<PAGE>
As filed with the Securities and Exchange Commission on July 8, 1997.
Registration No. 333-27787
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
THE RECOVERY NETWORK, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Colorado 7812 39-173-1029
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
1411 5th Street
Suite 250
Santa Monica, California 90401
(310) 393-3979
(Address and Telephone Number of Principal Executive Offices)
-------------------------
WILLIAM D. MOSES
President and Chief Executive Officer
The Recovery Network, Inc.
1411 5th Street
Suite 250
Santa Monica, California 90401
(310) 393-3979
(Name, Address and Telephone Number of Agent For Service)
-------------------------
Copies of Communications to:
HENRY I. ROTHMAN, Esq. ROBERT J. MITTMAN, Esq.
Parker Chapin Flattau & Klimpl, LLP Tenzer Greenblatt LLP
1211 Avenue of the Americas The Chrysler Building
New York, New York 10036 New York, New York 10174
Telephone: (212) 704-6000 Telephone: (212) 885-5000
Telecopier: (212) 704-6288 Telecopier: (212) 885-5001
-------------------------
<PAGE>
Approximate Date of Proposed Sale to the Public: As soon as practicable
after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
-------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
Proposed Proposed
Maximum Maximum Amount Of
Title Of Each Class Of Amount To Offering Price Aggregate Registration
Securities To Be Registered Be Registered Per Security (1) Offering Price (1) Fee
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share............... 1,840,000(2) $ 5.00 $ 9,200,000 $ 2,787.88
- -----------------------------------------------------------------------------------------------------------
Redeemable Warrants, each
to purchase one share of
Common Stock ............... 1,840,000(3) $ .10 $ 184,000 $ 55.76
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (4) ......... 1,840,000(5) $ 5.50 $ 10,120,000 $ 3,066.67
- -----------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each
to purchase one share of
Common Stock (6) ............ 160,000 $ .001 $ 160 (7)
- -----------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each
to purchase one warrant ... 160,000 $ .001 $ 160 (7)
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (8) ......... 160,000 $ 7.00 $ 1,120,000 $ 339.40
- -----------------------------------------------------------------------------------------------------------
Warrants, each to purchase
one share of Common
Stock (8) .................. 160,000 $ .14 $ 22,400 $ 6.79
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (9) ......... 160,000 $ 9.075 $ 1,452,000 $ 440.00
- -----------------------------------------------------------------------------------------------------------
Total Registration Fee.................................................................... $ 6,696.50
===========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Includes 240,000 shares of Common Stock which the Underwriter has the
option to purchase from the Registrant to cover over-allotments, if any.
(3) Includes 240,000 redeemable warrants which the Underwriter has the option
to purchase from the Registrant to cover over-allotments, if any.
(4) Issuable upon exercise of the redeemable warrants to be sold to the public
hereunder, together with such indeterminate number of shares of Common
Stock as may be issuable by reason of the anti-dilution provisions
contained therein.
(5) Assumes the Underwriter's option to purchase 240,000 additional redeemable
warrants to cover over-allotments, if any, has been exercised.
(6) To be issued to the Underwriter at the time of delivery and acceptance of
the securities to be sold to the public hereunder.
(7) No fee due pursuant to Rule 457(g).
(8) Issuable upon exercise of the Underwriter's Warrants.
(9) Issuable upon exercise of the warrants underlying the Underwriter's
Warrants, together with such indeterminate number of shares of Common
Stock as may be issuable by reason of the anti-dilution provisions
contained therein.
<PAGE>
THE RECOVERY NETWORK, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number of Form SB-2 Location or Caption in Prospectus
------------------------ ---------------------------------
<S> <C> <C>
1. Front of the Registration Statement and
Outside Front Cover Page of Prospectus ............. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus ......................................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information and Risk Factors .............. Prospectus Summary; Risk Factors
4. Use of Proceeds .................................... Use of Proceeds
5. Determination of Offering Price .................... Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution .......................................... Risk Factors; Dilution
7. Selling Security Holders ........................... Not Applicable
8. Plan of Distribution .............................. Outside Front Cover Page; Underwriting
9. Legal Proceedings ................................. Not applicable
10. Directors, Executive Officers, Promoters and
Control Persons..................................... Management
11. Security Ownership of Certain Beneficial
Owners and Management .............................. Principal Shareholders
12. Description of Securities........................... Outside Front Cover Page; Description of
Securities
13. Interest of Named Experts and Counsel .............. Not applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Management--Limitation of Liability and
Indemnification
15. Organization Within Last Five Years ............... Not Applicable
16. Description of Business ........................... Prospectus Summary; Risk Factors; Business
17. Management's Discussion and Analysis or
Plan of Operation ................................. Plan of Operation
18. Description of Property ........................... Business - Properties
19. Certain Relationships and Related
Transactions ....................................... Certain Transactions
20. Market for Common Equity and Related
Shareholder Matters ................................ Dividend Policy; Description of Securities;
Shares Eligible for Future Sale
21. Executive Compensation ............................. Management - Executive Compensation;
Management - Stock Option Plans
22. Financial Statements .............................. Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure ......................................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED JULY 8, 1997
SUBJECT TO COMPLETION
[LOGO] THE RECOVERY NETWORK, INC.
1,600,000 Shares of Common Stock and
Redeemable Warrants to Purchase 1,600,000 Shares of Common Stock
The Recovery Network, Inc. (the "Company") is offering hereby 1,600,000
shares (the "Shares") of common stock, par value $.01 per share (the "Common
Stock"), of the Company and redeemable warrants to purchase 1,600,000 shares of
Common Stock (the "Warrants"). The Shares and Warrants may be purchased
separately. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at a price of $5.50, subject to adjustment in certain
circumstances, at any time commencing , 1998 (or such earlier date as
to which the Underwriter consents) through and including , 2002. The
Warrants are redeemable by the Company, at any time commencing , 1998,
upon notice of not less than 30 days, at a price of $.10 per Warrant, provided
that the closing bid quotation of the Common Stock on all 20 trading days
ending on the third day prior to the day on which the Company gives notice (the
"Call Date") has been at least 150% (currently $8.25, subject to adjustment) of
the then effective exercise price of the Warrants and the Company obtains the
written consent of the Underwriter to such redemption prior to the Call Date.
See "Description of Securities."
Prior to this offering there has been no public market for the Common
Stock or Warrants and there can be no assurance that any such market will
develop. It is anticipated that the Shares and Warrants will be quoted on the
Nasdaq SmallCap Market ("Nasdaq") under the symbols "RNET" and "RNETW,"
respectively. The offering prices of the Shares and the Warrants and the
exercise price of the Warrants were determined pursuant to negotiations between
the Company and the Underwriter and do not necessarily relate to the Company's
book value or any other established criteria of value. For a discussion of the
factors considered in the determination of the offering prices of the Shares
and Warrants, see "Underwriting."
-------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 8 AND "DILUTION" ON PAGE 19.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions (1) Company (2)
- --------------------------------------------------------------------------------
Per Share ........ $5.00 $.50 $4.50
- --------------------------------------------------------------------------------
Per Warrant ...... $ .10 $.01 $ .09
- --------------------------------------------------------------------------------
Total (3) ........ $8,160,000 $816,000 $7,344,000
================================================================================
<PAGE>
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance, to grant to the Underwriter warrants
(the "Underwriter's Warrants") to purchase up to 160,000 shares of Common
Stock and/or 160,000 Warrants and to retain the Underwriter as a financial
consultant. The Company has also agreed to indemnify the Underwriter
against certain civil liabilities, including those arising under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, including the nonaccountable expense allowance
in the amount of $244,800 ($281,520 if the Underwriter's over-allotment
option is exercised in full), estimated at $722,000, payable by the
Company.
(3) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 240,000 additional
shares of Common Stock and/or 240,000 additional Warrants on the same terms
set forth above, solely for the purpose of covering over-allotments, if any.
If the Underwriter's over-allotment option is exercised in full, the price
to public, underwriting discounts and commissions and proceeds to the
Company will be $9,384,000, $938,400, $8,445,600, respectively. See
"Underwriting."
-------------------------
The Shares and Warrants are being offered, subject to prior sale, when, as
and if delivered to, and accepted by, the Underwriter and subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering and
to reject any order in whole or in part. It is expected that delivery of
certificates representing the Shares and Warrants offered hereby will be made
against payment therefor at the offices of the Underwriter, 650 Fifth Avenue,
New York, New York 10019, on or about , 1997.
Whale Securities Co., L.P.
The date of this Prospectus is , 1997
<PAGE>
The Company, through its television and radio networks, interactive media and a
national 800 help line, serves individuals, families and communities across the
nation by providing information, interaction and support to those recovering
from, affected by or confronting alcoholism, substance abuse, eating disorders,
depression and other behavioral and mental health problems.
[Picture of map of the United States indicating the Company's current radio and
television markets]
[Logo]
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its shareholders with annual
reports containing audited financial statements certified by its independent
public accountants and such other periodic reports as the Company deems
appropriate or as may be required by law.
-------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK AND WARRANTS.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK AND WARRANTS IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Except as otherwise noted, all
information contained in this Prospectus, including per share data and
information relating to the number of shares outstanding, (i) gives effect to a
1-for-7.7432 reverse stock split of the Common Stock effected as of February
10, 1997 (the "Stock Split") and (ii) assumes no exercise of the Underwriter's
over-allotment option to purchase up to 240,000 additional shares of Common
Stock and/or 240,000 additional Warrants. See "Underwriting" and Note 1 of
Notes to Financial Statements.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The Company
The Recovery Network, Inc. (the "Company"), a development stage company,
was organized to provide information, interaction and support via television,
radio and interactive media services to persons affected by or afflicted with
alcoholism, drug and substance abuse, eating disorders, depression and a variety
of behavioral and mental health problems ("Recovery Issues"), as well as to
persons seeking to prevent the onset of these problems and select positive
lifestyle choices ("Prevention Issues"). The Company currently addresses
Recovery Issues and Prevention Issues through The Recovery Network(TM), a cable
television network which commenced test-broadcasting on a limited basis in March
1996, and was launched nationally in April 1997 and is currently airing in over
60 cities nationwide; Recovery Talk Radio(TM), a nationally syndicated talk
radio program introduced in December 1996 and currently airing on 56 stations;
and a toll-free telephone helpline (the "Help Line") which offers information to
viewers of The Recovery Network about where to obtain information and help in
their communities. The Company also owns a 50% interest in RecoveryNet
Interactive, L.L.C. ("Recovery Interactive"), a joint venture with TCI Online
RecoveryNet Holdings, Inc. (an affiliate of TeleCommunications, Inc.), formed in
August 1996 to commence a business to provide behavioral health care products
and services to managed care organizations and other organizations offering or
providing health care services, as well as to provide information, interaction
and support regarding Recovery Issues and Prevention Issues through an
integrated multimedia platform.
The Company believes that the market for recovery and prevention-oriented
programming consists of four groups: (i) friends, families and co-workers of
persons afflicted with Recovery Issues (the "Affected Others"); (ii) persons
who are already in recovery ("Persons in Recovery") and seek the daily support
and connection to others in recovery; (iii) afflicted persons who are not yet
in recovery either because they are unaware of the resources that are available
or are unwilling or unable to attend meetings or seek help publicly ("Afflicted
Persons"); and (iv) persons concerned about Prevention Issues, particularly
families with children. The Company believes that these four groups constitute
a significant portion of the nation's population.
The Company expects that a substantial portion of its audience will be the
Affected Others, including the approximately 56 million people directly
affected by alcohol abuse or addiction, the approximately 26.8 million children
of alcoholics in the United States and others affected by their relationships
with persons suffering from substance abuse, eating disorders and depression.
Persons in Recovery include the millions of Americans who regularly attend
meetings of various support groups, such as Alcoholics Anonymous, Al-Anon,
Overeaters Anonymous, Cocaine Anonymous and Narcotics Anonymous, or are in some
other form of treatment, including counseling. Afflicted Persons include the
estimated 43 million Americans who are either heavy or binge drinkers and the
approximately 12.8 million Americans who use illegal drugs. Afflicted Persons
also include the approximately 20% of the female population between the ages of
12 and 30 that have major eating disorders, the estimated 59% of the United
States population that
3
<PAGE>
is clinically obese, the estimated more than 11 million Americans who suffer
from depression as well as the 61 million Americans that the 1995 National
Household Survey on Drug Abuse estimates were current smokers, many of whom the
Company believes wish to quit smoking.
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under a "nesting" contract (the "Nesting Contract") with
Access Television Network ("ATN"). Pursuant to the Nesting Contract, ATN
provides satellite uplink, master control and other related services (the "ATN
Services") on its satellite transponder to The Recovery Network for two hours
of broadcast time every day to subscribers of cable systems with which ATN has
affiliation agreements. Currently, the Recovery Network is broadcast one hour
in the morning to approximately 13 million subscribers and one hour in the
evening to approximately 3.5 million subscribers. In addition to its
distribution under the Nesting Contract, the Company is seeking two hours of
broadcast time per day in other local cable systems in a large number of
markets. The Company has identified all local cable systems in the United
States with at least 50,000 subscribers and is engaged in a general marketing
campaign ("affiliate marketing") directed at those 259 systems. The Company is
also targeting a more focused affiliate marketing effort on 11 major cities
whose communities contain 103 of these 259 systems.
The Company has produced 59 episodes of its flagship program, Full Circle,
an on-going one-hour series that documents the recovery process by featuring
Persons in Recovery in actual meetings, 21 episodes of Testimony, in which
people describe their stories of addiction and recovery, and two episodes of
Bottoms, a comedy program that takes recovering alcoholics and addicts back to
the scenes of their lowest moments and turning points on the road to recovery.
The Company is currently producing additional episodes of these programs, as
well as developing several other half-hour series focusing on several Recovery
Issues and Prevention Issues. The Company is also airing two programs it has
licensed from third parties and is also seeking to license additional recovery
and prevention-oriented programming.
The Company intends for The Recovery Network to expand its hours of
operations as additional programing is developed, as it is able to demonstrate
viewer loyalty to local cable systems and as additional channel capacity
becomes available. The recent development of direct satellite services ("DSS"),
which currently offer more channel capacity than cable television, and the
conversion of cable systems from analog to digital signal transmission, which
will enable cable systems to offer more channels, are expected to create
substantial additional channel capacity over the next several years. The
Company believes that these developments will enable The Recovery Network to
eventually become a full time television network. The Company believes that the
unique benefits of its socially responsible programming to local communities
and to cable systems positions the Company to capitalize on this projected
increase in channel capacity.
The Company has developed relationships with local and national grassroots
organizations (such as groups whose members consist of recovery, prevention and
other health professionals, community activists and/or Persons in Recovery)
focused on Recovery Issues and Prevention Issues. The Company is seeking
support from these organizations, and from local politicians and law
enforcement agencies to further demonstrate the credibility and social
significance of The Recovery Network to local cable systems. The Company has
also formed The National Partnership for Recovery and Prevention (the
"Partnership"), an umbrella coalition of national recovery and prevention
organizations, which the Company believes will assist the Company's affiliate
marketing by obtaining the support of the Partnership's members. The Company
believes that demonstrating this support to local cable systems will help in
obtaining agreements to air The Recovery Network's programming ("affiliation
agreements"). In addition, the Company intends to use Recovery Talk Radio to
advertise and promote The Recovery Network in markets in which The Recovery
Network will air. The Company also expects that providing the toll-free Help
Line will help build and maintain viewer loyalty and support for The Recovery
Network. The Company's Board of Advisors will from time to time recommend to
the Company's Board of Directors the adoption of standards and practices to
provide guidance for the Company's employees in determining appropriate
programming and online content, advertising and merchandise sales.
4
<PAGE>
The Company is in the development stage and has not yet generated any
meaningful revenues. The Company believes that generation of meaningful
revenues will be dependent upon the Company entering into affiliation
agreements with local cable systems with a significant number of subscribers,
developing additional television programming to enable The Recovery Network to
expand its hours of broadcast, achieving significant viewer loyalty, attracting
more advertisers and developing or entering into arrangements for the supply of
recovery and prevention-related products, such as videotapes, audio cassettes
and books to merchandise. The Company requires proceeds substantially in excess
of the proceeds of this offering to implement its business plan. The Company
expects to incur substantial up-front expenditures and operating costs in
connection with the operation and expansion of The Recovery Network, satellite
transmission of its programming and the development and production of
television programming, which will result in significant losses for the
foreseeable future. There can be no assurance that the Company will be able to
enter into affiliation agreements with local cable systems with a sufficient
number of subscribers, achieve significant viewer loyalty or attract
advertisers for The Recovery Network, generate meaningful revenues or achieve
profitable operations.
The Company was incorporated under the laws of the State of Wisconsin in
May 1992 under the name Recovery Net, Inc., merged with and into a Colorado
corporation in December 1995 and changed its name to The Recovery Network, Inc.
in May 1996. Unless the context requires otherwise, all references to the
Company include Recovery Direct, Inc., a wholly-owned subsidiary of the Company
("Recovery Direct"). The Company's principal executive offices are located at
1411 5th Street, Suite 250, Santa Monica, California 90401, and its telephone
number is (310) 393-3979.
Private Financing
In March and April 1997, the Company completed a private financing (the
"Private Financing") pursuant to which the Company issued and sold to 21
"accredited investors" an aggregate of 40 units (the "Units") consisting of an
aggregate of (i) $2,000,000 principal amount of unsecured non-negotiable
promissory notes (the "Financing Notes") which bear interest at the rate of 9%
per annum and are due on the earlier of the consummation of this offering or
March 6, 1998; (ii) 400,000 shares of Common Stock (the "Financing Shares");
and (iii) warrants (the "Financing Warrants") to purchase an aggregate of
500,000 shares of Common Stock at an exercise price of $4.00 per share. The
offering price was $50,000 per Unit. After payment of $200,000 in placement
agent fees to the Underwriter, which acted as placement agent for the Company
in connection with the Private Financing, and other offering expenses of
approximately $262,000, the Company received net proceeds of approximately
$1,538,000 from the sale of the Units. The net proceeds of the Private
Financing are being used by the Company for the costs of, among other things,
an affiliate marketing campaign in connection with the national launch of The
Recovery Network, programming expenses for the production of Full Circle,
Testimony and Bottoms, a capital contribution in the amount of $200,000 to
Recovery Interactive and payments under the Nesting Contract with ATN in the
amount of $102,000. The Company intends to use a portion of the proceeds of
this offering to repay the entire principal amount of, and accrued interest on,
the Financing Notes. See "Use of Proceeds" and "Description of
Securities--Recent Financing."
In July 1997, the Company issued to one individual $105,250 aggregate
principal amount of 15% promissory notes (the "Promissory Notes"). The
Promissory Notes are due on the earlier of (i) the date which is two business
days following the consummation of this offering and (ii) July 2, 1998;
provided, however, that in the event that the Promissory Notes are repaid prior
to the one year anniversary, the lenders will receive a full year's interest.
The Company paid to the lender a loan origination fee in an amount equal to 5%
of the Promissory Notes, or $5,260. The net proceeds from the issuance of the
Promissory Notes were used for working capital. The Company intends to repay the
Promissory Notes, plus $15,790 of interest thereon, from the net proceeds of
this offering. See "Use of Proceeds" and "Plan of Operation."
5
<PAGE>
The Offering
Securities offered ...... 1,600,000 shares of Common Stock and Warrants to
purchase 1,600,000 shares of Common Stock. See
"Description of Securities."
Common Stock to be outstanding
after the offering...... 4,121,250 shares (1)
Warrants:
Number to be outstanding after
the offering............ 1,600,000 Warrants (2)
Exercise terms ......... Exercisable commencing , 1998 (or such earlier
date as to which the Underwriter consents), each to
purchase one share of Common Stock at a price of
$5.50, subject to adjustment in certain
circumstances. See "Description of Securities --
Redeemable Warrants."
Expiration date ......... , 2002.
Redemption............... Redeemable by the Company at any time commencing
, 1998, upon notice of not less than 30 days, at
a price of $.10 per Warrant, provided that the
closing bid quotation of the Common Stock on all 20
trading days ending on the third day prior to the
date on which the Company gives notice (the "Call
Date") has been at least 150% (currently $8.25,
subject to adjustment) of the then effective
exercise price of the Warrants and the Company
obtains the written consent of the Underwriter with
respect to such redemption prior to the Call Date.
The Warrants will be exercisable until the close of
business on the date fixed for redemption. See
"Description of Securities -- Redeemable Warrants."
Use of Proceeds ......... The Company intends to use the net proceeds of
this offering for the repayment of outstanding
indebtedness; marketing and affiliate sales;
programming expenses; sales and marketing; the
commencement of merchandising operations; and the
balance for working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors ............ The securities offered hereby involve a high
degree of risk and immediate substantial dilution to
new investors. The securities should not be
purchased by investors who cannot afford the loss of
their entire investment. See "Risk Factors" and
"Dilution."
Proposed Nasdaq symbols Common Stock -- RNET
Warrants -- RNETW
- ------------
(1) Does not include: (i) 1,600,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 320,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 15,506
shares of Common Stock reserved for issuance upon exercise of stock
options available for future grant under the Company's stock option plans
(the "Stock Option Plans"); (iv) 334,494 shares of Common Stock reserved
upon exercise of outstanding options granted under the Stock Option Plans;
(v) 113,290 shares of Common Stock reserved for issuance upon exercise of
outstanding non-plan stock options; (vi) 515,498 shares of Common Stock
reserved for issuance upon exercise of warrants which have been
6
<PAGE>
issued by the Company, including 500,000 shares of Common Stock issuable
upon exercise of the Financing Warrants; and (vii) an indeterminable number
of shares of Common Stock reserved for issuance in the event the Company
fails under certain circumstances to register, or to maintain an effective
registration statement with respect to, the Financing Shares and the shares
of Common Stock issuable upon exercise of the Financing Warrants (the
"Financing Warrant Shares"). See "Plan of Operation -- Liquidity and
Capital Resources," "Management -- Stock Option Plans," "-- Non-Plan Stock
Options," "Description of Securities" and "Underwriting."
(2) Does not include any Warrants referred to in clauses (ii) and (vi) of Note
1 above. See "Description of Securities -- Recent Financing."
Summary Financial Information
The summary financial data set forth below is derived from and should be
read in conjunction with the audited financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended June 30, Nine Months Ended March 31,
------------------------------- ------------------------------
1995 1996 1996 1997
-------------- -------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Net loss ........................ $ (490,341) $(1,223,829) $ (569,110) $(2,286,273)
Net loss per share ............... (.43) (.71) (.55) (1.13)
Weighted average number of shares
outstanding ..................... 1,145,962 1,733,028 1,629,831 2,023,852
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
At March 31, 1997 (unaudited)
--------------------------------------------------
Actual Pro Forma(1) As Adjusted(2)
--------------- -------------- ---------------
<S> <C> <C> <C>
Working capital (deficit) ............ $ (571,319) $ (554,963) $ 5,047,442
Total assets ........................ 1,114,462 1,267,052 5,500,928
Total liabilities .................. 1,323,388 1,452,022 290,370
Shareholders' equity (deficit) ...... (208,926) (184,970) 5,210,558
</TABLE>
------------
(1) Gives effect to (i) the issuance and sale of one Unit in the Private
Financing for net proceeds of $45,000 and (ii) the issuance in June 1997 of
the $105,250 aggregate principal amount of Promissory Notes and the receipt
of approximately $99,990 of net proceeds therefrom (collectively, the "Pro
Forma Adjustments"). The issuance and sale of 39 Units in March 1997 in
connection with the Private Financing for which the Company received net
proceeds of approximately $1,493,000 are included in the Company's balance
sheet at March 31, 1997 (actual). See "Plan of Operation."
(2) Gives effect to (i) the sale of the 1,600,000 shares of Common Stock and
1,600,000 Warrants offered hereby and the application of the estimated net
proceeds therefrom, including the repayment of the Financing Notes plus
accrued interest thereon of approximately $60,000, (ii) non-recurring
charges of approximately $943,598 representing the loan discount relating to
the Private Financing and $201,617 representing the issuance costs of the
Financing Notes and (iii) repayment of the Promissory Notes, including
interest of approximately $15,790 and a non-recurring charge of
approximately $5,260 respresenting deferred financing costs. See "Use of
Proceeds."
7
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and therefore should not be purchased by anyone who cannot
afford a loss of his or her entire investment. Each prospective investor should
carefully review and consider the following risks before making an investment
decision.
1. Development Stage Company; Lack of Meaningful Revenues; Significant and
Continuing Losses; Explanatory Paragraph in Independent Public Accountants
Report. The Company was organized in 1992, was reorganized in 1995 and is in
the development stage. Since its inception, the Company has been primarily
engaged in test broadcasting of The Recovery Network in limited markets (which
was launched nationally in April 1997), affiliate marketing and development,
acquisition and production of programming, establishing Recovery Talk Radio and
the Help Line and forming relationships with individuals and organizations in
the recovery field. Accordingly, the Company has a limited relevant operating
history upon which an evaluation of the Company's performance and prospects can
be made. Such prospects must be considered in light of the numerous risks,
expenses, problems, and difficulties typically encountered in establishing a
new business and launching and expanding a cable television network. The
Company has not generated any meaningful revenues and does not expect to
generate any meaningful revenues for the foreseeable future. To date, the
Company has incurred significant net losses, including net losses of $1,223,829
and $2,286,273 for the year ended June 30, 1996 and the nine months ended March
31, 1997, respectively. At March 31, 1997, the Company had a deficit
accumulated in the development stage of $4,365,740 and, since March 31, 1997,
the Company has continued to incur significant and increasing losses. The
Company expects to incur substantial up-front capital expenditures and
operating costs in connection with the operation and expansion of The Recovery
Network, satellite transmission of its programming and the development and
production of television programming, which will result in significant losses
for the foreseeable future. The Company will also incur a non-recurring charge
during the fiscal quarter in which this offering is consummated of
approximately $1,150,475 relating to the Private Financing and Promissory
Notes. There can be no assurance that the Company will ever generate
significant revenues or achieve profitable operations. The Company's
independent public accountants have included an explanatory paragraph in their
report on the Company's financial statements, stating that certain factors
raise substantial doubt about the Company's ability to continue as a going
concern. See "Plan of Operation" and Financial Statements.
2. Significant Capital Requirements; Dependence on Proceeds for Plan of
Operation; Continuing Need for Additional Financing. The Company's capital
requirements have been and will continue to be significant, and its cash
requirements have been exceeding its cash flow from operations. At March 31,
1997, the Company had a working capital deficit of $571,319 due to, among other
things, costs associated with program development and affiliate marketing
efforts. As a result, the Company has been substantially dependent on loans
from its shareholders and private placements of its securities to fund its
operations. The Company is dependent upon the proceeds of this offering to fund
its plan of operations, including the operation of The Recovery Network and
production of new programming, as well as to fund its other working capital
requirements. Although the Company anticipates that the net proceeds of this
offering, together with projected revenues from operations, will be sufficient
to fund the Company's operations and capital requirements for approximately 12
months following the consummation of this offering, there can be no assurance
that such funds will not be expended prior thereto due to unanticipated changes
in economic conditions or other unforeseen circumstances. In the event the
Company's plans change or its assumptions change or prove to be inaccurate, the
Company could be required to seek additional financing sooner than currently
anticipated. The Company has no current arrangements with respect to, or
potential sources of, any additional financing, and it is not anticipated that
existing shareholders will provide any portion of the Company's future
financing requirements. Consequently, there can be no assurance that any
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all. Any inability to obtain additional
financing when needed would have a material adverse effect on the Company,
requiring it to curtail and possibly cease its operations. In addition, any
additional equity financing may involve substantial dilution to the interests
of the Company's then existing shareholders. See "Use of Proceeds" and "Plan of
Operation."
3. Uncertainty of Ability to Implement Plan of Operation. The Company's
proposed plan of operation and prospects will be largely dependent on the
success of its affiliate marketing efforts, including its ability to enter into
affiliation agreements with operators of local cable systems with a significant
number of subscribers or other
8
<PAGE>
arrangements for the airing of The Recovery Network, its ability to successfully
operate under the Nesting Contract, develop or acquire sufficient television
programming to enable the Recovery Network to expand its hours of broadcast,
achieve significant viewer loyalty, attract advertisers and develop or enter
into arrangements for the supply of products, such as videotapes, audio
cassettes and books to merchandise. The Company has limited experience in
developing and operating a cable television network and marketing recovery and
prevention-related products and services, and there is limited information
available concerning the potential performance or market acceptance of The
Recovery Network and recovery and prevention-related products and services.
There can be no assurance that the Company will be able to implement its
business plan successfully or that unexpected expenses, problems, or technical
difficulties will not occur which would result in material delays in its
implementation. See "Business -- The Recovery Network."
4. New Concept; Uncertainty of Market Acceptance of The Recovery Network
by Cable System Operators, Viewers and Advertisers; Limited Affiliation
Arrangements. The Recovery Network and the Company's recovery and
prevention-related products and services involve a new business concept. As is
typical in the case of a new concept in the entertainment industry, demand and
market acceptance of The Recovery Network and recovery and prevention-related
products and services is subject to a high level of uncertainty. The Company
has not conducted and does not intend to conduct any independent market or
concept feasibility studies, nor does it currently expect to conduct any
additional market testing activities. The Company's prospects will be
significantly affected by the success of its affiliate marketing efforts, the
acceptance of its programming by potential viewers and its ability to attract
advertisers. Achieving market acceptance for The Recovery Network and the
Company's recovery and prevention-related products and services will require
significant effort and expenditures by the Company to create awareness and
demand by viewers, advertisers and cable operators that potentially will carry
The Recovery Network. The Company has only recently launched The Recovery
Network nationally via satellite transmission for two hours of broadcast time
per day. In addition to The Recovery Network's distribution under the Nesting
Contract, it will be important for the Company to enter into affiliation
arrangements with a number of cable systems to significantly increase its
subscriber base. Although the Company believes that the socially responsible
nature of The Recovery Network's programming provides a valuable community
service, cable system operators may be reluctant to provide air time for The
Recovery Network and advertisers may be reluctant to pay for advertising time
until such time, if ever, as the Company is able to demonstrate meaningful
viewer loyalty. The Company's strategy and preliminary and future marketing
plans may be subject to change as a result of a number of factors, including
progress or delays in the Company's affiliate marketing efforts, the nature of
possible affiliation and other broadcast arrangements which may become
available to it in the future and factors affecting the cable television
industry. There can be no assurance that the Company's strategy will result in
initial or continued market acceptance for The Recovery Network and the
Company's recovery and prevention-related products and services. See "Business
- -- The Recovery Network."
5. Uncertainty of Program Development and Production and Program
Acquisition. The Company has only recently commenced production of its first
television programs. The Company will be required to commit considerable time,
effort, and resources to continue development and production of its
programming. The Company's development and production efforts are subject to
all of the risks inherent in the development and production of new programming,
including unexpected delays, expenses, technical problems and difficulties, as
well as the possible insufficiency of funds to complete satisfactory
development and production of programming, which could result in abandonment or
substantial change in programming. There can be no assurance that the Company's
program development and production efforts will be successfully completed on a
timely basis, or at all, or that unexpected events will not occur which would
result in increased costs or material delays in program development and
production and delays in the Company's ability to air original programming. The
Company's success will also be partially dependent upon its ability to acquire
or license suitable programming. The Company currently has no specific
arrangements for the acquisition or licensing of any programming and has
allocated only limited proceeds to acquire or license programming. Accordingly,
the Company's ability to obtain programming is subject to a high degree of
uncertainty. Failure to obtain sufficient programming on acceptable terms would
have a material adverse effect on the Company. There can be no assurance that
the Company will be able to license suitable programming on acceptable terms,
or at all. See "Business -- The Recovery Network -- Programming."
6. Dependence on Consultants and Third-Party Marketing Arrangements. The
Company has undertaken only limited marketing activities and has only limited
marketing experience and limited financial, personnel and
9
<PAGE>
other resources to undertake extensive marketing activities independently.
