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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-12597
PENN-AKRON CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 11-1843262
------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1980 Gallows Road, Suite 200, Vienna, Virginia 22182
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(Address of principal executive offices)
(703) 761-1900
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(Registrant's telephone number, including area code)
3455 Peachtree Road, NE, 5th Floor, Atlanta, GA 30326
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes[ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
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State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.01 par value per share, 34,760,742 shares issued and
outstanding as of October 30, 2000.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
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PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENN-AKRON CORPORATION
BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
September 30, December 31,
2000 1999
---- ----
CURRENT ASSETS:
Cash in bank $ 159,248 $ 100
Accounts receivable 8,998,088 3,981,395
Other receivables 26,573 22,808
Employee advances 177,567 2,000
Refundable deposits -- 4,380
PrinVest Corp. escrow for OneWeb -- 205,000
Prepaid maintenance and training costs 224,000 224,000
Prepaid expenses 52,889 --
Deferred financing costs -- 45,833
----------- ----------
Total Current Assets 9,638,365 4,485,516
----------- ----------
EQUIPMENT, less accumulated depreciation of $7,365 at
September 30, 2000 and $1,065 at December 31, 1999 32,443 4,258
----------- ----------
OTHER ASSETS:
Other assets 3,100 5,116
Investment in Sanswire.net, LLC 211,201 --
Loan to Children's Heroes, Inc. 320,100 --
Prepaid maintenance and training costs - long-term 246,998 415,997
----------- ----------
Total Other Assets 781,399 421,113
----------- ----------
Total Assets $10,452,207 $4,910,887
=========== ==========
(Continued)
The accompanying notes are an integral part of these financial statements.
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PENN-AKRON CORPORATION
BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2000 1999
---- ----
CURRENT LIABILITIES:
Line of credit $ 2,871,114 $ --
Accounts payable and accrued expenses 6,223,454 3,858,406
Employee accounts payable -- 1,328
Accrued compensation 356,250 665,032
Deferred maintenance and training revenue 224,000 224,000
------------ -----------
Total Current Liabilities 9,674,818 4,748,766
------------ -----------
DEFERRED MAINTENANCE AND TRAINING
REVENUE - LONG-TERM 247,997 415,997
------------ -----------
STOCKHOLDERS' EQUITY:
Common stock, 100 million shares authorized, $.001
par value, 32,924,662 shares issued and outstanding
at September 30, 2000; 1,000 shares no par value
authorized, 500 shares issued and outstanding at
December 31, 1999 32,925 400
Paid-in capital 2,606,031 --
Less subscription receivable (781,739) --
Retained earnings (deficit) (1,327,825) (254,276)
------------ -----------
Total Stockholders' Equity 529,392 (253,876)
------------ -----------
Total Liabilities and Stockholders' Equity $ 10,452,207 $ 4,910,887
============ ===========
The accompanying notes are an integral part of these financial statements.
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PENN-AKRON CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Local school installations $ -- $19,345,424 $6,196,383 $19,345,424
Training revenue 56,000 -- 168,000 --
Network operations center -- 243,964 -- 243,964
Lan project -- -- -- 5,008
T-1 Telecom access -- -- 432 12,506
Interest income 5,000 -- 11,202 --
--------- ----------- ---------- -----------
Total Revenues 61,000 19,589,388 6,376,017 19,606,902
--------- ----------- ---------- -----------
DIRECT COSTS:
Local school installations
and training 137,335 18,164,546 6,147,778 18,164,546
Network operations center -- 613,476 22,745 613,476
Lan project -- -- -- 2,745
T-1 Telecom access -- 5,119 7,740 22,541
Other -- 161,779 33,408 161,779
--------- ----------- ---------- -----------
Total Cost of Sales 137,335 18,944,920 6,211,671 18,965,087
--------- ----------- ---------- -----------
GROSS PROFIT (76,335) 644,468 164,346 641,815
--------- ----------- ---------- -----------
EXPENSES:
Advertising -- -- 6,000 --
Amortization -- -- 45,833 --
Commissions -- 75 -- 20,075
Consulting 64,101 -- 69,101 --
Conventions and exhibits -- -- 9,816 541
Director's fees -- -- 2,750 55,137
Insurance expense 14,554 -- 14,554 --
Interest -- 8,421 -- 19,090
Legal and accounting 198,947 280,130 335,717 309,117
Meals expense -- 2,426 1,460 4,336
(Continued)
The accompanying notes are an integral part of these financial statements.
