<PAGE>
As filed with the Securities and Exchange Commission on August 13, 1998.
Registration No. 333-
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
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 39-1731029
(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
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.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone: (212) 704-6000
Telecopier: (212) 704-6288
------------------
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. |_|
------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================= ================== =================== ===================== ====================
Proposed
Proposed Maximum Maximum
Title Of Each Class Of Amount To Offering Price Aggregate Amount Of
Securities To Be Registered Be Registered Per Security Offering Price Registration Fee
- ----------------------------------------- ------------------ ------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Common Stock,
par value $.01 per share............ 2,265,966 (1) $1.47 (2) $3,328,137 (2) $981.80
- ----------------------------------------- ------------------ ------------------- --------------------- --------------------
Common Stock
par value $.01 per share............ 100,000 (3) $5.50 $550,000 $162.25
- ----------------------------------------- ------------------ ------------------- --------------------- --------------------
Total Registration Fee.......................................................................................$1,144.05
===========================================================================================================================
</TABLE>
(1) The shares of Common Stock offered hereby includes the resale of such
presently indeterminate number of shares of Common Stock as shall be
issued upon exercise by the Selling Shareholders of certain Reset
Rights and the exercise by the Company of Put Rights in the aggregate
principal amount of $3,000,000. The number of shares of Common Stock
offered for resale hereby is an estimate and represents the number of
shares that the Company has agreed to register in this Registration
Statement. Such number of shares is subject to adjustment and could be
materially less than such estimated amount depending upon factors that
cannot be predicted by the Company at this time, including, among
others, the future market price of the Common Stock. This presentation
is not intended to constitute a prediction as to the future market
price of the Common Stock or as to the number of shares of Common Stock
issuable upon exercise of the Reset Rights or the Put Rights.
(2) Pursuant to Rule 457(c) of the Securities Act, calculated based upon the
average of the bid and asked price of the Common Stock as of August 10,
1998.
(3) Issuable upon exercise of certain warrants.
------------------
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>
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.
SUBJECT TO COMPLETION, DATED AUGUST 13, 1998
PROSPECTUS
- -------------------------------------------------------------------------------
2,365,966 Shares of
THE RECOVERY NETWORK, INC.
Common Stock
- -------------------------------------------------------------------------------
This Prospectus relates to an aggregate of 2,365,966 shares (the
"Shares") of Common Stock, $.01 par value per shares ("Common Stock"), of The
Recovery Network, Inc. (the "Company") which may be offered and sold from time
to time, by the Selling Shareholders named herein (the "Selling
Shareholders"), consisting of (i) 1,111,110 shares of Common Stock issued to
certain subscribers (the "Subscribers") pursuant to each Subscription
Agreement dated June 29, 1998 between the Company and each of the Subscribers
(collectively, the "Agreements"); (ii) 1,111,140 shares of Common Stock,
representing an estimate of shares issuable to the Subscribers pursuant to
certain provisions of the Agreements, including but not limited to exercise of
the Reset Rights by the Subscribers and exercise of the Put Rights by the
Company; (iii) 100,000 shares of Common Stock reserved for issuance to the
Subscribers upon their exercise of warrants issued pursuant to the Agreements
and exercisable at an exercise price of $5.50 per share until June 29, 2001
(the "Warrants"); and (iv) an aggregate of 43,716 shares of Common Stock
issued to certain parties who served as placement agents (the "Placement
Agents") in the Private Placement (as defined herein). See "Selling
Shareholders".
The Shares may be offered for sale from time to time by the Selling
Shareholders or their pledgees, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The Shares
may be sold directly by the Selling Shareholders or through one or more
broker-dealers. Such broker-dealers may receive compensation in the form of
commissions, discounts or concessions from the Selling Shareholders and/or
purchasers of Shares for whom such broker-dealers may act as agent, or to whom
they may sell as principal, or both (which compensation as to a particular
broker-dealer may be in excess of customary commissions). The Selling
Shareholders and such broker-dealers may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933 (the "Securities Act"), and any
discounts, commissions and concessions and any profits realized on any sale of
the Shares may be deemed to be underwriting compensation. See "Selling
Shareholders" and "Plan of Distribution".
------------------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" COMMENCING ON PAGE 8.
------------------------------------
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.
------------------------------------
The date of this Prospectus is _________ __, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information electronically
filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR"). The Common Stock is currently quoted on The Nasdaq
Stock Market and such reports and other information can also be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (Registration No. 333- ) under the Securities Act with
respect to the Shares (the "Registration Statement"). As permitted by the
rules of the Commission, this Prospectus 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
Shares offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Statements contained in this
Prospectus, and in any document incorporated herein by reference, as to the
contents of any contract or any other document referred to are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement or such
document, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of
the Registration Statement may be obtained from such office upon the payment
of the fees prescribed by the Commission. The Registration Statement has been
filed through EDGAR and is publicly available through the Commission's Web
site (http://www.sec.gov).
<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.
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
until its acquisition of FMS (as defined herein) in December 1997, 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 on over 175 cable systems; Recovery Talk Radio(TM), a
nationally syndicated talk radio program introduced in December 1996 and
currently airing on 53 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 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 FMS Productions, Inc., a wholly-owned subsidiary of the
Company ("FMS"). The Company's principal executive offices are located at 1411
5th Street, Suite 200, Santa Monica, California 90401, and its telephone
number is (310) 393-3979.
Private Placement
On June 29, 1998 (the "Subscription Date"), the Company entered into
the Agreements with each of the Subscribers (the "Private Placement").
Pursuant to the Agreements, the Company is entitled to aggregate proceeds of
up to $5,500,000 in the Private Placement. The Agreements provide for the
issuance by the Company of (i) 1,111,110 shares (the "Shares") of Common Stock
for $2,500,000, or $2.25 per share, (ii) additional shares of Common Stock to
the Subscribers pursuant to certain other provisions of the Agreements,
including shares issuable for no additional consideration pursuant to the
Reset Rights (as defined herein) and shares issuable for up to $3,000,000
pursuant to the Put Rights (as defined herein) (collectively, the "Additional
Shares"), and (iii) 100,000 shares of Common Stock upon the exercise of
warrants (the "Warrants"). The Warrants are exercisable at an exercise price
of $5.50 per share and may be exercised at any time or from time to time on or
before June 29, 2001.
-3-
<PAGE>
The Company has also issued to certain placement agents in the Private
Placement (the "Placement Agents") an aggregate of 43,716 shares of Common
Stock (the "Placement Shares"), of which 13,115 shares were delivered to an
escrow agent and will be released upon the satisfaction by the Company of the
following conditions: (i) the filing by the Company of a registration
statement with respect to the Shares, the Additional Shares, the shares of
Common Stock issuable upon exercise of the Warrants and the Placement Shares
(collectively, the "Securities"); and (ii) the obtainment of shareholder
approval of the issuance of certain shares pursuant to the Agreements.
Common Stock and Warrants
The Shares and Warrants were sold at an initial price of $2.25 per
share (the "Closing Price"), which was 75% of the average of the closing bid
prices of the Common Stock for the five day trading period immediately
preceding the Subscription Date. Of the 1,111,110 shares purchased, 777,776
shares have been issued and delivered to the Subscribers and 174,415 shares
were issued to the Subscribers but delivered to an escrow agent. The remaining
158,919 shares have not yet been issued by the Company as such issuance is
conditioned upon the approval by the Company's shareholders of such additional
shares and the filing by the Company of the Registration Statement of which
this Prospectus is a part. Of the $2,500,000 purchase price of the Shares and
the Warrants, $1,750,000 was delivered to the Company and $750,000 was
delivered to an escrow agent.
Reset Rights
Pursuant to the Agreements, the Subscribers received certain reset
rights (the "Reset Rights") that may require the Company to issue additional
shares of Common Stock to the Subscribers in the future (the "Reset Shares").
The Subscribers are entitled to additional shares of Common Stock, without the
payment of additional consideration, to account for a decrease in the market
value of the Common Stock after the Subscription Date. The Subscribers are
first entitled to such additional shares on the date on which a registration
statement covering the Securities has been declared effective by the
Securities and Exchange Commission (the "Commission") or, at the Subscriber's
election, on the 180th day after the Subscription Date if such registration
statement has not been declared effective by the Commission on such date
("Trigger Date"). The Company may be required to issue Reset Shares on the
30th, 60th, 90th, 120th, 150th, 180th, 210th, 240th, and 270th days following
the Trigger Date (the Trigger Date and each of such other dates, a "Repricing
Date"). If the closing bid price on any Repricing Date is lower than the
Closing Price, then, at each Subscriber's election, not less than 10% and not
more than 25% of the shares received by such Subscriber for the purchase price
paid to the Company for such shares (the "Designated Portion"), shall be
subject to the Reset Rights. The aggregate of any Subscriber's Designated
Portion from each Trigger Date may not exceed the purchase price paid by such
Subscriber. To account for any deficiency between the closing bid price on any
Repricing Date and the Closing Price, the Company will issue additional shares
to the Subscribers equal to the number of additional shares that could be
purchased for the Designated Portion on such date.
In lieu of delivering additional shares pursuant to the Reset Rights,
the Company has received certain repurchase rights. The repurchase rights
provide that the Company may, in the event the average closing bid price for
the Common Stock on the NASDAQ SmallCap Market for the five trading days
immediately preceding, but not including, a Repricing Date is less than $2.50
per share (the "Redemption Price"), deliver to each Subscriber a sum of money
determined by multiplying the number of additional shares otherwise
deliverable by the Redemption Price.
-4-
<PAGE>
Put Rights
The Company also has the right to "put" up to $3,000,000 of its Common
Stock to the Subscribers during the two year period commencing on the
Subscription Date (the "Put Rights"). Such Put Rights contemplate the issuance
of shares of Common Stock required to be purchased from time to time by the
Subscribers (the "Put Shares") after delivery of a notice (a "Put Notice")
from the Company, at a price equal to 88% of the average closing bid prices of
the Company's Common Stock over the five-day trading period beginning two
trading days prior to the date the Put Notice is given and ending two trading
days after the Put Notice is given. The obligation of the Subscribers to
purchase Common Stock pursuant to the exercise by the Company of the Put
Rights is subject to various conditions, including conditions relating to
minimum market price, minimum trading volume and timing. The number of shares
of Common Stock that the Company may issue at any one time upon exercise by
the Company of the Put Rights is limited, depending upon the average closing
bid price for the Common Stock and the average daily Common Stock trading
volume for the 15 days immediately preceding the date of the Put Notice.
Right of First Refusal
If the Company seeks to sell shares of its Common Stock to prospective
investors at any time after the Subscription Date until the later of 90 days
after the effective date of a registration statement covering the Securities
or 270 days after the Subscription Date, the Company must give the Subscribers
(i) prior written notice of such sale and (ii) an opportunity to purchase an
amount of Common Stock to maintain their respective proportionate interests in
the Company (the "Right of First Refusal"). The Right of First Refusal must be
on the same terms and conditions offered to the prospective investors.
-5-
<PAGE>
The Offering
Securities offered by the Selling Shareholder 2,365,966 shares (a)
Common Stock outstanding
before and after the offering hereby... 5,977,920 shares (b)
Nasdaq symbol............................... RNET
- -------------------
(a) Includes: (i) 1,111,110 shares of Common Stock issued to the Subscribers
pursuant to the Agreements; (ii) 1,111,140 shares of Common Stock,
representing an estimate of shares issuable to the Subscribers pursuant to
certain provisions of the Agreements, including but not limited to
exercise of the Reset Rights by the Subscribers and exercise of the Put
Rights by the Company; (iii) 100,000 shares of Common Stock reserved for
issuance pursuant to the Warrants; and (iv) an aggregate of 43,716 shares
of Common Stock issued to the Placement Agents in the Private Placement.
(b) Represents shares of Common Stock outstanding as of August 13, 1998. As
the offering relates to shares of Common Stock to be sold from time to
time by the Selling Shareholders, no additional shares of Common Stock
will be outstanding as a result of the offering hereby. Does not include:
(i) 649,251 shares of Common Stock issuable upon exercise of stock options
granted to employees and consultants of the Company; (ii) 2,415,000 shares
of Common Stock issuable upon exercise of the Redeemable Warrants (as
defined herein); (iii) 420,000 shares of Common Stock issuable upon
exercise of warrants granted to Whale Securities Co., L.P.; (iv) 515,498
shares of Common Stock issuable upon exercise of warrants issued by the
Company, including 500,000 shares of Common Stock issuable upon exercise
of the Financing Warrants (as defined herein); (v) an indeterminable
number of shares of Common Stock issuable by the Company if it fails to
register, or to maintain an effective registration statement with respect
to, the Financing Shares (as defined herein), the shares of Common Stock
issuable upon exercise of the Financing Warrants; (vi) an indeterminable
number of shares of Common Stock over the number of shares of Common Stock
offered hereby that are issuable by the Company pursuant to the Reset
Rights and the Put Rights; (vii) 200,000 shares of Common Stock that may
be issuable pursuant to a consulting agreement between the Company and a
third party and 200,000 shares of Common Stock that may be issuable to
such party upon exercise of a warrant granted pursuant to such agreement;
and (viii) 157,096 share of Common Stock that are issuable to the
Subscribers but, pursuant to the rules of the Nasdaq SmallCap Market, may
not be issued by the Company without the approval of the Company's
shareholders.
Risk Factors
The securities offered hereby involve a high degree of risk. The
securities should not be purchased by investors who cannot afford the loss of
their entire investment. See "Risk Factors."
-6-
<PAGE>
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>
Nine Month Period Ended March 31,
---------------------------------------------
1997 1998
---- ----
<S> <C> <C>
Net loss............................................... $(2,286,273) $(5,210,003)
Basic and diluted loss per share....................... (1.23) (1.27)
Weighted average number of shares outstanding.......... 1,859,914 4,116,757
Balance Sheet Data:
<CAPTION>
At March 31, 1998
---------------------------------------------
Actual Pro Forma(a)
(unaudited) (unaudited)
<S> <C> <C>
Working capital........................................ $2,359,193 $4,659,193
Total assets........................................... 4,234,408 6,534,408
Total liabilities...................................... 788,853 788,853
Shareholders' equity................................... 3,445,555 5,745,555
- --------------
</TABLE>
(a) Gives effect to (i) the issuance of 1,111,110 shares of Common Stock to
the Subscribers for $2,500,000 and 43,716 shares of Common Stock issued to
the Placement Agents and (ii) offering costs of approximately $200,000.
Assumes that all shares placed in escrow and all shares to be issued upon
shareholder approval pursuant to the Agreements (currently 333,334 shares
for net proceeds of $720,000) will be issued to the Subscribers. Does not
give effect to any additional shares of Common Stock that may be issuable
pursuant to the exercise of the Warrants or pursuant to any other
provision of the Agreements. Does not include 200,000 shares of Common
Stock that may be issuable pursuant to a consulting agreement between the
Company and a third party and 200,000 shares of Common Stock that may be
issuable to such party upon exercise of a warrant granted pursuant to such
agreement. Includes shares of Common Stock issuable to the Subscribers
upon approval thereof by the Company's shareholders, pursuant to the rules
of the Nasdaq SmallCap Market.
-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.
This Prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
typically identified by the words "believe," "expect," "intend," "estimate"
and similar expressions. Those statements appear in a number of places in this
report and include statements regarding the intent, belief or current
expectation of the Company or its directors or officers with respect to, among
other things, trends affecting the Company's financial conditions and results
of operations and the Company's business and growth strategies. Such
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from
those projected, expressed or implied in the forward-looking statements as a
result of various factors (such factors are referred to herein as "Cautionary
Statements"). The accompanying information contained in this Prospectus,
including the information set forth under "Plan of Operation" and "Business"
identifies important factors that could cause such differences. Such
forward-looking statements speak only as of the date of this report, and the
Company cautions potential investors not to place undue reliance on such
statements. The Company undertakes no obligation to update or revise any
forward-looking statements. All subsequent written or oral forward- looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
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 was in
the development stage until its acquisition of FMS in December 1997. 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
$3,817,652 for the years ended June 30, 1996 and 1997, respectively, and
losses of $5,210,003 for the nine months ended March 31, 1998. At March 31,
1998, the Company had a deficit accumulated of $11,107,122 and, since March
31, 1998, the Company has continued to incur significant 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. 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.
