<PAGE> 1
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, 1999
Commission File Number: 0-27862
REALITY INTERACTIVE, INC.
MINNESOTA 41-1781991
State of Incorporation I.R.S. Employer Identification Number
Suite 121
7885 Fuller Road
Eden Prairie, MN 55345
(612) 282-4497
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 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, 1999 totaled
$254,199.
As of February 29, 2000, the Company had 4,677,407 shares of Common Stock
outstanding. The aggregate market value of the 4,092,443 shares of Common Stock
held by non-affiliates of the Company was $895,017, based on the closing bid
price of $0.2187 on February 29, 2000 on the Over The Counter Bulletin Board.
Transitional small business disclosure format: Yes No X
----- -----
<PAGE> 2
FORM 10-KSB INDEX
<TABLE>
<S> <C> <C>
PART I
- ------
Item 1. Description of Business...............................................................................3
Item 2. Description of Property...............................................................................3
Item 3. Legal Proceedings.....................................................................................3
Item 4. Submission of Matters to a Vote of Security Holders...................................................3
PART II
- -------
Item 5. Market for Common Equity and Related Stockholder Matters..............................................5
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operation..................5
Item 7. Financial Statements Index............................................................................7
Item 8. Changes and Disagreements with Accountants on Accounting and Financial Disclosure.....................7
PART III
- --------
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.....................................................................8
Item 10. Executive Compensation...............................................................................10
Item 11. Security Ownership of Certain Beneficial Owners and Management.......................................11
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
</TABLE>
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.
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.
Since April 30, 1999, the Company has been 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> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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 30, 1999, the Company ceased business operations and all
employees were terminated. Management of the Company believes this action was
necessary in light of the Company's liquidity needs and lack of short-term
revenue opportunities.
Since April 30, 1999, the Company has been selling the intellectual
property embodied in its previously developed CD-ROM and Internet products, as
well as its fixed assets, including computers and office furniture. The Company
is also exploring potential uses of its public shell. In the meantime, the
Company intends to comply with all SEC reporting requirements in order to
maintain its status as a public company.
The Company has incurred operating losses in each period since
inception, and has an accumulated deficit of $15,407,200.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive office is located in Eden Prairie,
Minnesota, where it leases approximately 1,000 square feet. The Company's office
space is secured by a 3 month renewable lease, which can be canceled by giving
an advanced 90 day written notice.
ITEM 3. LEGAL PROCEEDINGS
NONE
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.
3
<PAGE> 4
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:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
PROPOSAL 1 1,423,821 106,200 24,500
PROPOSAL 2 1,423,821 106,200 24,500
</TABLE>
Because a quorum was not achieved, the Company rescheduled the
Special Meeting of Shareholders in order to accumulate additional votes. The new
meeting was 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.
At the reconvened Special Meeting of Shareholders on August 17,
1999, 2,513,914 shares were voted and present, representing 53.75% of total
shares outstanding. The shares voted were tabulated in the following manner:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
PROPOSAL 1 2,347,714 115,000 34,200
PROPOSAL 2 2,364,714 115,000 34,200
</TABLE>
Since a quorum was achieved, the proposals were passed.
4
<PAGE> 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET PRICE OF COMMON STOCK
The Company's common stock trades on the Over The Counter Bulletin
Board (OTC BB) under the symbol RINT. The following table sets forth the high
and low prices of the Company's Common Stock for each calendar quarter for the
past two years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
---------------------------- ----------------------------
QUARTER HIGH LOW QUARTER HIGH LOW
------- ---- --- ------- ---- ---
<S> <C> <C> <C> <C> <C>
First $0.31 $0.09 First $0.69 $0.28
Second $0.15 $0.03 Second $0.78 $0.09
Third $0.13 $0.06 Third $0.28 $0.06
Fourth $0.13 $0.03 Fourth $0.17 $0.04
</TABLE>
The Company has never paid cash dividends on its common stock and
does not anticipate paying cash dividends in the foreseeable future.
B. CHANGES IN SECURITIES
NONE
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, 1998 and 1999.
RESULTS OF OPERATIONS
REVENUES. Revenues were $744,221 for 1998, compared to revenues of
$254,199 for 1999. This decrease was due primarily to the Company's decision to
cease its business operations effective April 30, 1999.
