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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1O-QSB
QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDING JUNE 30, 1996 COMMISSION FILE NUMBER 33-23138-D
HEARTSOFT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 87-0456766
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(State of Incorporation) (IRS Employer Identification No.)
31Ol Hemlock Circle, Broken Arrow, Oklahoma 74012
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 918/251-1066
Indicate by check mark whether the registrant (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 requirement for the past 90 days. YES X NO
---- ----
As of June 30, 1996, there were 5,089,608 shares of Heartsoft, Inc. Common
Stock, $0.0005 par value outstanding.
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HEARTSOFT, INC. - QUARTERLY REPORT ENDING JUNE 30, 1996.
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HEARTSOFT, INC. - QUARTERLY REPORT
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1: Balance Sheet as of June 30, 1996 3
Statement of Income as of June 30, 1996 4
Statement of Cash Flow - Three Months Ending
June 30, 1996 5
Notes to Financial Statements 6
Management's Discussion, Analysis of
Financial Condition, and Results of Operations 7
PART 11. OTHER INFORMATION
Item 1: Legal Proceedings 9
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HEARTSOFT, INC. - QUARTERLY REPORT ENDING JUNE 30, 1996.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEET
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<CAPTION>
June 30, 1996 March 3l, 1996
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ASSETS
<S> <C> <C>
Cash $ 552,533 $ 19,922
Accounts Receivable-trade 222,613 165,013
Inventory 12,874 11,216
Prepaid Expenses and Deposits 118,205 50,495
Receivables- related parties 57,490 51,013
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Total Current Assets $ 963,715 297,659
Fixed Assets-Net 111,718 100,478
Developed Software (See Note 2) 569,052 536,140
Deferred income tax benefit 138,926 145,901
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Total Other Assets $ 819,696 782,519
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Total Assets $ 1,783,411 $ 1,080,178
============ ============
LIABILITIES
Accounts Payable - Trade $ 84,726 122,851
Notes Payable-current portion 106,270 261,801
Capital lease obligations-current portion 34,768 22,662
Taxes Payable 66,928 53,901
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Total Current Liabilities $ 292,692 461,215
Long Term Liabilities 37,068 38,404
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Total Liabilities $ 329,760 $ 499,619
STOCKHOLDERS EQUITY
Retained Earnings (941,633) (884,467)
Common Stock 2,512 2,513
Preferred Stock 6,550 1,550
Paid-In Capital 2,346,699 1,460,963
Net Profit/(Loss) 39,523
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Total Stockholders Equity $ 1,453,651 $ 580,559
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Total Liabilities And
Stockholders Equity $ 1,783,411 $ 1,080,178
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HEARTSOFT, INC. - QUARTERLY REPORT ENDING JUNE 30, 1996.
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PART I. FINANCIAL INFORMATION
STATEMENT OF INCOME
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<CAPTION>
Three months ended
June 30,
1996 1995
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REVENUE
Gross Sales $459,196 $277,313
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Sales Returns (1,380) (12,284)
Sales Discounts (270) (737)
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Net Sales 457,546 264,292
Total Cost of Good 185,372 25,186
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GROSS MARGIN 272,174 239,107
EXPENSES
Payroll Expense 83,069 54,497
Administrative Expense 142,607 87,297
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Operating Expense 225,676 141,794
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Net Operating Income $ 46,468 96,672
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Less: Income Taxes (See Note 3) 6,975 0
Net Income After Taxes $ 39,523 $ 96,672
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EARNINGS (LOSS) PER SHARE* 0.008 0.023
</TABLE>
*Primary weighted average common shares outstanding during the period.
1995 = 4,259,740 and 1996 = 5,089,608
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HEARTSOFT, INC. - QUARTERLY REPORT ENDING JUNE 30, 1996.
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PART I. FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
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<CAPTION>
3 Months ended June 30, 1995, 1996
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1996 1995
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<S> <C> <C>
Cash Flow from operating activities
Net Income (Loss) $ 39,523 $ 96,672
Change in Current Assets
Net Receivables (121,245) (97,602)
Inventory (1 ,659) (7,750)
Prepaid Expenses (67,710) 37,283
Change in Current Liabilities
Accounts Payable (20,408) 18,096
Loan Payable (6,968) 6,000
Other Current Liabilities 13,026 3,515
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Total Cash Flow from operating activities (165,441) 56,215
Cash Flow from investing activities
Developed Software (59,187) (15,543)
Property, Plant & Equipment (14,238) (18,726)
Depreciation on Disposed Prop, Plant & Equip. 30,000 511
Intangible Assets 6,250 (632)
Total Cash Flow from investing activities (37,175) (34,390)
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Cash Flow from financing activities
Long-Term Debt (155,509) (35,941)
Paid-In Capital 890,735 5,950
Retained Earnings (10,742)
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Total Cash Flow from financing activities 735,226 (40,734)
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Net Increase (Decrease) in Cash $ 532,610 $(18,909)
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Beginning Cash Balance $ 19,923 $ 32,813
Net Increase (Decrease) in Cash $ 532,610 $(18,909)
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Ending Cash Balance $ 552,533 $ 13,904
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HEARTSOFT, INC. - QUARTERLY REPORT ENDING JUNE 30, 1996.
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HEARTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Note 1 . Basis of Presentation.
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The accompanying financial statements have been prepared by the Company without
audit. In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have been
included.
