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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 DECEMBER 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 033-23138-D
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HEARTSOFT, INC.
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(Name of small business issuer in its charter)
DELAWARE 87-0456766
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
organization)
3101 NORTH HEMLOCK CIRCLE, BROKEN ARROW, OKLAHOMA 74012
(Address of principal executive offices)
(918) 362-3600
(Issuer's Telephone Number)
(Former name, former address and former fiscal year, if changed since last
report)
As of December 31, 2001, 17,997,946 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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PART I. FINANCIAL INFORMATION
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<Caption>
Item 1: Balance Sheet as of December 31, 2001 3
Statement of Operations For the Six Month Periods Ended
December 31, 2001 and December 31, 2000 5
Statement of Cash Flows For the Six Month Periods Ended
December 31, 2001 and December 31, 2000 6
Notes to Financial Statements 7
Item 2: Management's Discussion, Analysis of Financial Condition,
and Results of Operations 9
PART II. OTHER INFORMATION 10
Signature Page 11
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INTRODUCTORY STATEMENT REGARDING ADOPTION OF FISCAL YEAR:
On August 4, 2000, the Board of Directors of Heartsoft, Inc. changed the
Company's fiscal year end from March 31 to June 30 effective for the fiscal year
beginning July 1, 2000. Therefore, Fiscal Year 2001 will be for the period July
1, 2000 to June 30, 2001 and the three months ended September 30, 2000, December
31, 2000 and March 31, 2001 represents the first, second and third quarters of
Fiscal Year 2001, respectively.
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PART I -- FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
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BALANCE SHEET
As of December 31, 2001
(Unaudited)
Assets
Current assets:
Cash deficiency $ (32,394)
Accounts receivable, trade, net 5,322
Note receivable - officer 250,254
Inventories, at cost 49,880
Prepaid Advertising 28,000
Total current assets 301,062
Property and equipment, at cost:
Property and equipment 298,776
Less accumulated depreciation (164,359)
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Property and equipment, net 134,417
Other assets:
Developed software, net 955,385
Other 1,319
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Total other assets 956,704
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Total assets $ 1,392,183
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BALANCE SHEET
As of December 31, 2001
(Unaudited)
<Table>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 804,410
Notes payable 1,363,774
Accrued expenses 224,205
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Total current liabilities 2,392,389
Long term liabilities:
Notes payable --
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Total liabilities 2,392,389
Commitments and contingencies --
Stockholders' deficiency:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 642,000 shares issued 6,420
Common stock, $0.0005 par value, 30,000,000
shares authorized, 17,997,946 shares issued 8,999
Additional paid-in capital 7,957,727
Accumulated deficit (9,130,327)
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Total stockholders' equity (1,157,181)
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Total liabilities and stockholders' equity $ 1,392,183
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STATEMENT OF OPERATIONS
(Unaudited)
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<Caption>
Six Month Periods Ended
December 31,
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2001 2000
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Net sales $ 144,202 $ 208,333
Costs and expenses:
Cost of production 14,226 101,920
Sales and marketing 129,760 435,399
General and administrative 570,533 825,543
Depreciation and amortization 66,809 73,652
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Total operating expenses (781,328) 1,436,514
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Operating loss (637,126) (1,228,181)
Other income and expense:
Interest expense (145,439) (84,530)
Other, net -- 3,778
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(145,439) (80,752)
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Loss before income taxes (782,565) (1,308,933)
Income taxes -- --
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Net income (loss) $ (782,565) $(1,308,933)
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Earnings per share $ (0.04) $ (0.11)
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HEARTSOFT, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited financial statements have been prepared in accordance
with instructions to Form 10-QSB as prescribed by the Securities and Exchange
Commission. In the opinion of management, all adjustments required to make a
fair presentation of the results of operations of Heartsoft, Inc., a Delaware
corporation (Heartsoft, or the Company, including its subsidiary), for the six
month periods ended December 31, 2001 have been included. The results of
operations for the six month period ended December 31, 2001 are not necessarily
indicative of the results of operations that may be achieved for the remainder
of the fiscal year.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN YEAR END
On August 4, 2000, the Board of Directors of the Company changed the Company's
fiscal year end from March 31 to June 30 effective for the fiscal year beginning
July 1, 2000. Therefore, Fiscal Year 2001 will be for the period July 1, 2000 to
June 30, 2001 and the three months ended September 30, 2000, December 31, 2000
and March 31, 2001 represents the first, second and third quarters of Fiscal
Year 2001, respectively.
