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10-QSB
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 period ended June 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 0 - 29044
HEURISTIC DEVELOPMENT GROUP, INC.
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(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.)
1219 MORNINGSIDE DRIVE, SUITE 102, MANHATTAN BEACH, CALIFORNIA 90266
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(Address of Principal Executive Offices) (Zip Code)
(310) 378-1749
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(Issuer's Telephone Number, Including Area Code)
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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
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State the number of shares outstanding of each of the issuer's common equity
as of June 30, 1999: 1,951,426 shares of Common Stock, $.01 par value.
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INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
June 30, 1999.................................................. 3
Condensed Statements of Operations - Three and Six
Months ended June 30, 1998 and 1999 and period
from inception (July 20, 1994) to June 30, 1999................ 4
Condensed Statements of Cash Flows - Six
Months ended June 30, 1998 and 1999 and
period from inception (July 20, 1994) to
June 30, 1999.................................................. 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations............... 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 10
SIGNATURES................................................................ 11
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HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
Balance Sheet
June 30, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 2,819,000
Prepaid expenses and other current assets 62,000
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Total current assets 2,881,000
Capitalized software costs 50,000
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TOTAL $ 2,931,000
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LIABILITIES
Current liabilities:
Accounts payable $ 49,000
Accrued expenses 56,000
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Total current liabilities 105,000
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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) 21,000
Additional paid-in capital 8,441,000
(Deficit) accumulated during the development stage (5,486,000)
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2,976,000
Treasury stock (149,900 shares) (150,000)
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Total stockholders' equity 2,826,000
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TOTAL $ 2,931,000
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HEURISTIC DEVELOPMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
July 20,
1994
Three Months Ended Six Months Ended (Inception)
June 30, June 30, to
------------------------------------------------------- June 30,
1998 1999 1998 1999 1999
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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 $130,000 258,000 $314,000 $432,000 3,844,000
Loss on sale and write down of - 7,000 13,000 185,000
equipment
Write down of capitalized software to
estimated net realizable value 456,000
Acquisition breakup fee 100,000
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Total costs and expenses 130,000 258,000 321,000 445,000 5,060,000
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(Loss) from operations (130,000) (258,000) (321,000) (445,000) (5,060,000)
Interest expense and amortization
of debt discount and expense - - - - (748,000)
Interest income 50,000 31,000 96,000 63,000 444,000
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Net (loss) $ (80,000) (227,000) (225,000) (382,000) $(5,364,000)
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Net (loss) per share - Basic and $ (0.05) (0.14) (0.13) (0.24)
Diluted =======================================================
Weighted average shares outstanding 1,751,956 1,602,056 1,751,956 1,602,056
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HEURISTIC DEVELOPMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
July 20,
1994
Six Months Ended (Inception)
June 30, to
--------------------------- June 30,
1998 1999 1999
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Cash flows from operating activities:
Net (loss) $(225,000) (382,000) (5,364,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization 5,000 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
Deposit for letter of intent 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 9,000 (30,000) (101,000)
Net (decrease) increase in accounts payable and accrued expenses (19,000) 76,000 100,000
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Net cash (used in) operating activities (223,000) (321,000) (3,444,000)
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Cash flows from investing activities:
Deposit for letter of intent (100,000)
Acquisition of fixed assets (5,000) 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 6,000 0 (921,000)
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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 (150,000)
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Net cash provided by financing activities - 0 7,184,000
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NET INCREASE (DECREASE) IN CASH (217,000) (321,000) 2,819,000
Cash - beginning of period 3,785,000 3,140,000
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Cash - end of period 3,568,000 $2,819,000 2,819,000
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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 16,000
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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 six-month
period ended June 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:
Heuristic Development Group (the "Company") is a development stage
company formed in 1994 to research, develop, design and market
fitness-related products. The Company's sole product 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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On June 3, 1999, the Company announced that it has executed a
definitive merger agreement to merge with Virtual Communities, Inc., a
privately held developer and publisher of Internet based communities.
