SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: June 3, 2004
Date of Earliest Event Reported: May 26, 2004
REALITY INTERACTIVE, INC.
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(Exact Name of Registrant as Specified in its Charter)
Nevada
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(State or Other Jurisdiction of Incorporation)
0-27862 80-0028196
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(Commission File Number) (I.R.S. Employer Identification No.)
820 Gessner, Suite 1340, Houston, Texas 77024
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(Address of Principal Executive Offices) (Zip Code)
(713) 935-0122
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(Registrant's Telephone Number, Including Area Code)
378 North Main Street, No. 124, Layton, Utah 84043
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
THE MERGER
On May 26, 2004, a newly formed wholly owned subsidiary of Reality
Interactive, Inc., a Nevada corporation ("Reality Interactive"), merged with and
into Natural Gas Systems, Inc., a Delaware corporation ("NGS"). As a result of
this merger (the "Merger"), NGS became a wholly owned subsidiary of Reality
Interactive.
The Merger occurred pursuant to an Agreement and Plan of Reorganization
dated as of April 12, 2004 (the "Merger Agreement") among Reality Interactive,
Reality Acquisition Corp., Global Marketing Associates, Inc., Dean H. Becker and
NGS. On April 27, 2004, Reality Interactive filed a copy of the Merger Agreement
with the Securities and Exchange Commission on a Report on Form 8-K/A.
Immediately prior to the Merger, Reality Interactive had 7,946,255
outstanding shares of common stock and no outstanding shares of preferred stock.
Pursuant to the Merger, (i) 7,000,000 of the 7,010,000 shares of Reality
Interactive common stock held by Dean H. Becker, Reality Interactive's President
and Chief Executive Officer, were cancelled, and (ii) 21,750,001 shares of
Reality Interactive common stock were issued to the stockholders of NGS in
exchange for 100% of the outstanding shares of common stock of NGS. The share
exchange ratio in the Merger was determined through arms'-length negotiations
between Reality Interactive and NGS. Prior to the Merger, Mr. Becker owned
approximately 88% of Reality Interactive's outstanding shares. Information in
this Report on Form 8-K regarding the number of shares of Reality Interactive
common stock issued in the Merger assumes that no stockholders of NGS will
exercise their right under Delaware law to seek an appraisal of the value of
their NGS stock in lieu of the receipt of shares of Reality Interactive common
stock.
Each outstanding option or warrant to purchase shares of NGS common
stock, whether or not then exercisable, was converted into an option or a
warrant to purchase an identical number of shares of Reality Interactive common
stock at a price equal to the exercise price of the option or warrant in effect
immediately prior to the Merger.
As a result of the Merger, (i) 22,696,256 shares of Reality Interactive
common stock are outstanding, 95.8% of which are owned by the former
stockholders of NGS, and (ii) Reality Interactive is now controlled by the
former stockholders of NGS.
CHANGE OF EXECUTIVE OFFICERS AND DIRECTORS
Immediately following the completion of the Merger, (i) Dean H. Becker
resigned as Reality Interactive's President and Chief Executive Officer, (ii)
Robert S. Herlin was appointed President and Chief Executive Officer of Reality
Interactive, and (iii) Sterling McDonald was appointed Chief Financial Officer
and Treasurer of Reality Interactive. Messrs. Herlin and McDonald hold the same
positions with NGS.
Immediately following the completion of the Merger, Mr. Becker (Reality
Interactive's sole director at the time) increased the size of the Board of
Directors to two directors and
appointed Laird Q. Cagan as Chairman of the Board of Directors. Messrs. Cagan
and Becker currently serve as Reality Interactive's only directors.
On May 26, 2004, Reality Interactive filed with the Securities and
Exchange Commission an Information Statement pursuant to Section 14(f) of the
Securities Exchange Act of 1934 and Rule 14f-1 thereunder regarding the
following change in a majority of Reality Interactive's Board of Directors in
accordance with the terms of the Merger Agreement: On or about June 5, 2004, Mr.
Becker will resign as a director, and Robert S. Herlin, John Pimentel, E.J.
DiPaolo and Gene Stoever will be appointed to the Board of Directors of Reality
Interactive to serve with Mr. Cagan.
Information regarding Reality Interactive's directors and executive
officers who are anticipated to be in office on or about June 5, 2004 is set
forth below. If any director or executive officer listed below is unable to
serve, the directors will appoint a successor. Each director serves until his
successor is elected at the annual meeting of shareholders or until his earlier
death, resignation or removal and, subject to the terms of any employment
agreement with Reality Interactive, each executive officer serves at the
pleasure of the Board of Directors.
Name Age Position
---- --- --------
Robert Herlin 49 Chief Executive Officer, President and Director
Laird Q. Cagan 46 Director
John Pimentel 38 Director
Sterling McDonald 55 Chief Financial Officer and Treasurer
E.J. DiPaolo 51 Director
Gene Stoever 65 Director
Dean Becker 50 Director
ROBERT S. HERLIN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Herlin has been President and Chief Executive Officer of NGS since
2003. He is responsible for all of NGS' operations, development of its business
model, identifying acquisitions of applicable oil and gas properties, developing
the NGS operating team and creating, establishing and maintaining industry
partnerships. Mr. Herlin has more than 21 years of experience in energy
transactions, operations and finance with small independents, larger
independents and major integrated oil companies. Since 2003, Mr. Herlin has also
served as a Partner with Tatum CFO, a financial advisory firm that provides
executive officers on a part-time or full-time basis to clients. From 2001 to
2003, Mr. Herlin served as Senior Vice President and Chief Financial Officer of
Intercontinental Towers Corporation, an international wireless infrastructure
company. From 1997 to 2001, he was employed at Benz Energy, Inc., an oil and gas
company, most recently as President. Mr. Herlin also serves on the board of
directors of Boots and Coots Group, an oil field services company. Mr. Herlin
graduated with honors from Rice University with B.S. and M.E. degrees in
engineering and has an MBA from Harvard University.