Significant Capital Requirements; 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
-8-
<PAGE>
its cash flow from operations. During the nine-month period ended March 31,
1998, the Company's operating cash flow requirements exceeded operating cash
flow sources by $5,161,006 due to. among other things, costs associated with
program development, reduction in accrued expenses and accounts payable and
affiliate marketing efforts. The proceeds from the Company's initial public
offering ("IPO") have been substantially expended and the proceeds from the
Private Placement will provide the Company with sufficient capital only
through December 1998. The Company is therefore dependent on obtaining
additional financing. 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.
Dilution; Impact of the Exercise of Reset Rights, Put Rights and
Warrants. The purchasers of the Shares offered hereby will experience
immediate and substantial dilution in the net tangible value of their shares
of Common Stock in the event of the exercise of the Reset Rights by the
Subscribers or the Put Rights by the Company, each of which is available in
certain circumstances pursuant to the Agreements, or in the event of the
exercise of the Warrants by the Subscribers. The exercise of any of the Reset
Rights, the Put Rights and the Warrants will result in the issuance of Common
Stock, at discounts from future market prices of the Common Stock, which could
result in substantial dilution to existing holders of Common Stock. The sale
of such Common Stock acquired at a discount could have a negative impact on
the trading price of the Common Stock and could increase the volatility in the
trading price of the Common Stock. Moreover, if the trading price of the
Common Stock were to decrease significantly, the issuance of Common Stock
pursuant to the Reset Rights could conceivably effect a change of control of
the Company.
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 arrangements for the airing of The
Recovery Network, its ability to successfully operate under the Transponder
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.
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 are 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
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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. With the loss of 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.
Uncertainty of Program Development and Production and Program
Acquisition. 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 continued ability to acquire
or license suitable programming. Although the Company has been successful in
licensing over 150 hours of programming to date, there can be no assurance
that it will be able to continue to license suitable programming on acceptable
terms, or at all. 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.
Loss of ATN Subscribers. ATN's subscribers currently represent the
majority of all of the households which receive broadcast of The Recovery
Network's programming. After the termination of the Nesting Contract in August
1998, the Company will be entirely dependent on its own affiliate marketing
efforts to obtain affiliate agreements with cable operators. Currently, the
Company's only such arrangement is with Cablevision, which provides the
Company with approximately 2 million subscribers in the New York and Boston
metropolitan areas. The Company expects that these will comprise substantially
all the subscribers it will have when it begins broadcasting under the
Transponder Contract.
Broadcast Interruptions and Equipment Failures. The Company is
dependent upon the Transponder Contract 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 the Company 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.
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Risks Relating to Joint Venture. The Company and TCII have each made
capital contributions to Recovery Interactive of approximately $750,000,
substantially all of which have been expended. These contributions by the
Company and TCII have not been sufficient to fund Recovery Interactive's
implementation of its business plan. The Company is not required to contribute
any additional funding to Recovery Interactive and does not intend to make any
additional contributions. There can also be no assurance that TCII will
provide any additional funding. Although Recovery Interactive is currently
seeking investment from third parties, there can be no assurance that it will
be able to obtain such additional capital on acceptable, or any, terms. 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.
Risks Relating to the Development and Supply of Recovery Related
Products; Risks Related to Recovery Direct; Uncertainty of Commercial
Acceptance of Recovery Related Products. The Company has just recently begun
to enter into arrangements for the supply of recovery and prevention-related
products to market and to offer them to the public, and has generated
approximately $282,000 of revenues through March 31, 1998 from its product
sales activities. Development of such business is subject to all of the risks
associated with the development of a new line of business, including
unexpected delays, as well as insufficiency of funds to complete satisfactory
development of products and services. 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 continue to be able to 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.
Risks Relating to FMS Acquisition. In December of 1997, the Company
acquired all of the outstanding stock of FMS. FMS's revenues from the
educational, institutional and correctional markets, which are its primary
markets, have been declining steadily for several years. It is likely that FMS
will require substantial additional capital in order to produce new products
and expand its sales and marketing efforts. Under the terms of the Merger
Agreement, the Company is required to contribute up to $150,000 per year to
produce additional films, but does not intend to make any additional capital
contributions beyond that. There can be no assurance that the $150,000 will be
adequate to develop sufficient new product or that FMS will otherwise be able
to fund its ongoing operations.
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, the
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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.
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 non-commercial 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.
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.
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
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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 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.
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.
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 $1,000,000 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.
Control by Management. The Company's current executive officers and
directors in the aggregate, beneficially own approximately 22.1% 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.
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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,
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 obtained key-man life insurance in the
amount of $2,000,000 on the life of Mr. Moses. The success of 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.
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.
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; 649,251 shares are reserved for issuance upon
exercise of outstanding options under the Company's stock option plans of
which 119,235 are exercisable at $5.00 per share and 504,831 are exercisable
at $1.56 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 (as defined herein). The Financing Warrants are exercisable until
March 6, 2002 at a price of $5.50 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..
No Assurance of Public Market; Possible Volatility of Market Price of
Common Stock and Warrants. Prior to the Company's IPO, there was no public
trading market for the Common Stock or Redeemable Warrants (as defined
herein). There can be no assurance that a regular trading market for the
Common Stock or Redeemable Warrants (as defined herein) will be sustained. 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.
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Possible Delisting of Securities from Nasdaq Systems; Risks Relating
to Penny Stocks. In order to continue to be listed on the Nasdaq SmallCap
Market, the Company must maintain $2,000,000 in net tangible assets and a
$1,000,000 market value on the public float. In addition, continued inclusion
requires two market makers, a minimum bid price of $1.00 per share 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 Redeemable Warrants from the Nasdaq SmallCap Market, and
trading, if any, in the Common Stock and Redeemable 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
Redeemable Warrants. As of the August 10, 1998, the bid price for the Common
Stock was $1.52 per share. There can be no assurance that the minimum bid
price of the Common Stock will remain above $1.00 per share.
In addition, if the Common Stock and Redeemable Warrants were to
become delisted from trading on the Nasdaq SmallCap Market and the trading
price of the Common Stock were to remain 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 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.
Shares Eligible for Future Sale; Registration Rights. The Company has
5,977,920 shares of Common Stock outstanding (assuming no exercise of
outstanding options or warrants). Of such shares 2,521,250 shares of Common
Stock 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 are eligible for sale, without registration,
under Rule 144 (subject to certain volume limitations prescribed by such rule
and to the contractual restrictions described below). In addition, 833,223 of
such restricted shares (not including 500,000 shares issuable upon exercise of
the Financing Warrants) are subject to certain registration rights, and the
Company has granted Whale Securities Co., L.P. demand and piggyback
registration rights with respect to the securities issuable upon exercise of
certain warrants issued thereto. 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.
Substantially all of the Company's officers, directors and security holders
have agreed not to (i) sell or otherwise dispose of any shares of Common Stock
in any public market transaction (including pursuant to Rule
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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
until September 29, 1998 (September 29, 1999 with respect to the Financing
Shares, Financing Warrants and shares issuable upon exercise of the Financing
Warrants). 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 Redeemable Warrants and could impair
the Company's ability to raise capital through the sale of its equity
securities.
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.
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USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
by the Selling Shareholders. However, on June 29, 1998, the Company entered
into the Agreements with the Subscribers. Pursuant to the Agreements, the
Company is entitled to aggregate proceeds of up to $2.5 million (the "Private
Placement"). The Company received $1,750,000 from the sale of the Shares to
the Subscribers pursuant to the Private Placement on June 29, 1998. In
addition, the Company's receipt of an additional $750,000 of proceeds which
the Subscribers have deposited with an escrow agent pursuant to the Agreements
is conditioned upon the Company filing by August 28, 1998 and the Securities
and Exchange Commission declaring effective by October 28, 1998 a Registration
Statement of which this Prospectus is a part. In addition to the proceeds
received in the Private Placement, the Company may receive $3 million pursuant
to a "put" provision in the Agreements that is subject to various conditions,
including those relating to minimum market price, minimum trading volume and
timing. There can be no assurance that the Company will exercise the Put
Rights or receive any of the proceeds therefrom. The net proceeds from the
sale of the Shares to the Subscribers are being used by the Company for
working capital, general corporate purposes and for expenses of approximately
$200,000 for the Private Placement. The proceeds from the exercise of the
Warrants will be used by the Company for working capital and general corporate
purposes.
The Company anticipates that $2,500,000 of the proceeds of the
Private Placement, together with projected revenues from operations, will be
sufficient to fund the Company's operations and capital requirements until
December 31, 1998. 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.
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 debt securities of the Company) or by the terms of any Preferred
Stock that may be authorized and issued.
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PLAN OF DISTRIBUTION
The Shares may be offered for sale from time to time by the Selling
Stockholder or their pledgees, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The Shares
may be sold directly by the Selling Shareholders or through one or more
broker-dealers. Such broker-dealers may receive compensation in the form of
commissions, discounts or concessions from the Selling Shareholders and/or
purchasers of Shares for whom such broker-dealers may act as agent, or to whom
they may sell as principal, or both (which compensation as to a particular
broker-dealer may be in excess of customary commissions). The Selling
Shareholders and such broker-dealers may be deemed to be "underwriters" within
the meaning of the of Securities Act, and any discounts, commissions and
concessions and any profit realized on any sales of the Shares may be deemed
to be underwriting compensation.
LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property, the
subject of, any material pending legal proceedings.
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CAPITALIZATION
The following table sets forth (i) the capitalization of the Company
as of March 31, 1998, and (ii) the pro forma capitalization at such date after
giving retroactive effect to the insurance of 1,111,110 shares of Common Stock
to the Subscribers for $2,500,000 and 43,716 shares of Common Stock to the
Placement Agents.
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------
Actual Pro Forma (a)
(unaudited) (unaudited)
<S> <C> <C>
Short-term debt, including current portion of capital lease
obligation............................................... $17,029 $17,029
============== ==============
Long-term obligation under capital lease, net of current
maturities............................................... $17,646 $17,646
-------------- --------------
Shareholders' equity:
Common Stock, $.01 par value: 25,000,000 shares
authorized; 4,980,250 shares issued and outstanding,
actual and 6,135,076 shares issued and outstanding,
pro forma ............................................ 49,803 61,351
Additional paid-in capital............................... 14,502,874 17,624,659
Deficit accumulated in the development stage............. (11,107,122) (11,940,455)
-------------- --------------
Total shareholders' equity (deficit).................. 3,445,555 5,745,555
-------------- --------------
Total capitalization............................. $3,463,201 $5,763,201
============== ==============
</TABLE>
- ------------------------
(a) Gives effect to (i) the issuance of 1,111,110 shares of Common Stock to
the Subscribers for $2,500,000 and 43,716 shares of Common Stock to the
Placement Agents and (ii) offering costs of approximately $200,000.
Assumes that all shares placed in escrow and all shares to be issued upon
shareholder approval pursuant to the Agreements (currently 333,334 shares
for net proceeds of $720,000) will be issued to the Subscribers. Does not
give effect to any additional shares of Common Stock that may be issuable
pursuant to the exercise of the Warrants or pursuant to any other
provision of the Agreements. Does not give effect to 200,000 shares of
Common Stock that may be issuable pursuant to a consulting agreement
between the Company and a third party and 200,000 shares of Common Stock
that may be issuable to such third party upon exercise of a warrant
granted pursuant to such agreement. The Company believes that such party
is not entitled to such shares under such agreement. Includes shares of
Common Stock issuable to the Subscribers upon approval thereof by the
Company's shareholders, pursuant to the rules of the Nasdaq SmallCap
Market.
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<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Prior to September 29, 1997, there was no market for the Company's
securities. From September 29, 1997 until January 7, 1998, one share of the
Company's Common Stock and one Redeemable Warrant (which entitled the holder
to purchase one share of Common Stock at a price of $5.50 per share through
the close of business on September 29, 2002, or an earlier redemption date)
(each, a "Redeemable Warrant" and collectively, the "Redeemable Warrants")
traded as a unit (each, a "Unit" and collectively, the "Units"). Starting on
January 9, 1998, shares of the Company's Common Stock and the Redeemable
Warrants began trading separately. In all cases, the Company's Units, Common
Stock and Redeemable Warrants traded on the Nasdaq SmallCap Market. The table
below sets forth the high and low closing bid prices for the Units, the Common
Stock and the Redeemable Warrants, as reported on the Nasdaq SmallCap Market,
during the period September 29, 1997 to June 30, 1998. The quotations
represent inter-dealer quotations without adjustment for retail mark-ups,
mark-downs or commissions and may not represent actual transactions:
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants Units
------------------ ------------------- -----
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended September 30, 1997........ N/A N/A N/A N/A 75/8 51/4
Quarter Ended December 31, 1997......... N/A N/A N/A N/A 71/4 35/8
Quarter Ended March 31, 1998............ 41/8 3 1 5/8 37/8 31/2
Quarter Ended June 30, 1998............. 61/2 23/4 15/8 7/16 N/A N/A
</TABLE>
As of the date of this Prospectus, the Company has outstanding
5,977,920 shares of Common Stock owned by approximately 109 holders of record,
and 2,413,900 Redeemable Warrants owned by approximately 1 holder of record.
-20-
<PAGE>
PLAN OF OPERATION
General
In April 1997, the Company nationally launched The Recovery Network,
a cable television network. Pursuant to a nesting contract (the "Nesting
Contract") with ATN, ATN provides satellite uplink, master control and other
related services on its satellite transponder to The Recovery Network for two
hours of telecast time every day to subscribers of cable systems with which
ATN has affiliation agreements, and to systems with which the Company has
direct affiliation agreements. Currently, The Recovery Network is telecast one
hour in the morning to approximately 11 million subscribers and one hour in
the evening to approximately 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 believes it 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 systems. The
Company is also targeting a more focused affiliate marketing effort on 10-12
major cities whose communities contain the bulk of those systems.
On February 26, 1998, the Company executed a contract to extend its
current agreement with ATN. The extension provides for an extension of
services on a month-to-month basis through and until August 31, 1998, at a
monthly fee of $65,000 and a one-time payment of $150,000 to reflect
unanticipated costs incurred by ATN in the course of performance under the
nesting contract.
To date, the Company has incurred significant net losses, including
net losses of $1,223,829, $3,817,652, $2,286,273, and $5,210,003 for the years
ended June 30, 1996 and 1997 and the nine-months ended March 31, 1997 and
1998, respectively. The Company anticipates that it will generate revenues
from advertising sales on The Recovery Network and Recovery Talk Radio,
merchandising recovery-related products and services on The Recovery Network,
Recovery Talk Radio, and 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 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,
advertising and merchandising although there can be no assurance that Recovery
Interactive will generate meaningful revenues or achieve profitable
operations.
Liquidity and Capital Resources
The Company's primary capital requirements in the next twelve months
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, master control and transmission services, and other 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, 1998, the Company had a working capital surplus of
$2,359,193. Due to, among other things, the lack of meaningful revenues, costs
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<PAGE>
associated with program development and affiliate marketing efforts, the
Company has been substantially dependent upon various private placements and
its initial public offering to fund its operations.
During the period from November 1995 through March 1, 1997, the
Company issued in private placements 745,674 shares of Common Stock at prices
ranging from $.77 per share to $3.48 per share for net proceeds of
approximately $1,433,767. Additionally, the Company raised debt proceeds of
$310,000 through another private placement. Of these debt proceeds raised,
$250,000 was converted into 71,033 shares of Common Stock and $60,000 was
repaid as of June 30, 1997. Upon conversion and repayment of the debt,
warrants to purchase 157,563 shares of Common Stock were issued. Warrants to
purchase 142,065 shares of Common Stock have been exercised for $330,000. A
warrant to purchase 15,498 shares of Common Stock at $3.87 per share remains
outstanding. Also, during this period, options to purchase 73,615 shares of
Common Stock were exercised for $171,000. See the Company's registration
statement on Form SB-2 dated September 29, 1997 for specifics of these
financing activities.