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PENN-AKRON CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Other subcontractors $ 10,589 $ 6,911 $ 68,773 $ 13,719
Rent 7,880 14,214 32,290 37,340
Salaries 191,879 110,000 526,796 583,330
Taxes - payroll 15,900 701 40,878 10,369
Telephone 1,202 19,604 27,923 51,576
Travel 22,517 2,849 32,428 7,856
Other expenses 8,829 980 23,576 12,795
------------ ----------- ------------ ------------
Total Expenses 536,398 446,311 1,237,895 1,125,281
------------ ----------- ------------ ------------
INCOME (LOSS) BEFORE
PROVISION FOR
INCOME TAXES (612,733) 198,156 (1,073,549) (483,466)
PROVISION FOR INCOME
TAXES -- -- -- --
------------ ----------- ------------ ------------
NET INCOME (LOSS) $ (612,733) $ 198,156 $ (1,073,549) $ (483,466)
============ =========== ============ ============
NET INCOME (LOSS)
PER SHARE:
Basic $ (0.02) $ 0.02 $ (0.04) $ (0.05)
============ =========== ============ ============
SHARES USED IN COMPUTING
EARNINGS PER SHARE:
Basic 32,924,662 10,194,826 32,924,662 10,194,826
============ =========== ============ ============
The accompanying notes are an integral part of these financial statements.
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PENN-AKRON CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
- --------------------------------------------------------------------------------
Common Stock Retained
------------------------- Paid-in Earnings Subscription
Shares Amount Capital (Deficit) Receivable
----------- -------- ------------ ------------ ------------
BALANCE at January 1, 1999 500 $ 400 $ -- $ (4,205) $ --
Net loss for the year ended
December 31, 1999 -- -- -- (250,071) --
----------- -------- ------------ ------------ ------------
BALANCE at December 31, 1999 500 400 -- (254,276) --
Conversion of note payable to
Spherus stock 500 -- 250,000 -- --
Shares of Penn-Akron
outstanding at merger 10,542,581 -- (800) -- --
Recapitalization for change in
par value -- 10,143 (10,143) -- --
Shares issued in merger with
Spherus Technologies, Inc. 17,143,581 17,144 367,212 -- --
Subscription receivable for
shares sold 4,500,000 4,500 1,995,500 -- (2,000,000)
Payment of subscription
receivable -- -- -- -- 1,218,261
Issuance of common stock to
reserve account 687,500 688 (688) -- --
Issuance of common stock for
services 50,000 50 4,950 -- --
Net loss for the nine months
ended September 30, 2000 -- -- -- (1,073,549) --
----------- -------- ------------ ------------ ------------
BALANCE at September 30, 2000 32,924,662 $ 32,925 $ 2,606,031 $ (1,327,825) $ (781,739)
=========== ======== ============ ============ ============
The accompanying notes are an integral part of these
financial statements.
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PENN-AKRON CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
-------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from contracts $ 1,348,123 $ 7,201
Cash paid to subcontractors, vendors and employees (5,563,121) (1,433,646)
Interest paid -- (19,090)
------------ ------------
Net Cash Used In Operating Activities (4,214,998) (1,445,535)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Sanswire.net, LLC (200,000) --
Loan to Children's Heroes, Inc. (320,100) --
Acquisition of equipment (34,485) (5,323)
------------ ------------
Net Cash Used In Investing Activities (554,585) (5,323)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipt of escrow desposit 205,000 --
Cash received for common stock 1,602,617 --
Cash received for note payable to stockholder 250,000 --
Net change in line of credit 2,871,114 1,498,673
------------ ------------
Net Cash Provided By Financing Activities 4,928,731 1,498,673
------------ ------------
INCREASE IN CASH 159,148 47,815
CASH, BEGINNING OF PERIOD 100 6,818
------------ ------------
CASH, END OF PERIOD $ 159,248 $ 54,633
============ ============
The accompanying notes are an integral part of these
financial statements.
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PENN-AKRON CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Nine Months Ended September 30,
-------------------------------
2000 1999
------------- -------------
Net loss $ (1,073,549) $ (483,466)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization 45,833 --
Depreciation 6,300 --
Issuance of common stock for services 5,000 --
Increase in accounts receivable (5,016,693) (19,599,701)
Decrease in prepaid maintenance costs 168,999 --
Increase in other current assets (227,841) (25,886)
Increase in other assets (9,185) --
Increase in accounts payable 2,364,248 6,605,728
Increase (decrease) in accrued expenses (310,110) 12,057,790
Decrease in deferred maintenance and training revenues (168,000) --
------------- -------------
Net Cash Used In Operating Activities $ (4,214,998) $ (1,445,535)
============= =============
NONCASH INVESTING AND FINANCING TRANSACTIONS
During the nine months ended September 30, 2000, the Company issued 4.5
million shares of common stock for a subscription receivable of $2 million.
