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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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[ ] 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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(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 Identification No.)
incorporation or organization)
3101 North Hemlock Circle, Broken Arrow, Oklahoma 74012
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(Address of principal executive offices)
(918) 362-3600
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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)
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The Company is amending its 10-QSB for the quarter ending September 30, 1999 as
a result of recently discovering two agreements for consulting services, one
dated September 20, 1998, which will have an impact on the Company's financial
statements and a second dated February 1, 1999, which will not affect the
Company's financial statements. Additionally, the Company is amending its 10-QSB
to include a "Statement of Operations For the Six Months Ended September 30,
1999", "Statements of Cash Flows For the Six Months Ended September 30, 1999 and
September 30, 1998" and "sales of unregistered securities". The Company is also
amending its financial statements to reflect adjustments to the quarterly
financial information as a result of the audit of the March 31,2000, financial
statements.
Part I. Financial Information - Items 1 and 2 and Part II. Other Information -
Items 2 and 6 have been amended.
As of September 30, 1999, 10,977,130 shares of Heartsoft, Inc. Common Stock
$0.0005 par value were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
2
HEARTSOFT, INC. - QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1: Balance Sheet as of September 30, 1999 4
Statements of Operations For the Six Months Ended
September 30, 1999 and September 30, 1998 5
Statements of Operations For the Three Months Ended
September 30, 1999 and September 30, 1998 6
Statements of Cash Flows For the Six Months Ended
September 30, 1999 and September 30, 1998 7
Note to Financial Statements 8
Item 2: Management's Discussion, Analysis of Financial
Condition, and Results of Operations 8
PART II. OTHER INFORMATION
Item 2: Changes in Securities 16
Item 6: Exhibits and Reports on Form 8-K 17
Signature Page 18
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEET
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AS OF SEPTEMBER 30, 1999
(UNAUDITED)
ASSETS
Current Assets
Cash 400,753
Accounts Receivable 53,292
Inventories 38,774
Prepaid Expenses 22,840
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Total Current Assets 515,659
Plant, Property and Equipment
Plant, Property and Equipment 168,776
Accumulated Depreciation (101,872)
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Total Plant, Property and Equipment 66,904
Other Assets
Developed Software, net 651,676
Other 3,089
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Total Other Assets 654,765
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Total Assets 1,237,328
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LIABILITIES
Current Liabilities
Accounts Payable 132,995
Accrued Liabilities (See Note 1) 174,154
Current Portion - long-term Debt 169,874
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Total Current Liabilities 477,023
Long Term Liabilities
Loans Payable - Long-term 213,146
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Total Liabilities 690,169
Equity
Preferred Stock 978
Common Stock 5,489
Additional Paid in Capital 4,196,690
Accumulated deficit (3,655,998)
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Total Shareholders' Equity 547,159
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Total Liabilities and shareholders' Equity 1,237,328
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4
STATEMENTS OF OPERATIONS
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SIX MONTHS ENDED
(UNAUDITED)
30-SEP-99 30-SEP-98
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Net Sales 191,073 263,573
Costs and expenses:
Costs of production 47,743 62,814
Sales and Marketing 113,219 143,876
General and administrative 322,396 317,297
Depreciation and amortization 58,572 154,272
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Total operating expenses 541,930 678,259
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Operating Loss (350,857) (414,686)
Other income and (expenses)
Gain on sale of interest in software library 0 165,513
Interest expense (21,265) (43,033)
Other, net (2,366) (70,755)
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(23,631) 51,725
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Loss before income taxes (374,488) (362,961)
Income taxes - -
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Net loss (374,488) (362,961)
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Net loss per common share - basic and diluted (0.04) (0.05)
5
STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED
(UNAUDITED)
30-SEP-99 30-SEP-98
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Net Sales 73,273 118,637
Costs and expenses:
Costs of production 26,960 29,462
Sales and Marketing 58,227 74,244
General and administrative 170,138 78,006
Depreciation and amortization 29,286 34,605
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Total operating expenses 284,611 216,317
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Operating Loss (211,338) (97,680)
Other income and (expenses)
Gain on sale of interest in software library 0 48,571
Interest expense (9,147) (7,061)
Other, net (1,662) (11,381)
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(10,809) 30,129
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Loss before income taxes (222,147) (67,550)
Income taxes - -
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Net loss (222,147) (67,550)
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Net loss per common share - basic and diluted (0.02) (0.01)
6
STATEMENTS OF CASH FLOWS
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SIX MONTHS ENDED
(UNAUDITED)
30-SEP-99 30-SEP-98
CASH FLOW FROM OPERATING ACTIVITIES ------------ ------------
Net Loss (374,488) (362,961)
Adjustments to reconcile net loss to net cash
provided by (used in ) operating activities
Depreciation and amortization 58,572 154,272
Changes in:
Accounts receivable (6,694) 236,376
Inventories (18,423) (8,843)
Other assets (8,641) (65,258)
Accounts payable (60,745) 34,826
Accrued expenses 30,451 64,983
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Net cash provided by (used in) operating activities (379,968) 53,395
CASH FLOW FROM INVESTING ACTIVITIES
Capitalized software development costs (81,120) (20,356)
Proceeds from sales of equipment - 47,784
Payments for the purchase of equipment (23,548) -
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Net cash provided by (used in) investing activities (104,668) 27,428
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 96,500 -
Repayment of debt (210,816) (235,147)
Proceeds from issuance of common stock 958,116 163,557
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Net cash provided by (used in) financing activities 843,800 (71,590)
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Net increase in cash 359,164 9,233
Beginning cash balance 41,589 4,411
Net increases in cash 359,164 9,233
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Ending cash balance 400,753 13,644
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7
ITEM 1. NOTE TO FINANCIAL STATEMENTS.
INTERIM FINANCIAL STATEMENTS
Management has compiled the interim financial statements for the period ending
September 30, 1999 in accordance with the standards set forth in generally
accepted accounting principles. In the opinion of management, all adjustments
required to make a fair representation of the Company have been included. This
compilation has not been audited or reviewed and accordingly management does not
express an opinion or any other form of assurance on them.
Note 1 - Restatement of Financial Statements
On September 20, 1998, Heartsoft and Intercap Funding LTD ("Intercap") entered
into an agreement whereby Intercap agreed to provide consulting advisory
services over a three year period, primarily related to capital formation, in
exchange for 1.2 million shares of Heartsoft's Convertible Preferred Stock. On
March 16, 2001, Heartsoft issued 1.2 million shares of its common stock to
satisfy the Company's obligation under the agreement.
Upon issuance of the common stock, it was determined that the Company had not
previously given accounting recognition to the agreement. The value of the
agreement, based on the September 20, 1998, trading price of the common stock
into which the preferred stock was to have been convertible, was $240,000. This
value has been allocated to general and administrative expenses over the term of
the agreement. The Company's legal counsel has advised that the preferred stock
called for in the agreement could not have been validly issued prior to the time
the services were rendered. As a result, the obligation will be reported as an
accrued liability as it is accrued over the period October 1998 through March
2001. For the six months ended September 30, 1999 and September 30, 1998, a
total of $48,157 and $2,646, respectively, were recognized as general and
administrative expense for these consulting advisory services.
On February 1, 1999 the Company also entered into a Non Circumvention and
Consulting Agreement with Intercap Funding LTD. Under the agreement, Intercap
was to provide Heartsoft with various services for a period of 180 days and it
automatically renewed on the first day of each month thereafter for nine months.
Intercap was to receive a finder's fee in cash equal to a certain percentage of
all amounts invested in the Company. In addition, the Company was to issue
warrants equal to a specified percentage of the number of shares purchased by
any introduced parties. In connection with this agreement the Company must issue
178,763 warrants to Intercap. The warrants are exercisable over five years at
values ranging from $1.3437 to $3.4375 per warrant. The warrants are a cost of
the capital that was raised and their issuance will not affect the Company's
financial statements.
