-----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, K/DgJAJSaFq+4079wCxN330o9e5h7TMDeDw6IdvWbyCHGbViFySGxjT2Z1LuIarD LkXHKVR8FDZabc6pzZYIbQ== 0000950132-98-000782.txt : 19981014 0000950132-98-000782.hdr.sgml : 19981014 ACCESSION NUMBER: 0000950132-98-000782 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980813 ITEM INFORMATION: FILED AS OF DATE: 19981009 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-21395 FILM NUMBER: 98723866 BUSINESS ADDRESS: STREET 1: 400 GREENTREE COMMONS STREET 2: 381 MANSFIELD AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15220 BUSINESS PHONE: 4129288800 MAIL ADDRESS: STREET 1: 400 GREENTREE COMMONS STREET 2: 381 MANSFIELD AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15220 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A (Amendment No. 1) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): August 13, 1998 Allin Communications Corporation (Exact Name of Registrant as Specified in its Charter) Delaware (State of Other Jurisdiction of Incorporation) 0-21395 21-1795265 (Commission File Number) (IRS Employer Identification No.) 400 Greentree Commons, 381 Mansfield Avenue Pittsburgh, Pennsylvania 15220-2751 (Address of Principal Executive Offices) (Zip Code) (412) 928-8800 (Registrant's Telephone Number, Including Area Code) This filing by Allin Communications Corporation (the "Company") is an amendment to the Company's current report on Form 8-K dated as of August 13, 1998 describing the Company's acquisition of all of the outstanding capital stock of KCS Computer Services, Inc., a Pennsylvania corporation ("KCS"), pursuant to a Stock Purchase Agreement among the Company and the shareholders of KCS. KCS provides information technology consulting and custom development services to its clients. This amendment provides certain financial information concerning KCS, including audited financial statements for the years ended December 31, 1996 and 1997, interim unaudited financial statements for the six months ended June 30, 1997 and 1998, and pro forma condensed consolidated financial information. The information contained in this filing on Form 8-K/A should be read in conjunction with information set forth in the Company's filings on Form 8-K dated as of August 13, 1998 describing the acquisition of KCS and dated as of September 30, 1998 describing the Company's sale of its sports marketing subsidiary, SportsWave, Inc. and the closure of a Loan and Security Agreement with S&T Bank, a Pennsylvania banking association. The information contained in this filing should also be read in conjunction with the audited financial statements and notes for the years ended December 31, 1996 and 1997 contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and the Company's filings on Form 10-Q for the quarterly periods ended March 31, 1998 and June 30, 1998. The audited financial statements of KCS included in this report were prepared by Grossman, Yanak & Ford LLP, independent accountants for KCS. The Company anticipates that the audit of KCS for the period ended December 31, 1998 will be conducted by the Company's independent accountants, Arthur Andersen LLP, as part of its audit of the Company and its subsidiaries. Item 7. Financial Statements and Exhibits (a) Financial Statements of Business Acquired: Independent Auditors' Report Audited Balance Sheets of KCS Computer Services, Inc. as of December 31, 1997 and 1996 Audited Statements of Operations and Retained Earnings of KCS Computer Services, Inc. for the Years Ended December 31, 1997 and 1996 Audited Statements of Cash Flows of KCS Computer Services, Inc. for the Years Ended December 31, 1997 and 1996 Notes to Audited Financial Statements of KCS Computer Services, Inc. Unaudited Balance Sheets of KCS Computer Services, Inc. as of June 30, 1998 and 1997 Unaudited Statements of Operations and Retained Earnings of KCS Computer Services, Inc. for the Six Months Ended June 30, 1998 and 1997 Unaudited Statements of Cash Flows of KCS Computer Services, Inc. for the Six Months Ended June 30, 1998 and 1997 Notes to Unaudited Financial Statements of KCS Computer Services, Inc. (b) Pro Forma Financial Information: Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1998 Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1997 Pro Forma Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 1998 Notes to Pro Forma Condensed Consolidated Financial Statements (c) Exhibits: 2.1 Stock Purchase Agreement dated August 13, 1998 among the Registrant, KCS Computer Services, Inc. and the stockholders of KCS Computer Services, Inc. (previously filed) 3(i)(a) Certificate of Designation for Series B Redeemable Preferred Stock of the Registrant (previously filed) 3(i)(b) Certificate of Correction Relating to the Series B Redeemable Preferred Stock of the Registrant (previously filed) 4.1 Preemptive Rights Agreement dated August 13, 1998 among the Registrant and certain stockholders of the Registrant (previously filed) Item 7. (cont.) 4.2 Form of Warrant for purchasers of Series B Redeemable Preferred Stock (previously filed) 4.3 Promissory Note dated August 13, 1998 in the principal amount of $2,000,000 (previously filed) 10.1 Registration Rights Agreement dated August 13, 1998 among the Registrant and certain stockholders of the Registrant (previously filed) 10.2 Promissory Note dated August 13, 1998 in the principal amount of $6,200,000 (previously filed) 23 Consent of Grossman Yanak & Ford LLP 99 Press Release dated August 13, 1998 (previously filed) INDEPENDENT AUDITORS' REPORT To The Stockholders and Board of Directors of KCS Computer Services, Inc. Pittsburgh, Pennsylvania We have audited the accompanying balance sheets of KCS Computer Services, Inc. as of December 31, 1997 and 1996, and the related statements of operations and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KCS Computer Services, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/GROSSMAN YANAK & FORD LLP Pittsburgh, Pennsylvania September 22, 1998 KCS COMPUTER SERVICES, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - ------------------------------------------------
ASSETS NOTES 1997 1996 - ------ ----- ----- ----- CURRENT ASSETS: Cash 1 $ 664,117 $ 230,304 Trade accounts receivable (net of allowance for doubtful accounts of $3,110 at December 31, 1997) 1,507,893 1,309,599 Employee advances - 5,646 Deferred income taxes 1,6 4,000 77,000 Prepaid expenses 101 7,401 ----------- ----------- Total current assets 2,176,111 1,629,950 PROPERTY AND EQUIPMENT, NET 1,3 194,438 270,183 DEPOSITS 2,307 1,502 ----------- ----------- TOTAL $ 2,372,856 $ 1,901,635 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------ CURRENT LIABILITIES: Accounts payable $ 154,655 $ 130,411 Accrued payroll and payroll related expenses 311,170 272,812 Sales tax payable 8 17,684 11,229 Income taxes payable 1,6 346,090 - Accrued expenses 14,850 - Current portion of notes payable 4 256,125 265,057 Current portion of capital lease obligations 5 14,958 18,288 ----------- ----------- Total current liabilities 1,115,532 697,797 ----------- ----------- NOTES PAYABLE 4 320,156 576,281 ----------- ----------- CAPITAL LEASE OBLIGATIONS 5 6,176 21,134 ----------- ----------- DEFERRED INCOME TAXES 1,6 322,000 420,000 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock - par value $1 per share; 500,000 shares authorized; 1,040 shares issued and outstanding 1,040 1,040 Additional paid-in capital 43 43 Retained earnings 607,909 185,340 ----------- ----------- Total stockholders' equity 608,992 186,423 ----------- ----------- TOTAL $ 2,372,856 $ 1,901,635 =========== ===========
