UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended September 30, 2004.
[_] Transition report under Section 13 or 15(d) of the Exchange Act For the
transition period from to
Commission file number: 000-49998
Heritage Scholastic Corporation
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(Exact Name of Registrant as Specified in its Charter)
Nevada
88-0502934
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(State of Incorporation)
(I.R.S. Employer
Identification No.)
136 N. Acacia Avenue, Suite B, Solana Beach, California 92075
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(Address of Principal Executive Offices)
760-635-8545
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(Issuer's Telephone Number, Including Area Code)
Check whether 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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State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
State issuer's revenues for its most recently completed fiscal year: $0
Common Stock, $0.001 par value per share: 7,919,875 (as of November 12, 2004)
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Transition Small Business Disclosure Format (check one):
Yes ______ No X
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Table of Contents
Heritage Scholastic Corp.
Part I
Financial Information
Item 1.
Financial Statements (unaudited)
Condensed consolidated balance sheets – September 30, 2004 and 2003.
Condensed consolidated statements of operations and comprehensive loss – Three months ended September 30, 2004 and September 30, 2003, and period from inception to September 30, 2004.
Condensed consolidated statements of cash flows – Three months ended September 30, 2004 and September 30, 2003, and period from inception to September 30, 2004.
Notes to condensed consolidated financial statements
Item 2.
Management’s Discussion and analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
Item 1.
Legal Proceedings
Item 2.
Change in Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K
Signatures
Certifications
PART I – FINANCIAL STATEMENTS
ITEM 1.
FINANCIAL STATEMENTS
Heritage Scholastic Corporation
(a Development Stage Company)
Condensed Consolidated Balance Sheets
(unaudited)
September 30, |
| 2004 |
|
| 2003 | |
Assets | ||||||
Current Assets | ||||||
Cash | $ | 209 | $ | 3,267 | ||
Restricted cash | 0 | 0 | ||||
Accounts receivable | 600 | 600 | ||||
Inventory | 0 | 5,481 | ||||
Prepaid expenses | 100 | 4,000 | ||||
Advances – related party | 0 | 0 | ||||
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|
|
|
| ||
Total current assets | 909 | 13,347 | ||||
Capitalized book expenses | 0 | 15,341 | ||||
0 | 15,341 | |||||
Total assets | $ | 909 |
| $ | 28,688 | |
|
|
|
|
| ||
Liabilities and Stockholders’ Deficit | ||||||
Current Liabilities | ||||||
Accounts payable and accrued expenses | $ | 9,413 | $ | 14,735 | ||
Wages payable and related taxes | 71,314 | 42,317 | ||||
Income taxes payable | 1,600 | 1,600 | ||||
Deferred revenue | 12,000 | 20,320 | ||||
Loan from shareholder | 52,401 | 6,401 | ||||
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|
|
|
| |
Total liabilities | $ | 146,728 | $ | 85,373 | ||
Stockholders’ Deficit | ||||||
Preferred stock;$0.001 par value, 20,000,000 shares authorized | 0 | 0 | ||||
and no shares issued and outstanding | ||||||
Common stock; $0.001 par value, 100,000,000 shares | 7,920 | 7,919 | ||||
authorized and 7,919,875 and 7,918,875 shares issued and outstanding | ||||||
Additional paid-in capital | 116,931 | 114,207 | ||||
Deficit accumulated in the development stage |
| (270,670) |
|
| (178,810) | |
Total stockholders’ deficit | $ | (145,819) |
| $ | (56,684) | |
Total liabilities and stockholders’ deficit | $ | 909 |
| $ | 28,688 |
The accompanying notes are an integral part of these condensed consolidated financial statements
Heritage Scholastic Corporation
(a Development Stage Company)
Condensed Consolidated Statements of Operations
(unaudited)
Three Months | Three Months | Period from Inception | |||||||
ended | ended | (30-July-1999) | |||||||
|
| 30-Sep-2004 |
| 30-Sep-2003 |
| to 30-Sep-2004 | |||
Revenues | $ | 0 | $ | 0 | $ | 8,400 | |||
Cost of Sales | 0 | 0 | 7,919 | ||||||
Gross Profit | 0 | 0 | 481 | ||||||
General and administrative expenses |
| 1,098 |
| 14,228 |
| 271,151 | |||
Net Loss | $ | (1,098) | $ | (14,228) | $ | (270,670) | |||
Loss Per Share of Common Stock | $ | (0.00) | $ | (0.00) | |||||
Weighted Average Shares Outstanding | 7,919,875 | 7,918,875 | |||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Heritage Scholastic Corporation
(a Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
| Period | |||||||||
| Three Months ended | Three Months ended | from Inception | |||||||
(30-July-1999) | ||||||||||
| 30-Sep-04 | 30-Sep-03 | to 30-Sep-2004 | |||||||
Cash Flows From Operating Activities | ||||||||||
Net loss | $ | (1,098) | $ | (14,228) | $ | (270,670) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||
Non-Cash based compensation expense |
|
| 162 | 821 | 39,146 | |||||
Impairment of Capitalized Publishing Costs | 0 | 0 | 15,341 | |||||||
