<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
Commission file number: 33-23138-D
HEARTSOFT, INC.
(Name of small business issuer in its charter)
Delaware 87-0456766
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3101 Hemlock Circle, Broken Arrow, Oklahoma 74012
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (918) 251-1066
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.0005 OTC pink sheets
------------------------------ ---------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 No X
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenue for its most recent fiscal year was $1,158,817.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock on June
18, 1996, was approximately $6,286,238. For purposes of this computation, all
officers, directors and 5% beneficial owners of Registrant are deemed to be
affiliates.
As of June 18, 1996, the issuer had outstanding a total of 5,089,608
shares of its $.0005 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Stockholders to be held August 28, 1996,
are incorporated into Part III.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
TABLE OF CONTENTS
PAGE
ITEM NUMBER AND CAPTION NUMBER
PART I
1. Description of Business 1
2. Description of Property 4
3. Legal Proceedings 4
4. Submission of Matters to a Vote of Security Holders 5
PART II
5. Market for Common Equity and Related Stockholder Matters 5
6. Management's Discussion and Analysis or Plan of Operation 6
7. Financial Statements 7
8. Changes In and Disagreements with Accountants on Accounting 8
and Financial Disclosure
PART III
9. Directors, Executive Officers, Promoters and Control Persons; 8
Compliance With Section 16(a) of the Exchange Act
10. Executive Compensation 8
11. Security Ownership of Certain Beneficial Owners and Management 8
12. Certain Relationships and Related Transactions 9
13. Exhibits and Reports on Form 8-K 9
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Heartsoft, Inc., a Delaware corporation ("Heartsoft", or including its
subsidiary described below, the "Company"), was incorporated on June 2, 1988,
under the name "Davenport Company". In July of 1988, Davenport made a public
offering of its stock in furtherance of the objective of seeking and acquiring
an interest in a prospective business opportunity. In May of 1989, Davenport
acquired all of the issued and outstanding stock of Heartsoft, Inc., a Delaware
corporation formed on January 15, 1988 ("Heartsoft -Delaware") pursuant to an
Agreement and Plan of Reorganization. As part of the Agreement and Plan of
Reorganization, on June 21, 1989, Davenport caused Heartsoft - Delaware to be
merged into it, and Davenport then changed its corporate name to Heartsoft, Inc.
As a result of the Agreement and Plan of Reorganization the former stockholders
of Heartsoft - Delaware became the then owners of approximately 70% of the
outstanding stock of Heartsoft.
Heartsoft is engaged in publishing its own proprietary educational software and
licensing technological products for distribution to the education market.
On August 16, 1991, Heartsoft incorporated Heartsoft Software, Inc., an Oklahoma
corporation, organized as a wholly-owned subsidiary of Heartsoft, in which the
actual day-to-day operations of the Company are conducted.
PRODUCTS AND MARKETS
The Company publishes proprietary educational software and licenses such
software to the educational market (both public and private school educators,
schools and school systems). In addition, the Company licenses and sells third
party educational technology. The Company believes that there are two basic
markets for educational software technology -- retail and educational systems.
The retail market consists of such outlets as computer and software specialty
stores, warehouse clubs and general merchandise outlets. The education market
consists of both school systems and individual educators requiring core
curriculum materials as well as supplemental materials. Because the Company
perceived the competition and barriers to entry into the retail market to be
extremely high, it has chosen to concentrate solely on the educational market.
With respect to products created for the education market, the primary emphasis
(apart from price considerations) are on content and instructional methodology.
Since, in contrast to the retail market, product obsolescence is less of a
concern, product life spans are greater, marketing costs are lower, and with the
emphasis on content and instructional methodology (as opposed to the
exponentially high demand placed on graphics and system performance in the
retail market) development costs are lower.
The Company believes that the educational supplemental materials market is
sufficiently served by many of the same companies competing in the retail
market, with software that focuses more on "edutainment" than core curriculum.
Therefore, the Company believes that the real opportunity for growth exists in
the curriculum materials market.
There does not appear to be a dominant company or companies that offer
curriculum materials of the type the Company offers. The majority of the
companies offering products to this market segment focus on network solutions or
integrated learning systems, which result in a comprehensive curriculum-based
solution, but at a very high price, and with the result that such networked
systems can exclude the concurrent use of computers in the classroom by others.
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The Company's market focus to date has been in the development of curriculum
based packages consisting of the multi-licensing of software titles at a price
well below industry average. In addition to traditional sales channels, in
April of 1995 the Company began marketing its curriculum based packages by
direct mailings to approximately 100,000 educators nationwide. Because of the
initial success of this campaign, the Company anticipates that direct sales will
assume an increasing marketing role over the next five years.
Among the Company's best selling proprietary titles are: Tommy the Time Turtle,
---------------------
an animated turtle that teaches children 5-7 to tell time on an analog clock,
with lessons ranging from 1 minute to 1 hour increments; Coin Changer, which
------------
introduces children from 5-7 to the relative denominations of coins; and the
Heartsoft Bestseller Site License, which consists of 12 titles under a license
- ---------------------------------
allowing the teacher to copy the software for every computer in the school. The
Company currently maintains a line of 38 proprietary educational software
titles.
