<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
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 May 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
________________ ________________
Commission File No. 0-12597
PENN-AKRON CORPORATION
----------------------
(Exact name of registrant as specified in its charter)
Nevada 11-1843262
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(State of Incorporation) (I.R.S. Employer Identification No.)
3455 Peachtree Road, NE, 5th Floor, Atlanta, Georgia 30326
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(Address of principal executive offices)
(404) 995-7026
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(Registrant's telephone number, including area code)
Not Applicable
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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
<PAGE> 2
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, 32,237,162 shares issued and
outstanding as of July 17, 2000.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
<PAGE> 3
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PENN-AKRON CORPORATION
BALANCE SHEETS
(SEE INDEPENDENT ACCOUNTANT'S REPORT)
MAY 31, 2000 AND DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
May 31, 2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash in bank $ 2,922 $ 100
Accounts receivable 9,179,021 3,981,395
Other receivables 26,573 22,808
Employee advances 32,000 2,000
Refundable deposits 4,380 4,380
PrinVest Corp. escrow for OneWeb -- 205,000
Prepaid maintenance and training costs 224,000 224,000
Deferred financing costs -- 45,833
------------ ------------
Total Current Assets 9,468,896 4,485,516
------------ ------------
EQUIPMENT, less accumulated depreciation of $4,565 at
May 31, 2000 and $1,065 at December 31, 1999 35,243 4,258
------------ ------------
OTHER ASSETS:
Other assets 3,100 5,116
Investment in Sanswire.net, LLC 204,535 --
Prepaid maintenance and training costs - long-term 322,664 415,997
------------ ------------
Total Other Assets 530,299 421,113
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Total Assets $ 10,034,438 $ 4,910,887
============ ============
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
PENN-AKRON CORPORATION
BALANCE SHEETS
(SEE INDEPENDENT ACCOUNTANT'S REPORT)
MAY 31, 2000 AND DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31, 2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 9,019,352 $ 3,858,406
Employee accounts payable 19,810 1,328
Accrued compensation 259,186 665,032
Deferred maintenance and training revenue 224,000 224,000
------------ ------------
Total Current Liabilities 9,522,348 4,748,766
------------ ------------
DEFERRED MAINTENANCE AND TRAINING
REVENUE - LONG-TERM 322,664 415,997
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, 100 million shares authorized, $.001
par value, 28,424,662 shares issued and outstanding
at May 31, 2000; 1,000 shares no par value
authorized, 500 shares issued and outstanding at
December 31, 1999 28,425 400
Paid-in capital 776,175 --
Retained earnings (deficit) (615,174) (254,276)
------------ ------------
Total Stockholders' Equity 189,426 (253,876)
------------ ------------
Total Liabilities and Stockholders' Equity $ 10,034,438 $ 4,910,887
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
PENN-AKRON CORPORATION
STATEMENTS OF INCOME
(SEE INDEPENDENT ACCOUNTANT'S REPORT)
FOR THE FIVE MONTHS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
REVENUES:
Local school installations $6,196,383 $ --
Training revenue 93,333 --
Lan project -- 2,695
T-1 Telecom access 432 13,189
Interest income 4,535 --
---------- ----------
Total Revenues 6,294,683 15,884
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DIRECT COSTS:
Local school installations and training 6,009,809 --
Network operations center 36,638 --
Lan project -- 2,745
T-1 Telecom access 7,740 12,301
Other 1,233 --
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Total Cost of Sales 6,055,420 15,046
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GROSS PROFIT 239,263 838
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EXPENSES:
Advertising 6,000 --
Consulting fees 5,000 --
Conventions and exhibits 9,816 541
Commissions -- 20,000
Interest and other bank fees 45,833 7,715
Legal and accounting 92,289 14,924
Meals expense 1,460 1,909
Other subcontractors 50,684 6,808
Printing -- 8,195
Rent - office 24,410 17,000
Salaries 292,417 408,053
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
PENN-AKRON CORPORATION
STATEMENTS OF INCOME
