<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 June 30, 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 Registrant's telephone number
offices
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
PART I - FINANCIAL INFORMATION
- --------------------------------
Item 1. Financial Statements.................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................7
Item 4. Submission of Matters to a Vote of Security Holders..................9
PART II - OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K....................................10
SIGNATURES...................................................................11
EXHIBIT INDEX................................................................12
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.
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.
While the Company 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>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ..................................................$ 28,704 $ 291,697
Restricted cash ............................................................ 111,000 111,000
Accounts receivable ........................................................ 54,671 231,525
Prepaid expenses and other current assets .................................. 26,133 40,299
----------- ------------
Total current assets.................................................... 220,508 674,521
----------- ------------
Fixed assets, net............................................................... 33,833 63,833
Other assets.................................................................... 0 9,356
----------- ------------
Total assets............................................................$ 254,341 $ 747,710
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 15,641 $ 38,733
Accrued liabilities ........................................................ 48,418 31,938
Bridge notes payable ....................................................... 70,631 0
Deferred revenue............................................................ 0 49,495
Other current liabilities.................................................. 0 1,572
----------- ------------
Total current liabilities............................................... 134,690 121,738
----------- ------------
Long-term liabilities .......................................................... 0 0
Total liabilities....................................................... 134,690 121,738
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares authorized;
4,677,407 shares outstanding ........................................... 46,774 46,774
Additional paid-in capital ................................................. 15,386,692 15,386,692
Accumulated deficit during the development stage ...........................(15,313,815) (14,807,494)
----------- ------------
Total stockholders' equity ............................................. 119,651 625,972
----------- ------------
Total liabilities and stockholders' equity .............................$ 254,341 $ 747,710
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
REALITY INTERACTIVE, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Product revenues ............................. $ 13,945 $ 87,215 $ 86,769 $ 218,910
Service revenues ............................. 138,595 114,696 139,395 227,340
----------- ----------- ----------- -----------
Total revenues ....................... 152,540 201,911 226,164 446,250
----------- ----------- ----------- -----------
Cost of product revenues ..................... 1,249 25,625 18,685 57,363
Cost of service revenues .................... 108,024 91,542 108,024 184,143
----------- ----------- ----------- -----------
Total cost of revenues ............... 109,273 117,167 126,709 241,506
----------- ----------- ----------- -----------
Gross profit ................................. 43,267 84,744 99,455 204,744
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ...................... 31,189 168,061 99,284 323,312
Research and development ................. 34,950 161,683 103,456 296,991
General and administrative ............... 207,262 336,239 408,155 668,655
----------- ----------- ----------- -----------
Total operating expenses ............. 273,401 665,983 610,895 1,288,958
----------- ----------- ----------- -----------
Operating loss ............................... (230,134) (581,239) (511,440) (1,084,214)
Interest income (expense), net ........... 1,689 15,450 5,119 39,219
----------- ----------- ----------- -----------
Net loss ............................. $ (228,445) $ (565,789) $ (506,321) $(1,044,995)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic and diluted earnings (loss) per share .. $ (0.05) $ (0.12) $ (0.11) $ (0.22)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding ... 4,677,407 4,677,407 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>
Six months ended
June 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (506,321) $(1,044,995)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization ........................................... 30,000 33,117
Changes in assets and liabilities:
Accounts receivable ..................................................... 176,854 159,965
Inventory ............................................................... 0 4,417
Prepaid expenses and other assets ....................................... 23,522 (20,354)
Accounts payable ........................................................ (23,092) 1,079
Accrued liabilities ..................................................... 16,480 (87,042)
Deferred revenue ........................................................ (49,495) (152,263)
Other current liabilities ............................................... (1,572) (1,684)
----------- -----------
Net cash used by operating activities ............................... (333,624) (1,107,760)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets, net of retirements ................................ 0 (5,087)
Purchases of short-term investments ......................................... 0 (32,977)
Sale of short-term investments .............................................. 0 1,563,522
Cash restricted for operating leases ........................................ 0 (111,000)
----------- -----------
Net cash used by investing activities ............................... 0 1,414,458
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge notes payable .......................................... 70,631 0
----------- -----------
Net cash provided (used) during period .......................................... (262,993) 306,698
CASH AND CASH EQUIVALENTS:
----------- -----------
Beginning of period ............................................................. 291,697 487,994
----------- -----------
End of period ............................................................... $ 28,704 $ 794,692
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
REALITY INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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.
On April 27, 1999, the Company announced that it would cease current
business operations effective April 30, 1999. At that time, all employees
were terminated. 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.
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.
Because the Company has ceased business operations, operating results
for the three and six months ended June 30, 1999 will not be indicative of
the operating results for the year ending December 31, 1999. 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 three and six months ended June 30, 1999 and 1998.
RESULTS OF OPERATIONS
REVENUES. Revenues were $152,540 for the second quarter of 1999, a 24%
decrease from revenues of $201,911 for the second quarter of 1998. For the
six month period ended June 30, 1999, revenues were $226,164, a 49% decrease
from revenues of $446,250 for the comparable period of 1998. The revenue
decrease was due primarily to fewer sales opportunities, longer than
anticipated sales cycles for contract service opportunities and ceasing
business operations on April 30, 1999.
COST OF REVENUES. Cost of revenues were $109,273 for the second quarter
of 1999, compared to $117,167 for the second quarter of 1998. For the six
month period ended June 30, 1999, cost of revenues were $126,709, compared to
cost of revenues of $241,506 for the same period of 1998. The decrease in
cost of revenues was due to the decrease in revenues.
