SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 15, 1997
THE RECOVERY NETWORK, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Colorado 0-22913 39-1731029
- ---------------------------- ----------- ------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File No.) Identification No.)
1411 5th Street, Suite 200, Santa Monica, California 90401
- ------------------------------------------------------ ---------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (310) 393-3979
Not Applicable
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
This Amendment No. 1 to the Report on Form 8-K is being filed to
provide the financial statements and financial information required by Item 7.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Effective December 10, 1997, Recovery Network, Inc. (the "Company")
acquired 100 percent of the issued and outstanding common stock of FMS
Productions, Inc. (FMS for total consideration of $225,490. Consideration
included 44,000 shares of the Company?s common stock valued at $209,000 ($4.75
per share) and cash payment totaling $34,383, less $17,893 of cash received from
FMS. Pro forma condensed consolidating statements of operations for the six
month period ended December 31, 1997 and for the year ended June 30, 1997 are
provided and reflect the FMS acquisition as if it was consummated on July 1,
1997 and 1996, respectively.
The pro forma adjustments are based upon currently available
information and upon certain assumptions that management of the Company believes
are reasonable. The FMS acquisition will be recorded based upon the estimated
fair market value of the net assets acquired at the date of acquisition. The
adjustments included in the unaudited pro forma condensed consolidated financial
statements represent the Company's preliminary estimates based upon available
information. Although the Company does not believe that such preliminary
estimates will differ significantly from the actual adjustments, no assurance
can be given.
The unaudited pro forma consolidated financial statements are based
on the historical financial statements of the company and FMS and the
assumptions and adjustments described in the accompanying notes. The Company
believes that the assumptions on which the unaudited pro forma financial
statements are based are reasonable. The unaudited pro forma consolidated
financial statements are provided for informational purposes only and do not
purport to represent what the Company's financial position or results of
operations actually would have been if the foregoing transactions occurred as of
the dates indicated or what such results will be for any future periods. The
unaudited pro forma financial statements should be read in conjunction with the
Financial Statements and the related notes thereto for each of the Company and
FMS included elsewhere in this Current Report on Form 8-K/A and the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.
(a) Financial Statements of Business Acquired.
The financial statements of FMS Productions, Inc.("FMS")are provided
herein on page F-1 through F-12.
(b) Pro Forma Financial Information.
Pro Forma financial information relative to FMS is provided herein on
pages F-13 through F-14.
<PAGE>
(c) Exhibits.
Exhibit
No. Description
--- -----------
* 2.1 Agreement and Plan of Merger dated as of December 10, 1997 among the
Company, Recovery Direct, FMS and each of John Frederick, P. Randall
Frederick, Jan Smithers, Joe C. Wood, Jr., Sharon R. Irish and Charles
S. Sapp.
* 4.1 Form of Registration Rights Agreement dated December 10, 1997 between
the Company and each of the Sellers.
- ----------------------
* Previously filed.
<PAGE>
June 30, 1997
To the Board of Directors
of FMS Productions, Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying balance sheet of FMS Productions, Inc. as of
April 30, 1997 and 1996 and the related statements of income, retained earnings,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company?'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FMS Productions, Inc. as of
April 30, 1997 and 1996 and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered losses from operations and its
total liabilities exceeds its total assets. This raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Bartlett, Pringle & Wolf, LLP
F-1
<PAGE>
FMS PRODUCTIONS, INC.
