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 December 31, 2002.
[_] 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
------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0502934
- ---------------------------------------- ------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1954 Kellogg Avenue, Carlsbad, California 92008
------------------------------------------------------------------------
(Address of Principal Executive Offices)
760-268-0700
----------------------------------------
(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 ______
----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $0.001 par value per share: 7,718,875 (as of December 31, 2002
and 7,918,875 as of September 30, 2003)
- -----------------------------------------------------------------------------
Transition Small Business Disclosure Format (check one):
Yes ______ No X
-----
/1/
Table of Contents
Heritage Scholastic Corp.
Part I Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets - December 31, 2002 and 2001.
Condensed statements of operations and comprehensive loss - Three
and Six months ended December 31, 2002 and December 31, 2001, and
period from inception to December 31, 2002.
Condensed statements of cash flows - Three and Six months ended
December 31, 2002 and December 31, 2001, and period from inception
to December 31, 2002.
Notes to the condensed 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
/2/
Signatures
Certifications
PART I - FINANCIAL STATEMENTS
ITEM 1.FINANCIAL STATEMENTS
/3/
Heritage Scholastic Corporation
(a Development Stage Company)
Balance Sheet
(unaudited)
===============================================================================
December 31, 2002 2001
- -------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 205 $ 13,716
Inventory 8,286 -
Deferred stock issuance costs - 7,000
- -----------------------------------------------------------------------------
Total current assets 8,491 20,716
Capitalized Publishing Costs 20,455 6,000
- -----------------------------------------------------------------------------
$ 28,946 $ 26,716
=============================================================================
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses $ 15,181 $ -
Wages payable and related taxes 15,859 -
Advances- related party (Note 3) 13,053 -
Income taxes payable 1,600 -
- -----------------------------------------------------------------------------
Total liabilities 45,693 -
Stockholders' Equity (Deficit)
Preferred stock; $0.001 par value, 20,000,000 shares - -
authorized and no shares issued and outstanding
Common stock; $0.001 par value, 100,000,000 shares 7,669 6,781
authorized 7,668,875 and 6,780,635 shares issued
and outstanding
Additional paid-in capital 82,836 33,444
Note receivable stockholders' - (7,300)
Deficit accumulated during the development stage (107,252) (6,209)
- -----------------------------------------------------------------------------
Total stockholders' equity (deficit) (16,747) 26,716
- -----------------------------------------------------------------------------
$ 28,946 $ 26,716
=============================================================================
The accompanying notes are an integral part of these financial statements.
/4/
Heritage Scholastic Corporation
(a Development Stage Company)
Statements of Operations
(unaudited)
===============================================================================
Period
from
Three Six Months Three Six Months Inception
Months ended ended Months ended ended (30-July-1999)
31-Dec-2002 31-Dec-2002 31-Dec-2001 31-Dec-2001 to 31-Dec-2002
- -------------------------------------------------------------------------------
Revenues $ 0 0 $ 0 $ 0 $ 0
General and $ 39,051 79,477 $ 509 $ 6,209 $ (107,252)
administrative
expenses
- -------------------------------------------------------------------------------
Net Loss $ (39,051) (79,477) $ (509) $ (6,209) $ (107,252)
- -------------------------------------------------------------------------------
Loss Per Share $ (0.01) (0.01) $ 0.00 $ 0.00
of Common Stock
- -------------------------------------------------------------------------------
Weighted 7,718,875 7,718,875 6,780,625 6,780,625
Average Shares
Outstanding
===============================================================================
The accompanying notes are an integral part of these financial statements.
