted, the parties shall each obtain any special endorsements required by their respective insurance carriers to evidence compliance with the waiver and release set forth herein and shall provide a copy thereof to the other party. (c) Cunard agrees to provide, at its own cost and expense, its normal maritime protection and indemnity insurance ("P&I") for the Manager and for each member of SeaVision's system installation crew for such periods of time as the Manager or crewmember, as the case may be, is employed by SeaVision and posted to the QE2, but only to the extent of Cunard's P&I coverage existing at the time of any claim. 8. Medical Care. ------------ At SeaVision's request, Cunard will furnish without charge, necessary onboard medical care by QE2's medical staff, as well as medicines, for illness and injury suffered by SeaVision's personnel while aboard the QE2. SeaVision is solely responsible for providing its personnel with any shoreside medical and/or dental care at its sole cost and expense. 9. Title. ----- Cunard acknowledges that unless and until it pays to SeaVision the Purchase Price in accordance with the terms of this Agreement, SeaVision shall retain exclusive ownership of the Hardware and Cunard shall have no right, title or interest therein. Upon Cunard's payment of each of the 2nd, 3rd and 4th Payments described on the installation payment schedule. SeaVision promptly shall convey to Cunard good and marketable title to approximately fourteen percent (14%) of the Hardware (based upon the value of the Hardware), free and clear of any liens, claims or other encumbrances. Upon Cunard's payment of the balance of the full amount of the Purchase Price to SeaVision, SeaVision promptly shall convey to Cunard good and marketable title to the balance of the Hardware (approximately 58%), free and clear of any liens, claims or other encumbrances. -5- 10. Warranty. -------- SeaVision hereby warrants its workmanship in connection with the installation of the replacement television distribution and broadcast system for a period of one (1) year after the completion of such installation. Any and all claims under the foregoing warranty must be delivered to SeaVision, in writing, within seven (7) days after the expiration of the warranty period. Cunard acknowledges that SeaVision is not the manufacturer of the Hardware and that warranties regarding the performance of the Hardware, if any, are provided solely by the respective manufacturers thereof, and not by SeaVision. SeaVision shall deliver to Cunard, upon completion of the installation of the replacement television distribution and broadcast system onboard the QE2, all information and documentation regarding such warranties as is then in SeaVision's possession or under its control. SeaVision shall assist Cunard in securing the benefits of any such warranties, but shall in no event be obligated under any such warranties. 11. Limitation of Liability. ----------------------- THE WARRANTIES AND REMEDIES EXPRESSLY SET FORTH IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES AND REMEDIES, ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR ANY IMPLIED WARRANTIES ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE. EXCEPT AS EXPRESSLY PROVIDED HEREIN OR ELSEWHERE IN THIS AGREEMENT, IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION, IN THE CASE OF SEAVISION, ANY SUCH DAMAGES ARISING OUT OF CUNARD'S USE OF OR INABILITY TO USE THE TELEVISION DISTRIBUTION AND BROADCAST SYSTEM ONBOARD THE QE2 OR ANY PORTION THEREOF, EVEN IF SEAVISION IS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN PARTICULAR, SEAVISION IS NOT RESPONSIBLE FOR ANY COSTS INCLUDING, BUT NOT LIMITED TO, THOSE INCURRED AS A RESULT OF LOST PROFITS OR REVENUE, LOSS OF USE OF THE TELEVISION DISTRIBUTION AND BROADCAST SYSTEM, OR CLAIMS BY THIRD PARTIES. IN ADDITION THERETO, NEITHER PARTY'S LIABILITY FOR DIRECT DAMAGES OF THE OTHER ARISING OUT OF ANY OF THE FOREGOING OR UNDER SECTION 13 OF THIS AGREEMENT SHALL IN NO EVENT EXCEED THE AMOUNT OF [Redacted-Confidential treatment requested]. 12. Confidentiality. --------------- (a) Each party agrees, during the term of this Agreement and thereafter, to maintain the confidential nature of the terms and conditions of this Agreement -6- and of any proprietary information shared by the other with it. For purposes of this Section 12(a), the term "proprietary information" excludes any information then in the public domain and any information that is independently, legally and without the breach of any agreement obtained from any third party. Notwithstanding anything contained in this Agreement to the contrary, the terms of this Section 12(a) shall survive the expiration or termination of this Agreement. (b) Each party acknowledges that its violation of its confidentiality or non-disclosure obligations under this Agreement may cause irreparable damage to the other that cannot be fully remedied by money damages. Accordingly, in the event of any such violation or threatened violation, the injured party will be entitled, in addition to pursuing any other remedy available to it under this Agreement or at law, to obtain injunctive or other equitable relief from any court of competent jurisdiction as may be necessary or appropriate to prevent any further violations thereof. (c) During the term of this Agreement (including any extensions thereof), and for a period of one (1) year thereafter, neither party shall induce or attempt to induce any employee or consultant of the other to terminate his or her employment or consulting relationship with such other party and shall not solicit any such employee or consultant for employment or consulting services. (d) Each party agrees to notify the other immediately upon the notifying party's becoming aware of or reasonably suspecting the possession, use or knowledge of all or part of any of the other party's proprietary information by any person or entity not authorized by this Agreement to have such possession, use or knowledge. The notifying party will promptly furnish the other party with details of such possession, use or knowledge, will assist in preventing a recurrence thereof and will cooperate with the other party in protecting the other party's rights in the other party's proprietary information. A party's compliance with the terms of this section 12 will not be construed as any waiver of the other party's right to recover damages or obtain other relief against the notifying party for the notifying party's breach of its confidentiality or non-disclosure obligations under this Agreement or the negligent or intentional harm to the other party's proprietary rights. 13. Indemnification. --------------- (a) SeaVision shall indemnify, defend and hold harmless Cunard and its successors and assigns from and against any and all liabilities, claims, suits, damages, judgments, awards, penalties, losses and other liabilities (including all related reasonable attorneys' fees, costs and expenses in connection therewith) (collectively referred to hereinafter as "Losses") suffered or incurred by Cunard by reason of, arising out of or in connection with: -7- (i) any negligent act or omission of SeaVision (or an employee, agent or representative of SeaVision) committed or omitted, as the case may be, in the course of SeaVision's performance of the terms of this Agreement; or (ii) SeaVision's failure to fully perform the terms of this Agreement. (b) Cunard shall indemnify, defend and hold harmless SeaVision and its successors and assigns from and against any and all Losses suffered or incurred by SeaVision by reason of, arising out of or in connection with: (i) any liability arising from or out of asbestos onboard the QE2, unless such liability arises as a result of SeaVision's negligence, willful misconduct or failure to observe Cunard's instructions relating to such asbestos; (ii) any negligent act or omission of Cunard (or an employee, agent or representative of Cunard) committed or omitted, as the case may be, in the course of Cunard's performance of the terms of this Agreement or its operation of the QE2; or (iii) Cunard's failure to fully perform the terms of this Agreement. (c) The terms of this Section 13 shall survive the expiration or termination of this Agreement. 14. Interruption in Performance. --------------------------- Neither Cunard nor SeaVision shall be liable to the other for any loss, damage or loss of profits arising out of any interruption or cessation of performance hereunder when such interruption or cessation is caused by any circumstance beyond the reasonable control of such party. 15. Arbitration. ----------- In the event of any dispute or controversy arising out of or related to this Agreement, the parties will seek to resolve any such controversy first by negotiating with each other in good faith in face-to-face negotiations between the respective principals of each. In the event a resolution is not reached in such manner, any remaining dispute or controversy shall be submitted for resolution by either party to any court of competent jurisdiction in City of New York, New York County, New York. -8- 16. Public Announcements. -------------------- The parties shall consult with each other and issue a public statement with respect to this Agreement as soon as is practical after the date hereof. 17. Right to Make Agreement. ----------------------- Each of the parties hereto represents and warrants to the other that it has all necessary and appropriate power and authority to execute, deliver and carry out the terms and provisions hereof and that its execution, delivery and performance thereof will not constitute a default by it under any other agreement to which it is a party. 18. Counterparts. ------------ This Agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which together shall constitute but one and the same original document. 19. Assignment. ---------- Either party hereto may assign this Agreement and its respective rights, interests and obligations hereunder to any third party without the consent of the other party hereto; provided, however, that no such assignment by a party shall relieve that party of any of its liabilities or obligations hereunder. It is expressly understood and agreed that, except as provided to the contrary in the preceding sentence, this Agreement and all of SeaVision's interests and rights herein and hereunder may be assigned, pledged, mortgaged and/or hypothecated by SeaVision in connection with the sale or transfer of all or substantially all of its assets or a change in the ownership of a controlling interest in SeaVision's capital stock. 20. Successors. ---------- This Agreement shall inure to the benefit of, and be binding upon, the respective successors and assigns of the parties hereto. 21. Effectiveness. ------------- This Agreement shall be effective upon its execution by an authorized representative of each party hereto, which execution may for all purposes be evidenced by facsimile transmission of a counterpart signature page of this Agreement. 22. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its principles of conflicts of laws. -9- 23. Severability. ------------ If any Section or provision of this Agreement, or any portion of any section or provision thereof, shall for any reason be held to be void, illegal or otherwise unenforceable, all other sections and portions of this Agreement shall nevertheless remain in full force and effect as if such void, illegal or unenforceable portion had never been included herein. 24. Notices. ------- All notices and other communications required or otherwise provided for in this Agreement shall be in writing and sent by registered or certified mail to: If to SeaVision: SeaVision, Inc. 300 Greentree Commons 381 Mansfield Avenue Pittsburgh, PA 15220 Attn: Brian K. Blair Telecopier: 412/928-0887 If to Cunard: Cunard Line Limited 555 Fifth Avenue New York, New York 10017 Attn: Robert Parry Telecopier: 212/949-0915 or to such other place as SeaVision or Cunard, as the case may be, may from time to time designate in accordance herewith. 25. Entire Agreement; Modification. ------------------------------ This Agreement, including the Exhibits attached hereto, contains the entire agreement of the parties on the subject matter hereof, and supersedes any and all prior agreements, if any, with respect to such subject matter. This Agreement may not be changed, modified or supplemented except by the written agreement of the parties. 26. Default. ------- (a) The following shall constitute "Events of Default" under this Agreement: (i) The failure of either party in any respect to perform any of the covenants, agreements or undertakings on its part to be performed under this Agreement, provided, the other party shall have -10- given written notice to the defaulting party as to such failure, and such defaulting party shall not, within thirty (30) days time after being so notified, have shown it has taken sufficient steps to correct such failure. (ii) A general assignment made by either party for the benefit of its creditors, the filing by either party of a petition in voluntary bankruptcy or of a petition for reorganization or for other relief under any bankruptcy or insolvency law, the filing of a petition by either party at common law or in equity for the appointment of a receiver in any court, or the filing against either party by one or more of its creditors of a petition seeking the appointment of a receiver of such party's assets, whether temporary or permanent, or a petition seeking relief under any bankruptcy or insolvency law, which petition shall not have been dissolved within sixty (60) days from the date of the filing of the petition in that court. (b) If an Event of Default occurs, the non-defaulting party may terminate this Agreement by giving written notice thereof to the defaulting party, whereupon the non-defaulting party shall have the right to withhold its future performance under this Agreement without, in any way, releasing the defaulting party from any of its obligations under this Agreement. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written. ATTEST: SEAVISION, INC. By: - ------------------------- ------------------------- Its: Its: --------------------- ----------------------- ATTEST/WITNESS: CUNARD LINE LIMITED By: - ------------------------- ------------------------- Its: Its: --------------------- ----------------------- -11- EXHIBIT A [Redacted - confidential treatment requested] EXHIBIT B BROADCAST STUDIO AND TELEVISION REFIT INSTALLATION SCHEDULE
========================================================================================= Task Date - ----------------------------------------------------------------------------------------- SeaVision team arrives on the ship to perform a thorough survey of the Completed ships facilities. Survey team will complete a test of the integrity of the existing RF system. Select a location for racks and specify power and cooling requirements for the Broadcast Control Center (BCC). - ----------------------------------------------------------------------------------------- Penetration drawings sent to QE2 to facilitate penetrations during SOLAS Completed work. - ----------------------------------------------------------------------------------------- Project manager to review all outstanding issues (TV stands, penthouse By 08/09 TV's, Public area TV's, and programming) with Cunard Management. - ----------------------------------------------------------------------------------------- Eight person RF team arrives to begin installation of new RF trunkline to 09/23 carry NTSC signal. Team to work section by section closing up as they install new trunk to cause minimal passenger disturbance. - ----------------------------------------------------------------------------------------- Move all necessary equipment from broadcast center to temporary 10/13 location in cabin next to BCC. Broadcast signal from temporary studio in NTSC and PAL format. Both systems broadcasting identical programming. - ----------------------------------------------------------------------------------------- Begin changing all televisions in passenger cabins from PAL to NTSC. 10/19 As television is changed, drop lines will be switched from PAL trunkline to NTSC trunk. TCM's installed on all televisions. - ----------------------------------------------------------------------------------------- Remodeling studio to accommodated new equipment, racks, and 10/19 television studio. Install new NTSC equipment in BCC. Test all newly installed equipment. - ----------------------------------------------------------------------------------------- SeaVision operator to arrive on QE2. SeaVision operator to coordinate 10/20 with Hotel Director and Cruise Director to increase programming and decide activities to film. SeaVision operator to provide Hotel Director a new schedule of all programming. - ----------------------------------------------------------------------------------------- Transfer signal from temporary broadcast center to permanent studio. 11/03 Removal of all equipment from temporary studio. - ----------------------------------------------------------------------------------------- All cabins switched to NTSC signal. Broadcast center now sending only 11/10 NTSC signal. Television system completed, work begins on ITV. =========================================================================================
EXHIBIT C TV STATION MANAGER - QUEEN ELIZABETH 2 Reports to: Deputy Cruise Director General Duties: Operates, maintains and plans schedules for a television and radio broadcasting service. Specific Duties: Plans a daily schedule of TV programmes on eight channels, six of which are running 24 hours per day. This includes a regularly changed selection of children's programmes, documentaries, feature films, music videos, opera, and a daily theme channel. Ensures that all broadcasts commence promptly at the advertised time (some of this work is delegated to the A.V.O. operator). Operates all T.V. Station equipment (multi-system VCR machines, laser disc machines, vision mixer, time-base corrector, cameras, lights, audio mixers, monitors, etc.). Submits accurate daily schedules to the print shop for advertising purposes. Facilitates the recording and production of special onboard programmes (interviews, magazine-style programmes, introductions to featured programmes and Tour Office promotions). Supervises a daily radio show (presented by the Disc Jockey). Skills Necessary: Experience in communications. Preferably some experience in broadcasting. A good speaking voice. A detailed knowledge of feature films, directors and actors that can be utilized in effective programming, especially of themed presentations. Good knowledge of all types of music. Some technical knowledge relating to required areas of operation. Creative camera skills for use with both studio and location work. Neat appearance. EXHIBIT D INSTALLATION PAYMENT SCHEDULE Total Installation Price $1,240,000.00 [Redacted - confidential treatment requested] EX-10.16 5 CONCESSION AGREEMENT Exhibit 10.16 CONCESSION AGREEMENT -------------------- THIS CONCESSION AGREEMENT ("Agreement") is made and executed this 17th day of September, 1996 by and between SEAVISION INC., a Delaware corporation ("SEAVISION") and ROYAL CARIBBEAN CRUISES LTD., a Liberian corporation ("RCCL"). W I T N E S S E T H: -------------------- RCCL operates the vessels MAJESTY OF THE SEAS and RHAPSODY OF THE SEAS (which vessel is currently under construction and scheduled to be delivered in April 1997) (collectively the "Vessel" or "Vessels"); SEAVISION has the expertise in providing interactive television and video entertainment systems; and RCCL desires to grant to SEAVISION a concession on the Vessels as described herein and SEAVISION desires to accept the concession, on the terms set forth herein: 1. Concession. RCCL hereby grants to SEAVISION and SEAVISION hereby accepts the concession for providing an interactive television and video entertainment system to RCCL, and passengers on each Vessel on the terms and conditions set forth herein. 2. SEAVISION's Responsibilities. ---------------------------- a) Services. SEAVISION hereby agrees to provide, at no charge to RCCL, an -------- interactive television and video entertainment system (the "System") consisting of the hardware and software described or listed on Exhibit A attached hereto, and to provide the services (the "Services") set forth on Exhibit B attached hereto. The System shall conform to the technical performance standards set forth on Exhibit C and the specifications set forth on Exhibit D attached hereto. RCCL may elect to use customized graphic displays ("look and feel") for the System on the television screens, which displays must be compatible with the then existing technical standards of the System, provided that if RCCL so elects, RCCL shall bear the cost of development of such graphics. [Redacted - confidential treatment requested] If RCCL elects to use such customized graphics displays, RCCL may either (i) develop such customized graphics itself or contract for such development through a third party, in which event SEAVISION will reasonably cooperate with RCCL or such third-party, or (ii) request SEAVISION to develop such customized graphics, in which event SEAVISION will undertake such development on terms mutually agreeable to the parties. [Redacted - confidential treatment requested] b) Upgrades. SEAVISION agrees to provide upgrades to the hardware and/or -------- software used in the System, at no cost to RCCL, at such times and in such manner as is reasonably necessary or appropriate, in SEAVISION's sole opinion, to maintain the System. RCCL shall have the right to review and approve any such upgrade prior to its installation on any Vessel, which approval shall not be unreasonably withheld or delayed by RCCL. c) Installation. The System shall be installed and fully functional ------------ onboard the MAJESTY OF THE SEAS on or before December 10, 1996. The installation on RHAPSODY OF THE SEAS shall be completed and the System fully operational prior to April 25, 1997. d) Maintenance. SEAVISION shall be responsible for ensuring that the ----------- System is in good, proper working order at all times during the Term of this Agreement. The System shall at all times meet the technical specifications set out in Exhibit C to this Agreement. SEAVISION shall coordinate all work on the System with each Vessel's Chief Engineer and/or Chief Electrician. e) Comment Cards. SEAVISION acknowledges that RCCL distributes to and ------------- collects from passengers comment cards requesting satisfaction ratings of on-board services. SEAVISION agrees to address any issues raised by such comment cards and to use reasonable efforts to comply with RCCL requests to make changes to the System to correct deficiencies noted in the System which are identified in the comment cards. 