See notes to financial statements. - -------------------------------------------------------------------------------- KCS COMPUTER SERVICES, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
NOTES 1997 1996 ----- ---- ---- PROFESSIONAL FEES $12,842,297 $10,992,354 ----------- ----------- EXPENSES: Wages and salaries 6,721,973 6,494,066 Payroll taxes 532,451 568,885 Employee fringe benefits 196,503 217,092 Outside services 3,215,322 1,925,765 Cost of software resold 59,412 228,775 Travel and entertainment 416,777 578,502 Club dues 6,073 7,509 Rent 195,094 291,340 Repairs 1,267 - Utilities 75,724 63,283 Auto expense 84,777 108,518 Professional services 203,795 89,198 Advertising 41,288 65,393 Seminars and training 5,414 10,023 Office expense 96,643 164,720 Licenses, fees, other taxes 11,364 758 Insurance 30,728 76,961 Dues and subscriptions 8,848 7,221 Bank charges 3,448 311 Depreciation and amortization 1 68,468 69,401 Bad debt expense 16,862 19,531 Miscellaneous 1,952 1,198 ----------- ----------- Total 11,994,183 10,988,450 ----------- ----------- OPERATING INCOME 848,114 3,904 ----------- ----------- OTHER INCOME (EXPENSE): Interest expense 4 (77,015) (104,700) Fines, penalties and other assessments (25,687) - Loss on sale of assets (2,671) - Other income 8,218 - ----------- ----------- Total (97,155) (104,700) ----------- ----------- INCOME (LOSS) BEFORE TAXES 750,959 (100,796) INCOME TAX PROVISION 6 328,390 10,000 ----------- ----------- NET INCOME (LOSS) 422,569 (110,796) ----------- ----------- RETAINED EARNINGS, BEGINNING - AS PREVIOUSLY STATED 185,340 766,414 CORRECTION OF ERRORS 2 - (470,278) ----------- ----------- RETAINED EARNINGS, BEGINNING - AS RESTATED 185,340 296,136 ----------- ----------- RETAINED EARNINGS, ENDING $ 607,909 $ 185,340 =========== =========== NET INCOME (LOSS) PER COMMON SHARE BASIC AND FULLY DILUTED (based on 1,040 shares outstanding during 1997 and 1996) $ 406.32 $ (106.53) =========== ===========
See notes to financial statements. - -------------------------------------------------------------------------------- KCS COMPUTER SERVICES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 422,569 $(110,796) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 68,468 69,401 Loss on sale of assets 2,671 - Deferred income taxes (25,000) 10,000 (Increase) decrease in: Accounts receivable and advances (192,648) 469,432 Prepaid expenses 7,300 (101) Increase (decrease) in: Accounts payable 24,244 77,277 Accrued liabilities 405,753 (103,810) --------- --------- Net cash provided by operating activities 713,357 411,403 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (9,394) (51,937) Proceeds from sale of equipment 14,000 - Increase in deposits (805) (1,052) --------- --------- Net cash provided (used) by investing activities 3,801 (52,989) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable and capital lease obligations (283,345) (299,211) Short-term borrowings, net - 50,000 Proceeds from long-term debt - 40,538 --------- --------- Net cash used by financing activities (283,345) (208,673) --------- --------- NET INCREASE IN CASH 433,813 149,741 CASH, BEGINNING 230,304 80,563 --------- --------- CASH, ENDING $ 664,117 $ 230,304 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 77,015 $ 104,700 ========= ========= Cash paid during the year for income taxes $ - $ - ========= =========
During 1996, the Company refinanced $824,500 of notes payable and $200,000 of short-term borrowings with a $1,024,500 term note. Also during 1996, the Company acquired office equipment of $41,738 under capital leases of like amount. See notes to financial statements. - ------------------------------------------------------------------------------- KCS COMPUTER SERVICES, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Presentation - KCS Computer Services, Inc. (the "Company") is a national systems integration company that provides custom technical solutions for client/server and legacy system environments. The Company was incorporated in Pennsylvania on March 20, 1986. Effective December 31, 1996, Information Technology Solutions, Inc., KCS Training and Temporary Services, Inc. and KCS Personnel Services, Inc., which were affiliated companies also controlled by the controlling stockholder, were merged into KCS Computer Services, Inc. The merger was accounted for in a manner similar to a pooling of interests. Accordingly, the financial statements as of December 31, 1996 and for the year then ended are presented on a combined basis. On August 13, 1998, the Company's stockholders sold all of the outstanding stock of the Company. In connection with this transaction, the Company is now a wholly-owned subsidiary of Allin Communications Corporation. Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting. Revenues are recognized when earned and expenses are recognized when incurred. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash - The Company maintains at financial institutions cash which may at times exceed federally insured amounts and which may at times exceed balance sheet amounts due to outstanding checks. Property and Equipment - Property and equipment are recorded at cost. Depreciation and amortization are provided for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from five to thirty-nine years. Maintenance and repairs are charged to income as incurred. The cost of property sold or retired and the related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in earnings. Net property and equipment includes assets held under capital leases with a cost of $67,803 at December 31, 1997 and 1996 and accumulated amortization of $48,883 and $33,520 at December 31, 1997 and 1996, respectively. Income Taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of current taxes due plus deferred taxes related primarily to differences between the bases of accrued expenses and property and equipment for financial and income tax reporting and the results of a change in accounting method for income tax purposes (see Note 6) as well as the utilization of net operating loss carryforwards. The deferred tax assets and liabilities represent future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. 2. CORRECTION OF ERRORS Effective January 1, 1996, the Company changed its methods of accounting for property and liabilities to methods acceptable under generally accepted accounting principles. In connection with the correction of these errors, retained earnings at January 1, 1996 was reduced by $470,278 principally due to the net effect of adjustments to property and equipment, accounts payable, accrued expenses, capital lease obligations and deferred income taxes (See Note 6) related to prior years. Adjustments to accounts payable and accrued expenses of approximately $137,000 were considered in the computation of the deferred tax liability at January 1, 1996 of $333,000 (see Note 6). These adjustments to accounts payable and accrued expenses had served to reduce the deferred tax liability at January 1, 1996 by approximately $56,000. The tax effects of the remaining adjustments were immaterial. 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1996 consist of:
