1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission File No. 0-12597
HEROES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Nevada 11-1843262
------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1980 Gallows Road, Suite 200, Vienna, Virginia 22182
----------------------------------------------------
(Address of principal executive offices)
(703) 761-1900
--------------
(Registrant's telephone number, including area code)
3455 Peachtree Road, NE, 5th Floor, Atlanta, GA 30326
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes[ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
2
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.001 par value per share, 40,285,760 shares issued and
outstanding as of June 11, 2001.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
3
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEROES, INC.
BALANCE SHEETS
ASSETS
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 150 $ 70,268
Accounts receivable 8,859,617 8,859,617
Other receivables 26,596 36,145
Employee advances 4,076 5,025
Refundable deposits 46,572 46,572
Prepaid maintenance and training costs 70,501 318,585
Other current assets 48,222 48,222
---------- ----------
Total Current Assets 9,055,735 9,384,434
---------- ----------
EQUIPMENT, less accumulated depreciation of
$11,565 as of December 31, 2001 and $9,465
as of December 31, 2000 540,813 269,669
---------- ----------
OTHER ASSETS:
Other assets 100 100
Prepaid maintenance and training costs - long-term -- 191,997
---------- ----------
Total Other Assets 100 192,097
---------- ----------
Total Assets $9,596,648 $9,846,200
========== ==========
(Continued)
The accompanying notes are an integral part of these financial statements.
1
4
HEROES, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
2001 December 31,
(Unaudited) 2000
------------ -------------
CURRENT LIABILITIES:
Line of credit $ 3,240,395 $ 3,131,190
Accounts payable and accrued expenses 7,580,167 7,025,958
Employee accounts payable 33,372 56,934
Accrued compensation 431,656 185,174
Deferred maintenance and training revenue -- 224,000
------------ ------------
Total Current Liabilities 11,285,591 10,623,256
------------ ------------
DEFERRED MAINTENANCE AND TRAINING
REVENUE - LONG-TERM -- 191,997
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 100 million shares authorized,
$.001 par value, 39,855,258 shares issued
and outstanding at March 31, 2001;
35,840,246 shares issued and outstanding at
December 31, 2000 39,855 35,840
Paid-in capital 5,907,990 4,646,253
Retained earnings (deficit) (7,636,788) (5,651,146)
------------ ------------
Total Stockholders' Equity (1,688,943) (969,053)
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,596,648 $ 9,846,200
============ ============
The accompanying notes are an integral part of these financial statements.
2
5
HEROES, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
2001 2000
---------- ----------
REVENUES:
Training revenue $ -- $ 56,000
Other income -- 1,682
---------- ----------
Total Revenues -- 57,682
---------- ----------
DIRECT COSTS:
Local school installations and training 31,208 56,750
Other -- 2,256
---------- ----------
Total Direct Costs 31,208 59,006
---------- ----------
GROSS PROFIT (LOSS) (31,208) (1,324)
---------- ----------
EXPENSES:
Advertising 62,271 --
Consulting 244,500 --
Depreciation and amortization 2,100 48,320
Interest and other bank fees 109,206 --
Insurance 68,856 --
Legal and accounting 113,697 69,981
Noncompete agreement 53,333 --
Other subcontractors -- 14,623
Payroll taxes 114,218 15,260
Rent 39,961 17,410
(Continued)
The accompanying notes are an integral part of these financial statements.
3
6
HEROES, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
2001 2000
------------ ------------
Salaries 742,740 217,833
Software license and development 151,261 --
Telephone 45,489 25,783
Travel 75,213 7,249
Other expenses 131,591 29,089
------------ ------------
Total Expenses 1,954,434 445,548
------------ ------------
LOSS BEFORE PROVISION FOR INCOME
TAXES (1,985,642) (446,872)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (1,985,642) $ (446,872)
============ ============
NET LOSS PER SHARE:
Basic $ (0.05) $ (0.04)
============ ============
SHARES USED IN COMPUTING NET LOSS
PER SHARE:
Basic 36,334,419 10,543,581
============ ============
The accompanying notes are an integral part of these financial statements.
