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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number: 0-27862
REALITY INTERACTIVE, INC.
MINNESOTA 41-1781991
State of Incorporation I.R.S. Employer Identification Number
Suite 400
7500 Flying Cloud Drive
Eden Prairie, MN 55344
(612) 996-6777
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
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 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulations S-B is not contained herein, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
/ X /
The Company's revenues for the Fiscal Year Ended December 31, 1996 totaled
$484,127
As of February 28, 1997, the Company had 4,677,407 shares of Common Stock
outstanding. The aggregate market value of the 2,261,881 shares of Common Stock
held by non-affiliates of the Company was $1,413,676, based on the closing bid
price on February 28, 1997 on the NASDAQ Small Cap Market.
Transitional small business disclosure format: Yes No x
----- -----
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Proxy Statement
for the Annual Meeting of Shareholders for the year ended December 31, 1996 are
incorporated by reference in Part III.
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FORM 10-KSB INDEX
PART I
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Item 1. Description of Business.......................................... 3
Item 2. Description of Property.......................................... 7
Item 3. Legal Proceedings................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.............. 8
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters......... 9
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation............................................. 9
Item 7. Financial Statement Index........................................ 11
Item 8. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 11
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................ 12
Item 10. Executive Compensation........................................... 12
Item 11. Security Ownership of Certain Beneficial Owners and Management... 12
Item 12. Certain Relationships and Related Transactions................... 12
Item 13. Exhibits and Reports on Form 8-K................................. 12
SIGNATURES................................................................. 15
EXHIBIT INDEX.............................................................. 16
FINANCIAL STATEMENTS....................................................... F-1
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the uncertainty in growth of a development stage
company; limited growth of the market for multimedia education and training
products; lack of market acceptance of the Company's products; inability of the
Company to expand its marketing capability; inability of the Company to
diversify its product offerings; failure of the Company to respond to evolving
industry standards and technological changes; inability of the Company to meet
its future additional capital requirements; inability of the Company to compete
in the business education and training industry; loss of key management
personnel; inability to retain subject matter experts; failure of the Company to
secure adequate protection for the Company's intellectual property rights; and
the Company's exposure to product liability claims. The forward-looking
statements are qualified in their entirety by the cautions and risk factors set
forth in Exhibit 99.1, under the caption "Cautionary Statement," to this Annual
Report on Form 10-KSB for the year ended December 31, 1996.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company was formed in May 1994 to design, develop and market
interactive multimedia knowledge solutions to the industrial marketplace. The
Company's business strategy is to identify industry standards and practices that
affect business productivity and profitability, where the adoption of such
standards and practices require enterprise-wide education and training. To
address this education and training need, the Company creates products that
incorporate digital multimedia elements, such as animation, video, graphics,
audio and text, into a rich, interactive learning environment. Also, each of
the Company's products contain productivity tools, such as word processors,
budget forms and custom tailored project plans, to allow the user to organize,
analyze and produce documents using company-specific information. The Company
believes the interactivity of its products allows the user to control the
learning environment, including the pace, sequence and level of instruction, as
well as improve memory retention, compress learning time and reduce costs
compared to traditional learning methods.
The Company considers itself to be a development stage company as its sales
and marketing efforts have not yet generated predictable or significant
revenues. The Company has a deficit accumulated during the development stage of
$9,795,144. To become profitable and to conserve capital, the Company must
significantly increase revenues and manage expenses. Future operating results
will depend upon many factors, including the rate at which industry adopts
interactive multimedia technology for education and training, the level of
product and price competition, the Company's success in maturing its direct and
indirect sales channels and the ability of the company to manage its expenses in
relation to sales.
PRODUCTS
The Company's product strategy has involved developing pre-packaged
products that help companies comply with emerging international management
standards and business practices. The Company develops products that are
composed of related titles in a series that addresses a specific topic. Each
series consists of four or five integrated titles and complimentary single
titles, which can be sold individually or as a group. Each individual title
generally sells for $995, with discounts being offered for increasing levels of
purchase commitments.
After identifying a business topic suitable for a product, the Company
retains subject matter experts to provide a combination of experience, course
materials, reference materials, video training, charts, diagrams and software
applications. The Company's product development team works closely with the
subject matter experts to transform static text and diagrams into a dynamic,
interactive learning environment. The objective of the development process is
to design and develop an engaging source of information that educates and trains
the user. The Company's products also provide digital tools to the user to
accomplish specific objectives, such as the creation of documents that provide
the foundation of compliance to international management standards.
The Company has developed four products within the areas of international
quality and environmental management standards, which are discussed below in
more detail:
1. ISO 9000 REGISTRATION SERIES. This product is a five title series
that guides a company through the entire process of complying with the
ISO 9000 quality management standard. This standard, which focuses on
the elements of a company's quality system, requires a company to (i)
review the efficacy of its business processes and procedures, (ii)
document its processes and procedures in a quality
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manual and (iii) periodically audit its processes and procedures for
consistent use. The product became available for sale in August 1995
and generated revenues of $347,844 in 1996.
2. QS-9000 COMPLIANCE SERIES. This product is a four title series that
helps automotive suppliers comply with the QS-9000 Supplier Quality
Requirements ("QS-9000") developed by Ford Motor Company, Chrysler
Corporation and General Motors Corporation ( the "Big Three").
QS-9000 includes three sections: the ISO 9000 standards with
enhancements and clarifications, additional quality requirements
common to the Big Three and supplier specific quality requirements
unique to each of the Big Three automakers. The product became
available for sale in September 1996 and generated revenues of
$131,245 for the remainder of the year.
3. ISO 14000 EMS CONFORMANCE SERIES. This product is a five title series
that assists companies with the design, implementation and management
of an environmental management system in accordance with the ISO 14000
environmental management system standard. A key requirement of ISO
14000 is the establishment of internal pollution prevention policies.
The objective is to require companies to create procedures for
managing environmental affairs within their organizations in a clear
and consistent manner. The Company released two of the titles to this
series in October 1996, with the remaining three titles released in
March 1997. The Company generated revenues of $3,788 with the initial
two titles in 1996.
4. POLLUTION PREVENTION. This is a one title product that enables
companies to understand the key concepts of pollution prevention, and
assists them in the preparation of a strategic plan that focuses on
improving business processes and waste reduction. This product also
allows users to link, via the World Wide Web, to state, regional,
national and international pollution prevention resources. This
product became available for sale in November 1996. No revenues were
generated by this product in 1996.
Currently, the Company is in the process of translating its QS-9000 product
for distribution in the German marketplace. This translation is being performed
by Futuremedia PLC, the Company's distributor in the UK. Completion of the
product is expected to occur in the summer of 1997, and once completed, will be
distributed by Lasermedia GMBH, Futuremedia's wholly-owned subsidiary in
Germany. The Company currently has no plans to translate its products into
other languages, although the Company will consider such plans if the
appropriate market opportunities arise.
All of the Company's products are delivered via CD-ROM, and operate on
multimedia equipped, Windows-configured PCs. Because the products were
developed using standard digital technology, the Company will have the ability
to deliver its products over a number of platforms, including the Internet,
corporate intranets, cable and satellite transmission. The Company believes its
future success will depend, in part, on its ability to adapt its products to
these other digital delivery platforms.
The Company has no immediate plans to develop additional off-the-shelf
products. During 1997, the Company's business strategy will include developing
customer relationships that result in the delivery of custom multimedia
development services. The Company expects that such services will allow the
Company to leverage the talent of its development staff. The Company will also
begin to focus its attention towards Internet and Intranet delivery of its
current products, as well as other Web development opportunities related to its
core business strategy. Although these strategies represent a shift from the
Company's historical focus of developing off-the-shelf products, the Company
believes this change will better position the Company as a complete source for
multimedia content development.
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PRODUCT MARKETS
The adoption of international quality and environmental management
standards has primarily occurred in manufacturing related companies,
encompassing small job shops to Fortune 500 multinational companies. According
to the January 1997 issue of QUALITY SYSTEMS UPDATE, which is published by
McGraw-Hill, 15,475 North American locations were registered to ISO 9000 by the
end of 1996. In the United States, 11,738 locations were registered to ISO 9000
by the end of 1996, a 38% increase over 1995.
For the QS-9000 market, certain representatives of the Big Three have
mandated their tier 1 suppliers to comply with this quality requirement.
Chrysler Corporation has mandated their suppliers to comply with QS-9000 by July
31, 1997, and General Motors Corporation has mandated compliance to QS-9000 by
December 31, 1997. In total, the mandate is estimated to affect approximately
13,000 tier 1 suppliers. It is widely believed by experts in the automotive
industry that QS-9000 may be adopted by companies who supply to the tier 1
suppliers, either voluntarily or as a result of a mandate by tier 1 suppliers.
If this occurs, it may represent a potential market for the Company's QS-9000
product of approximately 80,000 companies. The Company is also marketing its
QS-9000 product in foreign markets, such as Europe and Asia, which represents a
major share of the worldwide auto market.
The ISO 14000 standard was first published in September 1996. The Company
believes that ISO 14000 may appeal to a number of industries, including
manufacturing, pharmaceuticals, petro-chemicals, forestry products, agriculture
and service businesses, which may result in a potentially large market for the
Company's ISO 14000 product. In addition, the Company believes that European
and Asian industries may be potential markets for the Company's ISO 14000
product, although such markets may require that the ISO 14000 product be
translated into local languages.
The market for the Company's POLLUTION PREVENTION product will be similar
to that of the Company's ISO 14000 product. Although compliance to ISO 14000 is
voluntary, the Pollution Prevention Act of 1990 established federal legislation
that requires companies to incorporate pollution prevention planning into their
business. In addition, 44 U.S. states have augmented the federal legislation by
incorporating their own regulations governing pollution prevention.
The Company's future sales success will depend upon the rate at which the
industrial marketplace adopts these international standards. In addition, the
industrial marketplace has not widely adopted the use of interactive multimedia
for education and training purposes, and many of the Company's potential
customers do not own or have access to multimedia equipment compatible with the
Company's products. In the event that adoption of international management
standards and interactive multimedia training do not become widespread, the
number of potential customers for the Company will be limited. Refer to the
section "Competition" for a discussion on the Company's competitive pressures.
SALES AND MARKETING
The Company spent 1996 hiring and developing its direct sales force and
developing strategic alliances with indirect channel partners. As further
discussed below, the Company uses several channels of marketing and
distribution, including direct sales, telesales, independent sales agents,
channel resellers, international distributors and market promoters.
DIRECT SALES. The direct sales group focuses its selling efforts on
Fortune 2000 companies, representing multi-site, multi-unit sales
opportunities. Sales cycles for this channel generally range from six
to twelve months. Currently, the Company has a direct sales office in
Minneapolis, MN, Cincinnati, OH, Philadelphia, PA, Indianapolis, IN,
Atlanta, GA and Los Angeles, CA. The Company believes the number of
direct sales people is adequate at this stage of its sales
development.
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TELESALES. The telesales group, which is located at the Company's
headquarters, focuses its selling efforts on small to medium-sized
companies. The telesales group also qualifies sales inquiries and
refers large prospects to the direct sales group.
INDEPENDENT SALES AGENTS. The Company's independent sales agent
program is primarily comprised of small to medium-sized companies that
specialize in selling multimedia training or technology business
solutions, or have demonstrated competencies in the area of
international management standards.
CHANNEL RESELLERS. Channel resellers warehouse, market and distribute
the Company's products. Currently, the Company has an agreement with
the American Society for Quality Control (ASQC) to warehouse, market
and distribute its ISO 9000 and QS-9000 products. ASQC is the largest
US organization that sells quality-related materials and holds a joint
copyright to the US version of the ISO 9000 standard. Through its
Automotive Division, ASQC has been involved with the QS-9000 quality
requirement since its inception in 1988. The Company is actively
seeking formal relationships with other channel resellers.
INTERNATIONAL DISTRIBUTORS. Currently, the Company is primarily
focusing its international sales efforts on the European market.
During 1996, the Company executed exclusive distribution agreements
with Futuremedia PLC to market and distribute the Company's ISO 9000,
QS-9000 and ISO 14000 products in the UK, and the Company's QS-9000
product in Germany through its wholly-owned subsidiary, Lasermedia
Gmbh. The Company is currently developing relationships with other
foreign distributors.
MARKETING PARTNERS. The Company has developed relationships with
certain organizations to act as promoters of the Company's products.
During 1996, the Company executed agreements with the American
National Standards Institute (ANSI) and the Global Environment &
Technology Foundation (GETF) to market and promote the Company's ISO
14000 product. ANSI, a non-profit organization, coordinates the US
voluntary standard system and is the official US representative to the
International Organization for Standardization (ISO). GETF, a
non-profit corporation, promotes the development and use of technology
to achieve environmentally sustainable development. ANSI and GETF
have agreed to allow the Company to reflect their respective business
logos on the ISO 14000 product packaging.
For 1996, direct sales, telesales, independent sales agents, resellers and
international distributors accounted for 52%, 21%, 5%, 12% and 10% of revenues,
respectively.
COMPETITION
The market for resources that prepare companies for compliance to
international management standards, such as ISO 9000, QS-9000 and ISO 14000, is
highly fragmented. No single company has a dominant market share, and the
Company generally competes with a variety of competitors, depending on factors
such as the size of the customer, specific business requirements, geographic
location and the level of anticipated investment by the customer.
The international standards market has traditionally been served by
consultants, instructor-led training and companies which market publications
such as books, manuals and tapes. Companies providing consulting services on
ISO 9000, QS-9000 and ISO 14000, such as Andersen Consulting, Ernst & Young and
Grant Thornton, enjoy a high level of customer loyalty as it relates to the
implementation of enterprise-wide business practices. The Company has
encountered many sales situations in which a company chose to use a consultant
versus the Company's technology solution. The Company can offer no assurance
that it will be ultimately successful in competing with such consultants.
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In addition to competition from consultants, the Company also competes with
providers of similar technology solutions for compliance to ISO 9000, QS-9000
and ISO 14000, such as Powerway, Inc. and SystemCorp. Both companies have
developed and are selling technology-based solutions that assist companies with
their standard compliance efforts. Because these companies are privately held,
information is unavailable regarding the level of sales success these
competitors may be experiencing. Although the Company believes its products
permit greater interactivity between the user and the program, and include more
training and education on the requirements of complying with ISO 9000, QS-9000
and ISO 14000, there can be no assurance the Company's products will achieve a
greater level of market acceptance than these competing technology solutions.
INTELLECTUAL PROPERTY RIGHTS
The Company regards its multimedia products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
The Company's products are licensed to end-users under a perpetual,
non-transferable, non-exclusive license. The Company relies primarily on a
"shrink-wrap" license for protection, which is included inside the product
packaging. Such a license sets forth the terms and conditions under which the
customer may use the product and binds the purchaser upon purchase and use of
the product. The Company does not require its shrink wrap licenses to be signed
by the licensee and therefore may be unenforceable under the laws of certain
jurisdictions.
The Company has made applications for registration of certain trademarks in
the United States and other parts of the world where its products are actively
marketed. Currently, the Company has received registration for the mark
"Reality Interactive (and Logo Design)" in the United States, Switzerland,
Benelux, France and Germany. Also, the Company has received registration for
the mark "Real Tools for Accelerated Learning" in the United States.
RESEARCH AND DEVELOPMENT
The Company spent most of 1996 developing its QS-9000, ISO 14000 and
Pollution Prevention products. The Company's research and development
expenditures are primarily comprised of direct employee costs. The Company also
incurs outside product development costs related to subject matter content
expertise, video and audio production and specialized computer programs.
For 1996, 1995 and 1994, the Company incurred expenditures of $2,355,922,
$939,487 and $200,366, respectively, developing its ISO 9000, QS-9000, ISO 14000
and Pollution Prevention products.
EMPLOYEES
As of March 15, 1997, the Company had 36 full-time employees, 1 part-time
employee and 3 independent contractors, including 11 in sales and marketing, 4
in administration and finance and 25 in research and development. The Company's
employees are not represented by any collective bargaining organization and the
Company has never experienced a work stoppage. The Company believes its
employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive office is located in Eden Prairie, Minnesota, where
it leases approximately 21,000 square feet under a sublease that expires in May
1999. Under the sublease, the Company is obligated to pay an annual rent of
approximately $318,900, with yearly increases in rent limited to its share of
any yearly
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increases in building operating expenses. There are no leases associated with
the Company's direct sales offices.