In March and April 1997, the Company completed a private financing
(the "Private Financing") pursuant to which it issued an aggregate of (i)
$2,000,000 principal amount of unsecured non-negotiable promissory notes
bearing interest at the rate of 9% per annum (the "Financing Notes"); (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 $5.50 per share. The
offering price was $50,000 per financing 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 financing units. The net
proceeds of the Private Financing were used by the Company for, among 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 repaid the entire principal amount of, and
accrued interest on, the Financing Notes subsequent to September 30, 1997 with
proceeds received from the initial public offering.
During July and August 1997, the Company issued Promissory Notes with
an aggregate principal amount of $605,250 to five lenders (the "Promissory
Notes"). The Company paid to each lender a loan origination fee in an amount
equal to 5% of the Promissory Notes, or approximately $30,300. The Promissory
Notes plus $95,000 of interest thereon were repaid on October 3, 1997. The net
proceeds from the issuance of the Promissory Notes were used for working
capital purposes. The Company incurred financing costs during the nine-month
period ended March 31, 1998 of approximately $765,000 relating to the Private
Financing and the Promissory Notes.
On October 23, 1997, the Company consummated its initial public
offering ("IPO") pursuant to which it issued 2,415,000 units (each, a "Unit").
Each Unit consisted of one share of Common Stock and one redeemable warrant to
purchase one share of Common Stock at $5.50 per share (each, a "Redeemable
Warrant"). The net proceeds received from the IPO were $10,141,757, and the
amount of said proceeds utilized by March 31, 1998 was approximately
$7,450,000 used principally to repay debt and operating expenses.
On the Subscription Date, the Company entered into the Agreements.
Pursuant to the Agreements, the Company is entitled to aggregate proceeds of
up to $5,500,000 in the Private Placement. The Private Placement provides for
the issuance by the Company of (i) 1,111,110 shares (the "Shares") of Common
Stock for $2,500,000, or $2.25 per share, (ii) additional shares of Common
Stock to the Subscribers pursuant to certain other provisions of the
Agreements, including shares issuable for no additional consideration pursuant
to the
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<PAGE>
Reset Rights in the Agreements and shares issuable for up to $3,000,000
pursuant to a "put" provision in the Agreements (the "Additional Shares"), and
(iii) 100,000 shares of Common Stock upon the exercise of warrants (the
"Warrants"). The Warrants are exercisable at an exercise price of $5.50 per
share and may be exercised at any time or from time to time on or before June
29, 2001.
The Company anticipates that the proceeds received from the sale of
the Shares to the Subscribers in the Private Placement (including net proceeds
of $720,000 currently deposited with an escrow agent), together with projected
revenues from operations, will be sufficient to fund the Company's operations
and capital requirements until December 31, 1998. 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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<PAGE>
BUSINESS
General
The 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 life-style 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 188 cable
systems; 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 45 stations and from 9:00 a.m. to 10:00 a.m. (EST)
on 36 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 behavioral 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.
-24-
<PAGE>
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.
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.
-25-
<PAGE>
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. These latter agreements are sometimes called "SSI Agreements". 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 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. Recently developed digital technologies offer cable
systems a cost effective method 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. TCI, one of the
nation's largest MSOs, has stated its intention to provide digiboxes to all of
its subscribers, and TCI, along with a consortium of other MSOs, recently
announced an order for 25 million digiboxes to be delivered and installed over
the next few years.
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.
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<PAGE>
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 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 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 11 million subscribers and one hour in the evening to
approximately 5 million subscribers. ATN provides distribution of the
Company's programming into cable systems through existing affiliation
agreements between ATN and those systems.
The Nesting Contract, as amended, expires effective August 31, 1998.
In May 1998, the Company entered into a five year contract with Group W
Network Services, a division of CBS Corporation, to provide program
origination, master control operations, uplink and C-Band Satellite
transponder services (the "Transponder Contract"). The Transponder Contract
will allow the Company to broadcast 24 hours a day, rather than the 2 hours a
day under the Nesting Contract. On September 1, 1998, the Company intends to
begin broadcasting a 4 hour block of programming that it will repeat 6 times a
day. This will allow cable operators the flexibility to receive the Company's
signal transmission at any time, rather than only during the 2 hours the
Company's signal is currently available under the Nesting Contract.
The Transponder Contract, however, does not provide the Company with
access to subscribers as did the Nesting Contract. Therefore, the Company is
seeking 4 hours of broadcast time per day in 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 approximately 250
systems. The Company is also targeting a more focused affiliate marketing
effort on 10-12 major cities whose communities contain a substantial portion
of those 250 systems.
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 that benefits 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
-27-
<PAGE>
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 four hours of air time per day in a large number of markets. The
satellite transmission signal provided under the Transponder Contract is
available to all cable systems in the United States. Furthermore, because the
Company's programming will be in a 4 hour block repeated 6 times a day, cable
operators will now be able to receive the Company's signal at any time, rather
than only during the 2 hours its was carried under the Nesting Agreement. This
allows cable operators much greater flexibility in fitting the Company's 4
hour block into their existing schedules.
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 4 hours per day, and the 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 4 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 systems. The Company has established a promotional world wide web site,
which contains programming schedules, information about the Company and the
Partnership and links to sources of recovery information on theworld wide 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 10-12 cities whose communities contain the bulk of the largest
systems. Such systems have an aggregate subscriber base of nearly
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<PAGE>
12 million households. Company executives intend to visit each of these 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 4 hours of airing per day, 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.
To facilitate this process, the Company is also seeking to enter into
SSI Agreements. In June 1998, the Company entered into an SSI Agreement with
the National Cable Television Cooperative, an organization of MSOs
representing over 8 million cable households. The Company is also negotiating
SSI Agreements with other major MSOs.
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
45 stations and from 9:00 a.m. to 10 a.m. (EST) on 36 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 to date, 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.
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
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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.
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.
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,
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<PAGE>
"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 approximately
$750,000 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.
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.
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 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 Recovery Interactive's ability to enter into license
agreements with Health Care Entities and upon further development of Recovery
Interactive's products. As of June 30, 1997, Recovery Interactive has not
generated any revenues, and has incurred operating losses of approximately
$757,000 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 on-line
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 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.
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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 capacity on cable systems and FCC regulations
governing relationships between program
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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 with respect to
indecent or patently offensive communications 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 enjoined 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
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<PAGE>
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.
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 $1,000,000 per annum),
including insurance relating to personal injury and advertising injury, in
amounts which the Company currently considers adequate.
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<PAGE>
Employees
The Company currently has 31 full time employees, of which five are
engaged in affiliate marketing sales, one in advertising sales, four in
programming, and ten in administration. 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 10,000 square feet in
Santa Monica, California pursuant to a five-year lease that expires in May
2002. The monthly rental is currently $20,000 per month and will increase
annually to a maximum rental of $25,000 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.
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<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........................ 42 Chairman of the Board
William D. Moses....................... 35 Chief Executive Officer and Director
Gary Horowitz.......................... 62 President
Donald J. Masters...................... 52 Executive Vice President and Director
John Wheeler........................... 44 Senior Vice President of Sales and Marketing
and Vice President of Operations
Gregory L. Richey...................... 43 Secretary, Chief Financial Officer, Treasurer
and General Counsel
Edward A. Byrnes....................... 44 Senior Vice President of Advertising Sales
Nimrod J. Kovacs....................... 48 Vice Chairman of the Board of Directors
Charlotte Schiff-Jones................. 58 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 & 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 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.
Gary Horowitz has been President of the Company since July 1998. Mr.
Horowitz was a production consultant from March 1996 until July 1998. Mr.
Horowitz was President, Chief Executive Officer and a director of Harmony
Holdings, Inc., from March 1992 until February 1996. Mr. Horowitz was a director
of L.A. Weekly, a periodical, from 1986 until 1995, its publisher from 1989
until 1993 and its Chief Executive Officer from 1990 until 1993. Mr. Horowitz
was President of Jenkins, Covington, Newman, Inc., a television production
organization from 1980 until 1983.
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
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<PAGE>
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 the Company's 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.
Gregory L. Richey has been the Secretary and Chief Financial Officer
of the Company since October 1997 and has been its General Counsel since June
1996. From April 1995 through September 1996, he was the President of
Alchemedia Digital Inc., a media and technology consulting company. From July
1993 through February 1995, he was Senior Vice President of Business & Legal
Affairs for Arnowitz Studios, a multimedia company. Previously, he spent eight
years as a tax and corporate finance attorney with O'Melveny & Myers in Los
Angeles and New York.
Edward A. Byrnes has been the Company's Senior Vice President of
Advertising Sales since March 1998. From 1985 through February 1998 he worked
for The Weather Channel, as its Vice President and General Manager for
Advertising Sales from 1996 through February 1998 and as its Eastern Sales
Manager from 1992 through 1996.
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.
Charlotte Schiff-Jones has been a director of the Company since July
1998. Since 1997, Ms. Schiff- Jones has been a consultant to the Company,
concentrating on affiliate marketing strategy and community outreach projects.
From 1995 to 1997, she was the president of Gamut Media, a strategic marketing
and creative services agency. From 1993 to 1995, she was a consultant to the
President and CEO of Time Warner Cable Programming; and from 1988 to 1993, she
was the president of Schiff-Jones Ltd., a consulting firm.
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
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<PAGE>
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 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 Board of Directors
of the Company has approved all grants of stock options since the Company's
IPO. Mr. Henry is Chairman of the Finance and Compensation Committee and Mr.
Moses is also a member 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 Mr.
Kovacs is also a member 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
The following table sets forth the cash compensation paid by the
Company to the chief executive officer and all other executive officers who
received compensation in excess of $100,000 (the "Named Executive Officers")
during fiscal 1998:
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
----------------------- --------------------
Shares
Year Ended Underlying All Other
Name and Principal Position June 30, Salary ($) Bonus ($) Options (#) Compensation
- ------------------------------------------------- ---------- ---------- -------------------- ----------------
<S> <C> <C> <C> <C>
William D. Moses, President and 1998 $182,765 -- 50,000 --
Chief Executive Officer.........
Donald J. Masters, Executive Vice 1998 $148,420 -- 50,000 --
President.......................
John Wheeler, Senior Vice 1998 $182,373 -- -- --
President of Sales and Marketing
Gregory L. Richey, Chief Financial 1998 $163,335 -- 50,000 --
Officer.........................
</TABLE>
The following table sets forth information concerning the grant of
stock options to the Named Executive Officers during fiscal 1998:
<TABLE>
<CAPTION>
Option Grants During Last Fiscal Year
Number of %of Total
Shares Options Granted
Underlying to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/sh) Date
- ------------------------------ --------------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
William D. Moses.............. 50,000 16.2% $1.56(a) 4/3/03
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Option Grants During Last Fiscal Year
Number of %of Total
Shares Options Granted
Underlying to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/sh) Date
- ------------------------------ --------------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Donald J. Masters............. 50,000 16.2 1.56(a) 4/3/03
Gregory L. Richey............. 50,000 16.2 1.56(a) 4/3/03
</TABLE>
- -------------------
(a) Such options were granted with an exercise price of $3.15 per share and
were subsequently repriced.
No options of the Company were exercised by such persons during
fiscal 1997.
Option Repricing
In April 1998, the Board of Directors of the Company voted to approve
the repricing of options to purchase 435,986 shares granted under the
Management Bonus Plan and the 1998 Stock Plan, including options to purchase
62,915, 62,915 and 50,000 shares granted to Messrs. Moses, Masters and Richey,
respectively. Such repricing was effected by offering to exchange new options
with an exercise price of $1.56 per share, which was the fair market value of
the Common Stock on the date of repricing, for the options then held by such
optionees. The new options otherwise would have identical terms and conditions
as the current options. By repricing such options, the Company intends to
reward key employees, including the named executive officers, holding such
options for their contributions to the Company.
Employment Agreements
Effective December 1, 1996, the Company entered into an employment
agreement with William D. Moses, the Company's 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.
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
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<PAGE>
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 $.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
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<PAGE>
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 four stock option plans, the 1996 Employee
and Consultants Stock Option Plan (the "Employee and Consultants Plan"), the
1996 Board of Directors and Advisory Board Stock Option Plan (the "Directors
and Advisory Board Plan"), the 1997 Management Bonus Plan (the "Management
Bonus Plan") and the 1998 Stock Plan (the "Stock Plan"). The Company has
reserved an aggregate of 940,251 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 ("NQSOs") or incentive stock options ("ISOs")
under the Internal Revenue Code of 1986, as amended. The Management Bonus Plan
and the Stock Plan also provide 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 granted to employees
vested approximately 8% on February 1, 1997 and vest monthly thereafter for a
period of 33 months. Options to purchase 5,583 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 Stock Option 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.
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<PAGE>
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 195,831 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 incentive stock options to Messrs. Masters
and Wheeler, each to purchase 12,915 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 $1.56 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 129,686 shares of Common Stock at an exercise price
of $1.56 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.
1998 Stock Plan
Effective May 28, 1998, the Company's shareholders approved the Stock
Plan. The purpose of the Stock Plan is to provide participants an incentive to
maintain and enhance the long-term performance and profitability of the
Company. Only key employees, directors and independent contractors of the
Company and certain of its affiliates are initially eligible to receive awards
under the Stock Plan. Under the Stock Plan, a maximum of 600,000 shares of
Common Stock are authorized to be delivered by the Company. The Company has
the right to deliver nonqualified or incentive stock options or other
stock-related awards. Under the Stock Plan, the Company has granted stock
options to purchase an aggregate of 309,000 shares at an exercise price of
$1.56 per share.
The Stock Plan is administered by the Board of Directors. The Board
of Directors has authority to determine when and to whom to make grants of
awards, the number of shares to be covered by the grants, the types and terms
of options and other stock-related awards granted and the exercise price of
options and stock appreciation rights, provided that the exercise price of an
option and the appreciation base of a stock appreciation right may not be less
than the fair market value of the shares of the Common Stock on the date of
grant, except that, in the case of an incentive stock option granted to an
individual who, at the time such incentive stock option is granted, owns
shares possessing 10% or more of the total combined voting power of all
classes of Stock of the
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<PAGE>
Company or its parent or subsidiary corporations, the option exercise price
may not be less than 110% of such fair market value on the date of grant.
Non-Plan Stock Options
The Company has granted 123,039 non-plan stock options to acquire
shares of Common Stock, of which 110,423 were granted at an exercise price of
$2.32 per share, 2,867 were granted at an exercise price of $.77 per share and
9,749 were granted at an exercise price of $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
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<PAGE>
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:
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 [Ernie] 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.
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<PAGE>
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.
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<PAGE>
SELLING SHAREHOLDERS
Relationship of Selling Shareholders with the Company
None of the Selling Shareholders currently has, or within the past
three years has had, any position, office, or other material relationship with
the Company or any predecessor or affiliate of the Company.
Sales of Outstanding Shares by Selling Shareholders
None of the Selling Shareholders have advised the Company, and the
Company is unable to predict, if, when, and the extent to which they intend to
sell the Shares being registered hereunder for their respective accounts.
Notwithstanding the foregoing, for purposes of the following Selling
Shareholders Table, all of the Shares are deemed to be offered hereby by the
Selling Shareholders for sale to the public. Based upon the foregoing
assumption, the following table sets forth information, as at August __, 1998,
with respect to (i) each Selling Shareholder's beneficial ownership of the
Company's Common Stock prior to the offering of any Shares hereunder by such
Selling Shareholder, (ii) the number of Shares which may be offered for sale
hereunder and (iii) the number shares of the Company's Common Stock to be
beneficially owned by each Selling Shareholder after the offering (assuming
the sale of all Shares being offered hereunder).
There can be no assurance that any of the Selling Shareholders will
offer for sale any or all of the Common Stock offered by them pursuant to this
Prospectus.
