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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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
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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.)
1980 GALLOWS ROAD, SUITE 200, VIENNA, VIRGINIA 22182 (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
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 [ ]
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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. [X]
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 30, THE AGGREGATE MARKET VALUE OF THE
VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES WAS $2,886,078.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 35,885,754
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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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 current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) the Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations; (iii) the Company's
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 the Company's 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 its revenues, fluctuations in the
Company's quarterly results, ability to continue and manage its growth,
liquidity and other capital resources issues, competition and the other factors
discussed in detail in the Company's filings with the Securities and Exchange
Commission.
Item 1. Description of Business.
History And Organization
Heroes, Inc. ("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
gas exploration activities.
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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 Spherus
Technologies, Inc. ("Spherus"), a Georgia corporation, and the Company, all of
the outstanding shares of common stock of Spherus were converted into the right
to receive 12,319,461 shares of the Company's Common Stock in a transaction in
which the Company 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 the outstanding Common
Stock of the Company following the transaction.
On December 4, 2000, the Company changed its name to Heroes, Inc. Since
that time, the Company has conducted business providing single-source,
media-technology and curriculum-enhancement solutions to schools. Heroes is a
technology-driven company that specializes in delivering educational content to
school classrooms. It provides media-technology and curriculum enhancement
solutions to kindergarten through twelfth grade public and private schools.
Additionally, Heroes is positioning itself 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, the Company 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 with Stages 2 and 3
anticipated to be completed over the next several years. The Company will
maintain responsibility for continuity and contract fulfillment for the MRESAnet
project and has 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.
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
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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.
Our sales force is currently working to enroll individuals as well as
local and Internet merchants in our fundraising program. The program will allow
schools to receive a certain percentage of the proceeds from their community's
purchases at the participating merchants. We intend to encourage merchants to
participate in our program by providing them with certain transaction services
and products. We plan to generate revenues through our fund raising program by
receiving a commission from participating merchants on each purchase by an
enrolled individual.
The 200,000-300,000 volunteers to be trained by Heroes staff will
solicit parents, grandparents and other family members to join the program on
behalf of the schools and their kids. This is a very effective program for both
the consumer and commercial markets. The participating commercial entity (such
as AT&T) is assured of having a targeted marketing and sales force effort
promoting its products at a low customer acquisition cost. Since this is a
cause-related marketing approach, with the interests of children and education
at heart, consumer retention should be very high. Furthermore, through our
relationships with AT&T and Bidland Systems, we intend to resell a number of
services (such as AT&T Internet access) under the name "Children's Heroes,"
leveraging our relationships with end-user customers and increasing our
revenues.
Other product and service offerings include a Children's Heroes brand
AT&T Internet access product competitively priced to yield $5 per month per
subscriber to the child's school and his or her college fund. In the near
future, the company hopes to offer a broadband product that will yield $12 per
month.
The Company is an e-learning integrator and facilitator for K-12
students, parents and teachers. Our focus is on developing relationships to
build out the K-12 market at the grassroots community level. First we create new
sources of funding for educational institutions, then work closely with the
schools to apply that funding to facilitate improved learning for every student.
Management believes that this combination will create a groundswell of demand
for our services in potentially every community in the United States.
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- Our resources include a variety of learning enhancement tools,
educational materials, video libraries, programs and
multimedia resources. We can provide turnkey systems including
equipment, networks, training and support, delivering
curriculum-enhancing multimedia content and lesson planning
tools directly to the classroom. We believe that industry
leaders must partner with educators and school officials at
all levels in order to bring new and improved learning
capabilities to the classroom. Teachers must be free to teach
without burdensome technological encumbrances, and students
must have ready access to effective learning resources to be
prepared for the 21st century marketplace. Additionally,
school administrators must be able to optimize budget dollars
to improve the quality of education everywhere. We can provide
schools with extraordinary learning content, cutting edge
technology and point-and-click simplicity through the model
project we developed for MRESAnet.
Services and Products
We currently provide and/or facilitate, or plan to provide and/or
facilitate, the following services and products:
- Online Procurement
- K-12 School Fundraising
- 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
- 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. Our revenues are
derived from:
- Children's Heroes fundraising services:
- Membership subscriptions through credit card
registration
- Telecom subscriptions through ISP, cellular, and
filtering
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- Click-on e-commerce rebates
- Point-of-Sale commerce rebates
- Portal subscription services
- Merchant acquisition and transaction services
- Subscription-based services for enhanced education resources
for consumers and customized solutions for entire schools and
districts
- Revenue sharing partnerships and strategic alliances
- E-procurement for schools as well as merchant and corporate
accounts
- Continued existing revenue through the expansion of the e-rate
program
By the end of 1999, the Heroes, Inc. educational product offering was
installed in over 192 schools. In 2000, the the Company 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
seek to systematically develop other markets for it and expand the Company. The
Company intends to adopt a rapid growth strategy, launching in several markets
during 2001 and 2002.
Parent-driven fundraising expands our current business model from the
school into the surrounding community. The Company's 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 allows us to use our revenue generation business model to
fuel the deployment of educational content services. Leveraging its appeal, we
will 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,
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schools, and merchants, thus allowing continued avenues for the up-selling of
additional educational products and services.
Other growth strategies include:
- Growth through innovative outsourcing of the primary sales
functions through regionalized or localized independent
contractors, who can enhance and further our business goals;
- Growth through direct sales in cases where specific learning
sales opportunities are evident;
- Growth through relational channels resulting from established
relationships with various industry connections; and
- 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, the Company had 22 full-time employees and two
consultants. We currently have 14 full time employees and five consultants, in
addition to our subcontractors, through whom we presently deliver most of our
services.
Risk Factors
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
As of March 15, 2001, we had $21,497.07 in cash. 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.
CURRENT TRADING MARKET FOR OUR SECURITIES.
Our common stock began trading in May 2000 on the OTC Bulletin Board ("OTCBB"),
operated by NASDAQ, under the symbol PNAC. As of December 2000, our symbol
changed to HERS. No assurance can be given that an active trading market in our
securities will be sustained.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY.
Our market is characterized by rapidly changing technologies, frequent new
service introductions and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our network. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new
features, content or network services. In addition, our new enhancements must
meet the requirements of our current and prospective users and must achieve
significant market acceptance. We could also incur substantial costs if we need
to modify our service or infrastructure to adapt to these changes.
