U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1997
( ) Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
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.)
17575 Pacific Coast Highway, Pacific Palisades, California 90272
(Address of Principal Executive Offices) (Zip Code)
(310) 230-3394
(Issuer's Telephone Number, Including Area Code)
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 _X_ NO___
State the number of shares outstanding of each of the issuer's common equity as
of November 3, 1997: 2,101,326 shares of Common Stock, $.01 par value.
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<PAGE>
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
September 30, 1997 .............................................. 3
Condensed Statements of Operations - Three Months and
Nine Months ended September 30, 1996 and 1997 and
period from inception (July 20, 1994) to September 30, 1997 ..... 4
Condensed Statements of Cash Flows - Nine Months ended
September 30, 1996 and 1997 and period from inception
(July 20, 1994) to September 30, 1997 ........................... 5
Notes to Financial Statements - September 30, 1997 ................ 6
Item 2. Management's Discussion and Analysis or Plan of Operations........... 8
Part II. OTHER INFORMATION
Item 3. Other Information .................................................. 10
Item 4. Exhibits and Reports on Form 8-K ................................... 10
SIGNATURES ................................................................. 11
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC
(a development stage company)
CONDENSED BALANCE SHEET
AS AT SEPTEMBER 30, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 3,926,000
Prepaid expenses and other current assets 46,000
-----------
Total current assets 3,972,000
-----------
Captialized software costs 476,000
Furniture and equipment (net of accumulated depreciation) 96,000
Organizational costs (net of accumulated amortization) 13,000
-----------
TOTAL $ 4,557,000
===========
LIABILITIES
Current liabilities:
Accounts payable $ 15,000
Accrued expenses 11,000
-----------
Total current liabilities 26,000
-----------
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value, authorized
5,000,000 shares; issued and outstanding none
Common stock - $01 par value, authorized
20,000,000 shares; issued and outstanding
2,101,326 shares (includes 349,370 shares
held in escrow) 21,000
Additional paid-in capital 8,440,000
(Deficit) accumulated during the development stage (3,930,000)
-----------
Total stockholders' equity 4,531,000
-----------
TOTAL $ 4,557,000
===========
See notes to condensed financiual statements.
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 20,
1994
Three Months Ended Nine Months Ended (Inception)
September 30 September 30, to
--------------------------- --------------------------- September 30,
1996 1997 1996 1997 1997
---------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development:
Direct expenditures $ 338,000
Payments under research
services agreement 137,000
------------
Total research and
development 475,000
General and administrative $ 474,000 $ 203,000 $ 808,000 $ 892,000 2,603,000
Loss on sale and write down of
equipment - 122,000 - 122,000 122,000
---------- ---------- ---------- ------------ ------------
Total costs and expenses 474,000 325,000 808,000 1,014,000 3,200,000
---------- ---------- ---------- ------------ ------------
(Loss) from operations (474,000) (325,000) (808,000) (1,014,000) (3,200,000)
Interest (expense) (7,000) - (42,000) (406,000) (746,000)
Interest income - 56,000 - 124,000 136,000
---------- ---------- ---------- ------------ ------------
Net (loss) $(481,000) (269,000) $(850,000) $(1,296,000) $(3,810,000)
========== ========== ========== ============ ============
Net (loss) per share $ (1.71) $ (0.15) $ (3.02) $ (0.96)
========== ========== ========== ============
Supplemental net (loss) per share $ (1.30) $ (2.17)
========== ==========
Weighted average shares outstanding 281,612 1,751,956 281,612 1,343,359
========== ========== ========== ============
Supplemental weighted average
shares outstanding 371,956 371,956
========== ==========
</TABLE>
See notes to condensed financiual statements.
