Executive Summary Hearts0ft www.heartsoft.com Heartsofl, Inc. 2oo Alittle about who we are: Heartsoft,Inc. isa publiclyheld, educationalsoftwarepublishingcompany,whichspecializesin the design,development, distribution,and sale of computer softwarefor youngchildrenages4 through 10yearsold. The company'sdiversesoftware products canbe sold to consumerand schoolmarkets in Englishand Spanish-speakingcountriesworldwide. Sinceits inceptionas a regionalpublisherin 1985,Heartsofthassuccessfullymaintainedownershipin and completecontrol over the developmentof its proprietaryeducationalsoftwareproducts.Overthe last 15years,the companyhas published nearly50educationalsoftwaretitlesof which,over95%are stillin distributionbythe companyin one formor another. These proprietaryproduct linescanbe broken into three districtcategorieswith the most recentlypublished titles discussedfirst: Internet Safari@,(Projectdevelopmentname: iSafari),is a revolutionarynewsecureInternet browserfor youngchildren whichboastsadvancedfeaturesthat placethe product farabovethe limitedcapabilitiesof other Intemet products claimingto protect youngchildrenfromdangerousaspectsof the Intemet. iSafari'sdistinguishingfeaturescanbe broken downinto severalaspects: • iSafariis an Intemet browserdesignedfor youngchildrenincorporatinga jungle-themecartoon interfacewith fun graphicsand junglesounds,iSafarihides allaspects of the advancedtechnologiesutilizedto allowchildren to safelybrowsethe Intemet --a featurethat neither MicrosoftIntemet Explorernor NetscapeNavigatorinclude.As a result,children havean Internetbrowserdesignedspecificallyfor their attentionspan combinedwith an exciting cartoon interfacewith animationand sound effectscreated to keep their interest levelhigh duringeach Intemet session. • DuringIntemet Safari'sinitialdesign,Heartsoftchoose to completelydevelopthe newbrowserin-houserather than licensingthe browserprogrammingcode fromother publishers.Whileboth Microsoftand Netscapeprovide accessto the programmingcode of their Intemet browsersthroughlicensingarrangements,Heartsoftchose to tacklethe huge projectof developingits own Intemet browser,a project that has been successfullycompleted by only a fewdozenpublishersworldwide.The two principlereasonsfor this taskwere to a) allowthe company's proprietaryInternet security(discussedbelow)to be integratedinto nearlyeverylineof programmingcodeof iSafari,therein increasingthe stabilityof the product'ssecurity,and b) to providesubstantiallyincreasedvalue to the company'sshareholders. Obviously,a product built upon programmingcode (software)that it does not own,has a limitedmarket valueas compared to proprietary,copyrightedcode owned bya publisher.In demonstratingthe value of a publisherowningits ownsoftwareprogramwhichit hasliterallydevelopedlinebbyline,simplyrefer to the recent sale of CyperPatrol®,whichwassold by Mattel,Inc. for $100millionwithin the lastfewmonths. CyperPatrolis a simple Internetfilteringprogramwhichrequiresit's users to use lnternet Exploreror NetscapeNavigator.Withrevenuesbarelyapproaching$7.5million,CyberPatrolsold at 13times grossrevenues. Internet Safari'scomplexityfarexceedsthat of CyberPatrol. • Further, unlikenearlyeveryIntemet browserdevelopedbyother publishers,Heartsoftchose to programit's new browserfor twomajorcomputer platforms,Windows2000/98/95and the AppleMacintoshOS,the latterof which ownsthe majorityof the education market. • Internet Safari'sInternetbrowseris builtupon a proprietaryartificialintelligence-based(M-based)Internet securitysystemwith6 distinctlevelsof Internet protection,iSafari'ssecuritysolutionutilizessignificantly improvedaspectsof manyof the securitycharacteristicsin productsthat couldbe consideredcompetitors. It should be noted that these products offeronly a fractionof the securityaspects includedin Intemet Safari.In fact, comparingthe fewcommerciallyavailable"filter"productsto Internet Safariwouldbe similarto drawinga comparisonof MicrosoftDOS3.3 toWindows98. Bothof these productsare definedas "operatingsystems",but cannot reallybe consideredcompetitivedue to the huge differencein their technologiesand capabilities. • In a moveto further empowerInternetSafaribeyondits perceivedcompetitors,Heartsoftannounced that it has developeda pornographicimagedetection and analysistechnologythat looks at picturestransmittedover the Internet, and determines to a high levelof accuracy,whether a computer-basedpicture is pornographicin nature or not. The technologywasso revolutionaryin it's capabilityand timing,that Heartsoftfileda patent with