<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 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 Identification No.)
incorporation or organization)
1219 Morningside Drive
Suite 102, Manhattan Beach, CA 90266
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 546-1065
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 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
--- ---
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of 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. [___]
The issuer's revenues for the fiscal year ended December 31, 1997 were
$0.00.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 31, 1998 (based upon the average bid and asked
prices) was $2,488,000.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of March 31, 1998 was 2,101,000.
Documents incorporated by reference: None.
Transitional Small Business Issuer Format (check one):
Yes No X
--- ---
1
<PAGE>
PART I
Item 1. Description of Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operations
Item 7. Financial Statements
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
<PAGE>
PART I
ITEM 1.
GENERAL DEVELOPMENT AND DESCRIPTION OF BUSINESS
Heuristic Development Group, Inc. (herein referred to as the "Company" or
"HDG") is a corporation organized under the state laws of Delaware in 1994. The
Company is engaged in the development, marketing, sale and licensing 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.
The original computer source programs and related documentation and
computerized services and instructional material (collectively, the "EIS
System") on which the Intellifit System is based was developed for Nautilus
Group Japan, Ltd. ("NGJ Ltd."), a Delaware company operating in Japan. The
Company acquired the rights to the EIS System from NGJ Ltd. in August 1994 and
spent approximately two years modifying and expanding upon the EIS System in
order to create the Intellifit System. NGJ Ltd. has advised the Company the EIS
System is currently installed in nine facilities in Japan and has generated over
7 million individualized exercise prescriptions.
Based on feedback from test sites and beta customers, and the
disappointing acceptance of the Intellifit product, the Company has revamped
its going forward business model. The Company no longer believes that it can
be successful in selling the Intellifit system to customers and supporting
the systems in the field. It still believes that the Intellifit software is a
viable product for a company which has complementary products and which has
an existing field sales organization. The Company has therefore opened
discussions with regard to selling or licensing the Intellifit software to OEM
customers who would likely incorporate the Intellifit product into their
existing product lines. The result of these discussions is unknown at this
time. Additionally, the Company believes that the Intellifit product has no
exposure to the year 2K problem that may result from the date change at the
end of 1999.
In parallel, the Company has decided to pursue a strategy of an
investment in, or acquisition of, an existing company. Management and the
board of directors have been investigating various investment and acquisition
possibilities. There can be no assurances that the Company will identify and
complete such an investment or acquisition.
ITEM 2
DESCRIPTION OF PROPERTY
The Company is currently located at 1219 Morningside Drive, Suite 102,
Manhattan Beach, CA, 90266. The Company rents the space in a shared-tenant
office and is under a six (6) month lease.
ITEM 3
LEGAL PROCEEDINGS
<PAGE>
The Company is not a party to (nor is any of its property subject to) any
pending legal proceedings. The Company is not aware of any proceedings
contemplated by governmental authorities.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
twelve months ended December 31, 1997.
PART II
ITEM 5
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock has been quoted under the Symbol IFIT since
February 11, 1997 on the Nasdaq SmallCap Stock Market. The following is a list
of the low and high bid quotations by fiscal quarters for 1997 as reported by
Nasdaq:
<TABLE>
<CAPTION>
1997
Low High
--- ----
<S> <C> <C>
Quarter ended March 31, 1997 $ 3.5 $ 3.5
Quarter ended June 30, 1997 2.75 3.625
Quarter ended Sept. 30, 1997 2.625 2.75
Quarter ended Dec. 31, 1997 1.875 2.375
</TABLE>
The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not represent actual transactions.
(b) Holders of Record
As of March 23, 1998 there were 24 holders of record of the Company's
Common Stock. As of December 10, 1997 there were approximately 358 beneficial
owners of the Company's Common Stock.
(c) Dividends
The Company declared no dividends during 1997.
ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
<PAGE>
In the second half of 1997, as a result of disappointing product
acceptance, the Company's board and management undertook a new direction. While
the Company believes that the marketing of the Intellifit System remains a
potentially viable business, it appears that the timing of the product launch is
premature relative to the needs of the market. Consequently, all former beta
sites have been terminated and the relevant inventory liquidated. During late
1997, the Company sold all excess computer hardware, office furniture and
equipment. Concurrent with the sales, the Company revalued the remaining
inventory of Intellifit System components and shortened their estimated useful
lives to one year, and suffered a loss on the sale and write down of the
remaining assets. The Company recognized a loss from the sale and writedown of
$178,000 during 1997. Additionally, the Company has relocated the corporate
office to much smaller, less expensive space, eliminated all personnel with the
exception of the President/CEO, Chief Financial Officer and Controller, and
liquidated all unnecessary fixed assets.