(SEE INDEPENDENT ACCOUNTANT'S REPORT)
FOR THE FIVE MONTHS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Taxes - payroll 21,216 8,791
Telephone 26,302 20,074
Travel 9,911 5,007
Other expenses 14,823 6,263
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Total Expenses 600,161 525,280
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LOSS BEFORE PROVISION FOR INCOME TAXES (360,898) (524,442)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (360,898) $ (524,442)
============ ============
NET LOSS PER SHARE:
Basic $ (0.02) $ (0.05)
============ ============
SHARES USED IN COMPUTING EARNINGS
PER SHARE:
Basic 17,538,513 10,194,826
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
PENN-AKRON CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(SEE INDEPENDENT ACCOUNTANT'S REPORT)
FOR THE FIVE MONTHS ENDED MAY 31, 2000 AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Retained
-------------------------------- Paid-in Earnings
Shares Amount Capital (Deficit)
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
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 17,144 532,856 --
Issuance of common stock for land subscription
receivable 4,500,000 4,500 1,995,500 --
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 five months ended May 31, 2000 -- -- -- (360,898)
----------- ------------ ------------ ------------
32,924,662 $ 32,925 $ 2,771,675 $ (615,174)
Less subscription receivable for land (4,500,000) (4,500) (1,995,500) --
----------- ------------ ------------ ------------
BALANCE at May 31, 2000 28,424,662 $ 28,425 $ 776,175 $ (615,174)
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
PENN-AKRON CORPORATION
STATEMENTS OF CASH FLOWS
(SEE INDEPENDENT ACCOUNTANT'S REPORT)
FOR THE FIVE MONTHS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from contracts $ 1,092,522 $ 7,201
Cash paid to subcontractors, vendors and employees (1,860,215) (199,088)
Interest paid -- (7,715)
------------ ------------
Net Cash Used In Operating Activities (767,693) (199,602)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Sanswire.net, LLC (200,000) --
Acquisition of equipment (34,485) (5,323)
------------ ------------
Net Cash Used In Investing Activities (234,485) (5,323)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipt of escrow desposit 205,000 --
Cash received for common stock 550,000 --
Cash received for note payable to stockholder 250,000 --
Net change in line of credit -- 257,715
------------ ------------
Net Cash Provided By Financing Activities 1,005,000 257,715
------------ ------------
INCREASE IN CASH 2,822 52,790
CASH, BEGINNING OF PERIOD 100 6,818
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CASH, END OF PERIOD $ 2,922 $ 59,608
============ ============
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
PENN-AKRON CORPORATION
STATEMENTS OF CASH FLOWS
(SEE INDEPENDENT ACCOUNTANT'S REPORT)
FOR THE FIVE MONTHS ENDED MAY 31, 2000 AND 1999
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net loss $ (360,898) $ (524,442)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization 45,833 --
Depreciation 3,500 --
Issuance of common stock for services 5,000 --
Increase in accounts receivable (5,197,626) (8,683)
Decrease in prepaid maintenance costs 93,333 --
Increase in other current assets (33,765) (20,092)
Increase in other assets (2,519) (341)
Increase in accounts payable 5,160,146 34,367
Increase (decrease) in accrued expenses (387,364) 319,589
Decrease in deferred maintenance and training revenues (93,333) --
------------ ------------
Net Cash Used In Operating Activities $ (767,693) $ (199,602)
============ ============
</TABLE>
NONCASH INVESTING AND FINANCING TRANSACTIONS
During the five months ended May 31, 2000, a $250,000 note payable to
stockholder was converted to 500 shares of Spherus common stock prior to the
merger.
During the five months ended May 31, 2000, the Company issued 50,000
shares of common stock for services at $.10 per share.
See Note 1 for merger transaction.
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 10
PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On March 24, 2000 Penn-Akron Corporation (the Company) acquired all the
outstanding stock of Spherus Technologies, Inc. (Spherus), doing business as
globalseer.com, in a stock for cash and stock merger, accounted for as a
purchase transaction whereby Spherus was deemed to be the acquirer. The
stockholders of Spherus received 17,143,581 shares of common stock of the
Company, including 1,000,000 shares issued as commission for the acquisition.