The Company considers its leased real property adequate for its current and
foreseeable future, and in the opinion of management, is adequately covered by
insurance.
ITEM 3. LEGAL PROCEEDINGS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been quoted on the NASDAQ Small Cap Market
since its initial public offering on April 10, 1996. The following table sets
forth the high and low prices of the Company's common stock for the last three
fiscal quarters as reported by the NASDAQ Small Cap Market.
YEAR ENDED DECEMBER 31, 1996
QUARTER HIGH LOW
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Second * $6 1/8 $3 3/4
Third $4 1/8 $2
Fourth $2 1/8 $1
* Prices shown are subsequent to April 10, 1996, the effective date of
the Company's initial public offering.
As of March 24, 1997, the Company had approximately 110 shareholders of
record of the Company's common stock. The Company has never paid cash dividends
on its common stock and does not anticipate paying cash dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operation should be read in
conjunction with the Company's financial statements and notes contained herein
for the years ended December 31, 1996 and 1995.
RESULTS OF OPERATIONS
REVENUES. Revenues were $484,127 for 1996, compared to revenues of $54,106
for 1995. The revenue increase was due primarily to increasing sales of the
Company's initial product, the ISO 9000 REGISTRATION SERIES, which generated
revenues of $347,844 during 1996. The ISO 9000 REGISTRATION SERIES was released
as a complete series in August 1995 and accounted for all of the Company's 1995
revenues.
The Company also generated approximately 27%, or $131,245 of its 1996
revenues from its second product, the QS-9000 COMPLIANCE SERIES, a four title
interactive multimedia product that was released in August 1996.
The revenue results from 1996 were less than the Company's original
expectations as a result of unexpected challenges associated with developing a
direct sales force and longer than expected sales cycles in corporate multi-site
enterprises.
COST OF REVENUES. Cost of revenues were $107,008 for 1996, compared to
$33,464 for 1995. The increase in cost of revenues was primarily due to
royalties paid to business partners as a result of an increasing level of sales.
Royalties were paid to the American Society for Quality Control ("ASQC"), a
sales channel for the Company's ISO 9000 REGISTRATION SERIES and QS-9000
COMPLIANCE SERIES, Process Management International,
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the Company's subject matter expert for its ISO 9000 REGISTRATION SERIES and the
Global Environment and Technology Foundation, a marketing partner for the
Company's ISO 14000 EMS CONFORMANCE SERIES. Cost of revenues also includes the
cost of media duplication and packaging materials.
OPERATING EXPENSES. The Company's operating expenses for 1996 were
$6,416,398, a 243% increase over operating expenses of $2,642,059 for 1995.
This increase in operating expenses between 1996 and 1995 was due primarily to
the following:
(a) Sales and marketing expenses were $2,531,058 for 1996, compared to
$808,825 for 1995, a 313% increase. This increase between periods was
due primarily to the addition of new direct sales, telesales and
marketing positions and the expansion of direct marketing programs
related to an increase in the Company's product offerings in 1996.
The Company expects its sales and marketing expenses will decrease in
1997 compared to 1996 as a result of fewer direct sales personnel and
marketing programs.
(b) Research and development expenses were $2,355,922 for 1996, compared
to $939,487 for 1995, a 251% increase. This increase was attributed
to the development of three new products in 1996, the QS-9000
COMPLIANCE SERIES, a four title CD-ROM product dealing with automotive
quality standards, the ISO 14000 EMS CONFORMANCE SERIES, a five title
CD-ROM product dealing with environmental management standards and
POLLUTION PREVENTION, a one-title product dealing with the key
concepts of developing a pollution prevention program. The Company
completed development of the QS-9000 COMPLIANCE SERIES in August 1996,
POLLUTION PREVENTION in November 1996 and two titles of the ISO 14000
CONFORMANCE SERIES in November 1996. The remaining three titles of
the ISO 14000 product were released in March 1997. Prior to 1996, the
Company's development expenses primarily related to the ISO 9000
REGISTRATION SERIES, the Company's first product. The Company expects
its research and development expenses to decrease in 1997 compared to
1996, as the Company shifts its attention away from the development of
off-the-shelf products to a model that focuses attention on the
delivery of custom and funded development services.
(c) General and administrative expenses were $1,529,418 for 1996, compared
to $893,747 for 1995, a 171% increase. This increase was due
primarily to increased travel, office rent, depreciation expense,
operating leases and professional fees. The Company expects that its
general and administrative expenses for 1997 will remain consistent
with 1996.
OTHER INCOME (EXPENSE). The Company's net other expense was $92,223 for
1996, compared to net other expense of $149,979 for 1995. For 1996, net other
expense primarily consists of expenses associated with the Company's January
1996 bridge note financing, including $282,846 of interest expense and $113,486
related to the amortization of offering costs. During 1996, the Company also
realized interest income of $304,109 from the investment of proceeds from its
bridge note financing and its April 1996 initial public offering ("IPO"). Net
other expense for 1995 primarily consists of interest expense related to prior
debt financings.
NET LOSS. Net loss, after deducting extraordinary losses of $219,470 from
the early retirement of debt, was $6,350,972 for 1996, compared to a net loss of
$2,771,396 for 1995. The Company expects to continue to experience losses at
least through 1997 as its projected revenues will continue to fall below its
base operating expenses for most of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents, and short-term investments were
$5,253,440 as of December 31, 1996, compared to $118,916 as of December 31,
1995. The increase in cash, cash equivalents and short-term investments was
primarily attributed to the Company's IPO in April 1996. Also contributing to
the increase was lease financing of approximately $266,157 obtained in a
sale-leaseback of computer equipment in
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May 1996. The decrease in cash and cash equivalents, and short-term investments
subsequent to the Company's IPO was due primarily to the net loss from
operations and repayment of Bridge Notes. See the Company's audited financial
statements contained herein for further information on financing transactions.
Although the Company anticipates that it will experience operating losses
and negative cash flow from operations at least through 1997, and the Company
currently does not have bank financing available, the Company believes that its
current cash balances will be sufficient to meet its working capital and capital
expenditure needs through 1997. Thereafter, the Company may need to raise
additional funds to finance its operations. To the extent the Company's
revenues do not meet management's expectations, or the Company's growth exceeds
management's expectations, the Company may require additional financing prior to
the end of 1997. At such time, there can be no assurance that debt or equity
financing would be available on favorable terms or at all.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
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Report of Independent Accountants..................... F-2
Balance Sheet......................................... F-3
Statement of Operations............................... F-4
Statement of Stockholders' Equity..................... F-5
Statement of Cash Flows............................... F-6 to F-7
Notes to Financial Statements......................... F-8 to F-14
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information under the captions "Election of Directors", "Executive
Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934", are contained in the Company's Proxy Statement relating to the Annual
Meeting of Shareholders for the year ended December 31, 1996, and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation" in the
Company's Proxy Statement relating to the Annual Meeting of Shareholders for the
year ended December 31, 1996 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Principal Shareholders" in the
Company's Proxy Statement relating to the Annual Meeting of Shareholders for the
year ended December 31, 1996 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's Proxy Statement relating to the Annual
Meeting of Shareholders for the year ended December 31, 1996 is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits
Exhibit
Number Description
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3.1(1) Articles of Incorporation of the Company
3.2(1) Amended and Restated Articles of Incorporation of the Company
3.3(1) Bylaws of the Company
3.4(1) Amended Bylaws of the Company
4.1(1) Specimen form of the Company's Common Stock Certificate
4.2(1) Warrant Agreement (including Form of Redeemable Warrant)
4.3(1) Form of Bridge Loan Agreement, Dated January 19, 1996, between
the Company and various investors (including for of Bridge Note
and Bridge Warrant)
4.4(1) Canceled Promissory Note in favor of Brightstone Fund VI in the
amount of $200,000
4.5(1) Canceled Promissory Note in favor of Wyncrest Capital, Inc. in
the amount of $120,000
4.6(1) Warrant in favor of Brightstone Fund VI for 43,109 shares
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Exhibit
Number Description
------ -------------------------------------------
4.7(1) Warrant in favor of Wyncrest Capital, Inc. for 25,188 shares
10.1(1) ISO 9000 Content Agreement between Reality Interactive, Inc. and
Process Management International, dated August 4, 1994
10.2(1) Joint Marketing and Distribution Agreement between Reality
Interactive, Inc. and American Society for Quality Control, Inc.,
dated May 10, 1995
10.3(1) Agreement for Consulting Services between Reality Interactive,
Inc. and Steven W. McClernon, dated January 15, 1996
10.4(1) Sublease Agreement between Reality Interactive, Inc. and Collopy
Saunders Real Estate, Inc., dated December 15, 1994
10.5(1) Subject Matter Expert Agreement between Reality Interactive, Inc.
and The Third Generation, Inc., dated January 6, 1996
10.6(1) Subject Matter Expert Agreement between Reality Interactive, Inc.
and WRITAR, dated February 1, 1996
10.7(1) Reality Systems, Inc. 1994 Stock Incentive Plan, as amended
(including for of Stock Option Agreement)
10.8(1) Form of Non-Statutory Directors' Option Agreement (issued to
certain non-employee directors or affiliates of non-employee
directors in 1994 and 1995)
10.9(1) Reality Interactive, Inc. 1996 Directors Stock Option Plan
(including form of Directors Stock Option Agreement)
10.10(1) Form of Shrink-Wrap License Agreement
10.11(1) Form of Enterprise License Agreement
10.12(1) Form of Volume Discount Agreement
10.13(1) ISO 9000/QS-9000 Addendum, dated March 13, 1996, between the
Company and Process Management Institute, Inc., amending the
agreement dated August 4, 1994
10.14(1) Form of Lock-Up Agreement
10.15(1) Independent Software Vendor Agreement between the Company and
Hewlett Packard
10.16(1) Master Equipment Lease Agreement, dated June 15, 1995, and
Amendment No. 1 to Master Equipment Lease Agreement, dated July
1995, each between the Company and Carlton Financial Corporation
10.17(1) Lease Agreement, dated January 30, 1996, between the Company and
Lease Finance Group, Inc.
10.18(1) Irrevocable Letters of Credit, dated June 20, 1995 and August 1,
1995, from BankWindsor in favor of Carlton Financial Corp. and
Irrevocable Letter of Credit, dated December 27, 1995, in favor
of Lease Finance Group, Inc.
10.19(2) First Amendment to Joint Marketing and Distribution Agreement
between Reality Interactive, Inc. and American Society for
Quality Control, Inc., dated May 1, 1996
10.20(2) Joint Marketing and Distribution Agreement between Reality
Interactive, Inc. and American Society for Quality Control, Inc.,
dated May 17, 1996
10.21(3) Equipment Lease between Reality Interactive, Inc. and Dexxon
Capital Corporation Dated June 3, 1996
10.22(4) Copyright License Agreement between Reality Interactive, Inc. and
the American National Standards Institute dated August 30, 1996,
including Modifying Agreement
10.23(4) ISO 14000 Marketing and Promotion Agreement between Reality
Interactive, Inc. and the American National Standards Institute
dated September 20, 1996
10.24(4) ISO 14000 Marketing and Promotion Agreement between Reality
Interactive, Inc. and the Global Environment and Technology
Foundation dated September 6, 1996
10.25(4) Distribution Agreement between Reality Interactive, Inc. and
Futuremedia PLC dated July 12, 1996
10.26 Sublease Agreement between Reality Interactive, Inc. and IVI
Publishing, Inc., dated September 17, 1996
13
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Exhibit
Number Description
------ -------------------------------------------
10.27+ Distribution Agreement between Reality Interactive, Inc. and
Lasermedia (Deutschland) GMBH, dated October 9, 1996
10.28 Amendment No. 2, dated December 9, 1996, to Master Equipment
Lease Agreement, dated July 1995, each between the Reality
Interactive, Inc. and Carlton Financial Corporation
10.29 Irrevocable Letter of Credit, dated December 9, 1996, from
BankWindsor in favor of Carlton Financial Corp.
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedules
99.1 Cautionary Statement
(1) Incorporated by reference to Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (File No. 0-27862), as filed with
the Securities and Exchange Commission on April 9, 1996.
(2) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1996.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended June 30, 1996.
(4) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended September 30, 1996.
+ Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934,
confidential portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended December 31, 1996.
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REALITY INTERACTIVE, INC.
Dated: March 28, 1997 By /S/ Wesley W. Winnekins
-----------------------------------
Wesley W. Winnekins
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/S/ Paul J. Wendorff Chairman, Chief Executive
- --------------------- Officer, President and Director
Paul J. Wendorff (Principal Executive Officer) March 28, 1997
/S/ Wesley W. Winnekins Chief Financial Officer and
- ------------------------ Secretary (Principal Financial
Wesley W. Winnekins and Accounting Officer) March 28, 1997
/S/ Ronald E. Eibensteiner Director March 28, 1997
- ---------------------------
Ronald E. Eibensteiner
/S/ James A. Bernards Director March 28, 1997
- ----------------------
James A. Bernards
15
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- ------------------------------------------------------------- --------
10.26 Sublease Agreement between Reality Interactive, Inc. and IVI
Publishing, Inc., dated September 17, 1996................... 17
10.27+ Distribution Agreement between Reality Interactive, Inc. and
Lasermedia (Deutschland) GMBH, dated October 9, 1996......... 26
10.28 Amendment No. 2, dated December 9, 1996, to Master Equipment
Lease Agreement, dated July 1995, each between Reality
Interactive, Inc. and Carlton Financial Corporation.......... 49
10.29 Irrevocable Letter of Credit, dated December 9, 1996, from
BankWindsor in favor of Carlton Financial Corp............... 54
23.1 Consent of Price Waterhouse LLP.............................. 57
27.1 Financial Data Schedules..................................... 58
99.1 Cautionary Statement......................................... 59
+ Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, confidential
portions of this Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
16
<PAGE>
EXHIBIT 10.26
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT is entered into effective as of the 17th day of
September, 1996, by and between IVI PUBLISHING, INC., a Minnesota corporation
("Sublessor") and REALITY INTERACTIVE, a Minnesota corporation ("Sublessee").
RECITALS
Sublessor is the tenant under a lease with Ryan/Wilson Limited Partnership,
a Minnesota limited partnership (the "Owner") dated March 30,1994 (the "Main
Lease") for the Leased Premises as defined in the Main Lease and as shown on
attached Exhibit A, (the "Main Lease Premises") located in the building at 7500
Flying Cloud Drive, Eden Prairie, Minnesota 55344 (the "Building").
The Main Lease is incorporated herein by reference as fully as if the terms
and provisions were set forth in full in this Sublease Agreement, except those
terms specifically excluded in or modified by this Sublease Agreement.
Sublessee desires to sublease from Sublessor that portion of the Main Lease
Premises located on the fourth (4th) floor of the Building, and shown by
cross-hatching on attached Exhibit A (the "Premises") and Sublessor desires to
sublease the Premises to Sublessee.
THEREFORE, in consideration of the mutual promises of the panties set forth
in this Sublease Agreement and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Sublessor and Sublessee agree as
follows:
ARTICLE 1. PREMISES
Sublessor hereby leases to Sublessee, and Sublessee hereby takes from
Sublessor, the Premises, subject to and together with the benefit of the terms,
covenants, conditions and provisions of this Sublease Agreement applicable
thereto. The Premises shall be deemed to be comprised of 21,184 rentable square
feet.
ARTICLE 2. TERM
The term of this Sublease Agreement (the "Term") shall be two (2) years and
six (6) months commencing on December 1, 1996 (the "Commencement Date") and
terminating on the day of May 31, 1999, unless sooner terminated as provided
herein.
ARTICLE 3. USE
Sublessee shall use the Premises for any purpose permitted in the Main
Lease.