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY.
Because our current operating business, operating under the name Heroes, Inc.,
was established in 1998 and did not commence material operations until 1999, we
have a limited operating history on which investors can base an evaluation of
our business and prospects. Our income potential is unproven and our business
model is unique and will continue to evolve. With the purchase of Children's
Heroes, we intend to deploy a nationwide grass roots and on-line marketing
system. We hope to generate revenue through subscriptions and transactions with
local and Internet merchants as well as schools/youth sports parents in our
proprietary registration program. This business plan is unproven and we can
provide no assurances that it will be successful or generate revenue for the
Company. An investor in our common stock must carefully consider the risks and
difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new and
rapidly evolving market. Our business strategy may not be successful and we may
not successfully overcome these risks.
WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR EARLY STAGE OF
DEVELOPMENT LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY.
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Our quarterly and annual operating results are likely to fluctuate significantly
in the future due to a variety of factors, many of which are outside of our
control. Factors that might cause quarterly fluctuations in our operating
results include the factors described in the subheadings below. To respond to
these and other factors, we may need to make business decisions that could
impact our quarterly operating results. Most of our expenses, such as lease
payment obligations, employee compensation and rent, are relatively fixed in the
short term. Moreover, our expense levels are based, in part, on our expectations
regarding future revenue levels. As a result, if total revenues for a particular
quarter are below our expectations we could not proportionately reduce our
operating expenses for that quarter. Therefore, this revenue shortfall would
have a disproportionate effect on our expected operating results for that
quarter. Consequently, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful, and should not be viewed as
indicators of our future performance. In addition, during future periods our
quarterly or annual operating results may fail to meet the expectations of
securities analysts or investors. In this case the trading price of our common
stock would likely decrease.
OUR BUSINESS AND FUTURE REVENUE GROWTH WILL SUFFER IF WE FAIL TO RETAIN AND GROW
OUR CUSTOMER BASE.
The success of our business will depend on our ability to add customers. Our
ability to grow our customer base depends largely on our ability to deploy our
network to additional schools. If we are unable to rapidly deploy our network to
a large number of additional schools, we will not be able to grow our core
school user base, and our ability to generate revenue and implement our strategy
will be limited.
WE ARE DEPENDENT ON THIRD PARTIES TO DEPLOY OUR NETWORK AND SUPPORT IT ONCE
INSTALLED.
We plan to deploy our network to additional schools across the country. We have
used, and plan to continue to use, third parties such as OneWeb Systems, AT&T,
and InfoSpace, Inc. to install and support the Heroes, Inc. network. Any changes
in the third parties we contract with to install and support our network could
cause delays in the deployment of the Heroes, Inc. network and any inability to
install schools according to our plan could limit revenue generated from
possible sponsorships, e-commerce and network services. Further, if we do need
to hire substitute or additional third-party installers of our network we cannot
assure you that we will be able to do so on terms as favorable as our current
arrangements, or at all, which could result in higher installation costs to us
as well as potential delays in our deployment. We also rely on third parties to
provide the majority of support necessary to maintain the Heroes, Inc. network
once installed. Any inability to maintain or delays to the maintenance of this
equipment could lead to lower revenue.
REGULATORY AND LEGAL ISSUES SPECIFIC TO THE INTERNET.
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The Internet is the subject of an increasing number of laws and regulations.
These laws or regulations may relate to liability for information retrieved from
or transmitted over the Internet, online content regulation, user privacy,
taxation and the quality of products and services. In addition, these new laws
have not yet been interpreted by the courts, and consequently their
applicability and reach are not defined. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property is not
clearly defined.
SCHOOLS MAY USE ALTERNATIVE MEANS TO ACQUIRE INTERNET ACCESS OR CONDUCT FUND
RAISING, WHICH COULD REDUCE OUR POTENTIAL CUSTOMER BASE AND MAY LEAD TO LOWER
THAN EXPECTED REVENUES.
An immediate attraction of our network is immediate access to media via the
Internet. However, for a variety of reasons, schools may decide to use other
methods to acquire Internet access and/or conduct fund raising. If schools
decide to use means other than deployment of our network, it will limit our user
base, and consequently we will have lower than expected revenues. Similarly, if
schools decide to use alternative methods to raise funds, it will limit our
customer base and we will have lower than expected revenues.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WE
CURRENTLY NEED.
We expect to use existing cash for general corporate purposes, including
expanding our sales and marketing activities, continuing investments in
technology and product development and other capital expenditures, as well as
working capital and other corporate expenses. Our cash requirements are large
and depend on several factors, including cash outflows due to lease obligations,
the rate of expansion of our school base, the availability of equipment leases
on competitive terms, our success in generating revenues, the growth of sales
and marketing, and other factors. If capital requirements vary materially from
those currently planned, we may require additional financing sooner than
anticipated.
Tampa Bay Financial, Inc., a large shareholder, has provided capital to us in
the last 15 months. Except as provided in the Merger Agreement between Heroes,
Inc., and Spherus Technologies, Inc., Tampa Bay Financial, Inc. is not obligated
to make additional capital available to us.
WE ARE DEPENDENT ON THE CONTINUED GROWTH IN USE AND POPULARITY OF OUR NETWORK
AND THE INTERNET BY OUR USERS AND OUR ABILITY TO SUCCESSFULLY ANTICIPATE THE
FREQUENTLY CHANGING TASTES OF OUR USERS.
Our business is unlikely to be successful if the popularity of the Internet and
related media in schools as an educational tool and among students in general
does not continue to increase. Even if the popularity of the Internet and
related media does increase, the
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success of our network in particular depends on our ability to anticipate and
keep current with the frequently changing preferences of our users. Any failure
on our part to successfully anticipate, identify or react to changes in styles,
trends or preferences of our users would lead to reduced interest in and use of
the Heroes, Inc. network.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER OUR
NETWORK.
We may be subject to claims relating to content that is published on or
downloaded from the Heroes, Inc. network. Such claims might include defamation
or trademark infringement and may involve costs to defend potential claims or to
indemnify us for all liability that may be imposed. In addition, any claims like
this, with or without merit, could require us to change our network in a manner
that could be less attractive to our customers and would result in the diversion
of our financial resources and management personnel.
WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE
RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US.