From its inception in 1994 through the second quarter of 1997, the
Company's efforts have been principally devoted to research, development and
design of products, marketing activities and raising capital. The Company has
generated only nominal revenues to date from the placement of test products and
has incurred substantial operating losses. From inception through December 31,
1997, the Company sustained cumulative net losses of approximately $3,954,000
primarily as a result of general and administrative expenses, including
salaries, marketing, and professional fees which have aggregated $2,761,000
since inception.
During the years ended December 31, 1997 and 1996, the Company incurred
operating losses of $1,441,000 and, $ 1,407,000 respectively. The increase in
operating losses during 1997 reflects a slight increase in the Company's general
and administrative expenses during the early part of 1997. Such expenses
subsequently declined during the second half of the year. The loss from
operations also includes an unusual loss on the sale and write down of fixed
assets of $178,000. The Company has reduced current cash use to approximately
$40,000 per month. The Company has interest income of approximately $15,000 per
month. The ongoing expenses are expected to remain at current levels into the
first quarter of 1998.
During 1997 and 1996, the Company recognized interest income of $193,000
and $1,000, respectively. The increase in 1997 interest income is as a result of
investment of the Company's working capital. During 1997 and 1996, the Company
incurred interest expense of $406,000 and $322,000, respectively. The increase
in interest expense during 1997 reflects expenses incurred from bridge
financing, debt financing and the amortization of the debt discount, all
resultant from the IPO.
PLAN OF OPERATION
Based on feedback from test sites and beta customers, and the
disappointing acceptance of the Intellifit product, the company has revamped its
going forward business model. The company no longer believes that it can be
successful in selling the Intellifit system to customers and supporting the
systems in the field. It still believes that the Intellifit software is a viable
product for a company which has complementary products and which has an existing
field sales organization. The Company has therefore opened discussions with
regard to selling or licensing the Intellifit software to OEM customers who
would likely incorporate the Intellifit product into their existing product
lines. The result of these discussions is unknown at this time. Additionally,
The Company believes that the Intellifit product has no exposure to the year 2K
problem that may result from the date change at the end of 1999.
<PAGE>
In parallel, the Company has decided to pursue a strategy of an investment
in, or acquisition of, an existing company. Management and the board of
directors have been investigating various investment and acquisition
possibilities. There can be no assurances that the Company will identify and
complete such an investment or acquisition.
Until the licensing of the Intellifit software or, an acquisition or
investment, the Company does not expect to generate any significant revenues and
there can be no assurance that efforts to market the existing product will be
successful. Accordingly, the Company expects to continue to incur losses for the
foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had working capital of $ 3,842,000.
Based on the Company's anticipated working capital needs, the Company
believes that the working capital 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 maintaining the reduced cash usage, making an
acquisition or investment in another company, and licensing the Intellifit
software. There can be no assurances that the Company's efforts will be
successful.
ITEM 7
FINANCIAL STATEMENTS
The financial statements of the company are included herein, commencing on page
F-1 hereof.
ITEM 8
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
ITEM 9
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
(a) The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Jonathan Seybold 54 Chairman of the Board of Directors
Gregory L. Zink 41 President, Acting CEO and Director
Theodore Lanes 34 Chief Financial Officer and Director
Brian Wasserman 32 Director
William Blase 46 Director
Kenneth W. Krugler 36 Director
<PAGE>
M. Caroline Martin 57 Director
Allan Dalfen 54 Director
</TABLE>
JONATHAN W. SEYBOLD has served as a director of the Company since its
inception in July, 1994. Mr. Seybold has served as Chairman of the Board since
July, 1994. Mr. Seybold also founded Seybold Seminars, Inc. ("Seybold
Seminars"), a company which conducts large scale, technology-based trade shows
and conferences and Seybold Publications ("Seybold Publications"), a company
which publishes reports on publishing systems, desktop publishing and digital
data applications. Mr. Seybold served as President of Seybold Seminars and
Seybold Publications from 1981 to 1993.
GREGORY L. ZINK has served as the Company's President since July 1994 and a
director of the Company since July 1994. In June, 1997 Mr. Zink assumed the
title of Acting CEO and agreed to devote a portion of his consulting time to the
company. Mr. Zink has served as Chief Operating Officer and Chief Financial
Officer of Nautilus Group Japan Ltd. since April 1988. Mr. Zink has also been
Vice President of Clark Management Co. Inc., an investment advisory company,
since January 1989. Mr. Zink holds an M.B.A. from the Wharton Business School.
THEODORE LANES has served as the Company's Chief Financial Officer since
February 1997 and was appointed to the Board in February, 1998. Previously, Mr.
Lanes was Vice President of Technology MarketForce, Inc., a Los Angeles based
consulting firm. From 1993 to 1995, Mr. Lanes owned and operated a software
development firm, which he sold in a private transaction. Mr. Lanes has a B.S.
in Finance from California State University, Long Beach, and an M.B.A. from
University of Southern California.
