<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1999.
REGISTRATION NO. 333-90481
----------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2/A
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RNETHEALTH.COM, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<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>
506 SANTA MONICA BLVD., SUITE 400
SANTA MONICA, CALIFORNIA 90401
(310) 393-3979
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
WILLIAM D. MOSES, PRESIDENT
RNETHEALTH.COM, INC.
506 SANTA MONICA BLVD., SUITE 400
SANTA MONICA, CALIFORNIA 90401
(310) 393-3979
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
BECKMAN, MILLMAN & SANDERS, LLP
116 JOHN STREET
NEW YORK, NEW YORK 10038
TELEPHONE: (212) 406-4700
TELECOPIER: (212) 406-3750
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK PAR VALUE $.01 PER SHARE ....... 1,522,649(1) $0.43(2) $654,739 $189.00
COMMON STOCK PAR VALUE $.01 PER SHARE ....... 900,000(3) $0.25 $225,000 $ 65.00
COMMON STOCK PAR VALUE $.01 PER SHARE ....... 200,000(4) $0.35 $ 70,000 $ 20.00
COMMON STOCK PAR VALUE $.01 PER SHARE ....... 61,591(5) $0.43(2) $ 4,844 $ 2.00
COMMON STOCK PAR VALUE $.01 PER SHARE ....... 1,500,000(6) $0.25 $375,000 $109.00
COMMON STOCK PAR VALUE $.01 PER SHARE ....... 260,333(7) $0.43(2) $111,943 $ 32.00
- ------------------------------------------------------------------------------------------------------------------------
TOTAL REGISTRATION FEE $417.00
PREVIOUSLY PAID $375.00
PAID WITH THIS FILING $ 42.00
========================================================================================================================
</TABLE>
(1) Includes approximate number of shares issued to certain investors pursuant
to the Restructuring Agreement dated September 28, 1999 relating to subscription
agreements entered into by some of the Investors with the Company for investment
by such Investors dated June 29, 1998, as amended by on October 27, 1998 and
pursuant to other subscription agreements dated March 18, 1999 and the
subscription agreement dated June 10, 1999 between the Company and Investors.
(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 October 18, 1999.
(3) Includes approximate number of shares reserved for issuance upon the
exercise of warrants, priced at $0.01 and $0.25 per share (the "Warrants").
(4) Shares underlying warrants issued to placement agents in the June 29, 1999
Private Placement ("Placement Warrants").
(5) Shares of Common Stock issued to certain parties who served as placement
agents in the June 29, 1999 Private Placement ("Placement Shares").
(6) Includes 1,200,000 additional shares issued in consideration of termination
of all outstanding reset rights and 300,000 shares of common stock underlying
warrants.
(7) Includes 33,333 shares of Common Stock issued pursuant to an agreement
entered into between the Company and a consultant and 227,000 shares issued to
consultant in connection with a promissory note.
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> 2
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.
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.
PROSPECTUS
4,444,573 Shares of
RNETHEALTH.COM, INC.
Common Stock
This Prospectus relates to an aggregate of 4,444,573 shares (the "Shares") of
Common Stock, $.01 par value per shares ("Common Stock"), of RnetHealth.com,
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) 1,522,649 shares of Common Stock issued to certain investors (the
"Investors") pursuant to the Restructuring Agreement dated September 28, 1999
(the "Restructuring Agreement") relating to subscription agreements entered into
by some of the Investors with the Company for investment by such Investors in
the securities of the Company dated June 29, 1998, as amended by Amendment No. 1
dated as of October 27, 1998 and pursuant to other subscription agreements dated
March 18, 1999 where certain of the Investors invested in an aggregate $100,000
of principal amount Convertible Notes of the Company and the subscription
agreement dated June 10, 1999 between the Company and Investors (collectively,
the "Subscription Agreements"); (ii) 900,000 shares of Common Stock reserved for
issuance to the Investors upon the exercise of warrants, exercisable at an
exercise price of $0.01 and $0.25 per share (the "Warrants"); (iii) an aggregate
of 61,591 shares of Common Stock issued to certain parties who served as
placement agents (the "Placement Agents") in the June 29, 1999 Private Placement
(as defined herein); (iv) an aggregate of 200,000 shares underlying warrants
issued to certain parties who served as placement agents in the June 29, 1999
Private Placement ("Placement Warrants"); and, (v) 1,200,000 issued to Investors
in consideration of termination of all outstanding reset rights and 300,000
shares of common stock underlying warrants, and (vi) includes 33,333 shares of
Common Stock issued pursuant to an agreement entered into between the Company
and a consultant and 227,000 shares of common stock issued to consultant in
connection with a promissory note. The Company will not receive any proceeds
from the sale of the Shares by the Selling Shareholders, except upon the
exercise of the Warrants under this offering. 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 Common Stock is listed on the Nasdaq Bulletin Board as RNET.OB.
-------------------------
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 5.
-------------------------
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 November 5, 1999
2
<PAGE> 3
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 includes, but is not
limited to, those discussed in "Risk Factors."
THE COMPANY
RnetHealth.com, Inc. (the "Company") is a digital media company
converging digital technologies of the Internet and the cable television network
to deliver behavioral health programming, products and services to a national
audience.
The Company will deliver, via converging multimedia platforms,
market-driven sponsorship, video rich content, and programming providing local,
national and personalized information, diagnostic/therapeutic tools and
community; via an integrated behavior health prevention and wellness package
with unique e-commerce and transactional applications.
The Company's primary market is individuals whose lives are impacted,
either directly or indirectly, by behavioral health issues (e.g., eating
disorders, depression, substance abuse, stress, anxiety, teen and domestic
violence), as well as by the chronic diseases associated with such behavioral
health issues, (including heart disease, hypertension, diabetes, hepatitis and
others). The Company provides action plans for traditional forms of treatment,
and as an adjunct to those traditional forms, clinically based alternative
health solutions.
Presently, the Company is preparing for the launch of its new Internet
site, which will provide a branded, integrated Web-based solution via a public
platform for consumers, as well as a platform for the behavioral healthcare
needs of individuals, employers, insurance companies, managed care
organizations, and health care organizations and providers, universities and
other organized communities. This new Internet site is expected to generate
various e-commerce opportunities and revenue for the Company.
The Company's broadband component, the Recovery Network cable television
programming service, is distributed nationally via a satellite agreement with
Group W Satellite Services, a division of CBS. The Recovery Network is currently
available in approximately Five million (5,000,000) cable television households
through agreements with multiple-system operators (MSOs), individual cable
systems, and government and educational institutions. Notable MSOs include:
Cablevision Systems, Telecommunications, Inc. (now an AT&T company), Time
Warner, Inc., Cox Communications, Cable One, Century Communications,
FrontierVisions, Knology and NCTC. The Recovery Television Network drives
traffic to the Company's web site, thereby enhancing the scope of web-based
community and providing subscription and e-commerce revenue generation
opportunities.
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED BY THE SELLING
SHAREHOLDER............................. 4,444,573 shares(a)
COMMON STOCK OUTSTANDING BEFORE
AND AFTER THE OFFERING HEREBY........... 18,063,799 shares(b)
NASDAQ SYMBOL............................. RNET.OB
</TABLE>
- -------------------------
(a) Includes: (i) 1,522,649 shares of Common Stock issued to certain investors
(the "Investors") pursuant to the Restructuring Agreement dated September 28,
1999 (the "Restructuring Agreement") relating to subscription agreements entered
into by some of the Investors with the Company for investment by such Investors
in the securities of the Company dated June 29, 1998, as amended on October 27,
1998 and pursuant to other subscription agreements dated March 18, 1999 where
certain of the Investors invested in an aggregate $100,000 of principal amount
Convertible Notes of the Company and the subscription agreement dated June 10,
1999 between the Company and Investors (collectively, the "Subscription
Agreements"); (ii) 900,000 shares of Common Stock reserved for issuance to the
Investors upon the exercise of warrants, exercisable at an exercise price of
$0.01 and $0.25 per share (the "Warrants"); (iii) an aggregate of 61,591 shares
of Common Stock issued to certain parties who served as placement agents (the
"Placement Agents") in the June 29, 1999 Private Placement (as defined herein);
(iv) an aggregate of 200,000 shares underlying warrants issued to certain
parties who served as placement agents in the June 29, 1999 Private Placement
("Placement Warrants");
3
<PAGE> 4
and, (v) 1,200,000 issued to Investors in consideration of termination of all
outstanding reset rights and 300,000 shares of common stock reserves for
issuance upon the exercise of warrants, and (vi) includes 33,333 shares of
Common Stock issued pursuant to an agreement entered into between the Company
and a consultant and 227,000 shares issued to consultant in connection with a
promissory note.
(b) Represents shares of Common Stock outstanding as of October 18, 1999. Does
not include: (i) 1,733,975 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) 500,000 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) 157,096 shares 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.
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>
Fiscal year Ended June 30,
--------------------------------
1998 1999
---- ----
<S> <C> <C>
Net loss $(8,261,734) $(8,141,287)
Basic and diluted loss per share $(1.91) $(0.96)
Weighted average number of
shares outstanding 4,336,405 8,514,557
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
At June 30, 1999
---------------------------
Actual Pro Forma(a)
------ -------------
(unaudited)
<S> <C> <C>
Working capital $(1,263,901) $ 583,886
Total assets $ 1,268,379 $ 1,542,379
Total liabilities $ 1,880,396 $ 1,474,381
Shareholders' (deficit) equity $ (612,017) $ 67,998
</TABLE>
- ---------
(a) Gives effect to the exercise of 1,400,000 shares of Common Stock by the
Warrant holders under this offering for net proceeds of approximately $274,000.
Does not give effect to any additional shares of Common Stock that may be
issuable pursuant to the exercise of any other outstanding options or warrants.
Also gives effect to the conversion of $406,015 of notes payable (net of
unamortized debt discount) at June 30, 1999 into 2,506,400 shares of common
stock pursuant to the October 13, 1999 Debt Restructuring.
4
<PAGE> 5
RISK FACTORS
Before you invest in the Company's common stock, you should be aware
that there are various risks, including those described below. You should
carefully consider these risk factors, together with all the other information
included or incorporated by reference in this prospectus, before you decide
whether to purchase shares of our common stock.
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.
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 Recovery Direct, Inc. (formerly FMS) in December 1997. Since its
inception, the Company has been primarily engaged in test broadcasting of
recovery television 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 for the fiscal year 1999 which were
$8,141,287 or $0.96 per share as compared to net losses of $8,261,734 or $1.91
per share in fiscal year 1998. The Company expects to incur substantial up-front
capital expenditures and operating costs in connection with the operation and
expansion of its business (including the Internet operations), 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" 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 its cash flow from operations and
financing activities. The Company's operating expenses for the fiscal year 1999
were $9,250,551, which was 9% higher than operating expenses of $8,524,380 for
the fiscal year 1998. 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, 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 Market and has been delisted. Unless the Company can demonstrate the
ability to raise the Company's equity to an amount in excess of $2 million, and
present a plan that will satisfy NASDAQ's other standards regarding
profitability and stock price stability maintaining minimum bid price over
$1.00, the Company's shares may not be registered on the NASDAQ Small Cap
Market.
NEW CONCEPT; UNCERTAINTY OF MARKET ACCEPTANCE OF RNETHEALTH.COM BY INTERNET
USERS, SUBSCRIBERS AND ADVERTISERS; 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 Rnethealth.com, its ability to successfully operate under the
Transponder Contract, develop or acquire sufficient television programming to
enable the Company 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 Recovery television and recovery
and prevention-related products and services. There can be no assurance that the
Company will be
5
<PAGE> 6
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. Rnethealth.com and the Company's recovery
and prevention-related products and services via the Internet involves a new
business concept. As is typical in the case of a new concept, demand and market
acceptance of Rnethealth.com and recovery and prevention-related products and
services are subject to a high level of uncertainty. To-date, the Company has
not conducted any independent market, concept feasibility studies or any
additional market testing activities, although it plans to. The Company's
prospects will be significantly affected by the success of its strategic efforts
to align the business with healthcare institutes and healthcare providers, the
acceptance of its Internet content by potential users and subscribers and its
ability to attract advertisers. Achieving market acceptance for Rnethealth.com
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 Internet users, advertisers and other host that potentially will
utilize Rnethealth.com.
UNCERTAINTY OF CONTENT DEVELOPMENT AND CONTENT ACQUISITION. The Company will be
required to commit considerable time, effort, and resources to development and
acquire an expansive library of content, beyond the programming it already
posses. The Company's development and production efforts are subject to all of
the risks inherent in the development and acquiring of new content, including
unexpected delays, expenses, technical problems and difficulties, as well as the
possible insufficiency of funds to complete satisfactory development and
acquisitions, which could result in abandonment or substantial change in
content. There can be no assurance that the Company's development and
acquisition 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 development.
BROADCAST INTERRUPTIONS AND EQUIPMENT FAILURES. The Company is dependent upon
the Transponder Contract to provide the necessary services to enable
Rnethealth.com 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 Rnethealth.com'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.
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. Net sales of $1,533,922 for the fiscal year 1999 were
71% higher than the net sales of $894,758 for the fiscal year 1998. The increase
is primarily attributable to the acquisition of Recovery Direct, Inc., the
Company's wholly owned merchandise and distribution subsidiary in December 1997;
as a result, the revenues for fiscal year 1998 include only six months' of
revenues from the subsidiary as compared to 12 months' revenues in fiscal year
1999. 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 Rnethealth.com 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.
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 Company may not be able to enter into a
sufficient number of affiliation agreements or other arrangements for the
carriage of Rnethealth.com, which would have a material adverse effect on the
Company.
6
<PAGE> 7
COMPETITION. Rnethealth.com competes with all other existing and planned
television networks and other television programming for available airtime,
channel capacity, advertiser revenue and revenue from license fees. Many of
these television networks and producers of television programming are well
established, have reputations for success in the development and operation of
television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than the
Company. In addition, if cable television channel capacity increases as the
Company expects, competition from smaller competitors and other start-up
television networks could increase significantly. Although the Company is not
aware of any television network with programming focusing principally on
Recovery Issues and Prevention Issues, there are an increasing number of
recently introduced or planned cable networks which focus on overall life-style,
self-improvement and health themes and there are numerous programs which address
Recovery Issues and Prevention Issues. Moreover, because Rnethealth.com's
programming is intended to provide information and support to persons facing
Recovery Issues and Prevention Issues, Rnethealth.com 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 airtime, 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
its trademarks. The Company uses the "Recovery Network" a registered trademark
in connection with its programming. The Company believes that its trademarks and
copyrights, including "The Recovery Network" trade name and the signature look
of the network, have significant value and are important to the marketing and
promotion of Rnethealth.com 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 49% 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.
DEPENDENCE ON KEY PERSONNEL; NEED FOR QUALIFIED PERSONNEL. The Company is highly
dependent on its executive officers and senior management, and it will likely
depend on the senior management of any significant business which the Company
will embark upon in the future. The loss of the services of any of our current
executive officers or key employees or any member of senior management of any
acquired business could have a material adverse effect on out business, results
of operations and financial condition.
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<PAGE> 8
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.
RISK OF LOW-PRICED STOCKS. Rules 15g-1 through 15g-9 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act") impose sales practice and
disclosure requirements on certain brokers and dealers who engage in certain
transactions involving "a penny stock." Currently the Company's Common Stock is
considered a penny stock for purposes of the Exchange Act. The additional sales
practice and disclosure requirements imposed on certain brokers and dealers
could impede the sale of the Company's Common Stock in the secondary market. In
addition, the market liquidity for the Company's securities may be severely
adversely affected, with concomitant adverse effects on the price of the
Company's securities. Under the penny stock regulations, a broker or dealer
selling penny stock to anyone other than an established customer or "accredited
investor" (generally, an individual with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with his or her spouse)
must make a special suitability determination for the purchaser and must receive
the purchaser's written consent to the transaction prior to sale, unless the
broker or dealer or the transaction is otherwise exempt. In addition, the penny
stock regulations require the broker or dealer to deliver, prior to any
transaction involving a penny stock, a disclosure schedule prepared by the
Securities and Exchange Commission ("SEC") relating to the penny stock market,
unless the broker or dealer or the transaction is otherwise exempt. A broker or
dealer is also required to disclose commissions payable to the broker or dealer
and the registered representative and current quotation for the securities. In
addition, a broker or dealer is required to send monthly statements disclosing
recent price information with respect to the penny stock held in a customer's
account and information with respect to the limited market in penny stocks.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by
the Selling Shareholders. However, upon the exercise of the warrants under this
offering, the Company may receive approximately $274,000. Further, on October
13, 1999, the Company finalized a debt restructuring and infusion of additional
capital with certain noteholders and shareholders, resulting in the following:
(1) conversion of all existing debt and accrued interest to equity (estimated at
approximately $756,000) at $0.25 per share; (2) commitment to receive an equity
infusion from key internal shareholders totaling up to $600,000 at $0.25 per
share; and (3) a 45-day option to noteholders to acquire additional equity at
$0.25 per share up to $756,000. This transaction will bring up to $1.3 million
in cash proceeds to the Company. The Company will use these proceeds and any
proceeds from the exercise of the warrants for operating expenses. The Company
projects that such additional cash will be sufficient to fund the Company's
operations and capital requirements until April 2000. 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 not paid dividend on its common stock and does not
anticipate paying dividends in the foreseeable future. The Company intends to
retain future earnings, if any, to finance the expansion of our operations and
for general corporate purposes. 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.