Accordingly, the Company has relied, and intends to continue to rely to a large
extent, on arrangements with third parties for the marketing and promotion of
The Recovery Network and the Company's recovery and prevention-related products
and services, including arrangements with political and marketing consultants,
grassroots organizations and the Partnership. The marketing efforts of the
Company's consultants and the support of local and national grassroots
organizations are important for obtaining the support of local communities
which the Company believes is necessary to persuade the operators of local
cable systems to carry The Recovery Network. The Company's success is
substantially dependent upon the efforts of these third parties and the
continued availability of their services as needed by the Company. While the
Company believes that third-party marketers and consultants will have an
economic motivation to market and promote The Recovery Network and the
Company's recovery and prevention-related products and services, the time and
resources devoted to these activities generally will be contributed and
controlled by such third parties and not by the Company. Many of these
arrangements are relatively short-term, or are informal arrangements. There can
be no assurance that any such third parties will continue to offer their
services to the Company or that the Company will be able to enter into other
marketing arrangements on commercially reasonable terms or at all. Moreover,
there can be no assurance that the efforts of any third parties will result in
market acceptance by cable system operators or viewers. See "Business -- The
Recovery Network -- Affiliate Marketing Strategy."
7. Dependence upon ATN; Broadcast Interruptions and Equipment Failures.
ATN's subscribers currently represent substantially all of the households
which receive broadcast of The Recovery Network's programming. The Company is
dependent upon ATN to broadcast its programming to ATN's subscribers and to
provide the necessary services to enable The Recovery Network to broadcast its
programming through cable systems with which the Company directly enters into
affiliation agreements. It is possible that ATN or its affiliates could
experience broadcast interruptions and equipment failures which could last for
a significant period of time. Broadcast interruptions or equipment failures
affecting broadcasting of The Recovery Network's programming could adversely
affect viewer perception of, and advertiser confidence in, The Recovery Network
and could result in loss of advertising revenue, which could have a material
adverse effect on the Company. The Company's prospects will be affected by
ATN's ability to maintain its existing subscriber base and to enter into
additional affiliation agreements to expand its subscriber base. Although the
Company believes that ATN has an economic motivation to enter into and maintain
affiliations with cable systems, ATN has complete discretion as to the cable
systems with which it enters into and maintains affiliations. There can be no
assurance that ATN will be able to increase its subscriber base or that ATN's
affiliates will not terminate their relationship with ATN. Moreover, the
Nesting Contract with ATN expires in April 1998 unless renewed by both parties
and there can be no assurance that it will be renewed on terms favorable to the
Company or at all. Failure to renew the Nesting Contract, in the absence of a
similar arrangement for the broadcast of The Recovery Network's programming
would have a material adverse effect on the Company. See "Business -- The
Recovery Network" and "Certain Transactions."
8. Conflicts of Interest. Mr. George H. Henry, the Chairman of the Board
of the Company, is the Chairman of the Board and Chief Executive Officer and a
principal shareholder of ATN. Mr. William D. Moses, the President and Chief
Executive Officer of the Company, is a principal shareholder of ATN. As a
result, conflicts of interest may arise from such officers' respective
positions with and interests in ATN. There can be no assurance that any
conflict of interest that arises will be resolved favorably to the Company. See
"Certain Transactions."
9. Risks Relating to Joint Venture. The Company has only recently entered
into a joint venture arrangement with TCI Online RecoveryNet Holdings, Inc.
("TCII"), pursuant to which Recovery Interactive was formed. The prospects of
Recovery Interactive will be dependent on its ability to finish construction of
its web site and its ability to enter into arrangements with managed care and
insurance companies for the delivery of behavioral health products and
services. The Company and TCII have each made a capital contribution to
Recovery Interactive in the amount of $300,000. There can be no assurance that
these contributions by the Company and TCII will be sufficient to fund Recovery
Interactive's implementation of its business plan without significant
additional capital. There can be no assurance that either the Company or TCII
will be able to provide any additional funding for Recovery Interactive or that
Recovery Interactive will be able to obtain any additional capital it may
require from third parties. The joint venture arrangement is subject to
termination by either party under certain conditions. Although the Company
believes that the joint venture will provide the Company with significant
opportunities relating to an Internet business there can be no assurance that
the joint venture will be commercially successful or will not be terminated by
TCII. See "Business -- Recovery Interactive."
10
<PAGE>
10. Risks Relating to the Development and Supply of Recovery Related
Products; Risks Related to Recovery Direct; Uncertainty of Commercial
Acceptance of Recovery Related Products. To date, the Company has not developed
or entered into any arrangements for the supply of recovery and
prevention-related products to market. Development of such products is subject
to all of the risks associated with the development of new products, including
unexpected delays, as well as insufficiency of funds to complete satisfactory
development of a product, which could result in abandonment or substantial
change in the product. To the extent the Company enters into arrangements for
the supply of recovery and prevention-related products with third parties, the
Company will be dependent upon its suppliers to, among other things, satisfy
the Company's quantity and performance specifications and to dedicate
sufficient production capacity to meet the Company's scheduled delivery
requirements. Additionally, the Company has not conducted and does not intend
to conduct any formal market studies or feasibility studies for any potential
products. Achieving market acceptance for recovery and prevention-related
products will require substantial marketing efforts, expenditure of significant
funds and use of commercial time on The Recovery Network and Recovery Talk
Radio otherwise available for sale to advertisers to inform potential customers
of potential products. There can be no assurance that the Company will develop
or enter into arrangements for the supply of recovery and prevention-related
products or that the Company's efforts will result in successful product
commercialization or initial or continued market acceptance for any potential
recovery and prevention-related products. See "Business -- Merchandise Sales."
11. Risks Relating to Possible Acquisitions. The Company may seek to
expand or compliment its operations through the possible acquisition or
licensing of programs or programming libraries or companies which the Company
believes are compatible with its business. While the Company is exploring
acquisition opportunities, as of the date of this Prospectus, the Company has
no definitive plans, agreements, commitments, arrangements or understandings
with respect to any acquisition. The Company has not established any minimum
criteria for any acquisition and management will have complete discretion in
determining the terms of any such acquisition. Consequently, there is no basis
for the investors in this offering to evaluate the specific merits or risks of
any potential acquisitions that the Company may undertake. There can be no
assurance that the Company will be able to ultimately effect any acquisition or
successfully integrate into its operations any business which it may acquire.
Under Colorado law, various forms of business combinations can be effected
without shareholder approval and, accordingly, investors in this offering will,
in all likelihood, neither receive nor otherwise have the opportunity to
evaluate any financial or other information which may be made available to the
Company in connection with any acquisition and must rely entirely upon the
ability of management in selecting, structuring and consummating acquisitions
that are consistent with the Company's business objectives. Although the
Company will endeavor to evaluate the risks inherent in a particular
acquisition, there can be no assurance that the Company will properly ascertain
or assess all significant risks factors prior to consummating any acquisition.
12. Factors Affecting Cable Television Industry. The Company's business is
concentrated in the cable television industry which is continually evolving and
subject to rapid change. Recently, direct satellite services ("DSS") and
digital cable deployment and advances in signal compression/decompression
technologies have begun to create additional channel capacity and new
opportunities for television networks. There can be no assurance, however, that
DSS or such other technologies will be further developed or utilized to expand
channel capacity. The Company's growth strategy is based, in part, upon the
continued growth of the cable and DSS industries and the expected increased
availability of channel capacity. If the cable industry grows slower than
expected or ceases to grow or if channel capacity does not expand as rapidly as
expected, or ceases to grow, or if channel capacity does not expand as rapidly
as expected, or at all, the Company may not be able to enter into a sufficient
number of affiliation agreements or other arrangements for the carriage of The
Recovery Network, which would have a material adverse effect on the Company.
See "Business -- The Cable Television Industry."
13. Government Regulation. The cable television industry is subject to
extensive and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the Federal
Communications Commission ("FCC"). Regulations governing the rates that can be
charged to subscribers by cable systems not in markets subject to effective
competition from other multichannel video program distributors could adversely
affect the ability of cable systems with limited channel capacity to finance
rebuilding or upgrading efforts to increase channel capacity or otherwise
restrict their ability to add new programming such as The Recovery Network. In
addition, federal "must-carry" rules requiring cable operators to devote up to
one-third of their channels to carriage of local commercial TV broadcast
stations (and additional channels for noncommercial educational TV stations);
commercial leased access rules designating 10% to 15% of system
11
<PAGE>
channels for lease by unaffiliated programmers; and local regulatory
requirements mandating additional channel set-asides for public, governmental
and educational use could reduce channel availability which might otherwise be
available for The Recovery Network on many cable systems. Statutory provisions
and FCC rules governing relationships among cable systems and competing forms of
multichannel video program distribution, as well as the relationships between
the Company and its cable system affiliates could adversely affect the
marketability of the Company's programming and the ability of the Company to
enter into arrangements for the distribution of its programming. Since ATN is a
cable program provider, the aforementioned regulatory constraints on the
availability of channel capacity on cable systems and FCC regulations governing
relationships between program providers and cable system affiliates also affect
distribution by ATN of The Recovery Network's programming as part of the
services provided to cable systems by ATN. Although program providers that do
not hold FCC licenses or operate distribution outlets, such as The Recovery
Network and Recovery Talk Radio, are not within the FCC's direct jurisdiction,
the satellite uplink provided by ATN must be licensed by the FCC, and ATN must
operate and maintain the uplink in accordance with the FCC's technical
standards. If ATN does not comply with the FCC's licensing and technical
standards, ATN could lose the ability to use its uplink and would be unable to
deliver The Recovery Network's programming to ATN's cable system affiliates. In
addition, the cable systems and radio stations that carry the Company's programs
are regulated by the FCC and, therefore, are subject to its rules and policies,
such as those relating to sponsorship identification, broadcast of indecent
language, provision of equal opportunities for political candidates and related
measures pertaining to program content and format. Failure of the Company's
programs to comply with one or more of these rules could subject the cable
systems or radio stations to FCC fines or other sanctions, adversely affect the
Company's relationship with such entities and result in the discontinuation of
carriage of the Company's programming by such entities.
Federal and state regulation governing interactive or on-line information
services and potentially affecting the activities of Recovery Interactive is
currently evolving. Regulations governing purchases of information services via
toll-free telephone calls and laws governing obscene, indecent, or otherwise
unlawful communications have been or may be adopted, and there can be no
assurance whether such laws and regulations will be applied to, and therefore
affect, the business and operations of Recovery Interactive. Additional laws
and regulations are currently being considered by the federal government and
many state and local governments. There can be no assurance that these or
existing laws or regulations will not be applied in a manner that will
adversely affect the Company's business or operations.
Proposals for additional or revised statutory or regulatory requirements
are considered by Congress, the FCC and state and local governments from time
to time, and a number of such proposals are currently under consideration.
Amendments to or interpretations of existing statutes and regulations, adoption
of new statutes or regulations or expansion of the Company's operations could
further restrict channel availability for The Recovery Network, require the
Company to alter methods of operation (the cost of which may be prohibitive)
limit the types of programming or services that the Company intends to provide,
modify the content of its programming or require the Company to obtain
regulatory approvals, any of which could result in material interruptions of
operation. There can be no assurance that the Company will be able to comply
with additional applicable statutory or regulatory requirements. See "Business
- -- Government Regulation."
14. Competition. The Recovery Network will compete with all other existing
and planned television networks and other television programming for available
air time, channel capacity, advertiser revenue and revenue from license fees.
Many of these television networks and producers of television programming are
well established, have reputations for success in the development and operation
of television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than the
Company. In addition, if cable television channel capacity increases as the
Company expects, competition from smaller competitors and other start-up
television networks could increase significantly. Although the Company is not
aware of any television network with programming focusing principally on
Recovery Issues and Prevention Issues, there are an increasing number of
recently introduced or planned cable networks which focus on overall life-style,
self-improvement and health themes and there are numerous programs which address
Recovery Issues and Prevention Issues. Moreover, because The Recovery Network's
programming is intended to provide information and support to persons facing
Recovery Issues and Prevention Issues, The Recovery Network and the Company's
12
<PAGE>
recovery and prevention-related products and services will compete with other
products and services which perform similar functions, such as support groups,
self- help videos, audio cassettes and books and helplines. There can be no
assurance that the Company will be able to successfully compete for air, time,
channel capacity, advertiser time or viewership. See "Business -- Competition."
15. Uncertainty of Protection of Proprietary Information. The Company has
pending registration applications in the United States Patent and Trademark
Office for four trademarks, including the "Recovery Network" trademark. The
Company believes that its trademarks and copyrights, including "The Recovery
Network" tradename and the signature look of the network, have significant
value and are important to the marketing and promotion of The Recovery Network
and the Company's recovery and prevention-related products and services.
Although the Company believes that its trademarks and copyrights do not and
will not infringe trademarks or violate proprietary rights of others, it is
possible that existing trademarks and copyrights may not be valid or that
infringement of existing or future trademarks or proprietary rights may occur.
In the event the Company's trademarks or copyrights infringe trademarks or
proprietary rights of others, the Company may be required to change the name of
its network, proposed television shows, radio talk show or obtain a license.
There can be no assurance that the Company will be able to do so in a timely
manner, on acceptable terms and conditions, or at all. Failure to do any of the
foregoing could have a material adverse effect on the Company. In addition,
there can be no assurance that the Company will have the financial or other
resources necessary to enforce or defend a trademark infringement or
proprietary rights violation action. Moreover, if the Company's trademarks or
copyrights infringe the trademarks or proprietary rights of others, the Company
could, under certain circumstances, become liable for damages, which could have
a material adverse effect on the Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts, ideas and the documentation of
its television programming and concepts in development. However, such methods
may not afford complete protection and there can be no assurance that others
will not independently develop similar know-how or obtain access to the
Company's know-how, concepts, ideas and documentation. Furthermore, although
the Company has and expects to have confidentiality and non-competition
agreements with its employees and appropriate consultants, there can be no
assurance that such arrangements will adequately protect the Company's trade
secrets or that others will not independently develop programming similar to
that of the Company. See "Business -- Proprietary Information."
16. Insurance and Potential Liability. The operation of a television,
radio and interactive media business subjects the Company to possible liability
claims from others, including viewers, listeners and callers to the Help Line
for claims arising from the unauthorized use of name or likeness, invasion of
privacy, defamation and slander. The Company maintains general liability
insurance (with coverage in amounts of up to $1,000,000 per occurrence and
$2,000,000 per annum), including insurance relating to personal injury and
advertising injury, in amounts which the Company currently considers adequate.
Nevertheless, a partially or completely uninsured claim against the Company, if
successful, could have a material adverse effect on the Company. See "Business
- -- Insurance."
17. Control by Management. Upon the consummation of this offering, the
Company's current officers and directors will in the aggregate, beneficially
own approximately 27.2% of the outstanding Common Stock. Accordingly, such
persons may have the ability to exert significant influence over the election
of the Company's Board of Directors and other matters submitted to the
Company's shareholders for approval. See "Management" and "Principal
Shareholders."
18. Dependence on Key Personnel; Need for Qualified Personnel. The success
of the Company will be largely dependent on the personal efforts of George H.
Henry, Chairman of the Board of the Company, and William D. Moses, President,
Chief Executive Officer of the Company, and other key personnel. Neither of
such officers, nor any other officer of the Company, prior to joining the
Company, had been employed by a company in the areas of Recovery Issues or
Prevention Issues. Although the Company has entered into an employment
agreement with Mr. Moses, the Company does not have an employment agreement
with Mr. Henry, and the loss of the services of either of such officer or other
key personnel would have a material adverse effect on the Company's business
and prospects. The Company has applied for and intends to obtain key-man life
insurance in the amount of $2,000,000 on the life of each of Mr. Moses and Mr.
Henry. There can be no assurance, however, that the Company will be able to
obtain such insurance on commercially reasonable terms, or at all. The success
of
13
<PAGE>
the Company will also be dependent upon its ability to hire and retain
additional qualified industry, programming, marketing, financial and other
personnel. Competition for qualified personnel is intense, and there can be no
assurance that the Company will be able to hire or retain additional qualified
personnel. Any inability to attract and retain qualified personnel would have a
material adverse effect on the Company. See "Management."
19. Use of Proceeds to Repay Indebtedness; Benefits to Related Parties. The
Company has allocated approximately $2,181,040 (32.9%) of the net proceeds of
this offering to repay the Financing Notes (including an aggregate of $900,000
principal amount of Financing Notes held by officers, directors and/or principal
shareholders of the Company) and the Promissory Notes, plus accrued interest
thereon. Accordingly, such proceeds will not be available for other purposes.
The Company will also be required to make payments under the Nesting Contract to
ATN, an affiliate of Messrs. Henry and Moses, for ATN Services (in an amount not
to exceed $60,000 per month during the first six months of the contract and
$65,000 per month during the seventh through twelfth months of the contract). As
a result, the Company has allocated approximately $1,014,000 of the net proceeds
of this offering to make required payments to ATN under the Nesting Contract.
Additionally, to the extent cash flow from operations is insufficient for such
purposes, a portion of the proceeds allocated to working capital may be utilized
to pay a portion of the salary and benefits of the Company's officers estimated
to be approximately $442,000 over the twelve months following the consummation
of this offering. See "Use of Proceeds," "Business -- Overview -- The Recovery
Network," "Management" and "Certain Transactions."
20. No Dividends. To date, the Company has not paid any cash dividends on
the Common Stock and does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. In addition, the payment of cash dividends may
be limited or prohibited by the terms of future loan agreements or the future
authorization and issuance of Preferred Stock. See "Dividend Policy."
21. Possible Adverse Effect of Outstanding Options and Warrants. As of the
date of this Prospectus, there are 123,039 shares reserved for issuance upon
exercise of outstanding non-plan stock options, of which 110,423 are exercisable
at an exercise price of $2.32 per share, 2,867 are exercisable at an exercise
price of $.77 per share and 9,749 are exercisable at an exercise price of $5.00
per share; 30,768 shares are reserved for issuance upon exercise of outstanding
options under the Company's 1996 Employee and Consultants Stock Option Plan
which are exercisable at $5.00 per share; 113,652 shares are reserved for
issuance upon exercise of outstanding options under the Company's 1996 Board of
Directors and Advisory Board Retainer Plan which are exercisable at $5.00 per
share; and 205,580 shares are reserved for issuance upon exercise of outstanding
options under the 1997 Management Bonus Plan, all of which are exercisable at
$5.00 per share. In addition, as of the date of this Prospectus, there are
515,498 shares reserved for issuance upon exercise of outstanding Warrants,
including 500,000 shares reserved for issuance upon exercise of the Financing
Warrants. The Financing Warrants are exercisable until March 6, 2002 at a price
of $4.00 per share. To the extent warrants or options are exercised, dilution of
the interests of the Company's Common Stock may occur. Moreover, the terms upon
which the Company will be able to obtain additional equity financing may be
adversely affected since the holders of outstanding options and warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain capital on terms more favorable to the Company than those
provided by such options and warrants. See "Use of Proceeds", "Plan of
Operation" and "Description of Securities -- Recent Financing".
22. Substantial Dilution. Investors purchasing Common Stock in this
offering will incur immediate and substantial dilution of $3.74 (74.8%) per
share between the adjusted net tangible book value per share after this offering
and the initial public offering price of $5.00 per Share. See "Dilution."
23. Benefits of Offering to Existing Shareholders. Upon the consummation
of this offering, the existing shareholders of the Company will receive
substantial benefits, including the creation of a public trading market for
their securities (although substantially all of such shares are subject to a
12-month lock-up agreement with the Underwriter and will not be registered for
sale under the Securities Act and will thus be "restricted securities" as
defined in Rule 144 promulgated under the Securities Act) and the corresponding
facilitation of sales by such shareholders of their shares of Common Stock in
the secondary market, as well as an immediate increase in net tangible book
value of $1.32 per share to such shareholders based upon the adjusted net
tangible book value per share after this offering and the initial public
offering price per share offered hereby. If, at the time the existing
shareholders are able to sell their shares of Common Stock in the public
market, the market price per share remains at the $5.00 initial public offering
price (of which there can be no assurance) such shareholders would realize an
aggregate gain of $8,949,649 ($3.55 per share) on the sale of all of their
existing shares. See "Use of Proceeds," "Dilution," "Underwriting" and "Shares
Eligible for Future Sale."
14
<PAGE>
24. No Assurance of Public Market; Arbitrary Determination of Offering
Prices; Possible Volatility of Market Price of Common Stock and Warrants. Prior
to this offering, there has been no public trading market for the Common Stock
or Warrants. There can be no assurance that a regular trading market for the
Common Stock or Warrants will develop after this offering or that, if
developed, it will be sustained. The initial public offering prices of the
Shares and Warrants and the exercise price of the Warrants have been determined
arbitrarily by negotiation between the Company and the Underwriter and are not
necessarily related to the Company's asset value, net worth, results of
operations or any other established criteria of value and may not be indicative
of the prices that may prevail in the public market. In addition, the market
prices of the Company's securities following this offering may be highly
volatile as has been the case with the securities of other emerging companies.
Factors such as the Company's operating results, announcements by the Company
or its competitors, introduction of new programs by the Company or its
competitors, changes in financial estimates of securities analysts and factors
effecting the cable television industry generally may have a significant impact
on the market price of the Company's securities. Additionally, in recent years,
the stock market has experienced a high level of price and volume volatility
and market prices for the stock of many companies, particularly of small and
emerging growth companies, the common stock of which trade in the
over-the-counter market, have experienced wide price fluctuations which have
not necessarily been related to the operating performance of such companies.
See "Underwriting."
25. Possible Delisting of Securities from Nasdaq Systems; Risks Relating
to Penny Stocks. It is currently anticipated that the Common Stock and Warrants
will be eligible for listing on the Nasdaq SmallCap Market upon the completion
of this offering. In order to continue to be listed on the Nasdaq SmallCap
Market, however, the Company must maintain $2,000,000 in total assets, a
$200,000 market value on the public float and $1,000,000 in total capital and
surplus. In addition, continued inclusion requires two market-makers and a
minimum bid price of $1.00 per share; provided, however, that if the Common
Stock falls below such minimum bid price it will remain eligible for continued
inclusion in the Nasdaq SmallCap Market if the market value of the public float
is at least $1,000,000 and the Company has $2,000,000 in capital and surplus.
The Nasdaq SmallCap Market has recently proposed new maintenance criteria
which, if implemented, would eliminate the exception to the minimum bid price
of $1.00 per share and require, among other things, $2,000,000 in net tangible
assets, $1,000,000 market value on the public float and adherence to certain
corporate governance provisions. The failure to meet these maintenance criteria
in the future may result in the delisting of the Common stock and Warrants from
the Nasdaq SmallCap Market, and trading, if any, in the Common Stock and
Warrants would thereafter be conducted in the non-Nasdaq over-the-counter
market. As a result of such delisting, an investor could find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock and Warrants.
In addition, if the Common Stock and Warrants were to become delisted from
trading on the Nasdaq SmallCap Market and the trading price of the Common Stock
were to fall below $5.00 per share, trading in the Common Stock would also be
subject to the requirements of certain rules promulgated under the Exchange
Act, which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any
non-Nasdaq equity security that has a market price of less than $5.00 per
share, subject to certain exceptions). Such rules require the delivery, prior
to any penny stock transaction, of a disclosure schedule explaining the penny
stock market and the risks associated therewith and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors (generally defined as an
investor with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 individually or $300,000 together with a spouse). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. The broker-dealer also must disclose the
commissions payable to the broker-dealer, current bid and offer quotations for
the penny stock and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Such information must be provided to the customer orally or in
writing before or with the written confirmation of trade sent to the customer.
Monthly statements must be sent disclosing recent price information for
15
<PAGE>
the penny stock held in the account and information on the limited market in
penny stocks. The additional burdens imposed upon broker-dealers by such
requirements could, in the event the Common Stock were deemed to be a penny
stock, discourage broker-dealers from effecting transactions in the Common
Stock which could severely limit the market liquidity of the Common Stock and
the ability of purchasers in this offering to sell the Common Stock in the
secondary market.
26. Potential Adverse Effect of Warrant Redemption. The Warrants are
subject to redemption by the Company, at any time commencing , 1998, upon
notice of not less than 30 days, at a price of $.10 per Warrant, provided that
the closing bid quotation of the Common Stock on all 20 trading days ending on
the third day prior to the day on which the Company gives notice (the "Call
Date") has been at least 150% (currently $8.25, subject to adjustment) of the
then effective exercise price of the Warrants and the Company obtains the
written consent of the Underwriter to such redemption prior to the Call Date.
Redemption of the Warrants could force the holders to exercise the Warrants and
pay the exercise price at a time when it may be disadvantageous for the holders
to do so, to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants, or to accept the redemption price, which
is likely to be substantially less than the market value of the Warrants at the
time of redemption. See "Description of Securities -- Redeemable Warrants."
27. Possible Inability to Exercise Warrants. The Company intends to
qualify the sale of the Common Stock and the Warrants in a limited number of
states. Although certain exemptions in the securities laws of certain states
might permit the Warrants to be transferred to purchasers in states other than
those in which the Warrants were initially qualified, the Company will be
prevented from issuing Common Stock in such states upon the exercise of the
Warrants unless an exemption from qualification is available or unless the
issuance of Common Stock upon exercise of the Warrants is qualified. The
Company may decide not to seek or may not be able to obtain qualification of
the issuance of such Common Stock in all of the states in which the ultimate
purchasers of the Warrants reside. In such a case, the Warrants held by
purchasers will expire and have no value if such Warrants cannot be sold.
Accordingly, the market for the Warrants may be limited because of these
restrictions. Further, a current prospectus covering the Common Stock issuable
upon exercise of the Warrants must be in effect before the Company may accept
Warrant exercises. There can be no assurance the Company will be able to have a
prospectus in effect when this Prospectus is no longer current, notwithstanding
the Company's commitment to use its best efforts to do so. See "Description of
Securities -- Redeemable Warrants."
28. Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have 4,121,250 shares of Common
Stock outstanding (assuming no exercise of the Warrants or the other
outstanding options or warrants), of which the 1,600,000 shares, being offered
hereby, will be freely tradeable without restriction or further registration
under the Securities Act. All of the remaining 2,521,250 shares of Common Stock
outstanding are "restricted securities", as that term is defined in Rule 144
promulgated under the Securities Act, and in the future may be sold only
pursuant to an effective registration statement under the Securities Act, in
compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Of the 2,521,250 restricted shares, an
aggregate of 1,681,139 shares will be eligible for sale, without registration,
under Rule 144 (subject to certain volume limitations prescribed by such rule
and to the contractual restrictions described below), commencing 90 days
following the date of this Prospectus. In addition, 833,223 of such restricted
shares (not including 500,000 shares issuable upon exercise of the Bridge
Warrants) are subject to certain registration rights, and the Company has
granted the Underwriter demand and piggyback registration rights with respect
to the securities issuable upon exercise of the Underwriter's Warrants. No
prediction can be made as to the effect, if any, that sales of such securities
or the availability of such securities for sale will have on the market prices
prevailing from time to time. While all of the Company's officers, directors
and securityholders have agreed not to (i) sell or otherwise dispose of any
shares of Common Stock in any public market transaction (including pursuant to
Rule 144) or (ii) exercise any rights held by such holders to cause the Company
to register any shares of Common Stock for sale pursuant to the Securities Act
for a period of 12 months following the date of this Prospectus without the
Underwriter's prior written consent, the possibility that a substantial number
of the Company's securities may be sold in the public market may adversely
affect prevailing market prices for the Common Stock and Warrants and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Description of Securities," "Underwriting" and "Shares
Eligible for Future Sale."
16
<PAGE>
29. Limitation of Liability of Directors and Officers. As permitted by the
Colorado Business Corporation Act, the Company's Articles of Incorporation
provide that directors and officers of the Company will not be personally
liable to the Company or its shareholders for monetary damages for breach of
fiduciary duty as a director or officer, except for liability for breach of a
director's or officer's duty of loyalty to the Company or its shareholders, for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, for acts relating to unlawful distributions or for
any transaction from which the director or officer derived an improper personal
benefit. The Company's Articles of Incorporation also provide (subject to
certain exceptions) that the Company shall, to the maximum extent permitted
from time to time under the law of the State of Colorado, indemnify, and upon
request shall advance expenses to, any director or officer to the extent
permitted under such law as it may from time to time be in effect. The
Company's bylaws require the Company to indemnify, to the full extent permitted
by law, any director, officer, employee or agent of the Company for acts which
such person reasonably believes are not in violation of the Company's corporate
purposes as set forth in the Articles of Incorporation. As a result of these
provisions, shareholders may be unable to recover damages against the directors
and officers of the Company for actions taken by them which constitute
negligence, gross negligence, or a violation of their fiduciary duties, which
may reduce the likelihood of shareholders instituting derivative litigation
against directors and officers and may discourage or deter shareholders from
suing directors, officers, employees and agents of the Company for breaches of
their duty of care, even though such an action, if successful, might otherwise
benefit the Company and its shareholders. See "Management -- Limitation of
Liability of Directors and Officers."
30. Possible Restrictions on Market-Making Activities in the Company's
Securities. The Company believes that the Underwriter intends to make a market
in the Company's securities and may be responsible for a substantial portion of
the market making activities in such securities. Regulation M under the
Exchange Act may prohibit the Underwriter from engaging in any market-making
activities with regard to the Company's securities for the period from five
business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Underwriter of the exercise of outstanding
Warrants until the termination (by waiver or otherwise) of any right that the
Underwriter may have to receive a fee for the exercise of the Warrants
following such solicitations; and any period during which the Underwriter, or
any affiliated parties, participate in a distribution of any securities of the
Company for the account of the Underwriter or any such affiliate. As a result,
the Underwriter may be unable to provide a market for the Company's securities
during certain periods, including while the Warrants are exercisable. Any
temporary cessation of such market-making activities could have an adverse
effect on the liquidity of the Company's securities. See "Underwriting."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,600,000 Shares and
1,600,000 Warrants offered hereby (after deducting underwriting discounts and
commissions and other expenses of the offering) are estimated to be
approximately $6,622,000 ($7,686,880 if the Underwriter's over-allotment option
is exercised in full). The Company expects to use the net proceeds (assuming no
exercise of the Underwriter's over-allotment option) approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage
Application of Net Proceeds Dollar Amount of Net Proceeds
- --------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Repayment of outstanding indebtedness(1) ............... $2,181,040 32.9%
Programming expenses(2) .............................. 2,000,000 30.2
Sales and marketing(3) ................................. 1,835,000 27.7
Commencement of merchandising operations(4) ............ 172,000 2.6
Working capital and general corporate purposes(5) ...... 433,960 6.6
----------- ------
Total ................................................ $6,622,000 100.0%
=========== ======
</TABLE>
- ------------
(1) Represents amounts to be used for the repayment of (i) the $2,000,000
principal amount of the Financing Notes plus accrued and unpaid interest
thereon of approximately $60,000 and (ii) the $105,250 principal amount of
the Promissory Notes plus interest of $15,790. The Financing Notes bear
interest at the rate of 9% per annum and are repayable on the earlier of the
consummation of this offering or March 6, 1998. The net proceeds of the
Private Financing are being used by the Company for the costs of, among
other things, an affiliate marketing campaign in connection with the
national launch of The Recovery Network, programming expenses for the
production of Full Circle, Testimony and Bottoms, a capital contribution in
the amount of $200,000 to Recovery Interactive and payments under the
Nesting Contract with ATN in the amount of $102,000. The Promissory Notes
are due on the earlier of two business days after the consummation of this
offering and July 2, 1998. The net proceeds of the Promissory Notes were
used for working capital. See "Plan of Operation."
(2) Represents anticipated costs of approximately (i) $708,000 for the
production, editing and/or licensing of the Company's programming; (ii)
$38,000 for the production of programming for Recovery Talk Radio; (iii)
$1,014,000 for ATN Services under the Nesting Contract; and (iii)
approximately $240,000 for the salaries of three production personnel. See
"Business -- The Recovery Network -- Programming."
