<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______ TO ______.
COMMISSION FILE NO. 0-22913
THE RECOVERY NETWORK, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Colorado 39-1731029
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1411 5th Street, Suite 200, Santa Monica, California, 90401
(Address of Principal Executive Offices)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 393-3979
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 14,287,251 shares as of
May 24, 1999.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
1
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THE RECOVERY NETWORK, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and June 30, 1998 ........................................................... 3
Condensed Consolidated Statements of Operations (unaudited) for the nine
and three months ended March 31, 1999 and 1998 .............................. 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine month
periods ended March 31, 1999 and 1998 ....................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited) ............. 6
Item 2. Plan of Operations ................................................... 13
PART II - OTHER INFORMATION
Item 1. Legal proceedings .................................................... 30
Item 6. Exhibits and Reports on Form 8-K .................................... 31
Signature Page ............................................................... 32
</TABLE>
2
<PAGE> 3
Part 1 - Financial Information
Item 1 - Financial Statement
THE RECOVERY NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 90,829 $ 2,219,145
Accounts receivable, net 73,535 254,750
Current portion of capitalized
Programming costs, net 220,000 191,500
Inventory 62,696 55,624
Prepaid expenses 35,032 59,220
------------ ------------
Total current assets 482,092 2,780,239
CAPITALIZED PROGRAMMING COSTS, net 515,586 765,962
FURNITURE AND EQUIPMENT, net 214,212 203,189
INVESTMENT IN JOINT VENTURE 619,650 --
OTHER, net 70,185 35,530
------------ ------------
$ 1,901,625 $ 3,784,920
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 754,000 $ --
Accounts payable and accrued liabilities 1,211,692 587,207
Accrued professional fees 206,805 131,647
Accrued royalty expense 476,837 322,630
Current portion of capital lease obligation 17,029 17,029
Due to joint venture -- 224,500
------------ ------------
Total current liabilities 2,666,363 1,283,013
CAPITAL LEASE OBLIGATION, net of current portion 6,005 13,126
------------ ------------
Total liabilities 2,672,368 1,296,139
------------ ------------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value:
Authorized - 25,000,000 shares
Issued and outstanding, 9,657,336 shares at
March 31, 1999, and 5,791,494 at June 30, 1998 96,573 57,915
Additional paid-in capital 19,619,517 17,050,969
Prepaid consulting costs (687,029) (461,250)
Deficit (19,799,804) (14,158,853)
------------ ------------
Shareholders' equity (deficit) (770,743) 2,488,781
------------ ------------
$ 1,901,625 $ 3,784,920
============ ============
</TABLE>
See Company notes
3
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THE RECOVERY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 268,433 $ 281,665 $ 947,392 $ 409,202
----------- ----------- ----------- -----------
OPERATING EXPENSES (GAIN):
Salaries and consulting 866,021 773,781 3,153,255 1,460,824
Marketing 233,401 467,758 396,506 1,125,607
General and administrative 222,274 460,141 1,592,613 980,008
Programming 168,653 438,875 1,496,726 998,686
(Gain)loss on investment
in joint venture (597,675) 167,400 (597,675) 317,400
Cost of video and publication
sales 91,313 75,219 309,377 91,202
----------- ----------- ----------- -----------
Operating expenses 983,987 2,383,174 6,350,802 4,973,727
----------- ----------- ----------- -----------
Loss from operations (715,554) (2,101,509) (5,403,410) (4,564,525)
INTEREST EXPENSE (285,375) (5,584) (299,253) (770,841)
INTEREST INCOME 2,000 48,191 62,686 125,363
----------- ----------- ----------- -----------
Loss before provision for
state income taxes (998,929) (2,058,902) (5,639,977) (5,210,003)
PROVISION FOR STATE INCOME TAXES -- -- 974 --
----------- ----------- ----------- -----------
Net loss $ (998,929) $(2,058,902) $(5,640,951) $(5,210,003)
=========== =========== =========== ===========
LOSS PER SHARE INFORMATION:
Basic and diluted loss per
Share $ (.14) $ (.41) $ (.75) $ (1.27)
=========== =========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 7,142,575 4,980,250 7,566,733 4,116,757
=========== =========== =========== ===========
</TABLE>
See Company Notes
4
<PAGE> 5
THE RECOVERY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR
NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,640,951) $ (5,210,003)
Adjustments to reconcile net loss to
net cash y operating activities:
Amortization of notes payable discount 255,000 479,568
Amortization of deferred offering and
financing costs -- 130,529
Amortization of and allowances for
capitalized programming costs 626,000 116,270
Depreciation and amortization 90,056 53,589
Common stock issued for services and
interest expense 795,016 --
Provision for doubtful accounts -- 7,000
(Gain) loss on investment in joint venture (597,675) 317,400
Changes in assets and liabilities:
Accounts receivable 181,215 (44,562)
Inventory (7,072) 11,711
Prepaid expenses 24,188 (211,706)
Other assets (34,655) (2,507)
Capitalized programming costs (249,917) (332,812)
Accounts payable and accrued liabilities 624,485 (124,948)
Accrued professional fees 75,158 (284,784)
Due to joint venture (74,500) --
Due to shareholders and directors -- (65,751)
------------ ------------
Net cash used in operating activities (3,933,652) (5,161,006)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of FMS -- (34,383)
Purchases of furniture and equipment (101,079) (134,903)
Investment in joint venture (150,000) (317,400)
------------ ------------
Net cash used in investing activities (251,079) (486,686)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 499,000 574,990
Payments on borrowings -- (2,605,250)
Payments on capital lease obligations (7,121) (12,655)
Proceeds from the issuance of common stock 1,664,536 10,715,355
Deferred offering and financing costs incurred (100,000) (343,558)
------------ ------------
Net cash provided by financing activities 2,056,415 8,328,882
------------ ------------
NET (DECREASE) INCREASE IN CASH (2,128,316) 2,681,190
CASH, beginning of period 2,219,145 10,883
CASH FROM ACQUISITION OF FMS -- 17,893
------------ ------------
CASH, end of period $ 90,829 $ 2,709,966
------------ ------------
</TABLE>
See Company Notes
5
<PAGE> 6
The Recovery Network, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and the instructions to Form 10-QSB related to interim
period financial statements. Accordingly, these condensed consolidated financial
statements do not include certain information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary in order to present the financial
statements fairly. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements, and notes thereto, which are
included in the Company's Registration Statement on Form SB-2 (File No.
333-61421 dated November 2, 1998), and the Company's Annual Report on Form
10-KSB, for the year ended June 30, 1998.
NOTE B - ISSUANCE OF COMMON STOCK
On September 24, 1998, and in connection with the 1998 Private Placement, the
shareholders of the Company approved the issuance of 346,449 shares of common
stock (including 13,115 shares of common stock for placement services) and a
three year warrant to purchase 30,000 shares of common stock at $5.50 per share
for gross proceeds of approximately $750,000.
In October 1998, the 1998 Private Placement agreement was amended (the
"Amendment"), whereby an additional 138,890 shares of common stock were issued.
Total shares of common stock issued under the 1998 Private Placement, including
the Amendment shares, were 1,250,000 shares, for gross proceeds of $2,500,000
(or $2.00 per share). Warrants to purchase an additional 400,000 shares of
common stock were also granted at exercise prices ranging from $4.00 to $6.00
per share. These additional warrants were originally exercisable until December
2001. An amendment to the Amendment was executed in December 1998 whereby the
expiration for the warrants was changed to January 4, 1999. The warrants expired
without being exercised.
Pursuant to the Amendment, 1998 Private Placement subscribers (the
"Subscribers") agreed not to sell their 1,250,000 shares of common stock until
December 21, 1998 (the "Lock-Up"), during which period the Subscribers had
granted a transferable option to sell 900,000 of such shares at $3.00 per share
(the "Option") to a minority shareholder of the Company. The Subscribers could
have elected not to sell up to 450,000 shares of common stock under the Option.
Had the Option been exercised, the Lock-Up would have been extended until
February 16, 1999 for all unsold shares and Subscriber reset rights would have
been forfeited. The Lock-Up and Option expired thereafter. Total expenses
incurred in connection with these series of transactions in fiscal 1999 are
approximately $100,000.