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
8
<PAGE> 9
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
On March 23, 1999, Michele LeBlanc filed a lawsuit against the Company
in United States District Court for the Central District of California, Western
Division. The complaint lists 10 separate counts including wrongful termination
and violation of Federal securities laws. Generally, the plaintiff seeks
unspecified compensatory damages, attorneys' fees and costs.
The Company believes that Ms. LeBlanc's claims are completely without
merit and intends to seek summary judgment as to all claims contained in Ms.
LeBlanc's complaint.
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<PAGE> 10
CAPITALIZATION
The following table sets forth (i) short-term debt and total
capitalization of the Company as of June 30, 1999, and (ii) the pro forma
capitalization at such date after giving retroactive effect to the exercise of
1,400,000 warrants by the warrant holders under this offering for shares of
Common Stock for total proceeds of $274,000 and to the conversion of $406,015
of notes payable into 2,506,400 shares of common stock.
Capitalization table
<TABLE>
<CAPTION>
ACTUAL PROFORMA
------ --------
<S> <C> <C>
Short-term debt, including current portion of capital
lease Obligation......................................... $ 500,832 $ 94,817
Shareholders' (deficit) equity:
Common Stock, $0.01 par value: 25,000,000 shares
authorized, 15,494,507 shares issued and outstanding
pro forma shares issued and outstanding.................. 154,945 194,009
Additional paid in capital............................... 21,813,509 22,454,460
Pre-paid consulting cost................................. (230,331) (230,331)
Common stock subscription receivable..................... (50,000) (50,000)
Deficit.................................................. (22,300,140) (22,300,140)
----------- -----------
Total shareholders' (deficit) equity............. (612,017) 67,998
---------- -----------
Total capitalization............................. (612,017) (67,998)
========== ===========
</TABLE>
(a) Gives effect to the exercise of 1,400,000 shares of Common Stock by
the Warrant holders under this offering for net proceeds of approximately
$274,000. Does not give effect to any additional shares of Common Stock that may
be issuable pursuant to the exercise of any other outstanding options or
warrants. Also gives effect to the conversion of $406,015 of notes payable (net
of unamortized debt discount) at June 30, 1999 into 2,506,400 shares of common
stock pursuant to the October 13, 1999 Debt Restructuring.
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<PAGE> 11
PRICE RANGE OF COMMON STOCK
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"). Beginning 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. On April 21, 1999, the
Company's stock was delisted and immediately began trading on bulletin board.
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 July 1, 1998 to April 21, 1999, and on the bulletin
board from April 22, 1999 through September 30, 1999. The quotations represent
inter-dealer quotations without adjustment for retail mark-ups, markdowns 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, 1998 $ 2.63 $ 1.63 $0.625 $0.125 N/A N/A
Quarter Ended December 31, 1998 $ 1.50 $ 0.312 N/A N/A N/A N/A
Quarter Ended March 31, 1999 $ 0.875 $ 0.375 N/A N/A N/A N/A
Quarter Ended June 30, 1999 $ 0.49 $ 0.29 N/A N/A N/A N/A
Quarter Ended September 30, 1999 $0.2969 $0.2656 N/A N/A N/A N/A
</TABLE>
As of the October 18, 1999, the Company had outstanding 18,063,799
shares of Common Stock owned by approximately 128 holders of record, and
2,413,900 Redeemable Warrants owned by approximately 5 holders of record.
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<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1999
Net sales of $1,533,922 for the fiscal year 1999 were 71% higher than
the net sales of $894,758 for the fiscal year 1998. The increase is primarily
attributable the acquisition of FMS in December 1997; as a result, the revenues
for fiscal year 1998 include only six months' of revenues from the subsidiary as
compared to 12 months' revenues in fiscal year 1999.
Operating expenses of $9,250,551 for fiscal year 1999 were 9% higher
than the operating expenses of $8,524,380 for the fiscal year 1998. The increase
is primarily attributed to $2,674,453 of non-cash expenses for employees and
consultants related to stock issuances in 1999, offset by a decrease of
$1,599,150 in the loss on investment in joint venture related to the sale of
this investment in fiscal year 1999.
Interest expense of $489,552 for fiscal year 1999 was 37% lower than the
interest expense of $775,611 in fiscal year 1998. The decrease is primarily
attributed the reduction in average debt balances from fiscal year 1998 to
fiscal year 1999.
As a result of the above factors, net losses for the fiscal year 1999
were $8,141,287 or $0.96 per share as compared to net loss of $8,261,734 or
$1.91 per share in fiscal year 1998.
FINANCIAL POSITION
Total assets decreased from $3,784,920 at June 30, 1998 to $1,268,379 at
June 30, 1999. The decrease is primarily attributed to a reduction in cash of
$2,083,087 and in capitalized programming costs of $437,814. Cash decreases are
primarily due to the net loss, offset by cash infusions, as explained in more
detail below. Capitalized programming costs decreased due to amortization of
existing costs in excess of new costs incurred during the fiscal year 1999.
Total liabilities increased from $1,296,139 at June 30, 1998 to
$1,880,396 at June 30, 1999. The increase in primarily attributed to short-term
notes payable of $481,015, which are explained in more detail below.
Shareholders' equity (deficit) decreased from $2,488,781 at June 30,
1998 to $(612,017) at June 30, 1999. The decrease is primarily attributed to the
net loss of $8,141,287 in fiscal year 1999, offset by new issuances of stock,
warrants, and options to investors, employees and consultants.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements in the next twelve months
will be to fund the costs of developing its Internet operations and to fund its
affiliate marketing efforts, 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 continue to exceed its cash flow from
operations. At June 30, 1999, the Company had a working capital deficit of
$1,263,901. Due to (among other things) the lack of meaningful revenues and
costs associated with program development and affiliate marketing efforts, the
Company has been substantially dependent upon various debt and equity private
placements and its initial public offering to fund its operations.
In fiscal 1999, the Company has obtained its liquidity from the
following sources: (i) exercise by option and warrant holders of their options
and warrants totaling 1,916,999 shares for $696,500; (ii) cash received from
June 1998 private placement of $566,536 (after offering costs); (iii) cash
received from June 1999 offering of $325,000 (after offering costs); (iv)
settled accounts payable for stock, plus issued stock for services, freeing up
cash for other purposes totaling $2,674,453; (v) borrowed money from
shareholders, totaling $825,000; and, (vi) cash received of $850,000 from the
sale of the Company's interest in its joint venture.
After fiscal 1999, the Company has obtained liquidity from the following
sources: (i) borrowing from shareholders, totaling $225,000; and, (ii) cash
received from stock subscription, totaling $50,000.
On October 13, 1999, the Company finalized a debt restructuring and
infusion of additional capital with the noteholders and certain shareholders,
resulting in the following: (1) conversion of all existing debt and accrued
interest to equity (estimated at approximately $756,000) at $0.25 per share; (2)
commitment to receive an equity infusion from key internal shareholders totaling
up
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<PAGE> 13
to $600,000 at $0.25 per share; and (3) a 45-day option to noteholders to
acquire additional equity at $0.25 per share up to $756,000. This transaction
will bring up to $1.3 million in cash and an increase to equity of up to $2.1
million. The Company projects that such additional cash will be sufficient to
fund the Company's operations and capital requirements until April 2000. In
addition, the increase in equity will assist the Company in its efforts to
become re-listed on the NASDAQ Small Cap Market (see below). There are no
assurances that the Company will receive all the funds as contemplated in the
agreements or that such funds, if received, will not be expended prior to the
Company's projections 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
substantial 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. An 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 Market and has been delisted. Unless the Company can
demonstrate the ability to raise the Company's equity to an amount in excess of
$2 million, and present a plan that will satisfy NASDAQ's other standards
regarding profitability and stock price stability maintaining minimum bid price
over $1.00, the Company's shares may not be registered on the NASDAQ Small Cap
Market.
Continued delisting from NASDAQ SmallCap hurts the marketability of the
Company's stock, and by extension, the market price of the Company's stock,
which would further hinder the Company's ability to raise additional capital.
The Company's independent public accountants have included a explanatory
paragraph in their report on the Company's June 30, 1999 Financial Statements,
stating that certain factors raise substantial doubt about the Company's ability
to continue as a going concern.
YEAR 2000 COMPLIANCE
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and date
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from the dates in the "1900's". These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that makes us of the date field.
STATE OF READINESS AND COST TO ADDRESS THE YEAR 2000 ISSUE
The Company's primary focus has been on its own internal systems. To
date, the Company is in the process of modifying or replacing software
components that it uses. The Company is also communicating with suppliers,
distributors, financial institutions and others with which it does business to
evaluate their Year 2000 compliance plans and state of readiness and to
determine the extent to which the Company will be affected by the failure of
others to remediate their own Year 2000 issues. There can be no assurance that
the systems of other companies on which the Company's systems rely will also be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems. Failure to complete the
system conversion in a timely manner could negatively impact the Company's
business, financial condition and results of operations. The cost for such
modifications and replacements is not expected to be material.
CONTINGENCY PLAN
Because the Company's Year 2000 conversion is expected to be completed
prior to any potential disruption to the Company's business, the Company has not
yet completed the development of a comprehensive Year 2000 specific contingency
plan. If the Company determines that its business or a portion thereof is at a
material risk of disrupting due to the Year 2000 issue, the Company will work to
enhance its contingency plan.
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<PAGE> 14
BUSINESS
GENERAL
RnetHealth.com, Inc. (the "Company") is a digital media company
converging digital technologies of the Internet and the cable television network
to deliver behavioral health programming, products and services to a national
audience.
The Company will deliver, via converging multimedia platforms,
market-driven sponsorship, video rich content, and programming providing local,
national and personalized information, diagnostic/therapeutic tools and
community; via an integrated behavior health prevention and wellness package
with unique e-commerce and transactional applications.
The Company's primary market is individuals whose lives are impacted,
either directly or indirectly, by behavioral health issues (e.g., eating
disorders, depression, substance abuse, stress, anxiety, teen and domestic
violence) as well as by the chronic diseases associated with such behavioral
health issues, (including heart disease, hypertension, diabetes, hepatitis and
others). The Company provides action plans for traditional forms of treatment,
and as an adjunct to those traditional forms, clinically based alternative
health solutions.
Presently, the Company is preparing for the launch of its new Internet
site, which will provide branded, integrated Web-based solution via a public
platform for consumers, as well as a platform for the behavioral healthcare
needs of individuals, employers, insurance companies, managed care
organizations, and health care organizations and providers, universities and
other organized communities. This new Internet site is expected to generate
various e-commerce opportunities and revenue for the Company.
The Company's broadband component, the Recovery Network cable television
programming service, is distributed nationally via a satellite agreement with
Group W Satellite Services, a division of CBS. Recovery Network Television (RNET
TV) is currently available in approximately Five million (5,000,000) cable
television households through agreements with multiple-system operators (MSOs),
individual cable systems, and government and educational institutions. Notable
MSOs include: Cablevision Systems, Telecommunications, Inc. (now an AT&T
company), Time Warner, Inc., Cox Communications, Cable One, Century
Communications, FrontierVisions, Knology and NCTC. The Recovery Television
Network drives traffic to the Company's web site, thereby enhancing the scope of
web-based community and providing subscription and e-commerce revenue generation
opportunities.
THE CABLE TELEVISION NETWORK
To date, Rnethealth.com's cable television programming service, Recovery
Network Television (RNET TV), has successfully secured approximately 5 million
homes for analog distribution of its 4 hour per day programming block without
paying any launch fees. The Company has distribution with Cablevision Systems,
Telecommunications Inc., Cox Communications, Cable One, Century, FrontierVision,
Knology, NCTC, and Time Warner. RNET TV's focus is on reality-based programming
and production , which is both informational and process-oriented, providing a
daily connection and support in the privacy of one's own home. 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", discussed below) 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.
RNET TV will serve to market and drive traffic to RnetHealth.com, the
Company's website, where therein lie the Company's e-commerce revenue
opportunities through sales of books, tapes, herbs and vitamins, tele-counseling
services, and other behavioral health programming, services and products ideally
suited to its target audience. The Company's cable television network provides a
point of differentiation and competitive advantage for the RnetHealth.com
commercial product. The cable television network brands the interactive business
to television viewers and promotes the RnetHealth.com URL during all network
identifications. The television network provides grass roots marketing for the
interactive business to many powerful and influential community and civic
organizations. Traditionally it has been difficult to garner support from these
organizations (e.g. CADCA and National Guard). Yet, the Company has already
secured governmental support for a national branding and marketing initiative
called 24 STRAIGHT, a day of Prevention and Recovery sponsored by SAMHSA and
CSAT.
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 allowed the Company to
broadcast 24 hours a day. On September 1, 1998, the
14
<PAGE> 15
Company began broadcasting a 4-hour block of programming that it repeated 6
times a day to 16 cable systems with approximately 3,000,000 subscribers. The
Company's programming schedule allowed cable operators the flexibility to
receive the Company's signal transmission at any time. In April 1999, the
Company and Group W amended the terms and conditions of their satellite services
agreement, thereby reducing the Company's monthly fees by 50%. The Transponder
Contract, however, does not provide the Company with access to subscribers as
did the Company's previous nesting contract. Therefore, in addition to its
current distribution, the Company is seeking 4 hours of broadcast time per day
in local cable systems in a large number of markets.
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 RNET TV's programming offers local
cable systems an opportunity to demonstrate their commitment to localism, which
provides cable operators a competitive advantage over other multi-channel
programming services. The Company's commitment to programming focusing on social
and behavioral health issues has helped to establish significant community
support for its programming. In addition, the formation by the Company of The
National Partnership for Recovery and Prevention (the "Partnership"), an
umbrella coalition of national recovery and prevention organizations, has helped
to establish Rnethealth.com's credibility and social significance. Based on such
successes, the Company believes that its ability to enter into affiliation
agreements has significantly improved. 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 RNET TV's
programming will help it obtain that support.
The Company believes that many cable systems are aware of the potential
benefits to them from airing RNET TV's programming. Such benefits include a
demonstration of the cable 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, however, the cost of
committing a dedicated, full time channel to RNET TV in order to receive those
benefits could be too high for some cable systems. Therefore, the Company is
asking cable systems to carry RNET TV for only 4 hours per day. Many cable
systems, including 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 RNET TV. 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.
As demand increases, the Company expects to enter into additional
affiliation agreements with new cable systems. As digital channel capacity
increases, the Company believes it will be able to expand into a full time
digital network with associated license fees from cable operators. With its
programming now airing on a number of cable systems, the Company can concentrate
on generating e-commerce and advertising sales revenue through both the
television network and Internet business. The Company can also promote product
sales through Recovery Direct through the aforementioned media. 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 digital network. There also can be no assurance that the
Company will be able to generate significant advertising or product sales.
The Company has secured distribution agreements with two MSOs, National
Cable Television Cooperative, Inc. ("NCTC") and Satellite Services, Inc.
("SSI"). The agreement with NCTC was entered into on May 18, 1998 (the "NCTC
Agreement"). NCTC represents over 8 million cable households comprising over
1,200 cable systems. Pursuant to the terms of the NCTC Agreement, the Company
has granted to NCTC the non-exclusive right to distribute the Company's
programming to its affiliate systems. The Company does not receive a license fee
for its programming. The NCTC Agreement has a term of five years.
The agreement with SSI was finalized on October 5, 1998 (the "SSI
Agreement", and collectively with the NCTC Agreement, the "MSO Agreements").
Pursuant to the terms of the SSI Agreement, the Company has granted to SSI the
non-exclusive right to distribute the Company's programming to systems owned by
Telecommunications, Inc. and partner systems. The SSI Agreement is effective for
an initial term of seven years and may be renewed for successive five-year
periods. The Company does not receive a license fee for its programming during
the initial term, but is entitled to negotiate for fees during any renewal
terms.
