SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 13, 2002
SCORES HOLDING COMPANY INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
UTAH 0-16665 87-0426358
- -------------------------------- ----------------- --------------------
State or other jurisdiction (Commission File (IRS Employer
of incorporation or organization) Number) Identification No.)
150 E. 58TH STREET, NEW YORK, NY 10022
------------------------------------------------------
(Address of principal executive offices)(Zip Code)
(212) 421-8480
---------------------------------------------------------
(Registrants Telephone Number, Including Area Code)
N/A
---------------------------------------------
(Former Name If Changed since Last Report.)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of HEIR Holding Co., Inc. (now known as Scores
Licensing Corp.)
(b) Pro Forma Financial Statements
(c) Exhibits
2.1 Agreement and Plan of Merger dated as of August 7, 2002 among Registrant,
HEIR Holding Company Inc. and Scores Acquisition Corp. (1)
2.2 Certificate of Merger between HEIR Holding Co. Inc. and Scores Acquisition
Corp. dated August 7, 2002 as filed with the Delaware Secretary of State
on August 13, 2002.(1)
10.1 Convertible Debenture Purchase Agreement dated as of August 7, 2002
between HEIR Holding Co. Inc. and HEM Mutual Assurance LLC. (1)
10.2 Convertible Debenture Purchase Agreement dated as of August 7, 2002
between Registrant and HEM Mutual Assurance Fund, Limited.(1)
10.3 Loan Agreement and Promissory Note dated as of August 7, 2002 between
Registrant and HEM Mutual Assurance Fund Limited.(1)
- -------------------
(1) Previously filed with the Registrant's Form 8K dated August 13, 2002
as filed wit the Securities and Exchange Commission on August 28, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly cause this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
SCORES HOLDING COMPANY, INC.
Dated: October 25, 2002 By: /s/ Richard Goldring
--------------------
Richard Goldring
President & Chief Executive Officer
2
ITEM 7(a) FINANCIAL STATEMENTS OF HEIR HOLDING CO., INC (NOW KNOWN
AS SCORES LICENSING CORP.)
Index to Financial Statements
PAGE
----
Independent Auditor's Report - Radin, Glass & Co., LLP . . . . . . . . . .4
Balance Sheet as of December 31, 2001 . . . . . . . . . . . . . . . . . . . .5
Statement of Operations for year ended December 31, 2001 . . . . . . . . . .6
Statement of Stockholders' Deficiency for the year ended December 31, 2001 . .7
Statement of Cash Flows for the year ended December 31, 2001 . . . . . . . . .8
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .9
3
INDEPENDENT AUDITOR'S REPORT
----------------------------
October 22, 2002
To the Board of Directors and Shareholders
HEIR Holding Co., Inc.
We have audited the accompanying balance sheet of HEIR Holding Co., Inc. as of
December 31, 2001, and the related statement of operations, stockholders'
deficiency and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HEIR Holding Co., Inc. as of
December 31, 2001 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
Radin, Glass & Co., LLP
Certified Public Accountants
New York, New York
4
HEIR HOLDING CO., INC.
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
---------
CURRENT ASSETS:
Cash $ 3,938
----------------------
Total Current Assets 3,938
INTELLECTUAL PROPERTY, net of accumulated amortization 240,750
LOAN RECEIVABLE - RELATED PARTY 262,865
----------------------
$ 507,553
======================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
-------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 9,333
Loan payable - related party 531,780
----------------------
Total Current Liabilities 541,113
STOCKHOLDERS' DEFICIENCY
Common stock, $.001 par value; 10,000,000 shares authorized,
3,000,000 issued and outstanding 3,000
Accumulated deficit (36,560)
----------------------
Total Stockholders' deficiency (33,560)
----------------------
$ 507,553
======================
See notes to financial statements.
5
HEIR HOLDING CO., INC.
STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 2001
NET SALES $ -
COST OF GOODS SOLD -
---------------------------
GROSS PROFIT -
GENERAL AND ADMINISTRATIVE EXPENSES 30,880
---------------------------
NET LOSS FROM OPERATIONS (30,880)
INTEREST EXPENSE (5,680)
---------------------------
NET LOSS BEFORE INCOME TAXES (36,560)
PROVISION FOR INCOME TAXES -
---------------------------
NET LOSS (36,560)
===========================
See notes to financial statements.
