<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 2000.
REGISTRATION NO. _____________
------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RNETHEALTH.COM, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
COLORADO 7812 39-1731029
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
506 SANTA MONICA BLVD., SUITE 400
SANTA MONICA, CALIFORNIA 90401
(310) 393-3979
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
WENDY BOROW JOHNSON, PRESIDENT
RNETHEALTH.COM, INC.
506 SANTA MONICA BLVD., SUITE 400
SANTA MONICA, CALIFORNIA 90401
(310) 393-3979
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF COMMUNICATIONS TO:
BECKMAN, MILLMAN & SANDERS, LLP
116 JOHN STREET
NEW YORK, NEW YORK 10038
TELEPHONE: (212) 406-4700
TELECOPIER: (212) 406-3750
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to Be Offering Price Per Aggregate Offering Amount of
Registered Registered Security Price Registration Fee
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 4,800,000(a) $0.50 $2,400,000 $696.00
par value $0.01 per
share
-------------------------------------------------------------------------------------------------------------------
Total Registration Fee $696.00
-------------------------------------------------------------------------------------------------------------------
Previously Paid 0
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Paid with this Filing $696.00
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</TABLE>
----------------
(a) Includes the estimated number of shares issuable to Torneaux Ltd. pursuant
to the common stock purchase agreement, including an estimated 960,000
shares issuable pursuant to the exercise of Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
4,800,000 Shares of
RNETHEALTH.COM, INC.
Common Stock
This Prospectus relates to an aggregate of 4,800,000 shares (the "Shares")
of Common Stock, $.01 par value per share ("Common Stock"), of RnetHealth.com,
Inc. (the "Company") which may be offered and sold from time to time, by
Torneaux Ltd. (referred hereinafter as the "Selling Shareholders") in connection
with all draw downs pursuant to the terms and conditions of the Common Stock
Purchase Agreement and the shares of Common Stock issuable pursuant to the
exercise of warrants. The Company will not receive any proceeds from the sale of
the Shares by the Selling Shareholders except for proceeds received from the
exercise of warrants. See "Selling Shareholders".
The Shares may be offered for sale from time to time by the Selling
Shareholders or their pledgees, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Shares may be sold
directly by the Selling Shareholders or through one or more broker-dealers. Such
broker-dealers may receive compensation in the form of commissions, discounts or
concessions from the Selling Shareholders and/or purchasers of Shares for whom
such broker-dealers may act as agent, or to whom they may sell as principal, or
both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The Selling Shareholders and such broker-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933
(the "Securities Act"), and any discounts, commissions and concessions and any
profits realized on any sale of the Shares may be deemed to be underwriting
compensation. See "Selling Shareholders" and "Plan of Distribution".
The Common Stock is listed on the Nasdaq Bulletin Board as RNET.OB.
-------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
The date of this Prospectus is June 23, 2000
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<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference includes, but is not
limited to, those discussed in "Risk Factors."
THE COMPANY
RnetHealth.com, Inc. (symbol: RNET.OB) (the "Company") is a digital media
company leveraging the converging digital technologies of the Internet
(www.rnethealth.com) and television (Recovery Network) to deliver traditional
and alternative behavioral health interactive intervention and self-help
programs, community and e-care to consumers, businesses and their employees.
The broadband component -- Recovery Network - is a satellite-delivered
television network reaching approximately 6.0 million cable households.
The Internet component -- www.rnethealth.com -- provides a branded,
integrated, Web-based solution via a public platform for consumers, as well as a
business-to-business platform for the behavioral healthcare needs of employees,
employers, insurance companies, managed care organizations, health care systems,
providers, universities and other organized communities. The Company is the
behavioral health resource for America Online's Digital City, Inc. ("AOL/DCI"),
the No. 1 local online city guide network. RnetHealth.com receives branding on
AOL/DCI and direct links from AOL/DCI to the RnetHealth.com web site.
The Company's primary market is individuals whose lives are impacted by
behavioral health issues (e.g., eating disorders, depression, substance abuse,
stress, anxiety, etc.) as well as by the chronic diseases associated with
behavioral health issues (including cancer, heart disease, hypertension, asthma,
diabetes, hepatitis, and others). The Company provides action plans for
traditional forms of treatment, as well as clinically based alternative and
complementary health solutions.
RnetHealth.com's efforts are uniquely integrated with leading nonprofit
behavioral health care organizations. The Company's National Partnership for
Recovery and Prevention consists of over 50 prominent national health,
support, recovery and prevention organizations that represent over 40 million
people throughout the United States.
2
<PAGE> 4
THE OFFERING
We have entered into a Common Stock Purchase Agreement with Torneaux Ltd. (the
"Purchaser") to raise up to $10 million through a series of sales of our common
stock, of which shares representing approximately $3,075,000 are being
registered herein. The dollar amount of each sale is limited by our common
stock's trading volume, and a minimum period of time must elapse between each
sale (see Draw Down Terms on page 36). Each sale will be to the Purchaser at a
discount of 10-12% of the then current stock price. In turn, the Purchaser (the
"Selling Shareholder") will either sell our stock in the open market, to other
investors through negotiated transactions or hold our stock. This prospectus
relates to the resale of our stock by the Purchaser either in the open market or
to other investors.
------------------------------------------------------------ ---------------
SECURITIES OFFERED BY THE SELLING SHAREHOLDER 4,800,000 (a)
------------------------------------------------------------ ---------------
COMMON STOCK OUTSTANDING BEFORE AND AFTER THE OFFERING 36,612,917 (b)
HEREBY
------------------------------------------------------------ ---------------
TRADING SYMBOL RNET.OB
------------------------------------------------------------ ---------------
------------
(a) Includes the estimated number of shares issuable to the Purchaser
(see above) pursuant to the Common Stock Purchase Agreement, including an
estimated 960,000 shares issuable pursuant to the exercise of warrants.
(b) Represents shares of Common Stock outstanding as of June 1, 2000 plus the
4,800,000 shares issuable to the Purchaser as described above. Does not include
11,736,273 shares of Common Stock issuable upon the exercise of stock options
and warrants granted to employees, investors and consultants of the Company
SUMMARY FINANCIAL INFORMATION
The summary financial data set forth below is derived from and should be
read in conjunction with the audited financial statements at June 30, 1999 and
for the fiscal years ended June 30, 1998 and 1999, and the unaudited interim
financial statements at March 31, 2000 and for the nine-month period then ended,
including the notes thereto, appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Nine-Month Period
Fiscal Year Ended June 30, Ended March 31,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Net loss $8,261,734 $8,141,287 $6,380,776
Basic and diluted loss per share $ (1.91) $ (0.96) $ (0.30)
Weighted average number of shares outstanding 4,336,405 8,514,557 21,426,404
BALANCE SHEET DATA:
<CAPTION>
At June 30, 1999 At March 31, 2000
Actual Actual Proforma(a)
------ ------ -----------
<S> <C> <C> <C>
Working capital (deficit) $(1,263,901) $ 86,902 $3,161,902
Total assets 1,268,379 1,675,908 4,750,908
Total liabilities 1,880,396 1,137,905 1,137,905
Shareholders' equity (deficit) (612,017) 538,003 3,613,003
</TABLE>
---------
(a) Gives effect to the sale of an estimated 3,840,000 Common Stock to the
Purchaser (see above) for net proceeds of approximately $3,075,000 (based on the
current stock price of $0.91 per share). Does not give effect to any proceeds
from shares of Common Stock issuable to the Purchaser upon the exercise of stock
warrants or any additional shares of Common Stock that may be issued pursuant
to the exercise of any other outstanding options or warrants.
3
<PAGE> 5
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, together with all the other information included or
incorporated by reference in this prospectus, before you decide whether to
purchase shares of our common stock.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are typically
identified by the words "believe," "expect," "intend," "estimate" and similar
expressions. Those statements appear in a number of places in this report and
include statements regarding the intent, belief or current expectation of our
directors or officers with respect to, among other things, trends affecting our
financial conditions and results of operations and our business and growth
strategies. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those projected, expressed or implied in the forward-looking
statements as a result of various factors (such factors are referred to herein
as "Cautionary Statements"). The accompanying information contained in this
Prospectus, including the information set forth under "Plan of Operation" and
"Business" identifies important factors that could cause such differences. Such
forward-looking statements speak only as of the date of this report, and we
caution potential investors not to place undue reliance on such statements. We
undertake no obligation to update or revise any forward-looking statements. All
subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf is expressly qualified in their entirety by the
Cautionary Statements.
LACK OF MEANINGFUL REVENUES; SIGNIFICANT AND CONTINUING LOSSES; EXPLANATORY
PARAGRAPH IN INDEPENDENT PUBLIC ACCOUNTANTS REPORT. Organized in 1992 and later
reorganized in 1995, we have been primarily engaged in broadcasting of recovery
television in limited markets, affiliate marketing and development, acquisition
and production of programming, establishing Recovery Talk Radio and the Help
Line and forming relationships with individuals and organizations in the
recovery field. Recently, we have begun developing our Internet business. We
have a limited relevant operating history upon which you can evaluate our
performance and prospects . We have not generated any meaningful revenues and do
not expect to generate any meaningful revenues for the foreseeable future. To
date, we have incurred significant net losses, including net losses for the
nine-month period ended March 31, 2000 which were $6,380,776 or $0.30 per share
as compared to net losses for the fiscal year 1999 which were $8,141,287 or
$0.96 per share and net losses of $8,261,734 or $1.91 per share in fiscal year
1998. We expect to incur substantial additional capital expenditures and
operating costs in connection with the operation and expansion of our business
(including the Internet operations), satellite transmission of programming and
the development and production of television programming, which will result in
significant losses for the foreseeable future. There can be no assurance that we
will ever generate significant revenues or achieve profitable operations. Our
independent public accountants have included an explanatory paragraph in their
report on our financial statements, stating that certain factors raise
substantial doubt about our ability to continue as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Financial Statements.
SIGNIFICANT CAPITAL REQUIREMENTS; CONTINUING NEED FOR ADDITIONAL FINANCING. Our
capital requirements have been and will continue to be significant, and our cash
requirements have been exceeding our cash flow from operations and financing
activities. Our operating expenses for the nine-month period ended March 31,
2000 were $5,448,357, as compared to fiscal year 1999 expenses of $9,250,551 and
fiscal 1998 expenses of $8,524,380. We don't anticipate that existing
shareholders will provide any portion of our future financing requirements.
Consequently, we can't be sure that any additional financing will be available
to us when needed, on commercially reasonable terms, or at all. If we can't
obtain additional financing when needed this would have a material adverse
effect on us, requiring us to curtail and possibly cease our operations. In
addition, any additional equity financing may involve substantial dilution to
the interests of our existing shareholders. In addition, our equity is currently
below the minimum required for the listing of the our shares on the NASDAQ Small
Cap Market and, as a result, our stock was delisted during 1999. Unless we can
demonstrate the ability to raise our 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, our shares may not be registered on the NASDAQ Small Cap Market.
SALE OF SHARES TO TORNEAUX LTD. MAY HAVE A DILUTIVE EFFECT TO OUR SHAREHOLDERS
AND LOWER THE MARKET PRICE FOR OUR COMMON STOCK. Shareholders may experience
significant dilution from our sale of shares of common stock and warrants, to
Torneaux LTD under the Common Stock Purchase Agreement. In addition of our
common stock, the resale by Torneaux LTD. of our common stock may lower its
market price.
4
<PAGE> 6
NEW CONCEPT; UNCERTAINTY OF MARKET ACCEPTANCE OF RNEHEALTH.COM BY INTERNET
USERS, SUBSCRIBERS AND ADVERTISERS; UNCERTAINTY OF ABILITY TO IMPLEMENT PLAN OF
OPERATION. Our proposed plan of operation and prospects will be largely
dependent on the success of our affiliate marketing efforts, including our
ability to enter into affiliation agreements with operators of local cable
systems with a significant number of subscribers or other arrangements for the
airing of the Recovery Network, our ability to successfully operate under the
Transponder Contract, develop or acquire sufficient television programming to
enable us to expand our hours of broadcast, achieve significant viewer loyalty,
attract advertisers and develop or enter into arrangements for the supply of
products, such as videotapes, audio cassettes and books to merchandise. We have
limited experience in developing and operating a cable television network and
marketing recovery and prevention-related products and services, and we have
limited information available concerning the potential performance or market
acceptance of Recovery television and recovery and prevention-related products
and services. There can be no assurance that we will be able to implement our
business plan successfully or that unexpected expenses, problems, or technical
difficulties will not occur which would result in material delays in its
implementation. The combination of our recovery and prevention-related products
and services via the Internet involves a new business concept. As is typical in
the case of a new concept, demand and market acceptance of Rnethealth.com and
recovery and prevention-related products and services are subject to a high
level of uncertainty. To-date, we have not conducted any independent market,
concept feasibility studies or any additional market testing activities,
although we plan to. Our prospects will be significantly affected by the success
of our strategic efforts to align our business with healthcare institutes and
healthcare providers, the acceptance of our Internet content by potential users
and subscribers and our ability to attract advertisers. Achieving market
acceptance for our recovery and prevention-related products and services will
require significant effort and expenditures from us to create awareness and
demand by Internet users, advertisers and other host that potentially will
utilize us.
UNCERTAINTY OF CONTENT DEVELOPMENT AND CONTENT ACQUISITION. We are required
to commit considerable time, effort, and resources to development and
acquisition of an expansive library of content, beyond the programming we
already possess. Our development and production efforts are subject to all of
the risks inherent in the development and acquiring of new content, including
unexpected delays, expenses, technical problems and difficulties, as well as the
possible insufficiency of funds to complete satisfactory development and
acquisitions, which could result in abandonment or substantial change in
content. There can be no assurance that our development and acquisition efforts
will be successfully completed on a timely basis, or at all, or that unexpected
events will not occur which would result in increased costs or material delays
in development.
BROADCAST INTERRUPTIONS AND EQUIPMENT FAILURES. We are dependent upon the
Transponder Contract to provide the necessary services to enable us to broadcast
our programming through cable systems with which we directly enter into
affiliation agreements. It is possible that we could experience broadcast
interruptions and equipment failures, which could last for a significant period
of time. Broadcast interruptions or equipment failures affecting broadcasting of
our programming could adversely affect viewer perception of, and advertiser
confidence in, Our Network could result in loss of advertising revenue, which
could have a material adverse effect on us.
RISKS RELATING TO THE DEVELOPMENT AND SUPPLY OF RECOVERY RELATED PRODUCTS;
RISKS RELATED TO RECOVERY DIRECT; UNCERTAINTY OF COMMERCIAL ACCEPTANCE OF
RECOVERY RELATED PRODUCTS. We have just recently begun to enter into
arrangements for the supply of recovery and prevention-related products to
market and to offer them to the public. Net sales were $985,880 for the
nine-month period ended March 31, 2000, as compared to net sales of $1,533,922
for the fiscal year 1999 and net sales of $894,758 for the fiscal year 1998. The
increases are primarily attributable to the acquisition of our wholly owned
merchandise and distribution subsidiary in December 1997; as a result, the
revenues for fiscal year 1998 include only six months' of revenues from the
subsidiary as compared to 12 months' revenues in fiscal year 1999 and 9 months'
revenues in fiscal year 2000. Development of such business is subject to all of
the risks associated with the development of a new line of business, including
unexpected delays, as well as insufficiency of funds to complete satisfactory
development of products and services. To the extent we enter into arrangements
for the supply of recovery and prevention-related products with third parties,
we will be dependent upon its suppliers to, among other things, satisfy our
quantity and performance specifications and to dedicate sufficient production
capacity to meet our scheduled delivery requirements. Additionally, we have not
conducted and do not intend to conduct any formal market studies or feasibility
studies for any potential products.
5
<PAGE> 7
Achieving market acceptance for recovery and prevention-related products
will require substantial marketing efforts, expenditure of significant funds and
use of commercial time on our network and Recovery Talk Radio and advertising
space on our ecommerce site otherwise available for sale to advertisers to
inform potential customers of potential products. There can be no assurance that
we will continue to be able to develop or enter into arrangements for the supply
of recovery and prevention-related products or that our efforts will result in
successful product commercialization or initial or continued market acceptance
for any potential recovery and prevention-related products.
FACTORS AFFECTING CABLE TELEVISION INDUSTRY. A portion of our business is
concentrated in the cable television industry, which is continually evolving,
and subject to rapid change. Recently, direct satellite services ("DSS") and
digital cable deployment and advances in signal compression/decompression
technologies have begun to create additional channel capacity and new
opportunities for television networks. There can be no assurance, however, that
DSS or such other technologies will be further developed or utilized to expand
channel capacity. Our growth strategy is based, in part, upon the continued
growth of the cable and DSS industries and the expected increased availability
of channel capacity. If the cable industry grows slower than expected or ceases
to grow or if channel capacity does not expand as rapidly as expected, or ceases
to grow, we may not be able to enter into a sufficient number of affiliation
agreements or other arrangements for the carriage of our Network, which would
have a material adverse effect on us.
COMPETITION. Our Network competes with all other existing and planned
television networks and other television programming for available airtime,
channel capacity, advertiser revenue and revenue from license fees. Many of
these television networks and producers of television programming are well
established, have reputations for success in the development and operation of
television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than us. In
addition, if cable television channel capacity increases as we expect,
competition from smaller competitors and other start-up television networks
could increase significantly. Although we are not aware of any television
network with programming focusing principally on recovery issues and prevention
issues, there are an increasing number of recently introduced or planned cable
networks which focus on overall life-style, self-improvement and health themes
and there are numerous programs which address recovery issues and prevention
issues. Moreover, because our programming and content is intended to provide
information and support to persons facing recovery issues and prevention issues,
our 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 we will be able to successfully compete for airtime, channel
capacity, advertiser time/space or viewership/visitors.
UNCERTAINTY OF PROTECTION OF PROPRIETARY INFORMATION. We have pending
registration applications in the United States Patent and Trademark Office for
our trademarks. We use the "Recovery Network" a registered trademark in
connection with our programming. We believe that our trademark and copyrights,
including "The Recovery Network" trade name and the signature look of the
network, have significant value and are important to the marketing and promotion
of Rnethealth.com and our recovery and prevention-related products and services.
Although we believe that our trademarks and copyrights do not and will not
infringe on trademarks or violate proprietary rights of others, it is possible
that existing trademarks and copyrights may not be valid or that infringement of
existing or future trademarks or proprietary rights may occur. In the event our
trademarks or our copyrights infringe trademarks or proprietary rights of
others, we may be required to change the name of our network, proposed
television shows, radio talk show or obtain a license. There can be no assurance
that we will be able to do so in a timely manner, on acceptable terms and
conditions, or at all. Failure to do any of the foregoing could have a material
adverse effect on us. In addition, there can be no assurance that we will have
the financial or other resources necessary to enforce or defend a trademark
infringement or proprietary rights violation action. Moreover, if our trademarks
or copyrights infringe the trademarks or proprietary rights of others, we could,
under certain circumstances, become liable for damages, which could have a
material adverse effect on us.
