heroes2001september10qsb
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(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, 2001
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
HEROES, INC.
(Exact name of registrant as specified in its charter)
Nevada 11-1843262
(State of Incorporation) (I.R.S. Employer Identification No.)
1915 - B Chain Bridge Road, Suite 506, McLean, Virginia 22102
(Address of principal executive offices)
(703) 761-1900
(Registrant's telephone number, including area code)
1980 Gallows Road, Suite 200, Vienna, Virginia 22182
(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
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Common Stock, $0.001 par value per share, 99,213,109 shares issued and
outstanding as of December 14, 2001.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEROES, INC.
BALANCE SHEETS
(UNAUDITED)
________________________________________________________________________________
ASSETS
September 30,
2001 December 31,
(unaudited) 2000
CURRENT ASSETS:
Cash and cash equivalents $ - $ 70,268
Accounts receivable 8,859,617 8,859,617
Other receivables 26,596 36,145
Employee advances 16,811 5,025
Refundable deposits -- 46,572
Prepaid maintenance and training costs 46,418 318,585
Other current assets 48,222 48,222
Total Current Assets 8,997,664 9,384,434
EQUIPMENT, less accumulated
depreciation of $15,765 at
September 30, 2001 and $9,465
at December 31, 2000 595,824 269,669
OTHER ASSETS:
Other assets 100 100
Prepaid maintenance and training
costs - long-term -- 191,997
Total Other Assets 100 192,097
Total Assets $9,593,588 $9,846,200
========== ==========
(Continued)
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
BALANCE SHEETS
(UNAUDITED)
________________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' DEFICIT
September 30, December 31,
2001 2000
CURRENT LIABILITIES:
Bank overdraft $ 204 $ --
Line of credit, including
accrued interest 3,593,337 3,131,190
Accounts payable and
accrued expenses 7,514,468 7,025,958
Employee accounts payable 53,241 56,934
Accrued compensation 375,951 185,174
Notes payable, including
accrued interest 1,177,895 --
Deferred maintenance and
training revenue -- 224,000
Total Current Liabilities 12,715,096 10,623,256
DEFERRED MAINTENANCE AND TRAINING
REVENUE - LONG-TERM -- 191,997
Total Liabilities 12,715,096 10,815,253
STOCKHOLDERS' DEFICIT:
Common stock, 500 million shares
and 100 million shares
authorized, as of September
30, 2001 and December 31,
2000, respectively; $.001 par
value, 91,213,109 shares issued
and outstanding at September
30, 2001; 35,840,246 shares
issued and outstanding at
December 31, 2000 91,213 35,840
Paid-in capital 6,023,076 4,646,253
Accumulated deficit (9,235,797) (5,651,146)
Total Stockholders' Deficit (3,121,508) (969,053)
Total Liabilities and
Stockholders' Deficit $ 9,593,588 $ 9,846,200
============ ============
The accompanying notes are an integral part of these financial statements.
