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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 JUNE 30, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-12597
HEROES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Nevada 11-1843262
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(State of Incorporation) (I.R.S. Employer Identification No.)
1915B Chain Bridge Road #506 Mclean, Va 22102
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(Address of principal executive offices)
(703) 761-1900
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(Registrant's telephone number, including area code)
1980 Gallows Road, Suite 200, Vienna, Virginia 22182
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(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
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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, 60,285,760 shares issued and
outstanding as of August 13, 2001.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
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PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEROES, INC.
BALANCE SHEETS
ASSETS
June 30,
2001 December 31
(Unaudited) 2000
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 17,208 $ 70,268
Accounts receivable 8,859,617 8,859,617
Other receivables 26,596 36,145
Employee advances 4,077 5,025
Refundable deposits -- 46,572
Prepaid maintenance and training costs 46,418 318,585
Other current assets 48,222 48,222
---------- ----------
Total Current Assets 9,002,138 9,384,434
---------- ----------
EQUIPMENT, less accumulated depreciation of
$13,665 as of June 30, 2001 and $9,465
as of December 31, 2000 597,924 269,669
---------- ----------
OTHER ASSETS:
Other assets 100 100
Prepaid maintenance and training costs - long-term -- 191,997
---------- ----------
Total Other Assets 100 192,097
---------- ----------
Total Assets $9,600,162 $9,846,200
========== ==========
(Continued)
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
2001 December 31
(Unaudited) 2000
------------ ------------
CURRENT LIABILITIES:
Line of credit $ 3,487,319 $ 3,131,190
Accounts payable and accrued expenses 7,535,897 7,025,958
Employee accounts payable 53,241 56,934
Accrued compensation 371,419 185,174
Notes payable 802,292 --
Deferred maintenance and training revenue -- 224,000
------------ ------------
Total Current Liabilities 12,250,168 10,623,256
------------ ------------
DEFERRED MAINTENANCE AND TRAINING
REVENUE - LONG-TERM -- 191,997
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 100 million shares authorized,
$.001 par value, 60,815,258 shares issued
and outstanding at June 30, 2001;
35,840,246 shares issued and outstanding at
December 31, 2000 60,815 35,840
Paid-in capital 6,019,702 4,646,253
Retained earnings (deficit) (8,730,523) (5,651,146)
------------ ------------
Total Stockholders' Equity (2,650,006) (969,053)
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,600,162 $ 9,846,200
============ ============
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
REVENUES:
Local school installations $ -- $6,196,383 $ -- $6,196,383
Training revenue -- 56,000 -- 112,000
T-1 Telecom access -- -- -- 432
Interest income -- 4,951 -- 6,202
---------- ---------- ---------- ----------
Total Revenues -- 6,257,334 -- 6,315,017
---------- ---------- ---------- ----------
DIRECT COSTS:
Local school installations
and training 24,083 5,970,155 55,291 6,028,726
Network operations center -- -- -- 36,638
T-1 Telecom access -- -- -- 7,740
Other -- -- -- 1,233
---------- ---------- ---------- ----------
Total Cost of Sales 24,083 5,970,155 55,291 6,074,337
---------- ---------- ---------- ----------
GROSS (LOSS) PROFIT (24,083) 287,179 (55,291) 240,680
---------- ---------- ---------- ----------
EXPENSES:
Advertising 65,198 -- 127,469 6,000
Consulting 174,705 -- 419,205 --
Depreciation and
amortization 2,100 -- 4,200 45,833
Interest 118,995 -- 228,200 2,750
Insurance 34,956 -- 103,811 --
Legal and accounting 82,860 74,553 196,557 136,770
Noncompete agreement 13,333 -- 66,667 --
Other subcontractors -- 23,394 -- 58,184
(Continued)
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Rent $ 61,814 $ 7,000 $ 101,775 $ 24,410
Salaries 310,000 117,083 1,052,740 334,917
Payroll taxes 37,891 9,719 152,110 24,978
Software license and
development 31,450 -- 182,711 --
Telephone 26,005 938 71,494 26,721
Travel 53,426 2,662 128,639 9,911
Other expenses 56,919 21,076 188,508 31,022
------------ ------------ ------------ ------------
Total Expenses 1,069,652 256,425 3,024,086 701,496
------------ ------------ ------------ ------------
(LOSS) INCOME
BEFORE PROVISION
FOR INCOME TAXES (1,093,735) 30,754 (3,079,377) (460,816)
