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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
[ ] 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: 7,541,733 shares as of
November 16, 1998.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
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THE RECOVERY NETWORK, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
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Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and June 30, 1998 .................................................................. 3
Condensed Consolidated Statements of Operations (unaudited) for the three
Months ended September 30, 1998 and 1997 ........................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the three Month
periods ended September 30, 1998 and 1997 ......................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited) ................... 6
Item 2. Plan of Operations ......................................................... 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........................ 14
Item 6. Exhibits and Reports on Form 8-K ........................................... 15
Signature Page ..................................................................... 16
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash .................................................................. 207,693 2,219,145
Accounts receivable, net of allowance of $35,000 ...................... 66,938 254,750
Current portion of capitalized programming costs, net ................. 185,000 191,500
Inventory ............................................................. 60,482 55,624
Prepaid expenses ...................................................... 98,187 59,220
------------ ------------
Total current assets .............................................. 618,300 2,780,239
CAPITALIZED PROGRAMMING COSTS, net ........................................ 756,427 765,962
FURNITURE AND EQUIPMENT, net .............................................. 253,283 203,189
INVESTMENT IN JOINT VENTURE ............................................... -- --
OTHER ..................................................................... 129,919 35,530
------------ ------------
Total Assets .............................................................. $ 1,757,929 $ 3,784,920
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 402,036 $ 323,391
Accrued payroll and benefits .......................................... 115,657 152,322
Accrued professional fees ............................................. 225,537 131,647
Accrued royalty expense ............................................... 335,499 322,630
Other accrued liabilities ............................................. 230,720 114,494
Due to joint venture .................................................. 150,000 224,500
Current portion of capital lease obligation ........................... 15,890 17,029
------------ ------------
Total current liabilities .................................. 1,475,339 1,283,013
CAPITAL LEASE OBLIGATION, net of current portion .......................... 8,833 13,126
------------ ------------
Total liabilities .......................................... 1,484,172 1,296,139
------------ ------------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value: Authorized-25,000,000 shares; issued
and outstanding - 6,137,943 at September 30, 1998 and 5,791,494 at
June 30, 1998 ......................................................... 61,379 57,915
Additional paid-in capital ............................................ 17,702,505 17,050,969
Stock Subscriptions Receivable ........................................ (754,421) --
Prepaid consulting .................................................... (461,250) (461,250)
Deficit ............................................................... (16,274,456) (14,158,853)
------------ ------------
Shareholders' equity ....................................... 273,757 2,488,781
------------ ------------
Total liabilities and shareholders' equity ................. $ 1,757,929 $ 3,784,920
============ ============
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
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THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
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<S> <C> <C>
DOMESTIC SALES ........................................... $ 406,324 $ 28,137
----------- -----------
SALARIES AND CONSULTING EXPENSES ......................... 1,111,283 327,167
GENERAL AND ADMINISTRATIVE EXPENSES ...................... 774,727 213,282
PROGRAMMING EXPENSES ..................................... 390,578 237,638
COST OF VIDEO AND PUBLICATION SALES ...................... 153,403 --
MARKETING EXPENSES ....................................... 139,031 172,529
----------- -----------
Operating Expenses .................................... 2,569,022 950,616
----------- -----------
Loss from operations .................................. (2,162,698) (922,479)
----------- -----------
INTEREST EXPENSE ......................................... 4,116 750,063
INTEREST INCOME .......................................... (51,387) --
----------- -----------
Loss before provision for state income taxes .......... (2,115,427) (1,672,542)
PROVISION FOR STATE INCOME TAXES ......................... 174 --
----------- -----------
NET LOSS ................................................. ($2,115,603) ($1,672,542)
=========== ===========
LOSS PER SHARE INFORMATION:
Basic and diluted loss per share ...................... $ (.36) $ (.56)
----------- -----------
Weighted average number of common and common equivalent
shares outstanding .................................... 5,814,117 2,981,798
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