During the nine months ended September 30, 2000, a $250,000 note payable to
stockholder was converted to 500 shares of Spherus common stock prior to the
merger.
During the nine months ended September 30, 2000, the Company issued 50,000
shares of common stock for services at $.10 per share.
The accompanying notes are an integral part of these
financial statements.
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PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. They do not include all information and notes required by generally
accepted accounting principles for complete financial statements. However,
except as disclosed herein, there has been no material change in the information
disclosed in the notes to financial statement included in the financial
statements on Form 10-Q of Penn-Akron Corporation (doing business as
globalseer.com) for the quarter ended May 31, 2000. In the opinion of
management, all adjustments necessary to fairly present the financial position
as of September 30, 2000, and the results of operations for the three-month and
nine-month periods ended September 30, 2000 and 1999, and the statements of cash
flows and stockholders' equity for the nine months ended September 30, 2000 and
1999. Results of operations for interim periods are not necessarily indicative
of results for the entire year.
The Company prepares its financial statements in accordance with
generally accepted accounting principles (GAAP). These principles are
established primarily by the Financial Accounting Standards Board (FASB) and the
American Institute of Certified Public Accountants.
The preparation of financial statements in conformity with GAAP requires
management to make estimates when recording transactions resulting from business
operations, based on information currently available. As additional information
becomes available (or actual amounts are determinable), the recorded estimates
may be revised and reflected in operating results. Although some variability is
inherent in these estimates, management believes the amounts provided are
adequate.
The Company elected to change its year-end from February 28th to
December 31st. The quarterly financial statement periods have also changed to
calendar quarters with the second quarter being June 30, 2000.
2. CONTINGENCY
In September 2000, the Company terminated its subcontract with Lynxus,
Inc. to deliver, install and test software and hardware at the Company's
customer locations. The Company is being sued by Lynxus for payment of
outstanding invoices of approximately $500,000. The Company has a counterclaim
against Lynxus in excess of $3.3 million for funds relating to Year 2 and
prepaid training, maintenance and support in Year 1.
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PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
The Schools and Library Division of Universal Services Administrative
Company, the primary funding source for MRESA, has stopped payments for the
contract pending resolution of these and other matters. The Company has entered
into a contract with Domain Networks to provide re-work and ongoing delivery,
installation and testing of software and hardware under current contracts with
MRESA. An accrual of $58,000 has been made for estimated re-working costs of
previously completed contracts.
At September 30, 2000, accounts receivable were made up as follows:
MRESA $2,653,368 Year 1 matching funds
$2,529,020 Year 2 matching funds
SLD $ 81,581 Year 1 installations
$3,595,648 Year 2 installations
Lynxus $ 138,471
The MRESA amount relates to local obligations to be paid from matching
contributions that have not yet been pledged. Further, if MRESA does not raise
the matching funds for Years 1 and 2, the terms of the SLD grant may not be met
and therefore SLD may not fund some part or all of the $3.6 million receivable,
or take other action under its contract with MRESA. Accounts payable at
September 30, 2000, includes a payable to Lynxus for $5.7 million that the
Company believes may not be due to Lynxus if the matching funds are not received
by MRESA. The $500,000 represented in the lawsuit by Lynxus against the Company
is included in this $5.7 million. Because the ultimate outcome of these matters
is not reasonably determinable as of November 7, 2000, no provision for
uncollectible amounts or elimination of amounts payable have been recognized.
The Company is also being sued by a stockholder who was a former
employee for approximately $100,000 for termination of his employment contract.
The Company has accrued for the compensation element of the claim in these
financial statements. The claim also seeks redemption of his common stock for $1
million. Management of the Company believes that the redemption claim against
the Company is without merit. Because the ultimate outcome of this matter is not
reasonably determinable as of November 7, 2000, the Company has not accrued for
the redemption of the common stock.