ARTICLE 4. BASE RENT AND ADDITIONAL RENT
A. Sublessee agrees to pay Sublessor during the Term, Base Rent at the
rate or rates set forth on the Addendum attached hereto as Exhibit B, payable in
equal monthly installments, in advance, on the first day of each and every month
during the Term. In the event the Term commences on a day other than the first
day of a
17
<PAGE>
calendar month, Sublessee shall pay Base Rent for said fractional month prorated
on the basis of a thirty (30) day period.
B. Sublessee agrees to pay Sublessor during the Term, Additional Rent, as
defined in the Main Lease, at the same rates and on the same basis as Sublessor
has agreed to pay to Owner under the Main Lease. If the Premises are comprised
of less than the entire Main Lease Premises, then the Additional Rent payable by
Sublessee hereunder shall be calculated by multiplying the Additional Rent
payable by Sublessor under the Main Lease by a fraction, the numerator of which
is the rentable area of the Premises, and the denominator of which is the
rentable area of the Main Lease Premises.
C. Sublessee shall also be responsible for paying a pro-rata share of the
utility charges for which Sublessor is responsible under the Main Lease. This
share shall be a fraction, the numerator of which is the rentable area of the
Premises, and the denominator of which is the rentable area of the Main Lease
Premises.
D. The parties acknowledge and agree that Sublessee shall timely pay all
Base Rent, Additional Rent, and any other charges which are Sublessee's
obligation hereunder.
E. All Base Rent and Additional Rent payable by Sublessee under this
Sublease shall be paid, without notice or prior demand therefor and without any
deduction or set-off whatsoever, to Sublessor, at the address set out in
Article 14 hereof or at such place as Sublessor may designate from time to time
by written notice to Sublessee given in the manner set out in Article 14
hereof.
F. The parties acknowledge that the Additional Rent currently payable by
Sublessor under the Main Lease equals $9.56 per square foot annually. The
panties also acknowledge that the Additional Rent is subject to the adjustments
and increases set forth in the Main Lease.
ARTICLE 5. MAIN LEASE
A. Except as may be inconsistent with the provisions of this Sublease
Agreement, the terms, provisions, covenants and conditions of the Main Lease are
incorporated herein by reference in like manner as though the same were
specifically set forth herein. Except as may be otherwise specifically provided
herein, Sublessee shall have all rights and privileges and assumes and agrees to
keep and perform, as to the Premises, all of the obligations, conditions and
covenants of the Tenant set forth under the Main Lease as though Sublessee were
substituted as Tenant thereunder. It is agreed and understood between the
panties hereto that the Sublessee obtains and is granted no more rights and
privileges, as to the Premises, under this Sublease Agreement than Sublessor was
granted as Tenant under the Main Lease.
B. The obligations, conditions and covenants of the Owner as the Landlord
under the Main Lease shall remain the Owner's, and Sublessor shall not be
required to perform the same in the event of a default by the Owner.
Notwithstanding the foregoing, Sublessor shall have, with respect to the
Premises, all of the rights and privileges of the Owner as Landlord under the
Main Lease, except as herein otherwise specifically provided.
C. Sublessor and Sublessee each agree not to do, suffer, or permit
anything to be done which would result in a default under the Main Lease, or
cause the Main Lease to be terminated or forfeited.
ARTICLE 6. PAYMENT OF COSTS AND FEES
Sublessee will pay and discharge all costs, attorneys fees and-expenses
that may be incurred by Sublessor in enforcing the-covenants and agreements of
this Sublease Agreement, or which may-be incurred
18
<PAGE>
by Owner in enforcing the covenants and agreements of_the Main Lease as a result
of a default by Sublessee hereunder
ARTICLE 7. INSURANCE
Sublessee shall maintain, as to the Premises, all insurance required to be
maintained, by Sublessor as Tenant, under the Main Lease, and have Sublessor and
Owner named as additional insureds thereon. The insurance policies maintained
by Sublessee shall provide that the same may not be canceled, terminated or
altered without thirty (30) days' prior written notice sent by certified mall,
return receipt requested, to Sublessor and Owner. The insurance maintained by
Sublessee shall contain an express waiver of claims and subrogation in favor of
Sublessor and Owner.
ARTICLE 8. INDEMNIFICATION
Sublessee agrees that it will indemnify and hold Sublessor and Owner
forever harmless as provided in Article 12 of the Main Lease, which
indemnification shall also include any and all responsibility or liability which
Sublessor may incur by virtue of this Sublease Agreement arising out of any
failure of Sublessee in any respect to comply with and perform the requirements
and provisions of the Main Lease (attributable to the Premises), or this
Sublease Agreement.
ARTICLE 9. ASSIGNMENT/TRANSFER
Sublessee shall not transfer, sell, assign or pledge this Sublease or
further sublease the Premises, or any part thereof without (i) compliance with
the requirements of the Main Lease relating thereto and (ii) obtaining the prior
written consent of the Sublessor and Owner. Owner and Sublessor have legitimate
concerns regarding the compatibility of new or different occupants of the
Premises, including concerns based upon the use to which such occupants may make
of the Premises, and may therefore withhold their consent to any such transfer
based upon any concern they or either of them may have regarding the use to
which the proposed transferee may put the Premises or based upon other
justifiable concerns related to possible lack of harmony between the use of the
proposed transferee and other uses or occupants in the Building or concerns
related to the financial strength, character or reputation of the proposed
transferee. No transfer of any nature shall relieve Sublessee of primary
liability to Sublessor hereunder unless Sublessor agrees in writing.
ARTICLE 10. ALTERATIONS AND IMPROVEMENTS
Sublessee shall not make any alterations or improvements to the Premises
without (i) complying with the terms of the Main Lease relating thereto and (ii)
obtaining the prior written consent of Sublessor and Owner. Sublessor's consent
may be conditioned upon Sublessor being provided with plans and specifications
for the proposed alteration or improvement, information regarding the identity
of the persons who will perform the work or provide the materials, security
against mechanic's liens (all of which must be reasonably acceptable to
Sublessor) and receipt of Owner's consent. All such work must be done in a
workmanlike fashion using new, first-grade materials. Sublessee shall be
responsible for the reasonable costs incurred by Sublessor and Owner in
reviewing any plans and specifications to be submitted pursuant to this Article.
19
<PAGE>
ARTICLE 11. SURRENDER OF THE PREMISES
Upon the expiration of the Term of this Sublease Agreement, Sublessee shall
remove its equipment and trade fixtures promptly (immediately repairing any
damage caused thereby) and quit and surrender the Premises in the condition
existing as of the date hereof.
ARTICLE 12. DEFAULT/REMEDIES
A. If any one or more of the following events occurs, then Sublessee
shall be deemed to be in default under this Sublease Agreement:
1. Sublessee fails to pay, when due, the Base Rent, Additional Rent or
other charges provided for under this Sublease Agreement;
2. Sublessee fails to keep, observe or perform any of the other terms,
covenants and conditions herein to be kept, observed and performed by
Sublessee under this Sublease Agreement for more than (i) five (5) days
after payment is due (in the case of a monetary default) or (ii) twenty
(20) days after written notice is given to Sublessee specifying the nature
of such default (in the case of a non-monetary default). Notwithstanding
the foregoing, if the applicable grace period set forth in the Main Lease
shall be shorter than that provided herein, the grace period set forth in
the Main Lease shall supersede the grace period set forth in this
subparagraph.
B. If a default occurs, then Sublessor shall be entitled to exercise any
and all of the rights and remedies available at law or in equity, including
those provided to the Owner as Landlord under the Main Lease. Any remedies
under this Sublease Agreement shall not be deemed exclusive, but shall be
cumulative and shall be in addition to all other remedies available to Sublessor
existing at law or in equity. Owner shall be entitled to enforce the provisions
of the Main Lease against Sublessee to the extent the same are violated by
Sublessee.
ARTICLE 13. CONSENTS
A. Wherever the Owner's consent as Landlord is required by the provisions
of the Main Lease, the Sublessee must, in addition to securing such consent,
also obtain the prior written consent of the Sublessor.
B. In no event shall Sublessee be entitled to any damages for any
withholding or delay in either Sublessor or Owner giving its consent and
Sublessee understands and agrees that its remedies shall be limited to an action
for summary judgment, an injunction or declaratory judgment.
ARTICLE 14. NOTICES
A. Sublessor shall immediately forward to Sublessee all notices of
default received by Sublessor from Owner as Landlord under the Main Lease.
Sublessee shall forward to Sublessor all reports and written statements
concerning the Premises required of the Tenant under the Main Lease at least ten
(10) days prior to the date such reports or written statements are due under the
Main Lease.
B. Any notice, demand, request or other communication which may be or is
required to be given to the Owner as Landlord under the Main Lease shall be
effective only if a copy of the notice to the Owner is either delivered
personally or sent to Sublessor as provided under subparagraph C below.
20
<PAGE>
C. Any notice which one party wishes or is required to give to the other
party will be regarded as given and received if in writing and either delivered
personally to such party or sent certified or registered mall, return receipt
requested, postage prepaid, to the addresses below, or such other addresses as
either party may, from time to time, designate by written notice to the other
party:
Sublessor: IVI Publishing, Inc.
7500 Flying Cloud Drive
Eden Prairie, MN 55344
Attention: CFO
Sublessee: Reality Interactive
7500 Flying Cloud Drive
Eden Prairie, MN 55344
Attention: Wes Winnekins, CFO
Owner: Ryan Properties, Inc.
700 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402
ARTICLE 15. RELATIONSHIP OF THE PARTIES
Nothing contained in this Sublease Agreement shall be deemed or construed
by the parties hereto, or by a third party, to create the relationship of
principal and agent or of partnership or joint venture or of any association
whatsoever between Owner, Sublessor, or Sublessee. It is hereby expressly
understood and agreed that no provision contained in this Sublease Agreement,
nor any act or acts of the parties hereto shall be deemed to create any
relationship between Sublessor and Sublessee other than the relationship of
Sublessor and Sublessee.
ARTICLE l6. INVALIDITY
If any part of this Sublease Agreement or any part of any provision hereof
shall be adjudicated to be void or invalid, then the remaining provisions
hereof, not specifically so adjudicated to be invalid, shall be executed without
reference to the part or portion so adjudicated as invalid, insofar as such
remaining provisions are capable of execution.
ARTICLE 17. IMPORTANCE OF EACH COVENANT
Each covenant and agreement on the part of one party is understood and
agreed to constitute an essential part of the consideration for each covenant
and agreement on the part of the other party.
ARTICLE 18. CONDITIONS
This Sublease Agreement is dependent and conditioned upon the Owner
executing its consent to this Sublease Agreement in the form attached hereto as
EXHIBIT C.
21
<PAGE>
ARTICLE 19. SUCCESSORS AND ASSIGNS
This Sublease Agreement and all covenants and agreements contained herein
shall be binding upon, apply and inure to the benefit of the respective
successors and assigns of the parties to this Agreement, subject to the
restrictions imposed under this Sublease Agreement and the Main Lease relating
to assignment or further sublease by the Sublessee.
ARTICLE 20. NON-WAIVER
Sublessor's failure to insist upon strict performance of any covenant in
this Sublease Agreement or to exercise any option or right herein contained
shall not be a waiver or relinquishment of such covenant, right or option, but
the same shall remain in full force and effect. Sublessor is specifically
authorized to accept a partial payment (no matter how such payment may be
labeled or conditionally delivered) without such acceptance being deemed a
waiver of the balance of the amount owed.
ARTICLE 21. APPLICABLE LAW
This Sublease Agreement shall be construed under the laws of the State of
Minnesota.
ARTICLE 22. ENTIRE AGREEMENT/AMENDMENTS
This Sublease Agreement and the Exhibits attached hereto set forth all of
the covenants, promises, agreements, conditions and understanding between
Sublessor and Sublessee concerning the Premises and there are no other
covenants, promises, agreements, conditions or understandings, either oral or
written, between them other than those which are set forth in this Sublease
Agreement. Except as otherwise provided herein, no subsequent alteration,
amendment, change or addition to this Sublease Agreement shall be binding upon
Sublessor or Sublessee unless reduced to writing and signed by both parties.
ARTICLE 23. ADDENDUM
Attached to this Sublease is an Addendum, the terms and provisions of which
are hereby incorporated into this Sublease by reference.
ARTICLE 24. COUNTERPARTS
This Sublease Agreement and the Consent attached hereto may be separately
executed as counterparts which shall be then read together and enforced.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
SUBLESSOR: IVI PUBLISHING, INC. SUBLESSEE: REALITY INTERACTIVE
By /S/ JOY SOLOMON By /S/ WESLEY W. WINNEKINS
---------------- ------------------------
Its CHIEF EXECUTIVE OFFICER Its CHIEF FINANCIAL OFFICER
----------------------- -----------------------
22
<PAGE>
EXHIBIT A
[Diagram of the Main Lease Premises and the Premises]
23
<PAGE>
EXHIBIT B
Addendum to Sublease
Sublessee shall pay Base Rent in the amount of $3.94 per square foot annually.
24
<PAGE>
EXHIBIT C
ACKNOWLEDGMENT AND CONSENT
This Agreement is entered into effective as of September 19, 1996 by and
between Ryan/Wilson Limited Partnership, a Minnesota limited partnership,
("Owner") and IVI Publishing, Inc., a Minnesota corporation ("Tenant").
RECITALS
Owner and Tenant are parties in the respective capacities of landlord and
tenant in the Lease dated March 30, 1994 (the "Lease") for the premises
described in the Lease (the "Premises") located at 7500 Flying Cloud Drive, Eden
Prairie, Minnesota.
Tenant has requested that Owner grant Tenant permission to sublease a
portion of the Subleased Premises to Reality Interactive, a Minnesota
corporation ("Sublessee") pursuant to the terms of the attached Sublease
Agreement.
Owner is willing to grant that consent subject to certain terms and
conditions.
PROVISIONS
In consideration of the mutual covenants of the parties and other valuable
consideration, the receipt and sufficiency is hereby acknowledged, the parties
agree as follows:
1. Owner grants permission to Tenant to sublease the Subleased Premises
to Sublessee for a term commencing on December 1,1996 and terminating May
31,1999 (the "Term") and pursuant to the terms and conditions of the attached
Sublease Agreement.
2. This consent shall not be construed as a consent to any other
transfer, or any further subleasing of all or any portion of the Premises.
3. Owner agrees that Sublessee's possession of the Premises pursuant to
the terms of the Sublease Agreement shall not be disturbed so long as Sublessee
is not in default under the terms of such Sublease Agreement and Tenant is not
in default under the terms of the Main Lease.
RYAN/WILSON LIMITED PARTNERSHIP
By: /S/ JOHN P. KELLY
------------------------------
Its: VICE PRESIDENT
------------------------------
IVI PUBLISHING, INC.
By: /S/ JOY SOLOMON
------------------------------
Its: CHIEF EXECUTIVE OFFICER
------------------------------
25
<PAGE>
EXHIBIT 10.27
DISTRIBUTION AGREEMENT
REALITY INTERACTIVE AND LASERMEDIA (DEUTSCHLAND) GMBH
________________________________________________________________________________
THIS AGREEMENT is made on October 9, 1996
BETWEEN Reality Interactive, Inc. a public company, incorporated in Minnesota
and having its registered office at 11200 West 78th Street, Suite 300, Eden
Prairie MN USA55344 and whose principal place of business is at 11200 West 78th
Street, Suite 300, Eden Prairie MN USA55344 (the "Company"), which expression
where the context so requires shall include its successors and assigns,
AND LaserMedia (Deutschland) GMBH, a public company registered in Germany and
having its registered office at Max-Planck-Strasse 39A, D-50858 Koln, Germany
and whose principal place of business is at Max-Planck-Strasse 39A, D-50858
Koln, Germany (the "Distributor"),
WHEREBY IT IS AGREED as follows:
1 APPOINTMENT
The Company hereby appoints the Distributor (and the Distributor hereby
accepts the appointment) as its exclusive distributor in the territory
described in Schedule A hereto (the "Territory") for the promotion,
marketing and distribution of the products more particularly described in
Schedule B-1 hereto (the "Products"). Distributor shall have the right to
name and license resellers to distribute the Products as long as
Distributor and such reseller execute a distribution agreement in
substantially the same form as this Agreement.