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THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... (2,115,603) (1,672,542)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of notes payable discount ...................................... -- 471,458
Amortization of deferred financing costs .................................... -- 130,529
Amortization of capitalized programming costs ............................... 138,159 11,850
Depreciation and other amortization ......................................... 26,482 13,492
Provision for deferred compensation ......................................... -- 117,387
Provision for doubtful accounts ............................................. -- 7,000
Interest income from escrow account ......................................... (29,421) --
Changes in assets and liabilities:
Accounts receivable ......................................................... 187,812 (4,491)
Inventory ................................................................... (4,858) --
Prepaid expenses ............................................................ (38,967) 10,567
Other assets ................................................................ (94,389) (22,549)
Capitalized programming costs ............................................... (63,474) --
Accounts payable, accrued payroll and benefits and other
accrued liabilities ....................................................... 161,206 525,678
Accrued royalty expense ..................................................... (45,781) --
Accrued professional fees ................................................... 23,890 145,364
Due to joint venture ........................................................ (74,500) --
Due to shareholders and directors ........................................... -- 23,079
----------- -----------
Net cash used in operating activities ..................................... (1,929,444) (243,178)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, equipment, and software ............................... (76,576) (17,663)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ...................................................... -- 574,990
Payments on capital lease obligation .......................................... (5,432) (4,261)
Deferred offering and financing costs incurred ................................ -- (312,750)
----------- -----------
Net cash (used in) provided by financing activities ......................... (5,432) 257,979
----------- -----------
NET DECREASE IN CASH ............................................................. (2,011,452) (2,862)
CASH, beginning of period ........................................................ 2,219,145 10,883
----------- -----------
CASH, end of period .............................................................. $ 207,693 $ 8,021
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated statements.
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 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.
333-61421) that became effective on November 2, 1998 and the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1998.
Note B - Issuance of Common Stock
On September 24, 1998, and in connection with the 1998 Private Placement, the
shareholders of the Company approved the issuance of 346,449 shares of common
stock (including 13,115 shares of common stock for placement services) and a
three year warrant to purchase 30,000 shares of common stock at $5.50 per share
for gross proceeds of approximately $750,000. Expenses associated with this
offering are approximately $95,000. The shares and warrant were issued on
October 2, 1998, and as of September 30, 1998, a $754,421 subscription
receivable has been recorded within shareholders' equity.
Note C - Acquisition of FMS
On December 10, 1997, Recovery acquired 100 percent of the issued and
outstanding common stock of FMS Productions, Inc. ("FMS"). The unaudited pro
forma results of operations for the three months ended September 30, 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 are as follows:
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 1998 (cont.)
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1997
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Pro forma total revenues ...... $ 377,000
===========
Pro forma net loss ............ $(1,674,000)
===========
Pro forma weighted average
number of common shares ... 3,025,798
===========
Pro forma loss per common share $ (0.55)
===========
</TABLE>
Note D - Loss per Share
Net loss per share is based on the weighted average number of common shares
outstanding and dilutive common stock equivalents during the periods presented.
Options and warrants to purchase 4,477,170 shares of common stock (at prices
ranging from $1.56 to $9.075) and 1,106,067 shares of common stock (at prices
ranging from $0.77 to $5.50 ) were outstanding as of September 30, 1998 and
1997, respectively, and were excluded from the computation of loss per share
assuming dilution as they would have been anti-dilutive.
Note E - Significant Business Risks
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has recurring
losses from operations and has limited operating revenues, that raises
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to operate as a going concern is dependent upon its
ability (1) to obtain sufficient additional capital, (2) to distribute its
programming and services through multimedia channels, (3) to achieve a critical
mass of viewers to attract advertisers and healthcare providers and (4) to
acquire and develop appropriate programming for broadcast. The Company plans to
raise additional working capital through private and public offerings. 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.
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 1998 (cont.)
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.