NOTE 2 - NOTES PAYABLE
Notes payable consist of the following at December 30, 2001:
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Notes payable to investors (A) $ 907,778
Notes payable to a finance company, $6,803
monthly, due October 2003 bearing interest at
14.82%, secured by property and equipment 65,388
Notes payable to investors, balloon payments due
December 31, 2001, bearing interest at rates
ranging from 8% to 15% 329,017
Note payable to an investment group, balloon
payment due February 28, 2002, bearing
interest at 8% 40,000
Notes payable to investors, bearing
interest at 8% 50,000
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Total 1,392,183
Current portion 1,392,183
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(A) On September 1, 2001, and October 15, 2001, three noteholders entered into
an extension agreement, and amended and restated note agreements and security
agreements (together, the Agreements). Under
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the Agreements, the principal balances bear interest at 15% per annum. Principal
and interest on each note are due December 31, 2001, which date would be
accelerated upon Heartsoft's receiving aggregate cumulative proceeds of
$1,000,000 from debt, equity or sale of assets. In consideration of the signed
notes, the Company issued the noteholders an aggregate of 525,000 shares of
common stock. In consideration of the extension agreement, the Company agreed to
issue the noteholders an aggregate of 1,200,000 shares of common stock. The fair
value of the common stock issued is accounted for as additional interest.
NOTE 3 - EARNINGS PER SHARE
Basic and diluted EPS are computed as follows:
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<Caption>
Six month periods ended
December 31,
2001 2000
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Basic EPS computation:
Net loss $ (782,565) $ (1,308,933)
Weighted average
Shares outstanding 17,997,946 11,505,391
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Basic and diluted
Net loss per share $ (0.04) $ (0.11)
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NOTE 4 - UNCERTAINTIES
The Company has experienced recurring net losses from operating activities,
which amounted to $782,565 for the six months ended December 31, 2001.
While the company released INTERNET SAFARI (R), its new secure Internet browser
in February, 2001, and has seen continued sales of its various product lines,
the company significantly scaled back its operations during the quarter ending
September 30, 2001. In order to finance the continuing costs of product
development and operating losses, management intends to raise additional capital
through equity offerings. However, the Company has no formal commitments for
equity placements. The ability of the Company to implement its operating plan
and to continue as a going concern depends on its ability to raise equity
capital and, ultimately, to achieve profitable operations.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This 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).
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.
GENERAL INFORMATION
Heartsoft is a publicly held Delaware Corporation, incorporated on January 15,
1988, and traded in the Over the Counter Bulletin Board (OTCBB) market under the
symbol HTSF. The Company is a provider of proprietary educational computer
software products distributed to the education and consumer markets. Its
products are sold through an internal sales organization, national and
international resellers, United States based catalogers with an annual aggregate
circulation of several million catalogs and online through four corporate
websites, www.heartsoft.com, www.internet-safari.com, www.thinkology.com, and
www.isafari.com.
The Company's product line is comprised of approximately 50 educational software
programs that assist young children in pre-kindergarten through the 6th grade to
practice and learn basic curriculum subjects. In February, 2001, the Company
released its new secure Internet browser for children, INTERNET SAFARI(R)
Version 1.0. The release of INTERNET SAFARI(R) has broadened the Company's
product line to include an Internet-based software solution. Further, the
Internet Safari(R) was granted approval from the United States Patent and
Trademark Office as a registered trademark of Heartsoft, Inc. This approval
denotes formal status of Internet Safari as a strongly protected software asset
of the company. Prior to this approval INTERNET SAFARI(R) was protected under
the common law copyright and trademark provisions of U.S. corporate law.
Since its release, INTERNET SAFARI(R) has been well received. Beginning in
January, 2001, the Company's education group has distributed thousands of copies
of a demo version of INTERNET SAFARI(R) at major education conferences in
Florida and Texas, and the feedback from the many educators who have seen or
used the product is highly encouraging.
The Company is currently exploring retail distribution opportunities for
INTERNET SAFARI(R) through two software retailers and expects to make an
announcement regarding specific plans once details have been finalized. The
Company is also in preliminary discussions with several original equipment
manufacturers (OEMs) which could eventually lead to INTERNET SAFARI(R) being
shipped with certain hardware configurations directory from the factory.
