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Heartsoft, Inc.
Financial Statement on Form 10Q
for the fiscal quarter ending December 31, 1998
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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, 1998 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 NO X
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As of December 31, 1997, there were 6,900,000 shares of Heartsoft, Inc. Common
Stock, $0.0005 par value outstanding.
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HEARTSOFT, INC. - QUARTERLY REPORT
TABLE OF CONTENTS
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PART I. Financial Information
Item 1: Balance Sheet as of December 31, 1998 3
Statement of Income Nine Months ending December 31, 1998 4
Statement of Cash Flow Nine Months ending December 31, 1998 5
Notes to Financial Statements 6
Item 2: Management's Discussion, Analysis of Financial
Condition, and Results of Operations 7
PART II. Other Information
Signature Page 10
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEET
(unaudited)
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Dec. 31, 1998 Sep. 30, 1998
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ASSETS
Cash & Cash Equivalents $ 397,030 365,568
Inventory 21,353 18,744
Prepaid Expenses and Deposits 198,294 174,383
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Total Current Assets $ 616,676 558,695
Fixed Assets-Net 123,585 123,585
Developed Software (See Note 3) 891,197 857,658
Deferred income tax benefit (See Note 4) 138,926 138,926
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Total Other Assets $ 1,153,708 1,120,169
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Total Assets $ 1,770,385 1,678,864
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LIABILITIES
Accounts Payable - Trade $ 256,904 221,254
Notes Payable-current portion 22,626 22,626
Lease obligations-current portion 54,900 54,900
Taxes Payable 65,394 65,394
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Total Current Liabilities $ 399,824 $ 364,174
Long Term Liabilities 244,244 188,976
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Total Liabilities $ 644,068 $ 553,150
STOCKHOLDERS EQUITY
Retained Earnings (1,749,946) (1,749,946)
Common Stock 3,723 3,723
Preferred Stock 11,380 11,380
Paid-In Capital 2,867,466 2,838,586
Net Profit (Loss) 5,074 21,971
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Total Stockholders Equity $ 1,126,317 1,125,714
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Total Liabilities And
Stockholders Equity $ 1,770,385 1,678,864
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STATEMENT OF INCOME
(unaudited)
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Nine months ended
Dec. 31, 1998 Sep. 30, 1998
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REVENUE
Gross Sales $ 669,337 $ 1,079,615
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Sales Returns & Discounts 0 (72,841)
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Net Sales 669,337 1,006,774
Total Cost of Good 93,347 164,504
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GROSS MARGIN 575,990 842,270
EXPENSES
Payroll Expense 172,642 160,772
Administrative Expense 398,274 496,756
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Total Operating Expenses 570,916 657,528
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Net Operating Income $ 5,074 $ 184,742
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Net Income $ 5,074 $ 184,742
EARNINGS (LOSS) PER SHARE $ 0.00 $ 0.04
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STATEMENT OF CASH FLOWS
(unaudited)
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Nine months ended
Dec. 31, 1998 Dec. 31, 1997
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CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $ 5,074 $ 184,742
Change in Current Assets
Net Receivables (198,626) (157,144)
Inventory (8,118) (4,044)
Prepaid Expenses (50,409) (7,648)
Change in Current Liabilities
Accounts Payable 89,785 53,309
Loan Payable 137,650 50,000
Other Current Liabilities (274) 30,126
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Total Cash Flow from operating activities (29,992) 149,341
Cash Flow from investing activities
Developed Software 43,144 40,418
Property, Plant & Equipment 1,953 10,592
Depreciation on Disposed Assets 14,000 80,400
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Total Cash Flow from investing activities 59,097 131,410
Cash Flow from financing activities
Long-Term Debt (254,470) 53,677
Paid-In Capital 258,510 68,665
Retained Earnings (34,865) 409,005)
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Total Cash Flow from financing activities (30,825) (286,663)
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Net Increase (Decrease) in Cash 3,354 $ (5,912)
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Beginning Cash Balance 4,411 5,156
Net Increase (Decrease) in Cash $ 3,354 (5,912)
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Ending Cash Balance $ 7,765 $ (756)
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Item 2. NOTES TO FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The financial statements for Heartsoft, Inc. (the "Company") for the nine
months ended December 31, 1998 and 1997, are unaudited and reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim periods. These financial statements should be read in conjunction
with all other publicly available information which is incorporated herein by
reference. The results of operations for the nine months ended December 31,
1998, are not necessarily indicative of the results for the entire fiscal
year ending March 31, 1999.
NOTE 2. NATURE OF BUSINESS
Heartsoft, Inc.'s business is the development, publishing, and distribution
of early-learning educational computer software products for schools and
parents throughout the United States and to certain markets internationally.
NOTE 3. CAPITALIZED SOFTWARE COSTS
Capitalization of software development costs begins when a 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.
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 is deferred to a future date.
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ITEM 2: Management's Discussion and Analysis of Financial Conditions and
Results of Operations
This report contains forward-looking statements. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes", "plans",
"intends", "anticipates", "expects", or words of similar import. Similarly,
statements that describe the Company's future plans, objectives, estimates,
or goals are also forward-looking statements. Such statements address future
events and conditions concerning capital expenditures, earnings, litigation,
liquidity, capital resources, and accounting matters. Actual results in each
case could differ materially from those currently anticipated in such
statements by reason of factors such as economic conditions, including
changes in customer demands; future legislative, regulatory and competitive
developments in markets in which the Company operates; and other
circumstances affecting anticipated revenues and costs.
OVERVIEW
Heartsoft, Inc. develops and publishes educational computer software products
which educate and inspire the joy of learning in young children ages 4 through
12 years old. The company's primary emphasis has been upon publishing its early
learning products for schools and school districts in the United States.