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LAIRD Q. CAGAN, CHAIRMAN OF THE BOARD
Mr. Cagan is a co-founder, and since 2001 has been Managing Director, of
Cagan McAfee Capital Partners, LLC, a technology-focused private equity firm in
Cupertino, California. He also serves as President of Cagan Capital, LLC, a
merchant bank he formed in 1990. From 1999 to 2001, he served as Chairman and
Chief Executive Officer of BarterNet Corporation, a worldwide Internet B2B
exchange. Mr. Cagan attended M.I.T. and received a BS and an MS degree in
engineering, and an MBA, from Stanford University. He is a member of the Young
Presidents Organization.
JOHN PIMENTEL, DIRECTOR
Since 2002, Mr. Pimentel has been a principal of Cagan McAfee Capital
Partners where he is responsible for business development, investment
structuring, and portfolio company management. From 1998 to 2002, he worked with
Bain & Company in the firm's Private Equity Group, and the general consulting
practice. From 1993-1996 Mr. Pimentel served as Deputy Secretary for
Transportation for the State of California. Mr. Pimentel has served as a
director of World Waste Technologies, Inc. and Pacific Ethanol, Inc. since early
2004. Mr. Pimentel has an MBA from Harvard Business School, and a BA from UC
Berkeley.
STERLING MCDONALD, CHIEF FINANCIAL OFFICER AND TREASURER
Sterling McDonald joined NGS as Chief Financial Officer in 2003. Since
joining NGS, Mr. McDonald has also been responsible for all the administrative
functions of NGS. From 1999 to 2003, Mr. McDonald acted as an independent
consultant and interim Chief Financial Officer to various companies. From 1997
to 1999, he served as Chief Financial Officer for PetroAmerican Services, a
subsidiary of an integrated NYSE-traded oil and gas company. Previously, he
served as Chief Financial Officer of PetroStar Energy, an exploration and
production company, and Treasurer of Reading and Bates Corporation, an
NYSE-traded international offshore drilling services, exploration and production
company. Mr. McDonald holds an MBA, with highest academic achievement, from the
University of Tulsa.
E. J. DIPAOLO, DIRECTOR
Mr. DiPaolo has served as an Energy Advisor to Growth Capital Partners,
L.P., an investment banking company, since 2003. From 2002 to the present, Mr.
DiPaolo has served as an independent energy producer. From 1976 to 2002, Mr.
DiPaolo was with Halliburton Company, most recently as Group Senior Vice
President of Global Business Development, where he was responsible for the
management of overall customer relationships with the companies within
Halliburton's upstream businesses, including Halliburton Energy Services, Brown
and Root Energy Services, and Landmark Graphics and Wellstream. Previously, Mr.
DiPaolo was the North American Regional Vice President and Far East Regional
Vice President for Halliburton, accountable for the overall operation of
Halliburton Energy Services in these regions. Mr. DiPaolo also serves on the
Board of Directors of Boots and Coots Group, an oil field services company, and
Edgen Corporation, a pipe distribution company. He received his undergraduate
degree in agricultural engineering from West Virginia University in 1976 where
he currently serves on the Advisory Board of the College of Engineering.
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GENE STOEVER, DIRECTOR
In 1993, Mr. Stoever retired from KPMG Peat Marwick after 32 years of
service, including 24 years as a partner. Since 1999, he has acted as an
independent consultant. From 1999 to 2004, he served as the trustee of the
Sterling Diagnostic Imaging and SDI Liquidating Trust. He also serves as a
Director of Exepack, LLC, a flexible packaging company. Mr. Stoever earned his
B.B.A. degree in accounting with honors from the University of Texas at Austin,
is a Certified Public Accountant in the State of Texas, was previously certified
to practice in the States of Louisiana and North Carolina, and was a member of
the American Institute of CPAs. Mr. Stoever is a current member of the Texas
Society of Public Accountants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Laird Q. Cagan, Managing Director of Cagan McAfee Capital Partners, LLC
(the "Financial Consultant") is NGS' Chairman of the Board. Eric M. McAfee, a
major shareholder in NGS, is also a Managing Director of the Financial
Consultant and also a major shareholder in Verdisys, Inc., with which NGS has a
drilling services agreement. All transactions between NGS and Verdisys have been
conducted on an arms'-length basis.
Individuals associated with the Financial Consultant currently
beneficially collectively own over 62% of the outstanding shares of NGS. For
services rendered in connection with the Merger, the Financial Consultant was
paid a merger and acquisitions advisory fee equal to $300,000 and received a
warrant to purchase 240,000 shares of NGS common stock, with a seven year
maturity, a cashless net exercise provision and an exercise price equal to $1.00
per share. The Financial Consultant also receives monthly fees from NGS in
connection with strategic and financial advisory services.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Reality
Interactive common stock beneficially owned immediately prior to the closing of
the Merger, and immediately after the closing of the Merger, by (i) those
persons or groups known to beneficially own more than 5% of Reality
Interactive's common stock immediately prior to the closing of the Merger, (ii)
those persons or groups known to beneficially own more than 5% of Reality
Interactive's common stock immediately after the closing of the Merger, (iii)
each current executive officer and director and each person who will become an
executive officer or director on or about June 5, 2004, (iv) all directors and
executive officers as a group immediately prior to the closing of the Merger,
and (v) as a group, persons who are expected to be directors and executive
officers on or about June 5, 2004. The information is determined in accordance
with Rule 13d-3 promulgated under the Securities Exchange Act of 1934. Except as
indicated below, the shareholders listed possess sole voting and investment
power with respect to their shares.