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In addition to the foregoing, the Company has successfully negotiated
agreements with the following MSOs: Cablevision, Time Warner Cable, Bresnan,
Insight, Charter and Cable One. Although the Company has not signed a written
agreement with all of these MSOs, the Company's programming is currently carried
in approximately 1,600,000 households served by Cablevision. Since October 1998,
additional launches include Jones Intercable in Independence, Missouri; Knology
in Alabama, Florida and Georgia; Marcus Cable in Fort Worth, Texas; Time Warner
in El Paso, Texas, Jackson, Mississippi, and Indianapolis, Indiana;
Frontiervision; Comcast in Indianapolis, Indiana; Cable One in Modesto,
California; Tele-Communications, Inc. in Newark, California; Access TV in Carson
City, Nevada.
In 1999, the Network also launched on Denver Community Television (DCTV)
to approximately 112,000 cable households, and on Los Angeles City-controlled
Educational Access Cable Channel 36 to 600,000 homes.
The MSO Agreements represent terms, which have been agreed to between
the Company and the respective MSO. By reaching agreement with the MSOs, the
Company is now free to approach the affiliated local systems of NCTC and SSI
regarding the airing of its programming. Neither the MSOs nor the affiliated
local systems are required, pursuant to the MSO Agreements, to provide the
Company with any subscribers. The Company is initially seeking to enter into
short-term affiliation agreements with local cable systems with a term of one
year that provide for four hours of airing per day, with no license fees paid to
the Company, and have a 30-day termination clause. The agreements would 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.
CONTENT AND MARKETING RELATIONSHIPS
Over the course of developing programming for RNET TV, the Company has
cultivated relationships with individuals and with organizations, which will
continue to play strategic roles in the further development of both the
television network and the Internet business. These include contributions in the
areas of content review and provision, service distribution and deployment,
market analysis, and community development.
Key elements of these relationships include:
The UNIVERSITY OF FLORIDA provides an academic affiliation for clinical
validation of information and programs. Under a grant for "alternative and
behavioral health Internet information", a wide range of contributions are
provided to the Company. Included is development of content, of electronic
models for delivering services, and of continuing professional on-line
education. Additionally, as an initial site for the company's Student Assistance
Program (SAP), University of Florida students will receive an alternative and
behavioral health care model, which is Internet based.
The NATIONAL PARTNERSHIP FOR RECOVERY AND PREVENTION (NPRP) consists of
more than 50 national recovery and prevention organizations representing over 40
million constituents. Providing information, advice, and communications, both to
and from, the organization's membership leverages established organizational
structures to further the goals of the organization and to promote the
distribution of the Company's media outlets.
THE BOARD OF ADVISORS provides professional and expert input to the
Company concerning editorial and content issues, current practices in clinical
environments, social and cultural viewpoints, and research perspectives. The
composition of the board includes highly respected individuals in the areas
associated with the Company's content.
Public/Private partnerships with government organizations such as the
NATIONAL CLEARINGHOUSE FOR ALCOHOL AND DRUG INFORMATION provide additional
resources in support of providing services under the RnetHealth.com banner.
Telephone information referral services, cross-site promotion links, and media
library services add to the reach and value of Rnethealth.com. The
community-based COPE program jointly developed with the "COMMUNITY ANTI-DRUG
COALITIONS OF AMERICA" extends the direct reach of the Company's media to the
local level. Examples of successful national programs include the "24 Straight"
initiative which was jointly developed by SAMHSA, THE NATIONAL GUARD, and
RnetHealth.com This program focused schools and local communities on issues of
substance abuse. Another example is the "Recovery Month" project, which targets
workplace issues of substance abuse in twenty cities. This year's conference is
"Addiction Treatment: Investing in People for Business Success" and is a
coproduction of the federal government's CENTER FOR SUBSTANCE ABUSE TREATMENT
(CSAT) , THE COMMUNITY ANTI-DRUG COALITIONS OF AMERICA (CADCA) and
RnetHealth.com.
RNET TV holds one of the largest libraries of behavioral health
programming in the world. Original productions by the Company and its Recovery
Direct subsidiary, and license agreements provide a resource for broadcast
operations. All electronic rights, including Internet distribution, are reserved
for original productions. Programs include celebrity talent such as Whoopi
Goldberg, Whitney Houston, Tom Selleck and John Bradshaw.
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THE INTERNET
The RnetHealth.com Web site, (URL www.rnethealth.com), will be designed
for both businesses and individual consumers. RnetHealth.com's web destination
will consist of two distinct Web sites -- a business-to-business site and a
public site directed to individuals via the Internet. The business-to-business
site will be supported by mass subscriptions through Employee Assistance
Programs ("EAP") suppliers whom serve employers, health plans, and various
government, university and other payers on a per month, per user basis. The
public site will emphasize community, chat forums, information and interaction
and is supported principally by ad revenue and e-commerce transactions.
RnetHealth.com will offer online services offering state-of-the-art
assessment tools, expert information sessions, and an extensive clinically
oriented library of information and treatment options.
BUSINESS-TO-BUSINESS. RnetHealth.com will be the single point of access
to electronic data interchange services, enhanced communications services, and
branded content and other Web-based offerings. For managed care companies,
insurance companies and employers, RnetHealth.com will augment current EAPs by
integrating multiple administrative, communications and research functions into
a single, easy to use Web-based solution.
The commercial site will be tailored to health plans and employers to
augment current EAPs. The site will be supported by mass subscriptions through
EAP suppliers who serve employers, health plans, and various government,
university and other payers on a per month, per user basis.
Increasing concern over the rising cost of healthcare in the United
States has caused a shift from fee-for-service reimbursement to managed care
forms of reimbursement such as capitation and fixed fees. These changes have led
many of the current EAPs in the United States to seek ways to improve
efficiency.
Many EAPs are intensive users of administrative, communications and
information services. The Company believes that a significant opportunity exists
for the EAPs to use the Internet to achieve measurable cost savings and improve
the quality of mental and behavioral health care.
Health and medical information is one of the fastest growing areas of
interest on the Internet. According to Media Metrix, an independent Web research
company, health care related content was the second most popular subject of
Web-based information retrieval searches in 1997. According to Cyber Dialogue,
an independent research company, approximately 70% of the persons searching for
health and medical information on the Internet believe the Internet empowers
them by providing them with information. Cyber Dialogue also indicates that
during the 12-month period ended July 1998, approximately 17 million adults in
the United States searched online for health and medical information, and
approximately 50% of these individuals made off-line purchases after seeking
information online.
Furthermore, Cyber Dialogue estimates that the number of adults in the
United States searching for online health and medical information will grow to
approximately 30 million in the year 2000, and they will spend approximately
$150 billion for all types of health-related products and services off-line.
An independent research company, Jupiter Communications, estimates that
expenditures for online health and medical advertising will grow to
approximately $265 million by 2002. The Company believes that RnetHealth.com
will have a significant opportunity to capitalize on multiple revenue
opportunities, including recurring subscription, advertising and sponsorship
revenue.
Key elements of RnetHealth.com's strategy will include being first to
market with an integrated solution for the administrative, communications and
information needs for EAPs, building recognition of our brand, leveraging our
strategic relationships and the sales forces of our strategic distribution
partners, enhancing RnetHealth.com offerings, engaging in complementary
acquisitions of technologies, products and services and capitalizing on multiple
revenue opportunities. RnetHealth.com believes that it has a competitive
advantage due to its strategic relationships and integrated Web-based solution.
RnetHealth.com plans on engaging in a marketing and advertising campaign to
increase awareness of the RnetHealth.com brand among EAPs and the public, as
well as entering into strategic relationships with behavioral, healthcare
providers and online market leaders to assist in rapidly distributing and
building RnetHealth.com's brand awareness.
RnetHealth.com also plans on providing access to premium behavioral and
healthcare content via relationships with various content providers. The Company
intends to introduce additional content and enhanced services, through strategic
relationships with other healthcare content providers.
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RnetHealth.com plans on becoming the leading national brand on the
Internet and corporate Intranets delivering the online provision of objective
information and high integrity resources for those in need help with work or
life related issues. RnetHealth.com will take advantage of the latest
developments in convergent technologies where the Internet and broadband
television provide access to online services. Recovery Network is the only
television network devoted to behavioral health programming. RnetHealth.com
features unique strengths with its partners including: a University affiliation
with the Brain Institute at the University of Florida; a recognized leader in
the Behavioral Health Industry in its Medical Director, Dr. Mark Gold; and a
pending relationship with the largest managed behavioral care company in the
country. Services will include an Internet/ Intranet site that augments
behavioral health benefit plans, which could be integrated into national health
plans as a gateway between medical benefits and behavioral health benefits. This
electronic Behavioral Health Benefit Plan will be supported by capitated monthly
subscriptions through behavioral health benefit providers who serve employers,
health plans and various government, university and other third party payers.
RnetHealth.com will provide Internet accessibility to a robust and
compelling database of information, educational materials and provider
resources, integrated as a supplemental mode of service delivery to our vendors.
Information is the important factor in helping employees and dependents
lead a more balanced and productive life at work and at home. RnetHealth.com
also offers a broad range of consulting and education resources that employees
and dependents can use to expand their personal expertise. These topics range
from child development, to emergency home repair, to conflict resolution in the
workplace. Online Internet access to skilled social workers with years of
experience in solving a unique range of personal, social and economic issues
will be available in the safety and security of the subscribers' homes.
RnetHealth.com will provide ongoing online support, resources and
counseling to help expatriate and foreign national employees and their families
adjust to international assignments. Special online services will be available
for companies that want to develop policies and systems to prevent crises in the
workplace. These services are designed to help reduce employee trauma and
related costs and therefore create a safer, healthier and more productive
workplace. RnetHealth.com will provide a broad selection of training programs
that address topics ranging from everyday personal issues to international
business practices. Training programs will also be designed specifically for
managers, supervisors and executives.
RnetHealth.com will provide online Internet assessments to match callers
with the most appropriate provider, based on individual needs. The client's
provider will manage individual cases. An alternative electronic EAP-driven
model that partners with a claims payer to avoid conflict of interest, which
could compromise sound clinical decisions will be an effective managed care
tool. RnetHealth.com will provide short and long-term online substance abuse
case management for all company-mandated referrals, including drug test
positive, DOT drug test positive and performance attendance behavior.
THE PUBLIC SITE. The public will have access to the RnetHealth.com web
site, which will include premium and proprietary health and behavioral content,
chat rooms, message boards, personalized healthcare information and e-mail
updates.
RnetHealth.com's objective is to become the Web's premium brand for
behavioral and health care related services.
Through heavy promotional rotation of the web address on the cable
television network, Rnethealth.com's cable television programming service will
market the Web site and web-based services. The public site emphasizes
community, chat, forums, information, and interaction. This site will be
supported principally by advertising revenue and e-commerce transactions.
For consumers, RnetHealth.com provides premium, branded content to
assist consumers in making informed decisions, personalized information about
specific health and behavioral conditions targeted according to the profiles of
individual consumers, and content-specific online communities that allow
consumers to participate in real-time discussions and support networks via the
Web.
RnetHealth.com has determined that the growing behavioral health needs
of the world's population can be met in a cost-effective manner through the
utilization of online electronic delivery systems. Globally more and more
consumers are increasingly interested in using online services and the Internet
to share information and ideas and discover "New Medicine" opportunities for the
treatment of and relief from a wide range of clinical problems in the behavioral
health area. RnetHealth.com is dedicated to creating a "Behavioral and
Alternative Health" consumer based Internet business that addresses all of these
issues. RnetHealth.com will specialize in the production of online forums with
the intent of assisting its members to make online activity a part of their
daily lives and communications. The Company believes that through engagement in
moderated chat sessions, online lectures (led by experts in the field of
behavioral and alternative health) and open forums, the Company will attract and
retain active members. The cornerstone of our efforts will be the strong
commitment to the most current clinical and editorial content. RnetHealth.com's
commitment to community will create extremely attractive, comfortable, and
interesting neighborhoods in the digital global village.
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RnetHealth.com currently targets the two fastest growing communities on
the Internet: Alternative and Behavioral Health. The consumer populations that
make up these communities are rapidly adopting the use of online services and
the Internet to build and enhance communication.
The Company's Internet business is in development stage and has not yet
generated any revenues. The Company believes that the generation of meaningful
revenues will depend on its ability to enter into license agreements with Health
Care Entities and upon further development of its products. The Company will
seek to generate revenues from its Internet business from advertising sales,
monthly subscriber fees generated from the web site, merchandising and from
Health Care Entities and employers for delivering mental and behavioral health
information and service to their members. Although the Company believes that the
Internet business will provide the Company with significant opportunities
relating to an interactive on-line business, there can be no assurance that it
will be commercially successful.
ECONOMIC BASIS OF BUSINESS ELEMENTS
The Company bases its profit centers on both its television network
and on its Internet activities. The Internet-related activities include two
major elements: a business-to-business application and a public/consumer
application.
HELP LINE. In March 1996, the Company commenced operations of a toll
free help-line and referral service for the viewers of RNET TV (the "Help
Line"). During the hours which RNET TV is airing, the Company displays a
toll-free 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 the Substance Abuse and Mental Health
Service Administration (SAMHSA) at no cost to the Company.
To the extent that the Company enters into affiliation agreements to air
RNET TV in additional communities, the Company expects to expand caller capacity
of the Help Line, as well as expand its existing national database of local
groups, treatment centers and other sources of help and information. The Company
also intends to use the projected expanded call center capacity to also offer
recovery and prevention-related products and services directly to its viewers.
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 RNET TV.
NATIONAL PARTNERSHIP FOR RECOVERY AND PREVENTION. National Partnership
for Recovery & 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 interactive media services
to develop and distribute effective and accurate information concerning
alcoholism and addiction. The Company's goal is to provide 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 partnered with more than 50
recovery and prevention organizations representing over 40 million constituents.
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 Rnethealth.com's television programming and
Internet content, provide ideas for programming and content that is of interest
to their constituencies and, in some cases, produce programming. Rnethealth.com
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
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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
Rnethealth.com 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 Rnethealth.com's
programming, and the Company expects that the Partnership will communicate to
its constituents information about Rnethealth.com's programming schedule and
availability.
RECOVERY DIRECT. The Company believes that the market for products and
services addressing social and behavioral health 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
Rnethealth.com and through RNET TV. 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 Rnethealth.com. In
addition, the Company intends for Recovery Direct to offer tapes and videos by
other well-known individuals in the recovery field. Recovery Direct currently
sells recovery-related audio and videotapes to the institutional market under
the trade name Recovery Direct, Inc. (formerly FMS). The Company is expanding
Recovery Direct's offerings to consumers and simultaneously broadening its
traditional marketing and distribution (i.e. catalog and phone sales) to include
and emphasize on-line marketing and sales. 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 Rnethealth.com through a toll-free
telephone number.
MEDIA SYNERGY
RNET TV provides an extremely valuable vehicle for driving traffic to
RnetHealth.com. Increasingly, non-Internet marketing tools are being cited as
providing highly effective techniques for driving traffic to a web site
(Forrester Research: Driving Site Traffic, 1999). Television ranks among the
most desirable methods for this marketing, but because of its high cost, it is
often employed on a limited basis or not employed at all. RnetHealth.com, with
its own television network, commands a highly valued asset for promotion of
visits to the web site.
Additionally, because of the targeted nature of RNET TV viewer
demographic, the synergy between the broadcast medium and the web site is
amplified and enhanced. Broadly addressed concerns which are presented on
television can be explored in depth on the web site. Information customized for
the individual viewer's circumstances can personalize the television content.
The converse of the relationships between the media is also valid: television
provides the media-rich delivery of audio and visual information, which is
currently constrained by the technology available to most web users today. As
broadband delivery becomes widely deployed, the television content enjoys the
role of a very valuable, exploitable asset.
COMPETITION
TELEVISION COMPETITION. RNET TV 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 directed at social and behavioral health 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 social and behavioral health issues.
Such networks include, America's Health Network and Discovery Health,
which provide 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 RNET TV's programming is intended to provide information and support to
persons facing social and behavioral health issues, RNET TV 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 airtime,
channel capacity, advertiser time or viewership.
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ONLINE COMPETITION. There are several potential competitors in the
Behavioral Health and CAM or alt.med. marketplace:
Healthshop.com is partnered with Lycos, and sells natural healthcare
products online. They carry over 6,000 brand-name items, offer a newsletter, and
have free shipping on offered products.
Naturemade.com sells products manufactured by Pharmvite Inc. Partnered
with national retailers, naturemade.com offers consumers in-store literature on
products and a toll-free number to call to determine their specific needs.
Founded in 1972, they are privately held.
