FILED UNDER RULE 424(b)(3) IN
CONNECTION WITH THE COMPANY'S
REGISTRATION STATEMENT ON FORM SB-2
(FILE NO. 333-01508C)
PROSPECTUS SUPPLEMENT
SUPPLEMENT NO. 3
TO
PROSPECTUS DATED APRIL 10, 1996
2,200,000 UNITS
REALITY INTERACTIVE
EACH UNIT CONSISTS OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
The following information amends and updates the Prospectus of Reality
Interactive, Inc. (the "Company") dated April 10, 1996 (the "Prospectus") and
should be read in conjunction therewith. Please keep this Prospectus Supplement
with your Prospectus for future Reference.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 27, 1997.
1
REALITY INTERACTIVE, INC.
TABLE OF CONTENTS
Selected Financial Data................................................... 3
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 4
Balance Sheet as of September 30, 1996 (unaudited) and December 31, 1995.. 7
Statement of Operations for the Three and Nine Months Ended
September 30, 1996 and 1995 (unaudited)............................... 8
Statement of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 (unaudited)............................... 9
Notes to Financial Statements (unaudited)................................. 10
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Prospectus Supplement contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties that may cause the Company's actual
results to differ materially from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, the uncertainty in growth of a development stage company; limited
growth of the market for multimedia education and training products; lack of
market acceptance of the Company's products; inability of the Company to expand
its marketing capability; inability of the Company to diversify its product
offerings; failure of the Company to respond to evolving industry standards and
technological changes; inability of the Company to meet its future additional
capital requirements; inability of the Company to compete in the business
education and training industry; loss of key management personnel; inability to
retain subject matter experts; failure of the Company to secure adequate
protection for the Company's intellectual property rights; and the Company's
exposure to product liability claims. The forward-looking statements are
qualified in their entirety by the cautions and risk factors set forth in the
Prospectus under the caption "Risk Factors".
2
SELECTED FINANCIAL DATA
The selected financial data presented below have been extracted from, and
are qualified in their entirety by, and should be read in conjunction with, the
financial statements and notes thereto included elsewhere in this Prospectus
Supplement, including the information presented under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
STATEMENT OF OPERATIONS DATA: 1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues.......................................... $ 93,677 $ 10,928 $ 341,784 $ 17,441
Cost of revenues.................................. 18,768 1,206 65,238 2,288
Gross profit...................................... 74,909 9,722 276,546 15,153
Operating expenses................................ 1,819,354 673,349 4,544,461 1,899,424
Operating loss.................................... (1,744,445) (663,627) (4,267,915) (1,884,271)
Other income (expense)............................ 104,551 (95,542) (174,521) (102,110)
Extraordinary loss from early retirement of debt.. 0 0 (219,470) 0
Net loss.......................................... (1,639,894) (759,169) (4,661,906) (1,986,381)
Net loss per common and common equivalent share (.35) (.46) (1.34) (1.21)
Weighted average common and common equivalent
shares............................................ 4,677,407 1,643,611 3,488,130 1,643,611
September 30, 1996 December 31, 1995
------------------ -----------------
BALANCE SHEET DATA:
Working capital (deficit)......................... $ 6,990,575 $ (320,345)
Current assets.................................... 7,208,055 173,824
Total assets...................................... 7,549,796 576,792
Current liabilities............................... 217,480 494,169
Long-term liabilities............................. 0 0
Redeemable preferred stock........................ 0 2,125,962
Total stockholders' equity (deficit).............. 7,332,316 (2,043,339)
3
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.
OVERVIEW
Reality Interactive, Inc. (the "Company") was formed in May 1994 to design,
develop and market interactive multimedia knowledge solutions primarily for sale
to Fortune 2000 companies. The Company is a development stage company and, as a
result, has undergone significant changes since its inception as the focus of
the Company's activities has shifted from organization to product design and
development to sales and marketing. Accordingly, the Company's revenue and
expenses for the periods presented below are not necessarily indicative of
future results.
