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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, 2000
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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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(Name of small business issuer in its charter)
DELAWARE 87-0456766
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
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, 2000 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.
Part I. Financial Information - Items 1 and 2 and Part II. Other Information -
Item 6 have been amended.
As of September 30, 2000, 11,291,837 shares of Heartsoft, Inc. Common Stock,
$0.0005 par value, were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
2
PAGE
PART I. FINANCIAL INFORMATION
Item 1: Balance Sheet as of September 30, 2000 4
Statements of Operations for the three months ended
September 30, 2000 and September 30, 1999 6
Statements of Cash Flows for the three months ended
September 30, 2000 and September 30, 1999 7
Notes to Financial Statements 8
Item 2: Management's Discussion, Analysis of Financial Condition,
and Results of Operations 14
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 18
Signature Page 23
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
represents the first quarter of Fiscal Year 2001.
3
PART I -- FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEET
As of September 30, 2000
(unaudited)
Assets
Current Assets:
Cash $ 92,192
Accounts receivable, trade, net of allowance
of $42,448 30,469
Inventories, at cost 45,189
Other 12,460
-----------
Total current assets 180,310
Property and equipment, at cost:
Property and equipment 257,870
Less accumulated depreciation (128,254)
-----------
Property and equipment, net 129,616
Other assets:
Developed software, net 857,692
Other 4,668
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Total other assets 862,360
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Total assets $ 1,172,286
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4
BALANCE SHEET
As of September 30, 2000
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 217,441
Notes payable 130,234
Accrued expenses 475,831
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Total current liabilities 823,506
Commitments and contingencies --
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 827,000 shares issued 8,270
Common stock, $0.0005 par value, 30,000,000 shares
authorized, 11,291,837 shares issued 5,646
Additional paid-in capital 6,511,457
Accumulated deficit (6,176,593)
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Total stockholders' equity 348,780
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Total liabilities and stockholders' equity $ 1,172,286
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5
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
September 30,
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2000 1999
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Net Sales $ 97,616 $ 73,273
Costs and expenses:
Cost of production 47,615 26,960
Sales and Marketing 201,294 58,227
General and administrative 588,096 170,138
Depreciation and amortization 37,743 29,286
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Total Operating Expenses 874,748 284,611
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Operating Loss (777,132) (211,338)
Other income and (expense):
Interest expense (3,964) (9,147)
Other, net 2,038 (1,662)
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(1,926) (10,809)
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Loss before income taxes $(779,058) $(222,147)
Income taxes -- --
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Net loss $(779,058) $(222,147)
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Earnings per Share $ (0.07) $ (0.02)
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6
STATEMENTS OF CASH FLOWS
Three months ended September 30, 2000
(unaudited)
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(779,058) $(222,147)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 37,743 29,286
Changes in:
Accounts receivable 33,943 12,936
Other assets (5,401) (10,921)
Inventories 1,823 (5,587)
Accounts payable (67,005) (28,117)
Accrued expenses 228,065 24,343
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Net cash used in operating activities (549,890) (200,207)
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized software development costs (143,421) (48,742)
Payments for the purchase of property (30,126) (20,343)
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Net cash used in investing activities (173,547) (69,085)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 79,500 82,500
Principal payments of debt (15,820) (196,432)
Proceeds from issuance of common stock 658,129 779,800
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Net cash provided by financing activities 721,809 665,868
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Net increase (decrease) in cash (1,628) 396,576
Cash at beginning of period 93,820 4,177
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Cash at end of period $ 92,192 $ 400,753
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7
HEARTSOFT, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
Three months ended September 30, 2000 and September 30, 1999
(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 three months ended September 30, 2000 have been included. The results of
operations for the three months ended September 30, 2000 are not necessarily
indicative of the results of operations that may be achieved for the entire
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
represents the first quarter of Fiscal Year 2001.