6
<PAGE> 7
THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999 (cont.)
The Company has issued 1,213,736 registered shares of common stock through March
31, 1999 pursuant to the Subscribers' reset rights.
Through March 31, 1999, certain warrants were exercised by paying the Company in
cash. These exercises total 622,000 unregistered shares for $745,000.
Through March 31, 1999, in connection with various consulting, service,
severance and employment agreements, the Company granted a total of 1,422,867
shares (both registered and unregistered) of common stock to employees, former
employees, consultants and other service providers. The fair value of these
shares totaled approximately $1,073,000, of which $338,000 is recorded in
prepaid consulting expenses as of March 31, 1999 and the remainder has been
recorded in operating expenses.
In March 1999, the Company settled an agreement with a service provider
(previously recorded as of June 30, 1998) whereby 200,000 shares of unregistered
common stock that were previously agreed to be issued were not issued. In
connection with this settlement, the Company reversed the following previously
recorded amounts: $625,000 of additional paid-in capital and consulting expense
of $344,000. In connection with this settlement, the 200,000 related
unregistered stock options were re-issued to the principal of the service
provider and repriced at $0.375 per share. The Company recorded additional
paid-in capital and consulting expense of $22,000 due to the re-issuance of
these options. Subsequent to March 31, 1999, 172,000 of these options were
exercised (see Note I below).
NOTE C - GRANTING OF STOCK OPTIONS AND WARRANTS
In connection with $725,000 notes payable issued by the Company to a group of
shareholders (the "Noteholders") in December 1998, the Company granted warrants
to purchase 500,000 unregistered common shares at $0.01 per share. The pro-rata
fair value of these warrants of approximately $326,000 is included in equity,
with the debit being recorded as a debt discount and being amortized into
interest expense through April 1999. Subsequent to Qtr end, additional warrants
were issued to the Noteholders in conjunction with renegotiating the due date of
these notes (see Note I below).
In connection with employee services and consulting arrangements, the Company
has granted options to acquire a total of 442,165 shares of registered common
stock to various employees, former employees and Board of Director members and
200,000 shares of unregistered common stock through March 31, 1999. These
options have exercise prices between $0.59 and $2.00 per share and were
generally immediately vested. The estimated value of certain non-employee
options within this group of options, at the time of grant, totaled
approximately $20,000 and has been included in equity.
7
<PAGE> 8
THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999 (cont.)
In connection with other consulting arrangements, the Company has issued
warrants to acquire a total of 1,150,000 shares of unregistered common stock at
exercise prices ranging from $1.00 to $4.00. Many of these warrants were
repriced at prices ranging from $0.50 to $0.75 in an effort to encourage the
exercise of these warrants. As noted above, 622,000 of these warrants have been
exercised for $745,000 during the nine-month period ended March 31, 1999. The
estimated value of these warrants at the time of grant (and/or repricing) is
approximately $551,000, of which approximately $328,000 is recorded in prepaid
consulting expenses as of March 31, 1999 and the remainder has been recorded in
operating expenses
NOTE D - ACQUISITION OF FMS
On December 10, 1997, Recovery acquired 100 percent of the issued and
outstanding common stock of FMS Productions, Inc. ("FMS"). The unaudited pro
forma results of operations for the nine months ended March 31, 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, 1997 are as
follows:
<TABLE>
<CAPTION>
For the Nine
Months Ended
March 31, 1998
<S> <C>
Pro forma total revenues $ 1,107,000
===========
Pro forma net loss $(5,302,000)
===========
Pro forma weighted average
number of common shares 4,142,932
===========
Pro forma loss per common share $ (1.28)
===========
</TABLE>
NOTE E - LOSS PER SHARE
Net loss per share is based on the weighted average number of common shares
outstanding and dilutive common stock equivalents during the periods presented.
Options and warrants to purchase 5,450,835 shares of common stock (at prices
ranging from $.01 to $9.075) and 3,378,282 shares of common stock (at prices
ranging from $0.77 to $9.075) were outstanding as of March 31, 1999 and 1998,
respectively, and were excluded from the computation of loss per share assuming
dilution as they would have been anti-dilutive.
8
<PAGE> 9
THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999 (cont.)
NOTE F - SIGNIFICANT BUSINESS RISKS
GOING CONCERN The accompanying condensed consolidated financial statements have
been prepared assuming the Company will continue as a going concern. The Company
has significant recurring losses from operations, limited operating revenues, a
working capital deficit of approximately $2,200,000 and a shareholders deficit
of $771,000. These factors (among others) that raises substantial doubt about
the Company's ability to continue as a going concern. The ability of the Company
to operate as a going concern is dependent upon its ability (1) to obtain
sufficient additional capital, (2) to distribute its programming and services
through Internet, cable and other multimedia channels, (3) to achieve a critical
mass of viewers and/or visitors to attract advertisers and healthcare providers,
and (4) to acquire and develop appropriate programming and/or content for
distribution. The Company plans to raise additional working capital through
private and public offerings. The successful outcome of future activities cannot
be determined at this time and there are no assurances that if achieved, the
Company will have sufficient funds to execute its intended business plan or
generate positive operating results.
The financial statements do not include any adjustments related to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
GOVERNMENT REGULATIONS
The cable television industry is subject to extensive and frequently changing
federal, state and local laws and substantial regulation under these laws by
governmental agencies, including the Federal Communications Commission (the
"FCC"). Regulations governing the rates that can be charged to subscribers by
cable systems, not in markets subject to effective competition from other
multichannel video program distributors, could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity, or otherwise restrict their ability to add
new programming (such as The Recovery Network). In addition, Federal
"must-carry" rules requiring cable operators to devote up to one-third of their
channels to carriage of local commercial TV broadcast stations (and additional
channels for noncommercial education TV stations); commercial leased access
rules designating 10 to 15 percent of system channels for lease by unaffiliated
programmers; and local regulatory requirements mandating further channel
set-asides for public, governmental and educational use could reduce channel
availability which might otherwise be available for The Recovery Network on many
cable systems. Statutory provisions and FCC rules governing relationships among
cable systems and competing forms of multichannel video program distribution, as
well as the relations between the Company and its cable system affiliates could
adversely affect the marketability of the Company's programming and the
flexibility of the Company in its business dealings with outlets for its
programming.
9
<PAGE> 10
THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999 (cont.)
DEPENDENCE UPON GROUP W NETWORK SERVICES
In May 1998, the Company entered into a five-year contract with Group W Network
Service ("Group W"), a division of CBS Corporation, to provide program
origination, master control operations, up-link and C-Band Satellite transponder
services (the "Transponder Contract"). It is possible that Group W or Company
affiliates could experience broadcast interruptions and equipment failures,
which could last for a significant period of time. The Transponder Contract will
allow the Company to broadcast 24 hours a day, rather than the 12 hours a day
under the ATN nesting contract (the "Nesting Contract"). The Transponder
Contract, however, does not provide the Company with access to subscribers as
did the Nesting Contract.
Through June 30, 1998, substantially all the households which received broadcast
of The Recovery Network's programming were provided under the terms of the
Nesting Contract. Starting September 1, 1998, the Company is entirely dependent
on its own affiliate marketing efforts to obtain affiliate agreements with cable
operators. Currently, the Company has carriage agreements with a number of major
multi system operators and strategic cable systems throughout the country.
Presently, the Company's programming in available on 34 cable systems serving
approximately four million cable subscribers.
On April 15, 1999, the Company entered into a settlement agreement with Group W.
The Company settled its $513,072 obligation to Group W by issuing 500,000 shares
of unregistered common stock (with a fair value of $265,000), paying cash of
$150,000 and agreeing to pay a note payable of $75,000 with 10% interest due
December 1999. The Company realized a gain of $23,072 in connection with this
settlement.
In addition, Group W agreed to provide transponder services to the Company 9
hours a day, 7 days a week for a reduced monthly fee of $50,000 on a five year
contract started July 1, 1998, cancelable if any Company payments are late or
upon 30 days notice.