PVSVitamins, a division of PharMor, has an anchor store at Shopnow.com;
there, this partner of Vitamin World and Rexall Sundown sells products from all
manufacturers. The emphasis is on advertising and marketing products rather than
providing content or community.
Mothernature.com, founded in 1995, they have raised $223 million in
1998-99 from venture capital. They have a keen awareness of the importance of
building a credible content site with varied resources and attempts at
community. They are well financed and well marketed.
Greentree Nutrition has raised more than $14 million in venture capital
and has recently purchased Acumin and VitaSave. They see their main rivals as
stores like GNC and online newcomers such as mothernature.com.
RnetHealth.com is able to compete successfully against these comparative
newcomers to the field, because RnetHealth's online platform provides a
multimedia approach and behavioral health and altmed has a continuing interest
in promotional opportunities surrounding our "Drug World" feature. The
credibility this will bring to the sales division as it launches will be
significant.
Other competitors to RnetHealth.com are poorly established or sparsely
attended. The 12-Step and recovery groups online are long established on
CompuServe, but the total monthly attendance is less than the projected average
week's attendance on RnetHealth.com, and ad sales are non-existent.
RnetHealth.com provides a significant Sponsorship opportunity. CompuServe's
fortunes have declined sharply in the past five years, and Prodigy has virtually
shut down though is now relaunching after a recent IPO.
The Internet has dozens of active informational sites, mail lists, and
newsgroups for both behavioral health, alternative medicine content and
addiction recovery. As yet, none of these Internet sites has a professional,
well supported, and well attended content structure and community. The strongest
offerings on the Internet may have a small amount of interesting content, but no
sense of community, and weak advertising draw.
GOVERNMENT REGULATION
CABLE TELEVISION. The 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 Rnethealth.com.
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 Rnethealth.com 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.
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
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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 to FCC fines or other
sanctions, adversely affect the Company's relationship with such entities and
result in the discontinuation of carriage of the Company's programming by such
entities.
INTERNET. Internet and state regulation governing interactive or on-line
information services and potentially affecting the activities of the Internet
business 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 RnetHealth.com. 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 RnetHealth.com. 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 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 the RnetHealth.com's offerings, by the
Company or by users of those offerings would not violate the CD Act, if it were
to become effective, or similar legislation that Congress might enact in the
future, or that attempts to implement defenses to such legislation would not
adversely affect the Company's business or operations. Federal laws dealing with
obscenity and child pornography as well as various state laws similar to those
laws or to the CD Act may also apply to information content available on or
through the Internet business'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 the trademarks. The Company uses the "Recovery
Network" a registered trademark in connection with its programming. The Company
believes that its trademarks and copyrights, including "Rnethealth.com" trade
name and the signature look of the network, have significant value and are
important to the marketing and promotion of Rnethealth.com 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.
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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, Internet 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.
EMPLOYEES
The Company currently has 24 full time employees engaged in
affiliate/marketing sales, programming, accounting, and in general
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 2,500 square feet in Santa
Monica, California pursuant to a five-year lease that expires in May 2001. The
monthly rental is currently $6,500 per month. The Company has an option to
extend the lease through May 2004 at a price to be negotiated by the parties
based upon then prevailing rental rates.
Our subsidiary Recovery Direct leases offices of approximately 2,805
square feet in Carpinteria, California, pursuant to a three-year lease that
expires November 2001. There is no renewable option with this lease, but a
renewed lease has been offered.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert Portrie 50 Chairman of the Board of Directors
George H. Henry 45 Chairman of the Executive Committee of the Board of Directors and Director
William D. Moses 37 Director and President
Charlotte Schiff Jones 58 Director
Kevin Wall 47 Director
Marc Guren 44 Director
Jay Handline 45 Director and Vice President of Health Care Services
Wendy Borow-Johnson 48 President of Health Care Services
Stacey Romm 31 Chief Financial Officer
Brad Parobek 35 Sr. Vice President, Affiliate Sales
</TABLE>
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<PAGE> 24
ROBERT E. PORTRIE has been Chairman of the Board of Directors since
October, 1999. Mr. Portrie is also a Managing Partner of RCM Technologies, Inc.,
a New Jersey based consulting and staffing company. Mr. Portrie is a former
President and CEO of InfoMation Publishing Corporation, a subsidiary of CMGI.
Mr. Portrie spent 23 years at AT&T, where he served as President and Chairman of
the Board of AT&T InView. At AT&T, Mr. Portrie also chaired the product
architecture committee responsible for developing and integrating network based
applications as part of the Large User Study Program under the auspices of the
Chairman's office at AT&T and developed the first network based Wide Area
Network (WAN) deployment in the United States.
GEORGE H. HENRY served as Chairman of the Board of Directors from May
1997 to November 1998, and has been 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 Access Television Network
("ATN"). Mr. Henry is also a trustee of Mitchell College.
WILLIAM D. MOSES serves as President of the Company. Mr. Moses is
co-founder of the Company and 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.
MARC D. GUREN has been a director of the Company since October, 1999.
Mr. Guren is also Manager and President of Acuity Capital, LLC, a venture
investment and advisory firm. Since 1984, Guren has been an independent business
and financial strategist and advisor for various computer and software companies
and Internet, online and healthcare companies, including BoxTop Interactive, iXL
Enterprises, and Personal Library Software. He was previously a Vice President
of the Roy Disney family's Shamrock Holdings, Inc. and subsequently worked with
media analyst Paul Kagan.
KEVIN WALL has been a director of the Company since October, 1999 and
Chairman of the Board of Advisors of RnetHealth.com since August, 1999. Mr. Wall
is Vice Chairman of the Board and Director of iXL Enterprises and served as
President of iXL-West and head of new ventures for iXL. Mr. Wall also founded
and served as President of BoxTop Interactive, which was acquired by iXL in
1997.
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.
JAY HANDLINE serves as the Company's Executive Vice President and will
be overseeing the expansion of the Company's website and e-commerce move. Mr.
Handline successfully helped launch Lifescape 1to1, LLC (formerly
RecoveryNetInteractive, LLC) formed in August 1996, as a joint venture between
TCI Digital Health Group and RnetHealth.com, Inc. Prior to this, Mr. Handline
was involved in the start-up of the Company. In 1995, he served as Senior Vice
President of Business Development, in this capacity, Mr. Handline was able to
secure private equity capital and forge successful partnerships to aggregate
products, services and information from dozens of world-class partners.
WENDY BOROW-JOHNSON has been President, Health Care Services of
RnetHealth.com since October, 1999. Borow-Johnson is also President of Com-Med
Strategic Alliances, Inc. and was the former President and founder of Com-Med
Interactive, an electronic media packaging division for healthcare for
Medicus/DMB&B. Previously, Borow-Johnson was Vice President of Corporate
Relations and Consumer Affairs for the American Medical Association, founder and
President of American Medical Television, a joint venture of NBC and the AMA,
and Vice President of Marketing for Source Media's Interactive Channel.
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<PAGE> 25
STACEY ROMM joined the Company's Finance Department in September 1998.
She presently serves as the Chief Financial Officer. From 1995 to 1998, Ms. Romm
worked for International Home Improvement as the Financial Manager. Prior to
1995, Ms. Romm was in charge of the finance department for LaPlaya Plumbing.
BRAD PAROBEK serves as the Company's Senior Vice President of Affiliate
Sales. Mr. Parobek is a 13-year veteran of the Cable and Telecommunications
industry and served on numerous boards and committees throughout his tenure.
From 1989-1995, he was a member of the Board of Directors of the North Central
Cable and Telecommunications Association. He presently is a member of the Board
of Directors of Rocky Mountain Empire Venture and Nanny's Baby Wraps in Denver,
CO.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Non-employee directors
do not receive cash compensation for serving as directors. The Company
reimburses directors for reasonable travel expenses incurred in connection with
their activities on behalf of the Company. Each member of the Board of Directors
is eligible to participate in the Company's 1996 Board of Directors and Advisory
Board Plan.
COMMITTEES OF THE BOARD OF DIRECTORS
In October 1996, the Company established a Finance and Compensation
Committee of the Board of Directors which reviews the compensation for all
officers and directors and affiliates of the Company. The Committee also
administers the 1996 Employee and Consultants Stock Option Plan, the 1996 Board
of Directors and Advisory Board Retainer Plan, the 1997 Management Bonus Plan,
and the 1998 Stock Option Plan. Mr. Henry is Chairman of the Finance and
Compensation Committee and Messrs. Moses and Masters (until his resignation in
May 1999) are also members of the Finance and Compensation Committee.
In May 1997, the Company established an Audit Committee of the Board of
Directors that 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.
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. Henry is the Chairman of the Executive Committee
and Messrs. Moses and Masters (until his resignation in May 1999) are also
members of the Executive Committee.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company
to executive officers that received compensation in excess of $100,000 (the
"Named Executive Officers") during fiscal 1998 and 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
YEAR ENDED SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION JUNE 30, SALARY($) BONUS($) OPTIONS(#) COMPENSATION
--------------------------- ---------- ---------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
William D. Moses, Chief Executive Officer 1998 $182,765 -- 50,000 --
1999 $336,037 -- 316,667 --
John Wheeler, Sr. Vice President of Operations 1998 $182,373 -- 50,000 --
1999 $186,349 $22,420(a)(b) 5,000 85,179(f)
Gary Horowitz, President 1999 $155,099(c) -- 267,915 --
Gregory Richey, Chief Financial Officer 1998 $163,335(d) -- 50,000 --
Donald Masters, Executive Vice President 1998 $148,420(e) -- 50,000 --
</TABLE>
- ------------
(a) Bonus paid to Mr. Wheeler pursuant to contact terms of employment
agreement, wherein Mr. Wheeler received commission per subscriber at
$0.01 per subscriber.
(b) Includes accrued but unused vacation paid to Mr. Wheeler upon expiration
of his employment agreement. Mr. Wheeler's employment agreement was not
renewed.
(c) Mr. Horowitz resigned from the Company in April 1999.
(d) Mr. Richey resigned from the Company effective September 18, 1998.
(e) Mr. Masters resigned from the Company effective May 1, 1999.
(f) Compensation paid for vacation pay owed per Mr. Wheeler's contract
which expired in May 1999 and compensation for letter agreement dated
January 26, 1999 disclosed in Item II Section III paid in unregistered
shares.
The following table sets forth information concerning the grant of stock
options to the Named Executive Officers during fiscal 1999:
25
<PAGE> 26
<TABLE>
<CAPTION>
OPTION GRANTS DURING LAST FISCAL YEAR
NAME NUMBER OF SHARES % OF TOTAL OPTIONS EXERCISE PRICE ($ EXPIRATION DATE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PER SHARE)
GRANTED IN FISCAL YEAR
<S> <C> <C> <C> <C>
William Moses 200,000 13% $0.31 05/11/02
50,000 4% $1.625 08/03/02
66,667 5% $1.56 08/03/02
John Wheeler 5,000 1% $0.59 01/12/04
Gary Horowitz 200,000 13% $0.43 01/02/04
5,000 1% $0.59 01/12/04
12,915 1% $1.81 10/19/03
50,000 4% $1.625 08/03/02
</TABLE>
No options of the Company were exercised by such persons during fiscal
1999.
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. In April 1999, approximately 655,925 options
previously granted under the 1997 Plan and 1998 Plan were canceled. These
options may or may not be re-issued at a later date.
EMPLOYMENT AGREEMENTS
Effective December 1, 1996, the Company entered into an employment
agreement with William D. Moses, the Company's Chief Executive Officer, which
expired on September 30, 1998. The employment agreement provided for a base
compensation payable to Mr. Moses of $12,000 per month through September 30,
1998. Pursuant to the agreement, Mr. Moses was 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 was 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
was 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 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 would have been deemed to have been terminated
without "good cause", and the covenant not to compete would have had 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 expired on November 30, 1998. The employment agreement provided for a base
compensation payable to Mr. Masters of $10,000 per month through November 30,
1998. Pursuant to the agreement, Mr. Masters was 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 was entitled
to severance compensation, equal to his base salary and vacation compensation,
at the option of the Company, for such period of time between one year and two
years that the non-compete covenant described below is in effect and such
severance compensation shall be payable one-half on the date of termination and
the balance shall be payable ratably over six months following the date of
termination. In the event of termination of the employment agreement by mutual
agreement of the Company and Mr. Masters, Mr. Masters was 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 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.
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 expired on May 31, 1999. The employment agreement provided 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
26
<PAGE> 27
received 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 did not already
receive the programming through the Company's Nesting Contract or through any
other agreement under which the Company purchases carriage rights. Pursuant to
the agreement, Mr. Wheeler was 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 was 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 was 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 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. Mr. Wheeler's
employment agreement expired on May 31, 1999. Mr. Wheeler was terminated upon
the expiration of his employment contract.
Effective May 1, 1997, the Company entered into an employment agreement
with Bill Megalos, the Company's Vice President of Production, which expired on
November 30, 1998. The employment agreement provided for a base compensation
payable to Mr. Megalos of $10,000 per month through November 30, 1998. Pursuant
to the agreement, Mr. Megalos was 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 was 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 was entitled to such compensation as is mutually agreed on between the
Company and Mr. Megalos but in no event to exceed the amount of severance
compensation payable in the event of termination without "good cause." Mr.
Megalos 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.
Effective May 11, 1999, the Company entered into an employment agreement
with Jay Handline, the Company's Executive Vice President, for a term of three
years. The employment agreement provides for a base compensation payable to Mr.
Handline of $12,000 per month through May 11, 2002. In addition to the base
salary, Mr. Handline shall receive an option to purchase 400,000 shares of the
Company's common stock exercisable at the closing bid price on May 11, 1999. The
Option vests 1/4th upon execution of the agreement, 1/4th at the end of year 1,
1/4th at the end of year 2, and 1/4th at the end of year 3. Pursuant to the
agreement, Mr. Handline 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. Handline's employment by the Company without cause, Mr.
Handline is entitled to severance compensation equal to six (6) months salary if
terminated within the first year, nine (9) months salary if terminated within
the second year, and twelve (12) months salary if terminated within the third
year. In the event of termination of Mr. Handline's employment by Mr. Handline
without cause, Mr. Handline is not entitled to severance allowance. Mr. Handline
agrees, during or after the term of his employment, not to reveal confidential
information, or trade secrets to any person, firm, corporation or entity. For a
period of two (2) years after the end of employment, Mr. Handline shall not
control, consult to or be employed by any business similar to that conducted by
the Company.
STOCK OPTION PLANS
The Company has adopted six 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"), the 1998 Stock Option Plan (the "Stock Plan"), the 1999 Stock
Compensation Plan and the 1999 Stock Option Plan (the "1999 Option Plan"). The
Company has reserved an aggregate of 1,932,876 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.
PURPOSE. The purpose of the plans is to grant incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code and
non-qualified stock options as a means to provide an incentive to selected
directors, officers, employee and consultants to acquire a proprietary interest
in RnetHealth.com, Inc., to continue in their positions with us and to increase
their efforts on our behalf.
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<PAGE> 28
ADMINISTRATION. The plans are administered by the board or a committee
appointed by the board. Under the plans, the plan administrator has the
authority to, among other things: (a) select the eligible persons to whom
options will be granted, (b) determining the size, type and the terms of each
option granted, (c) adopted, amend and rescind rules and regulation for the
administration of the plans, and (d) decide all questions and settle all
controversies and disputes of general applicability that may arise in connection
with the plans.
OPTIONS. Each option granted under the plans is evidenced by an
agreement that states the terms and conditions of the grant. The exercise price
of an option granted under any of the plans shall not be less than 100% of the
fair market value of the stock at the time of grant. Each option plan granted
under the plans will be exercisable at the times and in the amounts determined
in accordance with the agreements. In addition the board, in its discretion, may
accelerate the exercisability of any option under any of the plans.
Options granted under the plans are not transferable and are only
exercisable by the grantee during the grantee's lifetime. Each option shall
terminate at the time specified in the agreements.
STOCK COMPENSATION PLAN
Effective February 19, 1999, the Company established the 1999 Employee
and Consultant's Stock Compensation Plan (the "Plan"). The purpose of the Plan
is to compensate employees and certain consultants of the Company for services
by issuing to them stock in lieu of cash payments. An aggregate of 1,500,000
shares of Common Stock are reserved for issuance under the Plan.
In June 1999, the Company established the Employee Stock Compensation
Plan (the "Employee Stock Plan") the purpose of the Employee Stock Plan is to
provide employees with an incentive to maintain the long-term performance and
profitability of the Company. A maximum of 1,300,000 shares may be issued
under the Employee Stock Plan.
