EXHIBIT 99.1
VIRTUAL COMMUNITIES, INC.
151 West 25th Street
New York, NY 10001
LETTER OF INTENT
March 31, 1999
Mr. Gregory L. Zink
President
Heuristic Development Group, Inc.
1219 Morningside Drive
Manhattan Beach, CA 90266
RE: PROPOSED MERGER WITH HEURISTIC DEVELOPMENT GROUP, INC.
Dear Greg:
This Letter of Intent ("LOI") outlines the terms and conditions of a
proposed merger ("Merger") of Virtual Communities, Inc., a Delaware corporation
(together with its subsidiaries, "VCI"), with and into Heuristic Development
Group, Inc., a Delaware corporation (together with its subsidiaries, "HDG") to
occur on or before June 30, 1999 ("Closing").
1. STOCK FOR STOCK EXCHANGE. (a) Upon Closing, each holder ("VCI Holder") of
outstanding VCI common stock (collectively with all of the shares of VCI
common stock underlying VCI's outstanding Class A Preferred Stock, "VCI
Common") shall exchange each share of VCI Common for a certain number of
shares of HDG common stock ("HDG Common") as determined by the Conversion
Ratio (as defined below). The Conversion Ratio will remain in effect
provided that the average share price for the HDG Common on the 20
consecutive trading days that end two trading days prior to Closing is at,
or above, the Transaction Price (as defined below) per HDG Common share, as
measured by the closing bid prices of the HDG Common trading on the Nasdaq
SmallCap Market ("Nasdaq") under the symbol "IFIT" on such 20 consecutive
trading days. If the average share price contemplated by the previous
sentence is below the Transaction Price either party hereto shall have the
right, in its sole discretion, to terminate the Merger.
(b) The conversion ratio ("Conversion Ratio") shall equal the VCI
Valuation (as defined below) divided by the total number of VCI Common at
Closing, and the result of such calculation shall then be further divided
by the Transaction Price. For example, assuming a VCI Valuation of
$22,000,000, the total number of VCI Common at Closing to
Mr. Gregory L. Zink
March 31, 1999
Page 2
be 10,336,357 shares and a Transaction Price of $1.97403, then the
Conversion Ratio would be 1.07821, and therefore 11,144,714 shares of HDG
Common would be issued by HDG in exchange for all of the VCI Common.
(c) The transaction price ("Transaction Price") shall equal 1.15
multiplied by the Cash Value (as defined below) as divided by the number of
HDG Primary Shares (as defined below).
(d) The Merger contemplates a pre-merger valuation of VCI at
$22,000,000 plus any additional gross proceeds raised by VCI prior to
Closing through the sale of VCI common stock or common stock equivalents,
("VCI Valuation"), or $2.13 per VCI Common (assuming the total number of
VCI Common at Closing to be 10,336,357 shares).
2. EXCLUSIVITY. In consideration of the parties hereto entering into this LOI,
from the execution of this LOI through the earlier of the Closing or the
termination of this LOI ("Termination Date"), both parties agree not to,
nor to permit any of their officers, directors, employees, financial
advisers, brokers, stockholders or any person acting on their behalf to,
enter into any agreements, discussions or negotiations with, or provide
information to, or solicit, initiate, encourage, entertain or consider any
inquiries, offers or proposals from, any other corporation, firm, entity or
other person, with respect to: (a) any possible disposition, sale or
transfer of all or any of their businesses or assets, (b) any equity or
debt financing (whether public or private), or (c) any business
combinations, whether by way of merger, consolidation, share exchange or
other transaction; provided, however, that VCI shall have the right to
raise up to $1.5 million in equity in one or more tranches.
