<PAGE>
10-QSB
Form 10-QSB
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, 1998
( ) 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.)
1219 Morningside Drive, Suite 102, Manhattan Beach, California 90266
- -------------------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(310) 546-1065
------------------------------------------------
(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
--- ---
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State the number of shares outstanding of each of the issuer's common equity
as of November 15, 1998: 2,101,326 shares of Common Stock, $.01 par value.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
September 30, 1998 ........................................ 3
Condensed Statements of Operations - Three
Months and Nine Months ended September 30, 1997
and 1998 and period from inception (July 20, 1994)
to September 30, 1998 ........................................ 4
Condensed Statements of Cash Flows - Nine
Months ended September 30, 1997 and 1998 and
period from inception (July 20, 1994) to
September 30, 1998 ........................................ 5
Notes to Financial Statements - September 30, 1998 ............. 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
</TABLE>
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<PAGE>
BALANCE SHEET AS OF SEPTEMBER 30, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 3,373,000
Prepaid expenses and other current assets 61,000
-----------
Total current assets 3,434,000
-----------
Capitalized software costs 50,000
Furniture and equipment (net of accumulated depreciation) 13,000
Organizational costs (net of accumulated amortization) 6,000
-----------
TOTAL $ 3,503,000
-----------
-----------
LIABILITIES
Current liabilities:
Accounts payable $ 2,000
Accrued expenses 8,000
-----------
Total current liabilities 10,000
-----------
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
Treasury stock (24,000 shares) (27,000)
(Deficit) accumulated during the development stage (4,941,000)
-----------
Total stockholders' equity 3,493,000
-----------
TOTAL $ 3,503,000
-----------
-----------
</TABLE>
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<PAGE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
July 20,
Nine Months 1994
Three Months Ended Ended (Inception)
September 30 September 30, to
---------------------- --------------------------- September 30,
1997 1998 1997 1998 1998
--------- --------- ----------- ------------ ------------
<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 $ 203,000 $ 124,000 $ 892,000 $ 438,000 3,199,000
Loss on sale and write down of equipment 122,000 - 122,000 7,000 185,000
Write down of capitalized software to
estimated net realizable value 456,000 456,000 456,000
Loss on impairment of investment 100,000 100,000 100,000
--------- --------- ----------- ----------- ------------
Total costs and expenses 325,000 680,000 1,014,000 1,001,000 4,415,000
--------- --------- ----------- ----------- ------------
(Loss) from operations (325,000) (680,000) (1,014,000) (1,001,000) (4,415,000)
Interest (expense) - (2,000) (406,000) (2,000) (748,000)
Interest income 56,000 42,000 124,000 138,000 344,000
--------- --------- ----------- ----------- ------------
Net (loss) $(269,000) $(640,000) $(1,296,000) (865,000) $(4,819,000)
--------- --------- ----------- ----------- ------------
--------- --------- ----------- ----------- ------------
Net (loss) per share - Basic and Diluted $ (0.15) $ (0.37) $ (0.96) $ (0.49)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average shares outstanding 1,751,956 1,743,789 1,343,359 1,749,234
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
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<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
July 20,
1994
Nine Months Ended (Inception)
--------------------------- to
September 30, September 30,
1997 1998 1998
------------- ---------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $(1,296,000) $ (865,000) $(4,819,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 40,000 8,000 149,000
Loss on sale and write down of equipment 123,000 7,000 185,000
Write down of capitalized software to
estimated net realizable value 456,000 456,000
Deposit for letter of intent 100,000 100,000
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
Accrued interest on notes payable - stockholders 64,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and
other current assets (32,000) 21,000 (100,000)
Net (decrease) increase in accounts payable
and accrued expenses (163,000) (17,000) 3,000
----------- ---------- -----------
Net cash (used in) operating activities (936,000) (290,000) (3,016,000)
----------- ---------- -----------
Cash flows from investing activities:
Deposit for letter of intent (100,000) (100,000)
Acquisition of fixed assets (59,000) (6,000) (336,000)
Capitalized software costs (149,000) (506,000)
Proceeds from sale of equipment 8,000 11,000 24,000
----------- ---------- -----------
Net cash (used in) investing activities (200,000) (95,000) (918,000)
----------- ---------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and
exercise of options 6,900,000 419,000
Proceeds from the sale of preferred stock 550,000
Proceeds from borrowings - notes payable -
stockholders 1,194,000
Proceeds from Bridge notes 1,000,000
Repayment of Bridge notes (1,000,000) (1,000,000)
Initial public offering expenses (1,201,000) 5,501,000
Repayment of notes payable - stockholders (170,000) (170,000)
Loan acquisition costs (160,000)
Purchase of treasury stock (27,000) (27,000)
----------- ---------- -----------
Net cash provided by financing activities 4,529,000 (27,000) 7,307,000
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH 3,393,000 (412,000) 3,373,000
Cash - beginning of period 533,000 3,785,000
----------- ---------- -----------
Cash - end of period $ 3,926,000 $3,373,000 $ 3,373,000
----------- ---------- -----------
----------- ---------- -----------
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 2,000 16,000
</TABLE>
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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 C) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended September 30, 1998, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. 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, 1997.
(NOTE B) - The Company:
Heuristic Development Group (the "Company") is a development stage
company incorporated in Delaware in July 1994. The Company has been
unsuccessful in arranging licensing agreements for the Intellifit software.