the U.S. Patentand TrademarkOfficein earlyJune, 2000to protect the advancedproprietarytechnologyfromcopyright and patent infringement. Together,these combinedfeatureshavecreated a turnkeysolutionwhichallowsboth parents and educators to protectyoungchildren frominappropriateInternetcontent at an unprecedented levelwith a simpleclickof the mouse. SinceiSafariis not dependent on MicrosoftInternetExplorerorAOL'sNetscapeNavigator,neither of these adultbrowserseven need to be present on a computeron whichiSafariis tobe installedand run. Internet Safariprovidessafeand fun Internetaccessforyoungchildren in a Saturday-morningstylecartoon environment,whileallthe complextechnologyof the Internetis tucked safelyawayin a product writtenby and owned 100%by Heartsoft,Inc.Asa result, iSafariis devoidof tediousinstallationand set-upproceduresand canbe installed byliterallycopyinga single filefrom the productCD-ROMor by downloadinga singlefilefromthe Internet. Internet Safari,is one of an estimateddozen, independentlywrittenbrowsers,worldwide,availablefor both Windows and Macintoshplatforms. It is the only product of its kindwith an engagingchildren'sinterface,integratedM-based securityfeatures,and the only browserwith the abilityto reviewInternet picturesand determinewith an excessof 90% accuracywhether a picture is pornographicin nature. However,the pornographydetection software,whileaccuratein excessof90%,when combinedwith the artificialintelligence-basedsecuritycapabilitiesof Intemet Safariprovidesa highlysafeenvironmentfor youngInternet users.Thinkology TM , latein the 4th quarterof 1998,Heartsoft,introduced anothercutting-edgeproduct,Thinkology,published in conjunctionwith the Foundationfor CriticalThinkingat SonomaStateUniversity,Sonoma,California.Thinkology was the firstproduct of its kind designedto teach youngchildrenessentialcriticalthinkingand higher order reasoning skillsthat formthe foundationofallaspects of basiclearningskills. Thinkologyis an advancedsoftwareapplicationthat required Heartsoftto writea one-of-a-kindauthoringsoftware utility. This utilityallowsthe criticalthinkingskillsto literallybe demonstratedon the computer screen, much like Saturday-morningcartoons aredisplayedon the television. Thinkologyincludes3 CD-ROMvolumescontainingboth Windowsand Macintoshversions.The threevolumescontain over40,000hand-drawnanimationcellswith fullvoice tracksand hundreds of sound effects.Thinkologyprovides childrenwith highlyengaginglearningsoftwareand provideseducators and parents with a unique teachingtool capableof teachingchildren the proper methodsof thinkingand reasoning. The tleartsoft K-8LibraryTM, is a product lineconsistingofa basisof 38educationalsoftwaretitles thatare derivativesof the company'soriginalsoftwareprogramsdevelopedduringits inceptionin 1985.Whilethe originaltitlescould be consideredsoftwareclassicsby the education market,the entire softwarelinecontinuesto sell incrediblywell.During the fiscalyear 1999,product salesof the K-8Libraryproduct lineaccountedfor over50%of Heartsoft'srevenuesto the education market.The reason forcontinued strongsalesis that the subjectsaddressed (i.e.,reading,math,geography, etc.) bythe programsremainbasictopics taughteach and everyyear to elementaryschoolstudents. The future looks bright! The company'sfuture looks extraordinarybrightwith significantgrowthprojectedin its current market,the education market,combinedwith the developmentof powerfulopportunitiesin additionalmarkets.Traditionally,Heartsofthas focusedits salesand marketingeffortsexclusivelyto the Education market. However,movinginto the later halfof fiscal 2001,newproduct developmentand salesand marketingwillbroaden it opportunitiesinto two newmarket segments-the Consumer market and the Business (B2B)market. The Education Market-Hear_oftwillcontinue to focuson the educationmarket and buildupon the foundation establishedbysalesof its existingproduct lines.However,with the additionof Intemet Safarito the Heartsoftproduct line,the entire education divisionwillsignificantlyexpanditsenergieson the recentlyreleasedThinkologyand Intemet Safariproducts. • Development-Futuredevelopmentfor the educationmarket includesthe completionof Intemet Safari,the developmentof a networkingversionof Internet Safarifor localarea networks(LANs)in schools,and continued refinementof securityand feature setsas required to meet the continuedneeds of the education market. The Thinkologycriticalthinkingseries is expected to be expandedto includetwo newfullfeaturedCD-ROMs-Relevanceand Evidence,bringingthe entire series to 5 CD-ROMs. The existingthree volumeswillalsobe augmentedbythe developmentofadditionalstoriesand activities,which maybe includedin an upgradeor offered separatelyto existingcustomers.