After the acquisition, the former shareholders of Spherus had received over 50%
of the outstanding shares of the Company.
On March 13, 2000 the Company changed its domicile from the state of
Delaware to Nevada and changed its authorized common capital stock from
10,000,000 shares with a par value of $.01 to 100,000,000 shares with a par
value of $.001.
The Company is in the business of providing turnkey installations of an
Internet-based video distribution and multimedia network to school districts
primarily in metropolitan Atlanta, Savannah and Brunswick, Georgia.
The balance sheet as of December 31, 1999 includes the accounts of
Spherus only. At the date of merger, Penn-Akron Corporation had $800 of
liabilities and ($800) in equity consisting of $942,469 in paid in capital and
($943,269) in retained earnings (deficit). There was no activity in Penn-Akron
Corporation for the prior 12 months.
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements are as follows:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
8
<PAGE> 11
PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND DECEMBER 31, 1999
Revenue for the installation at each participating school is recorded
when each phase of the installation project is complete. The contract calls for
initial training, maintenance and support of each school for 36-months from
installation. The revenue and expense related to the training, maintenance and
support have been deferred and will be amortized over the 36-month period. The
Company estimated that no gross profit needs to be deferred related to the
training and maintenance agreements.
Accounts receivable are stated at estimated net realizable value. An
allowance for doubtful accounts has not been established because management is
of the opinion that all accounts are collectible.
Deferred financing costs resulted from a line of credit and were
amortized over the term of the line of credit utilizing the straight-line
method.
Equipment is stated at original cost. Depreciation is provided using
the straight-line method over the estimated useful lives of three to five years.
Basic income (loss) per share is calculated by dividing net income
(loss) by the weighted average shares outstanding after the stock split. The
Company issued contingent shares to three stockholders on January 1, 2000 to be
earned over 5 years. Because these contingent shares are antidilutive in nature,
the Company does not report fully diluted earnings (loss) per share.
There are no temporary differences in the recognition of assets and
liabilities for financial statement and income tax purposes at December 31,
1999, hence no provision for deferred taxes has been recorded. The Company has a
net operating loss carryforward of approximately $940,000 from Penn-Akron and
$85,000 from Spherus and has provided a 100% valuation reserve because
utilization of the loss carryforward in the future is not assured.
2. CONTRACT WITH METROPOLITAN REGIONAL EDUCATIONAL SERVICE AGENCY
The Company receives funding from the Schools and Library Division
(SLD) of the Universal Service Administrative Company, through a contract with
Metropolitan Regional Educational Service Agency (MRESA). This program requires
a 10 - 50% matching commitment for each school from private or local funds.
Through May 31, 2000, the Company has approval for installations at 71 schools
under the second year funding under the contract. These schools represent gross
revenues in excess of $12,000,000 which include the SLD and MRESA funds. All
performance under the MRESA contract has been assigned to Lynxus (see Note 3)
and MRESA
9
<PAGE> 12
PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND DECEMBER 31, 1999
has no recourse against Spherus for matters assigned to Lynxus. The Company and
its subcontractor has completed the first of three phases of the project at each
of the 71 schools at May 31, 2000. Through December 31, 1999, the Company and
its subcontractors completed the installations at 192 schools under the first
year funding under the contract. Funds representing 58% in 2000 and 88% in 1999
of revenues were from the SLD.
The contract with MRESA covers a three-year term beginning in 1999,
which coincides with the SLD award of grant money to certain schools in the 14
districts covered by MRESA. The fee for each school is approximately $174,000
for year 2 schools and $105,000 for year 1 schools under the contract. SLD pays
for 50%-90% of the fee based on certain criteria. The schools and MRESA are
responsible for finding the matching money through private or local funds.