3. RCCL's Responsibilities. ----------------------- a) Access to Vessel. RCCL hereby agrees to make available to SEAVISION in ---------------- respect to each Vessel (a) the Vessel to the extent necessary for SEAVISION's installation, operation and maintenance of the System, including but not limited to granting SEAVISION personnel reasonable access to the television studio and video distribution system, (b) such personnel as are reasonably necessary or appropriate to assist in the successful installation, operation and maintenance of the System, including but not limited to appropriate on-board support for, and oversight of, the installation, operation and maintenance of the System by a designated officer on that Vessel (provided however, primary responsibility for maintenance and upkeep shall be the responsibility of SEAVISION), (c) all reasonably necessary systems integration support to allow the System to communicate with RCCL's on- board systems, and (d) appropriate accommodations on-board the Vessel for the SEAVISION personnel who are engaged in installing, operating or maintaining the System on the Vessel. b) Executive Personnel. With the prior approval of RCCL, SEAVISION's ------------------- executive personnel may travel from time to time on the Vessels as needed to insure the performance by SEAVISION of its obligations hereunder. In such cases, RCCL will make available, at no charge (except for port charges, gratuities and personal items), passenger- type accommodations for such executive personnel, unless all -2- passenger facilities have been utilized by paying passengers. Such executive personnel shall travel alone on a space available basis and not with their families or other guests and shall be bound by and subject to all the terms and conditions of RCCL's passenger ticket contract. c) Marketing. RCCL hereby agrees to provide reasonable marketing support --------- for the System on-board the Vessels. Such marketing support shall include, but not be limited to in-cabin collateral material, coverage in the Cruise Compass and daily television guide (if any), mention by the Cruise Director during his or her introductory remarks to passengers on the Ship, and such other activities of a supporting nature as are acceptable to both parties to this Agreement. RCCL hereby agrees to work with SEAVISION's marketing personnel to develop appropriate and effective means for testing and gauging passenger reaction to the System on a regular basis. RCCL shall from time to time, provide access to the Vessels while in their home port for SEAVISION personnel and guests to demonstrate the System to potential advertisers, marketers and clients. Such visits shall be requested in advance and RCCL reserves the right to refuse to allow such visitors onboard the Vessels on certain days. In addition, access to various parts of the Vessel may be restricted. d) Data. RCCL hereby agrees to provide the SEAVISION onboard manager with ---- the following data in electronic form (i.e., diskettes, tapes or similar means) with respect to each passenger onboard the Vessel: name, cabin assignment, dining assignment and folio number. In the event SEAVISION acquires any additional passenger information such as addresses and phone numbers as a result of the passenger's use of the System (e.g. through the purchase of items to be mailed to the passenger's home), SEAVISION agrees to keep such information in confidence and not to sell, exchange or otherwise provide such information to any other party without the prior written consent of RCCL. Without limiting the foregoing, SEAVISION shall not sell any lists of RCCL passenger names or use such names in any manner other than as may be required to fulfill its obligations under this Agreement. In the event SEAVISION is required to provide the information to a fulfillment house to process orders, SEAVISION shall use commercially reasonable efforts to ensure that such information is kept confidential by such fulfillment house. e) Collection of funds. RCCL hereby agrees to collect all monies paid or ------------------- payable by passengers in respect of Services provided on or through the System and charged to the respective on-board account of such passengers, except as set forth in Section 6 of this Agreement. f) Equipment. RCCL hereby agrees to provide all in-cabin televisions and --------- television control modules; [Redacted - confidential treatment requested] RCCL shall retain title to all television sets and control modules. -3- 4. [Redacted - confidential treatment requested] 5. Revenue-Sharing. [Redacted - confidential treatment requested] --------------- 6. Payment Terms. ------------- a) Reports. On or before the twenty-first day of each calendar month ------- during the Term of this Agreement, SEAVISION shall provide RCCL with a written report detailing the Adjusted Gross Revenue from cruises completed during the prior calendar month (any cruise commencing before last day of month will be considered completed in that current month). The report shall separately identify the Adjusted Gross Revenue for each module and the cost of goods and shall be in the form attached as Exhibit F. This report shall govern the determination of fees to be retained by RCCL and the revenues to be remitted by RCCL to SEAVISION under the terms of this Agreement. In addition, SEAVISION shall provide the reports listed on Exhibit G, samples of which reports are attached as part of Exhibit G. SEAVISION shall provide any and all hardware and/or software reasonably necessary or appropriate to interface SEAVISION's accounting software with the Vessel's property management system in order for SEAVISION to obtain accurate accounting information for such reports, as further discussed in Section 3a)(c) above. b) Settlement. Within thirty (30) days after RCCL's receipt of the ---------- monthly report delivered to RCCL by SEAVISION pursuant to the terms of subsection a) above, RCCL shall remit to SEAVISION the Adjusted Gross Revenue during the calendar month applicable to such report, less RCCL's share of such Adjusted Gross Revenue as provided in Section 5. SEAVISION shall pay to RCCL its portion of the Adjusted Gross Revenue associated with the advertising within thirty (30) days of the close of each month. c) [Redacted - confidential treatment requested] d) [Redacted - confidential treatment requested] 7. Term. [Redacted - confidential treatment requested] ---- 8. Additional Vessels. ------------------ a) Grandeur and Enchantment. RCCL has the option to add its vessels, ------------------------ GRANDEUR OF THE SEAS (delivery scheduled for December 1996) and ENCHANTMENT OF THE SEAS (delivery scheduled for July 4, 1997), or either one of them, as additional vessels under this Agreement. Such additional vessels shall be governed by the same terms and conditions contained in this -4- Agreement and, if added, shall be considered a "Vessel" as said term is defined in this Agreement. [Redacted - confidential treatment requested] b) [Redacted - confidential treatment requested] c) [Redacted - confidential treatment requested] 9. Facilities and Equipment. ------------------------ a) "As is". SEAVISION accepts "as is" the existing facilities and ----- fixtures on the Vessels for the Concession. SEAVISION accepts "as is" the existing storage facilities and all water, electricity, television cabling and air conditioning systems incident to SEAVISION's operations on the Vessel with consideration given to the fact that the Vessel's storage facilities are limited. SEAVISION shall have the opportunity of making a detailed site inspection of the facilities prior to installation of the System. SEAVISION has provided RCCL with specifications regarding HVAC and electrical requirements, which specifications are attached hereto as Exhibit H. RCCL agrees that it shall be RCCL's obligation to ensure that the HVAC and electrical specifications are met. b) Damage. SEAVISION shall give RCCL prompt written notice of any damage ------ to or defective condition in any part of the plumbing, electrical, heating, air conditioning, television cabling or other system serving, located in, or passing through the areas in which the Concession is operating. Except as otherwise provided herein, SEAVISION shall, at its own expense, keep the facilities under its control in good order and condition during the term of this Agreement. SEAVISION shall not make any alterations or additions to the such facilities without the prior written consent of RCCL. Upon the termination of this Agreement, RCCL shall have the option of requiring SEAVISION to remove any such improvements at SEAVISION's cost and expense. c) Storage. Subject to the provisions of subsection f) below, SEAVISION ------- shall be solely responsible for its storage areas and facilities and will bear the risk of loss caused by SEAVISION's breach of any governmental regulation or for SEAVISION's failure to comply with requirements relative for the manifesting of goods for customs purposes and for loading or off-loading on Landed Goods Advice (LGAs). d) Locks and Security. RCCL will provide normal locks, seals and security ------------------ for storage areas and RCCL will cooperate in all efforts to provide security for the property of SEAVISION, including all reasonable efforts to see that said areas are not invaded or otherwise entered. RCCL acknowledges that SEAVISION has no enforcement or disciplinary power as to personnel other than SEAVISION's employees on board the Vessel and RCCL agrees that the Vessel, through its -5- Master, will cooperate with SEAVISION to enforce security of SEAVISION's property through such disciplinary measures or procedures as are reasonably necessary and required. e) Safe Storage. Subject to the approval of the Master, SEAVISION shall ------------ safely stow for sea, and will maintain such safe stowage for sea, all stores and other of its property, as well as all equipment, furniture, or other items and any other property belonging to RCCL which SEAVISION may use to perform its obligations hereunder, or which otherwise may be in SEAVISION's control. f) Unseaworthy Condition. SEAVISION shall not knowingly create an --------------------- unseaworthy condition in the performance of its obligations hereunder. SEAVISION shall operate the Concession in a safe, careful and businesslike manner. g) Carrier's Release. Upon expiration or termination of this Agreement ----------------- for whatever reason, RCCL agrees to provide SEAVISION with a carrier's release releasing all of SEAVISION's goods, equipment and wares for off-loading, at the regularly scheduled port or port(s), as SEAVISION may select, and that it will, in no way, inhibit or hamper SEAVISION's right to take possession of the goods, equipment and wares and remove the same from the Vessel, provided that all sums due RCCL or the Vessel have been paid or placed in escrow or a bond for said amount is purchased by SEAVISION. Notwithstanding anything to the contrary herein, SEAVISION shall at all times retain title to all components of the System which are provided by SEAVISION. 