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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 DECEMBER 31, 1996 COMMISSION FILE NUMBER 33-23138-D
HEARTSOFT, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 87-0456766
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
3101 Hemlock Circle, Broken Arrow, Oklahoma 74012
- -------------------------------------------- --------
(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 December 31, 1996, there were 5,408,390 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 December 31, 1996 3
Statement of Income as of December 31,1996 4
Statement of Cash Flow - Three Months Ending
December 31, 1996 5
Notes to Financial Statements 6
Management's Discussion, Analysis of 7
Financial Condition, and Results of Operations
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>
December 31, 1996 September 30, 1996
<S> <C> <C>
ASSETS
Cash $140,758 $161,341
Accounts Receivable 578,817 238,541
Allowance for Return 29,282 (3,151)
Inventory 29,918 (18,907)
Prepaid Advertising & Deposits 232,969 205,678
Receivables- Related Parties 282,937 210,401
---------- ----------
Total Current Assets $1,294,681 $793,903
Fixed Assets 146,128 170,061
Developed Software (See Note 2) 636,253 606,973
Deferred Income Tax Benefit 163,816 164,201
---------- ----------
Total Other Assets 946,197 941,235
---------- ----------
Total Assets $2,240,878 $1,735,138
=========== ===========
LIABILITIES
Accounts Payable - Trade $378,919 $128,141
Notes Payable- Current Portion 231,711 89,479
Capital Lease- Current Portion 34,768 34,768
Taxes Payable 70,750 70,750
---------- ----------
Total Current Liabilities 716,148 323,138
Long Term Liabilities 18,384 25,152
---------- ----------
Total Liabilities $734,532 $348,290
STOCKHOLDERS EQUITY
Retained Earnings (941,633) (941,633)
Common Stock 2,512 2,512
Preferred Stock 11,230 6,550
Paid-In Capital 2,536,351 2,423,116
Net Profit / (Loss) (102,114) (103,697)
---------- ----------
Total Stockholders Equity $1,506,346 $1,386,848
---------- ----------
Total Liabilities And
Stockholders Equity $2,240,878 $1,735,138
=========== ===========
</TABLE>
<PAGE 4>
<TABLE>
Part I. FINANCIAL INFORMATION
STATEMENT OF INCOME
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
(Note 3)
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Gross Sales $512,962 $415,537 $1,174,438 $967,329
-------- -------- -------- --------
Sales Returns & Discounts (43) (162,466) (21,693) (225,024)
-------- -------- -------- --------
Net Sales 512,919 253,071 1,152,745 742,305
Total Cost of Good 342,377 52,820 669,781 151,114
-------- -------- -------- --------
GROSS MARGIN 170,542 200,251 482,964 591,191
EXPENSES
Payroll Expense 65,770 73,120 235,476 190,455
Administrative Expense 102,204 104,844 367,517 230,523
-------- -------- -------- --------
Operating Expense 167,974 177,964 602,993 420,978
-------- -------- -------- --------
Net Operating Income 2,568 22,287 (120,029) 170,213
Less: Income Taxes (Note 4) (385) 0 17,915 0
-------- -------- -------- --------
Net Income After Taxes $2,183 $22,287 $(102,114) $170,213
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE* 0.00 0.00 (0.02) 0.03
</TABLE>
*Primary weighted average common shares outstanding during the period.