BALANCE SHEET
April 30, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Current Assets:
Cash: Unrestricted $ 12,122 $ 12,951
Restricted 8,502 9,864
-------------------------- -----------------
Total cash 20,624 22,815
Accounts receivable, less allowance for uncollectible
accounts of $18,500 in 1997 and 1996 78,353 108,758
Other receivables -- 1,620
Inventories 48,168 42,334
Production costs, net of amortization of $457,399 and 55,410 56,497
$450,953 for 1997 and 1996, respectively 2,989 2,454
-------------------------- -----------------
Prepaid expenses 205,544 234,478
-------------------------- -----------------
Total current assets 32,049 35,495
Equipment 22,773 22,985
Machinery and equipment 28,500 28,500
Furniture and fixtures 14,784 14,306
-------------------------- -----------------
Automobiles 98,106 101,286
Office equipment (88,04384) (89,883)
-------------------------- -----------------
Less accumulated depreciation 10,063 11,403
Net equipment 5,257 6,398
-------------------------- -----------------
Other Assets:
Refundable deposits $ 220,864 $ 252,279
-------------------------- -----------------
-------------------------- -----------------
Total assets
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable $ 65,849 $ 60,862
Accrued royalties 160,428 156,155
Accrued payroll and related tax liabilities 33,681 38,225
Deferred revenue 7,181 8,765
Current portion of long-term debt 12,205 38,208
-------------------------- -----------------
Total current liabilities 279,344 302,215
Long-term debt, net of current portion 22,846 29,057
-------------------------- -----------------
Total liabilities 302,190 331,272
-------------------------- -----------------
Stockholders' Equity:
Common stock - no par value; authorized 2,500 shares;
Issued and outstanding 100 shares 700 700
Retained earnings (deficit) (82,026) (79,693)
Total stockholders? equity (deficit) (81,326) (78,993)
Total liabilities and stockholders' equity $ 220,864 $ 252,279
========================== =================
See accompanying notes
</TABLE>
F-2
<PAGE>
<TABLE>
MS PRODUCTIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the Years Ended April 30, 1997 and 1996
- -----------------------------------------------------------------------------
1997 1996
---- ----
<CAPTION>
<S> <C> <C>
Net Sales $1,180,926 $ 1,286,710
Cost of Sales 378,096 406,198
Gross profit 802,830 880,512
---------------- ---------------
Operating Expenses
Selling 379,495 481,347
General and administrative 420,316 488,986
Interest 10,208 14,072
------ ------
Total operating expenses 810,019 984,405
---------------- ---------------
Operating loss (7,189) (103,893)
---------------- ---------------
Other Income:
Net gain on disposal of assets -- 112
Interest income 305 593
Miscellaneous income 5,351 5,000
---------------- ---------------
Total other income 5,656 5,705
---------------- ---------------
Loss before income taxes (1,533) (98,188)
Provision for income taxes 800 800
---------------- ---------------
Net loss (2,333) (98,988)
Retained earnings (deficit), beginning of year (79,693) 19,295
---------------- ---------------
Retained earnings (deficit), end of year $ (82,026) $ (79,693)
================ ===============
See accompanying notes
</TABLE>
F-3
<PAGE>
<TABLE>
FMS PRODUCTIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended April 30, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Cash Flows from Operating Activities: 1997 1996
- ------------------------------------- ---- ----
<S> <C> <C>
Net loss $ (2,333) $ (98,988)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 11,587 13,439
Gain on disposal of assets -- (112)
Decrease (increase) in:
Accounts receivable 30,404 20,003
Other receivables 1,620 63
Inventories (5,834) 12,283
Production costs (5,359) (781)
Prepaid expenses and refundable deposits 606 27,049
Increase (decrease) in:
Accounts payable 4,987 (9,798)
Accrued royalties 4,273 14,138
Accrued payroll and related taxes (4,544) (2,665)
Deferred revenue (1,584) --
----------------- ----------------
Net cash provided (used) by operating activities 33,823 (25,369)
----------------- ----------------
Cash Flows from Investing Activities:
Purchase of equipment (3,800) (5,053)
----------------- ----------------
Net cash used in investing activities (3,800) (5,053)
----------------- ----------------
Cash Flows from Financing Activities:
Repayments under line of credit -- (42,500)
Principal payments on long-term borrowing (32,214) (28,946)
Proceeds from long-term borrowing -- 34,494
----------------- ----------------
Net cash used in financing activities (32,214) (36,952)
----------------- ----------------
Net decrease in cash
Cash at beginning of year (2,191) (67,374)
22,815 90,189
----------------- ----------------
Cash at end of year $ 20,624 $ 22,815
----------------- ----------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $10,208 $ 14,072
Income taxes 800 800
See accompanying notes
</TABLE>
F-4
<PAGE>
FMS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1 - Nature of Business and Summary of Significant Accounting Policies
A) Nature of Business
FMS Productions, Inc., located in Carpinteria, California, is
a nationwide distributor of educational films and videos. The
Company grants credit to its customers including educational,
correctional, and counseling institutions throughout the
United States, many of which rely on governmental funding.
