Form 10-QSB
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1999
( ) Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______ to _______
Commission file number 001-12637
VIRTUAL COMMUNITIES, INC.
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(Exact name of small business issuer in its charter)
DELAWARE 95-4491750
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
589 EIGHTH AVENUE SEVENTH FLOOR, NEW YORK, NEW YORK 10018
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(Address of Principal Executive Offices) (Zip Code)
(212) 931-8600
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(Issuer's Telephone Number, Including Area Code)
HEURISTIC DEVELOPMENT GROUP, INC.
1219 Morningside Drive, Suite 102
Manhattan Beach, California 90266
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(Former name or former address, if changed since last report)
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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 the latest practicable date: 14,075,382 shares of Common Stock, $.01 par
value were outstanding as of November 1, 1999.
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INDEX
PAGE
Part I. HDG FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and December 31, 1998............ 3
Condensed Consolidated Statements of Operations - Three and Nine
Months ended September 30, 1998 and 1999 and period
from inception (July 20, 1994) to September 30, 1999 (Unaudited). 4
Condensed Consolidated Statements of Cash Flows - Nine
Months ended September 30, 1998 and 1999 and
period from inception (July 20, 1994) to
September 30, 1999 (Unaudited).................................. 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations............... 7
Part II. OTHER INFORMATION
Item 5. Subsequent Event ............................................. 10
Item 6. Exhibits and Reports ......................................... 10
SIGNATURES................................................................ 11
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VIRTUAL COMMUNITIES, INC.
(Previous Name: HEURISTIC DEVELOPMENT GROUP, INC.)
(a development stage company)
Condensed Consolidated Balance Sheet
September 30, 1999
September 30, December 31,
ASSETS 1999(Unaudited) 1998
------------------ ------------------
Current assets:
Cash and cash equivalents $ 2,377,000 $3,140,000
Short term loan to VCI 250,000 -
Prepaid expenses and other current assets 60,000 32,000
------------------- ------------------
Total current assets 2,687,000 3,172,000
Capitalized software costs 50,000 50,000
Furniture and equipment (net of accumulated depreciation) - 12,000
Organizational costs (net of accumulated amortization) - 4,000
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TOTAL ASSETS $ 2,737,000 $3,238,000
=================== ==================
LIABILITIES
Current liabilities:
Accounts payable $ 11,000 $18,000
Accrued expenses 91,000 12,000
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Total current liabilities 102,000 30,000
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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) at September 30, 1999 and
December 31, 1998 21,000 21,000
Additional paid-in capital 8,441,000 8,441,000
Accumulated Deficit during the development stage (5,677,000) (5,104,000)
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2,785,000 3,358,000
Treasury stock (149,900 shares) at September 30,
1999 and December 31, 1998 (150,000) (150,000)
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Total stockholders' equity 2,635,000 3,208,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,737,000 $3,238,000
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VIRTUAL COMMUNITIES, INC.
(Previous Name: HEURISTIC DEVELOPMENT GROUP, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS(Unaudited)
July 20,
1994
Three Months Ended Nine Months Ended (Inception)
September 30, September 30, to
------------------------------------------------------- September 30,
1998 1999 1998 1999 1999
------------------------------------------------------------------------
Costs and expenses:
Research and development:
Direct expenditures $ 338,000
Payments under research
services agreement 137,000
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Total research and
development 475,000
General and administrative $124,000 $235,000 $438,000 $667,000 4,079,000
Loss on sale and write down of
equipment - - 7,000 13,000 185,000
Write down of capitalized software to
estimated net realizable value 456,000 456,000 456,000
Acquisition breakup fee 100,000 100,000 100,000
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Total costs and expenses 680,000 235,000 1,001,000 680,000 5,295,000
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Loss from operations (680,000) (235,000) (1,001,000) (680,000) (5,295,000)
Interest expense and amortization
of debt discount and expense (2,000) - (2,000) - (748,000)
Interest income 42,000 45,000 138,000 108,000 489,000
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Net loss $(640,000) (190,000) (865,000) (572,000) $(5,554,000)
========================================================================
Net loss per share - Basic and
Diluted $ (0.37) (0.12) (0.49) (0.36)
=======================================================
Weighted average shares outstanding 1,743,789 1,602,056 1,749,234 1,602,056
=======================================================
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VIRTUAL COMMUNITIES, INC.