BRIAN WASSERMAN was appointed to the Board in December of 1997. Mr.
Wasserman owns and operates a New York based consulting firm and for at least 5
years prior to that, Mr. Wasserman served as a manager of Coopers & Lybrand and
Senior Vice President and Chief Financial Officer of D.H. Blair Investment
Banking in New York.
WILLIAM BLASE has been a director of the Company since August 1995. Since
1985, Dr. Blase has served a director of California Eye Care, an ophthalmology
practice. Since November 1992, Dr. Blase has been a director of Valley Health
Systems California District Hospital. Dr. Blase has an M.D. from the University
of Virginia School of Medicine and a M.S. from Oxford University in England.
KENNETH W. KRUGLER has served as a director of the Company since July 1994.
Mr. Krugler has served as President of TransPac Software Inc. since founding it
in January 1987. From 1983 to 1987, Mr. Krugler was a software architect at
Apple Computer, Inc. Mr. Krugler has a B.S. in Computer Science and Engineering
from the Massachusetts Institute of Technology.
M. CAROLINE MARTIN has served as a director of the Company since December
1996. Since January 1986, Ms. Martin has served as Executive Vice President of
Riverside Health System; a multi-facility integrated healthcare system. She is
currently a member of the board of directors of Signet Bank.
ALLAN DALFEN has served as a director of the Company since December 1996.
Mr. Dalfen currently serves as President of Kent Spiegel Direct Inc., the
sporting goods and fitness division of Kent & Spiegel. Since January 1995, Mr.
Dalfen has also served as President of Dalfen Corporation, an investment
corporation. From October 1992 to December 1994, Mr. Dalfen served as President
and Chief Executive Officer of Vestro Foods, Inc. and from 1979 to 1992, Mr.
Dalfen served as President and Chief Executive
<PAGE>
Officer of Weider Health and Fitness. Mr. Dalfen is currently a director of
Vestro Foods, Inc.
Directors serve until the next annual meeting of shareholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors.
(b) Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review Forms 3,4 and 5 furnished to the Company,
The Company does not believe that any director, officer or beneficial owner of
more than 10% of any class of the Company's equity securities failed to file on
a timely basis, reports required by Section 16(a) of the Securities Exchange Act
of 1934 during the last fiscal year.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, which makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company and may administer the Company's stock
option plan. The members of the Compensation committee are Jonathan Seybold,
Allan Dalfen and William Blase. The Board of Directors also has an Audit
Committee, which reviews the results, and scope of the audit and other
accounting related matters. The members of the Audit Committee are Jonathan
Seybold, M. Caroline Martin and Brian Wasserman.
ITEM 10
EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
Name and year Salary Bonus Options Other
principal position Compensation
<S> <C> <C> <C> <C> <C>
Steven Gumins (1) 1997 68,750(3) $ 50,000(4)
CEO 1996 133,436
1995 100,000 6,000
Deborah Griffin (2) 1997 64,516(5) $ 50,000(4)
COO 1996 133,436
1995 100,000 6,000
Gregory Zink 1997 $ 40,000(6)
Acting CEO 1996 --
1995 --
</TABLE>
(1) Mr. Gumins resigned as Chief Executive Officer in May, 1997.
(2) Ms. Griffin resigned as Chief Operating Officer in May, 1997.
<PAGE>
(3) In December, 1996, the Company entered into a three-year employment
agreement with Mr. Gumins. The agreement provided for a base annual salary
of $150,000 and bonuses at the discretion of the Board.
(4) Represents severance payment.
(5) In December, 1996, the Company entered into a three-year employment
agreement with Ms. Griffin. The agreement provided for a base annual salary
of $150,000 and bonuses at the discretion of the Board.
(6) Amounts paid for consulting services.
DIRECTORS COMPENSATION
The Company does not pay fees to its directors. Directors are entitled
to receive options pursuant to the Company's 1996 Stock Option Plan. In
February 1997, Company granted options to purchase 1,000 shares of Common
Stock to each of Jonathan W. Seybold. Gregory L. Zink, R. William Blase, M.
Caroline Martin, Allan Dalfen and Kenneth W. Krugler. Such options will be
exercisable at $5.00 per share commencing one year from the date of grant. In
February, 1997, the Company entered into a consulting agreement with Mr.
Seybold pursuant to which he received five-year options to purchase 5,000
shares of Common Stock. All of such options will be exercisable at $5.00 per
share commencing one year from the date of grant.