Under the terms of the merger agreement, a subsidiary of HDG will
merge with VCI in an all stock transaction in which VCI's stockholders would
receive between approximately 11.8 million to 15.4 million shares of HDG
common stock (subject to adjustment), representing approximately 88% to 91%
of HDG's common stock after the merger (assuming no exercise of either
company's warrants or options). HDG's existing common stock and Class A and
Class B warrants will remain outstanding. VCI's Board of Directors and
management will become the Board of Directors and management of the merged
company.
The transaction is expected to close in the third quarter of 1999,
subject to the satisfaction of certain conditions, including obtaining the
approval of HDG's and VCI's stockholders and an opinion from an investment
banking firm that the transaction is fair to HDG's stockholders.
The merger will be 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.
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.
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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 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 June 30, 1999, the Company sustained
cumulative net losses of approximately $5,364,000 primarily as a result of
general and administrative expenses, including salaries, marketing, and
professional fees which have aggregated $3,844,000 since inception. During
the six months ended June 30, 1999, the Company incurred net losses of
$382,000, while during the same period during 1998, the Company incurred net
losses of $225,000. The increased net losses during 1999 were the 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
proposed merger with Virtual Communities, Inc. HDG has interest income of
approximately $10,000 per month. The ongoing expenses are expected to remain
at current levels through the end of 1999, except for expenses incurred in
connection with the merger.
During the six months ended June 30, 1999 and 1998, the Company
recognized interest income of $63,000 and $96,000 respectively. The reduction
in 1999 interest income is as a result of lower interest rates and a
reduction in the Company's working capital. Prepaid expenses increased from
$13,000 to $62,000 during the three months ended June 30, 1999 to reflect the
prepayment of the annual Directors and Officers Insurance policy.
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, or selling or licensing the IntelliFit software to 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, 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 June 3, 1999, the
Company announced the execution of the definitive merger agreement for the
proposed acquisition of Virtual Communities, Inc. ("VCI"), an Internet
communities company. Under the terms of the merger agreement, a subsidiary of
HDG will merge with VCI in an all stock transaction in which, VCI's
stockholders would receive between approximately 11.8 million to 15.4 million
shares of HDG common stock (subject to adjustment), representing
approximately 88% to 91% of HDG's common stock after the merger (assuming no
exercise of either company's warrants or options). HDG's existing common
stock and Class A and Class B warrants will remain outstanding. VCI's Board
of Directors and management will become the Board of Directors and management
of the merged company.
The transaction is expected to close in the third quarter of 1999,
subject to the satisfaction of certain conditions, including obtaining the
approval of HDG's and VCI's stockholders, an opinion from an investment
banking firm that the transaction is fair to HDG's stockholders and the SEC
declaring effective the Company's registration statement with respect to the
shares to be issued to the VCI stockholders in the proposed merger.
On July 26, 1999, the Company filed its preliminary proxy
statement/prospectus on a confidential basis with the SEC with respect to the
proposed merger between the Company and VCI. The companies are now waiting for
any comments on the filed document from the SEC.
While the Company is working diligently to close the transaction in
the third quarter of 1999, there can be no assurances that the Company will
complete the merger.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had working capital of $2,776,000. 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, completing the above mentioned
acquisition, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
EXHIBITS DESCRIPTION
2.1 Agreement and Plan of Merger between the Company and Virtual
Communities, Inc. dated June 2, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the three months ended June 30, 1999:
April 7, 1999: The Company announced that it had entered into a letter of
intent dated as of March 30, 1999 with Virtual Communities, Inc.
providing for the merger of Virtual Communities, Inc. with the Company.
June 10, 1999: The Company announced the signing of a definitive Agreement
and Plan of Merger dated as of June 2, 1999 with Virtual Communities, Inc.
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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: August 11, 1999 by: /s/ Gregory L. Zink
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Gregory L. Zink, President
by: /s/ Theodore Lanes
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Theodore Lanes,
Chief Financial Officer
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