6
HEIR HOLDING CO., INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR YEAR ENDED DECEMBER 31, 2001
Preferred Stock Common Stock Additional Total
----------------- ------------------- Paid in Accumulated Stockholders
Shares Amount Shares Amount Capital Deficit Equity
------- -------- ---------- ------- --------- ------------ ------------
Balance as of December 31, 2000 - $ - 300 $ - $ 3,000 $ - $ 3,000
Stock Split - - 2,999,700 3,000 (3,000) - -
Net loss - - - - - (36,560) (36,560)
------ --------- --------- -------- --------- ------------ ------------
Balance as of December 31, 2001 - $ - 3,000,000 $ 3,000 $ - $ (36,560) $ (33,560)
====== ========= ========= ======== ========= ============ ============
See notes to financial statements.
7
HEIR HOLDING CO., INC.
STATEMENT OF CASH FLOWS
FOR YEAR ENDED DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (36,560)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization 9,250
Accounts payable 9,333
--------------
NET CASH USED IN OPERATIONS (17,977)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of capital expenditures (250,000)
Loan receivable - related party (262,865)
--------------
NET CASH USED IN INVESTING ACTIVITIES (512,865)
--------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Loan payable - related party 534,780
--------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 534,780
--------------
NET INCREASE IN CASH 3,938
CASH, beginning of the period -
--------------
CASH, end of the period 3,938
==============
Supplemental disclosures of cash flow information:
Interest paid $ 5,680
Taxes paid -
See notes to financial statements.
8
HEIR HOLDING CO., INC.
-----------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
YEAR ENDED DECEMBER 31, 2001
------------------------------
NOTE 1. ORGANIZATION
HEIR Holding Co., Inc. (the "Company") is a Delaware Corporation, formed in
September 2000 and is located in Wilmington, DE. The Company is the owner of
the property rights respecting the name "Scores" which is a recognized name in
the adult entertainment industry.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents.
Intellectual Property
Intellectual property is stated at cost. Amortization is provided for using the
straight-line method. The intellectual property has an estimated useful life
of ten years (See Note 3).
Income Taxes
The Company utilizes the liability method of accounting for income taxes as set
forth in SFAS 109, "Accounting for Income Taxes." Under the liability method,
deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Accounting Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, receivables, and
accrued expenses approximate fair value based on the short-term maturity of
these instruments.
9
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combination", SFAS No.
142, "Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. It also
requires that the Company recognize acquired intangible assets apart from
goodwill. SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. SFAS No. 143
establishes accounting standards for recognition and measurement of a liability
for an asset retirement obligation and the associated asset retirement cost,
which will be effective for financial statements issued for fiscal years
beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which basically further clarifies SFAS No. 121
and methods of quantifying potential impairments or disposal of assets as well
as the related reporting of such impairments or disposals.
The adoption of SFAS No. 141, SFAS No. 142, SFAS No. 143, SFAS No. 144 is not
expected to have a material effect on the Company's financial position, results
of operations and cash flows.
NOTE 3. INTELLECTUAL PROPERTY
Intellectual property is composed of property rights respecting the name
"Scores" which is a recognized name in the adult entertainment industry.
At December 31, 2001, intellectual property consists of the following:
2001
----------
Intellectual property $ 250,000
Less: accumulated amortization 9,250
----------
$ 240,750
==========
Amortization expense was $9,250 for the year ended December 31, 2001.
NOTE 4. RELATED-PARTY TRANSACTIONS
The Company entered into a License Agreement ("Agreement") dated August 15, 2001
and amended as of March 3, 2002 with a related party Go West Entertainment, Inc.
10
("GW"). According to the terms of the Agreement, GW has the right and license
to use certain "Scores" trademarks in New York City in connection with the
operation of up to three adult entertainment nightclubs and the retail sale of
commercial merchandise. Under the Agreement, GW is obligated to pay annual
royalty fee of $520,000 to Heir payable $10,000 per week commencing with the
opening of at least one nightclub.
NOTE 5. LOAN RECEIVABLE - RELATED PARTY
As of December 31, 2001, the Company loaned $262,865 to a related entity which
is part of the merger discussed in Note 9. The loan is payable on demand and
bears no interest.
NOTE 6. LOAN PAYABLE - RELATED PARTY
As of December 31, 2001, the Company borrowed $237,780 from its shareholders.
These loans are payable on demand and bears interest at a rate of 5% per annum.
As of December 31, 2001, the Company also borrowed $294,000 from a related
party. This loan is payable upon demand and bears no interest.
NOTE 7. INCOME TAXES
As a result of the Company's net losses in 2001, no federal income taxes were
paid.