The Company has been unprofitable since its inception and expects to incur
operating losses at least through 1997. During the period from May 24, 1994
(inception) through September 30, 1996, the Company incurred cumulative losses
of $8,106,078. The Company expects that its operating expenses will continue to
increase as it continues to develop new products and increase its sales and
marketing efforts. To become profitable, the Company must significantly
increase revenues. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and price
competition, the Company's success in maturing its direct sales force and
indirect distribution channels, general economic conditions and the ability of
the Company to develop and market new products and to control costs.
RESULTS OF OPERATIONS
REVENUES. Revenues were $93,677 for the quarter ended September 30, 1996,
compared to revenues of $10,928 for the quarter ended September 30, 1995. For
the nine month period ended September 30, 1996, revenues were $341,784, compared
to revenues of $17,441 for the comparable period of 1995. The revenue increase
was due primarily to increasing sales of the Company's initial product, the ISO
9000 REGISTRATION SERIES, which was released as a complete series in August
1995. The Company also generated approximately 47% of its third quarter 1996
revenues from its second product, the QS-9000 COMPLIANCE SERIES, a four title
interactive multimedia product that was released in August 1996. The revenue
results through September 30, 1996 are less than the Company's original
expectations as a result of unexpected challenges associated with developing a
direct sales force and longer than expected sales cycles in corporate multi-site
enterprises.
COST OF REVENUES. Cost of revenues were $18,768 for the quarter ended
September 30, 1996, compared to $1,206 for the quarter ended September 30, 1995.
For the nine month period ended September 30, 1996, cost of revenues were
$65,238, compared to cost of revenues of $2,288 for the comparable period of
1995. The increase in cost of revenues was primarily due to royalties paid on
an increasing level of sales. Royalties were paid to the American Society for
Quality Control ("ASQC"), a sales channel for the Company, and Process
Management International, the Company's subject matter expert for its ISO 9000
REGISTRATION SERIES. Cost of revenues also includes the cost of media
duplication and packaging materials.
OPERATING EXPENSES. The Company's operating expenses for the quarter ended
September 30, 1996 were $1,819,354, a 170% increase over operating expenses of
$673,349 for the quarter ended September 30, 1995. For the nine months ended
September 30, 1996, operating expenses were $4,544,461, a 139% increase over
operating expenses of $1,899,424 for the same period in 1995. This increase in
operating expenses between the periods noted for 1996 and 1995 was due primarily
to the following:
4
(a) Sales and marketing expenses were $712,912 for the third quarter of 1996,
compared to $238,500 for the third quarter of 1995, a 199% increase. For
the nine months ended September 30, 1996, sales and marketing expenses were
$1,859,101, compared to $545,113 for the same period in 1995, a 241%
increase. This increase between periods was due primarily to the addition
of new direct sales, telesales and marketing positions and the expansion of
direct marketing programs. The Company expects its sales and marketing
expenses to increase as a result of increasing travel expenditures related
to its direct sales force, and initiation of marketing programs for newly
released products, as well as products currently being developed.
(b) Research and development expenses were $678,085 for the third quarter of
1996, compared to $175,502 for the third quarter of 1995, an 286% increase.
For the nine months ended September 30, 1996, research and development
expenses were $1,598,251, compared to $738,627 for the same period in 1995,
a 116% increase. This increase was attributed to the development of three
new products, the QS-9000 COMPLIANCE SERIES, a multi-title product dealing
with automotive quality standards, the ISO 14000 EMS CONFORMANCE SERIES, a
multi-title product dealing with environmental management standards and
POLLUTION PREVENTION, a one-title product dealing with the key concepts of
a pollution prevention program. The Company completed development of the
QS-9000 COMPLIANCE Series in August 1996. Management believes that the ISO
14000 CONFORMANCE SERIES and POLLUTION PREVENTION products will be released
during the fourth quarter of 1996. The Company expects its research and
development expenses to remain consistent with current levels, unless
additional projects, if any, are identified, which may require an increase
in staffing.
