10QSB 1 heritage10qsb.txt 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, 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 ------------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Nevada 88-0502934 ------------------------------------ ------------ (State of Incorporation) (I.R.S. Employer Identification No.) 136 Acacia, Solana Beach, California 92075 ------------------------------------------------------------ (Address of Principal Executive Offices) 858-755-9829 ---------------------------------------- (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 February 19, 2004) -------------------------------------------------------------- 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, 2003 and 2002. Condensed consolidated statements of operations and comprehensive loss - Three months and Six months ended December 31, 2003 and December 31, 2002, and period from inception to December 31, 2003. Condensed consolidated statements of cash flows - Six months ended December 31, 2003 and December 31, 2002, and period from inception to December 31, 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 INFO ITEM 1. FINANCIAL STATEMENTS Heritage Scholastic Corporation (a Development Stage Company) Condensed Consolidated Balance Sheets (unaudited) ============================================================================== December 31, 2003 2002 ------------------------------------------------------------------------------ Assets Current Assets Cash $ 1,418 $ 205 Restricted cash 0 0 Accounts receivable 600 0 Inventory 5,481 8,286 Prepaid expenses 4,000 0 Advances - related party 0 0 ------------------------------------------------------------------------------ Total current assets 11,499 8,491 Capitalized book expenses 15,341 20,455 ------------------------------------------------------------------------------ 15,341 20,455 ------------------------------------------------------------------------------ Total assets $ 26,840 $ 28,946 ============================================================================== Liabilities and Stockholders' Deficit Current Liabilities Accounts payable and accrued expenses $ 24,759 $ 15,181 Wages payable and related taxes 51,983 15,859 Income taxes payable 1,600 1,600 Deferred revenue 20,320 0 Loan from shareholder 15,068 13,053 ------------------------------------------------------------------------------ Total liabilities $ 113,730 $ 45,693 /3/ Stockholders' 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 7,919,875 and 7,668,875 shares issued and outstanding 7,920 7,669 Additional paid-in capital 115,127 82,836 Deficit accumulated in the development stage (209,937) (107,252) ------------------------------------------------------------------------------ Total stockholders' deficit $ (86,890) $ (16,747) ------------------------------------------------------------------------------ Total liabilities and stockholders' deficit $ 26,840 $ 28,946 ============================================================================== 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 SIX MONTHS THREE SIX MONTHS PERIOD MONTHS MONTHS FROM INCEPTION ENDED ENDED ENDED ENDED (30-JULY-1999) 31-DEC-2003 31-DEC-2003 31-DEC-2002 31-DEC-2002 TO 31-DEC-2003 ------------------------------------------------------------------------------------------------------------------ Revenues $ 0 $ 0 $ 0 $ 0 $ 8,400 Cost of Sales 0 0 0 0 7,919 ------------------------------------------------------------------------------------------------------------------ Gross Profit 0 0 0 0 481 General and administrative 31,126 45,355 39,051 79,477 210,418 expenses ------------------------------------------------------------------------------------------------------------------ NET LOSS $ (31,126) $ (45,355) $ (39,051) $ (79,477) $ (209,937) ------------------------------------------------------------------------------------------------------------------ LOSS PER SHARE OF COMMON STOCK $ (0.00) $ (0.01) $ (0.01) $ (0.01) ------------------------------------------------------------------------------------------------------------------ Weighted Average Shares 7,918,875 7,918,875 7,643,875 7,635,542 Outstanding ==================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. /5/ Heritage Scholastic Corporation (a Development Stage Company) Condensed Consolidated Statements of Cash Flows (unaudited) ============================================================================== Six Six Period Months Months from Inception ended ended (30-July-1999) 31-Dec-2003 31-Dec-2002 to 31-Dec-2003 ------------------------------------------------------------------------------ Cash Flows From Operating Activities Net loss $ (45,355) $ (79,477) $ (209,937) Adjustments to reconcile net loss to net cash used in operating activities: Non-Cash based compensation expense 1,642 4,200 37,342 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 5,166 8,911 24,759 Wages and related taxes payable 20,231 9,481 51,983 Income taxes payable 0 0 1,600 Deferred revenues 8,320 0 20,320 ------------------------------------------------------------------------------ Net cash used in operating activities (7,296) (65,171) (84,014) ------------------------------------------------------------------------------ Cash Flows From Investing Activities Net change in advances-related party 0 0 3,255 Decrease in capitalized publishing costs 0 (6,071) (15,341) ------------------------------------------------------------------------------ Net cash used in investing activities 0 (6,071) (12,086) ------------------------------------------------------------------------------ Cash Flows From Financing Activities Net proceeds from issuance of common stock 100 5,000 85,705 Net change in advances-related party 7,767 9,798 11,813 ------------------------------------------------------------------------------ /6/ Net cash provided by financing activities 7,867 14,798 97,518 ------------------------------------------------------------------------------ Net increase (decrease) in cash 571 (56,444) 1,418 Cash at Beginning of Period 847 56,649 0 ------------------------------------------------------------------------------ Cash at End of Period $ 1,418 $ 205 $ 1,418 ============================================================================== -------------------------------------------------------------- Noncash Investing and Financing Activities: During the six-month periods ended December 31, 2003 and December 31, 2002, the Company recorded non-cash stock based compensation expense of $1,642 and $4,200 respectively for stock options issued to non-employees. During the period from inception to December 31, 2003, the Company recorded non-cash stock based compensation expense of $37,342 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") include the accounts of the Company and its subsidiary, Books for Kids, Inc. 