NON-PLAN STOCK OPTIONS
The Company has granted 1,138,207 non-plan stock options to acquire
shares of Common Stock, which are outstanding as of June 30, 1999 and
exercisable at prices ranging from $0.28 to $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
28
<PAGE> 29
such person reasonably believes are not in violation of the Company's corporate
purposes as set forth in the Articles of Incorporation. As a result of these
provisions, shareholders may be unable to recover damages against the directors
and officers of the Company for actions taken by them which constitute
negligence, gross negligence, or a violation of their fiduciary duties, which
may reduce the likelihood of shareholders instituting derivative litigation
against directors and officers and may discourage or deter shareholders from
suing directors, officers, employees and agents of the Company for breaches of
their duty of care, even though such an action, if successful, might otherwise
benefit the Company and its shareholders.
ADVISORY BOARD
The Board of Directors of the Company has established a Board of
Advisors (the "Advisory Board") to assist the Company in the development and
implementation of its long-term strategy and goals and to propose, adopt and
audit compliance by the Company with programming and business standards that are
consistent with the delivery of effective, non-exploitative, and non-biased
recovery based services. The Advisory Board will recommend to the Company's
Board of Directors the adoption of standards and practices to provide guidance
for the Company's employees in determining appropriate programming and online
content, advertising, and merchandise sales. The Advisory Board will advise on
technical matters and also serve as an independent voice for the recovery
community.
The Company has enlisted the membership of seven 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:
DAVID BRALOVE is the founder of a law firm representing substance abuse
and behavioral care providers nation-wide, and is Board President of The
National Treatment Consortium.
DR. MARK GOLD is a Professor of Neuroscience, Psychiatry and Community
Health and Family Medicine at the University of Florida College of Medicine. Dr.
Gold has been a national leader in the field for 25 years leading treatment and
the general public toward a greater understanding of the nature of addiction and
its successful treatment. Dr. Gold has done pioneering research in tobacco,
alcohol, cocaine and opiate addictions and has been granted several patents for
his discoveries. Dr. Gold is widely recognized by his peers, the government, the
business community and the general public as a best selling author and addiction
expert.
EARNIE LARSEN is a nationally known lecturer on managing personal
relationships and overcoming dysfunctional behaviors, and an author and producer
of over 55 motivational self-help books and videos. He is the originator of the
process known as "Stage II Recovery" where one attempts to resolve life issues,
which often impede spiritual growth.
ROBERT LINDSEY is a veteran of over 20 years in the field of alcoholism
and drug addiction treatment. Mr. Lindsey is currently the Vice President of
Longview Associates, Inc., a consulting firm specializing in the design and
implementation of employee assistance programs. Prior to this, Mr. Lindsey
served as the Community Relations Director at the Betty Ford Center and as the
Executive Director of the New York State Council on Alcoholism and Other Drug
Addictions.
FATHER JOSEPH MARTIN is the founder of Ashley, Inc., a non-profit center
dedicated to the treatment of the chemically addicted. He is an internationally
recognized speaker and creator of the film "Chalk Talk", the principal
educational vehicle on alcoholism for most treatment centers in the country.
JOSEPH A PURSCH, M.D. is a nationally recognized psychiatrist involved,
since 1962, in the treatment and rehabilitation of individuals with addictive
behaviors. Dr. Pursch is the former Director of Alcohol Rehabilitation Service
at the Naval Regional Medical Center at Long Beach, California. An author and
syndicated columnist, Dr. Pursch has supervised drug-testing programs for
numerous sports events and has treated many public figures. Dr. Pursch has been
on the President's Commission on Alcohol and Drugs since 1979.
DAVID SMITH, M.D. is the founder and president of the Haight-Ashbury
free clinics. A specialist in the field of addiction medicine and clinical
toxicology, Dr. Smith is also the founder and executive editor of the Journal of
Psychoactive Drugs and is the president of the American Society of Addiction
Medicine (ASAM). He is a leader in the areas of treatment of addictive disease,
the psychopharmacology of drugs, and new strategies in the management of drug
abuse problems.
The Advisory Board meets semi-annually on a formal basis, and deals with
individual issues as they arise. Advisors serve terms of three years, are
compensated for meetings attended, and are eligible to participate in the
Company's 1996 Board of Directors
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<PAGE> 30
and Advisory Board Retainer Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
On June 29, 1998, the Company entered into certain subscription
agreements (the "Agreements") with 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
were exercisable at exercise prices between $4.00 and $6.00 per share and were
subsequently repriced to $0.43 per share in September 1999.
On December 7, 1998, the Company entered into an agreement with G.
Howard Associates, Inc. ("Howard") wherein Howard would represent the Company,
on an exclusive basis with respect to certain investors in connection with
raising capital for the Company. For its services, Howard would receive a cash
fee equal to 6% of the total consideration received by the Company and to
reimburse Howard for its out-of-pocket expenses. The fee is due at the closing
of a said transaction. Such agreement with Howard was amended in April 1999. The
amendment expanded Howard's representation to include (a) the sale of the
Company's 20% ownership in RecoveryNetInteractive; (b) the settlement with
certain creditors identified; and, (c) assistance in raising $300,000 of
additional capital. Pursuant to this amendment, Howard would receive 900,000
newly issued shares of the Common Stock and warrants held by Howard and/or
George Henry were cancelled.
In December 1998, in connection with $725,000 notes payable by the
Company, the Company granted warrants to purchase 500,000 unregistered shares at
$0.01 per share to a group of shareholders (the "Noteholders"). In April 1999,
the Company renegotiated the terms of the $725,000 notes payable to certain
shareholders. In exchange for extending the due date to October 1999 (six
months), the Company granted another 1,000,000 warrants at $0.01 per share.
Approximately 999,999 shares to date have been exercised.
On January 7, 1999 the Company engaged Ms. Jones, member of the Board of
Directors to act as a "Special Agent" to help the Company secure financing.
Pursuant to Ms. Jones proposal Ms. Jones received 50,000 shares of unregistered
common stock and is entitled to 5% of the first one million of value, 4% of the
second one million value, 3% of the third one million value, 2% of the fourth
one million value and 1% on all amounts of value excess of five million dollars
upon closing.
On January 26, 1999 the Company engaged Mr. Wheeler Executive in the
Company as a Agent to help secure financing . Pursuant to the Letter of
Agreement Mr. Wheeler will received 75,000 shares of unregistered common stock
and is entitled to a cash fee equal to four percent (4%) of the total financing
apon closing.
Beginning in February 1999, executive officers and other employees of
the Company have received stock in lieu of salaries. To date, the Company has
issued 527,657 shares in lieu of salaries.
In March 1999, in connection with an aggregate $100,000 investment by
certain investors, the Company agreed to issue notes convertible into Common
Stock of the Company.
In April 1999, the Company entered into an agreement with third parties
to sell its interest in Recovery Interactive and to receive its web-site back
from Recovery Interactive.
On June 11, 1999, entered into a Subscription Agreement (the
"Agreement") with certain Subscribers (the "Private Placement"). The Private
Placement provides for the issuance upon closing by the Company of (i) 350,000
shares (the "Shares") of Common Stock for $350,000, or $1.00 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 $1,500,000 pursuant to a "put" provision in the Agreement (the
"Additional Shares"), and (iii) 35,000 shares of Common Stock and 175,000
placement warrants exercisable at $0.35 per common share, as partial
compensation to the placement agents in the Private Placement.
30
<PAGE> 31
In September 1999, the Company undertook to restructure existing
transactions relating to (i) the Subscription Agreement entered into by
Investors with the Company for investment by such Investors in the securities of
the Company dated June 29, 1998, as amended by Amendment No. 1 dated as of
October 27, 1998; (ii) the subscription agreements dated March 18, 1999 where
certain of the Investors invested in an aggregate $100,000 of principal amount
Convertible Notes of the Company; and, (iii) the Subscription Agreement dated
June 10, 1999 between the Company and Investors (see above). On September 28,
1999, the Company entered into a Restructuring Agreement with the Investors to
the above-mentioned transactions, wherein, among other things, upon issuance of
additional shares (i) there would be no further resets pursuant to the June 29,
1998 investment; (ii) any further resets, if any, in connection with the June
1999 investment would be determined based on a purchase price of $0.50 per
shares; and (iii) Convertible Notes issued on March 1999 would be converted at
the conversion price of $0.50.
On October 13, 1999, the Company finalized a debt restructuring and
infusion of additional capital with certain noteholders and shareholders,
resulting in the following: (1) conversion of all existing debt and accrued
interest to equity (estimated at approximately $756,000) at $0.25 per share; (2)
commitment to receive an equity infusion from key internal shareholders totaling
up to $600,000 at $0.25 per share; and (3) a 45-day option to noteholders to
acquire additional equity at $0.25 per share up to $756,000.
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.
31
<PAGE> 32
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of September 29,
1999, 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>
NO. OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(a) BENEFICIALLY OWNED(b) PERCENTAGE OF CLASS
- --------------------------------------- -------------------- -------------------
<S> <C> <C>
William D. Moses 2,457,676 (c) 13.6%
George Henry(d) 2,241,970 (e) 12.4%
Donald Masters(f) 294,074 (g) 1.6%
Continental Capital(h) 600,000 (i) 3.3%
John Wheeler(j) 122,951 (k) *
Charlotte Schiff Jones(l) 67,915 (m) *
Robert Portrie(n) 1,015,000 (o) 5.7%
Stacey Romm(p) 50,000 (q) *
Marc Guren(r) 1,015,000 (s) 5.7%
Jay Handline(t) 224,484(u) 1.25%
Kevin Wall(v) 1,015,000(w) 5.7%
All directors and executive officers
as a group (10 persons or entities) 49%
</TABLE>
- -------------
* Less than 1%.
(a) Unless otherwise indicated, the address for each named individual or group
is in care of RnetHealth.com, Inc., 506 Santa Monica Blvd., Suite 400, 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 September 29, 1999 and those that 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 18,063,799
shares of Common Stock before any consideration is given to outstanding
options, warrants or convertible securities.
(c) Includes (i) options to purchase 503,295 shares of Common Stock.
(d) The address of the beneficial owner is 6860 Sunrise Court, Coral Gables, FL
33133.
(e) Includes (i) options to purchase 272,542 shares of Common Stock.
(f) The address of the beneficial owner is 333 Adams St., Denver, CO 80206.
(g) Includes (i) options to purchase 142,496 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.
(h) The address of the beneficial owner is 195 Wekiva Springs Road, Suite 200,
Longwood, Florida 32779.
(i) Includes an option to purchase 200,000 shares of Common Stock.
(j) The address of the beneficial owner is 2628 Yellowwood Drive, Westlake
Village, California 91631.
32
<PAGE> 33
(k) Includes an option to purchase 22,601 shares of the Common Stock.
(l) The address of the beneficial owner is 1687 Brickell Ave., #601, Miami, FL
33129.
(m) Includes options to purchase 17,915 shares of the Common Stock.
(n) The address of the beneficial owner is 8010 Mergaser Drive, Ponte Vedra, FL
32082.
(o) Includes a warrant to purchase 1,015,000 shares of the Common Stock.
(p) The address of the beneficial owner 19759 Schoolcraft Street, Winnetka,
California 91306
(q) Includes an option to purchase 50,000 shares of the Common Stock.
(r) The address of the beneficial owner is 12011 San Vicente Blvd., Suite 606,
Los Angeles, CA 90049.
(s) Includes a warrant to purchase 1,015,000 shares of the Common Stock.
(t) The address of the beneficial owner is 105 Tides Edge Place, Ponte Vedra
Beach, FL 32082.
(u) Includes options to purchase 211,569 shares of the Common Stock.
(v) The address of the beneficial owner is 10880 Wilshire Boulevard,
Suite 1400, Los Angeles, CA 90024.
(w) Includes a warrant to purchase 1,015,000 shares of the Common Stock.
33
<PAGE> 34
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, 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 June 30, 1999,
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 COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK TO SHARES OF COMMON STOCK
OWNED PRIOR TO THE BE OFFERED BENEFICIALLY OWNED
NAME OF SELLING SHAREHOLDER OFFERING HEREUNDER AFTER OFFERING
- --------------------------- ------------------ ----------------- ----------------------
<S> <C> <C> <C>
INVESTORS
Austost Anstalt Schaan 478,348 942,948 0
Balmore Funds, S.A. 450,049 912,649 0
Zakeni Ltd. 43,965 459,118 0
BL Squared Foundation 134,664 107,996 0
The Sargon Fund, L.P. 76,837 753,918 0
TLG Realty 34,721 37,271 0
Martin Chopp 392,165 374,537 0
Guarantee & Finance Corp. 50,000 187,500 0
Nesher, Inc. 50,000 87,500 0
WARRANT HOLDERS
Pnina Bak 0 100,000 0
Elliott Birnbaum 0 200,000 0
Lynn Chopp 0 200,000 0
</TABLE>
- -------------
Shares deemed beneficially owned prior to the offering include shares issued
or issuable to the Selling Shareholder pursuant to the Restructuring Agreement
(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.
34
<PAGE> 35
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 18,063,799 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.
On June 11, 1999, the Company entered into Subscription Agreements (the
"Agreements") with certain Subscribers. Pursuant to the Agreements, the Company
is entitled to receive proceeds up to $500,000 upon the closing of this
transaction (the "Private Placement"). The Company has received $350,000, less
placement fees, legal fees to date, and other applicable fees, and in exchange
the Company issued 350,000 shares of Common Stock, valued at $1.00 to the
investors and 35,000 shares of Common Stock and 175,000 placement warrants
exercisable at $0.35 per common share, as partial compensation to the placement
agents in the Private Placement. 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. In
addition to the proceeds received in the Private Placement, the Company may
receive $1.5 million pursuant to a "put" provision in the Agreements that is
subject to various conditions, including those relating to re-listing on NASDAQ
and timing.
In September 1999, the Company undertook to restructure existing
transactions including the June 29, 1999 Private Placement. On September 28,
1999, the Company entered into a Restructuring Agreement with certain Investors,
wherein, among other things, upon issuance of additional shares (i) there would
be no further resets pursuant to the June 29, 1998 investment; (ii) any further
resets, if any, in connection with the June 1999 Private Placement would be
determined based on a purchase price of $0.50 per shares; and (iii) Convertible
Notes issued on March 1999 would be converted at the conversion price of $0.50.
On October 13, 1999, the Company finalized a debt restructuring and
infusion of additional capital with certain noteholders and shareholders,
resulting in the following: (1) conversion of all existing debt and accrued
interest to equity (estimated at approximately $756,000) at $0.25 per share; (2)
commitment to receive an equity infusion from key internal shareholders totaling
up to $600,000 at $0.25 per share; and (3) a 45-day option to noteholders to
acquire additional equity at $0.25 per share up to $756,000. This transaction
will bring up to $1.3 million in cash and an increase to equity of up to $2.1
million.
WARRANTS
Warrant previously issued pursuant to the June 29, 1999 Private
Placement entitles the holder thereof (the "Warrant Holders") to purchase one
share of Common Stock at a price of $0.35, subject to adjustment in certain
circumstances, through and including June 10, 2002.
The Warrant Holders shall have the right to exercise their Warrants
until the close of business on June 10, 2002.
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.
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.
35
<PAGE> 36
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).
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.
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 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 are American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
36
<PAGE> 37
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (Registration No. 333-90481) 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).
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 NASD OTC Bulletin Board 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.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Beckman,
Millman & Sanders, New York, New York.
EXPERTS
The audited 1999 financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statements as of June 30, 1999 and
for the year through June 30, 1999 have been audited by Corbin & Wertz,
independent public accountants, and for the year ended June 30, 1998 have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firms as experts in giving said reports. Reference is made to
said reports which include explanatory paragraphs regarding the Company's
ability to continue as a going concern.
37
<PAGE> 38
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports........................................... F-2
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheet as of June 30, 1999.......................... F-4
Consolidated Statements of Operations for the Years Ended
June 30, 1998 and 1999.............................................. F-5
Consolidated Statements of Shareholders' (Deficit) Equity
for the Years Ended June 30, 1998 and 1999.......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998 and 1999.............................................. F-8
Notes to Consolidated Financial Statements.............................. F-9
</TABLE>
<PAGE> 39
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders of
Rnethealth.com, Inc.:
We have audited the accompanying consolidated balance sheet of Rnethealth.com,
Inc. (formerly known as The Recovery Network, Inc.) (the "Company") as of June
30, 1999, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rnethealth.com, Inc.
as of June 30, 1999, and the results of their operations and their cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has negative working capital,
reduced cash levels, recurring losses from operations and limited operating
revenues that raise substantial doubt about its ability to continue as a going
concern. The ability of the Company to continue operating as a going concern is
dependent upon its ability (1) to obtain sufficient additional debt or equity
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 content for its
multimedia channels. The Company plans to raise additional working capital
through private and public offerings. 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 consolidated 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.