We are dependent on various third parties for software, systems and related
services. Several of the third parties that provide software and services to us
have a limited operating history, have relatively immature technology and are
themselves dependent on reliable delivery of services from others. As a result,
our ability to deliver various services to our users may suffer due to the
failure of these third parties to provide reliable software, systems and related
services to us. Additionally, we make seek to contract with alternative third
parties to the ones we have formerly used, which may or may not have a negative
effect on our operations.
FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES.
We plan to expand our operations. We anticipate that further significant
expansion will be required to grow our customer base if we are to be successful
in implementing our business strategy. We may not be able to implement
management information and control systems in an efficient and timely manner,
and our current or planned personnel, systems, procedures and controls may not
be adequate to support our future operations. If we are unable to manage growth
effectively, our business would suffer.
THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY.
Our success depends to a significant degree upon the continued contributions of
the principal members of our sales and management departments, many of whom
perform important management functions and would be difficult to replace. The
loss of the services
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of any key personnel, particularly senior management, could seriously harm our
business.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OB JECTIVES.
We may not be able to attract and retain the necessary personnel to accomplish
our business objectives, and we may experience constraints that will adversely
affect our ability to deploy the Heroes, Inc. network in a timely fashion or to
support our users and operations. Recruiting qualified personnel is an intensely
competitive and time-consuming process.
Item 2. Description of Property.
As of December 31, 2001, the Company has an office located at 1980
Gallows Road, Suite 200, Vienna, Virginia 22182. The Company entered into a
lease on October 1, 2000 for such office, and the lease expires on November 30,
2002. The rental payments under the lease are $11,424 per month plus annual
increases of 4%. The Company also owns some laptop and desktop computers, which
constitute its only property.
Item 3. Legal Proceedings.
Lynxus, Inc. v. Penn-Akron Corporation n/k/a Heroes, Inc. On September
7, 2001, a subcontractor of the Company, Lynxus, Inc., filed suit against the
Company in
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the United States District Court for the Northern District of Georgia. The claim
arises out of a network implementation agreement between the Company and
Metropolitan Regional Education Services Agency ("MRESA"). The Company is the
general contractor under the agreement, and Lynxus agreed to act as a
subcontractor on the project. Lynxus claims that the Company has breached the
subcontract, that Lynxus has performed work under the contract, and that Lynxus
is entitled to approximately $483,000 plus interest.
The Company has denied liability and has asserted a counterclaim for
damages the Company has suffered as a result of breach of the subcontract by
Lynxus. The Company believes its 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. The Company intends to pursue
its claims against Lynxus in the bankruptcy.
Maurice Delamont v. Penn-Akron Corporation n/k/a Heroes, Inc. On August
24, 2000, Maurice Delamont, a former employee of the Company, 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 the Company owes 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. The Company has asserted a
counterclaim against Mr. Delamont, claiming that he breached his fiduciary duty
and his employment agreement with the Company. The Company maintains that its
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.
Heroes, Inc. v. Sanswire.Net. The Company is the plaintiff in an action
against Sanswire.Net in the Superior Court of Fulton County, Georgia. The
Company 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. Because no answer has yet been filed in the lawsuit, the Company is
unaware of what defenses or counterclaims may be asserted by Sanswire.Net.
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, the Company obtained the written consent of the holders
of a majority of the outstanding shares of common stock of the Company for the
approval of the change in the Company's name from Penn Akron Corporation to
Heroes, Inc. On that date, the number of shares of the Company's common stock
outstanding was 34,787,742 shares; the number of shares that consented to
approve the aforementioned actions was
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17,436,448, representing 50.1% of the outstanding shares of the Company. The
Company 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
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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 web site.
As of March 31, 2001, there were 2,450 owners of record of the
Company's common stock.
The Company has never paid any cash dividends. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors of the Company, and will depend upon the Company's earnings, its
capital requirements and financial condition, and other relevant factors.
Management does not expect to declare dividends in the foreseeable future.
Sales of Unregistered Securities
Pursuant to the Merger Agreement with Spherus, in March 2000, the
Company issued 15,693,581 shares of restricted Common Stock to the former
stockholder of Spherus. The Company also issued 1,000,000 shares of restricted
Common Stock to Tampa Bay Financial, Inc., as compensation for financial
consulting services in connection
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15
with the merger. Such shares were issued to a limited number of sophisticated
investors, and the Company believes that such issuance was exempt from
registration under Section 4(2) of the Securities Act of 1933.
Additionally, in March 2000, the Company 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, the Company 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 the Company believes that such issuance was exempt from
registration under Section 4(2) of the Securities Act of 1933.
On October 27, 2000, the Company 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 the
Company believes 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, the Company 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 the Company believes 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.
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, the Metropolitan Regional
Educational Service Agency ("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,
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16
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 believe that we will expand into a number of states and school
districts within the next 12-24 months.
In August 2000, Arthur Andersen, LLP, began an audit of MRESA. The
MRESA contract is 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. We
anticipate that payment from the SLD for past services performed by us will be
forthcoming, subject to the approval by both the FCC and the SLD to continue the
MRESA project. This is our first invoice to the SLD for Year 2, and there will
be additional invoices for work performed. The total amount of these invoices to
the SLD for Year 2, as per our agreement, will eventually exceed $7,000,000.
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 intend 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
17
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. We are currently in the process of negotiating agreements with
replacement vendors.
Our total cost of sales decreased to $6,506,416 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 $5,327,869 for the year ended December 31, 2000 from
$2,256,502 for the same period in 1999. This is due to 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 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.
On September 7, 2000, Lynxus, Inc. ("Lynxus"), one of our contractors,
filed Civil Action No. 008872-1 ("Lynxus Suit") against us in the State Court of
Fulton County, Georgia. The Lynxus Suit seeks $484,943.13 plus interest, costs,
and attorney fees. On October 10, 2000, we filed our affirmative defenses,
answer and counterclaim to the Lynxus Suit ("Counterclaim"). In the
Counterclaim, we deny liability to Lynxus, seek damages in excess of $3,300,000,
plus payment of all costs, expenses, and attorney fees. We have removed the case
to federal court and discovery is just beginning at the time of this filing.
Lynxus has failed to perform its obligations under its agreement with us, and
has failed and refused to cure its default within the time permitted by the
agreement and, therefore, we have formally terminated our agreement with Lynxus.