On August 17, 1999, the Company received approval from its shareholders
to sell certain intellectual property rights associated with its CD-ROM and
internet-based training products. See Item 4. "SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS," and Item 6. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - GAIN ON SALE OF INTELLECTUAL
PROPERTY."
5
<PAGE> 6
COST OF REVENUES. Cost of revenues were $346,743 for 1998, compared to
$129,773 for 1999. The decrease in cost of revenues was primarily due to the
decrease in product sales attributed to the Company's decision to cease business
operations effective April 30, 1999.
OPERATING EXPENSES. The Company's operating expenses for 1998 were
$2,229,350, compared to operating expenses of $816,422 for 1999. This decrease
in operating expenses between 1998 and 1999 was due primarily to expense
reductions and ceasing business operations effective April 30, 1999
(a) SALES AND MARKETING. Sales and marketing expenses were $493,908
for 1998, compared to $99,285. This decrease between periods was
due primarily to the Company's decision to cease business
operations effective April 30, 1999.
(b) RESEARCH AND DEVELOPMENT. Research and development expenses were
$545,192 for 1998, compared to $103,456 for 1999. This decrease
between periods was due primarily to the Company's decision to
cease business operations effective April 30, 1999.
(c) GENERAL AND ADMINISTRATIVE. General and administrative expenses
were $1,190,250 for 1998, compared to $613,681 for 1999. This
decrease between periods was due primarily to the Company's
decision to cease business operations effective April 30, 1999.
The Company expects that it will continue to incur general and
administrative expenses for the year 2000 as it continues to
maintain a small administrative office, pursues opportunities for
its public shell and maintains its status as a fully reporting
company with the Securities and Exchange Commission.
GAIN ON SALE OF INTELLECTUAL PROPERTY. In connection with the sale of
business assets, the Company entered into an Asset Purchase Agreement dated June
18, 1999 with VirtualFund.com, Inc. (the "Buyer"), whereby the Buyer agreed to
purchase certain intellectual property assets owned by the Company for a price
of $85,000. The Buyer agreed to provide loans to the Company up to the amount of
the purchase price until the asset sale is approved by the Company's
shareholders. Upon approval by the Company's shareholders, the loans advanced
would be considered payment for the assets and all loans would be discharged and
canceled. During the second and third quarters of 1999, the Buyer made loans to
the Company of $70,000 and $15,000, respectively. In connection with a Special
Meeting of Shareholders on August 17, 1999, the sale of assets to the Buyer was
approved by shareholders, and the proceeds realized were treated as a gain on
sale of intellectual property. See Item 4. "Submission of Matters to a Vote of
Security Holders."
INTEREST INCOME. The Company's interest income was $54,444 for 1998,
compared to net other income of $7,290 for 1999. For 1998 and 1999, net other
income consisted entirely of interest earned on short-term investments, with the
decrease between years being attributed to declining cash reserves.
NET LOSS. Net loss was $1,777,428 for 1998, compared to a net loss of
$599,706 for 1997. Since the Company has ceased business operations, it does not
expect to incur additional substantial losses in 2000, except for expenses
relating to the operation of a small office, pursuing opportunities for its
public shell and SEC public filing requirements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $291,697 as of December
31, 1998, compared to $40,986 as of December 31, 1999. This decrease in cash,
cash equivalents and short-term investments was due primarily to the net loss
from operations for the year ended December 31, 1998.
6
<PAGE> 7
The Company expects that its current cash balance will allow it to meet
its minimal operating expenditures at least through June 30, 2000.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
Notes to Financial Statements........................... F-7 to F-12
</TABLE>
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
7
<PAGE> 8
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS
Information regarding the Directors of the Company is set forth below:
Name Age Offices
Paul J. Wendorff * 46 Chairman of the Board, President and
Chief Executive Officer
----------------------------------
* Is currently fulfilling the duties of the above noted offices as an outside
consultant.
Paul J. Wendorff has served as the Company's Chairman of the Board,
President and Chief Executive Officer since the Company's inception in May 1994.
From December 1990 to May 1994, he served as Director of Strategic Markets for
Fourth Shift Corporation. From November 1983 to December 1990, he was Manager of
Mid Range Software for Management Science America, Inc. Prior to that he served
in various sales management positions for the American Hospital Supply
Corporation between December 1976 and November 1983.