1995 - 4,893,570 and 1996 - 5,360,240
<PAGE 5>
<TABLE>
Part I. FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
3 Months ended December 31,
1995, 1996
<CAPTION>
<S> <C> <C>
1996 1995
Cash Flow from operating activities
Net Income (Loss) $2,183 $153,955
Change in Current Assets
Net Receivables (372,709) (213,333)
Inventory (48,825) 5,145
Prepaid Expenses (27,291) 18,462
Receivables- Related Parties (72,536)
Change in Current Liabilities
Accounts Payable 250,778 21,062
Loan Payable - current portion 142,232 (35,608)
Other Current Liabilities 0 19,290
---------- ----------
Total Cash Flow from operating activities (126,168) (31,027)
Cash Flow from investing activities
Developed Software (56,280) (27,611)
Property, Plant & Equipment 20,933 (2,151)
Amortization and Depriciation 30,000 0
Intangible Assets 385 0
---------- ----------
Total Cash Flow from investing activities (4,962) (29,762)
Cash Flow from financing activities
Long-Term Debt (6,766) 85,445
Paid-In Capital 113,235 (9,200)
Preferred Stock 4,680
---------- ----------
Total Cash Flow from financing activities 111,149 76,245
---------- ----------
Net Increase (Decrease) in Cash $(19,983) $15,456
=========== ===========
Beginning Cash Balance $160,741 $4,989
Net Increase (Decrease) in Cash $(19,983) $15,456
---------- ----------
Ending Cash Balance $140,758 $20,445
=========== ===========
</TABLE>
<PAGE 6>
HEARTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 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 December 31, 1995 column has been adjusted to show the effect
of moving the amortization of software from administrative expense,
to cost of goods sold. Also, sales returns have been adjusted to
accurately reflect year-end adjustments which were applied as of
3/31/96. These moves were 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 carryforward.
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
December 31, 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
5,408,390 shares issued and outstanding. Over the past ninety
days, the Company's stock has traded in the $.91 to $1.72 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.
Effective April 1, 1996 Heartsoft began recognizing revenues from
its 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 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
Net Sales of the Company's educational computer software for the 9
months ending December 31, 1996, were $1,152,745 compared to
$742,305 for the same period one year ago, an increase of 55%. The
increase in revenues can be attributed to the Company's expanded
presence in the Educational Technology Market, and the inclusion of
the Dallas Heartsoft Advanced Technologies Division, whose revenues
came on-line April 1, 1996. Sales returns for the 9 month period
declined as the Company moved away from earlier marketing policies
which encouraged preview sales.
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.
<PAGE 8>
COST OF GOODS SOLD
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. For the 9 month period, total gross
margin decreased to $482,964 a 18% decline. The decline was due to
a general slowdown in educational technology sales, as sales from
direct mail campaigns and the reseller channel lagged year earlier
levels. The gross margin of 41.9% for the nine months ended
12/31/96 was a decline from 79.6% 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
General operating expenses increased across the board from $420,978
for the nine months ended December 31, 1995 to $602,993 for period
ending December 31, 1996. As a percentage of sales, operating
expenses declined to 52.3%, compared to 56.7% of the year earlier
period. The increase in total expenses is primarily due to
increased marketing and sales capacity, including the Advanced
Technology Division.
NET INCOME
The Company incurred a net loss of $102,204, or two cents per
share, for the 9 months ending December 31, 1996, compared to net
income of $170,213 for the year earlier period.
During this period, managment signigicantly 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996 the Company's principle sources of
liquidity included cash and accounts receivable of $719,575 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.
<PAGE 9>
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)
February 5 ,1997 /s/ Benjamin P. Shell
- ---------------- ---------------------------
Date Benjamin P. Shell, Chairman
February 5, 1997 /s/ Bryan J. Reusser
- ---------------- -------------------------------------
Date Bryan J. Reusser, Director of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDTIED QUARTERLY FINANCIAL STATEMENTS OF HEARTSOFT, INC., AS OF DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 140,758
<SECURITIES> 0
<RECEIVABLES> 578,817
<ALLOWANCES> (29,282)
<INVENTORY> 29,918
<CURRENT-ASSETS> 1,294,681
<PP&E> 146,128
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,240,878
<CURRENT-LIABILITIES> 716,148
<BONDS> 0
0
11,230
<COMMON> 2,512
<OTHER-SE> 1,492,604
<TOTAL-LIABILITY-AND-EQUITY> 2,240,878
<SALES> 1,174,438
<TOTAL-REVENUES> 1,152,745
<CGS> 669,781
<TOTAL-COSTS> 669,781
<OTHER-EXPENSES> 602,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (120,029)
<INCOME-TAX> (17,915)
<INCOME-CONTINUING> (102,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (102,114)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