6
<PAGE> 8
We also rely on trade secrets and proprietary know-how and employs various
methods to protect its concepts, ideas and the documentation of its television
programming and concepts in development. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop similar know-how or obtain access to our know-how,
concepts, ideas and documentation. Furthermore, although we expect to have
confidentiality and non-competition agreements with our employees and
appropriate consultants, there can be no assurance that such arrangements will
adequately protect the our trade secrets or that others will not independently
develop programming similar to ours.
INSURANCE AND POTENTIAL LIABILITY. The operation of a television, radio and
interactive media business subjects us to possible liability claims from others,
including viewers, listeners and callers to the Help Line for claims arising
from the unauthorized use of name or likeness, invasion of privacy, defamation
and slander. We maintain general liability insurance (with coverage in amounts
of up to $1,000,000 per occurrence and $1,000,000 per annum), including
insurance relating to personal injury and advertising injury, in amounts which
we currently considers adequate. Nevertheless, a partially or completely
uninsured claim against us, if successful, could have a material adverse effect
on us.
CONTROL BY MANAGEMENT. Our current executive officers and directors in the
aggregate, beneficially own approximately 42% of the outstanding Common Stock.
Accordingly, such persons may have the ability to exert significant influence
over the election of our Board of Directors and other matters submitted to our
shareholders for approval.
DEPENDENCE ON KEY PERSONNEL; NEED FOR QUALIFIED PERSONNEL. We are highly
dependent on our executive officers and our senior management, and we will
likely depend on our senior management for any significant business which we
will embark upon in the future. The loss of the services of any of our current
executive officers or our key employees or any member of our senior management
of any acquired business could have a material adverse effect on our business,
results of operations and financial condition.
NO DIVIDENDS. To date, we have not paid any cash dividends on the Common
Stock and do not expect to declare or pay dividends on the Common Stock in the
foreseeable future. In addition, the payment of cash dividends may be limited or
prohibited by the terms of future loan agreements or the future authorization
and issuance of Preferred Stock.
RISK OF LOW-PRICED STOCKS. Rules 15g-1 through 15g-9 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act") impose sales practice and
disclosure requirements on certain brokers and dealers who engage in certain
transactions involving "a penny stock." Currently our Common Stock is considered
a penny stock for purposes of the Exchange Act. The additional sales practice
and disclosure requirements imposed on certain brokers and dealers could impede
the sale of our Common Stock in the secondary market. In addition, the market
liquidity for our securities may be severely adversely affected, which could
have a concomitant adverse effects on the price of our securities. Under the
penny stock regulations, a broker or dealer selling penny stock to anyone other
than an established customer or "accredited investor" (generally, an individual
with net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with his or her spouse) must make a special suitability
determination for the purchaser and must receive the purchaser's written consent
to the transaction prior to sale, unless the broker or dealer or the transaction
is otherwise exempt. In addition, the penny stock regulations require the broker
or dealer to deliver, prior to any transaction involving a penny stock, a
disclosure schedule prepared by the Securities and Exchange Commission ("SEC")
relating to the penny stock market, unless the broker or dealer or the
transaction is otherwise exempt. A broker or dealer is also required to disclose
commissions payable to the broker or dealer and the registered representative
and current quotation for the securities. In addition, a broker or dealer is
required to send monthly statements disclosing recent price information with
respect to the penny stock held in a customer's account and information with
respect to the limited market in penny stocks.
7
<PAGE> 9
USE OF PROCEEDS
We expect to sell to Purchaser, subject to an effective registration and
applicable limitations, $3,075,000 of common stock under the Common Stock
Purchase Agreement. Additional amounts may be received if the warrants to
purchase common stock are exercised. Net proceeds are determined after deducting
all expenses of the offering (estimated to be $30,000). We intend to use the net
proceeds from this offering for working capital and general corporate purposes.
The Company projects that this additional cash will be sufficient to fund the
Company's operations and capital requirements through March 31, 2001. There can
be no assurance, however, that such funds will not be expended prior thereto due
to inability to obtain all the committed funds from the Purchaser, unanticipated
changes in economic conditions, or other unforeseen circumstances. In the event
the Company's plans change or its assumptions change or prove to be inaccurate,
the Company could be required to seek additional financing sooner than currently
anticipated. The Company has no current arrangements with respect to, or
potential sources of, any additional financing, and it is not anticipated that
existing shareholders will provide any portion of the Company's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all. Proceeds not immediately required for the purposes
described above will be invested principally in short-term bank certificates of
deposit, short-term securities, United States Government obligations, money
market instruments and/or other interest-bearing investments.
DIVIDEND POLICY
The Company has not paid dividend on its common stock and does not
anticipate paying dividends in the foreseeable future. The Company intends to
retain future earnings, if any, to finance the expansion of our operations and
for general corporate purposes. The declaration in the future of any cash or
stock dividends on the Common Stock will be at the discretion of the Board and
will depend upon a variety of factors, including the earnings, capital
requirements and financial position of the Company and general economic
conditions at the time in question. In addition, the payment of cash dividends
on the Common Stock in the future could be limited or prohibited by the terms of
financing agreements that may be entered into by the Company (e.g., a bank line
of credit or an agreement relating to the issuance of debt securities of the
Company) or by the terms of any Preferred Stock that may be authorized and
issued.
PLAN OF DISTRIBUTION
The Shares may be offered for sale from time to time by the Selling
Stockholder or their pledges, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Shares may be sold
directly by the Selling Shareholders or through one or more broker-dealers. Such
broker-dealers may receive compensation in the form of commissions, discounts or
concessions from the Selling Shareholders and/or purchasers of Shares for whom
such broker-dealers may act as agent, or to whom they may sell as principal, or
both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The Selling Shareholders and such broker-dealers may be
deemed to be underwriters within the meaning of the of Securities Act, and any
discounts, commissions and concessions and any profit realized on any sales of
the Shares may be deemed to be underwriting compensation.
LEGAL PROCEEDINGS
On March 23, 1999, Michele LeBlanc filed a lawsuit against the Company in
United States District Court for the Central District of California, Western
Division. The complaint listed 10 separate counts including wrongful termination
and violation of Federal securities laws. Generally, the plaintiff seeks
unspecified compensatory damages, attorneys' fees and costs. In January 2000,
the Company filed a Motion for Summary Judgment with respect to all claims
asserted by Ms. LeBlanc. The Court ordered summary judgment for the Company as
to seven of the ten claims, including the wrongful termination claim and the
alleged Federal securities laws violations.
On April 25, 2000, Peter Graf filed a lawsuit against the Company and its
officer in the United States District Court, Southern District of New York. Mr.
Graf alleges claims for negligence,breach of fiduciary duty, as well as theft
and conversion. Mr. Graf seeks damages in excess of $1.3 million. The Company
has filed its answer together with affirmative defenses and a counterclaim
against Mr. Graf for breach of contract.
8
<PAGE> 10
CAPITALIZATION
The following table sets forth (i) short-term debt and total capitalization of
the Company as of June 30, 1999 and March 31, 2000, and (ii) the pro forma
capitalization at March 31, 2000 date after giving retroactive effect to the
Sale of stock to the Purchaser for estimated net proceeds of approximately
$3,075,000.
<TABLE>
<CAPTION>
June 30, 1999 March 31, 2000 (UNAUDITED)
Actual Actual Proforma (a)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt, including
current portion of capital
lease obligation $ 500,832 $ 37,500 $ 37,500
============ =========== ============
---------------------------------------------------------------------------------------------------
Shareholders' equity (deficit);
Common Stock, $0.01 par
value $ 154,945 $ 299,606 $338,006
---------------------------------------------------------------------------------------------------
Additional paid in capital 21,813,509 29,641,294 32,677,894
---------------------------------------------------------------------------------------------------
Prepaid Consulting (230,331) - -
---------------------------------------------------------------------------------------------------
Common stock subscription
receivable (50,000) - -
---------------------------------------------------------------------------------------------------
Accumulated deficit (22,300,140) (29,402,897) (29,402,897)
------------ ----------- ------------
---------------------------------------------------------------------------------------------------
Total shareholder's equity
(deficit) $ (612,017) $ 538,003 $ 3,613,003
============ =========== ============
---------------------------------------------------------------------------------------------------
Total Capitalization $ (617,017) $ 538,003 $ 3,613,003
============ =========== ============
---------------------------------------------------------------------------------------------------
</TABLE>
(a) Gives effect to the sale of an estimated 3,840,000 shares of Common Stock to
the Purchaser (see above) for net proceeds of approximately $3,075,000 based on
the current stock price of $0.91 per share. Does not give effect to any proceeds
form shares of Common Stock issuable to the Purchaser upon the exercise of stock
warrants or any additional shares of Common Stock that may be issuable pursuant
to the exercise of any other outstanding options or warrants.
9
<PAGE> 11
PRICE RANGE OF COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Prior to September 29, 1997, there was no market for the Company's
securities. From September 29, 1997 until January 7, 1998, one share of the
Company's Common Stock and one Redeemable Warrant (which entitled the holder to
purchase one share of Common Stock at a price of $5.50 per share through the
close of business on September 29, 2002, or an earlier redemption date) (each, a
"Redeemable Warrant" and collectively, the "Redeemable Warrants") traded as a
unit (each, a "Unit" and collectively, the "Units"). Beginning on January 9,
1998, shares of the Company's Common Stock and the Redeemable Warrants began
trading separately. In all cases, the Company's Units, Common Stock and
Redeemable Warrants traded on the NASDAQ SmallCap Market. On April 21, 1999, the
Company's stock was delisted and immediately began trading on bulletin board.
The table below sets forth the high and low closing bid prices for the Units,
the Common Stock and the Redeemable Warrants, as reported on the NASDAQ SmallCap
Market, during the period July 1, 1998 to April 21, 1999, and on the bulletin
board beginning April 22, 1999 . The quotations represent inter-dealer
quotations without adjustment for retail mark-ups, markdowns or commissions and
may not represent actual transactions:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
COMMON STOCK REDEEMABLE WARRANTS UNITS
---------------------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended September $2.63 $1.63 $0.625 $0.125
30, 1998
---------------------------------------------------------------------------------------------------------------------
Quarter Ended December $1.50 $0.312 N/A N/A N/A N/A
31, 1998
---------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, $0.875 $0.375 N/A N/A N/A N/A
1999
---------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, $0.49 $0.29 N/A N/A N/A N/A
1999
---------------------------------------------------------------------------------------------------------------------
Quarter Ended September $0.2969 $0.2656 N/A N/A N/A N/A
30, 1999
---------------------------------------------------------------------------------------------------------------------
Quarter Ended December $1.44 $1.22 N/A N/A N/A N/A
31, 1999
---------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, $1.97 $1.66 N/A N/A N/A N/A
2000
---------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 1, 2000, the Company had outstanding 31,812,917 shares of Common
Stock owned by approximately 148 holders of record, and 2,413,900 Redeemable
Warrants owned by approximately 11 holders of record.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1999:
RESULTS OF OPERATIONS
Net sales of $1,533,922 for the fiscal year 1999 were 71% higher than the
net sales of $894,758 for the fiscal year 1998. The increase is primarily
attributable the acquisition of FMS in December 1997; as a result, the revenues
for fiscal year 1998 include only six months' of revenues from the subsidiary as
compared to 12 months' revenues in fiscal year 1999.
Operating expenses of $9,250,551 for fiscal year 1999 were 9% higher than
the operating expenses of $8,524,380 for the fiscal year 1998. The increase is
primarily attributed to $2,674,453 of non-cash expenses for employees and
consultants related to stock issuances in 1999, offset by a decrease of
$1,599,150 in the loss on investment in joint venture related to the sale of
this investment in fiscal year 1999.
Interest expense of $489,552 for fiscal year 1999 was 37% lower than the
interest expense of $775,611 in fiscal year 1998. The decrease is primarily
attributed the reduction in average debt balances from fiscal year 1998 to
fiscal year 1999.
As a result of the above factors, net losses for the fiscal year 1999 were
$8,141,287 or $0.96 per share as compared to net loss of $8,261,734 or $1.91 per
share in fiscal year 1998.
FINANCIAL POSITION
Total assets decreased from $3,784,920 at June 30, 1998 to $1,268,379 at
June 30, 1999. The decrease is primarily attributed to a reduction in cash of
$2,083,087 and in capitalized programming costs of $437,814. Cash decreases are
primarily due to the net loss, offset by cash infusions, as explained in more
detail below. Capitalized programming costs decreased due to amortization of
existing costs in excess of new costs incurred during the fiscal year 1999.
Total liabilities increased from $1,296,139 at June 30, 1998 to $1,880,396
at June 30, 1999. The increase in primarily attributed to short-term notes
payable of $481,015.
Shareholders' equity (deficit) decreased from $2,488,781 at June 30, 1998
to $(612,017) at June 30, 1999. The decrease is primarily attributed to the net
loss of $8,141,287 in fiscal year 1999, offset by new issuances of stock,
warrants, and options to investors, employees and consultants.
NINE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999:
RESULTS OF OPERATIONS:
Net sales of $985,880 for the nine-month period ended March 31, 2000 were
4% higher than the net sales of $947,392 for the nine-month period ended March
31, 1999, due to normal sales growth.
Operating expenses of $5,448,357 for the nine-month period ended March 31,
2000 were 22% lower than the operating expenses of $6,948,477 for the nine-month
period ended March 31, 1999, due primarily to reductions in programming and
marketing expenses.
Interest expense of $1,919,590 for the nine-month period ended March 31,
2000 was $1,620,337 higher than the interest expense of $299,253 for the
nine-month period ended March 31, 1999. The increase is primarily attributed to
non-cash interest charges incurred in connection with the issuance of
convertible notes during the nine-month period ended March 31, 2000
(approximately $1,720,000).
As a result of the above factors, the net loss for the nine-month period
ended March 31, 2000 was $6,380,776 or $0.30 per share as compared to a net loss
of $5,640,951 or $0.75 per share for the nine-month period ended March 31, 1999.
11
<PAGE> 13
FINANCIAL POSITION:
Total assets increased from $1,268,379 at June 30, 1999 to $1,675,908 at March
31, 2000. The increase is primarily attributed to the increase in cash primarily
due to proceeds from the issuance of common stock of approximately $2,614,000
which was offset by the cash used in operating activities of $1,870,284. The
increase in cash was offset by reductions in accounts receivable (due to normal
seasonal fluctuations) and capitalized programming costs (due to no significant
new programming being acquired or developed yet in fiscal 2000 due to change in
Company's focus from cable broadcasting to internet).
Total liabilities decreased from $1,880,396 at June 30, 1999 to $1,137,905
at March 31, 2000. The decrease in primarily attributed to a debt conversion of
approximately $406,000 and reductions in accounts payable and accrued expenses
of approximately $279,000.
Shareholders' equity (deficit) increased from $(612,197) at June 30, 1999
to $538,003 at March 31, 2000. The increase is primarily attributed to the
proceeds received and fair value of services received (totaling approximately
$6,650,000) related to issuances of stock, warrants and options to investors,
employees and consultants and debt of approximately $900,000 converted to common
stock during the period, offset in part by a net loss of approximately
$6,400,000 during the nine-month period ended March 31, 2000.
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 up-link,
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, 2000, the Company had a cash balance of $877,917 and
had positive working capital of $86,902. Due to (among other things) the lack of
meaningful revenue and costs associated with program development and affiliated
marketing efforts, the Company has been substantially dependent upon various
debt and equity private placements and its initial public offering to fund its
operations.
The Company's cash flow used in operating activities decreased from
$3,933,652 for the nine-month period ended March 31, 1999 to $1,870,284 for the
nine-month period ended March 31, 2000. This decrease is primarily due to the
Company's significant cutbacks in personnel, overhead and other corporate
expenses and the Company's ability to pay many expenses in stock and warrants
rather than cash. Total net non-cash charges for the nine-month period ended
March 31, 2000 were $4,681,603 as compared to only $1,168,397 for the nine-month
period ended March 31, 1999.
During the nine-month period ended March 31, 2000, the Company has obtained
liquidity from the proceeds received from debt issuances, common stock issuances
and commitments and collections of subscription receivable totaling $2,843,592.
In April 2000, the Company received an additional $150,000 in cash for
150,000 shares of common stock.
The Company currently anticipates that the proceeds received during the
nine-month period ended March 2000 and in April 2000 from the new stock activity
and the exercise of stock options and warrants, together with projected revenues
from operations, will be sufficient to fund the Company's operations and capital
requirements through June 30, 2000. There can be no assurance, however, that
such funds will be sufficient to fund the Company's operations and capital
requirements until June 30, 2000 or 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 substantial portion of the Company's future financing requirements.
However, the Company is actively negotiating certain strategic alliances and
private placements. 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 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 $4 million minimum required for re-listing of the Company's shares on the
NASDAQ Small Cap exchange. Unless we can demonstrate the ability to raise our
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, our shares may not be
registered on the NASDAQ Small Cap Market.
12
<PAGE> 14
BUSINESS
GENERAL
RnetHealth.com, Inc. (the "Company") is a digital media company leveraging
the converging digital technologies of the Internet (www.RnetHealth.com) and
television (Recovery Network) to deliver traditional and alternative behavioral
health interactive intervention and self-help programs, community and e-care to
consumers, businesses and their employees.
The broadband component -- Recovery Network - is a satellite-delivered
television network reaching approximately 6.0 million cable households through
agreements with multiple-system operators ("MSOs"), individual cable systems,
and government and educational institutions. Notable MSOs include: Cablevision
Systems, Telecommunications, Inc. (now an AT&T company), Time Warner, Inc., Cox
Communications, Cable One, Century Communications, FrontierVision, Knology and
National Cable Television Cooperative, Inc. ("NCTC"). Recovery Network is
distributed nationally via a satellite agreement with Group W Satellite
Services, a division of CBS.
The Internet component -- www.RnetHealth.com -- provides a branded,
integrated, Web-based solution via a public platform for consumers, as well as a
business-to-business platform for the behavioral healthcare needs of employees,
employers, insurance companies, managed care organizations, health care systems,
providers, universities and other organized communities. The Company is the
behavioral health resource for America Online's Digital City, Inc. ("AOL/DCI"),
the No. 1 local online city guide network. RnetHealth.com receives branding on
AOL/DCI and direct links from AOL/DCI to the RnetHealth.com web site.
The Company's primary market is individuals whose lives are impacted by
behavioral health issues (e.g., eating disorders, depression, substance abuse,
stress, anxiety, etc.) as well as by the chronic diseases associated with
behavioral health issues (including cancer, heart disease, hypertension, asthma,
diabetes, hepatitis, and others). The Company provides action plans for
traditional forms of treatment, as well as clinically based alternative and
complementary health solutions.