/5/
Heritage Scholastic Corporation
(a Development Stage Company)
Statements of Cash Flows
(unaudited)
===============================================================================
Period
Six Months Six Months from Inception
ended ended (30-July-1999)
31-Dec-2002 31-Dec-2001 to 31-Dec-2002
- -------------------------------------------------- ----------- --------------
Cash Flows From Operating Activities
Net loss $ (79,477) $ (6,209) $ (107,252)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non-Cash stock based compensation 4,200 5,700 9,900
expense
Change in operating assets and
liabilities:
Accounts receivable 0 0 0
Inventory (8,286) 0 (8,286)
Accounts payable and 8,911 0 15,181
accrued expenses
Wages and related taxes payable 9,481 0 15,859
Income taxes payable 0 0 1,600
- -------------------------------------------------------------------------------
Net cash used in operating activities (65,171) (509) (72,998)
- -------------------------------------------------------------------------------
Cash Flows From Investing Activities
Net change in advances-related party 0 (4,200) 0
Increase in deferred stock 0 (7,000) 0
offering issuance
Increase in capitalized (6,071) (2,000) (20,455)
publishing costs
- -------------------------------------------------------------------------------
Net cash provided by (used in) (6,071) (13,200) (20,455)
investing activities
- -------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from issuance of common stock 5,000 27,224 80,605
Net change in advances-related party 9,798 0 13,053
- -------------------------------------------------------------------------------
Net cash provided by financing activities 14,798 27,224 93,658
- -------------------------------------------------------------------------------
Net increase (decrease) in cash (56,444) 13,515 205
Cash at Beginning of Period 56,649 201 0
- -------------------------------------------------------------------------------
Cash at End of Period $ 205 $ 13,716 $ 205
===============================================================================
/6/
Heritage Scholastic Corporation
(a Development Stage Company)
Statements of Cash Flows
(unaudited)
- --------------------------------------------------------------------------
Noncash Investing and Financing Activities:
During the year ended June 30, 2001, the Company issued 6,100,000
common shares valued at $7,300 in exchange for notes receivable.
This amount was collected in 2002.
During the year ended June 30, 2002, the Company issued 280,000 common
shares valued at $28,000 in exchange for
services performed in a common stock offering.
During the six months ended December 31, 2001, the Company recorded non-
cash stock based compensation expense of $3,150 for stock
options issued to non-employees.
During the six months ended December 31, 2002, the Company recorded non-
cash stock based compensation expense of $4,200 for stock options
issued to non-employees.
==========================================================================
The accompanying notes are an integral part of these financial statements.
/7/
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to Condensed Financial Statements
==================================================================
1. Basis of The accompanying condensed financial
Presentation statements include the activity 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 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 Amended Form 10-SB, for the year ended
June 30, 2002, filed on January 29, 2003 the
Company filed 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
December 31, 2002 are not necessarily indicative
of results that may be expected for the fiscal
year ending June 30, 2003 or any future period,
and the Company makes no representations related
thereto.
The accompanying condensed financial
statements as of December 31, 2002 have been
prepared assuming the Company will continue as a
going concern. However, the Company had a working
capital deficit of $37,202 as of December 31,
2002, and incurred a net loss for the six month
period ended December 31, 2002 and period from
inception to December 31, 2002 of $79,477 and
$107,252, respectively. These conditions raise
substantial doubt about the Company's ability to
continue as a going concern. During the period
from inception to December 31, 2002, the Company
raised net proceeds of approximately $91,000
through sales of common stock. Subsequent to
March 2003, 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.
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.
/8/
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to Condensed Financial Statements
==================================================================
1. Basis of The preparation of financial statements in
Presentation conformity with generally accepted accounting
Cont'd 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 These condensed financial statements do not
Accounting include the complete list of significant
Policies accounting policies, reference should be made to
the Company's Amended Form 10-SB filed on January
29, 2003 for a more complete description of the
relevant accounting policies.
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 December 31, 2002 a current deferred
tax asset of approximately $43,000 had been
recognized for the temporary differences related
to net operating losses carried forward. A
valuation allowance of approximately $43,000 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 $107,000 expire
in 2022 and the state net operating losses of
approximately $107,000 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.