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 20
1994
Nine Months Ended (Inception)
September 30, to
---------------------------- September 30
1996 1997 1997
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (850,000) $ (1,296,000) $ (3,810,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization 38,000 40,000 130,000
Loss on sale of equipment 11,000 11,000
Loss on revaluation of equipment 112,000 112,000
Value of preferred stock charged to research and development 50,000
Amortization of loan acquisition costs 95,000 160,000
Amortization of debt discount 297,000 500,000
Fair value of options granted 236,000 236,000
Accrued interest on notes payable - stockholders 42,000 64,000
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets 3,000 (32,000) (47,000)
Net (decrease) increase in accounts payable and accrued expenses 18,000 (163,000) 21,000
--------- ----------- -----------
Net cash (used in) operating activities (513,000) (936,000) (2,573,000)
--------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (28,000) (59,000) (329,000)
Capitalized software costs (267,000) (149,000) (476,000)
Proceeds from sale of equipment 8,000 8,000
Advances to employees (3,000) (38,000)
--------- ----------- -----------
Net cash (used in) investing activities (298,000) (200,000) (835,000)
--------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 49,000 6,900,000 7,319,000
Proceeds from the sale of preferred stock 550,000
Proceeds from borrowings - notes payable - stockholders 562,000 1,194,000
Proceeds from Bridge notes 1,000,000
Repayment of Bridge notes (1,000,000) (1,000,000)
Initial public offering expenses (61,000) (1,201,000) (1,399,000)
Repayment of notes payable - stockholders (170,000) (170,000)
Loan acquisition costs (160,000)
--------- ----------- -----------
Net cash provided by financing activities 550,000 4,529,000 7,334,000
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (261,000) 3,393,000 3,926,000
Cash and cash equivalents - beginning of period 279,000 533,000
--------- ----------- -----------
Cash and cash equivalents - end of period $ 18,000 $ 3,926,000 $ 3,926,000
========= =========== ===========
Supplemental and noncash disclosures:
Preferred stock issued in connection with assignment agreement $ 50,000
Warrants issued in connection with Bridge notes 500,000
Common stock issued for repayment of long-term debt and interest $ 1,084,000 1,084,000
Common stock issued for preferred stock and accrued dividends 122,000 122,000
Initial public offering expenses charged to additional paid-in capital 198,000
Interest paid 14,000 14,000
</TABLE>
See notes to condensed financial statements
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10 - QSB and Item 310 (b)
of Regulation S -B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and such other adjustments as described in NOTE D) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 1997, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997. For
further information, refer to the financial statements and footnotes thereto
included in the Registrant Company annual report on Form 10 - KSB for the year
ended December 31, 1996.
(NOTE B) - The Company:
Heuristic Development Group (the "Company") is a development stage company
incorporated in Delaware in July 1994. 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 IntelliFit
System interacts with a user by applying algorithms to an individual's personal
profile and adjusting a user's exercise prescription based on progress,
frequency of workouts and other variables. The Company believes that this
interactive feature helps motivate users to continue exercising, and allows
users to reach their goals more quickly.
To date, the Company has been engaged primarily in research and development
activities relating to the IntelliFit System and has conducted only limited
marketing activities. The Company believes that product development necessary to
initiate commercial sales has been substantially completed although development
efforts aimed at enhancements and upgrades will be ongoing. The Company
completed it's initial public offering in February 1997 and realized net
proceeds of $4.7 million. There can be no assurance that the Company will
successfully commercialize the IntelliFit System, generate any significant
revenues or ever achieve profitable operations.
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Sale of Common Stock:
On February 14, 1997, the Company sold 1,200,000 units, resulting in net
proceeds to the Company of $4.7 million. Each unit ("Unit") offered by the
Company, consists of one common stock, $ .01 par value ("Common Stock"), one
redeemable class A warrant ("Class A Warrants") and redeemable class B warrant
("Class B Warrants"). The components of the Units will be transferable
separately immediately upon issuance. Each Class A Warrant entitles the holder
to purchase one share of Common Stock and one Class B Warrant at an exercise
price of $6.50, subject to adjustment, at any time until February 14, 2002. Each
Class B Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of $8.75, subject to adjustment, at any time until February 14,
2002. Commencing one year from the date of issuance the Class A Warrants and
Class B Warrants (collectively, the "Warrants") are subject to redemption by the
Company at a redemption price of $ .05 per Warrant on 30 days' written notice,
provided the closing bid price of the Common Stock averages in excess of $9.10
and $12.25 per share, respectively, for any 30 consecutive trading days ending
within 15 days of the notice of redemption.
(NOTE D) -Loss on Sale and Write Down of Equipment:
During the third quarter of 1997, management decided to sell excess office
equipment and selected components of the IntelliFit System. As a result of such
sales, the Company decided to write down the remaining physical components and
housings of the IntelliFit System and shorten their estimated useful lives to
one year.
Losses recorded as a result of the sales and write downs are reported
separately in the Statement of Operations as "Loss on Sale and Write Down of
Equipment."
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<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Safe Harbor Language
Certain statements made herein that are not historical are forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimate" "project" "intend" "expect" "believe" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements involve known and unknown risks and uncertainties. Many factors could
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward looking statements, including, among
others, changes in general economic and business conditions, inability to
establish and maintain market acceptance to the Companys products, loss of
market share and pressure on prices resulting from competition, introduction of
competing products and implementation of industry standards by other companies,
lack of development and general system failure of the private wide-area network
currently in use, regulatory obstacles to the use of the Internet for
communications, inability to manage growth, inability to develop distribution
networks and loss of major distributors and OEM partners, inability to attract
and retain qualified personnel, and the inability to protect the Company's
proprietary technology. For additional information regarding these and other
risks and uncertainties associated with the Company's business, reference is
make to the Company's reports filed from time to time with the Securities and
Exchange Commission.