ITEM 11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 15,
1998, regarding the ownership of Common Stock by (i) each person known by the
Company to own beneficially more than 5% of each class of outstanding Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company named in the Summary Compensation Table, and (iv) all executive officers
and directors of the Company as a group:
<TABLE>
<CAPTION>
% Of Shares
Beneficially Owned
Shares -----------
Name and Address Beneficially Outstanding
of Beneficial Owner Owned(1) Shares
- ------------------------------ ------- ------
<S> <C> <C>
Nautilus Group Japan, Ltd.(2) 366,514 17.4%
Seybold Family Trust (3) 141,464 6.7
Jonathan W. Seybold (4) 141,464 6.7
Gregory L. Zink (5) 379,908 18.1
William Blase (6) 14,278 *
Kenneth W. Krugler (7) -- *
M. Caroline Martin (8) -- *
Allan Dalfen (9) -- *
Brian Wasserman (10) -- *
Theodore Lanes (11) -- *
All executive officers and directors
as a group (eight persons) 535,650 25.5
</TABLE>
<PAGE>
- - --------
* Less than 1%.
(1) Includes such individuals' Escrow Shares and Escrow Options. See "Escrowed
Shares and Options" below. In computing the number of shares beneficially owned
by a person and the percentage ownership of a person, shares of Common Stock of
the Company, subject to options held by that person that are currently
exercisable or exercisable within 60 days are deemed outstanding and owned by
such person. Such shares, however, are not deemed outstanding for purposes of
computing the percentage ownership of any other person. Except as indicated in
the footnotes to this table and pursuant to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock.
(2) The address of such company is c/o Clark Management Co. Inc., P.O. Box
3090, Boynton Beach, Florida 33424.
(3) The address of such trust is P.O. Box 1315 East Sound, Washington 98245.
(4) Consists of 141,464 shares held by the Seybold Family Trust. Mr. Seybold is
a Trustee of such Trust. The address of such individual is c/o Heuristic
Development Group, Inc., 1219 Morningside Drive, Suite 102, Manhattan Beach, CA
90266.
(5) Includes 366,514 shares held by NGJ Ltd. Mr. Zink is the Chief Operating
Officer of NGJ Ltd. The address of such individual is c/o Clark Management Co.
Inc., P.O. Box 3090, Boynton Beach, Florida 33424. Mr. Zink disclaims beneficial
ownership of the shares owned by NGJ Ltd.
(6) Represents shares held by the Blase Family Trust, of which Dr. Blase is
Trustee. The address of such individual is c/o California Eye Care, 2390 East
Florida Avenue, Suite 207, Hemet, California 92544.
(7) The address of such company is c/o Clark Management Co. Inc., P.O. Box 3090,
Boynton Beach, Florida 33424.
(8) The address of such individual is c/o Riverside Health System, 606 Denbigh
Boulevard, Suite 604, Newport News, Virginia 23608
(9) The address of such individual is c/o Kent Spiegel Direct, Inc., 6133
Bristol Parkway, Culver City, California 90230.
(10) The address of such individual is c/o Heuristic Development Group, 1219
Morningside Drive, Suite 102, Manhattan Beach, CA. 90266.
(11) The address of such individual is c/o Heuristic Development Group, 1219
Morningside Drive, Suite 102, Manhattan Beach, CA. 90266.
Escrowed Shares and Options
In connection with the Company's initial public offering in February,
1997, the holders of 349,370 shares of the Company's Common Stock (the "Escrow
Shares") and options to purchase 50,630 shares of the Company's Common Stock
(the "Escrow Options") have placed the Escrow Shares and Escrow Options into
escrow pursuant to an
<PAGE>
escrow agreement (the "Escrow Agreement") with American Stock Transfer & Trust
Company, as escrow agent. The Escrow Shares and Escrow Options are not
transferable or assignable, except upon death, by operation of law, to family
members of the holders or to any trust for the benefit of the holders; provided
that any permitted transferees must agree to be bound by the provisions of the
Escrow Agreement. The Escrow Shares may be voted by the persons putting such
shares into escrow. Holders of Escrow Options may exercise their options prior
to their release from escrow; however, the shares issuable upon such exercise
will be held as Escrow Shares pursuant to the Escrow Agreement.
The Escrow Shares and Escrow Options will be released from escrow if,
and only if, one or more of the following conditions is/are met:
(a) the Company's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited by the Company's independent
public accountants) (the "Minimum Pretax Income") amounts to at least $3.3
million for the fiscal year ending December 31, 1998;
(b) the Minimum Pretax Income amounts to at least $4.5 million for the fiscal
year ending December 31, 1999;
(c) the Minimum Pretax Income amounts to at least $5.7 million during the
fiscal year ending December 31, 2000;
(d) the Bid Price (as defined in the Escrow Agreement) of the Common Stock
averages in excess of $12.50 per share for 30 consecutive business days
during the 18-month period commencing on February 11, 1997; or
(e) the Bid Price of the Common Stock averages in excess of $16.75 per share
for 30 consecutive business days during the 18-month period commencing with
the nineteenth month from February 11, 1997.