REVENUE RECOGNITION
Revenues from the sale of software products are recognized upon
shipment, provided that no significant obligations remain outstanding and
collection of the receivable is probable. Shipments of software previews to
customers include the right of return for 30 days. Sales on these shipments are
not recognized until expiration of the preview period. Allowances for estimated
returns are provided at the time of sale. The Company evaluates the adequacy of
allowances for returns and doubtful accounts primarily based upon its evaluation
of historical and expected sales experience. The allowances for returns and
doubtful accounts are based upon information available at the reporting date. To
the extent the future market, customer mix, channels of distribution, product
pricing and general economic and competitive conditions change, the estimated
allowances required for returns and doubtful accounts may also change.
INVENTORIES
Inventories consist primarily of raw materials such as CD-ROM and
floppy discs and manuals. They are stated at the lower of cost, determined by
using the first-in, first-out method, or market.
ADVERTISING AND MARKETING COSTS
The Company expenses advertising costs, excluding co-operative
advertising, as incurred. Co-operative advertising programs are initially
capitalized and then expensed over
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the period of the specific contract for services. Capitalized advertising costs
are not material at September 30, 2000. Advertising costs totaled $35,171 for
the three months ended September 30, 2000.
DEPRECIATION
The Company's property and equipment is carried at cost and
depreciated over the estimated useful lives of the related assets. Depreciation
is computed using the straight-line method over a seven-year period for both
financial reporting and federal income tax purposes.
DEVELOPED SOFTWARE
Costs for new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. Once the project reaches technological feasibility, all software
development costs are capitalized 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.
Amortization expense of software development costs was $31,105 for the three
months ended September 30, 2000.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the
differences between the financial statement basis and tax basis of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Statement of Financial Accounting Standards
("SFAS") 109, "Accounting for Income Taxes," also requires a valuation allowance
against net deferred tax assets if, based upon the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued expense
amounts reported in the accompanying balance sheet approximate fair value.
Accounts receivable are unsecured. Based on the borrowing rates currently
available to the Company, the carrying amounts reported in the accompanying
balance sheet for notes payable approximate fair value.
CONCENTRATIONS OF CREDIT RISK
Heartsoft markets to educators nationwide, which is a large, diverse
group governed by unrelated buying decisions. Thus, no single customer
represents a significant portion of the Company's revenues or accounts
receivable. The education market consists of both school systems and individual
educators requiring core curriculum materials as well as supplemental materials.
9
EMPLOYEE STOCK OPTIONS
When the exercise price of employee stock options equals or exceeds
the market value of the stock at date of grant, the Company recognizes no
compensation expense.
EARNINGS PER SHARE
Basic net loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
share is computed using the weighted average number of common shares outstanding
during the period, plus the dilutive effect of common stock equivalents.
COMPREHENSIVE INCOME
The Company has no comprehensive income items for the three months
ended September 30, 2000. Therefore, net loss equals comprehensive income.
NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 133, "Accounting for Derivative
Investments and Hedging Activities" during the first quarter of fiscal 2001.
Currently, the Company does not engage in hedging activities or transactions
involving derivatives.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions regarding items such as allowances for sales returns and
uncollectible accounts, and valuation allowances for deferred tax assets that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2 - NOTES PAYABLE
Notes payable consist of the following at September 30, 2000:
Note payable to a bank, due $1,034 monthly
including interest at 9%, due October 2000 $ 1,023
Note payable to a finance company, $4,575 monthly
including interest at 14.82%, due Feb. 2001,
secured by property and equipment 50,423
Note payable to a finance company, $738 monthly
including interest at 14.82%, due July 2003,
secured by property and equipment 17,588
10
Note payable to an investment group, balloon
payment including interest at 8%,
due December 31, 2000 61,200
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Total 130,234
Current portion 130,234
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Noncurrent portion $ -
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NOTE 3 - ACCRUED EXPENSES
On September 27, 2000, the Company and the holder of the Series A
preferred stock entered into an amendment to the Stock Purchase Agreement (the
"Amendment"). Under the terms of the original Stock Purchase Agreement, the
Company agreed to cause a registration statement relating to the common shares
into which the Series A preferred stock are convertible, and the common shares
issuable upon exercise of certain warrants to become effective by August 1,
2000. Also under the terms of the original Stock Purchase Agreement , the
Company would become liable under a penalty provision in the Stock Purchase
Agreement if the Company was unable to cause such registration statement to
become effective by August 1, 2000. Under the Amendment to the Stock Purchase
Agreement, the Company agreed to cause a registration statement relating to the
common shares into which the Series A preferred stock are convertible, and the
common shares issuable upon exercise of certain warrants to become effective
within a reasonable time after October 1, 2000. In addition, the Company agreed
to issue 300,000 shares of common stock to the Series A preferred stockholder in
exchange for the stockholder's agreement to release the Company from any and all
current and future liability that the Company might have under the penalty
provision. A liability totaling $227,810 associated with the 300,000 shares was
recorded. As of November 9, 2000, this stock has not been issued.
