heroes10qsbjune2002
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
_________________________
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) 627-4479
(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 August 12, 2002.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
1
HEROES, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheet as of June 30, 2002 4
Statements of Operations for the three and six months
ended June 30, 2002 and 2001 5
Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 9
Item 2. Changes in Securities. 10
Item 3. Defaults Upon Senior Securities. 10
Item 4. Submission of Matters to a Vote of Securities Holders. 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K. 10
Signature 10
2
PART I
FORWARD-LOOKING STATEMENTS
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to financial results and plans for future
business development activities, and are thus prospective. These statements
appear in a number of places in this Form 10-QSB and include all statements that
are not statements of historical fact regarding intent, belief or our current
expectations, with respect to, among other things: (i) our financing plans; (ii)
trends affecting our financial condition or results of operations; (iii) our
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. The words "may," "would," "could," "will," "expect," "estimate,"
"anticipate," "believe," "intend," "plans," and similar expressions and
variations thereof are intended to identify forward-looking statements.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, many of
which are beyond our ability to control. Actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. Among the key risks, assumptions and factors that may affect operating
results, performance and financial condition are changes in technology,
fluctuations in our quarterly results, ability to continue and manage our
growth, liquidity and other capital resources issues, competition and the other
factors discussed in detail in our filings with the Securities and Exchange
Commission.
3
HEROES, INC.
BALANCE SHEET
AS OF JUNE 30, 2002
(Unaudited)
________________________________________________________________________________
ASSETS
CURRENT ASSETS - Cash $ 75
OTHER ASSETS 100
Total Assets $ 175
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,558,138
Line of credit, including accrued interest 3,847,241
Notes payable, including accrued interest 1,300,637
Accrued compensation 633,640
Deferred maintenance and training revenue 415,997
Total Current Liabilities 13,755,653
STOCKHOLDERS' DEFICIT:
Common stock, 500 million shares authorized,
$.001 par value, 99,213,109 shares issued and
outstanding 99,213
Paid-in capital 6,166,833
Accumulated deficit (20,021,524)
Total Stockholders' Deficit (13,755,478)
Total Liabilities and Stockholders' Deficit $ 175
==============
________________________________________________________________________________
See notes to financial statements.
4
HEROES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
______________________________________________________________________________________________________________
For the For the For the For the
Six-Months Six-Months Three-Months Three-Months
Ended June Ended June Ended June Ended June
30, 2002 30, 2001 30, 2002 30, 2001
Revenue $ - $ - $ - $ -
Direct Costs - 55,291 - 24,083
Gross Margin - (55,291) - (24,083)
Other Operating Expenses:
Advertising - 127,469 - 65,198
Consulting fees - 419,205 - 174,705
Interest and other bank fees 243,051 228,200 114,154 118,995
Insurance - 103,811 - 34,956
Legal and accounting 31,327 196,557 31,077 82,860
Payroll taxes 13,645 152,110 5,421 37,891
Rent - 101,775 - 61,814
Salaries and wages 215,000 1,052,740 107,500 310,000
Software license and
development - 182,711 - 31,450
Travel - 128,639 - 53,426
Other operating expenses 1,314 330,869 293 98,357
Total other operating expenses 504,337 3,024,086 258,445 1,069,652
LOSS BEFORE PROVISION FOR INCOME
TAXES (504,337) (3,079,377) (258,445) (1,093,735)
PROVISION FOR INCOME TAXES - - - -
NET LOSS $ (504,337) $ (3,079,377) $(258,445) $(1,093,735)
============ ============= ========== ============
NET LOSS PER SHARE - basic and
diluted $ (0.005) $ (0.080) $ (0.003) $ (0.030)
============ ============= ========== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - basic
and diluted 99,213,100 39,354,838 99,213,100 42,375,258
============ ============= ========== ============
______________________________________________________________________________________________________________
See notes to financial statements.
5
HEROES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
__________________________________________________________________________________________________
For the For the
Six-Months Ended Six-Months Ended
June 30, 2002 June 30, 2001
Net Loss $ (504,337) $ (3,079,377)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization - 4,200
Forfeited security deposit - 46,572
Issuance of common stock for services - 417,244
Changes in operating assets and liabilities:
Decrease in prepaid maintenance costs - 464,164
Decrease in other assets - 10,498
Increase in accounts payable and accrued expenses 264,467 862,374
Increase in accrued compensation 228,645 186,245
Decrease in deferred maintenance and training revenues - (415,997)
NET CASH USED IN OPERATING ACTIVITIES (11,225) (1,504,077)
CASH FLOWS FROM INVESTING ACTIVITIES -
Acquisition of equipment - (332,455)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to stockholder 11,300 677,722
Proceeds from issuance of common stock - 1,105,750
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,300 1,783,472
NET CHANGE IN CASH AND CASH EQUIVALENTS 75 (53,060)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 70,268
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 75 $ 17,208
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ - $ -
============= =============
Interest paid $ - $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six-months ended June 30, 2001, the Company issued 17,084,182 shares
of common stock for compensation to certain employees for a total expense
of $257,242.
During the six-months ended June 30, 2001, the Company converted $124,570 of
capital contributions to notes payable.
__________________________________________________________________________________________________
See notes to financial statements.