B) Restricted Cash
Restricted cash represents amounts received from third
parties for the production of films.
C) Inventories
Inventories are stated at the lower of cost (first in, first
out) or market (net realizable value).
D) Equipment
Equipment is stated at cost with depreciation provided over
the estimated useful lives utilizing the straight line and
150% declining balance methods.
The estimated useful lives of all of the assets range from
five to seven years.
E) Production Costs
Production costs consist of negative costs, which are the
costs the Company incurs to produce a film, and other
production costs that the Company incurs to produce books and
cassette tapes. Negative costs are amortized under the
individual film-forecast- computation method. This method
amortizes the film costs in relation to an estimate of the
film's revenues over the sales life of the film. Other
production costs are amortized in a similar manner. It is
reasonably possible that those estimates of anticipated gross
revenues will be reduced in the near term. As a result, the
carrying amount of the capitalized production costs would be
reduced.
F) Income Taxes
Income taxes are provided for the tax effect of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to
differences between methods of depreciating fixed assets,
allowances for doubtful accounts, and reporting of lawsuit
settlement expense for financial and income tax reporting.
The deferred tax assets represent the future tax return
consequences of those differences, which will be deductible
when the assets are recovered. Deferred taxes also are
recognized for operating losses that are available to offset
future taxable income.
G) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of
revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-5
<PAGE>
Note 2 - Inventories
Amounts included in inventory are as follows:
1997 1996
--------------------- ---------------------
Pre-production costs $ 1,836 $ 677
Finished goods 46,332 41,657
--------------------- ---------------------
$ 48,168 $ 42,334
===================== =====================
Note 3 - Notes Payable and long-term Debt
The note payable represents a line of credit secured by accounts
receivable, business assets, inventories and a trust deed on
property owned by a stockholder under a general security agreement.
The note was paid off on February 16, 1996. The company had
available a $50,000 line of credit which expired August 15, 1996.
At April 30, 1996 the Company was in violation of certain
restrictive covenants of its loan agreement with the bank under its
term loan. Therefore, the term loan is classified as current as of
April 30, 1996.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------------
<S> <C> <C>
Unsecured 9% note payable to a stockholder of the Company,
payments of principal and interest due in monthly installments
Of $532, note was due in full and paid by January 1, 1997. $ $ 4,612
Loan payable to bank in monthly principal $ 5,993 $ 18,497
installments of $1,042 plus interest. The interest rate is the Wall Street
Journal prime rate plus 2%, which equaled 10.5% and 11% at April 30,1997 and
1996, respectively. The loan is secured by all corporate assets and a Company
officer's home. the company officer is a guarantor.
Lawsuit settlement, payable in monthly installments of $1,000, including
interest, plus a final payment of $3,000, which was paid in full December
1,1996. Interest is imputed at 8% based on the Company's incremental borrowing rate. $ 9,662
13.4% note payable to a stockholder of the Company in monthly
principal and interest payments of $811. Note is due in full on
February 25, 2001. The note is secured by accounts receivable,
inventories and all other assets of the Company. The loan is
subordinate to the loan payable to the bank
Described above. 29,058 34,494
------------------ -------------------------
Total long-term debt 35,051 67,265
Less current portion of long-term debt 12,205 38,208
------------------ -------------------------
Long-term debt, net of current portion $ 22,846 $ 29,057
================== =========================
</TABLE>
Principal repayments are scheduled as follows for the years ending April 30:
1998 $ 12,205
1999 7,097
2000 8,106
2001 7,643
$ 35,051
=====================
F-6
<PAGE>
Note 4 - Lease Commitments
The Company leases its facilities and equipment under month to
month operating lease arrangements. The total expense for the year
ended April 30, 1997 and 1996 was $47,378 and $50,390,
respectively.