The Minimum Pretax Income amounts set forth above shall (i) be
calculated exclusively of any extraordinary earnings, including any charge to
income resulting from release of the Escrow Shares and Escrow Options and (ii)
be increased proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for or
exercisable into Common Stock are issued after completion of the Company's
initial public offering. The Bid Price amounts set forth above are subject to
adjustment in the event of any stock splits, reverse stock splits or other
similar events.
Any money, securities, rights or property distributed in respect of
the Escrow Shares and Escrow Options, including any property distributed as
dividends or pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company, shall be held in escrow until
release of the Escrow Shares and Escrow Options. If none of the applicable
Minimum Pretax Income or Bid Price levels set forth above have been met by March
31, 2001, the Escrow Shares and Escrow Options, as well as any dividends or
other distributions made with respect thereto, will be canceled and contributed
to the capital of the Company. The Company expects that if the Escrow Shares and
Escrow Options are released the release of the Escrow Shares and Escrow Options
to officers, directors, employees and consultants of the Company will be deemed
compensatory and, accordingly, will result in a substantial charge to reportable
earnings, which would equal the fair market value of such shares on the date of
release. Such charge could substantially increase the loss or reduce or
eliminate the Company's net income, if any, for financial reporting purposes for
the period during which such shares and options are, or become
<PAGE>
probable of being, released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a negative effect on the market price of the
Company's securities.
The Minimum Pretax Income and Bid Price levels set forth above were
determined by negotiation between the Company and D.H. Blair Investment Banking
Corp. and should not be construed to imply or predict any future earnings by the
Company or any increase in the market price of its securities.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kenneth W. Krugler, a director of the Company, is the President of Transpac
Software Inc. In August 1994, the Company and Transpac entered into a consulting
agreement. In 1997, Transpac Software, Inc. was paid $ 229,400 pursuant to such
agreement.
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
BALANCE SHEET
AS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $3,785,000
Prepaid expenses and other current assets 82,000
----------
Total current assets 3,867,000
Capitalized software costs 506,000
Furniture and equipment (net of accumulated depreciation) 27,000
Organizational costs (net of accumulated amortization) 11,000
----------
TOTAL $4,411,000
----------
----------
LIABILITIES
Current liabilities:
Accounts payable $ 8,000
Accrued expenses 17,000
----------
Total current liabilities 25,000
----------
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 8,441,000
(Deficit) accumulated during the development stage (4,076,000)
----------
Total stockholders' equity 4,386,000
----------
TOTAL $4,411,000
----------
----------
</TABLE>
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
<TABLE>
<CAPTION>
July 20,
1994
Year Ended (Inception)
December 31, to
---------------------------- December 31,
1996 1997 1997
------------ ------------- ------------
<S> <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 $ 1,086,000 $ 1,050,000 2,761,000
Loss on sale and write down of equipment -- 178,000 178,000
------------ ------------- ------------
Total costs and expenses 1,086,000 1,228,000 3,414,000
------------ ------------- ------------
(Loss) from operations (1,086,000) (1,228,000) (3,414,000)
Interest expense and amortization
of debt discount and expense (322,000) (406,000) (746,000)
Interest income 1,000 193,000 206,000
------------ ------------- ------------
Net (loss) $ (1,407,000) $ (1,441,000) $(3,954,000)
------------ ------------- ------------
------------ ------------- ------------
Net (loss) per share - Basic and Diluted $ (0.91)
-------------
-------------
Weighted average shares outstanding 1,581,160
-------------
-------------
Supplemental net (loss) per share $ (3.78)
-------------
-------------
Supplemental weighted average shares outstanding 371,956
-------------
-------------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
<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 $ --
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 -- 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 -- 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 options in August 1996 .................
Warrants issued in connection with
Bridge notes .........................................
Net (loss) for the year ended
December 31, 1996 ....................................
------- ------- ------- -------
Balance - December 31, 1996 ............................... 600 281,612 3,000
Proceeds of Initial Public Offering, net
of expenses, in February 1997 ....................... 1,380,000 14,000
Conversion of debt, accrued interest,
preferred stock, and preferred dividends
to common stock in February 1997 .................... (600) -- 439,714 4,000
Net (loss) for the year ended
December 31,1997 .....................................
