heroes10ksbamended
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to __________
Commission file number 0-12597
Heroes, Inc.
(Name of small business issuer in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
11-1843262
(I.R.S. Employer Identification No.)
1915B Chain Bridge Road, Suite 506, McLean, Virginia 22102
(703) 761-1900
(Address of principal executive offices) (Zip Code) (Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
(Title of class)
Common Stock, par value $0.001
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $6,437,415
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) As of March 15, 2002, the aggregate market value of
the voting and non-voting common equity held by non-affiliates was $122,451.46.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 99,213,109 as of March 15, 2002
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The list
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990). NONE.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
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Table of Contents
PART I.........................................................................4
Item 1. Description of Business............................................4
Item 2. Description of Property............................................9
Item 3. Legal Proceedings..................................................9
Item 4. Submission of Matters to a Vote of Security Holders...............11
PART II.......................................................................11
Item 5. Market for Common Equity and Related Stockholder Matters..........11
Item 6. Management's Discussion and Analysis or Plan of Operation.........12
Item 7. Financial Statements..............................................15
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................34
PART III......................................................................34
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.................34
Item 10. Executive Compensation............................................37
Item 11. Security Ownership of Certain Beneficial Owners and Management....39
Item 12. Certain Relationships and Related Transactions....................40
Item 13. Exhibits and Reports on Form 8-K..................................41
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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 Annual Report 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 reliance on a small number of
customers for a larger portion of our revenues, fluctuations in our quarterly
results, ability to continue and manage growth, liquidity and other capital
resources issues, competition and the other factors discussed in detail in our
filings with the Securities and Exchange Commission.
Item 1. Description of Business.
History And Organization
Heroes, Inc. ("we," "Heroes" or the "Company") was incorporated under the
laws of the State of Delaware on December 7, 1953, under the name Erie
Reinforced Plastic Pipe Company. During 1957, the Company changed its name to
Penn-Akron Corporation. The Company was originally incorporated for the purpose
of manufacturing plastic pipe, but discontinued these operations in 1973 after a
Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court for the
District of Connecticut. The Court discharged the Company on October 11, 1978.
The Company was dormant from approximately 1973 until 1984.
From 1984 until approximately March 1, 1987, the Company and its
wholly-owned subsidiary, Petroleum Basins Exploration, Inc., were engaged in the
business of oil and gas exploration, development and production. The prices for
oil and gas declined, and the Company could not afford to continue its oil and
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gas exploration activities. The oil and gas properties of the Company were
leased to other entities. The Company was unable to renew these leases once they
expired. The Company's inability to renew its leases caused the Company to go
into inactivity.
The Company was reactivated in 2000. Pursuant to a Merger Agreement (the
"Merger Agreement") dated as of March 23, 2000, between us and Spherus
Technologies, Inc. ("Spherus"), a Georgia corporation, all of the outstanding
shares of common stock of Spherus were converted into the right to receive
12,319,461 shares of our Common Stock in a transaction in which we continued as
the surviving corporation, and the separate corporate existence of Spherus
ceased (the "Merger"). The shares issued to the Spherus shareholders represented
approximately 42% of our outstanding Common Stock following the transaction.
On December 4, 2000, we changed our name to Heroes, Inc. Since that time,
we have conducted business providing single-source, media-technology and
curriculum-enhancement solutions to schools. We are a technology-driven company
that specializes in delivering educational content to school classrooms. We
provide media-technology and curriculum enhancement solutions to kindergarten
through twelfth grade public and private schools. Additionally, we are
positioning ourselves to provide new and expanded sources of educational content
and other learning services to both higher education and corporate training
environments.
The original concept for Heroes began in 1998 when Spherus responded to a
request from the Metro Regional Educational Services Agency ("MRESA") in Atlanta
(a division of the Georgia Department of Education) for specialized video
curriculum enhancement for its schools. The resulting comprehensive suite of
products and services provided "on-demand" video and was referred to as the
MRESAnet 2000 project. In 1999, Spherus was awarded a contract for the MRESAnet
project. The contract provided for payment totaling $22 million in the first
year. In 1999, Spherus recorded $20,097,000 in gross revenues resulting from its
work on the MRESAnet project.
The pilot project was implemented in 192 schools within MRESA's
jurisdiction. Stage 1 of the project was completed in 1999. At present, the
project is on hold pending completion of a government audit. If the project
proceeds, we anticipate that Stages 2 and 3 would be completed over the next
several years. In that event, we would maintain responsibility for continuity
and contract fulfillment for the MRESAnet project and have the option of using
contractors to coordinate, manage and administer performance of the installation
of the network components to the MRESA schools. Our primary focus is to
replicate the model we developed for the MRESAnet project for use in additional
school systems in Georgia and other parts of the United States. The system model
created for the project is capable of providing direct-to-the-classroom lesson
planning tools, with an accompanying library of supplemental
curriculum-enhancement content.
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To supplement our then-existing product line and market potential, on
October 13, 2000, we purchased substantially all of the assets of Children's
Heroes.com, Inc., a Nevada corporation ("Children's Heroes"). The aggregate
purchase price for the assets of Children's Heroes was 235,000 shares of our
common stock. Additionally, we issued approximately 1,260,750 shares of our
common stock to certain creditors of an affiliate of Children's Heroes, in
consideration for certain releases of liability for Children's Heroes.
With the purchase of Children's Heroes, we intend to deploy a nationwide
grass roots and on-line marketing system aimed at K-12 fundraising and
developing Internet educational tools. The concept behind the fundraising
program is simple. In addition to credit card companies' awarding a participant
points towards Frequent Flyer miles, the participant will now be able seamlessly
to have those rebate dollars automatically directed to his or her child's school
and/or a college education fund by simply shopping at local participating
merchants. Instead of students selling candy, wrapping paper or candles to
neighbors and friends (a $70 billion industry), the schools ask parents to sign
up for the Children's Heroes fundraising program.
On August 7, 2001, we signed a letter of intent to exchange certain of our
shares for all the issued and outstanding shares of Internet Advantage, Inc. On
September 28, 2001, the parties terminated the letter of intent because they
could not agree on the terms of the deal.
On December 4, 2001, we filed a voluntary petition for relief under chapter
11 of the Bankruptcy Code as an initial step in executing a financial
restructuring. We filed the petition in the US Bankruptcy Court for the District
of Virginia. Current conditions facing the national economy, and in particular
the financial markets, have created an environment in which we have been
unsuccessful in securing the financing necessary to meet on-going business
expenses. Faced with the ongoing issues of non-payment by MRESA and the Schools
and Libraries Division of the Universal Service Administrative Company, which
rendered questionable our ability to collect on more than $8 million, management
had no choice but to seek protection under chapter 11. Management elected to
enter into a chapter 11 reorganization to facilitate obtaining new financing and
to develop a plan of reorganization to be submitted to the court.
