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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDING SEPTEMBER 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.)
3101 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
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As of September 30, 1996, there were 5,312,090 shares of
Heartsoft, Inc. Common Stock, $0.0005 par value outstanding.
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<PAGE 2>
HEARTSOFT, INC. - QUARTERLY REPORT
TABLE OF CONTENTS
PART I. Financial Information Page
Item 1: Balance Sheet as of September 30, 1996 3
Profit and Loss Statement as of September 30, 1996 4
Statement of Cash Flow -Six Months Ending
September 30, 1996 5
Notes to Financial Statements 6
Item 2: Management's Discussion 7
PART II. Other Information
Item 1: Legal Proceedings. 9
Signature Page 9
<PAGE 3>
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEET
<CAPTION>
September 30, 1996 June 30, 1996
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<S> <C> <C>
ASSETS
Cash $161,341 $552,533
Accounts Receivable-trade 238,541 217,579
Allowance for Returns (3,151) 5,034
Inventory (18,907) 12,874
Prepaid Expenses and Deposits 205,678 118,205
Receivables- related parties 210,401 57,490
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Total Current Assets $793,903 $963,715
Fixed Assets-Net 170,061 111,718
Developed Software (See Note 2) 606,973 569,052
Deferred income tax benefit 164,201 138,926
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Total Other Assets $941,235 $819,696
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Total Assets $1,735,138 $1,783,411
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LIABILITIES
Accounts Payable - Trade $128,141 84,726
Notes Payable- current portion 89,479 106,270
Capital lease obligation-current portion 34,768 34,768
Taxes Payable 70,750 66,928
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Total Current Liabilities $323,138 292,692
Long Term Liabilities 25,152 37,068
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Total Liabilities $348,290 $329,760
STOCKHOLDERS EQUITY
Retained Earnings (941,633) (941,633)
Common Stock 2,512 2,512
Preferred Stock 6,550 1,550
Paid-In Capital 2,423,116 2,346,699
Net Profit / (Loss) (103,697) 39,523
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Total Stockholders Equity $1,386,848 $1,453,651
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Total Liabilities And
Stockholders Equity $1,735,138 $1,783,411
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</TABLE>
<PAGE 4>
<TABLE>
Part I. FINANCIAL INFORMATION
PROFIT AND LOSS STATEMENT
6 Months ended September 30, 1996, and 1995
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<CAPTION>
1996 1995
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<S> <C> <C>
REVENUE
Gross Sales (See Note 3) $661,476 548,828
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Sales Returns & Discounts (21,649) (62,549)
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Net Sales 639,827 486,279
Total Cost of Goods 327,404 67,807
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GROSS MARGIN 312,423 418,472
EXPENSES
Payroll Expense 169,107 113,525
Administrative Expense 265,313 141,827
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Operating Expense 434,420 255,352
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Net Operating Income (121,997) 163,120
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Less: Income Taxes (See Note 4) 18,300 0
Net Income After Taxes $ (103,697) $163,120
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EARNINGS (LOSS) PER SHARE* (.02) .03
*Primary weighted average common shares outstanding during the period.
1996 - 5,249,340 and 1995 - 4,893,570.
</TABLE>
<PAGE 5>
<TABLE>
Part I. FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
6 Months ended September 30, 1996, 1995
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<CAPTION>
1996 1995
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<S> <C> <C>
Cash Flow from operating activities
Net Income (Loss) ($103,697) $163,120
Change in Current Assets
Net Receivables (70,377) (161,873)
Inventory 30,123 (9,916)
Prepaid Expenses (155,183) 26,455
Receivables- Related Parties (159,388)
Change in Current Liabilities
Accounts Payable 5,290 19,224
Loan Payable - current portion (172,322) 18,465
Other Current Liabilities 28,955 17,787
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Total Cash Flow from operating activities (596,599) 72,622
Cash Flow from investing activities
Developed Software (124,833) (43,621)
Property, Plant & Equipment (75,583) (9,776)
Depreciation on Disposed Prop, Plant & Equip. 60,000 511
Intangible Assets (18,300) (3,993)
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Total Cash Flow from investing activities (158,716) (56,879)
Cash Flow from financing activities
Long-Term Debt (13,253) (49,078)
Paid-In Capital 962,153 7,450
Retained Earnings (57,166) (10,742)
Preferred Stock 5,000
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Total Cash Flow from financing activities 896,734 (52,370)
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Net Increase (Decrease) in Cash $141,419 ($36,627)
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Beginning Cash Balance $19,922 $33,412
Net Increase (Decrease) in Cash $141,419 ($36,627)
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Ending Cash Balance $161,341 $(3,215)
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</TABLE>
<PAGE 6>
HEARTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
Note 1. Basis of Presentation.
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
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 31, 1996, this policy
represents a change in the Company's accounting treatment for amortization
of its development costs.
Note 3. FY 1995 Presentation Basis
The September 30, 1995, column has been adjusted to show the effect of
moving the amortization of software from administrative expense, to cost of
goods sold. This move was done to allow uniform presentation and comparison
from year-to-year periods.
Note 4. 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 carry forward. Therefore, tax expense for both years is
deferred to a future date.