10. On-Board Personnel. ------------------ a) Training. SEAVISION will engage in its service aboard the Vessel one -------- (1) employee sufficiently trained and licensed in his/her duties who will perform SEAVISION's obligations hereunder and in accordance with the terms of this Agreement in a courteous and efficient manner so as to meet high standards of operation ("SEAVISION's Operator(s)"). [Redacted - confidential treatment requested] b) [Redacted - confidential treatment requested] c) Meals. SEAVISION's Operator shall eat staff food in the appropriate ----- staff dining areas. d) Appearance. SEAVISION's Operator shall, at all times, keep ---------- himself/herself neatly groomed, well spoken and suitably attired in compliance with Master's Standards. -6- e) Control. Subject to the provisions of Section 12, SEAVISION, at all ------- times, has the obligation and right to control all of the personnel engaged by SEAVISION to perform its obligations hereunder. 11. Experience. SEAVISION represents that it is an experienced concessionaire ---------- fully qualified to supervise and operate the Concession. SEAVISION shall obtain and maintain in full force and effect throughout the term of this Agreement, any and all permits or licenses necessary to operate the Concession, including but not limited to trademark and copyright licenses. 12. Certain Obligations ------------------- a) Health and Moral Character. SEAVISION shall only employ persons who -------------------------- are in good health, sober and of good moral character. Each of SEAVISION's Operators must hold a doctor's health report on a form approved by RCCL indicating that the employee is medically fit for service on board the Vessel in accordance with standards established by RCCL and which are the same as for RCCL's own employees. It shall be SEAVISION's sole responsibility to employ persons who have valid passports, visas and all other permits required by any governmental authority whether United States or foreign in order that they might enter and leave the ports of call of the Vessel. b) SEAVISION Employees. SEAVISION's Operators are solely the employees of ------------------- SEAVISION and shall, under no circumstances, be deemed employees of RCCL. SEAVISION is solely responsible for the payment of all wages, vacation pay, commissions, benefits and repatriation expenses of each of its employees. SEAVISION shall comply with all applicable laws, governmental regulations or other governmental requirements relating to wages, tax withholding and benefits paid to employees and governing SEAVISION's conduct in connection therewith. c) Independent Contractor and Waiver of Maritime Lien. SEAVISION -------------------------------------------------- understands that it is not the agent of RCCL but is an independent contractor and has no right to pledge the credit of RCCL or any Vessel in any manner or sum whatsoever. SEAVISION shall not contract with any supplier of merchandise unless the supplier executes a purchase order containing a conspicuous notice to the effect that SEAVISION has no right or authority to bind any Vessel or create a lien upon them and that by acceptance of such purchase order, the supplier acknowledges that he/she looks solely to SEAVISION and not the Vessel for payment of goods ordered. Neither SEAVISION nor SEAVISION's Operator shall have the right to assert maritime liens on any Vessel for any payments due to them and SEAVISION, on behalf of itself and its employees, hereby waives any rights that SEAVISION or its employees may have to assert claims against RCCL under the Jones Act, U.S. Code Section 688 et seq, or any other applicable law. In the event that a lien is placed on any Vessel in contradiction -7- of the terms hereof or as a result of any act, omission or neglect by SEAVISION or its employees, SEAVISION shall remove immediately, by bond or otherwise, any such lien or reimburse RCCL for the cost incurred by RCCL in obtaining its removal. Neither this Concession Agreement nor the relationship of the parties hereby created constitutes a partnership or a joint venture. d) Picket Lines. SEAVISION shall immediately take all lawful action, at ------------ its sole expense, to effect removal of any picket line or other impediment to a Vessel's sailing resulting from any labor dispute between SEAVISION and its employees or subcontractors. e) Agent. SEAVISION irrevocably appoints the Master and Vessel's Hotel ----- Manager as its agent, with the power of overall supervision of SEAVISION's Operator for purposes of health, safety and discipline of each Vessel. For this purpose, SEAVISION's Operator will sign on Ship's Articles and obey the Master's Rules and Regulations. The foregoing will not in any way detract from or modify SEAVISION's status as an independent contractor or its employer-employee relationship with its personnel, and its right to control its employees as described herein. f) Repatriation. In the Master's discretion, and for purposes of health, ------------ safety and discipline, the Master of any Vessel may require any employee of SEAVISION to be removed with the employee's belongings from the Vessel at any time when the Vessel is in port. If for any reason any of SEAVISION's Operator is unable to be on board a Vessel upon its scheduled departure from any port, SEAVISION shall be responsible for the repatriation of said party, and SEAVISION shall be fully responsible for any and all fines, penalties, and assessments levied by any third party in connection with any violation of the immigration laws of any government, nation, or country. g) Prohibited Acts. SEAVISION's Operator are not permitted: --------------- i) To carry or consume on board any Vessel any narcotic or other drug which is prohibited, or for which a doctor's prescription would be required, except pursuant to a program of medical care under the direct supervision of the Vessel's doctor; ii) To board the Vessel in an intoxicated state or to consume alcoholic beverages aboard the Vessel to the point of intoxication or to the point where during the subsequent performance of their duties such consumption could become apparent to the passengers; iii) To engage in any form of gambling aboard the Vessel; and -8- iv) To sell any merchandise to passengers or crew members except in the course of their duties and only during the agreed hours of operation of SEAVISION's Concession thereunder. 13. Insurance. --------- a) Marine Hull and Machinery. RCCL agrees that the Vessel's owners shall, ------------------------- at their own expense, provide and maintain marine hull and machinery and war risk hull and machinery insurance covering the Vessel, with first class marine underwriters, which insurance shall be endorsed to designate the owners as the sole loss payee. In the event that SEAVISION or its employees cause any loss or damage covered by this insurance, or which would have been covered by this insurance but for any deductible, SEAVISION agrees to reimburse owners for the deductible applicable to such loss or damage; provided however, SEAVISION's obligation to reimburse shall not exceed [Redacted - confidential treatment requested]. While SEAVISION will not be named in this insurance as an additional assured, neither the owners nor the underwriters shall have any further right of recovery or subrogation in excess of said deductible against SEAVISION on account of any loss or any damage covered by such insurance. b) Protection and Indemnity. RCCL shall, at its own expense, obtain and ------------------------ maintain protection and indemnity insurance with first-class Marine Underwriters which shall provide coverage to RCCL and SEAVISION. In the event that SEAVISION or its employees cause any loss or damage covered by this insurance, or which would have been covered by this insurance but for any deductible, SEAVISION agrees to reimburse owners for the deductible applicable to such loss or damage; provided however such reimbursement shall not exceed [Redacted - confidential treatment requested]. c) Medical. RCCL shall provide, at no charge to SEAVISION, the use of its ------- shipboard medical facilities for employees of SEAVISION while working on the vessel. In addition, RCCL will permit SEAVISION to use the shoreside medical facilities with which RCCL has provider agreements for medical care for SEAVISION's employees who are working on RCCL's vessels; provided, however, if SEAVISION elects to use such shoreside facilities, SEAVISION shall reimburse RCCL for all expenses associated with such medical care. d) SEAVISION's Insurance. SEAVISION shall maintain general liability --------------------- insurance, in form and content acceptable to RCCL. Such insurance shall name RCCL as an additional named insured and shall provide that the insurance may not be canceled or modified without at least thirty (30) days prior written notice to RCCL. [Redacted - confidential treatment requested] -9- e) Limitation of Liability. Except as expressly provided elsewhere in ----------------------- this Agreement, no party shall be liable for any indirect, special or consequential damages arising out of this Agreement. SEAVISION's liability shall not exceed [Redacted - confidential treatment requested] in the aggregate, provided however, that the foregoing limitations shall not apply to damages resulting from the gross negligence or willful misconduct or SEAVISION, its employees or agents. The warranties expressly set out in this Agreement are exclusive and are in lieu of all other warranties, express or implied, including without limitation the implied warranty of merchantability and fitness for a particular purpose or any implied warranties arising from course of performance, course of dealing or usage of trade. 14. Itinerary Changes, [Redacted - confidential treatment requested]. RCCL, ---------------------------------------------------------------- in its sole discretion and without liability to SEAVISION, may change the itineraries of the Vessels. [Redacted - confidential treatment requested] 15. Force Majeure. RCCL shall not be liable to SEAVISION for any cruise ------------- delays, cancellations or deviations, or any loss or damage to SEAVISION's property, caused by acts outside the reasonable control of RCCL, including Acts of God, acts of war, public enemies, government restrictions, perils of the sea, mechanical difficulties, seizure or arrest of the Vessel, or acts of passengers or other third parties. 