3. COVENANTS. (a) From the execution of this LOI through the earlier of the
Closing or the Termination Date, HDG shall covenant to: (i) operate HDG
consistent with past practice and use its best efforts to maintain its
business and assets; (ii) prepare and issue, at HDG's sole expense, any and
all press releases, public announcements, and any other news or information
regarding the Merger, as reasonably requested and approved by VCI, which
releases, announcements, news or other information may be lawfully
disseminated to the public; (iii) not incur any debt or liabilities of any
kind other than in the ordinary course of business or in furtherance of the
Merger; (iv) not issue any equity, options, warrants or any other rights to
acquire any such equity, options or warrants, to any corporation, entity or
person other than VCI, except for the Escrow Shares, the Escrow Options,
the GT Options (as defined below) or as contemplated by the terms of the
definitive Merger Agreement; (v) not authorize or consummate any dividends
or distributions of assets, or effect any other extraordinary corporate
transaction, excluding the sale of HDG's software in an arm's length
transaction in which HDG retains all of the
Mr. Gregory L. Zink
March 31, 1999
Page 3
proceeds from such sale; and (vi) use its best efforts to maintain HDG's
current Nasdaq listings under the trading symbols "IFIT", "IFITU", "IFITW"
and "IFITZ".
(b) Beginning with the date of the execution of this LOI through the
earlier of the Closing or the Termination Date, VCI shall covenant to: (i)
operate VCI consistent with past practice and use its best efforts to
maintain its business and assets; (ii) not incur any debt or liabilities of
any kind other than in the ordinary course of business or in furtherance of
the Merger; (iii) except for $1.5 million in common stock or common stock
equivalents, not issue any equity, options, warrants or any other rights to
acquire any such equity, options or warrants, to any corporation, entity or
person; and (iv) not authorize or consummate any dividends or distributions
of assets, or effect any other extraordinary corporate transaction
(c) Beginning with the date of the execution of this LOI and
continuing through the earlier of the Closing or the Termination Date, both
parties hereto shall: (i) covenant to cooperate fully and promptly with the
other party in furnishing any necessary information required in connection
with: (A) the preparation, distribution and filing with the Securities and
Exchange Commission ("SEC") with any proxy statements, information
statements, and any other filings or documents required by the SEC, and (B)
the preparation, distribution and filing of any filings, applications and
notices which may be required by other federal, state and local government
or regulatory agencies or stock exchanges in any jurisdiction; and (ii) act
in a timely fashion to use commercially reasonable efforts to: (A) take all
actions necessary to obtain receipt of all requisite approvals, including,
without limitation, requisite shareholder approvals, and (B) prepare,
distribute and file or apply for all filings or applications necessary to
effect the proposed Merger.
4. MERGER TERMS. A merger agreement ("Merger Agreement") for the proposed
Merger shall be drafted by VCI's counsel pursuant to, among other things,
the following terms and conditions:
a) CONDITIONS TO CLOSING. Closing of the Merger Agreement will be subject
to satisfaction of customary closing conditions, including, without
limitation, the following: (i) immediately prior to Closing, the HDG
Common shall be publicly traded on the Nasdaq, in full compliance with
all Nasdaq continued listing requirements then in effect; (ii) the
average share price of the HDG Common (as measured by the closing bid
prices of the HDG Common trading on the Nasdaq under the symbol
"IFIT") for the 20 consecutive trading days ending 2 trading days
prior to Closing is at, or above, the Transaction Price per HDG Common
share; (iii) each and every HDG director, officer and employee shall
tender their resignation to HDG, and such resignation shall release
HDG and VCI from any and all claims, including, without limitation,
claims for salaries, wages, bonuses, fees or other compensation;
Mr. Gregory L. Zink
March 31, 1999
Page 4
(iv) HDG's indemnification obligations to its directors and officers
and obligations to such persons in their capacities as holders of HDG
shares, options or warrants shall survive the Closing; (v) each party
hereto shall act in a timely fashion to take all actions necessary to
obtain receipt of, and shall receive, all requisite approvals,
including, without limitation, requisite shareholder approvals; (vi)
satisfaction of both HDG's and VCI's representations, warranties and
covenants, and the execution of a definitive Merger Agreement; (vii)
HDG and VCI shall each provide the other party with audited financial
statements; (vii) concurrently with the Closing, HDG's name shall be
changed to VCI; (viii) concurrently with the Closing, all of VCI's
outstanding options and warrants shall be adjusted: (A) in number, by
multiplying such number of outstanding options and warrants by the
Conversion Ratio, and (B) in exercise prices, by dividing such
exercise prices by the Conversion Ratio; (ix) HDG shall have a minimum
of $2,750,000 in immediately available funds at Closing net of all of
the following costs and fees (the amount of such net figure at
Closing, "Cash Value"): (a) severance costs, bonuses or other
termination fees due to directors, officers, employees, affiliates and
agents, (b) costs arising out of, or involved with, the termination of
any of HDG's existing businesses or operations; and (c) HDG's
accounting, consultant and legal fees, except for financial advisor
fees; (x) HDG will have no debt or other liabilities due or owing at
Closing; (xi) both parties shall cooperate fully with the other's due
diligence requests as contemplated by Section 10 hereof; (xii)
concurrently with the Closing, a minimum of 75% of the aggregate of
all Escrow Shares (as defined below) and all Escrow Options (as
defined below) shall convert into 3 year warrants which may be
exercised 6 months after issuance, each with the right to purchase one
share of HDG Common at the Transaction Price in the case of each
Escrow Share, and at 125% of the Transaction Price in the case of each
Escrow Option; (xiii) HDG shall have a sufficient number of authorized
and unissued HDG Common to exchange all of the VCI Common shares and
to exchange all of the VCI Common shares and the VCI Common shares
underlying all of the outstanding VCI warrants, options and
convertible debt into shares of HDG Common; and (xiv) all of VCI's
Class A Preferred Stock shall automatically convert into VCI Common.