Note 5 - Income Taxes
Temporary differences giving rise to the deferred tax assets
consist primarily of the excess of depreciation for financial
reporting purposes over the amount for tax purposes, allowances for
accounts receivable reported differently for financial reporting
and tax purposes, and lawsuit settlement expense accounted for
differently for financial reporting and tax purposes.
The provision for income taxes consists of:
1997 1996
---------------------- -----------------
Current tax expense -- state $ 800 $ 800
---------------------- -----------------
The net deferred tax assets include the following components:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax assets:
Federal $ 29,346 $ 30,415
State 12,252 12,888
Deferred tax asset valuation account:
Federal (29,346) (30,415)
State (12,252) (12,888)
Total deferred tax asset $ 0 $ 0
====================== ================
Valuation allowance, beginning of year $ 43,303 $ 23,808
Increase (decrease) in allowance (1,705) 19,495
---------------------- ----------------
Valuation allowance, end of year $ 41,598 $ 43,303
====================== ================
</TABLE>
The Company has available at April 30, 1997 an unused operating
loss carryforward of approximately $206,000 which may be applied
against future federal taxable income; and approximately $142,000
which may be applied against future state taxable income. These
operating loss carryforwards expire in the years ending April 30,
2011 and 2001, respectively.
Note 6 - Depreciation and Amortization Expense
Included in the financial statements for the years ending April 30
are:
1997 1996
----------------- ------------------
Depreciation expense $ 5,140 $ 5,380
Amortization of production costs 6,447 8,059
$ 11,587 $ 13,439
================= ==================
Note 7 - Related Party Transactions
The Company purchased consulting services from a 20% shareholder.
For the year ending April 30, 1996, the Company paid this
shareholder $10,8000. There were no amounts paid to this
shareholder during the year ending April 30, 1997. Amounts due to
this shareholder and included in trade payables totaled $1,350 as
of April 30, 1997 and 1996.
F-7
<PAGE>
Also included in trade payables are amounts due to shareholders and
employees for unreimbursed expenses totaling $13,813 as of April
30, 1997.
Note 8 - Employment Contract
The Company has entered into an employment contract with its
president through June 30, 1999 that provides for a minimum annual
salary of $65,000 plus a bonus based on the Company?s attainment of
specified levels of sales and earnings. In addition, if the
president is terminated for other than cause as specified in the
terms of the contract, the president will be paid severance in an
amount equal to his base salary payable from the date of the event
causing the termination through the expiration date of the
agreement plus two times his bonus for the immediately preceding
year. In no event will the amount of severance payable be less than
his base salary for the twelve month period immediately preceding
the date of such termination plus two times his bonus for the
immediately preceding fiscal year, if any such termination is made
with in the final twelve months of the term of the employment
contract.
Note 9 - Subsequent Event
The Company received a letter of intent form a potential buyer who
would acquire all of the outstanding stock of the Company, subject
to certain conditions, in exchange for the issuance of the
purchasing company?s common stock to the shareholders of FMS
Productions, Inc. the Company?s shareholders have accepted this
offer. After closing, the Company would be a wholly owned
subsidiary of the purchasing company.
Note 10 - Going Concern
The Company experienced significant declines in sales during the
years ended April 30, 1997 and 1996. In addition, as of April 30,
1997 and 1996, total liabilities exceeded total assets. As
mentioned in Note 9, the Company?s shareholders have accepted an
offer to sell all of their outstanding stock. In addition,
management has undertaken a cost reduction plan that has reduced
monthly operating expenses. The success of the pending sale of the
Company and management?s cost reduction plan, as well as increasing
sales and the Company?s continued ability to obtain necessary short
and long-term financing, will be critical factors in the Company?s
ability to continue as a going concern.
