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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
-------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from ______________to ________________
Commission file number 033-23138-D
---------------------------------------------
HEARTSOFT, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 87-0456766
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3101 North Hemlock Circle, Broken Arrow, Oklahoma 74012
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(Address of principal executive offices)
(918) 251-1066
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
As of June 30, 1999, 9,935,230 shares of Heartsoft, Inc. Common Stock, $0.0005
par value, were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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HEARTSOFT, INC. - QUARTERLY REPORT
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1: Balance Sheet as of June 30, 1999 3
Statement of Income as of June 30, 1999 4
Statement of Cash Flow - Three Months Ending
June 30, 1999 5
Item 2: Management's Discussion and Analysis or Plan
of Operations 6
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PART II. OTHER INFORMATION PAGE
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Item 1: Legal Proceedings 13
Item 2: Changes in Securities 13
Item 3: Defaults Upon Senior Securities 13
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
Signature Page 14
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEET
AS OF JUNE 30, 1999
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30-Jun-99 31-Mar-99
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ASSETS
CURRENT ASSETS
Cash 63,947 41,589
Accounts Receivable 39,957 46,598
Inventories 12,955 20,351
Prepaid Expenses 13,035 14,599
Total Current Assets 129,894 123,137
Plant, Property and Equipment
Plant, Property and Equipment 148,432 145,228
Accumulated Depreciation -97,081 -92,290
Total Plant, Property and Equipment 51,351 52,938
OTHER ASSETS
Developed Software, net 652,318 619,546
Other 2,689 2,689
Total Other Assets 655,007 622,235
Total Assets 836,252 798,310
LIABILITIES
CURRENT LIABILITIES
Accounts Payable 198,106 193,740
Accrued Liabilities 92,900 92,900
Current Portion - long-term Debt 281,376 281,376
Total Current Liabilities 572,382 568,016
LONG TERM LIABILITIES
Loans Payable - Long-term 213,146 213,146
Total Liabilities 785,528 781,162
EQUITY
Preferred Stock
Common Stock 4,968 4,585
Additional Paid in Capital 3,428,271 3,243,271
Retained Earnings -3,382,515 -3,230,708
Treasury Stock
Total Equity 50,724 17,148
Total Shareholders' Equity 50,724 17,148
Total Liabilities and shareholders' Equity 836,252 798,310
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STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30
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30-Jun-99 30-Jun-98
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Net Sales 124,374 177,062
Costs and expenses:
Costs of production 20,803 29,989
Sales and Marketing 50,639 49,150
General and administrative 152,448 136,534
Depreciation and amortization 44,883 47,153
Total operating expenses 268,774 262,826
Operating Loss -144,400 -85,764
Other income and expenses
Gain on sale of interest in software library 0 116,941
Interest expense -8,112 -9,442
Other (net) 705 626
Loss before income taxes -151,807 22,361
Income taxes 0 0
Loss before unusual item -151,807 22,361
Unusual item - costs associated with closing 0 0
Dallas sales office
Net loss -151,807 22,361
Net loss per common share - basic and diluted (0.02) 0.001
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STATEMENT OF CASH FLOW
THREE MONTHS ENDED JUNE 30, 1999
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CASH FLOW FROM OPERATING ACTIVITIES
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Net Income (Loss) (151,807)
Change in Current Assets
Net Receivables 6,641
Inventory 7,396
Prepaid Expenses 1,564
Change in Current Liabilities
Accounts Payable 4,366
Loan Payable
Other Current Liabilities -
Total Cash Flow from operating activities (131,840)
Cash Flow from investing activities
Developed Software (72,864)
Property, Plant & Equipment 6,378
Depreciation on Disposed Assets (4,791)
Intangible Assets 40,092
Total Cash Flow from investing activities (31,185)
Cash Flow from financing activities
Long-Term Debt -
Paid-In Capital 185,383
Retained Earnings -
Total Cash Flow from financing activities 185,383
Net Increase (Decrease) in Cash 22,358
Beginning Cash Balance 41,589
Net Increases (Decrease) in Cash 22,358
Ending Cash Balance 63,947
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-QSB contains "forward-looking" statements
regarding potential future events and developments affecting the business of
Heartsoft, Inc., a Delaware corporation ("Heartsoft," or the "Company,"
including its subsidiary). Such statements relate to, among other things:
- - future operations of Heartsoft, including the impact of any year 2000
issues encountered by Heartsoft;
- - the development of new products and distribution channels and product
sales;
- - competition for customers for Heartsoft's products;
- - the uncertainty of developing or obtaining rights to new products that
will be accepted by the market;
- - the timing of the introduction of new products into the market;
- - the limited market life of Heartsoft's products; and
- - other statements about Heartsoft or the educational software market.