THE CABLE TELEVISION NETWORK
To date, the Company's cable television programming service, Recovery
Network, has successfully secured approximately 6 million homes for analog
distribution of its 4 hour per day programming block without paying any launch
fees. The Company has distribution with Cablevision Systems, Telecommunications
Inc., Cox Communications, Cable One, Century, FrontierVision, Knology, NCTC, and
Time Warner. Recovery Network's focus is on reality-based programming and
production, which is both informational and process-oriented, providing daily
connection and support in the privacy of one's own home. The Company has also
identified and is targeting all local cable systems in the United States with at
least 50,000 subscribers and is engaged in a general marketing campaign
("Affiliate Marketing", discussed below) directed at gaining more viewers. The
Company intends to evolve into a full-time digital cable network, and in turn,
generate the traditional licensing fees from cable operators.
Recovery Network will serve to market and drive traffic to RnetHealth.com,
the Company's website, where therein lie the Company's e-commerce revenue
opportunities through sales of books, tapes, herbs and vitamins, tele-counseling
services, and other behavioral health programming, services and products ideally
suited to its target audience. The Company's cable television network provides a
point of differentiation and competitive advantage for the RnetHealth.com
commercial product. The cable television network brands the interactive business
to television viewers and promotes the RnetHealth.com URL during all network
identifications. The television network provides grass roots marketing for the
interactive business to many powerful and influential community and civic
organizations. Traditionally it has been difficult to garner support from these
organizations ( Community Anti Drug Coalition American and National Guard). Yet,
the Company has already secured governmental support for a national branding and
marketing initiative called 24 STRAIGHT, a day of prevention and recovery
sponsored by Substance Abuse and Mental Health Services Administration and
Center Substance Abuse Treatment.
13
<PAGE> 15
In May 1998, the Company entered into a five-year contract with Group W
Network Services, a division of CBS Corporation, to provide program origination,
master control operations, uplink and C-Band Satellite transponder services (the
"Transponder Contract"). The Transponder Contract allowed the Company to
broadcast 24 hours a day. On September 1, 1998, the Company began broadcasting a
4-hour block of programming that it repeated 6 times a day to 16 cable systems
with approximately 3,000,000 subscribers. The Company's programming schedule
allowed cable operators the flexibility to receive the Company's signal
transmission at any time. In April 1999, the Company and Group W amended the
terms and conditions of their satellite services agreement, thereby reducing the
Company's monthly fees by 50%. The Transponder Contract, however, does not
provide the Company with access to subscribers as did the Company's previous
nesting contract. Therefore, in addition to its current distribution, the
Company is seeking 4 hours of broadcast time per day in local cable systems in a
large number of markets.
AFFILIATE MARKETING STRATEGY
The Company's strategy for obtaining affiliation agreements with cable
systems is based on the premises that cable systems are effectively monopolies
franchised by local governments, and in order to renew their franchises, many
cable systems will need to demonstrate a commitment to localism by providing
programming that benefits the local community, and that although it will be
difficult to obtain a full time dedicated channel for a new network until new
digital technologies expand channel capacity, more channel capacity will become
available over the next several years.
The first premise forms the basis for the Company's grassroots affiliate
marketing strategy. The Company believes that 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 RnetHealth.com's credibility and social
significance. Based on such successes, the Company believes that its ability to
enter into affiliation agreements has significantly improved. The Company is
also seeking support from other grassroots organizations, local politicians and
law enforcement agencies and officials, and believes that the socially
responsible nature of 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 RnetHealth.com'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 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 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
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.
The Company has secured distribution agreements with two MSOs: 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.
14
<PAGE> 16
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 has successfully negotiated
agreements with the following MSOs: Cablevision, Time Warner Cable,
Bresnan,Insight, Charter and Cable One. Although the Company has not signed a
written agreement with all of these MSOs, the Company's programming is currently
carried in approximately 1,600,000 households served by Cablevision. Since
October 1998, additional launches include Jones Intercable in Independence,
Missouri; Knology in Alabama, Florida and Georgia; Marcus Cable in Fort Worth,
Texas; Time Warner in El Paso, Texas, Jackson, Mississippi, and Indianapolis,
Indiana; Frontiervision; Comcast in Indianapolis, Indiana; Cable One in Modesto,
California; Tele-Communications, Inc. in Newark, California; Access TV in Carson
City, Nevada.
In 1999, the Network also launched on Denver Community Television (DCTV)
and on Los Angeles City-controlled Educational Access Cable Channel 36.
In May of 2000, the Network has launched on AT&T Cable Services of Zion,
Illinois to 100,000 cable households and on Northern Dakota (Minnesota) County
Community Television to 50,000 cable households.
The MSO Agreements represent terms, which have been agreed to between the
Company and the respective MSO. By reaching agreement with the MSOs, the Company
is now free to approach the affiliated local systems of NCTC and SSI regarding
the airing of its programming. Neither the MSOs nor the affiliated local systems
are required, pursuant to the MSO Agreements, to provide the Company with any
subscribers. The Company is initially seeking to enter into short-term
affiliation agreements with local cable systems with a term of one year that
provide for four hours of airing per day, with no license fees paid to the
Company, and have a 30-day termination clause. The agreements would also provide
that the programming can be aired on local origination and on public,
educational and government access channels or on other channels at the cable
system's discretion.
CONTENT AND MARKETING RELATIONSHIPS
Over the course of developing programming for Recovery Network, the Company
has cultivated relationships with individuals and with organizations that will
continue to play strategic roles in the further development of both the
television network and the Internet business. These include contributions in the
areas of content review and provision, service distribution and deployment,
market analysis, and community development.
Key elements of these relationships include:
The UNIVERSITY OF FLORIDA provides an academic affiliation for clinical
validation of information and programs. Under a grant for "alternative and
behavioral health Internet information", a wide range of contributions are
provided to the Company. Included is development of content, of electronic
models for delivering services, and of continuing professional on-line
education. Additionally, as an initial site for the company's Student Assistance
Program (SAP), University of Florida students will receive an alternative and
behavioral health care model, which is Internet based.
The NATIONAL PARTNERSHIP FOR RECOVERY AND PREVENTION (NPRP) consists of
more than 50 national recovery and prevention organizations representing over 40
million constituents. Providing information, advice, and communications, both to
and from, the organization's membership leverages established organizational
structures to further the goals of the organization and to promote the
distribution of the Company's media outlets.
THE BOARD OF ADVISORS provides professional and expert input to the Company
concerning editorial and content issues, current practices in clinical
environments, social and cultural viewpoints, and research perspectives. The
composition of the board includes highly respected individuals in the areas
associated with the Company's content.
15
<PAGE> 17
Public/Private partnerships with government organizations such as the
NATIONAL CLEARINGHOUSE FOR ALCOHOL AND DRUG INFORMATION provide additional
resources in support of providing services under the RnetHealth.com banner.
Telephone information referral services, cross-site promotion links, and media
library services add to the reach and value of RnetHealth.com. The
community-based COPE program jointly developed with the "COMMUNITY ANTI-DRUG
COALITIONS OF AMERICA" extends the direct reach of the Company's media to the
local level. Examples of successful national programs include the "24 Straight"
initiative which was jointly developed by SAMHSA, THE NATIONAL GUARD, and
RnetHealth.com This program focused schools and local communities on issues of
substance abuse. Another example is the "Recovery Month" project, which targets
workplace issues of substance abuse in twenty cities.
Rnethealth.com holds one of the largest libraries of behavioral health
programming in the world. Original productions by the Company, its subsidiary,
and license agreements provide a resource for broadcast operations. All
electronic rights, including Internet distribution, are reserved for original
productions. Programs include celebrity talent such as Whoopi Goldberg, Whitney
Houston, Tom Selleck and John Bradshaw.
THE INTERNET
The RnetHealth.com Web site, (URL www.RnetHealth.com), is being designed
for both businesses and individual consumers. RnetHealth.com's web destination
will consist of two distinct Web sites -- a business-to-business site (to be
launched) and a public site (launched May 3, 2000) directed to individuals via
the Internet. The business-to-business site will be supported by mass
subscriptions through Employee Assistance Programs ("EAP") suppliers whom serve
employers, health plans, and various government, university and other payers on
a per month, per user basis. The public site is action-oriented and provides
state-of-the-art interactive assessment and support tools including community,
chat forums, Ask-the-Expert services, extensive clinically oriented library of
information on a wide range of behavioral health solutions, including both
traditional and alternative treatment options. The public site is supported
principally by ad revenue and e-commerce transactions.
In February, 2000, RnetHealth.com entered into an agreement with AOL/DCI to
supply the millions of AOL/DCI users with direct and convenient access to a
comprehensive listing of local behavioral and alternative health providers in
their communities. Rnet-branded alternative and behavioral health content,
including interactive tools, may also be available to Digital City users through
www.rnethealth.com.
In February, 2000, the Company announced a strategic deal with HealthStreet
Interactive to offer a co-branded version of HealthStreet's healthcare provider
search engine to users of www.rnethealth.com. HealthStreet's healthcare provider
directory includes physicians, psychologists, clinical social workers, and
alternative healthcare providers who treat behavioral health and chronic
illnesses. The directory will be designed to complement the condition-related
content areas on mymindandbody.com and enable consumers to access providers who
treat those conditions.
In March, 2000, the Company announced e-commerce deals with IVC, one of the
largest manufacturers and distributors of nutraceuticals, to supply branded
vitamins, including herbal products, food supplements and dietary supplements,
for sale to users of www.rnethealth.com; with Certified Diabetic Services to
provide prescriptions and supplies; with Dr. Mike's Kitchen to provide heart
healthy low fat and disease specific gift packages, including a dieters package
and smoke-enders package.
In April, 2000, the Company announced an agreement with Recovery
Communications, Inc., owner of Recovery Net Radio, to feature Recovery Net Radio
on RnetHealth.com's web site, www.rnethealth.com. RnetHealth.com and Recovery
Net Radio will also jointly produce multimedia productions suitable for
broadcast on Recovery Network television, Recovery Net Radio and
www.rnethealth.com.
In May, 2000, the Company announced an agreement with Healtheatre.com to
partner to create eCarePak, a broadband workplace productivity enhancement and
support tool that will be offered to consumers and large employers on a
subscription model. Healtheatre.com will provide complete streaming video
services in support of this product, as well as offer streaming video services
in support of RnetHealth.com's consumer website, www.rnethealth.com. Under the
terms of the agreement, Healtheatre.com will build a digital video archive of
existing content developed by RnetHealth.com for its cable television initiative
Recovery Network, and, utilizing a unique, secure intranet, host and stream that
content to site visitors and eCarePak subscribers.
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In addition, RnetHealth.com content will reach an expanded audience through
Healtheatre.com's extensive syndicated broadcast network. eCarePak will
incorporate video streaming of programming from RnetHealth.com's television
network, Recovery Network, as well as related interactive online workplace
productivity enhancement and support tools. These state-of-the-art tools will
include an electronic employee assistance program, Ask-The-Expert advice, diet
journals, workshops, workplace surveys and outcomes, behavioral modification and
compliance applications, and e-counseling.
In May, 2000, the Company also announced a worldwide licensing agreement
with American Botanical Council ("ABC") (www.herbalgram.org), providing users of
RnetHealth.com's web site, www.rnethealth.com, full access to ABC's collection
of herbal education materials and thereby extending the Company's offering of
complementary and alternative therapies for wellness and behavioral health
problems.
In May, 2000, the Company also announced a cross-licensing agreement
with Oncology.com for the mutual provision of worldwide rights to the Companies'
web sites, www.rnethealth.com and www.oncology.com. The companies will promote
each other's content and will prominently display links to each other's sites.
The agreement will give cancer patients and their families access to a full
complement of clinical, emotional and behavioral support and tools to help them
deal with both the physical and emotional components of their disease. The
agreement is an important component of RnetHealth.com's goal to provide
behavioral and emotional support to sufferers of chronic illness as well as to
those with classic behavioral disorders.
BUSINESS-TO-BUSINESS. RnetHealth.com will be the single point of access
to electronic data interchange services, enhanced communications services, and
branded content and other Web-based offerings. For managed care companies,
insurance companies and employers, RnetHealth.com will augment current EAPs by
integrating multiple administrative, communications and research functions into
a single, easy to use Web-based solution.
The commercial site will be tailored to health plans and employers to
augment current EAPs. The site will be supported by mass subscriptions through
EAP suppliers who serve employers, health plans, and various government,
university and other payers on a per month, per user basis.
Increasing concern over the rising cost of healthcare in the United
States has caused a shift from fee-for-service reimbursement to managed care
forms of reimbursement such as capitation and fixed fees. These changes have led
many of the current EAPs in the United States to seek ways to improve
efficiency.
Many EAPs are intensive users of administrative, communications and
information services. The Company believes that a significant opportunity exists
for the EAPs to use the Internet to achieve measurable cost savings and improve
the quality of mental and behavioral health care.
Health and medical information is one of the fastest growing areas of
interest on the Internet. According to Media Metrix, an independent Web research
company, health care related content was the second most popular subject of
Web-based information retrieval searches in 1997. According to Cyber Dialogue,
an independent research company, approximately 70% of the persons searching for
health and medical information on the Internet believe the Internet empowers
them by providing them with information. Cyber Dialogue also indicates that
during the 12-month period ended July 1998, approximately 17 million adults in
the United States searched online for health and medical information, and
approximately 50% of these individuals made off-line purchases after seeking
information online.
Furthermore, Cyber Dialogue estimates that the number of adults in the
United States searching for online health and medical information will grow to
approximately 30 million in the year 2000, and they will spend approximately
$150 billion for all types of health-related products and services off-line.
An independent research company, Jupiter Communications, estimates that
expenditures for online health and medical advertising will grow to
approximately $265 million by 2002. The Company believes that RnetHealth.com
will have a significant opportunity to capitalize on multiple revenue
opportunities, including recurring subscription, advertising and sponsorship
revenue.
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Key elements of RnetHealth.com's strategy 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 continuing to cement 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 will continue to provide access to premium behavioral
and healthcare content via relationships with various content providers. The
Company intends to continue to introduce additional content and enhanced
services, through strategic relationships with other healthcare content
providers.
RnetHealth.com intends to become the leading national brand on the Internet
and corporate Intranets delivering the online provision of objective information
and high integrity resources for those in need help with work or life related
issues. RnetHealth.com will take advantage of the latest developments in
convergent technologies where the Internet and broadband television provide
access to online services. Recovery Network is the only television network
devoted to behavioral health programming. RnetHealth.com features unique
strengths with its partners including: a University affiliation with the Brain
Institute at the University of Florida; a recognized leader in the Behavioral
Health Industry in its Medical Director, Dr. Mark Gold; and a pending
relationship with the largest managed behavioral care company in the country.
Services will include an Internet/ Intranet site that augments behavioral health
benefit plans, which could be integrated into national health plans as a gateway
between medical benefits and behavioral health benefits. This electronic
Behavioral Health Benefit Plan will be supported by capitated monthly
subscriptions through behavioral health benefit providers who serve employers,
health plans and various government, university and other third party payers.
RnetHealth.com will provide Internet accessibility to a robust and
compelling database of information, educational materials and provider
resources, integrated as a supplemental mode of service delivery to our vendors.
Information is the important factor in helping employees and dependents
lead a more balanced and productive life at work and at home. RnetHealth.com
also offers a broad range of consulting and education resources that employees
and dependents can use to expand their personal expertise. These topics range
from child development, to emergency home repair, to conflict resolution in the
workplace. Online Internet access to skilled social workers with years of
experience in solving a unique range of personal, social and economic issues
will be available in the safety and security of the subscribers' homes.
RnetHealth.com will provide ongoing online support, resources and
counseling to help expatriate and foreign national employees and their families
adjust to international assignments. Special online services will be available
for companies that want to develop policies and systems to prevent crises in the
workplace. These services are designed to help reduce employee trauma and
related costs and therefore create a safer, healthier and more productive
workplace. RnetHealth.com will provide a broad selection of training programs
that address topics ranging from everyday personal issues to international
business practices. Training programs will also be designed specifically for
managers, supervisors and executives.
RnetHealth.com will provide online Internet assessments to match callers
with the most appropriate provider, based on individual needs. The client's
provider will manage individual cases. An alternative electronic EAP-driven
model that partners with a claims payer to avoid conflict of interest, which
could compromise sound clinical decisions will be an effective managed care
tool. RnetHealth.com will provide short and long-term online substance abuse
case management for all company-mandated referrals, including drug test
positive, DOT drug test positive and performance attendance behavior.
THE PUBLIC SITE. The public has access to the RnetHealth.com web site,
which includes premium and proprietary health and behavioral content, chat
rooms, message boards, personalized healthcare information and e-mail updates.
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RnetHealth.com's objective is to become the Web's premium brand for
behavioral and health care related services.
Through heavy promotional rotation of the web address on the cable
television network, RnetHealth.com's cable television programming service will
market the Web site and web-based services. The public site emphasizes
community, chat, forums, information, and interaction. This site will be
supported principally by advertising revenue and e-commerce transactions.
For consumers, RnetHealth.com provides premium, branded content to assist
consumers in making informed decisions, personalized information about specific
health and behavioral conditions targeted according to the profiles of
individual consumers, and content-specific online communities that allow
consumers to participate in real-time discussions and support networks via the
Web.
RnetHealth.com has determined that the growing behavioral health needs of
the world's population can be met in a cost-effective manner through the
utilization of online electronic delivery systems. Globally more and more
consumers are increasingly interested in using online services and the Internet
to share information and ideas and discover "New Medicine" opportunities for the
treatment of and relief from a wide range of clinical problems in the behavioral
health area. RnetHealth.com is dedicated to creating a "Behavioral and
Alternative Health" consumer based Internet business that addresses all of these
issues. RnetHealth.com will specialize in the production of online forums with
the intent of assisting its members to make online activity a part of their
daily lives and communications. The Company believes that through engagement in
moderated chat sessions, online lectures (led by experts in the field of
behavioral and alternative health) and open forums, the Company will attract and
retain active members. The cornerstone of our efforts will be the strong
commitment to the most current clinical and editorial content. RnetHealth.com's
commitment to community will create extremely attractive, comfortable, and
interesting neighborhoods in the digital global village.
RnetHealth.com currently targets the two fastest growing communities on the
Internet: Alternative and Behavioral Health. The consumer populations that make
up these communities are rapidly adopting the use of online services and the
Internet to build and enhance communication.
The Company's Internet business is in development stage and has not yet
generated any revenues. The Company believes that the generation of meaningful
revenues will depend on its ability to enter into license agreements with Health
Care Entities and upon further development of its products. The Company will
seek to generate revenues from its Internet business from advertising sales,
monthly subscriber fees generated from the web site, merchandising and from
Health Care Entities and employers for delivering mental and behavioral health
information and service to their members. Although the Company believes that the
Internet business will provide the Company with significant opportunities
relating to an interactive on-line business, there can be no assurance that it
will be commercially successful.