NOTE 8. STOCK SPLIT
On July 30, 2002 the Company designated its outstanding shares as common shares
and effected a 10,000 for 1 forward split resulting in outstanding
capitalization of 3,000,000 common shares which has been retroactively reflected
in the statement of stockholders' equity.
NOTE 9. SUBSEQUENT EVENT
On August 13, 2002, the Company and its shareholders entered into an Merger
Agreement ("Merger") with Scores Holding Company Inc. ("SCOH"), and Scores
Acquisition Corp., a wholly-owned subsidiary of SCOH ("SAC"). Pursuant to the
Merger, SAC was merged with and into the Company, which is the surviving
corporation under the name Scores Licensing Corp. ("SLC"). SLC remains a
wholly-owned subsidiary of SCOH. As part of the merger, 3,000,000 shares of
SCOH's common stock were exchanged for 3,000,000 of the Company's common stock.
The merger is treated as a tax-free exchange pursuant to Section 351 of the
Internal Revenue Code of 1986.
11
ITEM 7(b) PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
INDEX TO FINANCIALS STATEMENTS
PAGE
----
Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Balance Sheets as of December 31, 2001 and June 30, 2002 . . . . . . 14
Statements of Operations for the year ended December 31, 2001
and the six-month period ended June 30, 2002 . . . . . . . . . . 16
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 18
12
PRO FORMA COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Combined Statement of Operations of Scores Holding
Company Inc. (the "Company") for the year ended December 31, 2001 and the
six-month period ended June 30, 2002 (the "Pro Forma Statements of Operations"),
and the Unaudited Pro Forma Combined Balance Sheets of the Company as of
December 31, 2001 and as of June 30, 2002 (the "Pro Forma Balance Sheets" and,
together with the Pro Forma Statement of Operations, the "Pro Forma Financial
Statements"), have been prepared to illustrate the estimated effect of merger
between the Company and HEIR Holding Co., Inc. ("HEIR"). The Pro Forma
Statements of Operations give pro forma effect to the merger as if it had
occurred on January 1, 2001 and 2002, respectively. The Pro Forma Balance
Sheets gives pro forma effect to the merger as if it had occurred on December
31, 2001 and June 30, 2002. The Pro Forma Financial Statements do not purport
to be indicative of the results of operations or financial position of the
Company that would have actually been obtained had such merger been completed as
of the assumed dates and for the period presented. The pro forma adjustments
are described in the accompanying notes and are based upon available information
and certain assumptions that the Company believes are reasonable. The Pro Forma
Financial Statements should be read in conjunction with the separate historical
financial statements of the Company and HEIR and the notes thereto.
Because the two companies have shareholders in common and common management, the
merger has been treated as an exchange of shares between entities under common
control as indicated in Paragraph D12 of Financial Accounting Standard 141.
Accordingly, the bases of the assets and liabilities have been carried forward
to the merged company.
These pro forma adjustments represent the Company's determination of accounting
adjustments and are based upon available information and certain assumptions
that the Company believes to be reasonable. Consequently, the amounts reflected
in the Pro Forma Financial Statements are subject to change, and the final
amounts may differ substantially.
13
SCORES HOLDING COMPANY, INC. AND SUBSIDIARY
PRO FORMA BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2001
Proforma Adjustments Pro-forma
THE ----------------------- THE
COMPANY HEIR Debits Credits COMPANY
----------- ---------- ----------- ---------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 18,626 $ 3,938 1,000,000 (A) 132,500 (E) 1,890,064
1,000,000 (C)
Notes receivable 10,000 - 10,000
----------- ---------- -----------
Total current assets 28,626 3,938 1,900,064
LEASEHOLD IMPROVEMENTS,
FURNITURE AND EQUIPMENT, NET 66,101 - 66,101
INTELLECTUAL PROPERTY, NET - 240,750 240,750
FINANCING COSTS - - 132,500 (E) 132,500
REORGANIZATION VALUE IN EXCESS OF
AMOUNTS ALLOCABLE TO IDENTIFIABLE
ASSETS 9,814 - 9,814
SECURITY DEPOSITS 252,667 - 252,667
----------- ---------- -----------