<PAGE 7>
Item 2:
HEARTSOFT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1996
Overview
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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 5,312,090 shares issued and
outstanding. Over the past ninety days, the Company's stock has traded in
the $1.50 to $2.50 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 numerous
products which are targeted at children in grades 4 through 12.
Effective April 1, 1996, Heartsoft began recognizing revenues from its
Advanced Technology Division office in Dallas, Texas which distributes,
licensed, leading-edge technology products to schools. Based on the
initial performance of this office, the Company may use it as a prototype
for additional offices to be opened in other major educational markets
across the country in the next few years.
Since the company's initial formation in 1989, the shareholders and
management of Heartsoft, Inc. have contributed over $2.4 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.
Net Revenues
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Net Sales of the Company's educational computer software for the 6 months
ending September 30, 1996, were $639,827 compared to $486,279 for the same
period one year ago representing a 32% increase.
The increase in revenues can be attributed to the Company's expanded
presence in the Education Technology Market and the inclusion of the Dallas
Heartsoft Advanced Technologies Division, whose revenues came on-line April
1, 1996. Sales returns declined as a percentage of sales over the period
one year ago, as the Company moved away from earlier marketing policies
which encouraged preview sales. Such preview sales traditionally have a
higher return rate.
Industry Trends Affect Sales
- ----------------------------
The educational technology industry is composed of both hardware and
software sales to schools. Sales in these categories tend to run counter
to one another and in any given year will be proportionally much higher in
one than the other.
It is management's opinion that the industry is currently favoring hardware
and Internet-related infrastructure building in schools. Consequently,
software sales have not been as brisk as in years past, and management
believes that cyclical forces will move customer buying habits back to
historical growth trends. Reference SIMBA's "Electronic Media for the
School Market 1996-97" for supporting documentation. SIMBA can be reached
at (203) 358-9900.
Furthermore, it is also management's opinion that delays which were
associated with federal funding during the U.S. Government's fiscal
operating budget for 1996, also delayed purchasing decisions by a majority
of educational institutions nationwide. Cyclical purchasing habits which
management has seen for over 15 years in the Educational Technology Market
simply were not applicable during the Company's last two fiscal quarters
and were directly responsible for the Company's slower growth during this
period.
Cost of Goods Sold
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The Company includes in cost of goods sold all costs associated with the
acquisition of components, assembly of finished products, shipping and
amortization. Included in that total is the Advanced Technology Division's
cost of licensed products, which varies by vendor and product line. Total
gross margin decreased to $312,423 a 25% decline. The decline was due to a
general slowdown in educational technology sales, as early sales from
direct mail campaigns lagged year earlier levels. The gross margin of 48.8%
for the six months ended 9/30/96 was a decline from 86.0% 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. The Tulsa Core Product's Division continued to operate at
roughly the same efficiency level as prior periods
Operating Expenses
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General operating expenses increased across the board from $255,352 for the
six months ended September 30, 1995 to $434,420 for period ending September
30, 1996. The increase in expenses is primarily due to increased marketing
and sales capacity, including the Advanced Technology Division.
Net Income
- ----------
The Company incurred a net loss of $103,697, or two cents per share, for
the 6 months ending September 30, 1996, compared to net income of $163,120
for the year earlier period.
During this period, management significantly increased expenditures related
to the development of new educational technology products as well as
expansion of the Company's marketing and sales areas. These higher
operating expenses contributed to the net loss.
Management anticipates that the current investment of operating capital
into these areas will significantly impact sales during its 1997 fiscal
year. The first new products to be available for distribution as a result
of these R&D efforts will begin to occur during the 4th fiscal quarter of
1996, and continue throughout all of fiscal 1997.
<PAGE 9>
Liquidity and Capital Resources
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As of September 30, 1996, the Company's principle sources of liquidity
included cash and accounts receivable of $399,882 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.
Part II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
On December 9, 1996, the lawsuit of Raymond Long vs. Heartsoft, Inc. and
Benjamin P. Shell which had been filed on May 17, 1996, in Superior Court
of Murray County, Georgia, by Raymond Long, a former stockholder of the
Company, was mutually dismissed.
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)
January 10, 1997 /s/ Benjamin P. Shell
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Date Benjamin P. Shell, Chairman
January 10, 1997 /s/ Bryan J. Reusser
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Date Bryan J. Reusser, Director of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
QUARTERLY FINANCIAL STATEMENTS OF HEARTSOFT, INC., AS OF SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 161,341
<SECURITIES> 0
<RECEIVABLES> 238,541
<ALLOWANCES> (3,151)
<INVENTORY> (18,907)
<CURRENT-ASSETS> 793,903
<PP&E> 170,061
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,735,138
<CURRENT-LIABILITIES> 323,138
<BONDS> 0
0
6,550
<COMMON> 2,512
<OTHER-SE> 1,377,786
<TOTAL-LIABILITY-AND-EQUITY> 1,735,138
<SALES> 661,476
<TOTAL-REVENUES> 639,827
<CGS> 327,404
<TOTAL-COSTS> 327,404
<OTHER-EXPENSES> 434,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (121,997)
<INCOME-TAX> 18,300
<INCOME-CONTINUING> (103,697)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (103,697)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