Services and Products
If we are able to obtain approval and financing for our plan of reorganization,
we plan to provide the following services and products:
o Online Procurement
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o K-12 School Fundraising
o Web-based community features
- Free e-mail for students, parents, and teachers
- Secure chat rooms for the school and the home
- Free Search engine and database
o Search engine - a Children's Heroes brand search engine for students, with
filtering features that can be configured by the parents and/or the teacher.
Growth Strategy
The Company is an e-learning integrator and facilitator for K-12 students,
parents, and teachers. It provides localized grassroots marketing, training, and
fundraising services that generate supplemental community-specific financial
support to schools, homes, and commercial entities. If we are able to obtain
approval and financing for our plan of reorganization, we anticipate that our
revenues will be derived from:
o Children's Heroes fundraising services:
- Membership subscriptions through credit card registration
- Telecom subscriptions through ISP, cellular, and filtering
- Click-on e-commerce rebates
- Point-of-Sale commerce rebates
- Portal subscription services
- Merchant acquisition and transaction services
o Subscription-based services for enhanced education resources for consumers
and customized solutions for entire schools and districts
o Revenue sharing partnerships and strategic alliances
o E-procurement for schools as well as merchant and corporate accounts
By the end of 1999, our educational product offering was installed in over
192 schools. In 2000, we commenced installation of the same product offering in
more than 71 additional schools. Having proven the feasibility and efficiency of
this offering in a regional setting, we now intend to systematically develop
other markets for it and expand our business. If we are able to obtain approval
and financing for our plan of reorganization, we intend to adopt a rapid growth
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strategy, launching in additional markets during 2002.
Parent-driven fundraising can expand our current business model from the
school into the surrounding community. Our fundraising is uniquely focused on
and designed for the adult consumer, and does not require the involvement of the
school children, the method traditionally used in other fundraising activities.
Our two community market channels--school and commerce--will allow us to
highlight the cause-related marketing power behind our product offering.
The school channel captures the participation and trust of the parents and
the education professionals. The commerce channel provides a commercial engine
for funding education content delivery to schools and homes alike.
This strategy will allow us to use our revenue generation business model to
fuel the deployment of educational content services. Leveraging its appeal, we
hope to speed our market penetration and increase revenue potential through our
combined offering.
This integrated strategy will provide substantial market time advantage
over e-commerce fundraising portals and other Internet content companies, whose
business models continue to be focused on increasing viewership and generating
revenues through advertising and the online sale of educational products. These
companies continue to focus on Internet marketing rather than relationship
marketing and community building.
Our differentiating advantage centers on our distribution channels. As
such, we are able to build long-term customer relationships with the subscribed
parents, teachers, schools, and merchants, thus allowing continued avenues for
the up-selling of additional educational products and services.
Other growth strategies include:
o Growth through innovative outsourcing of the primary sales functions
through regionalized or localized independent contractors, who can enhance
and further our business goals;
o Growth through direct sales in cases where specific learning sales
opportunities are evident;
o Growth through relational channels resulting from established relationships
with various industry connections; and
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o Growth through opportunistic strategic alliances, joint ventures and/or
mergers with industry related companies who can augment, enhance and/or
further our business goals, eventually expanding our network beyond the
education arena into business and commercial environments.
Outsourcing
We rely on a number of subcontractors and vendors in connection with the
delivery of our service. In addition to proprietary methodology, we bundle the
products and services of vendors to satisfy our customers' needs.
Employees
As of December 31, 2001, we had 2 full-time employees.
Item 2. Description of Property.
In June 2001, we terminated our lease for office space and forfeited the
$46,572 deposit. We have not obtained replacement commercial office space. We
are currently operating from an officer's residence for no consideration. We own
no other property.
Item 3. 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.
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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 4. Submission of Matters to a Vote of Security Holders.
As of October 30, 2000, pursuant to Section 78.320 of the Nevada General
Corporation Law, we obtained the written consent of the holders of a majority of
the outstanding shares of our common stock for the approval of the change in our
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name from Penn Akron Corporation to Heroes, Inc. On that date, the number of
shares of our common stock outstanding was 34,787,742 shares; the number of
shares that consented to approve the aforementioned actions was 17,436,448,
representing 50.1% of the outstanding shares. We filed the amendment to the
Company's Articles of Incorporation with the Nevada Secretary of State on
December 4, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
During the past several years there has been no established trading market
for the Company's common stock. The Company's common stock began trading again
on May 4, 2000, and is traded on the OTC Bulletin Board under the symbol "HERS."
Set forth below is a table summarizing the high and low bid quotations for the
Company's common stock during the portion of its last two fiscal years that
there has been a trading market.
Summary of Quarterly High and Low Price of Common Stock in 2000
QUARTER HIGH BID LOW BID
2nd Quarter 2000 $5.00 $0.75
3rd Quarter 2000 $1.062 $0.28
4th Quarter 2000 $1.00 $0.312
The above table is based on Over-The-Counter quotations. These quotations
reflect inter-dealer prices, without retail mark-up, markdown or commissions,
and may not represent actual transaction. All historical data was obtained from
the cnbc.com and the quick and reilly.com web sites.
As of March 31, 2001, there were 2,450 owners of record of our common stock.
We have never paid any cash dividends. The payment of dividends, if any,
in the future is within the discretion of our Board of Directors, and will depend
upon our earnings, capital requirements and financial condition, and other
relevant factors. Management does not expect to declare dividends in the
foreseeable future.
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Sales of Unregistered Securities
Pursuant to the Merger Agreement with Spherus, in March 2000, we issued
15,693,581 shares of restricted Common Stock to the former stockholder of
Spherus. We also issued 1,000,000 shares of restricted Common Stock to Tampa Bay
Financial, Inc., as compensation for financial consulting services in connection
with the merger. Such shares were issued to a limited number of sophisticated
investors, and we believe that such issuance was exempt from registration under
Section 4(2) of the Securities Act of 1933.
Additionally, in March 2000, we issued 4,500,000 shares of restricted
Common Stock to Catalyst Communications, Inc., in consideration of a 17-acre
tract of undeveloped land in Apex, North Carolina valued at $2,000,000.
On October 6, 2000, we issued 1,000,000 shares of restricted Common Stock
to two employees in accordance with the terms of their Employment Agreements.
Such shares were issued to a limited number of sophisticated investors, and we
believe that such issuance was exempt from registration under Section 4(2) of
the Securities Act of 1933. On October 27, 2000, we issued 1,495,750 shares of
restricted Common Stock in connection with the acquisition of Children's
Heroes.com. Such shares were issued to a limited number of sophisticated
investors, and we believe that such issuance was exempt from registration under
Section 4(2) of the Securities Act of 1933 and under Rule 505 promulgated under
such Act.
On December 5, 2000, we issued 400,000 shares of restricted Common Stock to
two consulting firms in exchange for performance of management and financial
consulting services. Such shares were issued to a limited number of
sophisticated investors, and we believe that such issuance was exempt from
registration under Section 4(2) of the Securities Act of 1933.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion should be read in conjunction with the financial
data appearing elsewhere in this report.