From its Dallas office, the Company licenses and sells leading edge technology
for the classroom. The two primary products marketed by the Dallas office are
Foundations in Reading and Discourse Technologies.
Foundations in Reading, the product developed by Breakthrough, Inc.,
concentrates on helping children learn how to read. The most successful results
have been attained where children initially scoring below the 60th percentile in
reading have improved an average of 33 percentile points after using the
program. Discourse Technologies provides a student response system which
utilizes individual student workstations (either computers or low cost units
manufactured by Discourse) that enable the teacher to communicate with each
student simultaneously. The teacher's workstation allows him or her to ask
questions and see all students' responses immediately, in the same amount of
time it would take to verbally ask a question, and receive a verbal response
from one student in the class.
In addition, Heartsoft has licensing agreements in place with over a dozen
additional product lines, which allow the Company to address reading and
language arts comprehensively for K-12.
Heartsoft derives commissions and overrides as a percentage of the total sales
from this type of leading edge technology. The Company relies on a seasoned,
professional sales staff with many years experience, and extensive contacts, in
the educational technology industry. The Dallas office opened in June, 1995,
and during the first nine months of its operation was engaged in building
market awareness of its third party products. Thus, as of March 31, 1996, all
of the Company's revenues were derived from the sale of its proprietary titles.
Management expects the Dallas office will assume an increasing percentage of
sales throughout the next fiscal years.
With respect to its publishing activities, the Company's personnel develop the
software, and the Company produces the medium of transmission, together with the
actual packaging of the final product, at its Broken Arrow facilities.
All of the software developed by Heartsoft has been copyrighted.
MAJOR CUSTOMERS
Heartsoft markets to educators nationwide, which is a large, diverse group
governed by unrelated buying decisions. Thus, no single customer represents a
significant portion of the Company's revenues. Heartsoft works diligently to
strengthen relationships with existing customers, most effectively by additional
and upgrade sales, where customers can add to their Heartsoft library.
Ongoing work involves constant upgrades and variations to support new hardware
configurations. Current development activities are focused on a "critical
thinking" based curriculum product, due out by January of 1997.
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SOURCES AND AVAILABILITY OF RAW MATERIALS
The most important raw materials purchased by the Company are computer diskettes
which are obtained from domestic suppliers. The Company also purchases from
other domestic manufacturers certain components, including packaging materials
used in its products. The Company endeavors to obtain the lowest possible cost
in its purchases of raw materials and components, consistent with meeting
specified quality standards. The Company is not dependent upon any one source
for its raw material or the major components of its manufactured products. The
Company anticipates that it will have adequate sources of supplies to meet its
manufacturing requirements for the foreseeable future.
MARKETING AND DISTRIBUTION
The Company utilizes a direct sales staff of three individuals to market its
products in the United States. The Company also has recently initiated a direct
mail marketing campaign for both its proprietary products and its licensed
technology. Sales are made directly to both individual teachers and to regional
school systems and districts, with shipments being made from the Company's
Broken Arrow office to the purchaser. Billings are to the end user.
The Company's products and sales strategy focus on a "niche" market -- that
being the education industry, as opposed to sales at retail outlets. Further,
even within the education market, the Company's products focus on utilization in
the school curriculum itself as opposed to the "supplemental" or "edutainment"
market (more suitable for home use). Two of the Company's best selling products,
Heartsoft Bestseller Site License (covering 12 software titles) and
- ---------------------------------
Heartsoft K-8 Library (containing all 38 titles in the current product line)
- ---------------------
sell from prices ranging from approximately $400 to $1,400, depending on the
configuration. Further, each product license allows multiple use of the software
throughout the school.
To support and service its customers the Company supplies technical support by
means of an in-house programming services team. .
The Company's warranty on its products is lifetime for content, and one year for
disc errors.
RESEARCH AND DEVELOPMENT
All research and development activities of the Company are company-sponsored,
rather than customer-sponsored. Research and development costs are expensed as
incurred. Ongoing work involves additional title development, with a new line of
"critical thinking" software due for release by January of 1997. Anticipated
detail program design costs of approximately $100,000 over the next two years
will be capitalized and amortized over a maximum of 7 years or the life of the
product, whichever is less.
BACKLOG
The Company has no current order backlog, and has experienced minimal
occurrences in the past. Each order is filled on demand, with sophisticated,
high-speed diskette duplicators which can duplicate a disk in as little as 25
seconds. Production delays are most likely caused by delays in raw material
receipt, referenced above. These delays rarely exceed 24-48 hours before
materials are procured.