Forward-looking statements may be indicated by the words "expects," "estimates,"
"anticipates," "intends," "predicts," "believes" or other similar expressions.
Forward-looking statements appear in a number of places in this Form 10-QSB and
may address the intent, belief or current expectations of Heartsoft and its
Board of Directors and Management with respect to Heartsoft and its business.
Heartsoft's ability to predict results or the effect of any future events on
Heartsoft's operating results is subject to various risks and uncertainties.
Some of these risks and uncertainties include competition for products and
customers, the Company's ability to develop or obtain rights to new products and
the limited market life of Heartsoft's current products.
RISK FACTORS
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company's quarterly revenues and operating results have varied significantly
in the past and are likely to vary substantially in the future. Quarterly
revenues and operating results may fluctuate as a result of a variety of
factors, including:
- - changes in the level of operating expenses;
- - demand for the Company's products;
- - the introduction of new products and product enhancements by the
Company or its competitors;
- - changes in customer budgets;
- - competitive conditions in the industry; and
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- - general economic conditions.
Further, the Company's customers often experience delays associated with
internal authorization procedures when purchasing the Company's products. For
these and other reasons, the sales cycles for the Company's products are
typically lengthy and subject to a number of significant risks outside the
Company's control including customers' budgetary constraints and internal
authorization reviews. The Company historically has operated with little backlog
because its software products are generally shipped as orders are received. The
Company can not ensure that it will be profitable in future quarters.
RAPID TECHNOLOGICAL CHANGE
The educational software market is subject to rapid technological change, new
product introductions, evolving industry standards and changes in customer
demands. The introduction of new technologies and the emergence of new industry
standards can render existing products obsolete and unmarketable. The Company's
future success will depend in part on its ability to enhance existing products
and to develop new products that meet changing client requirements. The Company
is in the process of developing a secure Internet browser for children. The
development of any new products utilizing the Internet involves significant
technical risks. The Company may not be successful in developing and marketing
product enhancements or new products. The Company could experience difficulties
that delay or prevent the successful development and marketing of product
enhancements or new products. The Company cannot guarantee that any new products
and product enhancements it may introduce will achieve market acceptance.
INTENSE COMPETITION
The educational software market is highly competitive and rapidly changing. A
number of companies offer products similar to the Company's products and target
the same customers as the Company. The Company believes its ability to compete
depends upon many factors including:
- - the timely development and introduction of new products and product
enhancements;
- - product functionality;
- - product performance;
- - price;
- - product reliability;
- - customer service and support;
- - sales and marketing efforts; and
- - product distribution.
Some of the Company's primary and potential competitors are substantially larger
than the Company and have significantly greater financial, technical and
marketing resources as well as established channels of distribution. As a
result, these competitors may be able to respond more quickly to emerging
technologies and changes in customer requirements and can devote greater
resources to their businesses. The Company also expects that competition will
increase as a
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result of software industry consolidation. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or prospective customers. Accordingly, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, operating results and financial condition. The Company can
not ensure it will be able to compete successfully against current or future
competitors.
MANAGEMENT OF CHANGING BUSINESS; DEPENDENCE ON MANAGEMENT AND KEY EMPLOYEES
The Company has experienced significant changes in its business, including an
expansion in the Company's staff and customer base, and the expansion of its
product lines. Such changes have placed and may continue to place a significant
strain on the Company's management and operations. In order to manage such
change in the future, the Company must continue to enhance its operational,
financial and management information systems and to hire, train and manage
employees. If the Company is unable to implement these systems and manage such
changes effectively, the Company's business, operating results and financial
condition could be materially and adversely affected.