DEPENDENCE UPON GROUP W NETWORK SERVICES
In May 1998, the Company entered into a five-year contract with Group W Network
Service, a division of CBS Corporation, to provide program origination, master
control operations, up-link and C-Band Satellite transponder services (the
"Transponder Contract"). It is possible that Group W Network Services or Company
affiliates could experience broadcast interruptions and equipment failures,
which could last for a significant period of time. The Transponder Contract will
allow the Company to broadcast 24 hours a day, rather than the 12 hours a day
under the ATN nesting contract (the "Nesting Contract"). The Transponder
Contract, however, does not provide the Company with access to subscribers as
did the Nesting Contract.
Through June 30, 1998, substantially all the households which received broadcast
of The Recovery Network's programming were provided under the terms of the
Nesting Contract. Starting September 1, 1998, the Company is entirely dependent
on its own affiliate marketing efforts to obtain affiliate agreements with cable
operators. Currently, the Company's only significant arrangement is with
Cablevision, which provides the Company with approximately 1.7 million
subscribers in the New York and Boston metropolitan areas. In total, the
Company's programming is available on systems with approximately 2.3 million
subscribers.
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 1998 (cont.)
Note E - New Financial Accounting Pronouncements
The Statement of Financial Accounting Standards No. (SFAS) 130 "Reporting
Comprehensive Income" was adopted as of September 30, 1998. The implementation
of SFAS 130 did not have an impact on the Company's results of operations. There
were no adjustments to net loss to arrive at comprehensive income (loss).
Note F - Subsequent Events
ISSUANCE OF COMMON STOCK
In October 1998, the 1998 Private Placement agreement was amended (the
"Amendment"), whereby an additional 138,890 shares of common stock were issued.
Total shares of common stock issued under the 1998 Private Placement, including
the Amendment shares, were 1,250,000 shares for gross proceeds of $2,500,000 (or
$2.00 per share). Warrants to purchase an additional 400,000 shares of common
stock were also granted at exercise prices ranging from $4.00 to $6.00 per
share. These additional warrants are exercisable until December 2001.
Pursuant to the Amendment, 1998 Private Placement subscribers (the
"Subscribers") agreed not to sell their 1,250,000 shares of common stock until
December 21, 1998 (the "Lock-Up"), during which period the Subscribers have
granted a transferable option to sell 900,000 of such shares at $3.00 per share
(the "Option") to a minority shareholder of the Company. The Subscribers may
elect not to sell up to 450,000 shares of common stock under the Option. If the
Option is exercised, the Lock-Up will be extended until February 16, 1999 for
all unsold shares and Subscriber reset rights will be forfeited. The Lock-Up
will expire if the closing bid price for the Company's common stock is $5.00 or
more for three consecutive trading days.
If the Option is not exercised, the Company will be required to pay liquidated
damages to the Subscribers of up to $150,000. The Company has placed 1 million
shares of common stock into escrow as security for additional shares that may be
required to be issued pursuant to the reset rights.
In October 1998, in connection with various consulting and service agreements,
the Company agreed to issue, in exchange for consulting and other services, a
total of 58,000 shares of Common Stock.
OPTIONS
During October 1998, the Board of Directors granted options to purchase 350,000
and 50,000 shares of common stock at $2.00 and $2.50 per share, respectively.
All shares and options to
9
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 1998 (cont.)
purchase 375,000 shares of common stock were granted for consulting services
rendered or to be rendered. In addition, options to purchase 25,000 shares of
common stock were granted for past Director services to a former Board member.
These options have an exercise price of $2.00 per share. The consulting options
vest immediately and director service options vest over three years.
In November 1998, a total of 52,915 options were granted to Mitchell Sahn, a
Director of the Company since October 1998. 12,915 were granted to Mr. Sahn in
connection with his appointment to the Board of Directors, and 40,000 were
granted to him in connection with his appointment as Vice Chairman of the Board
of Directors and head of the Finance Committee. The first group of options have
an exercise price of $2.25 and vest immediately. The second group have an
exercise price of $2.00 and vest ratably over a six month period.
