<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number: 0-27862
REALITY INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1781991
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation of organization
SUITE 115
6121 BAKER ROAD
MINNETONKA, MINNESOTA 55344 (612) 253-4700
Address of principal executive offices Registrant's telephone number
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. /X/ Yes /_/ No
At April 30, 1999, 4,677,407 shares of registrant's $.01 par value Common Stock
were outstanding.
Transitional Small Business Issuer Format /_/ Yes /X/ No
<PAGE>
FORM 10-QSB INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 9
SIGNATURES................................................................ 10
EXHIBIT INDEX............................................................. 11
</TABLE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB 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. Since the Company has determined that it will cease
its current business operations, and operate solely as a public shell company
while it seeks potential uses for the public shell, the primary factor that
might cause such difference in results is the Company's inability to find a
suitable acquisition or merger candidate or other use for its public shell in
the near future.
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REALITY INTERACTIVE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 188,992 $ 291,697
Accounts receivable ............................................ 33,264 231,525
Prepaid expenses and other current assets ...................... 87,880 40,299
------------ ------------
Total current assets ....................................... 310,136 563,521
------------ ------------
Fixed assets, net .................................................. 48,833 63,833
Restricted cash .................................................... 111,000 111,000
Other assets ....................................................... 9,356 9,356
------------ ------------
Total assets ............................................... $ 479,325 $ 747,710
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable ............................................... $ 33,185 $ 38,733
Accrued liabilities ............................................ 28,599 31,938
Deferred revenue ............................................... 69,445 49,495
Other current liabilities ...................................... 0 1,572
------------ ------------
Total current liabilities .................................. 131,229 121,738
Long-term liabilities .............................................. 0 0
------------ ------------
Total liabilities .......................................... 131,229 121,738
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares authorized;
4,677,407 shares outstanding ............................... 46,774 46,774
Additional paid-in capital ..................................... 15,386,692 15,386,692
Accumulated deficit during the development stage ............... (15,085,370) (14,807,494)
------------ ------------
Total stockholders' equity ................................. 348,096 625,972
------------ ------------
Total liabilities and stockholders' equity ................. $ 479,325 $ 747,710
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
REALITY INTERACTIVE, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Product revenues ............................... $ 72,824 $ 131,695
Service revenues ............................... 800 112,644
----------- -----------
Total revenues ......................... 73,624 244,339
----------- -----------
Cost of product revenues ....................... 17,436 31,738
Cost of service revenues ....................... 0 92,601
----------- -----------
Total cost of revenues ................. 17,436 124,339
----------- -----------
Gross profit ................................... 56,188 120,000
----------- -----------
Operating expenses:
Sales and marketing ........................ 68,095 155,251
Research and development ................... 68,506 135,308
General and administrative ................. 200,893 332,416
----------- -----------
Total operating expenses ............... 337,494 622,975
----------- -----------
Operating loss ................................. (281,306) (502,975)
Interest income (expense), net ............. 3,430 23,769
----------- -----------
Net loss ............................... $ (277,876) $ (479,206)
----------- -----------
----------- -----------
Basic and diluted earnings (loss) per share .... $ (0.06) $ (0.10)
----------- -----------
Weighted average common shares outstanding ..... 4,677,407 4,677,407
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
REALITY INTERACTIVE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(277,876) $(479,206)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization ....................................... 15,000 22,500
Changes in assets and liabilities:
Accounts receivable ................................................. 198,261 215,890
Inventory ........................................................... 0 2,161
Prepaid expenses and other current assets ........................... (47,581) (18,913)
Accounts payable .................................................... (5,548) 22,924
Accrued liabilities ................................................. (3,339) (96,921)
Deferred revenue .................................................... 19,950 (64,013)
Other current liabilities ........................................... (1,572) (1,819)
--------- ---------
Net cash used by operating activities ........................... (102,705) (397,397)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets, net of retirements ............................ 0 (4,793)
Purchases of short-term investments ..................................... 0 (20,717)
--------- ---------
Net cash used by investing activities ........................... 0 (25,510)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES: ....................................... 0 0
--------- ---------
Net cash provided (used) during period ...................................... (102,705) (422,907)
CASH AND CASH EQUIVALENTS:
Beginning of period ..................................................... 291,697 487,994
--------- ---------
End of period ........................................................... $ 188,992 $ 65,087
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
REALITY INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Reality Interactive, Inc. (the "Company") was incorporated on May 24, 1994
for the purpose of developing technology-based knowledge solutions for the
industrial marketplace. Since inception, the Company has developed several
off-the-shelf multimedia training products within the areas of international
quality and environmental management standards. To better align with the needs
of the marketplace, the Company recently began offering multimedia and web
development services to help customers improve business performance through
technology-assisted knowledge transfer. The Company consults with its customers
to identify initiatives and corporate best practices that are key to improving
productivity, quality, cost reduction and time to market. The Company then uses
its expertise with interactive technologies, such as the Web and multimedia, to
develop solutions that foster enterprise-wide learning and culture change.
Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The preparation of financial statements in accordance
with generally accepted accounting principles require management to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities, including the disclosure of contingent assets
and liabilities at the date of the accompanying interim financial statements,
and the reported amounts of revenue and expenses during the reporting period. In
the opinion of management, the interim financial statements include all
adjustments necessary for a fair presentation of the results of operations for
the interim periods presented.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the operating results to be expected for the year
ending December 31, 1999, since the Company has decided to cease its current
business operations. See Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted. The statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.
6
<PAGE>
ITEM 2 - 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 quarters ended March 31, 1999 and 1998.
RESULTS OF OPERATIONS
REVENUES. Revenues were $73,624 for the first quarter of 1999, a 70%
decrease from revenues of $244,339 for the first quarter of 1998. The revenue
decrease was due primarily to fewer sales opportunities and longer than
anticipated sales cycles for contract service opportunities that were in the
sales pipeline.
