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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ______ TO ______.
COMMISSION FILE NO. 0-22913
THE RECOVERY NETWORK, INC.
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(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:
8,809,335 shares as of February 22, 1999.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
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THE RECOVERY NETWORK, INC.
INDEX
PART I - FINANCIAL INFORMATION
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Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998 (unaudited)
and June 30, 1998.............................................................. 3
Condensed Consolidated Statements of Operations (unaudited) for the six
and three months ended December 31, 1998 and 1997.............................. 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the six month
periods ended December 31, 1998 and 1997....................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)................ 6
Item 2. Plan of Operations.................................................... 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 15
Signature Page.................................................................. 16
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
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(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash .......................................................... 313,672 2,219,145
Accounts receivable, net of allowance of $35,000 .............. 189,642 254,750
Current portion of capitalized programming costs, net ......... 183,372 191,500
Inventory ..................................................... 62,604 55,624
Prepaid expenses .............................................. 229,402 59,220
------------ ------------
Total current assets ...................................... 978,692 2,780,239
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CAPITALIZED PROGRAMMING COSTS, net ................................ 654,447 765,962
FURNITURE AND EQUIPMENT, net ...................................... 196,451 203,189
INVESTMENT IN JOINT VENTURE ....................................... 7,050 --
OTHER ............................................................. 69,919 35,530
------------ ------------
Total Assets ............................................ $ 1,906,559 $ 3,784,920
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 843,498 $ 323,391
Accrued payroll and benefits .................................. 82,677 152,322
Accrued professional fees ..................................... 176,942 131,647
Accrued royalty expense ....................................... 327,676 322,630
Other accrued liabilities ..................................... 593,684 111,494
Notes payable ................................................. 663,344 --
Due to joint venture .......................................... 75,000 224,500
Current portion of capital lease obligation ................... 17,029 17,029
------------ ------------
Total current liabilities .......................... 2,779,850 1,283,013
CAPITAL LEASE OBLIGATION, net of current portion .................. 12,297 13,126
------------ ------------
Total liabilities .................................. 2,792,147 1,296,139
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COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value: Authorized-25,000,000 shares;
issued and outstanding- 7,541,733 at December 31, 1998 and
5,791,494 at June 30, 1998 .................................... 75,417 57,915
Additional paid-in capital .................................... 18,301,118 17,050,969
Prepaid consulting ............................................ (461,250) (461,250)
Deficit ....................................................... (18,800,873) (14,158,853)
------------ ------------
Shareholders' equity (deficit) ..................... (885,588) 2,488,781
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,906,559 $ 3,784,920
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended
December 31 Six Months December 31
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
DOMESTIC SALES 272,639 99,401 678,963 127,538
---------- ---------- ---------- ----------
SALARIES AND CONSULTING EXPENSES 1,175,951 359,876 2,287,234 687,043
GENERAL AND ADMINISTRATIVE EXPENSES 595,612 306,585 1,370,339 519,867
PROGRAMMING EXPENSES 937,495 322,172 1,328,073 559,812
LOSS ON JOINT VENTURE -- 150,000 -- 150,000
COST OF VIDEO AND PUBLICATION SALES 64,661 15,983 218,064 15,983
MARKETING EXPENSES 24,074 485,320 163,105 657,849
---------- ---------- ---------- ----------
Operating Expenses 2,797,793 1,639,936 5,366,815 2,590,554
---------- ---------- ---------- ----------
Loss from operations (2,525,154) (1,540,535) (4,687,852) (2,463,016)
---------- ---------- ---------- ----------
INTEREST EXPENSE (9,762) (15,194) (13,880) (765,257)
INTEREST INCOME 9,299 77,172 60,686 77,172
---------- ---------- ---------- ----------
Loss before provision for state income taxes (2,525,617) (1,478,557) (4,641,046) (3,151,101)
PROVISION FOR STATE INCOME TAXES 800 -- 974 --
---------- ---------- ---------- ----------
NET LOSS (2,526,417) (1,478,557) (4,642,020) (3,151,101)
---------- ---------- ---------- ----------
LOSS PER SHARE INFORMATION:
Basic and diluted loss per share (.34) (.30) (.70) (.85)
Weighted average number of common and common
Equivalent shares outstanding 7,472,400 4,867,543 6,643,258 3,694,394
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</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
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THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Six months ended December 31,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (4,642,020) $ (3,151,101)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of notes payable discount .................................. -- 479,568
Amortization of deferred financing costs ................................ -- 130,529
Amortization of capitalized programming costs ........................... 639,758 83,700
Loss on sale of fixed assets ............................................ 300 --