<TABLE>
<CAPTION>
Shares of Shares of
Common Stock Common Shares of Common
Beneficially Owned Stock to be Stock Beneficially
Name of Selling Shareholder Prior to Offering Offered Hereunder Owned After Offering
--------------------------- ----------------- ----------------- --------------------
Subscribers
- -----------
<S> <C> <C> <C>
Austost Anstalt Schaan (a).................... 696,675 696,675 --
Balmore Funds S.A. (a)......................... 696,675 696,675 --
Zakeni Ltd. (a)................................ 464,450 464,450 --
BL Squared Foundation (a)...................... 185,780 185,780 --
Martin Chopp (a)............................... 139,335 139,335 --
The Sargon Fund, L.P. (a)...................... 92,890 92,890 --
TLG Realty (a)................................. 46,445 46,445 --
Placement Agents
- ----------------
Ellis Enterprises Ltd. (b)..................... 32,787 32,787 --
Libra Finance S.A. (b)......................... 10,929 10,929 --
</TABLE>
- -----------------------
(a) Shares deemed beneficially owned prior to the offering include shares
issued or issuable to the Selling Shareholder in the Private
Placement (including shares issuable pursuant to any provision of the
Agreements, including but not limited to those shares issuable
pursuant to certain Reset Rights and Put Rights in the Agreements)
and shares reserved for issuance upon exercise of the Warrants.
(b) Shares deemed beneficially owned prior to the offering include shares
issued to the Selling Shareholder as partial compensation for
services as placement agent of the Shares and the Warrants.
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<PAGE>
On June 29, 1998 (the "Subscription Date"), the Company entered into
the Agreements with each of the Subscribers (the "Private Placement").
Pursuant to the Agreements, the Company is entitled to aggregate proceeds of
up to $5,500,000 in the Private Placement. The Agreements provide for the
issuance by the Company of (i) 1,111,110 shares (the "Shares") of Common Stock
for $2,500,000, or $2.25 per share, (ii) additional shares of Common Stock to
the Subscribers pursuant to certain other provisions of the Agreements,
including the Additional Shares, and (iii) 100,000 shares of Common Stock upon
the exercise of the Warrants. The Warrants are exercisable at an exercise
price of $5.50 per share and may be exercised at any time or from time to time
on or before June 29, 2001.
The Company has also issued to certain placement agents an aggregate
of 43,716 shares of Common Stock (the "Placement Shares"), of which 13,115
shares were delivered to an escrow agent and will be released upon the
satisfaction by the Company of the following conditions: (i) the filing by the
Company of a registration statement with respect to the Shares, the Additional
Shares, the shares of Common Stock issuable upon exercise of the Warrants and
the Placement Shares (collectively, the "Securities"); and (ii) the obtainment
of shareholder approval of the issuance of certain shares pursuant to the
Agreements.
Common Stock and Warrants
The Shares and Warrants were sold at an initial price of $2.25 per
share (the "Closing Price"), which was 75% of the average of the closing bid
prices of the Common Stock for the five day trading period immediately
preceding the Subscription Date. Of the 1,111,110 shares purchased, 777,776
shares have been issued and delivered to the Subscribers and 174,415 shares
were issued to the Subscribers but delivered to an escrow agent. The remaining
158,919 shares have not been issued by the Company as such issuance is
conditioned upon the approval by the Company's shareholders of such additional
shares and the filing by the Company of the Registration Statement of which
this Prospectus is a part. Of the $2,500,000 purchase price of the Shares and
the Warrants, $1,750,000 was delivered to the Company (net of $200,000 in
expenses) and $750,000 was delivered to an escrow agent.
Reset Rights
Pursuant to the Agreements, the Subscribers received certain reset
rights (the "Reset Rights") that may require the Company to issue additional
shares of Common Stock to the Subscribers in the future (the "Reset Shares").
The Subscribers are entitled to additional shares of Common Stock, without the
payment of additional consideration, to account for a decrease in the market
value of the Common Stock after the Subscription Date. The Subscribers are
first entitled to such additional shares on the date on which a registration
statement covering the Securities has been declared effective by the
Securities and Exchange Commission (the "Commission") or, at the Subscriber's
election, on the 180th day after the Subscription Date if such registration
statement has not been declared effective by the Commission on such date
("Trigger Date"). The Company may be required to issue Reset Shares on the
30th, 60th, 90th, 120th, 150th, 180th, 210th, 240th, and 270th days following
the Trigger Date (the Trigger Date and each of such other dates, a "Repricing
Date"). If the closing bid price on any Repricing Date is lower than the
Closing Price, then, at each Subscriber's election, not less than 10% and not
more than 25% of the shares received by such Subscriber for the purchase price
paid to the Company for such shares (the "Designated Portion"), shall be
subject to the Reset Rights. The aggregate of any Subscriber's Designated
Portion from each Trigger Date may not exceed the purchase price paid by such
Subscriber. To account for any deficiency between the closing bid price on any
Repricing Date and the Closing Price, the Company will issue additional shares
to the Subscribers equal to the number of additional shares that could be
purchased for the Designated Portion on such date.
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<PAGE>
In lieu of delivering additional shares pursuant to the Reset Rights,
the Company has received certain repurchase rights. The repurchase rights
provide that the Company may, in the event the average closing bid price for
the Common Stock on the NASDAQ SmallCap Market for the five trading days
immediately preceding, but not including, a Repricing Date is less than $2.50
per share (the "Redemption Price"), deliver to each Subscriber a sum of money
determined by multiplying the number of additional shares otherwise
deliverable by the Redemption Price.
Put Rights
The Company also has the right to "put" up to $3,000,000 of its
Common Stock to the Subscribers during the two year period commencing on the
Subscription Date (the "Put Rights"). Such Put Rights contemplate the issuance
of shares of Common Stock required to be purchased from time to time by the
Subscribers (the "Put Shares") after delivery of a notice (a "Put Notice")
from the Company, at a price equal to 88% of the average closing bid prices of
the Company's Common Stock over the five-day trading period beginning two
trading days prior to the date the Put Notice is given and ending two trading
days after the Put Notice is given. The obligation of the Subscribers to
purchase Common Stock pursuant to the exercise by the Company of the Put
Rights is subject to various conditions, including conditions relating to
minimum market price, minimum trading volume and timing. The number of shares
of Common Stock that the Company may issue at any one time upon exercise by
the Company of the Put Rights is limited, depending upon the average closing
bid price for the Common Stock and the average daily Common Stock trading
volume for the 15 days immediately preceding the date of the Put Notice.
Right of First Refusal
If the Company seeks to sell shares of its Common Stock to
prospective investors at any time after the Subscription Date until the later
of 90 days after the effective date of a registration statement covering the
Securities or 270 days after the Subscription Date, the Company must give the
Subscribers (i) prior written notice of such sale and (ii) an opportunity to
purchase an amount of Common Stock to maintain their respective proportionate
interests in the Company (the "Right of First Refusal"). The Right of First
Refusal must be on the same terms and conditions offered to the prospective
investors.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of August
12, 1998, 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>
Number of shares Percentage
Name and address of beneficial owner(a) beneficially owned (b) of class
- --------------------------------------- ---------------------- -----------
<S> <C> <C>
William D. Moses.......................................... 766,681(c) 12.4%
George H. Henry (d)....................................... 344,183(e) 5.7%
Donald J. Masters......................................... 164,342(f) 2.7%
Nimrod J. Kovacs (g)...................................... 65,623(h) 1.0%
Charlotte Schiff-Jones.................................... 0 *
Austost Anstalt Schaan (i)................................ 285,657(j) 4.8%
Balmore Funds S.A (k). ................................... 285,657(j) 4.8%
All directors and executive officers as 1,444,425(l) 22.1%
a group (8 persons)..................................
</TABLE>
- ---------------------
* Less than 1%.
(a) Unless otherwise indicated, the address for each named individual or group
is in care of The Recovery Network, Inc., 1411 5th Street, Suite 200, Santa
Monica, California 90401.
(b) 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 July 31, 1998 have been exercised and converted. Pursuant to a
"change of control" provision, which defines a "change of control" to have
occurred if individuals who are directors at the beginning of a 24-month
period fail to constitute at least two-thirds of all directors of the
Company during such period, in the various stock option contracts issued to
certain of the beneficial owners, all stock options beneficially owned by
such person are currently exercisable. Assumes a base of 5,977,920 shares
of Common Stock before any consideration is given to outstanding options,
warrants or convertible securities.
(c) Includes (i) options to purchase 137,915 shares of Common Stock and (ii)
warrants to purchase 43,750 shares of Common Stock.
(d) The address of the beneficial owner is 6860 Sunrise Court, Coral Gables,
Florida 33133.
(e) Includes (i) options to purchase 47,915 shares of Common Stock and (ii)
warrants to purchase 62,500 shares of Common Stock.
-49-
<PAGE>
(f) Includes (i) options to purchase 88,745 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)
warrants to purchase 6,250 shares of Common Stock held jointly by Mr.
Masters and his spouse.
(g) The address of the beneficial owner is 50 Falcon Hills Drive, Highland
Ranch, Colorado 80126.
(h) Includes (i) options to purchase 47,915 shares of Common Stock, and (ii)
warrants to purchase 6,250 shares of Common Stock held by Kovacs
Communication, Inc., of which Mr. Kovacs is a controlling shareholder.
(i) The address of the beneficial owner is 7440 Fuerstentum, Lichenstein,
Landstrasse 163.
(j) Does not include 77,676 shares of Common Stock (30,000 of which are
issuable upon exercise of warrants) issuable only upon the filing of a
registration statement by the Company covering such securities and the
obtainment of shareholder approval contemplated herein.
(k) The address of the beneficial owner is P.O. Box 4603, Zurich, Switzerland.
(l) Includes (i) options to purchase 439,001 shares of Common Stock and (ii)
warrants to purchase 118,750 shares of Common Stock.
-50-
<PAGE>
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.
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 George H. Henry, a director of the
Company and William D. Moses, the Company's President and Chief Executive
Officer 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, a former
principal stockholder and a former director and officer of the Company and
Chief Executive Officer of Recovery Interactive. 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.
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. Henry and Mr.
Kovacs exercised options to purchase 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
-51-
<PAGE>
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
Financing Units in the Private Financing. Each Financing 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 Financing Unit.
In connection with the Private Financing, Mr. Henry purchased 5 Financing
Units; Paul Graf, a former director of the Company, purchased 5 Financing
Units; Mr. Masters and his spouse jointly purchased .5 Financing Units; Mr.
Moses purchased 3.5 Financing Units; Terrance and Daryl Berman, former
principal shareholders of the Company, purchased 3.5 Financing Units; and
Kovacs Communication, Inc., of which Mr. Nimrod Kovacs, a director of the
Company is a controlling shareholder, purchased .5 Financing Units in the
Private 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. On February 26, 1998, the Company
executed a contract to extend its current agreement with ATN. The extension
provides for an extension of services on a month-to-month basis through and
until August 31, 1998, at a monthly fee of $65,000 and a one-time payment of
$150,000 to reflect unanticipated costs incurred by ATN in the course of
performance under the Nesting Contract. 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 Chief Executive Officer of the Company, is a principal
shareholder of ATN.
On January 26, 1998, Mr. Henry entered into an agreement with
Recovery Interactive. Pursuant to such agreement, Mr. Henry is entitled to a
percentage of any proceeds from a "change of control" (as defined in the
agreement) of Recovery Interactive which exceeds a base amount.
Charlotte Schiff-Jones, a director of the Company, provides consulting
services in the areas of affiliate marketing and strategic business development.
During the fiscal year ending June 30, 1998, Ms. Schiff-Jones received $58,314
as compensation for such services.
-52-
<PAGE>
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.
-53-
<PAGE>
DESCRIPTION OF SECURITIES
General
The aggregate number of shares that the Company is authorized to
issue is 25,000,000 shares of Common Stock, par value $.01 per share. As of
the date of this Prospectus, the Company had outstanding 5,977,920 shares of
Common Stock.
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
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.
Warrants
Each Warrant issued pursuant to the Agreements entitles the holder
thereof (the "Warrant Holders") to purchase one share of Common Stock at a
price of $5.50, subject to adjustment in certain circumstances, through and
including June 29, 2001.
The Warrants are not redeemable by the Company at any time. The
Warrant Holders shall have the right to exercise their Warrants until the
close of business on June 29, 2001.
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 (which has been filed as an exhibit to this Registration
Statement) 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 on or
prior to the expiration date to the Company at its principal office or at the
office of the Warrant agent appointed by the Company in accordance with the
terms of the Warrant, with the subscription form attached thereto completed
and executed as indicated, accompanied by full payment of the exercise price
(in cash or by certified check or official bank check payable to the order of
the Company) for the number of Warrants being exercised. The Warrant Holders
do not have the right or privileges of holders of Common Stock.
-54-
<PAGE>
Redeemable Warrants
Each Redeemable Warrant outstanding entitles the registered holder
thereof (the "Redeemable Warrant Holders") to purchase one share of Common
Stock at a price of $5.50, subject to adjustment in certain circumstances,
through and including September 29, 2002.
Each Redeemable Warrant is redeemable by the Company at any time,
upon notice of not less than 30 days, at a price of $.10 per Redeemable
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 Redeemable
Warrants and the Company obtains the written consent of Whale Securities Co.,
L.P., the underwriter in the Company's initial public offering (the
"Underwriter") to such redemption prior to the Call Date. The Redeemable
Warrant Holders shall have the right to exercise their Redeemable Warrants
until the close of business on the date fixed for redemption.
The Redeemable Warrants are issued in registered form under a warrant
agreement by and among the Company, American Stock Transfer & Trust Company,
as warrant agent (the "Redeemable Warrant Agent"), and the Underwriter (the
"Redeemable Warrant Agreement"). The exercise price and number of shares of
Common Stock or other securities issuable on exercise of the Redeemable
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 Redeemable Warrants are not subject
to adjustment for issuances of Common Stock at prices below the exercise price
of the Redeemable Warrants. Reference is made to the Redeemable Warrant
Agreement (which has been filed as an exhibit to the Company's Registration
Statement on Form SB-2, as amended (File No. 333-27787)) for a complete
description of the terms and conditions therein (the description herein
contained being qualified in its entirety by reference thereto).
The Redeemable Warrants may be exercised upon surrender of the
Redeemable Warrant certificate on or prior to the expiration date at the
offices of the Redeemable Warrant Agent, with the exercise form on the reverse
side of the Redeemable 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 Redeemable Warrant Agent
for the number of Redeemable Warrants being exercised. The Redeemable Warrant
Holders do not have the right or privileges of holders of Common Stock.
No Redeemable 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
Redeemable 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 Redeemable Warrant. The Company
will use its best efforts 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 Redeemable Warrants, subject to the terms
of the Redeemable 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 Redeemable
Warrants. However, if a Redeemable Warrant Holder exercises all Redeemable
Warrants then owned of record by him or her, the Company will pay to such
Redeemable 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.
-55-
<PAGE>
Registration Rights
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 "Financing 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 $5.50
per share. In connection with the Private Financing, the Company 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. If such registration statement is not declared effective by
the Commission within 15 months following the consummation of the Company's
initial public 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 24
months following the effective date of the Company's Registration Statement on
Form SB-2, as amended (File No. 333- 27787).
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 September 29, 1998.
In connection with its initial public offering, the Company has
agreed to grant to the Whale Securities Co., L.P. certain demand and piggyback
registration rights in connection with the 400,000 shares of Common Stock
issuable upon exercise of certain warrants and the additional warrants
included therein.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American
Stock Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Parker
Chapin Flattau & Klimpl, LLP, New York, New York.
-56-
<PAGE>
EXPERTS
The audited financial statements of the Company 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.
-57-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
THE RECOVERY NETWORK, INC.
Report of Independent Public Accountants............................ F-2
Balance Sheet as of June 30, 1997................................... F-3
Statements of Operations for the fiscal years ended
June 30, 1996 and 1997 and for the period from inception
(May 1992) to June 30, 1997......................................... F-4
Statements of Shareholders' Deficit for the period from
inception (May 1992) to June 30, 1997.............................. F-5
Statements of Cash Flows for the fiscal years ended June 30,
1996 and 1997 and for the period from inception (May 1992)
to June 30, 1997.................................................... F-7
Notes to Financial Statements....................................... F-8
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and June 30, 1997....................................... F-25
Condensed Consolidated Statements of Operations (unaudited)
for the three and nine month
periods ended March 31, 1998 and 1997............................... F-26
Condensed Consolidated Statements of Shareholders Equity
(Deficit) for the period from July 1,
1997 through March 31, 1998 (unaudited)............................ F-27
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended March 31, 1998
and 1997............................................................. F-28
Notes to Condensed Consolidated Financial Statements (unaudited)...... F-29
FMS PRODUCTIONS, INC.