ECONOMIC BASIS OF BUSINESS ELEMENTS
The Company bases its profit centers on both its television network and on
its Internet activities. The Internet-related activities include two major
elements: a business-to-business application and a public/consumer application.
HELP LINE. In March 1996, the Company commenced operations of a toll free
help-line and referral service for the viewers of Recovery Network (the "Help
Line"). During the hours, which RnetHealth.com is airing, the Company displays a
toll-free telephone number for viewers to call for information about how to
obtain additional help in their communities. Telephone calls are answered seven
days a week during the hours of 6:30 to 7:30 a.m. (EST) and Mondays to Fridays
during the hours of 9:00 a.m. to 5:00 p.m. EST) by a trained crisis response
counselor provided to the Company by the Substance Abuse and Mental Health
Service Administration (SAMHSA) at no cost to the Company.
To the extent that the Company enters into affiliation agreements to air
Recovery Network in additional communities, the Company expects to expand caller
capacity of the Help Line, as well as expand its existing national database of
local groups, treatment centers and other sources of help and information. The
Company also intends to use the projected expanded call center capacity to also
offer recovery and prevention-related products and services directly to its
viewers.
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The Company does not generate any revenues from the Help Line, and does not
receive any fees or commissions for this service, including from referrals made
by the Help Line. The Company operates the Help Line solely to provide support
to its viewers and as a community service. The Company also expects that
providing the toll-free Help Line will help build and maintain viewer loyalty
and support for Recovery Network.
NATIONAL PARTNERSHIP FOR RECOVERY AND PREVENTION. National Partnership for
Recovery & Prevention (the "Partnership"), an umbrella coalition of national
recovery and prevention organizations, was formed in November 1996 to work in
conjunction with the Company to employ the Company's interactive media services
to develop and distribute effective and accurate information concerning
alcoholism and addiction. The Company's goal is to provide a Partnership of
prominent national prevention and recovery organizations, public figures who are
passionate about recovery and prevention, and corporations and institutions that
are willing to support the Company's mission.
To date, the Company has identified and partnered with more than 50
recovery and prevention organizations representing over 40 million constituents.
Member organizations of the Partnership currently include African American
Parents for Drug Prevention, Community Anti-Drug Coalitions of America, Dharma
Associates, Gateway Foundation, Hands Across Cultures, ISA Associates, National
Asian Pacific American Families Against Substance Abuse, National Association of
Addiction Treatment Providers, National Drug Prevention League, National
Families in Action, National Hispanic/Latino Community Prevention Network,
National Parents Resource Institute for Drug Education, National Treatment
Consortium, Physicians for Prevention, Prevention Intervention and Treatment
Coalition for Health, The Bralove Group, The Miami Coalition for a Safe and Drug
Free Community and The Village.
Depending on their interests and abilities, partners may have the
opportunity to review and comment on RnetHealth.com's television programming and
Internet content, provide ideas for programming and content that is of interest
to their constituencies and, in some cases, produce programming. RnetHealth.com
may also air public service messages from the partners and otherwise help them
disseminate information that is important to them.
With a national platform, the Partnership will seek to help focus the
attention of government and society on the issues of interest to the
Partnership's members and also foster better communication among its members,
their constituencies and the communities they are designed to serve. The Company
believes that the member organizations of the Partnership will be instrumental
in helping the Company demonstrate to cable operators a high level of community
support for RnetHealth.com and how carriage of the Company's programming can
help the local operator fulfill the promise of localism. The Company believes
that the individual constituents of the Partnership's member organizations will
account for a significant portion of the initial audience for RnetHealth.com's
programming, and the Company expects that the Partnership will communicate to
its constituents information about RnetHealth.com's programming schedule and
availability.
RECOVERY DIRECT. The Company believes that the market for products and
services addressing social and behavioral health issues is significant. The
Company also believes that, because it is attempting to create a nationwide
medium specifically targeting this market, if successful, it will be in a unique
position to offer such recovery and prevention-related products and services.
The Company has formed a subsidiary, Recovery Direct, through which it will seek
to develop recovery and prevention-related products and services to market on
RnetHealth.com and through Recovery Network. The Company intends for Recovery
Direct to offer a variety of self-help and recovery and prevention-related
products, including videos of the Company's programming aired on RnetHealth.com.
In addition, the Company intends for Recovery Direct to offer tapes and videos
by other well-known individuals in the recovery field. Recovery Direct currently
sells recovery-related audio and videotapes to the institutional market under
the trade name Recovery Direct, Inc. (formerly FMS). The Company will expand
Recovery Direct's offerings to consumers and simultaneously broadening its
traditional marketing and distribution (i.e. catalog and phone sales) to include
and emphasize on-line marketing and sales. The Company will also seek to enter
into arrangements with third parties to provide or develop recovery and
prevention-related products and services and to research opportunities for the
direct marketing of products advertised on RnetHealth.com through a toll-free
telephone number.
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MEDIA SYNERGY
Recovery Network provides an extremely valuable vehicle for driving traffic
to RnetHealth.com. Increasingly, non-Internet marketing tools are being cited as
providing highly effective techniques for driving traffic to a web site
(Forrester Research: Driving Site Traffic, 1999). Television ranks among the
most desirable methods for this marketing, but because of its high cost, it is
often employed on a limited basis or not employed at all. RnetHealth.com, with
its own television network, commands a highly valued asset for promotion of
visits to the web site.
Additionally, because of the targeted nature of RnetHealth.com Television
(Recovery Network) viewer demographic, the synergy between the broadcast medium
and the web site is amplified and enhanced. Broadly addressed concerns which are
presented on television can be explored in depth on the web site. Information
customized for the individual viewer's circumstances can personalize the
television content. The converse of the relationships between the media is also
valid: television provides the media-rich delivery of audio and visual
information, which is currently constrained by the technology available to most
web users today. As broadband delivery becomes widely deployed, the television
content enjoys the role of a very valuable, exploitable asset.
COMPETITION
TELEVISION COMPETITION. 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
Recovery Network's programming is intended to provide information and support to
persons facing social and behavioral health issues, 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.
ONLINE COMPETITION. There are several potential competitors in the
Behavioral Health and CAM or alternative medicine marketplace:
Healthshop.com is partnered with Lycos, and sells natural healthcare
products online. They carry over 6,000 brand-name items, offer a newsletter, and
have free shipping on offered products.
Naturemade.com sells products manufactured by Pharmvite Inc. Partnered with
national retailers, naturemade.com offers consumers in-store literature on
products and a toll-free number to call to determine their specific needs.
Founded in 1972, they are privately held.
PVSVitamins, a division of PharMor, has an anchor store at Shopnow.com;
there, this partner of Vitamin World and Rexall Sundown sells products from all
manufacturers. The emphasis is on advertising and marketing products rather than
providing content or community.
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Mothernature.com, founded in 1995, they have raised $223 million in 1998-99
from venture capital. They have a keen awareness of the importance of building a
credible content site with varied resources and attempts at community. They are
well financed and well marketed.
Greentree Nutrition has raised more than $14 million in venture capital and
has recently purchased Acumin and VitaSave. They see their main rivals as stores
like GNC and online newcomers such as mothernature.com.
RnetHealth.com is able to compete successfully against these comparative
newcomers to the field, because RnetHealth's online platform provides a
multimedia approach and behavioral health and altmed has a continuing interest
in promotional opportunities surrounding our "Drug World" feature. The
credibility this will bring to the sales division as it launches will be
significant.
Other competitors to RnetHealth.com are poorly established or sparsely
attended. The 12-Step and recovery groups online are long established on
CompuServe, but the total monthly attendance is less than the projected average
week's attendance on RnetHealth.com, and ad sales are non-existent.
RnetHealth.com provides a significant Sponsorship opportunity. CompuServe's
fortunes have declined sharply in the past five years, and Prodigy has virtually
shut down though is now relaunching after a recent IPO.
The Internet has dozens of active informational sites, mail lists, and
newsgroups for both behavioral health, alternative medicine content and
addiction recovery. As yet, none of these Internet sites has a professional,
well supported, and well attended content structure and community. The strongest
offerings on the Internet may have a small amount of interesting content, but no
sense of community, and weak advertising draw.
GOVERNMENT REGULATION
CABLE TELEVISION. The Television industry is subject to extensive and
frequently changing federal, state and local laws and substantial regulation
under these laws by governmental agencies, including the Federal Communications
Commission ("FCC"). Regulations governing the rates that can be charged to
subscribers by cable systems not in markets subject to effective competition
from other multichannel video program distributors could adversely affect the
ability of cable systems with limited channel capacity to finance rebuilding or
upgrading efforts to increase channel capacity or otherwise restrict their
ability to add new programming such as RnetHealth.com.
In addition, federal "must-carry" rules requiring cable operators to devote
up to one-third of their channels to carriage of local commercial TV broadcast
stations (and additional channels for noncommercial educational TV stations);
commercial leased access rules designating 10% to 15% of system channels for
lease by unaffiliated programmers; and local regulatory requirements mandating
additional channel set-asides for public, governmental and educational use could
reduce channel availability, which might otherwise be available for
RnetHealth.com on many cable systems. Statutory provisions and FCC rules
governing relationships among cable systems and competing forms of multichannel
video program distribution, as well as the relationships between the Company and
its cable system affiliates could adversely affect the marketability of the
Company's programming and the ability of the Company to enter into arrangements
for the distribution of its programming.
In addition, the cable systems and radio stations that carry the Company's
programs are regulated by the FCC and, therefore, are subject to its rules and
policies, such as those relating to sponsorship identification, broadcast of
indecent language, provision of equal opportunities for political candidates and
related measures pertaining to program content and format. Failure of the
Company's programs to comply with one or more of these rules could subject the
cable systems to FCC fines or other sanctions, adversely affect the Company's
relationship with such entities and result in the discontinuation of carriage of
the Company's programming by such entities.
INTERNET. Internet and state regulation governing interactive or on-line
information services and potentially affecting the activities of the Internet
business is currently evolving. Regulations governing purchases of information
services via toll-free telephone calls and laws governing obscene, indecent, or
otherwise unlawful communications have been adopted, and there can be no
assurance whether such laws and regulations will be applied to, and therefore
affect, the business and operations of RnetHealth.com. Additional laws and
regulations are currently being considered by the federal government and many
state and local governments.
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There can be no assurance that these or existing laws or regulations will
not be applied in a manner that will adversely affect the Company's business or
operations. Moreover, the FCC currently is considering proposals that could
increase the charges most individuals and entities pay to access Internet and
on-line services, which, if adopted, could adversely affect the Company's
business or operations.
The FCC does regulate common carriers whose services are used for purchases
of information services via toll-free telephone calls or pay-per-call services,
which regulation could affect RnetHealth.com. The Federal Trade Commission also
has jurisdiction over the provision of such services. Among the FCC's
regulations are disclosure requirements and other prerequisites to charging
calling parties for such services. The Communications Decency Act ("CD Act")
would make it unlawful to: (i) knowingly send to a minor or display in a manner
available to a minor "obscene", "indecent" or "patently offensive"
communications using a telecommunications device or on-line service, (ii) send
such a communication to anyone with the intent to annoy, threaten or harass; or
(iii) allow a telecommunications facility under one's control to be used for
such purpose. A preliminary injunction against enforcement of the CD Act with
respect to indecent or patently offensive communications has been affirmed by
the United States Supreme Court, which found the CD Act's provisions to violate
the First Amendment. Although it is unlikely that the enjoined provisions of the
CD Act will ever become effective, there can be no assurance that information
content made available on or through the RnetHealth.com's offerings, by the
Company or by users of those offerings would not violate the CD Act, if it were
to become effective, or similar legislation that Congress might enact in the
future, or that attempts to implement defenses to such legislation would not
adversely affect the Company's business or operations. Federal laws dealing with
obscenity and child pornography as well as various state laws similar to those
laws or to the CD Act may also apply to information content available on or
through the Internet business's offerings. There is no assurance that those laws
will not be applied in a manner that will adversely affect the Company's
business or operations.
Proposals for additional or revised statutory or regulatory requirements
are considered by Congress, the FCC and state and local governments from time to
time, and a number of such proposals are under consideration at this time. It is
possible that certain of the provisions and requirements described herein are
now, and in the future may be, the subject of federal or state legislation,
agency proceedings or court litigation. It is not possible to predict what
legislative, regulatory or judicial changes, if any, may occur or their impact
on the Company's business or operations.
PROPRIETARY INFORMATION
The Company has pending registration applications in the United States
Patent and Trademark Office for the trademarks. The Company uses the "Recovery
Network" a registered trademark in connection with its programming. The Company
believes that its trademarks and copyrights, including "Rnethealth.com" trade
name and the signature look of the network, have significant value and are
important to the marketing and promotion of Rnethealth.com and the Company's
recovery and prevention-related products and services. Although the Company
believes that its trademarks and copyrights do not and will not infringe
trademarks or violate proprietary rights of others, it is possible that existing
trademarks and copyrights may not be valid or that infringement of existing or
future trademarks or proprietary rights may occur. In the event the Company's
trademarks or copyrights infringe trademarks or proprietary rights of others,
the Company may be required to change the name of its network, proposed
television shows, radio talk show or obtain a license.
There can be no assurance that the Company will be able to do so in a
timely manner, on acceptable terms and conditions, or at all. Failure to do any
of the foregoing could have a material adverse effect on the Company. In
addition, there can be no assurance that the Company will have the financial or
other resources necessary to enforce or defend a trademark infringement or
proprietary rights violation action. Moreover, if the Company's trademarks or
copyrights infringe the trademarks or proprietary rights of others, the Company
could, under certain circumstances, become liable for damages, which could have
a material adverse effect on the Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts, ideas and the documentation of
its television programming concepts in development. However, such methods may
not afford complete protection and there can be no assurance that others will
not independently develop similar know-how or obtain access to the Company's
know-how, concepts, ideas and documentation. Furthermore, although the Company
has or expects to have confidentiality and non-competition agreements with its
employees, and appropriate consultants, there can be no assurance that such
arrangements will adequately protect the Company's trade secrets or that others
will not independently develop programming similar to that of the Company.
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INSURANCE
The operation of a television, radio, Internet and interactive media
business subjects the Company to possible liability claims from others,
including viewers, listeners and callers to the Help Line for claims arising
from the unauthorized use of name or likeness, invasion of privacy, defamation
and slander. The Company maintains general liability insurance (with coverage in
amounts of up to $1,000,000 per occurrence and $1,000,000 per annum), including
insurance relating to personal injury and advertising injury, in amounts which
the Company currently considers adequate.
EMPLOYEES
The Company currently has 27 full time employees engaged in
affiliate/marketing sales, programming, accounting, and in general
administration. The Company also from time to time retains a number of marketing
and political consultants to support its grassroots marketing efforts nationwide
and in local communities.
PROPERTY
The Company leases offices of approximately 2,500 square feet in Santa
Monica, California pursuant to a five-year lease that expires in May 2001 and
additional office space in Carpinteria, California pursuant to a three-year
lease that expires in February 2003. The combined monthly rents are currently
approx. $7,500 per month. The Company has an option to extend the lease in Santa
Monica, California through May 2004 at a price to be negotiated by the parties
based upon then prevailing rental rates.
Our subsidiary Recovery Direct leases offices of approximately 2,805 square
feet in Carpinteria, California, pursuant to a three-year lease that expires
November 2001. There is no renewable option with this lease, but a renewed lease
has been offered.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the directors and executive officers of the Company:
<TABLE>
<S> <C> <C>
---------------------------------------------------------------------------------------------------
Robert Portrie 50 Chairman of the Board of Directors
---------------------------------------------------------------------------------------------------
George Henry 45 Chairman of the Executive Committee and Director
---------------------------------------------------------------------------------------------------
William Moses 37 Vice Chairman of the Board
---------------------------------------------------------------------------------------------------
Wendy Borow Johnson 48 Chief Executive Officer and President
---------------------------------------------------------------------------------------------------
Kevin Wall 47 Director
---------------------------------------------------------------------------------------------------
Marc Guren 44 Director
---------------------------------------------------------------------------------------------------
W. Thomas Oliver 57 Director
---------------------------------------------------------------------------------------------------
Stacey Romm 32 Chief Financial Officer
---------------------------------------------------------------------------------------------------
Anthony Cinelli 24 Chief Technical Officer
---------------------------------------------------------------------------------------------------
Brad Parobek 36 Sr. Vice President, Affiliate Sales
---------------------------------------------------------------------------------------------------
</TABLE>
ROBERT E. PORTRIE has been Chairman of the Board of Directors since
October, 1999. Mr. Portrie is also a Managing Partner of RCM Technologies, Inc.,
a New Jersey based consulting and staffing company, where he is responsible for
the insurance and financial services industry in addition to the knowledge
management practice. Bob spent 23 years with AT&T in numerous sales, marketing,
operational and research positions. In his last position, he was President and
Chairman of the Board of AT&T InView, a subsidiary of AT&T which developed, sold
and implemented the first internet business to business application in the
insurance industry providing network centric business applications. Mr. Portrie
also chaired the product architecture committee responsible for developing and
integrating network based applications as part of the Large User Study Program
under the auspices of the Chairman's office at AT&T. This program was credited
with numerous customer focused developments, including the first network based
Wide Area Network (WAN) deployment in the U.S. Portrie also served as President
and CEO of InfoMation Publishing Corporation, a CMGI subsidiary which developed
leading edge knowledge management software that today is the engine behind such
internet companies as Zine Zone and Planet Direct, in addition to being the
knowledge management system backbone for several Fortune 500 companies.
GEORGE H. HENRY has been a director of the Company since its founding and
is a principal shareholder. Mr. Henry has extensive Wall Street experience in
both public and private finance and has served on nine public company Boards as
well as the Boards of a dozen private companies. In 1980, after attending
Columbia University Graduate School of Business, Mr. Henry worked in the
Corporate Finance Department at Goldman Sachs & Co, and was a Vice President in
the Corporate Finance Department at Wertheim Schroeder. In 1986, he founded G.
Howard Associates, Inc., a private investment firm specializing in later stage
venture finance and corporate advisory work. Mr. Henry is currently Chairman and
Chief Executive Officer of Access Television Network, Inc. and a Trustee of
Mitchell College.
WILLIAM D. MOSES is a founder and director or Rnethealth.com. In addition
he has served as President from January '97 to July '98. He has also served as
Chief Executive Officer from April 1999 to June 2000. He is currently Vice
Chairman of the Board. In January 1993, Mr. Moses co-founded Access Television
Network and served as a director of ATN from June 1993 to June 1996. Prior to
his tenure at Access, Mr. Moses was a managing partner of Axiom Partners, a New
York investment banking and brokerage firm, and a money manager for Oscar Gruss
& Co. and Bear Stearns. In May of 1998, Mr. Moses received the Ellis Island Gold
Medal Award for Humanitarian Service, in recognition of his work as Honorary
Chairman of Cable Positive, a non-profit organization that uses the influence of
the communications industry for raising AIDS awareness, raising funds for AIDS
research, and creating a compassionate climate for people living with HIV and
AIDS.