(Prior Name: HEURISTIC DEVELOPMENT GROUP, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
July 20,
1994
Nine Months Ended (Inception)
September 30, to
--------------------------- September 30,
1998 1999 1999
------------------------------------------
Cash flows from operating activities:
Net loss $(865,000) (572,000) (5,554,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,000 2,000 170,000
Loss on sale and write down of equipment 7,000 13,000 185,000
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 160,000
Amortization of debt discount 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 (28,000) (99,000)
Net (decrease) increase in accounts payable and accrued expenses (17,000) 72,000 96,000
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Net cash used in operating activities (290,000) (513,000) (3,636,000)
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Cash flows from investing activities:
Issuance of short term loan to VCI 0 (250,000) (250,000)
Deposit for letter of intent (100,000) (100,000)
Acquisition of fixed assets (6,000) 0 (339,000)
Capitalized software costs - (506,000)
Proceeds from sale of equipment 11,000 0 24,000
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Net cash used in investing activities (95,000) (250,000) (1,171)
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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)
Proceeds from public offering, net of expenses 5,501,000
Repayment of notes payable - stockholders (170,000)
Loan acquisition costs (160,000)
Purchase of treasury stock (27,000) (150,000)
------------------------------------------
Net cash provided by (used in) financing activities (27,000) 0 7,184,000
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NET INCREASE (DECREASE) IN CASH (412,000) (763,000) 2,377,000
Cash and cash equivalents - beginning of period 3,785,000 3,140,000
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Cash and cash equivalents - end of period 3,373,000 $2,377,000 2,377,000
==========================================
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
Interest paid 2,000 16,000
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VIRTUAL COMMUNITES, INC.
(Prior Name: 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 considered necessary for
a fair presentation have been included. Operating results for the nine-month
period ended September 30, 1999, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. For further
information, refer to the financial statements and footnotes thereto included
in the Registrant Company's annual report on Form 10-KSB for the year ended
December 31, 1998.
(NOTE B) - The Company:
As of September 30, 1999 Heuristic Development Group, Inc. (the
"Company" prior to its name change - See Note C") was a development stage
company formed in 1994 to research, develop, design and market fitness-related
products. The Company's sole product as of September 30, 1999 has been
IntelliFit, a proprietary computerized system which generates personalized
exercise prescriptions and tracks and records fitness programs.
Based on feedback from test sites and beta customers, and the
disappointing acceptance of the IntelliFit product, the Company revamped its
business model in the second half of 1997. The Company no longer believes
that it can be successful in selling or licensing the IntelliFit product to
customers and supporting the product in the field. The Company still
believes, however, that the IntelliFit software may be a viable product for a
company which has complementary products or an existing field sales
organization, and plans to pursue licensing or selling the IntelliFit system
to such a buyer.
Additionally, because the IntelliFit software operates on a
Macintosh OS operating system, the Company believes that the IntelliFit
software has no exposure to the year 2000 problem that may result from the
date change at the end of 1999. However, because there are currently no
operations using the IntelliFit software, the Company is unable to assess
whether the IntelliFit software would have any year 2000-related problems
when installed or operated in conjunction with other non-Macintosh OS
networks and systems.