If Distributor meets the revenue targets more particularly described in
Schedule G hereto (the Distributor Discount Schedule), Distributor can
maintain its exclusive appointment beyond calendar year 1997. If such
revenue targets are not met by Distributor then the appointment beyond
calendar year 1997 shall convert to a nonexclusive appointment subject to
termination in accordance with Clauses 2, 7 or 11.
Localization issues shall be covered in Schedule B-2.
2 PERIOD
Subject to the terms and conditions of the Agreement, this Agreement shall
continue in force until December 31, 1997 from the Effective Date of this
Agreement but subject to earlier termination in accordance with Clause 7 or
Clause 11.
This Agreement shall automatically continue after the end of the said
initial period for successive annual terms provided the parties agree to
an annual revision of the Business Plan attached as Schedule C on or before
December 31 preceding the renewal term, unless terminated by either party
by giving to the other not less than six months prior notice to expire at
the end of the said initial period or prior to the expiration of any
subsequent annual renewal term.
3 DISTRIBUTOR'S OBLIGATIONS
The Distributor agrees with the Company:
(a) To use its reasonable endeavours to promote, market and distribute the
Products in the Territory as part of the Distributor's range of interactive
multimedia products as more particularly described in the Business Plan
attached as Schedule C:
(i) To devote sufficient time, energy and expertise to market,
supply, deliver, install, set-up, commission, instruct customers
in the use of, provide contractual field support, warranties and
help-line facilities for the Products;
26
<PAGE>
(ii) To permit an audit of all records relating to revenues and
collections derived from the sale of Products;
(iii)Not to undertake representation of any software system which
may be competitive to or dilute efforts in the marketing etc of
the Products.
(b) To give the Company, upon the signing of this Agreement and calendar
monthly thereafter during the term of this Agreement, (1) a written but
non-binding forecast outlining the quantities of Products that the
Distributor proposes to sell during the next calendar month in the format
attached as Schedule D-1; (2) a written but non-binding forecast outlining
the quantities of Products that the Distributor proposes to sell during the
next 6 months in the format attached as Schedule D-2; and (3) a written
marketing report outlining Distributor's activities in the preceding month
and proposed activities for the subsequent month as well as other relevant
marketing information in the format attached as Schedule D-3. .
(c) To supply the Products at prices agreed with the Company, and to pay a
royalty based on a percentage of sales revenues received by the
Distributor as detailed in the Business Plan attached as Schedule C.
(d) For those Products localized into German, to be responsible for the
creation of the German packaging and to be responsible for the
manufacturing of the Products into final end user form; provided, however,
that German versions will not be sold to end users (except for beta release
purposes) until Company has been sent a full copy of the German version for
review and has had a chance to review such German version. Company will
review the German version within 7 business days of its receipt
(e) Not in any manner to pledge the credit of the Company or to receive any
money on behalf of the Company and not to make any warranty or other
representation regarding the Products other than as authorised by the
Company in writing from time to time.
(f) Upon the termination of this Agreement for any reason to return to the
Company and at the cost of the Distributor all materials supplied to the
Distributor by the Company relating to the Products including all magnetic
and optical materials embodying or containing the Products, and all
documentation forming part of or relating to or concerning the Products,
except that the Distributor shall be able to retail stocks of Products then
held or on order together with related documentation.
(g) Not to modify, amend or in any other way interfere with the Products or
any names, notices or copyright marks which may appear therein except as
may be required to correct errors which may appear in the textual material
associated with or forming a part of the Products from time to time, and in
the event such an alteration is made to notify the Company of the
alteration promptly.
(h) To co-operate with the Company or its nominees in the instruction and
training of the employees of the Distributor in connection with (i) the
procedures necessary to enable them to comply with the requirements of this
Agreement, and (ii) the operation and use of the Products. Distributor
shall be required, at its own expense, to have a person responsible for
customer support attend training on Company's Products for the purposes of
performing customer support. What constitutes "training" for this Clause
shall be agreed to between the parties.
(i) Not without written authority from the Company to copy or reproduce the
Products or any part thereof and upon the termination of this Agreement to
return to the Company and at cost of the Company all brochures, pamphlets
and materials supplied to the Distributor by the Company relating to the
Products.
(j) Not to modify, amend or in any other way interfere with the Products or
any names, notices or copyright marks which may appear thereon except as
may be required to correct errors which may appear in the textual material
associated with or forming a part of the Products from time to time, and in
the event such alteration is made to notify the Company of the alteration
promptly.
(k) To supply the Company with reseller and customer information as
reasonably requested by the Company including a complete list of registered
customers with all essential contact information.
27
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(l) To be responsible for and obtain any license, permits or other such
legal or regulatory requirements for importing the Products into the
Territory.
4 COMPANY'S OBLIGATIONS
The Company agrees with the Distributor:
(a) To supply the Distributor with such information, know-how and technical
data concerned with the Products as is reasonably necessary or appropriate,
in the opinion of the Company, to the Distributor's activities in supplying
the Products in the Territory and which shall come into the Company's
possession or control and which the Company is free to disclose.
(b) In the Company's sole discretion, to make its sales and technical
support personnel (or those of its nominees) available to the Distributor
by telephone or otherwise.
(c) To give serious consideration to any modifications to the Products
suggested by the Distributor without being under any obligation to
incorporate any such modifications into the Products.
(d) To supply the Distributor with examples in English of publicity
materials, catalogues and price lists available to the Company from time to
time as the Distributor shall reasonably require and the Distributor shall
be entitled to reproduce the same or parts thereof in its own publicity and
other materials.
(e) Upon termination of this Agreement for any reason, the Company shall if
so required by the Distributor fulfill any orders for the Product from the
Distributor outstanding at the date of termination.
5 SHIPPING, CUSTOMS, TITLE, LIMITATION, WARRANTIES
(a) Risk of loss or damage to the Products shall pass to the Distributor
upon delivery to the carrier as specified by Distributor. Company will not
ship orders without Distributor's delivery and carrier instructions.
Distributor shall be responsible for cost of shipping any ordered Products.
Order procedures, payment procedures and payment terms shall be more
particularly described in Schedule
(b) The Company hereby excludes to the maximum extent permitted by law any
liability arising in tort, contract or otherwise for:
(i) Consequential loss or damage caused by or arising out of the use
of the Products or occurring in respect of the Products;
(ii) Loss, injury or damage due to fair wear and tear, or to negligent
or improper installation, use, maintenance, storage or handling of the
Products on the part of any person, firm or company other than the
Company and its employees.
(c) Under no circumstances shall either party be liable to the other for
any damages in excess of the aggregate amount of purchases that have
exchanged between the parties under this Agreement.
(d) Company authorises Distributor to pass through to its customers the
standard warranties as set forth in its standard license agreement attached
as Schedule E. All such warranty claims shall be made promptly in writing
and shall state the nature and details of the claim, the date the cause of
the claim was first observed and the registration number of the Products
concerned. All such warranty claims must be received by Company not later
than 15 days after the expiration of the warranty period for such customer
as provided to customer in Company's standard license Agreement. Company
shall have no obligations to Distributor or Distributor's resellers or
customers under this Clause if (1) the Products have not been properly
installed, used or maintained in accordance with Company's product
documentation; (2) the Products have been modified in any manner or are
used or combined with other products not supplied by Company and without
the prior written consent of Company; or (3) The Products have been
distributed to a customer with any warranties or representations oral or
written, made by Distributor beyond those expressly set forth in Company's
standard license agreement (Schedule E).
28
<PAGE>
(e) THE WARRANTIES SET FORTH IN THIS CLAUSE AND IN COMPANY'S STANDARD
LICENSE AGREEMENT, SCHEDULE E ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS
OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY COMPANY, INCLUDING
WITHOUT LIMITATION ANY WARRANTY OR MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE AND ALL OBLIGATIONS OR LIABILITIES ON THE PART OF
COMPANY ARISING OUT OF OR IN CONNECTION WITH THE DISTRIBUTION, USE, REPAIR
OR PERFORMANCE OF THE PRODUCTS.
(f) THE SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF ANY AND ALL WARRANTIES
AND THE SOLE REMEDIES FOR COMPANY'S LIABILITY OF ANY KIND (INCLUDING
LIABILITY FOR NEGLIGENCE OR PRODUCTS LIABILITY) WITH RESPECT TO THE
PRODUCTS AND SERVICES COVERED BY THIS AGREEMENT AND ALL OTHER PERFORMANCE
BY COMPANY UNDER THIS AGREEMENT SHALL BE LIMITED TO THE REMEDIES PROVIDED
IN COMPANY'S STANDARD LICENSE AGREEMENT, ATTACHED HERETO AS SCHEDULE E.
6 INTELLECTUAL PROPERTY RIGHTS
(a) The Distributor shall have no right, title or interest in any patent
related to the Products or any trade mark or name used in connection with
the Products, or the copyright in the Products or in any drawing,
specification or other document relating to the Products except as provided
in Schedule B-2 and the Distributor agrees to enter into at the Company's
expense such license agreements in respect of such rights and interest as
the Company may reasonably request from time to time, and to cease any and
all use of such rights upon termination of this Agreement whatever the
cause or reason for such termination, except to the extent necessary to
enable the Distributor to dispose of any stocks of Products then remaining
or on order.
(b) The Company warrants the Company has all necessary rights to enable the
Company to enter into this Agreement and to grant to the Distributor the
distribution and other rights contained in this Agreement.
(c) The Company has no actual knowledge of any present claim by any third
party that the Products infringe any patents, registered designs, trade
marks, copyright or similar rights existing or registered in any of the
countries in the Territory.
7 TERMINATION
(a) This Agreement shall terminate upon expiry of any notice given under
Clause 2.
(b) Without prejudice to any other remedy that may be available for the
breach or nonperformance of any of the obligations herein contained, either
party shall be entitled immediately to terminate this Agreement forthwith
without compensation by notice to the other if the other shall:
(i) Commit a breach of any of its obligations hereunder and shall not
remedy such breach (if the same is capable of remedy) within thirty
(30) days of being required to do so by notice;
(ii) Pass a resolution, or have an order made, for its winding-up
(except for the purpose of and followed by an amalgamation or
reconstruction).
8 FORCE MAJEURE
The Company shall not be liable to the Distributor for any loss or damage
which may be suffered by the Distributor as a direct or indirect result of
the supply of the Products by the Company being prevented, hindered or
delayed, and the Distributor shall not be liable to the Company in respect
of any delay or failure by the Distributor in carrying out any of its
obligations hereunder, in either case by reason of war, riot, civil
disturbance, act of God, strike, lock-out, trade dispute or labour
disturbance, accident, breakdown of plant or machinery, fire, flood,
difficulty in obtaining workmen, materials or transport or any other
circumstances whatsoever outside the control of the party concerned.
9 MISCELLANEOUS
29
<PAGE>
(a) This Agreement is personal to the Distributor who shall not assign or
transfer to any other person, form or company any of its rights or
obligations hereunder.
(b) Each of the parties hereto is an independent contractor and nothing
herein contained shall be deemed to create a partnership, joint venture or
the relationship of principal and agent, between the parties.
10 WAIVER
The failure by either party to require strict performance by the other of
any provision hereof shall not waive or diminish the right of that party to
require strict performance of the provision thereafter nor shall any such
failure waive or diminish the right of the party to require strict
performance of any other provision hereof.
11 ALTERATIONS
If any governmental or other authority (including without limitation the
Commission of the European Communities)(hereinafter together called the
"Authority") requires any alteration (hereinafter called the "Alteration")
to be made to this Agreement or to any agreement made under this Agreement
as a condition of granting approval, clearance or exemption of this
Agreement or to any agreement made under this Agreement, then the parties
hereto shall within one month of both parties having notice of the
Alteration confer together for the purpose of making the Alteration and any
other alteration, change or other action which they consider necessary
(hereinafter called the "Consequential Alterations"). In the event that
either party shall not agree to the Alteration or the Consequential
Alterations within two months from the date on which both parties had
notice of the Alteration, then either party shall be entitled to terminate
this Agreement or any agreement made under this Agreement by giving not
less than one month's notice to the other party.
12 ENTIRETY OF AGREEMENT
Except as provided in this Agreement and Schedules A to G inclusive hereto
embody the entire understanding between the parties with respect to the
distribution of the Products in the Territory to the entire exclusion of:
(a) Any term or conditions appearing on or referred to in the Distributor's
orders or the Company's acknowledgment thereof.
(b) Any prior understanding, agreement, representation, warranty or dealing
by or between the parties in such respect.
The parties hereby confirm that there is no agreement, expressed or
implied, which is in contradiction to this Agreement. No modification or
addition to this Agreement shall be binding unless made in writing and
signed on behalf of each party hereto by a duly authorised representative.
13 CONFIDENTIALITY
The Distributor shall at all times during the continuance of this Agreement
and after its termination:
(a) Use its best endeavours to keep all Restricted Information confidential
and accordingly not to disclose any Restricted Information to any other
person.
(b) Not use any Restricted Information for any purpose other than the
performance of the obligations under this Agreement.
(c) Any Restricted Information may be disclosed by the Distributor to:
(i) Any customers or prospective customers;
(ii) Any governmental or other authority or regulatory body;
(iii) Any employees of the Distributor or for any aforementioned
persons;
30
<PAGE>
to such extent only as is necessary for the purposes contemplated by
this Agreement, or as is required by law and subject in each case to
the Distributor using its best endeavours to ensure that the person in
question keeps the same confidentiality and does not use the same
except for the purposes for which the disclosure is made.
(d) Any Restricted Information may be used by the Distributor for any
purpose, or disclosed by the Distributor to any other person, to the extent
only that:
(i) It is at the date hereof, or hereafter becomes public knowledge
through no fault of the Distributor (provided that in doing so the
Distributor shall not disclose any Restricted Information which is not
public knowledge);
(ii) It can be shown by the Distributor, to the reasonable
satisfaction of the Company, to have been known to it prior to its
being disclosed by the Company to the Distributor.
(e) In this clause Restricted Information means any information which is
disclosed to the Distributor by the Company pursuant to or in connection
with this Agreement (whether orally or in writing, and whether or not such
information is expressly stated to be confidential or marked as such).
14 NOTICES
(a) Any notice required or authorised to be given hereunder shall be in
writing and shall be served by facsimile or first class prepaid airmail
letter and shall (unless a different address is notified in writing by one
party to the other by due notice under this Clause) be addressed in the
case of the Company to:
REALITY INTERACTIVE, INC.
11200 West 78th Street, Suite 300
Eden Prairie, MN 55344 USA
FAX: +1 612 996 6799
TEL: +1 612 996 6777
marked for the attention of the Director of International Sales with a
copy to the Chief Financial Officer
And in the case of the Distributor to:
LASERMEDIA (DEUTSCHLAND) GMBH
Max-Planck-Strasse 39A, D-50858 Koln
FAX: +44 1243 555 020 (in care of LaserMedia GMBH)
TEL: +49 2234 95518-0
marked for the attention of the Director of Sales & Marketing with a
copy to the Chief Financial Officer
(b) Any such notice shall be deemed to be served, in the case of a
facsimile, at the opening of office hours of the recipient party on the
next working day of the recipient party after the day of dispatch and , in
the case of first class prepaid letter, five days after the date of proved
posting.
15 PROPER LAW
The construction, validity and performance of this Agreement shall be
governed by and construed in all respects by the laws of the state of
Minnesota and the parties hereby submit to the nonexclusive jurisdiction
of the Minnesota state or federal courts.
31
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SCHEDULE A
THE TERRITORY
"Territory" shall include:
Germany, German speaking portion of Switzerland and Austria
32
<PAGE>
SCHEDULE B-1
THE PRODUCTS AND US RETAIL PRICE LIST
"Products" shall include the following:
ISO 9000 Registration Series (5 titles) and the QS 9000 Series (4 titles) and
such versions localized into German
US RETAIL PRICE FOR THE AMERICAN VERSION OF THE PRODUCTS:
PRODUCT NAME US PRICE
ISO 9000 Series (5 CD Set) $4,995.00
Title 1 $ 99.00
Title 2 $1,295.00
Title 3 $1,795.00
Title 4 $1,795.00
Title 5 $ 895.00
QS 9000 Series (4 CD Set) $3,595.00
Title 1 $ 995.00
Title 2 $ 995.00
Title 3 $ 995.00
Title 4 $ 995.00
All the above US Retail Prices are in US dollars.