MEETINGS OF THE BOARD OF DIRECTORS AND CERTAIN COMMITTEES
During the fiscal year ended December 31, 1999, there were no Board of
Directors meeting. The Board of Directors and its committees also act from time
to time by written consent in lieu of meetings.
The Board of Directors of the Company has standing audit and
compensation committees which have a current membership as indicated in the
foregoing section. The Board of Directors has no standing nominating committee.
The Audit Committee makes recommendations as to the selection of
auditors and their compensation, and reviews with the auditors the scope of the
annual audit, matters of internal control and procedure and the adequacy
thereof, the audit results and reports and other general matters relating to the
Company's accounts, records, controls and financial reporting. There was no
formal meeting of the Audit Committee during fiscal 1999.
The Compensation Committee reviews and recommends to the Board of
Directors the compensation guidelines for executive officers. There was no
formal meeting of the Compensation Committee during fiscal 1999 as all employees
were terminated on April 30, 1999 when the Company ceased its business
operations.
8
<PAGE> 9
EXECUTIVE OFFICERS
Name Age Offices
Paul J. Wendorff 45 President, Chief Executive Officer
See the biographical information for Mr. Wendorff under the section "Directors."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and directors and persons who beneficially own more than 10% of the
Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms they file.
The Company believes that all Section 16(a) filing requirements were
met in a timely manner for the fiscal year ending December 31, 1999.
9
<PAGE> 10
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to or earned in
fiscal years 1997, 1998 and 1999 by the Company's Chief Executive Officer. No
other executive officer of the Company earned salary and bonus in excess of
$100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Fiscal ------------------------------ ------------
Name Year Salary (1) Bonus Options (2)
- ---- ---- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Paul J. Wendorff 1999 $48,442 -- --
President and Chief Executive Officer 1998 129,938 -- 100,000
1997 125,000 -- 105,000
</TABLE>
- ---------------------------------
(1) The compensation to Mr. Wendorff for 1999 represents payments made through
April 30, 1999, the effective date of the Company's cessation of business
operations.
(2) All options granted to Mr. Wendorff for the years presented have expired.
The following table summarizes the options granted to the executive
officer named in the Summary Compensation Table in 1999.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
Number of Securities Percent of Total Options
Underlying Options Granted to Employees Exercise Expiration
Name Granted in Fiscal 1997 Price Date
- ---- ----------------------- --------------------------- ---------- -------------
<S> <C> <C> <C> <C>
Paul J. Wendorff --- ---% $--- ---
</TABLE>
No options were granted or exercised by the executive officer named in
the Summary Compensation Table during fiscal year 1999.
10
<PAGE> 11
The following table summarizes the number of unexercised options held
by the executive officer named in the Summary Compensation Table as of December
31, 1999.
OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at End of In-the-Money Options
Fiscal 1999 at End of Fiscal 1999 (1)
------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Paul J. Wendorff --- --- $-- $--
</TABLE>
(1) Value is based on the difference between the closing price of the
Company's Common Stock of $0.10 on December 31, 1999 and the option exercise
price per share multiplied by the number of shares subject to the option. All
options had expired by December 31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of February 26, 1999 by:
(i) each director of the Company, (ii) each executive officer of the Company
named in the Summary Compensation Table, (iii) all directors and executive
officers of the Company as a group and (iv) each person or entity known by the
Company to own beneficially more than 5% of the Company's Common Stock. Unless
noted below, the address of each of the following shareholders is the same as
the Company.
<TABLE>
<CAPTION>
Beneficial Ownership (1)
------------------------
Name Shares Percent
---- ------ -------
<S> <C> <C>
Perkins Capital Management, Inc.(2).................. 674,050 12.9%
730 E. Lake Street
Wayzata, Minnesota 55391
Paul J. Wendorff..................................... 584,964 12.5
The Perkins Opportunity Fund(3)...................... 525,000 10.6
730 E. Lake Street
Wayzata, Minnesota 55391
All directors and executive officers
as a group (1 person)(8).......................... 584,964 12.5
</TABLE>
- ------------------------------
(1) Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days of February 29, 2000 are deemed
to be outstanding for purposes of computing the percentage of shares
beneficially owned by the person holding such options or warrants, but
are not deemed to be outstanding for purposes of computing such
percentage for any other person. Except as indicated by footnote, the
persons named in the table above have the sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them.
(2) Includes 555,600 shares of Common Stock subject to warrants.