1997 1996 ---------- ---------- Office furniture and equipment $ 365,246 $ 395,516 Leasehold improvements 54,326 54,326 --------- --------- Total 419,572 449,842 Less accumulated depreciation (225,134) (179,659) --------- --------- Property and equipment, net $ 194,438 $ 270,183 ========= =========
4. NOTES PAYABLE Notes payable consist of:
1997 1996 --------- --------- Note payable to bank in monthly principal installments of $21,344 plus interest at the prime rate plus .75% through March 2000 $ 576,281 $ 832,406 Note payable to bank in monthly principal installments of $3,378 plus interest at the prime rate plus .75% through February 1997 - $ 6,756 Note payable to financing company in monthly installments of $332 including interest at 5.0% through March 1997; secured by automobile - 2,176 --------- --------- $ 576,281 841,338 Less current portion (256,125) (265,057) --------- --------- Long-term debt $ 320,156 $ 576,281 ========= =========
Maturities of debt for years after December 31, 1997 are as follows: 1998 $ 256,125 1999 256,125 2000 64,031 --------- Total $ 576,281 =========
The Company also has a revolving line of credit agreement, which expires on March 27, 1999, with maximum borrowings of $250,000 at December 31, 1997 and 1996 and interest on the line is payable monthly at the prime rate plus .75%. The prime rate was 8.5% and 8.25% at December 31, 1997 and 1996, respectively. There were not any outstanding borrowings on the line at December 31, 1997 and 1996. In March 1998 the line was amended to increase the maximum borrowings to $400,000 and to reduce the interest rate to prime plus .5%. The term note and line of credit are secured by all tangible and intangible assets of the Company, are personally guaranteed by the majority stockholder, and are subject to certain covenants which are ordinary to such credit facilities and which include restrictions as to, among other things, debt coverage ratios and tangible net worth. 5. LEASES The Company leases office space, automobiles and equipment under operating leases that expire at various times through 2001. Total rental expense under operating leases was $195,094 and $291,340 for the years ended December 31, 1997 and 1996, respectively. Minimum future annual rental commitments for all non-cancellable operating leases as of December 31, 1997 are as follows:
1998 $203,413 1999 185,426 2000 175,574 2001 27,682 -------- Total $592,095 ========
The Company leases other office equipment under capital leases which expire at various times through 2001. The following represents the future minimum lease payments under capital leases and their present value at December 31, 1997:
1998 $18,048 1999 2,712 2000 2,712 2001 2,261 ------- Total minimum lease payments 25,733 Less amount representing interest 4,599 ------- Present value of minimum lease payments (including $14,958 classified as current) $21,134 =======
6. INCOME TAXES The components of the income tax provisions are as follows:
1997 1996 ---- ---- Current income tax provision: Federal $282,732 - State 70,658 - -------- ------- Total 353,390 - -------- -------
Deferred income tax provision (benefit):
Federal $(17,000) $ 10,000 State (8,000) - -------- -------- Total (25,000) 10,000 -------- -------- Total $328,390 $ 10,000 ======== ========
The income tax provisions differ from the amounts computed using the federal statutory income tax rates as follows: Provision (benefit) at federal statutory rates $255,326 $(34,270) State taxes, net of federal benefit 49,563 (6,653) Nondeductible expenses 27,774 49,200 Other (4,273) 1,723 -------- -------- Income tax provision $328,390 $ 10,000 ======== ========
The current federal and state provisions at December 31, 1997 reflect the utilization in 1997 of federal and state net operating loss carryforwards of $189,819 and $166,677, respectively. The current federal and state provisions for the year ended December 31, 1996 reflect utilization of net operating loss carryforwards of $362,484 and $338,484, respectively. Deferred income taxes result from differences in timing of recognition of income and expense items for tax and financial reporting purposes. The tax effects of temporary differences that give rise to the Company's deferred tax asset and liability are as follows:
1997 1996 ---- ---- Current deferred tax asset: Allowance for doubtful accounts $ 1,000 Accrued expenses 3,000 $ 1,000 Tax loss carryforwards - 76,000 -------- -------- Total $ 4,000 $ 77,000 ======== ========
1997 1996 ---- ---- Noncurrent deferred tax liability: Accumulated depreciation $ 22,000 $ 20,000 Excess of accrual basis income over cash basis income 300,000 400,000 -------- -------- Total $322,000 $420,000 ======== ========
The Company changed its method of accounting for income tax purposes from the cash basis to the accrual basis under Section 446 of the Internal Revenue Code effective with the filing of the 1997 corporate income tax return. Among the effects of this change was the recognition of approximately $985,000 of taxable income evenly over a four year period beginning in 1997. Accordingly, approximately $246,000 of taxable income was included in 1997 for purposes of calculating the current tax provision for the year ended December 31, 1997. Further, the deferred taxes related to the excess of income recognized under the accrual basis as reflected in financial statements over the cash basis income included in the corporate income tax returns through December 31, 1995 was not reflected in the accrual basis financial statements prior to January 1, 1996 as required by generally accepted accounting principles. Accordingly, a deferred tax liability of $333,000 at January 1, 1996 was included in the correction of errors discussed at Note 2. 7. PROFIT SHARING PLAN The Company sponsors a 401(k) profit sharing plan covering substantially all employees under which eligible employees may contribute a portion of their eligible earnings to the plan. The Company may make discretionary contributions as determined by the Board of Directors. No Company contributions were recognized for the years ended December 31, 1997 and 1996. 8. OTHER COMMITMENTS AND CONTINGENCIES The Pennsylvania Department of Revenue had presented KCS Computer Services, Inc. and its prior affiliated companies (See Note 1) a tax assessment of $193,212 plus penalties and interest of $63,238 as a result of a sales tax audit. The Company filed timely appeals and vigorously contested the assessment. During April 1998, the Pennsylvania Department of Revenue reduced the assessment by $57,020 and abated penalties of $38,492. During September 1998, the Pennsylvania Department of Revenue further reduced the assessment to $9,345. Accordingly, the assessment, penalties and interest, except for $10,837 of use tax, which was management's estimate of the ultimate obligation, have not been reflected in these financial statements. - ------------------------------------------------------------------------------- KCS COMPUTER SERVICES, INC. BALANCE SHEETS (UNAUDITED) JUNE 30, 1998 AND 1997 - --------------------------------------------------------------------------------