(3) Represents anticipated costs of approximately (i) $1,076,000 for an
affiliate marketing campaign and approximately $277,000 for salaries and
benefits of six marketing and sales personnel; (ii) $140,000 for the
development of the National Partnership for Recovery and Prevention; and
(iii) $342,000 associated with selling advertising time. See "Business --
The Recovery Network."
<PAGE>
(4) Represents expenses associated with the development of merchandising
operations for recovery and prevention-related products and services by
the Company's subsidiary, Recovery Direct and related salaries. See
"Business -- Merchandise Sales."
(5) Represents proceeds allocated to working capital and to general corporate
purposes. To the extent cash flow from operations is insufficient for such
purposes, a portion of the proceeds allocated to working capital may be
utilized to pay a portion of the salaries and benefits of the Company's
officers estimated to be approximately $442,000 over the twelve months
following the consummation of this offering.
If the Underwriter's over-allotment option in exercised full, the Company
will realize additional net proceeds of approximately $1,064,880. See
"Underwriting."
The allocation of the net proceeds from this offering set forth above
represents the Company's best estimate based upon its currently proposed plans
and assumptions relating to its operations and certain assumptions regarding
general economic conditions. If any of these factors change, the Company may
find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes.
18
<PAGE>
The Company anticipates that the net proceeds of this offering, together
with projected revenues from operations, will be sufficient to fund the
Company's operations and capital requirements for approximately 12 months
following the consummation of this offering. There can be no assurance,
however, that such funds will not be expended prior thereto due to
unanticipated changes in economic conditions or other unforeseen circumstances.
In the event the Company's plans change or its assumptions change or prove to
be inaccurate, the Company could be required to seek additional financing
sooner than currently anticipated. The Company has no current arrangements with
respect to, or potential sources of, any additional financing, and it is not
anticipated that existing shareholders will provide any portion of the
Company's future financing requirements. Consequently, there can be no
assurance that any additional financing will be available to the Company when
needed, on commercially reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in short-
term bank certificates of deposit, short-term securities, United States
Government obligations, money market instruments and/or other interest-bearing
investments.
DILUTION
As of March 31, 1997, the net tangible book value of the Company was
$(208,926) or approximately $(.08) per share of Common Stock. After giving
retroactive effect to the Pro Forma Adjustments (see footnote 1 of "Prospectus
Summary -- Summary Financial Information"), the pro forma net tangible book
value of the Company as of March 31, 1997 was $(184,970) or $(.07) per share.
After also giving effect to (i) the sale of the 1,600,000 shares of Common
Stock and 1,600,000 Warrants being offered hereby (less underwriting discounts
and commissions and estimated expenses of this offering) and (ii) non-recurring
charges of $1,150,475 relating to the Private Financing and the Promissory
Notes, the adjusted net tangible book value of the Company as of March 31, 1997
would have been approximately $5,210,558, or $1.26 per share, representing an
immediate increase in net tangible book value of $1.33 per share of Common
Stock to existing shareholders and an immediate dilution of $3.74 per share to
new investors. The following table illustrates this dilution to new investors
on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price ....................................... $5.00
Net tangible book value before Pro Forma Adjustments ..... $ (.08)
Increase attributable to Pro Forma Adjustments ........... .01
-------
Pro forma net tangible book value before this offering ...... (.07)
Increase attributable to new investors .................. $ 1.33
--------
Adjusted net tangible book value after offering ............ 1.26
------
Dilution to new investors ................................. $3.74
======
</TABLE>
The following table sets forth with respect to existing shareholders and
new investors in this offering, a comparison of the number of shares of Common
Stock acquired from the Company, the percentage of ownership of such shares,
the total cash consideration, the percentage of total cash consideration and
the average price per share.
<TABLE>
<CAPTION>
Total Cash Average
Shares Purchased Consideration Paid Price Per
----------------------- ------------------------- ----------
Number Percent Amount Percent Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders ...... 2,521,250 61.2% $ 3,656,601 31.4% $1.45
New Investors ............... 1,600,000 38.8 8,000,000 68.6 5.00
---------- ------ ------------ ------ ------
Total ..................... 4,121,250 100.0% $11,656,601 100.0%
========== ====== ============ ======
</TABLE>
The above tables assume no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$9,200,000 for 1,840,000 shares of Common Stock, representing approximately
68.6% of the total consideration for 42.2% of the total number of shares of
Common Stock outstanding. In addition, the above table assumes no exercise of
other outstanding stock options or warrants. As of the date of this Prospectus,
there are also outstanding Financing Warrants to purchase 500,000 shares of
Common Stock at an exercise price of $4.00 per share, other warrants to
purchase 15,498 shares of Common Stock
19
<PAGE>
at an exercise price of $3.87, outstanding stock options granted under the
Stock Option Plans to purchase an aggregate of 334,494 shares of Common Stock
at an exercise price of $5.00 per share and outstanding non-plan options to
purchase an aggregate of 113,290 shares of Common Stock at exercise prices
ranging from $.77 to $2.32.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock, and the
Board of Directors does not intend to declare or pay any dividends on its
Common Stock in the foreseeable future. The Board currently intends to retain
all available earnings (if any) generated by the Company's operations for the
development and growth of its business. The declaration in the future of any
cash or stock dividends on the Common Stock will be at the discretion of the
Board and will depend upon a variety of factors, including the earnings,
capital requirements and financial position of the Company and general economic
conditions at the time in question. In addition, the payment of cash dividends
on the Common Stock in the future could be limited or prohibited by the terms
of financing agreements that may be entered into by the Company (e.g., a bank
line of credit or an agreement relating to the issuance of other debt
securities of the Company) or by the terms of any Preferred Stock that may be
authorized and issued. See "Description of Securities."
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1997, (ii) the pro forma capitalization at such date after giving
retroactive effect to the Pro Forma Adjustments (See footnote 1 of "Prospectus
Summary -- Summary Financial Information"), and (iii) the pro forma
capitalization as adjusted to give effect to the sale of the Common Stock and
Warrants offered hereby and the anticipated application of the estimated net
proceeds therefrom (including the repayment of the Financing Notes and
Promissory Notes plus accrued interest thereon):
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------
Actual Pro Forma As Adjusted
-------------- --------------- ---------------------
<S> <C> <C> <C>
Short-term debt, including current portion of capital lease
obligation ................................................ $ 1,034,786 $ 1,163,420 $ 1,768
=========== =========== ==============
Long-term debt and obligation under capital lease, net of
current maturities ....................................... $ 1,687 $ 1,687 $ 1,687
----------- ----------- --------------
Shareholders' equity (deficit):
Common Stock, $.01 par value: 10,000,000 shares
authorized; 2,511,250 shares issued and
outstanding, actual; 2,521,250 shares issued and
outstanding, pro forma; 4,121,250 shares issued
and outstanding, as adjusted(1) ........................ 25,112 25,212 41,212
Additional paid-in capital .............................. 4,152,852 4,176,708 10,782,501
Notes receivable .......................................... (9,900) (9,900) (9,900)
Prepaid consulting costs ................................. (11,250) (11,250) (11,250)
Deficit accumulated in the development stage ............ (4,365,740) (4,365,740) (5,592,005)(2)
----------- ----------- --------------
Total shareholders' equity (deficit) .................. (208,926) (184,970) 5,210,558
----------- ----------- --------------
Total capitalization .............................. $ (207,239) $ (183,283) $ 5,212,245
=========== =========== ==============
</TABLE>
- ------------
(1) Does not include: (i) 1,600,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 320,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 15,506
shares of Common Stock reserved for issuance upon exercise of stock
options available for future grant under the Stock Option Plans; (iv)
334,494 shares of Common Stock reserved upon exercise of outstanding
options granted under the Stock Option Plans; (v) 113,290 Shares of Common
Stock reserved for issuance upon exercise of outstanding non-plan stock
options; (vi) 515,498 Shares of Common Stock reserved for issuance upon
exercise of warrants which have been issued by the Company, including
500,000 shares of Common Stock issuable upon exercise of the Financing
Warrants; and (vii) an indeterminable number of shares of Common Stock
reserved for issuance in the event the Company fails under certain
circumstances to register, or to maintain an effective registration
statement with respect to, the Financing Shares and the Financing Warrant
Shares. See "Plan of Operation -- Liquidity and Capital Resources,"
"Management -- Stock Option Plans," "Description of Securities" and
"Underwriting."
(2) Includes non-recurring charges of approximately (i) $943,598 representing
the loan discount related to the Private Financing, $201,617 representing
the issuance costs of the Financing Notes and (ii) $5,260 representing
deferred financing costs relating to the Promissory Notes.
21
<PAGE>
PLAN OF OPERATION
General
The Company was organized in 1992, was reorganized in 1995 and is in the
development stage. Since its inception, the Company has been primarily engaged
in test broadcasting of The Recovery Network in limited markets (which was
launched nationally in 1995), affiliate marketing, development, acquisition and
production of programming, establishing Radio Talk Recovery and the Help Line
and forming relationships with individuals and organizations in the recovery
field.
The Company has not generated any meaningful revenues and does not expect
to generate any meaningful revenues for the foreseeable future. To date, the
Company has incurred significant net losses, including net losses of $1,223,829
and $2,286,273 for the year ended June 30, 1996 and nine months ended March 31,
1997, respectively. Since March 31, 1997, the Company has continued to incur
significant losses. The Company believes that generation of meaningful revenues
will be dependent upon the Company entering into affiliation agreements with
local cable systems with a significant number of subscribers, developing
television programming to enable The Recovery Network to expand its hours of
broadcast, achieving significant viewer loyalty, attracting advertisers and
developing or entering into arrangements for the supply of products, such as
videotapes, audio cassettes and books, to merchandise. The Company expects to
incur substantial up-front capital expenditures and operating costs in
connection with the operation and expansion of The Recovery Network, satellite
transmission of its programming and the development and production of
television programming, which will result in significant losses for the
foreseeable future. The Company will also incur a non-recurring charge during
the fiscal quarter in which this offering is consummated of approximately
$1,150,475 relating to the Private Financing.
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under the Nesting Contract. Pursuant to the Nesting
Contract, ATN provides the ATN Services on its satellite transponder to The
Recovery Network for two hours of broadcast time every day to subscribers of
cable systems with which ATN has affiliation agreements. Currently, The
Recovery Network is broadcast one hour in the morning to approximately 13
million subscribers and one hour in the evening to approximately 3.5 million
subscribers. In addition to the distribution under the Nesting Contract, the
Company is seeking two hours of broadcast time per day in other local cable
systems in a large number of markets. The Company has identified all local
cable systems in the United States with at least 50,000 subscribers and is
engaged in a general marketing campaign ("affiliate marketing") directed at
those 259 systems. The Company is also targeting a more focused affiliate
marketing effort on 11 major cities whose communities contain 103 of those 259
systems.
The Company anticipates that it will generate revenues from sales of
advertising on The Recovery Network and Recovery Talk Radio, merchandising
recovery-related products and services on The Recovery Network, Recovery Talk
Radio and the Company's site on the world wide web by seeking sponsorships for
its programming and from license fees from cable systems for its programming.
The Company does not expect that it will generate any meaningful revenues from
license fees until such time, if ever, that The Recovery Network enters into
affiliation agreements providing the Company with a significant subscriber
base. There can be no assurance that the Company will be able to enter into
affiliation agreements with local cable systems with a sufficient number of
subscribers, achieve significant viewer loyalty or attract advertisers for The
Recovery Network, generate meaningful revenues or achieve profitable
operations. The Company also anticipates that Recovery Interactive will
generate revenue from monthly subscriber fees from managed care companies,
insurance companies and employers for delivering mental and behavioral health
benefits to covered individuals and merchandising.
Liquidity and Capital Resources
The Company's primary capital requirements will be to fund the costs of
its affiliate marketing efforts, sales of advertising time and producing its
programming, satellite transponder costs, costs for uplink and transmission
services under the Nesting Contract and working capital expenses.
The Company's capital requirements have been and will continue to be
significant and its cash requirements have been exceeding its cash flow from
operations. At March 31, 1997, the Company had a working capital
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deficit of $571,319 due to, among other things, costs associated with program
development and affiliate marketing efforts. As a result, the Company has been
substantially dependent on loans from its shareholders and private placements
of its debt and equity securities to fund its operations.
During the period from November 1995 through April 1996, the Company
issued in a private placement 322,663 shares of Common Stock at a price of
$2.32 per share for proceeds of approximately $749,500. The Company issued to a
director of the Company 17,220 shares of Common Stock valued at $2.32 per share
in consideration for certain strategic and operational consulting services
rendered by him from June 1995 to May 1996.
During April 1996, the Company issued, pursuant to a shareholder rights
offering, 259,281 shares of Common Stock and received proceeds of $200,767. In
connection with the shareholder rights offering, the Company granted each
shareholder of record one transferable right for each share of Common Stock
owned by such shareholder. Five rights entitled a shareholder to purchase one
share of Common Stock at a price of approximately $.77 per share.
During the period from July 1996 through October 1996, the Company issued
10% Convertible Promissory Notes (the "Convertible Notes") in the aggregate
principal amount of $310,000. The Convertible Notes became due and payable on
the earlier of the first anniversary of their issuance or the consummation of
an equity offering with gross proceeds of at least $1.5 million. Convertible
Notes in the aggregate principal amount of $60,000 were issued to two directors
and/or officers of the Company. The principal and interest on the Convertible
Promissory Notes was convertible at any time at the option of the holder into
shares of Common Stock at a conversion price of $3.87 per share of Common
Stock. Upon conversion on or before maturity, the noteholder was entitled to
receive warrants to acquire shares of Common Stock in an amount that equaled
twice the number of shares issued upon conversion. If the Convertible Notes
were held to maturity and not converted, the noteholder was entitled to receive
warrants to purchase the number of shares of Common Stock that equaled the
number of shares the principal on the Note would have been converted into. All
of such warrants are exercisable at any time during the period within two years
after the date of issuance.
In October 1996, the holder of a convertible promissory note dated October
9, 1994 in the aggregate principal amount of $20,000 agreed to a modification
of the terms of the note pursuant to which interest was paid in cash and the
principal amount of the note was converted into 6,888 shares of Common Stock at
a price of $2.90 per share.
From October 1996 through January 1997, the Company issued in a private
placement 138,761 shares of Common Stock at a price of $3.48 per share for
proceeds of approximately $483,500. The Company issued 7,749 shares in
consideration of services rendered in connection with such offering. The
purchasers were granted certain registration rights with respect to the Common
Stock issued in the private placement. See "Description of Securities --
Registration Rights."
During November 1996, in order to induce the noteholders to convert the
Convertible Notes, the Company offered the noteholders who converted their
Convertible Notes and exercised the warrants issuable upon conversion of the
Convertible Notes, a reduction in the conversion price of $3.87 per share of
Common Stock to an effective price of approximately $3.68 per share and a
reduction of the exercise price of the warrants from $3.87 per share to $2.32
per share. The converting noteholders were also granted certain registration
rights with respect to the shares of Common Stock issued upon conversion of the
Convertible Notes and shares received upon the exercise of the warrants. In
November and December 1996, Convertible Notes in the aggregate principal amount
of $250,000 and interest of approximately $11,500 were converted into an
aggregate of 71,033 shares of Common Stock. The noteholders also received and
exercised warrants for 142,065 shares of Common Stock resulting in proceeds to
the Company of approximately $330,000. The remaining outstanding Convertible
Note in the principal amount of $60,000 was repaid in April 1997 from the net
proceeds of the Private Financing, and in connection with such repayment the
Company issued to the holder warrants to purchase 15,498 shares of Common
Stock, exercisable at a price of $3.87 per share.
In November and December 1996, certain directors and shareholders
exercised options to acquire 73,615 shares of Common Stock at an exercise price
of $2.32 per share resulting in proceeds to the Company of approximately
$171,000.
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In March and April 1997, the Company completed a private financing
pursuant to which it issued to 20 "accredited investors" an aggregate of 40
Units consisting of an aggregate of (i) $2,000,000 principal amount of
unsecured non-negotiable promissory notes which bear interest at the rate of 9%
per annum and are due on the earlier of the consummation of this offering or
March 6, 1998; (ii) 400,000 shares of Common Stock; and (iii) warrants to
purchase an aggregate of 500,000 shares of Common Stock at an exercise price of
$4.00 per share. The offering price was $50,000 per Unit. After payment of
$200,000 in placement agent fees to the Underwriter, which acted as placement
agent for the Company in connection with the Private Financing, and other
offering expenses of approximately $262,000, the Company received net proceeds
of approximately $1,538,000 from the sale of the Units. The net proceeds of the
Private Financing are being used by the Company for, among other things, an
affiliate marketing campaign in connection with the national launch of The
Recovery Network, programming expenses for the production of Full Circle,
Testimony and Bottoms, a capital contribution in the amount of $200,000 to
Recovery Interactive and payments under the Nesting Contract with ATN in the
amount of $102,000. The Company intends to use a portion of the proceeds of
this offering to repay the entire principal amount of, and accrued interest on,
the Financing Notes. See "Use of Proceeds" and "Description of Securities --
Recent Financing."
In July 1997, the Company issued to one individual $105,250 aggregate
principal amount of the Promissory Notes are due on the earlier of (i) the date
which is two business days following the consummation of this offering and (ii)
July 2, 1998; provided, however, that in the event that the Promissory Notes are
repaid prior to the one year anniversary, the lenders will receive a full year's
interest. The Company paid to the lender a loan origination fee in an amount
equal to 5% of the Promissory Notes, or approximately $5,260. The net proceeds
from the issuance of the Promissory Notes were used for working capital. The
Company intends to repay the Promissory Notes, plus $15,790 of interest thereon,
from the net proceeds of this offering.
The Company anticipates that the net proceeds of this offering, together
with projected revenues from operations, will be sufficient to fund the
Company's operations and capital requirements for approximately 12 months
following the consummation of this offering. There can be no assurance,
however, that such funds will not be expended prior thereto due to
unanticipated changes in economic conditions or other unforeseen circumstances.
In the event the Company's plans change or its assumptions change or prove to
be inaccurate, the Company could be required to seek additional financing
sooner than currently anticipated. The Company has no current arrangements with
respect to, or potential sources of, any additional financing, and it is not
anticipated that existing shareholders will provide any portion of the
Company's future financing requirements. Consequently, there can be no
assurance that any additional financing will be available to the Company when
needed, on commercially reasonable terms, or at all. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, requiring it to curtail and possibly cease its operations. In
addition, any additional equity financing may involve substantial dilution to
the interests of the Company's then existing shareholders.
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BUSINESS
General
The Company, a development stage company, was organized to provide
information, interaction and support via television, radio and interactive media
services to persons affected by or afflicted with alcoholism, drug and substance
abuse, eating disorders, depression and a variety of behavioral and mental
health problems ("Recovery Issues"), as well as to persons seeking to prevent
the onset of these problems and select positive lifestyle choices ("Prevention
Issues"). The Company currently addresses Recovery Issues and Prevention Issues
through The Recovery Network, a cable television network which commenced
test-broadcasting on a limited basis in March 1996, was launched nationally via
satellite transmission in April 1997 and is currently airing on over 150 cable
systems in 60 cities nationwide; Recovery Talk Radio, a nationally syndicated
talk radio program introduced in December 1996 currently airing every Sunday
morning from 8:00 a.m. to 9:00 a.m. (EST) on 56 stations and from 9:00 a.m. to
10:00 a.m. (EST) on 47 stations; and a toll-free telephone helpline (the "Help
Line") which offers information to viewers of The Recovery Network about where
to obtain information and help in their communities. The Company also owns a 50%
interest in RecoveryNet Interactive, L.L.C. ("Recovery Interactive"), a joint
venture with TCII (an affiliate of Tele-Communications, Inc., "TCI"), formed in
August 1996 to commence a business to provide health care products and services
to managed care organizations and other organizations offering or providing
behavorial health care services, as well as to provide information, interaction
and support regarding Recovery Issues and Prevention Issues through an
integrated multimedia platform.
Overview
The Recovery Market
The Company believes that the market for recovery and prevention-oriented
programming consists of four groups: (i) friends, families and co-workers of
persons afflicted with Recovery Issues (the "Affected Others"); (ii) persons
who are already in recovery ("Persons in Recovery") and seek the daily support
and connection to others in recovery; (iii) afflicted persons who are not yet
in recovery either because they are unaware of the resources that are available
or are unwilling or unable to attend meetings or seek help publicly ("Afflicted
Persons"); and (iv) persons concerned about Prevention Issues, particularly
families with children. The Company believes that these four groups make up a
significant portion of the nation's population.
The Company expects that a substantial portion of its audience will be the
Affected Others. According to The American Journal of Psychiatry Official
Practice Guide published in November 1995, approximately 56 million persons in
the United States are directly affected by alcohol abuse or addiction alone.
The National Association for Children of Alcoholics estimated that in 1995
there were approximately 26.8 million children of alcoholics in the United
States. A substantial number of employers and coworkers are affected by alcohol
abuse in the workplace.
Persons in Recovery include the millions of Americans who regularly attend
meetings of various support groups, such as Alcoholics Anonymous, Al-Anon,
Overeaters Anonymous, Cocaine Anonymous, Narcotics Anonymous, or are in some
other form of treatment, including counseling. While this group is smaller than
the Affected Others, the Company believes that The Recovery Network's
programming will provide a useful and important service to Persons in Recovery,
and that members of this group are likely to make an effort to seek out the
Company's programming and to inform others in their respective support groups
about The Recovery Network.
Afflicted Persons include the estimated 43 million Americans who,
according to the 1995 National Household Survey on Drug Abuse ( the "National
Household Survey"), are heavy or binge drinkers and the approximately 12.8
million who use illegal drugs. Afflicted Persons also include approximately 20%
of the female population between the ages of 12 and 30 that Anorexia and
Related Disorders, Inc. in 1992 estimated had a major eating disorder such as
anorexia or bulimia or some of its symptoms, and the 59% of the adult
population that Scientific American, in August 1996, estimated met the current
definition of clinical obesity.
Afflicted Persons also include persons suffering from depression and
persons who wish to quit smoking. In 1993, The National Institute of Health
estimated that more than 11 million Americans suffered from depression and that
one in eight persons will be affected by depression sometime in their lives.
The National Household Survey estimates that there were 61 million Americans
who were current smokers in 1995, many of whom the Company believes wish to
quit smoking.
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With the recent substantial rise in drug use, especially among
adolescents, the Company believes that there is and will continue to be a
growing interest in Prevention Issues, particularly in families with
adolescents ages 13 to 18. According to the National Household Survey, the
percentage of adolescents using illegal drugs increased 105% from 1992 to 1995,
and, in 1995, approximately 18% of 18 to 20-year olds and approximately 15.6%
of 16 and 17-year olds used illegal drugs. A recent survey by the National
Center on Addiction and Substance Abuse cited drugs as the number one problem
facing teenagers.
The economic and social impact of addiction on society is high. A study
conducted by Brandeis University in October 1993 estimated the annual negative
impact on the economy from substance abuse exceeded $230 billion. It is
commonly believed among industry experts that substance abuse is a major cause
of crime and family problems, especially family violence, and is a factor in
one out of three divorces.
Despite the perceived size of the market for recovery and
prevention-related products and services, the Company believes that there is
currently no effective national marketplace to enable suppliers of such
products and services to reach their target consumers. The Company believes
that, to date, consumers seeking recovery and prevention-related products and
services have done so primarily through local support groups, such as
Alcoholics Anonymous, local treatment centers, counseling through health
professionals, churches and schools in their communities, and from self-help
books and other materials. A disadvantage of these traditional sources is that
they all require, to some extent, that the consumer publicly acknowledge that
he or she is seeking information. The Company believes that many persons in its
target audience may be reluctant to seek help publicly.
The Cable Television Market
Cable television was first developed in the late 1940s primarily to serve
rural communities unable to receive broadcast television signals. By June 1995,
there were more than 11,200 cable systems serving over 60 million subscribers
in over 32,000 communities in the United States. Of these cable systems, 259 of
them have 50,000 or more subscribers. The largest cable system in the country
has over 1,000,000 subscribers, but only the 30 largest systems have 200,000
subscribers or more. Cable system operators range from large multiple system
operators ("MSOs") that own many systems to small, independent systems that
serve as few as several thousand households. The 10 largest MSOs control 231 of
the 259 largest systems and have approximately 80% of their subscribers.
Despite this concentration, each system operates under a franchise from the
government of the local community in which it is located. Thus, MSOs and other
cable operators have to contract with the local franchising authorities for
each cable system.
The cable industry is regulated by federal and state governments in part
to help local communities insure that their community receives some benefit
from the valuable local rights-of-way it grants to the cable system operator.
Many local franchising authorities require that cable systems devote a portion
of their channel capacity to public access, educational and governmental access
channels. Many communities also expect cable systems to offer a minimum amount
of channel capacity, certain system design features and programming that either
originates from or addresses the needs and interests of the local community.
This concept is commonly referred to in the industry as "localism." Prominent
individuals in the cable industry are aware that, for a variety of reasons, the
industry has not fulfilled on the promise of localism. The Company believes
that, as cable franchise contracts expire and are subject to renewal over the
next several years, many cable systems will need to upgrade and expand channel
capacity as well as to demonstrate to the communities their continued
commitment to localism to obtain renewal.
Most programming decisions for the majority of cable systems that are
owned by MSOs are made at the MSO level in negotiations between the MSO and the
various television networks. Typically, these negotiations, if successful,
result in one of two types of affiliation agreement. In one, the agreement
specifically identifies which local cable systems will carry the programming
and does not directly involve the cable system in negotiations. In the other,
the agreement specifies terms that are approved at the MSO level but requires
the network to negotiate affiliation agreements with each individual cable
system. Many cable systems also have local channels which are designed to serve
the community's needs and interests, and the decision to add programming to
these channels is typically left to the discretion of the local cable system
manager. Some, but not all, networks, receive license fees calculated on a per
subscriber, per month basis. According to an industry survey of 41 networks in
1996, 38 networks received monthly fees ranging from $.03 per subscriber to
$.70 per subscriber and
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three networks did not receive license fees. Of those 38 networks that received
license fees, 22 networks received license fees ranging from $.10 to $.29.
Generally, networks that air less than 16 hours of programming per day do not
receive license fees. Also, new networks often offer their programming for some
period of time after their launch free to cable systems that sign affiliation
agreements within a certain time after launch. In some cases, newly-launched
networks also provide affiliates with monetary launch support or other
financial incentives in order to secure initial carriage.
Channel capacity on most cable systems is currently limited. Channel
capacity is generally a function of the bandwidth of the individual cable
system's infrastructure. There are three categories of cable systems: (i) low
capacity systems that can offer a maximum of 50 to 55 channels; (ii) medium
capacity systems that can offer a maximum of 80 channels; and (iii) high
capacity systems that can offer approximately 110 channels, effectively the
limit of the current analog infrastructure. Of the 259 largest systems,
approximately 107 have 55 channels or less, 132 have 80 channels or less, and
only 20 have more than 80 channels. Until the recent introduction of new
digital technologies, in order for a low or medium capacity cable system to
expand channel capacity it needed to upgrade its entire hardware infrastructure
to a higher capacity analog system. Another alternative is to install new fiber
optic cable wiring. Although industry analysts expect that fiber optic cable
will eventually be installed nationwide, this is not likely to occur until the
next century. Both of these approaches are expensive and time consuming.
Recently developed digital technologies offer cable systems a less
expensive alternative for expanding channel capacity. Digital technologies
enable the cable systems to compress multiple digital channels into the
bandwidth currently required for a single analog channel. The cable system
sends the compressed, multi-channel signal to a subscriber's home where it is
decompressed by a digital converter box ("digibox"). This new technology
permits a cable system to expand significantly its current channel capacity
with a much lower capital investment than would be required to install fiber
optic cables or to make other major infrastructure upgrades. While the Company
expects that digiboxes will most likely be offered first to subscribers willing
to pay an additional fee to receive premium channels and other services, some,
including TCI, the nation's largest MSO, have stated their intention to provide
digiboxes to all of their subscriber base. Cable systems can install digiboxes
on a subscriber-by-subscriber basis at a rate determined by market demand and
funded in part by higher fees. A system can choose to convert only a portion of
its analog bandwidth to digital transmission, and thus continue to provide
analog service to its subscribers who do not want to pay a premium while
offering expanded programming and services to customers willing to pay for
them.
The recent introduction of direct satellite services ("DSS") has also
increased pressure on cable systems to offer more channels and services. DSS
systems offer their subscribers more than twice as many channels as all but a
small number of cable systems, with better audio and video quality. The price
of the satellite dishes required to receive programming has dropped to the
point that DSS is currently price competitive with premium cable. There were
approximately 4.5 million DSS subscribers in February 1997, and industry
analysts expect that number to reach approximately 19 million by the year 2000.
The Company believes that the combination of DSS and the conversion of
cable systems from analog to digital signal transmission will create
substantial additional channel capacity over the next several years. The
Company believes that these developments will enable The Recovery Network to
eventually become a full time cable television network.
The Recovery Network
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under the Nesting Contract with ATN. Pursuant to the
Nesting Contract, ATN provides the ATN Services on its satellite transponder to
The Recovery Network for two hours of broadcast time every day to subscribers
of cable systems with which ATN has affiliation agreements. Currently the
Recovery Network is broadcast one hour in the morning to approximately 13
million subscribers and one hour in the evening to approximately 3.5 million
subscribers. ATN provides distribution of the Company's programming into cable
systems through existing affiliation agreements between ATN and those systems.
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Pursuant to the Nesting Contract, the Company is charged a daily rate for
broadcast time provided by ATN at an estimated rate of approximately $2,100 for
April 1997 which increases to an estimated rate of approximately $3,595 by
March 1998. The actual charge for each calendar month is based on the actual
monthly number of households served by affiliates of ATN ("ATN Affiliates").
The Nesting Contract provides, however, that the Company will not be charged
more than $60,000 per calendar month during the first six months of the Nesting
Contract or more than $65,000 during the subsequent six months of the Nesting
Contract. ATN has also agreed to provide the ATN Services for two additional
hours of broadcasting, if such time is available, to the Company at ATN's cost
plus 20%, which fee is in addition to the charges for broadcast time. ATN has
also agreed to provide authorization services for cable systems with which the
Company directly enters into affiliation agreements to enable the Company to
broadcast its programming on such affiliates' cable systems, provided that the
Company purchase the necessary equipment, if any. The Nesting Contract expires
in April 1998, unless renewed by both parties. In the event the number of ATN
Affiliates decreases by 10%, the Company may terminate the Nesting Contract
upon 30 days written notice. The Company has granted ATN the right, for the
term of the Nesting Contract and for a period of one year thereafter, to match
any other nesting arrangement presented to the Company by a third party.
In addition to its distribution under the Nesting Contract, the Company is
seeking two hours of broadcast time per day in other local cable systems in a
large number of markets. The Company has identified all local cable systems in
the United States with at least 50,000 subscribers and is engaged in a general
marketing campaign ("affiliate marketing") directed at those 259 systems. The
Company is also targeting a more focused affiliate marketing effort on 11 major
cities whose communities contain 103 of those 259 systems.
The Company is currently producing its flagship program, Full Circle, an
on-going one-hour program that documents the recovery process by featuring
Persons in Recovery in actual meetings, as well as Testimony and Bottoms. The
Company is also in various stages of development or production of several other
half-hour series focusing on several Recovery Issues and Prevention Issues. See
"Programming."
The Company requires the proceeds of this offering for continued
transmission under the Nesting Contract and has allocated $1,014,000 of the
proceeds of this offering to make payments under the Nesting Contract. The
Company used $102,000 of the proceeds of the Private Financing for payments
under the Nesting Contract. Certain officers and directors of the Company are
officers, directors and/or principal shareholders of ATN. See "Management" and
"Certain Transactions."
Affiliate Marketing Strategy
The Company's strategy for obtaining affiliation agreements with cable
systems is based on the premises that cable systems are effectively monopolies
franchised by local governments, and in order to renew their franchises, many
cable systems will need to demonstrate a commitment to localism by providing
programming and Help Line services that benefit the local community, and, that
although it will be difficult to obtain a full time dedicated channel for a new
network until new digital technologies expand channel capacity, more channel
capacity will become available over the next several years.