3
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WORKING CAPITAL PRACTICES
Working capital practices in the industry center on inventories and accounts
receivable. The Company regularly reviews its working capital components with a
view to maintaining the lowest level consistent with requirements of anticipated
levels of operation. Its greatest needs arise during the months of November and
December, the peak season for inventory (primarily purchased material) and
accounts receivable. The Company's working capital requirements are generally
met through a bank revolving credit facility, which currently permits allowable
borrowings up to $250,000. The Company believes that the combination of the
proceeds received upon completion of its private placement of preferred stock
and its available bank credit, will be sufficient to meet its working capital
needs through 1997.
SEASONALITY
The Company experiences mild seasonality in its sales patterns, with the peak
buying periods in the October through December quarter and April through June
quarter.
COMPETITION
The Company competes with approximately 600 other educational software
developers, with such competitors having sales ranging from less than $500,000,
to over $300 million. Heartsoft differentiates itself on the basis of price,
total value and quality of product. In addition, the Company is representing
new, leading edge technology solutions which are under-marketed, and show a
consistent record of test score improvement by the students utilizing these
products.
EMPLOYEES
As of June 15, 1996, the Company had 20 full-time employees, one part-time
employee and two temporary employees, none of whom are represented by unions.
Management considers its relations with its employees to be good.
COPYRIGHTS, PATENTS, TRADEMARKS, LICENSES AND CONCESSIONS
The Company routinely copyrights its proprietary software titles, and all of its
proprietary titles developed to dated have been copyrighted. The Company has
further trademarked the "Heartsoft" name.
ENVIRONMENTAL MATTERS
The Company's operations are of a nature that laws concerning the environment
(such as the Clean Water Act, the Clean Air Act, the Resource Conservation and
Recovery Act, the Occupational Safety and Health Act, the National Environmental
Policy Act, the Toxic Substances Control Act, regulations promulgated under
these Acts) do not substantial affect the Company's domestic operations. The
Company believes that it presently complies with these laws and that future
compliance will not materially adversely affect the Company's earnings or
competitive position.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases its principal office location in Broken Arrow, Oklahoma. The
Broken Arrow office, which includes both executive offices and production space,
contains 4,350 square feet (1,200 sq. ft. of production/warehouse space and
3,150 sq. ft. of office space), located in a business office park at 3101
Hemlock Circle, Broken Arrow, Oklahoma. The lease is for a five year term
expiring October of 2000.
The Company's operations in Dallas, Texas, are conducted out of space leased by
Charles Carlson, who served as the Company's CEO during this period. Pursuant
to the Company's arrangement with Mr.
4
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Carlson, during the year ended March 31, 1996, Mr. Carlson maintained an
independent sales business in Dallas. This business represented Heartsoft and
several other suppliers of software to schools in Texas. His sales of Heartsoft
products represented less than 5% of his total business during this period. For
this reason, no rent has been charged to the Company for this space.
The Company's current office space is believed to be adequate for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
Both the Company and Benjamin Shell, the Company's Chairman of the Board, are
named as defendants in a lawsuit filed on May 17, 1996, in Superior Court of
Murray County, Georgia, by Raymond Long, a former stockholder of the Company.
The suit sets forth various claims against Mr. Shell and the Company,
essentially alleging fraud in connection with Mr. Long's investment in the
Company in 1991 and 1992. Although it is difficult to ascertain from the
complaint the specific facts giving rise to the allegations or the aggregate
amount of damages sought, the suit alleges actual damages in excess of
$2,000,000, punitive damages, as well as treble damages under various theories
of recovery. While the lawsuit has only recently been filed, both the Company
and Mr. Shell have retained Georgia counsel, and have filed both an answer to
the allegations in the complaint, asserting numerous defenses, as well as a
motion to dismiss the case, for lack of jurisdiction. Both Mr. Shell and the
Company believe they have meritorious defenses to the suit, and both plan to
vigorously defend the allegations contained therein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders, through solicitation of
proxies or otherwise, during the period from December 31, 1995, through March
31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded over the counter (symbol: HTSF). The range
of sales prices for the Company's Common Stock during the last two years, as
reported by the National Association of Securities Dealers, Inc., was as
follows:
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------- -------- -------
<S> <C> <C>
June 30, 1994 $ .8125 $ .50
September 30, 1994 $ .6875 $ .50
December 31, 1994 $ .50 $ .375
March 31, 1995 $ .5625 $ .375
June 30, 1995 $ .9372 $.34375
September 30, 1995 $ .9375 $ .50
December 31, 1995 $ .8125 $ .25
March 31, 1996 $2.0625 $ .25
</TABLE>
The above quotes reflect inter-dealer prices without retail mark-up or mark-down
or commissions, and may not represent actual transactions.
5
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On June 1, 1996, there were 422 holders of record, and approximately 798
beneficial owners, of the Company's Common Stock.