/9/
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to Condensed Financial Statements
==================================================================
3. Advances Heritage Media Corporation's (HMC) sole
with shareholders are Charles and Lori Parks. The
a Related Parks' are also shareholders in the Company.
Party The Company also shares officers, directors,
facilities, and other various resources with
HMC. From time to time the Company and a HMC
advance money to cover common expenses related
to graphic design and other operating expenses.
The advances are due on demand and bear interest
at 6% per annum. During the three month period
ended September 30, 2002, the Company paid the
$3,255 due to HMC from June 30, 2002. As of
December 31, 2002, the Company had net advances
from HMC of $13,053.
4. Recent In April 2002, the Financial Accounting
Accounting Standards Board ("FASB") issued Statement of
Pronouncements Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds
SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of
that SFAS, SFAS No. 64, "Extinguishment of Debt
Made to Satisfy Sinking-Fund Requirements." SFAS
No. 145 also rescinds SFAS No. 44, "Accounting
for Intangible Assets of Motor Carriers."
Further, SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an
inconsistency between the required accounting
for sale- leaseback transactions and the
required accounting for certain lease
modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS
No. 145 also amends other existing authoritative
pronouncements to make various technical
corrections, clarify meanings, or described
their applicability under changed conditions.
This pronouncement requires gains and losses
from extinguishment of debt to be classified as
an extraordinary item only if the criteria in
Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions,"
have been met. Further, lease modifications with
economic effects similar to sale-leaseback
transactions must be accounted for in the same
manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 shall be applied in
fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to Statement
13 shall be effective for transactions occurring
after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not
have a material impact on the Company's
financial position or results of operations.
/10/
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to Condensed Financial Statements
==================================================================
4. Recent In July 2002, the FASB issued Statement of
Accounting Financial Accounting Standards No. 146,
Pronouncements "Accounting for Costs Associated with Exit or
Cont'd Disposal Activities" ("SFAS 146"). SFAS 146
requires that a liability for costs associated
with an exit or disposal activity be recognized
and measured initially at fair value only when
the liability is incurred. SFAS 146 is effective
for exit or disposal activities that are
initiated after December 31, 2002. Management
does not expect the adoption of SFAS 146 to have
a material impact on our operating results or
financial position.
In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation-
Transition and Disclosure-an amendment of SFAS
No. 123." SFAS No. 148 provides alternative
methods of transition for a voluntary change to
the fair value based method of accounting for
stock-based employee compensation. In addition,
this Statement amends the disclosures in both
annual and interim financial statements about
the method of accounting for stock-based
employee compensation and the effect of the
method used on reported results. Management is
evaluating the adoption of this statement.
In November 2002 the Financial Accounting
Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 elaborates
on previously existing disclosure requirements
for most guarantees. It also clarifies that at
the time a company issues a guarantee, the
company must recognize an initial liability for
the fair value, or market value, of the
obligations it assumes under the guarantee and
must disclose that information in its financial
statements. The provisions related to
recognizing a liability at inception of the
guarantee for the fair value of the guarantor's
obligations does not apply to product warranties
or to guarantees accounted for as derivatives.
FIN No. 45 also requires expanded disclosures
regarding product warranty expense. The initial
recognition and initial measurement provisions
apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The
adoption of this Statement is not expected
to have a material effect on the financial
statements.
In January 2003 the FASB issued FASB
Interpretation (FIN) No. 46, "Consolidation of
Variable Interest Entities, an interpretation of
ARB No. 51." This interpretation provides
guidance on: 1) the identification of entities
for which control is achieved through means
other than through voting rights, known as
"variable interest entities" (VIEs); and 2)
which business enterprise is the primary
beneficiary and when it should consolidate the
VIE. This new model for consolidation applies
to entities: 1) where the equity investors (if any)
do not have a controlling financial interest; or 2) whose
/11/
equity investment at risk
is insufficient to finance that entity's
activities without receiving additional
subordinated financial support from other
parties. In addition, this interpretation
requires that both the primary beneficiary and
all other enterprises with a significant
variable interest in a VIE make additional
disclosures. This interpretation is effective
for all new VIEs created or acquired after
January 31, 2003. For VIEs created or acquired
prior to February 1, 2003, the provisions of the
interpretation must be applied no later than the
beginning of the first interim or annual
reporting period beginning after June 15, 2003.
