SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
Amendment No. 1
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________
TO___________.
Commission File No. 0-22913
THE RECOVERY NETWORK, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Colorado 39-1731029
------------------------------ -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1411 5th Street, Suite 200, Santa Monica, California, 90401
-----------------------------------------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (310) 393-3979
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No [ ]
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes |X| No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 4,980,250 shares as of
February 2, 1998.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No |X|
-1-
<PAGE>
Item 1. Financial Statements.
THE RECOVERY NETWORK, INC.
(A development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 1997 June 30, 1997
----------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash............................... $ 5,048,344 $ 10,883
Accounts Receivable................ 98,495 25,631
Inventory.......................... 78,747 -
Prepaid expenses................... 152,825 15,693
------- ------
Total current assets...... 5,378,411 52,207
CAPITALIZED PROGRAMMING COSTS......... 715,795 237,600
FURNITURE AND EQUIPMENT, net.......... 176,595 112,750
DEFERRED FINANCING COSTS.............. - 100,269
DEFERRED OFFERING COSTS............... - 270,040
SECURITY DEPOSIT AND OTHER, net....... 89,222 26,386
------ ------
$ 6,360,023 $ 799,252
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable..................................$ - $ 1,520,432
Accounts payable and accrued liabilities........ 585,722 502,642
Accrued professional fees....................... 18,586 312,249
Accrued royalty expense......................... 176,050 -
Current portion of capital lease obligation..... 17,029 17,029
Deferred compensation........................... - 51,672
Due to shareholders and directors............... 36,271 65,751
------ ------
Total current liabilities.............. 833,658 2,469,775
CAPITAL LEASE OBLIGATION, net of current portion... 21,908 30,301
------ ------
Total liabilities..................... 855,566 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 December 31, 1997, 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 accumulated in the development stage..(9,048,220) (5,897,119)
----------- -----------
Shareholders' equity (deficit)............. 5,504,457 (1,700,824)
--------- -----------
$ 6,360,023 $ 799,252
========== ===========
The accompanying notes to financial statements are an integral
part of these condensed consolidated balance sheets.
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<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
AND FOR THE PERIOD FROM INCEPTION (MAY 1992) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Three months ended December 31, Six months ended December 31, From Inception
(May 1992) to
December 31,
1997 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
Advertising..................................... $ 27,534 $ 5,800 $ 55,671 $ 14,780 $ 89,134
Video and publication .......................... 51,867 - 51,867 - 51,867
Other........................................... 20,000 - 20,000 - 20,000
------ ----- ------ ------ ------
Total revenues....................... 99,401 5,800 127,538 14,780 161,001
------ ----- ------- ------ -------
OPERATING EXPENSES:
Salaries and consulting......................... 359,876 291,848 687,043 456,051 3,225,390
Marketing....................................... 485,320 62,203 657,849 97,118 1,166,731
General and administrative...................... 306,585 245,227 519,867 359,071 1,767,588
Programming..................................... 103,085 32,424 340,723 50,925 891,519
Programming transmission........................ 219,087 - 219,087 - 219,087
Loss on investment in joint venture............. 150,000 72,531 150,000 96,000 450,000
Cost of book and publication sales.............. 15,983 - 15,983 - 15,983
------ ------ ------ ------ ------
Operating expenses.................... 1,639,936 704,233 2,590,552 1,059,165 7,736,298
--------- ------- --------- --------- ---------
Loss from operations............................ (1,540,535) (698,433) (2,463,016) (1,044,385) (7,575,297)
INTEREST EXPENSE ................................. (15,194) (18,549) (765,257) (21,581) (1,546,695)
INTEREST INCOME .................................. 77,172 - 77,172 - 77,172
------ -------- ------ -------- ------
Loss before provision for income taxes........ (1,478,557) (716,982) (3,151,101) (1,065,966) (9,044,820)
PROVISION FOR STATE INCOME TAXES................... - - - - 3,400
----------- --------- ----------- ----------- -----------
Net loss...................................... $(1,478,557) $ (716,982) $(3,151,101) $(1,065,966) $(9,048,220)
============ =========== =========== =========== ===========
