<PAGE 0>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 2
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.
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(Name of small business issuer in its charter)
Delaware 87-0456766
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(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
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<PAGE 0>
TABLE OF CONTENTS
Page
Item Number and Caption Number
PART I
1. Description of Business 1
2. Description of Property 4
3. Legal Proceedings 5
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 8
8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 8
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of
the Exchange Act 8
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 1>
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.
<PAGE 2>
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.
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 THE PRODUCTS SECURED
FOR RESALE. AS SUCH, THE COMPANY RECOGNIZED NO REVENUES FROM
THESE PRODUCT LINES OUT OF ITS DALLAS OPERATIONS, WITH THE
EXCEPTION OF HEARTSOFT-OWNED PRODUCTS, WHICH SALES AMOUNTED TO
LESS THAN $5,000. 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.
<PAGE 3>
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.
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.
<PAGE 4>
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 substantially 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.
<PAGE 5>
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. 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:
Quarter Ended High Bid Low Bid
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
The above quotes reflect inter-dealer prices without retail mark-
up or mark-down or commissions, and may not represent actual
transactions.
<PAGE 6>
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:
Years ended March 31,
-----------------------
1996 1995 1994
------ ------ ------
(In thousands)
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 157,471 122,771 67,027
------------ ------------ ----------
Gross Margin 644,653 363,124 164,301
------------ ------------ ----------
Payroll Expense 316,624 143,370 201,726
Depreciation 24,028 6,133 6,206
Advertising Expense 164,078 44,377 -0-
Administrative Expense 264,325 131,972 163,053
------------ ------------ ----------
Operating Expenses 769,055 325,852 370,985
------------ ------------ ----------
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)
========== ========= ==========
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.
<PAGE 7>
Gross profit increased by 78% in the fiscal year ended March
31, 1996, compared to 1995, and 292% compared to the fiscal
year ended March 31, 1994. Total cost of goods sold declined as
a percentage of sales to 19.67%, compared with 25.2% and
29.0% for the fiscal years ended March 31, 1995 and 1994,
respectively. This improvement was primarily attributable to
improved production efficiency and economies gained by sales of
higher priced items. 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.
Total SG&A expenses increased 113% for the period ended March 31,
1996, as compared to the fiscal year ended March 31, 1995.
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.
<PAGE 8>
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
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 on
Form 10-KSB. 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.
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.
<PAGE 9>
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.
<PAGE 10>
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: November 8, 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: November 8, 1996 /s/ Benjamin P. Shell
---------------------
Benjamin P. Shell
Chairman of the Board and Director
(principal executive officer)
Dated: November 8, 1996 /s/ Jimmy L. Butler, Jr.
------------------------
Jimmy L. Butler, Jr.
President and Director
Dated: November 8, 1996 /s/ Bryan J. Reusser
---------------------
Bryan J. Reusser
Director of Finance
(principal financial officer
and principal accounting officer)
<PAGE 11>
HEARTSOFT, INC.
TULSA, OKLAHOMA
FINANCIAL STATEMENTS
AS OF
MARCH 31, 1996 (AUDITED)
AND MARCH 31, 1995 (UNAUDITED)
<PAGE 12>
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.
<PAGE 13>
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
/s/ Cross and Robinson
-----------------------
Certified Public Accountants
June 12, 1996
<PAGE 14>
<TABLE>
HEARTSOFT, INC.
Tulsa, Oklahoma
BALANCE SHEETS
AS OF MARCH 31, 1996 (AUDITED) AND 1995 (UNAUDITED)
A S S E T S
------------
(Unaudited)
1996 1995
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<CAPTION>
<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
<PAGE 15>
<TABLE>
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
-----------------------------------------------------------------------
(Unaudited)
1996 1995
------ ------
<CAPTION>
<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>
<PAGE 16>
<TABLE>
HEARTSOFT, INC.
Tulsa, Oklahoma
STATEMENTS OF INCOME
FOR THE YEARS ENDED
MARCH 31, 1996 (AUDITED) AND 1995 (UNAUDITED)
(Unaudited)
1996 1995
-------- --------
<CAPTION>
<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 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.
<PAGE 17>
<TABLE>
HEARTSOFT, INC.
Tulsa, Oklahoma
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED
MARCH 31, 1996 (AUDITED) AND 1995 (UNAUDITED)
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital Deficit Total
---------- ---------- ---------- ---------- ----------
<CAPTION>
<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 financial statements.
<PAGE 18>
<TABLE>
HEARTSOFT, INC.
Tulsa, Oklahoma
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
MARCH 31, 1996 (AUDITED) AND 1995 (UNAUDITED)
(Unaudited)
1996 1995
------ ------
<CAPTION>
<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.
<PAGE 19>
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.
<PAGE 20>
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
Balances as of March 31, 1996 1995
-------- --------
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
<PAGE 21>
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)
Balances as of March 31, 1996 1995
-------- --------
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
------ ========= =========
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:
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
========
<PAGE 22>
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:
March 31, 1997 $ 42,820
March 31, 1998 42,960
March 31, 1999 43,096
March 31, 2000 14,380
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.
<PAGE 23>
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:
1996 1995
------ ------
Net operating loss carryforwards $144,401 $117,206
Provision for doubtful accounts 1,500 1,300
------- -------
TOTAL $145,901 $118,506
----- ======= =======
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:
1996 1995
------- -------
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%
======= =======
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.
<PAGE 24>
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.
<TABLE> <S> <C>
<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> 157,471
<TOTAL-COSTS> 157,471
<OTHER-EXPENSES> 736,606
<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>