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Before Closing After Closing
of the Merger(1) of the Merger(2)
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Amount and Amount and
Nature of Nature of
Beneficial Percent Beneficial Percent
Name and Address of Beneficial Owner Ownership of Class Ownership of Class
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Dean Becker(3) 7,010,000 88.22% 10,000 0.04%
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Global Marketing Associates, Inc.(3) 125,000 1.57 125,000 0.55
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Robert Herlin(4)(5) 0 -- 1,046,875 4.61
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Laird Q. Cagan(6)(7) 0 -- 7,630,000 33.40
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John Pimentel(6) 0 -- 450,000 1.98
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Sterling McDonald(8) 0 -- 31,250 *
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E.J. DiPaolo(4) 0 -- 0 --
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Gene Stoever(4) 0 -- 0 --
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Eric A. McAfee
Marguerite McAfee
P2 Capital LLC
McAfee Capital(6)(9) 0 -- 6,350,000 27.79%
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All executive officers and directors as
a group (one person prior to the Merger
and six persons following the closing of
the Merger) 7,010,000 88.22% 9,158,125 39.95%
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* Less than 1%.
(1) Based on 7,946,255 Reality Interactive shares outstanding on May 25, 2004.
(2) Based on 22,696,256 Reality Interactive shares outstanding immediately after
the closing of the Merger on May 26, 2004.
(3) Address: 378 North Main, #124, Layton, Utah 84041.
(4) Address: c/o Natural Gas Systems, Inc. 820 Gessner, Suite 1340, Houston,
Texas 77024.
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(5) Includes 46,875 shares issuable upon options exercisable within 60 days of
the date hereof and excludes 203,125 options not exercisable within 60 days of
the date hereof.
(6) Address: c/o Cagan McAfee, 10600 N. De Anza Blvd., Suite 250, Cupertino,
California 95014
(7) Includes (x) 1,000,000 shares held in trust by Mr. Cagan's two daughters and
(y) immediately exercisable warrants to acquire 150,000 shares of common stock
held by Cagan McAfee Capital Partners, LLC.
(8) Includes 31,250 shares issuable upon options exercisable within 60 days of
the date hereof and excludes 218,750 options not exercisable within 60 days of
the date hereof. (9) Includes (i) 1,000,000 shares directly held by Eric McAfee,
(ii) 2,000,000 shares held by P2 Capital LLC, an entity owned 50% by Marguerite
McAfee (Mr. McAfee's spouse) and 25% by each of Mr. and Mrs. McAfee's minor
children (over which shares Mrs. McAfee holds sole dispositive and voting
power), (iii) 2,700,000 shares held by McAfee Capital, LLC, an entity owned 50%
by each of Mr. and Mrs. McAfee (over which shares Mr. and Mrs. McAfee share
voting and dispositive power) and (iv) 500,000 shares owned by Berg McAfee, LLC,
an entity in which Mr. McAfee owns a 50% interest and shares voting and
dispositive power. Also includes immediately exercisable warrants to acquire
150,000 shares of common stock held by Cagan McAfee Capital Partners, LLC. Mr.
McAfee disclaims beneficial ownership over all of the shares held by P2 Capital
and 50% of the shares held by Berg McAfee. Mrs. McAfee disclaims beneficial
ownership over all of the shares and warrants held directly by Mr. McAfee and
all of the shares held by Berg McAfee. McAfee Capital disclaims beneficial
ownership over all of the shares held by P2 Capital LLC and 50% of the shares
held by Berg McAfee.
BUSINESS OF REALITY INTERACTIVE
Immediately prior to the completion of the Merger, Reality Interactive
did not conduct any business operations and had minimal assets and liabilities.
BUSINESS OF NGS
OVERVIEW
Headquartered in Houston, Texas, NGS and its wholly owned subsidiaries
(collectively, "NGS") is a development stage company that was founded in late
2003 to focus on acquiring established oil and gas fields and applying
specialized technology to increase production rates. NGS currently has two
full-time employees and has engaged a small number of independent contractors
and service providers.
NGS is re-developing a field in northern Louisiana, the Delhi Field,
through conventional work-overs, re-entries, new drilling and selective
application of lateral drilling. Separately, NGS recently executed a non binding
letter of intent to purchase approximately 500 shallow gas wells in the same
vicinity as the Delhi Field that management believes are candidates for lateral
re-drilling and conventional redevelopment. NGS has also entered into a
non-binding agreement to purchase approximately 127 shallow oil wells, also in
the same general vicinity and with potential for conventional rehabilitation.
NGS is reviewing other acquisition opportunities.
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BUSINESS MODEL
Much of the oil and gas found to date in the United States remains in
place and is unable to be economically produced from existing wells for various
reasons, including depleted reservoir energy, well bore damage, low oil and gas
prices at the time of abandonment, and inadequate reservoir penetration and
drainage. NGS formed its business to acquire such resources at a low cost per
MCF (thousand cubic feet of gas) or BO (barrel of oil) and apply existing and
new technologies to access and produce incremental reserves, particularly those
resources not fully exploited due to inadequate reservoir penetration.