In February 2001, Lynxus filed for Chapter 7 Bankruptcy. Consequently, we
believe that the Lynxus civil lawsuit will be dismissed. We are pursuing all
legal recourse under the Bankruptcy laws to recover all monies and equipment
owed by Lynxus to us.
As a result of the termination of Lynxus from our MRESA contract, we
are responsible for implementing and installing an internet-based video
distribution and multi-media network for installation at elementary and
secondary schools participating in the e-rate program under contract with MRESA.
Our contract with MRESA also includes a 36-month training program and on-going
maintenance. We will continue the implementation when permitted by the FCC and
the SLD to do so.
Liquidity and Capital Resources
Our total current assets increased to $9,384,434 at December 31, 2000
from $4,485,516 at December 31, 1999. This increase is due primarily to an
increase in
15
18
accounts receivable resulting from performance under our contract with MRESA.
Our total current liabilities increased to $10,623,256 as of December 31, 2000
from $4,748,766 at December 31, 1999. This increase is primarily due to an
increase in accounts payable, primarily payable to our subcontractors, and the
Company's Line of Credit with PrinVest Corp. However, due to the termination of
our main subcontractor, we believe that our accounts payable will fall
dramatically, resulting in a stronger balance sheet and greater liquidity for
the company. The resulting working capital deficit decreased to ($1,238,822) at
December 31, 2000 from ($263,250) at December 31, 1999. We expect to collect the
full amounts owed to the Company by both the SLD and MRESA, subject to the
approval of the FCC and the SLD.
Our total stockholders' equity decreased to ($969,053) at December 31,
2000 from ($253,876) at December 31, 1999. This decrease is due to the
considerable net loss for the year ended December 31, 2000.
In June 2000, we negotiated a new line of credit with PrinVest Corp
with a maximum line of credit of $3,500,000. We have drawn down approximately
$3.13 million on this facility. As of January 5, 2001 we are in default under
the PrinVest Corp agreement due to failure to remit payments when due. As a
result of such default, the outstanding balance of $3,131,190, was accelerated
and became immediately due on January 5, 2001.
We had $70,268 in cash as of December 31, 2000, and $21,497.07 as of
March 15, 2001. Our continuation as a going concern is dependent upon our
ability to obtain additional working capital. Tampa Bay Financial, Inc., has
agreed in principle to fund us with up to $1.2 million, our working capital
needs over the next 90 days. Tampa Bay Financial, Inc., may elect to cease
providing such financing at any time. If other 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.
16
19
Item 7. Financial Statements.
HEROES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
17
20
HEROES, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
CONTENTS
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS:
Balance Sheets
Statements of Income
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
18
21
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors
Heroes, Inc.
We have audited the balance sheets of HEROES, INC. as of December 31,
2000 and 1999, and the related statements of income, changes in stockholders'
equity 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.
Except as discussed below with respect to 1999, we conducted our audits
in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit 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 report.
As discussed in Note 2 to the financial statements, the Company has
significant uncertainty relating to the valuation of certain assets and the
completeness of certain liabilities.
Because of the significance of the matter described in the preceding
paragraph, we are unable to express and we do not express, an opinion on the
2000 financial statements referred to in the first paragraph above.
As of December 31, 1999, we were unable to obtain a confirmation for
the receivable balance of $2,972,772 from MRESA; nor were we able to satisfy
ourselves as to the carrying value of the receivable by other auditing
procedures.
In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had we been able to examine evidence
regarding the receivable as of December 31, 1999, the 1999 financial statements
referred to in the first paragraph above present fairly, in all material
respects, the financial position of Heroes, Inc. as of December 31, 1999, and
the results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
19
22
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company has suffered recurring losses from operations,
it current liabilities exceed its current assets, and significant assets and
liabilities are subject to significant change in the near term, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 4. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Windham Brannon, P. C.
Atlanta, Georgia
March 21, 2001
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23
HEROES, INC.
BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
2000 1999
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 70,268 $ 100
Accounts receivable 8,859,617 3,981,395
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 318,585 224,000
Deferred financing costs -- 45,833
Other current assets 48,222 --
---------- ----------
Total Current Assets 9,384,434 4,485,516
---------- ----------
EQUIPMENT, less accumulated depreciation of
$9,465 as of December 31, 2000 and $1,065
as of December 31, 1999 269,669 4,258
---------- ----------
OTHER ASSETS:
Other assets 100 5,116
Prepaid maintenance and training costs - long-term 191,997 415,997
---------- ----------
Total Other Assets 192,097 421,113
---------- ----------
Total Assets $9,846,200 $4,910,887
========== ==========
(Continued)
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
BALANCE SHEETS
December 31, 2000 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
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' EQUITY:
Common stock 100 million shares authorized,
$.001 par value, 35,840,246 shares issued
and outstanding at December 31, 2000; 1,000
shares no par value authorized, 500 shares
issued and outstanding at December 31, 1999 35,840 400
Paid-in capital 4,646,253 --
Retained earnings (deficit) (5,651,146) (254,276)
------------ ------------
Total Stockholders' Equity (969,053) (253,876)
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,846,200 $ 4,910,887
============ ============
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
STATEMENTS OF INCOME
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 6,442,523 17,606,527
Network operations center 22,745 452,792
Other 41,148 32,219
----------- -----------
Total Direct Costs 6,506,416 18,091,538
----------- -----------
GROSS PROFIT (LOSS) (69,001) 2,006,431
----------- -----------
EXPENSES:
Assignment fees -- 129,075
Bad debt expense 216,600 --
Consulting 523,248 --
Depreciation and amortization 54,233 230,232
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.
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26
HEROES, INC.
STATEMENTS OF INCOME
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 229,005 43,705
------------ ------------
Total Expenses 5,327,869 2,256,502
------------ ------------
LOSS BEFORE PROVISION FOR INCOME
TAXES (5,396,870) (250,071)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (5,396,870) $ (250,071)
============ ============
NET LOSS PER SHARE:
Basic $ (0.19) $ (0.02)
============ ============
SHARES USED IN COMPUTING NET LOSS
PER SHARE:
Basic 27,752,906 10,194,826
============ ============
The accompanying notes are an integral part of these financial statements.