Liquidity And Capital Resources
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On December 4, 2001, we filed for protection under chapter 11 of the
Bankruptcy Code. On December 19, 2001, we filed a Current Report on Form 8-K
describing such filing in greater detail.
As of March 20, 2002, we had no cash, a working capital deficit of
approximately $14 million and a stockholders deficit of approximately $14
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.
At December 31, 2000 we were owed approximately $8.9 million related to our
contract with MRESA. Receipt of this amount is uncertain and we currently deem
this receivable to be uncollectible. Although we may continue to pursue this
receivable, there is no assurance that we will be successful in these efforts
with respect to this matter.
Results of Operations
Our revenues decreased to $6,437,415 for the year ended December 31, 2000
from $20,097,969 for the year ended December 31, 1999. This decrease is due to
the fact that fewer schools enrolled in the Company's program in Year 2 of our
three-year contract with our current customer, MRESA. We also have not yet
submitted additional invoices for additional work to be performed in Year 2,
pending the outcome of an audit of MRESA by Arthur Andersen, LLP, and the
determination by both the Federal Communications Commission ("FCC") and the 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 more than 11
school districts, 13 and nearly 750 schools. Our contract with MRESA was
executed in March 1999, and we began performance thereunder in August 1999. The
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 had 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 legally
responsible for all performance under the contract, including the procurement
and installation of all equipment. We are currently seeking additional customers
for our school products and if we are able to obtain approval and financing for
our plan of reorganization, we believe that we can expand into a number of
states and school districts.
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In August 2000, Arthur Andersen, LLP, began an audit of MRESA. The MRESA
contract is currently funded by the SLD. This is a non-profit entity under the
jurisdiction of the Federal Communications Commission ("FCC"), that administers
funds 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 or local funds. The audit is part of an
ongoing program integrity process initiated by the SLD to ensure that applicants
to 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
$3,595,647.60 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 such amount remains unpaid by the SLD.
Additionally, in October 2000, we purchased substantially all of the assets
of Children's Heroes.com, Inc. ("Children's Heroes"). The aggregate purchase
price for the assets of Children's Heroes was 235,000 shares of our common
stock. We also issued approximately 1,260,750 shares of our common stock to
certain creditors of Children's Heroes, Inc., a Washington corporation, and an
affiliate of Children's Heroes, in consideration for becoming a beneficiary of
certain releases provided by the creditors to Children's Heroes. With the
purchase of Children's Heroes, we intended to deploy a nationwide grassroots and
on-line marketing system aimed at K-12 fundraising and developing Internet
educational tools.
As part of the Children's Heroes transaction, we acquired certain licensing
agreements with Frequent Friends.com, Inc. pursuant to which Frequent
Friends.com was to provide software in connection with the Children's Heroes
program. We have received from Frequent Friends.com, Inc. a purported notice of
default due to non-payment 14 of certain licensing fees under such agreements.
We have suspended performance under the agreements due to Frequent Friends.com's
failure to perform under the Agreement.
Our total cost of sales decreased to 7,016,998 for the year ended December
31, 2000 from $18,091,538 for the same period of 1999. The decrease is due to
the smaller number of schools billed for Year 2 of the MRESA contract. Our
expenses increased to $10,275,303 for the year ended December 31, 2000 from
$6,168,685 for the same period in 1999. This is due to increased bad debt
expense, an increase in payroll and consulting fees, as well as software license
and development fees, subcontractor fees, and greater travel and general
expenses, in order to implement the Children's Heroes business model and launch
the Children's Heroes product and service. Our bad debt expense increased by
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$1,251,851 to $5,164,034 in 2000 from $3,912,183 in 1999 as a result of
uncertainties in the collectibility of receivables related to the MRESA project.
Our salary expense increased to $2,664,779 from $1,424,860 due primarily to
operational expansion and the deployment of the Children's Heroes product and
service. As of March 16, 2001, we reduced the salaries of numerous employees and
consultants in order to lower payroll expenses and conserve cash flow. Our legal
and accounting expenses increased to $540,932 from $60,158 due to litigation
described in Item 3. Legal Proceedings.
As a result of the foregoing, our net loss increased by $6,692,632 to
$10,854,886 in 2000 from $4,162,254 in 1999.
Item 7. Financial Statements.
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS:
Balance Sheets 17
Statements of Operations 19
Statements of Changes in Stockholders' Deficit 21
Statements of Cash Flows 22
Notes to Financial Statements 24
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Heroes, Inc.:
We have audited the accompanying balance sheets of Heroes, Inc. (the "Company")
as of December 31, 2000 and 1999, and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2000 and 1999, and the results of its operations and cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to the
financial statements, the Company filed for protection under Chapter 11 of the
U.S. Bankruptcy Code in December 2001, is having difficulty in meeting its
current obligations, and will require a significant amount of capital and/or
debt financing to proceed with its business plan. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KINGERY, CROUSE & HOHL P.A.
March 25, 2002
Tampa, FL
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HEROES, INC.
December 31, 2000 and 1999
ASSETS
2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 70,268 $ 100
Accounts receivable (less allowance for
doubtful accounts of $8,859,617 and
$3,912,183, respectively) - 69,212
Other receivables 36,145 22,808
Employee advances 5,025 2,000
Refundable deposits 46,572 4,380
PrinVest Corp. escrow for OneWeb - 205,000
Prepaid maintenance and training costs - 224,000
Deferred financing costs - 45,833
Other current assets 48,222 -
Total Current Assets 206,232 573,333
EQUIPMENT (less accumulated depreciation of
$9,465 and $1,065, respectively) 269,669 4,258
OTHER ASSETS:
Other assets 100 5,116
Prepaid maintenance and training
costs - long-term - 415,997
Total Other Assets 100 421,113
Total Assets $ 476,001 $ 998,704
============ ===========
(Continued)
The accompanying notes are an integral part of these financial statements.
17
HEROES, INC.
BALANCE SHEETS
December 31, 2000 and 1999
LIABILITIES AND STOCKHOLDERS' DEFICIT
2000 1999
CURRENT LIABILITIES:
Line of credit $ 3,131,190 $ -
Accounts payable and accrued expenses 7,082,892 3,859,734
Accrued compensation 185,174 665,032
Deferred maintenance and training revenue 224,000 224,000
Total Current Liabilities 10,623,256 4,748,766
DEFERRED MAINTENANCE AND TRAINING
REVENUE - LONG-TERM 191,997 415,997
STOCKHOLDERS' DEFICIT:
Common stock 500 million shares authorized,
$.001 par value, 27,687,162 and
10,543,581 shares issued and outstanding,
respectively 35,840 27,687
Paid-in capital 4,673,540 -
Deficit (15,048,632) (4,193,746)
Total Stockholders' Deficit (10,339,252) (4,166,059)
Total Liabilities and Stockholders'
Deficit $ 476,001 $ 998,704
============= ============
The accompanying notes are an integral part of these financial statements.