Many oil and gas fields discovered, developed and produced primarily
before the 1970's offer the potential of re-entering or restoring to production
wells with significant amounts of recoverable reserves, as the decision to shut
in or abandon such wells was based upon oil or gas prices far below current
levels. Many of these fields have been passed down from major oil companies to
large independents and then to small independents due to low profitability.
Additionally, many are held by private companies lacking the resources to fully
re-develop the fields. The frequent result is a neglect of field repair,
maintenance needs and exploitation opportunities, thereby presenting NGS with
the opportunity to apply modern techniques and modest amounts of capital to take
advantage of current and projected product prices.
In many oil and gas reservoirs, particularly those characterized as
having low permeability (high resistance to flow), adequate drainage only occurs
close to the original well bore or along fractures or permeability streaks. In
such reservoirs, modern drilling completion practices typically include
hydraulic fracturing to break apart the reservoir near the well bore and
increase the permeability of the reservoir. However, the hydraulic fracturing
cost increases rapidly with the required extent of penetration into the
reservoir. Those areas outside of the fractured zone provide limited
contribution to flow, evidenced by rapid initial decline in rate followed by a
long life, hyperbolic decline and low long term flow rate.
By drilling a lateral hole horizontally from the well bore, the well may
be effectively extended into or closer to previously untapped or partially
depleted areas of the reservoir, potentially yielding incremental resources of
oil or gas. Until recently, lateral drilling required an expensive and
specialized, steerable drill bit capable of drilling laterally up to 5,000 feet
at depths down to 13,000 feet, and at a cost of up to several hundred thousand
dollars. One recently developed method of lateral drilling uses a patented
ultra-high pressure water jetting process that is capable of drilling multiple
lateral holes in existing wells up to 300-500 feet in length at well depths down
to 5,800 feet, and at a much lower cost. While not yet fully proven, initial
results of this process by other parties in over 300 wells to date have
demonstrated effectiveness under certain circumstances, compared to conventional
hydraulic fracturing, particularly in relatively thin, low permeability and dual
porosity reservoirs.
In late 2003, NGS executed an agreement with Verdisys, Inc., the holder
of the U.S. license rights to this patented lateral drilling technology. Under
the agreement, Verdisys has agreed to provide NGS with lateral drilling services
based on NGS' projected needs, subject only to adequate advance notice, at a
fixed price not to exceed the lowest price offered by Verdisys to any other
customer for similar services.
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NGS plans to target well-established properties with existing production
facilities and pipelines producing from a large number of well bores from
shallow, low permeability reservoirs. NGS plans to sell production to a
well-established and liquid market and a variety of buyers.
DELHI FIELD
NGS owns 100% of the working interest in the unitized Delhi Field in
Northern Louisiana that extends about 12 miles in length and covers about 13,400
acres. At the time of purchase, the field had declined to a production level of
approximately 25 barrels of oil per day from six producing wells. Early in 2004,
NGS completed an agreement whereby a substantial net profits interest held by a
third party was terminated. The only remaining obligation of NGS is the mortgage
held by the sellers in the amount of $875,000 as of June 1, 2004. The balance of
the promissory note that is secured by the mortgage is due in monthly
installments through the end of 2004.
Late last year, NGS initiated a plan to re-develop the field by
restoring wells to production, re-completing wells in previously tested
reservoirs, re-entering plugged and abandoned wells to produce previously tested
reservoirs, drilling new wells to offset old wells that tested high gas rates,
and selectively applying lateral drilling in formations that exhibit limited
drainage characteristics due to streaks of impermeability.
RISK FACTORS RELATING TO THE BUSINESS OF NGS AND REALITY INTERACTIVE
Because Reality Interactive did not conduct any business operations
immediately prior to the Merger, its business operations after the Merger will
be conducted primarily through its wholly owned subsidiary, NGS. This Report on
Form 8-K contains statements relating to the future results of NGS and Reality
Interactive that are "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, and are subject to the "safe harbor" created
by those sections. Forward-looking statements frequently are identifiable by the
use of words such as "believe," "anticipate," "expect," "intend," "will," and
other similar expressions.
The actual operating results of NGS and Reality Interactive may differ
materially from those projected as a result of certain risks and uncertainties.
These risks and uncertainties include, but are not limited to, the risks that
are described below and in Reality Interactive's other filings with the
Securities and Exchange Commission that will be made after the date of this
Report on Form 8-K. The forward-looking statements in this Report on Form 8-K
are made only as of the date hereof, and Reality Interactive undertakes no
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise. If any of the following
risks actually occurs, Reality Interactive's business could be harmed, the
market price of its common stock could decline, and investors could lose all or
part of their investment.
NGS NEEDS ADDITIONAL FINANCING, WHICH IT MAY BE UNABLE TO OBTAIN.
NGS does not have sufficient capital reserves to satisfy its obligations
and continue operations through the end of 2004, and therefore has an immediate
need for capital. While NGS
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is exploring various capital raising avenues, there is no assurance that NGS
will be able to obtain the sufficient short-term capital needed to sustain
operations. Further, NGS is incurring losses from operating activities. NGS'
current capital reserves will not be sufficient to allow it to fully execute its
business plan within the time frame projected and take advantage of available
business opportunities during fiscal year 2004. Furthermore, NGS' growth
strategy may not produce material revenue even if successfully funded.
NGS HAS A LIMITED OPERATING HISTORY.