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(NOTE C) - Subsequent Event:
On October 29, 1999, Virtual Communities, Inc. ("VCI") merged with and
into HDG Acquisition Sub, Inc., a wholly owned subsidiary of Heuristic
Development Group, Inc. ("HDG"). Previously, on June 3, 1999, HDG and VCI had
entered into a Plan and Agreement of Merger (the "Merger") that was subsequently
amended on September 8, 1999. VCI shareholders approved the merger by means of a
Consent of Shareholders dated as of October 26, 1999 and HDG shareholders
approved the merger at HDG's Annual Meeting held on the same date. See Also Item
5 Herein.
In connection with the Merger, HDG changed its name to Virtual
Communities, Inc. and began trading its securities (former symbol: IFIT) on the
NASDAQ Small Cap Market on Monday, November 1, 1999 under the symbols: "VCIX"
for the common stock, "VCIXU" for the Units, "VCIXW" for the Class A Warrants
and "VCIXZ" for the Class B warrants. As a result of the Merger, VCI
shareholders received 1.151 shares of HDG common stock for each share of VCI
common stock held by them. After the Merger, there were a total of 14,075,382
shares of the Company outstanding. HDG's Board of Directors and management
resigned and were replaced with VCI's Board of Directors and management.
Following the Merger, VCI shareholders control HDG, holding 88.6% of the Common
Stock of the Company with HDG shareholders holding 11.4%. On September 30, 1999,
the Company filed a Registration Statement on Form S-4B, which included the
financial statements of VCI for the period ending December 31, 1998 and
unaudited financial statements for the period ending June 30, 1999, which
are incorporated herein by reference thereto.
The Merger was accounted for as a capital transaction, which is
equivalent to the issuance of stock by VCI for HDG's net monetary assets,
accompanied by a recapitalization of VCI.
Proforma revenue, net loss and loss per share of the combined
entity as of September 30, 1999 was $613,000, $3,965,000 and $0.28,
respectively. This pro forma information reflect the merger as if the merger had
occurred January 1, 1999 and carried forward to September 30, 1999, taking into
effect certain events that occurred subsequent to the period presented.
Furthermore, this pro forma information does not purport to be indicative of the
results which would have actually been obtained had such transaction been
completed as of September 30, 1999 or which may be obtained in the future .
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 continued through the merger date.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The financial statements in this Quarterly Report on Form 10-QSB speak
as of September 30, 1999, as required by the Securities Exchange Act of 1934, as
amended, however, for a more complete understanding of the Company, the reader
is directed to the subsequent events described in ITEM 5, below.
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 in connection
with the IntelliFit system. 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. Prior to the second quarter of 1999, the Company
had believed that licensing or entering into a joint venture deal for the
Intellifit software was viable. While the Company still believes that the
software has value, it does not believe that it is likely to conclude such a
transaction in the near term. As such, the Company will continue to value the
capitalized software at its estimated net realizable value of $50,000. The
Company will still pursue licensing agreements for the Intellifit system.
From inception through September 30, 1999, the Company sustained
cumulative net losses of approximately $5,554,000 primarily as a result of
general and administrative expenses, including salaries, marketing, and
professional fees which have aggregated $4,079,000 since inception. During
the nine months ended September 30, 1999, the Company incurred net losses of
$572,000, while during the same period during 1998, the Company incurred net
losses of $865,000. The losses for the same period in 1998 included a one time
loss on impairment of investment of $100,000, related to an aborted merger of
the Company and Autoskill Inc., a California corporation, and a one time write
off of capitalized software costs. Other than the effect of these one time
expenses, there was a $263,000 increase in net losses for the nine months ended
September 30, 1999 over that of the same period in 1998 as a result of reduced
interest income and increased legal and other transactional expenses related to
the proposed merger.
HDG has reduced current cash use to approximately $10,000 per month,
not including transaction expenses being incurred in connection with the
merger with Virtual Communities, Inc. HDG has interest income of
approximately $12,000 per month. The ongoing expenses remained at this
level through the merger, except for expenses incurred in connection with the
merger.
During the nine months ended September 30, 1999 and 1998, the Company
recognized interest income of $108,000 and $138,000 respectively. The reduction
in 1999 interest income is as a result of lower interest rates and a
reduction in the Company's working capital.