(3) Includes 275,000 shares of Common Stock subject to warrants. Perkins
Capital Management, Inc. serves as investment advisor to The Perkins
Opportunity Fund, and holds voting and dispositive power over such
shares. Perkins Capital Management, Inc. disclaims beneficial ownership
in such shares.
11
<PAGE> 12
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------
<S> <C>
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 form 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
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 form 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
</TABLE>
12
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<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------------
<S> <C>
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(5) Sublease Agreement between Reality Interactive, Inc. and IVI Publishing, Inc., dated September
17, 1996
10.27(5) Distribution Agreement between Reality Interactive, Inc. and Lasermedia (Deutschland) GMBH,
dated October 9, 1996
10.28(5) 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(5) Irrevocable Letter of Credit, dated December 9, 1996, from BankWindsor in favor of Carlton Financial Corp.
10.30(6) Master Distribution Agreement between Reality Interactive, Inc. and Interactive Media
Communications, dated February 24, 1997
10.31(6) Multinational Copyright Exploitation Agreement between Reality Interactive, Inc. and the
International Organization for Standardization, dated February 17, 1997
10.32(6) Multinational Copyright Exploitation Agreement between Reality Interactive, Inc. and the
International Organization for Standardization, dated February 17, 1997
10.33(7) Asset Purchase Agreement between Reality Interactive, Inc. and VirtualFund.com, Inc., dated
June 18, 1999
10.34(7) Credit Agreement between Reality Interactive, Inc. and VirtualFund.com, Inc., dated May 28,
1999
10.35(7) Form of Demand Note between Reality Interactive, Inc. and VirtualFund, Inc., dated May 28, 1999
10.36(7) Security Agreement between Reality Interactive, Inc. and VirtualFund, Inc., dated May 28, 1999
23.1 Consent of Lund Koehler Cox & Arkema LLP
27.1 Financial Data Schedule for the Year Ended December 31, 1999
99.1 Cautionary Statement
</TABLE>
13
<PAGE> 14
(1) Incorporated by reference to Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (File No. 333-01508C), 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.
(5) Incorporated by reference to the Company's Form 10-KSB for the
year ended December 31, 1996.
(6) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended March 31, 1997.
(7) Incorporated by reference to the Company's Proxy Statement
filed June 28, 1999.
(b) Reports on Form 8-K
A report dated January 11, 1999 on Form 8-K was filed regarding a
change in the Company's auditor for the year ended December 31, 1998.
An initial report dated September 1, 1999, and an amended report dated
October 29, 1999 on Form 8-K was filed regarding the sale of certain
intellectual property assets and furniture, fixtures and equipment.
14
<PAGE> 15
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 30, 2000 By /S/ Paul J. Wendorff
--------------------
Paul J. Wendorff
Chief Executive 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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/S/ Paul J. Wendorff Chairman, Chief Executive Officer,
- ----------------------------- President and Director
Paul J. Wendorff (Principal Executive Officer) March 30, 2000
</TABLE>
15
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
-------- ----------------------------------------------------------------------------------- --------
<S> <C> <C>
23.1 Consent of Lund Koehler Cox & Arkema LLP........................................... 17
27.1 Financial Data Schedule for the Year Ended December 31, 1999
99.1 Cautionary Statement............................................................... 18
</TABLE>
16
<PAGE> 17
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.......................... F-2
Balance Sheet..................................................... F-3
Statement of Operations........................................... F-4
Statement of Stockholders' Equity................................. F-5
Statement of Cash Flows........................................... F-6
Notes to Financial Statements..................................... F-7 to F-12
</TABLE>
F-1
<PAGE> 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Reality Interactive, Inc.:
We have audited the accompanying balance sheets of Reality Interactive, Inc. as
of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reality Interactive, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that Reality
Interactive, Inc. will continue as a going concern. As discussed in Note 1 to
the financial statements, Reality Interactive, Inc. has suffered recurring
losses from operations and has a significant accumulated deficit that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The 1999