NOTE G - RECOVERY INTERACTIVE, L.L.C. ("RI")
In October 1998, the Company and TCI agreed to amend the joint venture to admit
a new partner. Based on the amount of cash brought into the venture by this new
partner for a minority interest, the Company was able to recompute the estimated
fair value of its investment. In accordance with Staff Accounting Bulletin Topic
5H, the Company has recognized a gain of approximately $600,000, representing
the per unit price received by RI from the new partner in excess of the
Company's carrying value multiplied by the Company's new ownership percentage.
This investment was sold after Quarter end for cash proceeds of $850,000--see
Note I below.
10
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999 (cont.)
NOTE H - NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
The Statement of Financial Accounting Standards No. (SFAS) 130 "Reporting
Comprehensive Income" was adopted as of September 30, 1998. The implementation
of SFAS 130 did not have an impact on the Company's results of operations. There
were no adjustments to net loss to arrive at comprehensive income (loss).
Note I - Subsequent Events
ISSUANCE OF COMMON STOCK
In April 1999, an option holder exercised 172,000 options at $0.375 per share by
tendering a payment of $64,500 to the Company.
The Company has embarked on a program to settle all accounts payable and certain
accrued royalty expenses by issuing unregistered stock in lieu of a cash
payment. In April and May, 1999, the Company has issued 699,794 shares of common
stock including 500,000 to Group W in settlement of approximately $798,262 of
liabilities. The Company is in the process of settling additional liabilities in
a like manner.
In April 1999, the Company granted to a director 900,000 shares of unregistered
common stock for consulting services in connection with settling liabilities and
raising additional equity capital. The fair value of this stock was
approximately $394,000.
STOCK OPTIONS AND WARRANTS
In April 1999, the Company renegotiated the terms of its $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.
The pro-rata fair value of these additional warrants of approximately $240,000
is included in equity, with the debit being recorded as a debt discount and
being amortized into interest expense through October 1999.
In April 1999, the Board of Directors approved for the repricing of certain
options (totaling 655,925 shares of common stock). Such repricing was effected
by offering to exchange new options with a purchase price of $0.43 per share
(the fair market value of the common stock on the date of repricing) for options
then held by such optionees. The new options otherwise have identical terms as
the old options.
11
<PAGE> 12
THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999 (cont.)
SALE OF INVESTMENT IN RI
In April 1999, the Company entered into an agreement with third parties to sell
its interest in RI for $850,000. This transaction resulted in a gain of
approximately $230,000 in April.
ADDITIONAL FINANCING COMMITMENT/NASDAQ LISTING
In May 1999, the Company received a $2,000,000 proposed financing term sheet
from a group of existing shareholders. Based on the letter of intent, $500,000
of the financing will be received when the letter of intent is signed with the
additional amount due to the Company upon the Company's relisting with NASDAQ.
The Company has requested for a hearing with NASDAQ to discuss the steps
required for the Company to get relisted.
12
<PAGE> 13
ITEM 2. PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
condensed financial statements and notes thereto appearing elsewhere herein.
Recovery Network, Inc. (the "Company"), (NASDAQ-BB:RNET), 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.
To date, the Company has incurred significant net losses, including net losses
of $1,223,829, $3,817,652, and $8,261,734 for the years ended June 30, 1996,
1997 and 1998, and $5,640,951 for the quarter ended March 31, 1999,
respectively. These net losses are primarily related to its cable television
operations. The Company's Internet operations are currently in the development
stage. The execution of the Company's Plan of Operation as outlined below
requires the Company to raise significant additional capital--see Liquidity and
Capital Resources section below.
RnetHealth.com, the internet operation, will provide a branded, integrated,
Web-based solution for the administrative, communications and information needs
of managed care companies, insurance companies and employers as well as deliver
alternative and behavioral healthcare information to the public and consumers.
The Company's primary market is those impacted by social and behavioral health
issues (i.e. substance abuse, domestic violence, depression, eating disorders
and child abuse, etc.) that effect 100 million Americans at a cost to the
economy in excess of five hundred billion dollars annually in increased health
care expenses, crime and lost productivity.
The Recovery Network cable television programming service reaches approximately
5.0 million cable households. The Recovery Television Network will serve to
market and drive traffic to the Company's web site, thereby enhancing e-commerce
revenue generation opportunities including sales of books, tapes, herbs and
vitamins, tele-counseling services, and other behavioral health programming,
services and products ideally suited to its target audience.
Recovery Network's National Partnership for Recovery and Prevention (NPRP)
consists of over 50 prominent national health, recovery and prevention
organizations that represent over 40 million people throughout the United
States.
13
<PAGE> 14
THE INTERNET:
The Company's Internet service, RnetHealth.com, will deliver alternative and
behavioral healthcare information to the public and consumers and provide a
branded, integrated, Web-based solution for the administrative, communications
and information needs of managed care companies, insurance companies and
employers.
The RnetHealth.com Web site, (URL WWW.RNETHEALTH.COM), will be designed for both
business and 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 who
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.
(1) BUSINESS-TO-BUSINESS:
RnetHealth.com will be the single point of access to electronic data interchange
services, enhanced communications services, 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 offline purchases after seeking
information online.
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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 offline.
An independent research company, Jupiter Communications, estimates that
expenditures for online health and medical advertising will grow to
approximately $265 million by 2002. We believe 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.
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.
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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.
(2) 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, the Recovery Network'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.
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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. We believe that through engagement in moderated
chat sessions, online lectures (led by experts in the field of behavioral and
alternative health) and open forums, we 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.
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.
THE TELEVISION NETWORK:
The Recovery Network cable television programming service has successfully
secured approximately 5 million homes of cable TV analog distribution for its 4
hour per day program block without paying any launch fees. The network has
distribution with Cablevision Systems, Telecommunications Inc., Cox
Communications, Cable One, Century, FrontierVision, Knology, NCTC, and Time
Warner. Recovery Network'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") 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.
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Recovery Network will serve to market and drive traffic to RnetHealth.com,
thereby enhancing e-commerce revenue generation opportunities including 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 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). The cable network has already secured governmental support for a
national branding and marketing initiative called 24 STRAIGHT, a day of
Prevention and Recovery sponsored by SAMSHA and CSAT.
The sum of broadband video programming, coupled with a public and commercial web
site interactive application, provides a deep and rich experience for which the
user could not attain with the singular parts.
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under a nesting contract (the "Nesting Contract") with
Access Television Network ("ATN"). Pursuant to the Nesting Contract, ATN
provided satellite uplink, master control and other related services
(collectively, the "ATN Services") on its satellite transponder to The Recovery
Network for two hours of broadcast time every day to subscribers of cable
systems with which ATN had affiliation agreements. The Nesting Contract, as
amended, expired on August 31, 1998.
In May 1998, the Company entered into a five year contract with Group W Network
Services, a division of CBS Corporation, to provide program origination, master
control operations, uplink and C-Band Satellite transponder services (the
"Transponder Contract"). The Transponder Contract allowed the Company to
broadcast 24 hours a day, rather than the 2 hours a day under the Nesting
Contract. On September 1, 1998, the Company 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 Recovery Network's monthly fees
by 50%. The Recovery Network now broadcasts a 4 hour block of programming that
is repeated twice daily to approximately 5,000,000 subscribers.
The Transponder Contract, however, does not provide the Company with access to
subscribers as did the 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. The Company has identified all local
cable systems in the United States with at least 50,000 subscribers and is
engaged in a general marketing campaign ("affiliate marketing") directed at
those approximately 250 systems.
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AFFILIATE MARKETING STRATEGY
The Company's strategy for obtaining affiliation agreements with cable systems
is based on the premises that cable systems are effectively monopolies
franchised by local governments, and in order to renew their franchises, many
cable systems will need to demonstrate a commitment to localism by providing
programming that benefits the local community, and that although it will be
difficult to obtain a full time dedicated channel for a new network until new
digital technologies expand channel capacity, more channel capacity will become
available over the next several years.
The first premise forms the basis for the Company's grassroots affiliate
marketing strategy. The Company believes that The Recovery Network's programming
offers local cable systems an opportunity to demonstrate their commitment to
localism, 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 The Recovery Network'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 The Recovery Network'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 The Recovery Network'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 The Recovery Network in order to
receive those benefits could be too high for some cable systems. Therefore, the
Company is asking cable systems to carry The Recovery Network 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 The Recovery Network. With the support of local communities and
politicians for socially responsible programming, the Company believes, although
there can be no assurance, it will be able to enter into affiliation agreements
for these initial 4 hours.