F-8
<PAGE>
FMS PRODUCTIONS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
October 31, 1997
ASSETS
CURRENT ASSETS
Cash......................................................... $34,867
Accounts receivable, less allowance for uncollectible
accounts of
$18,500............................................... 55,172
Inventories.................................................. 85,876
Productions costs, net of amortization of $462,121........... 53,331
Prepaid expenses............................................. 9,866
---------
Total current assets.................................. 239,112
FURNITURE AND EQUIPMENT, net...................................... 11,175
REFUNDABLE SECURITY DEPOSIT....................................... 5,257
---------
$255,544
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................. $83,007
Accrued royalties............................................ 160,172
Accrued payroll and related tax liabilities.................. 16,579
Deferred revenue............................................. 7,146
Current portion of long-term debt............................ 6,212
---------
Total current liabilities............................. 273,116
LONG-TERM DEBT, net of current portion............................ 19,333
---------
Total liabilities..................................... 292,449
---------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, no par value:
Authorized 2,500 shares
Issued and outstanding 100 shares..................... 700
Accumulated deficit.......................................... (37,605)
---------
Shareholders' deficit................................. (36,905)
---------
$255,544
=========
The accompanying notes are an integral part of this condensed balance sheet
F-9
<PAGE>
FMS PRODUCTIONS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
for the Six Month Periods Ended October 31, 1997 and 1996
1997 1996
--------- ---------
Net Sales $698,195 $648,641
Cost of Sales 210,768 192,913
--------- ---------
Gross profit 487,427 455,728
--------- ---------
Operating Expenses
Selling 225,240 197,671
General and administrative 216,405 212,884
Interest 3,661 4,949
--------- ---------
Total operating expenses 445,306 415,504
--------- ---------
Operating income 42,121 40,224
Other Income 3,100 -
--------- ---------
Income before provision for income taxes 45,221 40,224
Provision for income taxes 800 800
--------- ---------
Net income $44,421 $39,424
========= =========
The accompanying notes are an integral part of
these condensed statements.
F-10
<PAGE>
FMS PRODUCTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Period Ended October 31, 1997 and 1996
1997 1996
------------- -----------
Net cash provided by operating activities $27,596 $24,880
------------- -----------
Cash flows from investing activities --
Purchases of equipment (3,847) (3,362)
------------- -----------
Cash flows from financing activities --
Principal payments on borrowings (9,506) (17,915)
------------- -----------
Net increase in cash 14,243 3,603
Cash, beginning of period 20,624 22,815
------------- -----------
Cash, end of period $34,867 $26,418
============= ===========
The accompanying notes are an integral part of
these condensed statements.
F-11
<PAGE>
FMS PRODUCTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1997
Note 1 Unaudited Information as of October 31, 1997
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principals for interim
financial statements and the Securities and Exchange Commission's Rule 10-1,
"Interim Financial Statements." Accordingly, these unaudited condensed financial
statements do not include certain information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the accompanying unaudited condensed financial statements contain all
adjustments (consisting only of normally recurring accruals) which, in the
opinion of management, are necessary in order to present the financial
statements fairly. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. These
unaudited condensed financial statements should be read in conjunction with FMS
Productions, Inc.'s audited financial statements and notes thereto included in
the Form 8-K/A.
Note 2 - Inventories
Inventories primarily consist of finished goods and are stated at
the lower of cost (first-in, first-out) or market (net realizable value).
F-12
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTH PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
Recovery
Network(5) FMS Adjustments Consolidated
---------- --- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Advertising................................ $55,671 $ - $ - $55,671
Video and publication...................... 698,195 - 698,195
Other...................................... 20,000 - - 20,000
Total revenues........................... 75,671 698,195 - 773,866
OPERATING EXPENSES:
Salaries and consulting.................... 661,935 272,606 19,500(1) 954,041
Marketing.................................. 640,431 82,828 - 723,259
General and administrative................. 528,557 83,111 - 611,668
Programming................................ 340,723 - - 340,723
Programming transmission................... 219,087 - - 219,087
Loss on investment in joint
venture.................................. 150,000 - - 150,000
Cost of book and publication
sales.................................... - 210,768 30,000(2) 240,768
Operating expenses.................. 2,540,733 649,313 49,500 3,239,546
Income (loss) from operations.............. (2,465,062) 48,882 (49,500) (2,465,680)
INTEREST EXPENSE............................... (765,267) (3,661) 2,000(3) (766,928)
INTEREST INCOME................................ 77,172 - - 77,172
Income (loss) before provisions
for income taxes......................... (3,153,157) 45,221 (47,500) (3,155,436)
PROVISION FOR STATE INCOME
TAXES...................................... - (800) - (800)
Net income (loss).......................... $(3,153,157) $ 44,421 $ (47,500) $(3,156,236)
LOSS PER SHARE INFORMATION:
Loss per share and loss per share
assuming dilution.......................... $ (0.85) $(0.85)
Weighted average number of common
and common equivalent shares
outstanding................................ 3,689,372 44,000(4) 3,733,372
- --------------------------
(1) Increase in officers' salaries based upon new employment agreements.