$ 357,208 $ 244,688 $2,601,896
=========== ========== ===========
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES:
Accounts payable $ 111,232 $ 9,333 $ 120,565
Related party payable 35,390 531,780 567,170
Due to (from) intercompany 262,865 (262,865) -
Current portion of
prepetition debt 14,991 - 14,991
Current portion of
prepetition debt -related party 6,875 - 6,875
Accrued expenses 94,124 - 94,124
----------- ---------- -----------
Total current liabilities 525,477 278,248 803,725
PREPITITION LONG TERM DEBT 22,178 - 22,178
NOTE PAYABLE - - 1,000,000 (C) 1,000,000
CONVERTIBLE DEBENTURES, NET OF DISCOUNT - - 1,000,000 (A) 1,000,000
DEFICIENCY IN ASSETS
Common stock 14,602 3,000 17,602
Additional paid-in-capital - - 1,000,000 (A) 1,000,000
Accumulated deficit (205,049) (36,560) 1,000,000(A) (1,241,609)
----------- ---------- -----------
Total deficiency in assets (190,447) (33,560) (224,007)
----------- ---------- -----------
$ 357,208 $ 244,688 $2,601,896
=========== ========== ===========
See notes to Pro Forma Financial Statements
14
SCORES HOLDING COMPANY, INC. AND SUBSIDIARY
PRO FORMA BALANCE SHEET (UNAUDITED)
JUNE 30, 2002
Proforma Adjustments Pro-forma
THE ----------------------- THE
COMPANY HEIR Debits Credits COMPANY
------------ ---------- ----------- ---------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 11,249 $ 3,726 1,000,000 (A) 132,500 (E) $ 1,882,475
1,000,000 (C)
Interest receivable 674 - 674
Notes receivable 10,000 - 10,000
------------ ---------- ------------
Total current assets 21,923 3,726 1,893,149
LEASEHOLD IMPROVEMENTS,
FURNITURE AND EQUIPMENT, NET 114,352 - 114,352
INTELLECTUAL PROPERTY, NET - 228,250 228,250
FINANCING COSTS - - 132,500 (E) 132,500
REORGANIZATION VALUE IN EXCESS OF
AMOUNTS ALLOCABLE TO IDENTIFIABLE
ASSETS 9,814 - 9,814
SECURITY DEPOSITS 1,002,667 - 1,002,667
------------ ---------- ------------
$ 1,148,756 $ 231,976 $3,380,732
============ ========== ============
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 143,919 $ 2,925 $ 146,844
Related party payable 932,212 605,116 1,537,328
Due to (from) intercompany 312,865 (312,865) -
Post petition accrued expenses 41,276 - 41,276
Current portion of prepetition debt 14,991 - 14,991
Current portion of prepetition debt -related party 6,875 - 6,875
------------ ---------- -----------
Total current liabilities 1,452,138 295,176 1,747,314
PREPITITION LONG TERM DEBT 16,714 - 16,714
NOTE PAYABLE - - 1,000,000 (C) 1,000,000
CONVERTIBLE DEBENTURES, NET OF DISCOUNT - - 1,000,000 (A) 1,000,000
DEFICIENCY IN ASSETS
Common stock 15,999 3,000 18,999
Additional paid-in-capital 740,144 - 1,000,000 (A) 1,740,144
Accumulated deficit (1,076,239) (66,200) 1,000,000 (A) (2,142,439)
------------ ---------- ------------
Total deficiency in assets (320,096) (63,200) (383,296)
------------ ---------- ------------
$ 1,148,756 $ 231,976 $3,380,732
============ ========== ============
See notes to Pro Forma Financial Statements
15
SCORES HOLDING COMPANY, INC. AND SUBSIDIARY
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2001
Proforma Adjustments Pro-forma
THE ---------------------- THE
COMPANY HEIR Debits Credits COMPANY
------------ ------------ ------------ -------- -----------
NET SALES $ 300,026 $ - $ 300,026
COST OF GOODS SOLD 89,290 - 89,290
------------ ------------ ------------
GROSS PROFIT 210,736 - 210,736
GENERAL AND ADMINISTRATIVE EXPENSES 518,353 30,880 549,233
REORGANIZATION EXPENSES 73,231 - 73,231
------------ ------------ ------------
NET LOSS FROM OPERATIONS (380,848) (30,880) (411,728)
OTHER INCOME (EXPENSE):
Amortization of financing costs - - 26,500 (F) (26,500)
Interest income (expense) (268) (5,680) 1,000,000 (A) (1,075,948)
------------ ------------ ------------
10,000 (B)
60,000 (D)
NET LOSS BEFORE INCOME TAXES (381,116) (36,560) (1,514,176)
PROVISION FOR INCOME TAXES - - -
------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY GAIN (381,116) (36,560) (1,514,176)
EXTRAORDINARY GAIN ON BANKRUPTCY
RESTRUCTURING NET OF $0 IN
INCOME TAXES 443,195 - 443,195
------------ ------------ ------------
NET INCOME (LOSS) $ 62,079 $ (36,560) $(1,070,981)
============ ============ ============
Net loss per share before extraordinary gain $ (0.03) $ (0.09)
Net gain per share extraordinary gain $ 0.03 $ 0.03
------------ ------------
Net income per share $ 0.00 $ (0.06)