6
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
________________________________________________________________________________
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
Heroes, Inc. ("we", "us", "our"), formerly known as Penn-Akron Corporation
(Penn-Akron), was 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. 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 six months ended June 30, 2002 are not necessarily
indicative of the results for the year ending December 31, 2002. The
accompanying financial statements and notes thereto should be read in
conjunction with our audited financial statements as of December 31, 2001 and
2000 contained in our current Annual Report on Form 10-KSB.
NOTE B - GOING CONCERN
On December 4, 2001, we 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 stockholders' deficit of approximately $14,000,000 through June 30,
2002, 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 the business plan which we are currently developing. 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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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.
As of June 30, 2002, we had cash of $75, a working capital deficit and
stockholders deficit of approximately $13.7 million. These deficits continue to
increase while we develop and market our products. 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
We did not have any revenues for the three-month or six-month periods ended
June 30, 2002 and 2001. This is primarily due to the fact that no additional
work has been performed in Year 2 and 3 of our three-year contract with our
current customer, the Metropolitan Regional Educational Service Agency
("MRESA"), 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 Libraries 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 there under 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.
In August 2000, Arthur Andersen, LLP, began an audit of MRESA. The MRESA
contract is funded by the 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 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
do not anticipate payment from the SLD for past services performed by us. The
total amount of invoices to the SLD and MRESA for Year 2, as per our agreement,
could eventually exceed $12,000,000.
Other operating expenses decreased to approximately $258,000 for the three
months ending June 30, 2002 from approximately $1,070,000 for the same period in
2001 and to approximately $504,000 for the six-month period ending June 30, 2002
from approximately $3,024,000 for the same period in 2001. Our salary expense
decreased to approximately $108,000 for the three months ending June 30, 2002
from approximately $310,000 for the same period in 2001 and to approximately
$215,000 for the six-month period ending June 30, 2002 from approximately
8
$1,053,000 for the same period in 2001, primarily due to the reduction of
operations.
PART II
Item 1. Legal Proceedings.
Lynxus, Inc. v. Penn-Akron Corporation n/k/a Heroes, Inc. On September 7,
2000, one of our subcontractors, Lynxus, Inc., filed suit against us in the
United States District Court for the Northern District of Georgia. The claim
arises out of a network implementation agreement between us and Metropolitan
Regional Education Services Agency ("MRESA"). We are the general contractor
under the agreement, and Lynxus agreed to act as a subcontractor on the project.
Lynxus claims that we have breached the subcontract, that Lynxus has performed
work under the contract, and that Lynxus is entitled to approximately $483,000
plus interest.
We have denied liability and have asserted a counterclaim for the damages
we have suffered as a result of breach of the subcontract by Lynxus. We believe
our damages exceed $2.8 million.
In the early stages of this litigation, Lynxus filed a bankruptcy petition
in the United States Bankruptcy Court for the Northern District of Georgia,
thereby staying action in the lawsuit.
Maurice Delamont v. Penn-Akron Corporation n/k/a Heroes, Inc. On August 24,
2000, Maurice Delamont, one of our former employees, filed two related actions
in state courts in Cobb and Fulton Counties, Georgia. The two actions have been
consolidated and are pending as a single arbitration proceeding. Mr. Delamont
claims that we owe him $1,050,000 arising out of (i) a right to redemption of
his stock in the Company, and (ii) a bonus. He also seeks access to certain
books and records of the Company. We have asserted a counterclaim against Mr.
Delamont, claiming that he breached his fiduciary duty and his employment
agreement with us. We maintain that our damages for Mr. Delamont's actions are a
defense to his claims and that its actual damages exceed the amount of Mr.
Delamont's claims.
On November 13, 2000, we entered into a consent scheduling order with the
Plaintiff, which, among other things, ordered the action to be decided by
binding arbitration. Mr. Delamont filed a motion for summary judgment on June
15, 2001. On August 14, 2001, the Arbitrator denied the motion as untimely.
In August 2001, Mr. Delamont filed a motion to enforce settlement agreement
or for the entry of a summary judgment in the State Court of Cobb County. On,
November 9, 2001, the Court denied the motions. Based on oral arguments heard on
September 17, 2001, the Court found that Mr. Delamont had failed to establish as
a matter of law that there was an enforceable settlement. The Court also found
that Mr. Delamont had failed to provide evidence that is sufficient to allow the
court to grant summary judgment. Due to our Chapter 11 petition filing on
December 4, 2001, action on this lawsuit has been stayed.
Heroes, Inc. v. Sanswire.Net. We are the plaintiff in an action against
Sanswire.Net in the Superior Court of Fulton County, Georgia. We filed the
lawsuit in March 2001, seeking to recover $200,000 in principal, together with
accrued interest and attorneys' fees, under the terms of a promissory note. The
promissory note was executed by Sanswire.Net on March 1, 2000.
Mastermind, Inc. v Heroes, Inc. On May 31, 2001, Mastermind Marketing filed
a civil action in the State Court of Fulton County, Georgia. On September 19,
2001 Mastermind Marketing was awarded a default judgment in the amount 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.
9
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.
NONE
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
NONE
(b) Reports on Form 8-K.
NONE
SIGNATURE
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.
By:/s/ Amer A. Mardam-Bey
Amer A. Mardam-Bey
(President, CEO & Chief Accounting
Officer)
Date: August 19, 2002