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 December 31, 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 December 31, 2003 have been prepared assuming the Company will continue as a going concern. The Company had negative working capital of $102,231 as of December 31, 2003, and incurred a net loss for the three month, six month period ended December 31, 2003 and period from inception to December 31, 2003 of $31,126, $45,355 and $209,937, 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 December 31, 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 December 31, 2003, management raised net proceeds of approximately $86,000 through sales of common stock. Subsequent to December 31, 2003, management intends to continue to raise additional financing through a combination of public and/or private equity placements 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 December 31, 2003 a current deferred tax asset of approximately $84,000 had been recognized for the temporary differences related to net operating losses carried forward. A valuation allowance of approximately $84,000 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 $210,000 begin to expire in 2022 and the state net operating losses of approximately $210,000 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 Parks Family LLC's (PFLLC) sole with members are Charles and Lori Parks. The a Related Parks' are also shareholders in the Company. Party The Company also shares facilities and other various resources with PFLLC. From time to time the Company and PFLLC 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. At December 31, 2003 the Company had been advanced $15,068 from PFLLC. 4. Recent There were no recent Accounting Pronouncements Accounting that effect the Company during the first Pronouncements quarter ended December 31, 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 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. 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. On December 31, 2003 the Company issued 1,000 shares of common stock to an investor for cash of $0.10 per share. /11/ Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS From inception to December 31, 2003, we have generated revenues of $8,400 of which none were generated in the three-month or six month period ended December 31, 2003. The Company has received additional orders totaling $20,320, which have not been filled as of December 31, 2003. We expect orders and revenue to grow in the 3rd and 4th quarter as we move forward in hiring a full-time salesperson, initially for the Los Angeles area. 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, has discontinued his work as a part-time salesperson in order to focus on locating and hiring a full-time salesperson. Stephen Hung continues to work as a commission-only salesperson in Boston. Currently the company is attempting to sell 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 quarter ended December 31, 2003 were approximately $31,100 compared with approximately $39,100 for the same quarter last year. In the quarter ended December 31, 2003 most of the expenses were for legal and professional fees related to the company's SEC filings. Accrued wages and salaries were the second largest expense and the same amount as the 1st Quarter of the current fiscal year. 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 completed the company's listing on the bulletin board in January, 2004 and the stock began trading in the public sector in February, 2004. The Company's ticket symbol is HGSC. Expenses during the first six months of 2003 were approximately $45,400 compared with approximately $79,500 for the same period last year. In the six months ended December 31, 2003 most of the expenses were for legal and professional fees related to the company's SEC filings. Accrued wages and salaries were the second largest expense. In the same period last year the largest expenses were legal and professional fees related to the 10-QSB filing for the SEC. LIQUIDITY AND CAPITAL RESOURCES The accompanying condensed consolidated financial statements as of December 31, 2003 have been prepared assuming the Company will continue as a going concern. However, the Company had negative working capital of $102,231 as of December 31, 2003, and incurred a net loss for the three-month period and six month period ended December 31, 2003 and period from inception to December 31, 2003 of $31,126, $45,355 and $209,936, respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern. As of December 31, 2003, we had $1,418 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 second quarter, the Company raised $100 in additional capital. We believe our total current assets of $11,499 less prepaid expenses of $4,000 as of December 31, 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 $84,000 for the temporary differences related to net operating losses carried forward. A full valuation allowance has been recorded as it is not more likely than not that the assets will be utilized. The increase in the deferred tax asset and the valuation allowance was $12,000 from September 30, 2003 to December 31, 2003. 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 December 31, 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: February 19, 2004 ----------------- By: /s/ Charles E. Parks -------------------- Charles E. Parks, President and CEO Date: February 19, 2004 ----------------- By: /s/ Randall L. Peterson ----------------------- Randall L. Peterson, Treasurer and CFO /15/