------- ------- ------- -------
Balance - December 31,1997 ................................ -- $ -- 2,101,326 $21,000
------- ------- ------- -------
------- ------- ------- -------
<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 options 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)
Proceeds of Initial Public Offering, net
of expenses, in February 1997 ....................... 5,487,000 5,501,000
Conversion of debt, accrued interest,
preferred stock, and preferred dividends
to common stock in February 1997 .................... 1,202,000 (122,000) 1,084,000
Net (loss) for the year ended
December 31,1997 ..................................... (1,441,000) (1,441,000)
----------- ----------- -----------
Balance - December 31,1997 ................................ $ 8,441,000 $(4,076,000) $ 4,386,000
----------- ----------- -----------
----------- ----------- -----------
</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,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $(1,407,000) $(1,441,000) $(3,954,000)
Adjustments to reconcile net (loss) to net cash (used
in)operating activities:
Depreciation and amortization 56,000 51,000 141,000
Loss on sale of equipment 29,000 29,000
Loss on write down of equipment 149,000 149,000
Value of preferred stock charged to research and
development 50,000
Amortization of loan acquisition costs 65,000 95,000 160,000
Amortization of debt discount 203,000 297,000 500,000
Fair value of options granted 236,000 236,000
Accrued interest on notes payable - stockholders 46,000 64,000
Changes in operating assets and liabilities:
Increase in prepaid expenses and other current assets (9,000) (68,000) (121,000)
Net (decrease) increase in accounts payable and accrued
expenses 43,000 (164,000) 20,000
------------ ------------ ------------
Net cash (used in) operating activities (767,000) (1,052,000) (2,726,000)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (45,000) (59,000) (330,000)
Capitalized software costs (327,000) (179,000) (506,000)
Proceeds from sale of equipment 13,000 13,000
------------ ------------ ------------
Net cash (used in) investing activities (372,000) (225,000) (823,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of
options 49,000 419,000
Proceeds from the sale of preferred stock 550,000
Proceeds from borrowings - notes payable - stockholders 702,000 1,194,000
Proceeds from Bridge notes 1,000,000 1,000,000
Repayment of Bridge notes (1,000,000) (1,000,000)
Proceeds from initial public offering, net of expenses (198,000) 5,699,000 5,501,000
Repayment of notes payable - stockholders (170,000) (170,000)
Loan acquisition costs (160,000) (160,000)
------------ ------------ ------------
Net cash provided by financing activities 1,393,000 4,529,000 7,334,000
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 254,000 3,252,000 3,785,000
Cash and cash equivalents - beginning of period 279,000 533,000
------------ ------------ ------------
Cash and cash equivalents - end of period $ 533,000 $ 3,785,000 $ 3,785,000
------------ ------------ ------------
------------ ------------ ------------
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 conversion of debt, accrued interest,
preferred stock and preferred dividends $ 1,084,000 1,084,000
Initial public offering expenses charged to additional
paid-in capital 198,000
Interest paid 14,000 14,000
</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"), is a development
stage company. The Company is engaged in the development and marketing of
the IntelliFit software, a product 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 software 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 software and has conducted
only limited marketing activities. The Company believes that product
development has been substantially completed and that the IntelliFit software
is a viable product for a company which has complementary products and an
existing field sales department. The Company has therefore initiated
discussions with OEM customers regarding the sale or licensing of the
IntelliFit software for incorporation into the OEM customers existing product
lines. The Company has not yet generated any significant revenue.
Additionally, the Company believes that the year 2000 issue has been
adequately addressed during development of the product and will not affect
its usefulness.
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.
In February 1997, the Company successfully completed its initial public
offering ("IPO") and received net proceeds of $5.5 million. In connection
with the IPO (i) all of the Series A preferred stock ($600,000) together with
accrued dividends of $122,000 through August 31, 1996 were converted into
175,793 shares of common stock and (ii) notes payable - stockholders and
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 commencing with sales of the software products.
Development costs incurred prior to achievement of technological
feasibility were expensed.
(continued) F-6
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
[2] FURNITURE AND EQUIPMENT:
Furniture 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.
[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. Deferred taxes are
recognized for temporary differences in the recognition of income and
expenses for financial reporting and income tax purposes, principally due to
capitalized start up costs and compensation expense in connection with the
grant of options.
[4] CASH EQUIVALENTS:
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are held at a national bank which is highly capitalized.
[5] NET LOSS PER SHARE AND SUPPLEMENTAL NET LOSS PER SHARE OF COMMON
STOCK:
During 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS
No. 128 requires the reporting of earnings per basic share and earnings per
diluted share. Earnings per basic share are calculated by dividing net
income (loss) by the weighted average outstanding shares during the period.
Earnings per diluted share are calculated by dividing net income (loss) by
the basic shares and all dilutive securities including options. Adoption of
SFAS No. 128 had no effect on prior periods. The Company has not included
potential common shares in the diluted per share computation as the result
would be antidilutive. As described in Note E (3), the stockholders have
agreed to place 349,370 shares in escrow and accordingly, such shares have
been excluded from the computation.
Supplemental net loss per share in 1996 gives effect to the
conversion in 1997 of preferred stock and notes payable - stockholders into
common stock as if such transactions had occurred on January 1, 1996. (Note A)
[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.