18
HEROES, INC.
STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2000 and 1999
2000 1999
REVENUES:
Local school installations $ 6,196,383 $ 19,532,867
Training revenue 224,000 -
Network operations center - 529,064
Other income 17,032 36,038
Total Revenues 6,437,415 20,097,969
DIRECT COSTS:
Local school installations and training 6,953,105 17,606,527
Network operations center 22,745 452,792
Other 41,148 32,219
Total Direct Costs 7,016,998 18,091,538
GROSS PROFIT (LOSS) (579,583) 2,006,431
EXPENSES:
Assignment fees - 129,075
Bad debt expense 4,947,434 3,912,183
Consulting 523,248 -
Depreciation 54,233 230,232
Impairment of investment in Sanswire.net, LLC 216,600 -
Interest and other bank fees 398,547 186,335
Legal and accounting 540,932 60,158
Marketing fees 131,827 18,297
Payroll taxes 71,000 41,867
Rent 67,061 49,501
(Continued)
The accompanying notes are an integral part of these financial statements.
19
HEROES, INC.
STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2000 and 1999
2000 1999
Salaries $ 2,664,779 $ 1,424,860
Software license and development 129,050 -
Telephone 67,062 63,030
Travel 234,524 9,442
Other expenses 229,006 43,705
Total Expenses 10,275,303 6,168,685
LOSS BEFORE PROVISION FOR INCOME
TAXES (10,854,886) (4,162,254)
PROVISION FOR INCOME TAXES - -
NET LOSS $(10,854,886) $ (4,162,254)
============= =============
NET LOSS PER SHARE:
Basic and Diluted $ (0.34) $ (0.15)
============= =============
SHARES USED IN COMPUTING NET LOSS
PER SHARE:
Basic and Diluted 32,038,802 27,687,162
============= =============
The accompanying notes are an integral part of these financial statements.
20
HEROES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For The Years Ended December 31, 2000 and 1999
Common Stock
Paid-in
Shares Amount Capital Deficit Total
BALANCE at January 1, 1999 27,687,162 $27,687 $ - $ (31,492) $ (3,805)
Net loss - - - (4,162,254) (4,162,254)
BALANCE at December 31, 1999 27,687,162 27,687 - (4,193,746) (4,166,059)
Conversion of note payable by
Spherus shareholders - - 250,000 - 250,000
Excess liabilities acquired in the
Penn-Akron Merger - - (800) - (800)
Cash received in merger with
Spherus Technologies, Inc. - - 494,096 - 494,096
Other issuance of common stock
for cash 4,500,000 4,500 1,995,500 - 2,000,000
Issuance of common stock for
acquisition of Children's Heroes 1,495,750 1,496 (1,496) - -
Issuance of common stock to
reserve account 687,500 687 (687) - -
Issuance of common stock for
services 1,469,834 1,470 1,936,927 - 1,938,397
Net loss - - - (10,854,886) (10,854,886)
BALANCE at December 31, 2000 35,840,246 $35,840 $4,673,540 $(15,048,632) $(10,339,252)
========== ======= ========== ============= =============
The accompanying notes are an integral part of these financial statements.
21
HEROES, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2000 and 1999
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 1,318,593 $ 16,121,978
Cash paid to subcontractors, vendors and employees (6,251,353) (15,784,056)
Interest received - 5,018
Interest paid - (69,335)
Net Cash Provided By (Used In) Operating
Activities (4,932,760) 273,605
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Sanswire.net, LLC (200,000) -
Acquisition of equipment (273,811) (5,323)
Net Cash Used In Investing Activities (473,811) (5,323)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit 2,732,643 -
Proceeds from note payable to stockholder 250,000 -
Proceeds from issuances of common stock 2,494,096 -
Deferred financing costs paid - (275,000)
Net Cash Provided By (Used In) Financing
Activities 5,476,739 (275,000)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 70,168 (6,718)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 100 6,818
CASH AND CASH EQUIVALENTS, END OF YEAR $ 70,268 $ 100
============= =============
(Continued)
The accompanying notes are an integral part of these financial statements.
22
HEROES, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2000 and 1999
RECONCILIATION OF NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
2000 1999
Net loss $ (10,854,886) $ (4,162,254)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Provision for doubtful accounts 4,947,434 3,912,183
Depreciation 54,233 230,232
Issuance of common stock for services 1,938,397 -
Write off of investment in Sanswire.net, LLC 216,600 -
Cash flows resulting from changes in:
Accounts receivable (4,878,223) (3,970,973)
Prepaid maintenance costs 639,997 (639,997)
Escrow for OneWeb 205,000 (205,000)
Other assets (118,361) (24,188)
Accounts payable 3,222,358 3,828,481
Accrued expenses (81,310) 665,124
Deferred maintenance and training revenues (224,000) 639,997
Net Cash Provided By (Used In) Operating
Activities $ (4,932,760) $ 273,605
============== =============
NONCASH INVESTING AND FINANCING TRANSACTIONS
During the year ended December 31, 2000 a $250,000 note payable to a stockholder
was converted to 500 shares of Spherus common stock prior to the merger.
During the year ended December 31, 2000, the Company issued 1,495,750 shares of
common stock as consideration for the purchase of Children's Heroes, Inc.
During the year ended December 31, 2000, the Company issued 687,500 shares of
common stock to a reserve account.
The accompanying notes are an integral part of these financial statements.
23
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 2000 and 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heroes, Inc. (we, us, our) formerly known as Penn-Akron Corporation
(Penn-Akron) 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.
On March 13, 2000, we changed our domicile from the state of Delaware to
Nevada and changed our authorized common capital stock from 10,000,000 shares
with a par value of $0.01 to 100,000,000 shares with a par value of $.001. On
March 24, 2000, we acquired all the outstanding stock of Spherus Technologies,
Inc. (Spherus), 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 our common stock, and our
shareholders retained 10,543,581 shares of our common stock. Immediately after
the acquisition, the former stockholders of Spherus owned over 50% of our
outstanding shares.
The financial statements for 1999 include the accounts of Spherus only. At
the date of merger, we had $800 of liabilities and ($800) in equity consisting
of $942,469 in paid in capital and ($943,269) in retained earnings (deficit). We
had no activity for the 12 months prior to the merger.
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.
As a result of these matters, all references to the number of shares and
par value in the accompanying financial statements and notes thereto have been
adjusted to reflect the merger with Spherus and changes in the authorized number
of shares of our common stock and its par value as though all such changes had
been completed as of January 1, 1999.