33
<PAGE>
SCHEDULE B-2
GERMAN LOCALIZATION OF QS 9000
October 7, 1996
Mr. Philip Lingard
Operations Manager
Futuremedia
Media House, Arundel Road
Walberton, Arundel
West Sussex, BN18 0QP
UK
TEL: 44-1243-555-000
FAX: 44-1243-555-020
Re: Letter Agreement regarding German Localization of QS 9000
Dear Philip:
This letter is meant to confirm our mutual understanding concerning the
development of the German version of Reality's four CD-ROM Series QS 9000
product ("QS"). Please review the letter agreement and indicate your acceptance
of the letter agreement by signing the signature block at the end of the letter.
Reality Interactive ("RII") and Futuremedia PLC (FM) agree as follows:
1. LOCALIZATION RIGHTS; DISTRIBUTION RIGHTS TO BE SEPARATELY NEGOTIATED WITH
LASERMEDIA.
RII hereby grants FM the right to develop a high quality German language version
of QS ("German Version"). Distribution rights with respect to the German Version
shall be dealt with in the International Distribution Agreement with FM'S
subsidiary company, LaserMedia Gmbh to be negotiated separately.
2. SCOPE OF LOCALIZATION.
FM agrees to perform all work to create the German Version including but not
limited to translations of text, replacement of graphic elements, authoring,
video production and editing and product management. RII understands that much
of the work will actually be performed by subcontractors.
3. RII TO PROVIDE REASONABLE SUPPORT TO FM.
RII agrees to provide support for FM'S localization efforts including but not
limited to providing (1) all necessary source materials to enable FM to create
the German Version; and (2) reasonable access to technical personnel to help FM
in dealing with source code issues. Reasonable access shall mean at least one
trip to the UK by a technical person from RII for a week. All expenses for this
trip shall be borne by RII.
4. MONETARY RESOURCE ALLOCATION BETWEEN RII AND FM.
The parties contemplate a combined investment of 150,000 pounds in order to
develop the German Version. The attached Schedule A apportions the respective
investments of the parties. The parties shall each bear one-half of the
combined investment. RII shall provide its share of the investment according to
Schedule A and shall front 35,000 pounds of FM's investment as also indicated
in Schedule A.
FM shall repay the 35,000 pounds to RII from the initial sales of the first 11
copies of the German Version. If FM has not repaid the 35,000 pound amount in
full by March 31, 1997, RII shall invoice FM for such remaining amount and FM
shall pay such amount via wire transfer within 30 days of such invoice.
34
<PAGE>
5. OWNERSHIP OF THE INTELLECTUAL PROPERTY RIGHTS OF THE GERMAN VERSION;
DISTRIBUTION RIGHTS.
RII shall have all right, title and interest in and to the underlying American
Version of the QS 9000 product subject to each party having a joint ownership
interest in the German Version. The distribution rights granted to LaserMedia in
the Distribution Agreement between RII and LaserMedia to be separately
negotiated.
If Futuremedia agrees to the terms of this letter agreement, please sign below
and fax back a copy to Randy Boyer, Director of International Sales, at +1
612-996-6789.
Sincerely,
REALITY INTERACTIVE
BY: /S/ Wes Winnekins
-------------------------
Wes Winnekins, CFO
Accepted by FUTUREMEDIA PLC
/S/ Philip Lingard
- -------------------
(Signature)
Philip Lingard
--------------
(Name Printed)
Operations Director
-------------------
(Title)
DATE: 20 October, 1996
----------------
35
<PAGE>
German Localization.xls
SCHEDULE A
Pounds USDollars
------ ---------
Exchange Rate: 1 pound equals 1.54 USD
Total Investment 150,000 $ 231,000
External 110,000 $ 169,400
FM 28,000 $ 43,120
RII 12,000 $ 18,480
Allocation FM 50% 75,000 $ 115,500
RII 50% 75,000 $ 115,500
RII Cash Contribution 110,000 $ 169,400
FM Owes RII 35,000 $ 53,900
Pay out of the $169,400 as follows:
Pounds USDollars
------ ---------
3rd Party Translation Week of Oct 7 26,000 $ 40,000
3rd Party Video Production & Week of Oct 21 60,000 $ 92,400
Graphic/Text Work
3rd Party Graphic Changes Week of Dec 9 20,000 $ 30,800
3rd Party Debug/Reprogram Week of Dec 23 4,000 $ 6,160
Total 110,000 169,400
36
<PAGE>
SCHEDULE C
BUSINESS PLAN CONTAINING
DISTRIBUTOR AND ROYALTY PAYMENTS TO THE COMPANY
LaserMedia's Business Plan Outline for Reality Interactive
I. Company Information
A. Contact information (e.g. address, phone, fax, email, website)
Lasermedia GmbH, Max-Planck-Strass 39A, D-50858 Cologne, Germany
Phone: 49-2234-9-55-18-0
Fax: 49-2234-9-55-18-55
Email Address: [email protected]
1. Key contact between the company and Reality Interactive
Christiane Toffolo-Haupt: responsible for the relationship
Claus Stratmann, Christiane Toffolo-Haupt: strategic
Christiane Toffolo-Haupt: Marketing
Stefan Lemanzyk: Sales
Brigitte Frank: Administration and finance
Sabine Pergande: pre- and post-sales support
B. Company Background
1. History
1989 Founded by Claus Stratmann; GmbH in 1991
Company Launch was during launch of SPC product in February 1990
3 major projects:
$1M DM w/Volkswagen in 1991
$1.7M DM w/Deutsche Telekom in 1994
$2M DM w/Post Office in 1993
Exclusive supplier relationship w/Volkswagen for multimedia
2. Structure of Organization
One legal organization: LaserMedia (Deutschland) GmbH; focussed on packaged
software distribution business. The parent company is Futuremedia PLC;
functionally the business runs independently from Futuremedia. LaserMedia is
also able to provide customized products, using free lancers.
Management Structure:
General Management: Claus Stratmann
Marketing Manager: Christiane Toffolo-Haupt
Finance and Account Manager: Brigitte Frank
3. # of employees: 6 fulltime and 2 contractors
37
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4. Branches
Cologne (head office)
In Cologne, in October 1995 launched, 50/50 JOINT VENTURE TRAINING CENTER (3
PRIVATE PARTIES IN THE TRAINING BUSINESS)
II. Financial Information
A. Revenue for Last 2 years
FY 95: 6.8 M DM (big deal in December 1994)
FY 96: 3.8 M DM
B. Key Changes in Financial Strategy
FY 96 was a disappointing year. In FY 97 new products contribute to make the
turnaround, such as ISO 9000 new version, crane operator, Quest + Desiger's
Edge, Financial Planning Analysis.
C. Banking References
Commerzbank, Koln
D. Accounting Firm
Ernst & Young, Dusseldorf
E. Public or Private
LaserMedia GmbH is 100% owned by LaserMedia International which is 100% owned
by Futuremedia PLC (the UK company).
38
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III. Sales
A. Staffing
1. Head Sales Manager: Claus Stratmann
2. Organization of Sales Team
a. Number: 3 people actively selling
b. How Allocated
i. Direct Major Accounts (3)
ii. Telesales (1)
iii. Indirect
-Switzerland reseller,
-open learning center channel
3. Sales Strategies (by product) QS-9000
a. Direct.
i. Target Customers: Automobile Manufacturers (current customers), automobile
manufacturers (not current customers), automotive suppliers (current and non
current customers), Quality Management Associations
Key customers: Ford, Volkswagon, Mercedes, Audi, BMW, Porsche, Lucas,
Mannesman, Bosch, Siemans, ABB, Akzo, Boge (part of Mannesman), Johnson
Controls, Dow Chemical, Dunlop, Eaton, Fichtel and Sachs (shock absorbers),
TRW, Karman, Krupp, MAN, Philips, Skoda (Czech manufacturer), Unikellar
(upholstery and interior)
The plan is for one-off sales of QS to get sales started immediately with the
american version of QS-9000; larger sales and company licenses to be made as
soon as the project is available in German.
Other modes of providing revenue:
rental sale
Hardware, after sales support
Sales Cycle
i. Made contract and established need/timescale (past customer, advertising,
referral, direct mail, seminar, channel partner, telemarketing)
ii. pre-qualifying prospect (early adopter, budget, authority, urgency,
management support, multimedia support, corporate vision)
iii. sent details; give price indication
iv. product demonstrated
v. formal proposal submitted
vi. budget approval confirmed
vii. key influencers involved
viii. LaserMedia shortlisted
ix. spend approved
x. verbal or written confirmation is received
xi. purchase order received
xii. LaserMedia accepts order
Sales process is tracked as a part of the database which shows complete
history included closed sales and tracking why sales did not close.
39
<PAGE>
IV. Marketing
A. Staffing
1. Marketing Manager, Christiana
2. Organization of Marketing Team
Christiana is responsible for PR, manages strategic relationships,
representing the company externally at speaking engagements, success stories,
writing articles, organizing exhibitions, creates and defines mail shots,
product management (developing new marketing strategy for the product;
product management);
Sabine Pergande is responsible for telemarketing; database management;
executes the mailings
a. Leads generation (mail shots and follow ups to targeted sectors with
actions)
b. Public relations (continuous press releases and articles)
c. Advertising (to be evaluated)
d. Product marketing (product literature, packaging)
e. Support for sales team
- proposal templates, pricing
- sales tools
- success stories, case studies
B. Key Strategies and Goals
Database of 10,000 contacts; address, contact info and general manager;
telemarketing investigates who are the key 4-6 managers for each customer
(CEO, Training, Quality, etc.); "Quality" is the main focus of business,
automobile suppliers.
1. Leads generation
a. mailshot to existing customer base (quality courses)
b. direct contact and presentation to the large automotive
companies (Ford, Opel, Mercedes, Volkswagen, Audi, etc.
(eventually presentation to the AKAB-CBT work group)
c. mailshots to the non customers of LaserMedia in the
automotive supplier industry
d. generating further leads from fairs as Qualifikation
(Oktober 96), Control (May 97) and eventually MTQ (November 96)
2. Public relations
a. one initial press release for the launch of 1st modules
b. further press releases to announce the launch of further modules
c. case studies to leading specialized magazines for quality as
QZ, Kontrolle, but also for training as Q-Magazin, etc.
d. speaking engagements to be defined when product availability
is established
3. Product Marketing
a. Preparation (packaging, broshures, demos-CDs)
b. Launch
-timetable
-event (press conference, speakers)
-advertising
-materials (special introductory offers)
-press release
4. Trade Shows and Conferences
40
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Factors that accelerate decision making cycle:
- -Multimedia training now
- -Multimedia hardware
- -Deadline/pressure
- -Good relationship (will always buy almost any products)
b. Indirect sales
Swiss Distributor-Quality Consultant-part of the Distribution agreement is to
train and sell the quality products and 12 month forecasts; one day training
session; support as needed and when asked; access to leads database
41
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SCHEDULE D-1
MONTHLY SALES FORECAST TEMPLATE
See attached spreadsheet templates for ISO 9000 and QS 9000 (These forecasts
are due between the 10th and 20th of every month.)
[Diagram of Excel-based Sales Forecasting Templates]
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SCHEDULE D-2
6-MONTH ROLLING FORECAST
See attached spreadsheet templates for ISO 9000 and QS 9000 (These forecasts
are due between the 10th and 20th of every month.)
[Diagram of Excel-based Rolling Sales Forecast]
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SCHEDULE D-3
QUARTERLY MARKETING REPORT
(This report is due between the 10th and 20th of December 1996, March 1997,
June 1997, September 1997 and December 1997.)
KEY MARKETING EVENTS THAT HAPPENED IN PREVIOUS QUARTER:
Trade Shows:
Press Releases:
Product Launches:
Public Relations Activities:
KEY MARKETING EVENTS FOR NEXT QUARTER:
Planned Trade Shows:
Planned Press Releases:
Planned Product Launches:
Planned Public Relations Activities:
IMPORTANT FUTURE MARKETING ACTIVITIES (MORE THAN ONE QUARTER AWAY):
Planned Trade Shows:
Planned Press Releases:
Planned Product Launches:
Planned Public Relations Activities:
Distributor Requests for Reality in the Unites States related to
Marketing/Marketing Support:
44
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SCHEDULE E
LASERMEDIA'S STANDARD LICENSE AGREEMENT
[Standard License Agreement in German Language]
45
<PAGE>
SCHEDULE F
PURCHASE ORDER PROCEDURE, ROYALTY PAYMENTS PROCEDURE, PAYMENT TERMS, COMPANY
CONTACT DETAILS
PRODUCT ORDER PROCEDURES:
The following procedures will apply when ordering American versions of product
from Reality Interactive:
1. Product is ordered once every 30 days via fax to: SALES ADMINISTRATION
MANAGER, REALITY INTERACTIVE, +1 (612) 996-6799 WITH A COPY TO RANDY BOYER,
DIRECTOR OF INTERNATIONAL SALES VIA EMAIL); product is supplied at cost;
invoices payable by Distributor within 30 days.
During the first week of every month, Distributor shall provide monthly royalty
statements against which Company will invoice LaserMedia GMBH. LaserMedia GMBH
will settle the royalty payments within seven days of Company receiving payment
from its customers (average payment is 35 days) but no more than 50 days from
LaserMedia GMBH invoicing its customers. Distributor will pay for shipment and
insurance.
2. Reality Interactive's payment terms: wire transfers are preferred.
Wire transfers to Reality Interactive can be made as follows:
Bank: First Bank, N.A.
Eden Prairie, MN 55344 USA
(612) 942-2847
ABA #: 091000022
Account #: 173100140149
3. Orders for marketing materials should be in writing and faxed or emailed to
Marketing Department (fax: +1 612 996 6799; email: [email protected])
REALITY INTERACTIVE CONTACT DETAILS:
Distributor should primarily communicate with Reality through the following
person:
Randy Boyer, Director, International Sales (business issues)
Peter Kelley, International Product Manager (product issues)
Randy Boyer's Contact Details:
Internet: [email protected] (communication via internet is preferred means)
Phone: +1 612 996 6789
Fax: +1 612 996 6799
Peter Kelley's Contact Details:
Internet: [email protected]
Phone: +1 612 996 6779
Fax: +1 612 996 6799
Reality's Corporate Website: http://www.realtools.com
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SCHEDULE G
DISTRIBUTOR DISCOUNT SCHEDULE FOR AMERICAN VERSION; ROYALTY RATE FOR GERMAN
VERSION
The discount rate shall be (***)% for American versions of the products. The
royalty rate payable to Reality for the German Version of QS 9000 shall be the
greater of $(***) per unit or (***)% of the German selling price.
Royalty targets to maintain exclusivity are as follows:
1. $USD (***) in royalties paid to Reality by June 30, 1997; and
2. $USD (***) in royalties paid to Reality by December 15, 1997 (includes
$(***) from part 1 above)
*** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934,
confidential portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
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AS WITNESSED this Agreement has been signed on behalf of each of the
parties the day and year first above written.
SIGNED for and on behalf of
REALITY INTERACTIVE, INC.
Signature: /S/ WESLEY W. WINNEKINS
------------------------
Name (printed: WESLEY W. WINNEKINS
-------------------
Title: CHIEF FINANCIAL OFFICER
-----------------------
Date: OCTOBER 9, 1996
---------------
SIGNED for and on behalf of
FUTUREMEDIA PLC
Signature: /S/ PHILIP LINGARD
-------------------
Name (printed: PHILIP LINGARD
--------------
Title: OPERATIONS DIRECTOR
-------------------
Date: OCTOBER 20, 1996
----------------
48
<PAGE>
EXHIBIT 10.28
LEASE SCHEDULE
THIS LEASE SCHEDULE NO. #2 is hereby added to, incorporated into and in all
respects made a part of that certain Master Equipment Lease Agreement, dated as
of June 15, 1995 (the "Agreement"), between Carlton Financial Corporation,
located at 7831 Glenroy Road, Suite 102, Edina, Minnesota 55439-3133, a
Minnesota corporation ('Lessor"), and Reality Interactive, Inc. located at 7500
Flying Cloud Drive, Suite 400, Eden Prairie, Minnesota 55344, a Minnesota
corporation ('Lessee"). Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Master Equipment Lease Agreement
Lessor and Lessee agree as follows:
1. EQUIPMENT DESCRIPTION. Lessor hereby delivers and leases to Lessee, and
Lessee hereby accepts and leases from Lessor, the following equipment (the
"Equipment"):
See Schedule A attached hereto and made a part hereof.