RECOVERY INTERACTIVE
During October 1998, the Company and TCI agreed to amend the joint venture to
admit FHC Internet Services, L.C. ("FHC") as a member. In connection with the
amendment, the Company agreed to contribute warrants to purchase 295,000 shares
of common stock at $2.125 per share, and 25,000 shares of common stock to RI.
The Company's ownership interest was reduced to 20 percent from 50 percent and
may be reduced another 10 percent if the Company does not satisfy certain
performance guidelines.
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Item 2. PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
condensed financial statements and notes thereto appearing elsewhere herein.
In April 1997, the Company nationally launched The Recovery Network, a cable
television network. Pursuant to a nesting contract (the "Nesting Contract") with
Access Television Network ("ATN"), ATN provided 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 had affiliation agreements. The Nesting Contract, as amended, expired
on August 31, 1998.
On September 1, 1998, The Recovery Network began broadcasting a four hour block
of programming that repeats six times a day to approximately 3,000,000
subscribers. The Company entered into a five year contract with Group W Network
Services, a division of CBS corporation ("Group W"), pursuant to which Group W
is to supply a fully dedicated Digital Satellite Transponder master control and
uplink utilizing Scientific Atlanta's Power Vu equipment (the "Transponder
Contract"). The Transponder Contract affords the Company the potential to
transmit its signal throughout North America 24 hours a day, 7 days a week. The
Company currently has obtained distribution of its programming with Cablevision,
Cox Communications, Telecommunications, Inc. and CableOne (the "Affiliated
Systems").
The Company has also identified and is targeting 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 gaining more viewers. The
Company intends to evolve into a full-time digital cable network, and in turn,
generate the traditional licensing fees from cable operators.
To date, the Company has incurred significant net losses, including net losses
of $1,223,829, $3,817,652 and $8,261,734 for the years ended June 30, 1996, 1997
and 1998, and $2,115,603 for the quarter ended September 30, 1998, respectively.
The Company anticipates that the continuing evolution of the Company's cable
television network, together with its world wide web site on the Internet and
its radio show will enable the Company to achieve greater distribution of both
its programming and the other products and services it offers. In turn, the
Company expects to market and promote its revenue opportunities. The Company
anticipates that it will generate revenues from advertising sales on The
Recovery Network, Recovery Interactive and Recovery Talk Radio, merchandising
recovery-related products and services on The Recovery Network, Recovery
Interactive, Recovery Talk Radio, and through Recovery Direct. The Company also
expects to generate revenues from license fees from cable operators for its
programming as Recovery Network evolves into a full-time digital cable network.
The Company does not expect that it will generate any meaningful revenues from
fees until such time, if ever, that it 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. However, there can be no assurance that Recovery
Interactive will generate meaningful revenues or achieve profitable operations.
Finally, the Company has in the past obtained federal grant moneys of an
aggregate of $63,200 from the Center for Substance Abuse Treatment and the
Center for Substance Abuse Prevention and expects to continue to obtain federal
grant moneys in the future. There can be no assurance, however, that the Company
will be able to obtain federal grant moneys.
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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 and acquiring 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
September 30, 1998, the Company had a working capital deficit of $857,039. Due
to, among other things, the lack of meaningful revenues, costs 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. 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
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 in October 1997 with proceeds
received from its 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 fiscal year ended June
30, 1998 of approximately $750,000 relating to the Private Financing and the
Promissory Notes.
On October 3, 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 June 30, 1998 was approximately $9,540,000 used principally
to repay debt and pay operating expenses.
On June 29, 1998, the Company entered into certain subscription agreements (the
"Agreements") with
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<PAGE> 13
seven investors (collectively, the "Subscribers"). Such Agreements were amended
in October 1998. Pursuant to the Agreements, the Company is entitled to
aggregate proceeds of up to $5,500,000 (the "Private Placement"). The Private
Placement provides for the issuance by the Company of (i) 1,250,000 shares (the
"Shares") of Common Stock for $2,500,000, or $2.00 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 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) 500,000 shares of Common Stock upon the exercise of warrants
(the "Warrants"). The Warrants are exercisable at exercise prices between $4.00
and $6.00 per share.