Since its inception, no cash dividends have been paid on the Company's Common
Stock and the Company does not anticipate paying cash dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Set forth below is income statement information with respect to the Company for
fiscal years ended March 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Gross Sales $1,158,817 $508,850 $ 289,525
Sales Returns & Discounts 356,693 22,955 58,197
---------- -------- ---------
Net Sales 802,124 485,895 231,328
Total Cost of Goods Sold 60,271 42,071 30,027
---------- -------- ---------
Gross Margin 741,853 443,824 201,301
---------- -------- ---------
Payroll Expense 316,624 143,370 201,726
Amortization/Depreciation 121,228 86,833 43,206
Advertising Expense 164,078 44,377 - 0-
Administrative Expense 264,325 131,972 163,053
---------- -------- ---------
Operating Expenses 866,255 406,552 407,985
---------- -------- ---------
Income Before Taxes (124,402) 37,272 (206,684)
Income Taxes Deferred (27,395) 6,905 (45,500)
Net Income (Loss) $ (97,007) $ 30,367 $(161,184)
========== ======== =========
</TABLE>
RESULTS OF OPERATIONS
Total sales increased by approximately 127% in the fiscal year ended March 31,
1996, as compared to 1995, and were 300% above 1994 levels. Net sales were 65%
higher for the fiscal year ended March 31, 1996 compared to March 31, 1995
levels. During the fiscal year ended March 31, 1996, the Company discontinued
certain sales and marketing activities deemed to have lower sales growth
potential, resulting in the recognition of certain expenses which had
accumulated at the fiscal year end. The majority of these expenses were an
increase in sales returns, which increased to 31% of gross sales from 5% in the
previous year. The Company initiated, and then discontinued, a telemarketing
campaign which sold product on a preview basis, resulting in the high return
rate. The program was discontinued after the increase in returns was noted, and
will not be used in the future. It is anticipated that the cancellation of this
program will bring the future return rate back in line with historical norms.
Gross profit increased by 65% in the fiscal year ended March 31, 1996, compared
to 1995, and 247% compared to the fiscal year ended March 31, 1994. Total cost
of goods sold declined as a percentage of sales to 7.6%, compared with 8.7% and
13.0% for the fiscal years ended March 31, 1995 and 1994,
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respectively. This improvement was primarily attributable to improved production
efficiency and economies gained by sales of higher priced items.
Total SG&A expenses increased 113% for the period ended March 31, 1996, as
compared to the fiscal year ended March 31, 1995. This includes the effect of
management's recognition of a need to make an accounting change to capitalize
certain software costs and begin amortization of the capitalized software costs.
Management believes that because amortization is fixed and would not vary based
on sales, such costs are more clearly presented as part of administrative
expenses. Without the impact of such amortization, total SG&A expenses rose 133%
when compared to the previous year's level, and 86% when compared to the fiscal
year ended march 31, 1994. Payroll expense and advertising expense rose 56% and
191%, respectively in the period ended March 31, 1996 compared to the year ended
March 31, 1995. The addition of nine full time employees accounted for the
majority of the payroll increase. The Company executed numerous marketing and
direct mail campaigns in 1995-1996, resulting in the increase in advertising
expenses over fiscal years ended March 31, 1995 and 1994. Management believes
that the $85,000 increase in advertising in the fiscal year just ended had a
direct effect on the increase in sales during the same period.
Administrative expenses increased 140% in the fiscal year ended March 31, 1996
compared to March 31, 1995, and 62% compared to the fiscal year ended March 31,
1994. This increase is due primarily to the Company's expanded service and
support functions, as additional capacity was added in the areas of production
and customer service.
FINANCIAL CONDITION AND LIQUIDITY
Current assets and current liabilities in the fiscal year ended March 31, 1996
were comparable to 1995 as a percentage of sales. The growth in accounts
receivable accounted for the majority of the current asset change. The growth in
current liabilities was attributable to short-term borrowings on a line of
credit secured by the aforementioned receivables.
The Company did not incur any major capital expenditures for the fiscal year
ended March 31, 1996, as the growth in property and equipment was in line with
expanded sales and support needs.
The Company changed its method of accounting for software development costs and
its amortization policy. Additional development costs of $57,000 for the year
ended March 31, 1994, have been retroactively capitalized.
Initial financial statements for the year ended March 31, 1994, and the year
ended March 31, 1995, did not include amortization, but have been retroactively
revised to include $37,000 for the year ended March 31, 1994, and $80,700 for
the year ended March 31, 1995.
During 1995 the Company implemented Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". Effective March, 31, 1994, the
significant component of the Company's deferred tax asset was a net operating
loss carryforward of $570,027 expiring in the year 2009, representing temporary
differences in reporting income. Retained earnings at March 31, 1994, have been
increased by $126,704, representing the combined federal and state effective tax
rates for the tax loss carryforward.
The Company's working capital needs are met primarily by its bank revolving
credit facility which is collateralized by accounts receivable and inventory. As
of March 31, 1995, the Company also relied on a short-term bank loan, secured by
the Company's assets and personal guarantees of the Company's Chairman, which
loan matured on March 31, 1996.
