<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 March 31, 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
--- ---
State the number of shares outstanding of each of the issuer's common equity as
of March 31, 1998: 2,101,326 shares of Common Stock, $.01 par value.
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INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Operations - Three
Months ended March 31, 1997
and 1998 and period from inception (July 20, 1994)
to March 31, 1998. . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows - Three
Months ended March 31, 1997 and 1998 and
period from inception (July 20, 1994) to
March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements -- March 31, 1998 . . . . . . 6
Item 2. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . . . . . 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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Balance Sheet as of March 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,697,000
Prepaid expenses and other current assets 50,000
-----------
Total current assets 3,747,000
-----------
Capitalized software costs 506,000
Furniture and equipment (net of accumulated depreciation) 14,000
Organizational costs (net of accumulated amortization) 10,000
-----------
TOTAL $ 4,277,000
-----------
-----------
LIABILITIES
Current liabilities:
Accounts payable $ 16,000
Accrued expenses 20,000
-----------
Total current liabilities 36,000
-----------
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 (4,221,000)
-----------
Total stockholders' equity 4,241,000
-----------
TOTAL $ 4,277,000
-----------
-----------
</TABLE>
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<PAGE>
Condensed Statement of Operations
<TABLE>
<CAPTION>
July 20,
1994
Three Months Ended (Inception)
March 31 to
------------------------- March 31,
1997 1998 1998
---------- ---------- -----------
<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 $ 265,000 $ 184,000 2,945,000
Loss on sale and write down of equipment -- 7,000 185,000
---------- ---------- -----------
Total costs and expenses 265,000 191,000 3,605,000
---------- ---------- -----------
(Loss) from operations (265,000) (191,000) (3,605,000)
Interest (expense) (406,000) -- (746,000)
Interest income 23,000 46,000 252,000
---------- ---------- -----------
Net (loss) $ (648,000) $ (145,000) $(4,099,000)
---------- ---------- -----------
---------- ---------- -----------
Net (loss) per share - Basic and Diluted $ (0.61) $ (0.08)
---------- ----------
---------- ----------
Weighted average shares outstanding 1,064,488 1,751,956
---------- ----------
---------- ----------
</TABLE>
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<PAGE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
July 20,
1994
Three Months Ended (Inception)
March 31 to
-------------------------- March 31,
1997 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (648,000) (145,000) (4,099,000)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation and amortization 15,000 2,000 143,000
Loss on sale and write down of equipment 7,000 185,000
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 (21,000) 32,000 (89,000)
Net (decrease) increase in accounts payable and accrued expenses (21,000) 10,000 30,000
----------- ----------- -----------
Net cash (used in) operating activities (283,000) (94,000) (2,820,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (53,000) (5,000) (335,000)
Capitalized software costs (64,000) (506,000)
Proceeds from sale of equipment 11,000 24,000
----------- ----------- -----------
Net cash (used in) investing activities (117,000) 6,000 (817,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 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 5,699,000 5,501,000
Repayment of notes payable - stockholders (170,000) (170,000)
Loan acquisition costs (160,000)
----------- ----------- -----------
Net cash provided by financing activities 4,529,000 -- 7,334,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 4,129,000 (88,000) 3,697,000
Cash - beginning of period 533,000 3,785,000
----------- ----------- -----------
Cash - end of period $ 4,662,000 $ 3,697,000 $ 3,697,000
----------- ----------- -----------
----------- ----------- -----------
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>
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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
three-month period ended March 31, 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 Company's 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 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 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 effect 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.
(NOTE C) -Loss on Sale and Write Down of Equipment:
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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."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
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 and $7,000 during the first quarter of 1998. 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 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. From inception through March 31,
1998, the Company sustained cumulative net losses of approximately $4,099,000
primarily as a result of general and administrative expenses, including
salaries, marketing, and professional fees which have aggregated $2,945,000
since inception.
During the three months ended March 31, 1998 and 1997, the Company incurred
operating losses of $145,000 and, $648,000 respectively. The decrease in
operating losses during 1998 reflects the reduction in the Company's general and
administrative expenses. The loss from operations also includes an unusual loss
on the sale and write down of fixed assets of $7,000 during the first quarter of
1998. 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 second
quarter of 1998.
During the three months ended March 31,1998 and 1997, the Company
recognized interest income of $46,000 and $23,000, respectively. The increase
in 1998 interest income is as a result of investment of the Company's working
capital. During the three months ended March 31,1998 and 1997, the Company
incurred interest expense of $0 and $406,000, respectively. The reduction in
interest expense during the 1998 quarter 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 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
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these discussions is unknown at this time. 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.
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.
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 March 31, 1998, the Company had working capital of $ 3,711,000. 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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<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K were filed during the three months ended
March 31, 1998.
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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: May 13, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,697,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,747,000
<PP&E> 22,000
<DEPRECIATION> 8,000
<TOTAL-ASSETS> 4,277,000
<CURRENT-LIABILITIES> 36,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 4,220,000
<TOTAL-LIABILITY-AND-EQUITY> 4,277,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 191,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (145,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (145,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (145,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