• Sales and Marketing-Heartsoftwillcontinue effortsto broaden itsbase ofeducation resellersbyfocusingon regionalresellerswith strong relationshipsin keystatesor schooldistricts. Productslinesofferedbythe education divisionwillbe benefitedby an increasein the Heartsoftdirect salesforce whichwillincludeoutside fieldsalesrepresentativeswhowillconcentrateon majorstates and schooldistricts alongwith additionalinside salesrepresentativeswho conduct outbound telemarketing-sales. Thinkologymarketingeffortswillfocuson well-fundededucationalprogramstargetingearly learnersand remedial learners. These programsmayincludeTitleI, Preschool,EarlyChildhood,and AfterSchoolprograms. Marketing effortsfor Internet Safariwillincludethe developmentand broad distributionof a self-expiringdemonstration version,as wellas, facilitatingreviewsof the product in educationand Intemet trade journals. Targeted direct mailwillalsobe used to focuson districtsuperintendents,technologycoordinatorsand informationsystemspersonnelwhichwillenhance salesthrough all three saleschannelsof the education division: resellers,inside salesrepresentativesand outside salesrepresentatives. The Consumer Market-Internet SafarioffersHeartsoftthe opportunityto expandits salesand marketingeffortsinto the consumer,or retail market. Internet safetyfor youngchildrenis a majorconcern for parents allowingtheir childrento accessthe Internet at home. Salesand marketingopportunitiesincludedirect to consumersalesbyHeartsoftviaInternet e-commerce,retail computer and massmarketerssuch as Wal-Mart, BestBW,CompUSAand manyothers. Potentiallicensing opportunitiesabound withinthe consumermarket includingISPs(Internet ServiceProvides),OEMs(Original EquipmentManufacturers)such as Compaq,Dell,Gateway,Apple,and manyothers. The companyhas alreadyset a goalof distributing10mi:llioncopiesof an expiringdemonstrationversionof Internet Safariviathe Internet, as wellas, inclusionof CDsbound-inand includedwith computer and Internet magazines. DireCtmailwillalsobe consideredas an appropriatemarketingtechnique to reach this largemarket. The BusinessMarket-Duringthe developmentof the advancedInternet securityfeatures containedwithinInternet Safari,severaltechnologieshaveemergedfrom the company'sresearch and developmentgroup whichare substantiallytransferableto other markets and industry.Principally,the pornographicimageanalysisand detection for whichthe companyhas filedfor patent protection with the U.S.Patentand TrademarkOffice,hasopened a huge opportunitywithinthe corporate businessmarket. Heartsoftannounced inJuly 2000,the establishmentof a newbusiness divisiondesignedto take these technologiesto corporate Americaand then later to the internationalmarkets.The firstproduct of this dMsionis expected to be a plug-inthat willexpandthe capabilitiesof MicrosoftIntemet Explorerand NetscapeNavigator,similarto plug-insfrom RealMedia®,AppleQuicktime®, and MacromediaFlash®. The newplug-inwillrevieweverypicture receivedbyan InternetBrowser,suchas MicrosoftExplorer,andwill instantaneouslydetermineifa picture is pornographicin nature. Ifsuch determinationismade,the picture willbe replacedbyan alternate image.In a report distributedby the FAA(FederalAviationAdministration)in 1999,the FederalGovernmentindicatedthat approximately60%of allsexualharassmentclaimssettledin 1998,werebased upon Internet deliveredpornographyin government and agencyoffices. Withthe establishmentof thisnewbusiness divisionwhichwillsell its products to businessand governmental agencies,the companyforesees futuredevelopmentof other browser-basedtechnologiesdesigned to giveemployers greater control over accessto inappropriatecontent ofany nature. Discussion of Capital Needs: Uponcompletionof an analysisof Heartsoft'sgrowth potential,managementbelievesthat to capitalizeon Heartsoft's earningpotentialand fullysupport its expandingproduct line,the Companymust receivea capitalcontributionof no less than $8million.The use of proceeds fromthe additionalcapitalcontributionwillbe utilizedbyHeartsoftin the followingmanner: Source &Use of Funds: Sales&MarketingCosts $2,750,000 ProductDevelopmentCosts 1,500,000 General&AdministrativeCosts 1,500,000 ReduceAccountsPayable 100,000 Computer&EquipmentPurchases 100,000 Subtotal 5,950,000 ......................... RetainedWorkingCapital 2,050,000 Proceedsfrom CapitalContribution $8,000,000