The first premise forms the basis for the Company's grassroots affiliate
marketing strategy. The Company believes that The Recovery Network's
programming offers local cable systems an opportunity to demonstrate their
commitment to localism. If The Recovery Network is successful in establishing
significant community support for its programming, the Company believes that
its ability to enter into affiliation agreements will be significantly
improved. As part of its strategy to demonstrate this support, the Company has
formed The National Partnership for Recovery and Prevention (the
"Partnership"), an umbrella coalition of national recovery and prevention
organizations. The Company believes that the members of the Partnership will
help to establish The Recovery Network's credibility and social significance.
The Company is also seeking support from other grassroots organizations, local
politicians and law enforcement agencies and officials, and believes that the
socially responsible nature of The Recovery Network's programming will help it
obtain that support.
The second premise accounts for the Company's strategy to seek to obtain
two hours of air time per day in a large number of markets. The Company
believes that satellite transmission via its Nesting Contract will facilitate
distribution of The Recovery Network for two hours per day by additional cable
systems. Because the
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satellite transmission signal provided under the Nesting Contract is available
to all cable systems in the United States, the Company believes it will be able
to add additional cable systems beyond those that have an affiliation agreement
with ATN. The Company believes that most cable systems will readily perceive
the potential benefits to them from airing the Recovery Network's programming,
including a demonstration of the system's support for localism and the
political and public relations benefits from offering socially responsible
programming to its viewers. With channel capacity currently so limited, the
cost of committing a dedicated, full time channel to The Recovery Network in
order to receive those benefits could be too high for many systems. Instead,
the Company is initially asking cable systems to carry The Recovery Network for
only two hours per day, and Company believes, based on discussions with
operators of cable systems, that most of the 259 largest systems have the
capacity to provide those hours. There can be no assurance, however, that such
systems will continue to have available channel capacity or otherwise be
willing to air The Recovery Network. With the support of local communities and
politicians for socially responsible programming, the Company believes,
although there can be no assurance, it will be able to enter into affiliation
agreements for these initial two hours.
Once its programming is airing on a cable system, the Company can
concentrate on building viewer loyalty and advertiser awareness in that
community. Because many of the Company's viewers are likely to be "appointment
viewers" (that is, they will be aware of when the Company's programming airs
and schedule time to see it, rather than finding it through "channel surfing"),
the Company expects that it will be able to reach its target audience airing
only two hours per day. The Company also believes that by demonstrating an
ability to attract viewers and advertisers, it will create increased demand for
The Recovery Network's programming. As demand increases, the Company expects to
enter into additional affiliation agreements with new cable systems and
increase the number of daily programming hours with existing affiliates. As
channel capacity increases, the Company believes it will be able to expand into
a full time network. There can be no assurance, however, that the Company will
be able to enter into additional affiliation agreements with new cable systems
or increase the number of daily programming hours with existing affiliates or
that the Company will be able to expand into a full time network.
The Company is implementing a two-tiered affiliate marketing strategy to
expand distribution beyond that currently provided under the Nesting Contract.
The Company has identified all local cable systems with at least 50,000
subscribers and is engaged in a general marketing campaign directed at those
259 systems. The Company commenced this campaign in December 1996 by sending
informational mailings to the general managers, programming directors and
marketing directors at these systems. The Company has established a promotional
web site, which contains programming schedules, information about the Company
and the Partnership and links to sources of recovery information on the web.
The Company will also rely on traditional marketing tools, such as mail,
telephone, trade advertisements, public relations and participation in trade
shows and conferences in connection with its general affiliate marketing
strategy.
The Company is also targeting a more in-depth affiliate marketing effort
on the 11 cities whose communities contain 103 of the 259 largest systems. Such
systems have an aggregate subscriber base of nearly 12 million households.
Company executives intend to visit each of these 11 cities to meet with cable
system managers, local grassroots organizations, and local politicians and
community leaders. The Company is seeking support from these organizations and
individuals to further demonstrate the credibility and social significance of
The Recovery Network to local cable systems.
The Company is initially seeking to enter into short-term affiliation
agreements with local cable systems with a term of one year and that provide
for two hours of airing per day (one hour in the morning, one hour in the
evening), with no license fees paid to the Company, and have a 30-day
termination clause. The agreements also provide that the programming can be
aired on local origination and on public, educational and government access
channels or on other channels at the cable system's discretion.
The Company intends to use approximately $1,076,000 of the net proceeds of
this offering for its affiliate marketing expenses during the 12 months
following the consummation of this offering.
Programming
The Company's programming goal is to create and maintain an open national
platform for airing a broad spectrum of information about Recovery Issues and
Prevention Issues. The Company will focus on producing
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informative, educational, inspirational, and entertaining programming. The
programming will also be sensitive to the traditions and concerns of the many
support groups and treatment programs that also address Recovery Issues. The
Company's programming mission is to first to help its viewers identify and
understand issues in their lives, to then provide them tools for effecting
solutions and finally to inspire them by example into making positive lifestyle
choices.
The Company believes that the market for recovery and prevention-oriented
programming consists of the Affected Others, Persons in Recovery, Afflicted
Persons and persons concerned about Prevention Issues. The Company believes its
target audience will respond best to ordinary people relating their own
stories, rather than to celebrities and actors. This belief underlies the
network's motto, "Real People, Real Solutions." By observing real people
sharing the steps they have taken to solve their problems, the Company believes
its viewers will receive the information and support they need to take the
critical first steps towards addressing similar problems in their own lives and
in the lives of their families and friends. The Company expects that its core
concept of real people sharing the solutions that worked for them to form the
basis of documentaries, talk shows, dramas, how-to instructional shows and even
comedy. The Company's programming is also expected to address the causes
underlying many Recovery Issues, such as sexual abuse, child abuse, family
violence and depression.
In response to the recent substantial rise in drug and alcohol use among
young persons in the United States, the Company has identified this segment of
the population, together with their parents, as an important target audience and
is developing several prevention programs specifically for this audience. The
Company believes that creating programming with which young people can identify
will help them handle the difficult decisions they will encounter and select
positive lifestyle choices, and also help to foster better relations between the
youths and their parents.
The Company has commenced in house production of original programming for
The Recovery Network. The Company is currently airing its flagship series, Full
Circle, as well as Testimony and Bottoms, all of which premiered upon the
national launch of The Recovery Network. As of the date of this Prospectus, the
Company has produced 59 episodes of Full Circle, 21 episodes of Testimony and
two episodes of Bottoms. The story lines of these three programs are as
follows:
o Full Circle -- An on-going, one-hour program documenting the inner
working of the recovery group process. The program follows five separate
groups of persons struggling with their addictions to alcohol, drugs,
food, nicotine, or sex, through the course of one year. The audience will
follow each person's progress through recovery.
o Testimony -- A program in which individuals from diverse socioeconomic
backgrounds describe their stories of addiction and recovery.
o Bottoms -- A comedy program that takes recovering alcoholics and addicts
back to the scenes of their lowest moments and turning points on the road
to recovery. The programs shows the role humor plays in recovery. In each
episode, host Tom Kramer (formerly of Not Necessarily the News and Candid
Camera) joins one or more Persons in Recovery on a lighthearted yet
poignant tour of where they hit bottom and started turning their lives
around.
The Recovery Network is also currently airing programming that is licensed
from third parties, reformatted by the Company and "bumpered" with The Recovery
Network's logo and related program introductions and network promotions,
including the following programs:
o Stolen Lives: Children of Addicts -- A documentary about the violation,
neglect and abuse endured by children of substance abusers.
o Secrets: Women, Drugs and Alcohol -- A program where women speak
intimately and honestly about their abuse of and recovery from drugs and
alcohol.
The Company currently has more than a dozen additional programs, in
addition to Full Circle, Testimony and Bottoms in various stages of production
and/or development. Some of the current titles and storylines representative of
the Company's programming are as follows:
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o Unhooked -- A series of music programs live from popular venues across
the country, featuring artists that have either made the decision not to
use drugs or those that are in recovery from alcohol or drug abuse.
Following the music, the artists will host question and answer discussions
with the young people in the audience.
o Let's Rap - Kids to Kids. A series of shows on location at schools,
street ball courts, neighborhoods and living rooms where a group of kids
will meet weekly to discuss how drugs and alcohol have affected their
lives and to share ideas for what they can do about it. Other variations
will include Let's Rap - Kids to Parents, which will give kids a chance to
raise issues they normally could not and to give parents a chance to
understand what their kids are facing and Let's Rap - Parent to Parent,
which will bring together parents of kids facing these issues to help them
understand and share their children's problems, concerns and solutions.
o SLAM! -- A documentary-style alcohol abuse prevention program for middle
and high school students, Slam will follow individual kids through their
daily lives, into their schools, neighborhoods and homes. While focusing
on drug and alcohol prevention, SLAM! will also examine other issues
adolescents must contend with, such as problems at home, peer pressure,
sexuality, life goals and growing up.
o Family Counsel -- A program featuring an in-depth look at home life and
its role in addiction and recovery. The hosts will be therapists who
identify and demonstrate solutions to the problems specific to family
interaction.
o Behind the Badge -- A program exploring the daily traumas and stress
facing police officers and offering support and solutions for officers and
the communities they serve.
o Secrets -- A program that seeks to show victims of sexual abuse that
they are not alone and give them the strength they need to take the first
steps toward overcoming abuse. Sexual abuse is a leading cause of
behavioral and mental health problems, but the shame victims feel often
makes it hard for them to acknowledge what has happened to them and to
seek help.
o What's Eating You? -- A program seeking to help viewers with eating
disorders, one of the most difficult compulsive behaviors because it
involves a relationship with a substance that cannot be given up entirely.
o Up in Smoke -- A program that is designed to help viewers quit smoking
and that reflects the Company's commitment to a broad range of Recovery
Issues.
o Equilibrium -- A program featuring a panel of medical experts in the
field of, and persons afflicted with, depression discussing the causes of
depression and offering solutions to fight depression on a day-to-day
basis.
o Recovery Theatre -- A program that will seek to show popular classic and
current movies and excerpts from movies that address or illustrate
Recovery Issues and Prevention Issues with introductions, discussion and
commentary by experts on the issues illustrated by the program.
o Recovery America -- A nationwide project that will encourage producers
and community groups to create programming for The Recovery Network that
is relevant to the community's concerns and issues.
The Company believes that Recovery America will add a local component to
its programming. The Recovery Network intends to provide program format and
other production support to producers and community groups for producing
approximately 20 episodes of Recovery America. The Recovery Network will also
seek to work with local cable operators to use their production facilities to
produce episodes. The Recovery Network will also seek to involve local
grassroots organizations and members of the Partnership with this project. The
Company also expects the program to serve as a platform for members of the
Partnership to address issues of concern to their constituencies. The Company
expects Recovery America to provide another means for cable systems to
demonstrate a commitment to localism.
The Company believes its focus on reality-based programming that can be
produced without elaborate scripting, staging, equipment, talent and location
expenses will permit it to produce programming at a cost well
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below industry standards. Programming costs for location, talent and
post-production, but not including Company staff costs and overhead, are
expected to average $5,000 per hour of Full Circle, $2,500 per one-half hour of
Testimony, $5,000 per one-half hour of Bottoms and $7,000 per episode of
original programming in the future.
There can be no assurance that the Company's program development and
production efforts will be successfully completed on a timely basis, or at all,
or that unexpected events will not occur which would result in increased costs
or material delays in program development and production and delays in the
Company's ability to air original programming.
The Company intends to use approximately $708,000 of the net proceeds from
this offering for producing original programming and licensing and/or
acquisition of programming from third parties.
Advertising
The Company believes that its projected audience demographics will enable
it to attract both mainstream advertisers, as well as companies which offer
recovery and prevention-related products and services ("non-
mainstream advertisers"). Non-mainstream advertisers market their products to a
large market but have no effective medium to access this market nationally and,
therefore, have not traditionally advertised on television. Because the Company
expects to offer the only national medium focused on Recovery and Prevention
Issues, the Company believes that non-mainstream advertisers will purchase the
Company's advertising time upon The Recovery Network's launch. The Company has
already attracted several non-mainstream advertisers for The Recovery Network
and expects that such non-mainstream advertisers will account for substantially
all of The Recovery Network's advertising revenues in the short term. Although
as of March 31, 1997, the Company has generated only limited revenues from
advertising, the Company believes it will continue to attract additional
non-mainstream advertisers.
The Company is also focusing its marketing efforts on attracting
mainstream advertisers for The Recovery Network and has attracted such
advertisers on a limited basis. However, mainstream advertisers are generally
ratings sensitive when purchasing time to offer products and services, and the
Company does not expect to have ratings to generate sufficient advertising
revenue from mainstream advertisers until such time, if ever, that it enters
into affiliation agreements with cable systems with a significant number of
subscribers. Many mainstream advertisers, however, also purchase time for
corporate responsibility advertising, where the focus of the advertising is to
create public relations benefits, rather than marketing products or services.
The Company believes its socially responsible programming and the support of
grassroots organizations will improve its efforts to obtain corporate
responsibility advertising. The Company will also seek sponsorship from
corporations for its programming.
As The Recovery Network enter into additional affiliation agreements and
the number of viewers increases, the Company believes its audience demographics
will be appealing to many mainstream advertisers. Based on a research study
commissioned by the Company and on its analysis of market research, the Company
expects that the majority of its audience will be female, well-educated, viewers
of day-time talk shows, buyers of self-help books and tapes and have an annual
household income in excess of $60,000. The Company believes that these
demographics are attractive for many mainstream advertisers. The Company also
believes it will be attractive to mainstream advertisers because its programming
is expected to attract "appointment viewers" from this demographic group. As a
result of an increase in programming narrowly targeted at specific interest
groups and the rise of "niche" networks, viewers now often tune in specifically
to watch programming tailored to their interest. Such viewers generally have a
higher level of interest in programming relating to their specific area of
interest, and the Company believes that these viewers will demonstrate loyalty
to advertisers who support that programming.
The Company expects that the majority of its advertising time will be sold
by contracts with advertisers and advertising agencies and that unsold
advertising time will be placed through arrangements with certain wholesale
agents. The Company expects that such wholesale arrangements will provide the
Company compensation based on a percentage of sales made by the advertisers, or
a small fee based on customer inquiries, generated by the advertisement. There
can be no assurance that the Company will generate any meaningful revenues from
the sale of advertising time.
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Viewership
Upon distribution in a geographic market, either through an affiliation
agreement with a local system or under the Nesting Contract, marketing directly
to viewers in that community becomes important to the success of The Recovery
Network. The Company expects to advertise on other local networks and radio
stations. The Company is also seeking to promote viewership by working with a
well-known public relations firm to create national awareness for The Recovery
Network. Additionally, the Company will work with the members of the
Partnership to alert their respective constituencies to the availability and
timing of The Recovery Network's programming in their communities. The Company
believes that these promotion efforts will help build and retain viewer
loyalty.
The Company believes that it will be the first national medium to provide
the Affected Others, Persons in Recovery and Afflicted Persons the information,
interaction and support they need in the privacy of their homes. Because the
Company believes many of those in its target audience are unable or unwilling
to seek help publicly, the Company hopes to build a loyal core audience among
this group. The Company believes its programming will also appeal to viewers
outside its core target audience, who will be intrigued by the opportunity to
observe real people struggling to find real solutions to their problems.
Recovery Talk Radio
In December 1996, the Company launched Recovery Talk Radio, a nationally
syndicated audience participation talk radio program on the Talk America Radio
Network which focuses on Recovery Issues and Prevention Issues. Currently, the
Company is airing one program entitled The Meeting on Air on Recovery Talk
Radio every Sunday morning from 8:00 a.m. to 9:00 a.m. (EST) on 56 stations and
from 9:00 a.m. to 10 a.m. (EST) on 47 stations. Recovery Talk Radio is based in
Boston, and listeners can call in to the program on a toll-free 800 telephone
number. The Meeting on Air features guest speakers who discuss their
experiences and perspectives with callers and the program's host. The Company
currently sells advertising time during such programming, although as of March
31, 1997, the Company has generated only limited revenues from such
advertising.
The Company has not yet generated any material revenues from Recovery Talk
Radio, and the Company does not expect that Recovery Talk Radio will account
for a material portion of the Company's revenues in the future. The Company
intends to utilize Recovery Talk Radio to help create support for and awareness
of The Recovery Network in markets in which The Recovery Network will or hopes
to air. The Company also intends to promote recovery-related merchandise on
Recovery Talk Radio. The Company intends to use approximately $38,400 of the
net proceeds from this offering to produce Recovery Talk Radio for
approximately 12 months following this offering.
Help Line
In March 1996, the Company commenced operations of a toll free help-line
and referral service for the viewers of The Recovery Network (the "Help Line").
During the hours which The Recovery Network is airing, the Company displays a
toll-free 800 telephone number for viewers to call for information about how to
obtain additional help in their communities. Telephone calls are answered seven
days a week during the hours of 6:30 to 7:30 a.m. (EST) and Mondays to Fridays
during the hours of 9:00 a.m. to 5:00 p.m. (EST) by a trained crisis response
counselor provided to the Company by an affiliate of Father Martin's Ashley
Treatment Center, a treatment center dedicated to the treatment of chemically
addicted persons. At times when the counselor is not available, viewers may
leave a message, and their calls will be returned. Father Joseph Martin, the
founder of the Ashley Treatment Center, is a member of the Company's Board of
Advisors. See "Management -- Advisory Board."
To the extent that the Company enters into affiliation agreements to air
The Recovery Network in additional communities, the Company expects to expand
caller capacity of the Help Line, as well as expand its existing national
database of local groups, treatment centers and other sources of help and
information. The Company also intends to use the projected expanded call center
capacity to also offer recovery and prevention-related products and services
directly to its viewers.
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The Company does not generate any revenues from the Help Line, and does
not receive any fees or commissions for this service, including from referrals
made by the Help Line. The Company operates the Help Line solely to provide
support to its viewers and as a community service. The Company also expects
that providing the toll-free Help Line will help build and maintain viewer
loyalty and support for The Recovery Network. A portion of the proceeds of this
offering allocated to affiliate marketing will be used to operate the Help
Line.
The National Partnership for Recovery and Prevention
The Partnership, an umbrella coalition of national recovery and prevention
organizations, was formed in November 1996 to work in conjunction with the
Company to employ the Company's television, radio and interactive media
services to develop and distribute effective and accurate information
concerning alcoholism and addiction. The Company's goal is to create a
Partnership of prominent national prevention and recovery organizations, public
figures who are passionate about recovery and prevention, and corporations and
institutions that are willing to support the Company's mission. To date, the
Company has identified, and is in discussions with, more than 50 recovery and
prevention organizations. Member organizations of the Partnership currently
include African American Parents for Drug Prevention, Community Anti-Drug
Coalitions of America, Dharma Associates, Gateway Foundation, Hands Across
Cultures, ISA Associates, National Asian Pacific American Families Against
Substance Abuse, National Association of Addiction Treatment Providers,
National Drug Prevention League, National Families in Action, National
Hispanic/Latino Community Prevention Network, National Parents Resource
Institute for Drug Education, National Treatment Consortium, Physicians for
Prevention, Prevention Intervention and Treatment Coalition for Health, The
Bralove Group, The Miami Coalition for a Safe and Drug Free Community and The
Village.
Depending on their interests and abilities, partners may have the
opportunity to review and comment on The Recovery Network's programming,
provide ideas for programming that is of interest to their constituencies and,
in some cases, produce programming. The Recovery Network may also air public
service messages from the partners and otherwise help them disseminate
information that is important to them. With a national platform, the
Partnership will seek to help focus the attention of government and society on
the issues of interest to the Partnership's members and also foster better
communication among its members, their constituencies and the communities they
are designed to serve. The Company believes that the member organizations of
the Partnership will be instrumental in helping the Company demonstrate to
cable operators a high level of community support for The Recovery Network and
how carriage of the Company's programming can help the local operator fulfill
the promise of localism. The Company believes that the individual constituents
of the Partnership's member organizations will account for a significant
portion of the initial audience for The Recovery Network's programming, and the
Company expects that the Partnership will communicate to its constituents
information about The Recovery Network's programming schedule and availability.
Recovery Interactive
The Company owns a 50% interest in Recovery Interactive, a joint venture
with TCI Online RecoveryNet Holdings, Inc., an affiliate of TCI ("TCII"),
formed on August 1, 1996 to commence a business that expects to provide
behavioral health care products and services ("Recovery Interactive Services")
to managed care agencies, large group medical practices, state, local and
federal governments and governmental agencies, employee assistance programs,
corporations and other organizations offering or providing health care services
(collectively, "Health Care Entities") as well as to provide information,
interaction and support regarding Recovery Issues and Prevention Issues,
through an integrated multimedia platform, including a site on the world wide
web. The Company and TCII have each made a capital contribution in the amount
of $300,000 to Recovery Interactive. Neither party may transfer its ownership
interest in the joint venture until June 30, 1999. After such date, the members
have a right of first refusal with respect to the sale of an ownership interest
by the other member. Pursuant to the joint venture agreement, to the extent
distributions of cash are made by Recovery Interactive, such distributions will
be made equally to TCII and the Company. Jonathan Katch, a principal
stockholder and a former officer and director of the Company, is the Chief
Executive Officer of Recovery Interactive. See "Certain Transactions."
Recovery Interactive has developed and is continuing to develop Recovery
Interactive Services for Health Care Entities and their clients. Recovery
Interactive currently plans to deliver these services through a platform
allowing access by computer, telephone or television.
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In May 1997, Recovery Interactive entered into a five year license
agreement with Merit Behavioral Care Corporation ("Merit"). The license
agreement provides for Merit to distribute Recovery Interactive Services
through interactive multimedia platforms. During the term of the agreement,
Recovery Interactive may not make Recovery Interactive Services available to
certain of Merit's competitors unless such competitor makes an equity
investment in Recovery Interactive of not less than $2,000,000. The license
agreement provides for Merit to pay Recovery Interactive an amount equal to
Merit's gross revenues received from customers who use Recovery Interactive
Services less 115% of Merit's costs for merchandising such services. Recovery
Interactive Services are offered as a separate service to Merit's customers.
None of Merit's existing customers currently receive Recovery Interactive
Services, and Merit does not require its customers to agree to receive Recovery
Interactive Services to receive other services offered by Merit. The license
agreement does not set a specific or minimum fee. The Company expects that
Recovery Interactive will receive a per month, per customer license fee, based
on a capitated rate for every Merit customer that receives Recovery Interactive
Services.
Recovery Interactive is also seeking to enter into additional license
agreements with other Health Care Entities whereby, for a per person fee, these
companies will be able to provide Recovery Interactive Services such as risk
assessments and evaluations, to individuals insured by such companies. In order
to provide this service, Recovery Interactive may provide this service on the
customer's intranet or may provide links from the Recovery Interactive web site
to dedicated sections of the web site that can be accessed only by customers
who have paid a fee and have obtained clearance to access that section of the
web site. Industry sources estimate, with 102 million members, behavioral
health managed care organizations provided $81.2 billion dollars in behavioral
health benefits in 1994. The Company believes that employers, schools and
government institutions may also be interested in establishing similar
designated web sites for the delivery of behavioral health products and
services to their constituents. The Company believes Recovery Interactive will
be a more cost effective system for the delivery of many of these behavioral
benefits than more traditional, in person and paper form-based methods.
Pursuant to the joint venture agreement, TCII agreed to cause its
affiliate, @Home Corp. ("@Home"), to enter into an affiliation agreement with
Recovery Interactive. @Home was formed to distribute interactive media content
by cable, utilizing recently developed cable modems. Cable modems are capable
of delivering data at rates far higher than the current telephone-based modems.
This higher speed is expected to allow delivery of much more sophisticated
interactive media, including high resolution, true color graphics, full motion
video and CD-quality audio. Current telephone-based modems are able to deliver
primarily text and low resolution graphics, with very limited audio and video
capability. @Home has begun limited trials, but does not to date have a
significant installed base of cable modems. There can be no any assurance that
Recovery Interactive and @Home will enter into an affiliation agreement on
terms favorable to Recovery Interactive, or at all, or that @Home will ever
expand its base beyond the current trials.
Recovery Interactive is a development stage company and has not yet
generated any revenues. The Company believes that the generation of meaningful
revenues will depend on Merit obtaining customers for Recovery Interactive
Services, Recovery Interactive's ability to enter into additional license
agreements with Health Care Entities and upon further development of Recovery
Interactive's products. As of the date of this Prospectus, Recovery Interactive
has not generated any revenues, and has incurred operating losses of
approximately $458,000 since its inception. Recovery Interactive will seek to
generate revenues from monthly subscriber fees generated from the Recovery
Interactive web site, merchandising and from Health Care Entities and employers
for delivering mental and behavioral health benefits to covered individuals.
Although the Company believes that Recovery Interactive will provide the
Company with significant opportunities relating to an interactive multimedia
business, there can be no assurance that Recovery Interactive will be
commercially successful.
Merchandise Sales
The Company believes that the market for products and services addressing
Recovery and Prevention Issues is significant. The Company also believes that,
because it is attempting to create a nationwide medium specifically targeting
this market, if successful, it will be in a unique position to offer such
recovery and prevention-
related products and services. The Company has formed a subsidiary, Recovery
Direct, through which it will seek to develop recovery and prevention- related
products and services to market on The Recovery Network, as
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well as on Recovery Talk Radio, the Help Line and, through Recovery
Interactive, on the Internet. The Company intends for Recovery Direct to offer
a variety of self-help and recovery and prevention-related products, including
videos of the Company's programming aired on The Recovery Network and audio
tapes of programs aired on Recovery Talk Radio. In addition, the Company
intends for Recovery Direct to offer tapes and videos by other well-known
individuals in the recovery field.
The Company expects to use approximately $172,000 of the proceeds from
this offering to fund the initial operations of Recovery Direct to commence the
merchandising of recovery and prevention-related products and services.
The Company will also seek to enter into arrangements with third parties
to provide or develop recovery and prevention-related products and services and
to research opportunities for the direct marketing of products advertised on
The Recovery Network and on Recovery Talk Radio through a toll-free 800
telephone number.
Competition
The Recovery Network will compete with all other existing and planned
television networks and other television programming for available air time,
channel capacity, advertiser revenue and revenue from license fees. Many of
these television networks and producers of television programming are
well-established, have reputations for success in the development and operation
of television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than the
Company. In addition, if cable television channel capacity increases as the
Company expects competition from smaller competitors and other start-up
television networks could increase significantly.
Although the Company is not aware of any television network with
programming focusing solely on Recovery Issues and Prevention Issues, there are
an increasing number of recently introduced or planned cable networks which
focus on overall life-style, self-improvement and health themes and there are
numerous programs which address Recovery Issues and Prevention Issues. Such
networks include, America's Health Network which provides daily live
programming and prerecorded programming relating to health issues, The Health
Channel, which provides programming about health, medicine and wellness,
Health-Net, an interactive health-
related program aimed at aging baby boomers, and Jones Health Network, which
provides instruction to persons seeking credentials or accreditation in the
health field. Moreover, because The Recovery Network's programming is intended
to provide information and support to persons facing Recovery Issues and
Prevention Issues, The Recovery Network and the Company's recovery and
prevention-related products and services will compete with other products and
services which perform similar functions, such as support groups, self-help
videos, audio cassettes and books and helplines. There can be no assurance that
the Company will be able to successfully compete for air time, channel
capacity, advertiser time or viewership.
Government Regulation
The cable television industry is subject to extensive and frequently
changing federal, state and local laws and substantial regulation under these
laws by governmental agencies, including the Federal Communications Commission
("FCC"). Regulations governing the rates that can be charged to subscribers by
cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as The Recovery Network. In addition, federal "must-carry"
rules requiring cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional channels for
noncommercial educational TV stations); commercial leased access rules
designating 10% to 15% of system channels for lease by unaffiliated
programmers; and local regulatory requirements mandating additional channel
set-asides for public, governmental and educational use could reduce channel
availability which might otherwise be available for The Recovery Network on
many cable systems. Statutory provisions and FCC rules governing relationships
among cable systems and competing forms of multichannel video program
distribution, as well as the relationships between the Company and its cable
system affiliates could adversely affect the marketability of the Company's
programming and the ability of the Company to enter into arrangements for the
distribution of its programming. Since ATN is a cable program provider, the
aforementioned regulatory constraints on the availability of channel
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capacity on cable systems and FCC regulations governing relationships between
program providers and cable system affiliates also affect distribution by ATN of
The Recovery Network's programming as part of the services provided to cable
systems by ATN. Although program providers that do not hold FCC licenses or
operate distribution outlets, such as The Recovery Network and Recovery Talk
Radio, are not within the FCC's direct jurisdiction, the satellite uplink
provided by ATN must be licensed by the FCC, and ATN must operate and maintain
the uplink in accordance with the FCC's technical standards. If ATN does not
comply with the FCC's licensing and technical standards, ATN could lose the
ability to use its uplink and would be unable to deliver The Recovery Network's
programming to ATN's cable system affiliates. In addition, the cable systems and
radio stations that carry the Company's programs are regulated by the FCC and,
therefore, are subject to its rules and policies, such as those relating to
sponsorship identification, broadcast of indecent language, provision of equal
opportunities for political candidates and related measures pertaining to
program content and format. Failure of the Company's programs to comply with one
or more of these rules could subject the cable systems or radio stations to FCC
fine or other sanctions, adversely affect the Company's relationship with such
entities and result in the discontinuation of carriage of the Company's
programming by such entities.
Federal and state regulation governing interactive or on-line information
services and potentially affecting the activities of Recovery Interactive is
currently evolving. Regulations governing purchases of information services via
toll-free telephone calls and laws governing obscene, indecent, or otherwise
unlawful communications have been adopted, and there can be no assurance
whether such laws and regulations will be applied to, and therefore affect, the
business and operations of Recovery Interactive. Additional laws and
regulations are currently being considered by the federal government and many
state and local governments. There can be no assurance that these or existing
laws or regulations will not be applied in a manner that will adversely affect
the Company's business or operations. Moreover, the FCC currently is
considering proposals that could increase the charges most individuals and
entities pay to access Internet and on-line services, which, if adopted, could
adversely affect the Company's business or operations.
The FCC does regulate common carriers whose services are used for
purchases of information services via toll-free telephone calls or pay-per-call
services, which regulation could affect the Help Line, Recovery Interactive and
certain other products and services contemplated by the Company. The Federal
Trade Commission also has jurisdiction over the provision of such services.
Among the FCC's regulations are disclosure requirements and other prerequisites
to charging calling parties for such services. The FCC also regulates certain
marketing methods such as the permissible time periods for telephone
solicitations to residences, the maintenance of do-not-call lists, and use of
autodialers, facsimile machines and artificial or prerecorded voice systems for
marketing purposes. It is uncertain at this time whether or how any of these
requirements can or will apply to or affect the Company's business or
operations or its business relationship with entities providing the
communications links used by it or its customers.
The Communications Decency Act ("CD Act") would make it unlawful to: (i)
knowingly send to a minor or display in a manner available to a minor "obscene",
"indecent" or "patently offensive" communications using a telecommunications
device or on-line service, (ii) send such a communication to anyone with the
intent to annoy, threaten or harass; or (iii) allow a telecommunications
facility under one's control to be used for such purpose. A preliminary
injunction against enforcement of the CD Act has been affirmed by the United
States Supreme Court, which found the CD Act's provisions to violate the First
Amendment. Although it is unlikely that the provisions of the CD Act will ever
become effective, there can be no assurance that information content made
available on or through Recovery Interactive's offerings, by the Company or by
users of those offerings would not violate the CD Act, if it were to become
effective, or similar legislation that Congress might enact in the future, or
that attempts to implement defenses to such legislation would not adversely
affect the Company's business or operations. Federal laws dealing with obscenity
and child pornography as well as various state laws similar to those laws or to
the CD Act may also apply to information content available on or through
Recovery Interactive's offerings. There is no assurance that those laws will not
be applied in a manner that will adversely affect the Company's business or
operations.