============ ============
Weighted average of common shares used
in computation 14,601,794 17,601,794
============ ============
See notes to Pro Forma Financial Statements
16
SCORES HOLDING COMPANY, INC. AND SUBSIDIARY
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002
Proforma Adjustments Pro-forma
THE ---------------------- THE
COMPANY HEIR Debits Credits COMPANY
------------ ------------ ------------ -------- -----------
NET SALES $ 56,250 $ - $ 56,250
COST OF GOODS SOLD - - -
------------ ------------ ------------
GROSS PROFIT 56,250 - 56,250
GENERAL AND ADMINISTRATIVE EXPENSES 925,613 23,623 949,236
------------ ------------ ------------
NET LOSS FROM OPERATIONS (869,363) (23,623) (892,986)
OTHER INCOME (EXPENSE):
Amortization of financing costs - - 13,250 (F) (13,250)
Interest income (expense) 674 (6,017) 1,000,000 (A) (1,040,343)
------------ ------------ -----------
5,000 (B)
30,000 (D)
NET LOSS BEFORE INCOME TAXES (868,689) (29,640) (1,946,579)
PROVISION FOR INCOME TAXES - - -
------------ ------------ ------------
NET LOSS $ (868,689) $ (29,640) $(1,946,579)
============ ============ ============
Net loss per share before extraordinary gain $ (0.05) $ (0.10)
Net gain per share extraordinary gain $ 0.00 $ 0.00
------------ ------------
Net income per share $ (0.05) $ (0.10)
============ ============
Weighted average of common shares used
in computation 15,826,343 18,826,343
============ ============
See notes to Pro Forma Financial Statements
17
SCORES HOLDING COMPANY INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
On August 13, 2002, Scores Holding Company Inc. (the "Company"), Scores
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the
Company (the "SAC") entered into a merger agreement with HEIR Holding Co. Inc.
("HEIR"), whereby SAC was merged with and into HEIR, which is the surviving
corporation under the name Scores Licensing Corp. ("SLC"). SLC remains a
wholly-owned subsidiary of the Company. As part of the merger, 3,000,000 shares
of the Company's common stock were exchanged for 3,000,000 shares of HEIR's
common stock. The merger is treated as a tax-free exchange pursuant to Section
351 of the Internal Revenue Code of 1986. In connection with the merger, the
Company obtained $1,000,000 from an investor for a promissory note. HEIR also
obtained $1,000,000 from a related investor for 1% Convertible Debentures ("HEIR
$1 Million Debt"). Pursuant to the merger, HEIR $1 Million Debt is exchanged
for $1,000,000 of Convertible Debentures of the Company (the "$1 Million Debt").
The $1 Million Debt is identical in all material respects to the HEIR $1 Million
Debt.
Because the two companies have shareholders in common and common management, the
merger has been treated as an exchange of shares between entities under common
control as indicated in Paragraph D12 of Financial Accounting Standard 141.
Accordingly, the bases of the assets and liabilities have been carried forward
to the merged company.
The following pro forma adjustments are recorded on the accompanying pro forma
financial statements:
A. To record the issuance of the HEIR $1 Million Debt with a conversion
feature. The conversion price of the debt was below the fair market price
of the shares on the date of sale ("a beneficial conversion feature"). As
the excess of the fair market price of the underlying shares exceeded the
proceeds, interest expense was recorded for the full amount of the
proceeds.
B. To record interest expense on the HEIR $1 Million Debt at 1% per annum.
C. To record the issuance of the promissory note.
D. To record interest expense on the promissory note at 6% per annum.
E. To record the financing costs in connection with the merger.
F. Amortization of the financing costs over a term of five years.
Subsequent to the merger, the Company is in the process of obtaining $2,000,000
from an investor for 1% Convertible Debentures with warrants.
The financial statements for the period June 30, 2002 are unaudited and include
all adjustments necessary to a fair presentation of the results of operations
for the period then ended. All such adjustments are of a normal recurring
nature. The results of the Company's and HEIR's operations for any interim
period are not necessarily indicative of the results of the Company's and HEIR's
operations for a full year.
18