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Minneapolis, Minnesota
March 6, 2000
/S/ LUND KOEHLER COX & ARKEMA LLP
F-2
<PAGE> 19
REALITY INTERACTIVE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 291,697 $ 40,986
Accounts receivable 231,525 0
Prepaid expenses and other current assets 40,299 2,921
--------------- ---------------
Total current assets 563,521 43,907
--------------- ---------------
Fixed assets, net 63,833 0
Restricted cash 111,000 0
Other assets 9,356 0
--------------- ---------------
Total assets $ 747,710 $ 43,907
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,733 $ 9,688
Accrued liabilities 31,938 7,953
Deferred revenue 49,495 0
Other current liabilities 1,572 0
--------------- ---------------
Total current liabilities 121,738 17,641
--------------- ---------------
Commitments (Note 5)
Stockholders' equity:
Common stock, $.01 par value, 25,000,000 shares
authorized 4,677,407 shares issued and outstanding
at both dates 46,774 46,774
Additional paid-in capital 15,386,692 15,386,692
Accumulated deficit (14,807,494) (15,407,200)
--------------- ---------------
Total stockholders' equity 625,972 26,266
--------------- ---------------
Total liabilities and stockholders' equity $ 747,710 $ 43,907
=============== ===============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE> 20
REALITY INTERACTIVE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1999
--------------- ---------------
<S> <C> <C>
Product revenues $ 384,637 $ 112,033
Service revenues 359,584 142,166
--------------- ---------------
Total revenues 744,221 254,199
--------------- ---------------
Cost of product revenues 81,682 21,749
Cost of service revenues 265,061 108,024
---------------
Total cost of revenues 346,743 129,773
--------------- ---------------
Gross profit 397,478 124,426
--------------- ---------------
Operating expenses:
Sales and marketing 493,908 99,285
Research and development 545,192 103,456
General and administrative 1,190,250 613,681
--------------- ---------------
Total operating expenses 2,229,350 816,422
--------------- ---------------
Operating loss (1,831,872) (691,996)
Gain on sale of intellectual property 0 85,000
Interest income 54,444 7,290
--------------- ---------------
Net loss $ (1,777,428) $ (599,706)
=============== ===============
Basic and Diluted Loss Per Share: $ (0.38) $ (0.13)
=============== ===============
Weighted average common shares outstanding 4,677,407 4,677,407
=============== ===============
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE> 21
REALITY INTERACTIVE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER ADDITIONAL TOTAL
OF SHARES COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED STOCK CAPITAL DEFICIT EQUITY
--------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 4,677,407 46,774 15,386,692 (13,030,066) 2,403,400
Net loss - - - (1,777,428) (1,777,428)
--------- ---------- ------------ ------------- ------------
Balance at December 31, 1998 4,677,407 $ 46,774 $ 15,386,692 $ (14,807,494) $ 625,972
Net loss - - - (599,706) (599,706)
--------- --------- ------------ ------------- ------------
Balance at December 31, 1999 4,677,407 $ 46,774 $ 15,386,692 $ (15,407,200) $ 26,266
========= ========= ============ ============= ============
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 22
REALITY INTERACTIVE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,777,428) $ (599,706)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization 63,115 30,000
Gain on disposal of intellectual property 0 (85,000)
Loss on disposal of property and equipment 0 5,019
Changes in assets and liabilities:
Accounts receivable 179,391 231,525
Inventory 71,197 0
Prepaid expenses and other assets 22,552 46,734
Accounts payable 2,618 (29,045)
Accrued liabilities (98,275) (23,985)
Deferred revenue (132,411) (49,495)
Other current liabilities (122) (1,572)
--------------- ---------------
Net cash provided (used) by operating activities (1,669,363) (475,525)
--------------- ---------------
Cash flows from investing activities:
Purchases of fixed assets (4,977) 0
Proceeds from sale of fixed assets 0 28,814
Proceeds from sale of intellectual property 0 85,000
Purchases of short-term investments (32,979) 0
Sales of short-term investments 1,563,522 0
Cash restricted for operating leases (52,500) 111,000
--------------- ---------------
Net cash provided (used) by investing activities 1,473,066 224,814
--------------- ---------------
Net cash used during year (196,297) (250,711)
Cash and cash equivalents:
Beginning of year 487,994 291,697
--------------- ---------------
End of year $ 291,697 $ 40,986
=============== ===============
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE> 23
REALITY INTERACTIVE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. ORGANIZATION AND STATUS
Reality Interactive, Inc. (the Company) was incorporated on May 24, 1994
for the purpose of developing technology-based knowledge solutions for
the corporate marketplace.