The Company believes that its future success will also depend in large part upon
its ability to attract and retain highly skilled technical, managerial and
marketing personnel. Competition for such personnel is intense. The Company
cannot ensure that it will be successful in attracting and retaining the
personnel it requires to continue growing. Because of the Broken Arrow, Oklahoma
(Tulsa Metropolitan area) location of the Company's headquarters, the Company
may have difficulty in attracting and retaining qualified management and
technical employees who may be required to move to become employed by the
Company.
The Company's success depends to a significant extent on the performance and
continued services of its senior management and certain other key employees.
The loss of one or more of senior management and key employees could have a
material adverse effect upon the Company. In October 1999, the Company began
entering into employment agreements with its key employees in order to reduce
the risk of loss of key employees.
PROTECTION OF INTELLECTUAL PROPERTY
The Company's success is heavily dependent upon its confidential and
proprietary intellectual property. The Company presently has no patents or
patent applications pending. Rather, the Company relies primarily on a
combination of copyright, trademark and trade secrets laws, confidentiality
procedures and contractual provisions to protect its proprietary rights.
Trade secret and copyright laws afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as
well as the laws of the United States. The Company cannot guarantee that its
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar technology.
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The Company does not believe that any of its products infringe upon the
proprietary rights of third parties. However, third parties could claim
infringement by the Company with respect to current or future products. The
Company expects that software product developers such as itself will
increasingly be subject to infringement claims as the number of products in the
educational software market increase and the functionality of such products
overlap. Defense of any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all. Any dispute regarding the proprietary rights of third
parties could have a material adverse effect upon the Company's business,
operating results and financial condition.
MANAGEMENT OF GROWTH
The Company is experiencing a period of transition and product introductions
that has and may continue to place a significant strain on its resources.
Expansion of the Company's product lines, additional product development and
product introductions, or acquisitions of other technologies, will further
place a strain on the Company's resources and personnel when added to the
day-to-day activities of the Company. In particular, the Company is currently
developing a new secure Internet browser for children, INTERNET
SAFARI-Registered Trademark-, scheduled to be released during the first
quarter of the calendar year 2000.
RISK OF PRODUCT DEFECTS
Prior to release of new products or upgrades to existing products, the Company
conducts exhaustive testing of those products. However, despite testing, new
products or enhancements may contain undetected errors or "bugs" that are
discovered only after a product has been installed and used by customers. There
can be no assurance that such errors will not be discovered in the future. Such
errors can cause delays in shipments that materially and adversely affect the
Company's competitive position and operating results. Although the Company has
not experienced material adverse effects resulting from any such errors to date,
the Company cannot ensure that its new products or releases will be error free
even after commencement of commercial shipments. Discovery of errors in the
Company's products after the commencement of commercial shipping could result in
the following:
- - loss of revenues;
- - delays in market acceptance;
- - diversion of development resources;
- - damage to the Company's reputation; and
- - increased service and warranty costs.
Any of these occurrences could have a material adverse effect upon the Company's
business, financial condition and results of operations.
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DEPENDENCE ON PRINCIPAL PRODUCTS
To date, the Company has derived substantially all of its revenue from the
sale of its 40 educational products. Accordingly, the Company's results will
depend on continued market acceptance of these existing products and
acceptance of its new products, including INTERNET SAFARI-Registered
Trademark-. Failure to achieve such acceptance could have a material adverse
effect on the Company's financial condition and results of operations.
DEVELOPMENT OF NEW PRODUCTS AND ENHANCEMENT OF EXISTING PRODUCTS
In order to remain competitive in the educational software market, the Company
must develop and introduce new products and product enhancements on a timely
basis. If the Company fails to develop and introduce new products and
enhancements on a timely basis, it could have a material adverse effect on the
Company's financial condition and results of operations.
YEAR 2000 ISSUES
Many existing computer systems and software products do not properly recognize
dates after December 31, 1999. This "Year 2000" problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
The Company has reviewed its internal systems and believes that such systems are
Year 2000 compliant. However, the Company can not ensure that Year 2000 errors
or defects will not be discovered in the Company's internal software systems. If
such errors or defects are discovered, the costs of making the Company's
internal systems Year 2000 compliant could be material.
The Company is subject to potential Year 2000 problems affecting the systems of
its customers and the systems of its vendors. Additionally, changing purchasing
patterns of customers impacted by Year 2000 issues may result in reduced
resources available for purchases of educational software. These problems could
also have a material adverse effect on the Company's financial condition and
results of operations.