OPERATING EXPENSES. The Company's operating expenses for the second
quarter of 1999 were $273,401, a 60% decrease from operating expenses of
$665,983 in the second quarter of 1998. For the six month period ended June
30, 1999, operating expenses were $610,895, a 53% decrease from operating
expenses of $1,288,958 for the same period of 1998. This decrease in
operating expenses between 1999 and 1998 was due primarily to expense
reductions and ceasing business operations on April 30, 1999.
(a) SALES AND MARKETING. Sales and marketing expenses were $31,189
for the second quarter of 1999 compared to $168,061 for the
second quarter of 1998, a 81% decrease. For the six-month period
ended June 30, 1999, sales and marketing expenses were $99,284, a
69% decrease from sales and marketing expenses of $323,312 for
the same period of 1998. 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
$34,950 for the second quarter of 1999 compared to $161,683 for
the second quarter of 1998, a 78% decrease. For the six month
period ended June 30, 1999, research and development expenses
were $103,456, a 65% decrease from research and development
expenses of $296,991 for the same period of 1998. This decrease
was primarily attributed to a decrease in development staff as
the Company moved from a product development to a contracted
service business model the beginning of 1998. 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 $207,262 for the second quarter of 1999 compared to $336,239
for the second quarter of 1998, a 38% decrease. For the six month
period ended June 30, 1999, general and administrative expenses
were $408,155, a 39% decrease from general and administrative
expenses of $668,655 for the same period of 1998. 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.
7
<PAGE>
OTHER INCOME (EXPENSE). The Company's net other income was $1,689 for
the second quarter of 1999, compared to net other income of $15,450 for the
second quarter of 1998. For the six month period ended June 30, 1999, net
other income was $5,119, compared to net other income of $39,219 for the same
period 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.
NET LOSS. Net loss was $228,455 for the second quarter of 1999,
compared to a net loss of $565,789 for the second quarter of 1998. For the
six-month period ended June 30, 1999, net loss was $506,321, compared to a
net loss of $1,044,995 for the same period of 1998. Since the Company has
ceased its business operations, the Company does not expect to incur
additional losses in 1999, except for activities relating to the shut down of
operations and costs relating to SEC public filing requirements. See
"--Recent Developments."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $28,704 as of June 30,
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.
As of June 30, 1999, the Company had outstanding a letter of credit
from a bank totaling $111,000. The letter of credit secures an operating
lease of office space for its business premises. The Company is required to
maintain at the bank a cash amount equal to the letter of credit until such
letter of credit expires on July 15, 1999. At that time, the Company will be
able to use such cash to pay expenses associated with the wind-down of its
business operations.
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, however, the Company is executing a plan to sell its
assets. See "Item 4. Submission of Matters to a Vote of Security Holders."
With respect to maintaining its status as a public company, the Company
intends to comply with all future SEC and other filing requirements
associated with being 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>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 8, 1999, the Company mailed a Proxy Statement to its
shareholders that gave notice of a Special Meeting of Shareholders to be held
at the Company's corporate offices on July 29, 1999. The purpose of the
Special Meeting was to consider the sale, lease, transfer or other
disposition of all or substantially all of the property and assets of the
Company and, in particular, to vote on the following proposals:
1. To approve the sale of certain intellectual property assets of
the Company, pursuant to an Asset Purchase Agreement dated
June 18, 1999 (the "IP Asset Sale"), to VirtualFund.com, Inc.
(the "Buyer"), in connection with the process of winding-down
the Company's business affairs.
2. To approve the sale of the remaining intellectual property and all
furniture, fixtures and equipment owned by the Company.
As of July 29, 1999, only 1,554,521 shares, or 33% of total shares
outstanding of 4,677,407, were voted and present at the Special Meeting.
Although less than a quorum, the shares were voted in the following manner:
FOR AGAINST ABSTAIN
--- ------- -------
PROPOSAL 1 1,423,821 106,200 24,500
PROPOSAL 2 1,423,821 106,200 24,500
Because a quorum was not achieved, the Company rescheduled the Special
Meeting of Shareholders in order to accumulate additional votes. The new
meeting will be held at 9:00 a.m. on Tuesday, August 17, 1999, at the
corporate offices of the Company, Baker Technology Plaza, 6121 Baker Road,
Suite 115, Minnetonka, Minnesota.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedules
99.1 Cautionary Statement
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1999
10
<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: August 13, 1999 By /s/ Paul J. Wendorff
-------------------------------------
Paul J. Wendorff
Its Chief Executive Officer
Dated: August 13, 1999 By /s/ Wesley W. Winnekins
-------------------------------------
Wesley W. Winnekins
Its Chief Financial Officer
11
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- ---------------------------------------------------------
27.1 Financial Data Schedules
99.1 Cautionary Statement
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,704
<SECURITIES> 0
<RECEIVABLES> 54,671
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 220,508
<PP&E> 453,004
<DEPRECIATION> 419,171
<TOTAL-ASSETS> 254,341
<CURRENT-LIABILITIES> 134,690
<BONDS> 0
0
0
<COMMON> 46,774
<OTHER-SE> 72,877
<TOTAL-LIABILITY-AND-EQUITY> 254,341
<SALES> 226,164
<TOTAL-REVENUES> 231,283
<CGS> 126,709
<TOTAL-COSTS> 126,709
<OTHER-EXPENSES> 610,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (506,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (506,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,321)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</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. The Company ceased its 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 or its assets will be found.