2. EQUIPMENT LOCATION. The location of the Equipment shall be as follows:
same as above
3. TOTAL COST. The total cost of the Equipment shall be as follows:
System Price: $116,833.48
Other (specify)
$
------------------- ----------
Total Cost: $116,833.48
4. RENTS AND PAYMENT DATES.
A. The Rent described in Section 2 of the Master Equipment Lease
Agreement shall be $5,494.00, ("Amount of Each Payment") and the
Rent Due Date shall be the 1st day of each month. The
commencement date shall be January 1, 1997.
B The Initial Term of the Lease as described in Section 1 of the
Master Equipment Lease Agreement shall be 24 months and Lessee
shall make 24 rent payments ("No. of Payments").
C. The Interim Rent payable on the Funding Date for this Schedule by
Lessee to Lessor under Section 2 of the Master Equipment Lease
Agreement shall be computed by multiplying the Periodic Rental
amount $5,494.00 by number of Prorata days and dividing the
product thereof by 30.
D. On Execution hereof, Lessee has paid $10,988+ tax ("Advance
Rentals').
5. REAFFIRMATION OF MASTER EQUIPMENT LEASE AGREEMENT ASSIGNMENT. All of the
provisions of the Master Equipment Lease Agreement are hereby incorporated
by reference in this Lease Schedule on and of the date hereof, to the same
extent as if fully set forth herein. This Lease Schedule may be assigned
by Lessor separately from any and all other Lease Schedules.
49
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Schedule to be
duly executed on the dates set forth beneath their signatures below.
LESSOR: LESSEE:
Carlton Financial Corporation Reality Interactive. Inc.
By: /S/ Michael J. McShane By: /S/ Wesley W. Winnekins
---------------------------- -----------------------------
Title: President Title: Chief Financial Officer
------------------------- --------------------------
Date: December 9, 1996 Date: December 9, 1996
-------------------------- ---------------------------
50
<PAGE>
MASTER EQUIPMENT LEASE AGREEMENT
DELIVERY AND ACCEPTANCE
LESSOR: CARLTON FINANCIAL CORPORATION
7831 Glenroy Road. Suite #102
Edina, MN 55439-3133
L
LEASE NO.
----------------
LEASE PLAN FMV
----------------
LESSEE: Reality Interactive, Inc.
7500 Flying Cloud Drive, Suite 400
Eden Prairie, MN 55344
Contact Person: Wes Wlnnekins 996-6712
DESCRIPTION OF EQUIPMENT: See Schedule A attached hereto and made a part
hereof.
LESSEE'S ACKNOWLEDGMENT AND CERTIFICATE OF ACCEPTANCE
1) Lessee hereby: (a) confirms that the equipment describe in the above
Agreement(s) has been delivered to and received by the undersigned Lessee:
(b) that all installation or other work necessary prior to the use of the
equipment has been completed: (c) that said equipment is in good working
order.
2) Lessee hereby: (a) confirms that the equipment is of the size, design,
capacity and manufacture by it: (b) irrevocably accepts the equipment as
is, where-is for all purposes of this Agreement.
Lessee hereby authorizes Lessor to pay for the leased equipment and commence
said lease. This certificate shall not be considered to alter, construe, or
amend the terms of the afore-said Agreements.
The undersigned affirms that he or she is a duly authorized corporate officer,
partner, or proprietor of the above name.
By: /S/ Wesley W. Winnekins
-----------------------------
Title: Wesley. W. Winnekins
-----------------------------
Date: Chief Financial Officer
-----------------------------
51
<PAGE>
SCHEDULE "A" OF EQUIPMENT
REALITY INTERACTIVE, AS LESSEE
SCHEDULE #2
4 MOUSE TRAY
3 HANGING WORKSURFACE 36W X 24D SQUARED EDGE
4 PANEL, 48X67
1 DUPLEX RECEPTACLE. B
1 DUPLEX RECEPTACLE. D
1 TWO-WAY CONNECTOR
1 THREE-WAY CONNECTOR
1 END CAP
2 DRAW ROD, H62
17 FABRIC COVERED FA PANEL 67H x 24W Product #AN6724F
9 FABRIC COVERED FA PANEL 67Hx36W Product #AN6736F
29 FABRIC COVERED FA PANEL 67Hx48W Product #AN6748F
74 FABRIC COVERED FA PANEL 67Hx48W Cable Mngmt W/4
8 BASE POWER ENTRY KIT DIRECT
15 DUPLEX RECEPTACLE A CIRCUIT
13 DUPLEX RECEPTACLE B CIRCUIT
25 DUPLEX RECEPTACLE C CIRCUIT
27 DUPLEX RECEPTACLE D CIRCUIT
18 HANGING WORK SURFACE 36Wx24D Product #ANWS3624
30 HANGING WORK SURFACE 4SWx24D Product #ANWS4824
54 HANGING CORNER WORK SURFACE 48Wx24D PRODUCT #ANCWS4824
43 SHELF I6Hx48WxI3D Product#ANSH481316
27 FLIPPER DOOR 16Hx48Wx13D
43 TACKBOARD 16Hx48W
11 FREESTANDING LATERAL FILE W/LOCK
11 COUNTER WEIGHT FOR USE WITH 2-DRAWER FILE
28 PENCIL DRAWER
27 METAL KBD TRAY W/PALM REST
21 MOBILE PED WITH LOCK
43 TASK LIGHT FOR USE WITH 48"W
3 "C" LEG 29 HIGH PKGD ASSY
23 MOUSE TRAY
27 SERIES 2 HRD-SRFCD 2-WAY 90 CONN KIT
11 SERIES 2 HRD-SRFCD 3-WAY 90 CONN KIT
4 SERIES 2 FOUR-WAY CRNER CONNECTOR KIT
27 SERIES 2 PANEL END CAP KIT 67H
61 SERIES 1 PANEL CONNECTOR 62H
10 SERIES 1 T-CONNECTOR 62H
24 WALL STRIP 6OH LIGHT GREY
1 FABRIC-COVERED FA PANEL 39Hx30W Product #AN3930F
2 FABRIC-COVERED FA PANEL 39Hx48W Product #AN3948F
7 FABRIC-COVERED FA PANEL 67Hx30W Product 4AN6730F
3 BASE POWER ENTRY KIT DIRECT CONNECT LH
1 HANGING WORK SURFACE 24Wx24D Product #ANWS2424
7 HANGING WORK SURFACE 30Wx24D Product #ANWS3024
1 SHELF 16Hx24Wx13D Product #ANSH241316
1 FLIPPER DOOR I6Hx24Wx13D Product #ANFD2413
1 TACKBOARD 16Hx24W Product #ANTB1624
52
<PAGE>
1 TASK LIGHT FOR USE WITH 24"W
1 SERIES 2 PANEL END CAP KIT 39H
2 SERIES 1 PANEL CONNECTOR 34H
14 VARIABLE HEIGHT FILLER
2 FABRIC-COVERED FA PANEL 53Hx24W Product #AN5324F
9 FABRIC-COVERED FA PANEL 53Hx36W Product #AN5336F
6 F.S. PED WITH LOCK 6/612 24D
11 SERIES 2 PANEL END CAP KIT 53H
9 SERIES 1 PANEL CONNECTOR 48H
1 CEILING ENTRY KIT WITH POWER 67H
9 CONFERENCE WORKSURFACE 5OW X 25D
1 PENINSULA DESK
1 HALF-ROUND EXTENSION I5"Dx3O"Wx29"H
1 SINGLE PAD CREDENZA
1 BRIDGE 22"Dx48"W
1 OVERCABINET W/FULL TB
1 FILENZA W/BOOKCASE
1 BOOKCASE I2Dx42Wx47H
1 FREESTANDING PED 6"
1 COUNTERWEIGHT FOR 42"W FILES
1 CENTER DRAWER METAL
1 UNDERSHELF LIGHT USE WITH 72" OVERCABINET
7 AS NEW, CHANGE OF HEIGHT STRIP. LIGHT GREY
4 30" HALF ROUNDS
6 30"x60" MATE TABLE
2 30" x 60,, x 34" TRAPEZOID MATE TABLE FIXED SYMMETRICAL LEG
10 GANGING DEVISE
Equipment transferred from Master Lease/Schedule 1
10 NO 3941 CONFERENCE CHAIRS - MIDBACK SWIVEL TILT W/MANUAL HEIGHT ADJUSTMENT
BLACK 5 STAR BASE AND NEW ERA GR 4 NO. NE02 CLARET UPHOLSTERY
10 AS ABOVE W/NEW ERA GR 4 NO. NEO9 SPRUCE UPHOLSTERY
2 CONFERENCE TABLES 48" X 120" RACETRACK W/NO. 735 BULL NOSE EDGE
(NO.27 NATURAL MAPLE W/CLEAR FINISH) P.LAM. TOP NO.62 STORM GRAY MATRIX &
TWO (2) NO. 7523-CB 23" DIA. P.LAM BASES NO.83 BLACK
7 FDA-1 FRICTION DISPLAY ARM
53
<PAGE>
EXHIBIT 10.29
IRREVOCABLE LETTER OF CREDIT
Loan/Letter of Credit No: 1114 96
Lender: BankWindsor
IDS Center
740 Marquette Avenue
Minneapolis, Minnesota 55402
Beneficiary: CARLTON FINANCIAL CORP.
7831 Glenroy Road #102
Edina, Minnesota 55439
Customer: Reality Interactive, Inc.
Flying Cloud Drive, #400
Eden Prairie, Minnesota 55344
Expiration Date: This Letter of Credit shall expire upon the earlier of: 1.
the close of business on December 9, 1997 and all drafts and
accompanying statements or documents must be presented to
Lender on or before that time; or 2. the day that Lender
honors a draw under which the full amount of this Letter of
Credit is drawn.
Lender indicated above ("Lender") hereby establishes an Irrevocable Letter
of Credit in favor of Beneficiary for a sum or sums not exceeding the aggregate
amount of ONE HUNDRED SIXTEEN THOUSAND EIGHT HUNDRED THIRTY-THREE AND 48/100
Dollars ($116,833.48). These funds shell be made available to Beneficiary
against Lender's receipt from Beneficiary of drafts drawn at sight on Lender at
its address indicated above (or such other address that Lender may provide
Beneficiary with written notice of in the future) and accompanied by the signed
written statements or documents indicated below.
WARNING TO BENEFICIARY: PLEASE EXAMINE THIS LETTER OF CREDIT AT ONCE. IF
YOU FEEL UNABLE TO MEET ANY OF ITS REQUIREMENTS, EITHER SINGLY OR TOGETHER, YOU
SHOULD CONTACT YOUR CUSTOMER IMMEDIATELY TO SEE IF THE LETTER OF CREDIT CAN BE
AMENDED. OTHERWISE. YOU WILL RISK LOSING PAYMENT UNDER THIS LETTER OF CREDIT
FOR FAILURE TO COMPLY STRICTLY WITH ITS TERMS AS WRITTEN.
1. DRAFT TERMS AND CONDITIONS
Lender shall honor the drafts submitted by Beneficiary under the following
terms and conditions:
A STATEMENT THAT A PAYMENT DUE UNDER THE MASTER EQUIPMENT LEASE AGREEMENT
DATED JANUARY 1, 1997 BETWEEN CARLTON FINANCIAL CORPORATION AND REALITY
INTERACTIVE, INC. HAS NOT BEEN MADE ON THE DUE DATE AND THE DRAFT SHALL BE FOR
UP TO THE TOTAL AMOUNT OF THE BALANCE DUE UNDER THE LEASE BASED UPON THE
ATTACHED AMORTIZATION SCHEDULE A.
Upon Lender's honor of such drafts and payment to the Beneficiary, Lender,
once the full amount of credit available under this Letter of Credit has been
drawn, shall be fully discharged of its obligations under this Letter of Credit
and shall not thereafter be obligated to make any further payments under this
Letter of Credit in respect of such demand for payments to Beneficiary or any
other person. If a non-conforming demand is made, Lender shall notify
Beneficiary of its dishonor on or before the time mentioned In Section 5 below.
54
<PAGE>
Beneficiary shall have no recourse against Lender for any amount paid under
this Letter of Credit after Lender honors any draft or other document which
complies strictly with this Letter of Credit, and which on its face appears
otherwise in order but which is signed, issued, or presented by any party or
under the name of any party purporting to act for Beneficiary, purporting to
claim through Beneficiary, or posing as Beneficiary. By paying to Beneficiary
an amount demanded in accordance with this Letter of Credit, Lender makes no
representation as to the correctness of the amount demanded and Lender shall not
be liable to Beneficiary or any other person for or in respect to any amount so
paid or disbursed for any reason whatsoever, including, without limitation, any
nonapplication or misapplication by Beneficiary of the proceeds of such payment.
By presenting upon Lender or a confirming bank, Beneficiary certifies that
Beneficiary has not and will not present upon the other, unless and until
Beneficiary meets with dishonor. Beneficiary promises to return to Lender and
confirmer any funds received by Beneficiary in excess of the Letter of Credit's
maximum drawing amount.
2. USE RESTRICTIONS
All drafts must be marked "DRAWN UNDER BANK WINDSOR IRREVOCABLE LETTER OF
CREDIT NO. 1114 96 DATED DECEMBER 9, 1996", and the amount of each draft shall
be marked on the draft. Only Beneficiary or Beneficiary's Transferee (only if
transferable) may complete a draft and accompanying statements or documents
required by this Letter of Credit and make a draw under this Letter of Credit.
This original Letter of Credit must accompany any draft drawn hereunder.
Partial draws are permitted under this Letter of Credit. Lender's honor
of a partial draw shall correspondingly reduce the amount of credit available
under this Letter of Credit. Following a partial draw, Lender shall return this
original Letter of Credit to Beneficiary with the partial draw noted thereon;
in the alternative, and in its sole discretion, Lender may issue a substitute
Letter of Credit to Beneficiary in the amount shown above less any partial
draw(s).
3. PERMITTED TRANSFEREES
The right to draw under this Letter of Credit shall be nontransferable,
except for:
A. A transfer by direct operation of law to the original Beneficiary's
administrator, executor, bankruptcy trustee, receiver, liquidator, successor, or
other representatives at law; and
B. The first immediate transfer by such legal representative to a third
party after express approval of a governmental body (judicial, administrative,
or executive).
4. TRANSFEREE'S REQUIRED DOCUMENTS
When the presenter is a permitted Transferee under paragraph 3 above. the
documents required for a draw shall include:
A. All documents required elsewhere in this Letter of Credit, except that
such documents may be in the name of either the original Beneficiary or the
presenter permitted by paragraph 3; and
B. When the presenter is a permitted Transferee under paragraph 3. A or a
third party under 3.B, a certified copy of the one or more documents which show
the presenter's authority to claim through or to act with authority for the
original Beneficiary.
5. TIMING OF DISHONOR
Under no circumstances shall Lender be precluded from relying upon any
reason for dishonor given in a communication which Beneficiary or the presenter
receives within three (3) banking days after Lender has
55
<PAGE>
received the last document forming part of Beneficiary's presentment (the
"Three-Day Period"). Lender shall be entitled to rely upon any such reason
without regard to either (i) the timing of any presentment made before the
Expiration Date, or (ii) the timing inside the Three-Day Period of any
preliminary communication(s) from Lender concerning the dishonor decision itself
or any reason for dishonor. For any such reason so given during the Three-Day
Period, Lender shall be conclusively deemed to have met the "reasonable time",
"without delay", and other timing requirements as the UCP (as hereafter defined)
and U.C.C. may impose. The Expiration Date shall not be extended to accommodate
a presentment made with less than three (3) banking days to go before the
Expiration Date, and Beneficiary shall not be entitled to submit a draw request
or provide Lender with any documents in support of a draw after the Expiration
Date hereof. Nor shall Lender ever be required to communicate a dishonor
decision or its reasons within a time less than the Three-Day Period.