ASSETS NOTES 1998 1997 - ------ ----- ---- ---- CURRENT ASSETS: Cash 1 $ 214,615 $ 303,186 Trade accounts receivable (net of allowance for doubtful accounts of $13,000 and $1,000, respectively) 2,060,524 1,598,299 Deferred income taxes 1,5 16,000 8,000 Prepaid expenses 8,121 101 ---------- ---------- Total current assets 2,299,260 1,909,586 PROPERTY AND EQUIPMENT, NET 1,2 189,762 216,777 DEPOSITS 3,513 2,455 ---------- ---------- TOTAL $2,492,535 $2,128,818 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 210,259 $ 181,127 Accrued payroll and payroll related expenses 373,824 315,014 Accrued other taxes 7 16,456 13,975 Income taxes payable 1,5 132,613 176,285 Current portion of notes payable 3 481,125 256,125 Current portion of capital lease obligations 4 8,847 15,949 ---------- ---------- Total current liabilities 1,223,124 958,475 ---------- ---------- LONG-TERM LIABILITIES: Notes payable 3 192,094 448,619 Capital lease obligation 4 5,272 14,121 Deferred income taxes 1,5 224,000 309,000 ---------- ---------- Total long-term liabilities 421,366 771,740 ---------- ---------- STOCKHOLDERS' EQUITY: Common stock - par value $1 per share; 500,000 shares authorized; 1,040 shares issued and outstanding 1,040 1,040 Additional paid-in capital 43 43 Retained earnings 846,962 397,520 ---------- ---------- Total stockholders' equity 848,045 398,603 ---------- ---------- TOTAL $2,492,535 $2,128,818 ========== ==========
See notes to financial statements. - -------------------------------------------------------------------------------- KCS COMPUTER SERVICES, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - --------------------------------------------------------------------------------
NOTES 1998 1997 ----- ---- ---- PROFESSIONAL FEES $7,070,881 $6,101,057 ---------- ---------- EXPENSES: Wages and salaries 3,587,948 3,364,366 Payroll taxes 312,953 305,054 Employee fringe benefits 117,960 118,542 Outside services 1,865,499 1,352,248 Cost of software and computers resold 79,497 25,115 Travel and entertainment 272,332 197,211 Club dues 3,186 2,568 Rent 110,802 97,866 Repairs 708 534 Utilities 35,716 35,101 Auto expense 29,909 46,280 Professional services 7,904 6,455 Advertising 21,546 15,471 Seminars and training 12,596 2,746 Office expense 40,450 46,591 Other taxes 7,734 4,714 Insurance 17,979 17,881 Dues and subscriptions 2,760 5,753 Charitable contributions 150 - Depreciation and amortization 33,447 36,735 Bad debt expense (7,918) (18,531) Miscellaneous 3,191 5,318 ---------- ---------- Total 6,556,349 5,668,018 ---------- ---------- OPERATING INCOME 514,532 433,039 ---------- ---------- OTHER EXPENSE: Interest expense 3 32,626 39,562 Loss on sale of assets - 2,671 Miscellaneous 83,412 37,041 ---------- ---------- - - Total 116,038 79,274 ---------- ---------- INCOME BEFORE TAXES 398,494 353,765 INCOME TAX PROVISION 5 159,441 141,585 ---------- ---------- NET INCOME 239,053 212,180 ---------- ---------- RETAINED EARNINGS, BEGINNING 607,909 185,340 ---------- ---------- RETAINED EARNINGS, ENDING $ 846,962 $ 397,520 ========== ==========
See notes to financial statements. - ------------------------------------------------------------------------------- KCS COMPUTER SERVICES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - --------------------------------------------------------------------------------
1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 239,053 $ 212,180 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 33,447 36,735 Loss on sales of assets - 2,671 Deferred income taxes (110,000) (42,000) (Increase) decrease in: Accounts receivable (552,631) (283,053) Prepaid expenses (8,020) 7,300 Increase (decrease) in: Accounts payable 55,604 50,716 Accrued liabilities (166,901) 221,233 ---------- ---------- Net cash provided by (used in) operating activities (509,448) 205,782 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (28,771) - Proceeds from sale of equipment - 14,000 Increase in deposits (1,206) (953) ---------- ---------- Net cash provided by (used in) investing activities (29,977) 13,047 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable and capital lease obligations (210,077) (145,947) Proceeds from borrowings 300,000 - ---------- ---------- Net cash provided by (used in) financing activities 89,923 (145,947) ---------- ---------- NET INCREASE (DECREASE) IN CASH (449,502) 72,882 CASH, BEGINNING 664,117 230,304 ---------- ---------- CASH, ENDING $ 214,615 $ 303,186 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 32,626 $ 39,562 ========== ========== Income taxes $ 482,918 $ - ========== ==========
See notes to financial statements. - ------------------------------------------------------------------------------- KCS COMPUTER SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - KCS Computer Services, Inc. (the "Company") is a national systems integration company that provides custom technical solutions for client/server and legacy system environments. The Company was incorporated in Pennsylvania on March 20, 1986. Effective December 31, 1996, Information Technology Solutions, Inc., KCS Training and Temporary Services, Inc. and KCS Personnel Services, Inc., which were affiliated companies also controlled by the controlling stockholder, were merged into KCS Computer Services, Inc. On August 13, 1998, the Company's stockholders sold all of the outstanding stock of the Company. In connection with this transaction, the Company is now a wholly-owned subsidiary of Allin Communications Corporation. Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting. Revenues are recognized when earned and expenses are recognized when incurred. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash - The Company maintains cash at financial institutions which may at times exceed federally insured amounts and which may at times exceed balance sheet amounts due to outstanding checks. Property and Equipment - Property and equipment are recorded at cost. Depreciation and amortization are provided for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from five to thirty-nine years. Maintenance and repairs are charged to income as incurred. The cost of property sold or retired and the related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in earnings. Net property and equipment includes assets held under capital leases with a cost of $67,803 and with accumulated amortization of $55,207 and $42,559 as of June 30, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- Income Taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of current taxes due plus deferred taxes related primarily to differences between the bases of accrued expenses and property and equipment for financial and income tax reporting and the results of a change in accounting method for income tax purposes (see Note 6). The deferred tax assets and liabilities represent future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. 2. PROPERTY AND EQUIPMENT Property and equipment at June 30, 1998 and 1997 consist of:
1998 1997 -------------- -------- Office furniture and equipment $ 394,018 $355,853 Leasehold improvements 54,325 54,325 --------- -------- Total 448,343 410,178 Less accumulated depreciation and amortization (258,581) 193,401 --------- -------- Property and equipment, net $ 189,762 $216,777 ========= ======== 3. NOTES PAYABLE 1998 1997 --------- -------- Notes payable consist of: Note payable to bank in monthly principal installments of $21,344 plus interest at the prime rate plus .75% through March 2000 $ 448,219 $704,744
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1998 1997 ---- ---- Note payable to bank in monthly principal installments of $25,000 plus interest at prime rate plus .5% from April 1998 through March 1999 $225,000 - -------- -------- Total 673,219 $704,744 Less current portion 481,125 256,125 -------- -------- Long-term debt $192,094 $448,619 ======== ========
Maturities of debt for years after June 30, 1998 are as follows: 1999 $481,125 2000 192,094 -------- Total $673,219 ========
The Company also has a revolving line of credit agreement, which expires on March 27, 1999, with maximum borrowings of $400,000. Interest on the line is payable monthly at the prime rate plus .5% and .75% at June 30, 1998 and 1997, respectively. The prime rate was 8.5% at June 30, 1998 and 1997. There were not any outstanding borrowings on the line at June 30, 1998 and 1997. The term notes and line of credit are secured by all tangible and intangible assets of the Company, are personally guaranteed by the majority stockholder, and are subject to certain covenants which are ordinary to such credit facilities and which include restrictions as to, among other things, debt coverage ratios and tangible net worth. 4. LEASES The Company leases office space, automobiles and equipment under operating leases that expire at various times through 2002. Total rental expense under operating leases for the six months ended June 30, 1998 and 1997 was $110,802 and $97,866, respectively. Minimum future annual rental commitments for all non-cancellable operating leases as of June 30, 1998 are as follows:
1999 $200,962 2000 179,054 2001 101,822 2002 13,647 -------- Total $495,485 ========
- -------------------------------------------------------------------------------- The Company leases other office equipment under capital leases which expire at various times through 2002. The following represents the future minimum lease payments under capital leases and their present value at June 30, 1998:
1999 $ 10,380 2000 2,712 2001 2,712 2002 904 -------- Total minimum lease payments 16,708 Less amount representing interest 2,589 -------- Present value of minimum lease payments (including $8,847 classified as current) $ 14,119 ========
5. INCOME TAXES The components of the income tax provision are as follows:
1998 1997 ---- ---- Current income tax provision: Federal $ 209,114 $138,388 State 60,327 45,197 --------- -------- Total 269,441 183,585 --------- -------- Deferred income tax benefit: Federal (83,000) (30,000) State (27,000) (12,000) --------- -------- Total (110,000) (42,000) --------- -------- Total $ 159,441 $141,585 ========= ========
The Company changed its method of accounting for income tax purposes from the cash basis to the accrual basis under Section 446 of the Internal Revenue Code effective with the filing of the 1997 corporate income tax return. Among the effects of this change will be the recognition of approximately $993,000 of taxable income evenly over a four year period beginning in 1997. Accordingly, approximately $248,000 of taxable income was included in 1998 and 1997 for purposes of calculating the current tax provision for the six months ended June 30, 1998 and 1997. - -------------------------------------------------------------------------------- The provision for income taxes for the six months ended June 30, 1998 and 1997 is more than that calculated at statutory rates principally due to deductions recognized in the financial statements which are not deductible for tax purposes, primarily consisting of penalties and nondeductible club dues, meals and entertainment. Also, the federal and state provisions at June 30, 1997 reflect the expected utilization in 1997 of federal and state net operating loss carryforwards of $189,819 and $166,677, respectively. The net deferred tax assets and liabilities at June 30, 1998 and 1997 consist of $16,000 and $8,000 of current deferred tax assets related principally to accrued expenses and $224,000 and $309,000, respectively, of noncurrent deferred tax liabilities related principally to the Section 446 adjustment discussed above and accumulated depreciation. Further, the deferred taxes related to the excess of income recognized under the accrual basis as reflected in financial statements over the cash basis income included in the corporate income tax returns through December 31, 1996 was not reflected in the accrual basis financial statements prior to January 1, 1997 as required by generally accepted accounting principles. Accordingly, a deferred tax liability of $343,000 at January 1, 1997 was included in the prior period adjustment discussed at Note 2. 6. PROFIT SHARING PLAN The Company sponsors a 401(k) profit sharing plan covering substantially all employees under which eligible employees may contribute a portion of their eligible earnings to the plan. The Company may make discretionary contributions as determined by the Board of Directors. No Company contributions were recognized for the six months ended June 30, 1998 and 1997. 7. OTHER COMMITMENTS AND CONTINGENCIES The Pennsylvania Department of Revenue has presented KCS Computer Services, Inc. and its prior affiliated companies (See Note 1) a tax assessment of $193,212 plus penalties and interest of $63,238 as a result of a sales tax audit. The Company had filed timely appeals and vigorously contested the assessment. During April 1998, the Pennsylvania Department of Revenue reduced the assessment by $57,020 and abated penalties of $38,492. During September 1998, the Pennsylvania Department of Revenue further reduced the assessment to $9,345. Accordingly, the assessment, penalties and interest, except for $10,837 of use tax that will not be contested, have not been reflected in these financial statements. - -------------------------------------------------------------------------------- PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following Pro Forma Condensed Consolidated Financial Statements of Allin Communications Corporation (the "Company") are based on its historical financial statements, adjusted to give effect to the September 30, 1998 sale of its wholly-owned subsidiary, SportsWave, Inc. ("SportsWave"), and its August 13, 1998 acquisition of all of the issued and outstanding capital stock of KCS Computer Services, Inc. ("KCS"). The Pro Forma Condensed Consolidated Financial Statements of Operations for the year ended