NGS is a development stage company with a limited operating history, and
it faces all of the risks common to companies in their early stages of
development, including undercapitalization and uncertainty of funding sources,
high initial expenditure levels and uncertain revenue streams, an unproven
business model, and difficulties in managing growth. NGS' prospects must be
considered in light of the risks, expenses, delays and difficulties frequently
encountered in establishing a new business. Since inception, NGS has incurred
significant losses.
NGS MAY INCUR UNFORESEEN COSTS.
NGS is currently operating at a loss, and it intends to increase its
operating expenses significantly with the expansion of acquisitions and oil and
gas production. NGS' current cash reserves are only sufficient to fund
short-term operations, and the proceeds will not be sufficient for NGS' medium
and long-term needs, including but not limited to acquisitions. Additionally,
NGS may encounter unforeseen costs that could also require it to seek additional
capital. NGS does not have any permanent arrangements or credit facilities in
place as a source of funds should this need arise, and there can be no assurance
that NGS will be able to raise sufficient additional capital on acceptable
terms, if at all. Any additional financing may result in significant dilution to
Reality Interactive's existing shareholders.
OIL AND GAS DRILLING, RE-COMPLETIONS AND RE-WORKING ARE SPECULATIVE
ACTIVITIES AND INVOLVE NUMEROUS RISKS AND SUBSTANTIAL AND UNCERTAIN COSTS.
NGS' growth will be materially dependent upon the success of its future
drilling and development program. Drilling for oil and gas and re-working
existing wells involve numerous risks, including the risk that no commercially
productive oil or natural gas reservoirs will be encountered. The cost of
drilling, completing and operating wells is substantial and uncertain, and
drilling operations may be curtailed, delayed or cancelled as a result of a
variety of factors beyond NGS' control, including unexpected drilling
conditions, pressure or irregularities in formations, equipment failures or
accidents, adverse weather conditions, compliance with governmental requirements
and shortages or delays in the availability of drilling rigs or crews and the
delivery of equipment. Even when fully utilized, horizontal drilling does not
predetermine if hydrocarbons will in fact be present in such structures if they
are drilled. NGS' future drilling activities may not be successful and, if
unsuccessful, such failure will have an adverse effect on NGS' future results of
operations and financial condition. NGS' drilling schedule may vary from NGS'
capital budget. The final determination with respect to the drilling of any
scheduled or budgeted wells will be dependent on a number of factors, including,
but not limited to: (i) the results of previous development efforts and the
acquisition, review and
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analysis of data; (ii) the availability of sufficient capital resources for the
drilling of the prospects; (iii) the approval of the prospects by other
participants after additional data has been compiled; (iv) economic and industry
conditions at the time of drilling, including prevailing and anticipated prices
for oil and natural gas and the availability of drilling rigs and crews; (v)
NGS' financial resources and results; (vi) the availability of leases and
permits on reasonable terms for the prospects; and (vii) the success of applied
drilling technology. There is no assurance that these projects can be
successfully developed or that the wells discussed will, if drilled, encounter
reservoirs of commercially productive oil or natural gas.
THE PROPRIETARY HORIZONTAL DRILLING TECHNOLOGY OF VERDISYS MAY NOT WORK
AS WELL AS PROJECTED.
The horizontal drilling technology to be utilized through the services
of Verdisys is still in its infancy and has not been widely applied within the
industry. The successful application in a variety of rock formations and
reservoir types has yet to be conclusively proven, and the long-term production
enhancement projected has yet to be thoroughly demonstrated. Verdisys may not be
able to provide sufficient quantity of services to meet the level of activity
projected or provide adequate services at the prices quoted.
NGS DEPENDS ON LICENSED TECHNOLOGY FROM THIRD PARTIES, AND THE FAILURE
TO MAINTAIN THOSE LICENSES WOULD ADVERSELY AFFECT NGS.
NGS uses a variety of technology in the oil and gas development and
drilling process. NGS does not have any patents or copyrights for the technology
it uses. Instead, NGS licenses or outsources most of the technology integral to
its business from third parties, including Verdisys. The commercial success of
NGS will depend in part on this licensed technology not infringing on the
propriety rights of others and not breaching technology licenses that cover the
technology NGS uses in its business. It is uncertain whether any third party
patents will require NGS to use or develop alternative technology or to alter
the company's business plan, obtain additional licenses, or cease activities
that infringe on third-parties' intellectual property rights. The inability of
NGS to acquire any third-party licenses, or to integrate the related third-party
products into its business plan, could result in delays in development unless
and until equivalent products can be identified, licensed, and integrated. Also,
existing or future licenses may not continue to be available to NGS on
commercially reasonable terms. Litigation, which could result in substantial
cost to NGS, may be necessary to enforce any patents that licensed to NGS or to
determine the scope and validity of third-party obligations.
NGS' TECHNOLOGY MAY BECOME OBSOLETE.
NGS' business is dependent upon the utilization of changing technology.
As a result, NGS' ability to adapt to evolving technologies, obtain new
technology and maintain technological advantages will be important to its future
success. As new technologies develop, NGS may be placed at a competitive
disadvantage, and competitive pressures may force NGS to implement such new
technologies at substantial cost. There is no assurance that NGS will be able to
successfully utilize, or expend the financial resources necessary to acquire,
new technology or that others will not either achieve comparable or superior
technological expertise.
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OIL AND NATURAL GAS PRICES ARE HIGHLY VOLATILE, AND LOW PRICES WILL
NEGATIVELY AFFECT NGS' FINANCIAL RESULTS.