Depreciation and other amortization ..................................... 88,910 --
Provision for deferred compensation ..................................... -- --
Provision for doubtful accounts ......................................... -- 7,000
Interest income from escrow account ..................................... (29,421) --
Loss on investment in joint venture ..................................... 65,852 150,000
Changes in assets and liabilities:
Accounts receivable ..................................................... 65,108 (29,423)
Inventory ............................................................... (6,980) 2,202
Prepaid expenses ........................................................ (170,182) (126,969)
Other assets ............................................................ (34,389) (22,579)
Capitalized programming costs ........................................... (374,399) (177,456)
Accounts payable and accrued liabilities ................................ 932,652 (68,444)
Accrued royalty expense ................................................. 5,042 10,989
Due to joint venture .................................................... (149,500) --
Accrued professional fees ............................................... 45,299 (264,113)
Deferred compensation ................................................... -- (51,672)
Due to shareholders and directors ....................................... -- (29,480)
------------ ------------
Net cash used in operating activities ................................... (3,563,970) (3,057,249)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of FMS ............................................. -- (34,383)
Purchases of furniture, equipment, and software ........................... (88,172) (71,944)
Investment in joint venture ............................................... (77,050) (150,000)
------------ ------------
Net cash used in (provided by) investing activities ............. (165,222) (256,327)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .................................................. 667,157 574,990
Payments on borrowings .................................................... (3,813) (2,605,250)
Payments on capital lease obligations ..................................... (829) (8,393)
Net proceeds from the issuance of common stock ............................ 1,161,204 10,715,355
Deferred offering and financing costs incurred ............................ -- (343,558)
------------ ------------
Net cash provided by financing activities ....................... 1,823,719 8,333,144
------------ ------------
NET INCREASE (DECREASE) IN CASH .............................................. (1,905,473) 5,019,568
CASH, beginning of period ......................................... 2,219,145 10,883
CASH FROM ACQUISITION OF FMS ...................................... -- 17,893
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CASH, end of period .............................................. $ 313,672 $ 5,048,344
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
December 31, 1998
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and the instructions to Form 10-QSB related to interim
period financial statements. Accordingly, these condensed consolidated financial
statements do not include certain information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary in order to present the financial
statements fairly. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. 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
subsequently 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 have
granted a transferable option to sell 900,000 of such shares at $3.00 per share
(the "Option") to a minority shareholder of the Company. The Subscribers may
elect not to sell up to 450,000 shares of common stock under the Option. If the
Option is exercised, the Lock-Up will be extended until February 16, 1999 for
all unsold shares and Subscriber reset rights will be forfeited. The Lock-Up
will expire if the closing bid price for the Company's common stock is $5.00 or
more for three consecutive trading days. If the Option is not exercised, the
Company will be required to pay liquidated damages to the Subscribers of up to
$150,000.
The Company has placed 1 million shares of common stock into escrow as security
for additional shares
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that may be required to be issued pursuant to the reset rights. As of December
31, 1998, none of these shares had been issued out of the escrow account in
connection with the reset rights. (See also "Note G - Subsequent Events").
In October 1998, in connection with various consulting and service agreements,
the Company agreed to issue, a total of 58,000 shares of Common Stock. These
shares were registered and fully tradable as of October 31, 1998. In November
1998, in connection with a consulting agreement, the Company agreed to issue an
additional 50,000 shares of stock. These shares were not registered as of
February 18, 1999. The estimated value of the 108,000 shares of common stock at
the time of grant is $144,998, and is included in equity and operating expense
for the quarter ended December 31, 1998.
In connection with a $750,000 loan to the Company made by a group of
shareholders ("the Noteholders") in December 1998, a total of 500,000 warrants
to purchase 500,000 shares of stock were issued to the Noteholders in December
1998. These warrants have an exercise price of $.01, and the underlying shares
were not registered shares as of February 18, 1999. The estimated value of these
warrants at the time of grant is $126,250, and is included in equity and
operating expense for the quarter ended December 31, 1998.
In connection with various consulting employee services, a total of 473,665
options were granted to various employees, consultants, and Board of Director
members from October 1 to December 31, 1998. The options have exercise prices
between $1.25 and $2.50 per share and were immediately vested. The estimated
value of these options at the time of grant is $10,139, and is included in
equity and operating expense for the quarter ended December 31, 1998.