6. COMPLIANCE BURDEN
Under no circumstances shall Lender be held responsible for any
impossibility or other difficulty in achieving strict compliance with the
requirements of this Letter of Credit precisely as written. Beneficiary
understands and acknowledges: (i) that unless and until the present wording of
this Letter of Credit is amended with Lender's prior written consent, the
burden of complying strictly with such wording remains solely upon Beneficiary;
and (ii) that Lender is relying upon the lack of such amendment as constituting
Beneficiary's initial and continued approval of such wording.
7. NON-SEVERABILITY
If any aspect of this Letter of Credit is ever declared unenforceable for
any reason by any court or governmental body having jurisdiction, Lender's
entire engagement under this Letter of Credit shall he deemed null and void ab
initio, and both Lender and Beneficiary shall be restored to the position each
would have occupied with all rights available as though this Letter of Credit
had never occurred. This non-severability provision shall override all other
provisions in this Letter of Credit, no matter where such provision appears
within the Letter's body.
8. CHOICE OF LAW/JURISDICTION
The International Chamber of Commerce Uniform Customs and Practice for
Documentary Credits, 1993 Revision, ICC Publication No. 500 (the "UCP") shall in
all respects be deemed a part hereof as fully as if incorporated herein and
shall apply to this Letter of Credit. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota, United States
of America, except to the extent such laws are inconsistent with the UCP.
Lender and Beneficiary consent to the jurisdiction and venue of any court
located in the State of Minnesota in the event of any legal proceeding under
this Letter of Credit.
9. EXPIRY
Lender hereby agrees with Beneficiary that drafts drawn under and in
compliance with the terms of this Letter of Credit will be duly honored if
presented to the Lender on or before the Expiration Date.
Dated: DECEMBER 9, 1996
LENDER: BANK WINDSOR
BY: /S/ KEVIN R. HOWK
------------------
TITLE: ASSISTANT VICE PRESIDENT
------------------------
56
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-05027) of Reality Interactive, Inc. of our
report dated February 21, 1997 appearing in this Form 10-KSB.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Minneapolis, Minnesota
March 28, 1997
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 508,728
<SECURITIES> 4,744,712
<RECEIVABLES> 97,396
<ALLOWANCES> 0
<INVENTORY> 134,853
<CURRENT-ASSETS> 5,548,524
<PP&E> 421,682
<DEPRECIATION> 229,746
<TOTAL-ASSETS> 5,885,741
<CURRENT-LIABILITIES> 247,419
<BONDS> 0
0
0
<COMMON> 46,774
<OTHER-SE> 5,591,548
<TOTAL-LIABILITY-AND-EQUITY> 5,885,741
<SALES> 484,127
<TOTAL-REVENUES> 788,236
<CGS> 107,008
<TOTAL-COSTS> 220,494
<OTHER-EXPENSES> 6,416,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282,846
<INCOME-PRETAX> (6,131,502)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,131,502)
<DISCONTINUED> 0
<EXTRAORDINARY> 219,470
<CHANGES> 0
<NET-INCOME> (6,350,972)
<EPS-PRIMARY> (1.68)
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT
Reality Interactive, Inc. (the "Company"), or persons acting on behalf of
the Company, or outside reviewers retained by the Company making statements on
behalf of the Company, or underwriters, from time to time may make, in writing
or orally, "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. When used in conjunction with an identified
forward-looking statement, this Cautionary Statement is for the purpose of
qualifying for the "safe harbor" provisions of such sections and is intended to
be a readily available written document that contains factors which could cause
results to differ materially from such forward-looking statements. These
factors are in addition to any other cautionary statements, written or oral,
which may be made or referred to in connection with any such forward-looking
statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement or statements shall be
deemed to be a statement that any or more of the following factors may cause
actual results to differ materially from those in such forward-looking statement
or statements:
DEVELOPMENT STAGE COMPANY. The Company was incorporated in May 1994, first
began to ship the complete series of its initial product in August 1995, and
accordingly, has only a limited history of operations. The Company's prospects
for success must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the formation
and development of a new business in a competitive industry. In addition, due
to the uncertainty in growth of a development stage company and the rate of
change in the industry perceived by the Company, the Company is uncertain of the
time frame or amount of funding required to accomplish its business objectives.
DEVELOPING MARKET; MARKET ACCEPTANCE. The market for educating and
training businesses has historically been served by consultants, instructor-led
training and training publications such as books, manuals and tapes. Currently,
there is little use of interactive multimedia education and training products by
businesses, and many of the Company's potential customers do not own or have
access to multimedia compatible equipment. The Company's future success will
depend upon, among other factors, the extent to which companies acquire
multimedia equipment compatible with the Company's products and adopt and use
interactive multimedia education and training programs. In addition, the
Company's success will depend in part on its ability to market and sell multiple
copies of its products to large corporate customers. In the event that adoption
and use of multimedia equipment compatible with the Company's products do not
become widespread, the number of potential customers of the Company will be
limited. There can be no assurance that the Company's products or the prices
the Company charges for its products will be acceptable to the market or that
the Company will be able to sell multiple copies to large corporate customers.
LIMITED MARKETING CAPABILITY. The Company currently has a small sales and
marketing staff and limited number of strategic alliances relating to
distribution of its products. There can be no assurance that the Company will
be able to build a suitable sales force or enter into satisfactory marketing
alliances with third parties, or that its sales and marketing efforts will be
successful.
DEPENDENCE ON DIVERSIFICATION OF PRODUCT OFFERINGS. The Company currently
has a limited number of product offerings, and purchasers of the Company's
products are not required to purchase additional products. Accordingly, the
Company's products represent non-recurring revenue sources, and the success of
the Company is dependent, in part, on its ability to develop sustained demand
for its current products and to develop and sell additional products. There can
be no assurance that the Company will be successful in developing and
maintaining such demand or in developing and selling additional products.
59
<PAGE>
DEPENDENCE ON EVOLVING INDUSTRY STANDARDS. The Company's initial product
offerings prepare businesses for adherence to worldwide management standards.
The failure of the Company to enhance its products in a timely manner to changes
in the standards, the lack of public acceptance of such standards or the delay
in introduction of or enhancement to such standards would materially adversely
affect the Company's operations.
TECHNOLOGICAL CHANGE. The industry in which the Company competes is
characterized by rapid technological change. The introduction of products
embodying new technology can render existing products and product formats
obsolete and unmarketable. The Company's success will depend on its ability to
anticipate changes in technology and to develop and introduce new and enhanced
products in a timely manner in response to technological changes, or if products
or product enhancements by the Company do not achieve market acceptance, the
Company's business would be materially adversely affected.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE. If the Company is unable to generate substantial revenues from its
operations or if the Company's expenses exceed expectations, the Company will
likely require additional funds to meet its capital requirements. The Company
does not currently have available bank financing. The Company may be required
to raise additional funds through public or private financings, including equity
financings, or through collaborative arrangements. There can be no assurance
that additional financing would be available on favorable terms, or at all. If
funding is not available when needed or on acceptable terms, the Company may be
forced to curtail its operations significantly or cease operations and abandon
its business entirely.
COMPETITION. The business education and training industry is highly
competitive. A large number of companies are currently developing interactive,
multimedia-based training, educational and instructional aids. Competitors also
include national, regional and local accounting firms engaged in industrial
consulting and instructor-led training and companies which market training tools
such as books, videos and audio tapes. Some of the Company's existing
competitors, as well as a number of potential competitors, have larger technical
staffs, more established marketing and sales organizations, and greater
financial resources than the Company. There can be no assurance the Company
will be able to compete successfully with such companies, or at all.
FLUCTUATIONS IN OPERATING RESULTS. The Company's future operating results
may vary substantially from quarter to quarter. At its current stage of
operations, the Company's quarterly revenues and results of operations may be
materially affected by the timing of the development and market acceptance of
the Company's products. Generally, operating expenses will be higher during
periods in which product development costs are incurred and marketing efforts
are commenced. Due to these and other factors, including the general economy,
stock market conditions and announcements by the Company or its competitors, the
market price of the Company's securities may be highly volatile.
DEPENDENCE ON KEY PERSONNEL; LACK OF EMPLOYMENT AND NONCOMPETITION
AGREEMENTS. The success of the Company is dependent in large part upon the
ability of the Company to attract and retain key management and operating
personnel. Qualified individuals are in high demand and are often subject to
competing offers. In the future, the Company will need to hire additional
skilled personnel in the areas of research and development, sales and marketing.
There can be no assurance that the Company will be able to attract and retain
the qualified personnel needed for its business. The Company has no employment
or noncompetition agreements with any of its management or other personnel.
DEPENDENCE ON ABILITY TO RETAIN SUBJECT MATTER EXPERTS. The Company's
product development strategy requires the Company to retain third-party subject
matter experts to perform research and development functions by providing
accurate and informative content for the Company's products. There can be no
assurance that the Company will be able to continue to attract and retain
qualified subject matter experts
60
<PAGE>
required to develop new products and enhance existing products. The inability
of the Company to attract and retain such experts could have a material adverse
effect on the Company and its prospects.
INTELLECTUAL PROPERTY. The Company regards its multimedia products as
proprietary and relies primarily on a combination of statutory and common law
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain or use the Company's products or
technology without authorization, or to develop similar products or technology
independently. If unauthorized use or copying of the Company's product were to
occur to any substantial degree, the Company's business and results of
operations could be materially adversely affected. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
products.
The Company believes that developers of multimedia products may
increasingly be subject to such claims as the number of products and competitors
in the industry grows and the functionality of such products in the industry
overlaps. Any such claim, with or without merit, could result in costly
litigation and could have a material adverse effect on the Company.
LACK OF PRODUCT LIABILITY INSURANCE. The Company may face a risk of
exposure to product liability claims in the event that use of its products is
alleged to have resulted in damage to its customers. The Company does not
currently carry product liability insurance. There can be no assurance that
such insurance will be available on commercially reasonable terms, or at all, or
that such insurance, even if obtained, would adequately cover any product
liability claim. A product liability or other claim with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the business and prospects of the Company.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants............................. F-2
Balance Sheet................................................. F-3
Statement of Operations....................................... F-4
Statement of Stockholders' Equity............................. F-5
Statement of Cash Flows....................................... F-6 to F-7
Notes to Financial Statements................................. F-8 to F-14
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Reality Interactive, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Reality
Interactive, Inc. (a development stage company) at December 31, 1995 and
1996, and the results of its operations and its cash flows for the periods
from May 24, 1994 (inception) to December 31, 1994, the years ended
December 31, 1995 and 1996 and the period from May 24, 1994 (inception) to
December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 21, 1997
F-2
<PAGE>
REALITY INTERACTIVE, INC.
(A Development Stage Company)
BALANCE SHEET
December 31,
1995 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 118,916 $ 508,728
Short-term investments 4,744,712
Accounts receivable 18,237 97,396
Inventory 28,359 134,853
Prepaid expenses and other current assets 8,312 62,835
---------- ----------
Total current assets 173,824 5,548,524
---------- ----------
Fixed assets, net 269,852 191,936
Restricted cash 119,000 116,800
Other assets 14,116 28,481
---------- ----------
Total assets $ 576,792 $5,885,741
---------- ----------
---------- ----------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------
AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------
Current liabilities:
Accounts payable $ 188,623 $ 116,388
Accrued liabilities 90,417 118,686
Current portion of capitalized lease obligation 14,127
Notes payable 201,002
Other current liabilities 12,345
---------- ----------
Total current liabilities 494,169 247,419
---------- ----------
Commitments (Note 6)
Mandatorily redeemable convertible preferred
stock, $.01 par value, 5,000,000 shares
authorized, 726,900 and 0 shares outstanding 2,125,962
---------- ----------
Stockholders' equity (deficit):
Common stock, $.01 par value, 25,000,000
shares authorized, 1,643,611 and 4,677,407
shares outstanding 16,436 46,774
Additional paid-in capital 1,384,397 15,386,692
Deficit accumulated during the development stage (3,444,172) (9,795,144)
---------- ----------
Total stockholders' equity (deficit) (2,043,339) 5,638,322
---------- ----------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity (deficit) $ 576,792 $5,885,741
---------- ----------
---------- ----------
See accompanying notes to the financial statements.
F-3
<PAGE>
REALITY INTERACTIVE, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
From From
May 24, 1994 May 24, 1994
(Inception) to Year Ended (Inception) to
December 31, December 31, December 31,
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 54,106 $ 484,127 $ 538,233
Cost of revenues 33,464 107,008 140,472
------------ ------------ ------------
Gross profit 20,642 377,119 397,761
------------ ------------ ------------
Operating expenses:
Sales and marketing $ 78,754 808,825 2,531,058 3,418,637
Research and development 200,366 939,487 2,355,922 3,495,775
General and administrative 399,218 893,747 1,529,418 2,822,383
---------- ------------ ------------ ------------
Total operating expenses 678,338 2,642,059 6,416,398 9,736,795
---------- ------------ ------------ ------------
Operating loss (678,338) (2,621,417) (6,039,279) (9,339,034)
---------- ------------ ------------ ------------
Other income (expense):
Interest income (expense), net 5,562 (149,979) 21,263 (123,154)
Debt offering costs (113,486) (113,486)
---------- ------------ ------------ ------------
Total other income (expense) 5,562 (149,979) (92,223) (236,640)
---------- ------------ ------------ ------------
Loss before extraordinary item (672,776) (2,771,396) (6,131,502) (9,575,674)
Extraordinary loss on early
retirement of debt (219,470) (219,470)
---------- ------------ ------------ ------------
Net loss $ (672,776) $ (2,771,396) $ (6,350,972) $ (9,795,144)
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
Loss before extraordinary item
per common and common
equivalent share $ (0.53) $ (1.69) $ (1.62)
Extraordinary loss per common
and common equivalent share (0.06)
---------- ------------ ------------
Net loss per common and
common equivalent share $ (0.53) $ (1.69) $ (1.68)
---------- ------------ ------------
Weighted average common
shares and equivalents 1,276,254 1,643,611 3,787,893
---------- ------------ ------------
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MAY 24, 1994 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Number Additional During
Price of Shares Common Paid-in Development
Consideration Per Share Issued Stock Capital Stage Total
------------- --------- ------ ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Founders shares issued - May 1994 (inception) Cash and Intangibles $ .06 900,000 $ 9,000 $ 42,750 $ 51,750
Initial shares issued - May 1994 Cash $1.80 83,333 833 149,167 150,000
Shares issued - August - December 1994
(Less offering costs of $69,839) Cash $1.80 660,278 6,603 1,112,058 1,118,661
Net loss $(672,776) (672,776)
--------- ------- ----------- ----------- ----------
Balance - December 31, 1994 1,643,611 16,436 1,303,975 (672,776) 647,635
Detachable warrants issued in connection
with notes payable 80,422 80,422
Net loss (2,771,396) (2,771,396)
--------- ------- ----------- ----------- ----------
Balance - December 31, 1995 1,643,611 16,436 1,384,397 (3,444,172) (2,043,339)
Detachable warrants issued in connection
with bridge note financing - January 1996 336,000 336,000
Units issued at initial public offering - April
1996 (less offering costs of $1,617,970) Cash $5.75 2,200,000 22,000 11,010,030 11,032,030
Shares issued upon conversion of mandatorily
redeemable convertible preferred stock - April 1996 726,900 7,269 2,118,693 2,125,962
Units issued to cover underwriter's
overallotments - May 1996 (less offering costs
of $60,375) Cash $5.75 100,000 1,000 513,625 514,625
Shares issued upon conversion of bridge notes -
May 1996 (less offering costs of $1,977) $3.94 6,346 63 22,963 23,026
Shares issued upon exercise of incentive stock
options - June 1996 Cash $1.80 550 6 984 990
Net loss (6,350,972) (6,350,972)
--------- ------- ----------- ----------- ----------
Balance - December 31, 1996 4,677,407 $46,774 $15,386,692 $(9,795,144) $5,638,322
--------- ------- ----------- ----------- ----------
--------- ------- ----------- ----------- ----------
</TABLE>
See Accompanying Notes to the Financial Statements.