26
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HEROES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock
------------ Retained
Paid-in Earnings Subscription
Shares Amount Capital (Deficit) Receivable
------ ------ ------- --------- ----------
BALANCE at January 1, 1999 500 $ 400 $ -- $ (4,205) $ --
Net loss -- -- -- (250,071) --
---------- ------- ----------- ----------- -----------
BALANCE at December 31, 1999 500 400 -- (254,276) --
Conversion of note payable to
Spherus stock 500 -- 250,000 -- --
Shares of Penn-Akron
outstanding at merger 10,542,581 -- (800) -- --
Recapitalization for change in
par value -- 10,143 (10,143) -- --
Shares issued in merger with
Spherus Technologies, Inc. 17,143,581 17,144 476,952 -- --
Subscription receivable for
shares sold 4,500,000 4,500 1,995,500 -- (2,000,000)
Payment of subscription
receivable -- -- -- -- 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 -- --
Net loss -- -- -- (5,396,870) --
---------- ------- ----------- ----------- -----------
BALANCE at December 31, 2000 35,840,246 $35,840 $ 4,646,253 $(5,651,146) $ --
========== ======= =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
27
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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 contracts $ 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 --
Cash received for note payable to stockholder 250,000 --
Cash received for 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.
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29
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 $(5,396,870) $ (250,071)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 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 (4,878,222) (3,970,973)
Prepaid maintenance costs 129,415 (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, the Company issued 4.5 million
shares of common stock for a subscription receivable of $2 million.
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 1,469,834
shares of common stock for services at $.10-$.83 per share or $1,938,397
expense.
During the year ended December 31, 2000, the Company issued 1,495,750
shares of common stock for the purchase of Children's Heroes, Inc. to former
owners and creditors.
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.
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30
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. (the Company) 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 December 7, 2000, the Company changed its name from Penn-Akron
Corporation to Heroes, Inc.
On March 13, 2000, the Penn-Akron Corporation (Penn-Akron) changed its
domicile from the state of Delaware to Nevada and changed its authorized common
capital stock from 10,000,000 shares with a par value of $0.1 to 100,000,000
shares with a par value of $.001. On March 24, 2000, Penn-Akron acquired all the
outstanding stock of Spherus Technologies, Inc. (Spherus), doing business as
globalseer.com, 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 common stock of the
Penn-Akron, including 1,000,000 shares issued as commission for the acquisition.
After the acquisition, the former stockholders of Spherus had received over 50%
of the outstanding shares of Penn-Akron.
The financial statements for 1999 include the accounts of Spherus only.
At the date of merger, Penn-Akron had $800 of liabilities and ($800) in equity
consisting of $942,469 in paid in capital and ($943,269) in retained earnings
(deficit). There was no activity in Penn-Akron for the prior 12 months.
On October 27, 2000, the Company 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 Penn-Akron's common stock to former
owners and creditors of CHI. Total liabilities of CHI were $235,100 and 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. The Company has expensed all costs
incurred in developing the marketing plan for the CHI business.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management 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
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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31
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
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. The revenue and expense related to the training, maintenance and
support have been deferred and will be amortized over the 36-month period. The
Company estimated that no gross profit needs to be deferred related to the
training and maintenance agreements.
Deferred financing costs are being amortized over the term of the line
of credit utilizing the straight-line method.
Equipment is stated at original cost. Depreciation is provided using
the straight-line method over the estimated useful lives of three to five years.
Basic income (loss) per share is calculated by dividing net income
(loss) by the weighted average shares outstanding after the stock split. The
Company issued contingent shares to three stockholders on January 1, 2000 to be
earned over 5 years. Because these contingent shares and stock options issued
are antidilutive in nature, the Company does not report fully diluted loss per
share.
The Company accounts 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 the Company's
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," established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. The Company has elected to use the intrinsic value
method of accounting as described above, and has adopted the disclosure
requirements of SFAS No. 123.
2. CONTRACT WITH METROPOLITAN REGIONAL EDUCATIONAL SERVICE AGENCY
The Company has 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") to
be installed in phases. The contract may collectively include up to
approximately 700 schools in 14 school districts primarily in the Atlanta
Metropolitan area and surrounding counties, plus Savannah and Brunswick.
31
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HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
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. The Company received a funding
letter from the SLD for Year/Phase 1 and Year/Phase 2.
A summary of the contract terms for each phase is as follows:
December 31, 2000 December 31, 1999
(Year/Phase 2) (Year/Phase 1)
--------------------------------------------
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 Company 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.
During 1999 (Year 1), Lynxus completed the installation of 152 schools. Lynxus
has completed the initial site surveys and purchased the equipment for
installation at the 71 schools for Year 2. Management estimates that this
approximates one-half of the work involved in the complete installation,
accordingly one-half of the revenues and expenses have been recognized in the
December 31, 2000, income statement.
In September 2000, the Company terminated its subcontract with Lynxus.
The Company is being sued by Lynxus for payment of outstanding invoices of
approximately $500,000. The Company has a counterclaim against Lynxus in excess
of $3.3 million for funds relating to Year 2 and prepaid training, maintenance
and support related to Year 1. Lynxus filed for bankruptcy in 2001. As of March
21, 2001, the bankruptcy is still pending.
The Company has entered into a contract with Domain Networks to provide
re-work and ongoing delivery, installation and testing of software and hardware
under current contracts with MRESA. At December 31, 2000, an accrual of $58,000
had been made for estimated re-working costs of previously completed contracts.
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:
32
33
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
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 the Company of approximately $18 million. In 2000
and 1999, 58% and 88%, respectively, of revenues were funding received from the
SLD.
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 the Company are included in this $5.8 million.
Because of the uncertainties related to the Lynxus bankruptcy and the
MRESAnet 2000 Project matching requirements, recorded accounts receivable,
accounts payable and accrued re-working costs are subject to significant change
in the near term. Because the ultimate outcome of these matters is not
reasonably determinable as of March 21, 2001, no reserves for uncollectible
amounts or changes in accounts payable have been recognized.
3. CONTINGENCIES
The Company is also being sued by a stockholder who was a former
employee for approximately $100,000 for termination of his employment contract.
The Company has accrued for the compensation element of the claim in these
financial statements. The claim also seeks redemption of his common stock for $1
million. Management of the Company believes that the redemption claim against
the Company is without merit. Because the ultimate outcome of this matter is not
reasonably determinable as of March 21, 2001, the Company has not accrued for
the redemption of the common stock.
