U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required)
For the fiscal year ended December 31, 1996 This report contains only financial
statements in accordance with Rule 15d-2
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) For the transition period from to
Commission file number 0- 29044
Heuristic Development Group, Inc.
(Name of Small Business Issuer in Its Charter)
Delaware 95-4491750
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17575Pacific Coast Highway, Pacific Palisades, California 90272
- --------------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(415) 617-2090
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under to Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Class A Warrants
----------------------------
(Title of Class)
Class B Warrants
----------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES NO __X__
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $0 State the aggregate
market value of the voting stock held by non-affiliates computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of May 8, 1996: $5,832,304. State the number of shares
outstanding of each of the issuer's common equity as of May 8, 1996: 2,101,326
shares of Common Stock, $.01 par value.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Heuristic Development Group, Inc.
Pacific Palisades, California
We have audited the accompanying balance sheet of Heuristic Development
Group, Inc. (a development stage company) as at December 31, 1996, and the
related statements of operations, changes in stockholders' equity (capital
deficiency) and cash flows for each of the years in the two-year period then
ended and for the period from July 20, 1994 (inception) through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Heuristic Development Group,
Inc. at December 31, 1996 and the results of its operations and cash flows for
each of the years in the two-year period then ended and for the period from July
20, 1994 (inception) through December 31, 1996 in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
April 24, 1997
F-1
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
BALANCE SHEET
AS AT DECEMBER 31, 1996
A S S E T S
Current assets:
Cash and cash equivalents ................................... $ 533,000
Prepaid expenses and other current assets ................... 14,000
-----------
Total current assets ................................. 547,000
Capitalized software costs ..................................... 327,000
Furniture and equipment (net of accumulated
depreciation) ............................................... 202,000
Organizational costs (net of accumulated amortization) ......... 19,000
Deferred registration costs .................................... 198,000
Loan acquisition costs (net of accumulated amortization) ....... 95,000
-----------
T O T A L ............................................ $ 1,388,000
===========
L I A B I L I T I E S
Current liabilities:
Accounts payable ............................................ $ 129,000
Accrued expenses ............................................ 56,000
Bridge notes, net of discount ............................... 703,000
Notes payable - stockholders ................................ 390,000
Interest payable - stockholders ............................. 32,000
-----------
Total current liabilities ............................ 1,310,000
Notes payable - stockholders ................................... 804,000
Interest payable - stockholders ................................ 32,000
-----------
T o t a l ............................................ 2,146,000
-----------
(CAPITAL DEFICIENCY)
Preferred stock, $.01 par value, authorized
5,000,000 shares; issued and
outstanding 600 shares (liquidating
preference $733,000)
Common stock - $.01 par value, authorized
20,000,000 shares; issued and outstanding
281,612 shares............................................... 3,000
Additional paid-in capital ..................................... 1,752,000
(Deficit) accumulated during the development stage ............. (2,513,000)
-----------
Total (capital deficiency) ........................... (758,000)
-----------
T O T A L ............................................ $ 1,388,000
===========
The accompanying notes to financial statements
are an integral part hereof.
F-2
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
July 20,
1994
Year Ended (Inception)
December 31, to
-------------------- December 31,
1995 1996 1996
------ ------ ------------
Costs and expenses:
Research and development:
Direct expenditures .......... $ 280,000 $ 338,000
Payments under research
services agreement ......... 117,000 137,000
----------- -----------
Total research and
development ........... 397,000 475,000
General and administrative ..... 466,000 $ 1,086,000 1,711,000
----------- ----------- -----------
Total costs and
expenses .............. 863,000 1,086,000 2,186,000
----------- ----------- -----------
(Loss) from operations ............ (863,000) (1,086,000) (2,186,000)
Interest (expense) ............... (18,000) (322,000) (340,000)
Interest income ................... 5,000 1,000 13,000
----------- ----------- -----------
NET (LOSS) ....................... $ (876,000) $(1,407,000) $(2,513,000)
=========== =========== ===========
Pro forma net (loss) per share .... $ (2.36) $ (3.78)
=========== ===========
Pro forma weighted average shares
outstanding .................... 371,956 371,956
=========== ===========
The accompanying notes to financial statements
are an integral part hereof.