Note 2. Developed Software
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Capitalization of software development costs begins when the project reaches
technological feasibility and includes the 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. As of March 3l, 1996 this policy represents a change in its
accounting treatment for amortization of its development costs.
Note 3. Deferred Income Tax
-------------------
The Company reports the deferred tax benefit in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". 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.
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HEARTSOFT, INC. - QUARTERLY REPORT ENDING JUNE 30, 1996.
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Item 2:
HEARTSOFT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1996
OVERVIEW
Heartsoft, Inc. is a publicly held Delaware Corporation, incorporated January
15, 1988, and traded OTC (Symbol: HTSF). Presently, 30 million shares of stock
are authorized, with 5,089,608 shares issued and outstanding. Over the past
ninety days, the Company's stock has traded in the $1.69 to $3.37 range.
The mission of Heartsoft, Inc. is to create value for its shareholders through
the development, acquisition, and distribution of advanced multimedia
technologies for education in schools and homes.
To date, Heartsoft's Core Products Division has designed and published more than
30 educational software titles. These proprietary titles range in price from
$34.95 to $995 depending on the configuration. These titles are targeted to both
public and private U.S. Schools with children in Pre-Kindergarten through the
8th grades. The Company has licensed other products which are targeted at
children in grades 4 through 12.
During the last year, Heartsoft has opened an Advanced Technology Division
office in Dallas, Texas to distribute leading-edge technology products to
schools. Based on the performance of this office, the Company may use it as a
prototype for offices to be opened in other major markets across the country in
the next few years.
Since the company's initial formation in 1989, the share holders and managements
of Heartsoft, Inc. have contributed over $1.3 million in capital and assets to
the Company. The continued financial strategy of Heartsoft emphasizes
reinvestment of income for continued growth during the next few years of
operations.
RESULTS OF OPERATIONS
NET REVENUES
Net Sales of the Company's educational computer software for the 3 months ending
June 30, 1996, were $457,546 compared to $264,292 for the same period one year
ago, an increase of 73%. The increase in revenues can be attributed to the
Company's expanded presence and the opening of the Dallas Heartsoft Advanced
Technologies Division.
COST OF GOODS SOLD
The Company includes in cost of goods sold all costs associated with the
acquisition of components, assembly of finished products and shipping. Included
in that total is the Advanced Technology Division's cost of licensed products,
which varies by vendor and product line. Total gross margin increased to
$272,174, a 12% improvement. The gross margin of 59.4% for the three months
ended 6/30/96 was a decline from 90.5% in the year earlier period. The decrease
was attributable to the inclusion of the different cost structure associated
with the Advanced Technology Division product line, as the Tulsa Core Product's
Division continued to operate at roughly the same efficiency level as prior
periods.
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HEARTSOFT, INC. - QUARTERLY REPORT ENDING JUNE 30, 1996.
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OPERATING EXPENSES
General operating expenses increased across the board from $141,794 for the
three months ended June 30, 1995 to $225,676 for period ending June 30, 1996.
As a percentage of net sales, operating expenses decreased from 53.4% one year
ago to 49.3% for the quarter ending June 30, 1996. The current quarter figures
include $30,000 in software amortization and depreciation expenses, which were
not included in year earlier periods. (See Note 2). Without the amortization
expense, the operating expenses as a percentage of sales would have declined to
42.8% as of 6/30/96.
NET INCOME
Net income decreased to $39,523 for the 3 months ending June 30, 1996 from
$96,672 for the same period one year ago. The net income fell due to the higher
operating expenses, as the Company continued to add additional sales and
development capacity.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 the Company's principle sources of liquidity included cash
and accounts receivable of $775,000 as well as a revolving line of credit with a
current limit of $250,000. Management believes that its existing sources of
liquidity and anticipated funds from operations will satisfy the working capital
and capital expenditures requirements for the foreseeable future.
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Item 1: 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. The hearing on the Motion
to Dismiss was held on August 21, 1996, and at that time the Court took the
Motion under advisement, until November 1, 1996. Both Mr. Shell and the Company
believe they have meritorious defenses to the suit, and both plan to vigorously
defend the allegations contained herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTSOFT, INC.
(Registrant)
September 5, 1996 /s/ BENJAMIN P. SHELL
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Date Benjamin P. Shell, Chairman
September 5, 1996 /s/ BRYAN REUSSER
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Date Bryan Reusser, Director of Finance
Page 9
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
QUARTERLY FINANCIAL STATEMENTS OF HEARTSOFT, INC., AS OF JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 552,533
<SECURITIES> 0
<RECEIVABLES> 280,103
<ALLOWANCES> 5,034
<INVENTORY> 12,874
<CURRENT-ASSETS> 963,715
<PP&E> 111,718
<DEPRECIATION> 76,342
<TOTAL-ASSETS> 1,783,411
<CURRENT-LIABILITIES> 292,692
<BONDS> 0
0
6,550
<COMMON> 2,512
<OTHER-SE> 1,444,589
<TOTAL-LIABILITY-AND-EQUITY> 1,783,411
<SALES> 459,196
<TOTAL-REVENUES> 457,546
<CGS> 185,372
<TOTAL-COSTS> 185,372
<OTHER-EXPENSES> 213,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,367
<INCOME-PRETAX> 46,468
<INCOME-TAX> 6,975
<INCOME-CONTINUING> 39,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,523
<EPS-PRIMARY> .008
<EPS-DILUTED> .007
</TABLE>