Year 2000 errors or defects in the internal systems maintained by the Company's
vendors could require the Company to incur significant unanticipated expenses to
remedy any problems or replace affected vendors. In order to limit its exposure
to potential Year 2000 inventory problems, the Company has established
relationships with various different sources of raw materials. The Company is
also prepared to increase its inventory of critical raw materials to offset any
unexpected delays in receiving such inventories.
LIMITED RESOURCES
Although the Company believes that its current cash reserves and cash flows from
operations will be adequate to fund its operations for at least the next twelve
months, such resources may be inadequate. Consequently, the Company may require
additional operating funds during or after such period. Additional financing may
not be available on favorable terms or at all. The
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Company is currently planning a private placement of equity to be completed by
the first calendar quarter of 2000. If the Company raises additional funds by
selling stock, the percentage ownership of the Company's current shareholders
will be reduced. If the Company cannot raise adequate funds to satisfy its
capital requirements, the Company may have to limit its operations
significantly. The Company's future capital requirements depend upon many
factors, including:
- - the rate at which the Company expands its sales and marketing
operations;
- - the extent to which the Company develops its products;
- - the rate at which the Company updates its technology;
- - the Company's ability to complete its planned private placement;
- - the rate at which the Company expands; and
- - the response of competitors to the Company's product and service
offerings.
OVERVIEW
Heartsoft, Inc. is a publicly held Delaware Corporation, incorporated January
15, 1988, and traded OTC (Symbol: HTSF). Presently, 30,000,000 shares of
common stock are authorized, with 9,935,230 shares issued and outstanding.
During the period from April, 1999 to June, 1999, the high and low bids for
the Company's stock, as reported by the National Association of Securities
Dealers, Inc, were $2.00 and $1.2188 respectively.
Heartsoft is engaged in the design and publishing of its own proprietary
educational software products for distribution to the education market and
consumer market. To date, Heartsoft's Core Products Division has designed and
published more than 40 educational software titles. One of the Company's best
selling proprietary titles is THINKOLOGY-Registered Trademark-, a software
series that teaches young children the skills of critical thinking and higher
order reasoning skills. Released in late 1998, THINKOLOGY-Registered
Trademark- has garnered the prestigious Media & Methods Portfolio Award for
1999. THINKOLOGY-Registered Trademark- has also received several favorable
reviews in top educational and consumer magazines, including FamilyPC and
Multimedia Schools.
Other popular Heartsoft titles include:
- - TOMMY THE TIME TURTLE, an animated turtle that teaches children ages
5-7 how to tell time;
- - COIN CHANGER, which introduces children ages 5-7 to the denominations
of coins; and
- - the HEARTSOFT BESTSELLER SITE LICENSE, which consists of 12 of the
Company's top selling titles under a license allowing the teacher to
copy the software for every computer in the school.
Three of the Company's best selling products, HEARTSOFT BESTSELLER SITE
LICENSE (covering 12 software titles) and HEARTSOFT K-8 LIBRARY (containing
all 38 titles in the current product line) and its most recent release,
THINKOLOGY-Registered Trademark-, sell from prices ranging from approximately
$400 to $1,400, depending on the configuration. Further, each product license
allows multiple use of the software throughout the school. Within the
consumer, or home
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market, the Company's products sell in the price range from approximately $10 to
over $100 depending on configuration and educational support materials.
During the first calendar quarter of 1999, the Company began development of
INTERNET SAFARI-Registered Trademark-, a secure Internet browser for
children. This proprietary product has been under in-house development and is
expected to be available during the first calendar quarter of 2000. INTERNET
SAFARI-Registered Trademark- is designed for children ages 4 through 12 years
to help simplify their use of the Internet. INTERNET SAFARI-Registered
Trademark- will offer its young users access to the Internet with an exciting
cartoon interface built around a safari theme with jungle sounds, music and
animation. The new browser will also utilize artificial intelligence combined
with advanced image detection and analysis software to protect users from
inappropriate Internet content such as adult content, pornography, violence,
hate crimes, etc. INTERNET SAFARI-Registered Trademark- will be distributed
to both the consumer and educational markets.
NET REVENUES
Net Sales of the Company's educational computer software for the 3 months ending
June 30, 1999, were $124,374 compared to $177,062 for the same period one year
ago, a decrease of 42%.