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PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
3. ACQUISITIONS
On October 27, 2000, the Company purchased the assets, consisting of
contracts, service agreements, licensing agreements, marketing and sales
agreements and other intellectual property, of Children's Heroes, Inc. (CHI) for
235,000 shares of Penn-Akron's common stock. The Company also issued 1,260,750
shares of common stock to certain creditors and former employees of CHI for
release from liability. The Company entered into employment agreements with
three employees of CHI for an initial term of three years and automatically
renewing for two additional years. The employees will receive a base salary to
be increased by at least 10% annually, quarterly cash bonus equal to 4.2% of the
base salary, and incentive compensation under arrangements to be implemented by
January 31, 2001. The Company also granted these employees stock options to
purchase 900,000 common shares each at various exercise prices, dates and
vesting periods.
At September 30, 2000, the Company had notes receivable from CHI
totaling $235,100 due on demand and bearing interest of 9% per annum.
Summary unaudited financial information for CHI for the period ended
September 30, 2000 follows:
Total assets $0
Total liabilities $235,100
Total revenues $0
Net loss (since inception) $(235,100)
4. LEASE OBLIGATIONS
The Company has entered into a lease for office space in Virginia. This
lease begins on October 1, 2000, and expires on November 30, 2002. The future
minimum lease payments under this lease are as follows:
2000 $ 30,464
2001 138,459
2002 131,641
--------
$300,564
========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements of Penn-Akron Corporation (the "Company" or "Penn-Akron")
(including the notes thereto) contained elsewhere in this report.
OVERVIEW
The Company is currently doing business under the name Penn-Akron,
providing single-source, media-technology and curriculum-enhancement solutions
to kindergarten through twelfth grade public and private schools. The Company is
also examining opportunities to provide new and expanded sources of educational
content and other learning services to higher education and corporate training
providers. Additionally, on October 6, 2000 the Company's Board of Directors
approved an amendment to the Company's Articles of Incorporation to change the
name of the Company to "Heroes, Inc" (the "Charter Amendment"). Holders of
17,436,448 shares of common stock approved the Charter Amendment by written
consent in lieu of a meeting dated October 30, 2000. The purpose of the name
change is to reflect (i) the Company's acquisition of substantially all of the
assets of Children's Heroes.com, Inc., a Nevada corporation ("Children's
Heroes"), and (ii) the Company's intent to move forward with its business plan
of deploying a nation-wide grass roots and on-line marketing system aimed at
fund raising for K-12 schools and developing Internet educational tools.
Subject to the stockholder notification requirements under the Securities
Exchange Act of 1934, as amended, the corporate name change will become
effective upon the filing of the Charter Amendment with the Secretary of State
of the State of Nevada. The Company anticipates that such filing will become
effective on or about December 4, 2000.
RESULTS OF OPERATIONS
Our revenues decreased to $6,376,017 for the nine-month period ended
September 30, 2000 from $19,606,902 for the nine-month period ended September
30, 1999, a decrease of approximately 67%. Our revenues decreased to $61,000 for
the three-month period ended September 30, 2000 from $19,589,388 for the
three-month period ended September 30, 1999. This decrease for the nine- and
three-month period ended September 30, 2000 is primarily due to the fact that
all local school installations to be performed by us under our contract with the
Metropolitan Regional Educational Service Agency ("MRESA") have been suspended
pending the completion of an audit of MRESA by Arthur Andersen, LLP.
Our current customer is MRESA, an administrative services agency of the
Georgia Department of Education. Our contract with MRESA was executed in March
1999 and we
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began performance thereunder in August 1999. This contract presently continues
for a three year period. As of December 31, 1999, we had completed Year 1 of the
three Years under this contract and installed our services at 192 schools. We
began performance on Year 2 of our contract with MRESA in early May 2000. We are
currently seeking additional customers.
The Schools and Library Division ("SLD") of the Universal Services
Administrative Company, a non-profit entity under the jurisdiction of the
Federal Communications Commission that administers funds pursuant to the federal
Telecommunications Act of 1996, provides significant funding to MRESA. The
program under which SLD provides funding to MRESA requires a 10% to 50% matching
commitment for each school from private or local funds.
In August 2000, Arthur Andersen, LLP, began an audit of MRESA. The
MRESA contract is currently funded by the SLD of the Universal Service
Administrative Company. The audit is part of an ongoing program integrity
process initiated by the SLD to insure that applicants to and vendors
(beneficiaries) of the E-rate program comply fully with all Federal
Communications Commission and SLD program guidelines, rules and regulations. A
number of beneficiaries of the SLD program are audited annually. The
determination of which beneficiaries are audited is done both randomly and based
upon the size of the beneficiary's award. As of the date of this report, the
audit of MRESA is still in progress. We, as the service provider of the
contract, are also being audited. As of the date of this report, we have
invoiced a total of $3,595,647.60 for services performed under our contract for
Year 2 of this program to the SLD. All of these invoices have been approved by
MRESA. As of the date of this report, $3,595,647.60 remains outstanding and
unpaid by the SLD. We anticipate that payment from the SLD for past services
performed by us will be forthcoming at the conclusion of the audit.