Certain disclosures are effective immediately.
The adoption of this Statement is not expected
to have a material effect on the financial
statements.
In April 2003 the Financial Accounting
Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 149,
"Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No.
149 amends and clarifies financial accounting
and reporting for derivative instruments,
including certain derivative instruments
embedded in other contracts (collectively
referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities."
SFAS No. 149 requires that contracts with
comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for
contracts entered into or modified after June
30, 2003, and for hedging relationships
designated after June 30, 2003. The adoption of
this Statement is not expected to have a
material effect on the consolidated financial
statements.
In May 2003 the Financial Accounting
Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 150,
"Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for
how an issuer classifies and measures certain
financial instruments with characteristics of
both liabilities and equity. It requires that an
issuer classify a financial instrument that is
within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective
for financial instruments entered into or
modified after May 31, 2003, and otherwise is
effective at the beginning of the first
interim period beginning after June 15, 2003. The
adoption of this Statement is not expected
to have a material effect on the financial
statements.
/12/
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to Condensed Financial Statements
==================================================================
5 Common
Stock On July 1, 2000 the Company issued 5,500,000
of the 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 275,000 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 (see Note (9).
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.
/13/
Part I Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
As of December 31, 2002, we have not generated any
revenue. Currently, the Company's CEO, Charles Parks is the
sole salesperson and he is working on a part time basis
between one and two days per week. Once sales increase to
approximately $20,000 per month, the Company plans to hire a
full time sales person. This is expected to occur in the
first quarter of the next fiscal year based on current sales
projections. Currently we are selling books only in the Los
Angeles area. This is expected to continue through the end
of the current fiscal year. Plans are to expand into other
markets once we have our first full time sales person.
Expenses during the first six months of this year were
$79,477 compared with $3,534 for the same period last year.
As was also the case then, approximately two-thirds of the
expenses were legal and professional. These expenses were
all related to the 10-SB filing for the SEC. We are
currently engaged in discussions and correspondence with the
NASD to complete the company's listing on the bulletin
board.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying condensed financial statements as of
December 31, 2002 have been prepared assuming the Company
will continue as a going concern. However, the Company had a
working capital deficit of $37,202 as of December 31, 2002,
and incurred a net loss for the six month period ended
December 31, 2002 and period from inception to December 31,
2002 of $79,477 and $107,252, respectively. These conditions
raise substantial doubt about the Company's ability to
continue as a going concern.
As of December 31, 2002, we had $205 in cash and $8,286
in books inventory. The rent expense continues to accrue as
a payable due to an affiliate. During the second quarter,
the Company raised an additional $5,000 in capital via
private placement of stock to a qualified private investor.
We believe our total current assets of $8,491 as of
December 31, 2002, plus projected cash flows, 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 $1,000,
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
In July 2001 the FASB issued Statements No. 141,
Business Combinations (SFAS 141) and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). These standards change
the accounting for business combinations by, among other
things, prohibiting the prospective use of pooling-of-
interests accounting and requiring companies to stop
amortizing goodwill and certain intangible assets with an
indefinite useful life created by business combinations
accounted for using the purchase method of accounting.
Instead, goodwill and intangible assets deemed to have an
indefinite useful life will be subject to an annual review
for impairment. We adopted the new standards on January 1,
2002; the adoption did not have an effect on our financial
statements.
/14/
In July 2001 the FASB issued Statement No. 143,
Accounting for Asset Retirement Obligations (SFAS 143).