In the previous quarter ended June 30, 2000, the Company sold 325,000
shares of restricted common stock. In connection with the sale of the 325,000
shares, Heartsoft agreed to file a registration statement. As of November 9,
2000 a registration has not been filed. Starting October 1, 2000, a penalty of
10,000 shares per month shall be awarded until the 325,000 shares become
free-trading. Additionally, as of November 9, 2000, these shares have not been
issued.
NOTE 4 - EARNINGS PER SHARE
Basic and diluted EPS are computed as follows:
Three month periods ended
September 30,
2000 1999
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Basic EPS computation:
Net loss $ (779,058) $ (222,147)
11
Weighted average
shares outstanding 11,233,093 10,395,376
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Basic and diluted
net loss per share $ (0.07) $ (0.02)
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NOTE 5 - UNCERTAINTIES
The Company has experienced recurring operating losses and negative
cash flows from operating activities, which increased to $779,058 and $549,890,
respectively, for the three months ended September 30, 2000. Management
implemented a program to increase the marketing and sales staff, and these
additional expenses are not expected to have a substantial impact on revenues
until later in fiscal year 2001. Management also plans to introduce significant
new products in fiscal 2001.
While product development expenditures have been substantial for
INTERNET SAFARI(TM) - a full-featured secure Internet browser for children, its
final release has not occurred as of September 30, 2000.
In order to finance these negative cash flows, the Company secured
approximately $692,000 in funding during the three months ended September 30,
2000 through a private placement of convertible debt and Common Stock.
Management plans to release INTERNET SAFARI(TM), in fiscal year 2001
as well as introduce new products. With new products and a strengthened sales
staff, management believes revenues from product sales will increase. 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.
NOTE 6 - SUBSEQUENT EVENT
To support the Company's policy of growth and to meet working capital
needs during the development and release of INTERNET SAFARI(TM), the Company
borrowed $500,000 on November 9, 2000 under two separate promissory notes, each
for the principal sum of $250,000. The principal sum of both promissory notes
plus interest at a per annum rate equal to 6.15% are due on the earlier of May
9, 2001 or five business days after the Company shall have received equity
investments or debt financing in excess of $750,000. In order to induce the
parties to enter into the promissory notes, the Company issued the holders of
each of the promissory notes 125,000 shares of common stock of the Company, and
Benjamin Shell, the Chairman and CEO of the Company, pledged collateral in the
form of 500,000 shares of common stock of the Company owned by him to secure the
amounts under the promissory notes. The Notes may be pre-paid in whole or in
part at any time without penalty, but with interest to the date of payment on
the amount prepaid.
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NOTE 7 - 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 three months ended September 30, 2000 and September 30, 1999, a
total of $24,343 and $24,343, 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.
13
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 in excess of 5,000,000 catalogs and online through four
corporate websites, www.heartsoft.com, www.internet-safari.com,
www.thinkology.com, and www.isafari.com.
Through the three months ended September 30, 2000, the Company's
product line was 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. During Fiscal Year 2001, the Company
anticipates the release of its new secure Internet browser for children,
INTERNET SAFARI(TM). The release of INTERNET SAFARI(TM) will broaden the
Company's product line to include an Internet-based software solution. A beta
version of INTERNET SAFARI(TM) was released on the Apple Macintosh platform on
September 23, 2000 and the Windows platform on September 29, 2000.
The Company intends to continue to expand its traditional educational
software business through internal growth as well as by focusing a substantial
portion of its resources on the introduction and sale of INTERNET SAFARI(TM).