CORBIN & WERTZ
Irvine, California
October 9, 1999
F-2
<PAGE> 40
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rnethealth.com, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' (deficit) equity and cash flows for the year ended June 30, 1998
of Rnethealth.com, Inc. (formerly known as The Recovery Network, Inc.) (the
"Company"). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Rnethealth.com, Inc. for the year ended June 30, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has recurring losses from
operations 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. 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 consolidated 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 23, 1998
F-3
<PAGE> 41
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 136,058
Accounts receivable, net of allowance for doubtful accounts
of $32,000 256,499
Current portion of capitalized programming costs, net 98,000
Inventory 55,593
Prepaid expenses 70,345
----------------
Total current assets 616,495
Capitalized programming costs, net 421,648
Furniture and equipment, net 177,550
Other 52,686
----------------
Total assets $ 1,268,379
================
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
Current liabilities:
Short-term notes payable, net of unamortized debt discount
of $181,318 $ 481,015
Accounts payable 442,085
Accrued payroll and benefits 139,086
Other accrued liabilities 295,256
Accrued royalty expense 503,137
Current portion of capital lease obligations 19,817
----------------
Total current liabilities 1,880,396
----------------
Commitments
Shareholders' equity (deficit):
Common stock, $.01 par value; 25,000,000 shares authorized; 15,494,507
shares issued and outstanding 154,945
Additional paid-in capital 21,813,509
Prepaid consulting (230,331)
Common stock subscription receivable (50,000)
Accumulated deficit (22,300,140)
-----------------
Total shareholders' equity (deficit) (612,017)
----------------
Total liabilities and shareholders' equity (deficit) $ 1,268,379
================
</TABLE>
<PAGE> 42
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------------- ---------------
<S> <C> <C>
Domestic sales $ 894,758 $ 1,533,922
--------------- ----------------
Operating expenses:
Salaries and consulting 3,346,720 4,819,488
General and administrative 2,326,807 2,659,700
Programming 1,543,997 2,172,385
Marketing 497,467 105,862
Loss (gain) on investment in joint venture 592,500 (1,006,650)
Cost of video and publication 216,889 499,766
--------------- ----------------
Total operating expenses 8,524,380 9,250,551
--------------- ----------------
Loss from operations (7,629,622) (7,716,629)
Other income (expense):
Interest 775,611 489,552
Other income (146,044) (65,694)
--------------- -----------------
Loss before provision for income taxes (8,259,189) (8,140,487)
Provision for income taxes 2,545 800
--------------- ----------------
Net loss $ (8,261,734) $ (8,141,287)
=============== =================
Loss per share information:
Basic and diluted loss per share $ (1.91) $ (0.96)
=============== ================
Weighted average number of common and common
equivalent shares outstanding 4,336,405 8,514,557
=============== ================
</TABLE>
<PAGE> 43
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK
------------------------------------ PAID-IN SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE
------------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Balance, July 1, 1997 2,521,250 $ 25,212 $ 4,176,708 $ -
Initial public offering of common
stock and warrants, net of offering
costs of $2,174,743 2,415,000 24,151 10,117,606 -
Issuance of common stock and
warrants for cash, net of offering costs
of $205,000 and including 30,601
shares issued for placement services 808,377 8,083 1,536,917 -
Services to be received in exchange
for options and shares of common
stock not yet issued - - 1,009,000 -
Purchase of FMS 44,000 440 208,560 -
Exercise of options 2,867 29 2,178 -
Amortization of prepaid consulting
costs - - - -
Net loss - - - -
------------- ------------ ------------- -------------
Balance, June 30, 1998 5,791,494 57,915 17,050,969 -
Issuance of common stock for cash,
net of offering costs of $150,000,
including 35,000 shares issued for
placement services 3,795,150 37,951 853,585 -
</TABLE>
<TABLE>
<CAPTION>
PREPAID
CONSULTING ACCUMULATED
COSTS DEFICIT TOTAL
--------------- --------------- --------------
<S> <C> <C> <C>
Balance, July 1, 1997 $ (5,625) $ (5,897,119) $ (1,700,824)
Initial public offering of common
stock and warrants, net of offering
costs of $2,174,743 -- -- 10,141,757
Issuance of common stock and
warrants for cash, net of offering co
of $205,000 and including 30,601
shares issued for placement services -- -- 1,545,000
Services to be received in exchange
for options and shares of common
stock not yet issued (1,009,000) -- --
Purchase of FMS -- -- 209,000
Exercise of options -- -- 2,207
Amortization of prepaid consulting
costs 553,375 -- 553,375
Net loss -- (8,261,734) (8,261,734)
------------ ------------ ------------
Balance, June 30, 1998 (461,250) (14,158,853) 2,488,781
Issuance of common stock for cash,
net of offering costs of $150,000,
including 35,000 shares issued for
placement services -- -- 891,536
</TABLE>
Continued
F-6
<PAGE> 44
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - CONTINUED
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK
------------------------------------ PAID-IN SUBSCRIPTION
SHARES AMOUNT CAPITAL RECEIVABLE
------------------ -------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Shares issued for cash to be
received, including 5,000 shares
issued for placement services 55,000 550 49,450 (50,000)
Exercise of options and warrants 1,916,999 19,170 677,330 -
Issuance of common stock for
compensation and services 3,935,864 39,359 1,828,928 -
Common stock to be issued for
compensation and services - - 415,577 -
Issuance of detachable warrants
with short-term notes payable - - 598,000 -
Issuance of options and warrants
for services - - 964,670 -
Cancellation of options related to
settlement of prior consulting
agreement - - (625,000) -
Amortization of prepaid
consulting costs - - - -
Net loss - - - -
------------- ------------ ------------- -------------
Balance, June 30, 1999 15,494,507 $ 154,945 $ 21,813,509 $ (50,000)
============= ============ ============= ==============
</TABLE>
<TABLE>
<CAPTION>
PREPAID
CONSULTING ACCUMULATED
COSTS DEFICIT TOTAL
--------------- --------------- --------------
<S> <C> <C> <C>
Shares issued for cash to be
received, including 5,000 shares
issued for placement services - - -
Exercise of options and warrants - - 696,500
Issuance of common stock for
compensation and services (130,331) - 1,737,956
Common stock to be issued for
compensation and services - - 415,577
Issuance of detachable warrants
with short-term notes payable - - 598,000
Issuance of options and warrants
for services (100,000) - 864,670
Cancellation of options related to
settlement of prior consulting
agreement 281,250 - (343,750)
Amortization of prepaid
consulting costs 180,000 - 180,000
Net loss - (8,141,287) (8,141,287)
------------ -------------- -------------
Balance, June 30, 1999 $ (230,331) $ (22,300,140) $ (612,017)
============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 45
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,261,734) $ (8,141,287)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock, options and warrants
for compensation and services - 2,674,453
Amortization of notes payable discount 479,568 416,682
Amortization of prepaid consulting costs 553,375 180,000
Amortization of deferred financing costs 130,529 -
Amortization of capitalized programming costs 230,360 692,814
Note issued for payment of services - 75,000
Depreciation and other amortization 166,956 89,446
Provision for doubtful accounts 16,000 -
Loss (gain) on investment in joint venture 592,500 (1,006,650)
Changes in operating assets and liabilities:
Accounts receivable (194,678) (1,749)
Inventory 25,325 31
Prepaid expenses (33,365) (11,125)
Other assets (3,887) (17,156)
Capitalized programming costs (565,783) (255,000)
Accounts payable, accrued payroll and benefits
and other accrued liabilities (317,545) 157,573
Accrued royalty expense 157,569 180,507
Deferred compensation (51,672) -
Due to shareholders and directors (65,751) -
--------------- ----------------
Net cash used in operating activities (7,142,233) (4,966,461)
--------------- -----------------
Cash flows from investing activities:
Proceeds from sale of investment in joint venture - 850,000
Cash paid for purchase of FMS Productions,Inc. (34,383) -
Purchases of furniture and equipment (206,569) (63,807)
Investment in joint venture (368,000) (67,850)
--------------- -----------------
Net cash provided by (used in) investing activities (608,952) 718,343
--------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings 574,990 825,000
Payments on borrowings (2,605,250) (237,667)
Payments on capital lease obligation (17,175) (10,338)
Proceeds from the issuance of common stock,
warrants and stock subscriptions 12,332,547 1,588,036
Deferred offering and financing costs incurred (343,558) -
--------------- ----------------
Net cash provided by financing activities 9,941,554 2,165,031
--------------- ----------------
</TABLE>
Continued
F-8
<PAGE> 46
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------------- ---------------
<S> <C> <C>
Net increase (decrease) in cash 2,190,369 (2,083,087)
Cash, beginning of year 10,883 2,219,145
Cash from acquisition of FMS 17,893 -
--------------- ----------------
Cash, end of year $ 2,219,145 $ 136,058
=============== ================
</TABLE>
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS
ORGANIZATION AND LINE OF BUSINESS
Rnethealth.com, Inc. (formerly known as The Recovery Network, Inc.) (the
"Company"), a Colorado corporation, is a digital media company drawing on the
converging digital technologies of the Internet and cable television to deliver
alternative and behavioral health programming products and services to a
national audience. The Company was incorporated in May 1992 and commenced
operations in February 1993.
ACQUISITIONS AND JOINT VENTURE
RECOVERY INTERACTIVE
The Company owned a 50% interest in Recovery Interactive ("RI"), a joint venture
with TCI Online Recovery Net 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. During 1998 and 1999, the Company and TCI each made capital
contributions to RI and incurred expenses on RI's behalf aggregating to
approximately $368,000 and $67,850, respectively. The Joint Venture agreement
was to continue through December 31, 2044. The Company's investment in the Joint
Venture was accounted for under the equity method of accounting. The Company
recorded a loss on investment in the joint venture for its entire investment of
$592,500 in 1998 which included amounts to be paid to RI for operating losses
incurred by RI through June 30, 1998.
In April 1999, the Company entered into an agreement with third parties to sell
its interest in RI for $850,000. The Company recognized a gain on this sale of
its investment of approximately $1,006,650, which is reflected in the
accompanying consolidated statement of operations.
FMS PRODUCTIONS
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.
Continued
F-9
<PAGE> 47
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS,
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.
The unaudited pro forma results of operations for the year ended June 30, 1998
(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,
1998, respectively, are as follows:
<TABLE>
<S> <C>
Pro forma total revenues $ 1,593,000
===========
Pro forma net loss $(8,354,000)
===========
Pro forma weighted average number
of common shares 4,356,055
===========
Pro forma loss per common share $ (1.92)
===========
</TABLE>
SIGNIFICANT BUSINESS RISKS
GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has negative working capital,
reduced cash levels, recurring losses from operations and has limited operating
revenues, that raise 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 debt and equity
capital from public and private sources, (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 content for internet and cable broadcastors. The Company plans to
raise additional working capital through private and public offerings. To
achieve this, the Company has embarked on a definitive plan to (1) get relisted
on the Nasdaq Smallcap Exchange; (2) convert certain debt to equity; (3) appoint
new members to the management team and board of advisors; and (4) receive an
equity infusion from board members and other shareholders (see Note 11). 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.
Continued
F-10
<PAGE> 48
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
Note 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS,
CONTINUED
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 Company's program offerings. 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 Company 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.
In addition, the Internet industry is subject to constantly evolving federal and
state regulation. It is possible that certain legislation or pending legislation
may adversely impact the Company's Internet operations.
DEPENDENCE UPON GROUP W NETWORK SERVICES
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"). 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, as
amended in April 1999 (see Note 10), allows the Company to broadcast 9 hours per
day.
Through June 30, 1998, substantially all the households which received broadcast
of The Recovery Network's programming were provided under the terms of the prior
transponder contract with ATN (see Note 7). Starting September 1, 1998, the
Company is entirely dependent on its own affiliate marketing efforts to obtain
affiliate agreements with cable operators.
Continued
F-11
<PAGE> 49
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated statement of operations for 1998 includes the
operating results of FMS from December 10, 1997 (the acquisition date) to June
30, 1998. For 1999, the consolidated statement of operations includes the
operating results of FMS for the entire fiscal year. All intercompany
transactions and accounts between the Company and FMS have been eliminated in
consolidation.
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 or revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Advertising revenues are recognized when the advertisements are broadcast. Video
and publications revenues are recognized when the goods are shipped or later
when accepted by the customer if acceptance is required. During 1998, the
Company recorded approximately $695,000, $150,000 and $50,000 of video and
publications, advertising and other revenues, respectively. During 1999, the
Company recorded approximately $1,466,000, $26,000 and $41,000 of video and
publications, advertising and other revenues, respectively.
CASH
At times, the Company maintains cash balances over the Federal Depository
Insurance Corporation insurable limited of $100,000 per customer per financial
institution.
Continued
F-12
<PAGE> 50
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
FURNITURE AND EQUIPMENT
Furniture and equipment is depreciated or amortized over the estimated useful
lives of the assets using straight-line and accelerated methods. Estimated
useful lives range from 3 to 7 years.
Furniture and equipment, at cost, consist of the following at June 30, 1999:
Computer equipment $ 364,982
Leasehold improvements 10,000
Office furniture 58,275
---------
433,257
Less accumulated depreciation and amortization (255,707)
---------
$ 177,550
=========
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS 109"), "Accounting for Income Taxes." Under SFAS
109, deferred income tax assets and 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 deferred income tax assets and
liabilities from period to period.
DEFERRED OFFERING COSTS
Costs associated with offerings of The 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. At June 30, 1999, the Company
has no deferred offering costs.
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. At June 30, 1999, the Company has no deferred financing costs.
Continued
F-13
<PAGE> 51
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
CAPITALIZED PROGRAMMING COSTS
Capitalized programming costs include direct costs of production, production
overhead and costs to acquire distribution rights. Production costs are
accumulated by each series produced or licensed. Production overhead is
allocated proportionately to each series produced based on the direct production
costs incurred for each series produced.
The costs are charged to earnings as the series are broadcast based on the
estimated number of future showings in accordance with SFAS No. 63, "Financial
Reporting by Broadcasters." Capitalized programming cost 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.
PREPAID CONSULTING COSTS
The value of common stock and options issued for consulting services is recorded
as prepaid consulting costs as a component of shareholders' (deficit) equity.
Such amounts are amortized, using the straight-line method, over the life of the
consulting agreements.
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.
STATEMENT 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 1998, deferred offering costs of $573,508 were recorded against proceeds
from the Initial Public Offering. Deferred offering costs of $40,000, paid to
the underwriters, were credited toward a two-year consulting agreement and
recorded in other assets. The Company common stock of 44,000 shares was issued
in connection with the acquisition of FMS.
The Company made cash payments of $2,545 in 1998 and $2,322 in 1999 for state
income taxes. During 1998 and 1999, cash payments for interest expense were
approximately $166,000 and $18,000, respectively.
Continued
F-14
<PAGE> 52
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. SFAS 130 has no impact on the financial
statements of the Company as it has no additional items of comprehensive income.
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. Company management has represented
that the Company currently operates in only one segment (i.e., the cable
television segment); therefore SFAS 131 has no impact on the financial
statements of the Company.
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/loss 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 computed diluted earnings per share using the
Treasury stock method.
Dilutive securities of 7,003,976 and 4,477,170 shares are not included in the
calculation of diluted EPS in the years ending June 30, 1999 and 1998,
respectively, because they are antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 107 ("SFAS 107"), "Disclosures About Fair Value of
Financial Instruments." SFAS 107 requires disclosure of fair value information
about financial instruments when it is practicable to estimate that value. The
carrying amount of the Company's cash, receivables, trade payables and accrued
Expenses approximates their estimated fair values due to the short-term
maturities of those financial instruments. The fair value of short-term notes
payable is not determinable as these borrowings are with related parties or the
carrying amount approximates fair values due to the short-term maturity of the
notes (see Note 4).
Continued
F-15
<PAGE> 53
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement, as amended by SFAS 137, is effective for
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect the adoption of this standard to have
a material impact on its results of operations, financial position or cash flows
as it currently does not engage in any derivative or hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 ("SOP 98-5"), "Reporting the Costs of Start-Up
Activities." SOP 98-5 requires that all non-governmental entities expense the
costs of start-up activities, including organization costs as those costs are
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect the adoption of
this standard to have a material effect on its results of operations, financial
position or cash flows.
YEAR 2000
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
Conducts business, the Company's revenues and financial condition could be
adversely impacted.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of," which requires that long-lived assets and
certain indentifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In accordance with the
provisions of SFAS 121, the Company regularly reviews long-lived assets and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Based on
its analysis, the Company believes that no impairment of the carrying value of
its long-lived assets existed at June 30, 1999.