December 31, 1997 and for the six months ended June 30, 1998 assume that such disposition and acquisition had occurred on January 1, 1997. The Pro Forma Condensed Consolidated Financial Statements reflect the estimated gain on disposal of SportsWave as gain realized on disposal of a segment since SportsWave's operations comprised the entirety of the Company's sports marketing business. The Pro Forma Condensed Consolidated Financial Statements also assume the that Company's August 13, 1998 issuance of Series B preferred stock and warrants and its October 1 , 1998 closure of its current revolving credit facility had occurred on January 1, 1997. The pro forma condensed consolidated financial information reflects the purchase method of accounting for the acquisition of KCS, and accordingly is based on estimated purchase accounting adjustments that are subject to further revision depending upon completion of any appraisals or other studies of the fair value of assets and liabilities. Final purchase accounting adjustments will differ from the pro forma adjustments presented herein and described in the accompanying notes due to the results of operations of KCS from June 30, 1998 to the date of acquisition. The final purchase accounting adjustments are not expected to differ significantly from the estimates used herein. There were no intercompany sales or expenses recorded between the Company and KCS during the periods presented. The pro forma condensed consolidated financial information reflects certain assumptions described above and in Notes to Pro Forma Condensed Consolidated Financial Statements of Operations below. The pro forma financial information does not purport to present what the Company's results of operations would actually have been if the disposal of SportsWave and the acquisition of KCS had occurred on the assumed date, as specified above, or to project the Company's financial condition or results of operations for any future period. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 (Unaudited) (Dollars in thousands)
Pro Forma Allin Consolidated Pro Forma Communications Allin Adjustments Corporation after Communications for Sale of Sale of Corporation SportsWave, Inc. SportsWave, Inc. Note ASSETS: Current Assets: Cash and cash equivalents $ 5,111 $ 2,944 (1) $ 8,055 Accounts receivable 2,594 (982) (2) 1,612 Notes receivable - 500 500 Inventory 1,858 1,858 Deferred Income Taxes - - Prepaid Expenses 337 (162) (2) 175 ---------------- ------------ Total current assets 9,900 12,200 Property and equipment, net 4,635 (70) (2) 4,565 Other assets 4,303 (2,022) (2) 2,281 ---------------- ------------ Total assets $ 18,838 $ 19,046 ================ ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Accounts payable $ 668 $ (78) (2) $ 590 Accrued liabilities 1,349 (98) (2) 1,251 Income taxes payable - - Current portion of notes payable 11 600 (4) 611 Current portion of deferred revenue 905 (724) (2) 181 ---------------- ------------ Total current liabilities 2,933 2,633 Non-current portion of deferred revenue 424 (424) (2) - Notes payable - - Deferred income taxes - - Other liabilities - - Series A convertible, redeemable preferred stock 2,500 2,500 Series B preferred stock and warrants - - Shareholder's equity 12,981 932 (3) 13,913 ---------------- ------------ Total liabilities and shareholders' equity $ 18,838 $ 19,046 ================ ============ Pro Forma Adjustments for Acquisition KCS of KCS Computer Computer Pro Forma Services, Inc. Services, Inc. Consolidated Note ASSETS: Current Assets: Cash and cash equivalents $ 215 $ (384)(5)(10) $ 7,886 (11)(12) Accounts receivable 2061 3,673 Notes receivable - 500 Inventory - 1,858 Deferred Income Taxes 16 (16) (7) - Prepaid Expenses 8 183 --------------- --------- Total current assets 2,300 14,100 Property and equipment, net 189 4,754 Other assets 4 13,408 (6) 15,693 --------------- --------- Total assets $ 2,493 $ 34,547 =============== ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Accounts payable $ 210 $ $ 800 Accrued liabilities 400 142 (8) 1,793 Income taxes payable 133 133 Current portion of notes payable 481 5,719 (5)(10) 6,811 Current portion of deferred revenue - 181 --------------- --------- Total current liabilities 1,224 9,718 Non-current portion of deferred revenue - - Notes payable 192 1,808 (5)(10) 2,000 Deferred income taxes 224 (93) (7) 131 Other liabilities 5 5 Series A convertible, redeemable preferred stock - 2,500 Series B preferred stock and warrants - 2,750 (11) 2,750 Shareholder's equity 848 2,682 (5)(9) 17,443 --------------- --------- Total liabilities and shareholders' equity $ 2,493 $ 34,547 =============== =========
The accompanying notes are an integral part of these financial statements. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (Unaudited) (Dollars in thousands, except per share data)
Pro Forma Allin Consolidated Pro Forma Communications Allin Adjustments Corporation after KCS Communications for Sale of Sale of Computer Corporation SportsWave, Inc. SportsWave, Inc. Services, Inc. Note Revenue $ 13,187 $ (3,590) (1) $ 9,597 $ 12,842 Cost of sales 8,103 (2,115) (1) 5,988 - ----------- ------------- -------- Gross profit 5,084 3,609 12,842 Selling, general & administrative 16,164 (1,647) (1) 14,517 12,014 ----------- ------------- -------- Loss from operations (11,080) (10,908) 828 Interest expense (income), net (425) (7)(1) (3) (432) 77 ----------- ------------- -------- Loss before income tax expense (10,655) (10,476) 751 Income tax expense 48 (3) (1) 45 328 ----------- ------------- -------- Loss before disposal of segment (10,703) (10,521) 423 Gain on disposal of segment - 907 (2) 907 - ----------- ------------- -------- Net income (loss) $ (10,703) $ (9,614)$ 423 =========== ============= ======== Net loss per common share - basic and diluted $ (2.08) (1.86) ----------- ------------- Weighted average shares outstanding - basic and diluted 5,157,399 5,157,399 ----------- ------------- Pro Forma Adjustments for Acquisition of KCS Computer Pro Forma Services, Inc. Consolidated Note Revenue $ $ 22,439 Cost of sales 8,748 (10) 14,736 ----------- Gross profit 7,703 Selling, general & administrative (8,173) (4)(10) 18,358 ----------- Loss from operations (10,655) Interest expense (income), net 289 (5)(6)(7) (66) ----------- (8)(9) Loss before income tax expense (10,589) Income tax expense 373 ----------- Loss before disposal of segment (10,962) Gain on disposal of segment 907 ----------- Net income (loss) $ (10,055) =========== Net loss per common share - basic and diluted $ (1.69) ----------- Weighted average shares outstanding - basic and diluted 5,962,594 -----------
The accompanying notes are an integral part of these financial statements. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (Unaudited) (Dollars in thousands, except per share data)