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.
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The Company has identified all local cable systems with at least 50,000
subscribers and is engaged in a general marketing campaign directed at those
systems. The Company has established a promotional World Wide Web site, which
contains programming schedules, information about the Company and the
Partnership and links to sources of recovery information on the World Wide Web.
The Company will also rely on traditional marketing tools, such as mail,
telephone, trade advertisements, public relations and participation in trade
shows and conferences in connection with its general affiliate marketing
strategy.
As of the date of this billing, 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.
In addition to the foregoing, the Company is currently negotiating agreements
with the following In additional MSOs: Cablevision, Time Warner Cable, Bresnan,
Insight, Charter and Cable One. Although the Company has not signed a written
agreement with these MSOs, the Company's programming is currently carried in
approximately 1,600,000 households served by Cablevision. Since October,
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.
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.
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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 The Recovery Network and
through RnetHealth.com. The Company intends for Recovery Direct to offer a
variety of self-help and recovery and prevention-related products, including
videos of the Company's programming aired on The Recovery Network. 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 video tapes to the institutional market under the
trade name FMS Productions. 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 The Recovery Network through a toll-free 800 telephone number.
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 The Recovery Network'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. The Recovery Network may
also air public service messages from the partners and otherwise help them
disseminate information that is important to them.
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With a national platform, the Partnership will seek to help focus the attention
of government and society on the issues of interest to the Partnership's members
and also foster better communication among its members, their constituencies and
the communities they are designed to serve. The Company believes that the member
organizations of the Partnership will be instrumental in helping the Company
demonstrate to cable operators a high level of community support for The
Recovery Network and how carriage of the Company's programming can help the
local operator fulfill the promise of localism. The Company believes that the
individual constituents of the Partnership's member organizations will account
for a significant portion of the initial audience for The Recovery Network's
programming, and the Company expects that the Partnership will communicate to
its constituents information about The Recovery Network's programming schedule
and availability.
THE MARKETS:
THE BEHAVIORAL HEALTH CARE MARKET
The Company believes that the market for internet content and television
programming directed at social and behavioral health issues consists of four
groups: (i) friends, families and co-workers (the "Affected Others") of persons
afflicted with substance abuse, eating disorders, domestic violence, depression
and child abuse, and other social and behavioral health issues ("Recovery
Issues"); (ii) persons who are already in recovery ("Persons in Recovery") and
seek the daily support and connection to others in recovery; (iii) afflicted
persons who are not yet in recovery either because they are unaware of the
resources that are available or are unwilling or unable to attend meetings or
seek help publicly ("Afflicted Persons"); and (iv) persons seeking to prevent
the onset of these problems and select positive life-style choices ("Prevention
Issues"), particularly families with children. The Company believes that these
four groups make up a significant portion of the nation's population.
The Company expects that a substantial portion of its audience and customers
will be the Affected Others. According to The American Journal of Psychiatry
Official Practice Guide published in November 1995, approximately 56 million
persons in the United States are directly affected by alcohol abuse or addiction
alone. The National Association for Children of Alcoholics estimated that in
1995 there were approximately 26.8 million children of alcoholics in the United
States. A substantial number of employers and coworkers are affected by alcohol
abuse in the workplace.
Persons in Recovery include the millions of Americans who regularly attend
meetings of various support groups, such as Alcoholics Anonymous, Al-Anon,
Overeaters Anonymous, Cocaine Anonymous, Narcotics Anonymous, or are in some
other form of treatment, including counseling. While this group is smaller than
the Affected Others, the Company believes that Recovery Network's internet
services and television programming will provide a useful and important service
to Persons in Recovery, and that members of this group are likely to make an
effort to seek out the Company's programming and to inform others in their
respective support groups about The Recovery Network.
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Afflicted Persons include the estimated 43 million Americans who, according to
the 1995 National Household Survey on Drug Abuse (the "National Household
Survey"), are heavy or binge drinkers and the approximately 12.8 Million who use
illegal drugs. Afflicted Persons also include approximately 20% of the female
population between the ages of 12 and 30 that Anorexia and Related Disorders,
Inc. in 1992 estimated had a major eating disorder such as anorexia or bulimia
or some of its symptoms, and the 59% of the adult population that Scientific
American, in August 1996, estimated met the current definition of clinical
obesity.
Afflicted Persons also include persons suffering from depression and persons who
wish to quit smoking. In 1993, The National Institute of Health estimated that
more than 11 million Americans suffered from depression and that one in eight
persons will be affected by depression sometime in their lives. The National
Household Survey estimates that there were 61 million Americans who were current
smokers in 1995, many of whom the Company believes wish to quit smoking.
With the recent substantial rise in drug use, especially among adolescents, the
Company believes that there is and will continue to be a growing interest in
Prevention Issues, particularly in families with adolescents ages 13 to 18.
According to the National Household Survey, the percentage of adolescents using
illegal drugs increased 105% from 1992 to 1995, and, in 1995, approximately 18%
of 18 to 20-year olds and approximately 15.6% of 16 and 17-year olds used
illegal drugs. A recent survey by the National Center on Addiction and Substance
Abuse cited drugs as the number one problem facing teenagers.
Despite the perceived size of the market for recovery and prevention-related
products and services, the Company believes that there is currently no effective
national marketplace to enable suppliers of such products and services to reach
their target consumers. The Company believes that, to date, consumers seeking
recovery and prevention-related products and services have done so primarily
through local support groups, such as Alcoholics Anonymous, local treatment
centers, counseling through health professionals, churches and schools in their
communities, and from self-help books and other materials. A disadvantage of
these traditional sources is that they all require, to some extent, that the
consumer publicly acknowledge that he or she is seeking information. The Company
believes that many persons in its target audience may be reluctant to seek help
publicly.
ALTERNATIVE HEALTH:
Alternative health serves the diverse group of Americans who are visiting
holistic medical practitioners more frequently than conventional primary care
physicians. People who are interested in alternative health traditionally
consume herbs and nutritional products. Annual sales of vitamins are estimated
to be $10-15 billion in 1999. In 1997 the American Medical Association reported
that Americans spent an estimated $10 billion out-of-pocket on alternative
therapies. The Office of Alternative Medicine at the National Institutes of
Health now fields an estimated 2000 public inquiries per month specific to the
number of people who come visit online Alternative Health sites. Studies in
mainstream medical journals support the argument that between 45%-60% of men and
women ages 25-55 seek alternative medical treatment every year, including
acupuncture, chiropractic, biofeedback, homeopathy, meditation, and various
herbal and nutritional therapies.
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THE CABLE TELEVISION MARKET
Cable television was first developed in the late 1940s primarily to serve rural
communities unable to receive broadcast television signals. By June 1995, there
were more than 11,200 cable systems serving over 60 million subscribers in over
32,000 communities in the United States. Of these cable systems, 259 of them
have 50,000 or more subscribers. The largest cable system in the country has
over 1,000,000 subscribers, but only the 30 largest systems have 200,000
subscribers or more. Cable system operators range from large multiple system
operators ("MSOs") that own many systems to small, independent systems that
serve as few as several thousand households. The 10 largest MSOs control 231 of
the 259 largest systems and have approximately 80% of their subscribers. Despite
this concentration, each system operates under a franchise from the government
of the local community in which it is located. Thus, MSOs and other cable
operators have to contract with the local franchising authorities for each cable
system.
The cable industry is regulated by federal and state governments in part to help
local communities insure that their community receives some benefit from the
valuable local rights-of-way it grants to the cable system operator. Many local
franchising authorities require that cable systems devote a portion of their
channel capacity to public access, educational and governmental access channels.
Many communities also expect cable systems to offer a minimum amount of channel
capacity, certain system design features and programming that either originates
from or addresses the needs and interests of the local community. This concept
is commonly referred to in the industry as "localism"
Prominent individuals in the cable industry are aware that, for a variety of
reasons, the industry has not fulfilled on the promise of localism. The Company
believes that, as cable franchise contracts expire and are subject to renewal
over the next several years, many cable systems will need to upgrade and expand
channel capacity as well as to demonstrate to the communities their continued
commitment to localism to obtain renewal.