Beginning in Fiscal Year 2001, the Company intends to use the Internet to expand
its geographic reach deeper into the consumer market both in the United States
and internationally.
For the three months ended September 30, 2000, the Company
experienced a loss of $779,058 and accumulated a total deficit of $6,176,593.
This loss and accumulated deficit have been primarily caused by the Company's
efforts in positioning itself for the release of INTERNET SAFARI(TM) and are
related, for the most part, to marketing and general and administrative
expenses.
To reach profitability, the Company plans, among other things, to do
the following:
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o Release its secure Internet browser, INTERNET SAFARI(TM) during Fiscal
Year 2001;
o Expand the marketing of all of the Company's products for the consumer
and school markets by utilizing additional marketing resources such as
direct mail, on-line purchasing, demonstration versions of key
products, magazine advertising and more;
o Establish strategic joint venture partners both in the United States
and internationally.
The Company plans to strengthen its brand name awareness and position
and to utilize its technological infrastructure and software development
capabilities to continue refining and upgrading its current and future products.
Accordingly, the Company intends to invest heavily in marketing and advertising,
new partnerships and strategic alliances, and its technology infrastructure. The
Company also anticipates that it will continue to experience losses similar to
or greater than those described above during the next 15 months. Significant
increases in the Company's advertising and marketing campaigns will contribute
to such loss. 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.
The Company believes that its investment in the development of
INTERNET SAFARI(TM) and the secure browser's release represents a key element of
its future and that the Company can become a leading player in the children's
Internet market.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999
NET REVENUE
Revenue for the three months ended September 30, 2000 increased to
$97,616 from $73,273 for the three months ended September 30, 1999, an increase
of $24,343 or 33%. The increase is primarily the result of hiring a Vice
President of Sales and Marketing in late 1999, reorganizing and expanding the
education sales division from three to eleven employees, and continuing the
implementation of a broad-based marketing strategy. The marketing strategy
focused on adding quality sales personnel and directing their efforts in
promoting educational programs to schools while maintaining existing reseller
business. It also included higher attendance at trade shows and increased direct
mailings, both of which contributed to the increase in revenues.
15
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 as well as
miscellaneous costs related to the needs of the Production Department. Cost of
production for the three months ended September 30, 2000 was $47,615 compared to
$26,960 for the three months ended September 30, 1999, an increase of $20,655 or
77%. Cost for the acquisition of raw materials increased approximately $5,837 as
a result of increased sales as noted in the Net Revenue discussion above.
Payroll cost increased $7,493 primarily from the addition of a technical support
employee. Royalty payments totaling $3,850 were made during the quarter in
accordance with Heartsoft's strategic marketing agreement with the Foundation
for Critical Thinking. Expenses for office rent increased $2,685 as a result of
leasing additional office in late 1999 and early 2000.
SALES AND MARKETING
Sales and marketing expenses for the three months ended September
30, 2000 were $201,294 versus $58,227 for the three months ended September 30,
1999, an increase of $143,067 or 246%. As noted previously, in the Net Revenue
discussion, a Vice President of Sales and Marketing was hired in late 1999, the
education sales division was reorganized and expanded, and the Company's
broad-base marketing strategy is continuing to be implemented. This strategy
involves active utilization of temporary personnel to fill selected positions,
then upon satisfactory completion of work responsibilities the hiring of these
individuals as full-time employees. All of the above factors, coupled with
direct mail campaigns targeted at schools, new advertising materials and higher
attendance at industry trade-shows lead to increased expenses in sales and
marketing. An approximate breakdown by component of the major increases in sales
and marketing expense follows: payroll and benefits $74,114; advertising
$12,182; travel and conferences $23,261; and contract labor $11,998.
GENERAL AND ADMINISTRATIVE
Total general and administrative (G&A) expense for the three months
ended September 30, 2000 was $588,096 compared to $170,138 for the same period
in 1999, an increase of $417,958. The primary reason for this increase relates
to accruing expenses totaling $227,810 in connection with amending a Stock
Purchase Agreement whereby the Company agreed to issue 300,000 shares of Common
Stock in order to eliminate any liability the Company might have under a penalty
provision in the Stock Purchase Agreement (see Financial Statement Note 3 -
Accrued expenses).