16. Indemnification. --------------- a) SEAVISION. SEAVISION shall indemnify and hold harmless RCCL, the --------- Vessels' owners, the successors and assigns of the foregoing, and their respective officers, directors, employees and agents from and against all damages, liabilities, claims and expenses (including attorneys' fees and payments for deductibles under any insurance policies) arising from or based upon SEAVISION's operations, or any act, omission or neglect by SEAVISION or its employees or agents. b) RCCL. RCCL shall indemnify and hold harmless SEAVISION, its successors ---- and permitted assigns, and their respective officers, directors, employees and agents from and against all damages, liabilities, claims and expenses (including attorneys' fees and payments for deductibles under any insurance policies) arising from or based upon RCCL's operations or any act, omission or neglect by RCCL or its employees or agents. 17. Default. ------- a) Termination Upon Default. Either party may terminate this ------------------------ Agreement immediately upon the occurrence of an event of default by the other party. The following shall constitute events of default under this Agreement: -10- i) Breach by either party of its obligations under this Agreement, which such breach shall not be remedied within thirty (30) days after receipt by the breaching party of written notice thereof from the other party; provided, however, if such breach is as a result of software errors or malfunctions, the cure period shall be [redacted-confidential treatment requested] from receipt of written notice and Seavision shall provide RCCL with a written plan and timetable to remedy such software problem within fifteen (15) days of receipt of written notice of such breach; or ii) The making by either party of any statement, representation or warranty in this Agreement or in any document furnished or to be furnished to the other party in connection herewith which shall prove to be knowingly or recklessly untrue or incorrect in any material respect, when made; or iii) Either party (A) applying for or consenting to the appointment of a receiver, trustee or liquidator of all or a substantial part of its assets; (B) being unable or failing to pay or admitting in writing its inability or failure to pay its debts as they mature; (C) making a general assignment for the benefit of creditors; (D) being adjudicated a bankrupt or insolvent or being dissolved; (E) filing a petition in bankruptcy or for reorganization or for an arrangement pursuant to a bankruptcy act or any insolvency law; or (F) filing an answer admitting the material allegation of, or consenting to, or defaulting in answering a petition filed against it, in any bankruptcy, reorganization or insolvency proceeding. b) Rights and Remedies. Termination of this Agreement upon an event ------------------- of default shall be without prejudice to any other rights and remedies available to the terminating party. 18. Applicable Law. This Agreement shall be governed by and interpreted in -------------- accordance with the laws of Florida to the exclusion of all choice-of-law rules which might otherwise be applicable except to the extent that circumstances would reasonably require application of the admiralty and maritime laws of the United States or the maritime laws of some other jurisdiction to resolve specific issues pertaining solely to health and safety or to mandatory requirements imposed by the laws of the state of the Vessel's registry. Venue for all matters hereunder shall be in the courts in Miami, Florida. 19. Confidentiality. Except as permission may be specifically granted to --------------- SEAVISION in writing and in accordance with RCCL's rules, SEAVISION agrees to hold in confidence and not disclose to any third party, except to authorized persons in the course of its work for RCCL, any and all information or data of a confidential nature not generally available to the public that is delivered to SEAVISION, or that SEAVISION obtains, in the course of its work for RCCL, relating to the business or operations of RCCL or its associated -11- companies, including, but not limited to, financial information, marketing plans, passenger names, personal data and addresses, designs, processes and agreements. SEAVISION further agrees to comply with all confidentiality agreements between RCCL and third parties (to the extent SEAVISION is notified of such agreements) and understands that its obligations under this confidentiality provision shall continue after the expiration of this Agreement and until RCCL specifically releases such obligations in writing. Except as permission may be specifically granted to RCCL in writing and in accordance with SEAVISION's rules, RCCL agrees to hold in confidence and not disclose to any third party, except to authorized persons in the course of its work, any and all information of a confidential nature not generally available to the public that is delivered to RCCL, or that RCCL obtains, in the course of its work with SEAVISION, or as a result of SEAVISION's performance of its obligations under this Agreement, relating to the business or operations of SEAVISION or its associated companies, including, but not limited to, (i) any knowledge gained by RCCL of SEAVISION's proprietary application software or the configuration of the System; (ii) SEAVISION's marketing and sales materials; (iii) the format of SEAVISION's reports, including those for data management, revenue remittance and marketing surveys; and (iv) SEAVISION's marketing and financial information. RCCL further agrees to comply with all confidentiality agreements between SEAVISION and third parties (to the extent RCCL is notified of such agreements) and understands that its obligations under this confidentiality provision shall continue after the expiration of this Agreement and until SEAVISION specifically releases such obligations in writing. RCCL acknowledges that the System represents and will continue to represent the valuable, confidential and proprietary property of SEAVISION. SEAVISION is not by this Agreement conveying to RCCL any exclusive proprietary or ownership rights in the System, including, but not limited, to any patent, copyright, trademark, service mark, trade secret, trade name or other intellectual property rights, except that RCCL will have the limited rights expressly set forth in this Agreement. Accordingly, RCCL acknowledges that, except as expressly provided for in this Agreement, RCCL possesses no title to or ownership of any System or any portion thereof. RCCL will keep the System free and clear of all claims, liens and encumbrances resulting from actions or omissions of RCCL. Each party agrees, during the Term of this Agreement and thereafter, to maintain the confidential nature of the terms and conditions of this Agreement. Each party acknowledges that its violation of its confidentiality or non- disclosure obligations under this Agreement may cause irreparable damage to the other that cannot be fully remedied by money damages. Accordingly, in the event of any such violation or threatened violation, the injured party will be entitled, in addition to pursuing any other remedy available to it under this Agreement or at law, to obtain injunctive or other -12- equitable relief from any court of competent jurisdiction as may be necessary or appropriate to prevent any further violations thereof. 20. Miscellaneous. ------------- a) Entire Agreement. This Agreement shall constitute the entire agreement ---------------- between the parties relative to concessions on the Vessels and all prior negotiations, agreements and communications shall be merged herein and superseded hereby. b) Amendments. The terms of this Agreement may not be waived, altered, ---------- modified, amended or supplemented in any manner whatsoever except by a written document duly executed by both parties hereto. c) Assignments. Neither party may assign this Agreement, in whole or in ----------- part, without the prior written consent of the other party. The foregoing is not intended to apply to a sale of the stock of either company or a merger or consolidation which results in a change of ownership of the company. d) Press Releases. The parties shall consult with each other and issue a -------------- press release with respect to this Agreement as soon as practical after the execution hereof. During the term of this Agreement, RCCL agrees to use best efforts to include a reference to SEAVISION in any press releases relating to any vessels on which the System is installed (or is planned to be installed) and in which interactive television services are discussed. e) Waivers. No waiver by any party of any inaccuracy of representation, ------- breach or rights or remedies provided hereunder and no course of dealing shall be deemed a continuing waiver of the same inaccuracy, breach or any other right or remedy, unless such waiver is in writing and is signed by the party sought to be bound. The failure of a party to exercise any right or remedy shall not be deemed a waiver of such right or remedy in the future. f) Modification and Severability. If a court of competent jurisdiction ----------------------------- declares that any provision of this Agreement is illegal, invalid or unenforceable, then such provision shall be modified automatically to the extent necessary to make such provision fully legal, valid or enforceable, and this Agreement otherwise shall remain in full force and effect. g) Enforceability. This Agreement shall be enforceable by and against -------------- RCCL and SEAVISION and their respective successors and permitted assignees. -13- h) Books and Records. SEAVISION shall at all times keep complete and ----------------- accurate books, records and accounts pertinent to this Agreement. Said books, records and accounts shall be retained for a period of at least three (3) years after the expiration or other termination of this Agreement and shall, at all reasonable times, be accessible to and open for inspection, examination, audit and copying by RCCL. i) Notices. All notices, demands, requests and other communications ------- required or permitted to be given to any party hereto in connection herewith (1) must be in writing and (2) may be served either by (A) depositing the same in the mail, full postage prepaid, certified or registered with return receipt requested, (B) delivering the same by an internationally recognized air courier service, full delivery cost paid, (C) delivering the same in person, or (D) sending a telecopy of same, confirming with a copy thereof delivered either by mail or air courier service. Any notice, demand, request or other communication served in the foregoing manner shall be deemed given upon delivery in person, three business days after mailing, two business days after sending by air courier, or on the first business day after sending by telecopy. For the purposes hereof, the addresses and telecopier numbers of the parties hereto are as follows: If to RCCL: Royal Caribbean Cruises Ltd. 1050 Caribbean Way