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 the sales of
hardware and products related to the building of the Internet infrastructure.
Consequently, software sales have not been as strong as in years past.
Management believes that cyclical forces will move customer buying habits back
to historical growth trends.
COST OF GOODS SOLD
The Company includes in cost of goods sold all costs associated with the
acquisition of components, assembly of the finished product, warehousing and
shipping. The costs associated with production of product for the quarter ending
June 30, 1999 was $20,803 compared to $29,989. Both numbers reflect a 17% cost
of goods sold.
OPERATING EXPENSES
General operating expenses increased 46% for the quarter ended June 30, 1999
when compared to the quarter ended June 30, 1998. The increase in operating
expenses can be attributed to expenses related to the research for
development of the INTERNET SAFARI-Registered Trademark-. Development costs
are capitalized once the product has reached technical feasibility. Prior to
a product reaching technical feasibility, all expenses related to research
are expensed. Costs associated with Sales and Marketing for already existing
product lines rose 13% compared to the quarter ended June 30, 1998. The
increase in Sales and Marketing expense is directly related to a company-wide
emphasis on marketing THINKOLOGY-Registered Trademark-.
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NET INCOME
The Company realized a loss in the quarter ending June 30, 1999 of $151,807
compared to a profit of $22,361 for the quarter ending June 30, 1998. This
loss was incurred as a result of unexpected trends in the education industry.
Research showed greater emphasis in Internet and hardware purchasing and a
decrease in software purchases. Revenue in both reseller and educational
channels declined. Additionally, the Company experienced costs related to
development of the INTERNET SAFARI-Registered Trademark-.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's principal sources of liquidity included
cash and accounts receivables of $103,904. During the quarter ending June 30,
1999, the company began implementation of Phase II of a structured growth
plan. Management believes that although current liquidity will sustain the
Company at it's present growth rate, additional funding will be required in
order to compete in the Internet industry. Management shall continue to seek
additional capital through equity and debt instruments to fund Phase III of
the growth plan.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 29, 1999, the Franklin Group, Inc. ("Franklin") filed a petition against
Heartsoft in the District Court of Tulsa County, the State of Oklahoma. Franklin
alleges that Heartsoft failed to tender common stock of the Company owed to
Franklin due to services Franklin provided pursuant to a Business Consulting and
Public Relations Agreement ("Consulting Agreement"). Franklin alleges that it
fully performed under the terms of the Consulting Agreement and it is entitled
to 25,000 free trading shares and 150,000 restricted shares of Heartsoft's
common stock. Franklin has requested a judgment against Heartsoft for these
shares or, in the alternative, the cash equivalent of such shares plus
reasonable attorney's fees and costs. This matter is still in the early stages
of discovery.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
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None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits:
27.1 Financial Data Schedule.
B. Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company during
the fiscal quarter ended June 30, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEARTSOFT, INC.
(Registrant)
Date: 11/17/99 /s/ Benjamin P. Shell
---------------------- -----------------------------------------
Benjamin P. Shell, Chairman of the Board,
President, and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: 11/17/99 /s/ Benjamin P. Shell
---------------------- -----------------------------------------
Benjamin P. Shell, Chairman of the Board,
President, and Chief Executive Officer
(Principal Executive Officer and Principal
Financial Officer)
Date: 11/17/99 /s/ Kathy David
---------------------- -----------------------------------------
Kathy David, Controller
14
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 63,947
<SECURITIES> 0
<RECEIVABLES> 39,957
<ALLOWANCES> 0
<INVENTORY> 12,955
<CURRENT-ASSETS> 129,894
<PP&E> 148,432
<DEPRECIATION> (97,081)
<TOTAL-ASSETS> 836,252
<CURRENT-LIABILITIES> 572,382
<BONDS> 0
0
0
<COMMON> 4,968
<OTHER-SE> 45,756
<TOTAL-LIABILITY-AND-EQUITY> 836,252
<SALES> 124,374
<TOTAL-REVENUES> 145,177
<CGS> 20,803
<TOTAL-COSTS> 268,774
<OTHER-EXPENSES> 705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,112
<INCOME-PRETAX> (151,807)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (151,807)
<CHANGES> 0
<NET-INCOME> (151,807)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
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