25
<PAGE> 27
WENDY BOROW-JOHNSON is currently serving as President and director of
RnetHealth.com since January 2000. In June 2000 she was appointed Chief
Executive Officer and previously served as President, Health Care Services since
October, 1999. Previously, Borow-Johnson was President of Com-Med Strategic
Alliances, Inc. and was the former President and founder of Com-Med Interactive,
an electronic media packaging division for healthcare for Medicus/DMB&B. She
created direct to consumer advertising initiatives for pharmaceutical
manufacturers and also was responsible for Internet production and strategic
marketing plans. Prior to her career in advertising and strategic marketing, Ms.
Borow-Johnson was the president, founder and CEO of American Medical Television,
a partnership of NBC Cable and the American Medical Association. Prior to
founding American Medical Television, Ms. Borow-Johnson as Vice President of
Corporate Relations and Consumer Affairs for the American Medical Association.
In this capacity she functioned as liaison to Fortune 500 companies and the
pharmaceutical industry for sponsorship and advertising of consumer programs.
KEVIN WALL has been a director of the Company since October, 1999. Mr. Wall
is former Vice Chairman of the Board and Director of iXL Enterprises and served
as President of iXL-West and head of new ventures for iXL. Mr. Wall also founded
and served as President of BoxTop Interactive, which was acquired by iXL in
1997. BoxTop created award-winning internet sites and strategies for such
clients as Fox Networks, Frito-Lay, Guess, and Universal Records. BoxTop also
created primetime television production and international marketing, licensing
and distribution of television programming. Mr. Wall was Executive Producer of
"The Billboard Music Awards" (FOX), "Planet Hollywood Comes Homes" (ABC),
"Twenty Years of David Copperfield" (CBS) and "Extreme Magic" (FOX). BoxTop had
offices in Los Angeles, London and Buenos Aires, where Mr. Wall produced,
created and/or distributed over five hundred single and multi-artist specials
and global events including "The 3 Tenors Live in Concert 1994," "Columbia
Records Celebrates the Music of Bob Dylan," "Freddy Mercury: AIDS Day Benefit,"
Michael Jackson's "Live From Bucharest," "Elton John: Live from Verona," as well
as individual specials for Eric Clapton, Dire Straits and magician David
Copperfield, among many others.
MARC GUREN has been a director of the Company since October, 1999. Mr.
Guren is also Manager and President of Acuity Capital, LLC, a venture investment
and advisory firm providing merchant banking services in the information
industry, including the Internet, software and hardware development, and health
care areas. Departing from the practice of law in 1984, Guren became an
independent business and financial strategist and an advisor to various computer
and software companies and individuals. He has served as a strategic, financial
and business advisor to, and has been an investor in, various Internet, online
and healthcare companies, including BoxTop Interactive, iXL Enterprises, and
Personal Library Software. He was a Vice President of the Roy Disney family's
Shamrock Holdings, Inc. where he was, among other things, responsible for
evaluating and making investments in, and turning around companies in the
software, entertainment retailing, and technology areas. He subsequently joined
media analyst Paul Kagan to manage Kagan's investments in businesses, most
notably in the Internet and technology areas as well as in traditional media and
cable businesses. Among his responsibilities were developing and implementing
business, strategic and financial plans and partnerships for Internet and media
companies.
W. THOMAS OLIVER has been a director of the Company since April, 2000. A
veteran cable television programming network executive and former Chairman and
Chief Executive Officer of the Interactive Channel, Oliver's focus has been on
promoting branded media services for distribution via the new distribution
channels, in particular managing ground floor product introduction efforts
behind as the HBO and Cinemax pay TV services, USA Network, DMX Music, and most
recently, the SourceSuite family of digital interactive broadband TV services
for Interactive Channel, Inc. Prior to his tenure at the Interactive Channel,
Oliver served as Executive Vice President and a founding partner of DMX Music,
Inc., a subsidiary of the Liberty Media Corp., from its inception in 1987.
STACEY ROMM joined the Company's Finance Department in September 1998. She
presently serves as the Chief Financial Officer. From 1995 to 1998, Ms. Romm
worked for International Home Improvement as the Financial Manager. Prior to
1995, Ms. Romm directed the finance department for LaPlaya Plumbing.
ANTHONY CINELLI serves as the Company's Chief Technical Officer. Mr.
Cinelli is well-acquainted with computer/Internet systems relating to
development and deployment. Prior to joining Rnethealth.com, Inc, he worked for
PayCom Billing Services where he helped create and maintain secure systems
processing over $1.5 million per day. Mr. Cinelli is fluent in numerous
programming languages, Internet communication protocols, and electronic content
distribution.
BRAD PAROBEK serves as the Company's Senior Vice President of Affiliate
Sales. Mr. Parobek is a 13-year veteran of the Cable and Telecommunications
industry and served on numerous board and committee throughout his tenure. From
1989 to 1995, he was a member of the Board of Directors of the North Central
Cable and Telecommunications Association. He presently is a member of the Board
of Directors of Rocky Mountain Empire Venture and Nanny's Baby Wraps in Denver,
CO.
26
<PAGE> 28
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Non-employee directors do
not receive cash compensation for serving as directors. The Company reimburses
directors for reasonable travel expenses incurred in connection with their
activities on behalf of the Company. Each member of the Board of Directors is
eligible to participate in the Company's 1996 Board of Directors and Advisory
Board Plan.
COMMITTEES OF THE BOARD OF DIRECTORS
In October 1996, the Company established a Finance and Compensation
Committee of the Board of Directors which reviews the compensation for all
officers and directors and affiliates of the Company. The Committee also
administers the 1996 Employee and Consultants Stock Option Plan, the 1996 Board
of Directors and Advisory Board Retainer Plan, the 1997 Management Bonus Plan,
and the 1998 Stock Option Plan. Mr. Henry is Chairman of the Finance and
Compensation Committee and Mr. Moses is also a member of the Finance and
Compensation Committee.
In May 1997, the Company established an Audit Committee of the Board of
Directors that meets with management and the Company's independent public
accountants to review the adequacy of internal controls and other financial
reporting matters. Mr. Henry is the Chairman of the Audit Committee.
In October 1996, the Company established an Executive Committee of the
Board of Directors which is responsible for overseeing strategic planning and
operations for the Company. Mr. Henry is the Chairman of the Executive Committee
and Mr. Moses is also a member of the Executive Committee.
27
<PAGE> 29
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company to
executive officers that received compensation in excess of $100,000 (the "Named
Executive Officers") during fiscal 1998 and 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
----------------------------------------------------------------------------------------------------------------
NAME AND YEAR
PRINCIPAL ENDED
POSITION JUNE 30, SALARY BONUS SHARES UNDERLYING OPTIONS (#) ALL OTHER COMPENSATION
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William Moses, 1998 $182,765 50,000
Chief Executive
Officer
----------------------------------------------------------------------------------------------------------------
1999 $336,037 316,667
(g)(k)
----------------------------------------------------------------------------------------------------------------
John Wheeler, 1998 $182,373 50,000
Sr. Vice
President,
Operations
----------------------------------------------------------------------------------------------------------------
1999 $186,349(h) $22,420 5,000 85,179(f)
(a)(b)
----------------------------------------------------------------------------------------------------------------
Gary Horowitz, 1999 $155,099(i) 267,915
President (c)
----------------------------------------------------------------------------------------------------------------
Gregory Richey, 1998 $163,335 50,000
Chief Financial (d)
Officer
----------------------------------------------------------------------------------------------------------------
Donald Masters 1998 $148,420 50,000
(e)
----------------------------------------------------------------------------------------------------------------
1999 $128,817 116,667
(j)
----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Bonus paid to Mr. Wheeler pursuant to contact terms of employment agreement,
wherein Mr. Wheeler received commission per subscriber at $0.01 per subscriber.
(b) Includes accrued but unused vacation paid to Mr. Wheeler upon expiration of
his employment agreement. Mr. Wheeler's employment agreement was not renewed.
(c) Mr. Howoritz resigned from the Company in April 1999.
(d) Mr. Richey resigned from the Company effective September 18, 1998.
(e) Mr. Masters resigned from the Company effective May 1, 1999.
(f) Compensation paid for vacation pay owed per Mr. Wheeler's contract which
expired in May 1999 and compensation for letter agreement dated January 26, 1999
disclosed in Item II Section III paid in unregistered shares.
(g) Includes compensation paid in stock valued at $186,037
(h) Includes compensation paid in stock valued at $48,849
(i) Includes compensation paid in stock valued at $30,099
(j) Includes compensation paid in stock valued at $89,317
(k) Mr. Moses resigned from the Company as Chief Executive Officer effective
June 2000.
The following table sets forth information concerning the grant of stock
options to the Named Executive Officers during fiscal 1999:
28
<PAGE> 30
OPTION GRANTS DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR ($/SH) DATE
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William Moses 200,000 13% $ 0.31 05/11/02
------------------------------------------------------------------------------------------------------------
50,000 4% $1.625 08/03/02
------------------------------------------------------------------------------------------------------------
66,667 5% $ 0.43 08/03/02
------------------------------------------------------------------------------------------------------------
John Wheeler 5,000 1% $ 0.59 Expired (a)
------------------------------------------------------------------------------------------------------------
Gary Horowitz 200,000 13% $ 0.43 Expired (a)
------------------------------------------------------------------------------------------------------------
5,000 1% $ 0.59 Expired (a)
------------------------------------------------------------------------------------------------------------
12,915 1% $ 1.81 Expired (a)
------------------------------------------------------------------------------------------------------------
50,000 4% $ 1.625 Expired (a)
------------------------------------------------------------------------------------------------------------
Donald Masters 50,000 4% $ 1.625 Expired (a)
------------------------------------------------------------------------------------------------------------
66,666 5% .43 Expired (a)
------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Options expired unexercised as a result of resignations during fiscal 1999.
The following table summarizes the aggregated options standing as of
June 30, 1999 for the executives listed above.
OPTIONS EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1999 AND
OPTION VALUES AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN THE MONEY
ACQUIRED ON VALUE OPTIONS AT JUNE 30, 1999 OPTIONS AT JUNE 30, 1999
NAME EXERCISE($) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William Moses 0 0 523,904/0(a) $60,373/$0
-------------------------------------------------------------------------------------------------------------
John Wheeler 0 0 5,000/0(b) $0/$0
-------------------------------------------------------------------------------------------------------------
Cary Horowitz 0 0 267,915/0(b) $14,000/$0
-------------------------------------------------------------------------------------------------------------
Donald Masters 0 0 155,112/0(c) $10,850/$0
-------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------
(a) All but 191,580 shares have been exercised in fiscal 2000.
(b) All of these options expired unexercised in fiscal 2000 as a result of
resignations during fiscal 1999.
(c) In September 1999, all of these options were allocated to Bill Moses,
Stacey Romm and Tracy Neal as a result of Mr. Master's resignation
in fiscal 1999.
OPTION REPRICING
In August 1998, the Board of Directors of the Company voted to approve the
repricing of options to purchase 806,746 shares granted under the Management
Bonus Plan and the 1998 Stock Plan, including options to purchase 241,667,
129,581 and 50,000 shares granted to Messrs. Moses, Masters and Richey,
respectively. Such repricing was effected by offering to exchange new options
with an exercise price of $1.56 per share, which was the fair market value of
the Common Stock on the date of repricing, for the options then held by such
optionees. The new options otherwise would have identical terms and conditions
as the current options. By repricing such options, the Company intends to reward
key employees, including the named executive officers, holding such options for
their contributions to the Company. In April 1999, approximately 655,925 options
previously granted under the 1997 Plan and 1998 Plan were canceled. These
options may or may not be re-issued at a later date.
EMPLOYMENT AGREEMENTS
Effective December 1, 1996, the Company entered into an employment
agreement with William D. Moses, the Company's Chief Executive Officer, which
expired on September 30, 1998. The employment agreement provided for a base
compensation payable to Mr. Moses of $12,000 per month through September 30,
1998. Pursuant to the agreement, Mr. Moses was entitled to participate in any
employee benefit plans and arrangements when and as implemented by the Company.
In the event of termination of Mr. Moses' employment by the Company, without
"good cause" (as defined in the employment agreement), Mr. Moses was entitled to
severance compensation equal to the lesser of his base salary and vacation
compensation due through September 30, 1998 and his base salary and vacation
compensation for one year, payable one-half upon termination and the balance
ratably over the following six months. In the event of termination of the
employment agreement by mutual agreement of the Company and Mr. Moses, Mr. Moses
was entitled to such compensation as is mutually agreed on between the Company
and Mr. Moses but in no event to exceed the amount of severance compensation
payable in the event of termination without "good cause." Mr. Moses agreed not
to compete with the Company during the term of the employment agreement and for
a period of two years after termination of his employment relationship with the
Company in the development or provision of media services or any other line of
business which the Company is engaged in or forms the intention to engage in
during this period. In the event of a "change in control" (as defined in the
employment agreement), Mr. Moses would have been deemed to have been terminated
without "good cause", and the covenant not to compete would have had no further
effect.
29
<PAGE> 31
Effective December 1, 1996, the Company entered into an employment
agreement with Donald J. Masters, the Executive Vice President of the Company,
which expired on November 30, 1998. The employment agreement provided for a base
compensation payable to Mr. Masters of $10,000 per month through November 30,
1998. Pursuant to the agreement, Mr. Masters was entitled to participate in any
employee benefit plans and arrangements when and as implemented by the Company.
In the event of termination of Mr. Master's employment by the Company, without
"good cause" (as defined in the employment agreement), Mr. Masters was entitled
to severance compensation, equal to his base salary and vacation compensation,
at the option of the Company, for such period of time between one year and two
years that the non-compete covenant described below is in effect and such
severance compensation shall be payable one-half on the date of termination and
the balance shall be payable ratably over six months following the date of
termination. In the event of termination of the employment agreement by mutual
agreement of the Company and Mr. Masters, Mr. Masters was entitled to such
compensation as mutually agreed on between the Company and Mr. Masters but in no
event to exceed the amount of severance compensation payable in the event of
termination without "good cause." In addition, Mr. Masters agreed under certain
circumstances not to compete with the Company during the term of the employment
agreement and for up to two years after termination of his employment
relationship with the Company in any media business whose programming, content
or services address or relate to Recovery Issues or in any organization whose
primary business is offering products and services relating to Recovery Issues.
Effective May 13, 1997, the Company entered into an employment agreement
with John Wheeler, the Company's Senior Vice President of Sales and Marketing,
which expired on May 31, 1999. The employment agreement provided for a base
ompensation payable to Mr. Wheeler of $12,000 per month through May 13, 1999. In
addition to the base salary, Mr. Wheeler received a commission payable quarterly
in the amount of $.01 for each additional subscriber household in excess of one
million subscriber households to which an affiliated cable system service
delivers a minimum of two hours of the Company's programming, so long as the
household subscriber did not already receive the programming through the
Company's Nesting Contract or through any other agreement under which the
Company purchases carriage rights. Pursuant to the agreement, Mr. Wheeler was
entitled to participate in any employee benefits plans and arrangements when and
as implemented by the Company. In the event of termination of Mr. Wheeler's
employment by the Company, without "good cause" (as defined in the employment
agreement), Mr. Wheeler was entitled to severance compensation equal to the
lesser of his base salary and vacation compensation due through March 13, 1999
and his base salary and vacation compensation for ninety days, payable one-half
upon termination and the balance ratably semi-monthly over the compensation
reference period. In the event of termination of the employment agreement by
mutual agreement of the Company and Mr. Wheeler, Mr. Wheeler was entitled to
such compensation as is mutually agreed on between the Company and Mr. Wheeler
but in no event to exceed the amount of severance compensation payable in the
event of termination without "good cause." Mr. Wheeler agreed not to compete
with the Company during the term of the employment agreement for a period of one
year after termination of his employment relationship with the Company in the
development or provision of recovery media services or any other line of
recovery media services which the Company is engaged in or forms the intention
to engage in during this period. Mr. Wheeler's employment agreement expired on
May 31, 1999. Mr. Wheeler was terminated upon the expiration of his employment
contract.
Effective May 1, 1997, the Company entered into an employment agreement
with Bill Megalos, the Company's Vice President of Production, which expired on
November 30, 1998. The employment agreement provided for a base
compensation payable to Mr. Megalos of $10,000 per month through November 30,
1998. Pursuant to the agreement, Mr. Megalos was entitled to participate in any
employee benefit plans and arrangements when and as implemented by the Company.
In the event of termination of Mr. Megalos's employment by the Company, without
"good cause" (as defined in the employment agreement), Mr. Megalos was entitled
to severance compensation equal to his base salary and vacation compensation for
90 days, payable ratably over such 90 day period. In the event of termination of
the employment agreement by mutual agreement of the Company and Mr. Megalos, Mr.
Megalos was entitled to such compensation as is mutually agreed on between the
Company and Mr. Megalos but in no event to exceed the amount of severance
compensation payable in the event of termination without "good cause." Mr.
Megalos agreed not to compete with the Company during the term of the employment
agreement and for a period of one year after termination of his employment
relationship with the Company in the development or provision of recovery media
services or any other line of recovery media services which the Company is
engaged in or in which the Company forms the intention to engage with the active
participation of Mr. Megalos during this period.
30
<PAGE> 32
Effective May 11, 1999, the Company entered into an employment agreement
with Jay Handline, the Company's Executive Vice President, for a term of three
years. The employment agreement provides for a base compensation payable to Mr.
Handline of $12,000 per month through May 11, 2002. In addition to the base
salary, Mr. Handline shall receive an option to purchase 400,000 shares of the
Company's common stock exercisable at the closing bid price on May 11, 1999. The
Option vests 1/4th upon execution of the agreement, 1/4th at the end of year 1,
1/4th at the end of year 2, and 1/4th at the end of year 3. Mr. Handline
resigned from the Company in May 2000.
Effective January 6, 2000, the Company entered into an employment agreement
with Wendy Borow Johnson, the Company's newly appointed President. The
employment agreement provides for a base compensation payable to Ms. Borow
Johnson of $12,500 per month together with incremental bonuses. Ms. Borow
Johnson's employment with the Company is for no fixed term. The Company has
retained Ms. Borow Johnson's services for the exclusive benefit of the Company
and Ms. Borow Johnson has agreed not to render her time and services to any
other entity. Ms. Borow Johnson's participation with EHealthcare World has been
excluded from this agreement between Ms. Borow Johnson and the Company. Ms.
Borow Johnson has received an option to purchase 1,015,000 shares of common
stock exercisable at $0.39 per share. The option vests in equal installments
monthly for a period of two (2) years.