As such, the Company has written down capitalized software to its estimated
net realizable value at September 30, 1998. The Company still believes that
the Intellifit software is a viable product for a company which has
complementary products and which has an existing field sales and support
division. Accordingly, the Company will still pursue licensing agreements
for the Intellifit software.
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 Company has also decided to pursue a strategy of investing in or
acquiring an existing company. During the three months ended September 30,
1998 a Letter of Intent to purchase an existing company was signed and a
deposit paid by the Company in accordance with the agreement. A condition to
the consummation of the transaction was that the Company's common stock
remain listed on the NASDAQ SmallCap market. The Company was later advised
by NASDAQ that the Company would be required to meet NADSAQ's initial listing
requirements in order to remain listed. The Company would not have met these
requirements and the agreement was terminated by the
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Company. The deposit was forfeited and is reflected in the accompanying
Statement of Operations as "Loss on impairment of investment".
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.
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENT
(NOTE C) - Loss on Sale and Write down of Equipment:
During the first quarter of 1998, management continued to sell excess
office equipment and selected components of the Intellifit System. As a
result of such sales, the Company wrote down some remaining equipment.
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."
(NOTE D) - Stock Repurchase:
The Company's Board of Directors authorized a program to repurchase up
to 200,000 shares of its common stock. As of September 30, 1998,
approximately 24,000 shares have been repurchased and are shown as a
reduction of stockholder' equity.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
From its inception in 1994 through the second quarter of 1997, the
Company's efforts had 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.
The Company has been unsuccessful in arranging licensing agreements for
the Intellifit system. As such, the Company has decided to write off $456,000
of capitalized software costs represented by the Intellifit system on the
Company's balance sheet. Up to this point, the Company had believed that a
licensing, OEM or Joint Venture deal was imminent with the Intellifit
software. While the Company still believes that the software has value, it
no longer believes that a deal is imminent. As such, the Company has decided
to write down the value of capitalized software to its estimated net
realizable value of $50,000. The Company will still pursue licensing
agreements for the Intellifit system.
From inception through September 30, 1998, the Company sustained
cumulative net losses of approximately $4,819,000 primarily as a result of
general and administrative expenses, including salaries, marketing, and
professional fees which have aggregated $3,199,000 since inception. During
the three and nine months ended September, 1998, the Company incurred
operating losses of $640,000 and $865,000, while during the same three and
nine month periods during 1997, the Company incurred operating losses of
$269,000 and $1,296,000 respectively. The reduced operating losses during
1998 include a one time loss on impairment of investment of $100,000,
$50,000 of which was a deposit due upon signing the Letter of Intent for the
merger of the Company and Autoskill Inc., a California corporation, and the
other $50,000 was paid to Autoskill during September, 1998 as required
pursuant to the Letter of Intent. A condition to the consummation of the
transaction was that the Company's common stock remain listed on the NASDAQ
SmallCap market. The Company was advised by NASDAQ that if the transaction
were consummated, it would have been required to meet NASDAQ's initial
listing requirements in order to remain listed. The Company would not have
met these requirements and the Letter of Intent was allowed to expire.
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 through the end
of 1998.
During the three and nine months ended September 30, 1998, the Company
recognized interest income of $42,000 and $138,000 respectively. During the
same periods in 1997, the Company recognized interest income of $56,000 and
$124,000. The
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increase in 1998 interest income is as a result of re-investment of the
Company's working capital. During the three and nine months ended September
30, 1998 the Company incurred nominal interest expense on previous payroll
taxes. During the same three and nine months periods in 1997, the Company
incurred interest expense of $0 and $406,000, respectively. The reduction of
interest expense during 1998 shows that the Company undertook no additional
financing activities.
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 consumers and supporting
the systems in the field. As such, the Company has written off capitalized
software costs of $456,000 representing all but the salvage value of the
Intellifit software on the Company's balance sheet. 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 and support
organization. Accordingly, the Company will still entertain discussions with
respect to possible licensing arrangements, with regard to selling or
licensing the Intellifit software to OEM customers for incorporation into
existing or new product lines. No assurances can be given that any such
discussions will result in any agreements being reached. Additionally, the
Company believes that the Intellifit product has no exposure to the year 2000
problem that may result from the date change at the end of 1999.
As of September 30, 1998, under the previously announced stock buyback
program, the Company has repurchased approximately 24,000 shares. The
Company anticipates that depending on market conditions, any additional
shares may be acquired in the open market or in privately negotiated
transactions.
Additionally, 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $3,424,000.
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.
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PART II
Item 4. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) The Company filed a Form 8-K dated August 10, 1998 reporting the
signing of the letter of intent with Autoskill Inc.
(c) The Company filed a Form 8-K dated October 23, 1998 reporting
the termination of the letter of intent with Autoskill, Inc.
(Item 5).
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Heuristic Development Group, Inc.
Date: November 5, 1998 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>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,373,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,434,000
<PP&E> 23,000
<DEPRECIATION> 10,000
<TOTAL-ASSETS> 3,503,000
<CURRENT-LIABILITIES> 10,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 3,472,000
<TOTAL-LIABILITY-AND-EQUITY> 3,503,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,001,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,000
<INCOME-PRETAX> (865,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (865,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (865,000)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