On March 21, 2001, the Company was notified of its default under the
terms of a licensing contract related to Children Heroes. The licensee is
demanding immediate payment of $55,000, which it says is in arrears. If the
Company fails to pay this sum by April 5, 2001, the licensee has threatened a
lawsuit. The Company vigorously disputes that they are in arrears with respect
to these fees. The Company also believes that the licensee has not performed its
obligations under the contract, and will contest any lawsuit as a result of this
matter.
33
34
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
4. GOING CONCERN
As displayed in the accompanying financial statements, the Company has
suffered recurring losses from operations, its current liabilities exceed its
current assets, and significant assets and liabilities are subject to
significant change in the near term. These matters raise substantial doubts
about the ability of the Company to continue in existence as a going concern.
Management plans with respect to continuing as a going concern include primarily
two areas. First, to devote appropriate resources to obtain a quick and
favorable resolution of the matters related to its MRESAnet 2000 Project.
Second, to begin substantial operations in the Children's Heroes division, which
management believes will provide a profit to the Company. Management recognizes
that additional working capital will be required for the Company to be
successful in achieving these goals. Accordingly, continuation of the Company as
a going concern is dependent upon obtaining additional working capital, either
through additional equity funding or loans with appropriate repayment terms.
By letter dated March 1, 2001, the primary investor of the Company has
committed to invest an additional $1.2 million over the next 90 days.
5. LINE OF CREDIT
At December 31, 1999, the Company had an $11,000,000 line of credit
through March 2000 with PrinVest Corp. The agreement contained covenants the
Company must meet on a monthly basis. The Company's cash, accounts receivable,
equipment, contract rights, and all other assets were used to secure the
agreement. Interest was payable at Prime plus 5.75% per annum, calculated on a
per diem basis, on the net outstanding balance of monies advanced to, or on
behalf of the Company. 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.
The Company signed a new agreement with PrinVest Corp. on June 7, 2000,
for a maximum line of credit of $3,500,000. This agreement includes a commitment
fee of 3% at the time of the initial funding, a credit facility fee of 1% of the
credit line, and a servicing fee of 1% on the outstanding amount. Interest is
payable at prime plus 2% per annum on the outstanding balance. The covenants and
collateral discussed above also apply to the new agreement. The Company received
notice on January 5, 2001, that it is 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.
34
35
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
6. INCOME TAXES
Income tax expense for the years ended December 31, 2000 and 1999, is
made up as follows:
2000 1999
----------- ---------
Current $ -- $ --
Deferred (2,023,000) (360,000)
Change in valuation reserve 2,023,000 360,000
----------- ---------
Income tax expense $ -- $ --
=========== =========
There are no temporary differences giving rise to deferred tax assets
and liabilities. At December 31, 2000, the Company had approximately $6,100,000
of unused operating tax loss carryforwards. Approximately $710,000 of the
remaining loss carryforwards expire from 2001 through 2002. The remaining loss
carryforward ($5,390,000) expires from 2014 through 2015. Because utilization of
the income tax loss carryfoward is not assured, a valuation reserve in an amount
equal to the net deferred tax asset has been provided.
At December 31, 2000 and 1999, deferred tax assets and liabilities
consisted of the following:
2000 1999
----------- ---------
Deferred tax asset:
Operating loss carryforward $ 2,383,000 $ 360,000
Valuation reserve (2,383,000) (360,000)
----------- ---------
$ -- $ --
=========== =========
7. SUBSCRIPTION RECEIVABLE
In March 2000, the Company acquired certain contract rights to 16 1/2
acres of commercial property (with an estimated value by management of
$2,800,000 subject to a mortgage of $800,000) from an existing stockholder for
the issuance of 4.5 million post split shares of the Company. The Company had
the right to sell the property and realize net cash proceeds of at least $2
million. The Company could elect not to sell this property, whereby the
stockholder would be obligated to purchase the property from the Company at a
net purchase price of $2 million. As of December 31, 2000, the stockholder had
contributed $2 million to satisfy this obligation.
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36
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
8. EMPLOYMENT AGREEMENTS
At December 31, 2000, there were employment agreements which 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,
the Company agreed to pay another employee/stockholder a bonus of $220,000 for
the year ended December 31, 1999. The Company 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.
9. STOCK TRANSACTIONS, GRANTS AND OPTIONS
On April 10, 1987, Penn-Akron completed a reverse common stock split of
selected shares, by the consent of the effected stockholders, amounting to two
shares of the outstanding stock for one share, resulting in a reduction of
3,152,877 in the outstanding shares. The available records have been
insufficient to verify the completion of the stock split. There were other
errors in the Penn-Akron stockholder records during the years 1953 through 1981
in which some of the stockholders were erroneously deleted from the stockholder
list. Management has issued 687,500 shares into a reserve account to be used in
the event of any valid claims from the possible errors outlined above.
Management believes the reserve of shares of 687,500 is adequate for any
possible future claim.
As part of the merger between the Company and 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 the Company shall issue
four additional shares of its common stock among the eligible stockholders for
every dollar of annual income (as defined in the agreement) achieved by the
Company for each such fiscal year in excess of the amount necessary to earn
$0.15 per share for the Company in the year. No additional shares relating to
this agreement have been earned through December 31, 2000.
As part of the acquisition of CHI, the Company issued 1,260,750 shares
of common stock to certain creditors and former employees of CHI for release
from liability. The Company entered into employment agreements with three
employees of CHI for an initial term of three years and automatically renewing
for two additional years. The employees will receive a base salary to be
increased by at least 10% annually, quarterly cash bonus equal to from 2.7% to
4.2% of the base salary, and incentive compensation under arrangements to be
implemented by January 31, 2001. The Company also granted these employees stock
options to purchase 1.8 million common shares each at various exercise prices,
dates and vesting periods.
36
37
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
The Company has a stock option plan that provides for the granting of
stock options to officers and key employees. The objectives of these plans
include attracting and retaining the best personnel, providing for additional
performance incentives, and promoting the success of the Company by providing
employees the opportunity to acquire common stock. The Company is 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. The Company 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 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.
The status of the Company's 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
The Company accounts for its 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
37
38
HEROES, INC.
------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
at the date of grant. Had compensation expense for the Company's 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," the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below.