Report of Independent Auditors........................................ F-36
Balance Sheets at April 30, 1997 and 1996............................. F-37
Statements of Income and Retained Earnings for the years ended
April 30, 1997 and 1996.............................................. F-38
Statements of Cash Flows for the years ended April 30, 1997
and 1996............................................................. F-39
Notes to Financial Statements......................................... F-40
Condensed Balance Sheet (unaudited) as of October 31, 1997............ F-44
Condensed Statements of Income (unaudited) for the six month
periods ended October 31, 1997 and 1996.............................. F-45
Condensed Statements of Cash Flows (unaudited) for the six month
period ended October 31, 1997 and 1996............................... F-46
Notes to Condensed Financial Statements (unaudited)................... F-47
THE RECOVERY NETWORK, INC. PRO FORMA FINANCIAL INFORMATION
Pro Forma Condensed Consolidated Statements of Operations
for the year ended June 30, 1997..................................... F-49
Pro Forma Condensed Consolidated Statements of Operations
for the nine months ended March 31, 1998............................. F-50
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 30,1997, and the
related statements of operations, shareholders' deficit and cash flows for the
years ended June 30, 1996 and 1997 and for the period from inception (May
1992) to June 30, 1997. 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 The Recovery Network, Inc. as
of June 30, 1997 and the results of its operations and its cash flows for the
years ended June 30, 1996 and 1997 and for the period from inception (May
1992) to June 30, 1997, 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 as of June 30, 1997 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 success 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.
ARTHUR ANDERSEN LLP
Los Angeles, California
September 5, 1997
F-2
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
BALANCE SHEET
AS OF JUNE 30, 1997
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 10,883
Accounts receivable................................... 25,631
Prepaid expenses...................................... 15,693
Total current assets............................. 52,207
CAPITALIZED PROGRAMMING COSTS.............................. 237,600
FURNITURE AND EQUIPMENT, net............................... 112,750
INVESTMENT IN JOINT VENTURE................................ --
DEFERRED FINANCING COSTS................................... 100,269
DEFERRED OFFERING COSTS.................................... 270,040
OTHER...................................................... 26,386
------------
$ 799,252
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable......................................... $ 1,520,432
Accounts payable and accrued liabilities.............. 502,642
Accrued professional fees............................. 312,249
Current portion of capital lease obligation........... 17,029
Deferred compensation................................. 51,672
Due to shareholders and directors..................... 65,751
-----------
Total current liabilities................. 2,469,775
CAPITAL LEASE OBLIGATION, net of current portion........... 30,301
-----------
Total Liabilities......................... 2,500,076
-----------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value:
Authorized-25,000,000 shares Issued and
outstanding, 2,521,250 shares.................... 25,212
Additional paid-in capital............................ 4,176,708
Prepaid consulting costs.............................. (5,625)
Deficit accumulated in the development stage.......... (5,897,119)
-------------
Shareholders' deficit............................ (1,700,824)
-------------
$ 799,252
=============
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997, AND FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1997
<TABLE>
<CAPTION>
For the
Years Ended June 30, From Inception
---------------------------- (May 1992)
1996 1997 to June 30, 1997
-------------- ----------- ----------------
<S> <C> <C> <C>
DOMESTIC ADVERTISEMENT SALES......................... $ - $ 33,464 $ 33,464
---------- ---------- ----------
SALARIES AND CONSULTING EXPENSES..................... 680,205 1,175,362 2,538,347
GENERAL AND ADMINISTRATIVE EXPENSES.................. 328,754 768,938 1,247,720
PROGRAMMING EXPENSES................................. 192,349 358,447 550,796
MARKETING EXPENSES................................... 28,135 468,017 508,882
LOSS ON INVESTMENT IN JOINT VENTURE.................. - 300,000 300,000
---------- ---------- ----------
Operating Expenses............................... 1,229,443 3,070,764 5,145,745
---------- ---------- ----------
Loss from operations............................. 1,229,443 3,037,300 5,112,281
---------- ---------- ----------
INTEREST (INCOME) EXPENSE, net....................... (6,414) 778,552 781,438
Loss before provision for state income taxes..... 1,223,029 3,815,852 5,893,719
PROVISION FOR STATE INCOME TAXES..................... 800 1,800 3,400
---------- ---------- ----------
NET LOSS............................................. $1,223,829 $3,817,652 $5,897,119
========== ========== ==========
LOSS PER SHARE INFORMATION:
Basic and diluted loss per share................. $ (1.04) $ (1.87)
========== ==========
Weighted average number of common and common 1,172,480 2,044,339
equivalent shares outstanding.................... ========== ==========
</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, 1997
<TABLE>
<CAPTION>
Deficit
Stock Accumulated
Common Stock Additional Subscriptions Prepaid in the
------------ Paid-in (Notes Consulting Development
Shares Amount Capital Receivable) Costs Stage Total
-------- -------- ---------- ------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash:
August 1992 at $0.45 per share 192,669 $ 1,927 $ 85,573 $ - $ - $ - $87,500
June 1993 at $23.36 per share 1,714 17 39,983 - - - 40,000
November 1993 at $32.70 per
share............................... 2,141 21 69,979 - - - 70,000
Issuance of common stock for
consulting services issued:
May 1993 at $0.62 per share 10,704 107 6,524 - - - 6,631
August 1993 at $5.92 per
share............................. 7,600 76 44,924 - (45,000) - -
May 1994 at $0.93 per share 23,764 238 21,842 - (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................... 238,592 2,386 268,825 32,703 (64,403) (365,297) 125,786
Issuance of common stock for
cash and stock subscription:
July 1994 at $11.62 per share 5,595 56 64,944 (15,000) - - 50,000
January 1995 at $0.54 per share 186,074 1,861 98,139 - - - 100,000
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 - - - 100,000
at $0.93 per share.................. 261,239 2,612 241,328 (17,703) - - 226,237
at $2.32 per share.................. 2,583 26 5,974 - - - 6,000
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 - - - 49,052
Amortization of prepaid
consulting costs.................... - - - - 48,153 - 48,153
Net loss.............................. - - - - - (490,341) (490,341)
-------- ------- -------- -------- -------- ---------- --------
BALANCE, June 30, 1995................... 932,950 9,330 825,873 - (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.......................... 339,883 3,399 746,101 - - - 749,500
April 1996 at $0.77 per share 259,281 2,593 198,174 - - - 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
FOR THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1997
<TABLE>
<CAPTION>
Deficit
Stock Accumulated
Common Stock Additional Subscriptions Prepaid in the
------------ Paid-in (Notes Consulting Development
Shares Amount Capital Receivables) Costs Stage Total
--------- -------- ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <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 - - - 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 1,591,969 15,920 1,908,590 500 (1,250) (2,079,467) (155,707)
Issuance of common stock for
consulting services issued during
October and November 1996 at
$2.32................................ 59,194 592 136,908 - (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................... 31,857 319 73,681 - - - 74,000
at $2.90 per share................... 6,888 69 19,931 - - - 20,000
at $3.68 per share................... 71,033 710 260,790 - - - 261,500
Issuance of common stock for cash:
during November 1996, 73,615
options exercised at $2.32 per
share.............................. 73,615 736 170,264 - - - 171,000
during November 1996 through
January 1997, warrants
exercised under convertible
notes payable at $2.32 per
share.............................. 142,065 1,420 328,580 - - - 330,000
during November 1996 through
January 1997, shares issued
$3.48 per share, including
7,749 shares issued for
services for stock offering........ 146,510 1,465 482,035 - - - 483,500
during December 1996,
options exercised at $0.77 per
share.............................. 44 - 33 - - - 33
Issuance of common stock for an
outstanding stock subscription
during December 1996................. 216 2 498 (500) - - -
Shares retired during December
1996 pursuant to a settlement
with a shareholder valued at
$2.32 per share...................... (2,141) (21) (4,952) - - - (4,973)
Issuance of common stock and
warrants for cash net of
$260,290 under the February 1997
private placement at $2.02 and
$0.51 per share,respectively......... 400,000 4,000 800,350 - - - 804,350
Amortization of prepaid
consulting costs..................... - - - - 18,125 - 18,125
Net loss............................. - - - - - (3,817,652) (3,817,652)
--------- -------- ---------- ------ -------- ----------- -----------
BALANCE, June 30, 1997 2,521,250 $ 25,212 $4,176,708 $ - $ (5,625) $(5,897,119) $(1,700,824)
========= ======== ========== ====== ======== =========== ===========
</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, 1996 AND 1997, AND FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1997
Increase (Decrease) in Cash
For the From inception
<TABLE>
<CAPTION>
For the
Years Ended June 30, From inception
------------------------------- (May 1992)
1996 1997 to June 30, 1997
-------------- ------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (1,223,829) $ (3,817,652) $(5,897,119)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of notes payable discount................. - 585,072 585,072
Amortization of deferred financing costs............... - 127,653 127,653
Amortization of capitalized programming costs.......... - 118,789 118,789
Depreciation and other amortization.................... 10,081 25,709 40,533
Common stock issued for services and interest expense.. 126,900 32,625 789,118
Provision for deferred compensation.................... 24,167 136,505 51,672
Provision for settlement of shareholder dispute........ 95,027 - -
Loss on investment in joint venture.................... - 300,000 300,000
Changes in assets and liabilities:
Accounts receivable.................................... - (25,631) (25,631)
Prepaid expenses....................................... (700) (14,993) (15,693)
Security deposit and other assets...................... (25,000) (1,386) (27,616)
Capitalized programming costs.......................... - (356,389) (356,389)
Accounts payable and accrued liabilities............... 98,433 418,142 502,642
Deferred compensation.................................. - (35,000) -
Accrued professional fees.............................. 14,286 297,963 312,249
Due to shareholders and directors...................... 107,141 (39,417) 65,751
-------------- ------------- -------------------
Net cash used in operating activities................ (773,494) (2,248,010) (3,428,969)
-------------- ------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment..................... (49,721) (45,396) (99,920)
Net proceeds from an officer............................. 10,200 - -
Investment in joint venture.............................. - (300,000) (300,000)
-------------- ------------- -------------------
Net cash used in investing activities.................. (39,521) (345,396) (399,920)
-------------- ------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................................. - 1,245,360 1,305,360
Payments on borrowings................................... - (60,000) (60,000)
Payments on capital lease obligation..................... (292) (4,511) (4,803)
Proceeds from the issuance of common stock, warrants
and stock subscriptions................................ 950,767 1,788,883 3,102,150
Repurchase of common stock............................... - (4,973) (4,973)
Deferred offering and financing costs incurred........... - (497,962) (497,962)
-------------- ------------- -------------------
Net cash provided by financing activities.............. 950,475 2,466,797 3,839,772
-------------- ------------- -------------------
NET INCREASE (DECREASE) IN CASH 137,460 (126,609) 10,883
CASH, beginning of period................................... 32 137,492 -
-------------- ------------- -------------------
CASH, end of period......................................... $ 137,492 $ 10,883 $ 10,883
============== ============= ===================
</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 STATEMENTS - (Continued)
JUNE 30, 1997
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 and
select positive lifestyle choices. The Company was incorporated in May 1992
and commenced operations in February 1993. The Company has defined and
developed its marketing concept and has procured and produced programming. The
Company commenced test broadcasting on a limited basis in March 1996 and was
launched nationally for two hours a day in April 1997.
The Company owns a 50% interest in Recovery Interactive ("RI"), a
joint venture with TCI OnLine RecoveryNet Holdings, Inc. ("TCIR"), an
affiliate of Tele-Communications, Inc. ("TCI"), formed on August 1, 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 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 accounted for under the equity method of accounting. During the
year ended June 30, 1997, the Company recorded a loss on investment in the
joint venture for its entire investment of $300,000. The Company is not
required to contribute any additional funding to RI and does not intend to
make any additional contributions (see Note 15). Should RI require additional
funding and TCIR agree to contribute additional funds, the Company's 50
percent interest would be reduced accordingly.
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.
Effective February 10, 1997, 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 to reflect the stock split.
b. Significant Business Risks
Going Concern
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has recurring losses
from operations, has minimal 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
F-8
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
1. Organization and Line of Business and Significant Business Risks -
(Continued)
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
(see Note 15), 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.
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
(the "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 education TV stations); commercial
leased access rules designating 10 to 15 percent 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 relations 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. Although program
providers that do not hold FCC licenses or operate distribution outlets, such
as The Recovery Network and Recovery 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.
F-9
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
1. Organization and Line of Business and Significant Business Risks -
(Continued)
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 (see Note 15) unless renewed by
both parties.
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.
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 at June
30, 1997:
Computer equipment..................................... $ 76,083
Office furniture....................................... 75,971
--------
152,054
Less-accumulated depreciation.......................... (39,304)
--------
$112,750
F-10
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
2. Summary of Significant Accounting Policies - (Continued)
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 the common shares when the offering is completed. If the intended offering
is terminated these costs are charged to operations. Offering costs of
$270,040 are capitalized as of June 30, 1997.
f. Deferred Financing Costs
Debt issuance costs are initially capitalized as deferred financing
costs and amortized over the terms of the notes using the effective interest
rate method. 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. Debt issuance costs of $227,922, net amortization of
$127,653, have been capitalized as of June 30, 1997.
g. Capitalized Programming Costs
Capitalized programming costs include direct costs of production and
production overhead. Production costs are accumulated by each series produced.
Production overhead is allocated proportionately to each series based on the
direct production costs incurred for each series. The costs are charged to
earnings as the series are broadcast based on the estimated number of future
showings in accordance with SFAS 63, "Financial Reporting by Broadcasters."
Capitalized programming costs are stated at the lower of unamortized
costs or estimated net realizable value on a series-by-series basis. A series
estimated net realizable value is periodically reviewed by management and
revised downward when warranted by changing conditions. Once adjusted, the new
estimated realizable value establishes a new unamortized cost basis.
F-11
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
2. Summary of Significant Accounting Policies - (Continued)
h. 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.
i. 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 surrendered, 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.
j. 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 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. The Company also entered into
$47,568 of capital lease arrangements in connection with the purchase of
furniture and equipment during the year.
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 7). The
Company also entered into a $4,565 capital lease for computer equipment.
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 7). 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. The Company also accrued expenses for consulting
services and interest expense of $87,650, which was converted into common
stock during 1995 and 1996.
F-12
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
2. Summary of Significant Accounting Policies - (Continued)
The Company made cash payments of $1,800 in 1997 and $800 in 1996 for
state income taxes. Inception to date payments for income taxes is $3,400.
During 1997 and 1996, cash payments for interest expense was approximately
$12,762 and $200, respectively.
k. 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 yars that begin after December 15, 1995.
The Company adopted the disclosure requirements of SFAS No. 123 effective
July 1, 1996.
SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131
"Disclosure About Segments of an Enterprise and Related Information" are
effective for fiscal years beginning after December 15, 1997. The Company will
adopt the new standards in the fiscal year ending June 30, 1999. The effects
of these new standards have not yet been determined.
l. Loss per Share
The Company has adopted SFAS No. 128, "Earnings Per Share" ("EPS"),
effective for the quarter ending December 31, 1997 and has restated its
earnings per share disclosure for all prior periods presented to comply with
SFAS No. 128. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS,
which excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. "Diluted" EPS, which is computed similarly to fully diluted EPS,
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
When dilutive, stock options are included as share equivalents in computing
diluted earnings per share using the treasury stock method.
Prior to adoption of SFAS No. 128, the Company computed net loss per
share in accordance with APB No. 15 and Securities and Exchange Commission
Staff Accounting Bulletin No. 83 (SAB No. 83). Pursuant to SAB 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 September 1997 initial public offering (the "IPO"), were
previously included in the calculation of common stock, using the treasury
stock method, as if they were outstanding for all periods presented (the
"Cheap Shares"). The effect of adopting SFAS No. 128 was to decrease the
weighted average shares outstanding by 460, 548 shares for the periods ended
June 30, 1997 and prior, as the Cheap Shares are no longer includable in the
calculation of earnings per share and increased the loss per share by $0.29
and $0.35 for the years ended June 30, 1996 and 1997, respectively.