Change in operating assets and liabilities: | ||||||||||
Accounts receivable |
| 0 | 2,700 | (600) | ||||||
Inventory |
| 0 | 0 | 0 | ||||||
Prepaid expenses | 0 | 0 | (100) | |||||||
Accounts payable and accrued expenses |
|
| (4,651) | (4,859) | 9,413 | |||||
Wages and related taxes payable |
|
| 0 | 10,566 | 71,314 | |||||
Income taxes payable |
|
| 0 |
| 0 | 1,600 | ||||
Deferred revenues | 0 | 8,320 | 12,000 | |||||||
| ||||||||||
Net cash provided by (used in) operating activities |
|
| (5,587) |
| 3,320 | (122,556) | ||||
| ||||||||||
Cash Flows From Investing Activities | ||||||||||
Net change in advances-related party |
| 0 | 0 | 0 | ||||||
Decrease in capitalized publishing costs |
|
| 0 |
| 0 | (15,341) | ||||
| ||||||||||
Net cash used in investing activities |
| 0 |
| 0 | (15,341) | |||||
|
Cash Flows From Financing Activities | ||||||||||
Net proceeds from issuance of common stock |
|
| 0 | 0 | 85,705 | |||||
Net change in advances-related party |
|
|
| 5,251 |
| (900) | 52,401 | |||
| ||||||||||
Net cash provided by (used in) financing activities |
|
|
| 5,251 |
| (900) | 138,106 | |||
| ||||||||||
Net increase (decrease) in cash | (336) | 2,420 | 209 | |||||||
Cash at Beginning of Period |
|
| 545 | 847 | 0 | |||||
| ||||||||||
Cash at End of Period |
| $ | 209 | $ | 3,267 | $ | 209 |
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Noncash Investing and Financing Activities: | ||||||
| ||||||
During the three-month periods ended September 30, 2004 and September 30, 2003, the Company recorded non-cash stock based compensation expense of $162 and $821 respectively for stock options issued to non-employees. | ||||||
During the period from inception to September 30, 2004, the Company recorded non-cash stock based compensation expense of $9,146 for stock options issued to non-employees. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to the Condensed Consolidated Financial Statements
1. | Basis of Presentation | The accompanying condensed consolidated financial statements of Heritage Scholastic Corporation (“the Company”), a Nevada corporation. In the opinion of management, the condensed financial statements reflect all normal and recurring adjustments, which are necessary for a fair presentation of the Company's financial position, results of operations and cash flows as of the dates and for the periods, presented. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Consequently, these statements do not include all disclosures normally required by generally accepted accounting principles of the United States of America for annual financial statements nor those normally made in an Annual Report on Form 10-KSB. Accordingly, reference should be made to the Company 's Form 10-KSB, for the year ended June 30, 2004, filed on October 1, 2004, with the U.S. Securities and Exchange Commission for additional disclosures, including a summary of the Company's accounting policies, which have not materially changed. The results of operations for the periods ended September 30, 2004 are not necessarily indicative of results that may be expected for the fiscal year ending June 30, 2005 or any future period, and the Company makes no representations related thereto. |
The accompanying condensed consolidated financial statements as of September 30, 2004 have been prepared assuming the Company will continue as a going concern. The Company had negative working capital of $145,820 as of September 30, 2004, and incurred a net loss for the three month period ended September 30, 2004 and period from inception to September 30, 2004 of $1,098 and $270,670, respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Even though the Company generated a small amount of revenue in the period from inception to September 30, 2004, the Company continues to be a development stage company as the Company’s primary focus is raising capital and attracting business. During the period from inception to September 30, 2004, management raised net procee ds of approximately $86,000 through sales of common stock. Subsequent to September 30, 2004, management intends to continue to raise additional financing through a combination of public and/or private equity placements, commercial project financing and government program funding to fund future operations and commitments. There is no assurance that additional debt and equity financing needed to fund operations will be consummated or obtained in sufficient amounts necessary to meet the Company's needs. | ||
1. | Basis of Presentation Cont’d | The accompanying condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. |
The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the results of operations during the reporting period. Actual results could differ materially from those estimates. | ||
2. | Significant Accounting Policies | These condensed consolidated financial statements do not include the complete list of significant accounting policies, reference should be made to the Company’s Form 10-KSB filed on October 1, 2004 for a more complete description of the relevant accounting policies. |