(continued) F-7
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
[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 (Note E [2]).
[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 and accounts
payable approximates fair value because of the short-term maturity of those
instruments.
(NOTE C) - FURNITURE AND EQUIPMENT:
Furniture and equipment are summarized as follows:
<TABLE>
<S> <C>
Computer Equipment $ 5,000
Furniture, fixtures and software 14,000
Office equipment 30,000
-------
49,000
Less accumulated depreciation 22,000
-------
Balance $27,000
-------
-------
</TABLE>
During 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. The loss of $178,000 on the sale and write down of this equipment was
recorded in 1997.
F-8
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - REPAYMENT OF NOTES PAYABLE - STOCKHOLDERS AND BRIDGE LOAN
In February 1997, the company repaid $170,000 of notes
payable - stockholders and approximately $1,084,000 of notes payable -
stockholders, including accrued interest, was converted to 263,921 shares of
common stock.
Additionally, Bridge notes of $1,000,000 and related interest were repaid.
(NOTE E) - STOCKHOLDERS' EQUITY:
[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. In conjunction with the IPO all of the
Series A preferred stock ($600,000) together with accrued dividends of
$122,000 were converted into 175,793 shares of common stock.
[2] STOCK OPTION PLANS:
The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options. Under 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 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 1996
and 1997 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. The weighted average fair value of
the options granted during 1996 and 1997 are estimated as $1.19 and $1.91,
respectively, on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 0.30 0.30
Risk-free interest rate 6.0% 6.14%
Expected life in years 3 5
</TABLE>
(continued) F-9
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - STOCKHOLDERS' EQUITY: (continued)
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 and net loss per share including pro forma amounts would
have been as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net Loss As Reported $(1,407,000) $(1,441,000)
Pro forma (1,413,000) (1,451,000)
Net Loss per share As Reported (3.78) (0.91)
Pro forma (3.80) (0.92)
</TABLE>
The Company's 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. None of these
options were exercised and all 200,000 of these options were rescinded upon
the resignation of these officers/stockholders from the Company during 1997.
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.
Upon effectiveness of the IPO in 1997, the Company granted five-year
options to purchase 6,000 shares of common stock to directors. Such options
are excercisable at $5.00 per share commencing one year from the date of
grant.
(continued) F-10
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - STOCKHOLDERS' EQUITY: (continued)
Additional information with respect to stock option activity is
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price Expiration Date
------ ----- ---------------
<S> <C> <C> <C>
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
Granted - February 1997 6,000 $5.00 February 2002
Rescinded - year ended
December 31, 1997 (200,000) $5.00
Balance at
December 31,1997 84,674 $ .82
---------
---------
</TABLE>
For the options issued in August 1996 to two former
officers/stockholders, the Company has recorded related compensation expense
of $236,000. In connection with the public offering certain of these options
are subject to escrow provisions as a condition of the offering (NOTE E[3]).
(continued) F-11
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - STOCKHOLDERS' EQUITY: (continued)
[3] 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.
[4] WARRANTS:
In connection with the sale of bridge notes in December 1996,
the Company issued warrants for the purchase of 500,000 shares of common
stock. Upon completion of the IPO, the warrants were converted into Class A
Warrants as described in Note F.
(NOTE F) - SALE OF COMMON STOCK:
In February and March 1997, the Company sold 1,380,000 units, resulting
in net proceeds to the Company of $5.5 million. Each unit ("unit") offered
by the Company consists of one share of common stock, $.01 par value ("Common
Stock"), one redeemable Class A warrant ("Class A Warrants") and one
redeemable Class B warrant ("Class B Warrants"). 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 per share in the case
of Class A Warrants and $12.25 per share in the case of Class B Warrants for
any 30 consecutive trading days ending within 15 days of the notice of
redemption.
F-12
<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - COMMITMENTS AND OTHER MATTERS:
RESEARCH SERVICES AGREEMENT:
Pursuant to an agreement, expiring on December 31, 1998, to assist the
Company in updating, designing, developing and implementing the software
system used in the IntelliFit System, the Company paid the following amounts
to a related party:
<TABLE>
<CAPTION>
PERIOD/YEAR ENDED AMOUNT
----------------- ------
<S> <C>
December 31, 1994 $ 20,000
December 31, 1995 110,000
December 31, 1996 244,000
December 31, 1997 179,000
</TABLE>
EMPLOYMENT AGREEMENT:
The Company has a three year employment agreement with an officer
providing for an annual base salary of $90,000 commencing February 1, 1997.
The agreement provides for a bonus at the discretion of the Board of
Directors and severance salary.
RELATED PARTY TRANSACTIONS:
The Company paid $40,000 to the President and stockholder of the Company
for consulting services performed during 1997.