MRESA pays 10-50% of the fee based on what the SLD pays. The Company
has a receivable from MRESA of approximately $2,900,000 from year 1 schools
which is being held as retainage until MRESA signs off on final acceptance of
the year 1 project. Management has not provided a reserve in anticipation of
collecting 100% of this receivable. Upon collection of the receivable,
approximately 95% is payable to Lynxus (See Note 3). At May 31, 2000, the
Company has an additional $2,600,735 due from MRESA for year 2 projects.
The contract with MRESA automatically renews for 1 subsequent annual
phase (2001) of the project to the extent that SLD funding or other alternative
funding remains available. The contract may be terminated by the Company or
MRESA under certain circumstances, including if less than 50% of the schools
join the project.
3. CONTRACT WITH LYNXUS, INC.
The Company has subcontracted with Lynxus, Inc. to coordinate and
manage the delivery, installation and testing requirements relating to the MRESA
contract for all schools in 11 out of the 14 school districts in year 1 (which
ended December 31, 1999), and in all districts in years 2 and 3. This contract
can be terminated under certain circumstances.
Under the terms of the contract, the Company is to pay 95% of the funds
received from MRESA and the SLD to Lynxus. This contract also covers the
36-month maintenance and training requirements under the first and second year
funding.
10
<PAGE> 13
PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND DECEMBER 31, 1999
4. EMPLOYMENT AGREEMENTS
There are employment agreements which provide for performance bonuses
to 3 employees/stockholders in the amount of the greater of $140,000 or 3% of
earnings before interest, taxes, depreciation and amortization (EBITDA) to be
paid by the end of calendar year 1999. In addition, the Company agreed to pay
another employee/stockholder a bonus of $220,000. The Company accrued $640,000
in the financial statements at December 31, 1999. At May 31, 2000, approximately
$200,000 of this amount is left to be paid.
In March 2000, the Company approved a consultant compensation agreement
for one consultant which entitles them to 100,000 shares of common stock of the
Company. As of May 31, 2000, 50,000 shares have been issued under this agreement
for a fair value of $5,000.
5. LINE OF CREDIT
At December 31, 1999, the Company had an $11,000,000 line of credit
through March 2000 with PrinVest Corp. The agreement contained covenants the
Company must meet on a monthly basis. The Company's cash, accounts receivable,
equipment, contract rights, and all other assets were used to secure the
agreement. Interest was payable at Prime plus 5.75% per annum calculated on a
per diem basis, on the net outstanding balance of monies advanced to, or on
behalf of the Company. Loan origination fees of $275,000 were capitalized and
amortized over the life of the agreement. There was no amount outstanding on
this line of credit at December 31, 1999.
The Company signed a new agreement with PrinVest Corp. on June 8, 2000
for a maximum line of credit of $3,500,000. This agreement includes a commitment
fee of 3% at the time of the initial funding, a credit facility fee of 1% of the
prevailing credit line, and a servicing fee of 1% on the outstanding funded
amount. Interest is payable at Prime plus 2.0% per annum calculated on a per
diem basis on the net outstanding balance of monies advanced to, or on behalf
of, the Company. The covenants and security discussed above also apply to this
revised agreement.
At December 31, 1999, the Company deposited $205,000 in escrow with
PrinVest Corp. to be paid to OneWeb, a software vendor, upon release of
retainage from MRESA of the project. This amount has been paid and released from
escrow in 2000.
OneWeb's remaining obligation relates to maintenance and upgrades only.
11
<PAGE> 14
PENN-AKRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2000 AND DECEMBER 31, 1999
6. SUBSCRIPTION RECEIVABLE
On March 14, 2000, the Company acquired certain contract rights to 16
1/2 acres of commercial property (with an estimated value by management of
$2,800,000 subject to a mortgage of $800,000) from an existing stockholder for
the issuance of 4.5 million post split shares of the Company. The Company also
has the right to sell the property and realize net cash proceeds of $2 million.
If the Company elects not to sell this property, the stockholder is obligated to
purchase this property from the Company at a net purchase price of $2 million.