On June 1, 2001, the Company and Intercap Funding LTD entered into a new
Consulting Agreement. The new agreement cancelled the Non Circumvention and
Consulting Agreement, dated February 1, 1999. Pursuant to the new agreement, the
Consultant also agreed to surrendered any and all rights that the Consultant had
to any warrants to purchase shares of common stock of the Company to which the
Consultant was entitled under the Non Circumvention and Consulting Agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
8
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This annual report on Form 10-KSB 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 described in Item 1). Such statements relate to, among
other things:
o future operations of Heartsoft, including the impact of any year 2000
issues encountered by Heartsoft;
o the development of new products and distribution channels and product sales;
o competition for customers for Heartsoft's products;
o the uncertainty of developing or obtaining rights to new products that will
be accepted by the market;
o the timing of the introduction of new products into the market;
o the limited market life of Heartsoft's products; and
o 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-KSB 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. See also "Management's
Discussion and Analysis or Plan of Operation."
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:
o changes in the level of operating expenses;
o demand for the Company's products;
o the introduction of new products and product enhancements by the Company or
its competitors;
o changes in customer budgets;
o competitive conditions in the industry; and
o 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 cannot ensure that it will be profitable in future quarters.
RAPID TECHNOLOGICAL CHANGE
The educational software market is subject to rapid technological change, new
product
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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:
o the timely development and introduction of new products and product
enhancements;
o product functionality;
o product performance;
o price;
o product reliability;
o customer service and support;
o sales and marketing efforts; and
o 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 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 cannot 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
10
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 executive officers 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.
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,
11
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(R), 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:
o loss of revenues;
o delays in market acceptance;
o diversion of development resources;
o damage to the Company's reputation; and
o 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(R). 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 cannot 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 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
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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:
o the rate at which the Company expands its sales and marketing operations;
o the extent to which the Company develops its products;
o the rate at which the Company updates its technology;
o the Company's ability to complete its planned private placement;
o the rate at which the Company expands; and
o 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 10,977,130 shares issued and outstanding. Over the
past ninety days, the high and low bids for the Company's stock, as reported by
the National Association of Securities Dealers, Inc, was $1.7813 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(R), a software series that teaches
young children the skills of critical thinking and higher order reasoning
skills. Released in late 1998, THINKOLOGY(R) has garnered the prestigious Media
& Methods Portfolio Award for 1999. THINKOLOGY(R) has also received several
favorable reviews in top educational and consumer magazines, including FamilyPC
and Multimedia Schools.
Other popular Heartsoft titles include:
o TOMMY THE TIME TURTLE, an animated turtle that teaches children ages 5-7
how to tell time;
o COIN CHANGER, which introduces children ages 5-7 to the denominations of
coins; and
o 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(R),
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 market, the Company's
products sell in the price range from approximately $10 to over $100 depending
on configuration and educational support materials.
14
During the first calendar quarter of 1999, the Company began development of
INTERNET SAFARI(R), 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(R) is designed for
children ages 4 through 12 years to help simplify their use of the Internet.
INTERNET SAFARI(R) 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(R) will be distributed to both the
consumer and educational markets.
NET REVENUES
Net sales of the Company's educational computer software for the six and three
months ending September 30, 1999, decreased 28% and 38% respectively. Net sales
for the six months ending September 30, 1999 were $191,073 compared to $263,573
for the same period one year ago. Net sales for the three months ending
September 30, 1999 were $73,273 versus $118,637 for the same period in 1998.
During the three months ended September 30, 1999, the Company substantially
discontinued its selling efforts and completely reorganized its sales
organization in preparation for the addition of Nita Seng as the company's new
Vice President of Sales and Marketing. Ms. Seng was formerly with The Learning
Company where she acted as National Director of Education Sales.
Ms. Seng officially began rebuilding the Company's sales organization in
October. Ms. Seng will refocus the Company's selling efforts using sales and
distribution models tailored more specifically for the Company's newest products
and will hire and train sales professionals experienced in selling to the
education market. The Company anticipates that it will accelerate hiring in its
sales and marketing division under Ms. Seng's guidance through the end of
calendar year 1999.
