heroesmarch200210qsb
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 March 31, 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 May 16, 2002.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
1
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEROES, INC.
BALANCE SHEETS
________________________________________________________________________________
ASSETS
March 31, December 31,
2002 2001
(unaudited)
CURRENT ASSETS - Cash $ 69 $ --
OTHER ASSETS 100 100
Total Assets $ 169 $ 100
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and
accrued expenses $ 7,537,062 $ 7,536,722
Line of credit, including
Accrued interest 3,763,241 3,664,241
Notes payable, including
accrued interest 1,260,183 1,229,286
Accrued compensation 520,719 404,995
Deferred maintenance and
training revenue 415,997 415,997
Total Current Liabilities 13,497,202 13,251,241
STOCKHOLDERS' DEFICIT:
Common stock, 500 million shares
authorized, $.001 par value,
99,213,109 shares issued
and outstanding 99,213 99,213
Paid-in capital 6,166,833 6,166,833
Accumulated deficit (19,763,079) (19,517,187)
Total Stockholders' Deficit (13,497,033) (13,251,141)
Total Liabilities and
Stockholders' Deficit $ 169 $ 100
============ =============
________________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
2
HEROES, INC.
STATEMENTS OF INCOME
(UNAUDITED)
________________________________________________________________________________
Three Months
Ended
March 31,
2002 2001
Revenue $ -- $ --
Direct Costs -- 31,208
Gross Deficit -- (31,208)
Other Operating Expenses:
Consulting fees -- 244,500
Interest and other bank fees 128,897 109,206
Legal and accounting 250 113,697
Payroll taxes 8,224 114,218
Salaries and wages 107,500 742,740
Software license and
development -- 151,261
Other operating expenses 1,021 487,812
Total Operating Expenses 245,892 1,954,434
LOSS BEFORE
PROVISION FOR
INCOME TAXES (245,892) (1,985,642)
PROVISION FOR INCOME
TAXES -- --
NET LOSS $ (245,892) $(1,985,642)
=========== ============
NET LOSS
PER SHARE:
Basic and Diluted $ (0.00) $ (0.05)
=========== ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic and Diluted 99,213,109 36,334,419
=========== ============
________________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
3
HEROES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
________________________________________________________________________________
Three Months
March 31,
2002 2001
Net loss $ (245,892) $(1,985,642)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation -- 2,100
Issuance of common stock for compensation & expenses -- 160,002
Decrease in assets:
Prepaid maintenance costs -- 440,081
Other assets -- 10,497
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 129,237 554,209
Accrued compensation 115,724 332,126
Deferred maintenance and training revenues -- (415,997)
Net Cash Used in Operating Activities $ (931) $ (902,624)
CASH FLOWS FROM INVESTING ACTIVITIES -
Acquisition of equipment -- (273,244)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received for note payable to stockholder 1,000 --
Cash received for common stock -- 1,105,750
Net Cash Provided By Financing Activities 1,000 1,105,750
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 69 (70,118)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 70,268
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 69 $ 150
============ ============
NONCASH INVESTING AND FINANCING TRANSACTIONS
During the three months ended March 31, 2001, the Company issued 695,012 shares
of common stock for compensation to certain employees for total expense of
$160,002.
________________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
4
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 three months ended March 31, 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 $13,000,000 through March 31, 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.
5
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 March 31, 2002, we had cash of $67, a working capital deficit and
stockholders deficit of approximately $13.5 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 periods ended March 31, 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 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.
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 $246,000 for the three month
period ending March 31, 2002 from approximately $1,954,000 for the same period
in 2001 and our salary expense decreased to approximately $107,000 for the three
month period ending March 31, 2002 from $742,000 for the same period in 2001,
primarily due to the reduction of operations.
6
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.
Item 2. Changes in Securities.
NONE
7
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
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: May 20, 2002