3
HEROES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
________________________________________________________________________________
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
Revenues $ -- $ 61,000 $ -- $ 6,376,017
Direct Costs -- 137,335 55,291 6,211,671
Gross Profit (Loss) -- (76,335) (55,291) 164,346
Operating Expenses:
General and Administrative
expenses 240,486 81,471 1,527,954 306,281
Consulting and professional
fees 21,055 263,048 704,933 404,818
Salaries and wages 243,732 191,879 1,296,472 526,796
Total Operating Expenses 505,273 536,398 3,529,359 1,237,895
LOSS BEFORE
PROVISION FOR
INCOME TAXES (505,273) (612,733) (3,584,650) (1,073,549)
PROVISION FOR INCOME
TAXES -- -- -- --
NET LOSS INCOME $(505,273) $(612,733) $(3,584,650) $(1,073,549)
========== ========== ============ ============
NET LOSS PER SHARE:
Basic $ (0.01) $ (0.02) $ (0.06) $ (0.03)
========== ========== ============ ============
SHARES USED IN COMPUTING
EARNINGS PER SHARE:
Basic 75,285,000 32,925,000 64,032,000 32,925,000
=========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
4
HEROES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
________________________________________________________________________________
Nine Months
September 30,
2001 2000
Net loss $(3,584,650) $(1,073,549)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization - 45,833
Depreciation 6,300 6,300
Forfeited security deposit 46,572 -
Issuance of common stock for compensation & expenses 602,196 5,000
(Increase) decrease in assets:
Accounts receivable - (5,016,693)
Other receivables 9,549 -
Other current assets - (227,841)
Employee advances (11,786) -
Prepaid maintenance costs 464,164 168,999
Other assets - (9,185)
Increase (decrease) in liabilities:
Bank overdraft 204 -
Accounts payable and accrued expenses 488,509 2,054,138
Line of credit accrued interest 462,147 -
Note payable accrued interest 22,103 -
Employee accounts payable (3,693) -
Accrued compensation 190,777 -
Deferred maintenance and training revenues (415,997) (168,000)
Net Cash Used in Operating Activities $(1,723,605) $(4,214,998)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to Children's Hero's, Inc. - (320,100)
Investment in Sanswire.net, LLC - (200,000)
Acquisition of equipment (332,455) (34,485)
Net Cash Used In Investing Activities (332,455) (554,585)
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipt of escrow deposit - 205,000
Proceeds from issuance of common stock 830,000 1,602,617
Cash received for note payable to stockholder 1,155,792 250,000
Net change in line of credit - 2,871,114
Net Cash Provided By Financing Activities 1,985,792 4,928,731
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (70,268) 159,148
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 70,268 100
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 159,248
============ ============
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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NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
Heroes, Inc. ("we", "us", "our") was incorporated under the laws of the state of
Nevada, and is in the business of providing turnkey installations of an
internet-based video distribution and multimedia network to school districts
primarily in metropolitan Atlanta, Savanna and Brunswick, Georgia. On December
7, 2000, we changed our name from Penn-Akron Corporation to Heroes, Inc.
Use of Estimates
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. The reported amounts of revenues and expenses
during the reporting period may be affected by the estimates and assumptions we
are required to make. Actual results could differ from those estimates.
Basis of Presentation
Our accompanying unaudited statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission ("SEC"). Accordingly,
the financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America. In our opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results for the year ending December 31, 2001. The
accompanying financial statements and notes thereto should be read in
conjunction with our audited financial statements as of December 31, 2000 and
1999 contained in our current Annual Report on Form 10-KSB.
NOTE B - GOING CONCERN
On December 4, 2001, we have filed for protection under Chapter 11 of the
Bankruptcy Code. The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. We have an
accumulated deficit of approximately $9,235,797 through September 2001, and
anticipate incurring net losses for the foreseeable future and will require a
significant amount of capital to commence our planned principal operations and
proceed with our business plan. Accordingly, our ability to continue as a going
concern is dependent upon our ability to secure an adequate amount of capital,
through either additional equity funding or loans with appropriate repayment
terms, to finance our planned principal operations and/or implement our business
plan. Our major plan is to devote appropriate resources to obtain a quick and
favorable resolution of the matters related to our MRESAnet 2000 Project. We
recognize that additional working capital will be required for us to be
successful in achieving these goals. These factors, among others, may indicate
that we will be unable to continue as a going concern for a reasonable period of
time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern.
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NOTE C - COMMON STOCK
On January 10, 2001, we issued a private placement memorandum at an offering
price of $.25 per unit. Each unit consists of one share of common stock, and one
warrant. The warrants entitle the holders to purchase one share of common stock
for each warrant held at an exercise price of $.50 per share until January 15,
2004. As of September 30, 2001, 3,320,000 units have been sold for $830,000.
We also issued 800,000 warrants for consulting services which entitles the
holders to purchase one share of common stock for each warrant held at exercise
prices ranging from $.40 - $.50 per share vesting in 4 - 24 months.
During the nine months ended September 30, 2001, 900,000 options to purchase
common stock expired due to the termination of two employees. In addition,
during that period we issued approximately 52,000,000 shares to employees and
consultants for compensation and reimbursement of operating expenses.