On October 27, 2000, we purchased the assets, consisting of contracts,
service agreements, licensing agreements, marketing and sales agreements and
other intellectual property, of Children's Heroes, Inc. (CHI) through the
issuance of 1,495,750 shares of our common stock to former owners and creditors
of CHI. Total liabilities of CHI were $235,100 and their net loss since
inception was $235,100, CHI had no revenue prior to the acquisition. The CHI
division earns a rebate for fundraising through Internet E-commerce and
purchases at bricks and mortar merchants. We have expensed all costs incurred in
developing the marketing plan for the CHI business.
On December 4, 2001, we filed for protection under Chapter 11 of the U.S.
Bankruptcy Code.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us 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
24
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.
Estimates that are critical to the accompanying financial statements include the
appropriate level of allowance for doubtful accounts, which can be significantly
impacted by future events. Actual results could significantly differ from our
estimates.
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. Revenue and expense related to the training, maintenance and
support was recognized ratably over the term of the contract.
Equipment is stated at original cost. Depreciation is provided using the
straight-line method over the estimated useful lives of three to five years.
We compute loss per share in accordance with SFAS No. 128 "Earnings per
Share" (SFAS No. 128) and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is computed by dividing the net loss for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. There were no common equivalent shares outstanding during the year ended
December 31, 1999. Common equivalent shares outstanding as of December 31, 2000,
which consist of contingent shares and stock options issued to certain
shareholders, have been excluded from diluted net loss per common share
calculations because they are anti-dilutive. Accordingly, basic and diluted net
per share are identical as of December 31, 2000 and 1999.
We compute income taxes in accordance with Financial Accounting Standards
Statement No. 109 "Accounting for Income Taxes" (SFAS 109). Under SFAS 109,
deferred taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. Also, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that included the enactment date.
Temporary differences between financial and tax reporting arise primarily from
the use of different methods to recognize bad debt expense.
Advertising costs are expensed as incurred.
We account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Compensation cost for stock options, if any, is measured
as the excess of the quoted market price of our stock at the date of grant over
the amount an employee must pay to acquire the stock. Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
25
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. We have
elected to use the intrinsic value method of accounting as described above, and
have adopted the disclosure requirements of SFAS No.
123.
2. GOING CONCERN
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 a deficit of approximately
$15 million at December 31, 2000 and anticipate incurring net losses for the
foreseeable future. In addition, we will require (1) the approval of the United
States Bankruptcy Court and (2) a significant amount of capital to proceed with
our business plan. Accordingly, our ability to continue as a going concern is
dependent upon our ability to emerge from bankruptcy proceedings and 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. In addition, our plans include devoting
appropriate resources to obtain a quick and favorable resolution of the matters
related to the contract discussed in Note 3. However, there is no assurance that
we will be successful in our efforts with respect to these matters. These
factors, among others, indicate that we may be unable to continue as a going
concern for a reasonable period of time.
Our 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.
3. CONTRACT WITH METROPOLITAN REGIONAL EDUCATIONAL SERVICE AGENCY
We have a contract with Metropolitan Regional Educational Service Agency
(MRESA) to provide a turnkey installation of an internet-based satellite video
distribution and multimedia system (MRESAnet 2000 Project) in up to
approximately 700 schools in 14 school districts primarily in the Atlanta
Metropolitan area and surrounding counties, plus Savannah and Brunswick.
The funds for this project are provided from a Federal program administered
through the Schools and Library Division (SLD) of the Universal Service
Administrative Company. The program requires a matching commitment of 10-80% for
each school from private or local funds. The agreement is automatically renewed
for subsequent phases of the MRESAnet 2000 Project to the extent that SLD
funding or other alternative funding remains available to fund the financial
requirements of this program. We received a funding letter from the SLD for
Year/Phase 1 and Year/Phase 2.
26
A summary of the contract terms for each phase is as follows:
December 31, 2000 December 31, 1999
(Year/Phase 2) (Year/Phase1)
Number of approved schools 71 192
Completed installations - 192
Installations partially complete 71 -
Approximate fee for each school $174,000 $105,000
Approximate gross revenues $12 million $20 million
The SLD has stopped payments for the contract pending resolution of these
and other matters. At December 31, 2000, accounts receivable was made up as
follows:
MRESA $2,653,368 Year 1 matching funds
$2,529,020 Year 2 matching funds
SLD $81,581 Year 1 installations
$3,595,648 Year 2 installations
The MRESA receivable relates to matching obligations to be paid from
contributions or other local funds. If MRESA does not raise the matching funds
for Years 1 and 2, the terms of the SLD grant may not be met and the SLD may not
fund some part of or all of the $3.6 million receivable, and may require refund
of all Year 1 money paid to us of approximately $18 million. In 2000 and 1999,
58% and 88%, respectively, of revenues were funding received from the SLD.
Because of the uncertainties related to the MRESAnet 2000 Project matching
requirements, and the fact that related accounts receivable have not been
collected as of the date we filed for protection under Chapter 11 of the
Bankruptcy Code, a reserve has been established for our receivables of
$8,859,617 and $3,912,183 at December 31, 2000 and 1999, respectively.
4. CONTINGENCIES
In addition to the contingent liability of approximately $18 million
referred to in Note 3, the following contingencies existed at December 31, 2000:
On September 7, 2000, one of our subcontractors, Lynxus, Inc. (Lynxus),
filed suit against us in the United States District Court for the Northern
District of Georgia claiming that they are entitled to approximately $483,000
plus interest. The claim arises out of the termination of a network
implementation agreement between us and MRESA, whereby we had 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 for Years 1 and 2. In September 2000, we terminated our
27
subcontract with Lynxus. As a result, we have expensed certain prepaid
maintenance and training services owed to the Company at December 31, 2000 of
approximately $511,000. 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. Because of this and because the litigation is in the
discovery stage, the ultimate outcome of this matter cannot be determined.
Accordingly, no provision for any loss that may result upon resolution of this
litigation has been made in the accompanying financial statements.
In addition, accounts payable at December 31, 2000, includes a payable to
Lynxus for $5.8 million that management believes may not be due to Lynxus if the
matching funds are not obtained by MRESA. The outstanding invoices detailed in
the lawsuit by Lynxus against us are included in this $5.8 million.
We are also being sued by a stockholder who was a former employee for
approximately $100,000 for termination of his employment contract. We have
accrued for the compensation element of the claim in our financial statements.
The claim also seeks redemption of his common stock for $1 million. We believe
that the redemption claim against us is without merit. Due to our Chapter 11
petition filing on December 4, 2001, action on this lawsuit has been stayed.
Because of this and because the ultimate outcome of this matter is not
reasonably determinable, we have not accrued for any costs or expenses that may
arise from the redemption of the common stock.
5. LINE OF CREDIT
At December 31, 1999, we had an $11,000,000 line of credit with PrinVest
Corp. Advances under the line accrued interest at prime plus 5.75% per annum,
and were secured by substantially all of our assets. 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.