Additional factors causing the increase in G&A expense can be
attributed to taking the necessary steps to build the Company's infrastructure.
These factors include the addition of a Chief Financial Officer, assuming full
reporting status to become compliant with SEC regulations, and strengthening
strategic customer and investor relationships, all of which are critical to
minimizing risks to the Company and execution of its business plan. Further, on
a
16
historical basis, executive management focused primarily on the development of
educational programs resulting in capitalization of appropriate executive
salaries. This focus shifted from development to more of an administrative role
resulting in the expensing of appropriate executive salaries and an increase in
related G&A payroll costs. An approximate breakdown by component (excluding the
late registration filing penalty expense noted above) of other major increases
in G&A expense follows: payroll and benefits $42,310; professional costs related
to accounting and legal fees $83,128; travel $16,198; miscellaneous expenses
$13,342 which includes cost associated with the Vice President of Sales and
Marketing relocation to Heartsoft's Corporate Office in Broken Arrow, Oklahoma;
and contract labor $7,959 for administrative support personnel. Also, G&A
expense includes $24,343 associated with the consulting advisory services
disclosed in Note 7 to the financial statements for the three months ended
September 30, 2000 and the three months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
To support the Company's policy of growth and to meet working capital
needs during the development of INTERNET SAFARI(TM), the Company secured
approximately $692,000 in funding during the three months ended September 30,
2000 through a private placement of convertible debt and common stock. A
breakdown of this funding is as follows:
o On August 18, 2000, the Company borrowed $100,000 under a convertible
promissory note agreement. On September 27, 2000, the Company amended
this agreement to issue 80,000 shares of restricted common stock in
lieu of a payment of $40,000. This stock issuance reduced the
promissory note to $60,000 that is due on December 31, 2000.
o During the three months ended September 30, 2000, the Company sold
684,500 shares of restricted common stock. Proceeds of the sale
aggregated $592,000 less offering expenses of $17,500. As of September
30, 2000, none of these shares have been issued.
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.
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(TM) begins generating a
sufficient cash flow to sustain operations and
17
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 the transition period April 1, 2000 to June 30, 2000, which was
filed on September 28, 2000.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS:
EXHIBIT NO. DESCRIPTION
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3.1 Articles of Incorporation of the Company. (Incorporated by
reference to the Company's Form 10-KSB/A for the period ended
March 1, 1999, which was filed on January 22, 2000.)
3.2 By-Laws of the Company. (Incorporated by reference to the
Company's Form 10-KSB/A for the period ended March 1, 1999, which
was filed on January 22, 2000.)
4.1 Specimen of Certificate for Heartsoft, Inc. Common Stock.
(Incorporated by reference to the Company's Form 10-KSB/A for the
period ended March 1, 1999, which was filed on January 22, 2000.)
10.1 Corporate Note to Dale Hill dated October 21, 1998. (Incorporated
by reference to the Company's Form 10-KSB/A for the period ended
March 1, 1999, which was filed on January 22, 2000.)
10.2 Corporate Note to Dale Hill dated February 10, 1998.
(Incorporated by reference to the Company's Form 10-KSB/A for the
period ended March 1, 1999, which was filed on January 22, 2000.)
10.4 Promissory Note dated October 16, 1999 to Tulsa National Bank.
(Incorporated by reference to the Company's Form 10-KSB/A for the
period ended March 1, 1999, which was filed on January 22, 2000.)
10.5 Promissory Note dated December 16, 1999 to Bank of Oklahoma.
(Incorporated by reference to the Company's Form 10-KSB/A for the
period ended March 1, 1999, which was filed on January 22, 2000.)
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10.6 Equipment Lease with Auto & Equipment Leasing by Flex, Inc. dated
February 12, 1998. (Incorporated by reference to the Company's
Form 10-KSB/A for the period ended March 1, 1999, which was filed
on January 22, 2000.)
10.7 Software Agreement dated May 16, 1997 between Heartsoft, Inc. and
Heartsoft 1997 Limited Partnership. (Incorporated by reference to
the Company's Form 10-KSB/A for the period ended March 1, 1999,
which was filed on January 22, 2000.)