(c) General and administrative expenses were $428,357 for the third quarter of
1996, compared to $259,347 for the third quarter of 1995, a 65% increase.
For the nine months ended September 30, 1996, general and administrative
expenses were $1,087,109, compared to $615,684 for the same period in 1995,
a 77% increase. This increase was due primarily to increased travel,
office rent, depreciation expense, operating leases and professional fees.
The Company expects that its general and administrative expenses will
increase as it hires additional accounting staff and expands its office
space during the fourth quarter of 1996.
OTHER INCOME (EXPENSE). The Company's net other income was $104,551 for
the third quarter of 1996, compared to net other expense of $95,542 for the
third quarter of 1995. For the nine months ended September 30, 1996, net other
expense was $174,521, compared to net other expense of $102,110 for the same
period in 1995. This difference was primarily the result of interest expense
associated with the Company's Bridge Notes and amortization of offering costs
the Company incurred to obtain the Bridge Notes. The Company also realized
interest income of $104,551 and $221,811 in the third quarter and first nine
months of 1996 from the investment of Bridge Note and IPO proceeds.
NET LOSS. Net loss was $1,639,894 for the third quarter of 1996, compared
to a net loss of $759,169 for the third quarter of 1995. For the nine months
ended September 30, 1996, net loss, after deducting extraordinary losses of
$219,470 from the early retirement of debt, was $4,661,906, compared to a net
loss of $1,986,381 for the same period in 1995. The Company expects to continue
to experience losses at least through 1997 as it continues to incur substantial
expenditures to develop its products and to increase its sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments were
$6,935,672 as of September 30, 1996, compared to $118,916 as of December 31,
1995. The increase in cash, cash equivalents and short-term investments was
primarily attributed to the Company's IPO in April 1996. Also contributing to
the increase was lease financing of approximately $266,157 that was obtained in
a sale-leaseback of computer equipment in May 1996. The decrease in cash and
cash equivalents subsequent to the Company's IPO was due primarily to the net
loss from operations and repayment of Bridge Notes. See Note 3 for further
information on financing transactions.
5
Although the Company anticipates that it will experience operating losses
and negative cash flow from operations at least through 1997, and the Company
currently does not have bank financing available, the Company believes that its
current cash balances will be sufficient to meet its working capital and capital
expenditure needs through 1997. Thereafter, the Company may need to raise
additional funds to finance its operations. To the extent the Company's
revenues do not meet management's expectations, or the Company's growth exceeds
management's expectations, the Company may require additional financing prior to
the end of 1997. At such time, there can be no assurance that debt or equity
financing would be available on favorable terms or at all.
6
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
September 30, December 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents..................... $ 271,269 $ 118,916
Short-term investments........................ 6,664,403 0
Accounts receivable........................... 108,117 18,237
Interest receivable........................... 31,649 0
Inventory..................................... 89,231 28,359
Prepaid expenses.............................. 43,386 8,312
---------- ---------
Total current assets....................... 7,208,055 173,824
---------- ---------
Fixed assets, net................................. 192,960 269,852
Restricted cash................................... 119,000 119,000
Other assets...................................... 29,781 14,116
---------- ---------
Total assets............................... $7,549,796 $ 576,792
---------- ---------
---------- ---------
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 136,050 $ 188,623
Accrued liabilities........................... 71,720 90,417
Capitalized lease obligation.................. 0 14,127
Notes payable................................. 0 201,002
Other current liabilities..................... 9,710 0
---------- ---------
Total current liabilities.................. 217,480 494,169
Long-term liabilities............................. 0 0
---------- ---------
Total liabilities.......................... 217,480 494,169
---------- ---------
Mandatorily redeemable convertible preferred
stock, $.01 par value,5,000,000 shares
authorized; 0 and 726,900 shares outstanding.. 0 2,125,962
---------- ---------
Stockholders' equity (deficit):
Common stock, $.01 par value, 20,000,000
shares authorized; 4,677,407 and
1,643,611 shares outstanding............... 46,774 16,436
Additional paid-in capital.................... 15,391,620 1,384,397
Accumulated deficit during the
development stage.......................... (8,106,078) (3,444,172)
---------- ---------
Total stockholders' equity (deficit)....... 7,332,316 (2,043,339)
---------- ---------
Total liabilities, mandatorily redeemable
preferred stock and stockholders'
equity (deficit)........................ $7,549,796 $ 576,792
---------- ---------
---------- ---------
See accompanying notes to the financial statements.