On September 24, 2001, we filed a certificate of amendment to our Articles of
Incorporation to increase the number of authorized shares from 100,000,000 to
500,000,000.
NOTE D - OPERATING LEASES
We terminated our lease for office space and forfeited the $46,572 deposit. No
new lease has been signed.
NOTE E - NOTES PAYABLE
We issued three promissory notes for a total of $1,155,792 received from three
current investors. These notes accrue interest at 10% per annum and are due on
demand, but no later than November 23, 2001. The note holder has the option to
convert all or a portion of the note into shares of our common stock at $.01 per
share. If we plan to payoff all or part of the principal amount, we shall give
the note holder 20 days notice of our intention. During this 20-day period, the
note holder may elect to convert the amount to be paid by us into shares at the
Conversion Price.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Liquidity And Capital Resources
On December 4, 2001, we filed for protection under chapter 11 of the Bankruptcy
Code. We intend to describe such filing in greater detail in a Current Report in
Form 8-K to be filed in accordance with the applicable rules.
As of September 30, 2001, we had no cash, a working capital deficit of
approximately $3.7 million and a stockholders deficit of approximately $3.1
million. These deficits continue to increase while we develop and market our
products. We have paid certain expenses and notes through the issuance of common
stock. Our continuation as a going concern is dependent upon our ability to
obtain additional working capital. If adequate financing is not available or is
not available on acceptable terms, our ability to meet our capital requirements
may be significantly limited and could have a material adverse effect on us and
ultimately could impair our ability to continue as a going concern.
Results of Operations
Our revenues decreased to $0 for the nine-month period ending September 30,
2001 from $6,376,017 for the nine-month period ending September 30, 2000. This
decrease is primarily due to the fact that no invoices for additional work to be
performed in Year 2 of our three-year contract with our current customer, the
Metropolitan Regional Educational Service Agency ("MRESA"), have been submitted,
pending the outcome of an audit of MRESA by Arthur Andersen, LLP, and the
determination by both the Federal Communications Commission ("FCC") and the Schools
and Library Division ("SLD")as to whether or not the MRESA project shall continue,
and under what terms and conditions.
Our current customer is MRESA, an administrative services agency of the
Georgia Department of Education. The MRESA jurisdiction covers over 11 school
districts, and nearly 750 schools. Our contract with MRESA was executed in March
1999, and we began performance thereunder in August 1999. This contract
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. All invoices and installations for Year 1 were approved by MRESA. We
began performance on Year 2 of our contract with MRESA in early May 2000.
Lynxus, Inc. ("Lynxus"), our main contractor at that time, was responsible for
all performance under the contract, including the procurement and installation
of all equipment.
We are currently seeking additional customers for our schools deliverable
and products, and are seeking to expand into a number of states and school
districts within the next 12-24 months.
In August 2000, Arthur Andersen, LLP, began an audit of MRESA. The MRESA
contract is funded by the Schools and Libraries Division ("SLD") of the Universal
Service Administrative Company. This is a non-profit entity under the jurisdiction
of the Federal Communications Commission ("FCC"). The latter administers all "E
rate" funds, which were enacted pursuant to the Federal Telecommunications Act
of 1996. The program under which the SLD provides funding to MRESA requires a
10% to 50% matching commitment for each school from private, corporate or
charitable contributions. The audit is part of an ongoing program integrity
process initiated by the SLD to ensure that applicants and vendors
(beneficiaries) of the E-rate program comply fully with all FCC and SLD program
guidelines, rules and regulations. A number of beneficiaries of the SLD program
8
are audited annually. The determination of which beneficiaries are audited is
done both randomly and based on the size of the beneficiary's award. We, as the
service provider of the contract, are also being audited as part of this
process. As of the date of this report, we have invoiced a total of $3,595,648
for services performed under our contract for Year 2 of this program to the SLD,
with all invoices being approved by MRESA. As of the date of this report,
all of that amount remains outstanding and unpaid by the SLD. We have also invoiced
MRESA $2,600,735 for Year 2 matching funds which also remains outstanding as of
the date of this report. We anticipate that payment from the SLD for past
services performed by us will be forthcoming, subject to the approval by both
the FCC and the SLD to continue the MRESA project. The total amount of these invoices
to the SLD and MRESA for Year 2, as per our agreement, could eventually exceed $12,000,000.