On April 30, 1999, the Company ceased business operations and terminated
all remaining employees. This action was necessary in light of the
Company's liquidity needs and lack of revenue opportunities.
Since the Company ceased its business operations, it has sold a majority
of its physical assets and intellectual property resulting in proceeds of
$113,814. Currently, the Company is exploring potential uses of its
public shell. While the Company pursues such opportunities, it intends to
comply with all future SEC reporting requirements in order to maintain
its status as a public company.
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. The Company maintains its cash
in bank deposit accounts at various financial institutions with high
credit quality. The balances, at times, may exceed federally insured
limits.
REVENUE RECOGNITION
Revenue derived from product sales and licenses is recognized upon
shipment of the products. The Company has no significant obligations
after shipment. Revenue derived from multimedia and Web-based development
services is recognized on the percentage of completion method over the
life of each project, which may range from three to nine months. Project
costs include all direct labor costs and other direct costs related to
service performance, such as contract labor, supplies and equipment
costs. The Company's use of the percentage of completion method of
revenue recognition requires estimates of the degree of project
completion. To the extent these estimates prove to be inaccurate, the
revenues and gross profits, if any, reported during the periods where the
project is ongoing may not accurately reflect the final results of the
project. Provisions for any estimated losses on uncompleted contracts are
made in the period in which such losses are determinable. Revenue is
reported net of reimbursable expenses.
F-7
<PAGE> 24
ACCOUNTS RECEIVABLE
The Company considered all accounts receivable to be fully collectible.
Accordingly, no allowance for uncollectible accounts had been
established. If accounts became uncollectible, they were charged to
operations when that determination had been made. The Company extended
unsecured credit to customers in the normal course of business.
FIXED ASSETS
Fixed assets were stated at cost. Accelerated depreciation methods are
used for both book and tax purposes over the estimated useful life of the
equipment ranging from three to seven years. Leasehold improvements were
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
The Company accounts for earnings (loss) per share as required under
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128). SFAS No. 128 requires dual presentation of basic and
diluted earnings (loss) per share for entities with complex capital
structures. Basic earnings (loss) per share includes no dilution and is
computed by dividing net earnings (loss) available to common stockholders
by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflects the potential dilution
of securities that could share in the earnings of an entity and is
similar to the former fully diluted earnings (loss) per share
calculation. For the years ended December 31, 1999 and 1998, basic and
diluted loss per share for the Company is the same because the inclusion
of stock options and warrants as common stock equivalents 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for all financial instruments approximate fair
value. The carrying amounts for cash and cash equivalents, accounts
payable and accrued liabilities approximate fair value because of the
short maturity of these instruments.
DEFINED CONTRIBUTION PLAN
The Company has established a qualified 401(k) profit sharing plan which
allows eligible employees to defer a portion of their salary. The Plan
does not require any discretionary Company contributions. This Plan was
terminated when the Company ceased its business operations on April 30,
1999.
F-8
<PAGE> 25
3. FIXED ASSETS
Fixed assets consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
---- ----
<S> <C> <C>
Computer equipment $ 332,938 $ 0
Office equipment and furniture 120,065 0
------------- -------------
453,003 0
Less accumulated depreciation and amortization (389,170) 0
------------- -------------
$ 63,833 $ 0
============= =============
</TABLE>
4. INCOME TAXES
Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,978,000 $ 6,150,000
Other 50,000 50,000
--------------- ---------------
Total deferred tax assets 6,028,000 6,200,000
Less valuation allowance (6,028,000) (6,200,000)
--------------- ---------------
Net deferred tax assets $ - $ -
=============== ===============
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $15,300,000 for income tax purposes. The net operating loss
carryforwards expire in 2009 through 2019 if not previously utilized.
The Company has determined, based on the weight of available evidence at
December 31, 1999, 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-9
<PAGE> 26
5. COMMITMENTS
LEASES
The Company leases office space and equipment under various operating
lease agreements, the last of which expires in 2003. The Company's office
space is secured by a 3 month renewable lease, which can be canceled by
the Company by giving an advanced 90 day written notice.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases were as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
------------------------ ------
<S> <C>
2000 $ 2,492
2001 2,492
2002 2,492
2003 831
-------------
Total future minimum lease payments $ 8,307
=============
</TABLE>
Rent expense was approximately $440,070 and $145,593 for the years ended
December 31, 1998 and 1999, respectively.