F-3
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Par Value $.01 Par Value $.01
-------------------- ----------------------
Shares Amount Shares Amount
------ ------- -------- -------
<S> <C> <C> <C> <C>
Issuance of common stock for cash
in August 1994 ................................... 212,456 $2,000
Issuance of preferred stock for cash
in August 1994 ................................... 550 $- 0 -
Issuance of preferred stock in
connection with obtaining assignment
rights to developed technology
in August 1994 ................................... 50
Net (loss) for the period from July 20,
1994 (inception) to December 31, 1994 ............
------ ------- -------- -------
Balance - December 31, 1994 ......................... 600 - 0 - 212,456 2,000
Surrender of common stock in
October 1995 ..................................... (17,928)
Exercise of options in December 1995 ................ 81,947 1,000
Net (loss) for the year ended
December 31, 1995 ................................
------ ------- -------- -------
Balance - December 31, 1995 ......................... 600 - 0 - 276,475 3,000
Exercise of options in March 1996 ................... 30,733
Issuance of common stock for cash
in March 1996 .................................... 9,218
Surrender of common stock in March 1996 ............. (21,770)
Surrender of common stock in June 1996 .............. (15,239)
Exercise of options in August 1996 .................. 5,358
Surrender of common stock in August 1996 ............ (3,163)
Compensation expense in connection
with grant of option in August 1996 ..............
Warrants issued in connection with
Bridge notes .....................................
Net (loss) for the year ended
December 31, 1996 ................................
------ ------- -------- -------
Balance - December 31, 1996 ......................... 600 $- 0 - 281,612 $3,000
====== ======= ======== =======
<CAPTION>
(Deficit)
Accumulated
Additional During the
Paid-in Development
Capital Stage Total
--------- ------- ------
<S> <C> <C> <C>
Issuance of common stock for cash
in August 1994 ................................... $ 68,000 $ 70,000
Issuance of preferred stock for cash
in August 1994 ................................... 550,000 550,000
Issuance of preferred stock in
connection with obtaining assignment
rights to developed technology
in August 1994 ................................... 50,000 50,000
Net (loss) for the period from July 20,
1994 (inception) to December 31, 1994 ............ $ (230,000) (230,000)
----------- ------------ ------------
Balance - December 31, 1994 ......................... 668,000 (230,000) 440,000
Surrender of common stock in
October 1995 .....................................
Exercise of options in December 1995 ................ 299,000 300,000
Net (loss) for the year ended
December 31, 1995 ................................ (876,000) (876,000)
----------- ------------ ------------
Balance - December 31, 1995 ......................... 967,000 (1,106,000) (136,000)
Exercise of options in March 1996 ................... 10,000 10,000
Issuance of common stock for cash
in March 1996 .................................... 37,000 37,000
Surrender of common stock in March 1996 .............
Surrender of common stock in June 1996 ..............
Exercise of options in August 1996 .................. 2,000 2,000
Surrender of common stock in August 1996 ............