Note C - Acquisition of FMS
On December 10, 1997, Recovery acquired 100 percent of the issued and
outstanding common stock of FMS Productions, Inc. ("FMS"). The unaudited pro
forma results of operations for the six months ended December 31, 1997
(reflecting all adjustments which, in the opinion of management, are necessary
for a fair presentation) as if the FMS acquisition was consummated on July 1,
1997 are as follows:
<TABLE>
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For the Six
Months Ended
December 31,
1997
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Pro forma total revenues $ 774,000
===========
Pro forma net loss $ 2,392,000
===========
Pro forma weighted average
number of common shares 4,254,422
===========
Pro forma loss per common share $ (.56)
===========
</TABLE>
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
December 31, 1998 (cont.)
Note D - Loss per Share
Net loss per share is based on the weighted average number of common shares
outstanding and dilutive common stock equivalents during the periods presented.
Options and warrants to purchase 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 $.77 to $5.50) were outstanding as of December 31, 1998 and 1997,
respectively, and were excluded from the computation of loss per share assuming
dilution as they would have been anti-dilutive.
Note E - Significant Business Risks
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has recurring
losses from operations and has limited operating revenues, that raises
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to operate as a going concern is dependent upon its
ability (1) to obtain sufficient additional capital, (2) to distribute its
programming and services through multimedia channels, (3) to achieve a critical
mass of viewers to attract advertisers and healthcare providers, and (4) to
acquire and develop appropriate programming for broadcast. The Company plans to
raise additional working capital through private and public offerings. The
successful outcome of future activities cannot be determined at this time and
there are no assurances that if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating results.
The financial statements do not include any adjustments related to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
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
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
December 31, 1998 (cont.)
local commercial TV broadcast stations (and additional channels for
noncommercial education TV stations); commercial leased access rules designating
10 to 15 percent of system channels for lease by unaffiliated programmers; and
local regulatory requirements mandating further channel set-asides for public,
governmental and educational use could reduce channel availability which might
otherwise be available for The Recovery Network on many cable systems. Statutory
provisions and FCC rules governing relationships among cable systems and
competing forms of multichannel video program distribution, as well as the
relations between the Company and its cable system affiliates could adversely
affect the marketability of the Company's programming and the flexibility of the
Company in its business dealings with outlets for its programming.
DEPENDENCE UPON GROUP W NETWORK SERVICES
In May 1998, the Company entered into a five-year contract with Group W Network
Service, a division of CBS Corporation, to provide program origination, master
control operations, up-link and C-Band Satellite transponder services (the
"Transponder Contract"). It is possible that Group W Network Services or Company
affiliates could experience broadcast interruptions and equipment failures,
which could last for a significant period of time. The Transponder Contract will
allow the Company to broadcast 24 hours a day, rather than the 12 hours a day
under the ATN nesting contract (the "Nesting Contract"). The Transponder
Contract, however, does not provide the Company with access to subscribers as
did the Nesting Contract.
Through June 30, 1998, substantially all the households which received broadcast
of The Recovery Network's programming were provided under the terms of the
Nesting Contract. Starting September 1, 1998, the Company is entirely dependent
on its own affiliate marketing efforts to obtain affiliate agreements with cable
operators. Currently, the Company 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.
Due to the Company's financial problems, it has been unable to pay a substantial
portion of the amount due to Group W under the terms of the Transponder
Contract. As of February 22, 1999, the amount due was $336,639, which is
included in accounts payable. At this time, the Company is able to continue
transmitting its program; however, there remains the possibility in the future
that transmission of programming may be interrupted or terminated for failure to
pay the amounts due under the Transponder Contract. The Company received notice
from Group W on February 9, 1999 that it has thirty days in which to pay the
full amount due under its contract, or transponder services will be discontinued
on March 12, 1999. The Company may seek to renegotiate the amount and timing of
payments due under the Transponder Contractor; however, there is no assurance
that such renegotiations can be resolved favorably.
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THE RECOVERY NETWORK, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
December 31, 1998 (cont.)
Note F - 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 G - Subsequent Events
ISSUANCE OF COMMON STOCK
In connection with the reset rights that certain shareholders have, a total of
970,632 shares of stock were issued out of an escrow account to the shareholders
in January and February 1999. These shares were released from a total pool of
1,000,000 shares that were deposited with an escrow agent. The 1,000,000 shares
are already included in the total number of shares outstanding.