Proposals for additional or revised statutory or regulatory requirements
are considered by Congress, the FCC and state and local governments from time
to time, and a number of such proposals are under consideration at this time.
It is possible that certain of the provisions and requirements described herein
are now, and in the future may be, the subject of federal or state legislation,
agency proceedings or court litigation. It is not possible to predict what
legislative, regulatory or judicial changes, if any, may occur or their impact
on the Company's business or operations.
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Proprietary Information
The Company has pending registration applications in the United States
Patent and Trademark Office for four trademarks, including the "Recovery
Network" trademark. The Company believes that its trademarks and copyrights,
including "The Recovery Network" tradename and the signature look of the
network, have significant value and are important to the marketing and
promotion of The Recovery Network and the Company's recovery and
prevention-related products and services. Although the Company believes that
its trademarks and copyrights do not and will not infringe trademarks or
violate proprietary rights of others, it is possible that existing trademarks
and copyrights may not be valid or that infringement of existing or future
trademarks or proprietary rights may occur. In the event the Company's
trademarks or copyrights infringe trademarks or proprietary rights of others,
the Company may be required to change the name of its network, proposed
television shows, radio talk show or obtain a license. There can be no
assurance that the Company will be able to do so in a timely manner, on
acceptable terms and conditions, or at all. Failure to do any of the foregoing
could have a material adverse effect on the Company. In addition, there can be
no assurance that the Company will have the financial or other resources
necessary to enforce or defend a trademark infringement or proprietary rights
violation action. Moreover, if the Company's trademarks or copyrights infringe
the trademarks or proprietary rights of others, the Company could, under
certain circumstances, become liable for damages, which could have a material
adverse effect on the Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts, ideas and the documentation of
its television programming concepts in development. However, such methods may
not afford complete protection and there can be no assurance that others will
not independently develop similar know-how or obtain access to the Company's
know-how, concepts, ideas and documentation. Furthermore, although the Company
has or expects to have confidentiality and non-competition agreements with its
employees, and appropriate consultants, there can be no assurance that such
arrangements will adequately protect the Company's trade secrets or that others
will not independently develop programming similar to that of the Company.
Insurance
The operation of a television, radio and interactive media business
subjects the Company to possible liability claims from others, including
viewers, listeners and callers to the Help Line for claims arising from the
unauthorized use of name or likeness, invasion of privacy, defamation and
slander. The Company maintains general liability insurance (with coverage in
amounts of up to $1,000,000 per occurrence and $2,000,000 per annum), including
insurance relating to personal injury and advertising injury, in amounts which
the Company currently considers adequate.
Employees
The Company currently has 14 full time employees and one part-time
employee, of which four are engaged in affiliate marketing sales, one in
advertising sales, four in programming, and six in administration. The Company
expects, depending upon its level of business activities, that it will hire
approximately three additional affiliate marketing employees during the three
months following this offering. The Company also from time to time retains a
number of marketing and political consultants to support its grassroots
marketing efforts nationwide and in local communities.
Property
The Company leases offices of approximately 5,000 square feet in Santa
Monica, California pursuant to a five-year lease that expires in May 2002. The
monthly rental is currently $10,000 per month and will increase annually to a
maximum rental of $12,500 per month. The Company has an option to extend the
lease through May 2004 at a price to be negotiated by the parties based upon
then prevailing rental rates.
38
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------- ----- -------------------------------------------
<S> <C> <C>
George H. Henry ......... 43 Chairman of the Board
William D. Moses ......... 34 President, Chief Executive Officer and
Director
Donald J. Masters ......... 51 Executive Vice President and Director
John Wheeler ............ 43 Senior Vice President of Sales and
Marketing and Vice President of Operations
Bill Megalos ............ 42 Vice President of Production
Carlene L. Feichter ...... 40 Vice President of Finance and
Administration
Nimrod J. Kovacs ......... 47 Vice Chairman of the Board of Directors
Paul Graf ............... 29 Director
</TABLE>
George H. Henry has been Chairman of the Board of Directors since May 1997
and a director of the Company since December 1995. Since April 1986, Mr. Henry
has been President of G. Howard Associates, Inc., a private investment firm.
Prior to April 1986, Mr. Henry was a Vice President in the Corporate Finance
Department of the predecessor of Schroder Wertheim & Co. Incorporated, an
investment banking firm. Mr. Henry is a director of PhoneTel Technologies,
Inc., a publicly traded telecommunications company. Mr. Henry is also Chairman
and Chief Executive Officer of ATN. Mr. Henry is also a trustee of Mitchell
College.
William D. Moses has been President and Chief Executive Officer of the
Company since November 1994. Mr. Moses has been a director of the Company since
1995. In January 1993, Mr. Moses co-founded ATN and served as a director of ATN
from June 1993 to June 1996. From July 1991 to December 1994, Mr. Moses was a
managing partner of Axiom Partners, a New York investment banking and brokerage
firm. From January 1992 to January 1994, Mr. Moses was a money manager for
Oscar Gruss & Co. From 1988 to 1991, Mr. Moses served as an independent
financial consultant. From 1986 through 1987, Mr. Moses was employed by Bear
Stearns & Co., Inc.
Donald J. Masters has been Executive Vice President of the Company since
May 1997 and a director of the Company since November 1995. Mr. Masters also
serves as Chairman of the Advisory Board and is responsible for developing and
overseeing the activities of the National Partnership for Recovery and
Prevention. Mr. Masters co-founded ATN, and he served as a director of ATN from
January 1993 to March 1996. From April 1992 until January 1996, Mr. Masters was
a partner in Masters Smith & Co., a media consulting firm that provided
services to the Company. From May 1989 to April 1992, Mr. Masters was Vice
President of Corporate Development and a founding officer of United
International Holdings, Inc. From November 1985 to May 1989, Mr. Masters was
Vice President and General Counsel of United Cable Television Corp., where he
was engaged in the development of the Discovery Channel, E! Entertainment,
Preview Guide, and several home shopping channels.
John Wheeler has been Senior Vice President of Sales and Marketing since
March 1997 and Vice President of Operations since May 1997. From June 1994
through February 1997 Mr. Wheeler was the president of a cable network. From
November, 1989 through May, 1994, Mr. Wheeler served as President of Cellular
System Management, Inc., a builder and manager of cellular properties
throughout the United States. From February 1982 to July 1987, Mr. Wheeler was
Vice President of Marketing of Metro Mobile CTS, a cellular company. From 1979
to 1982, Mr. Wheeler served as Vice President of Vision Cable Communications
Inc. Mr. Wheeler served as Northeast Regional Marketing manager for Showtime
Entertainment in 1978. Mr. Wheeler began his career at Cablevision Systems of
Long Island in 1976.
Bill Megalos has been Vice President of Production since April 1997 and
Executive Producer of the Company since May 1996. From 1981 to 1986, Mr.
Megalos worked on various aspects of film production on a
39
<PAGE>
freelance basis, including producing comedy features and directing dramatic
films, commercials and music videos. Mr. Megalos' credits include numerous
documentaries, such as the Emmy Award winning "W. Eugene Smith" with Peter
Riegart for American Masters, "A Night in Havana--Dizzy Gillespie in Cuba"
(1986), the PBS series "Quest for the Killers" (1986-1988), "Legendary Trails"
(1992) and the Academy Award winning "Down and Out in America" (1990). His work
as a director ranges from commercials and music videos to dramatic films. His
biography of Jack Benny for HBO was awarded the Cine Golden Eagle Award in
1994, and he has filmed nearly 50 full-length documentaries for BBC during the
past ten years.
Carlene L. Feichter has been Vice President of Finance and Administration
of the Company since April 1997 and has been employed by the Company since
January 1997. From January 1995 through December 1996, Ms. Feichter was
Assistant Finance Director for Jewish Family Service of Los Angeles. From
February 1994 to January 1995, Ms. Feichter was Assistant Controller for the
Writer's Guild of America, West, an entertainment industry labor union. From
April 1992 to January 1994, Ms. Feichter was the Finance Director for the
Institute for Policy Studies.
Nimrod J. Kovacs has been a director of the Company since October 1996 and
serves as Vice Chairman of the Board of Directors and Chairman of the Company's
Executive Committee. Since January 1995, Mr. Kovacs has been President of
Eastern European Electronic Distribution & Global Programming Group of United
International Holdings, Inc ("UIH"). From 1991 to 1996, Mr. Kovacs directed
UIH's investments which included Kabelkom in Hungary, Kabelvision in Sweden,
Kabel Net in the Czech Republic, Multicanal in Portugal, and HBO Czech/TV Max
in the Czech Republic. From 1989 to 1992, Mr. Kovacs was President of NJK
International, an international media consulting company. From 1982 to 1989,
Mr. Kovacs was responsible for the investments of United Cable, and
subsequently United Artists, in the Discovery Channel in the United States and
Europe, E! Entertainment, Think Entertainment, Preview Guide, Bravo UK, and
several home shopping channels.
Paul Graf has been a director of the Company since April 1997. Mr. Graf is
currently a private investor and since October of 1989 has been Chief Executive
Officer and founder of International Arts, a business specializing in antique
art from Asia. From December 1992 to September 1995, Mr. Graf was Vice
President of Marketing and Productions for Wizard Management, Inc., an
independent record/management company. Since January 1997, Mr. Graf has been a
director of Catamount Brewing Co.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Non-employee directors
do not receive cash compensation for serving as directors. The Company
reimburses directors for reasonable travel expenses incurred in connection with
their activities on behalf of the Company. Each member of the Board of
Directors is eligible to participate in the Company's 1996 Board of Directors
and Advisory Board Retainer Plan.
Committees of the Board of Directors
In October 1996, the Company established a Finance and Compensation
Committee of the Board of Directors which reviews the compensation for all
officers and directors and affiliates of the Company. The Committee also
administers the 1996 Employee and Consultants Stock Option Plan, the 1996 Board
of Directors and Advisory Board Retainer Plan and the 1997 Management Bonus
Plan. Mr. Henry is Chairman of the Finance and Compensation Committee and
Messrs. Moses, Fuellhart and Graf are also members of the Finance and
Compensation Committee.
In May 1997, the Company established an Audit Committee of the Board of
Directors which meets with management and the Company's independent public
accountants to review the adequacy of internal controls and other financial
reporting matters. Mr. Henry is the Chairman of the Audit Committee and Messrs.
Fuellhart, Graf and Kovacs are also members of the Audit Committee.
In October 1996, the Company established an Executive Committee of the
Board of Directors which is responsible for overseeing strategic planning and
operations for the Company. Mr. Masters is the Chairman of the Executive
Committee and Messrs. Henry, Moses and Kovacs are also members of the Executive
Committee.
Executive Compensation
For the fiscal year ended June 30, 1996, the executive officers were paid
an aggregate of approximately $123,332, and no executive officer received
aggregate cash compensation in excess of $100,000. William D.
40
<PAGE>
Moses, President and Chief Executive Officer of the Company, received cash
compensation during the fiscal year ended June 30, 1996 of approximately
$57,000, and no cash compensation the preceding year. For the fiscal year ended
June 30, 1997, compensation paid to current executive officers of the Company
was approximately $343,000.
The following table sets forth the cash compensation paid by the Company to
the chief executive officer and all other officers who received compensation
in excess of $100,000 (the "Named Executive Officers") during fiscal 1997:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
---------------------- ---------------------
Shares
Year Ended Underlying All Other
Name and Principal Position June 30, Salary ($) Bonus ($) Options (#) Compensation
- ---------------------------- ------------ ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William D. Moses, President
and Chief Executive
Officer.................... 1997 $109,000 -- 75,000 --
Larry Namer, former Chief
Operating Officer.......... 1997 $120,000 -- 12,915 $33,263(1)
</TABLE>
- ----------
(1) Paid pursuant to termination of an employment agreement between the Company
and Mr. Namer.
The following table sets forth information concerning the grant of stock
options to the Named Executive Officers during fiscal 1997:
Option Grants During Last Fiscal Year
<TABLE>
<CAPTION>
Number of % of Total
Shares Options Granted
Underlying to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/sh) Date
- ----- ----------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
William D. Moses........... 75,000 47.6% $5.00 April 30, 2002
Larry Namer................ 12,915 8.2% $5.00 April 30, 2002
</TABLE>
No options of the Company were exercised by such persons during fiscal
1997.
Employment Agreements
Effective December 1, 1996, the Company entered into an employment
agreement with William D. Moses, the Company's President and Chief Executive
Officer, which expires on September 30, 1998. The employment agreement provides
for a base compensation payable to Mr. Moses of $12,000 per month through
September 30, 1998. Pursuant to the agreement, Mr. Moses is entitled to
participate in any employee benefit plans and arrangements when and as
implemented by the Company. In the event of termination of Mr. Moses'
employment by the Company, without "good cause" (as defined in the employment
agreement), Mr. Moses is entitled to severance compensation equal to the lesser
of his base salary and vacation compensation due through September 30, 1998 and
his base salary and vacation compensation for one year, payable one-half upon
termination and the balance ratably over the following six months. In the event
of termination of the employment agreement by mutual agreement of the Company
and Mr. Moses, Mr. Moses is entitled to such compensation as is mutually agreed
on between the Company and Mr. Moses but in no event to exceed the amount of
severance compensation payable in the event of termination without "good
cause." Mr. Moses has agreed not to compete with the Company during the term of
the employment agreement and for a period of two years after termination of his
employment relationship with the Company in the development or provision of
media services or any other line of business which the Company is engaged in or
forms the intention to engage in during this period. In the event of a "change
in control" (as defined in the employment agreement), Mr. Moses will be deemed
to have been terminated without "good cause", and the covenant not to compete
will have no further effect.
41
<PAGE>
Effective December 1, 1996, the Company entered into an employment
agreement with Donald J. Masters, the Executive Vice President of the Company,
which expires on November 30, 1998. The employment agreement provides for a
base compensation payable to Mr. Masters of $10,000 per month through November
30, 1998. Pursuant to the agreement, Mr. Masters is entitled to participate in
any employee benefit plans and arrangements when and as implemented by the
Company. In the event of termination of Mr. Master's employment by the Company,
without "good cause" (as defined in the employment agreement), Mr. Masters is
entitled to severance compensation, equal to his base salary and vacation
compensation, at the option of the Company, for such period of time between one
year and two years that the non-compete covenant described below is in effect
and such severance compensation shall be payable one-half on the date of
termination and the balance shall be payable ratably over six months following
the date of termination. In the event of termination of the employment
agreement by mutual agreement of the Company and Mr. Masters, Mr. Masters is
entitled to such compensation as mutually agreed on between the Company and Mr.
Masters but in no event to exceed the amount of severance compensation payable
in the event of termination without "good cause." In addition, Mr. Masters has
agreed under certain circumstances not to compete with the Company during the
term of the employment agreement and for up to two years after termination of
his employment relationship with the Company in any media business whose
programming, content or services address or relate to Recovery Issues or in any
organization whose primary business is offering products and services relating
to Recovery Issues. In connection with his employment, Mr. Masters was granted
an option (the "Option") to purchase 12,915 shares of Common Stock at an
exercise price of $2.32 per share. The Option vests with respect to 10,770
shares on February 1, 1997 and the remainder vests ratably monthly thereafter.
In the event of a "change in control" (as defined in the employment agreement),
Mr. Masters will be deemed to have been terminated without "good cause," the
covenant not to compete will have no further effect and the Option will vest in
full. In addition on April 16, 1997, Mr. Masters was granted an option under
the Company's Management Bonus Plan to purchase 12,915 shares of Common Stock
at an exercise price of $5.00 per share, which will vest quarterly over one
year commencing on October 1, 1997.
Effective May 13, 1997, the Company entered into an employment agreement
with John Wheeler, the Company's Senior Vice President of Sales and Marketing,
which expires on May 31, 1999. The employment agreement provides for a base
compensation payable to Mr. Wheeler of $12,000 per month through May 13, 1999.
In addition to the base salary, Mr. Wheeler will receive a commission payable
quarterly in the amount of
42
<PAGE>
$.01 for each additional subscriber household in excess of one million
subscriber households to which an affiliated cable system service delivers a
minimum of two hours of the Company's programming, so long as the household
subscriber does not already receive the programming through the Company's
Nesting Contract with ATN or through any other agreement under which the Company
purchases carriage rights. Pursuant to the agreement, Mr. Wheeler is entitled to
participate in any employee benefits plans and arrangements when and as
implemented by the Company. In the event of termination of Mr. Wheeler's
employment by the Company, without "good cause" (as defined in the employment
agreement), Mr. Wheeler is entitled to severance compensation equal to the
lesser of his base salary and vacation compensation due through March 13, 1999
and his base salary and vacation compensation for ninety days, payable one-half
upon termination and the balance ratably semi-monthly over the compensation
reference period. In the event of termination of the employment agreement by
mutual agreement of the Company and Mr. Wheeler, Mr. Wheeler is entitled to such
compensation as is mutually agreed on between the Company and Mr. Wheeler but in
no event to exceed the amount of severance compensation payable in the event of
termination without "good cause." Mr. Wheeler has agreed not to compete with the
Company during the term of the employment agreement for a period of one year
after termination of his employment relationship with the Company in the
development or provision of recovery media services or any other line of
recovery media services which the Company is engaged in or forms the intention
to engage in during this period.
Effective May 1, 1997, the Company entered into an employment agreement
with Bill Megalos, the Company's Vice President of Production, which expires on
November 30, 1998. The employment agreement provides for a base compensation
payable to Mr. Megalos of $10,000 per month through November 30, 1998. Pursuant
to the agreement, Mr. Megalos is entitled to participate in any employee
benefit plans and arrangements when and as implemented by the Company. In the
event of termination of Mr. Megalos's employment by the Company, without "good
cause" (as defined in the employment agreement), Mr. Megalos is entitled to
severance compensation equal to his base salary and vacation compensation for
90 days, payable ratably over such 90 day period. In the event of termination
of the employment agreement by mutual agreement of the Company and Mr. Megalos,
Mr. Megalos is entitled to such compensation as is mutually agreed on between
the Company and Mr. Megalos but in no event to exceed the amount of severance
compensation payable in the event of termination without "good cause." Mr.
Megalos has agreed not to compete with the Company during the term of the
employment agreement and for a period of one year after termination of his
employment relationship with the Company in the development or provision of
recovery media services or any other line of recovery media services which the
Company is engaged in or in which the Company forms the intention to engage
with the active participation of Mr. Megalos during this period.
Stock Option Plans
The Company has adopted two stock option plans, the 1996 Employee and
Consultants Stock Option Plan (the "Employee and Consultants Plan") and the 1996
Board of Directors and Advisory Board Stock Option Plan (the "Directors and
Advisory Board Plan"). The Company has reserved an aggregate of 144,420 shares
of Common Stock for future issuance under these plans. All options granted or to
be granted under these plans are non-qualified stock options under the Internal
Revenue Code of 1986, as amended. On February 6, 1997, the Company's
shareholders approved the 1997 Management Bonus Plan (the "Management Bonus
Plan"). The Company has reserved 205,580 shares of Common Stock for issuance
under such plan. The options granted under the Management Bonus Plan are either
non-qualified or incentive stock options, at the discretion of the Company. The
Management Bonus Plan also provides for non-option awards, such as stock
appreciation rights and restricted stock awards.
1996 Employee and Consultants Stock Option Plan
Effective December 3, 1996, the Company established its Employee and
Consultants Plan for its employees and consultants. The purpose of the Employee
and Consultants Plan is to enable the Company to recognize the contributions
made to the Company by its employees and consultants and to provide such
persons with additional incentive to devote themselves to the future success of
the Company. An aggregate of 30,768 shares of Common Stock have been reserved
for issuance under the Plan. As of the date of this Prospectus, all 30,768
authorized Employee and Consultants options have been granted at an exercise
price of $5.00 per share. Options
43
<PAGE>
granted to employees vested approximately 8% on February 1, 1997 and vest
monthly thereafter for a period of 33 months. Options to purchase 3,045 shares
of Common Stock granted to two consultants are fully vested. The Employee and
Consultants Plan is administered by the Finance and Compensation Committee.
1996 Board of Directors and Advisory Board Retainer Plan
Effective December 3, 1996, the Company established its Directors and
Advisory Board Plan. The purpose of the Directors and Advisory Board Plan is to
enable the Company to recognize the contributions made to the Company by its
directors and members of the Advisory Board and to provide such persons with
additional incentive to devote themselves to the future success of the Company.
An aggregate of 113,652 shares of Common Stock are reserved for issuance under
the Directors and Advisory Board Plan.
Effective January 16, 1997, each director of the Company on December 31,
1996, was granted 12,915 options to acquire shares of Common Stock of the
Company at an exercise price of $5.00 per share. Also effective as of such
date, each member of the Advisory Board and each individual who became a member
of the Advisory Board before March 3, 1997, was granted 2,583 options to
acquire shares of Common Stock of the Company at an exercise price of $5.00 per
share. As of January 16, 1997, 113,652 options have been granted under the
Directors and Advisory Board Plan at an exercise price of $5.00 per share of
which options to purchase 12,915 shares have been granted to each of Messrs.
Henry, Moses, Masters, and Kovacs and to two former directors. Options granted
to directors vest approximately 22% on February 1, 1997 and ratably thereafter
for a period of 28 months, except that 12,915 options granted to a former
director are fully vested. Options granted to advisors vest approximately 6% on
February 1, 1997, and monthly thereafter for a period of 34 months. The
Directors and Advisory Board Plan is administered by the Finance and
Compensation Committee.
1997 Management Bonus Plan
Effective February 6, 1997, the Company's shareholders approved the
Management Bonus Plan to enable the Company to recognize the contributions made
to the Company by its directors and key personnel and to provide such persons
with additional incentive to devote themselves to the future success of the
Company. The Company has reserved 205,580 shares for issuance under the
Management Bonus Plan and has the right to grant either non-qualified or
incentive stock options and other stock-related awards. The exercise price of
incentive stock options granted under the Management Bonus Plan must be at
least 100% of the fair market value of the stock subject to the option on the
date of grant or 110% with respect to holders of more than 10% of the voting
power of the Company's outstanding Common Stock. Under the terms of the
Management Bonus Plan, the Finance and Compensation Committee determines the
fair market value of the Common Stock. The exercisability and term of each
option and the manner in which it may be exercised is determined by the Finance
and Compensation Committee, provided that no incentive stock option may be
exercised more than five years after the date of grant. The Company may grant
options for any number of shares, except that the value of the shares subject
to one or more incentive stock options first exercisable in any calendar year
may not exceed $100,000 (determined at the grant date). The Finance and
Compensation Committee administers the Management Bonus Plan.
The Company has granted to Mr. Graf a non-qualified stock option to
purchase 12,915 shares of Common Stock at an exercise price of $5.00 per share
under the Management Bonus Plan, which vests monthly over three years
commencing May 1, 1997. The Company has also granted incentive stock options to
Messrs. Masters and Wheeler, each to purchase 12,915 shares of Common Stock, an
incentive stock option to Ms. Feichter to purchase 1,000 shares of Common Stock,
incentive stock options to purchase 3,300 shares of Common Stock to other
employees of the Company and incentive stock options to purchase 2,894 shares of
Common Stock to a consultant, all of which options are at an exercise price of
$5.00 per share under the Management Bonus Plan, all of which options vest
monthly over three years commencing May 1, 1997.
The Company has also granted the following incentive stock options to
purchase an aggregate of 133,686 shares of Common Stock at an exercise price of
$5.00 per share, all of which options vest monthly over three years commencing
July 1, 1997, including options to purchase 35,000, 75,000, 9,686 and 10,000
shares to Messrs. Henry, Moses, Wheeler and Kovacs, respectively, and an option
to purchase 4,000 shares to Ms. Feichter.
44
<PAGE>
Non-Plan Stock Options
The Company has granted 123,039 non-plan stock options to acquire shares
of Common Stock, of which 110,423 are currently exercisable at an exercise
price of $2.32 per share, 2,867 are currently exercisable at an exercise
price of $.77 per share and 812 are currently exercisable at $5.00 per share.
Limitation of Liability and Indemnification
The articles of incorporation of the Company provide for the
indemnification of the Company's directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers or controlling persons
of the Company pursuant to the articles of incorporation and the corporation
law of the State of Colorado, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in such Act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Company will not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of
a director's duty of loyalty to the Company or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 7-108-403 of the Colorado statute
relating to unlawful distributions or (iv) for any transaction from which the
director derived an improper personal benefit. The Articles of Incorporation
also provide (subject to certain exceptions) that the Company shall, to the
maximum extent permitted from time to time under the law of the State of
Colorado, indemnify, and upon request shall advance expenses to, any director
or officer to the extent permitted under such law as it may from time to time
be in effect. The Company's bylaws require the Company to indemnify, to the
full extent permitted by law, any director, officer, employee or agent of the
Company for acts which such person reasonably believes are not in violation of
the Company's corporate purposes as set forth in the Articles of Incorporation.
As a result of these provisions, shareholders may be unable to recover damages
against the directors and officers of the Company for actions taken by them
which constitute negligence, gross negligence, or a violation of their
fiduciary duties, which may reduce the likelihood of shareholders instituting
derivative litigation against directors and officers and may discourage or
deter shareholders from suing directors, officers, employees and agents of the
Company for breaches of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its shareholders.
Advisory Board
The Board of Directors of the Company has established a Board of Advisors
(the "Advisory Board") to assist the Company in the development and
implementation of its long-term strategy and goals and to propose, adopt and
audit compliance by the Company with programming and business standards that
are consistent with the delivery of effective, non- exploitative, and
non-biased recovery based services. The Advisory Board will recommend to the
Company's Board of Directors the adoption of standards and practices to provide
guidance for the Company's employees in determining appropriate programming and
online content, advertising, and merchandise sales. The Advisory Board will
advise on technical matters and also serve as an independent voice for the
recovery community.
The Company has enlisted the membership of eight noted professionals in
the field of recovery, with nationally recognized expertise for their
commitment and contributions in the treatment of alcoholism and drug addiction,
child welfare issues, and the treatment and recovery field generally to serve
on the Advisory Board. The following persons serve on the Advisory Board:
45
<PAGE>
Claudia Black, Ph.D. is a nationally-recognized expert and author on the
issues confronting children of addiction and past Chairperson and founder of
the National Association for Children of Alcoholics. Dr. Black designs and
presents workshops and seminars, and has published several best selling books
in her areas of expertise.
David Bralove is the founder of a law firm representing substance abuse
and behavioral care providers nation-wide, and is Board President of The
National Treatment Consortium.
Dr. Mark Gold is a Professor of Neuroscience, Psychiatry and Community
Health and Family Medicine at the University of Florida College of Medicine.
Dr. Gold has been a national leader in the field for 25 years leading treatment
and the general public toward a greater understanding of the nature of
addiction and its successful treatment. Dr. Gold has done pioneering research
in tobacco, alcohol, cocaine and opiate addictions and has been granted several
patents for his discoveries. Dr. Gold is widely recognized by his peers, the
government, the business community and the general public as a best selling
author and addiction expert.
Earnie Larsen is a nationally known lecturer on managing personal
relationships and overcoming dysfunctional behaviors, and an author and
producer of over 55 motivational self-help books and videos. He is the
originator of the process known as "Stage II Recovery" where one attempts to
resolve life issues which often impede spiritual growth.
Robert Lindsey is a veteran of over 20 years in the field of alcoholism
and drug addiction treatment. Mr. Lindsey is currently the Vice President of
Longview Associates, Inc., a consulting firm specializing in the design and
implementation of employee assistance programs. Prior to this, Mr. Lindsey
served as the Community Relations Director at the Betty Ford Center and as the
Executive Director of the New York State Council on Alcoholism and Other Drug
Addictions.
Father Joseph Martin is the founder of Ashley, Inc., a non-profit center
dedicated to the treatment of the chemically addicted. He is an internationally
recognized speaker and creator of the film "Chalk Talk", the principal
educational vehicle on alcoholism for most treatment centers in the country.
Joseph A Pursch, M.D. is a nationally-recognized psychiatrist involved,
since 1962, in the treatment and rehabilitation of individuals with addictive
behaviors. Dr. Pursch is the former Director of Alcohol Rehabilitation Service
at the Naval Regional Medical Center at Long Beach, California. An author and
syndicated columnist, Dr. Pursch has supervised drug testing programs for
numerous sports events and has treated many public figures. Dr. Pursch has been
on the President's Commission on Alcohol and Drugs since 1979.
David Smith, M.D. is the founder and president of the Haight-Ashbury free
clinics. A specialist in the field of addiction medicine and clinical
toxicology, Dr. Smith is also the founder and executive editor of the Journal
of Psychoactive Drugs and is the president of the American Society of Addiction
Medicine (ASAM). He is a leader in the areas of treatment of addictive disease,
the psychopharmacology of drugs, and new strategies in the management of drug
abuse problems.
The Advisory Board meets semi-annually on a formal basis, and deals with
individual issues as they arise. Advisors serve terms of three years, are
compensated for meetings attended, and are eligible to participate in the
Company's 1996 Board of Directors and Advisory Board Retainer Plan.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of the date of this
Prospectus and as adjusted to reflect the sale by the Company of 1,600,000
shares of Common Stock offered hereby (based on information obtained from the
persons named below), relating to the beneficial ownership of shares of Common
Stock by: (i) each person or entity who is known by the Company to own
beneficially five percent or more of the outstanding Common Stock, (ii) each of
the Company's directors and (iii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned (2)
----------------------
Number of Shares Before After
Name and address of Beneficial Owners(1) Beneficially Owned (2) Offering Offering
- ------------------------------------------ ------------------------ ---------- ---------
<S> <C> <C> <C>
William D. Moses ........................ 640,399(3) 24.8% 15.4%
George H. Henry ........................ 284,570(4) 11.0 6.8
6860 Sunrise Court
Coral Gables, Florida 33133
Terrance and Daryl Berman ............... 195,519(5) 7.6 4.7
15601 Cheswick Court
Tampa, Florida 33647
Jonathan Katch ........................... 163,952(6) 6.4 4.0
Paul Graf .............................. 135,820(7) 5.3 3.2
High Pine, Turk Hill Road
Brewster, New York 10509
Robert P. Gordon ........................ 132,648(8) 5.2 3.2
234 21st Avenue, NE
St. Petersburg, FL 33704
Donald J. Masters ........................ 93,895(9) 3.7 2.3
Nimrod J. Kovacs ........................ 23,925(10) * *
50 Falcon Hills Drive
Highland Ranch, Colorado 80126
All directors and executive officers as a
group (8 persons) ..................... 1,186,945(11) 43.1 27.2
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address for each named individual or group
is in care of The Recovery Network, Inc.,1411 5th Street, Suite 250, Santa
Monica, California 90401.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Memorandum have been exercised and converted. Assumes a base of 2,521,250
shares of Common Stock outstanding prior to this offering and a base of
4,121,250 shares of Common Stock outstanding immediately after this
offering, before any consideration is given to outstanding options,
warrants or convertible securities.
(3) Includes (i) currently exercisable options to purchase 11,633 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
43,750 shares of Common Stock. Does not include options to purchase 76,282
shares of Common Stock which are not currently exercisable.
(4) Includes (i) currently exercisable options to purchase 8,302 shares of
Common Stock and (ii) currently
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exercisable Financing Warrants to purchase 62,500 shares of Common Stock.
Does not include options to purchase 39,613 shares of Common Stock which
are not currently exercisable.
(5) Includes currently exercisable Financing Warrants to purchase 43,750
shares of Common Stock.
(6) Includes currently exercisable options to purchase 19,734 shares of Common
Stock. Does not include options to purchase 6,096 shares of Common Stock
which are not currently exercisable.
(7) Includes (i) currently exercisable options to purchase 1,795 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
62,500 shares of Common Stock. Does not include options to purchase 11,120
shares of Common Stock which are not currently exercisable. Does not
include 83,686 shares of Common Stock held by Mr. Graf's father as to
which Mr. Graf disclaims beneficial ownership.