Any or all of the closing conditions set forth in the previous
sentence may be waived in whole or in part to the extent permitted by
law by the party beneffiting from such closing conditions.
b) HDG'S REPRESENTATIONS AND WARRANTIES. In addition to customary
representations and warranties, HDG shall represent and warrant as of
the Closing that: (i) HDG's capital structure consists solely of the
following: (a) 1,602,053 shares ("HDG Primary Shares") of HDG Common
fully paid, non-assessable, issued and outstanding, (b) 349,370 shares
of HDG Common fully paid, non-assessable, issued and held in escrow
("Escrow Shares"), (c) 169,508 outstanding options with exercise
prices ranging from $0.50 to $1.00 per option (inclusive of 50,630
options, each with an
Mr. Gregory L. Zink
March 31, 1999
Page 5
exercise price of $0.50 per option ("Escrow Options"), and inclusive
of 50,000 options, each with an exercise price equal to the fair
market value of the underlying HDG Common at the time of grant ("GT
Options")), (d) 2,000,000 Class A Warrants issued and outstanding each
with an exercise price of $6.50 per Warrant, (e) 2,000,000 Class B
Warrants each with an exercise price of $8.75 per Warrant, which
Warrants shall issue upon the exercise of the Class A Warrants, (f)
1,500,000 Class B Warrants issued and outstanding each with an
exercise price of $8.75 per Warrant, and (g) 120,000 shares of HDG
Common underlying the Unit Options of the underwriter; (ii) HDG has
2,120,931 shares of HDG Common issued and outstanding on a fully
diluted basis, excluding warrants and options with exercise prices
above the Transaction Price; (iii) HDG has a maximum of 5,620,000
shares of HDG Common which may be issued upon the exercise of all of
HDG's outstanding warrants and options with exercise prices above the
Transaction Price; (iv) HDG has no existing, pending or threatened
claims, orders or judgments against it, except as set forth in a
schedule attached to the Merger Agreement; (v) HDG is duly
incorporated in the state of Delaware, is qualified to do business and
is in good standing in all jurisdictions in which it conducts its
businesses, and has all necessary regulatory approvals to operate in
such jurisdictions; (vi) neither the matters set forth in this LOI,
nor the consummation of the Merger, will breach or interfere with any
contractual or other obligations to any third party; (vii) HDG owns
all of its assets free and clear of any liens or encumbrances; and
(viii) VCI will not incur any liability in connection with the Merger
to any third party with whom HDG or its agents have had discussions
regarding the Merger.
c) VCI'S REPRESENTATIONS AND WARRANTIES. In addition to customary
representations and warranties, VCI shall represent and warrant as of
the Closing that: (i) VCI is duly incorporated in the state of
Delaware, is qualified to do business and is in good standing in all
jurisdictions in which it conducts its businesses; (ii) neither the
matters set forth in the LOI, nor the consummation of the Merger, will
breach or interfere with any contractual or other obligations to any
third party; (iii) VCI has 10,336,357 shares of VCI Common outstanding
(inclusive of 1,807,081 shares of VCI Common underlying all of VCI's
outstanding Class A Preferred Stock), and 2,499,626 shares of VCI
Common underlying all of its outstanding warrants, options and
convertible debt; (iv) VCI has no existing, pending or threatened
claims, orders or judgments against it, except as set forth in a
schedule attached to the Merger Agreement; (v) HDG will not incur any
liability in connection with the Merger to any third party with whom
VCI or its agents have had discussions regarding the Merger; and (vi)
VCI owns all of its assets free and clear of any liens or
encumbrances.