10.8 Acquisition Note dated May 16, 1997 from Heartsoft 1997 Limited
Partnership. (Incorporated by reference to the Company's Form
10-KSB/A for the period ended March 1, 1999, which was filed on
January 22, 2000.)
10.9 Assumption Agreement dated April 30, 1997 by and among Heartsoft
1997 Limited Partnership, Heartsoft, Inc. and Limited Partners.
(Incorporated by reference to the Company's Form 10-KSB/A for the
period ended March 1, 1999, which was filed on January 22, 2000.)
10.10 Joint Venture Agreement dated May 16, 1997 between Heartsoft,
Inc. and Heartsoft 1997 Limited Partnership. (Incorporated by
reference to the Company's Form 10-KSB/A for the period ended
March 1, 1999, which was filed on January 22, 2000.)
10.11 Software Agreement dated July 30, 1997 between Heartsoft, Inc.
and Heartsoft II 1997 Limited Partnership. (Incorporated by
reference to the Company's Form 10-KSB/A for the period ended
March 1, 1999, which was filed on January 22, 2000.)
10.12 Acquisition Note dated July 30, 1997 from Heartsoft II 1997
Limited Partnership. (Incorporated by reference to the Company's
Form 10-KSB/A for the period ended March 1, 1999, which was filed
on January 22, 2000.)
10.13 Assumption Agreement dated July 30, 1997 by and among Heartsoft
II Limited Partnership, Heartsoft, Inc. and Limited Partners.
(Incorporated by reference to the Company's Form 10-KSB/A for the
period ended March 1, 1999, which was filed on January 22, 2000.)
10.14 Joint Venture Agreement dated July 30, 1997 between Heartsoft,
Inc. and Heartsoft II 1997 Limited Partnership. (Incorporated by
reference to the Company's Form 10-KSB/A for the period ended
March 1, 1999, which was filed on January 22, 2000.)
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10.15 Software Agreement dated October 28, 1997 between Heartsoft, Inc.
and Heartsoft III 1997 Limited Partnership. (Incorporated by
reference to the Company's Form 10-KSB/A for the period ended
March 1, 1999, which was filed on January 22, 2000.)
10.16 Acquisition Note dated October 28, 1997 from Heartsoft III 1997
Limited Partnership. (Incorporated by reference to the Company's
Form 10-KSB/A for the period ended March 1, 1999, which was filed
on January 22, 2000.)
10.17 Assumption Agreement dated July 30, 1997 by and among Heartsoft
III 1997 Limited Partnership, Heartsoft, Inc. and Limited
Partners. (Incorporated by reference to the Company's Form
10-KSB/A for the period ended March 1, 1999, which was filed on
January 22, 2000.)
10.18 Joint Venture Agreement dated October 28, 1997 between Heartsoft,
Inc. and Heartsoft III 1997 Limited Partnership. (Incorporated by
reference to the Company's Form 10-KSB/A for the period ended
March 1, 1999, which was filed on January 22, 2000.)
10.19 Convertible Promissory Note dated August 30, 1999 between
Heartsoft, Inc. and Hi-Tel Group, Inc. (Incorporated by reference
to the Company's Form 10-KSB for the period ended March 31, 2000,
which was filed on July 14, 2000.)
10.20 Letter Agreement by and between Heartsoft, Inc. and the Weather
Channel Enterprises, Inc. dated September 1, 1999. (Incorporated
by reference to the Company's Form 10-KSB for the period ended
March 31, 2000, which was filed on July 14, 2000.)
10.21 Cobranding Program Agreement by and between Heartsoft, Inc. and
Ask Jeeves, Inc. dated September 16, 1999. (Incorporated by
reference to the Company's Form 10-KSB for the period ended March
31, 2000, which was filed on July 14, 2000.)
10.22 Engagement Agreement by and between Heartsoft, Inc. and Juanita
Seng dated October 1, 1999. (Incorporated by reference to the
Company's Form 10-KSB for the period ended March 31, 2000, which
was filed on July 14, 2000.)