LOSS PER SHARE INFORMATION:
Loss per share and loss per share assuming dilution $ (.30) $ (.31) $ (.85) $ (.49)
============ =========== =========== ===========
Weighted average number of common and common
Equivalent shares outstanding...................... 4,867,543 2,329,325 3,694,394 2,190,928
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated statements
</TABLE>
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<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996 AND FOR THE PERIOD
FROM INCEPTION (MAY 1992) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
From Inception
(May 1992) to
Six months ended December 31, December 31,
----------------------------- ------------
1997 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss..................................................... $(3,151,101) $(1,065,966) $(9,048,220)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of notes payable discount......................... 479,568 - 1,064,640
Amortization of deferred financing costs...................... 130,529 - 258,182
Amortization of and allowances for capitalized programming costs 83,700 - 202,489
Depreciation and other amortization............................ 29,550 7,833 64,458
Common stock issued for services and interest expense........ - 21,375 794,743
Provision for deferred compensation.............................. - 67,333 -
Provision for doubtful accounts................................ 7,000 - 7,000
Loss on investment in joint venture............................ 150,000 96,000 450,000
Changes in assets and liabilities:
Accounts receivable............................................ (29,423) (8,260) ( 55,054)
Prepaid expenses............................................... (126,969) (17,200) (142,662)
Inventory...................................................... 2,202 - 2,202
Security deposit & other assets................................ (22,579) - (50,195)
Capitalized programming costs.................................. (177,456) - (533,845)
Accounts payable and accrued liabilities....................... (68,444) 108,058 434,198
Accrued royalty expense........................................ 10,989 10,989
Accrued professional fees...................................... (293,663) - 18,586
Deferred compensation.......................................... (51,672) - -
Due to shareholders and directors.............................. (29,480) 2,056 36,271
-------- ----- ------
Net cash used in operating activities................... (3,057,249) (788,771) (6,486,218)
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of FMS.................................. (34,383) - (34,383)
Purchases of furniture and equipment........................... (71,944) (20,825) (171,864)
Investment in joint venture.................................... (150,000) (100,000) (450,000)
-------- -------- --------
Net cash used in investing activities.................... (256,327) (120,825) (656,247)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings....................................... 574,990 310,000 1,880,350
Payments on borrowings......................................... (2,605,250) - (2,665,250)
Payments on capital lease obligations.......................... (8,393) (785) (13,196)
Proceeds from the issuance of common
stock, warrants and stock subscriptions..................... 10,715,355 650,700 13,817,505
Repurchase of common stock..................................... - - (4,973)
Deferred offering and financing costs incurred................. (343,558) (65,000) (841,520)
--------- ------- ---------
Net cash provided by financing activities................ 8,333,144 894,915 12,172,916
--------- ------- ----------
NET INCREASE (DECREASE) IN CASH...................................... 5,019,568 (14,681) 5,030,451
CASH, beginning of period...................................... 10,883 137,492 -
CASH FROM ACQUISITION OF FMS................................... 17,893 - 17,893
------ ------- ------
CASH, end of period............................................ $ 5,048,344 $ 122,811 $5,048,344
=========== =========== ==========
The accompanying notes are an integral part of these condensed consolidated statements
-4-
</TABLE>
<PAGE>
THE RECOVERY NETWORK, INC.
( A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1997
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.
On October 3, 1997, the Company consummated its 1997 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 for $5.50. The units were issued for $12,316,500 (or $5.10 per
unit). IPO offering expenses were approximately $2,175,000.
Note 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 or ($4.75 per share) and 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
six-month period ended December 31, 1997 includes the operating results of FMS
from December 10, 1997 (the acquisition date) to December 31, 1997. All
intercompany transactions have been eliminated.