d) INDEMNIFICATIONS. Each party hereto unconditionally agrees to
indemnify, defend and hold harmless the other, their officers,
directors, stockholders, lenders,
Mr. Gregory L. Zink
March 31, 1999
Page 6
employees, agents and affiliates from and against any and all
liability, claim, injury, damage, cost or expense of any kind
(including, without limitation, legal and other expenses incurred in
connection with defending such claims), directly or indirectly related
to, associated with, or arising out of: (i) claims by, or liabilities
to, third parties for brokers or finders fees and expenses which arise
from contacts initiated by or with the indemnifying party, (ii) any
breach of representation, warranty or covenant made by the
indemnifying party, or (iii) the indemnifying party's negotiations or
execution of this LOI.
e) OTHER MERGER TERMS. The Merger Agreement shall contain other customary
terms, including, without limitation, a New York governing law clause,
a waiver of jury trial and a waiver of the assertion of forum
nonconveniens.
5. TIMING. It is contemplated that the Closing shall take place on or before
June 30, 1999. The Closing will occur as soon as all conditions to such
Closing as contemplated hereby and further set forth in the definitive
Merger Agreement are met.
6. TERMINATION. Should the Closing not occur on or prior to June 30, 1999,
then HDG and VCI may mutually elect to extend the deadline or either party
may terminate this LOI through written notification to the other, and upon
such termination, this LOI shall be of no further force and effect except
as expressly provided herein. Notwithstanding the foregoing, the parties
hereto agree to use their best efforts to promptly negotiate and execute
the definitive Merger Agreement on or before April 30, 1999. If a
definitive Merger Agreement is not executed by May 15, 1999, this LOI shall
expire by its terms.
7. NON-DISCLOSURE. The bilateral Non-Disclosure Agreement ("NDA") by and
between HDG and VCI dated March 23, 1999 remains in full force and effect.
This LOI, including the terms and conditions hereof and the information
exchanged between HDG and VCI in connection herewith, is deemed to
constitute Confidential Information under the terms of such NDA, and
therefore is subject to all of the terms of such NDA; provided, however,
that neither party is precluded by this LOI or such NDA from having
confidential discussions with, or making confidential disclosures to, its
stockholders, key employees, legal counsel, accountants, banks and other
agents, and third parties (including governmental or regulatory officials
where required by law) whose consent is required in order to consummate the
transaction contemplated herein, as reasonably deemed necessary by each
party, respectively, in order to facilitate the transaction contemplated
hereby; and provided further, that VCI shall have the right to disclose
HDG's financial statements and related information, the terms of the
proposed transactions contemplated herein and the identity of HDG to
potential investors, analysts, investor or public relations firms of, or
which may in the future be retained by, VCI. The covenants contained in
this Section 9 will survive the termination of this LOI.
Mr. Gregory L. Zink
March 31, 1999
Page 7
8. REPRESENTATIONS AND WARRANTIES. HDG hereby represents and warrants that as
of the execution of this LOI all of the representations and warranties set
forth in Section 4(b)(i) through 4(b)(viii), inclusive, are true and
complete in all respects. VCI hereby represents and warrants that as of the
execution of this LOI all of the representations and warranties set forth
in Section 4(c)(i) through 4(c)(vi), inclusive, are true and complete in
all respects. The covenants contained in this Section 8 will survive the
termination of this LOI.