STOCK OPTION PLANS
The Company has adopted six stock option plans: the 1996 Employee and
Consultants Stock Option Plan (the "Employee and Consultants Plan"), the 1996
Board of Directors and Advisory Board Stock Option Plan (the Directors and
Advisory Board Plan"), the 1997 Management Bonus Plan (the "Management Bonus
Plan"), the 1998 Stock Option Plan (the "Stock Plan"), the 1999 Stock
Compensation Plan and the 1999 Stock Option Plan (the "1999 Option Plan"). The
Company has reserved an aggregate of 1,932,876 shares of Common Stock for future
issuance under these plans. All options granted or to be granted under these
plans are non-qualified stock options ("NQSOs") or incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended. The management
Bonus Plan and the Stock Plan also provide for non-option awards, such as stock
appreciation rights and restricted stock awards.
PURPOSE. The purpose of the plans is to grant incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code and
non-qualified stock options as a means to provide an incentive to selected
directors, officers, employee and consultants to acquire a proprietary interest
in RnetHealth.com, Inc., to continue in their positions with us and to increase
their efforts on our behalf.
ADMINISTRATION. The plans are administered by the board or a committee
appointed by the board. Under the plans, the plan administrator has the
authority to, among other things: (a) select the eligible persons to whom
options will be granted, (b) determining the size, type and the terms of each
option granted, (c) adopted, amend and rescind rules and regulation for the
administration of the plans, and (d) decide all questions and settle all
controversies and disputes of general applicability that may arise in connection
with the plans.
OPTIONS. Each option granted under the plans is evidenced by an agreement
that states the terms and conditions of the grant. The exercise price of an
option granted under any of the plans shall not be less than 100% of the fair
market value of the stock at the time of grant. Each option plan granted under
the plans will be exercisable at the times and in the amounts determined in
accordance with the agreements. In addition the board, in its discretion, may
accelerate the exercisability of any option under any of the plans.Options
granted under the plans are not transferable and are only exercisable by the
grantee during the grantee's lifetime. Each option shall terminate at the time
specified in the agreements.
STOCK COMPENSATION PLAN
Effective February 19, 1999, the Company established the 1999 Employee and
Consultant's Stock Compensation Plan (the "Plan"). The purpose of the Plan is to
compensate employees and certain consultants of the Company for services by
issuing to them stock in lieu of cash payments. An aggregate of 1,500,000 shares
of Common Stock are reserved for issuance under the Plan.
In June 1999, the Company established the Employee Stock Compensation Plan
(the "Employee Stock Plan") the purpose of the Employee Stock Plan is to provide
employees with an incentive to maintain the long-term performance and
profitability of the Company. A maximum of 1,300,000 shares may be issued under
the Employee Stock Plan.
31
<PAGE> 33
NON-PLAN STOCK OPTIONS
The Company has granted 3,382,085 non-plan stock options to acquire shares
of Common Stock, which are outstanding as of March 31, 2000 and exercisable at
prices ranging from $0.25 to $5.00 per share.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The articles of incorporation of the Company provide for the
indemnification of the Company's directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers or controlling persons of
the Company pursuant to the articles of incorporation and the corporation law of
the State of Colorado, the Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in such Act and is therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Company will not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of a
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 7-108-403 of the Colorado statute relating
to unlawful distributions or (iv) for any transaction from which the director
derived an improper personal benefit. The Articles of Incorporation also provide
(subject to certain exceptions) that the Company shall, to the maximum extent
permitted from time to time under the law of the State of Colorado, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent permitted under such law as it may from time to time be in effect. The
Company's bylaws require the Company to indemnify, to the full extent permitted
by law, any director, officer, employee or agent of the Company for acts which
such person reasonably believes are not in violation of the Company's corporate
purposes as set forth in the Articles of Incorporation. As a result of these
provisions, shareholders may be unable to recover damages against the directors
and officers of the Company for actions taken by them which constitute
negligence, gross negligence, or a violation of their fiduciary duties, which
may reduce the likelihood of shareholders instituting derivative litigation
against directors and officers and may discourage or deter shareholders from
suing directors, officers, employees and agents of the Company for breaches of
their duty of care, even though such an action, if successful, might otherwise
benefit the Company and its shareholders.
ADVISORY BOARD
The Board of Directors of the Company has established a Board of Advisors
(the "Advisory Board") to assist the Company in the development and
implementation of its long-term strategy and goals and to propose, adopt and
audit compliance by the Company with programming and business standards that are
consistent with the delivery of effective, non-exploitative, and non-biased
recovery based services. The Advisory Board will recommend to the Company's
Board of Directors the adoption of standards and practices to provide guidance
for the Company's employees in determining appropriate programming and online
content, advertising, and merchandise sales. The Advisory Board will advise on
technical matters and also serve as an independent voice for the recovery
community.
The Company has enlisted the membership of noted professionals in their
respective fields, with nationally recognized expertise for their commitment and
contributions.
The Advisory Board meets semi-annually on a formal basis, and deals with
individual issues as they arise. Advisors serve one year terms and receive
options to purchase stock for their participation on the Company's Advisory
Board.
32
<PAGE> 34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 26, 1998, Mr. Henry entered into an agreement with Recovery
Interactive. Pursuant to such agreement, Mr. Henry is entitled to a percentage
of any proceeds from a "change of control" (as defined in the agreement) of
Recovery Interactive which exceeds a base amount.
Charlotte Schiff Jones, a director of the Company, provides consulting
services in the areas of affiliate marketing and strategic business
development. During the fiscal year ending June 30, 1998, Ms. Schiff Jones
received $58,314 as compensation for such services.
On December 7, 1998, the Company entered into an agreement with G. Howard
Associates, Inc. ("Howard") wherein Howard would represent the Company, on an
exclusive basis with respect to certain investors in connection with raising
capital for the Company. For its services, Howard would receive a cash fee equal
to 6% of the total consideration received by the Company and to reimburse Howard
for its out-of-pocket expenses. The fee is due at the closing of a said
transaction. Such agreement with Howard was amended in April 1999. The amendment
expanded Howard's representation to include (a) the sale of the Company's 20%
ownership in RecoveryNetInteractive; (b) the settlement with certain creditors
identified; and, (c) assistance in raising $300,000 of additional capital.
Pursuant to this amendment, Howard would receive 900,000 newly issued shares of
the Common Stock and warrants held by Howard and/or George Henry were cancelled.
In December 1998, in connection with $725,000 notes payable by the Company,
the Company granted warrants to purchase 500,000 unregistered shares at $0.01
per share to a group of shareholders (the Noteholders"). In April 1999, the
Company renegotiated the terms of the $725,000 notes payable to certain
shareholders. In exchange for extending the due date to October 1999 (six
months), the Company granted another 1,000,000 warrants at $0.01 per share.
Approximately 999,999 shares to date have been exercised.
On January 7, 1999 the Company engaged Ms. Jones, member of the Board of
Directors to act as a "Special Agent" to help the Company secure financing.
Pursuant to Ms. Jones proposal Ms. Jones received 50,000 shares of unregistered
common stock and is entitled to 5% of the first one million of value, 4% of the
second one million value, 3% of the third one million value, 2% of the fourth
one million value and 1% on all amounts of value excess of five million dollars
upon closing.
On January 26, 1999 the Company engaged Mr. Wheeler as a Agent to help
secure financing . Pursuant to the Letter of Agreement Mr. Wheeler will received
75,000 shares of unregistered common stock and is entitled to a cash fee equal
to four percent (4%) of the total financing upon closing.
Beginning in February 1999, executive officers and other employees of the
Company have received stock in lieu of salaries. To-date, the Company has issued
270,971 shares in lieu of salaries.
In March 1999, in connection with an aggregate $100,000 investment by
certain investors, the Company agreed to issue notes convertible into Common
Stock of the Company.
On October 13, 1999, the Company finalized a debt restructuring and
infusion of additional capital with certain noteholders and shareholders,
resulting in the following: (1) conversion of all existing debt and accrued
interest to equity (estimated at approximately $756,000) at $0.25 per share; (2)
commitment to receive an equity infusion from key internal shareholders totaling
up to $600,000 at $0.25 per share; and (3) a 45-day option to noteholders to
acquire additional equity at $0.25 per share up to $756,000.
On November 18, 1999, additional notes and accrued interest totaling
$108,000 were converted for 432,000 shares at $0.25 per share.
In January 2000, the Company issued 2,221,606 shares to a group of existing
investors resulting in proceeds of $556,271.
In March 2000, Peter Graf, a shareholder in the Company subscribed to
purchase 400,000 shares of the Company's common stock at $1.00 per share. The
Company received $400,000, which was used to finance operations.
33
<PAGE> 35
The Company believes that all of the foregoing transactions and
arrangements with affiliates were fair and reasonable to the Company and were
and are on terms no less favorable than could have been obtained from
unaffiliated third parties. There can be no assurance, however, that future
transactions or arrangements between the Company and affiliates will continue to
be advantageous to the Company, that conflicts of interest will not arise with
respect thereto, or that if conflicts do arise, they will be resolved in a
manner favorable to the Company. Any such future transactions will be on terms
no less favorable to the Company than could be obtained from unaffiliated
parties and will be approved by the Company's Finance and Compensation
Committee.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of June 19, 2000,
relating to the beneficial ownership of shares of Common Stock by: (i) each
person or entity who is known by the Company to own beneficially five percent or
more of the outstanding Common Stock, (ii) each of the Company's directors and
(iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Number of shares beneficially
Name and address of beneficial owner(a) owned(b) Percentage of Class
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
William Moses 3,523,034(c) 11%
-----------------------------------------------------------------------------------------------------------
George Henry (d) 2,720,401(e) 8%
-----------------------------------------------------------------------------------------------------------
Robert Portrie (f) 1,588,608(g) 5%
-----------------------------------------------------------------------------------------------------------
Marc Guren (h) 1,655,000(i) 5%
-----------------------------------------------------------------------------------------------------------
Kevin Wall (j) 1,646,206(k) 5%
-----------------------------------------------------------------------------------------------------------
Wendy Borow Johnson (l) 1,215,000(m) *
-----------------------------------------------------------------------------------------------------------
Peter Graf (n) 1,665,306 5%
-----------------------------------------------------------------------------------------------------------
W. Thomas Oliver (o) 250,000(p) *
-----------------------------------------------------------------------------------------------------------
Stacey Romm (q) 101,704(r) *
-----------------------------------------------------------------------------------------------------------
All Directors and Executive Officers as a group 14,365,259 45%
-----------------------------------------------------------------------------------------------------------
</TABLE>
* Owns less than 5%
(a) Unless otherwise indicated, the address for each named individual or group
is in care of RnetHealth.com, Inc., 506 Santa Monica Blvd., Suite 400, Santa
Monica, California 90401.
(b) Each beneficial owner's percentage ownership is determined by assuming that
options, warrants or convertible securities that are held by such person (but
not those held by any other person) and which are exercisable within 60 days of
June 19, 2000 and those that have been exercised and converted. Pursuant to
a "change of control" provision, which defines a "change of control" to have
occurred if individuals who are directors at the beginning of a 24-month period
fail to constitute at least two-thirds of all directors of the Company during
such period, in the various stock option contracts issued to certain of the
beneficial owners, all stock options beneficially owned by such person are
currently exercisable. Assumes a base of 31,812,917 shares of Common Stock
before any consideration is given to outstanding options, warrants or
convertible securities.
(c) Includes options to purchase 191,530 shares of Common Stock.
(d) The address of the beneficial owner is 6860 Sunrise Court, Coral Gables, FL
33133.
(e) Includes options to purchase 777,082 shares of Common Stock.
(f) The address of the beneficial owner is 8010 Mergaser Drive, Ponte Vedra, FL
32082.
(g) Includes a warrant to purchase 1,215,000 shares of the Common Stock.
(h) The address of the beneficial owner is 12011 San Vicente Blvd., Suite 606,
Los Angeles, CA 90049.
(i) Includes a warrant to purchase 1,215,000 shares of the Common Stock.
34
<PAGE> 36
(j) The address of the beneficial owner is 10880 Wilshire Boulevard, Suite 1400,
Los Angeles, CA 90024.
(k) Includes a warrant to purchase 1,215,000 shares of the Common Stock.
(l) The address of the beneficial owner is 1571 Christina Lane, Lake Forest, IL
60045.
(m) Includes an option to purchase 1,015,000 shares of Common Stock.
(n) The address of the beneficial owner is 87 Holly Place, Briarcliff Manor, NY
10510.
(o) The address of the beneficial owner 542 Warner Avenue, Los Angeles, CA
90024.
(p) Includes an option to purchase 250,000 shares of Common Stock.
(q) The address of the beneficial owner is 19759 Schoolcraft Street, Winnetka,
CA 91306
(r) Includes an option to purchase 101,704 shares of Common Stock.
SELLING SHAREHOLDER
RELATIONSHIP OF SELLING SHAREHOLDER WITH THE COMPANY
The Selling Shareholder currently has not, nor within the past three years
has had, any position, office, or other material relationship with the Company
or any predecessor or affiliate of the Company.
SALES OF OUTSTANDING SHARES BY SELLING SHAREHOLDER
The Selling Shareholder has not advised the Company, and the Company is
unable to predict, if, when, the extent to which it intends to sell the Shares
being registered hereunder for its account. Notwithstanding the foregoing, for
purposes of the following Selling Shareholder Table, all of the Shares are
deemed to have been sold to the Selling Shareholder by the Company and
susequently to be offered hereby by the Selling Shareholder for sale to the
public. Based upon the foregoing assumption, the following table sets forth
information, as at June 1, 2000, with respect to (i) the Selling Shareholder's
beneficial ownership of the Company's Common Stock prior to the offering of any
Shares hereunder by such Selling Shareholder, (ii) the number of Shares which
may be offered for sale hereunder and (iii) the number shares of the Company's
Common Stock to be beneficially owned by each Selling Shareholder after the
offering (assuming the sale of all Shares being offered hereunder).
35
<PAGE> 37
There can be no assurance that any of the Selling Shareholders will offer
for sale any or all of the Common Stock offered by them pursuant to this
Prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Shares of Common Stock Shares of Common Stock
Beneficially Owned Prior Shares of Common Stock to Beneficially Owned After
Name of Selling Shareholder to Offering be Offered Hereunder Offering
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Torneaux Ltd. 4,800,000(a) 4,800,000 --
---------------------------------------------------------------------------------------------------------------------
</TABLE>
---------------------
(a) Includes the estimated number of shares issuable to Purchaser pursuant to
the Common Stock purchase agreement including an estimated 960,000 shares
issuable pursuant to the exercise of Warrants.
THE COMMON STOCK PURCHASE AGREEMENT
On June 2, 2000, we entered into a Common Stock Purchase Agreement (the
"Agreement") with Torneaux Ltd. hereinafter referred to as "Purchaser". Pursuant
to the terms of the Agreement, we may, in our sole discretion and subject to
certain restrictions, periodically sell shares of the Company's Common Stock for
up to $10,000,000 to the Purchaser upon the effective registration of such
shares and continuing for a period of Fourteen (14) months thereafter. The
Agreement allows us to choose to sell Common Stock to the Purchaser at times,
which we decide are advantageous. The Agreement is not a debt instrument. Any
sale by us shall be to Purchaser for the sale of our Common Stock and not a
loan.
DRAW DOWN TERMS. A draw down notice must be delivered to the Purchaser
prior to the date that we intend to sell the Common Stock to the Purchaser. The
draw down notice shall state a draw down of $300,000 if the threshold price is
equal to $0.50, and an additional $50,000 for every $0.50 increase of the
threshold price above $0.50 up to $5.50 for a maximum draw down amount of
$800,000, which draw down the Purchaser is obligated to accept. (the "Draw Down
Notice").The threshold price (the "Threshold Price") is the lowest price at
which the Company will set in the Draw Down Notice in order to sell Shares. The
number of shares to be issued in connection with each draw down shall be equal
to the sum of the quotients (for each trading day if the draw down pricing
period for which the volume weighted average price ("VWAP") equals or exceeds
the Threshold Price) of (x) 1/20th (or such other fraction based upon draw down
pricing period) of the draw down amount divided by (y) (A) the applicable draw
down discount percentage multipled by (B) the VWAP for such day.
TEN PERCENT LIMIT On each settlement date ("Settlement Date"), the second
business day following the end of the settlement period ("Settlement Period"),
the two periods of ten consecutive trading days, the number of Shares then to be
purchased shall not exceed the number of such shares that, when aggregated with
all other shares of Common Stock then owned by the Purchaser beneficially or
deemed beneficially owned by the Purchaser, would result in the Purchaser owning
more than 9.9% of all of such Common Stock as would be outstanding on such
Settlement Date, as determined in accordance with Section 16 of the Exchange Act
and the regulations promulgated thereunder. For purposes of this Section 5.3(h),
in the event that the amount of Common Stock outstanding as determined in
accordance with Section 16 of the Exchange Act and the regulations promulgated
thereunder is greater on a Settlement Date than on the date upon which the Draw
Down Notice associated with such Settlement Date is given, the amount of Common
Stock outstanding on such Settlement Date shall govern for purposes of
determining whether the Purchaser, when aggregating all purchases of Common
Stock made pursuant to this Agreement would own more than 9.9% of the Common
Stock following such Settlement Date.
WARRANTS. Following each Settlement Date, the Company shall issue to the
Purchaser a warrant to purchase up to 25% of the number of shares of Common
Stock purchased in such corresponding Settlement Period (a "Warrant"), each such
warrant being exercisable for a period of three (3) years commencing on the date
of issuance of such Warrant. The exercise price of each Warrant (the "Warrant
Exercise Price") shall be 115% of the price per Share paid by the Purchaser
during the Settlement Period.
36
<PAGE> 38
TERMINATION OF AGREEMENT. The Purchaser may terminate this Agreement upon
one (1) day's notice (v) if the Company issues convertible debentures or enters
an equity financing facility without the Purchaser's prior written consent, or
(w) if an event resulting in a Material Adverse Effect or a Material Change of
Control in Ownership has occurred, or (x) the Registration Statement is not
declared effective within 120 days following the Filing Date, or (y) there shall
occur any stop order or suspension of the effectiveness of the Registration
Statement for an aggregate of five (5) trading days during the Investment
Period, for any reason other than deferrals or suspension during a blackout
period as a result of corporate developments subsequent to the Closing Date that
would require such Registration Statement to be amended to reflect such event in
order to maintain its compliance with the disclosure requirements of the
Securities Act, or (z) the Company shall at any time fail to comply with the
requirements of Section 4.2, 4.3 or 4.4 hereof.