SFAS 143 addresses the accounting and reporting for
obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. We
adopted the new standard on January 1, 2002; the adoption
did not have an effect on our financial statements.
In August 2001 the FASB issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 clarifies the accounting for the
impairment of long-lived assets and for long-lived assets to
be disposed of, including the disposal of business segments
and major lines of business. We adopted the new standard on
January 1, 2002; the adoption did not have an effect on our
financial statements.
In April 2002, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an
amendment of that SFAS, SFAS No. 64, "Extinguishment of Debt
Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets
of Motor Carriers." Further, SFAS No. 145 amends SFAS No.
13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various
technical corrections, clarify meanings, or described their
applicability under changed conditions. This pronouncement
requires gains and losses from extinguishment of debt to be
classified as an extraordinary item only if the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," have been
met. Further, lease modifications with economic effects
similar to sale-leaseback transactions must be accounted for
in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 was applicable in fiscal years beginning after May 15,
2002. The provisions of SFAS No. 145 related to Statement 13
shall be effective for transactions occurring after May 15,
2002, with early application encouraged. The adoption of
SFAS No. 145 did not have a material impact on our financial
position or results of operations for the year ended
December 31, 2002.
In July 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 146 requires that a liability for costs associated with
an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred.
SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. We do not expect the
adoption of SFAS 146 to have a material impact on our
operating results or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS No. 123." SFAS No. 148 provides
alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends
the disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. Management is evaluating the adoption of
this statement.
In November 2002 the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others."
FIN No. 45 elaborates on previously existing disclosure
requirements for most guarantees. It also clarifies that at
the time a company issues a guarantee, the company must recognize
an initial liability for the fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that
/15/
information in its financial statements.
The provisions related to recognizing a liability at
inception of the guarantee for the fair value of the
guarantor's obligations does not apply to product warranties
or to guarantees accounted for as derivatives. FIN No. 45
also requires expanded disclosures regarding product
warranty expense. The initial recognition and initial
measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The
adoption of this Statement is not expected to have a
material effect on the financial statements.
In January 2003 the FASB issued FASB Interpretation
(FIN) No. 46, "Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51." This interpretation
provides guidance on: 1) the identification of entities for
which control is achieved through means other than through
voting rights, known as "variable interest entities" (VIEs);
and 2) which business enterprise is the primary beneficiary
and when it should consolidate the VIE. This new model for
consolidation applies to entities: 1) where the equity
investors (if any) do not have a controlling financial
interest; or 2) whose equity investment at risk is
insufficient to finance that entity's activities without
receiving additional subordinated financial support from
other parties. In addition, this interpretation requires
that both the primary beneficiary and all other enterprises
with a significant variable interest in a VIE make
additional disclosures. This interpretation is effective for
all new VIEs created or acquired after January 31, 2003. For
VIEs created or acquired prior to February 1, 2003, the
provisions of the interpretation must be applied no later
than the beginning of the first interim or annual reporting
period beginning after June 15, 2003. Certain disclosures
are effective immediately. The adoption of this Statement
is not expected to have a material effect on the financial
statements.
In April 2003 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for
derivative instruments, including certain derivative
instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 requires that contracts
with comparable characteristics be accounted for similarly.
SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The adoption of
this Statement is not expected to have a material effect on
the financial statements.
In May 2003 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this
Statement is not expected to have a material effect on the
financial statements.
/16/
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 our offering of common stock (as
described in Part II, Item 4. Recent Sale of Unregistered
Securities) 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.
/17/
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 on page 12 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.
/18/
HERITAGE SCHOLASTIC CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any litigation or legal
proceedings during the six months ended December 31, 2002.
/19/
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: October 7, 2003
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By: /s/ Charles E. Parks
--------------------
Charles E. Parks, President and CEO
Date: October 7, 2003
---------------
By: /s/ Randall L. Peterson
-----------------------
Randall L. Peterson, Treasurer and CFO
/20/