To date, the Company has received several inquiries from international
distributors regarding the conversion, or localization, of INTERNET SAFARI(R)
into four foreign languages. These opportunities will be explored in the future.
The Company believes that its investment in the development of INTERNET
SAFARI(R) represents a key element of its future and that the Company can become
a leading player in the children's Internet market.
To accelerate the development of the potential of INTERNET SAFARI(R) and the
many related opportunities, the Company began pursuing the private placement of
up to $5 million in additional capital. The capital will be raised through a
long-term convertible preferred stock in order to minimize short-term dilution
to common shareholders while simultaneously providing essential growth capital.
The additional capital will allow the Company to strengthen its brand name
awareness and position and utilize its technological infrastructure and software
development capabilities to continue refining and upgrading its current and
future products. Accordingly, the Company intends to use the capital to invest
heavily in marketing and advertising, new partnerships and strategic alliances,
and its technology infrastructure. The Company believes that this program of
expansion is necessary to continue building its brand recognition and ability to
generate revenues.
Further, if the investments mentioned above are successful, the Company
anticipates that it will see an increase in revenues and a narrowing of losses
as percentage of revenues. The Company expects that the combination of increased
revenues and decreased expenses as percentage of revenues will lead to
profitability.
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RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED DECEMBER 31, 2001 VS. SIX MONTH PERIOD ENDED
SEPTEMBER 30, 2000
NET REVENUE
Revenue for the six months ended December 31, 2001 decreased to $144,202 from
$208,333 for the months ended December 31, 2001, a decrease of $64,131. The
decrease significantly resulted by reduction in staff of the Company's direct
sales force as technology purchasing within the United States fell across the
board due to economic and war-time factors.
COST OF PRODUCTION
Cost of production includes all costs associated with the acquisition of raw
materials, assembly of finished products, warehousing, shipping, and payroll
associated with production and shipping of finished products. This expense
category also includes labor costs associated with maintaining and implementing
enhancements to existing educational programs (software maintenance costs) as
well as miscellaneous costs related to the needs of the Production Department.
Cost of production for the six months ended December, 2001 was $14,226 compared
to $101,920 for the six months ended December 31, 2000, a decrease of $87,694.
SALES AND MARKETING
Sales and marketing expenses for the six months ended December 31, 2001, were
$129,760 versus $435,399 for the six months ended December 31, 2000, a decrease
of $305,639.
GENERAL AND ADMINISTRATIVE
Total general and administrative (G&A) expense for the six months ended December
31, 2001 was $570,533 compared to $825,543 for the same period in 2000, a
decrease of $255,010.
INTEREST EXPENSE
Interest expense for the six months ended September 30, 2001 was $145,439
compared to $84,530 for the same period in 2000, an increase of $$59,909. The
primary reason for this increase relates to recording interest expense for
shares of the Company's common stock issued to senior debt holders as
consideration to renegotiate and extend debt as discussed in Financial Footnote,
Note 2 - Notes Payable.
LIQUIDITY AND CAPITAL RESOURCES
In order to maintain current level of operations, the Company will need to
secure additional funding sources to meet its operating expenses. Such funding
sources may include, but are not limited to, additional private placements of
common or convertible equities, placement of debt with banks, private or public
investors, or other lending institutions and/or licensing agreements with
strategic partners. The Company believes that through a combination of outside
sources of capital and revenues generated from product sales it will have
sufficient sources of capital to meet its operating needs. However, any
substantial delays in receipt of or failure to obtain such capital may prevent
the Company from operating as a going concern, given its limited revenues and
capital reserves.
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SUMMARY OF RISK FACTORS
To date, the Company has funded its operations primarily through revenues
generated by various products and equity financings. The Company will need
additional capital before INTERNET SAFARI(R) begins generating a sufficient cash
flow to sustain operations and anticipated growth. Additionally, Heartsoft is
subject to other risks and uncertainties. A summary of risk factors is discussed
in Part III of Heartsoft's Form 10-KSB for fiscal year ending June 30, 2001.
PART II -- OTHER INFORMATION
None.
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SIGNATURES
In accordance with the requirements 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: 3/18/02 /s/ Benjamin P. Shell
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Benjamin P. Shell, Chairman of the Board,
President, and Chief Executive Officer
(Principal Executive Officer)
Date: 3/18/02 /s/ Benjamin P. Shell
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Benjamin P. Shell, Chief Financial Officer
(Principal Financial Officer)
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