Plan of Operation
Based on feedback from test sites and beta customers and the
disappointing acceptance of the IntelliFit product, HDG has revamped its
going forward business model. HDG no longer believes that it can be
successful in selling or licensing the IntelliFit System to consumers and
supporting the system in the field. As such, HDG has written off capitalized
software costs of
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$456,000 representing all but the salvage value of the IntelliFit software on
HDG's balance sheet. The Company still believes that the IntelliFit software
is a viable product for a company which has complementary products or which
has an existing field sales and support organization. Accordingly, HDG will
still entertain discussions with respect to possible licensing or sale
arrangements. No assurances can be given that any such discussions will
result in any agreements being reached. Additionally, because the IntelliFit
software operates on a Mac OS operating system, HDG believes that the
IntelliFit software has no exposure to the year 2000 problem that may
result from the date change at the end of 1999. However, because there
are currently no operations using the IntelliFit software, HDG is
unable to assess whether the IntelliFit software would have any year
2000-related problems when installed or operated in conjunction with
other non-Mac OS networks and systems.
During 1998, under the previously announced stock buyback program,
the Company repurchased approximately 149,900 shares. The Company has
suspended the stock repurchase program.
Following the Company's previously announced strategy of an
investment in, or acquisition of, an existing company, on October 29,
1999, Virtual Communities, Inc. ("VCI") merged with and into
HDG Acquisition Sub, Inc., a wholly owned subsidiary of Heuristic
Development Group, Inc. ("HDG"). Previously, on June 3, 1999, HDG and VCI
had entered into a Plan and Agreement of Merger (the "Merger") that was
subsequently amended on September 8, 1999. VCI shareholders approved the
merger by means of a Consent of Shareholders dated as of October 26, 1999
and HDG shareholders approved the merger at HDG's Annual Meeting held on the
same date.
In connection with the Merger, HDG changed its name to Virtual
Communities, Inc. and began trading its securities (former symbol: IFIT) on the
NASDAQ Small Cap Market on Monday, November 1, 1999 under the symbols: "VCIX"
for the common stock, "VCIXU" for the Units, "VCIXW" for the Class A Warrants
and "VCIXZ" for the Class B warrants. As a result of the Merger, VCI
shareholders received 1.151 shares of HDG common stock for each share of VCI
common stock held by them. After the Merger, there were a total of 14,075,382
shares of the Company outstanding. HDG's Board of Directors and management
resigned and were replaced with VCI's Board of Directors and management.
Following the Merger, VCI shareholders control HDG, holding 88.6% of the Common
Stock of the Company with HDG shareholders holding 11.4%.
The merger was accounted for as a capital transaction, which is
equivalent to the issuance of stock by VCI for HDG's net monetary assets,
accompanied by a recapitalization of VCI.
LIQUIDITY AND CAPITAL RESOURCES
In September 1999, HDG entered into a Note Purchase Agreement with VCI to
issue up to $750,000 12% Senior Convertible Notes (the "Notes") to HDG. $250,000
of such Notes had been issued as of September 30, 1999 and an additional
$500,000 Notes was issued to HDG in October 1999. All principal plus all
accrued interest was forgiven as of completion of the merger transaction.
At September 30, 1999, the Company had working capital of $2,585,000. Upon
commencement of the merger transaction with Virtual Communities, Inc.,
existing working capital was transferred to the new entity.
-9-
PART II
Item 5. Subsequent Event
On October 29, 1999, Virtual Communities, Inc. ("VCI") merged with and into
HDG Acquisition Sub, Inc., a wholly owned subsidiary of Heuristic
Development Group, Inc. ("HDG"). Previously, on June 3, 1999, HDG and VCI
had entered into a Plan and Agreement of Merger (the "Merger") that was
subsequently amended on September 8, 1999. VCI shareholders approved the
merger by means of a Consent of Shareholders dated as of October 26, 1999
and HDG shareholders approved the merger at HDG's Annual Meeting held on the
same date.