Most programming decisions for the majority of cable systems that are owned by
MSOs are made at the MSO level in negotiations between the MSO and the various
television networks. Typically, these negotiations, if successful, result in one
of two types of affiliation agreement. In one, the agreement specifically
identifies which local cable systems will carry the programming and does not
directly involve the cable system in negotiations. In the other, the agreement
specifies terms that are approved at the MSO level but requires the network to
negotiate affiliation agreements with each individual cable system. Many cable
systems also have local channels which are designed to serve the community's
needs and interests, and the decision to add programming to these channels is
typically left to the discretion of the local cable system manager. Some, but
not all, networks, receive license fees calculated on a per subscriber, per
month basis. According to an industry survey of 41 networks in 1996, 38 networks
received monthly fees ranging from $.03 per subscriber to $.70 per subscriber
and three networks did not receive license fees. Of those 38 networks that
received license fees, 22 networks received license fees ranging from $.10 to
$.29. Generally, networks that air less than 16 hours of programming per day do
not receive license fees. Also, new networks often offer their programming for
some period of time after their launch free to cable systems that sign
affiliation agreements within a certain time after launch. In some cases,
newly-launched networks also provide affiliates with monetary launch support or
other financial incentives in order to secure initial carriage.
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Channel capacity on most cable systems is currently limited. Channel capacity is
generally a function of the bandwidth of the individual cable system's
infrastructure. Recently developed digital technologies offer cable systems a
cost effective method for expanding channel capacity. Digital technologies
enable the cable systems to compress multiple digital channels into the
bandwidth currently required for a single analog channel. The cable system sends
the compressed, multi-channel signal to a subscriber's home where it is
decompressed by a digital converter box ("digibox"). This new technology permits
a cable system to expand significantly its current channel capacity with a much
lower capital investment than would be required to install fiber optic cables or
to make other major infrastructure upgrades. TCI, one of the nation's largest
MSOs, has stated its intention to provide digiboxes to all of its subscribers,
and TCI, along with a consortium of other MSOs, recently announced an order for
25 million digiboxes to be delivered and installed over the next few years.
The recent introduction of direct satellite services ("DSS") has also increased
pressure on cable systems to offer more channels and services. DSS systems offer
their subscribers more than twice as many channels as all but a small number of
cable systems, with better audio and video quality. The price of the satellite
dishes required to receive programming has dropped to the point that DSS is
currently price competitive with premium cable. There were approximately 4.5
million DSS subscribers in February 1997, and industry analysts expect that
number to reach approximately 19 million by the year 2000.
The Company believes that the combination of DSS and the conversion of cable
systems from analog to digital signal transmission will create substantial
additional channel capacity over the next several years. The Company believes
that these developments will hasten the full time launch of The Recovery
Network.
COMPETITION:
The Recovery Network will compete with all other existing and planned television
networks and other television programming for available air time, channel
capacity, advertiser revenue and revenue from license fees. Many of these
television networks and producers of television programming are
well-established, have reputations for success in the development and operation
of television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than the
Company. In addition, if cable television channel capacity increases as the
Company expects competition from smaller competitors and other start-up
television networks could increase significantly.
Although the Company is not aware of any television network with programming
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 The Recovery
Network's programming is intended to provide information and support to persons
facing social and behavioral health issues,
25
<PAGE> 26
The Recovery Network and the Company's recovery and prevention-related products
and services will compete with other products and services which perform similar
functions, such as support groups, self-help videos, audio cassettes and books
and helplines. There can be no assurance that the Company will be able to
successfully compete for airtime, channel capacity, advertiser time or
viewership.
GOVERNMENT REGULATION:
The cable television industry is subject to extensive and frequently changing
federal, state and local laws and substantial regulation under these laws by
governmental agencies, including the Federal Communications Commission ("FCC").
Regulations governing the rates that can be charged to subscribers by cable
systems not in markets subject to effective competition from other multichannel
video program distributors could adversely affect the ability of cable systems
with limited channel capacity to finance rebuilding or upgrading efforts to
increase channel capacity or otherwise restrict their ability to add new
programming such as The Recovery Network. In addition, federal "must-carry"
rules requiring cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional channels for
noncommercial educational TV stations); commercial leased access rules
designating 10% to 15% of system channels for lease by unaffiliated programmers;
and local regulatory requirements mandating additional channel set-asides for
public, governmental and educational use could reduce channel availability which
might otherwise be available for The Recovery Network on many cable systems.
Statutory provisions and FCC rules governing relationships among cable systems
and competing forms of multichannel video program distribution, as well as the
relationships between the Company and its cable system affiliates could
adversely affect the marketability of the Company's programming and the ability
of the Company to enter into arrangements for the distribution of its
programming.
In addition, the cable systems and radio stations that carry the Company's
programs are regulated by the FCC and, therefore, are subject to its rules and
policies, such as those relating to sponsorship identification, broadcast of
indecent language, provision of equal opportunities for political candidates and
related measures pertaining to program content and format. Failure of the
Company's programs to comply with one or more of these rules could subject the
cable systems 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.
Federal 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 the Internet business. 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.
26
<PAGE> 27
The FCC does regulate common carriers whose services are used for purchases of
information services via toll-free telephone calls or pay-per-call services,
which regulation could affect the Internet business. 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 Internet business'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.
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 March 31, 1999, the Company had a working capital deficit of
$2,184,271. 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 private placements and its
initial public offering to fund its operations.
27
<PAGE> 28
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. An amendment to the Private Placement agreement that was executed in
December 1998 resulted in the Subscribers relinquishing their right to the
Warrants on January 4, 1999. The Warrants subsequently were allowed to lapse
without being exercised.
On September 24, 1998 and in connection with the 1998 Private Placement, the
shareholders of the Company approved the issuance of 346,449 shares of common
stock (including 13,115 shares of common stock for placement services) and a
three year warrant to purchase 30,000 shares of common stock at $5.50 per share
for gross proceeds of approximately $750,000.
In March 1999, the Company settled an agreement with a service provider
(previously recorded as of June 30, 1998) whereby 200,000 shares of unregistered
common stock that were previously agreed to be issued. In connection with this
settlement, the Company reversed the previously recorded amounts: $625,000 of
additional paid-in capital and consulting expense of $344,000. In connection
with this settlement, the 200,000 related unregistered stock options were
re-issued to the principal of the service provider and repriced at $0.375 per
share. The Company recorded additional paid-in capital and consulting expense of
$22,000 due to the re-issuance of these options. Subsequent to March 31, 1999,
172,000 of these options were exercised for $64,500.
In connection with other consulting arrangements, the Company has issued
warrants to acquire a total of 1,150,000 shares of unregistered common stock at
exercise prices ranging from $1.00 to $4.00. Many of these warrants were
repriced at prices ranging from $0.50 to $0.75 in an effort to encourage the
exercise of these warrants. 622,000 of these warrants have been exercised for
$745,000 during the nine-month period ended March 31,1999.
In December 1998, the Company reached an agreement with a group of shareholders
to lend the Company $725,000 as bridge financing, which is intended to help
provide the Company with financing prior to the consummation of a long-term
equity financing arrangement. The financing called for notes secured by the
Company's 20% interest in RI later renegotiated for the notes to be secured by
100% of recoverynetwork.com., which would pay a 10% per annum rate of interest.
The notes would be repaid by the Company on or before October 31, 1999 or upon
the closing of equity financing in the amount of $2,000,000 or above. The note
holders were granted total shares of 1,500,000 warrants to purchase stock at
$.01 per share, with the warrants expiring in January 2003.
28
<PAGE> 29
The Company has embarked on a program to settle all accounts payable by issuing
unregistered stock in lieu of a cash payment. In April and May, 1999, the
Company has issued 668,500 shares of common stock including 500,000 to Group W
in settlement of approximately $798,262 in liabilities. This amount has been
classified to equity after Quarter end. The Company is in the process of
settling additional liabilities in a like manner.