7. STOCK EARN OUT AGREEMENT
As part of the merger between the Company and Spherus, certain Spherus
stockholders were granted additional shares of stock upon the accomplishment of
certain earn out goals. The term of this Earn Out is for five fiscal years
beginning January 1, 2000. This Earn Out provides that the Company shall issue
four additional shares of its common stock among the eligible stockholders for
every dollar of annual income (as defined in the agreement) achieved by the
Company for each such fiscal year in excess of the amount necessary to earn
$0.15 per share for the Company in the year.
The Company accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost has been recognized for these stock awards
because the number of shares to be received is unknown. The Company has not
adopted the disclosure option of Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" because management believes the
effect would be immaterial and the amounts are indeterminable.
8. INVESTMENT
The Company has invested $200,000 in a promissory note of Sanswire.net,
LLC, an organization in which the Company was considering doing business.
Interest accrues at 10% per annum and is due and payable in full on the maturity
date. The note is due 10 business days following the date on which a Change in
Control occurs.
12
<PAGE> 15
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")
(including the notes thereto) contained elsewhere in this report.
OVERVIEW
The Company is currently doing business under the name globalseer.com,
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.
RESULTS OF OPERATIONS
Our revenues increased to $6,294,683 for the five month period ended
May 31, 2000 from $15,884 for the five month period ended May 31, 1999, an
increase of 3,960%. This increase is primarily due to $6,196,383 of revenue
recognized for 71 local school installations under Year 2 of our contract and
$93,333 of training revenue.
Our current customer is the Metropolitan Regional Educational Service
Agency ("MRESA"), an administrative services agency of the Georgia Department of
Education. Our contract with MRESA was executed in March 1999 and we 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.
<PAGE> 16
MRESA has secured funding from the SLD for installations of our
services at 71 schools under Year 2 (installations began in May 2000 under our
contract with MRESA and are scheduled to be completed by September 30, 2000). We
believe that a matching commitment from private or local funds for each school
for Year 2 of our contract with MRESA has been located. MRESA was successful in
securing the required matching commitment for the 192 schools installed in 1999.
For the first 71 schools to be installed for Year 2, the Company will recognize
revenues in excess of $12 million
Our total cost of sales increased to $6,055,420 for the five-month
period ended May 31, 2000 from $15,046 for the same period of 1999. This
increase is due to the delivery of installations of our services to schools
under our contract with MRESA. Our expenses increased to $600,161 for the
five-month period ended May 31, 2000 from $525,280 for the same period in 1999.
Because we conduct our business primarily through subcontractors, our expenses
did not increase proportionally to our revenue.
Our salary expense actually decreased to $292,417 from $408,053 due
primarily to operational consolidation. Our legal and accounting expenses
increased to $92,289 from $14,924 due to contractual issues, including
litigation described under "Legal Proceedings" in Part II of this Form 10-Q, as
well as the merger between Spherus Technologies, Inc. and Penn-Akron
Corporation.
We have subcontracted with Lynxus, Inc. to implement and install an
internet-based video distribution and multi-media network at elementary and
secondary schools participating in the e-rate program under contract with MRESA.
Under the terms of this subcontract, we pay 95% of the funds received from both
the SLD and MRESA to Lynxus. This sub-contract also covers the 36-month
maintenance and training requirements under the first and second years of our
contract with MRESA.
LIQUIDITY AND CAPITAL RESOURCES
Our total current assets increased to $9,468,896 at May 31, 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 $9,522,348 as of May 31, 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 decreased to ($53,452) at May 31, 2000 from ($263,250)
at December 31, 1999. We expect to collect the full amounts owed to the Company
by both the SLD and MRESA.
Our total stockholders' equity increased to $189,426 at May 31, 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.
<PAGE> 17
In June 2000 we negotiated a line of credit with PrinVest Corp with a
maximum line of credit of $3,500,000. The Company has drawn down approximately
$2.8 million on this facility as of July 27, 2000. The Company has a
subscription receivable from Tampa Bay Financial in the amount of $2,000,000.
See Note 6 to Penn-Akron Corporation's Financial Statements filed with this
report.
We had $2,922 in cash as of May 31, 2000 and $55,496 on July 27, 2000.
