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, 2003.
[_] 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.)
1954 Kellogg Avenue, Carlsbad, California 92008
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(Address of Principal Executive Offices)
760-268-0700
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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 ______
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: 7,919,875 (as of
November 12, 2003)
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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 - September 30,
2003 and 2002.
Condensed consolidated statements of operations and
comprehensive loss - Three months ended September 30, 2003
and September 30, 2002, and period from inception to
September 30, 2003.
Condensed consolidated statements of cash flows - Three
months ended September 30, 2003 and September 30, 2002, and
period from inception to September 30, 2003.
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
/2/
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
Heritage Scholastic Corporation
(a Development Stage Company)
Condensed Consolidated Balance Sheets
(unaudited)
==============================================================================
September 30, 2003 2002
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Assets
Current Assets
Cash $ 3,267 $ 277
Restricted cash 0 2,650
Accounts receivable 600 0
Inventory 5,481 8,286
Prepaid expenses 4,000 0
Advances - related party 0 5,607
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Total current assets 13,347 16,820
Capitalized book expenses 15,341 20,455
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15,341 20,455
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Total assets $ 28,688 $ 37,275
==============================================================================
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses $ 14,375 $ 14,587
Wages payable and related taxes 42,317 6,193
Income taxes payable 1,600 1,600
Deferred revenue 20,320 0
Loan from shareholder 6,401 0
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Total liabilities $ 85,373 $ 22,371
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Stockholders' Equity (Deficit)
Preferred stock; $0.001 par value, 20,000,000 shares
authorized and no shares issued and outstanding 0 0
Common stock; $0.001 par value, 100,000,000 shares
authorized and 7,918,875 and 7,618,875 shares
issued and outstanding 7,919 7,619
Additional paid-in capital 114,207 75,486
Deficit accumulated in the development stage (178,810) (68,201)
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Total stockholders' equity (deficit) $ (56,684) $ 14,904
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Total liabilities and stockholders' equity (deficit) $ 28,688 $ 37,275
==============================================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
/4/
Heritage Scholastic Corporation
(a Development Stage Company)
Condensed Consolidated Statements of Operations
(unaudited)
==============================================================================
Three Three Period
Months Months from Inception
ended ended (30-July-1999)
30-Sep-2003 30-Sep-2002 to 30-Sep-2003
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Revenues $ 0 $ 0 $ 8,400
Cost of Sales 0 0 7,919
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Gross Profit 0 0 481
General and administrative expenses 14,228 40,426 179,291
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Net Loss $ (14,228) $ (40,426) $ (178,810)
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Loss Per Share of Common Stock $ (0.00) $ (0.01)
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Weighted Average Shares Outstanding 7,918,875 6,780,635
==============================================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
/5/
Heritage Scholastic Corporation
(a Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(unaudited)
==============================================================================
Three Three Period
Months Months from Inception
ended ended (30-July-1999)
30-Sep-2003 30-Sep-2002 to 30-Sep-2003
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Cash Flows From Operating Activities
Net loss $ (14,228) $ (40,426) $ (178,810)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Non-Cash based compensation
expense 821 1,800 36,521
Change in operating assets and
liabilities:
Accounts receivable 2,700 0 (600)
Inventory 0 (8,286) (5,481)
Prepaid expenses 0 0 (4,000)
Accounts payable and accrued
expenses (4,859) 8,305 14,735
Wages and related taxes payable 10,566 (183) 42,317
Income taxes payable 0 0 1,600
Deferred revenues 8,320 0 20,320
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Net cash provided by (used in)
operating activities 3,320 (38,790) (73,398)
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Cash Flows From Investing Activities
Net change in advances-related party 0 (5,607) 0
Decrease in capitalized publishing
costs 0 (6,071) (15,341)
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Net cash used in investing activities 0 (11,678) (15,341)
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Cash Flows From Financing Activities
Net proceeds from issuance of common
stock 0 0 85,605
Net change in advances-related party (900) (3,255) 6,401
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Net cash provided by (used in) financing
activities (900) (3,255) 92,006
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Net increase (decrease) in cash 2,420 (53,723) 3,267
Cash at Beginning of Period 847 56,650 0
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Cash at End of Period $ 3,267 $ 2,927 $ 3,267
==============================================================================
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Noncash Investing and Financing Activities:
During the three-month periods ended September 30, 2003 and
September 30, 2002, the Company recorded non-cash stock based
compensation expense of $821 and $1,800 respectively for
stock options issued to non-employees.
During the period from inception to September 30, 2003, the
Company recorded non-cash stock based compensation expense of
$36,521 for stock options issued to non-employees.