Compensation expense in connection
with grant of option in August 1996 .............. 236,000 236,000
Warrants issued in connection with
Bridge notes ..................................... 500,000 500,000
Net (loss) for the year ended
December 31, 1996 ................................ (1,407,000) (1,407,000)
----------- ------------ ------------
Balance - December 31, 1996 ......................... $1,752,000 $(2,513,000) $ (758,000)
=========== ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-4
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 20,
1994
(Inception)
Year Ended December 31, to
----------------------- December 31,
1995 1996 1996
---- ---- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................ $ (876,000) $(1,407,000) $(2,513,000)
Adjustments to reconcile net (loss)
to net cash (used in)
operating activities:
Depreciation and amortization ..................... 25,000 56,000 90,000
Value of preferred stock charged
to research and development ..................... 50,000
Amortization of loan acquisition costs ............ 65,000 65,000
Amortization of debt discount ..................... 203,000 203,000
Fair value of options granted ..................... 236,000 236,000
Accrued interest on notes payable - stockholders .. 18,000 46,000 64,000
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses ......... 1,000 (9,000) (15,000)
(Increase) in other assets ...................... (38,000)
Increase in accounts payable and accrued expenses 111,000 43,000 184,000
----------- ----------- -----------
Net cash (used in) operating activities ....... (721,000) (767,000) (1,674,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets ........................... (186,000) (45,000) (271,000)
Capitalized software costs ............................ (327,000) (327,000)
----------- ----------- -----------
Net cash (used in) investing activities ....... (186,000) (372,000) (598,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common
stock and exercise of options ..................... 300,000 49,000 419,000
Proceeds from sale of preferred stock ................. 550,000
Proceeds from borrowings - notes payable - stockholder 492,000 702,000 1,194,000
Proceeds from Bridge notes ............................ 1,000,000 1,000,000
Deferred registration costs ........................... (198,000) (198,000)
Loan acquisition costs ................................ (160,000) (160,000)
----------- ----------- -----------
Net cash provided by financing activities ..... 792,000 1,393,000 2,805,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH .......................... (115,000) 254,000 533,000
Cash - beginning of period ............................... 394,000 279,000
----------- ----------- -----------
CASH - END OF PERIOD ..................................... $ 279,000 $ 533,000 $ 533,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Noncash transactions:
Preferred stock issued in connection
with assignment agreement ....................... $ 50,000
Warrants issued in connection
with Bridge notes ............................... $ 500,000 500,000
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-5
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and Basis of Presentation:
Heuristic Development Group, Inc. (the "Company" or "HDG"), formerly EIS
International Group, Ltd., is a development stage company. The Company is
engaged in the development, marketing and sale of the IntelliFit System, a
computerized system which generates personalized exercise prescriptions based
on, among other things, an individual's weight, ability, medical history, goals,
fitness level and exercise preferences and tracks and records fitness progress.
The Company was incorporated in Delaware and commenced operations on July 20,
1994. The Company has not yet generated any revenue.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company has incurred substantial losses since
inception and such losses are expected to continue during the development stage.
As at December 31, 1996, the Company had a working capital and a capital
deficiency.
In February 1997 the Company successfully completed its initial public
offering ("IPO") and received net proceeds of $5.2 million. In conjunction with
the IPO (i) all of the Series A preferred stock together with accrued dividends
of $722,000 through August 31, 1996 were converted into 175,793 shares of common
stock and (ii) notes payable -- stockholders together with accrued interest
aggregating $1,084,000 were converted into 263,921 shares of common stock.
(NOTE B) - Summary of Significant Accounting Policies:
[1] Capitalized software costs:
In accordance with Statement of Financial Accounting Standards No. 86, the
Company capitalizes certain costs associated with the development of computer
software. Such costs will be amortized over their estimated useful lives,
usually three years. Amortization will commence when the Company has revenue.
Development costs incurred prior to achievement of technological
feasibility (December 31, 1995) are expensed.
[2] Furniture and equipment:
Property and equipment are carried at cost. Depreciation is provided using
the straight-line method over the useful lives of the assets which range from
three to seven years.
(continued)
F-6
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[3] Income taxes:
The Company has applied to the accompanying financial statements provisions
required by accounting standards which require the use of the liability method
of accounting for income taxes.
[4] Cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
[5] Pro forma net loss per share of common stock:
Pro forma net loss per share assumes the conversion of preferred stock and
notes payable - stockholders as if such transactions had occurred on January 1,
1996. The stockholders have agreed to place 349,370 shares in escrow and,
accordingly, such shares have been excluded from the computation.
[6] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
[7] Stock based compensation:
During 1996, the Company implemented Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value method
set forth in APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB
25") but disclose the pro forma effects on net income (loss) had the fair value
of the options been expensed. The Company has elected to continue to apply APB
25 in accounting for its stock option incentive plans (see Note E[2]).
(continued)
F-7
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Summary of Significant Accounting Policies: (continued)
[8] Organizational costs:
Organizational costs incurred by the Company are being amortized over five
years.
[9] Fair value of financial instruments:
The carrying value of cash and cash equivalents, accounts payable and notes
payable approximates fair value because of the short-term maturity of those
instruments. For other debt instruments, the carrying value approximates the
fair value based on stated interest rates.