The per share computations for all periods presented reflect the one
for 7.7432 reverse stock split (see Note 1a). Dilutive securities of
161,721 and 963,282 shares are not included in the calculation of diluted EPS
in the year ending June 30, 1996 and 1997, respectively, because they are
antidilutive.
F-13
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
3. Capitalized Production Costs
Capitalized production costs, net of amortization, are summarized by
series as follows:
Full Circle.................................. $194,631
Testimony.................................... 42,969
--------
$237,600
These series were released on a limited basis in 1997. Based on the
Company's estimates of future showings, 75 percent of the costs will be
amortized within the next three years.
4. Note Payables
At June 30, 1997, notes payable consist of $2,000,000 promissory
notes issued in the Company's March 1997 private placement, net of $479,568 of
unamortized loan discount (see Note 7). The notes bear interest at 9 percent
per annum (estimated effective rate is 125 percent) and are due on the earlier
of the consummation of an initial public offering or one year (see Note 15).
The discount is being amortized using the effective interest rate method
through September 30, 1997, the date the notes are expected to be repaid.
In July 1996, the Company issued $310,000 of 10 percent convertible
debentures (a total of $120,000 to certain shareholders and Directors). In
November and December 1996, certain note holders who converted their notes
payable 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). Original conversion rate and exercise price was
$3.87. 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.
The remaining $60,000 note payable and accrued interest was paid in
April 1997. The note holder received a warrant to purchase 15,498 shares of
common stock at $3.87 per share. The warrant expires in April 1999.
In November 1996, a $20,000 note payable was converted into 6,888
shares of common stock valued at $2.90 per share by the Company. Accrued
interest thereon was paid at the time of conversion.
5. Deferred Compensation
During May and June 1997, five officers (three of which are
shareholders) earned compensation in excess of amounts paid by approximately
$5,400 to $6,500 each month for each officer. At the option of the employees,
amounts are to be repaid with either the proceeds from the subsequent notes
payable (see Note 14) or the IPO (see Note 15). If repayment of the amounts is
deferred until the IPO is completed, then the employees are entitled to
interest under terms identical to that of the subsequent noteholders.
During 1997, an officer and a former officer converted $74,000 in
deferred compensation due them into 31,857 shares of common stock valued at
$2.32 per share by the Company.
F-14
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
6. Income Taxes
The components of the net deferred income tax asset at June 30, 1997
are as follows:
Development costs capitalized for tax purposes............ $ 2,045,130
Carryforward of net operating losses...................... 252,620
Other temporary differences............................... 46,670
-----------
2,344,420
Valuation allowance....................................... (2,344,420)
-----------
Deferred income tax asset................................. $ 0
===========
The provision for income taxes of $800 and $1,800 for the fiscal
years ended June 30, 1996 and 1997, 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, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------------------------- ------------------------------
Amount Percent Amount Percent
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Income tax benefit at federal statutory rate....... $(415,829) (34.00)% $(1,297,390) (34.00)%
State taxes, net of federal income tax effect...... 800 0.07 1,800 0.05
Net operating losses and other deferred income
tax assets not benefited....................... 415,829 34.00 1,297,390 34.00
---------- ------ ----------- ------
$ 800 0.07% $ 1,800 0.05%
========== ====== =========== ======
</TABLE>
As of June 30, 1997, the Company had approximately $236,000 of
federal net operating loss carryforwards, which will expire in fiscal years
ending 2008 to 2012. As of June 30, 1997, the Company had approximately
$17,000 of California state net operating loss carryforwards, which will
expire in fiscal years ending 2001 and 2002. 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.
F-15
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
7. 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.
b. 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.
c. 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.
d. The $3.48 Placement
During November 1996 through January 1997, the Company issued 138,761
shares of common stock for cash of $483,500 ($3.48 per share). The Company
also issued 7,749 shares in consideration of services rendered in connection
with such placement.
e. The March 1997 Private Placement
In March 1997, the Company consummated a private financing pursuant
to which it issued 40 units 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; (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, which was subsequently changed to $5.50 per share.
The net proceeds for the offering were $1,512,654. 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 instruments issued. Amortization of $585,072 of the loan
discount has been charged to operations as interest expense as of June 30,
1997. Offering costs of approximately $487,000 were incurred of which
approximately $228,000 was capitalized as debt offering costs. The balance of
$259,000 was charged to equity as cost of raising the equity proceeds.
F-16
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
7. Capital Stock Transactions - (Continued)
f. Other Stock Transactions
During November 1996 the exercise price of 67,157 options granted in
fiscal year 1996 to three members of the Board of Directors 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, the options
to purchase 67,157 shares of common stock were exercised. Other options to
purchase 6,458 shares of common stock at $2.32 per share were also exercised.
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).
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
fiscal year 1996.
During January 1996, the Company 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.
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.
8. 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 1996 and 1997, cash payments of approximately
$210,000 and $708,000 were made to shareholders and Directors, including
affiliated companies, for compensation in connection with services rendered.
b. Due to Shareholders and Directors
As of June 30, 1997, amounts due to shareholders and directors
consist of expense reimbursements due of $52,751 and other amounts of $13,000.
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 reimbursement of $100,000 of expenses paid for by these
shareholders. During February and March 1997, other shareholder claims were
settled for $100,000 and 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.
F-17
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
8. Related Party Transactions - (Continued)
c. 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 (see
Note 15).
During 1997, the Company made cash payments of $57,000 to ATN.
Accounts payable and accrued expenses include approximately $100,000 due to
ATN as of June 30, 1997.
9. 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.
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.
F-18
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
10. Employment Agreements
Effective December 1, 1996 through May 13, 1997, the Company and its
wholly-owned subsidiary entered into certain employment agreements with
employees, shareholders and/or Directors. The agreements expire at various
dates from September 30, 1998 to May 31, 1999. The agreements provide for
minimum monthly cash compensation ranging from approximately $10,000 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 employment agreements provide certain option rights 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 June 30, 1997, are approximately $648,000 and
$332,000 in fiscal years 1998 and 1999, respectively.
11. 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 $21,000 and
$118,000 which relate to these agreements have been recorded as programming
expenses in the accompanying financial statements during fiscal year 1997 and
1996, respectively.
12. 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
340,251 shares of common stock are reserved for issuance, pursuant to options
granted and to be granted under these plans. 15,506 shares are available for
grant, including an option to purchase 12,915 shares which has been
terminated, as of June 30, 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 during fiscal year 1997, 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 June 30, 1997. Options to purchase 43,910 shares vest
over 1.5 to 2 years. All non-plan options expire in 2001.
During June 1997, non-plan options to purchase 9,749 shares of common
stock were granted. The options' exercise price is $5.00 per share, monthly
vesting commences July 1997, and they expire in five years.
The following is a summary of all options granted to employees,
directors and consultants to acquire the Company's common stock as of June 30,
1997:
F-19
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
12. Options and Warrants (Continued)
Shares Exercise Shares Shares Shares
Granted Price Vested Exercised Terminated
------- ----- ------ --------- ----------
347,409 $5.00 67,511 -- 12,915
110,423 $2.32 81,728 -- --
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):
Year Ended
June 30, 1997
-------------
Net loss - as reported....................... $ 3,818
Net loss - pro forma......................... $ 3,911
Loss per share - as reported................. $ (1.87)
Loss per share - pro forma................... $ (1.91)
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 fiscal year
1997 is $0.31. During 1996, the weighted average fair value of options granted
was zero.
Warrants
At June 30, 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 $5.50 per share and 15,498 warrants are
exercisable through March 1999 at $3.87 per share.
F-20
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
13. Commitments and Contingencies
a. Operating Leases
During March 1997, the Company executed an operating lease agreement
for its office facilities that expires in April 2002. Under the 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,
1998................................. 93,000
1999................................. 125,000
2000................................. 132,000
2001................................. 142,000
2002................................. 145,000
--------
$637,000
Rent expense charged to operations in fiscal 1996 and 1997 were
approximately $11,500 and $79,600, respectively.
b. Capital Leases
The Company leases certain office equipment under a capital lease. At
June 30, 1997, minimum lease payments under the terms of the lease agreement
are as follows:
Year Ending June 30,
1998 $22,997
1999 22,350
2000 18,711
-------
64,058
Less-amounts representing interest 16,728
Less-Current portion 17,029
-------
$30,301
14. Subsequent Events
During July and August 1997, the Company borrowed $605,250 under one
year, 15 percent notes payable to unrelated parties. The notes provide for a
minimum of $90,790 of interest. The Company incurred $30,260 of deferred
financing costs related to these notes.
15. Events Subsequent to Date of Auditors' Report (Unaudited)
a. Initial Public Offering
On October 3, 1997, the Company consummated its initial public
offering (the "IPO") pursuant to which it issued 2,415,000 units. Each unit
consisted of one share of common stock and one warrant to purchase one
F-21
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
15. Events Subsequent to Date of Auditors' Report (Unaudited) (Continued)
share of common stock at $5.50 per share. The units were sold for $5.10 per
unit for net proceeds of approximately $10,142,000.
The proceeds from the IPO have been substantially expended to fund
operations and repay notes payable and other liabilities.
b. Acquisition of FMS
On December 10, 1997, 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 a cash payment
totaling $34,383, less $17,893 of cash received from FMS. In conjunction with
the acquisition, which has been accounted for under the purchase method,
assumed liabilities were as follows:
Fair value of assets acquired, excluding cash...... $ 542,074
Net cash payment .................................. (16,490)
Value of Company's common stock issued ............ (209,000)
---------
Liabilities assumed ............................... $ 316,584
=========
Prior to the FMS acquisition, the Company was classified as a
development stage company, due to the lack of significant operating revenues.
Effective for the first quarter after the FMS acquisition (quarter ended March
31, 1998), the Company emerged from the development stage as a result of the
revenues generated from FMS's operations subsequent to the purchase date.
c. 1998 Private Placement
In June 1998, the Company issued (i) 1,111,110 shares of Common
Stock, for net proceeds of approximately $2,300,000, including $720,000 not yet
received, and (ii) warrants to purchase 100,000 shares of Common Stock at an
exercise price of $5.50 per share through June 29, 2001 (the "1998 Private
Placement"). The shares were issued at a 25 percent discount when compared to
current public trading prices at the time of the placement.
The 1998 Private Placement also provides for additional shares of
Common Stock to be issued pursuant to certain other provisions of the 1998
Private Placement agreement, including shares issuable for no additional
consideration pursuant to certain reset rights (as defined in the agreement)
and shares issuable for up to $3,000,000 pursuant to the put rights (as
defined in the agreement).
In June 1988, the Company issued 43,716 shares of Common Stock as
partial compensation to the placement agents in the 1998 Private Placement, of
which 13,115 shares were delivered into the escrow account. All escrow amounts
will be released upon the satisfaction by the Company of the following
conditions: (i) the filing by the Company of a registration statement with
respect to all shares issued or to be issued under the 1998 Private Placement
and (ii) the obtainment of shareholder approval as defined in the agreements.
F-22
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
15. Events Subsequent to Date of Auditors' Report (Unaudited) (Continued)
Based upon current estimates, management believes that the net proceeds
from the 1998 Private Placement (including the $720,000 not yet received) will
provide the Company with sufficient capital only through December 1998. The
Company is therefore dependent on obtaining additional financing. 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.
d. ATN Agreement and Additional Significant Business Risk
On February 26, 1998, the Company executed a contract to extend its
current agreement with ATN. The contract provides for an extension of services
on a month-to-month basis through and until August 31, 1998, at a monthly fee
of $64,000 and a one-time payment of $150,000 to reflect unanticipated costs
incurred by ATN in the course of the performance under the nesting contract.
In May 1998, the Company entered into a five year contract with Group
W Network Services, a division of CBS Corporation, to provide program
origination, master control operations, uplink and C-Band Satellite
transponder services (the "Transponder Contract"). The transponder contract
will allow the Company to broadcast 24 hours a day, rather than the 12 hours a
day under the nesting Contract. The Transponder Contract, however, does not
provide the Company with access to subscribers as did the Nesting Contract.
ATN's subscribers currently represent the majority of all of the
households which receive broadcast of The Recovery Network's programming.
After the termination of the Nesting Contract in August 1998, the Company will
be entirely dependent on its own affiliate marketing efforts to obtain
affiliate agreements with cable operators. Currently, the Company's only such
arrangement is with Cablevision, which provides the Company with approximately
2 million subscribers in the New York and Boston metropolitan areas. The
Company expects that these will comprise substantially all the subscribers it
will have when it begins broadcasting under the Transponder Contract.
e. Options and Warrants
Effective on May 28, 1998, the Company's shareholders approved by the
1998 Stock Option Plan (the "Stock Plan"). The Company has reserved 600,000
shares of Common Stock for issuance under such plan, of which the Company has
granted approximately 309,000 options to purchase Common Stock at an exercise
price of $3.15 per share.
Subsequent to March 31, 1998, the Company granted non-plan options to
non-employees to acquire approximately 284,000 shares of the Common Stock at
an exercise price that approximates the fair market value. Options to acquire
200,000 shares vest ratably over 24 months with the remaining options of
approximately 84,000 vesting when granted.
F-23
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 30, 1997
15. Events Subsequent to Date of Auditors' Report (Unaudited) (Continued)
During August 1998, the exercise price of all options granted under the
1998 Stock Option Plan, the non-plan stock options granted subsequent to March
31, 1998 and 1997 Management Bonus Plan was reduced to $1.56, which approximate
fair market value on date of modification.
f. Recovery Interactive
Subsequent to June 30, 1997, the Company and TCII have each made
additional capital contributions to Recovery Interactive (RI) of approximately
$450,000, substantially all of which have been expended by RI. During the nine
month period ended March 31, 1998, the Company recorded a loss on investment
in the joint venture for its entire additional investment of $450,000. These
contributions by the Company and TCII have not been sufficient to fund
Recovery Interactive's implementation of its business plan. Currently, the
Company does not anticipate providing any additional funding to RI.
g. Contingency and Commitments
In May 1998, the Company entered into a consulting agreement whereby
consulting services were to be rendered in exchange for 200,000 shares of Common
Stock and warrants to purchase 200,000 shares of Common Stock. The securities
issued were to vest through September 1998. No amounts have been issued under
the agreement and all amounts have been excluded from loss per share
calculations as it is management's assertion that the contract was terminated by
the consulting party due to the lack of performance.
F-24
<PAGE>
THE RECOVERY NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ................................................ $ 2,709,966 $ 10,883
Accounts Receivable ................................. 113,634 25,631
Inventory ........................................... 69,238 --
Prepaid expenses .................................... 237,562 15,693
------------ ------------
Total current assets ............................ 3,130,400 52,207
CAPITALIZED PROGRAMMING COSTS, net ....................... 819,343 237,600
FURNITURE AND EQUIPMENT, net ............................. 215,515 112,750
DEFERRED FINANCING COSTS ................................. -- 100,269
DEFERRED OFFERING COSTS .................................. -- 270,040
OTHER, net ............................................... 69,150 26,386
------------ ------------
$ 4,234,408 $ 799,252
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES:
Notes payable ............................................ $ -- $ 1,520,432
Accounts payable and accrued liabilities ................. 580,890 502,642
Accrued professional fees ................................ 27,465 312,249
Accrued royalty expense .................................. 145,823 --
Current portion of capital lease obligation .............. 17,029 17,029
Deferred compensation .................................... -- 51,672
Due to shareholders and directors ........................ -- 65,751
------------ ------------
Total current liabilities ........................... 771,207 2,469,775
CAPITAL LEASE OBLIGATION, net of current portion ......... 17,646 30,301
------------ ------------
Total liabilities ................................... 788,853 2,500,076
------------ ------------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY(DEFICIT):
Common stock, $.01 par value:
Authorized--25,000,000 shares
Issued and outstanding, 4,980,250 shares at March 31,
1998, and 2,521,250 at June 30, 1997 ................ 49,803 25,212
Additional paid-in capital ............................... 14,502,874 4,176,708
Prepaid consulting costs ................................. -- (5,625)
Deficit .................................................. (11,107,122) (5,897,119)
------------ ------------
Shareholders' equity (deficit) ...................... 3,445,555 (1,700,824)
------------ ------------
$ 4,234,408 $ 799,252
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-25
<PAGE>
THE RECOVERY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997.