As of March 31, 1996, the Company was in the process of raising additional
capital through the private placement of convertible preferred stock. The total
offering was for $1,200,000 of preferred stock, with a 12% cumulative dividend
payable through January 2, 1998, at which time each share of preferred stock
7
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automatically converts into 0.8 shares of common stock. The initial proceeds of
this offering were used to extinguish the short-term bank loan, as well as
amounts drawn under the Company's line of credit. Subsequent to March 31, 1996,
the Company has raised in excess of $1,000,000 and expects the offering to be
completed by mid-1996. Additional proceeds from the offering will be used for
additional business development and sales expansion, as well as additional
product development. Management believes that the combination of profits,
revolving debt and this new equity infusion will provide the necessary liquidity
and capital resources to the Company for at least the next two years.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are included at page 11.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In January, 1996, the Company engaged Cross and Robinson, certified public
accountants, as the Company's accountants for purposes of auditing the Company's
financial statements for the fiscal year ended March 31, 1996.
Prior to the engagement of Cross and Robinson, Brown, Kinion and Company had
served, and continues to serve as the Company's tax accountants. However, since
1990 the Company had not engaged any accounting firm to audit its financial
statements, because the Company did not believe it was required to file annual
reports. Because the Company now has such number of shareholders of record that
cause it to again be a "reporting company" under Section 12(g), Cross and
Robinson was engaged by the Company due to their experience with public
companies. The engagement of Cross and Robinson did not result from any
disagreement related to accounting principles or practices, financial statement
disclosure, or auditing scope or procedure with Brown, Kinion and Company or any
other accountant. The engagement of Cross and Robinson was recommended and
approved by the board of directors of the Company because of such firm's
experience with SEC reporting companies.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1996 Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1996 Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1996 Annual Meeting of Stockholders.
8
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1996 Annual Meeting of Stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial statements.
See Financial Statements beginning on page 11.
2. Exhibits:
(3) (A) Articles of Incorporation (i)
(B) Bylaws (i)
(21) List of Subsidiaries: Heartsoft Software, Inc.
(27) Financial Data Schedule
-------------
(i) Incorporated herein by reference to the Company's 10-K
for the fiscal year ended March 31, 1989.
(b) The Company did not file any reports on Form 8-K during the period
from December 31, 1995 to March 31, 1996.
9
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this Amendment No. 1 to Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEARTSOFT, INC.
Dated: October 11, 1996 By: /s/ Benjamin P. Shell
---------------------------
Benjamin P. Shell, Chairman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: October 11, 1996 By: /s/ Benjamin P. Shell
---------------------------
Benjamin P. Shell
Chairman of the Board and
Director
(principal executive
officer)
Dated: October 11, 1996 By: /s/ Jimmy L. Butler, Jr.
---------------------------
Jimmy L. Butler, Jr.
President and Director
Dated: October 11, 1996 By: /s/ Bryan J. Reusser
---------------------------
Bryan J. Reusser
Director of Finance
(principal financial
officer
and principal accounting
officer)
10
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HEARTSOFT, INC.
---------------
TULSA, OKLAHOMA
FINANCIAL STATEMENTS
--------------------
AS OF
-- --
MARCH 31, 1996 (AUDITED)
------------------------
AND MARCH 31, 1995 (UNAUDITED)
------------------------------
11
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[LETTERHEAD OF CROSS & ROBINSON]
Independent Auditors' Report
----------------------------
To the Board of Directors
Heartsoft, Inc.
Broken Arrow, Oklahoma
We have audited the accompanying balance sheet of Heartsoft, Inc. as of
March 31, 1996, and the related statements of income and changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heartsoft, Inc. as of March
31, 1996, and the results of its operations and its cash flows for the year
ended in conformity with generally accepted accounting principles.
12
<PAGE>
The accompanying balance sheet of Heartsoft, Inc. as of March 31, 1995, and
the related statements of income, stockholders' equity, and cash flows for the
year then ended, were not audited by us and, accordingly, we do not express an
opinion on them.