THE PURCHASER'S RIGHT OF INDEMNIFICATION. The Company will indemnify and
hold harmless the Purchaser and each person, if any, who controls the Purchaser
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act from and against any losses, claims, damages, liabilities and
expenses (including reasonable costs of defense and investigation and all
reasonable attorney's fees) to which the Purchaser and each person, if any, who
controls the Purchaser may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages, liabilities and expenses (or
actions in respect thereof) arise out of or are based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained, or
incorporated by reference, in the Registration Statement or the Prospectus
relating to the shares being sold to the Purchaser, or any amendment or
supplement to it, or (ii) the omission or alleged omission to state in that
Registration Statement or any document incorporated by reference in the
Registration Statement, a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
Company shall not be liable under this Section 9.1(a) to the extent that a court
of competent jurisdiction shall have determined by a final judgment that such
loss, claim, damage, liability or action resulted directly from any such acts or
failures to act, undertaken or omitted to be taken by the Purchaser or such
person through its bad faith or willful misconduct; provided, however, that the
foregoing indemnity shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information furnished to
the Company by the Purchaser expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto). The Company will reimburse the Purchaser and each such controlling
person promptly upon demand for any legal or other costs or expenses reasonably
incurred by the Purchaser or the controlling person in investigating, defending
against, or preparing to defend against any such claim, action, suit or
proceeding, except that the Company will not be liable to the extent a claim or
action which results in a loss, claim, damage, liability or expense arises out
of, or is based upon, an untrue statement, alleged untrue statement, omission or
alleged omission, included in the Registration Statement or any Prospectus in
reliance upon, and in conformity with, written information furnished by the
Purchaser to the Company for inclusion in the Registration Statement or
Prospectus.
37
<PAGE> 39
DESCRIPTION OF SECURITIES
GENERAL
The aggregate number of shares that the Company is authorized to issue is
50,000,000 shares of Common Stock, par value $.01 per share. As of the date of
this Prospectus, the Company had outstanding 31,812,917 shares of Common Stock.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share
held of record in the election of directors of the Company and in all other
matters to be voted on by the shareholders. There is no cumulative voting with
respect to the election of directors, with the result that the holders of more
than 50 percent of the shares voting for the election of directors can elect all
of the directors. Holders of Common Stock are entitled (i) to receive such
dividends as may be declared from time to time by the board of directors out of
funds legally available for such purpose, and (ii) in the event of the
liquidation, dissolution, or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities and after provision has been made
for each class of stock, if any, having preference over the Common Stock. All of
the outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable. Holders of Common Stock have no preemptive right to subscribe for
or purchase additional shares of any class of the Company's capital stock.
WARRANTS
Warrants previous issued pursuant to the 1999 Private Placement entitles the
holder thereof (the "Warrant Holders") to purchase one share of Common Stock at
a price of $0.35, subject to adjustment in certain circumstances, through and
including June 10, 2002. As of June 21, 2000, there is a balance of 162,500
warrants exercisable.
The Warrant Holders shall have the right to exercise their Warrants until
the close of business on June 10, 2002.
The exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at prices below the
exercise price of the Warrants. Reference is made to the Warrant (which has been
filed as an exhibit to this Registration Statement) for a complete description
of the terms and conditions therein (the description herein contained being
qualified in its entirety by reference thereto).
The Warrants may be exercised upon surrender of the Warrant on or prior to
the expiration date to the Company at its principal office or at the office of
the Warrant agent appointed by the Company in accordance with the terms of the
Warrant, with the subscription form attached thereto completed and executed as
indicated, accompanied by full payment of the exercise price (in cash or by
certified check or official bank check payable to the order of the Company) for
the number of Warrants being exercised. The Warrant Holders do not have the
right or privileges of holders of Common Stock.
REDEEMABLE WARRANTS
Each Redeemable Warrant outstanding entitles the registered holder thereof
(the "Redeemable Warrant Holders") to purchase one share of Common Stock at a
price of $5.50, subject to adjustment in certain circumstances, through and
including September 29, 2002.
Each Redeemable Warrant is redeemable by the Company at any time, upon
notice of not less than 30 days, at a price of $.10 per Redeemable Warrant,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives notice
(the "Call Date") has been at least 150% (currently, $8.25, subject to
adjustment) of the then effective exercise price of the Redeemable Warrants and
the Company obtains the written consent of Whale Securities Co., L.P., the
underwriter in the Company's initial public offering (the "Underwriter") to such
redemption prior to the Call Date. The Redeemable Warrant Holders shall have the
right to exercise their Redeemable Warrants until the close of business on the
date fixed for redemption.
38
<PAGE> 40
The Redeemable Warrants are issued in registered form under a warrant agreement
by and among the company, American Stock Transfer & Trust Company, as warrant
agent (the "Redeemable Warrant Agent"), and the Underwriter (the "Redeemable
Warrant Agreement"). The exercise price and number of shares of Common Stock or
other securities issuable on exercise of the Redeemable Warrants are subject to
adjustment in certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, the Redeemable Warrants are not subject to adjustment for issuances of
Common Stock at prices below the exercise price of the Redeemable Warrants.
Reference is made to the Redeemable Warrant Agreement (which has been filed as
an exhibit to the Company's Registration Statement on Form SB-2, as amended
dated 9/23/97 (File No. 333-27787)) for a complete description of the terms and
conditions therein (the description herein contained being qualified in its
entirety by reference thereto).
No Redeemable Warrant will be exercisable unless, at the time of exercise,
the Company has filed a current registration statement with the Commission
covering the shares of Common Stock issuable upon exercise of such Redeemable
Warrant and such shares have been registered or qualified or deemed to be exempt
from registration or qualification under the securities laws of the state of
residence of the holder of such Redeemable Warrant. The Company will use its
best efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, subject to the terms of the Redeemable
Warrant Agreement. While it is the Company's intention to do so, there can be no
assurance that the Company will be able to do so.
REGISTRATION RIGHTS
In March and April 1997, the Company completed a private financing (the
"Private Financing") pursuant to which the Company issued and sold to 21
"accredited investors" an aggregate of 40 units (the "Financing Units")
consisting of an aggregate of (i) $2,000,000 principal amount of unsecured
non-negotiable promissory notes (the "Financing Notes") which bear interest at
the rate of 9% per annum and are due on the earlier of the consummation of this
offering or March 6, 1998; (ii) 400,000 shares of Common Stock (the "Financing
Shares"); and (iii) warrants (the "Financing Warrants") to purchase an aggregate
of 500,000 shares of Common Stock at an exercise price of $5.50 per share. In
connection with the Private Financing, the Company agreed to include the 400,000
Financing Shares and the 500,000 shares issuable upon exercise of the Financing
Warrants (the "Financing Warrant Shares") in a registration statement which the
Company will prepare and file with, and use its best efforts to have declared
effective by, the Commission so as to permit the public trading of the Financing
Shares and Financing Warrant Shares pursuant thereto. If such registration
statement is not declared effective by the Commission within 15 months following
the consummation of the Company's initial public offering, then commencing on
the first day of the 16th month following the consummation of this offering, the
Company shall issue to each holder of Financing Shares and Financing Warrant
Shares, on the first day of each month a registration statement continues not to
have declared effective by the Commission, such number of additional shares of
Common Stock as is equal to 10% of the number of Financing Shares and Financing
Warrant Shares issued to and held by such holder and such number of additional
warrants as is equal to 10% of the number of Financing Warrants issued to and
held by such holder. The holders of the Financing Shares and Financing Warrants
have agreed not to sell or otherwise dispose of any of such securities for a
period of 24 months following the effective date of the Company's Registration
Statement on Form SB-2, as amended dated 9/23/97 (File No. 333-27787).
The Company has granted certain "demand" and "piggyback" registration
rights to the holders of additional 433,223 shares of Common Stock. The demand
registration rights are exercisable, under certain circumstances, commencing
September 29, 1998.
In connection with its initial public offering, the Company has agreed to
grant to the Whale Securities Co., L.P. certain demand and piggyback
registration rights in connection with the 400,000 shares of Common Stock
issuable upon exercise of certain warrants and the additional warrants included
therein.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock are American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
39
<PAGE> 41
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (Registration No. 333- ) under the Securities Act with
respect to the Shares (the "Registration Statement"). As permitted by the rules
of the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Shares offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. Statements contained in this Prospectus, and in any document
incorporated herein by reference, as to the contents of any contract or any
other document referred to are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such document, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part of the Registration Statement may be obtained from
such office upon the payment of the fees prescribed by the Commission. The
Registration Statement has been filed through EDGAR and is publicly available
through the Commission's Web site (http://www.sec.gov).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained
at prescribed rates from the Public Reference Section of the Commission,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information electronically filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
The Common Stock is currently quoted on The NASD OTC Bulletin Board and such
reports and other information can also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Beckman,
Millman & Sanders LLP, New York, New York.
40
<PAGE> 42
RNETHEALTH.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
PAGE
<S> <C>
-------------------------------------------------------------------------------------------------------------
Independent Auditors' Report F-2
-------------------------------------------------------------------------------------------------------------
Report of Independent Public Accountants F-3
-------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet as of June 30, 1999 F-4
-------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations for the Years Ended June 30, 1998 and 1999 F-5
-------------------------------------------------------------------------------------------------------------
Consolidated Statements of Shareholders' (Deficit) Equity for the Years Ended June
30, 1998 and 1999 F-6
-------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998 and 1999 F-8
-------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements as of June 30, 1999 F-9
-------------------------------------------------------------------------------------------------------------
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited) and June 30,
1999 F-32
-------------------------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Operations (unaudited) for the three-month
and nine-month periods ended March 31, 2000 and 1999 F-33
-------------------------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine-month
periods ended March 31, 2000 and 1999 F-34
-------------------------------------------------------------------------------------------------------------
Notes to Condensed Consolidated Financial Statements as of March 31, 2000 F-35
-------------------------------------------------------------------------------------------------------------
</TABLE>
F-1
<PAGE> 43
.
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders of Rnethealth.com, Inc.:
We have audited the accompanying consolidated balance sheet of Rnethealth.com,
Inc. (the "Company") as of June 30, 1999, and the related consolidated
statements of operations, shareholders' equity(deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rnethealth.com, Inc.
as of June 30, 1999, and the results of their operations and their cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has negative working capital,
reduced cash levels, recurring losses from operations and limited operating
revenues that raise substantial doubt about its ability to continue as a going
concern. The ability of the Company to continue operating as a going concern is
dependent upon its ability (1) to obtain sufficient additional debt or equity
capital, (2) to distribute its programming and services through multimedia
channels, (3) to achieve a critical mass of viewers to attract advertisers and
healthcare providers and (4) to acquire and develop appropriate content for its
multimedia channels. The Company plans to raise additional working capital
through private and public offerings. The success of future activities cannot be
determined at this time and there are no assurances that if achieved, the
Company will have sufficient funds to execute its intended business plan or
generate positive operating results. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
CORBIN & WERTZ
Irvine, California
October 9, 1999
F-2
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rnethealth.com, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' (deficit) equity and cash flows for the year ended June 30, 1998
of Rnethealth.com, Inc. (formerly known as The Recovery Network, Inc.).
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with accounting standard generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Rnethealth.com, Inc. for the year ended June 30, 1998, in conformity with
accounting principals generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has recurring losses from
operations that raises substantial doubt about its ability to continue as a
going concern. The ability of the Company to operate as a going concern is
dependent upon its ability (1) to obtain sufficient additional capital, (2) to
distribute its programming and services through multimedia channels, (3) to
achieve a critical mass of viewers to attract advertisers and healthcare
providers and (4) to acquire and develop appropriate programming for broadcast.
The Company plans to raise additional working capital through private and public
offerings. The success of future activities cannot be determined at this time
and there are no assurances that if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Los Angeles, California
September 23, 1998
F-3
<PAGE> 45
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 136,058
Accounts receivable, net of allowance for doubtful accounts
of $32,000 256,499
Current portion of capitalized programming costs, net 98,000
Inventory 55,593
Prepaid expenses 70,345
------------
Total current assets 616,495
Capitalized programming costs, net 421,648
Furniture and equipment, net 177,550
Other 52,686
------------
Total assets $ 1,268,379
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term notes payable, net of unamortized debt discount
of $181,318 $ 481,015
Accounts payable 442,085
Accrued payroll and benefits 139,086
Other accrued liabilities 295,256
Accrued royalty expense 503,137
Current portion of capital lease obligations 19,817
------------
Total current liabilities 1,880,396
------------
Commitments
Shareholders' equity (deficit):
Common stock, $.01 par value; 25,000,000 shares authorized; 15,494,507
shares issued and outstanding 154,945
Additional paid-in capital 21,813,509
Prepaid consulting (230,331)
Common stock subscription receivable (50,000)
Accumulated deficit (22,300,140)
------------
Total shareholders' equity (deficit) (612,017)
------------
Total liabilities and shareholders' equity (deficit) $ 1,268,379
============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 46
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Domestic sales $ 894,758 $ 1,533,922
----------- -----------
Operating expenses:
Salaries and consulting 3,346,720 4,819,488
General and administrative 2,326,807 2,659,700
Programming 1,543,997 2,172,385
Marketing 497,467 105,862
Loss (gain) on investment in joint venture 592,500 (1,006,650)
Cost of video and publication 216,889 499,766
----------- -----------
Total operating expenses 8,524,380 9,250,551
----------- -----------
Loss from operations (7,629,622) (7,716,629)
Other income (expense):
Interest (775,611) (489,552)
Other income 146,044 65,694
----------- -----------
Loss before provision for income taxes (8,259,189) (8,140,487)
Provision for income taxes 2,545 800
----------- -----------
Net loss $(8,261,734) $(8,141,287)
=========== ===========
Loss per share information:
Basic and diluted loss per share $ (1.91) $ (0.96)
=========== ===========
Weighted average number of common and common
equivalent shares outstanding 4,336,405 8,514,557
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 47
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK PREPAID
---------------------- PAID-IN SUBSCRIPTION CONSULTING ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE COSTS DEFICIT TOTAL
--------- -------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 2,521,250 $ 25,212 $4,176,708 $ -- $ (5,625) $(5,897,119) $(1,700,824)
Initial public offering of
common stock and warrants,
net of offering costs
of $2,174,743 2,415,000 24,151 10,117,606 -- -- -- 10,141,757
Issuance of common stock and
warrants for cash, net of
offering costs of $205,000 and
including 30,601 shares issued
for placement services 808,377 8,083 1,536,917 -- -- -- 1,545,000
Services to be received in
exchange for options and shares
of common stock not yet issued -- -- 1,009,000 -- (1,009,000) -- --
Purchase of FMS Productions, Inc. 44,000 440 208,560 -- -- -- 209,000
Exercise of options 2,867 29 2,178 -- -- -- 2,207
Amortization of prepaid
consulting costs -- -- -- -- 553,375 -- 553,375
Net loss -- -- -- -- -- (8,261,734) (8,261,734)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 5,791,494 57,915 17,050,969 -- (461,250) (14,158,853) 2,488,781
Issuance of common stock
for cash, net of offering
costs of $150,000, including
35,000 shares issued for
placement services 3,795,150 37,951 853,585 -- -- -- 891,536
</TABLE>
Continued F-6
<PAGE> 48
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - CONTINUED
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK PREPAID
---------------------- PAID-IN SUBSCRIPTION CONSULTING ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE COSTS DEFICIT TOTAL
--------- -------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued for cash
to be received, including
5,000 shares issued for
placement services 55,000 550 49,450 (50,000) -- -- --
Exercise of options
and warrants 1,916,999 19,170 677,330 -- -- -- 696,500
Issuance of common stock
for compensation and services 3,935,864 39,359 1,828,928 -- (130,331) -- 1,737,956
Common stock to be issued
for compensation and services -- -- 415,577 -- -- -- 415,577
Issuance of detachable
warrants with short-term
notes payable -- -- 598,000 -- -- -- 598,000
Issuance of options and
warrants for services -- -- 964,670 -- (100,000) -- 864,670
Cancellation of options
related to settlement of
prior consulting agreement -- -- (625,000) -- 281,250 -- (343,750)
Amortization of prepaid
consulting costs -- -- -- -- 180,000 -- 180,000
Net loss -- -- -- -- -- (8,141,287) (8,141,287)
------------ ---------- ----------- ---------- ---------- ------------ ----------
Balance, June 30, 1999 15,494,507 $ 154,945 $21,813,509 $ (50,000) $ (230,331) $(22,300,140) $ (612,017)
============ ========== =========== ========== ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 49
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,261,734) $ (8,141,287)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock, options and warrants
for compensation and services -- 2,674,453
Amortization of notes payable discount 479,568 416,682
Amortization of prepaid consulting costs 553,375 180,000
Amortization of deferred financing costs 130,529 --
Amortization of capitalized programming costs 230,360 692,814
Note issued for payment of services -- 75,000
Depreciation and other amortization 166,956 89,446
Provision for doubtful accounts 16,000 --
Loss (gain) on investment in joint venture 592,500 (1,006,650)
Changes in operating assets and liabilities:
Accounts receivable (194,678) (1,749)
Inventory 25,325 31
Prepaid expenses (33,365) (11,125)
Other assets (3,887) (17,156)
Capitalized programming costs (565,783) (255,000)
Accounts payable, accrued payroll and benefits
and other accrued liabilities (317,545) 157,573
Accrued royalty expense 157,569 180,507
Deferred compensation (51,672) --
Due to shareholders and directors (65,751) --
------------ ------------
Net cash used in operating activities (7,142,233) (4,966,461)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment in joint venture -- 850,000
Cash paid for purchase of FMS Productions, Inc. (34,383) --
Purchases of furniture and equipment (206,569) (63,807)
Investment in joint venture (368,000) (67,850)
------------ ------------
Net cash provided by (used in) investing activities (608,952) 718,343
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 574,990 825,000
Payments on borrowings (2,605,250) (237,667)
Payments on capital lease obligation (17,175) (10,338)
Proceeds from the issuance of common stock,
warrants and stock subscriptions 12,332,547 1,588,036
Deferred offering and financing costs incurred (343,558) --
------------ ------------
Net cash provided by financing activities 9,941,554 2,165,031
------------ ------------
</TABLE>
Continued
F-8
<PAGE> 50
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net increase (decrease) in cash 2,190,369 (2,083,087)
Cash, beginning of year 10,883 2,219,145
Cash from acquisition of FMS 17,893 --
----------- -----------
Cash, end of year $ 2,219,145 $ 136,058
=========== ===========
</TABLE>
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS
ORGANIZATION AND LINE OF BUSINESS
Rnethealth.com, Inc. (formerly known as The Recovery Network, Inc. changed as of
) (the "Company"), a Colorado corporation, is a digital media company
drawing on the converging digital technologies of the Internet and cable
television to deliver alternative and behavioral health programming products and
services to a national audience. The Company was incorporated in May 1992 and
commenced operations in February 1993.
ACQUISITIONS AND JOINT VENTURE
RECOVERY INTERACTIVE
The Company owned a 50% interest in Recovery Interactive ("RI"), a joint venture
with TCI Online Recovery Net Holdings, Inc. ("TCIR"), an affiliate of
Tele-Communications, Inc. ("TCI"), formed on August 1, 1996 to commence a
business to provide behavioral health care products and services to managed care
organizations and other organizations offering or providing health care
services, as well as to provide information, interaction and support regarding
recovery issues and prevention issues, through an integrated multimedia
platform. During 1998 and 1999, the Company and TCI each made capital
contributions to RI and incurred expenses on RI's behalf aggregating to
approximately $368,000 and $67,850, respectively. The Joint Venture agreement
was to continue through December 31, 2044. The Company's investment in the Joint
Venture was accounted for under the equity method of accounting. The Company
recorded a loss on investment in the joint venture for its entire investment of
$592,500 in 1998 which included amounts to be paid to RI for operating losses
incurred by RI through June 30, 1998.