LETTERS OF CREDIT
The Company had an outstanding letter of credit with a bank as security
for an operating lease of office space. The Company was required to
maintain a commensurate amount of cash as collateral at the bank which
issued the letter of credit. This amount is reflected as restricted cash
at December 31, 1998.
SIGNIFICANT CUSTOMERS
Product and service revenues from clients that individually exceed 10% of
the Company's total revenues included three clients at 26%, 20% and 12%
for the year ended December 31, 1998. Accounts receivable from two of
these customers represented approximately 26% and 23% of total accounts
receivable at December 31, 1998.
6. STOCKHOLDERS' EQUITY
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.
F-10
<PAGE> 27
WARRANTS
A summary of the Company's warrant activity is as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE EXPIRATION
------ ----- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1997 3,365,922 $2.40-$8.00 1998-2001
Expired (7,625) $3.00 12/31/98
-------------
Outstanding at December 31, 1998 3,358,297 $2.40-$8.00 1999-2001
Expired (560,000) $4.31 1/19/99
-------------
Outstanding at December 31, 1999 2,798,297 $2.40-$8.00 2000-2001
=============
</TABLE>
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.
STOCK OPTIONS
At December 31, 1999, the Company had 700,000 shares of common stock
reserved under its 1994 Stock Incentive Plan. The plan provides for
grants of incentive and nonqualified stock options to officers, employees
and independent contractors. 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. In addition, the Company had
400,000 shares of common stock reserved under its 1996 Directors' Stock
Option Plan. 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 each grant date.
Option transactions under these plans are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED AVERAGE
OPTIONS PRICE EXERCISE PRICE
STOCK INCENTIVE PLAN OUTSTANDING PER SHARE PER SHARE
-------------------- ----------- --------- ---------
<S> <C> <C> <C>
Options outstanding at December 31, 1997 483,100 $0.45 - $4.44 $0.90
Granted 180,000 $0.75 $0.75
Canceled (75,600) $0.50 - $4.44 $0.81
-------------
Options outstanding at December 31, 1998 587,500 $0.45 - $1.00 $0.87
Granted 0
Canceled (587,500) $0.45 - $1.00 $0.87
-------------
Options outstanding at December 31, 1999 0
=============
Exercisable at December 31, 1999 0
=============
</TABLE>
F-11
<PAGE> 28
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
DIRECTOR'S STOCK OPTION PLAN OUTSTANDING PER SHARE PER SHARE
---------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Options outstanding at December 31, 1997 20,000 $1.13 $1.13
Granted 10,000 $0.25 $0.25
Canceled (30,000) $0.25 - $1.13 $0.83
-----------
Options outstanding at December 31, 1998 0
Granted 0
Canceled 0
-----------
Options outstanding at December 31, 1999 0
===========
</TABLE>
The estimated weighted average grant-date fair value of stock options
granted during 1998 was $0.75 per option.
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." 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:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net loss - as reported $ (1,777,428) $ (599,706)
Net loss - pro forma $ (1,821,136) $ (599,706)
Basic and Diluted net loss per share - as reported $ (0.38) $ (0.13)
Basic and Diluted net loss per share - pro forma $ (0.39) $ (0.13)
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Expected dividend level 0% 0%
Expected stock price volatility 50% 50%
Risk-free interest rate 5.4% 6.0%
Expected life of options 4 years 4 years
</TABLE>
F-12
<PAGE> 1
EXHIBIT 23.1
CONSENT OF LUND KOEHLER COX & ARKEMA LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public 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 March 6, 2000 appearing in this Form
10-KSB.
/S/ Lund Koehler Cox and Arkema LLP
- ------------------------------------
Lund Koehler Cox and Arkema LLP
Minneapolis, Minnesota
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 40,986
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,907
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,907
<CURRENT-LIABILITIES> 17,641
<BONDS> 0
0
0
<COMMON> 46,774
<OTHER-SE> (20,508)
<TOTAL-LIABILITY-AND-EQUITY> 43,907
<SALES> 254,199
<TOTAL-REVENUES> 261,489
<CGS> 129,773
<TOTAL-COSTS> 129,773
<OTHER-EXPENSES> 816,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (691,996)
<INCOME-TAX> 0
<INCOME-CONTINUING> (691,996)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (599,706)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
<PAGE> 1
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 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.