9. EXPENSES AND INDEMNIFICATIONS. Each party hereto agrees to bear the full
cost of all of its own fees and expenses for the transactions contemplated
hereby, including, without limitation, legal, accounting and consultants
fees, provided, however, that a financial advisory fee payable to Jesup &
Lamont Securities Corporation upon Closing in the amount of 8% of the Cash
Value plus a 5 year warrant to purchase 160,205 shares of HDG Common shares
after the Closing shall paid by the merged company as a transaction
expense. Each party hereto unconditionally agrees to indemnify, defend and
hold harmless the other, their officers, directors, stockholders, lenders,
employees, agents and affiliates from and against any and all liabilities,
claims, injuries, damages, costs or expenses of any kind, directly or
indirectly related to, associated with, or arising out of: (i) such fees
and expenses which arise from contacts initiated by or with indemnifying
party, (ii) any breach of representation, warranty or covenant made by the
indemnifying party, or (iii) the indemnifying party's negotiations or
execution of this LOI. The covenants contained in this Section 9 will
survive the termination of this LOI.
10. DUE DILIGENCE. From the execution of the LOI through the earlier of the
Termination Date or the Closing, HDG and VCI agree to cooperate and make
readily available all of the documents, key directors, officers and
employees, books, records, contracts and other information necessary for
each party and their representatives to conduct their due diligence
investigation and to verify the representations and warranties made by the
other party in this LOI and in the Merger Agreement. In the event that
either party hereto does not cooperate with such due diligence
investigation, or if either party's due diligence reveals some fact or set
of facts that causes such party to conclude, in its sole discretion, that
such party will not receive the benefits of the transactions contemplated
by this LOI, then the injured party shall have the right, in its sole
discretion, to terminate this LOI upon written notice to the other party.
11. NOTICES. All notices and other communications hereunder shall be in writing
and shall be furnished by hand delivery, registered or certified mail
return receipt requested, overnight courier or by facsimile with the
original to follow the same day by registered or certified mail return
receipt requested, to the parties at the addresses set forth below. Any
such notice or communication shall be deemed duly given upon the date it is
delivered to the addresses set forth below:
Mr. Gregory L. Zink
March 31, 1999
Page 8
If to VCI:
Virtual Communities, Inc.
151 West 25th Street
New York, NY 10001
Attn: Mr. Avi Moskowitz, President
Facsimile: (212) 214-0550
with a copy to:
Morrison & Foerster LLP
1290 Avenue of the Americas
40th Floor
New York, NY 10104
Attn: Joseph Bartlett, Esq.
Facsimile: (212) 468-7900
If to HDG:
Heuristic Development Group, Inc.
1219 Morningside Drive
Manhattan Beach, CA 90266
Attn: Mr. Gregory L. Zink, President
Facsimile: (561) 364-0771
with a copy to:
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP
212 Avenue of the Stars
18th Floor
Los Angeles, CA 90067
Attn: Gary Jacobs, Esq.
Facsimile: (310) 586-0189
12. SEVERABILITY. If any term, provision, covenant or restriction contained in
this LOI that is intended to be binding and enforceable is held by a court
of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions contained in
this LOI shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
Mr. Gregory L. Zink
March 31, 1999
Page 9
13. COUNTERPARTS. This LOI may be executed in any number of counterparts each
of which shall be deemed an original, but taken together shall be deemed
one and the same instrument.
14. BINDING EFFECT; GOVERNING LAW. By executing this LOI, HDG and VCI
acknowledge and agree to use their best efforts to negotiate promptly and
in good faith the terms and conditions of the definitive Merger Agreement.
Except for Sections 2, 7, 8, 9, 10, 11, 12, 13 and 14 hereof, which are
intended to constitute binding and enforceable commitments to which the
parties hereto intend and agree to be legally bound, this LOI is not and is
not intended to constitute a contract between the parties hereto. This LOI
shall be interpreted and enforced under the laws of the State of New York
without giving effect to its conflict of laws.
Please indicate your acceptance of and agreement to the terms and conditions
herein by signing in the space provided below and returning the signed copy of
this LOI to my attention with a copy to Doug Chertok, Esq. c/o Morrison &
Foerster LLP at the addresses set forth in Section 11 hereof. This LOI will
expire at 5:00 PM, Eastern Standard Time, on April 6, 1999 unless a signed copy
of this LOI is returned to VCI in accord with the foregoing instructions before
that time.
Very truly yours,
VIRTUAL COMMUNITIES, INC.
By: /s/ Avi Moskowitz
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Avi Moskowitz
President
ACCEPTED AND AGREED TO:
HEURISTIC DEVELOPMENT GROUP, INC.
By: /s/ Gregory L. Zink
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Gregory L. Zink
President
Dated: /d/ April 2, 1999
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