PROVISION FOR
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (1,093,735) $ 30,754 $ (3,079,377) $ (460,816)
============ ============ ============ ============
NET (LOSS) INCOME
PER SHARE:
Basic $ (0.03) $ 0.00 $ (0.08) $ (0.02)
============ ============ ============ ============
SHARES USED IN
COMPUTING
EARNINGS PER SHARE:
Basic 42,375,258 28,162,162 39,354,838 19,352,872
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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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) --
(Continued)
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Common Stock
------------- Retained
Paid-in Earnings Subscription
Shares Amount Capital (Deficit) Receivable
------ ------ ------- --------- -------------
Issuance of common stock
to employees for services
and expenses 16,819,194 16,819 304,425 -- --
Issuance of common stock
to S-8 Trust 3,875,818 3,876 (3,876)
Capital contributions -- -- 275,750 -- --
Conversion of capital
contribution to note payable -- -- (124,570) -- --
Issuance of common stock
for private placement
memorandum 3,320,000 3,320 826,680 -- --
Issuance of common stock
to employees for
severance pay 960,000 960 95,040 -- --
Net loss for the six months
ended June 30, 2001 -- -- -- (3,079,377) --
---------- ------- ----------- ----------- ----
BALANCE at June 30, 2001 60,815,258 $60,815 $ 6,019,702 $(8,730,523) $ --
========== ======= =========== =========== ====
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from contracts $ -- $ 1,292,122
Cash paid to subcontractors, vendors and
employees (1,504,077) (4,972,615)
Interest received -- --
Interest paid -- --
----------- -----------
Net Cash Used In Operating Activities (1,504,077) (3,680,493)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Sanswire.net, LLC -- (200,000)
Acquisition of equipment (332,455) (34,485)
----------- -----------
Net Cash Used In Investing Activities (332,455) (234,485)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipt of escrow deposit -- 205,000
Cash received for note payable to stockholder 677,722 250,000
Cash received for common stock 1,105,750 590,820
Net change in line of credit -- 2,871,114
----------- -----------
Net Cash Provided By Financing Activities 1,783,472 3,916,934
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (53,060) 1,956
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 70,268 100
----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 17,208 $ 2,056
=========== ===========
(Continued)
The accompanying notes are an integral part of these financial statements.
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HEROES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
RECONCILIATION OF NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Six Months Ended June 30,
2001 2000
----------- -----------
Net loss $(3,079,377) $ (460,816)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,200 50,033
Forfeited security deposit 46,572 --
Issuance of common stock for services 417,244 5,000
Cash flows resulting from changes in:
Accounts receivable -- (5,016,693)
Prepaid maintenance costs 464,164 112,250
Other assets 10,498 (50,640)
Accounts payable 509,939 2,199,900
Accrued expenses 538,680 (407,527)
Deferred maintenance and training revenues (415,997) (112,000)
----------- -----------
Net Cash Used In Operating Activities $(1,504,077) $(3,680,493)
=========== ===========
NONCASH INVESTING AND FINANCING TRANSACTIONS
During the six months ended June 30, 2001, the Company issued
17,084,182 shares of common stock for compensation to certain employees for
total expense of $257,242.
During the six months ended June 30, 2001, the Company issued 3,875,818
shares of common stock to the S-8 Trust in reserve for future issuance to
employees for compensation.
During the six months ended June 30, 2001, the Company converted
$124,570 of capital contributions to notes payable.
During the six months ended June 30, 2000 a $250,000 note payable to a
stockholder was converted to 500 shares of Spherus common stock prior to the
merger.
During the six months ended June 30, 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.
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HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
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 June 30, 2001, and the
results of operations, the statements of cash flows, and changes in
stockholders' equity for the six months ended June 30, 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
one area. To devote appropriate resources to obtain a quick and favorable
resolution of the matters related to its MRESAnet 2000 Project. 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.