These condensed consolidated financial statements include the accounts of its wholly owned subsidiary, Books for Kids, Inc. (a Nevada Corporation). Books for Kids, Inc. was incorporated on February 21, 2003. All material intercompany transactions have been eliminated in consolidation. Supplies inventory consists of operating supplies and are stated at lower of cost or market as determined by the first-in, first-out method. | ||
Deferred income taxes are recognized for the tax consequences in future periods of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. | ||
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. | ||
As of September 30, 2004 a current deferred tax asset of approximately $108,000 had been recognized for the temporary differences related to net operating losses carried forward. A valuation allowance of approximately $108,000 has been recorded to fully offset the deferred tax asset, as it is not more likely than not that the assets will be utilized. The Federal net operating losses of approximately $271,000 begin to expire in 2022 and the state net operating losses of approximately $271,000 begin to expire in 2011, unless previously utilized. | ||
California law imposes a franchise tax of 1.5% of taxable income on companies doing business in the state with a certain minimum amounts per year. |
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to Condensed Consolidated Financial Statements
3. | Loan from shareholder | Since its inception, the Company has received various services related to day to day operations from related entities, HMC, Parks Family, LLC and Imprint Publications, LLC, which entities are wholly owned by Charles E. and Lori M. Parks, who are officers, directors and shareholders of HSC. The note payable represents the balance due for these services as well as advances made by these companies to HSC, and is due on demand. |
4. | Recent Accounting Pronouncements | There were no recent Accounting Pronouncements that effect the Company during the first quarter ended September 30, 2004. For past pronouncements please refer to the Company’s 10-KSB filed October 1, 2004. |
5. | Common Stock | |
On July 1, 2000 the Company issued 5,500,000 shares of common stock to the Company's founders at $0.001 per share for a note receivable that was repaid in the year ended June 30, 2002. On September 29, 2000 the Company issued 600,000 shares of common stock to a key officer of the Company at $0.003 per share for a note receivable that was repaid in the year ended June 30, 2002. | ||
On September 14, 2001 the Company issued 680,625 shares of common stock to various investors for cash of $0.04 per share. | ||
On June 30, 2002 the Company issued 558,250 shares of common stock in a Nevada-registered offering filed under Rule 504 of Regulation D of the Securities Act of 1933 to various investors for cash of $0.10 per share. | ||
Related to the shares issued on June 30, 2002 the Company issued 75,000 shares to a stock offering consulting firm and 5,000 shares to an individual for work performed on the stock offering. These shares were valued at the stock-offering price of $0.10 per share, or $28,000. The shares issued to the consulting firm were in addition to cash fees under an agreement for various stock offering services. | ||
The Company incurred a total of approximately $43,000 in direct costs related to above common stock offering, inclusive of the shares issued for services issued at a fair value of $28,000. | ||
On November 27, 2002 the Company issued 50,000 shares of common stock to an investor for cash of $0.10 per share. On February 8, 2003 the Company issued 50,000 shares of common stock to an investor for cash of $0.10 per share. On March 30, 2003 the Company issued 200,000 for services performed with a fair value of $20,000. On December 31, 2003, the Company issued 1,000 shares of common stock to an investor for cash of $0.10 per share. |
Part I Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
As of September 30, 2004, we have generated revenues of $8,400 of which none were generated in the three-month period ended September 30, 2004. The Company has received additional orders totaling $12,000, which has not been filled as of September 30, 2004. We expect orders and revenue to grow in the 2nd quarter as the newly hired salesperson in Los Angeles begins to make more sales contacts. Even though we have generated a small amount of revenue to-date, we continue to be a development stage company as defined by SFAS 7, as our primary focus is raising capital and attracting business. Accordingly, due to the Company’s status as a development stage company, negative working capital, and continued losses, our independent public accountants have issued a comment regarding our ability to continue as a going concern (please see footnote 1 of the condensed consolidated financial statements). Currently the compa ny is focusing on selling books in only the Los Angeles area. This is expected to continue through the fourth quarter of the current fiscal year. Plans are to expand into other markets once we have substantial success in Los Angeles.