The pro forma results of operations for the six-month periods ended
December 31, 1997 and 1996 (reflecting all adjustments which, in the opinion of
management, necessary for a fair presentation) as if the FMS acquisition and the
IPO transaction were consummated on July 1, 1997 and 1996, respectively, are as
follows:
-5-
<PAGE>
<TABLE>
<CAPTION>
Six-months ended December 31,
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Company revenues before consolidation with FMS 76,000 $15,000
Pro forma adjustment-
FMS revenues (six-months ended October 31, 1997 and 1996) 698,000 649,000
------- -------
Pro forma revenue 774,000 664,000
------- -------
NET LOSS:
Company historical net loss before consolidation with FMS (3,153,000) (1,066,000)
Pro forma adjustments:
FMS net income (six-months ended October 31, 1997 and 1996) 44,000 39,000
Amortization of FMS's television rights (30,000) (30,000)
Increase in FMS's officer salaries based on new
employment agreements (20,000) (20,000)
Reduction in interest expense due to retirement of
note payable to FMS shareholder 2,000 2,000
Reduction in interest expense due to retirement of Company
notes payable with the net proceeds received form the IPO 765,000 -
------- -----
Pro forma net loss $(2,392,000) $(1,075,000)
=========== ===========
LOSS PER SHARE INFORMATION:
Historical weighted average number of
common shares outstanding 3,694,394 2,190,928
Increase in weighted average share to
acquire FMS if consummated on July 1, 1997 and 1996 38,978 44,000
Additional shares to be sold to retire Company debt 521,050 -
------- ------
Pro forma weighted average number
of common shares 4,254,422 2,234,928
======= =========
Pro forma loss per common share $ (0.56) $ (0.48)
============ ===========
</TABLE>
Note C -- Loss per Share
Effective December 31, 1997, the Company adopted the Statement of
Financial Accounting Standards No. 128 "Earnings Per Share." The adoption of
this standard had no effect on the loss per share calculations for the 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. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin no. 83, common stock issued for
consideration below the offering price of $5.00 per share (the "Offering Price")
and stock options and warrants issued with exercise prices below the Offering
Price during the twelve-month period preceding the IPO, have been included in
the calculation of basic earning per share, using the treasury stock method, as
if they were outstanding for all periods presented that ended June 30, 1997 or
prior. The effect of the stock options and warrants issued at consideration
below the IPO price was to increase the weighted average shares outstanding by
460,548 shares for the periods ended December 31, 1996.
Options and warrants to purchase 3,378,282 shares of common stock (at
prices ranging from $0.77 to $5.50) were outstanding as of December 31, 1997 and
excluded from the computation of loss per share assuming dilution for periods
subsequent to June 30, 1997 as they would be anti-dilutive.
-6-
<PAGE>
Note D -- 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 six-months ended December 31, 1997, deferred offering costs of
$573,578 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 security deposits and other assets. Company's common
stock of 44,000 shares was issued with the acquisition of FMS.
As of December 31, 1996, the Company recorded the issuance of common
stock for monies (totaling $334,333) received in January and February 1997 and
recorded stock subscriptions. The Company also 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 E -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 distributes programming and services through multimedia
channels, (iii) to achieve a critical mass of viewers to attract advertisers and
healthcare providers and (iv) to acquire and 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 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.
-7-
<PAGE>
Dependence upon Access Television Network ("ATN", a related company)
ATN's subscribers currently represent substantially all of the households
that 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 Company's agreement with ATN
expires April 1998 unless renewed by both parties.
-8-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on form 8-K
The Company filed a report on Form 8-K on December 15, 1997
(Date of earliest event reported). Other than the forgoing,
the Company did not file any such reports during the quarterly
period ended December 31, 1997.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE RECOVERY NETWORK, INC.
Dated: February 27, 1998 By:/S/WILLIAM D. MOSES
-------------------
William D. Moses
President and Chief
Executive Officer
-10-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001017822
<NAME> The Recovery Network, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5048344
<SECURITIES> 0
<RECEIVABLES> 124027
<ALLOWANCES> 25532
<INVENTORY> 78747
<CURRENT-ASSETS> 5378411
<PP&E> 235078
<DEPRECIATION> 58483
<TOTAL-ASSETS> 6360023
<CURRENT-LIABILITIES> 833658
<BONDS> 0
0
0
<COMMON> 49803
<OTHER-SE> 5454654
<TOTAL-LIABILITY-AND-EQUITY> 6066023
<SALES> 51867
<TOTAL-REVENUES> 127538
<CGS> 15983
<TOTAL-COSTS> 2590552
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 765257
<INCOME-PRETAX> (3151101)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3151101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3151101)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