2000 1999
------------- -----------
Net loss
As reported $ (5,396,870) $ (250,071)
Pro forma (5,401,370) (250,071)
Loss per share
As reported $ (0.19) $ (0.02)
Pro forma (0.19) (0.02)
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 the Company's
stock options outstanding at December 31, 2000, is as follows:
Weighed
Average
Contractual Weighed Weighed
Range of Outstanding Periods In Average Exercisable at Average
Exercise Price at 12/31/00 Years Exercise Price 12/31/2000 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
============= ========== ==== ====== ======== ======
10. INVESTMENT
The Company invested $200,000 in a promissory note of Sanswire.net,
LLC, an organization with which the Company was considering doing business.
Interest accrued at 10% per annum. On December 31, 2000, the Company formally
demanded payment of the $200,000 plus accrued interest of $16,600. The Company
has fully reserved for this receivable.
38
39
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
11. LEASE OBLIGATIONS
The Company has entered into a lease for office space in Virginia. This
lease began on October 1, 2000, and expires on November 30, 2002. The future
minimum lease payments under this lease are as follows:
2001 $ 138,459
2002 131,641
---------
$ 270,100
=========
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40
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
NONE
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Management
Members of the Company's Board of Directors are elected by the
Company's shareholders at each annual meeting of shareholders, to hold office
until their successors are elected and qualified. The executive officers are
appointed by the Board of Directors of the Company and hold office at the
pleasure of the Board. Executive officers 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, 2001, certain
information regarding the directors and executive officers of the Company:
Name Age Position
---- --- --------
Amer A. Mardam-Bey 39 Chief Executive Officer, President and Director
Christopher J.S. Baker 36 Chief Financial Officer and Director
Tammy L. Lambert 32 Chief Operations Officer and Director
Christopher R. Smith 39 Director
Carl L. Smith 58 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.
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41
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. Mr. Mardam-Bey has over 18 years of professional
experience. 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, 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.
Responsible for the day-to-day activities, Mr. Mardam-Bey built the structure
and processes necessary to manage the organization's projected growth. He
managed the implementation of the organization's overall objectives, oversaw the
preparation of budgets based on corporate goals and growth objectives. Mr.
Mardam-Bey led the organization through a three-company merger, including the
integration of the various business units, multiple product lines and personnel
resources. One of his key achievements was leading the company to two
extraordinary revenue growth awards, placing 2nd and 5th in 1998 and 1999,
respectively within the top 50 companies in the Greater Washington Metro Area.
Mr. Mardam-Bey holds a BA, in Business Administration for Management and Public
Policy from New England College, New Hampshire/University of Sussex, United
Kingdom; as well as Masters of Business Administration with a concentration in
Marketing and International Business from The American University, Washington
D.C., Kogod College of Business Administration. Mr. Mardam-Bey resigned from his
position at ATCALL on December 7, 1999. In early 2000, it filed for protection
from creditors under the United States bankruptcy laws and was subsequently sold
to Equalnet.
CHRISTOPHER J.S. BAKER, CHIEF FINANCIAL OFFICER AND DIRECTOR. Christopher Baker
joined us in 2000 and serves as our Chief Financial Officer and a member of our
Board of Directors. Mr. Baker is responsible for our day-to-day financial
affairs and reports directly to the Board of Directors. Mr. Baker's duties also
include asset and cash management and allocation, corporate finance and
reporting activities, financial planning and budgeting, investor relations, and
business development. Prior to joining us, Mr. Baker worked with Atlin
Investments from 1997 through 1999, in an entrepreneurial role, where he
structured deals and obtained financing for companies in the high-tech,
Internet, media and real estate industries. Mr. Baker has worked with
institutions, specialist boutiques, venture capital firms and private investors.
Prior to Atlin Investments, Mr. Baker worked directly within the business empire
of a senior member of the Saudi royal family. Mr. Baker was headquartered in
London, England, and worked with and reported directly to the CEO, and was
responsible for investment management, including equity and real estate
investments, acquisitions, and financial placements in conjunction with large
banks and institutions. Baker holds an MBA from the University of Chicago, as
well as a Master's degree (M.Sc) from the London School of Economics, and a BA
(Honours), concentration History and Politics, from the University of York.
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42
TAMMY L. LAMBERT, CHIEF OPERATIONS OFFICER AND DIRECTOR. Since October 2000,
Tammy L. Lambert has served our Chief Operating Officer. Ms. Lambert has over 10
years of operational management experience in the telecommunications, customer
service, and training industries. She also has extensive political and lobbying
expertise, having previously served as the Manager of Government Relations for a
Washington D.C.- based trade association. She holds a Bachelors Degree in both
English and Political Science from St. Mary's College and a Master's
certification in Instructional Systems Design.
Prior to joining Heroes, Lambert co-founded Drawbridge, LLC, a professional
management services firm, specializing in assisting companies in their early
growth stages. At Drawbridge, Lambert advised domestic and international high
technology and educational companies in their sales, marketing and operational
efforts. Before founding Drawbridge, Lambert served as Vice President of
Operations for ATCALL, Inc., a long distance reseller and prepaid services
provider. In this role, she successfully implemented drastic cost reduction
processes, launched an international consultancy and built a state-of-the-art
inbound customer service center that became one of the company's core
competencies.
CHRISTOPHER R. SMITH, DIRECTOR. Christopher R. Smith has been a director since
October 2000. Mr. Smith is a founder and principal of Hallman-Smith Consulting,
Inc. and C.A. Investments, LLC. Mr. Smith is a private equity investment banker
and business consultant. Mr. Smith is currently the Chairman of Hallman-Smith
Consulting, Inc., Atlanta, Georgia. Smith began his career as a principal of an
Atlanta based magnetic media storage facility with 14 franchisees nationally.
Upon sale of the company, Smith subsequently spent eight years with Aluminum
Company of America (Alcoa) as a start-up specialist, creating subsidiaries and
divisions in the manufacturing and distribution sector of the Commercial Rolled
Products and Aerospace Division. Concurrently, Smith and his spouse purchased a
failing software development and network integration firm, F1, Inc. and built a
solid multi-million dollar firm specializing in Local Area Network design and
customized database software applications. After selling F1, Inc., Smith
co-founded several firms in the telecommunications and Internet industry. Smith
was a co-founder of LatCom International, LLC, a prepaid telephone card
manufacturing and distribution firm specializing in the Hispanic markets
throughout the United States. Concurrently, Smith co-founded Rent-A-Line, LLC, a
prepaid local telephone exchange firm (CLEC). LatCom and Rent-A-Line telephone
companies were consequently sold to Charter Communications International, Inc.,
now Telscape Communications (TSCP) NASDAQ, which integrates telecommunications
and Internet facilities throughout Central and South America. Smith joined the
Charter management team for one and a half years, integrating Charter's US
acquisitions operationally as well as participating in the start-up of
subsidiaries for C-Com in Caracas, Venezuela, Panama City, Panama, and Cancun,
Mexico.