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Advertising .......................... $ 21,977 $ 22,918 $ 77,648 $ 28,718
Government Contracts ................. 29,900 -- 49,900 --
Video and publication ................ 229,788 -- 281,654 --
----------- ----------- ----------- -----------
Total revenues ....................... 281,665 22,918 409,202 28,718
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Salaries and consulting .............. 773,781 521,013 1,460,824 812,861
Marketing ............................ 467,758 168,713 1,125,607 230,916
General and administrative ........... 460,141 343,201 980,008 588,428
Programming .......................... 123,532 250,300 464,256 282,724
Programming transmission ............. 315,343 -- 534,430 --
Loss on investment in joint venture .. 167,400 156,454 317,400 228,985
Cost of video and publication sales .. 75,219 -- 91,202 --
----------- ----------- ----------- -----------
Operating expenses ................... 2,383,174 1,439,681 4,973,727 2,143,914
----------- ----------- ----------- -----------
Loss from operations ................. (2,101,509) (1,416,763) (4,564,525) (2,115,196)
INTEREST EXPENSE ........................ (5,584) (152,528) (770,841) (171,077)
INTEREST INCOME ......................... 48,191 -- 125,363 --
----------- ----------- ----------- -----------
Loss before provision for
income taxes ....................... (2,058,902) (1,569,291) (5,210,003) (2,286,273)
PROVISION FOR STATE INCOME TAXES ........ -- -- -- --
----------- ----------- ----------- -----------
Net loss ............................. $(2,058,902) $(1,569,291) $(5,210,003) $(2,286,273)
=========== =========== =========== ===========
LOSS PER SHARE INFORMATION:
Basic and diluted loss per share ........ $ (.41) $ (.72) $ (1.27) $ (1.23)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding.. 4,980,250 2,186,250 4,116,757 1,859,914
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-26
<PAGE>
THE RECOVERY NETWORK, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
FOR THE PERIOD FROM JULY 1, 1997 THROUGH MARCH 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Prepaid
-------------------------------- Paid-in Consulting
Shares Amount Capital Costs Deficit Total
---------------- ------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
June 30, 1997 ......... 2,521,250 $ 25,212 $ 4,176,708 $ (5,625) $ (5,897,119) $ (1,700,824)
Amortization of prepaid
consulting costs ...... -- -- -- 5,625 -- 5,625
Initial public offering of
common stock, net of
fees of $2,174,743 .... 2,415,000 24,151 10,117,606 -- -- 10,141,757
Purchase of FMS .......... 44,000 440 208,560 -- -- 209,000
Net loss ................. -- -- -- -- (5,210,003) (5,210,003)
------------ ------------ ------------ ---------- ------------ ------------
Balance, March 31, 1998 .. 4,980,250 $ 49,803 $ 14,502,874 -- $(11,107,122) $ 3,445,555
(unaudited) ============ ============ ============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-27
<PAGE>
THE RECOVERY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Nine months ended March 31,
--------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss................................................................... $ (5,210,003) $ (2,286,273)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of notes payable discount................................... 479,568 121,042
Amortization of deferred financing costs................................. 130,529 26,305
Amortization of and allowances for capitalized programming costs......... 116,270 --
Depreciation and other amortization...................................... 53,589 10,749
Common stock issued for services and interest expense.................... -- 27,000
Provision for doubtful accounts.......................................... 7,000 --
Loss on investment in joint venture...................................... 317,400 228,985
Changes in assets and liabilities:
Accounts receivable...................................................... (44,562) (4,928)
Inventory................................................................ 11,711 --
Prepaid expenses......................................................... (211,706) (10,822)
Security deposit & other assets.......................................... (2,507) (7,710)
Capitalized programming costs............................................ (313,574) --
Accounts payable and accrued liabilities................................. (73,276) 178,275
Accrued royalty expense.................................................. (19,238) --
Accrued professional fees................................................ (284,784) --
Deferred compensation.................................................... (51,672) 49,833
Due to shareholders and directors........................................ (65,751) (95,314)
------------- -----------
Net cash used in operating activities.................................. (5,161,006) (1,762,858)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of FMS............................................ (34,383) --
Purchases of furniture and equipment..................................... (134,903) (26,332)
Investment in joint venture.............................................. (317,400) (300,000)
------------- -----------
Net cash used in investing activities.................................. (486,686) (326,332)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................................................. 574,990 1,221,976
Payments on borrowings................................................... (2,605,250) (60,000)
Payments on capital lease obligations.................................... (12,655) (818)
Proceeds from the issuance of common stock, warrants and stock
subscriptions.......................................................... 10,715,355 1,755,027
Repurchase of common stock............................................... -- (4,973)
Deferred offering and financing costs incurred........................... (343,558) (225,582)
------------- -----------
Net cash provided by financing activities.............................. 8,328,882 2,685,630
------------- -----------
NET INCREASE IN CASH.......................................................... 2,681,190 596,440
CASH, beginning of period................................................ 10,883 137,492
CASH FROM ACQUISITION OF FMS............................................. 17,893 --
------------- -----------
CASH, end of period...................................................... $ 2,709,966 $ 733,932
============= ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-28
<PAGE>
THE RECOVERY NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial statements and the instructions to Form
10-QSB related to interim period financial statements. Accordingly, these
condensed consolidated financial statements do not include certain information
and footnotes required by generally accepted accounting principles for
complete financial statements. However, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal 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. The Company's condensed consolidated financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's Registration Statement
on Form SB-2 (File No. 333-27787) that became effective on September 29, 1997.
The Company had been in the development stage until its acquisition
of FMS (see Note B) on Deecember 10, 1997, at which time it emerged from the
development stage.
NOTE B -- ACQUISITION OF FMS
On December 10, 1997, The 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 or
($4.75 per share) and a cash payment totaling $34,383, less $17,893 of cash
received from FMS. In conjunction with the acquisition, which has been
accounted for under the purchase method, assumed liabilities were as follows:
Fair value of assets acquired, excluding cash........ $542,074
Net cash payment..................................... (16,490)
Value of Company's common stock issued............... (209,000)
--------
Liabilities assumed.................................. $316,584
========
The unaudited condensed consolidated statement of operations for the
nine-month period ended March 31, 1998 includes the operating results of FMS
from December 10, 1997 (the acquisition date) to March 31, 1998. All
intercompany transactions have been eliminated.
The pro forma results of operations for the nine-month periods ended
March 31, 1998 and 1997 reflecting all adjustments which, in the opinion of
management, are necessary for a fair presentation as if the FMS acquisition was
consummated on July 1, 1997 and 1996, respectively, are as follows:
F-29
<PAGE>
<TABLE>
<CAPTION>
Nine-months ended March 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Company revenues before consolidation with FMS $ 128,000 $ 29,000
FMS revenues from acquisition date 282,000 --
Pro forma adjustment--
FMS revenues prior to acquisition 662,000 905,000
----------- -----------
Pro forma revenue $ 1,072,000 $ 934,000
=========== ===========
Pro forma net loss $ 5,213,000 $ 2,337,000
=========== ===========
Pro forma weighted average number
of common shares 4,142,932 1,903,914
=========== ===========
Pro forma loss per common share $ (1.26) $ (1.23)
=========== ===========
</TABLE>
NOTE C -- LOSS PER SHARE
Effective December 31, 1997, the Company adopted the Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" and has restated
its earnings per share disclosure for all prior periods presented.
Net loss per share and loss per share assuming dilution are based on
the weighted average number of common shares outstanding and dilutive common
stock equivalents during the periods presented. Options and warrants to
purchase 3,798,282 and 773,208 shares of common stock (at prices ranging from
$0.77 to $5.50) were outstanding as of March 31, 1998 and 1997 respectively
and excluded from the computation of loss per share as they would be
anti-dilutive.
NOTE D -- INITIAL PUBLIC OFFERING
On October 3, 1998, the Company consummated its initial public
offering (the "IPO") pursuant to which it issued 2,415,000 units.. Each unit
consisted of one share of common stock and one warrant to purchase one share
of common stock at $5.50 per share. The units were sold for $5.10 per unit for
net proceeds of approximately $10,142,000.
The proceeds from the IPO have been used to fund operations and repay
notes payable and other liabilities.
NOTE E -- 1998 PRIVATE PLACEMENT
In June 1998, the company issued (i), 1,111,110 shares of Common Stock,
for net proceeds of approximately $2,300,000, including $720,000 not yet
received, and (ii) warrants to purchase
F-30
<PAGE>
100,000 shares of Common Stock at an exercise price of $5.50 per share through
June 28, 2001 (the "1998 Private Placement"). The shares were issued at a 25
percent discount when compared to current public trading prices at the time of
the placement.
The 1998 Private Placement also provides for additional shares of
Common stock to be issued pursuant to certain other provisions of the 1998
Private Placement agreement, including shares issuable for no additional
consideration pursuant to certain reset rights (as defined in the agreement)
and shares issuable for up to $3,000,000 pursuant to the put rights (as
defined in the agreement). In June 1988, the Company issued 43,716 shares of
Common stock as partial compensation to the placement agents in the 1998
Private Placement, of which 13,115 shares were delivered into the escrow
account. All escrow amounts will be released upon the satisfaction by the
Company of the following conditions (i) the filing by the company of a
registration statement with respect to all shares issued or to be issued under
the 1998 Private Placement and (ii) the obtainment of shareholder approval as
defined in the agreements.
NOTE F -- ATN AGREEMENT AND ADDITIONAL SIGNIFICANT BUSINESS RISK
On February 26, 1998, the Company executed a contract to extend its
current agreement with ATN. The contract provides for an extension of services
on a month-to-month basis through and until August 31, 1998, at a monthly fee
of $65,000 and a one-time payment of $150,000 to reflect unanticipated costs
incurred by ATN in the course of performance under the nesting contract.
In May 1998, the Company entered into a five-year contract with Group
W Network services, a division of CBS Corporation, to provide program
origination, master control operations, uplink and C-Bank Satellitte
transponder services (the "Transponder Contract"). The transponder contract
will allow the Company to broadcast 24 hours a day, rather than the 2 hours a
day under the nesting Contract. The Transponder Contract, however, does not
provide the Company with access to subscribers as did the Nesting Contract.
ATN's subscribers currently represent the majority of all of the
households which receive broadcast of The Recovery Network's programming.
After the termination of the Nesting Contract in August 1998, the Company will
be entirely dependent on its own affiliate marketing efforts to obtain
affiliate agreements with cable operators. Currently, the Company's only such
arrangement is with Cablevision, which provides the Company with approximately
2 million subscribers in the New York and Boston metropolitan areas. The
Company expects that these will comprise substantially all the subscribers it
will have when it begins broadcasting under the Transponder Contract.
NOTE G -- RECOVERY INTERACTIVE
Subsequent to June 30, 1997, the Company and TCII have each made
additional capital contributions to Recovery Interactive (RI) of approximately
$450,000, substantially all of which have been expended by RI. During the
nine-month period ended March 31, 1998, the Company recorded a loss on
investment in the joint venture for its entire additional investment of
$450,000. These contributions by the Company and TCII have not been sufficient
to fund Recovery Interactive's implementation of its business plan. The
Company is not required to contribute any additional funding to Recovery
Interactive and does not intend to make any additional contributions. At this
time, there can be no assurance that TCII will provide any additional funding.
F-31
<PAGE>
NOTE H -- SUPPLEMENTAL CASH FLOWS DISCLOSURE
The Company prepares its statements of cash flows using the indirect
method as defined under SFAS No. 95, "Statement of Cash Flows." Required
non-cash transaction disclosures are as follows:
For the nine-months ended March 31, 1998, deferred offering costs of
$573,508 were recorded against proceeds from the IPO. Deferred offering costs
of $40,000, paid to the underwriters, were credited toward a two year
consulting agreement and recorded in other assets. Company common stock of
44,000 shares was issued in connection with the acquisition of FMS.
As of 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.
NOTE I -- SIGNIFICANT BUSINESS RISK
Lack of Operating History
The Company has recurring losses from operations and has minimal
operating revenues. The ability of the Company to generate positive operating
results is dependent upon its ability (i) to obtain sufficient additional
capital, (ii) to distribute programming and services through multiple media
channels, (iii) to achieve a critical mass of viewers necessary to attract
advertisers and (iv) to acquire or develop appropriate programming for
broadcast. The Company intends to raise additional working capital through
private and/or public offerings. 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.
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
(the "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 that offered by the Company. 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 up to 10 to 15 percent 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
Company's programming 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 relations 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. Although program
providers that do not hold FCC licenses or operate distribution outlets, such
as the Company's offerings of The Recovery Network and Recovery 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
F-32
<PAGE>
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.
Dependence upon Access Television Network ("ATN," a related company)
ATN's subscribers currently represent substantially all of the
households that receive the Company's programming. The company is dependent
upon ATN to deliver its programming to ATN's subscribers and to provide the
necessary services to enable the Company to deliver its programming through
cable systems with which the Company directly enters into affiliation
agreements. It is possible that ATN or its affiliates could experience
delivery 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 ATN's subscriber base. Moreover, the Company's
agreement with ATN expires August 31, 1998 unless renewed by both parties.
NOTE J - 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
340,251 shares of common stock are reserved for issuance, pursuant to options
granted and to be granted under these plans. 15,506 shares and 195,831 shares
are available for grant, including an option to purchase 12,915 shares which
has been terminated, as of March 31, 1998 and 1997, respectively. 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 during the nine month period ended March 31, 1997, 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 97,397 shares and 66,513 shares are fully vested as of March 31, 1998
and 1997, respectively. Options to purchase 43,910 shares vest over 1.5 to 2
years. All non-plan options expire in 2001.
During June 1997, non-plan options to purchase 9,749 shares of common
stock were granted. The options' exercise price is $5.00 per share, monthly
vesting commences July 1997, and they expire in five years.
The following is a summary of all options granted to employees,
directors and consultants to acquire the Company's common stock as of March
31, 1998:
F-33
<PAGE>
<TABLE>
<CAPTION>
Shares Granted Exercise Price Shares Vested Shares Exercised Shares Terminated
- -------------- -------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
347,409 $5.00 144,627 -- 12,915
110,423 $2.32 97,379 -- --
</TABLE>
The following is a summary of all options granted to employees,
directors and consultants to acquire the Company's common stock as of March
31, 1997:
<TABLE>
<CAPTION>
Shares Granted Exercise Price Shares Vested Shares Exercised Shares Terminated
- -------------- -------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
157,335 $5.00 51,223 -- 12,915
110,423 $2.32 66,513 -- --
</TABLE>
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 plan 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 Nine Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
Net loss - as reported.............. $5,210 $2,286
Net loss - pro forma................ $5,233 $2,378
Loss per share - as reported........ $(1.27) $(1.13)
Loss per share - pro forma.......... $(1.27) $(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:
Nine Months
Ended
March 31, 1997
--------------
Expected dividend yield.............. 0.00%
Expected stock price volatility...... 0.00%
Risk free interest rate.............. 6.00%
Expected life of options............. 5 years
F-34
<PAGE>
The weighted average fair value of options granted during the nine
months ended March 31, 1997 is $0.32. There were no options granted during the
nine months ended March 31, 1998.
Warrants
At March 31, 1998 and 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 $5.50 per share and 15,498 warrants are
exercisable through March 1999 at $3.87 per share. At March 31, 1998, there were
also 2,835,000 warrants outstanding granted in connection with the Company's
October 3, 1997 Initial Public Offering.