NGS' revenue, profitability, cash flow, future growth and ability to
borrow funds or obtain additional capital, as well as the carrying value of its
properties, are substantially dependent upon prevailing prices of oil and
natural gas. Lower oil and natural gas prices also may reduce the amount of oil
and natural gas that NGS can produce economically. Historically, the markets for
oil and natural gas have been volatile, and such markets are likely to continue
to be volatile in the future. Prices for oil and natural gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond the control of NGS. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions, the foreign supply of oil and natural gas, the price of foreign
imports and overall economic conditions. It is impossible to predict future oil
and natural gas price movements with certainty. Declines in oil and natural gas
prices may materially adversely affect NGS' financial condition, liquidity,
ability to finance planned capital expenditures and results of operations.
REGULATORY AND ACCOUNTING REQUIREMENTS MAY IMPOSE SUBSTANTIAL REDUCTIONS
IN PROVEN RESERVES, AND NGS' RELATED HEDGING ARRANGEMENTS MAY EXPOSE NGS TO
CERTAIN RISKS.
NGS plans to review on an annual or quarterly basis the carrying value
of its oil and natural gas properties under the applicable rules of the various
regulatory agencies, including the Securities and Exchange Commission. Under
these rules, the carrying value of proved oil and natural gas properties may not
exceed the present value of estimated future net after-tax cash flows from
proved reserves, discounted at 10%. Application of this "ceiling" test generally
requires pricing future revenue at the unescalated prices in effect as of the
end the fiscal year and requires a write down for accounting purposes if the
ceiling is exceeded, even if prices declined for only a short period of time. In
the future, NGS may be required to write down the carrying value of its oil and
natural gas properties when oil and natural gas prices are depressed or
unusually volatile. Whether NGS will be required to take such a charge will
depend on the prices for oil and natural gas at the end of any fiscal year and
the effect of reserve additions or revisions and capital expenditures during
such period.
In order to reduce NGS' exposure to short-term fluctuations in the price
of oil and natural gas, NGS may periodically enter into hedging arrangements.
The hedging arrangements would apply to only a portion of NGS' production and
provide only partial price protection against declines in oil and natural gas
prices. Such hedging arrangements may expose NGS to risk of financial loss in
certain circumstances, including instances where production is less than
expected, NGS' customers fail to purchase contracted quantities of oil or
natural gas or a sudden, unexpected event materially impacts oil or natural gas
prices. In addition, NGS' hedging arrangements may limit the benefit to NGS of
increases in the price of oil and natural gas.
NGS MAY BE UNABLE TO ACQUIRE ADDITIONAL RESERVES.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Except to
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the extent NGS acquires additional properties containing proved reserves or
conducts successful development activities, or both, its proved reserves will
decline. NGS' future oil and natural gas production is, therefore, highly
dependent upon its level of success in finding or acquiring additional reserves.
NGS IS SUBJECT TO SUBSTANTIAL OPERATING RISKS.
The oil and natural gas business involves certain operating hazards such
as well blowouts, mechanical failures, explosions, uncontrollable flows of oil,
natural gas or well fluids, fires, formations with abnormal pressures,
hurricanes, pollution, releases of toxic gas and other environmental hazards and
risks. NGS could suffer substantial losses as a result of any of these events.
While NGS carries general liability insurance, control of well insurance, and
operations extra expense coverage typical in its industry, NGS is not fully
insured against all risks incident to its business.
NGS may not always be the operator of some of its wells. As a result,
NGS' operating risks for those wells and its ability to influence the operations
for these wells will be less subject to its control. Operators of these wells
may act in ways that are not in NGS' best interests.
THE LOSS OF KEY PERSONNEL WOULD ADVERSELY AFFECT NGS.
NGS depends to a large extent on the services of certain key management
personnel, including NGS' executive officers, the loss of any of whom could have
a material adverse effect on NGS' operations. NGS does not maintain key-man life
insurance with respect to any employees. Also, except for the agreement with
Verdisys, NGS does not have long-term agreements with its drilling and
maintenance service providers. Accordingly, there is a risk that any of these
service providers could discontinue servicing NGS' oil and gas fields for any
reason. NGS also relies on third-party carriers for the transportation and
distribution of its recovered reserves, and the loss of any of these carriers
could have a material adverse effect on NGS' operations
GOVERNMENTAL REGULATIONS AND LIABILITY FOR ENVIRONMENTAL MATTERS MAY
ADVERSELY AFFECT NGS.
Oil and natural gas operations are subject to extensive federal, state
and local government regulations, which may be changed from time to time.
Matters subject to regulation include discharge permits for drilling operations,
drilling bonds, reports concerning operations, the spacing of wells, unitization
and pooling of properties and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. There are federal, state and
local laws and regulations primarily relating to protection of human health and
the environment applicable to the development, production, handling, storage,
transportation and disposal of oil and natural gas, byproducts thereof and other
substances and materials produced or used in connection with oil and natural gas
operations. In addition, NGS may be liable for environmental damages caused by
previous owners of property NGS purchases or leases. As a result, NGS may incur
substantial liabilities to third parties or governmental entities. NGS is also
subject to changing and extensive tax laws,
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the effects of which cannot be predicted. The implementation of new, or the
modification of existing, laws or regulations could have a material adverse
effect on NGS.
NGS MAY HAVE DIFFICULTY MANAGING FUTURE GROWTH.