CROSS AND ROBINSON
Certified Public Accountants
June 12, 1996
13
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Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Balance Sheets
--------------
As of March 31, 1996 (Audited) and 1995 (Unaudited)
---------------------------------------------------
A S S E T S
- - - - - -
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
----------- ---------
<S> <C> <C>
Current Assets-Note 2
- ---------------------
Cash $ 19,922 $ 33,412
Accounts receivable-trade, net of allowance
for doubtful accounts of 6,900 and 5,900, respectively 165,013 53,264
Inventory-at cost 11,216 1,858
Prepaid expenses and deposits 50,495 69,059
Receivables-related parties-Note 7 51,013 6,400
-------- --------
Total Current Assets 297,659 163,993
-------- --------
Property and Equipment
- ----------------------
Equipment 173,820 125,825
Less accumulated depreciation (73,342) (50,308)
-------- --------
Property and Equipment - Net 100,478 75,517
-------- --------
Other Assets
- ------------
Developed software-net-Note 5 536,140 494,449
Deferred income tax benefit-Note 5 145,901 118,506
-------- --------
Total Other Assets 682,041 612,955
-------- --------
Total Assets $1,080,178 $852,465
------------ ========== ========
</TABLE>
See accompanying independent auditors' report
and notes to financial statements
14
<PAGE>
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
---------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
---------- ----------
<S> <C> <C>
Current Liabilities
- -------------------
Accounts payable-trade $122,851 $111,538
Notes payable-current portion 261,801 179,000
Capital lease obligations-current portion-Note 4 22,662 8,079
Payroll taxes and other taxes payable 53,901 --
---------- ----------
Total Current Liabilities 461,215 298,617
---------- ----------
Long-Term Liabilities
- ---------------------
Capital lease obligations-non current
portion Note 4 38,404 20,276
---------- ----------
Total Liabilities 499,619 318,893
---------- ----------
Shareholders' Equity -Notes 5 and 6
- -----------------------------------
Preferred stock $0.01 par value, 1,200,000
shares authorized, 155,000 shares issued
and outstanding 1,550 --
Common stock $0.0005 par value, 30,000,000
shares authorized, 5,025,570 shares
issued and outstanding 2,513 2,105
Additional paid-in capital 1,460,963 1,318,927
Retained earnings (deficit)-Note 5 (884,467) (787,460)
---------- ----------
Total Stockholders' Equity 580,559 533,572
---------- ----------
Total Liabilities and Stockholders' Equity $1,080,178 $ 852,465
------------------------------------------ ========== ==========
</TABLE>
15
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Statements of Income
--------------------
For the Years Ended
-------------------
March 31, 1996 (Audited) and 1995 (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
----------- ----------
<S> <C> <C>
Revenue
- -------
Sales $1,158,817 $508,850
Less returns and discounts (356,693) (22,955)
---------- --------
Net Sales 802,124 485,895
Cost of Goods Sold 60,271 42,071
- ------------------ ---------- --------
Gross Profit 741,853 443,824
---------- --------
Operating Expenses
- ------------------
Salaries and employee benefits 316,624 143,370
Advertising 164,078 44,377
Office rental 30,728 28,568
Interest 32,449 4,560
Legal and professional 48,133 18,879
Payroll taxes and other taxes 21,071 2,849
Telephone 29,697 15,607
Depreciation and amortization-Note 5 121,228 86,833
Other expenses 102,247 61,509
---------- --------
Total Operating Expenses 866,255 406,552
---------- --------
Income (Loss) Before Income Taxes (124,402) 37,272
Income Taxes-Deferred-Note 5 (27,395) 6,905
- ---------------------------- ---------- --------
Net Income (Loss) $ (97,007) $ 30,367
----------------- ========== ========
Earnings (Loss) Per Common Share
- --------------------------------
Primary $(0.02) $0.01
========== ========
</TABLE>
See accompanying independent auditor's report
and notes to financial statements.
16
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Statements of Changes in Stockholders' Equity
---------------------------------------------
For the Years Ended
-------------------
March 31, 1996 (Audited) and 1995 (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital Deficit Total
------------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at
- ----------
March 31, 1994 (Unaudited)
--------------------------
$ -- $ 2,037 $1,312,207 $(817,827) $496,417
Net Income for Year
Ended March 31, 1995 -- -- -- 30,367 30,367
Issue 135,766 shares
of stock -- 68 6,720 -- 6,788
------- ------- ---------- --------- --------
Balance at
- ----------
March 31, 1995 (Unaudited) -- 2,105 1,318,927 (787,460) 533,572
--------------------------
Net Income (loss) for Year
ended March 31, 1996 -- -- -- (97,007) (97,007)
Issue 155,000 shares of
preferred stock 1,550 -- 118,027 -- 119,577
Issue 815,830 shares
of common stock -- 408 24,009 -- 24,417
------- ------- ---------- --------- --------
Balance at
- ----------
March 31, 1996 $ 1,550 $ 2,513 $1,460,963 $(884,467) $580,559
-------------- ------- ------- ---------- --------- --------
</TABLE>
See accompanying independent auditors' report
and notes to finanical statements.
17
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Statements of Cash Flows
------------------------
For the Years Ended
-------------------
March 31, 1996 (Audited) and 1995 (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
- ------------------------------------
Net income (loss) for year $ (97,007) $ 30,367
Cash provided by operating activities:
Depreciation and amortization not requiring cash 120,234 97,808
Deferred income tax not requiring cash (27,395) 6,900
(Increase) Decrease current operating activities:
Accounts receivable-trade-net (111,749) (12,567)
Inventory (9,358) 12,572
Prepaid expense and other (26,049) (63,445)
Accounts and taxes payable 76,006 (144,813)
--------- ---------
Cash Provided (Used) by Operating Activities (75,318) (73,178)
--------- ---------
Cash Flows from Investing Activities
- ------------------------------------
Software development (135,141) (55,366)
Equipment purchased (3,161) (12,119)
--------- ---------
Cash Provided (Used) by Investing Activities (138,302) (67,485)
--------- ---------
Cash Flows from Financing Activities
- ------------------------------------
Proceeds of notes payable 171,382 179,000
Principal payments (100,704) (6,291)
Proceeds from issuing preferred and common stock 129,452 --
--------- ---------
Cash Provided by Financing Activities 200,130 172,709
--------- ---------
Net Increase (Decrease) in Cash (13,490) 32,046
-------------------------------
Cash at Beginning of Period 33,412 1,366
- --------------------------- --------- ---------
Cash at End of Period $ 19,922 $ 33,412
--------------------- ========= =========
Supplemental Disclosures
- ------------------------
Cash paid during the year for interest $ 32,449 $ 4,560
Additional noncash investing and financing activity:
Stock issued for payment of operating expenses
and for software development 14,542 6,788
Equipment purchased through capital leases 44,834 34,646
</TABLE>
See accompanying independent auditor's report
and notes to financial statements.