F-35
<PAGE>
June 30, 1997
Santa Barbara, California
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-36
<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
$450,953 for 1997 and 1996, respectively 55,410 56,497
Prepaid expenses 2,989 2,454
--------------- ----------------
Total current assets 205,544 234,478
--------------- ----------------
Equipment
Machinery and equipment 32,049 35,495
Furniture and fixtures 22,773 22,985
Automobiles 28,500 28,500
Office equipment 14,784 14,306
--------------- ----------------
98,106 101,286
Less accumulated depreciation (88,043) (89,883)
--------------- ----------------
Net equipment 10,063 11,403
Other Assets:
Refundable deposits 5,257 6,398
--------------- ----------------
Total assets $ 220,864 $ 252,279
--------------- ----------------
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
=============== ================
</TABLE>
See accompanying notes
F-37
<PAGE>
FMS PRODUCTIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the Years Ended April 30, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<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)
=============== =================
</TABLE>
See accompanying notes
F-38
<PAGE>
FMS PRODUCTIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended April 30, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<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 (2,191) (67,374)
Cash at beginning of year 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
</TABLE>
See accompanying notes
F-39
<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-40
<PAGE>
Note 2 - Inventories
Amounts included in inventory are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Pre-production costs $ 1,836 $ 677
Finished goods 46,332 41,657
----------------- ----------------
$ 48,168 $ 42,334
================= ================
</TABLE>
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-41
<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:
<TABLE>
<CAPTION>
1997 1996
--------------- -----------------
<S> <C> <C>
Current tax expense--state $ 800 $ 800
--------------- -----------------
</TABLE>
The net deferred tax assets include the following components:
<TABLE>
<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:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Depreciation expense $ 5,140 $ 5,380
Amortization of production costs 6,447 8,059
$ 11,587 $ 13,439
================ ================
</TABLE>
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 $10,800. 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-42
<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-43
<PAGE>
FMS PRODUCTIONS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
October 31, 1997
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
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
==================
</TABLE>
The accompanying notes are an integral part of this condensed balance sheet
F-44
<PAGE>
FMS PRODUCTIONS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
for the Six Month Periods Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
<S> <C> <C>
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
===================== ======================
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-45
<PAGE>
FMS PRODUCTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Periods Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
<S> <C> <C>
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
======================= =======================
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-46
<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-47
<PAGE>
THE RECOVERY NETWORK, INC.
PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
The following unaudited pro forma condensed combing statements of
operations for the nine months ended March 31, 1998 and for the year ended June
30, 1997 illustrate the effect of the acquisition by the Company of FMS
Productions, Inc. (FMS) on December 10, 1998 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 a net cash payment of $16,490. The FMS
acquisition is being accounted for as a purchase, with the assets acquired and
liabilities assumed being recorded at estimated fair market value. The unaudited
pro forma combining statements of operations assumes that this transaction
occurred at the begining of the periods presented.
The pro form adjustments are based upon currently available information and
upon certain assumptions that the Company believes are reasonable. The
acquisition of FMS has been recorded based upon the estimated fair market value
of the tangible assets acquired at the date of acquisition. The adjustments
included in the unaudited pro forma combining financial statements represent the
Company's preliminary determination of these adjustments based upon available
information. There can be no assurance that the actual adjustments will not
differ significantly from the pro forma adjustments reflected in the pro forma
financial information.
The unaudited pro forma combining financial statements are not necessarily
indicative of either future results of operations or results that might have
been achieved if the foregoing transaction had been consummated as of the
indicated dates. The unaudited pro forma combining financial statements should
be read in conjuction with the historical financial statements of the Company
and FMS, together with the related notes thereto, included elsewhere in this
Prospectus.
F-48
<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>
<CAPTION>
Recovery
Network (1) FMS(2) Adjustments Consolidated
------- ----- ----------- ------------
<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(3) 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(4) 438,096
----------- ---------- ----------
Operating
expenses........... 3,070,764 1,177,907 99,000 4,347,671
----------- ---------- ---------- ---------
INTEREST EXPENSE........................ (778,552) (9,903) 4,000(5) (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) $(1.87)
======= =======
Weighted average number of
Common and common
Equivalent shares
outstanding................... 2,044,339 44,000(6) 2,088,339
========= ====== =========
</TABLE>
- -------------------------
(1) Historical results of operations for the Company for the year ended
June 30, 1997.
(2) Historical results of operations for FMS for the year ended April 30, 1997.
(3) Increase in officer's salaries based upon new employment agreements.
(4) Amortization of FMS's television rights.
(5) Reduction in interest expense due to retirement of note payable to FMS
Shareholder.
(6) Increase in weighted average shares to acquire FMS as if consummated on
July 1, 1996.
F-49
<PAGE>
THE RECOVERY NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTH PERIOD ENDING MARCH 31, 1998
<TABLE>
<CAPTION>
Recovery
Network(1) FMS(2) Adjustments Consolidated
---------- ------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Advertising.......................... $ 77,648 $ - $ - $ 77,648
Video and publication................ 281,654 698,195 - 979,849
Other................................ 49,900 - - 49,900
----------- --------- ----------- -----------
Total revenues.................... 409,202 698,195 - 1,107,397
----------- -------- ----------- -----------
OPERATING EXPENSES:
Salaries and consulting.............. 1,460,824 272,606 19,500(3) 1,752,930
Marketing............................ 1,125,607 82,828 - 1,208,435
General and administrative........... 980,008 83,111 - 1,063,119
Programming.......................... 464,256 - - 464,256
Programming transmission............. 534,430 - - 534,430
Loss on investment in joint
venture........................... 317,400 - - 317,400
Cost of book and publication
sales............................. 91,202 210,768 30,000(4) 331,970
----------- --------- ----------- -----------
Operating expenses............. 4,973,727 649,313 49,500 5,672,540
----------- --------- ----------- -----------
Income (loss) from operations........ (4,564,525) 48,882 (49,500) (4,565,143)
INTEREST EXPENSE........................ (770,841) (3,661) 2,000(5) (772,502)
INTEREST INCOME......................... 125,363 - - 125,363
----------- --------- ----------- -----------
Income (loss) before provisions
for income taxes.................. (5,210,003) (45,221) (47,500) (5,212,282)
PROVISION FOR STATE INCOME
TAXES................................ - (800) - (800)
----------- --------- ------------ -----------
Net income (loss).................... $(5,210,003) $ (44,421) $ (47,500) $(5,213,082)
=========== ========= ============ ===========
LOSS PER SHARE INFORMATION:
Loss per share and loss per share
assuming dilution.................... $(1,27) $(1.26)
======== ===========
Weighted average number of common
and common equivalent shares
outstanding.......................... 4,116,757 26,175(6) 4,142,932
========== ============ ===========
</TABLE>
- --------------------------
(1) Includes the historical results of operations of the Company for the
nine months ending March 31, 1998, which includes the results of FMS
from the date of acquisition (December 10, 1997).
(2) Includes the historical results of operations of FMS for the period from
May 1, 1997 through October 31, 1997.
(3) Increase in officers' salaries based upon new employment agreements.
(4) Amortization of FMS's television rights
(5) Reduction in interest expense due to retirement of note payable to FMS
Shareholder.
(6) Increase in weighted average shares to acquire FMS as if consummated on
July 1, 1997.
F-50
<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..................................................17
Dividend Policy..................................................17
Plan of Distribution.............................................18
Legal Proceedings................................................18
Capitalization...................................................19
Market for the Company's Common Equity
and Related Shareholder Matters................................20
Plan of Operation................................................21
Business.........................................................24
Management.......................................................36
Selling Shareholders.............................................46
Principal Shareholders...........................................49
Certain Transactions.............................................51
Description of Securities........................................54
Legal Matters....................................................56
Experts..........................................................57
Index to Financial Statements...................................F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,365,966 Shares
[LOGO]
THE RECOVERY
NETWORK, INC.
2,365,966 Shares of Common Stock
---------------------------
PROSPECTUS
---------------------------
______ __, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 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 Registrant shall, to the maximum extent permitted form
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 indemnify, 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 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.
Registration fee...............................................$1,144.05
Nasdaq listing expenses fee..................................... *
Blue sky fees and expenses (including legal and filing fees).... *
Printing expenses (other than stock certificates)............... *
Legal fees and expenses (other than Blue Sky)................... *
Accounting fees and expenses.................................... *
Miscellaneous expenses.......................................... *
--------
Total.................................................$ *
========
- ------------
* To be provided by amendment.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
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 owed 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, he Registrant relied on the exemption
provided by Section 4(2) of the Securities Act.
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
II-2
<PAGE>
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 $5.50 per share. Whale Securities,
L.P., the underwriter in the Registrant's initial public offering, 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 June 1997, the Registrant sold $605,250 aggregate principal amount
of promissory notes which bear interest at 15% due on the earlier of two
business days after the consummation of the Registrant's initial public
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 June 1998, the Registrant issued (i) 1,111,110 shares of Common
Stock, valued at $2.25 per share, to 7 "accredited investors" and (ii)
warrants to purchase 100,000 shares of Common Stock at an exercise price of
$5.50 per share (the "Private Placement"). In issuing such securities, the
Registrant relied on the exemption provided by Rule 506 of Regulation D
promulgated under the Securities Act.
In June 1988, the Registrant issued 43,716 shares of Common Stock as
partial compensation to the placement agents in the Private Placement. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
2.1 Form of Subscription Agreement between Registrant and each of Austost Anstalt Schann, Balmore Funds
S.A., Zakeni Ltd., BL Squared Foundation, Martin Chopp, The Sargon Fund, L.P. and TLG Realty dated
as of June 29, 1998. *
2.3 Funds Escrow Agreement between the Registrant, Austost Anstalt Schaan, Balmore Funds S.A., Zakeni
Ltd., BL Squared Foundation, Martin Chopp, The Sargon Fund, L.P., TLG Realty and Grushko & Mittman
dated as of June 29, 1998 *.
2.4 Shares Escrow Agreement between the Registrant, Austost Anstalt Schaan, Balmore Funds S.A., Zakeni
Ltd., BL Squared Foundation, Martin Chopp, The Sargon Fund, L.P., TLG Realty and Grushko & Mittman
dated as of June 29, 1998. *
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
2.5 Agreement and Plan of Merger dated as of December 10, 1997 among the Registrant, Recovery Direct, Inc.,
FMS Productions, Inc. and each of John Frederick, P. Randall Frederick, Jan Smithers, Joe C. Wood, Jr.,
Sharon R. Irish and Charles S. Sapp.++
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 Redeemable Warrant Agent Agreement (including Form of Redeemable 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 Stock Option Plan.**
4.7 Amendment to 1996 Board of Directors and Advisory Board Stock Option Plan.**
4.8 1997 Management Bonus Plan.**
4.9 Amendment to 1997 Management Bonus Plan.**
4.10 Form Stock Option Contract.**
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997.**
4.12 1998 Stock Plan.++
4.13 Form of Warrant.*
4.14 Form of Registration Rights Agreement dated December 10, 1997 between the Registrant and each of the Sellers.++
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, 1997.**
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, 1977.**
10.5 Employment Agreement between the Registrant and Donald Masters effective as of December 1, 1996.**
10.6 Non-Disclosure and Inventions Agreements 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 Bartlett, Pringle & Wolf, LLP
23.3 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1).*
</TABLE>
II-4
<PAGE>
24.1 Power of Attorney (see page II-4).
- ---------------------------------
* To be filed by amendment.
** Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form SB-2, file number
333-27787.
+ Incorporated by Reference to Exhibit A to the Registrant's Definitive
Proxy Statement on Schedule 14A filed by the Registrant on April 29,
1998.
++ Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
1997 Form 8-K.
++++ Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
1997 Form 8-K.
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 effective 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;
(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
Registration Statement; provided, however, that paragraphs
(1)(i) and (1)(ii) do not apply if the registration statement is
on Form S-3, Form S-8, and the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Company pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities herein, 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 this offering.
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 asserting 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.
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
Registration Statement to be signed on its behalf by the undersigned, in Santa
Monica County, State of California, on the 13th day of August, 1998.
THE RECOVERY NETWORK, INC.
By: /s/William D. Moses
---------------------------
William D. Moses
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William D. Moses, his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
amendments (including post-effective amendments) to this registration
statement (or any other registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933), and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
upon said attorney-in-fact and agent, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent or either of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/George H. Henry Chairman of the Board of Directors
- ---------------------------- (principal executive officer)
George H. Henry August 13, 1998
/s/William D. Moses
- ----------------------------
William D. Moses Chief Executive Officer and Director August 13, 1998
/s/Donald J. Masters
- ----------------------------
Donald J. Masters Executive Vice President and Director August 13, 1998
/s/Gregory L. Richey
- ---------------------------- Chief Financial Officer and General Counsel
Gregory L. Richey (principal accounting and financial officer August 13, 1998
- ----------------------------
Nimrod J. Kovacs Vice Chairman of the Board of Directors
/s/Charlotte Schiff Jones
- ----------------------------
Charlotte Schiff Jones Director August 13, 1998
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
2.1 Form of Subscription Agreement between Registrant and each of Austost Anstalt Schann, Balmore
Funds S.A., Zakeni Ltd., BL Squared Foundation, Martin Chopp, The Sargon Fund, L.P. and TLG
Realty dated as of June 29, 1998.*
2.3 Funds Escrow Agreement between the Registrant, Austost Anstalt Schaan, Balmore Funds S.A., Zakeni
Ltd., BL Squared Foundation, Martin Chopp, The Sargon Fund, L.P., TLG Realty and Grushko &
Mittman dated as of June 29, 1998 *.
2.4 Shares Escrow Agreement between the Registrant, Austost Anstalt Schaan, Balmore Funds S.A., Zakeni
Ltd., BL Squared Foundation, Martin Chopp, The Sargon Fund, L.P., TLG Realty and Grushko &
Mittman dated as of June 29, 1998.*
2.5 Agreement and Plan of Merger dated as of December 10, 1997
among the Registrant, Recovery Direct, Inc., FMS
Productions, Inc. and each of John Frederick, P. Randall
Frederick, Jan Smithers, Joe C.
Wood, Jr., Sharon R. Irish and Charles S. Sapp.++
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 Redeemable Warrant Agent Agreement (including Form of Redeemable 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 Stock Option Plan.**
4.7 Amendment to 1996 Board of Directors and Advisory Board Stock Option Plan.**
4.8 1997 Management Bonus Plan.**
4.9 Amendment to 1997 Management Bonus Plan.**
4.10 Form Stock Option Contract.**
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997.**
4.12 1998 Stock Plan.++
4.13 Form of Warrant.*
4.14 Form of Registration Rights Agreement dated December 10, 1997 between the Registrant and each of the Sellers.++
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, 1997.**
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, 1977.**
10.5 Employment Agreement between the Registrant and Donald Masters effective as of December 1, 1996.**
10.6 Non-Disclosure and Inventions Agreements 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.**
</TABLE>
<PAGE>
<TABLE>
<S> <C>
21.1 List of Subsidiaries.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Bartlett, Pringle & Wolf, LLP
23.3 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (see page II-4).
</TABLE>
- ---------------------------------
* To be filed by amendment.
** Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form SB-2, file number
333-27787.
+ Incorporated by Reference to Exhibit A to the Registrant's Definitive
Proxy Statement on Schedule 14A filed by the Registrant on April 29,
1998.
++ Incorporated by Reference to Exhibit 2.1 to the Registrant's
December 15, 1997 Form 8-K.
++++ Incorporated by Reference to Exhibit 4.1 to the Registrant's
December 15, 1997 Form 8-K.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report for The Recovery Network, Inc. included in this Form SB-2 registration
statement and to all references to our Firm included in this registration
statement.
/s/ ARTHUR ANDERSEN, LLP
Los Angeles, California
August 13, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on From SB-2 of The Recovery Network, Inc. of our
report dated June 30, 1997 relating to the financial statements of FMS
Productions, Inc. As of and for the years ended April 30, 1997 and 1996, which
appears in such Prospectus.
/s/ Bartlett, Pringle & Wolf, LLP
Santa Monica, California
August 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001017822
<NAME> The Recovery Network, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,709,966
<SECURITIES> 0
<RECEIVABLES> 120,634
<ALLOWANCES> 7,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,130,400
<PP&E> 286,227
<DEPRECIATION> 70,712
<TOTAL-ASSETS> 4,234,408
<CURRENT-LIABILITIES> 771,204
<BONDS> 0
0
0
<COMMON> 49,803
<OTHER-SE> 3,395,752
<TOTAL-LIABILITY-AND-EQUITY> 4,234,408
<SALES> 409,202
<TOTAL-REVENUES> 409,202
<CGS> 0
<TOTAL-COSTS> 4,973,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (770,841)
<INCOME-PRETAX> (5,210,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,210,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,210,003)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