(NOTE H) - INCOME TAXES:
At December 31, 1996 and December 31, 1997, the Company had available
net operating loss carryforwards to reduce future taxable income of
approximately $1,584,000 and $3,309,000, respectively. The net operating
loss carryforwards expire in various amounts through 2012. 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 during 1997 from the IPO and conversion
of preferred stock and notes payable into common stock.
At December 31, 1996 and December 31, 1997, the Company has deferred tax
assets of approximately $963,000 and $1,497,000, respectively, representing
the benefits of its net operating loss carryforwards and deferred taxes
resulting from capitalized start-up costs and compensation expense in
connection with the grant of options. The Company has provided a 100%
valuation allowance for such assets since the likelihood of realization
cannot be determined.
F-13
<PAGE>
ITEM 13
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit 3.1
to the Company's Registration Statement on Form SB-2 (No. 333-17635))
3.2 By-laws of the Registrant (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))
4.1 Bridge Note Agreement (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))
4.2 Bridge Warrant Agreement (Incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))
4.3 Warrant Agreement (Incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))
10.1 1996 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))
10.2 Form of Escrow Agreement by and between the Registrant, American Stock
Transfer & Trust Company and certain security holders of the
Registrant. (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))
10.3 Assignment dated August 22, 1994 between Nautilus Group Japan, Ltd.
and the Company. (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))
10.4 Exclusive Distribution License Agreement dated June 1995 between
Nautilus Group Japan, Ltd. and the Company. (Incorporated by reference
to Exhibit 10.5 to the Company's Registration Statement on Form SB-2
(No. 333-17635))
10.5 Letter Agreement dated November 27, 1996 between Nautilus Group Japan,
Ltd. and the Company. (Incorporated by reference to Exhibit 10.6 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))
10.6 Retainer Agreement dated August 16, 1994 between TransPac Software
Inc. and the Company. (Incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))
10.7 Conversion Agreement between the Company and Nautilus Group Japan,
Ltd. (Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))
11.1 Statement re: computation of earnings per share.
23.1 Consent of Richard A. Eisner & Company, LLP
<PAGE>
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December 31,
1997.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized
HEURISTIC DEVELOPMENT GROUP, INC.
---------------------------------
(Registrant)
/s/ Gregory L. Zink
---------------------------------
Gregory L. Zink
Chief Executive Officer (Acting)
<PAGE>
Dated: April 6, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ JONATHAN SEYBOLD Chairman of the Board and Director April 9, 1998
-----------------------
Jonathan Seybold
/s/ GREGORY L. ZINK President and Director April 9, 1998
-----------------------
Gregory L. Zink
/s/ THEODORE LANES Chief Financial Officer and Director April 9, 1998
-----------------------
Theodore Lanes
/s/ BRIAN WASSERMAN Director April 9, 1998
-----------------------
Brian Wasserman
/s/ WILLIAM BLASE Director April 9, 1998
-----------------------
William Blase
/s/ KENNETH W. KRUGLER Director April 9, 1998
-----------------------
Kenneth W. Krugler
/s/ M. CAROLINE MARTIN Director April 9, 1998
-----------------------
M. Caroline Martin
/s/ ALLAN DALFEN Director April 9, 1998
-----------------------
Allan Dalfen
</TABLE>
<PAGE>
Exhibit 11.1
Heuristic Development Group, Inc.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the year ended
------------------
1996 1997
---- ----
<S> <C> <C>
Net (loss) .............................................. $ 1,407,000) ($1,441,000)
---------- ---------
---------- ---------
Shares:
Weighted average number of common
shares outstanding (1) ............................... 281,000 1,930,530
Shares to be issued in connection with the conversion of:
i) Preferred stock and unpaid dividends ............. 175,793
ii) Notes payable and accrued interest ............... 263,921
Less: Escrow shares .................................... (349,370) (349,370)
---------- ---------
Weighted average number of shares
outstanding ............................................. 1,581,160
---------
---------
Supplemental weighted average number of
shares outstanding ...................................... 371,956
----------
----------
Net (loss) per share .................................... $ (0.91)
---------
---------
Supplemental net (loss) per share ....................... $ (3.78)
----------
----------
</TABLE>
(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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Heuristic Development Group, Inc.
Manhattan Beach, California
We have audited the accompanying balance sheet of Heuristic Development
Group, Inc. (a development stage company) as of December 31, 1997, 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,
1997. 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 required 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, 1997 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, 1997 in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 4, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1997 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,867,000
<PP&E> 49,000
<DEPRECIATION> 22,000
<TOTAL-ASSETS> 4,411,000
<CURRENT-LIABILITIES> 25,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 8,441,000
<TOTAL-LIABILITY-AND-EQUITY> 4,411,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,050,000
<OTHER-EXPENSES> 178,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 406,000
<INCOME-PRETAX> 1,441,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,441,000
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