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 PRODUCTION
Cost of production accounts for all costs associated with the acquisition of
components, assembly of the finished products, warehousing, shipping and payroll
for all personnel associated with the production and shipping of the finished
product. Cost of production was 25% and 37% of net sales for the six and three
months ended September 30, 1999, respectively. This was a 1% and 12% increase
when compared to the six and three month periods ended September 30, 1998.
OPERATING EXPENSES
General and administrative expenses increased 2% and 118%, respectively, for the
six and three months ended September 30, 1999 when compared to the same period
in 1998. The increase in administrative expenses include $48,157 for the six
months ended and $24,343 for the three months ended September 30, 1999,
associated with the consulting advisory services disclosed in Note 1 to the
financial statements. Costs associated with Sales and Marketing for already
15
existing product lines decreased 21% and 22% over the six and three months ended
September 30, 1998. Again this decrease is attributed to the Company
substantially discontinuing its selling efforts to completely reorganize its
sales organization in preparation for the addition of Nita Seng as the company's
new Vice President of Sales and Marketing.
NET INCOME
The Company realized a loss for the six and three months ended September 30,
1999 of $374,488 and $222,147, respectively, compared to a loss of $362,961 and
$67,550 for the same periods in 1998. The net loss for the six months ended
September 30, 1999 was greater than the previous year as a result of lower
software industry sales, coupled with the Company recording a $165,513 gain on
the sale of part of its interest in a software library which reduced its loss in
1998. The net loss for the three months ended September 30, 1999 compared to
September 30, 1998 was primarily the result of decreased product sales as the
Company substantially discontinued its selling efforts and completely
reorganized its sales organization. Additionally, in 1999 the Company
experienced certain costs associated with the development of its new secure
Internet browser for children, INTERNET SAFARI(R).
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's principal sources of liquidity included
cash and accounts receivables of $454,045. During the quarter ending September
30, 1999, the Company was well into Phase II of a structured growth plan.
Interim capital was acquired through equity as well as funding by private
sources. Management believes that although current liquidity will sustain the
Company at its 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 the Company's
growth plan.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the quarter ended September 30, 1999, the Company has issued
the following securities without registering the securities under the Securities
Act of 1933:
- ------------------- ------------------------------------------------------------
CLASS OF PERSONS CONSIDERATION
- ------------------- ------------------------------------------------------------
Investment A total of 1,000,000 shares of common stock were issued for
Group cash consideration.
- ------------------- ------------------------------------------------------------
Individuals A total of 3,500 shares of common stock were issued for
investor relation and printing services.
- ------------------- ------------------------------------------------------------
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- ------------------- ------------------------------------------------------------
Individual A total of 17,600 shares of common stock were granted for
conversion of convertible preferred stock.
- ------------------- ------------------------------------------------------------
Individuals A total of 3,300 shares of common stock were issued to
individuals in lieu of preferred stock dividends.
- ------------------- ------------------------------------------------------------
Employees A total of 17,500 shares were issued for services.
- ------------------- ------------------------------------------------------------
The Company relied on the exemption set forth in Section 4(2) of the
Securities Act of 1933, as amended, in connection with the issuances of stock
set forth above. All parties listed above are sophisticated persons or entities,
performed services for the Company or had prior or existing relationships with
members of Company's management staff at the time of the transactions listed
above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits:
10.1 Consulting Agreement by and between Heartsoft, Inc.
and Intercap Funding LTD dated September 20, 1998.
(Incorporated by reference to the Company's Form
10-QSB for the period ended March 31, 2001, which was
filed on May 15, 2001.)
10.2 Non Circumvention and Consulting Agreement by and
between Intercap Funding LTD dated February 1, 1999.
(Incorporated by reference to the Company's Form
10-QSB for the period ended March 31, 2001, which was
filed on May 15, 2001.)
B. Reports on Form 8-K:
None.
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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: July 13, 2001 /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: July 13, 2001 /s/ Benjamin P. Shell
----------------- -------------------------------------------------
Benjamin P. Shell, Chairman of the Board,
President, and Chief Executive Officer
(Principal Executive Officer)
Date: July 13, 2001 /s/ Rodger Graham
----------------- -------------------------------------------------
Rodger Graham
(Principal Financial Officer)
18