In April 1999, the Company entered into an agreement with third parties to sell
its interest in RI for $850,000 and to receive its website back from RI.
In May 1999, the Company received a $2,000,000 proposed financing term sheet
from a group of existing shareholders. Based on the letter of intent, $500,000
of the financing will be received when the letter of intent is signed with the
additional amount due to the Company upon the Company's relisting with NASDAQ.
The Company currently anticipates that the proceeds received from the exercise
of stock options and warrants, the proposed financing, the RI settlement and
vendor settlements, together with projected revenues from operations, will be
sufficient to fund the Company's operations and capital requirements until
approximately June 30, 1999. There can be no assurance, however, that such funds
will not be expended prior thereto due to unanticipated changes in economic
conditions or other unforeseen circumstances. The Company has no current
arrangements with respect to any additional financing, and it is not anticipated
that existing shareholders will provide any portion of the Company's future
financing requirements. Consequently, there can be no assurance that any
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all. 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 exchange 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. A 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, 1998
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, ofter 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.
29
<PAGE> 30
STATE OF READINESS AND COST TO ADDRESS THE YEAR 2000 ISSUE
The Companys 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.
DISCLOSURE REGARDING PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements with respect to the
future performance of the Company that involve risks and uncertainties. Various
factors could cause actual results to differ materially from those projected in
such statements. These factors include, but are not limited to, the Company's
lack of meaningful revenues, its significant and continuing losses, its
significant capital requirements, the uncertainty of its ability to implement
its plan of operation and other factors discussed herein and in the Company's
other filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM #1. LEGAL PROCEEDING
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.
30
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
99 Exhibits relating to Group W settlement and RI Settlement.
(b) Reports on Form 8-K
On February 4, 1999, the Company filed a Form 8-Kwhich made reference to
a February 3, 1999 press release. This release documented the hiring of a
consultant to investigate possible alternatives to the Company operating
independently. Such alternatives could involve mergers, asset dispositions, or
strategic alliances. In addition, the filing documented the fact that a hearing
had been established for March 5, 1999 for the Company to present a plan to
NASDAQ as to why its listing on NASDAQ SmallCap should be continued.
On April 8, 1999 the Company filed a form 8-K which documents a change
in management. The Company's Chief Executive Officer, Chief Financial Officer
and Executive Vice President all resigned on March 31, 1999. On April 6, 1999
the board of directors appointed William Moses Chairman of the Board, President
and Chief Financial Officer of the company, with Tracy Neal as Secretary and
Stacey Romm as Treasurer.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE RECOVERY NETWORK, INC.
Dated: May 24, 1999 By: /s/ William Moses
---------------------------------
William Moses
President and Chief Financial
Officer
32
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 90,829
<SECURITIES> 0
<RECEIVABLES> 105,535
<ALLOWANCES> (32,000)
<INVENTORY> 62,696
<CURRENT-ASSETS> 482,092
<PP&E> 470,528
<DEPRECIATION> (256,316)
<TOTAL-ASSETS> 1,901,625
<CURRENT-LIABILITIES> 2,666,353
<BONDS> 754,000
0
0
<COMMON> 19,716,090
<OTHER-SE> (20,486,833)
<TOTAL-LIABILITY-AND-EQUITY> 1,901,625
<SALES> 947,392
<TOTAL-REVENUES> 947,392
<CGS> 309,377
<TOTAL-COSTS> 6,350,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 299,253
<INCOME-PRETAX> (5,639,977)
<INCOME-TAX> 974
<INCOME-CONTINUING> (5,639,977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,640,951)
<EPS-BASIC> (.75)
<EPS-DILUTED> (.75)
</TABLE>
<PAGE> 1
[GROUP W LETTERHEAD]
April 15, 1999
Mr. George H. Henry
G. Howard Associates, Inc.
800 5th Avenue
New York, NY 10021 VIA FAX AND MAIL
Dear George:
This letter will confirm our discussions this morning in which I agreed to make
the following modifications to the Recovery Network service agreement, and you
said that you would recommend these changes be accepted by the Recovery Board.
I understand the Board will be meeting this afternoon.
Specifically if this proposal is accepted by your Board GWNS will prepare an
additional amendment to the technical Services Agreement between Recovery
Network, Inc. and Group W Network Services dated April 1, 1998 as amended by
side letter dated October 27, 1998. Therefore, the points contained here will
not be effective until that amendment is fully executed. We will likewise
prepare the note described in paragraph 5 below for signature.
We discussed and agreed to the following principal points:
1) The service hours will be reduced from the present 24-hours per day, 7-days
per week full time service, to a service that will operate 9-hours per day,
7-days per week. The new hours of operation will be 11:00 pm to 8:00 am
(Eastern Time).
2) The revised monthly fee will be $50,000 per month for the 9 hours of daily
service.
3) GWNS is free to cancel the service to Recovery Network at our sole
discretion if payments fall in arrears, or upon 30-days prior written
notice.
<PAGE> 2
Mr. George H. Henry
April 15, 1999
Page 2
4) Recovery will make an immediate payment in the amount of $150,000 as
partial payment for the amount in arrears. This payment will be in GWNS's
hands no later than the close of business on Friday, April 23, 1999.
5) GWNS will accept a note from Recovery in the amount of $75,000, at 10%
interest, due on December 30, 1999. This note shall be non-subordinated.
6) Recovery will issue 500,000 shares of its common stock to GWNS for $225,000
of credit against the amount in arrears.
7) On a going forward basis Recovery will at all times be paid up 3 months in
advance. We are agreeable to accepting two payments to affect this 3-month
period. Specifically the first payment of $100,000 would be due on Friday,
April 30, 1999. The second $100,000 installment will be due on Friday, May
28, 1999.
8) When the Recovery business warrants the service will be restored to a full
time operation. The fee for the restored full time operation will be that
which would have been applicable at the point in time that the service is
restored had the fee not been reduced to support the fewer hours of
operation.
9) In the event GWNS cancels the service per paragraph 3 above there will be
no cancellation penalties. Should Recovery cancel the services the
termination liabilities and cancellation fees called out in the referenced
agreement will apply.
I believe these points accurately summarize our discussion this morning. If they
do please so indicate by signing the documents where indicated. Following my
receipt of the countersigned document I will instruct our attorneys to
immediately draft the necessary documentation to formalize the matter. This
agreement is, of course, predicated on our receipt of payments identified above
in a timely fashion. If the payments are not received on schedule, the service
will be terminated at midnight on the day the payments were due.
With regard to the issuance of the 500,000 shares of common stock. A stock
transaction is subject to corporate approval. We do not envision any difficulty
in receiving approval to accept these shares. But pending receipt of such
approval, this aspect of the package is subject confirmation.
<PAGE> 3
Mr. George H. Henry
April 15, 1999
Page 3
I look forward to receiving your concurrence on these points. We look forward
to working with Recovery in the future.
Yours truly,
[signature illegible]
ACS:cp Agreed:
CC: R. Weir By: /s/ GEORGE H. HENRY
------------------------------
Its: Chairman Executive Committee
Date: 4/16/99
<PAGE> 4
AGREEMENT AND GENERAL RELEASES
This Agreement and General Releases ("Agreement") is made and entered into
as of the ___day of April, 1999 by and among RECOVERY NETWORK, INC., a Colorado
corporation ("RTV"), TCI ONLINE RN HOLDINGS, INC. ("TCI"), FHC INTERNET
SERVICES, LC, a Virginia limited liability company ("FHC"), and LIFESCAPE 1 TO
1, LLC, a Delaware limited liability company f/k/a RecoveryNet Interactive, LLC
("RI") with reference to the following facts:
A. RTV, TCI and FHC are parties to (i) that certain Amended and
Restated Operating Agreement of RecoveryNet Interactive, LLC dated as of
October 26, 1998 ("Operating Agreement") pursuant to which they agreed to be,
and are, the members of RI, and (ii) that certain Adjustment Agreement dated
October 26, 1998 ("Adjustment Agreement").
B. RTV and RI are parties to that certain Services Agreement dated as of
October 26, 1998 ("Services Agreement").