The Company believes that it will have sufficient liquidity and capital
resources to finance its operations for the remainder of 2000; however, if there
is a delay in the receipt of funds or the collection of our receivables, such
delay may have a material adverse effect on our liquidity and capital resources.
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.
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 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.
<PAGE> 18
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY.
Because our current operating business, operating under the name
globalseer.com, 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.
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.
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 rapidly deploy our network to additional schools across the
country. We have used, and plan to continue to use, third parties such as OneWeb
Systems and Lynxus, Inc. to install and support the globalseer.com network in
each school. Any changes in the third parties we contract with
<PAGE> 19
to install and support our network could cause delays in the deployment of the
globalseer.com 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 globalseer.com 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, 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. 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.
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, Tampa Bay
Financial, Inc. is not obligated to make additional capital available to us.
<PAGE> 20
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 globalseer.com network.
Moreover, the globalseer.com brand could be eroded by misjudgments in service
offerings or a failure to keep our content current with the evolving preferences
of our audience.
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 globalseer.com 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 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.
<PAGE> 21
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 globalseer.com 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.
We filed an action in the Superior Court of Dekalb County, Georgia, (the
"Court") seeking injunctive and other relief against Mr. S.J. Neri, a resident
of Dekalb County, Georgia ("Mr. Neri"). We alleged that Mr. Neri engaged in
deceptive trade practices, misappropriation of trade names, tortious
interference with business relations and tortious interference with contractual
relations. Mr. Neri formed a company with the name Spherus Technologies, Inc. in
an attempt to deceive certain parties with whom we do business. Among other
actions, Mr. Neri interfered with our contractual relationship with MRESA. On
May 31, 2000, the Court entered a temporary restraining order against Mr. Neri
and on June 29, 2000 the Court issued a Permanent Injunction and Final Judgment
against Mr. Neri. The Court resolved all issues in our favor and against Mr.
Neri, awarding us compensatory damages and attorneys' fees of $88,760.84 and
punitive damages in the amount of $250,000.
Additionally, Mr. Neri has filed a pro se class action complaint in the United
States District Court, Northern District of Georgia - Atlanta Division against
us and a number of other companies and individuals. We believe the complaint is
completely without merit and have filed a Motion to Dismiss the complaint in its
entirety. We expect to have our motion granted and the complaint dismissed.
ITEM 5. OTHER INFORMATION
Three of our directors, Michael K. Molen, Patty P. Harris and Frank F.
Pitts, resigned as directors of the Company. We are currently identifying
qualified candidates to fill these vacancies on our Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<PAGE> 22
<TABLE>
<S> <C>
3.1 Amended and Restated Bylaws of Penn-Akron Corporation (Amended
and Restated as of July 5, 2000)
10.1 Financing and Security Agreement between PrinVest Financial
Corp. and Penn-Akron Corporation, executed June 8, 2000
10.2 Promissory Note, executed June 8, 2000, from Penn-Akron
Corporation to PrinVest Financial Corp.
10.3 Obligation to Forward Payments by Penn-Akron to PrinVest Financial Corp., executed
June 8, 2000
27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K.
Current Report on Form 8-K dated April 28, 2000 - reporting Changes in
Control of the Registrant, the Acquisition of Assets and the Financial
Statements of the business acquired, Spherus Technologies, Inc.
("Spherus"). The Form 8-K included Spherus's audited Balance Sheet as
of 12/31/99 as well as the audited Income Statement, Statement of
Changes in Stockholder's Equity and Statement of Cash Flows for the
year ended 12/31/99. The Form 8-K also included unaudited Pro Forma
Condensed, Consolidated Balance Sheet for the Company and Spherus as of
12/31/99 as well as unaudited Pro Forma Condensed, Consolidated
Statement of Income for the Company and Spherus for the year ended
12/31/99.
<PAGE> 23
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: July 28, 2000 By: /s/ Christopher J.S. Baker
--------------------------------------------------
Christopher J.S. Baker, Chief Financial Officer
(principal financial and accounting officer)