(8) Includes (i) currently exercisable options to purchase 15,498 shares of
Common Stock, (ii) currently exercisable Financing Warrants to purchase
6,250 shares of Common Stock and (iii) currently exercisable warrants to
purchase 15,498 shares of Common Stock. Does not include options to
purchase 2,368 shares of Common Stock which are not currently exercisable.
(9) Includes (i) currently exercisable options to purchase 18,298 shares of
Common Stock, (ii) 37,212 shares of Common Stock held jointly by Mr.
Masters and his spouse, (iii) 14,259 shares of Common Stock held in the
name of trusts for the benefit of the children of Mr. Masters and his
spouse. Mr. Masters disclaims beneficial ownership of the shares of Common
Stock held in trust and (iv) currently exercisable Financing Warrants to
purchase 6,250 shares of Common Stock held jointly by Mr. Masters and his
spouse. Does not include options to purchase 20,447 shares of Common Stock
held by Mr. Masters which are not currently exercisable.
(10) Includes (i) currently exercisable options to purchase 6,217 shares of
Common Stock, and (ii) 5,000 shares of Common Stock and Financing Warrants
exercisable to purchase 6,250 shares of Common Stock held by Kovacs
Communication, Inc., of which Mr. Kovacs is a controlling shareholder.
Does not include options to purchase 16,698 shares of Common Stock which
are not currently exercisable.
(11) Includes (i) currently exercisable options to purchase 54,581 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
181,250 shares of Common Stock. Does not include options to purchase
136,843 shares of Common Stock which are not currently exercisable.
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CERTAIN TRANSACTIONS
In May 1994, the Company entered into a one-year consulting agreement with
Masters, Smith & Co. pursuant to which Masters, Smith & Co. was engaged to
assist the Company in the financing and development of its business. Pursuant
to the agreement, Masters, Smith & Co. received 42,818 shares of Common Stock
valued at $.93 per share, $10,000 upon execution of the agreement and a monthly
retainer in the amount of $10,000 commencing June 1, 1994. During 1995,
Masters, Smith & Co. agreed to accept 64,424 shares of Common Stock valued at
$.93 per share in lieu of such cash payments. Donald J. Masters, Executive Vice
President of the Company, was a partner of Masters, Smith & Co. The Company
believes that its arrangements with Masters, Smith & Co. were fair and
reasonable to the Company and were on terms no less favorable than could have
been obtained from an unaffiliated party.
In November 1994, William D. Moses, the Company's President, Chief
Financial Officer and Acting Chief Financial Officer purchased 186,074 shares
of Common Stock from the Company at a purchase price of $.54 per share (or an
aggregate of $100,000). In June 1995, Mr. Moses was issued an additional
186,074 shares at $.54 per share for services rendered to the Company during
the fiscal year ended June 30, 1995.
In January 1995, Jonathan Katch, a principal stockholder and a former
director and officer of the Company and Chief Executive Officer of Recovery
Interactive, was issued 78,776 shares of Common Stock, valued at $.93 per
share, as reimbursement for expenses incurred by him on behalf of the Company.
During November 1995 and April 1996, the Company sold shares of Common
Stock at $2.32 per share in a private placement. George H. Henry, a director of
the Company, purchased 32,288 shares of Common Stock in such offering, at the
same price and on the same terms as the other investors in such offering. In
May 1996, the Company issued to Mr. Henry 17,220 shares, valued at $2.32 per
share, of Common Stock in consideration for certain strategic and operational
consulting services rendered by him from June 1995 to May 1996. In June 1996,
Mr. Henry was also granted an option to purchase an additional 15,498 shares of
Common Stock at an exercise price of $3.87 for certain strategic and
operational consulting services to be rendered by him from June 1996 to May
1997.
During April 1996, the Company issued shares of Common Stock in a
shareholders rights offering, pursuant to which the Company granted each
shareholder of record one transferable right for each share of Common Stock
owned by such shareholder. Five rights entitled a shareholder to purchase one
share of Common Stock at a price of $.77 per share. Mr. Moses exercised rights
to purchase 87,670 shares of Common Stock, Mr. Henry exercised rights to
purchase 31,581 shares of Common Stock and Mr. Katch exercised rights to
purchase 10,020 shares of Common Stock in such offering.
During the period from July 1996 through October 1996, the Company issued
an aggregate principal amount of $310,000 of Convertible Notes in a private
placement. The Company sold a Convertible Note in an aggregate principal amount
of $30,000 to each of Messrs. Henry and Moses on July 17, 1996 and October 14,
1996, respectively. In November 1996, Messrs. Henry and Moses each converted
the principal and interest on their Convertible Note into 8,524 shares of
Common Stock at an effective purchase price of $3.68 per share. Pursuant to the
terms of the Convertible Notes, as modified by a change in terms offered to all
noteholders, each of Messrs. Henry and Moses received and exercised warrants to
purchase an additional 17,048 shares of Common Stock at a purchase price of
$2.32 per share. In addition, Messrs. Moses and Henry were granted certain
registration rights with respect to the shares of Common Stock issued upon
conversion of the Convertible Notes and upon the exercise of the warrants.
Effective August 30, 1996, the Company entered into a consulting and bonus
agreement (the "Consulting Agreement") with Jonathan Katch. Mr. Katch was
granted a bonus of 12,915 stock options at an exercise price of $2.32 per share
for his services relating to the creation of Recovery Interactive and for his
services as a former officer and director of the Company. The stock options
vested upon execution of the Consulting Agreement. In addition, the Consulting
Agreement provides that Mr. Katch will serve as a consultant to the Company's
management for a period of three years for which Mr. Katch was granted an
additional 12,915 stock options at an exercise price of $2.32 per share. Such
stock options commenced vesting at the rate of 1,075 stock options per fiscal
quarter, on September 30, 1996.
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<PAGE>
From October to November 1996, the Company reduced the exercise price of
options granted to its non- employee directors from $3.87 to $2.32 to encourage
such directors to exercise their vested options. Mr. Fuellhart, Mr. Henry and
Mr. Kovacs exercised options to purchase 25,830, 28,412 and 6,458 shares of
Common Stock, respectively. Each director was granted certain registration
rights with respect to the shares of Common Stock issued upon exercise of the
options. See "Description of Securities -- Registration Rights."
During October and November 1996, Messrs. Katch and Moses were issued
10,763 and 32,287 shares of Common Stock, respectively, valued at $2.32 per
share as reimbursement for expenses incurred by them on behalf of the Company.
During October 1996 to January 1997, the Company sold shares of Common
Stock at $3.48 per share in a private placement. Messrs. Henry and Berman
purchased 28,699 shares and 71,891 shares of Common Stock, respectively, in
such offering at the same price and on the same terms as the other investors in
such offering. The purchasers in the private placement, including Messrs. Henry
and Berman, were granted certain registration rights with respect to the shares
of Common Stock purchased.
On November 22, 1996, Mr. Moses agreed to convert $49,000 of deferred
compensation earned by him from May 1996 to November 1996 into 21,094 shares of
Common Stock, at a price of $2.32 per share.
In March and April 1997, the Company sold an aggregate of 40 Units in the
Private Financing. Each Unit consisted of a $50,000 principal amount Financing
Note, 10,000 shares of Common Stock and 12,500 Financing Warrants. The offering
price was $50,000 per Unit. In connection with the Private Financing, Mr. Henry
purchased 5 Units; Paul Graf, a director of the Company, purchased 5 Units;
Mr. Masters and his spouse jointly purchased .5 Units; Mr. Moses purchased 3.5
Units; Terrance and Daryl Berman, principal shareholders of the Company,
purchased 3.5 Units; and Kovacs Communication, Inc., of which Mr. Nimrod
Kovacs, a director of the Company is a controlling shareholder, purchased .5
Units in the Private Financing. See "Description of Securities -- Recent
Financing."
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under the Nesting Contract entered into with ATN. Under
the Nesting Contract, ATN provides the ATN Services on its satellite
transponder to The Recovery Network for two hours of broadcast time per day,
one hour in the morning and one hour in the evening. ATN provides distribution
of the Company's programming into cable systems through existing affiliation
agreements between ATN and those systems. Under the Nesting Contract, the
Company is charged a daily rate for broadcast time provided by ATN to the
Company with the actual charges for each calendar month being based on the
actual monthly number of households served by ATN affiliates. However, the
Nesting Contract provides that in no event will charges exceed $60,000 per
calendar month for the first six months of the Nesting Contract, or $65,000 for
the subsequent six months of the Nesting Contract. ATN has also agreed to
provide the ATN Services for two additional hours of broadcasting, if such time
is available, to the Company at ATN's cost plus 20%, which fee is in addition
to the charges for broadcast time. ATN has also agreed to provide authorization
services for cable systems with which the Company directly enters into
affiliation agreements to enable the Company to broadcast its programming on
such affiliates' cable systems, provided that the Company purchase the
necessary equipment, if any. The Nesting Contract expires in April 1998, unless
renewed by both parties. In the event the number of ATN Affiliates decreases by
10%, the Company may terminate the Nesting Contract upon 30 days written
notice. The Company has granted ATN the right, for the term of the Nesting
Contract and for a period of one year thereafter, to match any other nesting
arrangement presented to the Company by a third party. Mr. George H. Henry, the
Chairman of the Board of the Company, is the Chairman of the Board and Chief
Executive Officer and a principal shareholder of ATN. Mr. William D. Moses, the
President and Chief Executive Officer, is a principal shareholder of ATN.
The Company believes that all of the foregoing transactions and
arrangements with affiliates were fair and reasonable to the Company and were
and are on terms no less favorable than could have been obtained from
unaffiliated third parties. There can be no assurance, however, that future
transactions or arrangements between the Company and affiliates will continue
to be advantageous to the Company, that conflicts of interest will not arise
with respect thereto, or that if conflicts do arise, they will be resolved in a
manner favorable to the Company. Any such future transactions will be on terms
no less favorable to the Company than could be obtained from unaffiliated
parties and will be approved by the Company's Finance and Compensation
Committee.
50
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.01 per share. As of the date of this Prospectus, the Company had
outstanding 2,521,250 shares of Common Stock owned by approximately 88 holders
of record.
Common Stock
The holders of the Common Stock are entitled to one vote for each share
held of record in the election of directors of the Company and in all other
matters to be voted on by the shareholders. There is no cumulative voting with
respect to the election of directors, with the result that the holders of more
than 50 percent of the shares voting for the election of directors can elect
all of the directors. Holders of Common Stock are entitled (i) to receive such
dividends as may be declared from time to time by the board of directors out of
funds legally available for such purpose, and (ii) in the event of the
liquidation, dissolution, or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities and after provision has been made
for each class of stock, if any, having preference over the Common Stock. All
of the outstanding shares of Common Stock are, and the shares of Common Stock
offered hereby will be, upon issuance and sale, validly issued, fully paid, and
nonassessable. Holders of Common Stock have no preemptive right to subscribe
for or purchase additional shares of any class of the Company's capital stock.
Redeemable Warrants
Each Warrant offered hereby will entitle the registered holder thereof
(the "Warrant Holders") to purchase one share of Common Stock at a price of
$5.50, subject to adjustment in certain circumstances at any time commencing
, 1998 (or such earlier date as to which the Underwriter consents) through
and including , 2002. The Warrants will be separately transferable
immediately upon issuance.
The Warrants are redeemable by the Company at any time commencing on
, 1998 upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives notice
(the "Call Date") has been at least 150% (currently, $8.25, subject to
adjustment) of the then effective exercise price of the Warrants and the
Company obtains the written consent of the Underwriter to such redemption prior
to the Call Date. The Warrant Holders shall have the right to exercise their
Warrants until the close of business on the date fixed for redemption.
The Warrants will be issued in registered form under a warrant agreement
by and among the Company, American Stock Transfer & Trust Company, as warrant
agent (the "Warrant Agent"), and the Underwriter (the "Warrant Agreement"). The
exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at prices below the
exercise price of the Warrants. Reference is made to the Warrant Agreement
(which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) for a complete description of the terms and conditions
therein (the description herein contained being qualified in its entirety by
reference thereto).
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the Warrant Agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless, at the time of exercise, the
Company has filed a current registration statement with the Commission covering
the shares of Common Stock issuable upon exercise of such Warrant and such
shares have been registered or qualified or deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of such Warrant. The Company will use its best efforts
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<PAGE>
to have all such shares so registered or qualified on or before the exercise
date and to maintain a current prospectus relating thereto until the expiration
of the Warrants, subject to the terms of the Warrant Agreement. While it is the
Company's intention to do so, there can be no assurance that the Company will
be able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrant Holder exercises all Warrants then owned of record by him
or her, the Company will pay to such Warrant Holder, in lieu of the issuance of
any fractional share which is otherwise issuable, an amount in cash based on
the market value of the Common Stock on the last trading day prior to the
exercise date.
Recent Financing
In March and April 1997, the Company sold to 21 persons who qualify as
"accredited investors" 40 Units. Each Unit consisted of (i) a Financing Note in
the principal amount of $50,000 bearing interest at the rate of 9% per annum
due and payable on the earlier of the consummation of this offering or March 6,
1998; (ii) 10,000 Financing Shares; and (iii) Financing Warrants to purchase
12,500 shares of Common Stock. The Financing Warrants are exercisable until
March 6, 2002 at a price of $4.00 per share.
The aggregate $2,000,000 principal amount of Financing Notes of and
accrued interest thereon of approximately $60,000 will be repaid from the
proceeds of this offering.
Registration Rights
In connection with the Private Financing, the Company has agreed to
include the 400,000 Financing Shares and the 500,000 shares issuable upon
exercise of the Financing Warrants (the "Financing Warrant Shares") in a
registration statement which the Company will prepare and file with, and use
its best efforts to have declared effective by, the Commission so as to permit
the public trading of the Financing Shares and Financing Warrant Shares
pursuant thereto commencing no later than 15 months following the effective
date of the Registration Statement of which this Prospectus is a part. If such
registration statement is not declared effective by the Commission within 15
months following the consummation of this offering, then commencing on the
first day of the 16th month following the consummation of this offering, the
Company shall issue to each holder of Financing Shares and Financing Warrant
Shares, on the first day of each month a registration statement continues not
to have declared effective by the Commission, such number of additional shares
of Common Stock as is equal to 10% of the number of Financing Shares and
Financing Warrant Shares issued to and held by such holder and such number of
additional warrants as is equal to 10% of the number of Financing Warrants
issued to and held by such holder. The holders of the Financing Shares and
Financing Warrants have agreed not to sell or otherwise dispose of any of such
securities for a period of 12 months following the effective date of the
Registration Statement of which this Prospectus is a part. See "Shares Eligible
for Future Sale."
The Company has granted certain "demand" and "piggyback" registration
rights to the holders of an additional 433,223 shares of Common Stock. The
demand registration rights are exercisable, under certain circumstances,
commencing 12 months following the date of this Prospectus.
In connection with this offering, the Company has agreed to grant to the
Underwriter certain demand and piggyback registration rights in connection with
the 320,000 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants and the warrants included therein. See "Underwriting."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock, and the Warrant
Agent for the Warrants, is American Stock Transfer and Trust Company, 40 Wall
Street, New York, New York 10005.
Reports to Stockholders
The Company has agreed, subject to the sale of the shares of Common Stock
and Warrants offered hereby, that on or before the date of this Prospectus, it
will register its Common Stock and Warrants under the provisions of Section
12(g) of the Exchange Act and that it will use its best efforts to maintain
such registration. Such registration will require the Company to comply with
periodic reporting, proxy solicitation and certain other requirements of the
Exchange Act.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,121,250
shares of Common Stock outstanding (assuming no exercise of the Warrants or the
other outstanding options and warrants), of which the 1,600,000 shares being
offered hereby will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate of the Company" (in general, a person who has a controlling position
with regard to the Company), which will be subject to the resale limitations of
Rule 144 promulgated under the Securities Act.
All of the remaining 2,521,250 shares of Common Stock currently
outstanding are "restricted securities" or owned by "affiliates" (as those
terms are defined in Rule 144) and thus may not be sold publicly unless they
are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration. Of the 2,521,250 restricted shares, an
aggregate of 1,681,139 shares will be eligible for sale, without registration,
under Rule 144 (subject to certain volume limitations prescribed by such rule
and to the contractual restrictions described below), commencing 90 days
following the date of this Prospectus and the balance of such shares will
become eligible for sale at various times commencing October 1997. Holders of
all of the 2,521,250 outstanding shares of Common Stock have agreed not to (i)
sell or otherwise dispose of any shares of Common Stock in any public market
transaction (including pursuant to Rule 144) or (ii) exercise any rights held
by such holders to cause the Company to register any shares of Common Stock for
sale pursuant to the Securities Act, in each case, for a period of 12 months
following the date of this Prospectus, without the Underwriter's prior written
consent.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate) who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of the issuer's Common Stock or the average weekly
trading volume during the four calendar weeks preceding such sale, provided
that certain public information about the issuer as required by Rule 144 is
then available and the seller complies with certain other requirements.
Affiliates may sell such shares in compliance with Rule 144, other than the
holding period requirement. A person who is not an affiliate, has not been an
affiliate within three months prior to sale, and has beneficially owned the
restricted shares for at least two years is entitled to sell such shares under
Rule 144 without regard to any of the limitations described above.
Prior to this offering, there has been no market for the Common Stock or
Warrants and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or Warrants or the availability of such shares
for sale will have on the market prices of the Common Stock and Warrants
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock and Warrants and could impair the
Company's ability to raise capital through the sale of its equity securities.
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UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the
terms and conditions contained in the underwriting agreement, to purchase
1,600,000 Shares and 1,600,000 Warrants from the Company. The Underwriter is
committed to purchase and pay for all of the Common Stock and Warrants offered
hereby if any of such securities are purchased. The Shares and Warrants are
being offered by the Underwriter, subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to approval of certain
legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Shares and Warrants to the public at the public offering prices set forth on
the cover page of this Prospectus. The Underwriter may allow to certain dealers
who are members of the National Association of Securities Dealers, Inc. (the
"NASD") concessions, not in the excess of $ per Warrant, of which not in
excess of $ per Share and $ per Warrant may be reallowed to the dealers
who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 240,000 additional
Shares and/or 240,000 additional Warrants at the public offering prices set
forth on the cover page of this Prospectus, less the underwriting discounts and
commissions. The Underwriter may exercise this option in whole or, from time to
time, in part, solely for the purpose of covering over-allotments, if any, made
in connection with the sale of the Shares and/or Warrants offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering, of which $50,000 has
been paid as of the date of this Prospectus. The Company has also agreed to pay
all expenses in connection with qualifying the Common Stock and Warrants
offered hereby for sale under the laws of such states as the Underwriter may
designate, including expenses of counsel retained for such purpose by the
Underwriter. The Company has agreed to sell to the Underwriter and its
designees for an aggregate of $176, warrants (the "Underwriter's Warrants") to
purchase up to 160,000 shares of Common Stock at an exercise price of $7.00 per
share (140% of the public offering price per share) and up to 160,000 Warrants
(each exercisable to purchase one share of Common Stock at a price of $9.075
per share) at an exercise price of $.14 per Warrant (140% of the public
offering price per Warrant). The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
Prospectus, except to the officers and partners of the Underwriter and members
of the selling group and are exercisable at any time and from time to time, in
whole or in part, during the five-year period commencing on the date of this
Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the
holders of the Underwriter's Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Common Stock. To
the extent that the Underwriter's Warrants are exercised, dilution to the
interests of the Company's shareholders will occur. Further, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the Underwriter's Warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company
than those provided in the Underwriter's Warrants. Any profit realized by the
Underwriter on the sale of the Underwriter's Warrants, the underlying shares of
Common Stock or the underlying warrants, or the shares of Common Stock issuable
upon exercise of such underlying warrants may be deemed additional underwriting
compensation. The Company has agreed, at the request of the holders of a
majority of the Underwriter's Warrants, at the Company's expense, to register
the Underwriter's Warrants, the shares of Common Stock and warrants underlying
the Underwriter's Warrants, and the shares of Common Stock issuable upon
exercise of the underlying warrants under the Securities Act on one occasion
during the Warrant Exercise Term and to include the Underwriter's Warrants, and
all such underlying securities in any appropriate registration statement which
is filed by the Company during the seven years following the date of this
Prospectus.
In addition, the Company has agreed to enter into a consulting agreement
to retain the Underwriter as a financial consultant for a period of two years
from the consummation of this offering at an annual fee of $30,000, the entire
$60,000 payable in full, in advance. The consulting agreement will not require
the consultant to devote a specific amount of time to the performance of its
duties thereunder. In the event that the Underwriter originates a financing or
a merger, acquisition, joint venture or other transaction to which the Company
is a party, the Underwriter will be entitled to receive a finder's fee in
consideration for origination of such transaction.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this
Prospectus), to pay to the Underwriter for bona fide services provided a
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fee of 5% of the exercise price for each Warrant exercised; provided however,
that the Underwriter will not be entitled to receive such compensation in
Warrant exercise transactions in which (i) the market price of Common Stock at
the time of the exercise is lower than the exercise price of the Warrants; (ii)
the Warrants are held in any discretionary account; (iii) disclosure of
compensation arrangements is not made, in addition to the disclosure provided
in this Prospectus, in documents provided to holders of Warrants at the time of
exercise; (iv) the holder of the Warrants has not confirmed in writing that the
Underwriter solicited such exercise; or (v) the transaction was in violation of
Regulation M promulgated under the Exchange Act.
The Company has also agreed, for a period of five years following the date
of this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to select a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. All of the Company's current officers, directors
and shareholders beneficially owning 5% or more of the Common Stock have agreed
to vote their Common Stock in favor of such designee. The Underwriter has not
yet exercised its right to designate such a person.
The Underwriter acted as placement agent for the Company in connection
with the Private Financing and was paid a placement agent fee of $200,000,
constituting 10% of the gross proceeds of the Private Financing, plus a
non-accountable expense allowance of $25,000.
Regulation M promulgated under the Exchange Act may prohibit the
Underwriter from engaging in any market making activities with regard to the
Company's securities for the period from nine business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation; and any period during which the
Underwriter, or any affiliated parties, participate in a distribution of
securities of the Company for the account of the Underwriter or any such
affiliate. As a result, the Underwriter may be unable to provide a market for
the Company's securities during certain periods while the Warrants are
exercisable.
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 1% of the securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public trading market for the
Shares or the Warrants. Consequently, the initial public offering price of the
Shares and the Warrants and the exercise price of the Warrants have been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in determining the offering prices and the exercise price of
the Warrants were the Company's financial condition and prospects, certain
financial and operating information and market prices of companies engaged in
activities similar to those of the Company and the general condition of the
securities market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Common Stock and Warrants. Specifically, the Underwriter may over-allot in
connection with the offering, creating a short position in the Common Stock
and/or Warrants for its own account. In addition, to cover over-allotments or
to stabilize the price of the Common Stock and Warrants, the Underwriter may
bid for, and purchase, shares of Common Stock and Warrants in the open market.
The Underwriter may also reclaim selling concessions allowed to a dealer for
distributing the Common Stock and Warrants in the offering, if the Underwriter
repurchases previously distributed Common Stock and Warrants in transactions to
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common stock and
Warrants above independent market levels. The Underwriter is not required to
engage in these activities, and may end any of these activities at any time.
55
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Parker Chapin Flattau &
Klimpl, LLP, New York, New York. Certain legal matters will be passed upon for
the Underwriter by Tenzer Greenblatt LLP, New York, New York.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. Reference is made to said report which includes
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the
securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the securities offered hereby,
reference is hereby made to the Registration Statement and the exhibits and
schedules thereto filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the office of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and the Commission's Regional
Offices at 7 World Trade Center, 13th Floor, New York, New York 10048, and
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering Analysis and Retrieval (EDGAR) system. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issues that file electronically with
the Commission. The address of that site is http://www.sec.gov.
56
<PAGE>
THE RECOVERY NETWORK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ...................................................... F-2
Balance Sheets at June 30, 1996 and March 31, 1997 .................................... F-3
Statements of Operations for the fiscal years ended June 30, 1995 and 1996, for the period
from inception (May 1992) to June 30, 1996 and for the nine months ended March 31, 1996
and 1997 .............................................................................. F-4
Statements of Shareholders' Deficit for the period from inception (May 1992) to June 30,
1996 and the nine months ended March 31, 1997 ........................................ F-5
Statements of Cash Flows for the fiscal years ended June 30, 1995 and 1996, for the period
from inception (May 1992) to June 30, 1996 and for the nine months ended March 31, 1996
and 1997 .............................................................................. F-7
Notes to Financial Statements ............................................................ F-8
</TABLE>
Information as of March 31, 1997 and for the
nine months ended March 31, 1996 and 1997 is unaudited.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Recovery Network, Inc.:
We have audited the accompanying balance sheet of The Recovery Network,
Inc. (a Colorado corporation in the development stage) as of June 30, 1996, and
the related statements of operations, shareholders' deficit and cash flows for
the years ended June 30, 1995 and 1996 and for the period from inception (May
1992) to June 30, 1996. 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 audit 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 audit provides 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 The Recovery Network, Inc.