Miami, Florida 33132 Attn: Executive VP, Operations Telecopier Number (305) 372-0441 cc: Legal Department If to SEAVISION: SeaVision Inc. 381 Mansfield Avenue Pittsburgh, PA 15220 Attn: Brian Blair, Chief Operating Officer Telecopier Number (305) 377-2221 Any party hereto may change its address for the purposes hereof by giving notice of such change of address to the other party in the manner provided herein. -14- IN WITNESS WHEREOF, RCCL and SEAVISION have executed this Agreement the dates set forth below. SEAVISION INC., a Delaware Corporation By: /s/ Brian Blair ----------------------------- Name: Brian Blair Title: Chief Operating Officer Dated: September 17, 1996 Royal Caribbean Cruises Ltd., a Liberian corporation By: /s/ Peter G. Whelpton By: /s/ G. Edward Bollinger ------------------------------ ---------------------------------- Name: Peter G. Whelpton Name: G. Edward Bollinger Title: Executive Vice President, Title: Vice President, Purchasing Operations Properties & Logistics Dated: September 17, 1996 Dated: September 17, 1996 -15- Exhibit A: Description of System (hardware and software components) Exhibit B: Description of Services Annex 1: [Redacted - confidential treatment requested] Exhibit C: Technical Performance Standards Exhibit D: Specifications Exhibit E: Cost of Goods Exhibit F: Settlement Form Exhibit G: List of Reporting Requirements Exhibit H: HVAC Specifications Exhibit I: Privileges -16- EXHIBIT A Primary Hardware and Software Components of the System to be provided by SeaVision Components: [Redacted - confidential treatment requested] EXHIBIT B Entertainment and Interactive Services to be Provided by SEAVISION ------------------------------------------------------------------ "Basic" SEAVISION Package: Services Provided at No Charge - --------------------------------------------------------- . In-Cabin Room Service Ordering: Passengers will be able to order RCCL's standard room service menu, including beverages charged to their cabin account, through the System. Orders will be printed out in appropriate pantries and/or galleys for delivery by RCCL personnel. SEAVISION shall provide, as part of the System, printers and/or monitors to be used in such pantries and/or galleys for such purpose. . Shore Excursion Ordering: Passengers will be able to watch videos of shore excursions and purchase tickets for shore excursions on and through the System by using their television remote-control. Orders will be printed out in the appropriate shore excursion office of RCCL, with tickets in respect thereof to be delivered by RCCL personnel. The System, at RCCL's option, will provide appropriate inventory control. SEAVISION will assist with the development of the interface with RCCL's shore excursion system. . Guest Survey: The System shall include guest satisfaction and guest information surveys the forms of which are to be agreed upon by RCCL. RCCL may periodically adjust or revise such questions. . Cruise Compass: The System shall include the daily Cruise Compass. . Wine Ordering: Passengers will be able to view a wine menu on the System and order their selection with their television remote-controls. Orders will be printed out in the Wine Steward's office or wine cellar, for delivery by RCCL personnel at the designated meal. . Interface with RCCL's Property Management System: The System will interface with the Vessel's property management system to enable appropriate charges to be applied to passenger accounts. . Interface with RCCL's Shore Excursion System: The System will interface with the Vessel shore excursion system to enable shore excursion tickets to be ordered and appropriate charges to be applied to passenger accounts. . Passenger Folio Review: Each passenger will be able to use the System to review a summary of their on-board account. . Access Control: The System will be designed to limit access to only those persons who are adult passengers or who are minors under adult supervision. Passengers will be able to limit access to various services, such as gaming and adult programming, by enabling lock-out codes and using password procedures. . Report Generation: The System will generate detailed activity reports, which will be made available to RCCL for the purposes of revenue payments to SEAVISION. SEAVISION shall also provide, at RCCL's request, reports pertaining to passenger usage of the System. . Language Options: The System will have the modules available in various languages, to be mutually agreed upon between RCCL and SEAVISION. . Future Cruise Module: RCCL will be able to feature information on other cruises and itineraries through the System. . Gaming Tutorials: The system shall provide on demand access to various gaming tutorials. . Safety Instructions: The System shall provide on demand access to safety information regarding the Vessel. RCCL shall be responsible for providing all ticket stock, videos and photographs for shore excursions, wine ordering, gaming tutorials, future cruise modules and safety instructions. RCCL shall retain control over all materials included in such programs. RCCL may choose, at its option, to produce its own videos and photographs, retain SEAVISION for this purpose and reimburse SEAVISION for all its costs incurred in connection with producing the same, or contract with a third party to produce such videos and/or photographs, provided, however, that any videos and photographs produced by any such third party shall in all ways meet SEAVISION's technical standards for use on the System. If RCCL elects to have SEAVISION produce any such videos or photographs, SEAVISION shall provide RCCL with detailed cost estimates prior to the initiation of video and photograph production. Such estimates will include the cost of preproduction scripting and preparation and the cost of sending crews aboard RCCL's Vessels for taping, photographing and post-production editing. RCCL shall pay these costs directly to SEAVISION as a supplier. [Redacted - confidential treatment requested] Revenue-Generating and Pay-Per-View Entertainment Services - ----------------------------------------------------------- RCCL will be entitled to a portion of the Adjusted Gross Revenues generated by the following revenue services, pursuant to and in accordance with the terms of Section 5 of the Agreement. [Redacted - confidential treatment requested] Revenue Services: . Video-on-Demand: Passengers will be able to purchase movies and other entertainment options such as taped concerts, on demand, using the System and their television remote-control. SEAVISION shall determine the fee that will be levied for each such order and charged to such passengers' respective onboard accounts. Such fee shall be subject to RCCL's prior approval, which shall not be unreasonably withheld, and in any event shall be consistent with the fees charged for similar services on comparable cruise lines and luxury hotels. Subject to RCCL's approval, adult programming may be offered. SEAVISION shall be responsible for all licenses, including but not limited to copyright licenses, which are needed in order to show such entertainment. . Gaming Options: Passengers will be able to play video slots, blackjack and poker on the System. Any additional games that SEAVISION may desire to provide on the System shall be subject to the parties' mutual agreement. [Redacted - confidential treatment requested] . Shopping: SEAVISION will offer passengers interactive video shopping on the System. [Redacted - confidential treatment requested] . Advertising and Promotion: SEAVISION shall have the exclusive right to sell advertising on the System [Redacted - confidential treatment requested] to third parties for the purposes of advertising, promotions and marketing of their companies, products or services. [Redacted - confidential treatment requested] [Redacted - confidential treatment requested] Interactive advertising on the System by concessionaires on board the Vessel, including but not limited to the beauty salon and spa and photographer will be by mutual agreement between SEAVISION and those suppliers. RCCL will be entitled to a portion of the Adjusted Gross Revenues generated by any fees paid by such concessionaires, pursuant to and in accordance with the terms of Section 5 of the Agreement. [Redacted - confidential treatment requested] [Redacted - confidential treatment requested] . Digital Photography: RCCL at its option, may select as an additional feature for the System to provide digital photography. If selected, passengers will be able to view in their cabins personal photographs taken by the on-board photo concessionaire. The system will display the photographs allowing the passengers to purchase a variety of sizes and poses. This services can include, subject to RCCL approval, kiosk based applications which will provide an entertaining and easy-to-use graphical, touch screen interface to purchase "instant" photographs with a wide variety of backgrounds and in various sizes. In the event RCCL selects to offer such service, the terms of the service shall be set forth in an addendum to this Agreement. . Crew Amenities: RCCL, at its option, may elect to have additional services provided to its crew on the Vessels, subject to the prior mutual agreement of the parties. Annex 1: [Redacted - confidential treatment requested] EXHIBIT C Technical Performance Standards for the System [Redacted - confidential treatment requested] Exhibit D Specifications [Redacted - confidential treatment requested] Exhibit E "Adjusted Gross Revenues" - Cost of Goods [Redacted - confidential treatment requested] EXHIBIT F [Redacted - confidential treatment requested] EXHIBIT G [Redacted - confidential treatment requested] EXHIBIT H [Redacted - confidential treatment requested] EXHIBIT I --------- [Redacted - confidential treatment requested] EX-10.17 6 EMPLOYMENT AGREEMENT Exhibit 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made and entered into as of this 16th day of September, 1996, by and between Allin Communications Corporation, a Delaware corporation ("Employer"), and Jon Eric VanAmringe ("Employee"), a resident of Pennsylvania. W I T N E S S E T H: ------------------- WHEREAS, Employer desires to employ Employee on a full-time and exclusive basis and Employee is willing to serve on a full-time and exclusive basis, all upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained and intending to be legally bound hereby, the parties agree as follows: Section 1. Employment. Subject to the terms and conditions of this --------- ---------- Agreement, Employer agrees to employ Employee as Chief Financial Officer of Employer, and Employee accepts such employment. Employee will diligently and faithfully and in conformity with the directions of the Board of Directors of Employer perform the duties of his employment hereunder, and he will devote his best efforts and attention on a full-time basis to the performance of said duties. Section 2. Employment Period. (a) Term. The term of Employee's --------- ----------------- ---- employment hereunder shall begin on September 16, 1996 and shall continue through December 31, 1998 unless