In connection with employment services, a total of 225,000 shares of common
stock were issued to three officers of the Company in February 1999. In
connection with the termination of their employment in February 1999, a total of
approximately 100,000 shares will be issued to former employees of the Company
in February and March. As of February 22, 1999, 7,602 of these shares had been
actually issued to the former employees. In connection with their employment and
agreement to work for common stock instead of cash in February and March,
approximately 200,000 shares are expected to be issued within the next thirty
days to various current employees. As of February 22, 1999, none of these
200,000 shares had been issued.
In connection with services rendered to the Joint Venture the Company has an
interest in, and the restructuring of the equity of that joint venture, 25,000
shares were issued to a consultant.
In connection with consulting services provided, a total of 1,010,000 shares
were issued from January 1, to February 22, 1999.
OPTIONS
During January and February 1999, the Board of Directors granted options to
various employees and consultants to purchase 1,137,000 shares of common stock
at exercise prices ranging from $.50 to $3.00. 500,000 of these options were
exercised at an exercise price of $.50 on February 19, 1999. The 500,000 shares
are included in the 1,010,000 shares noted above.
In addition, options to purchase 137,000 shares at $2.00 per share were
re-priced to exercise prices between $.50 and $.625 in January 1999. These
options were initially issued in October 1998 and the underlying stock was
registered as part of a Form SB-2 filing that month. The exercise of these
options in January and February resulted in $75,752 gross proceeds to the
Company.
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Item 2. PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
condensed financial statements and notes thereto appearing elsewhere herein.
In April 1997, the Company nationally launched The Recovery Network, a cable
television network. Pursuant to a nesting contract (the "Nesting Contract") with
Access Television Network ("ATN"), ATN provided satellite uplink, master control
and other related services on its satellite transponder to The Recovery Network
for two hours of telecast time every day to subscribers of cable systems with
which ATN had affiliation agreements. The Nesting Contract, as amended, expired
on August 31, 1998.
On September 1, 1998, The Recovery Network began broadcasting a four hour block
of programming that repeats six times a day to approximately 2,000,000
subscribers. The Company entered into a five year contract with Group W Network
Services, a division of CBS corporation ("Group W"), pursuant to which Group W
is to supply a fully dedicated Digital Satellite Transponder master control and
uplink utilizing Scientific Atlanta's Power Vu equipment (the "Transponder
Contract"). The Transponder Contract affords the Company the potential to
transmit its signal throughout North America 24 hours a day, 7 days a week. The
Company currently has obtained distribution of its programming with Cablevision,
Cox Communications, Telecommunications, Inc. and CableOne (the "Affiliated
Systems").
The Company has also identified and is targeting all local cable systems in the
United States with at least 50,000 subscribers and is engaged in a general
marketing campaign ("affiliate marketing") directed at gaining more viewers. The
Company intends to evolve into a full-time digital cable network, and in turn,
generate the traditional licensing fees from cable operators.
To date, the Company has incurred significant net losses, including net losses
of $1,223,829, $3,817,652 and $8,261,734 for the years ended June 30, 1996, 1997
and 1998, and $4,642,020 for the six months ended December 31, 1998,
respectively. The Company anticipates that the continuing evolution of the
Company's cable television network, together with its world wide web site on the
Internet and its radio show will enable the Company to achieve greater
distribution of both its programming and the other products and services it
offers. In turn, the Company expects to market and promote its revenue
opportunities.
The Company anticipates that it will generate revenues from advertising sales on
The Recovery Network and Recovery Interactive, merchandising recovery-related
products and services on The Recovery Network, Recovery Interactive, and through
Recovery Direct. The Company also expects to generate revenues from license fees
from cable operators for its programming as Recovery Network evolves into a
full-time digital cable network. The Company does not expect that it will
generate any meaningful revenues from fees until such time, if ever, that it
enters into affiliation agreements providing the Company with a significant
subscriber base. There can be no assurance that the Company will be able to
enter into affiliation agreements with local cable systems with a sufficient
number of subscribers, achieve significant viewer loyalty or attract advertisers
for The Recovery Network, generate meaningful revenues or achieve profitable
operations.
Due to the Company's financial problems, it has been unable to pay a substantial
portion of the amount due to Group W under the terms of the Transponder
Contract. As of February 22, 1999, the amount due was $336,639, which is
included in accounts payable. At this time, the Company is able to continue
transmitting its program; however, there remains the possibility in the future
that transmission of programming may be interrupted or terminated for failure to
pay the amounts due under the Transponder Contract. The Company received notice
from Group W on February 9, 1999 that it has thirty days in
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which to pay the full amount due under its contract, or transponder services
will be discontinued on March 12, 1999. The Company may seek to renegotiate the
amount and timing of payments due under the Transponder Contractor; however,
there is no assurance that such renegotiations can be resolved favorably.