==============================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
/7/
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to the Condensed Consolidated Financial Statements
===================================================================
1. Basis of The accompanying condensed consolidated financial
Presentation statements of Heritage Scholastic Corporation
("the Company"), was incorporated in the state of
Nevada on July 30, 1999 with the purpose of
developing history textbooks for sale to students
in grades kindergarten through high school in the
United States. 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, 2003, filed on October 10, 2003, 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, 2003 are not
necessarily indicative of results that may be
expected for the fiscal year ending June 30, 2004
or any future period, and the Company makes no
representations related thereto.
The accompanying condensed consolidated financial
statements as of September 30, 2003 have been
prepared assuming the Company will continue as a
going concern. The Company had negative working
capital of $72,026 as of September 30, 2003, and
incurred a net loss for the three month period
ended September 30, 2003 and period from
inception to September 30, 2003 of $14,228 and
$178,810, 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, 2003,
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, 2003,
management raised net proceeds of approximately
$86,000 through sales of common stock. Subsequent
to September 30, 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
/8/
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 The accompanying condensed financial statements
Presentation do not include any adjustments to reflect the
Cont'd 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 These condensed consolidated financial statements
Accounting do not include the complete list of significant
Policies accounting policies, reference should be made to
the Company's Form 10-KSB filed on October 10,
2003 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.
Inventory consists of book inventory and is
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, 2003 a current deferred tax
asset of approximately $72,000 had been
recognized for the temporary differences related
to net operating losses carried forward. A
valuation allowance of approximately $72,000 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 $179,000 begin
to expire in 2022 and the state net operating
losses of approximately $179,000 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.
/9/
Heritage Scholastic Corporation
(a Development Stage Company)
Notes to Condensed Consolidated 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 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. There were no
outstanding advances at September 30, 2003.
4. Recent There were no recent Accounting Pronouncements
Accounting that effect the Company during the first
Pronouncements quarter ended September 30, 2003. For past
pronouncements please refer to the Company's 10-
KSB filed October 10, 2003.
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.
/10/
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.
/11/
Part I Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
As of September 30, 2003, we have generated revenues of $8,400
of which none were generated in the three-month period ended
September 30, 2003. The Company has received additional orders
totaling $20,320, which have not been filled as of September
30, 2003. We expect orders and revenue to grow in the 2nd
quarter as more sales contacts are made. 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). The
Company's CEO, Charles Parks, continues as a part-time
salesperson between one and two days per week. In addition the
Company has hired Stephen Hung as a commission-only
salesperson. Currently the company is selling books in both the
Los Angeles and Boston areas. Plans are to expand into other
markets once we have our first full time sales person, cash
flow permitting.
Expenses during the first quarter of this year were
approximately $14,200 compared with approximately $40,400 for
the same quarter last year. In the quarter ended September 30,
2003 most of the expenses were accrued wages and salaries. In
the same quarter last year the largest expenses were legal and
professional fees related to the 10-QSB filing for the SEC.
The company is 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 consolidated financial statements as
of September 30, 2003 have been prepared assuming the Company
will continue as a going concern. However, the Company had
negative working capital of $72,026 as of September 30, 2003,
and incurred a net loss for the three-month period ended
September 30, 2003 and period from inception to September
30, 2003 of $14,228 and $178,810, respectively. These
conditions raise substantial doubt about the Company's ability
to continue as a going concern.
As of September 30, 2003, we had $3,267 in cash, $600 in
receivables and $5,481 in books inventory. The rent expense
continues to accrue as a payable due to an affiliate. During
the first quarter, the Company raised no additional capital.
We believe our total current assets of $13,347 as of September
30, 2003, 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
$1,500, exclusive of management's salaries, which continued to
be deferred until we have sufficient sales and cash flow to pay
them.
The Company currently has a deferred tax asset of approximately
$72,000 for the temporary differences related to net operating
losses carried forward. A fully valuation allowance has been
recorded as it is not more likely than not that the assets will
be utilized. The Company also has federal net operating losses
that will begin to expire in 2022 and state net operating
losses in 2011, see also footnote 1 in the notes to the
consolidated financial statements.
/12/
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
There were no recent Accounting Pronouncements that effect the
Company during the first quarter ended September 30, 2003. For
past pronouncements please refer to the Company's 10-KSB filed
October 10, 2003.
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.
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.
/13/
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.
/14/
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, 2003
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By: /s/ Charles E. Parks
--------------------
Charles E. Parks, President and CEO
Date: November 12, 2003
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By: /s/ Randall L. Peterson
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Randall L. Peterson, Treasurer and CFO
/15/