4
7
HEROES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Common Stock Retained
------------------------ Paid-in Earnings Subscription
Shares Amount Capital (Deficit) Receivable
---------- -------- ------------ ------------ ------------
BALANCE at January 1, 2000 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 for the year ended
December 31, 2000 -- -- -- (5,396,870) --
---------- -------- ------------ ------------ ------------
BALANCE at December 31, 2000 35,840,246 35,840 4,646,253 (5,651,146) --
Issuance of common stock to
employees for services and 695,012 695 159,307 -- --
expenses
Capital contributions -- -- 275,750 -- --
Issuance of common stock for
private placement 3,320,000 3,320 826,680 -- --
memorandum
Net loss for the three months
ended March 31, 2001 -- -- -- (1,985,642) --
---------- -------- ------------ ------------ ------------
BALANCE at March 31, 2001 39,855,258 39,855 5,907,990 (7,636,788) --
---------- -------- ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
5
8
HEROES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from contracts $ -- $ 999,189
Cash paid to subcontractors, vendors and
employees (902,624) (1,137,015)
Interest received -- --
Interest paid -- --
------------ ------------
Net Cash Used In Operating Activities (902,624) (137,826)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Sanswire.net, LLC -- (150,000)
Acquisition of equipment (273,244) (34,485)
------------ ------------
Net Cash Used In Investing Activities (273,244) (184,485)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received for note payable to stockholder -- 250,000
Cash received for common stock 1,105,750 345,800
------------ ------------
Net Cash Provided By Financing Activities 1,105,750 595,800
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (70,118) 273,489
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 70,268 100
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
YEAR $ 150 $ 273,589
============ ============
(Continued)
The accompanying notes are an integral part of these financial statements.
6
9
HEROES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
RECONCILIATION OF NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Three Months Ended March 31,
2001 2000
------------ ----------
Net loss $ (1,985,642) $ (446,872)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,100 47,928
Issuance of common stock for services 160,002 5,000
Cash flows resulting from changes in:
Escrow for OneWeb -- 205,000
Accounts receivable -- 998,757
Prepaid maintenance costs 440,081 48,735
Other assets 10,497 (1,496)
Accounts payable 554,209 (512,598)
Accrued expenses 332,126 (426,280)
Deferred maintenance and training revenues (415,997) (56,000)
------------ ----------
Net Cash Used In Operating Activities $ (902,624) $ (137,826)
============ ==========
NONCASH INVESTING AND FINANCING TRANSACTIONS
During the three months ended March 31, 2001, the Company issued
695,012 shares of common stock for compensation to certain employees for total
expense of $160,002.
During the three months ended March 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 three months ended March 31, 2000, the Company issued 50,000
shares of common stock for services at $.10 per share.
The accompanying notes are an integral part of these financial statements.
7
10
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. They do not include all information and notes required by accounting
principles generally accepted in the United States for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to financial statement included
in the financial statements on Form 10-K of Heroes, Inc. for the year ended
December 31, 2000. In the opinion of management, all adjustments necessary to
fairly present the financial position as of March 31, 2001, and the results of
operations, the statements of cash flows, and changes in stockholders' equity
for the three months ended March 31, 2001 and 2000 have been made. Results of
operations for interim periods are not necessarily indicative of results for the
entire year.
The Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States. These principles
are established primarily by the Financial Accounting Standards Board (FASB) and
the American Institute of Certified Public Accountants. The preparation of
financial statements in conformity with GAAP requires management to make
estimates when recording transactions resulting from business operations, based
on information currently available. As additional information becomes available
(or actual amounts are determinable), the recorded estimates may be revised and
reflected in operating results. Although some variability is inherent in these
estimates, management believes the amounts provided are adequate.
2. 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.
8
11
HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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.
3. UNCERTAINTIES
At June 7, 2001, the uncertainties discussed in Note 2 to the December
31, 2000 financial statements had not been resolved.
4. COMMON STOCK
On January 10, 2001, the Company issued a private placement memorandum
at an offering price of $.25 per unit. Each unit consists of one share of common
stock, and one warrant of the company. The warrants entitle the holders to
purchase one share of common stock for each warrant held at an exercise price of
$.50 per share until January 15, 2004. As of March 31, 2001, 3,320,000 units
have been sold for $830,000.