The Company anticipates that Recovery Interactive will generate revenue from
monthly subscriber fees from managed care companies, insurance companies and
employers for delivering mental and behavioral health benefits to covered
individuals, advertising and merchandising. However, there can be no assurance
that Recovery Interactive will generate meaningful revenues or achieve
profitable operations. Due to a capital restructuring that was consummated in
October 1998, the Company's interest in Recovery Interactive decreased from a
50% interest to a 20% interest. In addition, there are provisions in the current
partnership agreement whereby the Company's interest in Recovery Interactive
could decrease to 10% (of the total joint venture) if an additional capital
commitment is not met on a timely basis. The Company's current expectation is
that the additional capital commitment will be approximately $75,000 and will be
due the first week of March 1999. At this time, the Company does not have
sufficient resources to pay the expected additional capital commitment. However,
the Company has placed a high priority on obtaining additional financing to
maintain its 20% interest in Recovery Interactive. In addition, the Company may
seek to re-negotiate the additional capital commitment amount and timing;
however, there is no assurance that those negotiations will be successful.
Finally, the Company has in the past obtained federal grant moneys of an
aggregate of $63,200 from the Center for Substance Abuse Treatment and the
Center for Substance Abuse Prevention and expects to continue to obtain federal
grant moneys in the future. There can be no assurance, however, that the Company
will be able to obtain federal grant moneys.
Liquidity and Capital Resources
The Company's primary capital requirements in the next twelve months will be to
fund the costs of its affiliate marketing efforts, sales of advertising time and
producing and acquiring programming, satellite transponder costs, costs for
uplink, master control and transmission services, and other working capital
expenses.
The Company's capital requirements have been and will continue to be
significant, and its cash requirements continue to exceed its cash flow from
operations. At December 31, 1998, the Company had a working capital deficit of
$1,801,158. 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.
During the period from November 1995 through March 1, 1997, the Company issued
in private placements 745,674 shares of Common Stock at prices ranging from $.77
per share to $3.48 per share for net proceeds of approximately $1,433,767.
Additionally, the Company raised debt proceeds of $310,000 through another
private placement. See the Company's registration statement on Form SB-2 dated
September 29, 1997 for specifics of these financing activities.
In March and April 1997, the Company completed a private financing (the "Private
Financing") pursuant to which it issued an aggregate of (i) $2,000,000 principal
amount of unsecured non-negotiable promissory notes bearing interest at the rate
of 9% per annum (the "Financing Notes"); (ii) 400,000 shares of Common Stock;
and (iii) warrants to purchase an aggregate of 500,000 shares of Common
12
<PAGE> 13
Stock at an exercise price of $5.50 per share. The offering price was $50,000
per financing unit. After payment of $200,000 in placement agent fees to the
placement agent for the Company in connection with the Private Financing, and
other offering expenses of approximately $262,000, the Company received net
proceeds of approximately $1,538,000 from the sale of the financing units. The
net proceeds of the Private Financing were used by the Company for, among
things, an affiliate marketing campaign in connection with the national launch
of The Recovery Network, programming expenses for the production of "Full
Circle", "Testimony" and "Bottoms", a capital contribution in the amount of
$200,000 to Recovery Interactive and payments under the Nesting Contract with
ATN in the amount of $102,000. The Company repaid the entire principal amount
of, and accrued interest on, the Financing Notes in October 1997 with proceeds
received from its initial public offering.
During July and August 1997, the Company issued Promissory Notes with an
aggregate principal amount of $605,250 to five lenders (the "Promissory Notes").
The Company paid to each lender a loan origination fee in an amount equal to 5%
of the Promissory Notes, or approximately $30,300. The Promissory Notes plus
$95,000 of interest thereon were repaid on October 3, 1997. The net proceeds
from the issuance of the Promissory Notes were used for working capital
purposes. The Company incurred financing costs during the fiscal year ended June
30, 1998 of approximately $750,000 relating to the Private Financing and the
Promissory Notes.
On October 3, 1997, the Company consummated its initial public offering ("IPO")
pursuant to which it issued 2,415,000 units (each, a "Unit"). Each Unit
consisted of one share of Common Stock and one redeemable warrant to purchase
one share of Common Stock at $5.50 per share (each, a "Redeemable Warrant"). The
net proceeds received from the IPO were $10,141,757, and the amount of said
proceeds utilized by June 30, 1998 was approximately $9,540,000 used principally
to repay debt and pay operating expenses.
