heroes10qsbsept2002
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 September 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 September 30, 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 September 30, 2002 4
Statements of Operations for the three and nine months ended 5
September 30, 2002 and 2001
Statements of Cash Flows for the nine months ended 6
September 30, 2002 and 2001
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations.
Item 3. Controls and Procedures 9
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
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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.
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HEROES, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(Unaudited)
________________________________________________________________________________
ASSETS
CURRENT ASSETS - Cash $ 41
OTHER ASSETS 100
Total Assets $ 141
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,555,659
Line of credit, including accrued interest 3,929,912
Notes payable, including accrued interest -
related party 1,171,440
Notes payable, including accrued interest 192,590
Accrued compensation 767,328
Deferred maintenance and training revenue 415,997
Total Current Liabilities 14,032,926
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 (20,298,831)
Total Stockholders' Deficit (14,032,785)
Total Liabilities and Stockholders' Deficit $ 141
=============
________________________________________________________________________________
See notes to financial statements.
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HEROES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
_______________________________________________________________________________________________________________
For the For the For the For the
Nine-Months Nine-Months Three-Months Three-Months
Ended Ended Ended Ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
Revenue $ - $ - $ - $ -
Direct Costs - 55,291 - -
Gross Margin - (55,291) - -
Other Operating Expenses:
Consulting fees 24,000 704,933 24,000 21,055
Interest 356,687 - 113,636 -
Insurance - - - -
Legal and accounting 37,026 - 5,699 -
Payroll taxes 39,833 - 26,188 -
Salaries and wages 322,500 1,296,472 107,500 243,732
Other operating expenses 1,601 1,527,954 284 240,486
Total other operating expenses 781,647 3,529,359 277,307 505,273
LOSS BEFORE PROVISION FOR INCOME
TAXES (781,647) (3,584,650) (277,307) (505,273)
PROVISION FOR INCOME TAXES - - - -
NET LOSS $ (781,647) $ (3,584,650) $ (277,307) $ (505,273)
============== ============= ============= =============
NET LOSS PER SHARE - basic and
diluted $ (.008) $ (0.06) $ (.003) $ (0.01)
============== ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - basic
and diluted 99,213,100 64,032,000 99,213,100 72,285,000
============== ============= ============= =============
_______________________________________________________________________________________________________________
See notes to financial statements.
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HEROES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
____________________________________________________________________________________________________
For the For the
Nine-Months Ended Nine-Months
September Ended September
30, 2002 30, 2001
Net Loss $ (781,647) $ (3,584,650)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization - 6,300
Forfeited security deposit - 46,572
Issuance of common stock for services - 602,196
Changes in operating assets and liabilities:
Decrease in other receivables - 9,549
Increase in employee advances - (11,786)
Decrease in prepaid maintenance costs - 464,164
Increase in bank overdraft - 204
Increase in accounts payable and accrued expenses 18,940 488,509
Increase in line of credit accrued interest 265,671 462,147
Increase in note payable accrued interest 91,016 22,103
Decrease in employee accounts payable - (3,693)
Increase in accrued compensation 362,333 190,777
Decrease in deferred maintenance and training revenues - (415,997)
NET CASH USED IN OPERATING ACTIVITIES (43,687) (1,723,605)
CASH FLOWS FROM INVESTING ACTIVITIES -
Acquisition of equipment - (332,455)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 43,728 1,155,792
Proceeds from issuance of common stock - 830,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,728 1,985,792
NET CHANGE IN CASH AND CASH EQUIVALENTS 41 (70,268)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 70,268
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41 $ -
=========== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ - $ -
=========== ==============
Interest paid $ - $ -
=========== ==============
____________________________________________________________________________________________________
See notes to financial statements.
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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 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 financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and the instructions to Form 10-QSB and Rule
10-1 of Regulation S-X of the Securities and Exchange Commission ("SEC").
Accordingly, these financial statements do not include all of the 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 nine months ended September 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 and for the year ended
December 31, 2001 contained in our 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 $14,033,000 through September 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 September 30, 2002, we had cash of $41, a working capital deficit and
stockholders deficit of approximately $14,033,000. 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 nine-month periods ended
September 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 the Metropolitan Regional Educational Service Agency ("MRESA").
Other operating expenses decreased to approximately $277,000 for the three
months ending September 30, 2002 from approximately $505,000 for the same period
in 2001 and to approximately $782,000 for the nine-month period ending September
30, 2002 from approximately $3,529,000 for the same period in 2001. Our salary
expense decreased to approximately $108,000 for the three months ending
September 30, 2002 from approximately $244,000 for the same period in 2001 and
to approximately $323,000 for the nine-month period ending September 30, 2002
from approximately $1,296,000 for the same period in 2001, primarily due to the
reduction of operations.
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ITEM 3.
Controls and Procedures
Within 90 days prior to the filing of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer (who also effectively serves as our Principal
Financial Officer), of the design and operation of our disclosure controls and
procedures. Based on this evaluation, or Chief Executive Officer concluded that
our disclosure controls and procedures are effective for the gathering,
analyzing and disclosing the information we are required to disclose in the
reports we file under the Securities Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date of this evaluation.
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.
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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
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
Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(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: November 19, 2002
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CERTIFICATION
I, Amer A. Mardam-Bey, certify that:
1. I have reviewed this quarterly report on Form 10QSB of Heroes, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
issuer as of, and for, the periods presented in this quarterly report.
4. I am responsible for establishing and maintaining disclosure controls and
procedures for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which the periodic reports are being prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure controls and
procedures as of September 30, 2002 ("Evaluation Date");
(iii) Presented in the report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. I have disclosed, based on our most recent evaluation, to the issuer's
auditors and the audit committee of the board of directors (or persons
fulfilling the equivalent function):
(i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record, process,
summarize and report financial data and have identified for the issuer's
auditors any material weaknesses in internal controls;
(ii) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls;
(6) I have indicated in the report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 19, 2002
/s/ Amer A. Mardam-Bey
Amer A. Mardam-Bey
Chief Financial Officer and CEO
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