<PAGE>
Heartsoft, Inc.
Financial Statement on Form 10Q
for the fiscal quarter ending December 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 DEC 31, 1997 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
----- -----
As of December 31, 1997, there were 5,600,000 shares of Heartsoft, Inc.
Common Stock, $0.0005 par value outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------
HEARTSOFT, INC. - QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. Financial Information
Item 1: Balance Sheet as of December 31, 1997 3
Statement of Income Nine Months ending December 31, 1997 4
Statement of Cash Flow Nine Months Ending December 31, 1997 5
Notes to Financial Statements 6
Management's Discussion, Analysis of Financial
Condition, and Results of Operations 7
PART II. Other Information
Signature Page 8
</TABLE>
<PAGE>
- ------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALANCE SHEET
<TABLE>
<CAPTION>
Dec. 31, 1997 Dec. 31, 1996
============= =============
<S> <C> <C>
ASSETS
Cash & Cash Equivalents $ 723,264 $ 1,031,794
Inventory 11,877 29,918
Prepaid Expenses and Deposits 121,826 232,969
----------- -----------
Total Current Assets $ 856,967 $ 1,294,681
Fixed Assets-Net 135,595 146,128
Developed Software (See Note 2) 574,512 636,253
Deferred income tax benefit 193,448 163,816
----------- -----------
Total Other Assets $ 903,555 946,197
----------- -----------
Total Assets $ 1,760,522 $ 2,240,878
=========== ===========
LIABILITIES
Accounts Payable - Trade $ 175,454 $ 378,919
Notes Payable-current portion 50,000 231,711
Lease obligations-current portion 30,126 34,768
Taxes Payable 70,749 70,750
----------- -----------
Total Current Liabilities $ 326,329 $ 716,148
Long Term Liabilities 358,820 18,384
----------- -----------
Total Liabilities $ 685,149 $ 734,532
STOCKHOLDERS EQUITY
Retained Earnings (1,735,263) (941,633)
Common Stock 2,518 2,512
Preferred Stock 11,380 11,230
Paid-In Capital 2,611,996 2,536,351
Net Profit (Loss) 184,742 (102,114)
----------- -----------
Total Stockholders Equity $ 1,075,373 $ 1,506,346
----------- -----------
Total Liabilities And
Stockholders Equity $ 1,760,522 $ 2,240,878
=========== ===========
</TABLE>
<PAGE>
- ------------------------------------------------------------------------
Part I. FINANCIAL INFORMATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Nine months ended
Dec. 31, 1997 Dec. 31, 1996
------------- --------------
<S> <C> <C>
REVENUE
Gross Sales $1,079,615 $1,172,438
------------- -------------
Sales Returns & Discounts (72,841) (21,693)
------------- -------------
Net Sales 1,006,774 1,152,745
Total Cost of Good 164,504 669,781
------------- -------------
GROSS MARGIN 842,270 482,964
EXPENSES
Payroll Expense 160,772 235,476
Administrative Expense 496,756 385,432
------------- -------------
Total Operating Expenses 657,528 620,908
------------- -------------
Net Operating Income $184,742 ($102,114)
Gain on Sale of Assets 0 0
============= ==============
Net Income $184,742 ($102,114)
EARNINGS (LOSS) PER SHARE* 0.04 (0.02)
</TABLE>
*Primary weighted average common shares outstanding during the period 1997 =
5,400,000 and 1996 = 5,300,000
<PAGE>
- ------------------------------------------------------------------------
Part I. FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
Dec. 31, 1997 Dec. 31, 1996
============= =============
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $ 184,742 $ 2,183
Change in Current Assets
Net Receivables (157,144) (445,245)
Inventory (4,044) (48,825)
Prepaid Expenses (7,648) (27,291)
Change in Current Liabilities
Accounts Payable 53,309 250,778
Loan Payable 50,000 142,232
Other Current Liabilities 30,126 0
--------- ---------
Total Cash Flow from operating act. 149,341 (126,168)
Cash Flow from investing activities
Developed Software 40,418 (56,280)
Property, Plant & Equipment 10,592 21,318
Depreciation on Disposed Assets 80,400 30,000
--------- ---------
Total Cash Flow from invest.act 131,410 (4,962)
Cash Flow from financing activities
Long-Term Debt 53,677 (6,766)
Paid-In Capital 68,665 113,235
Retained Earnings (409,005) 0
Preferred Stock 0 4,680
--------- ---------
Total Cash Flow from fin.act (286,663) 111,149
Net Increase (Decrease) in Cash $ (5,912) $ (19,983)
========= =========
Beginning Cash Balance 5,156 160,741
Net Increase (Decrease) in Cash $ (5,912) (19,983)