(NOTE C) - Furniture and Equipment:
Furniture and equipment are summarized as follows:
Assembled units ............................................ $107,000
Components ................................................. 29,000
Furniture and fixtures ..................................... 29,000
Office equipment ........................................... 88,000
Leasehold improvements ..................................... 18,000
--------
271,000
Less accumulated depreciation .............................. 69,000
--------
B a l a n c e .................................... $202,000
========
(NOTE D) - Notes Payable - Stockholders:
During the years ended December 31, 1995 and December 31, 1996 the Company
borrowed approximately $550,000 and $1,194,000, respectively, from certain
stockholders. These notes bear an interest rate of 10%.
Approximately $250,000 of the notes and accrued interest of approximately
$26,000 were due in June 1996. Subsequent to June 1996, the due date was
extended to June 1997. (See Note A with respect to conversion of notes payable.)
(continued)
F-8
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Notes Payable - Stockholders: (continued)
Future principal payments on long-term debt are as follows:
1997 .............................................. $ 250,000
2000 .............................................. 242,000
2001 .............................................. 702,000
----------
$1,194,000
==========
The interest on these notes is payable on the due dates of the notes.
Upon effectiveness of the IPO, the unconverted notes payable and related
interest were repaid.
Bridge financing:
In December 1996, the Company issued $1,000,000 of 10% Bridge notes due the
earlier of December 2, 1997 or the completion of the IPO. In connection with the
sale of the notes, the Company issued warrants for the purchase of 500,000
shares of common stock commencing December 2, 1998. Upon completion of the
public offering in February 1997, the warrants were converted into Class A
Warrants containing the same terms as the warrants included in such public
offering. The warrants have been valued at $500,000 by application of the Black-
Scholes model and accounted for as debt discount which was amortized over the
period ending with repayment of the notes from the IPO proceeds. The effective
interest rate on the notes is 304% based on original due date of the notes.
Subsequent to the balance sheet date upon completion of the public offering in
February 1997, the Bridge notes were paid in full.
(NOTE E) - Stockholders' Equity (Capital Deficiency):
[1] Preferred stock:
In August 1994, the Company authorized and issued 600 shares of its $.01
par value Series A preferred stock (the "Series A Preferred"). The authorized
capital for the preferred stock was increased to 5,000,000 shares with a par
value of $.01 per share. The holders of the Series A Preferred are entitled to
(i) vote on all matters on which the common stock can vote and have twenty
percent of the total voting power, (ii) receive cumulative annual dividends
equal
(continued)
F-9
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Stockholders' Equity (Capital Deficiency): (continued)
[1] Preferred stock: (continued)
to $100 per share and (iii) liquidation preference of $1,000 per share plus any
dividends accrued and unpaid. The Series A Preferred is redeemable at the option
of the Company at a price of $1,000 per share plus accrued and unpaid dividends.
(See Note A with respect to conversion of preferred stock upon effectiveness of
public offering.)
[2] Stock option plans:
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under the APB 25,
where the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation is
recognized.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Such information has been determined
as if the Company had accounted for its employee stock options under the fair
value method of that statement. The effect of applying SFAS No. 123 on 1995 and
1996 pro forma net income is not necessarily representative of the effects on
reported net income for future years due to, among other things: (1) the vesting
period of the stock options and the (2) fair value of additional stock options
in future years. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in 1995 and 1996 would have been approximately $948,000 and
$1,413,000, or $2.55 per share and $3.80 per share, respectively. The weighted
average fair value of the options granted during 1995 and 1996 are estimated as
$1.99 and $1.19, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected dividend yield in
both of the years 0%, expected volatility of 30% for 1995 and 1996, risk-free
interest rate of 6.00% for 1995 and 1996 and estimated life of 3 years in 1995
and 1996.