C. RTV has asserted in a letter dated March 24, 1999 from its legal
counsel, that it has various claims against TCI and FHC (collectively "RTV's
Claims"). TCI and FHC deny that RTV's Claims have any merit.
D. Despite good faith efforts, TCI and FHC, on the one hand, and RTV, on
the other hand, are unable to resolve certain differences concerning the
operation and management of RI.
E. Solely to avoid time consuming and expensive litigation and to resolve
the current differences concerning the operation and management of RI, the
parties to this Agreement have agreed, as set forth below, that in exchange for
a cash payment, the transfer of RI's interest in a certain website, and the
release of any and all claims any of TCI, FHC and RI, asserts it has against
RTV, RTV will transfer its interest in RI to TCI, FHC, RTV will release any and
all claims RTV asserts it has against TCI. FHC and RI, and the parties hereto
will terminate certain agreements to which RTV is a party.
G. RTV and RI or TCI may be parties to other agreements not named in
these recitals. The parties intend by this Agreement to terminate only the
Services Agreement and the Adjustment Agreement, and to acknowledge the fact
that RTV will have no rights, obligations or duties related to RI or RI's
business upon the consummation of the transactions described in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by each
<PAGE> 5
party, the parties herein agree as follows:
1. Conveyance of Interest by RTV.
RTV hereby conveys its membership interest in RI and all of its
rights, titles and interests, of all types, in and to RI and RI's assets
(collectively, the "Interest") to TCI and to FHC in equal shares. The interest
is the same twenty percent interest originally acquired by RTV under the
Operating Agreement. From and after the date hereof, RTV shall have no rights
obligations or duties of any kind related to RI or RI's business, subject to
the performance by TCI and FHC of their obligations under this Agreement. To
the extent that this conveyance, or the procedure for accomplishing this
conveyance, is different from, inconsistent with, or contrary to, any provision
of the Operating Agreement, the parties agree that the provisions of this
Agreement supersede the Operating Agreement.
2. Termination of Agreements; Return of RTV Website to RTV.
2.1 The parties agree that the Adjustment Agreement and the Services
Agreement are hereby terminated, and shall have no further force or effect.
2.2 RI hereby conveys to RTV, without warranty except as otherwise
set forth in this Agreement, all of RI's right, title and interest in and to the
Internet website known as "www.recoverynetwork.com"; the Uniform Resource
Locators "www.recoverynetwork.com" and "www.recoverynet.com" (which are the
Uniform Resource Locators for such website); and the Domain Names, and Domain
Registrations for. "www.recoverynetwork.com" and "www.recoverynet.com". Each
party shall have the unrestricted right to engage in any business and to compete
against the other. RTV acknowledges and agrees that RI will continue to use the
URL "recovery1to1", and RI agrees to remove all references to RTV from the
"recovery1to1" website as quickly as reasonably possible following the execution
of this Agreement.
3. Payment.
Within ten (10) business days following the execution and delivery of
this Agreement by all parties. TCI and FHC shall pay to RTV an aggregate sum
of Eight Hundred Fifty Thousand Dollars ($850,000.00) by federal funds wire
transfer to the account which RTV designates to TCI and FHC in writing upon the
execution of this Agreement. Such payment is, together with the provisions of
Article 2 and the release set forth in Article 6 of this Agreement, the entire
consideration due to RTV under this Agreement or otherwise. The parties
acknowledge and agree that said sum is fair and adequate consideration for the
settlement of the disputes between them and for all of the transactions
described in this Agreement.
4. Representations and Warranties of RTV.
2
<PAGE> 6
4.1 RTV hereby makes the representations and warranties set forth in
Sections 4.2 through 4.5 below to each of the other parties to this Agreement.
The complete truth of all of such representations and warranties are conditions
to the obligation of the other parties to perform their obligations under this
Agreement, as well as covenants of RTV. All of such representations and
warranties shall survive the consummation of the transactions contemplated by
this Agreement.
4.2 RTV has the full right, power and authority to enter into, and
perform its obligations under, this Agreement without the consent of, or payment
of any money or other consideration to, any person or entity. This Agreement has
been duly executed and delivered by RTV, and constitutes a legal, valid and
binding obligation on RTV. There is no legal basis known to RTV for any person
to object to the terms of this Agreement, and this Agreement is enforceable
against RTV in accordance with its terms, except as enforceability may be
limited or affected by applicable bankruptcy, insolvency, reorganization or
other laws of general application relating to or affecting the rights of
creditors. The execution, delivery and performance of this Agreement by RTV and
the consummation of the transactions contemplated hereby: (i) do not and will
not conflict with, or result in a breach, default, violation or loss of any
benefit under any agreement, mortgage, lease, license or other instrument or
obligation of RTV; (ii) do not require the consent or permission of any person
or governmental agency; and (iii) will not violate any law, rule or regulation
of any agency or governmental body to which RTV is subject. No registration,
declaration or filing with any governmental or administrative authority is
required on the part of RTV or any officer, director or shareholder of RTV in
connection with the execution, delivery and performance of this Agreement. RTV
has received independent legal advice from attorneys of its own choice with
respect to the advisability of entering into this Agreement. Prior to the
execution of this Agreement, RTV's attorneys reviewed this Agreement at length
and made all desired changes. TCI, FHC and RI and their attorneys have made
various statements and representations to the other parties and their attorneys
during negotiations leading to this Agreement. Nevertheless, RTV specifically
does not rely upon any statement, representation, legal opinion, or promise of
any other party or its counsel in executing this Agreement or in making the
settlement provided for herein, except as expressly stated in this Agreement.
RTV, together with its attorneys, has made such investigation of the facts and
the law pertaining to this settlement and this Agreement, and of all the matters
pertaining thereto, as it deems necessary. RTV forever waives all rights to
assert that this Agreement was the result of a mistake in law or in fact. RTV is
the sole and lawful owner of all right, title and interest in and to every claim
and other matter which is releases through this Agreement, and that it has not
assigned or transferred, or purported to assign or transfer to any person or
entity any claims or other matters released through this Agreement. RTV has not
filed against TCI, FHC and/or RI any complaints, charges, demands, causes of
action, or other claims in any jurisdiction or before any dispute resolution
entity.
4.3 RTV is the sole owner, beneficially and of record, of the entire
Interest. RTV has not entered into any agreement with any person regarding the
sale, transfer or other disposition of all or any part of the Interest.
3
<PAGE> 7
4.4 Upon the execution of this Agreement, FHC and TCI will
collectively hold good and valid title to the entire Interest free and clear of
all liens, claims, charges or other encumbrances of any nature whatsoever.
5. Representations and Warranties of TCI, FHC and RI.
5.1 TCI, FHC and RI hereby represent and warrant to RTV as set forth
in Section 5.2 below. The complete truth of all of such representations and
warranties are conditions to the obligations of RTV to perform its obligations
under this Agreement as well as covenants of FHC, TCI and RI. All of such
representations and warranties shall survive the consummation of the
transactions contemplated by this Agreement. Each of TCI, FHC, and RI is making
the representations solely as to itself and shall not be responsible for the
truth or untruth of any representation made by the others.
5.2 TCI, FHC and RI each has the full right, power and authority to
enter into, and perform its obligations under, this Agreement without the
consent of, or payment of any money or other consideration to, any person or
entity. This Agreement has been duly executed and delivered by RI, TCI and FHC,
and constitutes a legal, valid and binding obligation on each of TCI, FHC and
RI. There is no legal basis known to TCI, FHC or RI for any person to object to
the terms of this Agreement, and this Agreement is enforceable against each of
them in accordance with its terms, except as enforceability may be limited or
affected by applicable bankruptcy, insolvency, reorganization or other laws of
general application relating to or affecting the rights of creditors. The
execution, delivery and performance of this Agreement by TCI, FHC and RI, and
the consummation of the transactions contemplated hereby: (i) do not and will
not conflict with, or result in a breach, default, violation or loss of any
benefit under any agreement, mortgage, lease, license or other instrument or
obligation of TCI, FHC or RI; (ii) do not require the consent or permission of
any person or governmental agency; and (iii) will not violate any law, rule or
regulation of any agency or governmental body to which TCI, FHC or RI is
subject. No registration, declaration or filing with any governmental or
administrative authority is required on the part of RI, FHC or TCI in
connection with the execution, delivery and performance of this Agreement. TCI,
FHC and RI have received independent legal advice from attorneys of its own
choice with respect to the advisability of entering into this Agreement. Prior
to the execution of this Agreement, the attorneys for TCI, FHC and RI,
respectively, have reviewed this Agreement at length and made all desired
changes. RTV and its attorneys have made various statements and representations
to the other parties and their attorneys during negotiations leading to this
Agreement. Nevertheless, TCI, FHC and RI specifically do not rely upon any
statement, representation, legal opinion, or promise of any other party or its
counsel in executing this Agreement or in making the settlement provided for
herein, except as expressly stated in this Agreement. TCI, FHC and RI, together
with their attorneys, have made such investigation of the facts and the law
pertaining to this settlement and this Agreement, and of all the matters
pertaining thereto, as it deems necessary.
