<PAGE>
Heartsoft, Inc.
Financial Statement on Form 10Q
for the fiscal quarter ending September 30, 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 SEPT. 30, 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 September 30, 1997, there were 5,521,324 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 September 30, 1997 3
Statement of Income Six Months ending Sept. 30, 1997 4
Statement of Cash Flow 6 Months Ending Sept. 30, 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>
Sept. 30, 1997 Sept. 30, 1996
============== ==============
<S> <C> <C>
ASSETS
Cash & Cash Equivalents $ 979,395 $ 607,132
Inventory 13,735 (18,907)
Prepaid Expenses and Deposits 110,924 205,678
----------- -----------
Total Current Assets $ 1,104,054 $ 793,903
Fixed Assets-Net 141,595 170,061
Developed Software (See Note 2) 611,466 606,973
Deferred income tax benefit 193,448 64,201
----------- -----------
Total Other Assets $ 946,509 941,235
----------- -----------
Total Assets 2,050,563 $ 1,735,138
=========== ===========
LIABILITIES
Accounts Payable - Trade $ 144,401 $ 128,141
Notes Payable-current portion 40,000 89,479
Lease obligations-current portion 30,126 34,768
Taxes Payable 70,749 70,750
----------- -----------
Total Current Liabilities $ 285,277 $ 292,692
Long Term Liabilities 364,173 25,152
----------- -----------
Total Liabilities $ 649,450 $ 348,290
STOCKHOLDERS EQUITY
Retained Earnings (1,346,198) (941,633)
Common Stock 2,512 2,512
Preferred Stock 11,380 6,550
Paid-In Capital 2,599,281 2,423,116
Net Profit (Loss) 134,138 (103,697)
----------- -----------
Total Stockholders Equity $ 1,401,138 $ 1,386,848
----------- -----------
Total Liabilities And
Stockholders Equity $ 2,050,563 $ 1,735,138
=========== ===========
</TABLE>
<PAGE>
- ------------------------------------------------------------------------
Part I. FINANCIAL INFORMATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Six months ended
Sept. 30, 1997 Sept. 30, 1996
============== ==============
<S> <C> <C>
REVENUE
Gross Sales $423,471 $661,476
------------- -------------
Sales Returns & Discounts (39,986) (21,649)
------------- -------------
Net Sales 383,485 639,827
Total Cost of Good 119,225 327,404
------------- -------------
GROSS MARGIN 264,260 312,423
EXPENSES
Payroll Expense 109,910 169,107
Administrative Expense 326,969 265,313
------------- -------------
Total Operating Expenses 436,879 434,420
------------- -------------
Net Operating Income $134,138 ($103,679)
Gain on Sale of Assets 306,757 0
============= =============
Net Income $134,138 ($103,679)
EARNINGS (LOSS) PER SHARE* 0.02 (0.02)
</TABLE>
*Primary weighted average common shares outstanding during the period
1997 = 5,507,357 and 1996 = 5,249,340
<PAGE>
- ------------------------------------------------------------------------
Part I. FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Sept. 30, 1997 Sept. 30, 1996
============== ==============
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $ 134,138 $(103,697)
Change in Current Assets
Net Receivables (34,093) 229,765)
Inventory (5,875) 30,123
Prepaid Expenses 3,254 (155,183)
Change in Current Liabilities
Accounts Payable 17,528 5,290
Loan Payable 54,121 (172,322)
Other Current Liabilities (287,199) 28,955
--------- ---------
Total Cash Flow from operating act (118,126) (596,599)
Cash Flow from investing activities
Developed Software 22,664 (124,833)
Property, Plant & Equipment 10,592 (75,583)
Depreciation on Disposed Assets 5,200 60,000
--------- ---------
Total Cash Flow from invest. act 88,456 (158,716)
Cash Flow from financing activities
Long-Term Debt 59,031 (13,253)
Paid-In Capital 55,950 962,153
Retained Earnings (89,149) (57,166)
Preferred Stock 0 5,000
--------- ---------
Total Cash Flow from financing act 25,832 896,734
--------- ---------
Net Increase (Decrease) in Cash $ (3,838) $ 141,419
========= =========
Beginning Cash Balance 5,156 $ 19,922
Net Increase (Decrease) in Cash $ (3,838) 141,419
--------- ---------
Ending Cash Balance $ 1,318 $ 161,341
========= =========
</TABLE>
<PAGE>
- ------------------------------------------------------------------------
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. 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>
- ------------------------------------------------------------------------
Item 2 HEARTSOFT, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1997
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 5,521,324 shares issued and outstanding. Over the
past ninety days, the Company's stock has traded in the $0.43 to $0.71 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 6 months ending
September 30, 1997, were $383,485 compared to $639,827 for the same period one
year ago representing a 40% decrease. For the quarter ended September 30, 1997,
total sales were $151,254 compared to $272,217 for the previous quarter. The
September quarter is traditionally a seasonal lowpoint 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 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.
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 $264,260, a 15% decline from year previous levels.
Gross Margin as a percentage of sales improved to 69% of Net Sales, compared to
49% in the year earlier period, as the product mix featured higher margin
products as a percentage of sales.
Operating Expenses
General operating expenses were essentially flat for the six months ended
September 30, 1997 to $436,879 compared to $434,420 for period ending September
30, 1996.
Net Income
The Company recorded a net income of $134,138, or two cents per share, for the 6
months ending September 30, 1997, compared to net loss of $103,697 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 September 30, 1996, the Company's principle sources of liquidity included
cash and accounts receivable of $979,395, which includes 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>
- ------------------------------------------------------------------------
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)
November 18, 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> SEP-30-1997
<CASH> 479,903
<SECURITIES> 0
<RECEIVABLES> 499,492
<ALLOWANCES> 215,725
<INVENTORY> 13,735
<CURRENT-ASSETS> 1,104,054
<PP&E> 141,595
<DEPRECIATION> 27,000
<TOTAL-ASSETS> 2,050,563
<CURRENT-LIABILITIES> 285,277
<BONDS> 0
11,380
0
<COMMON> 2,512
<OTHER-SE> 1,253,108
<TOTAL-LIABILITY-AND-EQUITY> 2,050,563
<SALES> 383,485
<TOTAL-REVENUES> 423,471
<CGS> 119,225
<TOTAL-COSTS> 159,211
<OTHER-EXPENSES> 436,879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 134,138
<INCOME-TAX> 0
<INCOME-CONTINUING> 134,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 134,138
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>