Our total cost of sales decreased to $6,211,671 for the nine-month
period ended September 30, 2000, from $18,965,087 for the same period of 1999, a
decrease of approximately 67%. Our total cost of sales decreased to $137,335 for
the three-month period ended September 30, 2000 from $18,944,920 for the same
period of 1999. This decrease is due primarily to the suspension of work under
our MRESA contract pending the completion of Arthur Andersen, LLP's audit of
MRESA. Our expenses increased to $1,237,895 for the nine-month period ended
September 30, 2000 from $1,125,281 for the same period in 1999. Our expenses
increased to $536,398 for the three-month period ended September 30, 2000 from
$446,311 for the same period in 1999. The increase in expenses for the
three-month period ended September 30, 2000 is primarily due to an increase in
salary expense, resulting from the addition of new management personnel, as well
as increased consulting expenses.
Our net loss for the three-month period ended September 30, 2000
increased to ($612,733) or ($0.02) per share over net income of $198,156 or
$0.02 per share for the same period of 1999. We had a net loss of ($1,073,549)
or ($0.04) per share, for the nine-month period ended September 30, 2000,
compared to a net loss of ($483,466) or ($0.05) per share, for the prior year
period. The primary cause of the increase in net loss over prior periods is the
decrease in revenue due to the suspension of work under our MRESA contract
pending the completion of Arthur Andersen, LLP's audit of MRESA.
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On October 13, 2000, we entered into an asset purchase agreement (the
"Transaction Agreement") pursuant to which we purchased substantially all of the
assets of Children's Heroes for the aggregate purchase price of 235,000 shares
of Common Stock which we issued to Children's Heroes on October 27, 2000 (the
"Closing"). Furthermore, at the Closing, we issued 1,228,755 shares of Common
Stock to certain creditors of Children's Heroes and its affiliates in
consideration for us becoming a beneficiary of certain releases provided by such
creditors to Children's Heroes and its affiliates.
With the purchase of substantially all of the assets of Children's
Heroes, we intend to deploy a nationwide grass roots and on line marketing
system aimed at fund raising for K-12 schools and developing Internet
educational tools. Our sales force is currently working to enroll individuals
as well as local and Internet merchants in our fund raising program. The program
will allow schools to receive a certain percentage of the proceeds from their
community's purchases at participating merchants. We intend to encourage
merchants to participate in our fund raising program by providing them with
certain transaction services and products. We plan to generate revenues through
our fund raising program by receiving a commission from participating merchants
on each purchase by an enrolled individual. Furthermore, through our
relationships with AT&T, N2H2, Inc., Bidland Systems and Frequent Friends, we
intend to resell a number of services such as AT&T Internet access under the
name "Children's Heroes", leveraging our relationships with end-user customers
and increasing our revenues.
On September 7, 2000, Lynxus, Inc. ("Lynxus"), one of our contractors,
filed Civil Action No. 008872-1 ("Lynxus Suit") against us in the State Court of
Fulton County, Georgia. The Lynxus Suit seeks $484,943.13 plus interest, costs,
and attorney fees. On October 10, 2000, we filed our affirmative defenses,
answer and counterclaim to the Lynxus Suit ("Penn-Akron Counterclaim"). In the
Penn-Akron Counterclaim, we deny liability to Lynxus, seek damages in excess of
$3,300,000, plus payment of all costs, expenses and attorney fees. The case has
been removed to federal court and discovery is just beginning at the time of
this filing. Lynxus has failed to perform its obligations under its agreement
with us, and has failed and refused to cure its default within the time
permitted by the agreement and, therefore, we have formally terminated our
agreement with Lynxus.
As a result of this termination, we are now directly responsible for
implementing and installing an internet-based video distribution and multi-media
network for installation at elementary and secondary schools participating in
the e-rate program under contract with MRESA. Our contract with MRESA also
includes a 36-month training program and on-going maintenance. We intend to
continue the implementation without any delays, and have the necessary
contractor in place to complete the work required under Year 1 of our contract
with MRESA.