as of June 30, 1996 and the results of its operations and its cash flows for
the years ended June 30, 1995 and 1996 and for the period from inception (May
1992) to June 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recurring losses from operations and has
a net capital deficiency that raises substantial doubt about its ability to
continue as a going concern. The ability of the Company to operate as a going
concern is dependent upon its ability (1) to obtain sufficient additional
capital, (2) to distribute its programming and services through multimedia
channels, (3) to achieve a critical mass of viewers to attract advertisers and
healthcare providers and (4) to acquire and develop appropriate programming for
broadcast. The Company plans to raise additional working capital through
private and public offerings, as well as attain listing of its stock for
trading in the NASDAQ Smallcap Market. The successful outcome of future
activities cannot be determined at this time and there are no assurances that
if achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results. The financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
November 26, 1996
F-2
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
BALANCE SHEETS
AS OF JUNE 30, 1996
AND MARCH 31, 1997 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1997
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................ $ 137,492 $ 733,932
Prepaid expenses ................................................ 700 11,522
Accounts receivable ............................................. -- 4,928
---------- ------------
Total current assets ....................................... 138,192 750,382
FURNITURE AND EQUIPMENT, net ....................................... 45,249 61,017
SECURITY DEPOSIT ................................................... 25,000 32,710
INVESTMENT IN JOINT VENTURE ....................................... -- 71,015
DEFERRED OFFERING COSTS .......................................... -- 199,277
OTHER ASSETS, net of accumulated amortization of $984 as of June 30,
1996 and $1,168 as of March 31, 1997 .............................. 246 61
---------- ------------
$ 208,687 $ 1,114,462
========== ============
</TABLE>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
June 30, March 31,
1996 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ........................... $ 99,500 $ 177,663
Accrued professional fees ....................................... 14,286 99,398
Current portion of capital lease obligation ..................... 1,571 1,768
Notes payable ................................................... -- 1,033,018
Deferred compensation ............................................. 24,167 --
Due to shareholders ............................................. 202,168 9,854
----------- -----------
Total current liabilities ................................. 341,692 1,321,701
CAPITAL LEASE OBLIGATION .......................................... 2,702 1,687
CONVERTIBLE NOTES PAYABLE .......................................... 20,000 --
----------- -----------
Total Liabilities .......................................... 364,394 1,323,388
----------- -----------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value:
Authorized--10,000,000 shares Issued and outstanding, 1,591,969
shares at June 30, 1996 and 2,511,250 shares at March 31, 1997 15,920 25,112
Additional paid-in capital .................................... 1,908,590 4,152,852
Stock subscriptions (notes receivable) ........................ 500 (9,900)
Prepaid consulting costs ....................................... (1,250) (11,250)
Deficit accumulated in the development stage .................. (2,079,467) (4,365,740)
----------- -----------
Shareholders' deficit ....................................... (155,707) (208,926)
----------- -----------
$ 208,687 $ 1,114,462
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996, FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996, AND FOR THE
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
For the For the Nine Months
Years Ended June 30, From inception Ended March 31,
-------------------------- (May 1992) ----------------------------
1995 1996 to June 30, 1996 1996 1997
----------- ------------- ------------------ ------------ --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
DOMESTIC ADVERTISEMENT
SALES ................................. $ -- $ -- $ -- $ -- $ 28,718
--------- ---------- ----------- --------- ----------
SALARIES AND CONSULTING
EXPENSES .............................. 423,820 680,205 1,362,985 324,157 812,861
GENERAL AND ADMINISTRATIVE
EXPENSES .............................. 57,410 328,754 478,782 108,143 588,428
PROGRAMMING EXPENSES .................. -- 192,349 192,349 131,107 282,724
MARKETING EXPENSES ..................... 1,000 28,135 40,865 11,178 230,916
LOSS ON INVESTMENT IN JOINT
VENTURE .............................. -- -- -- -- 228,985
--------- ---------- ----------- --------- ----------
Operating Expenses .................. 482,230 1,229,443 2,074,981 574,585 2,143,914
--------- ---------- ----------- --------- ----------
Loss from operations .................. 482,230 1,229,443 2,074,981 574,585 2,115,196
INTEREST (INCOME) EXPENSE, net .......... 7,311 (6,414) 2,886 (5,475) 171,077
--------- ---------- ----------- --------- ----------
Loss before provision for state income
taxes .............................. 489,541 1,223,029 2,077,867 569,110 2,286,273
PROVISION FOR STATE INCOME
TAXES ................................. 800 800 1,600 -- --
--------- ---------- ----------- --------- ----------
NET LOSS .............................. $ 490,341 $1,223,829 $2,079,467 $ 569,110 $2,286,273
========= ========== =========== ========= ==========
LOSS PER SHARE INFORMATION:
Loss per share ........................ $ (0.43) $ (0.71) $ (0.35) $ (1.13)
========= ========== ========= ==========
Weighted average number of common
and common equivalent shares
outstanding ........................... 1,145,962 1,733,028 1,629,831 2,023,852
========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996
AND FOR THE NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in
Shares Amount Capital
--------- --------- ------------
<S> <C> <C> <C>
Issuance of common stock for
cash:
August 1992 at $0.45 per share...... 192,669 $ 1,927 $ 85,573
June 1993 at $23.36 per share ...... 1,714 17 39,983
November 1993 at $32.70 per
share ........................... 2,141 21 69,979
Issuance of common stock for
consulting services issued:
May 1993 at $0.62 per share ...... 10,704 107 6,524
August 1993 at $5.92 per share...... 7,600 76 44,924
May 1994 at $0.93 per share......... 23,764 238 21,842
Stock subscriptions for:
Purchase of common stock issued
July 1994 at $11.62 per share ..... -- -- --
Shares to be issued for payment
of consulting services rendered
at $0.93 per share ............... -- -- --
Amortization of prepaid consulting
costs ............................. -- -- --
Net loss ........................ -- -- --
-------- -------- ---------
BALANCE, June 30, 1994 ............ 238,592 2,386 268,825
Issuance of common stock for
cash and stock subscription:
July 1994 at $11.62 per share ..... 5,595 56 64,944
January 1995 at $0.54 per
share ........................... 186,074 1,861 98,139
Issuance of common stock for
consulting services and stock
subscription issued November
1994 through June 1995:
at $0.54 per share ............... 186,074 1,861 98,139
at $0.93 per share ............... 261,239 2,612 241,328
at $2.32 per share ............... 2,583 26 5,974
Issuance of common stock for
conversion of debt and accrued
interest issued on November
1994 at $0.93 per share ......... 52,793 528 48,524
Amortization of prepaid consulting
costs ............................. -- -- --
Net loss ........................ -- -- --
-------- -------- ---------
BALANCE, June 30, 1995 ............ 932,950 9,330 825,873
Issuance of common stock for
cash:
November 1995 through April
1996 at $2.32 per share,
including 17,220 shares
issued for services for stock
offering ........................ 339,883 3,399 746,101
April 1996 at $0.77 per share ..... 259,281 2,593 198,174
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Stock Prepaid Accumulated in
Subscriptions Consulting the Development
(Notes Receivable) Costs Stage Total
-------------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock for
cash:
August 1992 at $0.45 per share...... $ -- $ -- $ -- $ 87,500
June 1993 at $23.36 per share ...... -- -- -- 40,000
November 1993 at $32.70 per
share ........................... -- -- -- 70,000
Issuance of common stock for
consulting services issued:
May 1993 at $0.62 per share ...... -- -- -- 6,631
August 1993 at $5.92 per share...... -- (45,000) -- --
May 1994 at $0.93 per share......... -- (22,080) -- --
Stock subscriptions for:
Purchase of common stock issued
July 1994 at $11.62 per share ..... 15,000 -- -- 15,000
Shares to be issued for payment
of consulting services rendered
at $0.93 per share ............... 17,703 (17,703) -- --
Amortization of prepaid consulting
costs ............................. -- 20,380 -- 20,380
Net loss ........................ -- -- (365,297) (365,297)
-------- -------- --------- ---------
BALANCE, June 30, 1994 ............ 32,703 (64,403) (365,297) (125,786)
Issuance of common stock for
cash and stock subscription:
July 1994 at $11.62 per share ..... (15,000) -- -- 50,000
January 1995 at $0.54 per
share ........................... -- -- -- 100,000
Issuance of common stock for
consulting services and stock
subscription issued November
1994 through June 1995:
at $0.54 per share ............... -- -- -- 100,000
at $0.93 per share ............... (17,703) -- -- 226,237
at $2.32 per share ............... -- -- -- 6,000
Issuance of common stock for
conversion of debt and accrued
interest issued on November
1994 at $0.93 per share ......... -- -- -- 49,052
Amortization of prepaid consulting
costs ............................. -- 48,153 -- 48,153
Net loss ........................ -- -- (490,341) (490,341)
-------- -------- --------- ---------
BALANCE, June 30, 1995 ............ -- (16,250) (855,638) (36,685)
Issuance of common stock for
cash:
November 1995 through April
1996 at $2.32 per share,
including 17,220 shares
issued for services for stock
offering ........................ -- -- -- 749,500
April 1996 at $0.77 per share ..... -- -- -- 200,767
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF SHAREHOLDERS' DEFICIT (continued)
FOR THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996
AND FOR THE NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in
Shares Amount Capital
----------- ---------- ------------
<S> <C> <C> <C>
Issuance of common stock for
consulting services January,
May and June 1996 at $2.32
per share ..................... 59,855 598 138,442
Cash received for shares to be
issued at $2.32 per share ...... -- -- --
Amortization of prepaid consulting
costs ........................... -- -- --
Net loss ........................ -- -- --
--------- -------- ----------
BALANCE, June 30, 1996 ......... 1,591,969 15,920 1,908,590
Issuance of common stock for
consulting services issued
during October and November
1996 at $2.32 .................. 59,194 592 136,908
Issuance of common stock for
conversion of debt, accrued
interest and deferred
compensation during November 1996:
at $2.32 per share ............ 31,857 319 73,681
at $2.90 per share ............ 6,888 69 19,931
at $3.68 per share ............ 71,033 710 260,790
Issuance of common stock for
cash and notes receivable:
during November 1996, 73,615
options exercised at $2.32
per share ..................... 73,615 736 170,264
during November 1996 through
January 1997, warrants
exercised under convertible notes
payable at $2.32 per share ..... 142,065 1,420 328,580
during November 1996 through
January 1997, shares issued
at $3.48 per share, including
7,749 shares issued for
services for stock offering 146,510 1,465 482,035
during December 1996, 44
options exercised at $0.77
per share ..................... 44 -- 33
Issuance of common stock for an
outstanding stock subscription
during December 1996 ......... 216 2 498
Shares retired during December
1996 pursuant to a settlement
with a shareholder valued at
$2.32 per share ............... (2,141) (21) (4,952)
Issuance of common stock and
warrants for cash net of
offering costs of $243,456 under
the February 1997 private
placement at $2.02 and $0.51
per share, respectively ......... 390,000 3,900 776,494
Amortization of prepaid consulting
costs ........................... -- -- --
Net loss for the nine months
ended March 31, 1997
(unaudited) .................. -- --
--------- -------- ----------
BALANCE,
March 31, 1997 (unaudited) ...... 2,511,250 $ 25,112 $4,152,852
========= ======== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Stock Prepaid Accumulated in
Subscriptions Consulting the Development
(Notes Receivable) Costs Stage Total
-------------------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Issuance of common stock for
consulting services January,
May and June 1996 at $2.32
per share ..................... -- -- -- 139,040
Cash received for shares to be
issued at $2.32 per share ...... 500 -- -- 500
Amortization of prepaid consulting
costs ........................... -- 15,000 -- 15,000
Net loss ........................ -- -- (1,223,829) (1,223,829)
-------- ---------- ------------ -----------
BALANCE, June 30, 1996 ......... 500 (1,250) (2,079,467) (155,707)
Issuance of common stock for
consulting services issued
during October and November
1996 at $2.32 .................. -- (22,500) -- 115,000
Issuance of common stock for
conversion of debt, accrued
interest and deferred
compensation during November 1996:
at $2.32 per share ............ -- -- -- 74,000
at $2.90 per share ............ -- -- -- 20,000
at $3.68 per share ............ -- -- -- 261,500
Issuance of common stock for
cash and notes receivable:
during November 1996, 73,615
options exercised at $2.32
per share ..................... -- -- -- 171,000
during November 1996 through
January 1997, warrants
exercised under convertible notes
payable at $2.32 per share ..... (9,900) -- -- 320,100
during November 1996 through
January 1997, shares issued
at $3.48 per share, including
7,749 shares issued for
services for stock offering -- -- -- 483,500
during December 1996, 44
options exercised at $0.77
per share ..................... -- -- -- 33
Issuance of common stock for an
outstanding stock subscription
during December 1996 ......... (500) -- -- --
Shares retired during December
1996 pursuant to a settlement
with a shareholder valued at
$2.32 per share ............... -- -- -- (4,973)
Issuance of common stock and
warrants for cash net of
offering costs of $243,456 under
the February 1997 private
placement at $2.02 and $0.51
per share, respectively ......... -- -- -- 780,394
Amortization of prepaid consulting
costs .......................... -- 12,500 -- 12,500
Net loss for the nine months
ended March 31, 1997
(unaudited) .................. -- -- (2,286,273) (2,286,273)
-------- ---------- ------------ -----------
BALANCE,
March 31, 1997 (unaudited) ...... $ (9,900) $ (11,250) $ (4,365,740) $ (208,926)
======== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996, FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996, AND
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
For the
Years Ended June 30,
-----------------------------
1995 1996
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ................................. $ (490,341) $ (1,223,829)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 810 10,081
Common stock issued for consulting
services and interest expense ............ 328,932 126,900
Provision for deferred compensation ...... -- 24,167
Provision for settlement of shareholder
dispute ................................. -- 95,027
Loss on investment in joint venture ...... -- --
Changes in assets and liabilities:
Accounts receivable ..................... -- --
Prepaid expenses ........................ -- (700)
Security deposit and other assets ......... 986 (25,000)
Accounts payable and accrued liabilities 1,067 112,719
Deferred compensation ..................... -- --
Due to shareholders ........................ (5,162) 107,141
----------- ------------
Net cash used in operating activities ...... (163,708) (773,494)
----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of furniture and equipment ...... -- (49,721)
Net proceeds from an officer ............ -- 10,200
Investment in joint venture ............... -- --
----------- ------------
Net cash provided by (used in) investing
activities .............................. -- (39,521)
----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings .................. 20,000 --
Payments on borrowings ..................... -- --
Payments on capital lease obligation ...... -- (292)
Proceeds from the issuance of common
stock, warrants and stock subscriptions 139,800 950,767
Repurchase of common stock ............... -- --
Deferred offering costs incurred ......... -- --
----------- ------------
Net cash provided by financing
activities .............................. 159,800 950,475
----------- ------------
NET INCREASE (DECREASE) IN CASH ............. (3,908) 137,460
CASH, beginning of period .................. 3,940 32
----------- ------------
CASH, end of period ........................ $ 32 $ 137,492
=========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in Cash For the Nine Months
From Inception Ended March 31,
(May 1992) ------------------------------
to June 30, 1996 1996 1997
----------------------------- --------------- -------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ................................. $ (2,079,467) $ (569,110) $(2,286,273)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 14,824 -- 158,096
Common stock issued for consulting
services and interest expense ............ 570,493 11,250 27,000
Provision for deferred compensation ...... 24,167 -- 84,833
Provision for settlement of shareholder
dispute ................................. 92,541 -- --
Loss on investment in joint venture ...... -- -- 228,985
Changes in assets and liabilities:
Accounts receivable ..................... -- -- (4,928)
Prepaid expenses ........................ (700) -- (10,822)
Security deposit and other assets ......... (26,230) -- (7,710)
Accounts payable and accrued liabilities 116,272 37,334 178,275
Deferred compensation ..................... -- -- (35,000)
Due to shareholders ........................ 107,141 60,318 (95,314)
------------ ----------- ------------
Net cash used in operating activities ...... (1,180,959) (460,208) (1,762,858)
------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of furniture and equipment ...... (54,524) -- (26,332)
Net proceeds from an officer ............ -- 10,200 --
Investment in joint venture ............... -- -- (300,000)
------------ ----------- ------------
Net cash provided by (used in) investing
activities .............................. (54,524) 10,200 (326,332)
------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings .................. 60,000 -- 1,221,976
Payments on borrowings ..................... -- -- (60,000)
Payments on capital lease obligation ...... (292) -- (818)
Proceeds from the issuance of common
stock, warrants and stock subscriptions 1,313,267 575,000 1,755,027
Repurchase of common stock ............... -- -- (4,973)
Deferred offering costs incurred ......... -- -- (225,582)
------------ ----------- ------------
Net cash provided by financing
activities .............................. 1,372,975 575,000 2,685,630
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH ............. 137,492 124,992 596,440
CASH, beginning of period .................. -- 32 137,492
------------ ----------- ------------
CASH, end of period ........................ $ 137,492 $ 125,024 $ 733,932
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT
JUNE 30, 1996
(Information as of March 31, 1996 and 1997 is unaudited)
1. Organization and Line of Business and Significant Business Risks
a. Organization and Line of Business
The Recovery Network, Inc. (the "Company"), a Colorado corporation in the
development stage, was organized to provide information, interaction and
support via television, radio and interactive media services to persons
affected by or afflicted with alcoholism, drug and substance abuse, eating
disorders, depression and a variety of behavioral and mental health problems,
as well as to persons seeking to prevent the onset of these problems. The
Company was incorporated in May 1992 and commenced operations in February 1993.
The Company has defined and developed its marketing concept, has procured and
produced programming, and is conducting its initial test market cablecast
launch in the Boston market.
The Company owns an inactive subsidiary with no assets or operations as of
year end. However, the Company intends to start selling merchandising products
through its subsidiary.
Subsequent to June 30, 1996, the Company approved a one for 7.7432 reverse
split of common stock. Unless otherwise indicated, all information relating to
the number and price per share of common stock has been retroactively adjusted
for to reflect the stock split.
b. Significant Business Risks
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has recurring losses from
operations, has no operating revenues, and has a net capital deficiency that
raises substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to operate as a going concern is dependent
upon its ability (1) to obtain sufficient additional capital, (2) to distribute
its programming and services through multimedia channels, (3) to achieve a
critical mass of viewers to attract advertisers and healthcare providers and
(4) to acquire and develop appropriate programming for broadcast. The Company
plans to raise additional working capital through private and public offerings,
as well as attain listing of its stock for trading in the NASDAQ Smallcap
Market. The successful outcome of future activities cannot be determined at
this time and there are no assurances that if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operating results.
The financial statements do not include any adjustments related to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
2. Summary of Significant Accounting Policies
a. Use of Estimates
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
b. Cash
At times, the Company maintains cash balances over the Federal Depository
Insurance Corporation insurable limit of $100,000 per customer per financial
institution.
F-8
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
c. Furniture and Equipment
Furniture and equipment is depreciated over the estimated useful lives of
the assets using accelerated methods. Estimated useful lives range from 3 to 7
years.
Furniture and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1997
--------------- ---------------
<S> <C> <C>
Computer equipment ................ $ 30,687 $ 52,925
Office furniture .................. 28,403 32,497
-------- --------
59,090 85,422
Less accumulated depreciation ...... (13,841) (24,405)
-------- --------
$ 45,249 $ 61,017
======== ========
</TABLE>
d. Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Under SFAS 109, deferred income tax assets or liabilities are computed
based on the temporary difference between the financial statement and income
tax basis of assets and liabilities using the enacted marginal income tax rate
in effect for the year in which the differences are expected to reverse.
Deferred income tax expenses and credits are based on the changes in the
deferred income tax assets and liabilities from period to period.
e. Deferred Offering Costs
Costs associated with offerings of Company common shares are initially
capitalized and then netted with the proceeds received from the sale of these
common shares when the offering is completed. If the intended offering is
terminated these costs are charged to operations. There are no offering costs
capitalized as of June 30, 1996.
Debt issuance costs are initially capitalized as other assets and
amortized over the terms of the notes. In the event the notes are repaid prior
to their original maturity, any unamortized portion of the debt issuance costs
capitalized will be charged to operations. There are no offering costs
capitalized as of June 30, 1996.
Deferred offering costs of $225,582, net of amortization of $26,305, have
been capitalized as of March 31, 1997.
f. Prepaid Consulting Costs
The value of common stock issued for consulting services is recorded as
prepaid consulting costs as a component of shareholders' deficit. Such amounts
are amortized, using the straight-line method, over the life of the consulting
agreements.
g. Non-Monetary Exchanges
Accounting for the transfer or distribution of non-monetary assets or
liabilities is based on the fair value of the assets or liabilities received or
surrender, which ever is more clearly evident. Where the fair value of the
non-monetary assets received or surrendered cannot be determined with
reasonable accuracy, the recorded book value of the non-monetary assets are
used.
h. Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect
method as defined under SFAS No. 95, "Statement of Cash Flows." Required cash
and non-cash transaction disclosures are as follows:
During 1996, common stock valued at $27,140 was issued as payment for
consulting services performed prior to fiscal 1995 by a shareholder. The
Company issued 17,220 shares of common stock valued at $40,000 ($2.32 per
share) in connection with an offering of common stock (see Note 6). The Company
also entered into a $4,565 capital lease for computer equipment.
F-9
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
During 1995, common stock valued at $43,589, $32,703, and $56,921 was
issued as payment for shareholder notes payable and interest, stock
subscriptions, and consulting services performed prior to fiscal 1995 by
certain shareholders, respectively. An officer receivable was also recorded for
amounts owed pursuant to the Moses transaction (see Note 6). Prior to 1995,
common stock and stock subscriptions valued at $91,414 were issued for
consulting services of which $84,783 was recorded to prepaid consulting costs
as a component of shareholders' deficit and amortized over the life of the
consulting agreements. As of June 30, 1996, the unamortized portion is $1,250.
The Company also accrued expenses for consulting services and interest expense
of $87,650 which was converted into common stock during 1995 and 1996.
During the nine months ended March 31, 1997, the Company issued shares of
common stock in connection with the conversion of $270,000 of notes payable,
the settlement of deferred compensation of $74,000 and amounts due to
consultants and shareholders for both past and future services of $137,500.
For 1996 and 1995, the Company made cash payments of $800 for state income
taxes. Inception to date payments for income taxes is $1,600. During 1996, cash
payments for interest expense was approximately $200. The Company made no cash
payments for interest expense during 1995.
For the nine months ended March 31, 1996 and 1997, the Company made no
cash payments for income taxes. For the nine months ended March 31, 1997, the
Company made cash payments for interest expense of $15,264. No cash payments
were made for interest expense for the nine months ended March 31, 1996.
i. New Financial Accounting Pronouncements
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," must be adopted for fiscal years
beginning after December 15, 1995. The Company adopted the new standard
effective July 1, 1996. The adoption of SFAS No. 121 was not material to the
Financial Statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for
transactions entered into fiscal years that begin after December 15, 1995. The
Company adopted the disclosure requirements of SFAS No. 123 effective July 1,
1996.
SFAS No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of
Information about Capital Structure" are effective for fiscal years ending
after December 15, 1997. The Company will adopt the new standards in the fiscal
year ending June 30, 1998. The effects of these new standards have not yet been
determined.
j. Government Regulations
The cable television industry is subject to extensive and frequently
changing federal, state and local laws and substantial regulation under these
laws by governmental agencies, including the Federal Communications Commission
("FCC"). Regulations governing the rates that can be charged to subscribers by
cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as The Recovery Network. In addition, federal "must-carry"
rules requiring cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional channels for
noncommercial educational TV stations); commercial leased access rules
designating 10% to 15% of system channels for lease by unaffiliated
programmers; and local regulatory requirements mandating further channel
set-asides for public, governmental and educational use could reduce channel
availability which might otherwise be available for The Recovery Network on
many cable systems. Statutory provisions and FCC rules governing relationships
among cable systems and competing forms of multichannel video program
distribution, as well as the relationships between the Company and its cable
system affiliates could adversely affect the marketability of the Company's
programming and the flexibility of the Company in its business dealings with
outlets for its programming.
F-10
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Although program providers that do not hold FCC licenses or operate
distribution outlets, such as The Recovery Network and Recovery Talk Radio, are
outside the FCC's direct jurisdiction, the cable systems and radio stations
that carry the Company's programs are regulated by the FCC and, therefore, are
subject to its rules and policies, such as those relating to sponsorship
identification, broadcast of indecent language, provision of equal
opportunities for political candidates and related measures pertaining to
program content and format. Failure of the Company's programs to comply with
one or more of these rules could subject the cable systems or radio stations to
FCC fine or other sanction and thus could adversely affect the Company's
relationship with such entities and could result in the discontinuation of
carriage of the Company's programming by such entities.
k. Dependence upon Access Television Network (ATN, a related company)
ATN's subscribers currently represent substantially all of the households
which receive broadcast of the Company's programming. The Company is dependent
upon ATN to broadcast its programming to ATN's subscribers and to provide the
necessary services to enable the Company to broadcast its programming through
cable systems with which the Company directly enters into affiliation
agreements. It is possible that ATN or its affiliates could experience
broadcast interruptions and equipment failures which could last for a
significant period of time. The Company's prospects will be affected by ATN's
ability to maintain its existing subscriber base and to enter into additional
affiliation agreements to expand its subscriber base. Moreover, the Nesting
Contract with ATN expires April 1998 unless renewed by both parties.
l. Unaudited Information as of March 31, 1996 and 1997
The accompanying unaudited financial statements as of March 31, 1996 and
1997 reflect all adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial statements of such interim periods.
Such adjustments consist only of normal recurring items. Interim results are
not necessarily indicative of results for a full year.
m. Loss per Share
Net loss per share is based on the weighted average number of common
shares outstanding and dilutive common stock equivalents during the periods
presented. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock issued for consideration below the offering price
of $5.00 per share (the "Offering Price") and stock options and warrants issued
with exercise prices below the Offering Price during the twelve-month period
preceding the initial filing of the proposed May 1997 initial public offering
(the "IPO"), have been included in the calculation of common stock, using the
treasury stock method, as if they were outstanding for all periods presented.
The effect of the stock, options and warrants issued at consideration below the
IPO price was to increase the weighted average shares outstanding by 560,548
shares for the periods ended June 30, 1996 and prior. The weighted average
shares outstanding increased by 163,938 shares for the period ended March 31,
1997.
3. Convertible Note Payable
Convertible note payable at June 30, 1996, consists of a $20,000 unsecured
note payable, bearing interest at 8 percent, is due October 1996, and is
subject to certain conversion rights. Accrued interest related to this note
payable is $1,067 at June 30, 1996. The holder of the note payable also
received an option to purchase additional shares of common stock.
In November 1996, all amounts owed for interest were paid and the
principal balance was converted into 6,888 shares of common stock valued at
$2.90 per share by the Company. The above option was canceled upon conversion.
4. Deferred Compensation
During May and June 1996, three officers (two of which are shareholders)
earned compensation in excess of amounts paid by approximately $5,000 to $7,000
each month for each officer.
F-11
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
4. Deferred Compensation -- (Continued)
Earned compensation in excess of amounts paid continued until November
1996, at which time, an officer and a former officer (subsequent to December
31, 1996) converted $74,000 in deferred compensation due them into 31,857
shares of common stock valued at $2.32 per share by the Company. As of November
1996, the Company began making cash payments to the officers that were equal to
compensation earned.
5. Income Taxes
The components of the net deferred income tax asset at June 30, 1996 are
as follows:
1996
-------------
Development costs capitalized for tax purposes .. $ 743,167
Carryforward of net operating losses ......... 59,899
Other temporary differences .................. 45,667
---------
848,733
Valuation allowance ........................... (848,733)
---------
Deferred income tax asset ..................... $ --
=========
The provision for income taxes of $800 for the fiscal years ended June 30,
1995 and 1996 respectively, consist only of the current state provision.
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended June 30, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------- ---------------------------
Amount Percent Amount Percent
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Income tax benefit at federal statutory
rate ................................. $(166,444) (34.00)% $(415,829) (34.00)%
State taxes, net of federal income tax
effect .............................. 800 0.16 800 0.07
Financial reporting operating losses not
currently available for use ......... 166,444 34.00 415,829 34.00
---------- ---------- ---------- ----------
$ 800 0.16% $ 800 0.07%
========== ========== ========== ==========
</TABLE>
As of June 30, 1996, the Company had approximately $59,000 of federal net
operating loss carryforwards, which will expire in fiscal years ending 2008 to
2011. As of June 30, 1996, the Company had less than $1,000 of California state
net operating loss carryforwards, which will expire as of fiscal year 2001.
Under SFAS No. 109, the Company has recorded valuation allowances against the
realization of its deferred tax assets. The valuation allowance is based on
management's estimates and analysis, which include the impact of tax laws which
may limit the Company's ability to utilize its tax loss carryforwards.
Additionally, pursuant to Internal Revenue Service code section 382, the
Company's existing net operating loss carryforwards, and other deferred tax
assets and liabilities, may be unavailable for future use due to possible
significant ownership changes after year end in connection with the sale of the
Company's common stock under a planned initial public offering.
6. Capital Stock Transactions
a. The Moses Transaction
In November 1994, the Company issued 186,074 shares of common stock to
William Moses Jr. for $100,000 ($0.54 per share) of which $10,200 was paid in
1996. Afterwards, Mr. Moses was issued another 186,074 shares for achieving
certain other terms during 1995 which were also valued at $100,000 ($0.54 per
share) by the Company.
F-12
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
6. Capital Stock Transactions -- (Continued)
b. Other Stock Transactions
During January 1996, an unrelated company was issued 45,523 shares of
common stock for consulting services valued at $105,748 ($2.32 per share) by
the Company.
During 1995, unrelated individuals were issued 22,500 and 2,583 shares of
common stock for consulting services. The shares were valued at $21,000 ($0.93
per share) and $6,000 ($2.32 per share), respectively.
c. The $2.32 Placement
During November 1995 through April 1996, the Company sold 322,663 shares
of its common stock (of which 107,625 shares were sold to certain Directors of
the Company) in a private offering for $2.32 per share (the $2.32 Placement)
resulting in net proceeds of $749,500. A Director of the Board rendered certain
services directly related to this private offering and was given 17,220 shares
of common stock. The shares were valued, by the Company, at $40,000 ($2.32 per
share) and treated as direct costs of the offering resulting in no net impact
on shareholders' deficit. The Director was also granted an option for services
to be rendered in the future (see Note 10).
Certain shareholders purchased a total of 216 share of common stock for
$500 during the $2.32 Placement which were not issued. The $500 has been
recorded as stock subscriptions as of June 30, 1996. During December 1996,
these shares and the 44 related shares entitled under the below $0.77 per share
offering were issued.
d. The $0.77 Placement and Other Related Matters
After the $2.32 Placement, the Company granted every shareholder of record
a right to purchase common stock for each share owned. Five rights could buy
one share of common stock for $0.77 per share.
During June 1996, the Company issued 14,332 shares of common stock to a
shareholder for consulting services performed prior to the $2.32 Placement. The
shares were valued by the Company at $2.32 per share and deemed to be eligible
for the $0.77 per share offering but not issued in time to participate. The
Company issued the shareholder an option to purchase 2,867 shares of common
stock at $0.77 per share which was exercised in December 1996.
In management's opinion, all of the above transactions have been recorded
at the estimated fair market value of the Company's common stock at the date of
grant.
7. Related Party Transactions
a. Compensation
During 1995, the Company issued certain shareholders 98,920 shares of
common stock for consulting services valued at $91,931 ($0.93 per share) by the
Company and was recorded as salaries and consulting expenses in the
accompanying financial statements.
During fiscal years 1995 and 1996, cash payments of approximately $87,000
and $210,000 were made to shareholders and Directors for compensation in
connection with services rendered.
During the nine months ended March 31, 1996 and March 31, 1997, cash
payments of approximately $198,000 and $679,000, respectively, were made to
shareholders and Directors for compensation for services rendered.
b. Due to Shareholders
As of June 30, 1996, amounts due to shareholders consist of expense
reimbursements due, shareholder claims, and other amounts of $100,000, $95,027,
and $7,141, respectively. As of March 31, 1997, amounts due to shareholders
consist of other amounts of $9,854.
F-13
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
7. Related Party Transactions -- (Continued)
During October and November 1996, the Company issued existing shareholders
a total of 43,050 shares of common stock valued by the Company at $2.32 per
share for expense reimbursements. During February and March 1997, the
shareholder claims were settled for $100,000, however, the shareholder
surrendered 2,141 shares of common stock. When tendered in December 1996, the
shares were valued at $4,973 ($2.32 per share) by the Company.
8. Consulting Agreements
a. Comspan
During August 1993, the Company entered into a three year consulting
agreement with Comspan, an unrelated company at the time the agreement was
executed. Under the agreement, Comspan received 7,600 shares of common stock
(valued at $5.92 per share or $45,000). The $45,000 was recorded as prepaid
consulting costs as a component of shareholders' deficit in the accompanying
financial statements and is being amortized over the life of the agreement to
salaries and consulting expenses.
Under the agreement, Comspan was also to receive certain monthly cash
payments as defined in the agreement. During November 1994, the Company issued
Comspan 56,291 shares of common stock (valued at $0.93 per share or $52,305) in
satisfaction of amounts owed as of November 1994. The Company recorded
consulting expense pertaining to the agreement of $36,921 and $15,384 in fiscal
years 1994 and 1995, respectively.
Subsequent to June 30, 1996, the Company has made monthly cash payments of
$3,300 to Comspan for consulting service.
b. Masters, Smith & Co.
During May 1994, the Company entered into a twelve month consulting
agreement with Masters, Smith & Co. (or MSC), an unrelated company at the time
the agreement was executed. Under the agreement, MSC received 42,818 shares of
common stock (valued at $0.93 per share or $39,783). MSC received 23,764 shares
in May 1994 and the other 19,054 shares in January 1995. During 1994, the
entire $39,783 was recorded as prepaid consulting costs as a component of
shareholders' deficit in the accompanying financial statements and amortized
over the life of the agreement to salaries and consulting expenses. The shares
received in January 1995 were recorded as stock subscriptions in 1994.
Under the agreement, MSC was also to receive certain monthly cash payments
as defined in the agreement. The Company issued 64,424 shares of common stock
(valued at $0.93 per share or $60,000) in settlement of amounts owed. The
Company recorded salaries and consulting expenses of $20,000 and $40,000 in
fiscal year 1994 and 1995, respectively.
9. Licensing Fees
During March 1995 through February 1996, the Company entered into certain
license agreements whereby the Company is granted the right to broadcast or
exhibit certain programs ranging between two to five years and expiring between
December 1997 and March 2001. In consideration for the rights granted, the
Company has agreed to either pay for each program and/or provide available
space for advertisements. Fees paid of approximately $118,000 which relate to
these agreements have been recorded as programming expenses in the accompanying
financial statements during fiscal year 1996.
10. Options and Warrants
During January 1996, options to purchase a total of 51,659 shares of
common stock at $3.87 per share were issued to three members of the Board of
Directors who joined the Board in fiscal year 1996. Half the options vest at
once and are exercisable over three years. The other half of the options vest
over three years.
F-14
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
10. Options and Warrants -- (Continued)
During fiscal year 1996, a Director was granted an option to purchase
15,498 shares of common stock at $3.87 per share for consulting services to be
rendered. The option was fully vested when granted.
See Note 13 for subsequent option activity and summary of options granted
as of May 1, 1997.
11. Commitments and Contingencies
a. Operating Leases
The Company leases its offices under an operating lease agreement that
expires May 2001. Under this agreement, the Company has an option to extend the
lease through May 2004. The lease requires that the Company also pay for
certain insurance coverages throughout the term of the lease. The aggregate
minimum future commitments under operating leases are as follows:.
Year Ending June 30,
1997 ...................................... $ 62,000
1998 ...................................... 73,000
1999 ...................................... 78,000
2000 ...................................... 78,000
2001 ...................................... 65,000
---------
$356,000
=========
Rent expense charged to operations in fiscal 1995 and 1996 were
approximately $11,000 and $11,500, respectively.
During March 1997, the Company assigned its rights and obligations under
the lease to its joint venture (see Note 12) and executed a new operating lease
agreement for its office facilities (see Note 13).
b. Capital Leases
The Company leases certain office equipment under a capital lease. At June
30, 1996, minimum lease payments under the terms of the lease agreement are as
follows:
Year Ending June 30,
1997 .................................... $1,755
1998 .................................... 1,755
1999 .................................... 1,460
-------
4,970
Less--amounts representing interest ...... 697
Less--Current portion ..................... 1,571
-------
$2,702
=======
12. Subsequent Events
a. Notes Payable
In July 1996, the Company issued $310,000 of 10 percent convertible
debentures (a total of $120,000 to certain shareholders and Directors),
maturing the earlier of the first anniversary of their issuance or the
consummation of an equity offering with gross proceeds of at least $1,500,000.
The notes are convertible, at the option of the holder, into such number
of shares of common stock that equals principal and accrued interest due
divided by approximately 3.87. Upon conversion, a warrant will also be issued
to allow the note holder to acquire shares of common stock at $3.87 per share,
in an amount that equals twice the numbers of shares issued upon conversion.
Warrants are exercisable at any time for two years after the date of issuance.
F-15
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
12. Subsequent Events -- (Continued)
If the notes are held to maturity and not converted, the holder is
entitled to a warrant to acquire shares of common stock at $3.87 per share, in
an amount that equals the principal amount due divided by approximately 3.87.
Subsequent to the date of the Auditors' Report, $250,000 of the above
notes payable were converted (see Note 13).
b. Joint Venture Agreement
The Company owns a 50% interest in Recovery Interactive, a joint venture
with TCI OnLine RecoveryNet Holdings, Inc., an affiliate of
Tele-Communications, Inc. ("TCI"), formed on August 1, 1996 to commence a
business that expects to provide behavioral health products and services to
managed care and insurance companies and their customers, as well as to provide
information, interaction and support regarding recovery issues and prevention
issues, via the Internet. The Company and TCI each made a capital contribution
in the amount of $300,000 to Recovery Interactive. The Joint Venture agreement
is to continue through December 31, 2044. The Company's investment in the Joint
Venture is to be accounted for under the equity method of accounting. During
the nine month period ended March 31, 1997, the Company recorded a loss on
investment in the joint venture of $228,985.
The Joint Venture has incurred operating losses of approximately $458,000
since its inception and has no meaningful operating revenue. This and the lack
of operating history raises substantial doubt about the Joint Venture's ability
to continue as a going concern.
c. Capital Transactions
During October 1996, the Company issued 6,458 shares of common stock
valued at $15,000 ($2.32 per share) for consulting services rendered during
1996.
During October 1996, the Company entered into a consulting agreement with
an unrelated individual, whereby 9,686 shares of common stock were issued as
compensation to help create and maintain a call center for one year. The shares
were valued by the Company at $22,500 ($2.32 per share).
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
a. Capital Transactions
During November 1996 through January 1997, the Company issued 138,761
shares of common stock for cash of $473,600 and a $9,900 60 day promissory note
($3.48 per share). The Company also issued 7,749 shares in consideration of
services rendered in connection with such offering.