In connection with the Merger, HDG changed its name to Virtual Communities,
Inc. and began trading its securities (former symbol: IFIT) on the NASDAQ
Small Cap Market on Monday, November 1, 1999 under the symbols: "VCIX" for
the common stock, "VCIXU" for the Units, "VCIXW" for the Class A Warrants
and "VCIXZ" for the Class B warrants. As a result of the Merger, VCI
shareholders received 1.151 shares of HDG common stock for each share of VCI
common stock held by them. After the Merger, there were a total of
14,075,382 shares of the Company outstanding. HDG's Board of Directors and
management resigned and were replaced with VCI's Board of Directors and
management. Following the Merger, VCI shareholders control HDG, holding
88.6% of the Common Stock of the Company with HDG shareholders holding
11.4%.
As a result of the Merger, VCI became a wholly-owned subsidiary of HDG. VCI
is a Delaware corporation that was organized in 1996 to develop, acquire and
operate online communities on the Web that aggregate and publish various
news, media and entertainment content targeted to specific demographic
groups. VCI currently operates five online communities: Virtual Jerusalem,
Virtual HolyLand, Virtual Ireland, Virtual Italy and Virtual India. VCI also
recently began offering Web site design and development services to Web site
publishers.
VCI, together with its Israeli subsidiaries, Virtual Communities Israel Ltd.
("VCIL") and V.C.I. Internet Properties Ltd. ("VCIIP"), employs 66 full-time
employees, 47 of whom are located in VCIL's offices in Jerusalem, Israel, 2
of whom are located in VCIIP's offices in Eli, Israel, and 17 of whom are
based in VCI's offices in New York, New York.
The offices of VCI and VCI's Israeli subsidiaries, VCIL and VCIIP, are
located at 589 Eighth Avenue, New York, New York 10018, Jerusalem Technology
Park, Jerusalem, Israel 91481 and Yishuv Eli 37, Eli, Israel
44828,respectively. VCI's Web site servers are housed in server parks in
Herndon, Virginia and in New York, New York where they receive 24-hour
maintenance and back-up services pursuant to an agreement with Frontier
Global, Inc.
As a result of the filing of the Certificate of Merger, HDG's Certificate of
Incorporation was amended and restated to change its name to "Virtual
Communities, Inc." and to increase the number of authorized shares of HDG's
stock to 45,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock. The Amended and Restated Certificate of Incorporation is HDG's
Certificate of Incorporation until changed or amended as provided therein or
by applicable law.
At the Annual Meeting of Shareholders held on October 26, 1999 HDG stockholders
also 1) ratified the appointment of Arthur Andersen, LLP as HDG's
independent auditors effective upon the Merger which was a condition to
VCI's obligation to consummate the Merger, and Richard A. Eisner LLP resigned as
the registrant's certifying accountant effective upon the ratified
appointment date of Arthur Anderson, LLP; 2) approved amendments to HDG's
Certificate of Incorporation and By Laws; and 3) approved a 1999 HDG Stock
Incentive Plan. These actions are described in greater detail in a Form 8-K
filed with the Commission on November 12, 1999.
Item 6. Exhibits and Reports
EXHIBITS.
Exhibit No. Description of document
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2.1 Amendment to the Agreement and Plan of Merger, filed on
September 30, 1999 (1)
27.1 Financial Data Schedule
99.1 VCI Consolidated Financial Statements for the year
ending December 31, 1998 (2)
99.2 VCI Consolidated Financial Statements for the period
ending June 30, 1999 (3)
-10-
(1) Filed with the Commission as Appendix L to HDG's Registration Statement on
Form S-4 Amendment No. 1 (Commission file number 333-87373), on September
30, 1999, and incorporated herein by reference thereto.
(2) Filed with the Commission as Appendix H to HDG's Registration Statement on
Form S-4 Amendment No. 1 (Commission file number 333-87373), on September
30, 1999, and incorporated herein by reference thereto.
(3) Filed with the Commission as Appendix I to HDG's Registration Statement on
Form S-4 Amendment No. 1 (Commission file number 333-87373), on September
30, 1999, and incorporated herein by reference thereto.
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.
VIRTUAL COMMUNITIES, INC.
[Prior name: HEURISTIC
DEVELOPMENT GROUP]
Date: November 19, 1999 by: /s/ Avi Moskowitz
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Avi Moskowitz, President
(Principal Executive and
Financial Officer)