LIQUIDITY AND CAPITAL RESOURCES
Our total current assets increased to $9,638,365 at September 30, 2000
from $4,485,516 at December 31, 1999. This increase is due primarily to an
increase in accounts receivable resulting from performance under our contract
with MRESA. Our total current liabilities increased to $9,674,818 as of
September 30, 2000 from $4,748,766 at December 31, 1999. This increase is
primarily due to an increase in accounts payable, primarily payable to our
subcontractors. The resulting working capital deficit increased to $1,327,825 at
September 30,
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2000 from $254,276 at December 31, 1999. We expect to collect the full amounts
owed to us by both the SLD and MRESA.
Our total stockholders' equity increased to $529,392 at September 30,
2000 from ($253,876) at December 31, 1999. This increase is primarily due to an
increase in paid-in capital resulting from the capital infusion that occurred in
connection with the merger transaction in March between Spherus Technologies,
Inc. and Penn-Akron Corporation.
In June 2000 we negotiated a line of credit with PrinVest Corp with a
maximum line of credit of $3,500,000. We have drawn down approximately $3
million on this facility as of November 4, 2000. We have a promissory note,
dated November 7, 2000, from Tampa Bay Financial, Inc. in the amount of
$781,738.59.
We had $159,248 in cash as of September 30, 2000. We believe that we
will have sufficient liquidity and capital resources to finance our operations
for the remainder of 2000.
CAUTIONARY STATEMENTS AND RISK FACTORS
Except for the historical information and discussions herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including the
Company's failure to continue to develop and market new and innovative products
and services and to keep pace with technological change; competitive pressures;
failure to obtain intellectual property rights; quarterly fluctuations in
revenue and volatility of stock prices; our ability to attract and retain key
personnel; dependence on certain suppliers and subcontractors; our ability to
manage acquisitions and alliances; legal, political and economic changes and
other risks, uncertainties and factors in our other filings with the Securities
and Exchange Commission ("SEC").
CURRENT TRADING MARKET FOR OUR SECURITIES.
Our common stock recently began trading on the OTC Bulletin Board
("OTCBB"), operated by NASDAQ, under the symbol PNAC. No assurance can be given
that an active trading market in our securities will be sustained.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
Our market is characterized by rapidly changing technologies, frequent
new service introductions and evolving industry standards. The recent growth of
the Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our network. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new
features, content or network services. In addition, our new enhancements must
meet the requirements of our
17
current and prospective users and must achieve significant market acceptance. We
could also incur substantial costs if we need to modify our service or
infrastructure to adapt to these changes.
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY.
Because our current operating business, operating under the name
Penn-Akron, was established in 1998 and did not commence material operations
until 1999, we have a limited operating history on which investors can base an
evaluation of our business and prospects. Our income potential is unproven and
our business model is unique and will continue to evolve.
With the purchase of Children's Heroes, we intend to deploy a
nationwide grass roots and on-line marketing system. We hope to generate revenue
through subscriptions and transactions with local and Internet merchants as well
as schools/youth sports parents in our proprietary registration program. This
business plan is unproven and we can provide no assurances that it will be
successful or generate revenue for the Company.
An investor in our common stock must carefully consider the risks and
difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new and
rapidly evolving market. Our business strategy may not be successful and we may
not successfully overcome these risks.
WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR EARLY STAGE OF
DEVELOPMENT LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY.
Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. Factors that might cause quarterly fluctuations in our
operating results include the factors described in the subheadings below. To
respond to these and other factors, we may need to make business decisions that
could impact our quarterly operating results. Most of our expenses, such as
lease payment obligations, employee compensation and rent, are relatively fixed
in the short term. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. As a result, if total revenues for
a particular quarter are below our expectations we could not proportionately
reduce our operating expenses for that quarter. Therefore, this revenue
shortfall would have a disproportionate effect on our expected operating results
for that quarter. Consequently, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful, and should not be viewed
as indicators of our future performance. In addition, during future periods our
quarterly or annual operating results may fail to meet the expectations of
securities analysts or investors. In this case the trading price of our common
stock would likely decrease.
18
OUR BUSINESS AND FUTURE REVENUE GROWTH WILL SUFFER IF WE FAIL TO RETAIN AND GROW
OUR CUSTOMER BASE.
The success of our business will depend on our ability to add
customers. Our ability to grow our customer base depends largely on our ability
to deploy our network to additional schools. If we are unable to rapidly deploy
our network to a large number of additional schools, we will not be able to grow
our core school user base, and our ability to generate revenue and implement our
strategy will be limited.