We signed a new agreement with PrinVest Corp. on June 7, 2000, for a
maximum line of credit of $3,500,000. Interest is payable at prime plus 2% per
annum on the outstanding balance. We received notice on January 5, 2001, that we
are deemed by PrinVest to be in default under this agreement due to failure to
remit payments when due. The balance at December 31, 2000 of $3,131,190 was
accelerated and became immediately due on January 5, 2001. Interest and
servicing fees continue to accrue, including additional default interest in the
amount of 4% per annum.
28
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 2000 and
1999, is made up of the following:
2000 1999
Current $ - $ -
Deferred (5,693,000) (1,881,000)
Change in valuation reserve 5,693,000 1,881,000
Provision for income taxes $ - $ -
============ ============
At December 31, 2000, we had approximately $6,100,000 of unused operating
tax loss carryforwards. These carryforwards expire at various times through the
year ended December 31 2020, however because our bankruptcy proceedings, changes
in control and various other matters utilization of the income tax loss
carryfoward is not assured. As such a valuation reserve in an amount equal to
the net deferred tax asset has been provided.
At December 31, 2000 and 1999, we had no deferred tax liabilities and our
deferred tax assets consisted of the following:
2000 1999
Deferred tax asset - noncurrent:
Operating loss carryforward $ 2,383,000 $ 360,000
Reserves 3,670,000 1,521,000
Valuation reserve (6,053,000) (1,881,000)
$ - $ -
============ ============
7. EMPLOYMENT AGREEMENTS
At December 31, 2000, we were obligated under employment agreements which
required minimum base salaries of approximately $540,000 per year through
October 2002 and provided for grants of 1,019,834 shares of common stock and
options to purchase 6,370,000 shares of common stock over various exercise
prices, dates and vesting periods.
At December 31, 1999, there were employment agreements which provided 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, we agreed to
pay another employee/stockholder a bonus of $220,000 for the year ended December
29
31, 1999. We accrued $640,000 for these agreements at December 31, 1999. At
December 31, 2000, approximately $45,000 of this amount is left to be paid.
8. STOCK TRANSACTIONS, GRANTS AND OPTIONS
On April 10, 1987, we completed a two for one reverse common stock split of
selected shares. The available records have been insufficient to verify the
completion of the stock split. Because of various errors and omissions, we have
issued 687,500 shares into a reserve account to be used in the event of any
valid claims from the possible errors outlined above. We believe these shares
of 687,500 will be adequate to cover any possible future claims.
As part of the merger with 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 we shall issue four additional shares of our
common stock among the eligible stockholders for every dollar of annual income
(as defined in the agreement) achieved by us for each such fiscal year in excess
of the amount necessary to earn $0.15 per share for us in the year. No
additional shares relating to this agreement have been earned through December
31, 2000.
We have a stock option plan that provides for the granting of stock options
to officers and key employees. The objectives of this plan includes attracting
and retaining the best personnel, providing for additional performance
incentives, and promoting our success by providing employees the opportunity to
acquire common stock. We are authorized to grant options for up to 11,264,304
common shares under the 2000 Equity Incentive Plan, of which 6.3 million have
been granted. Options for 3.7 million shares were issued at an exercise price of
$.11 per share, which is less than the $.40 per share fair value at the date of
grant. These options vest 12.5% per quarter for 2 years. We recognized
$1,069,300 of compensation expense related to these options in 2000 based on the
difference between the fair value and the option exercise price. The remaining
options which were granted at prices which are either equal to or above the fair
value of the stock on the date of grant, vest over 2, 3, or 5 year period, and
expire ten years after the grant date.
30
The status of our stock options are summarized below:
Weighted
Number of Average
Shares Exercise Price
Outstanding at December 31, 1999 - $ -
Granted 6,300,000 0.53
Exercised - -
Canceled - -
Outstanding at December 31, 2000 6,300,000 $ 0.53
========= ==========
Options exercisable at:
December 31, 2000 225,000 $ 0.68
December 31, 2001 2,550,000 0.31
December 31, 2002 2,550,000 0.31
December 31, 2003 300,000 1.36
December 31, 2004 337,500 1.80
December 31, 2005 337,500 1.80
We account for our stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" under which no compensation cost for stock options is
recognized for stock option awards granted at or above fair market value.
Accordingly, other than the 3.7 million options mentioned above, no compensation
cost has been recognized for stock options, since all options were granted at an
exercise price equal to or greater than the fair market value of the common
stock at the date of grant. Had our compensation expense for stock-based
compensation plans been determined based upon fair values at the grant dates for
awards under this plan in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," our net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below.
2000 1999
Net loss
As reported $ (10,859,386) $ (4,162,254)
Pro Forma (10,859,386) (4,162,254)
Loss per share
As reported $ (0.34) $ (0.15)
Pro Forma $ (0.34) (0.15)
31
The weighted average fair value of options granted during 2000 estimated
on the date of grant using the Black-Scholes option-pricing model was $.42. The
fair value of options granted is estimated on the date of grant using the
following assumptions: dividend yield of 0%, expected volatility of 167%,
risk-free interest rate range of 5.75% to 6.0% depending on grant date, and an
expected life ranging from 2 - 5 years. Summary information about our stock
options outstanding at December 31, 2000, is as follows:
Weighed
Average
Contractual Weighed Weighed
Range of Outstanding Periods In Average Excercisable at Average
Exercise Price at 12/31/00 Years Exercise Price 12/31/00 Exercise Price
$0.11-$0.43 4,500,000 2.00 0.17 - $ -
$0.68-$1.87 1,800,000 3.38 1.44 225,000 0.68
$0.11-$1.87 6,300,000 2.39 0.53 225,000 $ 0.68
9. INVESTMENT
We invested $200,000 in a promissory note of Sanswire.net, LLC, an
organization with which we were considering doing business. Interest
accrued at 10% per annum. On December 31, 2000, we formally demanded payment of
the $200,000 plus accrued interest of $16,600. We have fully reserved for the
loss on this investment.
10. LEASE OBLIGATION
During 2000, we entered into a lease for office space in Virginia. This
lease began on October 1, 2000, and was scheduled to expire on November 30,
2002. In June 2001, we terminated this lease and forfeited our $46,572 deposit.
Subsequent to the lease termination, we have operated from office space provided
to us by our officers for no consideration. The minimum lease payments under
this lease were as follows:
2001 $ 138,459
2002 131,641
$ 270,100
11. OTHER SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 2000, the following significant transactions and/or events occurred:
Litigation
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. Because the conditions giving rise to the litigation did not exist at
December 31, 2000, no liabilities have been recorded in the accompanying
financial statements as a result of these matters.
Financing
On January 10, 2001, we offered 4 million units, each unit consisting of
one share of common stock, and one warrant in a private placement memorandum at
an offering price of $.25 per unit. 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 March 20, 2002, 3,320,000 units have been
sold for $830,000.
We issued and defaulted on three promissory notes for approximately $1.2
million. 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.