CARL L. SMITH, DIRECTOR. Carl Smith has been a director since October 2000. Mr.
Smith is an entrepreneur in marketing, sales and business development. Mr. Smith
has served as the CEO of DNAPrint genomics (and its predecessor in interest)
from 1994 to
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43
present. 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 Boards of Directors of CDX.com, Inc. and American
Communications Enterprises, Inc.
On March 26, 2001, Kenneth M. Herman resigned as a director of the
Company. On March 21, 2001, Christopher Hutcherson tendered his resignation as
President of Business Development of the Company. Mike Galbraith, VP of
Fundraising and Community Outreach, resigned from the Company on March 23, 2001.
On March 23, 2001, the Company terminated the employment of Robert Henslee, the
VP of Technology.
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44
Item 10. Executive Compensation.
The following table sets forth the compensation paid by the Company to
its executive officers in 2000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
------------------- 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.
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45
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, the Company entered into an employment agreement
with Amer A. Mardam-Bey, its 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 chief executive
officer of the Company 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 the Company's 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, the
Corporation granted to Mr. Mardam-Bey 500,000 shares of the Company's common
stock, all of which was vested as of that date. In accordance with the
Penn-Akron Corporation Stock Option Plan, the Company granted to Mr. Mardam-Bey
an option to purchase 400,000 shares of the Company's 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, the Company
granted to Mr. Mardam-Bey an option to purchase 2,100,000 shares of the
Company's 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 Mr. Mardam-Bey's employment is terminated by the Company without
cause, the vesting of all such options shall be accelerated.
The employment agreement prohibits Mr. Mardam-Bey from competing with
the Company for a period of one year after termination of employment. In the
event that his
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46
employment is terminated by the Company without cause and other than as a result
of Mr. Mardam-Bey's 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. The agreement
commenced on January 1, 2000 and expires on April 1, 2002, subject to automatic
renewal for successive one-year periods unless either party elects not to renew
the agreement. The agreement requires Mr. Baker to serve as chief executive
officer of the Company and provides for him a base salary of $110,000 per year.
The employment agreement prohibits Mr. Baker from competing with the
Company for a period of one year after termination of employment. In the event
that his employment is terminated by the Company without cause and other than as
a result of Mr. Baker's death or disability, Mr. Baker 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. Baker, denominated terminations "for
good reason," are deemed to be terminations without cause. Terminations for good
reason include reductions in Mr. Baker's compensation and material diminution of
his authority or duties.
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, 2001 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.
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47
Name And Address Of Amount Of Beneficial
Beneficial Owner (1) Ownership Percent Of Class(2)
--------------------- -------------------- -------------------
John R. Julian 3,798,446 10.6%
Kenneth M. Herman 3,509,231 9.8%
ASFT, Inc. 3,218,739 9.0%
7701 Iguana Drive
Sarasota, FL 34241
Tampa Bay Financial, Inc. 2,916,422 8.1%
355 Interstate Boulevard
Sarasota, FL 34240
Amer A. Mardam-Bey 905,814 2.5%
Christopher J.S. Baker 1,573,336 4.4%
Tammy L. Lambert 666,672 1.9%
Christopher R. Smith 428,000 1.2%
Carl L. Smith 0 0%
All Officers and Directors as a 2,933,814 8.2%
Group (5 persons)
(1) Unless otherwise indicated, address is 1980 Gallows Road, Suite 200,
Vienna, Virginia 22182.
(2) Based on 35,885,754 shares of Common Stock outstanding on the date of
this report.
Item 12. Certain Relationships and Related Transactions.
In March 2000, the Company purchased a 17-acre tract of undeveloped
land in Apex, North Carolina valued at $2,000,000 from DNAPrint genomics, Inc.
(then known as Catalyst Communications, Inc.), for 4,500,000 shares of the
Company's common stock. Carl L. Smith, a director of the Company, is Chief
Executive Officer and a director of DNAPrint genomics, Inc.
In connection with the Merger Agreement with Spherus, in March 2000,
the Company issued 1,000,000 shares of restricted Common Stock to Tampa Bay
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Financial, Inc., a significant stockholder of the Company. Carl L. Smith, a
director of the Company, is a director and officer of Tampa Bay Financial, Inc.
In September and November 2000, the Company 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 the Company's Chief Executive Officer and
President, Amer A. Mardam-Bey, and its 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 the Company as officers.
These fees and expenses were paid by the Company and totaled.
In December 2000, the Company granted Hallman-Smith Consulting, Inc.
200,000 shares of common stock as compensation for management and financial
consulting services. Christopher R. Smith, a director of the Company, controls
Hallman-Smith Consulting, Inc.
In December 2000, the Company 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
the Company's Chief Executive Officer and President, Amer A. Mardam-Bey.
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(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).
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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).
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).
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10.15 Heroes, Inc. 2001 Executive Equity Compensation Plan.
10.16 Employment Agreement between the Company and Christopher J.S.
Baker, executed January 1, 2000
10.17 Employment Agreement between the Company and Kenneth Herman,
executed January 1, 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, President
Date: April 6, 2001
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 April 6, 2001
--------------------------- Officer, Director
Amer Mardam-Bey
/s/ Christopher J.S. Baker Chief Financial Officer, April 6, 2001
--------------------------- Director
Christopher J.S. Baker
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/s/ Tammy L. Lambert Chief Operations Officer, April 6, 2001
-------------------------- Director
Tammy L. Lambert
/s/ Christopher R. Smith Director April 6, 2001
--------------------------
Christopher R. Smith
/s/ Carl L. Smith Director April 6, 2001
--------------------------
Carl L. Smith
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EXHIBIT INDEX
Number Exhibit
------ -------
10.15 Heroes, Inc. 2001 Executive Equity
Compensation Plan.
10.16 Employment Agreement between the Company
and Christopher J.S. Baker, executed
January 1, 2000
10.17 Employment Agreement between the Company
and Kenneth Herman, executed January 1,
2000
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