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Heartsoft, Inc.
Financial Statement on Form 10Q
for the fiscal quarter ending June 30, 1997
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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 June 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 bysection 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) hasbeen subject to such filing
requirement for the past 90 days. YES X NO
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As of June 30, 1997, there were 5,408,390 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 June 30, 1997 3
Statement of Income Three Months ending June 30, 1997 4
Statement of Cash Flow Three Months Ending June 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
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Part I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALANCE SHEET
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June 30, 1997 June 30,1996
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ASSETS
Cash & Cash Equivalents $ 797,690 $ 832,636
Inventory 2,400 12,874
Prepaid Expenses and Deposits 124,610 118,205
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Total Current Assets $924,640 963,715
Fixed Assets-Net 147,595 111,718
Developed Software (See Note 2) 653,230 569,052
Deferred income tax benefit 193,448 138,926
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Total Other Assets $ 994,273 819,696
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Total Assets $1,918,913 $1,783,411
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LIABILITIES
Accounts Payable - Trade $ 128,454 $ 84,726
Notes Payable-current portion 40,000 106,270
Lease obligations-current portion 30,126 34,768
Taxes Payable 70,750 66,928
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Total Current Liabilities $ 269,330 $ 292,692
Long Term Liabilities 368,150 37,068
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Total Liabilities $ 637,480 $ 329,760
STOCKHOLDERS EQUITY
Retained Earnings (1,346,594) (941,633)
Common Stock 2,512 2,512
Preferred Stock 11,380 6,550
Paid-In Capital 2,539,829 2,346,699
Net Profit (Loss) 74,306 39,523
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Total Stockholders Equity $1,281,433 $1,453,651
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Total Liabilities And
Stockholders Equity $1,918,913 $1,783,411
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Part I. FINANCIAL INFORMATION
STATEMENT OF INCOME
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Three months ended
June 30, 1997 June 30, 1996
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REVENUE
Gross Sales $272,217 $459,166
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Sales Returns & Discounts (14,922) (1,650)
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Net Sales 257,295 457,516
Total Cost of Good 62,600 215,372
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GROSS MARGIN 194,695 242,144
EXPENSES
Payroll Expense 71,091 83,069
Administrative Expense 169,700 112,607
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Total Operating Expenses 240,791 195,676
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Gain on Sale of Assets 120,402 0
Net Operating Income $74,306 $46,468
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Net Income $74,306 $46,468
EARNINGS (LOSS) PER SHARE* 0.01 0.01
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*Primary weighted average common shares outstanding during the period
1997 = 5,450,890 and 1996 = 5,089,608
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Part I. FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
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Three months ended
June 30, 1997 June 30, 1996
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CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $ 74,306 $ 39,523
Change in Current Assets
Net Receivables 163,967 (121,245)
Inventory 5,460 (1,659)
Prepaid Expenses (10,432) (67,710)
Change in Current Liabilities
Accounts Payable 1,582 (20,408)
Loan Payable (170,070) (6,968)
Other Current Liabilities 0 13,026
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Total Cash Flow from operating activities 4,813 (165,441)
Cash Flow from investing activities
Developed Software 12,101 (59,187)
Property, Plant & Equipment (1,408) (14,238)
Depreciation on Disposed Assets 30,000 30,000
Intangible Assets 0 6,250
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Total Cash Flow from investing activities 40,693 (37,175)
Cash Flow from financing activities
Long-Term Debt 0 (155,509)
Paid-In Capital (3,502) 890,735
Retained Earnings (89,545) 0
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Total Cash Flow from financing activities (93,047) 735,226
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Net Increase (Decrease) in Cash $ 12,459 $ 532,610
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Beginning Cash Balance 5,154 $19,923
Net Increase (Decrease) in Cash $ 12,459 $532,610
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Ending Cash Balance $ 17,613 $552,533
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HEARTSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 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, 1995, 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.
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ITEM 2 HEARTSOFT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 30, 1997
OVERVIEW
Heartsoft, Inc. is a publicly held Delaware Corporation, incorporated January
15, 1988, and traded OTC Bulletin Board (Symbol: HTSF). Presently, 30 million
shares of stock are authorized, with 5,493,390 shares issued and outstanding.
Over the past ninety days, the Company's stock has traded in the $0.43 to
$0.75 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 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. The
Company has licensed other products which are targeted at children in grades
4 through 12. Currently the Company is completing work on its new product
line, Thinkology(r), which will be released in the Fall 1997. The 3 volume
program focuses on critical thinking skill development within the K-4 grade
segment. 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
3 months ending June 30, 1997, were $257,295 compared to $457,516 for the
same period one year ago, a decrease of 44%. The decrease in revenues can be
attributed to the elimination of revenue from the Dallas Heartsoft Advanced
Technologies Division, which was closed first quarter 1997. Compared to year
earlier levels, revenue generated solely from the Tulsa Core Products
Division increased by 15%. Sales returns were 5.5% of sales, which is roughly
equivalent to historical norms.
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. Total gross margin decreased to $194,695, a 20% decrease. The
gross margin of 76% for the three months ended June 30, 1997 was an increase
from 53% in the year earlier period. The ncrease was attributable to the
exclusion of the different cost structure associated with the Advanced
Technology Division product line. The 76% gross margin is slightly below the
historical norm of 79% to 85%.
OPERATING EXPENSES
General operating expenses increased across the board from $195,676 for the
three months ended June 30, 1996 to $240,791 for period ending June 30, 1997.
Additional research and development on the Company's new product line
contributed to the increase in administrative expense from $112,607 to
$169,700. Payroll expense declined from $83,069 to $71,091 for the 3 month
period.
NET INCOME
Net income increased to $74,306 for the 3 months ending June 30, 1997 from
$46,468 for the same period one year ago. The increase in net income was
partially attributable to a licensing agreement consummated within the
quarter that included a gain on sale for the Company. The licensing agreement
provides for the Company to sell a portion of its software titles, in return
for a royalty stream to be repaid to the licensor through the sale of future
product.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's principle sources of liquidity included
cash and accounts receivable in excess of $375,000 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.
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Part II. OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registranthas duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTSOFT, INC.
(Registrant)
Date August 7, 1997 /s/ Benjamin P. Shell
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Benjamin P. Shell,
Chairman
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<PERIOD-START> APR-01-1997
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