F-5
<PAGE>
REALITY INTERACTIVE, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
From From
May 24, 1994 May 24, 1994
(Inception) to Year Ended (Inception) to
December 31, December 31, December 31,
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (672,776) $ (2,771,396) $ (6,350,972) $ (9,795,144)
Reconciliation of Net Loss to Net Cash Used
By Operating Activities:
Depreciation and Amortization 16,414 103,261 120,000 239,675
Noncash Interest Expense Related to
Warrants 80,422 193,979 274,401
Extraordinary Loss Related to Early
Retirement of Debt (Interest Expense
Related to Warrants) 142,021 142,021
Changes in Assets and Liabilities:
Accounts Receivable (18,237) (79,159) (97,396)
Inventory (28,359) (106,494) (134,853)
Prepaid Expenses and Other Assets (24,466) 2,038 (68,888) (91,316)
Accounts Payable 69,876 118,747 (72,235) 116,388
Accrued Liabilities 90,417 28,269 118,686
Other Current Liabilities 12,345 12,345
---------- ------------ ------------ ------------
Net Cash Used by Operating Activities (610,952) (2,423,107) (6,181,134) (9,215,193)
---------- ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of Fixed Assets (146,849) (205,792) (308,241) (660,882)
Purchases of Short-term Investments (30,000) (10,244,712) (10,274,712)
Sales of Short-term Investments 30,000 5,500,000 5,530,000
Cash Restricted for Operating Leases (119,000) 2,200 (116,800)
---------- ------------ ------------ ------------
Net Cash Used by Investing Activities (176,849) (294,792) (5,050,753) (5,522,394)
---------- ------------ ------------ ------------
Cash Flows from Financing Activities:
Net Proceeds from Issuance of Common Stock 1,320,411 1,320,411
Proceeds from Related Party Financing 320,000 320,000
Repayments of Capital Lease Obligation (5,149) (17,610) (14,127) (36,886)
Proceeds from Note Payable 951,002 951,002
Repayment of Notes Payable (750,000) (201,002) (951,002)
Net Proceeds from Issuance of Preferred Stock 1,805,962 1,805,962
Proceeds from Convertible Notes Payable 2,800,000 2,800,000
Repayment of Convertible Notes Payable (2,776,974) (2,776,974)
Proceeds from Sale Leaseback of Fixed Assets 266,157 266,157
Net Proceeds from Initial Public Offering 11,546,655 11,546,655
Proceeds from Exercise of Stock Options 990 990
---------- ------------ ------------ ------------
Net Cash Provided by Financing
Activities 1,315,262 2,309,354 11,621,699 15,246,315
---------- ------------ ------------ ------------
Net Cash Provided (Used) During Period 527,461 (408,545) 389,812 508,728
Cash and Cash Equivalents:
Beginning of Period 527,461 118,916
---------- ------------ ------------ ------------
End of Period $ 527,461 $ 118,916 $ 508,728 $ 508,728
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
(CONTINUED)
F-6
<PAGE>
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
From From
May 24, 1994 May 24, 1994
(Inception) to Year Ended (Inception) to
December 31, December 31, December 31,
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 1,100 $ 72,507 $ 92,285 $ 165,892
-------- --------- ---------- ----------
Noncash investing and financing activities:
Capital lease obligation incurred $ 36,886 $ 36,886
-------- ----------
Conversion of preferred stock from
related party financing $ 320,000 $ 320,000
--------- ----------
Warrants issued in connection with
notes payable $ 80,422 $ 336,000 $ 416,422
--------- ---------- ----------
Conversion of mandatorily redeemable
convertible preferred stock to common
stock $2,125,962 $2,125,962
---------- ----------
Conversion of bridge notes payable
to common stock $ 25,003 $ 25,003
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-7
<PAGE>
REALITY INTERACTIVE, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - ORGANIZATION AND STATUS
Reality Interactive, Inc. (the Company) was incorporated on May 24, 1994 for the
purpose of developing interactive multimedia knowledge solutions for the
industrial marketplace. Currently, the Company's product offerings consist of
CD-ROM titles within the areas of international quality and environmental
management standards. The first product, the ISO 9000 REGISTRATION SERIES, is a
five-title series that guides a company through the process of complying with
the ISO 9000 quality management standard. The second product, the QS-9000
COMPLIANCE SERIES, is a four-title series that helps automotive suppliers comply
with the Big Three automakers' QS-9000 quality requirements. The third product,
the ISO 14000 EMS CONFORMANCE SERIES, is a five-title series that assists
companies with the design, implementation and management of an environmental
management system in accordance with the ISO 14000 Environmental management
systems standard. The fourth product, POLLUTION PREVENTION, enables companies
to understand the key concepts of pollution prevention and waste reduction.
At December 31, 1996, the Company was in the development stage as its sales and
marketing efforts have not yet generated predictable or significant revenues.
The Company has a deficit accumulated during the development stage of
$9,795,144. To become profitable and to conserve capital, the Company must
significantly increase revenues and control expenses. Future operating results
will depend upon many factors, including the rate at which industry adopts
interactive multimedia technology for education and training, the level of
product and price competition, the Company's success in maturing its direct and
indirect sales channels and the ability of the Company to manage its expenses in
relation to sales.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of less than 90 days and are generally invested in money market funds
and certificates of deposit.
SHORT-TERM INVESTMENTS
Short-term investments consist of commercial paper held for periods generally
less than 90 days. These investments are considered available for sale and are
carried at fair value. The estimated fair value of the investments approximates
the amortized cost, and therefore, there are no unrealized gains or losses as of
December 31, 1996.
F-8
<PAGE>
REVENUE RECOGNITION
Revenue is derived from product sales and licenses and is recognized upon
shipment of the products. The Company has no significant obligations after
shipment.
INVENTORY
Inventory consists primarily of software media, manuals and related packaging
materials. Inventory is carried at the lower of cost or market using the
first-in, first-out valuation method.
FIXED ASSETS
Fixed assets are stated at cost. Accelerated depreciation methods are used for
both book and tax purposes over the estimated useful life of the equipment.
Leasehold improvements are amortized over the lease term using the straight-line
method.
INCOME TAXES
Income taxes are accounted for using the liability method under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of common
stock and common stock equivalents outstanding. Net loss per common and common
equivalent share excludes stock options and warrants as common stock equivalents
when the effect of their inclusion would be antidilutive.
PRODUCT DEVELOPMENT AND RESEARCH
Expenditures for software development costs and research are expensed as
incurred. Such costs are required to be expensed until the point that
technological feasibility and proven marketability of the product is
established. Costs otherwise capitalizable after technological feasibility is
achieved are also generally expensed because they are insignificant.
NOTE 3 - FIXED ASSETS
Fixed assets consist of the following:
December 31,
1995 1996
---- ----
Computer equipment $ 288,871 $ 297,618
Office equipment and furniture 85,574 120,064
Leasehold improvements 12,913 4,000
---------- ----------
387,358 421,682
Less accumulated depreciation and amortization (117,506) (229,746)
---------- ----------
$ 269,852 $ 191,936
---------- ----------
---------- ----------
F-9
<PAGE>
NOTE 4 - NOTES PAYABLE
In May 1995, the Company entered into a loan for up to $1,050,000 (the Notes)
from a bank. The Notes bear interest at 9%, with interest due monthly, and were
payable in full on April 30, 1996. There was an outstanding balance of $201,002
at December 31, 1995. On January 22, 1996, the Company paid off the remaining
balance and retired the loan. In connection with this financing, the Company
issued warrants to purchase a total of 210,000 shares of Common Stock. The
estimated fair value of the warrants of $80,422, as determined by management,
was credited to additional paid-in capital and was amortized over the
anticipated outstanding period of the Notes as interest expense.
In January 1996, the Company closed a $2,800,000 convertible bridge note
financing (the Bridge Notes) in a private placement, resulting in net proceeds
to the Company of $2,626,570. The Bridge Notes provided for interest at 10% per
annum and matured on the earlier of July 31, 1996 or 30 days after the effective
date of an initial public offering (IPO). At the option of the Bridge Note
holders, up to 100% of the principal amount of the Bridge Notes was convertible
into Common Stock for a period of 20 days following the effective date of the
Company's IPO. In connection with this financing, the Company also issued
detachable warrants to the purchasers of the Bridge Notes to purchase a total of
560,000 shares of Common Stock.
In May 1996, the Company made payments totaling $2,861,281 to repay the Bridge
Notes, including accrued interest of $86,285. In connection with this
repayment, approximately $25,000 of the Bridge Notes were converted to 6,346
shares of Common Stock at a price equal to $3.94. As a result of the early
repayment of its bridge note financing, the Company recognized an extraordinary
loss of approximately $219,000 in 1996 related to the unamortized portion of
Bridge Note offering costs and original issue discount.
NOTE 5 - INCOME TAXES
Significant components of the Company's deferred tax assets are as follows:
December 31,
1995 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 1,371,000 $ 3,969,000
Other 50,000 50,000
------------- -------------
Total deferred tax assets 1,421,000 4,019,000
Less valuation allowance (1,421,000) (4,019,000)
------------- -------------
Net deferred tax assets $ - $ -
------------- -------------
------------- -------------
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $9,500,000 for income tax purposes. The net operating loss
carryforwards expire in 2009 through 2011 if not previously utilized.
The Company has determined, based on the weight of available evidence at
December 31, 1996, that it is more likely than not the Company's deferred tax
assets will not be realized. Accordingly, a valuation allowance has been
established for the tax benefits of these items. Future utilization of the
available net operating loss carryforwards may be limited under Internal Revenue
Code Section 382 due to future significant changes in ownership.
F-10
<PAGE>
NOTE 6 - COMMITMENTS
LEASES
The Company leases office space, equipment and furniture under various operating
lease agreements, the last of which expires in 2000.
At December 31, 1996, future minimum lease payments under noncancelable
operating leases were as follows:
Operating
Year Ending December 31, Leases
- ----------------------- ------
1997 $ 579,153
1998 442,754
1999 140,548
2000 655
-----------
Total future minimum lease payments $ 1,163,110
-----------
-----------
Rent expense was approximately $25,000, $150,000 and $324,000 for the periods
ended December 31, 1994, 1995 and 1996, respectively.
The Company has entered into agreements with third party content providers and
marketing partners that require royalty payments to be made based upon the sales
of the Company's products. The amount expensed under these agreements for 1995
and 1996, all of which was accrued at December 31, 1995 and 1996, totaled
approximately $7,200 and $79,800, respectively.
LETTERS OF CREDIT
The Company has outstanding letters of credit from a bank as security for
operating leases of certain office furniture and equipment. The Company is
required to maintain the cash as collateral at the bank which issued the letters
of credit. This amount is reflected as restricted cash at December 31, 1995 and
1996.
NOTE 7 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
From September to December 1995, the Company issued, through a private
placement, 726,900 shares of Series A Mandatorily Redeemable Convertible
Preferred Stock receiving net proceeds of $1,805,962 and the conversion of a
related party financing in the principal amount of $320,000 plus accrued
interest. The Company incurred issuance costs of $54,738 in connection with the
sale of this preferred stock. Further, in connection with this private
placement, warrants to purchase 7,625 shares of Common Stock were granted
to a selling agent.
The holders of Preferred Stock are entitled to the same number of votes they
would have if such shares were converted into Common Stock. The Preferred Stock
was automatically converted, on a one-to-one basis, into Common Stock in April
1996 as the Company made a registered public offering of its Common Stock.
F-11
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ISSUED
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders. Holders of Common Stock have no
preemptive, subscription or conversion rights and there are no redemption or
sinking fund provisions applicable thereto. The outstanding shares of Common
Stock are fully paid and nonassessable.
In April 1996, the Company completed an IPO of 2,200,000 units at a price of
$5.75 per unit. Each unit sold consisted of one share of Common Stock and one
Redeemable Common Stock Purchase Warrant to purchase one share of Common Stock.
The sale of such units resulted in gross proceeds of $12,650,000 and net
proceeds of $11,032,030. At the closing of the offering, all 726,900 shares of
Mandatorily Redeemable Convertible Preferred Stock outstanding at December 31,
1995 were converted into 726,900 shares of Common Stock.
In May 1996, the Company issued an additional 100,000 units to its underwriter
to cover over-allotments, resulting in gross proceeds of $575,000 and net
proceeds of $514,625.
WARRANTS
A summary of the Company's warrant activity, all of which occurred after
December 31, 1994 is as follows:
Exercise
Number Price Expiration
------ ----- ----------
Warrants issued to a selling agent 7,625 $3.00 1998
Warrants issued to note payable
guarantors (Note 4) 210,000 $3.00 2000
Warrants issued with related party financing 68,297 $2.40 1998-2000
---------
Outstanding at December 31, 1995 285,922 $2.40-$3.00 1998-2000
Warrants issued in bridge financing (Note 4) 560,000 $4.31 1999
Warrants issued in connection with IPO 2,300,000 $8.00 2000
Warrants issued to underwriter in
connection with IPO 220,000 $6.90 2001
---------
Outstanding at December 31, 1996 3,365,922 $2.40-$8.00 1998-2001
---------
---------
Such warrants were issued in connection with various financing transactions by
the Company. The holders of these warrants are not entitled to vote, receive
dividends or exercise any other rights until such warrants have been duly
exercised and payment of the purchase price has been made.
F-12
<PAGE>
STOCK OPTIONS
Under the terms of the Company's 1994 Stock Incentive Plan, effective February
16, 1996, 700,000 shares of Common Stock have been reserved for issuance to
officers, employees and independent contractors upon the exercise of stock
options. Nonqualified and incentive stock options may be granted under the
plan. Furthermore, the Company may grant nonqualified options outside of this
plan. These stock options generally vest evenly over a three to four year
period and are exercisable over periods up to five years from date of grant.
Effective February 16, 1996, the Company adopted the 1996 Directors' Stock
Option Plan under which 400,000 options have been reserved. This plan provides
for annual grants of options to purchase 10,000 shares of Common Stock per
director per year and vests six months from the date of grant.
The Board of Directors establishes all terms and conditions of each grant.
Stock options are granted at or above fair market value as determined by the
Board of Directors at the respective grant dates.
The following summarizes stock option activity:
Weighted
Average
Exercise Exercise
Options Price Price
Outstanding Per Share Per Share
--------- --------- ---------
Options outstanding at December 31, 1994 176,000 $1.80 - $1.98 $1.83
Granted 216,200 $1.80 - $3.00 $2.35
Canceled (17,200) $1.80 $1.80
---------
Options outstanding at December 31, 1995 375,000 $1.80 - $3.00 $2.13
Granted 181,000 $1.00 - $5.25 $4.50
Canceled (57,400) $1.80 - $5.25 $3.20
Exercised (550) $1.80 $1.80
---------
Options outstanding at December 31, 1996 498,050 $1.00 - $5.25 $2.87
---------
---------
Exercisable at December 31, 1996 195,950 $1.00 - $5.25 $2.31
---------
---------
The 498,050 options outstanding at December 31, 1996 have a remaining weighted
average contractual life of 3.9 years.
F-13
<PAGE>
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," in
1996. As allowed by SFAS No. 123, the Company applies APB Opinion No. 25 and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation expense related thereto. If the
Company had elected to recognize compensation expense based on the fair value of
the options granted at grant date as prescribed by SFAS No. 123, net loss and
net loss per share would have been increased to the pro forma amounts indicated
in the following table:
1995 1996
---- ----
Net loss - as reported $ (2,771,396) $ (6,350,972)
Net loss - pro forma $ (2,788,717) $ (6,443,983)
Net loss per share - as reported $ (1.69) $ (1.68)
Net loss per share - pro forma $ (1.69) $ (1.70)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1995 1996
---- ----
Expected dividend level 0% 0%
Expected stock price volatility 70% 70%
Risk-free interest rate 6% 6%
Expected life of options 4 years 4 years
F-14