WE ARE DEPENDENT ON THIRD PARTIES TO DEPLOY OUR NETWORK AND SUPPORT IT ONCE
INSTALLED.
We plan to deploy our network to additional schools across the country.
We have used, and plan to continue to use, third parties such as OneWeb Systems,
AT&T, InfoSpace, Inc. and N2H2, Inc. to install and support the Penn-Akron
network. Any changes in the third parties we contract with to install and
support our network could cause delays in the deployment of the Penn-Akron
network and any inability to install schools according to our plan could limit
revenue generated from possible sponsorships, e-commerce and network services.
Further, if we do need to hire substitute or additional third-party installers
of our network we cannot assure you that we will be able to do so on terms as
favorable as our current arrangements, or at all, which could result in higher
installation costs to us as well as potential delays in our deployment.
We also rely on third parties to provide the majority of support
necessary to maintain the Penn-Akron network once installed. Any inability to
maintain or delays to the maintenance of this equipment could lead to lower
revenue.
REGULATORY AND LEGAL ISSUES SPECIFIC TO THE INTERNET.
The Internet is the subject of an increasing number of laws and
regulations. These laws or regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. In addition, these
new laws have not yet been interpreted by the courts, and consequently their
applicability and reach are not defined. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property is not
clearly defined.
SCHOOLS MAY USE ALTERNATIVE MEANS TO ACQUIRE INTERNET ACCESS OR CONDUCT FUND
RAISING, WHICH COULD REDUCE OUR POTENTIAL CUSTOMER BASE AND MAY LEAD TO LOWER
THAN EXPECTED REVENUES.
An immediate attraction of our network is immediate access to media via
the Internet. However, for a variety of reasons, schools may decide to use other
methods to acquire Internet access and/or conduct fund raising. If schools
decide to use means other than deployment of our network, it will limit our user
base, and consequently we will have lower than expected revenues. Similarly, if
schools decide to use alternative methods to raise funds, it will limit our
customer base and we will have lower than expected revenues.
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WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED.
We expect to use existing cash for general corporate purposes,
including expanding our sales and marketing activities, continuing investments
in technology and product development and other capital expenditures, as well as
working capital and other corporate expenses. Our cash requirements are large
and depend on several factors, including cash outflows due to lease obligations,
the rate of expansion of our school base, the availability of equipment leases
on competitive terms, our success in generating revenues, the growth of sales
and marketing, and other factors. If capital requirements vary materially from
those currently planned, we may require additional financing sooner than
anticipated.
Tampa Bay Financial, Inc., a large shareholder, has provided capital to
us in the last few months. Except as provided in the Merger Agreement between
Penn-Akron and Spherus Technologies, Inc., Tampa Bay Financial, Inc. is not
obligated to make additional capital available to us.
WE ARE DEPENDENT ON THE CONTINUED GROWTH IN USE AND POPULARITY OF OUR NETWORK
AND THE INTERNET BY OUR USERS AND OUR ABILITY TO SUCCESSFULLY ANTICIPATE THE
FREQUENTLY CHANGING TASTES OF OUR USERS.
Our business is unlikely to be successful if the popularity of the
Internet and related media in schools as an educational tool and among students
in general does not continue to increase. Even if the popularity of the Internet
and related media does increase, the success of our network in particular
depends on our ability to anticipate and keep current with the frequently
changing preferences of our users. Any failure on our part to successfully
anticipate, identify or react to changes in styles, trends or preferences of our
users would lead to reduced interest in and use of the Penn-Akron network.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER OUR
NETWORK.
We may be subject to claims relating to content that is published on or
downloaded from the Penn-Akron network. Such claims might include defamation or
trademark infringement and may involve costs to defend potential claims or to
indemnify us for all liability that may be imposed. In addition, any claims like
this, with or without merit, could require us to change our network in a manner
that could be less attractive to our customers and would result in the diversion
of our financial resources and management personnel.
WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE
RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US.
We are dependent on various third parties for software, systems and
related services. Several of the third parties that provide software and
services to us have a limited operating history, have relatively immature
technology and are themselves dependent on reliable delivery of services from
others. As a result, our ability to deliver various services to our users may
suffer due to the failure of these third parties to provide reliable software,
systems and related
20
services to us. Additionally, we make seek to contract with alternative third
parties to the ones we have formerly used, which may or may not have a negative
effect on our operations.
FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES.