18
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Notes to Financial Statements
-----------------------------
March 31, 1996 and 1995
-----------------------
(Information With Respect to the Year Ended
-------------------------------------------
March 31, 1995 is Unaudited)
----------------------------
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
This summary of significant accounting policies of Heartsoft,
Inc. (the Company) is presented to assist in understanding the
Company's financial statements. The financial statements and notes
are representations of the Company's management, who is responsible
for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements,
except as described in Note 5.
Nature of Operations
--------------------
The Company is a publicly held Delaware Corporation, incorporated
in January, 1988. Until March 31, 1994, the Company was in its
development stage. It devoted substantially all of its efforts to
financial planning, raising capital, and developing products and
markets. The Company designs, produces, and distributes integrated
multimedia educational software and learning products to educational
institutions nationwide.
Revenue Recognition
-------------------
Sales are recorded by the Company upon shipment of the products.
Sales are made with the right of return for forty-five days. The
Company provides for estimated returns when the products are shipped.
Inventories
-----------
Inventories consist primarily of raw materials and are stated at
the lower of cost or market. Cost is determined by using the first-
in, first-out method.
Depreciation
------------
The Company's property and equipment is carried at cost and
depreciated over the estimated useful lives of the related assets.
Depreciation is computed using the straight-line method over a seven-
year period for both financial reporting and federal income tax
purposes.
Developed Software
------------------
Capitalization of software development costs begins when the
project reaches technological feasibility and includes costs incurred
until the project is ready for release. Software development costs
are amortized on the straight-line method over a maximum of seven
years or the expected life of the product, whichever is less.
19
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Notes to Financial Statements
-----------------------------
March 31, 1996 and 1995
-----------------------
(Information With Respect to the Year Ended
-------------------------------------------
March 31, 1995 is Unaudited)
----------------------------
Note 1 - Summary of Significant Accounting Policies (Continued)
------------------------------------------
Income Taxes
------------
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of deferred taxes
related to income tax reporting. The deferred tax asset represents
the future tax consequences of utilizing a net operating loss
carryforward that is available to offset future federal income taxes.
(See Note 5).
Earnings Per Share
------------------
Earnings per share is based on the weighted average common shares
outstanding during the period. Primary weighted average shares
outstanding for the year ended March 31, 1996, were 4,800,405; for
1995 was 4,161,539.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles require management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Note 2 - Notes Payable
-------------
<TABLE>
<CAPTION>
Balances as of March 31, 1996 1995
------------ ------------
<S> <C> <C>
A $100,000 line of credit bears interest
at a floating rate, presently at 9.75%.
The Company has provided its receivables
and inventory as security. The note is
renewable on an annual basis with a
renewal date of September 30. $ 99,742 $ --
A $150,000 line of credit bears interest
at a floating rate, presently at 8.75%.
The Chairman of the Company provided his
personal assets for security. The note
was retired in April, 1996. 148,563 150,000
</TABLE>
20
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Notes to Financial Statements
-----------------------------
March 31, 1996 and 1995
-----------------------
(Information With Respect to the Year Ended
-------------------------------------------
March 31, 1995 is Unaudited)
----------------------------
Note 2 - Notes Payable (Continued)
-------------
<TABLE>
<CAPTION>
Balances as of March 31, 1996 1995
------------ ------------
<S> <C> <C>
A loan bears interest at 10.9%. The
Chairman of the Company provided
personal assets for security.
Subsequent to March 31, 1996 the note
was renewed as part of a line of
credit secured by company assets. 13,496 29,000
-------- --------
Total $261,801 $179,000
----- ======== ========
</TABLE>
Note 3 - Concentration of Credit Risk
----------------------------
The Company's customer base is comprised primarily of hundreds of
public and private schools, and numerous resellers to the same
marketplace. This results in a concentration of customers in the
education industry.
Note 4 - Leases
------
Capital Lease Obligations
-------------------------
The Company leases certain equipment under agreements which are
classified as capital leases. Future minimum payments, by year, under
noncancellable capital leases are as follows:
<TABLE>
<S> <C>
March 31, 1997 $34,768
March 31, 1998 27,738
March 31, 1999 17,695
March 31, 2000 1,380
-------
Total lease payments 81,581
Less interest included 20,515
-------
Present value of payments 61,066
Less current maturities 22,662
-------
Capital lease obligations $38,404
=======
</TABLE>
21
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Notes to Financial Statements
-----------------------------
March 31, 1996 and 1995
-----------------------
(Information With Respect to the Year Ended
-------------------------------------------
March 31, 1995 is Unaudited)
----------------------------
Note 4 - Leases (Continued)
------
Operating Lease
---------------
The Company leases office space for a period of five years,
beginning August 1, 1995 for $3,561 per month plus adjustments over
the life of the lease.