(continued)
F-10
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Stockholders' Equity (Capital Deficiency): (continued)
[2] Stock option plans: (continued)
The Company's 1996 Stock Option Plan (the "Plan") adopted in October 1996,
provides for issuance of 250,000 shares of the Company's common stock. In
October 1996, options to purchase 200,000 shares of common stock at $5.00
per share were granted to officers/stockholders exercisable in four equal annual
installments commencing one year from the date of grant. The Plan provides for
grant of options to employees, officers, directors and consultants of the
Company. Options may be either "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended or nonqualified
options. The Plan expires in October 2006. Incentive options granted under the
Plan are exercisable for a period of up to 10 years from the date of grant at an
exercise price which is not less than the fair market value of the common stock
on the date of the grant, except that the term of an incentive option granted
under the Plan to a stockholder owning more than 10% of the outstanding voting
power may not exceed five years and its exercise price may not be less than 110%
of the fair market value of the common stock on the date of the grant.
Additional information with respect to stock option activity is summarized
as follows:
Weighted
Average
Shares Price Expiration Date
------ ----- ---------------
Granted - year ended
December 31, 1994 ...... 115,359 $2.70 December 1995 -
August 1996
Granted - year ended
December 31, 1995 ...... 2,679 $ .33 August 1997 -
August 1999
Exercised - year ended
December 31, 1995 ...... (81,947) $3.67
-------
Balance at
December 31, 1995 ...... 36,091 $ .33 May 1996 -
August 1999
Granted - August 1996. .... 78,674 $ .50 August 2006
Granted - October 1996 .... 200,000 $5.00 October 1997 -
October 2000
Exercised - year ended
December 31, 1996 . .... (36,091) $ .33
-------
Balance at
December 31, 1996 ...... 278,674 $3.73 October 1997 -
======= August 2001
(continued)
F-11
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Stockholders' Equity (Capital Deficiency): (continued)
[2] Stock option plans: (continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding
----------------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Number Remaining Exercise
Prices Outstanding Life Price
-------- ----------- --------- --------
$0.50 78,674 3 $0.50
$5.00 200,000 3 $5.00
In August 1996 the Company issued to two officers/stockholders options to
purchase 78,674 shares of its common stock at $.50 per share. The Company has
reflected compensation expense of $236,000 in connection with the issuance of
such options. In connection with the public offering, these options are subject
to escrow provisions as a condition of the offering (Note F).
[3] Reorganization:
In October 1996, the Board of Directors and stockholders approved a
1,339.4362 to 1 stock split which has been given retroactive effect in the
accompanying financial statements. All references to shares and per share
amounts in the notes to financial statements have been adjusted to reflect the
stock split.
[4] Escrow shares/Options:
In connection with the public offering, the underwriter had required, as a
condition of the offering, that an aggregate of 349,370 shares of the Company's
common stock and outstanding options to purchase 50,630 shares be placed in
escrow until certain pretax income levels or market value targets are met. The
escrow shares and escrow options will be released from escrow upon the Company
meeting a minimum pretax income as defined, ranging from $3.3 million to $5.7
million for the years ending December 31, 1998 to December 31, 2000 or if the
bid price of the Company's common stock averages in excess of $12.50 per share
for 30 consecutive business days during the first period ended August 11, 1998
and $16.75 per share during the period ended February 11, 2001. If the
conditions are not met by March 31, 2001, all shares remaining in escrow will be
returned to the Company as treasury shares for cancellation. There will be a
nondeductible charge to earnings for the fair value of these shares and options
upon their release.
(continued)
F-12
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Commitments and Other Matters:
Research Services Agreement:
In August 1994, the Company entered into a retainer agreement with Transpac
Software, Inc. ("Transpac") a stockholder and a noteholder. The agreement
provides for Transpac to assist the Company in updating and improving the source
programs and in designing, developing and implementing such improved source
programs for use in the EIS Expert Instructor System. The agreement provides for
the payment of $120,000. Accordingly, the Company paid Transpac $20,000 during
the year ended December 31, 1994 and $100,000 during the year ended December 31,
1995.
In addition, the agreement provides for future software development
services upon the Company's request in designated scheduled projects through
December 31, 1998. During the years ended December 31, 1995 and December 31,
1996, the Company paid Transpac approximately $10,000 and $244,000,
respectively, for additional services.