Pro Forma Allin Consolidated Pro Forma Communications Allin Adjustments Corporation after KCS Communications for Sale of Sale of Computer Corporation SportsWave, Inc. SportsWave, Inc. Services, Inc. Note Revenue $ 7,089 $ (2,061) (1) $ 5,028 $ 7,071 Cost of sales 3,603 (1,191) (1) 2,412 - ------------ ------------- ------------ Gross profit 3,486 2,616 7,071 Selling, general & administrative 6,079 (599) (1) 5,480 6,640 ------------ ------------- ------------ Loss from operations (2,593) (2,864) 431 Interest expense (income), net (121) 8 (1) (113) 33 ------------ ------------- ------------ Loss before income tax expense (2,472) (2,751) 398 Income tax expense 6 6 159 ------------ ------------- ------------ Net loss $ (2,478) $ (2,757) $ 239 ============ ============= ============ Net loss per common share - basic and diluted $ (0.48) $ (0.53) $ ------------ ------------- Weighted average shares outstanding - basic and diluted 5,157,399 5,157,399 ------------ ------------- Pro Forma Adjustments for Acquisition of KCS Computer Pro Forma Services, Inc. Consolidated Note Revenue $ $ 12,099 Cost of sales 4,828 (10) 7,240 ------------- Gross profit 4,859 Selling, general & administrative (4,541) (4)(10) 7,579 ------------- Loss from operations (2,720) Interest expense (income), net 143 (6)(7) 63 ------------- (8)(9) Loss before income tax expense (2,783) Income tax expense 165 ------------- Net loss $ (2,948) ============= Net loss per common share - basic and diluted $ (0.49) ------------- Weighted average shares outstanding - basic and diluted 5,962,594 -------------
The accompanying notes are an integral part of these financial statements. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share data) The pro forma adjustments to the condensed consolidated balance sheets are as follows: (1) To record the sale proceeds received from Lighthouse Holdings, Inc. ("Lighthouse") for all of the issued and outstanding shares of SportsWave as if the proceeds had been received as of June 30, 1998. Proceeds include receipt of cash in the amount of $2,944 and a note receivable in the amount of $500. (2) To remove the assets and liabilities of SportsWave, as of June 30, 1998, which were included in the Company's consolidated balance sheet as of that date, but which are assumed to be transferred to Lighthouse. Assets assumed transferred to Lighthouse include SportsWave's accounts receivable, prepaid expenses, property and equipment, net of accumulated depreciation, and other asset balances. Other assets consists primarily of intangible assets related to the Company's purchase of SportsWave, net of accumulated amortization, and the long-term portion of prepaid expenses. Liabilities assumed transferred to Lighthouse include accounts payable, accrued expenses and the current and long-term portions of deferred revenue. SportsWave's cash balance as of June 30, 1998 is assumed to have been utilized to repay a portion of the intercompany balance due the Company. (3) To adjust shareholder's equity to reflect an estimated gain on the disposal of SportsWave of $932. The pro forma balance sheet presentation assumes that the sale of SportsWave occurred as of June 30, 1998. The assumed gain was estimated by comparing the sale proceeds, as identified in Note (1) above, less a liability to the former shareholders of SportsWave, as discussed in Note (4), to the Company's recorded investment in SportsWave. The recorded investment reflects the Company's original purchase at cost, an adjustment for its equity-basis ownership interest in SportsWave's results of operations from acquisition through June 30, 1998, plus the Company's intercompany receivable balance from SportsWave, net of SportsWave's June 30, 1998 cash which is assumed to have been utilized to repay a portion of the intercompany balance. The Company had sufficient federal and state net operating loss carryforwards as of the actual date of sale of SportsWave, September 30, 1998, to offset the estimated gain to be recorded on disposal. Consequently, no provision for income taxes is expected to be recorded in connection with the gain and therefore no provision for income taxes related to the gain on disposal has been reflected in the pro forma condensed consolidated financial statements. (4) To record a liability of $600 to reflect the Company's settlement of any contingent liability owed the former shareholders of SportsWave related to the earn-out provisions of the original stock purchase agreement pursuant to which the Company acquired SportsWave in 1996. (5) To record the purchase price consideration for the Company's acquisition of KCS, including a cash payment of $2,443, the issuance of 805,195 shares of the Company's common stock to certain selling KCS shareholders valued at $4.406 per share resulting in a credit to shareholder's equity of $3,548, the issuance of a note payable to a selling KCS shareholder of $6,200 with an assumed maturity of approximately 4.5 months, and the issuance of a second note payable to a selling KCS shareholder of $2,000 with an assumed maturity of two years. The number of shares and valuation placed on the common stock issued corresponds to that utilized in the actual acquisition. The assumed maturities of the notes payable correspond with the time periods from issuance to maturity of the actual notes payable. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share data) (6) To record the estimated excess purchase price of approximately $13,408 assigned to intangible assets. The intangible assets identified, based upon an independent appraisal, along with the assigned values and the estimated useful lives, are as follows:
Estimated Useful ----------------- Assets Assumed Values Lives in Years ------ -------------- -------------- Assembled Work Force $ 257 5 Customer List 2,230 14 Goodwill 10,921 30
The agreement governing the acquisition of KCS includes provisions for contingent payments of up to $1,200 in cash and up to $400 in the Company's common stock based on the Adjusted Operating Income, as defined in the agreement, of KCS for the year ended December 31, 1998. Future contingent payments, if any, made to the selling shareholders of KCS will be reflected as additional cost of the acquired entity. These additional costs of the affected assets will be capitalized and amortized over the remaining useful life of the assets. (7) To record the reversal of certain deferred tax liabilities of $93 and deferred tax assets of $16 in connection with the estimated purchase accounting. (8) To record an estimated liability for professional, legal and accounting fees incurred or expected to be incurred in connection with the acquisition. Such fees have been added to the Company's estimated investment in KCS in estimating the excess purchase price. (9) To reflect elimination of KCS equity balance as of June 30, 1998. (10) To record assumed repayment by the Company of certain notes payable due from KCS to a bank. Assumed cash disbursement is $673 to retire notes with current portion due of $481 and non-current portion due of $192 as of June 30, 1998. (11) To record the net proceeds of $2,750 from the issuance of 2,750 shares of the Company's Series B preferred stock and warrants. Such proceeds were utilized in connection with the acquisition of KCS. (12) To record disbursements of $18 to regulatory agencies in connection with the Company's issuance of additional common shares. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share data) The pro forma adjustments to the condensed consolidated statements of operations are as follows: (1) To remove the revenue, cost of sales, selling, general & administrative expenses, interest income and income tax expenses applicable to the operations of SportsWave for the periods presented. (2) To reflect an assumed gain on disposal of SportsWave of $907 as of the beginning of the income statement periods presented. The gain is reflected as if the sale had occurred as of January 1, 1997. The assumed gain was estimated by comparing the sale proceeds, less a liability to the former shareholders of SportsWave, as discussed in Note (4) to pro forma balance sheet, to the Company's recorded investment in SportsWave. The recorded investment reflects the Company's original purchase at cost, an adjustment for its equity basis ownership interest in SportsWave's results of operations from its acquisition by the Company in November 1996 through December 31, 1996, plus the Company's intercompany receivable balance from SportsWave, net of SportsWave's January 1, 1997 cash balance which is assumed to be utilized to repay a portion of the intercompany balance. As discussed above in Note (3) to pro forma balance sheet, no provision for income taxes has been reflected for the gain on disposal because the Company has sufficient federal and state net operating loss carryforwards as of actual date of disposal to offset the estimated gain. (3) To reflect interest income based on estimated money market rates for the assumed cash receipt of $2,944 at the closing of the sale of SportsWave for approximately 1.5 months. The majority of the proceeds from the sale of SportsWave, were utilized to repay a note payable incurred by the Company in connection with the Company's acquisition of KCS. The note retirement occurred approximately 1.5 months after the KCS acquisition. Therefore, for the pro forma statements of operations, it is also assumed that the note was retired approximately 1.5 months after the assumed date of acquisition of KCS, January 1, 1997. Assumed additional interest income is $19 for the year ended December 31, 1997. (4) To record estimated amortization expense related to intangible assets recorded in connection with the acquisition of KCS, including assembled work force, customer list and goodwill. Estimated amortization expense is $575 for the year ended December 31, 1997 and $287 for the six months ended June 30, 1998. (5) To record interest expense of $38 for a $6,200 note payable related to the acquisition of KCS. As discussed above under Note (3) to pro forma statements of operations, such note is assumed to have been outstanding approximately 1.5 months. (6) To record interest expense of $122 for the year ended December 31, 1997 and $61 for the six months ended June 30, 1998 for a $2,000 note payable related to the acquisition of KCS. (7) To record interest expense of $83 for the year ended December 31, 1997 and $48 for the six months ended June 30, 1998 related to the borrowing of $1,000 under the Company's revolving credit line with S&T Bank. The borrowing is assumed to have occurred to repay a portion of a note payable due a selling KCS shareholder approximately 1.5 months after the assumed date of KCS acquisition, January 1, 1997. The interest expense is based on estimated prime interest rates during the periods and the premium to prime rate specified in the Company's loan agreement. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in thousands, except per share data) (8) To reflect foregone interest income at estimated money market rates on $2,355 of the Company's working capital assumed to have been utilized in connection with repayment of the $6,200 note payable related to the KCS acquisition. Interest income is estimated to have been foregone for 10.5 and 6 months, respectively, for the yearly and six-month 1997 and 1998 periods presented. Foregone interest income is estimated at $111 for the year ended December 31, 1997 and $64 for the six months ended June 30, 1998. (9) To reflect reduced interest expense resulting from the assumed January 1, 1997 repayment of notes payable due from KCS to a bank. The estimated reduction in interest expense is based on average principal balances outstanding during the respective periods, estimated prime interest rates during the periods and the premium to prime rate applicable under the KCS notes. Reduced interest expense reflected in the pro forma statements of operations are $65 for the year ended December 31, 1997, and $30 for the six months ended June 30, 1998. (10) To reclassify estimated cost of sales applicable to KCS' operations during the periods presented in the pro forma statements of operations. Such costs were not segregated from other selling, general & administrative expenses in KCS financial statements. Cost of sales was estimated based on rates consistent with historical KCS operational analysis of billing rates and consultant costs. The reclassification makes the presentation consistent with the Company's classifications of cost of sales and selling, general & administrative expenses for its technology consulting business. Amounts reclassified to cost of sales were $8,748 for the year ended December 31, 1997 and $4,828 for the six months ended June 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIN COMMUNICATIONS CORPORATION Date: October 9, 1998 By: /s/ Richard W. Talarico ----------------------- Richard W. Talarico Chairman and Chief Executive Officer EXHIBIT INDEX 2.1 Stock Purchase Agreement dated August 13, 1998 among the Registrant, KCS Computer Services, Inc. and the stockholders of KCS Computer Services, Inc. (previously filed) 3(i)(a) Certificate of Designation for Series B Redeemable Preferred Stock of the Registrant (previously filed) 3(i)(b) Certificate of Correction Relating to the Series B Redeemable Preferred Stock of the Registrant (previously filed) 4.1 Preemptive Rights Agreement dated August 13, 1998 among the Registrant and certain stockholders of the Registrant (previously filed) 4.2 Form of Warrant for purchasers of Series B Redeemable Preferred Stock (previously filed) 4.3 Promissory Note dated August 13, 1998 in the principal amount of $2,000,000 (previously filed) 10.1 Registration Rights Agreement dated August 13, 1998 among the Registrant and certain stockholders of the Registrant (previously filed) 10.2 Promissory Note dated August 13, 1998 in the principal amount of $6,200,000 (previously filed) 23 Consent of Grossman Yanak & Ford LLP 99 Press Release dated August 13, 1998 (previously filed) EX-23 2 CONSENT OF GROSSMAN YANAK & FORD LLP Exhibit 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Allin Communications Corporation We consent to the inclusion in this Amended Current Report on Form 8-K/A of Allin Communications Corporation of our report dated September 22, 1998, relating to the balance sheets of KCS Computer Services, Inc. as of December 31, 1997 and 1996 and the related statements of operations and Retained earnings and of cash flows for the years then ended. /s/GROSSMAN YANAK & FORD LLP Pittsburgh, Pennsylvania October 7, 1998 -----END PRIVACY-ENHANCED MESSAGE-----