NGS intends to grow through acquisitions and development activity. Any
future growth may place a significant strain on NGS' financial, technical,
operational and administrative resources. NGS' ability to grow will depend upon
a number of factors, including its ability to identify and acquire new
development or acquisition prospects, its ability to develop existing
properties, its ability to continue to retain and attract skilled personnel, the
results of its drilling program and acquisition efforts, the success of its
technology and access to capital. There is no assurance that NGS will be
successful in achieving or managing growth
NGS FACES STRONG COMPETITION FROM LARGER OIL AND NATURAL GAS COMPANIES.
NGS' competitors include major integrated oil and natural gas companies
and numerous independent oil and natural gas companies, individuals and drilling
and income programs. Many of these competitors are large, well-established
companies with substantially larger operating staffs and capital resources than
NGS has. NGS may not be able to successfully conduct its operations in this
highly competitive environment. Specifically, these larger competitors may be
able to pay more for development projects and productive oil and natural gas
properties and may be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than NGS' resources permit. In addition, such
companies may be able to expend greater resources on the existing and changing
technologies that NGS believes will be increasingly important to attaining
success in the industry.
ANY CREDIT FACILITY THAT NGS ENTERS INTO IN THE FUTURE MAY HAVE
BURDENSOME OPERATING RESTRICTIONS AND FINANCIAL COVENANTS.
NGS intends to attempt to put in place a credit facility. Any such
credit facility will likely be secured by a pledge of substantially all of NGS'
assets and likely will have covenants that limit additional borrowings, sales of
assets and the distributions of cash or properties and that prohibit the payment
of dividends and the incurrence of liens. The credit facility also may require
that specified financial ratios be maintained. The restrictions of such credit
facility and the difficulty in obtaining additional debt financing may have
adverse consequences on NGS' operations and financial results, including its
ability to obtain financing for working capital, capital expenditures, its
drilling program or purchases of new technology. NGS may be required to use a
substantial portion of its cash flow to make debt service payments, which will
reduce the funds that would otherwise be available for operations and future
business opportunities. A substantial decrease in NGS' operating cash flow or an
increase in its expenses could make it difficult to meet debt service
requirements and require NGS to modify operations.
NGS' ACQUISITION PROGRAM MAY BE UNSUCCESSFUL.
The successful acquisition of producing properties requires an
assessment of recoverable reserves, future oil and natural gas prices, operating
costs, potential environmental and other liabilities and factors. Such
assessments, even when performed by experienced personnel, are necessarily
inexact and their accuracy inherently uncertain. NGS' review of subject
properties,
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which generally includes on-site inspections, review of selected title and the
review of reports filed with various regulatory entities, will not reveal all
existing or potential problems, deficiencies and capabilities. NGS may not
always perform inspections or title examinations on every well, and may not be
able to observe structural and environmental problems even when it does
undertake an inspection. Even when problems are identified, the seller may be
unwilling or unable to provide effective contractual protection against all or
part of such problems. There is no assurance that any acquisition of property
interests by NGS will be successful and, if unsuccessful, that such failure will
not have an adverse effect on NGS' future results of operations and financial
condition.
NGS CANNOT MARKET ITS PRODUCTION WITHOUT THE ASSISTANCE OF THIRD
PARTIES, WHICH CANNOT BE ASSURED.
The marketability of NGS' production depends upon the proximity of its
reserves to, and the capacity of, facilities and third-party services, including
oil and natural gas gathering systems, pipelines, trucking or terminal
facilities, and processing facilities. The unavailability or lack of capacity of
such services and facilities could result in the shut in of producing wells or
the delay or discontinuance of development plans for properties. Any such delay
or discontinuance could adversely affect NGS' financial condition.
REALITY INTERACTIVE'S COMMON STOCK HAS A LIMITED PUBLIC TRADING MARKET,
AND ITS STOCK PRICE MAY BE VOLATILE.
The common stock of Reality Interactive is traded on the OTC Bulletin
Board. The common stock is thinly traded, and an active trading market may never
develop. A shareholder who decides to sell some or all of his or her shares may
be unable to locate persons who are willing to purchase the shares. Also,
because of the various risk factors described above, the price of the common
stock may be volatile.
REALITY INTERACTIVE DOES NOT INTEND TO PAY CASH DIVIDENDS.
Reality Interactive has never paid cash dividends on its common stock
and does not intend to do so in the foreseeable future.
AFFILIATES OF THE FINANCIAL CONSULTANT COLLECTIVELY OWN APPROXIMATELY
62% OF REALITY INTERACTIVE'S OUTSTANDING STOCK AND THEREFORE COULD EXERCISE
SIGNIFICANT CONTROL OVER THE CORPORATION.
Affiliates of the Financial Consultant, including Laird Q. Cagan, the
Chairman of the Board of Reality Interactive, beneficially collectively own
approximately 62% of Reality's common stock. As a result, if these holders
decided to act as a group, they would be able to exercise significant control
over Reality Interactive and to significantly influence all matters requiring
the approval of shareholders, including the election of directors and the
approval of significant corporate transactions. This concentration of ownership
may make some transactions more difficult or impossible to complete without the
approval of such holders, which could have an adverse effect on the market price
of Reality Interactive's common stock or prevent Reality's shareholders from
realizing a premium over the market price of the common stock.
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REALITY INTERACTIVE'S ABILITY TO ISSUE PREFERRED STOCK MAY HAVE
ANTI-TAKEOVER EFFECTS THAT COULD CAUSE THE PRICE OF ITS COMMON STOCK TO DECLINE.