Continued
F-16
<PAGE> 54
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," which defines a fair
value based method of accounting for stock-based compensation. However, SFAS 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB 25 must make proforma disclosures of net Income (loss), as if the
fair value method of accounting defined in SFAS 123 has been applied. The
Company has elected to account for its stock-based compensation to employees
under APB 25.
RECLASSIFICATIONS
Certain 1998 financial statement amounts have been reclassified to conform to
the 1999 presentation.
NOTE 3 - CAPITALIZED PRODUCTION COSTS
Capitalized production costs, net of amortization, are as follows:
Produced programs $ 691,274
FMS film library acquired 376,762
Licensed films 493,575
-----------
1,561,611
Less accumulated amortization (1,041,963)
-----------
Net capitalized production costs $ 519,648
Based on the Company's estimates of future showings, approximately 90 percent of
the remaining unamortized costs will be amortized within the next three years.
Continued
F-17
<PAGE> 55
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at June 30, 1999:
<TABLE>
<S> <C> <C>
Unsecured notes payable to shareholders, interest at 10%,
principal and interest due October 1999, net of
unamortized debt discount of $181,318 $306,015
Convertible notes payable to shareholders, interest at
12%, principal and interest due March 2000 100,000
Unsecured note payable to Group W Network Services,
interest at 10%, principal and interest due December 1999 75,000
--------
$481,015
========
</TABLE>
The Company originally borrowed $725,000 under unsecured notes payable to
shareholders, due April 1999. These notes had 500,000 detachable warrants at
$0.01 per share, which were valued at $326,000 (based on a Black-Scholes
computation under SFAS No. 123) and recorded as a debt discount. This discount
was amortized as additional interest expense through the maturity of the
original notes in April 1999. Upon maturity, the Company negotiated an extension
of $487,333 of the notes (along with accrued interest on the entire original
note balance totaling approximately $25,000) through October 1999 in exchange
for an additional 950,000 detachable warrants at $0.01 per share. The new
warrants were valued at $272,000 (based on a Black-Scholes computation under
SFAS No. 123) and recorded as a debt discount, which is being amortized as
additional interest expense through the maturity of the new notes. Through June
30, 1999, the Company recorded a total debt discount of $598,000, of which
$416,862 has been amortized to interest expense.
The convertible notes payable to shareholders are convertible at any time into
common stock at the lower of (1) 70% of the average closing bid price for the
common stock for the five days immediately preceding the conversion date; or (2)
$0.50. These notes are in default due to the Company's de-listing from the
NASDAQ SmallCap exchange under the terms of the agreements. The Company has
negotiated the conversion of most notes with the note holders at $0.50 per
share, which will be completed in early fiscal year 2000.
Continued
F-18
<PAGE> 56
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 5 - INCOME TAXES
The components of the net deferred income tax asset at June 30, 1999 are as
follows:
Carryforward of net operating losses $ 6,894,000
Development costs capitalized for tax purposes 403,000
Other temporary differences 131,000
-----------
7,428,000
Valuation allowance (7,428,000)
-----------
Deferred income tax asset $ --
===========
The provision for income taxes of $2,545 and $800 for the fiscal years ended
June 1998 and 1999, 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, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------------- -----------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax benefit at federal
statutory rate $(2,808,124) (34.00)% $(2,768,038) (34.00)%
State taxes, net of federal income
tax effect 2,545 0.03 800 0.00
Net operating losses and other
deferred income tax assets not
benefited 2,808,124 34.00 2,768,038 34.00
----------- ------- ----------- -------
$ 2,545 0.03% $ 800 0.00%
=========== ========= =========== =======
</TABLE>
As of June 30, 1999, the Company had approximately $18,700,000 of federal net
operating loss carryforwards, which will expire in fiscal years ending 2008 to
2013. As of June 30, 1999, the Company had approximately $9,300,000 of
California state net operating loss carryforwards, which will expire in fiscal
years ending 2001 to 2004. 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 significant
ownership changes of the Company's common stock.
Continued
F-19
<PAGE> 57
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 6 - CAPITAL STOCK TRANSACTIONS
Initial Public Offering
On October 3, 1997, the Company consummated its Initial Public Offering 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 each for net proceeds of approximately
$10,142,000.
1998 PRIVATE PLACEMENT
In June 1998, the Company issued (i) 808,377 shares of common stock for net
proceeds of approximately $1,545,000, and (ii) warrants to purchase 70,000
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 Company placed 346,449 shares of common stock into escrow, which
were released in fiscal year 1999 (along with a warrant to purchase 30,000
shares at $5.50 per share through 2001) once shareholder approval was obtained,
for net proceeds of approximately $720,000.
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).
The 1998 Private Placement was amended twice in fiscal 1999. After the
amendments and shares issued under the reset rights through June 1999, the
transaction can be summarized as follows: net cash proceeds were approximately
$2,111,536 for 4,218,527 shares, with warrants to purchase another 100,000
shares of common stock at $5.50 per share, and 500,000 shares of common stock at
$0.01 per share (418,000 shares were exercised in Fiscal year 2000) exercisable
through June 2001. In May 1999, the Company issued additional warrants to
purchase 500,000 shares of common stock at $0.25 per share in exchange for a 90
day deferral of any further reset rights. The Company is negotiating The
termination of the reset rights; however, there can be no assurances that this
negotiation will be successful.
ACQUISITION OF FMS
As discussed in Note 1, during fiscal 1998 the Company issued 44,000 shares to
shareholders of FMS in connection with the acquisition of FMS.
Continued
F-20
<PAGE> 58
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 6 - CAPITAL STOCK TRANSACTIONS, CONTINUED
JUNE 1999 PRIVATE PLACEMENT
In June 1999, the Company issued 385,000 shares pursuant to a private placement
in exchange for $325,000 (net of offering costs). The Company issued another
55,000 shares to an escrow agent until the additional $50,000 in committed cash
was received, which occurred after June 30, 1999. In connection with this
private placement, 385,000 warrants were issued to the investors and placement
agents at $0.35 per share, exercisable through June 2002. The Company has a put
option in connection with this offering to the investor group for an additional
$1,500,000 in exchange for 1,500,000 shares exercisable within two weeks after
the Company gets re-listed on the NASDAQ SmallCap exchange, contingent upon
numerous other items as outlined in the agreement. If the put option is
exercised, additional warrants and shares will be issued to investors and
placement agents as defined in the agreement. The agreement also includes reset
rights for the investors after an initial 90 day waiting period, as referred in
the agreement.
ISSUANCE OF STOCK FOR COMPENSATION AND SERVICES
During fiscal 1999, the Company issued 3,935,864 shares of common stock to
employees, directors, and consultants in connection with amounts owed to these
parties for compensation and other services rendered. Based on the trading price
of the stock on the dates of issuance (discounted up to 15% for restricted
shares issued), the Company recorded total expense of approximately $1,737,956
in salaries and consultant expense, with an additional $100,000 being recorded
as a prepaid to be amortized to expense through April 2000. In addition, the
Company recorded an additional expense amount of $415,577 in fiscal 1999 for
shares issued after June 30, 1999 related to services performed through June 30,
1999.
EXERCISE OF OPTIONS AND WARRANTS
In fiscal 1998 and 1999, holders of options and warrants exercised 2,867 and
1,916,999 shares of common stock, respectively, for proceeds of $2,207 and
$696,500, respectively
OTHER STOCK TRANSACTIONS
During April 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 options to purchase 200,000 shares of common stock. The securities are
to vest through September 1998. No securities were issued under the agreement
through June 30, 1998 as the Company was negotiating to modify or cancel the
agreement, however, approximately 106,000 shares of common stock had vested
under the terms of the original agreement of June 30, 1998. In 1998, the Company
has recorded compensation expense of approximately $522,000 related to this
agreement. In 1999, the agreement was cancelled and a new agreement was Executed
for only 200,000 options. As a result of the cancellation, $343,750 of
previously recognized consulting expense, was reversed along with a
corresponding amount in shareholders' equity (deficit).
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.
Continued
F-21
<PAGE> 59
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 7 - RELATED PARTY TRANSACTIONS
COMPENSATION
During fiscal years 1998 and 1999, cash payments of approximately $660,000 and
$0, respectively, were made to shareholders and directors, including affiliated
companies, for compensation in connection with services rendered.
SHARES ISSUED TO RELATED PARTIES
In April 1999, the Company issued 900,000 restricted shares to a director as
compensation for services rendered on behalf of the Company. The shares were
valued at approximately $287,000, which was recorded to salaries and consulting
expense in the accompanying consolidated statement of operations.
Beginning in December 1998, the Company issued shares to employees and directors
for a portion of their compensation and expense reimbursement. The total shares
issued to employees and directors (excluding the 900,000 shares referred to
above) was approximately 2,410,000, valued at approximately $1,031,000, which
was recorded to salaries and consulting expense in the accompanying consolidated
statement of operations.
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. The Nesting Contract expired on August 31, 1998.
During 1998 and 1999, the Company made cash payments of $57,000 and $0,
respectively, to ATN.
NOTES PAYABLE
See Note 4 for a discussion of these transactions.
Continued
F-22
<PAGE> 60
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 8 - EMPLOYMENT AGREEMENTS
The Company has two employment agreements with employees, which provide for base
salary and bonuses through fiscal 2003. The bonuses are payable annually and are
primarily calculated based on revenues of the subsidiary, as defined in the
agreements. The future minimum payments under these agreements are as follows:
Years Ending
June 30,
------------
2000 $ 368,000
2001 368,000
2002 356,000
2003 112,000
----------
$1,204,000
==========
The employment agreements contain certain non-compete and severance pay clauses,
as defined in the agreements. Upon termination for cause, the agreements will be
cancelled with no additional amounts owing to the terminated party.
NOTE 9 - OPTIONS AND WARRANTS
STOCK OPTIONS
The Company has the following stock option plans: the 1996 Employee and
Consultants Stock Option Plan, the 1996 Board of Directors and Advisory Board
Retainer Stock Option Plan, the 1997 Management Bonus Plan, the 1998 Stock Plan,
the 1999 Stock Compensation Plan and the 1999 Stock Option Plan. A total of
2,890,251 shares of common stock are reserved for issuance, pursuant to options
granted and to be granted under these plans. 1,932,876 shares are available for
grant under the plans as of June 30, 1999. Options pursuant to the 1996 and 1997
plans have fully vested as of June 30, 1998, resulting from change of control
provisions being activated due to changes in the Board of Directors of the
Company. Options under the 1998 and 1999 plans both generally vest over three
years. All plan options generally 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 the 1996 plans were
at an exercise price of $5.00 per share. All grants under the 1997 and 1998
plans were repriced, effective August 3, 1998, as the Board of Directors of the
Company approved the repricing of options to purchase 806,746 shares granted
under these two plans, certain non-plan options and an option granted after June
30, 1998. 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 have identical terms and conditions as the
current original options.
Continued
F-23
<PAGE> 61
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
As of April 1999, certain employee options were canceled in anticipation of
being reissued in early fiscal 2000 at a reduced price of $0.43 per share (the
issuance has not yet occurred).
During 1998 and 1999, non-plan options to purchase 109,833 and 2,286,830
shares, respectively, of common stock were granted. The options' exercise prices
ranged from $1.56 to $3.00 per share in 1998 and $0.23 and $5.00 per share in
1999. The vesting and expiration of these options vary. During 1998, 1,000 of
these options were cancelled upon termination of employment of an optionee.
Options granted to non-employees,(totaling 1,577,915 shares) during fiscal 1999
were valued under SFAS No. 123 using the Black-Scholes option pricing model (see
below), totaling $434,670 in fiscal 1999.
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, 1998 and 1999:
<TABLE>
<CAPTION>
Shares Subject Price
To Option Exercisable Range
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, July 1, 1997 280,627 $1.30 - $5.00
Granted 890,209 $1.56 - $5.00
Exercised (2,867) $ 1.30
Canceled/expired (99,546) $1.56 - $5.00
---------
Balance, June 30, 1998 1,068,423 628,669 $1.56 - $5.00
Granted 2,724,665 $0.23 - $5.00
Exercised (917,000) $0.38 - $2.00
Canceled/expired (1,142,113) $0.38 - $3.00
----------
Balance, June 30, 1999 1,733,975 1,039,685 $0.23 - $5.00
========== ============= =============
</TABLE>
Continued
F-24
<PAGE> 62
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 9 - OPTIONS AND WARRANTS, CONTINUED
The following table summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------------
Weighted Weighted Weighted
Range of Total Average Average Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life Price Outstanding Price
- ------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.23 - $0.75 1,271,000 2 $ 0.39 596,002 $ 0.47
$1.00 - $1.56 210,853 3 1.42 210,312 1.42
$1.81 - $2.50 126,292 2 2.20 107,541 2.24
$3.00 - $5.00 125,830 2 3.85 125,830 3.85
--------- ---------
1,733,975 1,039,685
========= =========
</TABLE>
If the Company had elected to recognize compensation cost based on the fair
value of the options granted to employees 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):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1998 1999
--------- ---------
<S> <C> <C>
Net loss - as reported $ (8,262) $ (8,141)
Net loss - pro forma $ (8,532) $ (8,539)
Loss per share - as reported $ (1.91) $ (0.96)
Loss per share - pro forma $ (1.97) $ (1.00)
</TABLE>
Continued
F-25
<PAGE> 63
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 9 - OPTIONS AND WARRANTS, CONTINUED
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:
<TABLE>
<CAPTION>
1998 1999
-------- ------------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 72% 30 - 214%
Risk free interest rate 6.0% 6.5%
Expected life of options 5 years 1 - 4 years
</TABLE>
The weighted average fair value of options granted during fiscal year 1998 is
$1.00. During 1999, the weighted average fair value of options granted to
employees was $0.41.
STOCK WARRANT
The following is a summary of all warrants granted to shareholders, consultants
and others to acquire the Company's common stock as of June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Shares Subject Price
To Warrants Exercisable Range
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, July 1, 1997 515,498 -- $3.87 - $5.50
Granted 2,835,000 -- $5.50 - $9.08
----------
Balance, June 30, 1998 3,350,498 3,350,498 $3.87 - $9.08
Granted 2,935,000 -- $0.01 - $5.50
Exercised (999,999) -- $ 0.01
Canceled/expired (15,498) -- $ 3.87
----------
Balance, June 30, 1999 5,270,001 5,270,001 $0.01 - $9.08
========== ========== =============
</TABLE>
Continued
F-26
<PAGE> 64
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The following table summarizes information about stock warrants outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------------
Weighted Weighted Weighted
Total Average Average Average
Exercise Warrants Remaining Exercise Warrants Exercise
Price Outstanding Life Price Outstanding Price
- ------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 950,001 2 $ 0.01 950,001 $ 0.01
0.25 500,000 3 0.25 500,000 0.25
0.35 385,000 3 0.35 305,000 0.35
5.50 3,015,000 3 5.50 3,515,000 5.50
9.08 420,000 3 9.08 420,000 9.08
--------- ---------
5,270,001 5,270,001
========= =========
</TABLE>
In connection with the granting of these warrants, the Company recorded
additional consulting expense of $0 and $430,000 in fiscal 1998 and 1999,
respectively. The value of the fiscal year warrants are estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions:
1999
-----------
Expected dividend yield 0%
Expected stock price volatility 133 - 214%
Risk free interest rate 6.5%
Expected life of warrants 1 - 3 years
Continued
F-27
<PAGE> 65
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 10 - COMMITMENTS
OPERATING LEASES
The Company has operating lease agreements for its facilities that expire at
various dates through 2001. Under one of the agreements, the Company has an
option to extend the lease through May 2004. The leases require 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:
Years Ending
June 30,
------------
2000 $138,000
2001 132,000
2002 20,000
--------
$290,000
========
Rent expenses charged to operations in fiscal 1998 and 1999 were approximately
$79,600 and $232,400, respectively.
CAPITAL LEASES
The Company leases certain office equipment under a capital lease. At June
30,1999, minimum lease payments under the terms of the lease agreement are as
follows:
Years Ending
June 30,
------------
2000 $19,817
=======
Continued
F-28
<PAGE> 66
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 10 - COMMITMENTS, CONTINUED
TRANSPONDER CONTRACT
In May 1998, the Company entered into a five-year contract with Group W Network
Services to provide program origination, master control operations, uplink and
C-Band Satellite transponder services. The contract requires the Company to make
monthly payments of approximately $85,000.
In April 1999, the Company negotiated a settlement of its accounts payable
balance owing to Group W Network Services as follows: payment of $150,000 in
cash, issuance of 500,000 of the Company's restricted common stock valued at
$159,000, and a note payable for $75,000 with an interest rate of 10% due in
December 1999. Future payment obligations were reduced to $50,000 per month in
advance in exchange for a reduction in daily broadcasting to nine hours per day
(see Note 1).