However, late in 1998, the company also began to sell its products to parents of
young children and to international software markets world-wide.
The company distributes its products directly to the school market utilizing
various sales methods including it own inside sales force, independent school
resellers, major school catalog resellers, and from time to time, direct
mail. The company also sells its products to parents using software clubs
distributed through school teachers. The company's international sales are
conducted through international distributors in Australia and Canada.
The company's products range in price from under $40 for a single-user
version to over $1,300 for a building-wide license. During 1998, the company
began to focus a greater percentage of its marketing and sales efforts on
larger-priced configurations for entire school districts.
The mission of Heartsoft, Inc. is to create value for its shareholders
through the development, licensing, and distribution of engaging
early-learning software technologies for education in schools and homes. The
company has achieved a market share of approximately 10% of the 100,000+
elementary schools in the U.S. since its inception, and plans to accelerate
its market share significantly over the next few years.
RESULTS OF OPERATIONS
Net Sales, derived from the combination of three revenue sources during fiscal
1997 and only two revenue sources during 1998, declined to $669,000 for the 9
months ending December 31, 1998, when compared to $1,080,000 for the same period
one year ago. The decrease in Net Sales is fully attributed to the elimination
of revenue from the company's unprofitable Advanced Technologies Division, which
was completely phased out during the fourth quarter of fiscal 1997, and a 67%
reduction of the one-time revenues derived from international product licensing.
Prior to December 31, 1998, the principle focus of the company was on the
development of the company's educational software product lines with only
minimal focus placed on product sales. During November, 1998, the company
completed all software development projects and shifted its focus to the
building of its marketing, sales, and distribution forces.
The company anticipates that results from these efforts will begin to have a
positive affect on the company's revenues during the fourth quarter, ending
March 31, 1999, continuing with a much larger, material affect on its revenue
growth during the first quarter of fiscal 1999, ending June 30, 1999.
COST OF GOODS SOLD
Cost of Goods sold decreased by 46% as a result of the shutdown of the
unprofitable Advanced Technologies Division which generated its revenues through
the sale of 3rd party products. Sale of these 3rd party products by the
discontinued division greatly increased the company's cost of goods since the
products were purchased from publishers and sold to end-users resulting in much
smaller margins. In the future, the company anticipates the cost of goods sold
will remain approximately 10 to 12% of net sales.
RESTRUCTURING AND OFFICE CLOSURE
Prior to December 31, 1998, the principle focus of the company was on the
development of the company's educational software product lines with only
minimal focus placed on product sales. During November, 1998, the company
completed all software development projects and shifted its focus to the
building of its marketing, sales, and distribution forces.
Also, during the fourth quarter of fiscal 1997, the company eliminated its
Advanced Technologies division in Dallas, Texas, and shifted all of its
available resources to its sole remaining core products division in Tulsa,
Oklahoma.
Certain on-going expenses related to the closing of the Advanced Technologies
Division were carried into 1998 and had a minor impact on Operating Expenses
OPERATING EXPENSES
Operating Expenses decreased slightly for the 9 months ended December 31, 1998,
to $571,000 compared to $658,000 for the period ending December 31, 1997. The
decrease can be attributed to streamlining of the company's software development
group and to cost-saving measures implemented across the board.
NET INCOME
Net income decreased to $5,100 for the 9 months ending December 31, 1998, down
from $184,700 for the same period one year ago. The decrease is the result of
the elimination of revenues from the company's Advanced Technologies division as
well as the one-time charges associated with the division's closing.
Additionally, the company's remaining core products division significantly
increased expenses associated with the establishment of its new inside sales
organization during the quarter ending December 31, 1998.
SALES AND MARKETING
The Company's sales and marketing efforts are comprised primarily of
compensation for the Company's sales and marketing personnel, advertising, trade
shows and other promotional costs.
For the foreseeable future it is the intention of the company to increase its
market share within the school, home, and home-school market with its current
product line and to expand or add to its product lines whenever it believes
favorable market conditions exist. Recent endorsements by third party reviews
of the company's new critical thinking skills product, Thinkology(r), have
caused the company to accelerate the growth of its marketing and sales
strategy. As a result, the company began to significantly increase staffing
of its inside sales group in November, 1998, and continuing into 1999.
The company believes that results from this expansion will begin to have a
small impact on revenues during its fourth fiscal quarter and will have a
significant impact on revenues during the first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998 the Company's principle sources of liquidity included
cash and accounts receivable in excess of $397,000 which includes a revolving
line of credit with a current limit of $100,000. Additional working capital has
been and may again be required to expand operations. Management may consider
options available in providing such funding sources, including debt or equity
financing.
YEAR 2000 ISSUES
The Company has reviewed its internal programs and has determined that there are
no significant Year 2000 issues within the Company's systems or services.
Further, all products sold by the company are Year 2000 compliant and will
impose no Year 2000 problems for its customers.
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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 there unto duly authorized.
HEARTSOFT, INC.
(Registrant)
August 7, 1997 /s/ Benjamin P. Shell
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Charirman, CEO, Treasurer
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 202,485
<SECURITIES> 0
<RECEIVABLES> 194,545
<ALLOWANCES> 0
<INVENTORY> 21,353
<CURRENT-ASSETS> 616,676
<PP&E> 123,585
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,770,385
<CURRENT-LIABILITIES> 399,824
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<COMMON> 3,723
<OTHER-SE> 1,122,594
<TOTAL-LIABILITY-AND-EQUITY> 1,770,385
<SALES> 669,337
<TOTAL-REVENUES> 669,337
<CGS> 93,347
<TOTAL-COSTS> 93,347
<OTHER-EXPENSES> 570,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,074
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 5,074
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