--------- ---------
Ending Cash Balance $ (756) $ 140,758
========= =========
</TABLE>
<PAGE>
- ------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(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. 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>
- ------------------------------------------------------------------------
Item 2 HEARTSOFT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1997
OVERVIEW
Heartsoft, Inc. is a publicly held Delaware Corporation, incorporated January
15, 1988, and traded OTC (Symbol: HTSF). Presently, 25 million shares of
stock are authorized, with 5,600,000 shares issued and outstanding. Over the
past ninety days, the Company's stock has traded in the $0.43 to $1.25 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 50 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. Since the company's initial formation in 1989, the shareholders and
management of Heartsoft, Inc. have contributed over $2.5 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 9 months
ending December 31, 1997, were $1,006,774 compared to $1,152,745 for the same
period one year ago representing an 8.73% decrease. For the quarter ended
December 31, 1997, total sales were $222,926 compared to $512,919 for the
previous quarter. The September quarter is traditionally a seasonal low as
schools are out of session for the bulk of the quarter. Sales returns
increased slightly as a percentage of sales, although it was not radically
different from historical norms. The variance in results are primarily caused
by the 1996 results inclusion of the Dallas Heartsoft Advanced Technologies
Division, which was closed as of March 31, 1997. The gross margin
improvement, as well as the decrease in revenues, can both be attributed to
the difference in operating environments, as the 1997 results reflect only
the Tulsa Core Products Division's efforts.
<PAGE>
- ------------------------------------------------------------------------
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. The Gross Margin declined to $337,371, a 7% decline from year
previous levels. Gross Margin as a percentage of sales improved to 84% of Net
Sales, compared to 42% in the year earlier period, as the product mix
featured higher margin products as a percentage of sales.
Operating Expenses
General operating expenses rose slightly for the nine months ended December
31, 1997 to $657,528 compared to $620,908 for period ending December 31,
1996. This can be attributed to beginning roll out of the companies new
Critical Thinking Series, Thinkology.
Net Income
The Company recorded a net income of $184,742, or four cents per share, for
the 9 months ending December 31, 1997, compared to net loss of $102,114 for
the year earlier period. The improvement included a net gain on the sale of
asset through the licensing and joint venture agreement the Company entered
into during the period.
Liquidity and Capital Resources
As of December 31, 1997, the Company's principle sources of liquidity
included cash and accounts receivable of $723,263, which includes a revolving
line of credit with a current limit of $250,000. Management believes that
with the introductions of its new product lines that capital resources should
be increased, and as a result, anticipates it will instigate means by which
to increase sources of corporate liquidity.
<PAGE>
- ------------------------------------------------------------------------
Part II. OTHER INFORMATION
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 13, 1997 /s/ Benjamin P. Shell
----------------- ---------------------------
Date Benjamin P. Shell,
Chairman
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 368,865
<SECURITIES> 0
<RECEIVABLES> 354,399
<ALLOWANCES> 106,319
<INVENTORY> 11,877
<CURRENT-ASSETS> 856,967
<PP&E> 10,592
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,760,522
<CURRENT-LIABILITIES> 326,329
<BONDS> 358,820
11,380
0
<COMMON> 2,518
<OTHER-SE> 1,075,373
<TOTAL-LIABILITY-AND-EQUITY> 1,760,522
<SALES> 1,006,774
<TOTAL-REVENUES> 1,006,774
<CGS> 164,504
<TOTAL-COSTS> 164,504
<OTHER-EXPENSES> 657,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 184,742
<INCOME-TAX> 0
<INCOME-CONTINUING> 184,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 184,742
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