We plan to expand our operations. We anticipate that further
significant expansion will be required to grow our customer base if we are to be
successful in implementing our business strategy. We may not be able to
implement management information and control systems in an efficient and timely
manner, and our current or planned personnel, systems, procedures and controls
may not be adequate to support our future operations. If we are unable to manage
growth effectively, our business would suffer.
THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY.
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales and management departments,
many of whom perform important management functions and would be difficult to
replace. The loss of the services of any key personnel, particularly senior
management, could seriously harm our business.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES.
We may not be able to attract and retain the necessary personnel to
accomplish our business objectives, and we may experience constraints that will
adversely affect our ability to deploy the Penn-Akron network in a timely
fashion or to support our users and operations. Recruiting qualified personnel
is an intensely competitive and time-consuming process.
PART 2
ITEM 1. LEGAL PROCEEDINGS.
On September 7, 2000, Lynxus, Inc. ("Lynxus"), one of our contractors,
filed Civil Action No. 008872-1 ("Lynxus Suit") against us in the State Court of
Fulton County, Georgia. The Lynxus Suit seeks $484,943.13 plus interest, costs,
and attorney fees. On October 10, 2000, we filed our affirmative defenses,
answer and counterclaim to the Lynxus Suit ("Penn-Akron Counterclaim"). In the
Penn-Akron Counterclaim, we deny liability to Lynxus, seek damages in excess of
$3,300,000, plus payment of all costs, expenses and attorney fees. The case has
been removed to federal court and discovery is just beginning at the time of
this filing. Lynxus has failed to perform its obligations under its agreement
with us, and has failed and refused to cure its default within the time
permitted by the agreement and, therefore, we have formally terminated our
agreement with Lynxus.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 2000, the holders of a majority of the shares of voting
stock issued and outstanding of Penn-Akron, acting by written consent in lieu of
a meeting, resolved to amend the Company's Articles of Incorporation to change
the Company's name to "Heroes, Inc." (the "Charter Amendment"). On the record
date of October 30, 2000, 34,760,742 shares of the Company's common stock were
outstanding; 17,436,448 shares of common stock voted to approve the Charter
Amendment, representing 50.1% of the total outstanding shares of the Company. No
further corporate approvals of the Charter Amendment are required. Pursuant to
Section 14(c) of the Securities Exchange Act of 1934, as amended, a Preliminary
Information Statement was filed with the SEC on November 2, 2000. The Definitive
Information Statement with respect to the Charter Amendment was filed with the
SEC and mailed to the stockholders of the Company on November 13, 2000.
Stockholder approval for the Charter Amendment will only become effective 20
days following the mailing of the Definitive Information Statement. The Company
proposes to file the Charter Amendment with the Secretary of State of the State
of Nevada on or about December 4, 2000, upon which the name change will become
effective.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Employment Agreement between Penn-Akron Corporation and Amer
A. Mardam-Bey, executed October 6, 2000
10.2 Employment Agreement between Penn-Akron Corporation and Tammy
L. Lambert, executed October 6, 2000
10.3 Employment Agreement between Penn-Akron Corporation and
Christopher Hutcherson, executed October 27, 2000
10.4 Employment Agreement between Penn-Akron Corporation and Allen
de Castro, executed October 27, 2000
10.5 Employment Agreement between Penn-Akron Corporation and John
C. Schaper, executed October 27, 2000
10.6 Stock Option Agreement between Penn-Akron Corporation and Amer
A. Mardam-Bey, executed October 6, 2000
10.7 Stock Option Agreement between Penn-Akron Corporation and
Tammy L. Lambert, executed October 6, 2000
10.8 Stock Option Agreement between Penn-Akron Corporation and
Christopher Hutcherson, executed October 27, 2000
10.9 Stock Option Agreement between Penn-Akron Corporation and
Allen de Castro, executed October 27, 2000
10.10 Stock Option Agreement between Penn-Akron Corporation and
John C. Schaper, executed October 27, 2000
10.11 Penn-Akron Corporation Equity Incentive Plan, effective as of
October 6, 2000
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
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Current Report on Form 8-K dated July 12, 2000 - reporting Changes in
Registrant's Certifying Accountant. This Form 8-K was amended on Form
8-K/A dated October 12, 2000 to include a letter from the former
accountants reporting that there were no disagreements with the
Registrant during the period ended February 29, 2000 and the period
through the termination of the client-auditor relationship.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENN-AKRON CORPORATION
Date: November 14, 2000 By: /s/ Christopher J.S. Baker
-----------------------------------------------
Christopher J.S. Baker, Chief Financial Officer
(principal financial and accounting officer)