In October 1998, in connection with various consulting and service agreements,
the Company agreed to issue, in exchange for consulting and other services, a
total of 58,000 shares of Common Stock, options to purchase 400,000 shares of
Common Stock, 50,000 of which are exercisable at $2.50 per share and 350,000 of
which are exercisable at $2.00 per share. The options immediately vest, and have
various registration rights. If fully exercised, the aggregate proceeds from the
exercise of the stock options and warrants would be $825,000. As of November 19,
1998, a total of $316,000 of the options had been exercised.
The Company anticipates that the proceeds received from the sale of the Shares
to the Subscribers in the Private Placement, together with projected revenues
from operations, will be sufficient to fund the Company's operations and capital
requirements until approximately December 14, 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. The Company
has no current arrangements with respect to 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. In addition, the Company's equity is
currently below the $2 million minimum required for the listing of the Company's
shares on the NASDAQ-Small Cap exchange. Unless the Company can demonstrate the
ability to raise the Company's equity to an amount in excess of $2 million, the
Company's shares may be subject to delisting from NASDAQ-Small Cap.
Year 2000 Compliance
The Company is in the process of modifying or replacing software components that
it uses so that such software will properly recognize dates beyond December 31,
1999 ("Year 2000 Compliance"). The cost for such modifications and replacements
is not expected to be material. There can be no guarantee that the systems of
such other companies will be timely converted, or that their conversion will be
compatible with information included in the Company's systems, without a
material adverse effect on the Company's business, financial condition or
results of operations.
Disclosure regarding Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements with respect to the
future performance of the Company that involve risks and uncertainties. Various
factors could cause actual results to differ materially from those projected in
such statements. These factors include, but are not limited to, the Company's
lack of meaningful revenues, its significant and continuing losses, its
significant capital
13
<PAGE> 14
requirements, the uncertainty of its ability to implement its plan of operation
and other factors discussed herein and in the Company's other filings with the
Securities and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 24, 1998, the Company held a Special Meeting of shareholders. At
the Meeting, the shareholders approved the following matter:
Approval of the issuance of additional shares of the Company's Common
Stock pursuant to a subscription agreement dated June 29, 1998 between the
Company and the subscribers referred to in such subscription agreement.
At the meeting, there were 3,134,279 shares present in person or by proxy
eligible to vote on the matter. This represented 52.43% of the 5,977,920 shares
of outstanding common stock. The votes in favor of the matter were 3,069,561
(97.9%) and the votes against were 64,718 (2.1%).
The measure thus was approved.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ONFORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on form 8-K
The Company has not filed any reports on Form 8-K during the quarterly
period ended September 30, 1998.
15
<PAGE> 16
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: November 20, 1998 By: /s/ Gary Horowitz
-----------------------------
Gary Horowitz
President and Chief
Executive Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 207,693
<SECURITIES> 0
<RECEIVABLES> 101,938
<ALLOWANCES> 35,000
<INVENTORY> 60,482
<CURRENT-ASSETS> 618,300
<PP&E> 445,626
<DEPRECIATION> 192,343
<TOTAL-ASSETS> 1,757,929
<CURRENT-LIABILITIES> 1,475,339
<BONDS> 0
0
0
<COMMON> 61,379
<OTHER-SE> 212,378
<TOTAL-LIABILITY-AND-EQUITY> 1,757,929
<SALES> 391,638
<TOTAL-REVENUES> 406,324
<CGS> 153,403
<TOTAL-COSTS> 2,569,022
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,116
<INCOME-PRETAX> (2,115,427)
<INCOME-TAX> 174
<INCOME-CONTINUING> (2,115,603)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,115,603)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
</TABLE>