Results of Operations
The Company remains in the development stage. Since its inception in July
1994, the Company's efforts have been devoted to research, development and
design of products, marketing activities and raising capital. The Company will
begin amortizing capitalized software costs when revenue is recognized.
The Company has generated only nominal revenues to date from the placement
of test products and has incurred substantial operating losses. From inception
through September 30, 1997, the Company sustained cumulative net losses of
approximately $3,810,000 primarily as a result of general and administrative
expenses, including salaries, marketing, and professional fees which have
aggregated $2,603,000 since inception.
During the three months ended September 30, 1997 (the "1997 quarter") and
the nine months ended September 30, 1997 (the "1997 nine months"), the Company
incurred operating losses of $325,000 and $1,014,000, respectively, compared
with operating losses of $474,000 and $808,000 during the three months ended
September 30, 1996 (the "1996 quarter") and the nine months ended September 30,
1996 (the "1996 nine months"), respectively. The decrease in operating losses
during the 1997 quarter reflects a reduction in the Company's general and
administrative expenses during such period. Such expenses are expected to remain
at current levels through the balance of 1997.
During the 1997 quarter, the Company sold certain components of excess
hardware as a result of changes management has decided to make to the Intellifit
System based on market research and trial customer feedback. As a result of such
sales, the Company decided to revalue the remaining inventory of Intellifit
System components and shorten their estimated useful lives to one year. The
Company recognized a loss from the sale and writedown of $122,000 during the
1997 quarter and the 1997 nine months.
During the 1997 quarter and the 1997 nine months, the Company
recognized interest income of $56,000 and $124,000, respectively, as a result of
investment of the
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<PAGE>
proceeds from its initial public offering (the "IPO"), compared with no interest
income during the 1996 periods. During the 1997 quarter and the 1997 nine
months, the Company incurred interest expense of $0 and $406,000, respectively,
compared with $7,000 and $42,000, respectively, during the comparable periods of
1996. The increase in interest expense during the 1997 nine months reflects
expenses incurred from bridge financing, debt financing and the amortization of
the debt discount.
Based on feedback from current test sites, The Company expects to revamp
it's sales and marketing program during the fourth quarter of 1997, and is
investigating new product possibilities and possible joint ventures with
partnering companies. The new program will be targeted at certain market
segments with the goal of enhancing the marketability of the IntelliFit System,
as well as introducing new products. Related marketing expenses are expected to
adversely impact the Company's results of operations during the fourth quarter
of 1997. The Company does not expect to generate any significant revenues during
1997 and there can be no assurance that sales and marketing efforts to be
undertaken by the Company will be successful. Accordingly, the Company expects
to continue to incur losses for the foreseeable future.
Liquidity and Capital Resources
At September 30, 1997, the Company had working capital of $ 3,946,000. The
Company believes that the proceeds from the IPO will be sufficient to sustain
planned operations for at least the next 12 months. During such period, the
company intends to focus its efforts on lowering the cost of each Intellifit
system and adjusting the price points to make the system more attractive to
potential customers and introducing new products to market through potential
joint venture arrangements. The Company will continue to market the IntelliFit
System to certain target markets including commercial health clubs, hospital
facilities, corporations, insurance companies and health maintenance
organizations. The Company also intends to devote resources to enhancing the
IntelliFit System in order to enable the Company to effectively target the
rehabilitation market. The Company will also focus on the development of product
improvements and upgrades.
The Company is also actively investigating a new strategy that would create
other opportunities for it's technology in a wide variety of markets.
Additionally, the Company is investigating licensing it's technology to other
companies as an Original Equipment Manufacturer for them to include in their
existing products.
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<PAGE>
PART II
Item 3. Other Information
Effective May 31, 1997, Steven Gumins, Chief Executive Officer of the
Company, and Deborah Griffin, Chief Operating Officer of the Company, resigned
as officers and directors of the Company to pursue other business interests. Mr.
Gumins and Ms. Griffin will continue as consultants to the Company through
September and December 1997, respectively. Gregory Zink, President of the
Company, will assume the role of Acting Chief Executive Officer.
Item 4. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1997.
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<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: November 3, 1997 by: /s/ Gregory L. Zink
-------------------------------------------
Gregory L. Zink, President
by: /s/ Theodore Lanes
-------------------------------------------
Theodore Lanes, Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,926,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,972,000
<PP&E> 159,000
<DEPRECIATION> 63,000
<TOTAL-ASSETS> 4,557,000
<CURRENT-LIABILITIES> 26,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 4,510,000
<TOTAL-LIABILITY-AND-EQUITY> 4,557,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 325,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (56,000)
<INCOME-PRETAX> (325,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (325,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (269,000)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>