Reality Interactive is authorized by its charter documents to issue
shares of preferred stock. No shares of preferred stock are currently
outstanding. The terms of any series of preferred stock may include special
voting rights, dividend preferences, liquidation preferences, conversion and
redemption rights. Some of these terms may favor the holders of preferred stock
at the expense of the holders of common stock. The issuance of preferred stock
could adversely affect the rights of the holders of Reality Interactive's common
stock and, therefore, could reduce the value of the common stock. In particular,
specific rights granted to future holders of preferred stock could be used to
restrict Reality Interactive's ability to merge with, sell its assets to, or
otherwise be acquired by, a third party and thereby preserve control by present
management.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 26, 2004, Reality Interactive acquired NGS. See Item 1 of this
Report on Form 8-K, which is incorporated by reference into this Item 2.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
On May 26, 2004, the Board of Directors of Reality Interactive (acting
in its capacity as the Audit Committee) dismissed Chisholm, Bierwolf & Nilson,
LLC as Reality Interactive's independent accountants and appointed Hein &
Associates LLP to serve as Reality Interactive's independent accountants. Hein &
Associates LLP has served as the independent accountants of NGS since 2004.
The reports of Chisholm, Bierwolf & Nilson, LLC on Reality Interactive's
financial statements for the fiscal years ended December 31, 2003 and 2002
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles, except that
the reports stated that there was a substantial doubt about Reality
Interactive's ability to continue as a going concern as a result of its
accumulated deficit and negative net worth.
During Reality Interactive's two most recent fiscal years and through
May 26, 2004, (i) there was no disagreement between Reality Interactive and
Chisholm, Bierwolf & Nilson, LLC on any matter regarding accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreement, if not resolved to the satisfaction of Chisholm, Bierwolf &
Nilson, LLC, would have caused it to make reference to the subject matter of the
disagreement in its reports on Reality Interactive's financial statements for
such years, and (ii) there were no "reportable events" (as defined in Item
304(a)(1)(v) of Regulation S-K adopted by the Securities and Exchange
Commission).
Reality Interactive provided Chisholm, Bierwolf & Nilson, LLC with a
copy of the preceding disclosures that are contained in this Item 4 and
requested Chisholm, Bierwolf & Nilson, LLC to provide Reality Interactive with a
letter stating whether or not it agrees with the disclosures. The letter from
Chisholm, Bierwolf & Nilson, LLC is attached to this Report on Form 8-K as
Exhibit 16.1.
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During Reality Interactive's two most recent fiscal years and through
May 26, 2004, neither Reality Interactive nor anyone acting on its behalf
consulted Hein & Associates LLP with respect to: (i) the application of
accounting principles to a specified transaction, either completed or proposed;
(ii) the type of audit opinion that might be rendered by Hein & Associates LLP
on Reality Interactive's financial statements; or (iii) any matter that was
either the subject of a "disagreement" (as defined in Item 304(a)(1)(v) of
Regulation S-K and the accompanying instructions) or a "reportable event" (as
defined in Item 304(a)(1)(v) of Regulation S-K).
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
As a result of the Merger, Reality Interactive has moved its principal
executive offices to 820 Gessner, Suite 1340, Houston, Texas 77024.
Following all required filings with governmental authorities, Reality
Interactive intends to change its name to Natural Gas Systems, Inc. and to
obtain a new trading symbol on the OTC Bulletin Board.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statement of Businesses Acquired.
The financial statements that are required by Item 7(a) of Form 8-K will
be filed pursuant to an amendment to this Report on Form 8-K by the applicable
filing deadline specified in Item 7(a).
(b) Pro Forma Financial Information.
Any pro forma financial information that is required by Item 7(b) of
Form 8-K will be filed pursuant to an amendment to this Report on Form 8-K by
the applicable filing deadline specified in Item 7(b).
(c) Exhibits.
2.1 Agreement and Plan of Reorganization dated as of April
12, 2004 among Reality Interactive, Inc., Reality
Acquisition Corp., Global Marketing Associates, Inc.,
Dean H. Becker and Natural Gas Systems, Inc. (filed as
an exhibit to Reality Interactive's Report on Form 8-K/A
dated April 22, 2004, which was filed with the
Securities and Exchange Commission on April 27, 2004,
and incorporated by reference into this Report on Form
8-K).
16.1 Letter dated June 2, 2004 from Chisholm, Bierwolf &
Nilson, LLC regarding its concurrence with the
statements made by Reality Interactive concerning the
change in accountants.
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ITEM 8. CHANGE IN FISCAL YEAR.
Concurrently with the closing of the Merger on May 26, 2004, Reality
Interactive determined to change its fiscal year end from December 31 to June
30, which is the fiscal year end of NGS. Reality Interactive intends to file an
Annual Report on Form 10-KSB for the transition period from January 1, 2004 to
June 30, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
REALITY INTERACTIVE, INC.
Date: June 2, 2004 By: /s/ ROBERT HERLIN
--------------------------------------
Robert Herlin, Chief Executive Officer
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EXHIBIT INDEX
Exhibit No. Description
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2.1 Agreement and Plan of Reorganization dated as of April 12, 2004
among Reality Interactive, Inc., Reality Acquisition Corp.,
Global Marketing Associates, Inc., Dean H. Becker and Natural
Gas Systems, Inc. (filed as an exhibit to Reality Interactive's
Report on Form 8-K/A dated April 22, 2004, which was filed with
the Securities and Exchange Commission on April 27, 2004, and
incorporated by reference into this Report on Form 8-K).
16.1 Letter dated June 2, 2004 from Chisholm, Bierwolf & Nilson, LLC
regarding its concurrence with the statements made by Reality
Interactive concerning the change in accountants.
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