Stock transactions
During 2001, we 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. As of March 20, 2002 all
the warrants have been fully vested.
During 2001, 900,000 options to purchase common stock expired due to the
termination of two employees. In addition, during 2001 we issued approximately
60,000,000 shares to employees and consultants for compensation and
reimbursement of operating expenses.
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure.
On December 10, 2001, 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.
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.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Management
Members of our Board of Directors are elected by our shareholders at each
annual meeting of shareholders, to hold office until their successors are
elected and qualified. The executive officers are appointed by our Board of
Directors and hold office at the pleasure of the Board. Executive officers
22
devote their full time to the affairs of the Company.
There are no arrangements or understandings whereby the directors or the
executive officers of the Company are elected, and there are no family
relationships between any of such persons.
The following table sets forth, as of March 31, 2002, certain information
regarding the directors and executive officers of the Company:
Name Age Position
Amer A. Mardam-Bey 40 Chief Executive Officer, President and Director
Tammy L. Lambert 33 Chief Operations Officer and Director
Carl L. Smith 59 Director
Set forth below is certain information concerning each of the directors and
executive officers of the Company. Unless otherwise indicated, the principal
occupation listed for each individual has been his principal occupation for the
past five years.
AMER A. MARDAM-BEY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Since
October 2000, Amer A. Mardam-Bey has served as our President, Chief Executive
Officer and a director. Prior to joining Heroes, Mr. Mardam-Bey co-founded
Drawbridge, LLC, a professional management services firm, specializing in
assisting companies in their early growth stages. At Drawbridge from 1999 to
2000, Mr. Mardam-Bey advised domestic and international high technology and
educational companies in their organizational, corporate governance, financial,
marketing and sales efforts. Prior to founding Drawbridge, Mr. Mardam-Bey
co-founded and served as Chief Operating Officer for ATCALL, Inc., a long
distance reseller and prepaid services provider, from 1995 to 1999.
TAMMY L. LAMBERT, CHIEF OPERATIONS OFFICER AND DIRECTOR. Since October 2000,
Tammy L. Lambert has served our Chief Operating Officer. Prior to joining
Heroes, Ms. Lambert co-founded Drawbridge, LLC, a professional management
services firm, specializing in assisting companies in their early growth stages.
At Drawbridge from 1999 to 2000, Ms. Lambert advised domestic and international
high technology and educational companies in their sales, marketing and
23
operational efforts. Before founding Drawbridge, Lambert served as Vice
President of Operations for ATCALL, Inc., a long distance reseller and prepaid
services provider from 1997 to 1999.
CARL L. SMITH, DIRECTOR. Carl Smith has been a director since September 2000.
Mr. Smith is an entrepreneur in marketing, sales and business development. Mr.
Smith served as the CEO of DNAPrint genomics (and its predecessor in interest)
from 1994 to March 2002. During that period, while DNAPrint's predecessor in
interest was known as Catalyst Communications, Inc., Catalyst and its
subsidiaries filed for protection from creditors under the United States
bankruptcy laws. Catalyst emerged from bankruptcy court protection in 1999. Mr.
Smith has also served on the Board of Directors of Diversified Resources Group,
Inc. from 1994 to 1996 and from April 1999 to present. In 1997, Diversified
Resources Group, Inc. and its subsidiaries filed for protection from creditors
under the United States bankruptcy laws. It emerged from bankruptcy court
protection in July 1999. Mr. Smith also serves on the Board of Directors of
American Communications Enterprises, Inc.
On March 26, 2001, Kenneth M. Herman resigned as a director of the Company.
Christopher Baker resigned from the Board of Directors on April 11, 2001.
Christopher Smith resigned from the Board of Director on September 19, 2001.
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Item 10. Executive Compensation.
The following table sets forth the compensation paid by the Company to its
executive officers in 2000.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
Name and Position Year (1) Salary ($) Bonus ($) Securities underlying
options (#)
Amer Mardam-Bey 2000 $55,000 $230,000 (2) 2,500,000
Chief Executive Officer
Christopher J.S. Baker 2000 $110,000 $ 0 0
Chief Financial Officer
Kenneth Herman 2000 $110,000 $ 0 0
Vice President
NOTES:
(1) No named executive officer was employed by the Company prior to the year 2000.
(2) Includes $215,000 paid in the form of 500,000 shares of common stock, valued at $0.43 per share.
The following table sets forth the options granted by the Company to its executive
officers in 2000.
OPTION GRANTS IN LAST FISCAL YEAR
Name Securities underlying % of Total Exercise Market Price Expiration
options (#) Options Granted Price ($/Sh) on Date of Grant Date
Amer Mardam-Bey 400,000 6.35% $0.43 $0.43 October 6, 2010
Amer Mardam-Bey 2,100,000 33.33% $0.11 $0.43 October 6, 2010
All options described herein vest ratably over the 8 calendar quarters beginning
October 6, 2000, provided the employee continues to be employed by the Company.
25
The following table sets forth the aggregate options outstanding at the end of 2000.
AGGREGATED FISCAL YEAR-END OPTION VALUES
Name Securities underlying
unexercised options (#)
Exercisable/
Unexercisable
Amer Mardam-Bey 625,000
1,875,000
No options were in the money as of the date of this Report.
Employment Agreements
On October 6, 2000, we entered into an employment agreement with Amer A.
Mardam-Bey, our chief executive officer. The agreement commenced on October 6,
2000 and expires on October 5, 2002, subject to automatic renewal for successive
one-year periods unless either party elects not to renew the agreement. The
agreement requires Mr. Mardam-Bey to serve as our chief executive officer and
provides for him a base salary of $240,000 per year. In addition, if the
performance of the Company and Mr. Mardam-Bey are satisfactory to our board of
directors, the agreement provides for payment to Mr. Mardam-Bey of a quarterly
cash bonus in the amount equal to 6.25% of his base salary, or $15,000.
In connection with the execution of the employment agreement, we granted
to Mr. Mardam-Bey 500,000 shares of our common stock, all of which was vested as
of that date. In accordance with the Penn-Akron Corporation Stock Option Plan, we
granted to Mr. Mardam-Bey an option to purchase 400,000 shares of our common
stock at an exercise price of $0.43 per share. The options vest as to one-eighth
of such options at the end of each quarterly period of service under the
agreement. In accordance with the Penn-Akron Corporation Stock Option Plan, we
granted to Mr. Mardam-Bey an option to purchase 2,100,000 shares of our common
stock at an exercise price of $0.11 per share. The options vest as to one-eighth
of such options at the end of each quarterly period of service under the
agreement. The agreement provides that in the event of a Change of Control (as
defined in the Penn-Akron Corporation Stock Option Plan), or in the event that
we terminate Mr. Mardam-Bey's employment without cause, the vesting of all such
options shall be accelerated.