The Company also issued 800,000 warrants for consulting services which
entitles the holders to purchase one share of common stock for each warrant held
at exercise prices ranging from $.40 - $.50 per share vesting in 4 - 24 months.
During the three months ended March 31, 2001, 900,000 options to
purchase common stock expired due to the resignation of an employee.
9
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS
Our revenues decreased to $0 for the three-month period ending March
31, 2001 from $57,682 for the three-month period ending March 31, 2000. This
decrease is due to the fact no invoices for additional work to be performed in
Year 2 of our three-year contract with our current customer, the Metropolitan
Regional Educational Service Agency ("MRESA"), have been submitted, 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 over 11 school
districts, and nearly 750 schools. Our contract with MRESA was executed in March
1999 and we began performance there under in August 1999. This contract
continues for a three-year period. As of December 31, 1999, we had completed
Year 1 of the three Years under this contract and installed our services at 192
schools. All invoices and installations for Year 1 were approved by MRESA. We
began performance on Year 2 of our contract with MRESA in early May 2000.
Lynxus, Inc. ("Lynxus"), our main contractor at that time, was responsible for
all performance under the contract, including the procurement and installation
of all equipment.
We are currently seeking additional customers for our schools deliverable and
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 the
Metropolitan Regional Educational Service Agency ("MRESA"). The MRESA contract
is funded by the Schools and Libraries Division ("SLD") of the Universal Service
Administrative Company. This is a non-profit entity under the jurisdiction of
the Federal Communications Commission ("FCC"). The later administers all "E
rate" funds, which was enacted pursuant to the Federal Telecommunications Act of
1996. The program under which the SLD provides funding to MRESA requires a 10%
to 50% matching commitment for each school from private, corporate or charitable
contributions. The audit is part of an ongoing program integrity process
initiated by the SLD to ensure that applicants and vendors (beneficiaries) of
the E-rate program comply fully with all FCC and SLD program guidelines, rules
and regulations. A number of beneficiaries of the SLD program are audited
annually. The determination of which beneficiaries are audited is done both
randomly and based on the size of the beneficiary's award. We, as the service
provider of the contract, are also being audited as part of this process. As of
the date of this report, we have invoiced a total of $3,595,647.60 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, $3,595,647.60
remains outstanding and unpaid by the SLD. We have also invoiced MRESA
$2,600,735.40 for Year 2 matching funds which also remains outstanding as of the
date of this report. 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 and MRESA for Year 2, as per our agreement,
could eventually exceed $12,000,000.
13
Our total cost of sales decreased to $31,208 for the three-month period
ending March 31, 2001 from $59,006 for the same period in 2000. The $31,208 in
costs incurred were for year 1 maintenance and corrective rework carried out on
our behalf by Domain Networks.
Our salary expense increased to $742,740 from $217,833, primarily due
to the addition of staff in preparation of launching the Children's Heroes
electronic fundraising program, pursuant to the acquisition of Children's Heroes
in October of 2000. Our Legal & Accounting expense increased to $113,697 from
$69,981 primarily due to the ongoing legal proceedings with Lynxus, Inc. Our
consulting expense increased to $244,500 from $0 as a result of the engagement
of several consultants to assist the company on working towards resolution on
the MRESAnet 2000 project. The $109,206 in Interest and Other Bank Fees was
primarily accrued interest on the Prinvest line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Our total current assets decreased from $9,384,434 to $9,055,735
primarily due to the write off of $224,000.00 in prepaid maintenance and
training costs that was paid to Lynxus, Inc. As a result of their filing for
bankruptcy protection, management feels this commitment to provide these
services will not be upheld. Our total current liabilities increased to
$11,285,591 from $10,623,256 primarily due to a $554,209 increase in our
Accounts Payable.
Our total stockholder's equity decreased to ($1,688,943) at March 31,
2001 from ($969,053) at December 31, 2000. This increase was due mainly to a
decrease to ($7,636,788) from ($5,651,146) in retained earnings.
We had $150 in cash as of March 31, 2001, and $22,676.63 as of June 1,
2001. Our continuation as a going concern is dependant 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.
PART 2
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
14
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Heroes, Inc.
/s/ Amer A. Mardam-Bey
-----------------------------------
By: Amer A. Mardam-Bey
(President & CEO)
Date: June 8, 2001