Employment agreements:
The Company has three-year employment agreements with two officers
providing for aggregate annual base salaries of $300,000 commencing December 1,
1996. The agreements provide for bonuses at the discretion of the Board of
Directors and severance salary.
(NOTE G)- Income Taxes:
At December 31, 1995 and December 31, 1996, the Company had available net
operating loss carryforwards to reduce future taxable income of approximately
$456,000 and $1,521,000, respectively. The net operating loss carryforwards
expire in various amounts through 2011. The Company's ability to utilize its net
operating loss carryforwards is subject to annual limitations as required under
Section 382 of the Internal Revenue Code pursuant to ownership change arising
from the IPO and conversion of preferred stock and notes payable into common
stock.
At December 31, 1995 and December 31, 1996, the Company has a deferred tax
asset of approximately $400,000 and $963,000, respectively, representing the
benefits of its net operating loss carryforwards and deferred taxes resulting
from capitalized start-up costs, cash basis tax reporting and compensation
expense in connection with the grant of options. The Company has provided a 100%
valuation allowance for such asset since the likelihood of realization cannot be
determined.
F-13
<PAGE>
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.
HEURISTIC DEVELOPMENT GROUP, INC.
Date: May 9 , 1997 By: /s/ Steven R. Gumins
--------------------------------
Steven R. Gumins, 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.
/s/ Jonathan W. Seybold
- ----------------------------------- Chairman May 9, 1997
Jonathan W. Seybold
/s/ Steven R. Gumins
- ----------------------------------- Chief Executive Officer and May 9, 1997
Steven R. Gumins Director (Principal Executive
Officer)
/s/ Theodore Lanes
- ----------------------------------- Chief Financial Officer May 9, 1997
Theodore Lanes (Principal Financial and
Accounting Officer
/s/ Deborah E. Griffin
- ----------------------------------- Chief Operating Officer May 9, 1997
Deborah E. Griffin and Director
/s/ Gregory L. Zink
- ----------------------------------- President and Director May 9, 1997
Gregory L. Zink
/s/ William Blase Director May 9, 1997
- -----------------------------------
William Blase
/s/ Kenneth W. Krugler Director May 9, 199
- -----------------------------------
Kenneth W. Krugler
/s/ M. Caroline Martin Director May 9, 1997
- -----------------------------------
M. Caroline Martin
/s/ Allen Dalfen Director May 9, 1997
- -----------------------------------
Allen Dalfen
Exhibit 11.1
Heuristic Development Group, Inc.
Computation of Earnings Per Share
For the year ended
------------------------
1995 1996
---- ----
Net (loss) .......................................... ($876,000) ($1,407,000)
========= ===========
Shares:
Weighted average number of common shares
outstanding (1) .............................. 281,612 281,612
Shares to be issued in connection
with the conversion of:
i) Preferred stock and unpaid dividends ........ 175,793 175,793
ii) Notes payable and accrued interest ......... 263,921 263,921
Less: Escrow shares ................................. (349,370) (349,370)
--------- -----------
Proforma weighted average number of shares
outstanding ....................................... 371,956 371,956
========= ===========
Proforma net (loss) per share ....................... ($2.36) ($3.78)
========= ===========
(1) In accordance with Securities and Exchange Commission requirements, all
common shares issued, including the shares issued in the proposed
reorganization by the Company, at a price below the proposed offering
price during the twelve-month period prior to the filing of the initial
public offering have been included in the calculation as if they were
outstanding for all periods.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 279,000 533,000
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 284,000 547,000
<PP&E> 226,000 271,000
<DEPRECIATION> 21,000 69,000
<TOTAL-ASSETS> 516,000 1,388,000
<CURRENT-LIABILITIES> 142,000 1,310,000
<BONDS> 0 0
0 0
0 0
<COMMON> 3,000 3,000
<OTHER-SE> (139,000) (761,000)
<TOTAL-LIABILITY-AND-EQUITY> 516,000 1,388,000
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 863,000 1,354,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 18,000 54,000
<INCOME-PRETAX> (876,000) (1,407,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (876,000) (1,407,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (876,000) (1,407,000)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