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HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
By letter of intent dated August 7, 2001, the primary investor of the
Company has committed up to an additional $2.5 million in funding upon the
completion of the acquisition of Internet Advantage and based on specific
performance criteria.
3. UNCERTAINTIES
At August 13, 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 six months ended June 30, 2001, 900,000 options to purchase
common stock expired due to the termination of two employees.
5. OPERATING LEASES
The Company terminated its lease for office space and forfeited the
$46,572 deposit. No new lease has been signed.
6. NOTES PAYABLE
The Company issued three promissory notes for a total of $802,292
received from three current investors. These notes accrue interest at 10% per
annum and are due on demand, but no later than November 23, 2001. The note
holder has the option to convert all or a portion of the note into shares of
common stock of the Company at $.01 per share. If the Company plans to payoff
all or part of the principal amount, the Company shall give the note holder 20
days notice of its intention. During this 20-day period, the note holder may
elect to convert the amount to be paid by the Company into shares at the
Conversion Price.
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HEROES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
-------------------------------------------------------------------------------
7. SUBSEQUENT EVENTS
On August 7, 2001, the Company signed a letter of intent to exchange
shares of the Company for all the issued and outstanding shares of Internet
Advantage, Inc. Upon completion of this merger, 53% of the Company's stock will
be issued to the stockholders of Internet Advantage. These stockholders will
also be able to earn 125 million bonus shares of the Company's stock based on
certain profit and sales targets through June 30, 2006.
Internet Advantage d/b/a, Scrip Advantage Inc., is a
business-to-business enterprise that provides a broad range of fundraising and
communication products and services directly to non-profit organizations. Their
revenues for 2000 exceeded $20 million (unaudited).
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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 June
30, 2001 from $6,196,383 for the three-month period ending June 30, 2000. This
decrease is due to the fact that 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 thereunder in August 1999. This
contract continues for a three-year period. As of December 31, 1999, we had
completed Year 1 of the three Years under this contract and installed our
services at 192 schools. All invoices and installations for Year 1 were
approved by MRESA. We began performance on Year 2 of our contract with MRESA in
early May 2000. Lynxus, Inc. ("Lynxus"), our main contractor at that time, was
responsible for all performance under the contract, including the procurement
and installation of all equipment.
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 latter 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.
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Our total cost of sales decreased to $24,083 for the three-month
period ending June 30, 2001 from $5,970,155 for the same period in 2000. The
$24,083 in costs incurred were for year 1 maintenance and corrective rework
carried out on our behalf by Domain Networks.
Our salary expense increased to $310,000 from $117,083, 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 consulting expense increased to $174,705 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 $118,995 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 $9,002,138
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
$12,250,168 from $10,623,256 primarily due to a $510,000 increase in our
Accounts Payable and a $802,292 increase in Notes Payable.
Our total stockholder's equity decreased to ($2,650,006) at June 30,
2001 from ($969,053) at December 31, 2000. This increase was due mainly to a
decrease to ($8,730,523) from ($5,651,146) in retained earnings as a result of
our operating loss.
We had $17,208 in cash as of June 30, 2001. 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.
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
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PART 2
ITEM 1. LEGAL PROCEEDINGS
On May 31, 2001, Mastermind Marketing filed a civil action suit in the
State Court of Fulton County, Georgia. Mastermind Marketing claims they are
owed $150,220.18 plus interest for the preparation of presentations, marketing
strategies, and other promotional programs and delivered intellectual property
and other products, services and expenses. The Company filed a motion for a 60
day extension to respond and is awaiting a ruling from the Judge. The Company
maintains that it does not owe the sum of $150,220.18 to Mastermind Marketing
and is currently in settlement negotiations.
ITEM 5. OTHER INFORMATION
One of our directors and CFO, Christopher Baker, resigned from the
Board of Directors, as well as from his employment with the Company. Subsequent
to his resignation from the Board of Directors on March 26, 2001, Ken Herman
resigned from his employment with the Company on May 1, 2001.
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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: August 14, 2001