sooner terminated in accordance with the terms of this Section 2, or extended as provided in the next paragraph ("Employment Period"). (b) Automatic Renewal. If Employee is still employed by Employer on ----------------- December 31, 1998, this Agreement shall be automatically renewed, on the same terms and conditions set forth in the Agreement, for another two (2) year period until December 31, 2000, unless either party gives written notice to the other of its intent not to renew this Agreement at least 60 days prior to December 31, 1998. Thereafter, if on any subsequent two (2) year anniversary, Employee is still employed by Employer, this Agreement shall be automatically renewed, on the same terms and conditions set forth in this Agreement, for another two (2) year period, unless either party gives written notice to the other of its intent not to renew this Agreement at least 60 days prior to the end of the then current two (2) year period. (c) Termination. The Employment Period shall terminate upon (i) Employee's ----------- death or, unless waived by Employer, his disability, either physical or mental (as determined by Employer's physician) which may reasonably be anticipated to render him unable, for a period of at least three (3) months, effectively to perform the obligations, duties and responsibilities of Employee's employment with Employer; or (ii) the termination of Employee's employment by the Board of Directors with cause (as hereinafter defined); or (iii) the passage of ninety (90) days from the date of delivery by either party to the other of his or its election to terminate this Agreement. As used herein, "cause" shall mean (i) dishonest, fraudulent or illegal conduct; (ii) misappropriation of Employer funds; (iii) conviction of a felony; (iv) excessive use of alcohol, (v) use of controlled substances or other addictive behavior; (vi) unethical business conduct; (vii) breach of any statutory or common law duty of loyalty to Employer; and (viii) action by Employee which is prejudicial or injurious to the business or goodwill of Employer or a material breach of this Agreement. Section 3. Employment Compensation and Other Benefits. --------- ------------------------------------------ (a) Salary. For services performed by Employee during the Employment ------ Period, Employer will pay to Employee a salary of not less than One Hundred Forty Thousand Dollars ($140,000) per annum, payable in equal semi-monthly installments of $5,833.33, prorated for any partial period of employment. (b) Benefits. During the term of his employment hereunder, Employee will -------- be entitled to the following: (i) payment by Employer of the premiums for medical insurance coverage for himself and his family consistent with programs from time to time in effect for the employees of Employer; (ii) not less than four weeks of paid vacation each year of employment; (iii) such other benefits as are available to other employees of Employer generally. (c) Business Expenses. Employer will reimburse Employee for ----------------- reasonable out-of-pocket expenses incurred by him, in accordance with Employer's policies as in effect from time to time, for entertainment, travel, lodging and similar items in connection with the business of Employer, provided that Employee properly accounts for and promptly submits appropriate supporting documentation with respect to all such expenses. (d) Discretionary Bonus. The Board of Directors of Employer may, on ------------------- an annual basis, in its sole and absolute discretion, award a bonus to Employee. (e) Stock Option Plan. Effective upon the commencement of an initial ----------------- public offering of common stock by Employer, Employee will receive, pursuant to Employer's 1996 Stock Option Plan (the "Stock Option Plan") options to purchase 14,000 shares of the common stock of Employer at an exercise price equal to the initial public offering price for such common stock. Such options shall vest in accordance with the terms of the Stock Option Plan. Provided, however, that if (i) the Company sells all or substantially all of its assets, (ii) merges with another entity in a transaction in which the Company is not the surviving corporation, or (iii) any person or group of persons other than the shareholders of Employer (as existing on the date hereof) holds 50% or more of the common stock of Employer (collectively, a "Change in Control"), all of the foregoing options shall vest on the date of the Change in Control. Further provided that Employer may, in the sole discretion of the Board of Directors, award additional options to Employee during the term of this Agreement. (f) Annual Merit Review. Annually, on or before September 15 of each ------------------- year, Employer will conduct an annual review of Employee's performance under this Agreement and, if deemed appropriate, implement adjustments to this Section 3 for such year. (g) Severance Pay. ------------- (i) Termination by Employer. If Employee's employment is terminated ----------------------- by Employer during the Employment Period without cause, Employee shall receive semi-monthly severance payments equal to the semi-monthly base salary payment which Employee was receiving immediately prior to the termination, until the one-year anniversary of the date of termination; provided, however, that if Employee is terminated without cause, after December 31, 1997, Employee shall receive such severance payments for a period of only six (6) months following the date of termination. If Employee's employment is terminated by Employer during the Employment Period, contemporaneously with a Change in Control, Employee shall receive semi-monthly severance payments equal to the semi-monthly base salary payment which Employee was receiving immediately prior to the termination, until the one-year anniversary of the date of termination. (ii) Voluntary Quit by Employee. If Employee's employment is -------------------------- terminated by Employee during the period from September 16, 1996 through December 31, 1997, due to Employee's voluntary quit, Employee shall receive semi-monthly severance payments equal to $5,833.33 until the earlier of (a) the six (6) month anniversary of the termination date or (b) the date on which Employee begins other full-time employment. Section 4. Conditions of Employment. As conditions of his employment --------- ------------------------ and in consideration of his employment, Employee covenants and agrees as follows: (a) that, during the Employment Period, he will devote his full time, services and attention and best efforts to the performance of his duties and to the promotion of the business and interests of Employer; (b) that, during the Employment Period, and for a period of two (2) years thereafter, he will not, without the prior written consent of the Board of Directors of Employer, directly or indirectly, as a stockholder (except as a stockholder owning beneficially or of record less than five percent (5%) of the outstanding shares of any class of stock of any issuer listed on a national securities exchange), or as an officer, director, manager, member, employee, partner, joint venturer, proprietor or otherwise, engage in, become interested in, consult with, lend to or borrow from, advise or negotiate for or on behalf of, any business which is of the type in which Employer or any affiliate or subsidiary of Employer engages during the Employment Period; provided that the prohibition contained in this subsection 4(b) shall not apply to any business in which Employer was engaged during the Employment Period if, during the two year period thereafter, Employer permanently ceases to be engaged in such business; (c) that, during the Employment Period, and for a period of two (2) years thereafter, he will not solicit any customer of Employer or any customer of any affiliate or subsidiary of Employer, directly or indirectly, for the purpose of enticing such customers to do business with anyone other than Employer; (d) that, during the Employment Period, and for a period of two (2) years thereafter, he will not solicit (or employ or cause to be employed other than by Employer) other employees of Employer or any affiliate or subsidiary of Employer, directly or indirectly, for the purpose of enticing them to leave their employment with Employer or any affiliate or subsidiary of Employer; (e) that, during the Employment Period and for a period of two (2) years thereafter, he will make full and complete disclosure of the existence of this Agreement and the content of this Section 4 to all prospective employers with whom he may discuss possible employment; (f) that, he will refrain from directly or indirectly disclosing, making available or using or causing to be used in any manner whatsoever, any information of Employer of a proprietary or confidential nature (including, without limitation, information regarding inventions, processes, formulas, systems, plans, programs, studies, techniques, "know-how," trade secrets, income or earnings, tax data, customer lists and contracts to which Employer is a party, but excluding any such information which may be in the public domain through proper means) and, upon termination of his employment, such information, to the extent that it has been reduced to writing (including any and all copies thereof), together with all copies of all forms, documents and materials of every kind, whether confidential or otherwise, shall forthwith be returned to the Employer and shall not be retained by Employee or furnished to any third party, either by sample, facsimile or by verbal communication; (g) that, he will refrain from any disparagement, direct or indirect, through innuendo or otherwise, of Employer or any of its employees, agents, officers, directors, shareholders or affiliates; (h) that, during the Employment Period, he will not, without the prior written consent in each case of the Board of Directors of Employer: (i) participate actively in any other business interests or investments which would conflict with his responsibilities under this Agreement, or (ii) borrow money from, or lend to, customers (except those commercial institutions whose business it is to lend money) or individuals or firms from which Employer or any affiliate or subsidiary of Employer buys services, materials, equipment or supplies, or with whom Employer or any affiliate or subsidiary of Employer does business; (i) that, during the Employment Period, he will not, without the prior written consent in each case of the Board of Directors of Employer: (i) exchange goods, products or services of Employer in return for goods, products or services of any individual or firm or (ii) accept gifts or favors from any outside organization or agency which, individually or collectively, may cause undue influence in his selection of goods, products or services for Employer; (j) that, after the termination of his employment, he will not secure, or attempt to secure, from any employee or former employee of Employer or any affiliate or subsidiary of Employer, any information relating to Employer or any affiliate