On June 29, 1998, the Company entered into certain subscription agreements (the
"Agreements") with 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 1999 resulted in the Subscribers
relinquishing their right to the Warrants on January 4, 1999. The Warrants
subsequently were allowed to lapse without being exercised.
In October 1998, in connection with various consulting and service agreements,
the Company agreed to issue, in exchange for consulting and other services, a
total of 58,000 shares of Common Stock, options to purchase 425,000 shares of
Common Stock, 50,000 of which are exercisable at $2.50 per share and 375,000 of
which are exercisable at $2.00 per share. The options immediately vested, and
have various registration rights. If fully exercised, the aggregate proceeds
from the exercise of the stock options and warrants would have been $825,000. As
of December 31, 1998, a total of 158,000 options had been exercised at $2.00 per
share, resulting in $316,000 of gross proceeds. On January 28, 1999, Company's
Board of Directors authorized the remaining 267,000 options to be re-priced at
exercise prices ranging between $.50 and $.75 per share in order to induce the
option-holders to exercise their options. In connection with that authorization,
as of February 18, 1999, a total of 137,000 options had been
13
<PAGE> 14
exercised, resulting in $75,752 in gross proceeds to the Company.
In January 1999, the Company reached an agreement with a group of shareholders
to lend the Company $750,000 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 Recovery Interactive, which would pay a 12% per annum
rate of interest. The notes would be repaid by the Company from the proceeds of
the next equity financing arrangement (over $2,000,000) that the Company would
enter into. In addition, the note holders would be granted 500,000 warrants to
purchase stock at $.01 per share, with the warrants expiring in January 2003.
The Company currently anticipates that the proceeds received from the exercise
of stock options and bridge financing, together with projected revenues from
operations, will be sufficient to fund the Company's operations and capital
requirements until approximately April 1, 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. 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, the Company's shares may be subject to
delisting from NASDAQ-Small Cap. A delisting from NASDAQSmallCap could hurt 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.
Year 2000 Compliance
The Company is in the process of modifying or replacing software components that
it uses so that such software will properly recognize dates beyond December 31,
1999 ("Year 2000 Compliance"). The cost for such modifications and replacements
is not expected to be material. There can be no guarantee that the systems of
such other companies will be timely converted, or that their conversion will be
compatible with information included in the Company's systems, without a
material adverse effect on the Company's business, financial condition or
results of operations.
Disclosure regarding Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements with respect to the
future performance of the Company that involve risks and uncertainties. Various
factors could cause actual results to differ materially from those projected in
such statements. These factors include, but are not limited to, the Company's
lack of meaningful revenues, its significant and continuing losses, its
significant capital 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.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on form 8-K
On November 6, 1998, the Company filed a Form 8-K, which made reference
to a November 3, 1998 press release. This release contained information
concerning several management changes within the Company, including the
appointment of a new Chief Executive Officer.
On November 24, 1998, the Company filed a Form 8-K, which documented the
possibility that the Company's stock may be de-listed from the NASDAQ SmallCap
Exchange. In addition, the filing discussed several additional management
changes within the Company, and detailed the terms of a $750,000 Bridge
Financing package which was expected to allow the Company to continue to operate
through February 1999, as it seeks additional long term financing.
On February 4, 1999, the Company filed a Form 8-K which 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 it's listing on NASDAQ SmallCap should be continued.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE RECOVERY NETWORK, INC.
Dated: February 22, 1999 By: /s/ Gary Horowitz
------------------------------------
Gary Horowitz
President and Chief Executive
Officer
16
<PAGE> 17
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 313,672
<SECURITIES> 0
<RECEIVABLES> 224,642
<ALLOWANCES> 35,000
<INVENTORY> 62,604
<CURRENT-ASSETS> 978,692
<PP&E> 451,462
<DEPRECIATION> 255,011
<TOTAL-ASSETS> 1,906,559
<CURRENT-LIABILITIES> 2,779,850
<BONDS> 0
0
0
<COMMON> 75,417
<OTHER-SE> (961,005)
<TOTAL-LIABILITY-AND-EQUITY> 1,906,559
<SALES> 626,675
<TOTAL-REVENUES> 678,963
<CGS> 218,064
<TOTAL-COSTS> 5,366,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,880
<INCOME-PRETAX> (4,641,046)
<INCOME-TAX> 974
<INCOME-CONTINUING> (4,642,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,642,020)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
