<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, 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.
(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) 378-1749
------------------------------------------------
(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 May 15, 1998: 2,101,326 shares of Common Stock, $ . 01 par value.
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<PAGE>
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
March 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Operations - Three
Months ended March 31, 1998 and 1999 and period
from inception (July 20, 1994) to March 31, 1999. . . . . . . . . . 4
Condensed Statements of Cash Flows - Three
Months ended March 31, 1998 and 1999 and
period from inception (July 20, 1994) to
March 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements - March 31, 1999. . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis
or Plan of Operations . . . . . . . . . . . . . . . . . . . . . . 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(a development stage company)
Balance Sheet
March 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Current assets: Cash and cash equivalents $ 3,008,000
Prepaid expenses and other current assets 13,000
---------------
3,021,000
Total current assets
Capitalized software costs 50,000
---------------
TOTAL $ 3,071,000
---------------
---------------
LIABILITIES
Current liabilities:
Accounts payable $ 1,000
Accrued expenses 17,000
---------------
Total current liabilities 18,000
---------------
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 (5,259,000)
---------------
Sub-Total 3,203,000
Treasury stock (149,900 shares) (150,000)
---------------
Total stockholders' equity 3,053,000
---------------
TOTAL $ 3,071,000
---------------
---------------
</TABLE>
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 20,
1994
Three Months Ended (Inception)
March 31 March 31 to
---------------------------- March 31,
1998 1999 1999
---------------------------------------------------
<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 $ 184,000 174,000 3,586,000
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
Acquisition breakup fee 100,000
---------------------------------------------------
Total costs and expenses 191,000 187,000 4,802,000
---------------------------------------------------
(Loss) from operations (191,000) (187,000) (4,802,000)
---------------------------------------------------
Interest expense and amortization
of debt discount and expense - - (748,000)
Interest income 46,000 32,000 413,000
---------------------------------------------------
Net (loss) $ (145,000) (155,000) $ (5,137,000)
---------------------------------------------------
---------------------------------------------------
Net (loss) per share - Basic and Diluted $ (0.08) $ (0.09)
------------------------------
------------------------------
Weighted average shares outstanding 1,751,956 1,751,956
------------------------------
------------------------------
</TABLE>
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<PAGE>
HEURISTIC DEVELOPMENT GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 20,
Three Months Ended 1994
------------------------- (Inception)
March 31, to
------------------------- March 31,
1998 1999 1999
---------- -------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $(145,000) (155,000) (5,137,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization 2,000 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 32,000 19,000 (52,000)
Net (decrease) increase in accounts payable and accrued expenses 10,000 (11,000) 13,000
---------- -------------------------
Net cash (used in) operating activities (94,000) (130,000) (3,255,000)
---------- -------------------------
---------- -------------------------
Cash flows from investing activities:
Deposit for letter of intent - (100,000)
Acquisition of fixed assets (5,000) - (339,000)
Capitalized software costs - - (506,000)
Proceeds from sale of equipment 11,000 24,000
---------- -------------------------
Net cash (used in) investing activities 6,000 - (921,000)
---------- -------------------------
---------- -------------------------
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)
Proceeds from public offering, net of expenses - - 5,501,000
Repayment of notes payable - stockholders - - (170,000)
Loan acquisition costs - (160,000)
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<PAGE>
Purchase of treasury stock - (150,000)
-
---------- -------------------------
Net cash provided by financing activities - - 7,184,000
---------- -------------------------
---------- -------------------------
NET INCREASE (DECREASE) IN CASH (88,000) (132,000) 3,008,000
Cash - beginning of period 3,785,000 3,140,000
--------- -------------------------
Cash - end of period $3,697,000 $3,008,000 3,008,000
---------- -------------------------
---------- -------------------------
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 198,000
Interest paid 14,000 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 considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 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 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
incorporated in Delaware in July 1994. The Company has been unsuccessful in
arranging licensing agreements for the Intellifit software. As such, the Company
the continues to value the capitalized software at it's net realizable value as
of March 31, 1999. The Company 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. The Company is pursuing licensing or sales
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 effect its
usefulness.
The Company also announced that it has entered into a Letter of Intent to
merge with Virtual Communities, Inc., a privately held developer and publisher
of Internet based communities.
Under the proposed merger, HDG would acquire VCI in an all stock
transaction. HDG's existing common stock and Class A and Class B warrants would
remain outstanding. VCI's stockholders would receive approximately 11.1 million
shares of HDG common stock (subject to adjustment), representing approximately
87% of HDG's common stock after the merger (assuming no exercise of HDG warrants
and options). HDG would change its name following the merger to Virtual
Communities, Inc. and VCI's Board of Directors and management would become the
management of the merged company.
The transaction is expected to close in the second quarter of 1999, subject
to the negotiation of definitive agreements and the satisfaction of certain
conditions, including obtaining the approval of HDG's and VCI's stockholders and
an opinion from an investment banking firm satisfactory to HDG that the
transaction is fair to HDG's stockholders.
The Company also announced that it has suspended its stock repurchase
program.
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<PAGE>
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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<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. 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 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 March 31, 1999, the Company sustained cumulative net
losses of approximately $5,137,000 primarily as a result of general and
administrative expenses, including salaries, marketing, and professional fees
which have aggregated $3,586,000 since inception. During the three months ended
March 31, 1999, the Company incurred net losses of $155,000, while during the
same three period during 1998, the Company incurred net losses of $145,000. The
increased net losses during 1999 were directly resultant of reduced interest
income.
The Company has reduced current cash use to approximately $40,000 per
month. The Company has interest income of approximately $11,500 per month. The
ongoing expenses are expected to remain at current levels through the end of
1999.
During the three months ended March 31, 1999 and 1998, the Company
recognized interest income of $32,000 and $46,000 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, 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.
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<PAGE>
As of March 31, 1999, under the previously announced stock buyback program,
the Company has repurchased approximately 149,900 shares. As previously
mentioned, 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 April 6, 1999, the Company announced
the proposed acquisition of Virtual Communities, Inc. ("VCI"). Under the
proposed merger, HDG would acquire VCI in an all stock transaction. HDG's
existing common stock and Class A and Class B warrants would remain outstanding.
VCI's stockholders would receive approximately 11.1 million shares of HDG common
stock (subject to adjustment), representing approximately 87% of HDG's common
stock after the merger (assuming no exercise of HDG warrants and options). HDG
would change its name following the merger to Virtual Communities, Inc. and
VCI's Board of Directors and management would become the management of the
merged company. The transaction is scheduled to close on or about June 30,
1999, but there can be no assurances that the Company will complete such an
investment or acquisition.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $3,003,000. 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, pursuing the above mentioned acquisition,
and licensing the Intellifit software. There can be no assurances that the
Company's efforts will be successful.
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,
1999.
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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 15, 1999 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-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,008,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,021,000
<PP&E> 0
<DEPRECIATION> 2,000
<TOTAL-ASSETS> 3,071,000
<CURRENT-LIABILITIES> 18,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 3,472,000
<TOTAL-LIABILITY-AND-EQUITY> 3,032,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 187,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (155,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (155,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155,000)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