26
The employment agreement prohibits Mr. Mardam-Bey from competing with us
for a period of one year after termination of employment. In the event that we
terminate his employment without cause and other than as a result of his death
or disability, Mr. Mardam-Bey is entitled to all salary and bonus that would
have been payable for the remaining term of the contract. In addition, certain
terminations by Mr. Mardam-Bey, denominated terminations "for good reason," are
deemed to be terminations without cause. Terminations for good reason include
reductions in Mr. Mardam-Bey's compensation, material diminution of his
authority or duties and relocation of the Company's headquarters from the
Washington, D.C. metropolitan area.
On January 1, 2000, the Company entered into an employment agreement with
Christopher J.S. Baker, its chief financial officer. Mr. Baker resigned on April
11, 2001, and his employment agreement terminated.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 2002 by (i) each person
known by the Company to be the beneficial owner of more than five percent (5%)
of the outstanding Common Stock; (ii) each director of the Company; (iii) each
named executive officer; and (iv) all directors and executive officers of the
Company as a group.
27
Name And Address Of Beneficial Owner (1) Amount Of Beneficial
Ownership Percent Of Class(2)
Vikki Cook 8,387,462 8.5%
355 Interstate Boulevard
Sarasota, FL 34240
Amer A. Mardam-Bey 21,330,611 21.5%
Tammy L. Lambert 16,656,770 16.8%
Carl L. Smith 0 0%
All Officers and Directors as a Group (5 37,987,381 38.3%
persons)
(1) Unless otherwise indicated, address is 1915 B Chain Bridge Rd, Suite 506, McLean, VA 22102
(2) Based on shares of Common Stock outstanding on the date of this report.
Item 12. Certain Relationships and Related Transactions.
In connection with the Merger Agreement with Spherus, in March 2000, we
issued 1,000,000 shares of restricted Common Stock to Tampa Bay Financial, Inc.
Carl L. Smith, one of our directors, is a director and officer of Tampa Bay
Financial, Inc.
In September and November 2000, we paid consulting fees and expenses
totaling $76,918 to Drawbridge, LLC, a professional management services firm
specializing in assisting companies in their early growth stages. Drawbridge,
LLC is controlled by our Chief Executive Officer and President, Amer A.
Mardam-Bey, and our Chief Operating Officer, Tammy L. Lambert. The consulting
fees and expenses were earned by Drawbridge, LLC prior to the date that Mr.
Mardam-Bey and Ms. Lambert joined us as officers.
In December 2000, we granted Bay Forest Limited 200,000 shares of common
stock as compensation for management and financial consulting services. Bay
Forest Limited is controlled by Ibrahim Mardam-Bey, the brother of our Chief
Executive Officer and President, Amer A. Mardam-Bey.
28
Item 13.Exhibits and Reports on Form 8-K.
(a) Exhibits
3(i).1 Articles of Incorporation (previously filed as Exhibit 3.(i) to the
Company's Current Report on Form 8-K, filed April 11, 2000).
3(i).2 Certificate of Amendment to Articles of Incorporation filed December 4, 2000
3(i).3 Certificate of Amendment to Articles of Incorporation filed September 25, 2001.
3(ii) Amended and Restated Bylaws (previously filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q, filed on July 31, 2000).
10.1 Financing and Security Agreement between PrinVest Financial Corp. and the
Company, executed June 8, 2000 (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q, filed on July 31, 2000).
10.2 Promissory Note, executed June 8, 2000, from the Company to PrinVest
Financial Corp. (previously filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q, filed on July 31, 2000).
10.3 Obligation to Forward Payments by the Company to PrinVest Financial Corp.,
executed June 8, 2000 (previously filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q, filed on July 31, 2000).
10.4 Employment Agreement between the Company and Amer A. Mardam-Bey, executed
October 6, 2000 (previously filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).
10.5 Employment Agreement between the Company and Tammy L. Lambert, executed
October 6, 2000 (previously filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).
10.6 Employment Agreement between the Company and Christopher Hutcherson,
executed October 27, 2000 (previously filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q, filed on November 14, 2000).
29
10.7 Employment Agreement between the Company and Allen de Castro, executed
October 27, 2000 (previously filed as Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).
10.8 Employment Agreement between the Company and John C. Schaper, executed
October 27, 2000 (previously filed as Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).
10.9 Stock Option Agreement between the Company and Amer A. Mardam-Bey, executed
October 6, 2000 (previously filed as Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).
10.10 Stock Option Agreement between the Company and Tammy L. Lambert, executed
October 6, 2000 (previously filed as Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).
10.11 Stock Option Agreement between the Company and Christopher Hutcherson,
executed October 27, 2000 (previously filed as Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q, filed on November 14, 2000
10.12 Stock Option Agreement between the Company and Allen de Castro, executed
October 27, 2000 (previously filed as Exhibit 10.9 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).
10.13 Stock Option Agreement between the Company and John C. Schaper, executed
October 27, 2000 (previously filed as Exhibit 10.10 to the Company's Quarterly
Report on Form 10-Q, filed on November 14, 2000).-
10.14 Penn-Akron Corporation Equity Incentive Plan, effective as of October 6,
2000 (previously filed as Exhibit 10.11 to the Company's Quarterly Report on
Form 10-Q, filed on November 14, 2000).
10.15 Heroes, Inc. 2001 Executive Equity Compensation Plan (previously filed as
Exhibit 10.15 to the Company's Annual Report on Form 10-KSB, filed on April 9,
2001).
10.16 Employment Agreement between the Company and Christopher J.S. Baker,
executed January 1, 2000 (previously filed as Exhibit 10.16 to the Company's
Annual Report on Form 10-KSB, filed on April 9, 2001).
30
10.17 Employment Agreement between the Company and Kenneth Herman, executed
January 1, 2000 (previously filed as Exhibit 10.17 to the Company's Annual
Report on Form 10-KSB, filed on April 9, 2001).
16.1 Letter from Windham Brannon, P.C. to the Securities and Exchange Commission
(previously filed as Exhibit 16.1 to the Company's Quarterly Report on Form
10-Q, filed on December 14, 2000).
(b) Reports on Form 8-K. On October 12, 2000, the Company filed an amendment to
its Current Report on Form 8-K filed July 12, 2000, reporting a change in
principal accountant. On November 2, 2000, the Company filed a Current Report on
Form 8-K, reporting (i) the Children's Heroes acquisition (see Item 1 of this
Annual Report), (ii) the MRESA audit (see Item 1 of this Annual Report), and
(iii) the Lynxus litigation (see Item 3 of this Annual Report).
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.
By:/s/Amer Mardam-Bey
Amer Mardam-Bey, President
Date: March 25, 2002
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/Amer Mardam-Bey Chief Executive Officer, March 25, 2002
Amer Mardam-Bey Chief Accounting Officer,
Director
31
/s/Tammy L. Lambert Chief Operations Officer, March 25, 2002
Tammy L. Lambert Director
/s/Carl L. Smith Director March 25, 2002
Carl L. Smith
32