CONSULTING AGREEMENTS
The Company is a party to various consulting agreements related to marketing,
website generally design, corporate development, strategic partnering,
technology, etc. These agreements range in term from 30 days to 2 years and
require varying amounts of cash and stock payments. Total estimated expenses to
be recognized under these contracts is $600,000, most of which will be
recognized in fiscal 2000. Total estimated shares and options/warrants to be
granted in the future under these agreements is approximately 450,000 shares and
1,115,000 shares, respectively.
UNIVERSITY OF FLORIDA GRANT
The Company entered into an agreement to provide funding for an unrestricted
educational grant of $120,000 during fiscal 2000 to the University of Florida
for research and development of a web site to provide alternative and behavioral
health and wellness assistance.
NOTE 11 - SUBSEQUENT EVENTS
Since year end, the Company has issued an additional 2,427,595 shares of stock,
primarily for the exercise of 418,000 warrants at $0.01 per share, employee
compensation, reimbursable employee expenses, consulting expense and debt
discount (on shareholder loans totaling $225,000).
In addition, certain shareholders have loaned the Company $225,000. The loans
bear interest at 10%, with principal and interest due on the earlier of (1)
January 2000 or (2) immediately upon the closing of a debt or equity financing.
The notes are convertible to stock at $0.50 per share.
Company management is currently negotiating with noteholders and key internal
shareholders to raise additional capital by the following: (1) convert all
existing debt and accrued interest to equity (estimated at approximately
$756,000 at $0.25 per share; (2) receive an equity infusion from key internal
shareholders totaling $600,000 at $0.25 per share; and (3) offer noteholders an
opportunity to buy additional $756,000 of equity at $0.25 per share. There are
no assurances that management will be successful in negotiating this transaction
as contemplated.
F-29
<PAGE> 67
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.
<TABLE>
<S> <C>
Registration fee
Nasdaq listing expenses fee 0
Blue Sky fees and expenses (including legal and filing fees) 0
Printing expenses (other than stock certificates $ 1,000.00
Legal fees and expenses (other than Blue Sky) $ 5,000.00
Accounting fees and expenses $10,000.00
Miscellaneous expenses $ 2,000.00
----------
Total $18,000.00
==========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In June 1998, the Registrant issued (i) 1,111,110 shares of Common
Stock, valued at $2.25 per share, to seven "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 1998, 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.
<PAGE> 68
In October 1998, the Registrant issued 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, in connection with various consulting and service agreements.
If all options and warrants were exercised, proceeds from the exercise of the
stock options and warrants would be $825,000. As of June 30, 1999, a total of
$775,000 of the options had been exercised
On December 7, 1998, the Company entered into an agreement with G.
Howard Associates, Inc. ("Howard") wherein Howard would represent the Company,
on an exclusive basis with respect to certain investors in connection with
raising capital for the Company. For its services, Howard would receive a cash
fee equal to 6% of the total consideration received by the Company and to
reimburse Howard for its out-of-pocket expenses. The fee is due at the closing
of a said transaction. Such agreement with Howard was amended in April 1999. The
amendment expanded Howard's representation to include (a) the sale of the
Company's 20% ownership in Recovery Interactive; (b) the settlement with certain
creditors identified; and, (c) assistance in raising $300,000 of additional
capital. Pursuant to this amendment, Howard received 900,000 newly issued shares
of the Common Stock valued at $287,000 and a reduction in warrants held by
Howard and/or Mr. Henry.
In December 1998, in connection with $725,000 notes payable by the
Company, the Company granted warrants to purchase 500,000 unregistered shares at
$0.01 per share to a group of shareholders (the "Noteholders"). In April 1999,
the Company renegotiated the terms of the $725,000 notes payable to certain
shareholders. In exchange for extending the due date to October 1999 (six
months), the Company granted another 1,000,000 warrants at $0.01 per share.
Approximately 999,999 shares to date have been exercised.
On January 7, 1999 the Company engaged Ms. Jones, member of the Board of
Directors to act as a "Special Agent" to help the Company secure financing.
Pursuant to Ms. Jones' proposal, Ms. Jones received 50,000 shares of
unregistered common stock and is entitled to 5% of the first one million of
value, 4% of the second one million value, 3% of the third one million value, 2%
of the fourth one million value and 1% on all amounts of value in excess of five
million dollars upon closing.
On January 26, 1999 the Company engaged Mr. Wheeler, Executive in the
Company, as an Agent to help secure financing. Pursuant to the Letter of
Agreement, Mr. Wheeler will receive 75,000 shares of unregistered common stock
and is entitled to a cash fee equal to four percent (4%) of the total financing
upon closing.
Beginning in February 1999, executive officers and other employees of
the Company have received stock in lieu of salaries. To-date, the Company has
issued 527,657 number of shares in lieu of salaries.
In March 1999, in connection with an aggregate $100,000 investment by
certain investors, the Company agreed to issue notes convertible into Common
Stock of the Company.
In April 1999, the Company entered into an agreement with third
parties to sell its interest in Recovery Interactive and to receive it web-site
back from Recovery Interactive.
On June 11, 1999, the Company entered into a Subscription Agreement
(the "Agreement") with certain Subscribers (the "Private Placement"). The
Private Placement provides for the issuance upon closing by the Company of (i)
350,000 shares (the "Shares") of Common Stock for $350,000, or $1.00 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 $1,500,000 pursuant to a "put" provision in the Agreement
(the "Additional Shares"), and (iii) 35,000 shares of Common Stock and 175,000
placement warrants exercisable at $0.35 per common share, as partial
compensation to the placement agents in the Private Placement.
In September 1999, the Company entered undertook to restructure
existing transactions relating to (i) the Subscription Agreement entered into by
Investors with the Company for investment by such Investors in the securities of
the Company dated June 29, 1998, as amended by Amendment No. 1 dated as of
October 27, 1998; (ii) the subscription agreements dated March 18, 1999 where
certain of the Investors invested in an aggregate $100,000 of principal amount
Convertible Notes of the Company; and, (iii) the Subscription Agreement dated
June 10, 1999 between the Company and Investors (see above). On September 28,
1999, the Company entered into a Restructuring Agreement with the Investors to
the above-mentioned transactions, wherein, among other things, upon issuance of
additional shares (i) there would be no further resets pursuant to the June 29,
1998 investment; (ii) any further resets, if any, in connection with the June
1999 investment would be determined based on a purchase price of $0.50 per
shares; and (iii) Convertible Notes issued on March 1999 would be converted at
the conversion price of $0.50.
On October 13, 1999, the Company finalized a debt restructuring and infusion of
additional capital with certain noteholders and shareholders, resulting in the
following: (1) conversion of all existing debt and accrued interest to equity
(estimated at approximately $756,000) at $0.25 per share; (2) commitment to
receive an equity infusion from key internal shareholders totaling up to
$600,000 at $0.25 per share; and (3) a 45-day option to noteholders to acquire
additional equity at $0.25 per share up to $756,000. This transaction will bring
up to $1.3 million in cash and an increase to equity of up to $2.1 million.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
</TABLE>
<PAGE> 69
<TABLE>
<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. ++
2.7 Convertible Note issued to Austost Anstalt Schaan, Balmore Funds,
The Sargon Fund, L.P., and Martin Chopp dated March 22, 1999 ****
2.9 Restructuring Agreement dated September 28, 1999 ****
3.1 Articles of Incorporation of Registrant. **
3.2 By-laws of 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
(included in Exhibit 10.19)
4.12 1998 Stock Plan. +
4.13 1999 Stock Plan. ****
4.14 Form of Warrant. ****
4.15 Form of Registration Rights Agreement dated December 10, 1997
between the Registrant and each of the Sellers.++
5.1 Opinion of Beckman, Millman and Sanders, LLP
10.1 Operating Agreement of RecoveryNet Interactive, L.L.C. dated as of
August 1, 1996. *
</TABLE>
<PAGE> 70
<TABLE>
<S> <C>
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, 1997. **
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 Magellan
dated as of May 1, 1997. **
10.9 Employment Agreement between the Registrant and Jay Handling dated
as of May 11, 1999. ****
10.10 License Agreement between RecoveryNet Interactive, L.L.C. and
Merit Behavioral Care Corporation dated as of May 1, 1997. **
10.11 Services Agreement dated as of April 1, 1998, as amended on
October 27, 1998 and April 15, 1999, by and between Registrant and
Group W Network Services. ****
10.12 Letter Agreement between Registrant and G. Howard Associates, Inc.
dated December 7, 1998, as amended on April 11, 1999. ****
10.13 Engagement Proposal between Registrant and Charlotte Schiff Jones
dated January 7, 1999. *****
10.14 Letter Agreement between Registrant and John Wheeler
dated January 26, 1999. ****
10.16 Agreement and General Releases dated as of April 15, 1999 between
the Registrant and TCI Online RN Holdings, Inc. FHC Internet
Services, LC and Lifescape 1 to 1, LLC. ****
10.17 Settlement Agreement and General Release and Common Stock Purchase
Warrant between the Registrant and Michael Lennon dated January
1999. ****
10.18 Settlement Agreement and General Release and Common Stock Purchase
Warrant between the Registrant and George Henry dated October 26,
1998. ****
10.19 Promissory Note between Registrant and William Moses and George
Henry dated May 27, 1999. ****
10.20 Promissory Notes between Registrant and George Henry, George Henry
III, Nicole Cox, William Moses, Martin Chopp and Michael Clurman
dated July 23, 1999. ****
10.21 Promissory Note between Registrant and George Henry dated
September 10, 1999. ****
10.22 Form of Debt Restructuring Agreement dated October 13, 1999
relating to $725,000 debt and $100,000 debt. ****
</TABLE>
<PAGE> 71
<TABLE>
<S> <C>
16 Letter regarding Change in Certifying Accountant. +++
21.1 List of Subsidiaries. **
23.1 Consent of Arthur Andersen, LLP ****
23.2 Consent of Corbin & Wertz ****
23.3 Consent of Beckman, Millman and Sanders, LLP (included in
Exhibit 5.1)
27.1 Financial Data Schedule. ****
</TABLE>
* Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-61421.
** 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 the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-82299.
**** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-90481.
+ 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.
+++ Incorporated by Reference to Exhibit 16 to the Registrant's August 31, 1999
Form 8-K/A.
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
<PAGE> 72
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.
<PAGE> 73
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 12th day of November, 1999.
THE RECOVERY NETWORK, INC.
By: /s/ WILLIAM D. MOSES
---------------------------
William D. Moses
President
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/ ROBERT PORTRIE
- -------------------------------- Chairman of the Board of Directors November 12, 1999
Robert Portrie
/s/ GEORGE HENRY Chairman of the Executive November 12, 1999
- -------------------------------- Committee of the Board of Directors
George Henry
/s/ WILLIAM D. MOSES President and Director
- -------------------------------- November 12, 1999
William D. Moses
/s/ STACEY ROMM Chief Financial Officer
- -------------------------------- November 12, 1999
Stacey Romm
/s/ MARC GUREN
- -------------------------------- Director November 12, 1999
Marc Guren
/s/ JAY HANDLINE
- -------------------------------- Director November 12, 1999
Jay Handline
/s/ CHARLOTTE SCHIFF JONES
- -------------------------------- Director November 12, 1999
Charlotte Schiff Jones
/s/ KEVIN WALL
- -------------------------------- Director November 12, 1999
Kevin Wall
</TABLE>
<PAGE> 74
EXHIBIT INDEX
<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. ++
2.7 Convertible Note issued to Austost Anstalt Schaan, Balmore Funds,
The Sargon Fund, L.P., and Martin Chopp dated March 22, 1999. ****
2.9 Restructuring Agreement and dated September 28, 1999. ****
3.1 Articles of Incorporation of Registrant. **
3.2 By-laws of 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
(included in Exhibit 10.19). ****
4.12 1998 Stock Plan. +
</TABLE>
<PAGE> 75
<TABLE>
<S> <C>
4.13 1999 Stock Plan. ****
4.14 Form of Warrant.
4.15 Form of Registration Rights Agreement dated December 10, 1997
between the Registrant and each of the Sellers.++
5.1 Opinion of Beckman, Millman and Sanders, 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, 1997. **
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 Magellan
dated as of May 1, 1997. **
10.9 Employment Agreement between the Registrant and Jay Handline dated
as of May 11, 1999. ****
10.10 License Agreement between RecoveryNet Interactive, L.L.C. and
Merit Behavioral Care Corporation dated as of May 1, 1997. **
10.11 Services Agreement dated as of April 1, 1998, as amended on
October 27, 1998 and April 15, 1999, by and between Registrant and
Group W Network Services. ****
10.12 Letter Agreement between Registrant and G. Howard Associates, Inc.
dated December 7, 1998, as amended on April 11, 1999. ****
10.13 Engagement Proposal between Registrant and Charlotte Schiff Jones
dated January 7, 1999. ****
10.14 Letter Agreement between Registrant and John Wheeler
dated January 26, 1999. ****
10.16 Agreement and General Releases dated as of April 15, 1999 between
the Registrant and TCI Online RN Holdings, Inc. FHC Internet
Services, LC and Lifescape 1 to 1, LLC. ****
10.17 Settlement Agreement and General Release and Common Stock Purchase
Warrant between the Registrant and Michael Lennon dated January
1999. ****
10.18 Settlement Agreement and General Release and Common Stock Purchase
Warrant between the Registrant and George Henry dated October 26,
1998. ****
10.19 Promissory Note between Registrant and William Moses and George
Henry dated May 27, 1999. ****
</TABLE>
<PAGE> 76
<TABLE>
<S> <C>
10.20 Promissory Notes between Registrant and George Henry, George Henry
III, Nicole Cox, William Moses, Martin Chopp and Michael Clurman
dated July 23, 1999. ****
10.21 Promissory Note between Registrant and George Henry dated
September 10, 1999. ****
10.22 Form of Debt Restructuring Agreement dated October 13, 1999
relating to $725,000 debt and $100,000 debt. ****
16 Letter regarding Change in Certifying Accountant. +++
21.1 List of Subsidiaries. **
23.1 Consent of Arthur Andersen, LLP. ****
23.2 Consent of Corbin & Wertz. ****
23.3 Opinion of Beckman, Millman and Sanders (included in Exhibit 5.1)
27.1 Financial Data Schedule. ****
</TABLE>
* Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-61421.
** 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 the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-82299.
**** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-90481.
+ 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.
+++ Incorporated by Reference to Exhibit 16 to the Registrant's August 31, 1999
Form 8-K/A.
<PAGE> 1
EXHIBIT 5.1
November 5, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: RNETHEALTH.COM, INC. REGISTRATION ON STATEMENT ON FORM SB-2
FILE NO. 333-90481
Gentlemen:
We have acted as counsel to The Recovery Network, Inc., a Colorado corporation
(the "Company") in connection with the registration by the Company under the
Securities Act of 1933 (the "Act") pursuant to the Company's Registration
Statement on Form SB-2 (File No. 333-90481) and Prospectus contained therein,
to be filed with the Securities and Exchange Commission (the "Commission") on
or about the date of this letter (the "Registration Statement") of up to
4,444,573 shares of the Company's common stock, par value $.01 ("Shares"). In
connection with this opinion, we have examined originals or copies, certified
or otherwise, to our satisfaction, of the Certificate of Incorporation of the
Company, as amended to date, by-laws as Directors and such other documents,
instruments and records; and have made such other investigations, as we have
deemed necessary or appropriate as a basis for the opinions set forth herein.
Page Two of Two
We have assumed the legal capacity of all natural persons, the genuineness of
all signatures, the authenticity of all documents submitted to us as originals
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of such
latter documents. In making our examinations of documents executed by parties
other than the Company, we have assumed that such parties had the power,
corporate or otherwise, to enter into and perform their respective obligations
thereunder and have also assumed the due authorization by all requisite action,
corporate or otherwise, and the execution and delivery by such parties of such
documents and the validity and binding effect thereof. As to any facts material
to the opinions expressed herein, we have relied upon oral or written
statements and representations of officers and other representatives of the
Company and others.
<PAGE> 2
Based upon and subject to the foregoing, we are of the opinion that the Shares,
when issued, sold and delivered in the manner and or the consideration stated
in the Prospectus included in the Registration Statement, will be duly
authorized and validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Commission as Exhibit
5.2 to the Registration Statement. We also consent to the reference to our firm
under the caption "Legal Matters" in the Prospectus included in the
Registration Statement.
Very truly yours,
BECKMAN, MILLMAN & SANDERS, LLP
/s/ STEVEN A. SANDERS
Steven A. Sanders