10.23 Lease dated November, 1999 for commercial office space in Broken
Arrow, Oklahoma. (Incorporated by reference to the
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Company's Form 10-KSB for the period ended March 31, 2000, which
was filed on July 14, 2000.)
10.24 Lease dated January, 2000 for commercial office space in Broken
Arrow, Oklahoma. (Incorporated by reference to the Company's Form
10-KSB for the period ended March 31, 2000, which was filed on
July 14, 2000.)
10.25 Stock Purchase Agreement by and between Heartsoft, Inc. and
Hi-Tel Group, Inc. dated March 1, 2000 with Certificate of
Designation of the Series A Convertible Preferred Stock attached
as Exhibit A and Common Share Purchase Warrant between Heartsoft,
Inc. attached as Exhibit B. (Incorporated by reference to the
Company's Form 10-KSB for the period ended March 31, 2000, which
was filed on July 14, 2000.)
10.26 Web Service Agreement by and between Heartsoft, Inc. and Gaggle,
Inc. dated June 9, 2000. (Incorporated by reference to the
Company's Form 10-KSB for the period ended March 31, 2000, which
was filed on July 14, 2000.)
10.27 Amendment to Stock Purchase Agreement by and between Heartsoft,
Inc. and Hi-Tel Group, Inc. dated September 27, 2000.
(Incorporated by reference to the Company's Form 10-KSB for the
transition period ended June 30, 2000, which was filed on
September 28, 2000.)
10.28 Amendment to Heartsoft, Inc. Common Share Purchase Warrant by and
between Heartsoft, inc. and Hi-Tel Group, Inc. dated September
27, 2000. (Incorporated by reference to the Company's Form 10-KSB
for the transition period ended June 30, 2000, which was filed on
September 28, 2000.)
10.29 Original Equipment Manufacturing (OEM) Licensing Agreement by and
between Heartsoft, Inc. and International Academy of Science
dated April 28, 2000.
10.30 Co-Branding License Agreement by and between Heartsoft, Inc. and
Merriam-Webster, Incorporated dated August 14, 2000.
10.31 Promissory Note dated August 18, 2000 between Heartsoft, Inc. and
Hi-Tel Group, Inc.
10.32 Equipment Lease with Auto & Equipment Leasing by Flex, Inc. dated
July 31, 2000.
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10.33 Trademark License Agreement by and between Heartsoft, Inc. and
Ask Jeeves dated September 8, 2000.
10.34 License Agreement by and between Benjamin Shell, CEO of
Heartsoft, Inc., and Yahoo for non-exclusive license to use the
Yahooligans logo dated September 19, 2000.
10.35 Engagement Agreement by and between Heartsoft, Inc. and Dana
Swift dated October 6, 2000.
10.36 Amendment to Promissory Note between Heartsoft, Inc. and Hi-Tel
Group, Inc. dated November 8, 2000.
10.37 Promissory Note dated November 9, 2000 between Heartsoft, Inc.
and Alan W. Carlton Revocable Living Trust.
10.38 Letter Agreement dated November 9, 2000 between Heartsoft, Inc.
and Alan W. Carlton Revocable Living Trust.
10.39 Promissory Note dated November 9, 2000 between Heartsoft, Inc.
and June Limited Partnership.
10.40 Letter Agreement dated November 9, 2000 between Heartsoft, Inc.
and June Limited Partnership.
10.41 Joint Security Agreement dated November 9, 2000 between
Heartsoft, Inc., Benjamin Shell, Alan W. Carlton Revocable Living
Trust and June Limited Partnership.
10.42 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.)
10.43 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.)
21.1 Subsidiaries of Heartsoft. (Incorporated by reference to the
Company's Form 10-KSB/A for the period ended March 1, 1999, which
was filed on January 22, 2000.)
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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: 07/13/01 /s/ Benjamin P. Shell
------------------------- --------------------------------------
Benjamin P. Shell, Chairman of the
Board, President, and Chief Executive
Officer (Principal Executive Officer)
Date: 07/13/01 /s/ Rodger Graham
------------------------- --------------------------------------
Rodger Graham, Chief Financial Officer
(Principal Financial Officer)
23