Expenses during the first quarter of this year were approximately $1,100 compared with approximately $14,200 for the same quarter last year. In the quarter ended September 30, 2004 most of the expenses were bank fees and rent. In the same quarter last year the largest expenses were accrued salaries and wages. Given the company’s current financial position, it has stopped accruing salaries for the officers.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying condensed consolidated financial statements as of September 30, 2004 have been prepared assuming the Company will continue as a going concern. However, the Company had negative working capital of $145,820 as of September 30, 2004, and incurred a net loss for the three-month period ended September 30, 2004 and period from inception to September 30, 2004 of $1,098 and $270,670, respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
As of September 30, 2004, we had $209 in cash and $600 in receivables. During the first quarter, the Company raised no additional capital.
We believe our total current assets of $909 as of September 30, 2004, plus projected cash flows, and future offerings that we plan to do, will provide sufficient capital to implement our plan to place our textbooks throughout the targeted school districts. Our current monthly operating expense is less than $400, exclusive of management’s salaries, which continued to be deferred until we have sufficient sales and cash flow to pay them.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
There were no recent Accounting Pronouncements that effect the Company during the quarter ended September 30, 2004. For past pronouncements please refer to the Company’s 10-KSB filed October 1, 2004.
RISKS AND UNCERTAINTIES
Limited Operating History
We have a limited operating history on which to base estimates for future performance and face all of the risks inherent in the educational textbook industry. These risks include, but are not limited to, market acceptance and penetration of our products, our ability to obtain a pool of qualified personnel, management of the costs of conducting operations, general economic conditions and factors that may be beyond our control. We cannot assure you that we will be successful in addressing these risks. Failure to successfully address these risks could have a material adverse effect on our operations.
Need for Additional Financing
We may need to obtain additional financing in the event that we are unable to realize sufficient revenue or collect accounts receivable when we emerge from the development stage. We may incur additional indebtedness from time to time to finance acquisitions, provide for working capital or capital expenditures or for other purposes. However, we currently anticipate that our expected operating cash flow and the funds raised from future offerings of common stock that we plan to do will be sufficient to meet our operating expenses for at least the next 12 to 24 months.
Furthermore, our ability to pay future cash dividends on our Common Stock, or to satisfy the redemption of future debt obligations that we may enter into will be primarily dependent upon the future financial and operating performance of our Company. Such performance is dependent upon financial, business and other general economic factors, many of which are beyond our control. If we are unable to generate sufficient cash flow to meet our future debt service obligations or provide adequate long-term liquidity, we will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing debt, selling assets or operations, or raising additional equity capital. There can be no assurance that such alternatives could be accomplished on satisfactory terms, if at all, or in a timely manner.
There were no recent Accounting Pronouncements that effect the Company during the quarter ended September 30, 2004. For past pronouncements please refer to the Company’s 10-KSB filed October 1, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Technological change, continuing process development, and a reduction in school district spending may affect the markets for our products. Our success will depend, in part, upon our continued ability to provide quality textbooks that meet changing customer needs, successfully anticipate or respond to technological changes in technological processes on a cost-effective and timely basis and enhance and expand our client base. Current competitors or new market entrants may provide products superior to ours that could adversely affect the competitive position of our Company. Any failure or delay in achieving our priorities for the next six to twelve months of operations as stated in Part I Item 2 could have a material adverse effect on our business, future results of operations and financial condition.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The management of the Company, including the President and Chief Executive Officer and the Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-14 (c) and 15d- 14 (c).under the Securities Exchange Act) as of a date (the “Evaluation Date”) within 90 days prior to the filing date of this report. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that, as of the evaluation date, the Company’s disclosure controls and procedures were effective in ensuring that all material information relating to the Company, including its consolidated subsidiaries, required to be filed in this quarterly report have been made known to them in a timely manner.
Changes in internal controls
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recently completed evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
HERITAGE SCHOLASTIC CORPORATION
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any legal proceedings nor do we have any knowledge of threatening litigation.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
Heritage Scholastic Corporation
(Registrant)
Date: ___November 12, 2004_________________
By: __/s/ Charles E. Parks_________________
Charles E. Parks, President and CEO
Date: __ November 12, 2004_________________
By: __/s/ Randall L. Peterson_______________
Randall L. Peterson, Treasurer and CFO