For the first quarter of 1998, revenue from three customers accounted for
57% of total revenues for the quarter.
COST OF REVENUES. Cost of revenues were $17,436 for the first quarter of
1999, compared to $124,339 for the first quarter of 1998. The decrease in cost
of revenues was due to the decrease in revenues.
OPERATING EXPENSES. The Company's operating expenses for the first quarter
of 1999 were $337,494, a 46% decrease from operating expenses of $622,975 in the
first quarter of 1998. This decrease in operating expenses between the first
quarter of 1999 and 1998 was due primarily to expense controls the Company
implemented to conserve capital.
(a) SALES AND MARKETING. Sales and marketing expenses were $68,095 for the
first quarter of 1999 compared to $155,251 for the first quarter of
1998, a 56% decrease. This decrease was due primarily to lower
staffing, travel and general selling expenses, along with cutbacks in
direct marketing initiatives such as tradeshow and marketing
literature expenses.
(b) RESEARCH AND DEVELOPMENT. Research and development expenses were
$68,506 for the first quarter of 1999 compared to $135,308 for the
first quarter of 1998, a 49% decrease. This decrease was primarily
attributed to a decrease in development staff as the Company moved to
a contracted service business model. Development costs associated with
contracted services are deferred until related service revenues are
recognized, at which time, such costs are expensed as cost of
revenues.
(c) GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$200,893 for the first quarter of 1999 compared to $332,416 for the
first quarter of 1998, a 40% decrease. This decrease was due primarily
to a decrease in headcount and lower expenses for rent, travel,
equipment leases and administrative operating costs due to an overall
drop in Company personnel.
OTHER INCOME (EXPENSE). The Company's net other income was $3,430 for the
first quarter of 1999, compared to net other income of $23,769 for the first
quarter of 1998. Net other income consists entirely of interest earned on cash
and cash equivalents. The decrease between periods is attributed to a decrease
in cash reserves.
7
<PAGE>
NET LOSS. Net loss was $277,876 for the first quarter of 1999, compared to
a net loss of $479,206 for the first quarter of 1998. Since the Company has
decided to cease its current business operations, the Company does not expect to
incur additional losses in 1999, except for costs relating to operations for
April of 1999, activities relating to the shut down of operations during May of
1999 and costs relating to SEC public filing requirements. See "Recent
Developments."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $188,992 as of March 31, 1999,
compared to $291,697 as of December 31, 1998. This decrease in cash and cash
equivalents was due primarily to the net loss from operations for the quarter.
RECENT DEVELOPMENTS
On April 27, 1999, the Company announced that it would cease current
business operations effective April 30, 1999. Management of the Company believes
this action was necessary in light of the Company's current liquidity needs and
lack of short-term revenue opportunities.
The Company is currently exploring potential uses of its public shell. In
the meantime, the Company intends to comply with all public company filing
requirements in order to maintain its status as a public company.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Some computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. All of the software produced by the
Company has been analyzed and the Company is not aware of any potential for date
recognition problems in its products. The Company also uses off-the-shelf
software ("Administrative Software") produced by third parties for use in
administrative functions such as word processing, billing and record keeping.
The vendors of the Company's Administrative Software products have indicated
that such products are Year 2000 compliant. In the event that any of these
programs are susceptible to date recognition problems, this could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process critical business
transactions. In the event that the Company experiences Year 2000 problems, the
Company believes the cost to remedy such problems will be immaterial.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
27.1 Financial Data Schedules
99.1 Cautionary Statement
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March
31, 1999
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
REALITY INTERACTIVE, INC.
Dated: May 17, 1999 By /s/ Paul J. Wendorff
------------------------------
Paul J. Wendorff
Its Chief Executive Officer
Dated: May 17, 1999 By /s/ Wesley W. Winnekins
-----------------------------
Wesley W. Winnekins
Its Chief Financial Officer
10
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- ----------- --------
27.1 Financial Data Schedules.....................................
99.1 Cautionary Statement......................................... 12
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 188,992
<SECURITIES> 0
<RECEIVABLES> 33,264
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 310,136
<PP&E> 453,004
<DEPRECIATION> 404,171
<TOTAL-ASSETS> 479,325
<CURRENT-LIABILITIES> 131,229
<BONDS> 0
0
0
<COMMON> 46,774
<OTHER-SE> 301,322
<TOTAL-LIABILITY-AND-EQUITY> 479,325
<SALES> 73,624
<TOTAL-REVENUES> 77,054
<CGS> 17,436
<TOTAL-COSTS> 17,436
<OTHER-EXPENSES> 337,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (277,876)
<INCOME-TAX> 0
<INCOME-CONTINUING> (277,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (277,876)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</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 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 matter, 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 may cause actual results to differ materially from
those in such forward-looking statement or statements:
DISCONTINUATION OF CURRENT OPERATIONS. On April 27, 1999, the Company
announced that it would cease current business operations effective as of April
30, 1999. Management of the Company believes this action was necessary in light
of the Company's current liquidity needs and lack of short-term revenue
opportunities. The Company is currently exploring potential uses for the Company
in its current form as an inoperative public company. In the meantime, the
Company intends to comply with all SEC filing requirements in order to maintain
the Company's good standing under the Securities Exchange Act of 1934, as
amended. In the event the Company is unable to find a suitable acquisition or
merger candidate or other suitable use for the Company in the near future, the
Company will be liquidated and its remaining assets will be distributed to its
creditors in satisfaction of its then-current obligations and, if any assets
remain thereafter, to its shareholders. There can be no assurance that any such
candidate or other suitable use for the Company will be found.
12