During November 1996 the exercise price of certain options granted in
fiscal year 1996 to three members of the Board of Directors (see Note 10) was
reduced to $2.32 (estimated market price at date of repricing) per share and
vesting was accelerated so that all options became fully vested. At that time,
options to purchase 67,157 shares of common stock were exercised.
During November 1996, certain holders who converted their notes payable
(see Note 12) and exercised the resulting warrants, were given a reduced
conversion rate of one share for each $3.68 in outstanding principal and
interest. The warrant exercise price was also reduced to $2.32 per share
(estimated market price at date of repricing). Notes totaling $250,000 in
principal, accrued interest of $11,500 and the resulting warrants were
converted into 213,098 shares of common stock. Cash of $330,000 was received
when the warrants were exercised.
In March 1997, the Company consummated a private financing pursuant to
which it issued 40 units (39 units in March and one unit in April) of the
Company's securities at $50,000 per unit. The private financing included an
aggregate of i) 2,000,000 principal amount of promissory notes which bear
interest at the stated rate
F-16
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
-- (Continued)
of 9 percent per annum (estimated effective rate is 146 percent) and are due on
the earlier of the consummation of an initial public offering or one year; ii)
400,000 shares of common stock; and iii) warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $4.00 per share. The net
proceeds for the offering were $1,537,654. A loan discount of $1,064,640 was
recorded and allocated to the Common Stock issued and warrants granted in the
private placement based upon the relative fair values of the debt and equity
issued instruments. $121,042 of the loan discount has been amortized to
operations as interest expense as of March 31, 1997. Offering costs of
approximately $462,000 were incurred of which approximately $216,000 was
capitalized as debt offering costs. The balance of $246,000 was charged to
equity as cost of raising the equity proceeds.
b. Consulting Agreements
The Company has entered into a consulting agreement with Comspan (a
related company) effective December 1996 and expiring during May 1997, pursuant
to which Comspan will handle affiliate sales and marketing efforts on behalf of
the Company for a consulting fee of approximately $8,900 per month.
c. Employment Agreements
Effective December 1, 1996 and after, the Company entered into certain
employment agreements with employees, shareholders and/or Directors. The
agreements expire at various dates from November 30, 1997 to March 13, 1999.
The agreements provide for minimum monthly cash compensation ranging from
approximately $8,000 to $12,000, and quarterly commissions to an officer of
$0.01 for each subscriber household, as defined, in excess of one million
households.
The Company canceled one of the above agreements and its wholly owned
subsidiary entered into a new agreement with the officer under similar terms
through January 31, 1999.
The employment agreements provide certain option rights (see below) and
contain certain non-compete and severance pay clauses, as defined, in the
agreements. Future minimum payments required under the amended and revised
employment agreements, entered into as of May 1, 1997, are approximately
$398,000, $570,000 and $258,000 in fiscal years 1997, 1998, and 1999,
respectively.
d. Stock Options and Warrants
Stock Options
The Company has three stock option plans: the 1996 Employee and
Consultants Stock Option Plan, the 1996 Board of Directors and Advisory Board
Retainer Stock Option Plan and the 1997 Management Bonus Plan. A total of
350,000 shares of common stock are reserved for issuance pursuant to options
granted and to be granted under these plans. Taking into consideration options
to purchase 144,135 shares of common stock granted on June 26, 1997, there are
15,506 shares available for grant, including an option to purchase 12,915
shares which has been terminated, as of March 31, 1997. Options pursuant to the
plans generally vest over three years and expire in four to five years.
The plans provide for option grants at exercise prices not less than the
fair market value on the date of grant. All options granted under these plans
are at an exercise price of $5.00 per share.
Effective December 1996 and after, the Company granted non-plan options to
acquire 110,423 shares of common stock for services rendered and pursuant to
certain employment agreements. Options to purchase 66,513 shares are fully
vested as of March 31, 1997. Options to purchase 43,910 shares vest over 1.5 to
2 years. All non-plan options expire in 2001.
F-17
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
-- (Continued)
The following is a summary of all options granted to employees, directors
and consultants to acquire the Company's common stock as of May 1, 1997:
Shares Exercise Shares Shares Shares
Granted Price Vested Exercised Terminated
- ------------ ---------- -------- ----------- -----------
203,274 $5.00 53,344 -- 12,915
110,423 $2.32 79,987 -- --
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, issued in October 1995. In accordance with provisions of SFAS No.
123, the Company applies APB Opinion 25 and related interpretations in
accounting for its stock options plans and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net loss and loss per share would have been increased to the pro
forma amounts indicated in the table below (in thousands, except per share
amounts):
Nine Months Ended
March 31, 1997
------------------
Net loss -- as reported ............ $ 2,286
Net loss -- pro forma ............... $ 2,378
Loss per share -- as reported ...... $ (1.13)
Loss per share -- pro forma ...... $ (1.17)
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:
Expected dividend yield ............... 0.00%
Expected stock price volatility ...... 0.00%
Risk free interest rate ............ 6.00%
Expected life of options ............ 5 years
The weighted average fair value of options granted during the nine months
ended March 31, 1997 is $0.32. During 1996, the weighted average fair value of
options granted was zero.
On June 26, 1997, the Company granted options to acquire 144,135 shares of
common stock at $5.00 per share under the 1997 Management Bonus Plan.
Warrants
At March 31, 1997, there were 515,498 warrants outstanding related to the
Company's prior debt and equity offerings. 500,000 warrants are exercisable
through March 2002 at $4.00 per share and 15,498 warrants are exercisable
through March 1999 at $3.78 per share.
e. ATN Satellite Nesting Contract
In April 1997, the Company entered into the Nesting Contract with ATN (a
related Company) under which ATN will provide the Company with satellite
uplink, master control and other related services on its satellite transponder
for two hours of broadcast time per day. Under the Nesting Contract, the
Company is charged a daily rate for programming time provided by ATN to the
Company starting at an estimated rate of approximately $2,100 for April 1997
which increases to approximately $3,600 by March 1998. The actual charge is
based on the monthly number of households served by ATN affiliates. The Nesting
Contract provides, however, that in no event will the Company be charged more
than $60,000 per month for the first six months or $65,000 for the subsequent
six months of the Nesting Contract. In addition, ATN will provide the Company
with other required services at cost plus 20 percent. The Nesting Contract
expires in April 1998 unless extended by mutual consent.
F-18
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
-- (Continued)
f. Operating Leases
During March 1997, the Company executed a new operating lease agreement
for its new office facilities that expires in April 2002. Under the new
agreement, the Company has an option to extend the lease through May, 2004. The
lease requires that the Company also pay for certain insurance coverages and
common area charges throughout the term of the lease. The aggregate minimum
future commitments under operating leases are as follows:.
Year Ending June 30,
1997 ............... $ 20,000
1998 ......... 121,000
1999 ......... 128,000
2000 ......... 139,000
2001 ......... 145,000
2002 ......... 125,000
---------
$678,000
=========
g. Notes Payable
On July 2, 1997, the Company borrowed $105,250 under one year, 15 percent
notes payable to unrelated parties. The notes provide for a minimum of $15,790
of interest. The Company incurred $5,260 of deferred financing costs related
to these notes.
F-19
<PAGE>
[Picture of the Company's programming in production]
Problems
56 Million Americans are affected by alcohol abuse or addiction
Adolescent illegal drug use increased 105% from 1992 to 1995
Substance abuse: a major cause of crime and family violence; a factor in 1 in 3
divorces
The estimated annual negative impact from substance abuse is over $230 billion
Solutions
Television: The Recovery Network
Radio: Recovery Talk Radio
Telephone: National 800 Help Line
Internet: Recovery Interactive
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by this Prospectus,
or an offer to sell or a solicitation of an offer to buy any securities by
anyone in any jurisdiction in which such offer or solicitation is not
authorized or is unlawful. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
----------------
TABLE OF CONTENTS
Page
------
Available Information ............... 2
Prospectus Summary .................. 3
Risk Factors ........................ 8
Use of Proceeds ..................... 18
Dilution .............................. 19
Dividend Policy ..................... 20
Capitalization ........................ 21
Plan of Operation ..................... 22
Business. ........................... 25
Management. ........................... 39
Principal Shareholders. ............... 47
Certain Transactions .................. 49
Description of Securities. ............ 51
Shares Eligible for Future Sale ...... 53
Underwriting ........................ 54
Legal Matters. ........................ 56
Experts .............................. 56
Additional Information ............... 56
Index to Financial Statements. ...... F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the shares of Common Stock offered hereby, whether or
not participating in this distribution may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
================================================================================
[LOGO]
THE RECOVERY
NETWORK, INC.
1,600,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
1,600,000 Shares of Common Stock
----------
PROSPECTUS
----------
Whale Securities Co., L.P.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The articles of incorporation of the Registrant provide for the
indemnification of the Registrant's directors and officers to the fullest
extent permitted by law. Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the articles of incorporation and the
corporation law of the State of Colorado, the Registrant has been informed that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in such Act and is therefore
unenforceable.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Registrant will not be
personally liable to the Registrant or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for breach
of a director's duty of loyalty to the Registrant or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under section 7-108-403 of the Colorado
statue relating to unlawful distributions or (iv) for any transaction from
which the director derived an improper personal benefit. The Articles of
Incorporation also provide (subject to certain exceptions) that the Registrant
shall, to the maximum extent permitted from time to time under the law of the
State of Colorado, indemnify, and upon request shall advance expenses to, any
director or officer to the extent permitted under such law as it may from time
to time be in effect. The Registrant's bylaws require the Registrant, to the
full extent permitted by law, any director, officer, employee or agent of the
Registrant for acts which such person reasonably believes are not in violation
of the Registrant's corporate purposes as set forth in the Articles of
Incorporation. As a result of these provisions, shareholders may be unable to
recover damages against the directors and officers of the Registrant for
actions taken by them which constitute negligence, gross negligence, or a
violation of their fiduciary duties, which may reduce the likelihood of
shareholders instituting derivative litigation against directors and officers
and may discourage or deter shareholders from suing directors, officers,
employees and agents of the Registrant for breaches of their duty of care, even
though such an action, if successful, might otherwise benefit the Registrant
and its shareholders.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses (other than selling
commissions and other fees paid to the underwriter) which will be paid by the
Registrant in connection with the issuance and distribution of the securities
being registered. With the exception of the registration fee and the NASD
filing fee, all amounts shown are estimates.
<TABLE>
<S> <C>
Registration fee ................................................ $ 6,696.50
NASD filing fee ................................................... 2,710.00
Nasdaq listing expenses .......................................... 10,000.00
Blue sky fees and expenses (including legal and filing fees) ...... 46,000.00
Printing expenses (other than stock certificates) ............... 75,000.00
Printing and engraving of stock certificates ..................... 2,500.00
Legal fees and expenses (other than Blue Sky) ..................... 175,000.00
Consulting fee ................................................... 60,000.00
Accounting fees and expenses .................................... 75,000.00
Transfer Agent and Registrar fees and expenses .................. 2,500.00
Miscellaneous expenses .......................................... 21,793.50
------------
Total ......................................................... $477,200.00
============
</TABLE>
- ------------
* To be provided by amendment.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
From May 1994 through January 1995, the Registrant issued 42,818 shares of
Common Stock valued at $.93 per share for consulting services rendered by a
third party. In issuing such securities, the Registrant relied on the exemption
provided by Section 4(2) of the Securities Act of 1933 (the "Securities Act").
From June 1994 to June 1995, the Registrant issued 28,973 shares of Common
Stock valued at $.93 for consulting services rendered by third parties. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
In July 1994, the Registrant sold 5,595 shares of Common Stock at a price
of $11.62 per share. In issuing such securities, the Registrant relied on the
exemption provided by Section 4(2) of the Securities Act.
In November 1994, the Registrant sold 186,074 shares of Common Stock at a
purchase price of $.54 per share. In issuing such securities, the Registrant
relied on the exemption provided by Section 4(2) of the Securities Act.
In November 1994, the Registrant issued 56,291 shares of Common Stock
valued at $.93 per share to a consultant in lieu of cash payments and any other
amounts owed to such consultant. In issuing such securities, the Registrant
relied on the exemption provided by Section 4(2) of the Securities Act.
In January 1995, the Registrant issued 66,514 shares of Common Stock
valued at $.93 per share, whereby 20,156 shares of Common Stock were issued for
consulting services rendered by third parties and 46,358 shares of Common Stock
were issued upon conversion of outstanding promissory notes held by these third
parties. In issuing such securities, the Registrant relied on the exemption
provided by Section 4(2) of the Securities Act.
In January 1995, the Registrant issued to an officer of the Registrant
78,776 shares of Common Stock, valued at $.93 per share, as reimbursement for
expenses incurred by such officer, on behalf of the Company. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
In June 1995, the Registrant issued to an officer of the Registrant
186,074 shares of Common Stock valued at $.54 per share for services rendered
to the Registrant by such officer during the fiscal year ended June 30, 1995.
In issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
During 1995, the Registrant issued 64,424 shares of Common Stock valued at
$.93 per share to a consultant in lieu of cash payments. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
During the period from November 1995 through April 1996, the Registrant
sold 322,663 shares of Common Stock at a price per share of $2.32 for proceeds
of approximately $749,500. In issuing such securities, the Registrant relied on
the exemption provided by Section 4(2) of the Securities Act.
In January 1996, the Registrant issued 48,106 shares of Common Stock
valued at $2.32 per share for consulting services rendered by third parties. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
During April 1996, the Registrant issued, pursuant to a shareholder rights
offering, 259,281 shares of Common Stock and received proceeds of $200,767. In
connection with the shareholder rights offering, the Registrant granted each
shareholder of record one transferable right for each share of Common Stock
owned by such shareholder. Five rights entitled a shareholder to purchase one
share of Common Stock at a price of approximately $.77 per share. In issuing
such securities, the Registrant relied on the exemption provided by Section
4(2) of the Securities Act and Rule 505 of Regulation D promulgated under the
Securities Act.
In May 1996, the Registrant issued to a director of the Registrant 17,220
shares of Common Stock, valued at $2.32 per share, for consulting services. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
II-2
<PAGE>
During June 1996, the Registrant issued 14,332 shares of Common Stock
valued at $2.32 per share for consulting services performed and expenses
incurred by such consultant prior to November 1995. In issuing such securities,
the Registrant relied on the exemption provided by Section 4(2) of the
Securities Act.
During the period from July 1996 through October 1996, the Registrant sold
10% Convertible Promissory Notes (the "Convertible Notes") in the aggregate
principal amount of $310,000. From November 1996 through January 1997,
Convertible Notes in the aggregate principal amount of $250,000 and interest of
approximately $11,500 were converted into an aggregate of 71,033 shares of
Common Stock. The noteholders also received and exercised warrants for 142,065
shares of Common Stock resulting in proceeds to the Registrant of approximately
$330,000. The remaining outstanding Convertible Note in the principal amount of
$60,000 was repaid in March 1997 from the net proceeds of a private financing
(the "Private Financing"), and in connection with such repayment the Registrant
issued to the holder warrants to purchase 15,498 shares of Common Stock,
exercisable at a price of $3.87 per share. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
In October 1996, the Registrant issued to two shareholders of the
Registrant 16,144 shares of Common Stock valued at $2.32 per share for
consulting services rendered by such shareholders, and the Registrant issued
7,749 shares of Common Stock valued at $3.48 per share for consulting services.
In issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
During October and November 1996, an officer and a former officer of the
Registrant were issued 43,050 shares of Common Stock, respectively, valued at
$2.32 per share as reimbursement for expenses incurred by them on behalf of the
Registrant, and the Registrant reduced the exercise price of 73,615 options
from $3.87 to $2.32 and all of such options were exercised. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
From October 1996 through January 1997, the Registrant sold 138,761 shares
of Common Stock for a price per share of $3.48 for proceeds of approximately
$483,500. The Registrant issued 7,749 shares in consideration of services
rendered in connection with such offering. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
In November 1996, the Registrant issued 31,857 shares of Common Stock,
valued at $2.32 per share to officers of the Registrant upon conversion of
deferred compensation earned by such officers. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
In November 1996, the Registrant issued 6,888 shares of Common Stock
valued at a price of $2.90 upon the conversion of a promissory note. In issuing
such securities, the Registrant relied on the exemption provided by Section
4(2) of the Securities Act.
In March and April 1997, the Registrant sold to 21 "accredited investors"
in the Private Financing an aggregate of (i) $2,000,000 principal amount of
promissory notes (the "Financing Notes") which bear interest at the rate of 9%
per annum and are due on the earlier of the consummation of this offering or
March 6, 1998; (ii) 400,000 shares of Common Stock; and (iii) Warrants (the
"Financing Warrants") to purchase an aggregate of 500,000 shares of Common
Stock at an exercise price of $4.00 per share. The Underwriter acted as
placement agent in connection with the Private Financing and received a
placement agent fee of $200,000 in connection with such offering. In issuing
such securities, the Registrant relied on the exemption provided by Section
4(2) of the Securities Act and Rule 505 of Regulation D promulgated under the
Securities Act.
In July 1997, the Registrant sold 105,250 aggregate principal amount of
promissory notes which bear interest at 15% due on the earlier of two business
days after the consummation of this offering and July 2, 1997. The lender
received an origination fee of 5% paid out of the proceeds of the note. In
issuing the note, the Registrant relied on the exemption provided by Section
4(2) of the Securities Act.
In issuing securities under the exemption provided by Section 4(2) of the
Securities Act, the Registrant relied on representations made by each purchaser
that such purchaser was either an "accredited investor" as such term is defined
in Rule 501 of Regulation D promulgated under the Securities Act or that such
purchaser has such knowledge and experience in financial and business matters
that such person was capable of evaluating the merits and risks of the
investment.
II-3
<PAGE>
Item 27. Exhibits.
<TABLE>
<CAPTION>
Number Description of Exhibit
- -------- -----------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of the Registrant.*
3.2 By-Laws of the Registrant.*
4.1 Specimen Certificate of the Registrant's Common Stock.+
4.2 Form of Warrant Agent Agreement (including Form of Warrant).*
4.3 Form of Underwriter's Warrant Agreement (including Form of Underwriter's Warrant).*
4.4 1996 Employee and Consultants Stock Option Plan.*
4.5 Amendment to 1996 Employee and Consultants Stock Option Plan.*
4.6 1996 Board of Directors and Advisory Board Retainer Plan.*
4.7 Amendment to 1996 Board of Directors and Advisory Board Retainer Plan.*
4.8 1997 Management Bonus Plan.*
4.9 Admendment to 1997 Management Bonus Plan.*
4.10 Form of Stock Option Contract.*
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.+
10.1 Operating Agreement of RecoveryNet Interactive, L.L.C. dated as of August 1, 1996.*
10.2 Channel Nesting Agreement between the Registrant and Access Television Network, Inc. dated as
of April 10, 1977.*
10.3 Employment Agreement between the Registrant and William D. Moses effective as of December
1, 1996.*
10.4 Non-Disclosure and Inventions Agreement between the Registrant and William Moses dated as of
January 30, 1997.*
10.5 Employment Agreement between the Registrant and Donald Masters effective as of December 1,
1996. *
10.6 Non-Disclosure and Inventions Agreement between the Registrant and Donald Masters dated as
of February 3, 1997.*
10.7 Employment Agreement between the Registrant and John Wheeler dated as of May 13, 1997.*
10.8 Employment Agreement between the Registrant and William Megalos dated as of May 1, 1997.*
10.9 License Agreement between RecoveryNet Interactive L.L.C. and Merit Behavioral Care
Corporation dated as of May 1, 1997.*
21.1 List of Subsidiaries.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1).+
24.1 Power of Attorney.*
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Filed previously.
+ To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the
II-4
<PAGE>
registration statement; (2) that, for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and (3) to remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing as specified in the Underwriting Agreement Common
Stock certificates in such denominations and registered in such names as
required by the Underwriting Agreement to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that it will: (1) for determining any
liability under the Securities Act of 1933 (the "Act"), treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Act as part of
this registration statement as of the time the Commission declared it effective;
(2) for determining any liability under the Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and the offering of such
securities at that time as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorizes this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, in Santa Monica County, State of California, on the 8th day of
July, 1997.
THE RECOVERY NETWORK, INC.
By: /s/ William D. Moses
-----------------------------------
William D. Moses
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ------------------------------------------- -------------
<S> <C> <C>
*
- ----------------------- Chairman of the Board of Directors July 8, 1997
George H. Henry
/s/ William D. Moses President, Chief Executive Officer and July 8, 1997
- ----------------------- Director (principal accounting officer and
William D. Moses principal financial officer)
*
- ----------------------- Executive Vice President and Director July 8, 1997
Donald J. Masters
*
- ----------------------- Vice Chairman of the Board of Directors July 8, 1997
Nimrod J. Kovacs
*
- ----------------------- Director July 8, 1997
Paul Graf
*By: /s/ William D. Moses
---------------------
William D. Moses
Attorney-in-fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Exhibit
- -------- -----------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of the Registrant.*
3.2 By-Laws of the Registrant.*
4.1 Specimen Certificate of the Registrant's Common Stock.+
4.2 Form of Warrant Agent Agreement (including Form of Warrant).*
4.3 Form of Underwriter's Warrant Agreement (including Form of Underwriter's Warrant).*
4.4 1996 Employee and Consultants Stock Option Plan.*
4.5 Amendment to 1996 Employee and Consultants Stock Option Plan.*
4.6 1996 Board of Directors and Advisory Board Retainer Plan.*
4.7 Amendment to 1996 Board of Directors and Advisory Board Retainer Plan.*
4.8 1997 Management Bonus Plan.*
4.9 Admendment to 1997 Management Bonus Plan.*
4.10 Form of Stock Option Contract.*
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.+
10.1 Operating Agreement of RecoveryNet Interactive, L.L.C. dated as of August 1, 1996.*
10.2 Channel Nesting Agreement between the Registrant and Access Television Network, Inc. dated as
of April 10, 1977.*
10.3 Employment Agreement between the Registrant and William D. Moses effective as of December
1, 1996.*
10.4 Non-Disclosure and Inventions Agreement between the Registrant and William Moses dated as of
January 30, 1997.*
10.5 Employment Agreement between the Registrant and Donald Masters effective as of December 1,
1996. *
10.6 Non-Disclosure and Inventions Agreement between the Registrant and Donald Masters dated as
of February 3, 1997.*
10.7 Employment Agreement between the Registrant and John Wheeler dated as of May 13, 1997.*
10.8 Employment Agreement between the Registrant and William Megalos dated as of May 1, 1997.*
10.9 License Agreement between RecoveryNet Interactive L.L.C. and Merit Behavioral Care
Corporation dated as of May 1, 1997.*
21.1 List of Subsidiaries.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1).+
24.1 Power of Attorney.*
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Filed previously.
+ To be filed by amendment.
<PAGE>
Exhibit 4.11
PROMISSORY NOTE
$
-------
FOR VALUE RECEIVED, on this second day of July, 1997, The Recovery Network,
Inc., a Colorado corporation ("Maker"), with its principal place of business at
1411 5th Street, Santa Monica, CA 90401 (310-393-3939) unconditionally promises
to pay to the order of ______________, resident in _________ ("Payee"), with a
principal place of business at:
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
(tel) ____________________ (fax) ____________________
in the manner and at the place hereinafter provided, the principal amount of
$________ on the date that is one (1) year from the date hereof. Notwithstanding
the foregoing, the outstanding principal amount shall be prepaid on the second
business day following the receipt by Maker of available funds from the
consummation of an underwritten initial public offering of the Maker's
securities.
Maker also unconditionally promises to pay interest at a rate equal
to fifteen percent (15%) rate per annum on the unpaid principal amount hereof
from the date hereof until paid in full, provided, however, that should the full
payment of principal occur prior to one year from the date hereof, the Payee
will be entitled to interest equal to fifteen percent (15%) of the entire
principal amount.
1. PAYMENTS
All payments of principal and interest in respect of this Note shall be made in
lawful money of the United States of America in same day funds at the office of
Payee located at the Payee's principal place of business or at such other place
as shall be designated in a written notice delivered to Maker. Whenever any
payment on this Note shall be stated to be due on a day that is not a Business
Day, such payment shall instead be made on the next succeeding Business Day. For
this purpose, "Business Day" means any day other than a Saturday, Sunday or
legal holiday under the laws of the State of New York or any other day on which
banking institutions located in such state are authorized or required by law or
other governmental action to close.
2. COVENANTS
Maker covenants and agrees that until this Note is paid in full it will:
(a) promptly provide to Payee all financial and operational information
with respect to Maker as Payee may reasonably request; or
(b) promptly after the occurrence of an Event of Default or an event, act
or condition which, with notice or lapse of time or both, would
constitute an Event of Default, provide Payee with a certificate of the
chief executive officer or chief financial officer of Maker specifying
the nature thereof and Maker's proposed response thereto.
3. REPRESENTATIONS AND WARRANTIES
Maker hereby represents and warrants to Payee that:
(a) it is a duly organized and validly existing corporation in good
standing under the laws of the jurisdiction of its incorporation and
has the corporate power and authority to own and operate its
properties, to transact the business in which it is now engaged and to
execute and deliver this Note;
<PAGE>
(b) this Note constitutes the duly authorized, legally valid and binding
obligation of Maker, enforceable against Maker in accordance with its
terms;
(c) all consents and grants of approval required to have been granted in
connection with the execution, delivery and performance of this Note
have been granted;
(d) there is no action, suit, proceeding or governmental investigation
pending or, to the knowledge of Maker, threatened against Maker or any
of its subsidiaries or any of their respective assets which if
adversely determined would have a material adverse effect on the
business, operations, properties, assets, condition (financial or
otherwise) or prospects of Maker and its subsidiaries, taken as a
whole, or the ability of Maker to comply with its obligations
hereunder.
4. EVENTS OF DEFAULT
The occurrence of any of the following events shall constitute an "Event of
Default":
(a) failure of Maker to pay any principal, interest or other amount due
under this Note within five Business Days after the date due; or,
(b) failure of Maker to perform or observe any other term, covenant or
agreement on its part to be performed or observed pursuant to this
Note; or,
(c) any order, judgment or decree shall be entered against Maker decreeing
the dissolution or liquidation of Maker; or,
(d) the liquidation or suspension of Maker's usual business; or,
(e) (i) a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of Maker in an involuntary case under Title
11 of the United States Code entitled "Bankruptcy" (as now and
hereinafter in effect, or any successor thereto, the "Bankruptcy Code")
or any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, which decree or order is not stayed; or any other
similar relief shall be granted under any applicable federal or state
law; or (ii) an involuntary case shall be commenced against Maker under
any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect; or a decree or order of a court having
jurisdiction in the premises for the appointment of a receiver,
liquidator, sequestrator, trustee, custodian or other officer having
similar powers over Maker or over all or a substantial part of its
property shall have been entered; or the involuntary appointment of an
interim receiver, trustee or other custodian of Maker, for all or a
substantial part of its property shall have occurred; or a warrant of
attachment, execution or similar process shall have been issued against
any substantial part of the property of Maker, and, in the case of any
event described in this clause (ii), such event shall have continued
for 60 days unless dismissed, bonded or discharged; or,
(f) an order for relief shall be entered with respect to Maker, or Maker
shall commence a voluntary case under the Bankruptcy Code or any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or shall consent to the entry of an order for relief in an
involuntary case, or to the conversion of an involuntary case to a
voluntary case, under any such law, or shall consent to the appointment
of or taking possession by a receiver, trustee or other custodian for
all or a substantial part of its property; or Maker shall make an
assignment for the benefit of creditors; or the Board of Directors of
Maker shall adopt any resolution or otherwise authorize action to
approve any of the foregoing; or,
(g) any representation or warranty made by Maker to Payee shall prove to
have been false in any material respect when made; or,
(h) Maker shall challenge, or institute any proceedings to challenge, the
validity, binding effect or enforceability of this Note or any
endorsement of this Note or any other obligation to Payee.
<PAGE>
5. REMEDIES
Upon the occurrence of any Event of Default specified in clauses (f) or (g)
above, the principal amount of this Note together with accrued interest thereon
shall become immediately due and payable, without presentment, demand, notice,
protest or other requirements of any kind (all of which are hereby expressly
waived by Maker), and upon the occurrence and during the continuance of any
other Event of Default Payee may, by written notice to Maker, declare the
principal amount of this Note together with accrued interest thereon to be due
and payable, and the principal amount of this Note together with such interest
shall thereupon immediately become due and payable without presentment, further
notice, protest or other requirements of any kind (all of which are hereby
expressly waived by Maker).
6. SUBORDINATION
This note is subordinate only to the principal and interest on certain
unsecured, non-negotiable 9% promissory notes in the principal amount of
$2,000,000 issued by the Company in March and April of 1997 and ranks pari passu
with 3 other notes issued by the Maker on the date hereof.
7. MISCELLANEOUS
(a) All notices and other communications provided for hereunder shall be in
writing (including telegraphic, telex, telecopier or cable
communication) and mailed, telegraphed, telexed, telecopied, cabled or
delivered to the addresses listed for each above, or at such other
address as shall be designated by Payee or Maker in a written notice to
the other. All such notices and communications shall, when mailed,
telegraphed, telexed, telecopied or cabled or sent by overnight
courier, be effective when deposited in the mails, delivered to the
telegraph company, cable company or overnight courier, as the case may
be, or sent by telex or telecopier.
(b) No failure or delay on the part of Payee or any other holder of this
Note to exercise any right, power or privilege under this Note and no
course of dealing between Maker and Payee shall impair such right,
power or privilege or operate as a waiver of any default or an
acquiescence therein, nor shall any single or partial exercise of any
such right, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The
rights and remedies herein expressly provided are cumulative to, and
not exclusive of, any rights or remedies which Payee would otherwise
have. No notice to or demand on Maker in any case shall entitle Maker
to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the right of Payee to any other
or further action in any circumstances without notice or demand.
(c) Maker and any endorser of this Note hereby consent to renewals and
extensions of time at or after the maturity hereof, without notice, and
hereby waive diligence, presentment, protest, demand and notice of
every kind and, to the full extent permitted by law, the right to plead
any statute of limitations as a defense to any demand hereunder.
(d) THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL
BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF COLORADO WITHOUT REGARD TO ITS CONFLICTS OF LAWS
PRINCIPLES. Maker & Payee hereby irrevocably submit to the jurisdiction
of any State of Colorado or United States court sitting in the City of
Denver over any action or proceeding arising out of or relating to this
Note Purchase Agreement or any agreement contemplated hereby, and all
claims in respect of such action or proceeding may be heard and
determined in such court. Maker & Payee further waive any objection to
venue in the State of Colorado and any objection to any action or
proceeding in such State on the basis of an inconvenient forum. MAKER
AND PAYEE WAIVE THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY DOCUMENT OR
AGREEMENT CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered by
its duly authorized officer, as of the day and year and at the residence of the
Payee.
THE RECOVERY NETWORK, INC.
- -----------------
William D. Moses
President & CEO
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
July 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1997 JUN-30-1996
<CASH> 733,932 137,492
<SECURITIES> 71,015 0
<RECEIVABLES> 4,928 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 750,382 138,192
<PP&E> 85,422 59,090
<DEPRECIATION> (24,405) (13,841)
<TOTAL-ASSETS> 1,114,462 208,687
<CURRENT-LIABILITIES> 1,321,701 341,692
<BONDS> 1,033,018 20,000
0 0
0 0
<COMMON> 4,177,964 1,924,510
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,114,462 208,687
<SALES> 28,718 0
<TOTAL-REVENUES> 28,718 0
<CGS> 0 0
<TOTAL-COSTS> 2,143,914 1,229,443
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 171,077 (6,414)
<INCOME-PRETAX> (2,286,273) (1,223,029)
<INCOME-TAX> 0 800
<INCOME-CONTINUING> (2,286,273) (1,223,829)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,286,273) (1,223,829)
<EPS-PRIMARY> (1.13) (.71)
<EPS-DILUTED> (1.13) (.71)
</TABLE>