7
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
Revenues.......................................... $ 93,677 $ 10,928 $ 341,784 $ 17,441
Cost of revenues.................................. 18,768 1,206 65,238 2,288
----------- ---------- ----------- -----------
Gross profit...................................... 74,909 9,722 276,546 15,153
----------- ---------- ----------- -----------
Operating expenses:
Sales and marketing.......................... 712,912 238,500 1,859,101 545,113
Research and development..................... 678,085 175,502 1,598,251 738,627
General and administrative................... 428,357 259,347 1,087,109 615,684
----------- ---------- ----------- -----------
Total operating expenses.................. 1,819,354 673,349 4,544,461 1,899,424
----------- ---------- ----------- -----------
Operating loss.................................... (1,744,445) (663,627) (4,267,915) (1,884,271)
----------- ---------- ----------- -----------
Other income (expense):
Interest income (expense), net............... 104,551 (95,542) (61,035) (102,110)
Debt offering costs.......................... 0 0 (113,486) 0
----------- ---------- ----------- -----------
Total other income (expense).............. 104,551 (95,542) (174,521) (102,110)
----------- ---------- ----------- -----------
Income before extraordinary loss............. $(1,639,894) $ (759,169) $(4,442,436) $(1,986,381)
Extraordinary loss from early retirement of debt.. 0 0 (219,470) 0
----------- ---------- ----------- -----------
Net Loss..................................... $(1,639,894) $ (759,169) $(4,661,906) $(1,986,381)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net loss per common and common equivalent share... $ (.35) $ (.46) $ (1.34) $ (1.21)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average common and common equivalent
shares............................................ 4,677,407 1,643,611 3,488,130 1,643,611
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
See accompanying notes to the financial statements.
8
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------------
1996 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (4,661,906) $ (1,986,381)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization.................. 90,000 60,525
Noncash interest expense related to warrants... 193,979 40,211
Extraordinary loss related to early retirement
of debt (interest expense related
to warrants)................................ 142,021 0
Changes in assets and liabilities:
Accounts receivable............................ (89,880) (6,350)
Interest receivable............................ (31,649) 0
Inventory...................................... (60,871) (55,383)
Prepaid expenses............................... (35,074) (8,988)
Accounts payable............................... (52,577) 124,858
Accrued liabilities............................ (18,697) 9,077
Other current liabilities...................... 11,059 0
------------ ------------
Net cash used by operating activities...... (4,513,595) (1,822,431)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets, net of retirements........ (279,266) (142,175)
Purchase of other assets............................ (15,666) (8,229)
Purchase of short-term investments.................. (10,164,404) 0
Sale of short-term investments...................... 3,500,000 29,836
Cash restricted for operating leases................ 0 (119,000)
------------ ------------
Net cash used by investing activities...... (6,959,336) (239,568)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligation.............. (15,471) (14,448)
Proceeds from convertible notes payable............. 2,800,000 951,002
Repayment of convertible notes payable.............. (2,774,997) 0
Repayment of notes payable.......................... (201,002) 0
Proceeds from sale leaseback of fixed assets........ 266,157 0
Proceeds from initial public offering, net.......... 11,549,607 0
Proceeds from related party financing............... 0 320,000
Proceeds from issuance of preferred stock........... 0 193,228
Proceeds from exercise of stock options............. 990 0
------------ ------------
Net cash provided by financing activities... 11,625,284 1,449,782
------------ ------------
Net cash provided (used) during period.................. 152,353 (612,217)
CASH AND CASH EQUIVALENTS:
Beginning of period................................. 118,916 527,461
------------ ------------
End of period....................................... $ 271,269 $ (84,756)
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ 88,867 $ 64,614
------------ ------------
------------ ------------
See accompanying notes to the financial statements.