Future minimum payments, by year, under the terms of the lease
are as follows:
<TABLE>
<S> <C>
March 31, 1997 $42,820
March 31, 1998 42,960
March 31, 1999 43,096
March 31, 2000 14,380
</TABLE>
Note 5 - Change in Method of Accounting and Restatement of Prior Years'
---------------------------------------------------------------
Financial Statements
--------------------
Development Cost and Amortization
---------------------------------
The Company changed its method of accounting for software
development costs and its amortization policy. Previously expensed
development costs of $57,000 for the year ended March 31, 1994, have
been retroactively capitalized.
Initial financial statements for the year ended March 31, 1994,
and the year ended March 31, 1995, did not include amortization
expense, but have been retroactively revised to include $37,000 for
the year ended March 31, 1994, and $80,700 for the year ended March
31, 1995.
Income Taxes
------------
During 1995 the Company implemented Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
Effective March 31, 1994, the significant component of the Company's
deferred tax asset was a net operating loss carryforward expiring in
the year 2011 of $570,027, representing a temporary difference in
reporting incomes. Retained earnings at March 31, 1994, have been
increased by $126,704, representing the combined federal and state
effective tax rates for the tax loss carryforward.
22
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Notes to Financial Statements
-----------------------------
March 31, 1996 and 1995
-----------------------
(Information With Respect to the Year Ended
-------------------------------------------
March 31, 1995 is Unaudited)
----------------------------
Note 5 - Change in Method of Accounting and Restatement of Prior Years'
--------------------------------------------------------------
Financial Statements (Continued)
--------------------
At March 31, 1996 and 1995, respectively the deferred tax asset
was comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net operating loss carryforwards $144,401 $117,206
Provision for doubtful accounts 1,500 1,300
-------- --------
Total $145,901 $118,506
----- ======== ========
</TABLE>
Income tax expense reflects federal and state income taxes on
current earnings. No actual current income taxes were paid due to the
application of the tax loss carryforward. Therefore, tax expense for
both years is deferred to a future date.
The provision for taxes on income differs from the amount
computed by applying the U.S. Federal statutory rate as a result of
the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Provision for income taxes computed
at the statutory rate 35.0% 35.0%
State taxes 7.0 7.0
Benefit of federal graduated rates (20.0) (20.0)
Other -- 3.5
----- -----
22.0% 18.5%
===== =====
</TABLE>
Note 6 - Stock Offerings
---------------
The Company was authorized to issue by June 30, 1996 up to
1,200,000 shares of non-voting preferred stock at $1.00 per share. As
of March 31, 1996, 155,000 shares of preferred stock have been issued.
The preferred stock is convertible at January 2, 1998, at a rate of
0.8 shares of common stock per share of preferred stock. Dividends
accrue at the rate of 12% per share, per year and are payable
quarterly. Preferred shares have a liquidation preference of $1.00
per share, and a par value of $0.01.
23
<PAGE>
Heartsoft, Inc.
---------------
Tulsa, Oklahoma
Notes to Financial Statements
-----------------------------
March 31, 1996 and 1995
-----------------------
(Information With Respect to the Year Ended
-------------------------------------------
March 31, 1995 is Unaudited)
----------------------------
Note 7 - Related Party Transactions
--------------------------
The Company's Board of Directors have approved an incentive stock
option of 497,000 shares, at par value to the Chief Executive Officer.
The option is exercisable at the rate of 100,000 shares per year, and
contains substantial restrictions to its resale.
Receivable-related parties, represent advances made to establish
a Dallas, Texas marketing affiliate owned by the Chief Executive
Officer of the Corporation and other advances to officers and
employees.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEARTSOFT, INC., AS OF AND FOR THE FISCAL YEAR ENDED
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 19,922
<SECURITIES> 0
<RECEIVABLES> 171,913
<ALLOWANCES> 6,900
<INVENTORY> 11,216
<CURRENT-ASSETS> 297,659
<PP&E> 173,820
<DEPRECIATION> 73,342
<TOTAL-ASSETS> 1,080,178
<CURRENT-LIABILITIES> 461,215
<BONDS> 0
0
1,550
<COMMON> 2,513
<OTHER-SE> 576,496
<TOTAL-LIABILITY-AND-EQUITY> 1,080,178
<SALES> 1,158,817
<TOTAL-REVENUES> 802,124
<CGS> 60,271
<TOTAL-COSTS> 60,271
<OTHER-EXPENSES> 833,806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,449
<INCOME-PRETAX> (124,402)
<INCOME-TAX> (27,395)
<INCOME-CONTINUING> (97,007)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97,007)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