or subsidiary of Employer or their business operations; and (k) that he will promptly and voluntarily advise the Board of Directors of Employer of any activities which might result in a conflict of interest with his duties to Employer hereunder, and, further, will make such other and further disclosures as Employer may reasonably request from time to time. Employee represents and warrants to Employer that, notwithstanding the operation of the covenants contained in this Section 4, upon the termination of his employment hereunder, Employee will be able to obtain employment for the purpose of earning a livelihood. Section 5. Injunctive Relief. Because the services to be performed --------- ----------------- by Employee hereunder are of a special, unique, unusual, confidential, extraordinary and intellectual character which character renders such services unique and because Employee will acquire by reason of his employment and association with Employer an extensive knowledge of Employer's trade secrets, customers, procedures, and other confidential information, the parties hereto recognize and acknowledge that, in the event of a breach or threat of breach by Employee of any of the terms and provisions contained in Section 4 or Section 7 of this Agreement, monetary damages alone to Employer would not be an adequate remedy for a breach of any of such terms and provisions. Therefore, it is agreed that in the event of a breach or threat of a breach of any of the provisions of Section 4 or Section 7 of this Agreement by Employee, Employer shall be entitled to an immediate injunction from any court of competent jurisdiction restraining Employee, as well as any third parties including successor employers of Employee whose joinder may be necessary to effect full and complete relief, from committing or continuing to commit a breach of such provisions without the showing or proving of actual damages. Any preliminary injunction or restraining order shall continue in full force and effect until any and all disputes between the parties to such injunction or order regarding this Agreement have been finally resolved. Employee hereby agrees to pay all costs of suit incurred by Employer, including but not limited to reasonable attorneys' fees, in obtaining any such injunction or order. Employee hereby waives any right he may have to require Employer to post a bond or other security with respect to obtaining or continuing any such injunction or temporary restraining order and, further, hereby releases Employer, its officers, directors, employees and agents from and waives any claim for damages against them which he might have with respect to Employer obtaining in good faith any injunction or restraining order pursuant to this Agreement. Section 6. Absence of Restrictions. Employee hereby represents and ---------- ----------------------- warrants that he has full power, authority and legal right to enter into this Agreement and to carry out his obligations and duties hereunder and that the execution, delivery and performance by Employee of this Agreement will not violate or conflict with, or constitute a default under, any agreements or other understandings to which Employee is a party or by which he may be bound or affected, including, but not limited to, any order, judgment or decree of any court or governmental agency. Section 7. Patents and Inventions. Employee will promptly submit to --------- ---------------------- Employer written disclosures of all inventions, improvements, discoveries, technological innovations and new ideas, relating to Employer's business, whether or not patentable (hereinafter called "Inventions"), which are directly or indirectly made, conceived, created or prepared by Employee, alone or jointly with others, during the Employment Period. Worldwide right, title and interest in and to the intellectual property rights (including but not limited to copyrights created in, patents to, or any other form of legal protection as may be obtained or obtainable in the United States of America or any foreign country), relating to all such Inventions that shall be within the existing or contemplated scope of Employer's business at the time such inventions are made or conceived or which result from or are suggested by any work Employee or others may do for or on behalf of Employer, shall belong to Employer. Employee will assign all right, title and interest in and to such intellectual property rights to Employer, and upon the request of Employer, will at any time during the Employment Period and after termination of Employee's employment for any reason, execute all proper papers for use in applying for, obtaining, maintaining and enforcing such copyrights, patents or other legal protection as Employer may desire and will execute and deliver all proper assignments thereof, when so requested, without remuneration but at the expense of Employer. Section 8. General. --------- ------- (a) Interpretation. If the provisions of subsections 4(b), 4(c) or -------------- 4(d) of this Agreement should be held to be invalid, illegal or unenforceable by a court of competent jurisdiction because of the time limitation or geographical area therein provided, such provisions shall nevertheless be effective and enforceable for such period of time and/or such geographical area as may be held to be reasonable by such court. Any provision of this Agreement that is invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without invalidating or rendering unenforceable the remaining provisions of this Agreement, and any such invalidity, illegality or unenforceability shall not, of itself, affect the validity, legality or enforceability of such provision in any other jurisdiction. (b) Notices. In any case where any notice or other communication is ------- to be given or made pursuant to any provision of this Agreement, such notice or communication shall be deemed to be delivered when actually received on the date specified in the return receipt for a notice or communication mailed by registered or certified mail, postage prepaid, addressed as follows: If to Employer: -------------- Allin Communications Corporation c/o SeaVision, Inc. 300 Greentree Commons 381 Mansfield Ave. Pittsburgh, PA 15220 Attention: R. Daniel Foreman with copies to: Bryan D. Rosenberger, Esq. Eckert Seamans Cherin & Mellott 600 Grant Street, 42nd Floor Pittsburgh, PA 15219 If to Employee: -------------- Jon Eric VanAmringe 100 Woodhaven Drive Pittsburgh, PA 15228 or such other address or addresses as any party may specify by notice to the other party given as herein provided. (c) Headings. The headings in this Agreement are inserted for -------- convenience and identification and in no way describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. (d) No Presumption on Interpretation. Nothing herein shall be -------------------------------- construed more strongly against or more favorably toward either party by reason of either party having drafted this Agreement or any portion hereof. (e) Binding Effect. This Agreement shall be binding upon, and inure -------------- to the benefit of, the parties hereto and their respective heirs, beneficiaries, executors, administrators, personal representatives, successors and permissible assigns. (f) Integration. This Agreement constitutes and contains the entire ----------- Agreement and understanding between the parties with respect to the subject matter hereof and supersedes any and all prior agreements, if any, understandings and negotiations relating thereto. No promise, understanding, representation, inducement, condition or warranty not set forth herein has been made or relied upon by any party hereto. (g) Waivers; Modification. This Agreement, or any provision hereof, --------------------- may be amended, supplemented or modified only by a writing signed by both parties and may be waived only by a writing signed by the party to be bound thereby. A written waiver of any provision shall be valid only in the instance for which given and shall not be deemed to be a continuing waiver or construed as a waiver of any other provisions. (h) Governing Law. This Agreement shall be construed in accordance ------------- with and governed in all respects by the laws of the Commonwealth of Pennsylvania (without giving effect to the conflicts of laws provisions thereof). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ALLIN COMMUNICATIONS CORPORATION By: /s/ Richard W. Talarico ----------------------------------- Name Printed: Richard W. Talarico ------------------------- Title: Chief Executive Officer -------------------------------- WITNESS: /s/ R. Daniel Foreman /s/ Jon Eric VanAmringe - ------------------------- -------------------------------------- Jon Eric VanAmringe EX-11 7 CALCULATION OF NET LOSS PER COMMON SHARE Exhibit 11 ALLIN COMMUNICATIONS CORPORATION Calculation of Net Loss Per Common Share (In thousands, except per share data)
Six months Period ended December 31, ended ---------------------------- June 30, 1994 1995 1996 ----------- ------------- ------------- Net loss $ (612) $ (2,168) $ (2,512) =========== ============= ============= Net loss per common share $ (0.25) $ (0.90) $ (1.05) =========== ============= ============= Weighted average common shares outstanding during the period (1) 2,400 2,400 2,400
(1) The weighted average common shares outstanding has been retroactively restated for the effect of the 2400 for 1 stock split. EX-23.2 8 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP ----------------------- Pittsburgh, Pennsylvania October 2, 1996 EX-23.3 9 CONSENT OF RICHARD TRUTANIC Exhibit 23.3 CONSENT OF RICHARD S. TRUTANIC ------------------------------ I consent to being named as about to become a director under the caption "Management -- Executive Officers and Directors" in the Registration Statement (Form S-1, file no. 333-10447) of Allin Communications Corporation, the related Prospectus and any amendments thereto. Arlington, Virginia October 2, 1996 /s/ Richard S. Trutanic ----------------------------- EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL DATA FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1996 AND THE PERIODS ENDED DECEMBER 31, 1994 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMEMTS. 6-MOS 6-MOS 7-MOS YEAR DEC-31-1995 DEC-31-1996 DEC-31-1994 DEC-31-1995 JAN-01-1995 JAN-01-1996 JUN-08-1994 JAN-01-1995 JUN-30-1995 JUN-30-1996 DEC-31-1994 DEC-31-1995 0 571,961 32,852 192,995 0 0 0 0 0 79,730 0 42,692 0 0 0 0 0 0 0 0 0 786,337 58,520 244,452 0 3,016,724 16,404 1,544,553 0 351,483 1,093 153,648 0 4,146,688 146,069 2,352,732 0 5,629,258 1,600 1,737,285 0 0 0 0 0 0 0 0 0 0 0 0 0 27,000 2,000 2,000 0 (5,316,854) (611,611) (2,779,691) 0 4,146,688 146,069 2,352,732 0 163,000 0 44,413 0 163,000 0 44,413 0 40,045 0 10,000 766,603 2,207,501 587,531 1,843,435 0 0 0 0 0 0 0 0 105,311 467,662 24,080 369,058 (871,914) (2,512,163) (611,611) (2,168,080) 0 0 0 0 (871,914) (2,512,163) (611,611) (2,168,080) 0 0 0 0 0 0 0 0 0 0 0 0 (871,914) (2,512,163) (611,611) (2,168,080) (.36) (1.05) (.25) (.90) (.36) (1.05) (.25) (.90)
-----END PRIVACY-ENHANCED MESSAGE-----