(2) Amortization of FMS's television rights
(3) Reduction in interest expense due to retirement of note payable to FMS
Shareholder.
(4) Increase in weighted average shares to acquire FMS as if consummated on
July 1, 1997.
(5) Does not include Recovery Network's equity interest in FMS's net income for
the period from December 11, 1997 to December 31, 1997.
</TABLE>
F-13
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
Recovery
Network (5) FMS Adjustments Consolidated
----------- --- ----------- ------------
<CAPTION>
<S> <C> <C> <C> <C>
REVENUES:
Advertising............................. $ 33,464 - $ - $ 33,464
Video and publication................... - 1,180,926 - 1,180,926
Total revenues........................ 33,464 1,180,926 - 1,214,390
OPERATING EXPENSES:
Salaries and consulting................. 1,175,362 511,690 39,000(1) 1,726,052
Marketing............................... 468,017 137,463 - 605,480
General and administrative.............. 768,938 150,658 - 919,596
Programming............................. 358,447 - - 358,447
Loss on investment in joint
venture............................... 300,000 - - 300,000
Cost of book and publication
sales................................. - 378,096 60,000(2) 438,096
Operating expenses............... 3,070,764 1,177,907 99,000 4,347,671
Income (Loss) from operations (3,037,300) 3,019 (99,000) (3,133,281)
INTEREST EXPENSE............................ (778,552) (9,903) 4,000(3) (784,455)
OTHER INCOME................................ - 5,351 - 5,351
Loss before provision for income
taxes................................. (3,815,852) (1,533) (95,000) (3,912,385)
PROVISION FOR STATE INCOME
TAXES................................... (1,800) (800) - (2,600)
Net loss................................ $(3,817,652) $ (2,333) (95,000) $(3,914,985)
LOSS PER SHARE INFORMATION:
Loss per share and loss per share
assuming dilution..................... $(1.87)(5) $(1.87)
Weighted average number of
Common and common
Equivalent shares outstanding......... 2,044,339(5) 44,000(4) 2,088,339
- -------------------------
(1) Increase in officer's salaries based upon new employment agreements.
(2) Amortization of FMS's television rights.
(3) Reduction in interest expense due to retirement of note payable to FMS
Shareholder.
(4) Increase in weighted average shares to acquire FMS as if consummated on
July 1, 1996.
(5) Number of common and common equivalents outstanding decreased by 460,548
shares when compared to the June 30, 1997 financial statements as the
Securities and Exchange Commission Staff Accounting Bulletin No. 83 no
longer applies after the issuance of the Statement of Financial Accounting
Standards No. 128 "Earnings Per Share."
</TABLE>
F-14
<PAGE>
SIGNATURES
Pursuant to the requirement of the securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 2, 1998 THE RECOVERY NETWORK, INC.
By: /s/ William D. Moses
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William D. Moses
President and Chief
Executive Officer
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EXHIBIT INDEX
Exhibit Page
No. Description No.
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* 2.1 Agreement and Plan of Merger dated as of December 10,
1997 between and among the Company, Recovery Direct,
FMS and each of John Frederick, P. Randall Frederick, Jan
Smithers, Joe C. Wood, Jr., Sharon R. Irish and Charles S.
Sapp
* 4.1 Form of Registration Rights Agreement dated December 10, 1997
between the Company and each of the Sellers.
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* Previously filed.