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TCI, FHC and RI forever waive all rights to assert that this Agreement was the
result of a mistake in law or in fact. TCI, FHC and RI are the sole and lawful
owners of all right, title and interest in and to every claim and other matter
which each is releasing through this Agreement, and that they have not assigned
or transferred, or purported to assign or transfer to any person or entity any
claims or other matters released through this Agreement. TCI, FHC and RI have
not filed against RTV any complaints, charges, demands, causes of action, or
other claims in any jurisdiction or before any dispute resolution entity.
5.3 Although TCI, FHC and RI agree that the consideration being given to
RI under this Agreement is fair and adequate consideration for the settlement of
the disputes between them and for all of the transactions described in this
Agreement (which transactions include, but are not limited to, the conveyance of
the Interest as described herein); however, TCI, FHC and RI make no
representations to RTV concerning the value of the Interest. No sale of any
interest in RI to any third party following the date of this Agreement,
regardless of the sum paid by such third party for its Interest, shall affect
the parties' agreement that the sum being paid to RTV under this Agreement is
fair and adequate consideration for the transactions described in this
Agreement.
5.4 RI makes no representation or warranty regarding the
recoverynetwork.com website (there being no website for recoverynet.com; such
Uniform Resource Locator being only a link to the recoverynetwork.com website)
except that RI made no changes to, and did not transfer to any person any
interest in, the recoverynetwork.com website following the date that RTV
originally conveyed said website to RI, other than changes made with the
knowledge and consent of RTV.
6. RELEASES BY RTV.
Subject to the performance by RI, TCI and FHC of their obligations under
this Agreement, RTV, for itself and on behalf of its respective present and
former officers, directors, shareholders, employees, agents, attorneys,
representatives, successors and assigns, hereby releases, waives and discharges
each of RI, TCI and FHC, and each of their respective parents, subsidiaries, or
otherwise affiliated corporations, partnerships or business enterprises, and
each of their respective present and former officers, directors, shareholders,
employees, agents, attorneys, representatives, successors, and assigns, from any
and all causes of action, claims, charges, demands, losses, damages,
compensation, costs, agreements, attorneys' fees and liabilities of any kind
that it or they may have or claim to have, whether known or unknown, suspected
or unsuspected, in any way relating to or arising out of any act or omission
from the beginning of time through the date of the execution of this Agreement
arising out of or concerning RI or RTV's involvement with RI, including, without
limitation, RTV's Claims.
7. RELEASES BY RI, TCI AND FHC
Subject to the performance by RTV or its obligations under this Agreement,
each of RI, TCI and FHC, for itself and on behalf of its officers, directors,
shareholders, employees
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agents, successors, and assigns, hereby releases, waives and discharges RTV and
its parents, subsidiaries, or otherwise affiliated corporations, partnerships or
business enterprises, and each, of its respective present and former officers,
directors, shareholders, employees, agents, attorneys, representatives,
successors, and assigns, from any and all causes of action, claims, charges,
demands, losses, damages, compensation, costs, agreements, attorneys' fees and
liabilities of any kind that it or they may have or claim to have, whether known
or unknown, suspected or unsuspected, in any way relating to or arising out of
any act or omission from the beginning of time through the date of the execution
of this Agreement arising out of or concerning RI or RTV's involvement with RI.
Notwithstanding the generality of the previous sentence, the release set forth
in this Article 7 is not intended to release, and does not release, any cause of
action, claim, charge, demand, loss, damage, compensation, costs, agreements,
defenses, counterclaims, setoffs, attorneys' fees and liabilities against any
person, who was, is, or hereafter may be, employed in any manner by RI who at
any time may have been an employee, agent or representative of RTV who asserts a
claim against RI, TCI, FHC or any of their respective affiliates.
B. Waiver of "Section 1542"-type statutes:
Notwithstanding the fact that this Agreement is governed by Colorado law,
and not California law, the parties wish to emphasize their intent with respect
to unknown causes of action as follows: It is the intention of each party in
executing this Agreement that this Agreement shall be effective as a bar to each
and every claim, demand or cause of action described above to be so barred. In
furtherance of this intention, each party hereby expressly waives any and all
rights and benefits which might be conferred upon it by the provisions of
Section 1542 of the California Civil Code (if such law ere applicable to this
Agreement), and any similar law in any state which might be found to be
applicable to this Agreement, notwithstanding the express choice of Colorado law
by the parties. Section 1542 of the California Civil Code provides:
"A general release does not extend in claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known to him must have materially
affected his settlement with the debtor."
Each party providing a release under this Agreement hereby acknowledges the
foregoing waivers of the provisions of Section 1542 of the California Civil
Code, and similar provisions in the law of any state which might be found
applicable to this Agreement notwithstanding the express choice of Colorado law
by the parties, was separately bargained for.
9. Miscellaneous
9.1 This Agreement sets forth the entire agreement of the parties with
respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements.
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discussions, understandings, negotiations and commitments of any kind between
the parties. This Agreement may not be amended or supplemented, nor may any
rights hereunder be waived, except in a writing signed by all of the parties
hereto.
9.2 The section and paragraph headings in this Agreement are
included for convenience only, are not a part of this Agreement and shall not
be used in construing it.
9.3 The parties intend that the provisions of this Agreement not be
severable.
9.4 The validity, interpretation, enforceability, and performance of
this Agreement shall be governed by and construed in accordance with the law of
the State of Colorado without regard to Colorado's conflicts of law principles.
The parties agree that any and claims concerning this Agreement must be brought
in, and the parties agree to submit to the jurisdiction of, the United States
Federal District Court for the District of Colorado, unless that court cannot
exercise jurisdiction over such claim or claims, in which case the parties
agree that such claims must be brought in, and the parties agree to submit to
the jurisdiction of, the District Court for the City and County of Denver,
Colorado. The terms of this Agreement shall not be construed against any party
by reason of that party's having drafted, or having contributed language to the
drafting of, this Agreement.
9.5 This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
9.6 Each party will execute such other and further documents
reasonably requested by the other parties to carry out the purposes of this
Agreement.
9.7 This Agreement effectuates the settlement of claims which are
contested. Nothing in this Agreement shall constitute or be construed as an
admission of liability or wrongdoing by any party.
9.8 The parties agree to keep confidential all of the terms of this
Agreement (other than the fact that RTV is no longer a member of RI and
conveyed its Interest to the other members), and shall not disclose the terms
of this Agreement to any person other than their
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respective legal and financial advisors, and except for disclosure of the
minimum information required under federal and state securities laws applicable
to RTV.
9.9 The parties shall mutually agree on the text and timing of a press
release regarding RTV's withdrawal as a member of RI as quickly as possible
following the execution of this Agreement. If, for any reason, the parties fail
to reach such agreement within a reasonable period of time and any party
proceeds to issue a press release, such press release shall not disparage any
other party in this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
TCI ONLINE RN HOLDINGS, INC. RECOVERY NETWORK, INC.
By: By: /s/ GEORGE H. HENRY
------------------------------- -----------------------------------
Name: Name: George H. Henry
Title: Title: Chairman, Executive Committee
FHC INTERNET SERVICES, LC LIFESCAPE 1 to 1, LLC
By: By:
- ------------------------------- -----------------------------------
Name: Name:
Title: Title:
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