9
REALITY INTERACTIVE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Reality Interactive, Inc. (the "Company") was incorporated on May 24, 1994
to design, develop and market interactive multimedia knowledge solutions
primarily for sale to Fortune 2000 companies. The Company's strategy is to
identify industry standards and practices that create a need for enterprise-wide
education and training. The Company uses digital technology, including
animation, video, graphics, audio narration and formatted text, to create its
interactive multimedia knowledge solutions.
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 as well as 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 adjustments
necessary for a fair presentation of the results of operations for the interim
periods presented. Operating results for the nine months ended September 30,
1996 are not necessarily indicative of the operating results to be expected for
the year ending December 31, 1996.
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
financial statements included in its Registration Statement on Form SB-2.
NOTE 2. INITIAL PUBLIC OFFERING
In April 1996, the Company completed an initial public offering (the "IPO")
of 2,200,000 units at a price of $5.75 per unit. Each unit sold consisted of
one share of Common Stock and one Redeemable Common Stock Purchase Warrant to
purchase one share of Common Stock. The sale of such units resulted in gross
proceeds of $12,650,000 and net proceeds of $11,034,982 after payment of the
underwriting discount and related expenses. Upon the closing of the offering,
all 726,900 outstanding shares of Mandatorily Redeemable Convertible Preferred
Stock were converted into 726,900 shares of Common Stock.
In May 1996, the Company issued an additional 100,000 units to its
underwriter to cover over-allotments, resulting in gross proceeds of $575,000
and net proceeds of $514,625 after payment of the underwriting discount and
related expenses.
NOTE 3. CONVERTIBLE NOTES PAYABLE
In January 1996, the Company closed a $2,800,000 convertible bridge note
financing (the "Bridge Notes") in a private placement, resulting in net proceeds
to the Company of $2,626,570 after payment of agent's commissions and related
expenses. The Bridge Notes provided for interest at 10% per annum and matured
on the earlier of July 31, 1996 or 30 days after the effective date of an IPO.
In connection with this
10
financing, the Company issued detachable warrants to purchase a total of 560,000
shares of Common Stock to the purchasers of the Bridge Notes. The Bridge Notes
were convertible into common stock at a price equal to $3.94, which was 75% of
$5.25 (the per share value assigned to the Common Stock at the time of the IPO).
In May 1996, 30 days after the effective date of the IPO, the Company made
payments totaling $2,861,281 to repay the Bridge Notes, including accrued
interest of $86,285. Approximately $25,000 of the Bridge Notes were converted
to Common Stock at the time of this repayment, resulting in the issuance of
6,346 shares. The Company recognized an extraordinary loss of approximately
$220,000 in its second quarter ended June 30, 1996 as a result of the early
repayment of the Bridge Notes.
NOTE 4. STOCK OPTIONS
Under the terms of the Company's 1994 Stock Incentive Plan, 700,000 shares
of Common Stock have been reserved for issuance to officers, employees and
independent contractors upon the exercise of stock options. The Company has
granted a total of 464,850 options to its officers, employees and independent
contractors at prices ranging from $1.80 to $5.25 per share. During the quarter
ended June 30, 1996, an employee exercised an option to purchase 550 shares of
Common Stock at an exercise price of $1.80 per share.
11