Our total cost of sales decreased to $55,291 for the nine-month period
ending September 30, 2001 from $6,211,671 for the same period in 2000. The
$55,291 in costs during 2001 were for year 1 maintenance and corrective rework
carried out on our behalf by Domain Networks.
General and administrative expenses increased to $1,527,954 for the nine
month period ending September 30, 2001 from $306,281 for the same period in 2000
and our salary expense increased to $1,296,472 for the nine month period ending
September 30, 2001 from $526,796 for the same period in 2000, primarily due to
the addition of staff in preparation of launching the Children's Heroes
electronic fundraising program, pursuant to the acquisition of Children's Heroes
in October of 2000. Our consulting and professional expenses increased to
$704,933 for the nine month period ending September 30, 2001 from $404,818 for the same
period in 2000 as a result of the engagement of several consultants to assist the
company on working towards resolution on the MRESAnet 2000 project.
9
PART II
Item 1. Legal Proceedings.
On May 31, 2001, Mastermind Marketing filed a civil action suit in the
State Court of Fulton County, Georgia. On September 19, 2001 Mastermind Marketing
was awarded a total of $169,246.41, including interest, for the preparation of presentations,
marketing strategies, and other promotional programs and delivered intellectual
property and other products, services and expenses. We are currently evaluating
whether to appeal this judgment.
Item 2. Changes in Securities.
NONE
Item 3. Defaults upon Senior Securities.
NONE
Item 4. Submission of Matters to a Vote of Security Holders.
NONE
Item 5. Other Information.
10
Resignation of Director
Christopher Smith resigned from the Board of Director on September 19, 2001.
Changes in Accountant
On December 10, 2000, we discharged Windham Brannon, P.C. as principal
independent accountant. The decision to change principal accountant was due to the
fact that we filed a voluntary petition for relief under chapter 11 of the bankruptcy
code, and Windham Brannon, P.C., is now a pre-petition creditor.
From the engagement of Windham Brannon, P.C. on July 6, 2000 to their
discharge on December 10, 2001, there were no disagreements on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreement, if not solved to their
satisfaction, would have caused them to make reference in connection with
their opinion to the subject matter of the disagreement.
Windham Brannon, P.C.'s reports on the financial statements of the Company
as of and for the year ending December 31, 2000 did not express an opinion
due to a significant uncertainty related to the valuation of certain assets
and the completeness of certain liabilities. In addition, there was an
explanatory paragraph related to our ability to continue as a going
concern.
Windham Brannon, P.C.'s reports on the financial statements of the Company
as of and for the year ending December 31, 1999 qualified their opinion due
the fact that they were unable to confirm a certain receivable and satisfy
themselves as to the carrying value of that receivable. In addition, there
was an explanatory paragraph related to our ability to continue as a going
concern.
We requested that Windham Brannon, P.C. furnish us with a letter addressed
to the Securities and Exchange Commission stating whether it agrees with
the statements contained in this Report on 10-QSB. A copy of such letter,
dated December 14, 2001, is filed as Exhibit 16.1 to this Report on 10-QSB.
On December 14, 2001, our Board of Directors approved the engagement of
Kingery, Crouse & Hohl, P.A., as our principal independent accountant. The
engagement will begin with our third quarter 2001 financial statements. Through
December 14, 2001, neither we nor anyone on our behalf consulted Kingery, Crouse
& Hohl, P.A. regarding (i) the application of accounting principles to any transaction,
either completed or proposed, or (ii) the type of audit opinion that might be
rendered by Kingery, Crouse & Hohl, P.A. on our financial statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
16.1 Letter from Windham Brannon, P.C
(b) Reports on Form 8-K.
NONE
11
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Heroes, Inc.
/s/ Amer A. Mardam-Bey
By: Amer A. Mardam-Bey
(President & CEO)
Date: December 14, 2001
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