In April 1999, the Company entered into an agreement with third parties to sell
its interest in RI for $850,000. The Company recognized a gain on this sale of
its investment of approximately $1,006,650, which is reflected in the
accompanying consolidated statement of operations.
FMS PRODUCTIONS
On December 10, 1997, the Company acquired 100 percent of the issued and
outstanding common stock of FMS Productions, Inc . ("FMS") for total
consideration of $225,490. Consideration included 44,000 shares of the Company's
common stock valued at $209,000 ($4.75 per share) and a cash payment totaling
$34,383, less $17,893 of cash received from FMS.
F-9
<PAGE> 51
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS,
continued
Prior to the FMS acquisition, the Company was classified as a development stage
company, due to the lack of significant operating revenues. Effective for the
first quarter after the FMS acquisition (quarter ended March 31, 1998), the
Company emerged from the development stage as a result of the revenues generated
from FMS's operations subsequent to the purchase date.
The unaudited pro forma results of operations for the year ended June 30, 1998
(reflecting all adjustments which, in the opinion of management, are necessary
for a fair presentation) as if the FMS acquisition was consummated on July 1,
1998, respectively, are as follows:
<TABLE>
<S> <C>
Pro forma total revenues $ 1,593,000
===========
Pro forma net loss $(8,265,000)
===========
Pro forma weighted average number
of common shares 4,356,055
===========
Pro forma loss per common share $ (1.90)
===========
</TABLE>
SIGNIFICANT BUSINESS RISKS
GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has negative working capital,
reduced cash levels, recurring losses from operations and has limited operating
revenues, that raise substantial doubt about the Company's ability to continue
as a going concern. The ability of the Company to operate as a going concern is
dependent upon its ability (1) to obtain sufficient additional debt and equity
capital from public and private sources, (2) to distribute its programming and
services through multimedia channels, (3) to achieve a critical mass of viewers
to attract advertisers and healthcare providers and (4) to acquire and develop
appropriate content for internet and cable broadcastors. The Company plans to
raise additional working capital through private and public offerings. To
achieve this, the Company has embarked on a definitive plan to (1) get relisted
on the Nasdaq Smallcap Exchange; (2) convert certain debt to equity; (3) appoint
new members to the management team and board of advisors; and (4) receive an
equity infusion from board members and other shareholders (see Note 11). The
successful outcome of future activities cannot be determined at this time and
there are no assurances that if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating results.
F-10
<PAGE> 52
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
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.
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS,
CONTINUED
GOVERNMENT REGULATIONS
The cable television industry is subject to extensive and frequently changing
federal, state and local laws and substantial regulation under these laws by
governmental agencies, including the Federal Communications Commission (the
"FCC"). Regulations governing the rates that can be charged to subscribers by
cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as the Company's program offerings. In addition, federal
"must-carry" rules requiring cable operators to devote up to one-third of their
channels to carriage of local commercial TV broadcast stations (and additional
channels for noncommercial education TV stations); commercial leased access
rules designating 10 to 15 percent of system channels for lease by unaffiliated
programmers; and local regulatory requirements mandating further channel
set-asides for public, governmental and educational use could reduce channel
availability which might otherwise be available for the Company on many cable
systems. Statutory provisions and FCC rules governing relationships among cable
systems and competing forms of multichannel video program distribution, as well
as the relations between the Company and its cable system affiliates could
adversely affect the marketability of the Company's programming and the
flexibility of the Company in its business dealings with outlets for its
programming.
In addition, the Internet industry is subject to constantly evolving federal and
state regulation. It is possible that certain legislation or pending legislation
may adversely impact the Company's Internet operations.
DEPENDENCE UPON GROUP W NETWORK SERVICES
In May 1998, the Company entered into a five-year contract with Group W Network
Services, a division of CBS Corporation, to provide program origination, master
control operations, uplink and C-Band Satellite transponder services (the
"Transponder Contract"). It is possible that Group W Network Services or Company
affiliates could experience broadcast interruptions and equipment failures,
which could last for a significant period of time. The Transponder Contract, as
amended in April 1999 (see Note 10), allows the Company to broadcast 9 hours per
day.
Through June 30, 1998, substantially all the households which received broadcast
of The Recovery Network's programming were provided under the terms of the prior
transponder contract with ATN (see Note 7). Starting September 1, 1998, the
Company is entirely dependent on its own affiliate marketing efforts to obtain
affiliate agreements with cable operators.
F-11
<PAGE> 53
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated statement of operations for 1998 includes the
operating results of FMS from December 10, 1997 (the acquisition date) to June
30, 1998. For 1999, the consolidated statement of operations includes the
operating results of FMS for the entire fiscal year. All intercompany
transactions and accounts between the Company and FMS have been eliminated in
consolidation.
USE OF ESTIMATES
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts or revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Advertising revenues are recognized when the advertisements are broadcast. Video
and publications revenues are recognized when the goods are shipped or later
when accepted by the customer if acceptance is required. During 1998, the
Company recorded approximately $695,000, $150,000 and $50,000 of video and
publications, advertising and other revenues, respectively. During 1999, the
Company recorded approximately $1,466,000, $26,000 and $41,000 of video and
publications, advertising and other revenues, respectively.
CASH
At times, the Company maintains cash balances over the Federal Depository
Insurance Corporation insurable limited of $100,000 per customer per financial
institution.
FURNITURE AND EQUIPMENT
Furniture and equipment is depreciated or amortized over the estimated useful
lives of the assets using straight-line and accelerated methods. Estimated
useful lives range from 3 to 7 years.
Furniture and equipment, at cost, consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Computer equipment $ 364,982
Leasehold improvements 10,000
Office furniture 58,275
---------
433,257
Less accumulated depreciation and amortization (255,707)
---------
$ 177,550
=========
</TABLE>
F-12
<PAGE> 54
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS 109"), "Accounting for Income Taxes." Under SFAS
109, deferred income tax assets and liabilities are computed based on the
temporary difference between the financial statement and income tax basis of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse. Deferred income tax
expenses and credits are based on the changes in deferred income tax assets and
liabilities from period to period.
DEFERRED OFFERING COSTS
Costs associated with offerings of The Company common shares are initially
capitalized and then netted with the proceeds received from the sale of the
common shares when the offering is completed. If the intended offering is
terminated, these costs are charged to operations. At June 30, 1999, the Company
has no deferred offering costs.
DEFERRED FINANCING COSTS
Debt issuance costs are initially capitalized as deferred financing costs and
amortized over the terms of the notes using the effective interest rate method.
In the event the notes are repaid prior to their original maturity, any
unamortized portion of the debt issuance costs capitalized will be charged to
operations. At June 30, 1999, the Company has no deferred financing costs.
CAPITALIZED PROGRAMMING COSTS
Capitalized programming costs include direct costs of production, production
overhead and costs to acquire distribution rights. Production costs are
accumulated by each series produced or licensed. Production overhead is
allocated proportionately to each series produced based on the direct production
costs incurred for each series produced. The costs are charged to earnings as
the series are broadcast based on the estimated number of future showings in
accordance with SFAS No. 63, "Financial Reporting by Broadcasters."
Capitalized programming cost are stated at the lower of unamortized costs or
estimated net realizable value on a series-by-series basis. A series estimated
net realizable value is periodically reviewed by management and revised downward
when warranted by changing conditions. Once adjusted, the new estimated
realizable value establishes a new unamortized cost basis.
PREPAID CONSULTING COSTS
The value of common stock and options issued for consulting services is recorded
as prepaid consulting costs as a component of shareholders' (deficit) equity.
Such amounts are amortized, using the straight-line method, over the life of the
consulting agreements.
F-13
<PAGE> 55
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
NON-MONETARY EXCHANGES
Accounting for the transfer or distribution of non-monetary assets or
liabilities is based on the fair value of the assets or liabilities received or
surrendered, which ever is more clearly evident. Where the fair value of the
non-monetary assets received or surrendered cannot be determined with reasonable
accuracy, the recorded book value of the non-monetary assets are used.
STATEMENT OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under SFAS No. 95, "Statement of Cash Flows." Required cash and non-cash
transaction disclosures are as follows:
During 1998, deferred offering costs of $573,508 were recorded against proceeds
from the Initial Public Offering. Deferred offering costs of $40,000, paid to
the underwriters, were credited toward a two-year consulting agreement and
recorded in other assets. The Company common stock of 44,000 shares was issued
in connection with the acquisition of FMS.
The Company made cash payments of $2,545 in 1998 and $2,322 in 1999 for state
income taxes. During 1998 and 1999, cash payments for interest expense were
approximately $166,000 and $18,000, respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. SFAS 130 has no impact on the financial
statements of the Company as it has no additional items of comprehensive income.
F-14
<PAGE> 56
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. Company management has represented
that the Company currently operates in only one segment (i.e., the cable
television segment); therefore SFAS 131 has no impact on the financial
statements of the Company.
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share" ("EPS"), effective
for the quarter ending December 31, 1997 and has restated its earnings per share
disclosure for all prior periods presented to comply with SFAS No. 128. Under
SFAS No. 128, primary EPS is replaced by "Basic" EPS, which excludes dilution
and is computed by dividing income/loss available to common shareholders by the
weighted average number of common shares outstanding for the period. "Diluted"
EPS, which is computed similarly to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. When dilutive, stock options are
included as share equivalents in computed diluted earnings per share using the
treasury stock method.
Dilutive securities of 7,003,976 and 4,477,170 shares are not included in the
calculation of diluted EPS in the years ending June 30, 1999 and 1998,
respectively, because they are antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 107 ("SFAS 107"), "Disclosures About Fair Value of
Financial Instruments." SFAS 107 requires disclosure of fair value information
about financial instruments when it is practicable to estimate that value. The
carrying amount of the Company's cash, receivables, trade payables and accrued
expenses approximates their estimated fair values due to the short-term
maturities of those financial instruments. The fair value of short-term notes
payable is not determinable as these borrowings are with related parties or the
carrying amount approximates fair values due to the short-term maturity of the
notes (see Note 4).
F-15
<PAGE> 57
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement, as amended by SFAS 137, is effective for
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect the adoption of this standard to have
a material impact on its results of operations, financial position or cash flows
as it currently does not engage in any derivative or hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 ("SOP 98-5"), "Reporting the Costs of Start-Up
Activities." SOP 98-5 requires that all non-governmental entities expense the
costs of start-up activities, including organization costs as those costs are
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect the adoption of
this standard to have a material effect on its results of operations, financial
position or cash flows.
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
YEAR 2000
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of," which requires that long-lived assets and
certain indentifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In accordance with the
provisions of SFAS 121, the Company regularly reviews long-lived assets and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Based on
its analysis, the Company believes that no impairment of the carrying value of
its long-lived assets existed at June 30, 1999.
F-16
<PAGE> 58
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," which defines a fair
value based method of accounting for stock-based compensation. However, SFAS 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB 25 must make proforma disclosures of net income (loss), as if the
fair value method of accounting defined in SFAS 123 has been applied. The
Company has elected to account for its stock-based compensation to employees
under APB 25.
RECLASSIFICATIONS
Certain 1998 financial statement amounts have been reclassified to conform to
the 1999 presentation.
F-17
<PAGE> 59
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 3 - CAPITALIZED PRODUCTION COSTS
Capitalized production costs, net of amortization, are as follows:
Produced programs $ 691,274
FMS film library acquired 376,762
Licensed films 493,575
-----------
1,561,611
Less accumulated amortization (1,041,963)
-----------
Net capitalized production costs $ 519,648
===========
Based on the Company's estimates of future showings, approximately 90 percent of
the remaining unamortized costs will be amortized within the next three years.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Unsecured notes payable to shareholders, interest at 10%,
principal and interest due October 1999, net of
unamortized debt discount of $181,318 $306,015
Convertible notes payable to shareholders, interest at
12%, principal and interest due March 2000 100,000
Unsecured note payable to Group W Network Services,
interest at 10%, principal and interest due December 1999 75,000
--------
$481,015
========
</TABLE>
The Company originally borrowed $725,000 under unsecured notes payable to
shareholders, due April 1999. These notes had 500,000 detachable warrants at
$0.01 per share, which were valued at $326,000 (based on a Black-Scholes
computation under SFAS No. 123) and recorded as a debt discount. This discount
was amortized as additional interest expense through the maturity of the
original notes in April 1999. Upon maturity, the Company negotiated an extension
of $487,333 of the notes (along with accrued interest on the entire original
note balance totaling approximately $25,000) through October 1999 in exchange
for an additional 950,000 detachable warrants at $0.01 per share. The new
warrants were valued at $272,000 (based on a Black-Scholes computation under
SFAS No. 123) and recorded as a debt discount, which is being amortized as
additional interest expense through the maturity of the new notes. Through June
30, 1999, the Company recorded a total debt discount of $598,000, of which
$416,862 has been amortized to interest expense.
F-18
<PAGE> 60
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The convertible notes payable to shareholders are convertible at any time into
common stock at the lower of (1) 70% of the average closing bid price for the
common stock for the five days immediately preceding the conversion date; or (2)
$0.50. These notes are in default due to the Company's de-listing from the
NASDAQ SmallCap exchange under the terms of the agreements. The Company has
negotiated the conversion of most notes with the note holders at $0.50 per
share, which will be completed in early fiscal year 2000.
F-19
<PAGE> 61
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 5 - INCOME TAXES
The components of the net deferred income tax asset at June 30, 1999 are as
follows:
<TABLE>
<S> <C>
Carryforward of net operating losses $ 6,894,000
Development costs capitalized for tax purposes 403,000
Other temporary differences 131,000
-----------
7,428,000
Valuation allowance (7,428,000)
-----------
Deferred income tax asset $ --
===========
</TABLE>
The provision for income taxes of $2,545 and $800 for the fiscal years ended
June 1998 and 1999, respectively, consist only of the current state provision.
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended June 30, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------------- -----------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax benefit at federal
statutory rate $(2,808,124) (34.00)% $(2,768,038) (34.00)%
State taxes, net of federal income
tax effect 2,545 0.03 800 0.00
Net operating losses and other
deferred income tax assets not
benefited 2,808,124 34.00 2,768,038 34.00
----------- ----------- ----------- -----------
$ 2,545 0.03% $ 800 0.00%
=========== =========== =========== ===========
</TABLE>
As of June 30, 1999, the Company had approximately $18,700,000 of federal net
operating loss carryforwards, which will expire in fiscal years ending 2008 to
2013. As of June 30, 1999, the Company had approximately $9,300,000 of
California state net operating loss carryforwards, which will expire in fiscal
years ending 2001 to 2004. Under SFAS No. 109, the Company has recorded
valuation allowances against the realization of its deferred tax assets. The
valuation allowance is based on management's estimates and analysis, which
include the impact of tax laws which may limit the Company's ability to utilize
its tax loss carryforwards.
Additionally, pursuant to Internal Revenue Service code section 382, the
Company's existing net operating loss carryforwards, and other deferred tax
assets and liabilities, may be unavailable for future use due to significant
ownership changes of the Company's common stock.
F-20
<PAGE> 62
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 6 - CAPITAL STOCK TRANSACTIONS
Initial Public Offering
On October 3, 1997, the Company consummated its Initial Public Offering pursuant
to which it issued 2,415,000 units. Each unit consisted of one share of common
stock and one warrant to purchase one share of common stock at $5.50 per share.
The units were sold for $5.10 each for net proceeds of approximately
$10,142,000.
1998 PRIVATE PLACEMENT
In June 1998, the Company issued (i) 808,377 shares of common stock for net
proceeds of approximately $1,545,000, and (ii) warrants to purchase 70,000
shares of common stock at an exercise price of $5.50 per share through June 29,
2001 (the "1998 Private Placement"). The shares were issued at a 25 percent
discount when compared to current public trading prices at the time of the
placement. The Company placed 346,449 shares of common stock into escrow, which
were released in fiscal year 1999 along with a warrant to purchase 30,000 shares
at $5.50 per share through 2001 once shareholder approval was obtained, for net
proceeds of approximately $720,000.
The 1998 Private Placement also provides for additional shares of common stock
to be issued pursuant to certain other provisions of the 1998 Private Placement
agreement, including shares issuable for no additional consideration pursuant to
certain reset rights (as defined in the agreement) and shares issuable for up to
$3,000,000 pursuant to the put rights (as defined in the agreement).
The 1998 Private Placement was amended twice in fiscal 1999. After the
amendments and shares issued under the reset rights through June 1999, the
transaction can be summarized as follows: net cash proceeds were approximately
$2,111,536 for 4,218,527 shares, with warrants to purchase another 100,000
shares of common stock at $5.50 per share, and 500,000 shares of common stock at
$0.01 per share (418,000 shares were exercised in Fiscal year 2000) exercisable
through June 2001. In May 1999, the Company issued additional warrants to
purchase 500,000 shares of common stock at $0.25 per share in exchange for a 90
day deferral of any further reset rights for 90 days. The Company is negotiating
the termination of the reset rights; however, there can be no assurances that
this negotiation will be successful. ( See Note)
ACQUISITION OF FMS
As discussed in Note 1, during fiscal 1998 the Company issued 44,000 shares to
shareholders of FMS in connection with the acquisition of FMS.
F-21
<PAGE> 63
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
JUNE 1999 PRIVATE PLACEMENT
In June 1999, the Company issued 385,000 shares pursuant to a private placement
in exchange for $325,000 (net of offering costs). The Company issued another
55,000 shares to an escrow agent until the additional $50,000 in committed cash
was received, which occurred after June 30, 1999. In connection with this
private placement, 385,000 warrants were issued to the investors and placement
agents at $0.35 per share, exercisable through June 2002. The Company has a put
option in connection with this offering to the investor group for an additional
$1,500,000 in exchange for 1,500,000 shares exercisable within two weeks after
the Company gets re-listed on the NASDAQ SmallCap exchange, contingent upon
numerous other items as outlined in the agreement. If the put option is
exercised, additional warrants and shares will be issued to investors and
placement agents as defined in the agreement. The agreement also includes reset
rights for the investors after an initial 90 day waiting period, as referred in
the agreement.
NOTE 6 - CAPITAL STOCK TRANSACTIONS, CONTINUED
ISSUANCE OF STOCK FOR COMPENSATION AND SERVICES
During fiscal 1999, the Company issued 3,935,864 shares of common stock to
employees, directors, and consultants in connection with amounts owed to these
parties for compensation and other services rendered. Based on the trading price
of the stock on the dates of issuance (discounted up to 15% for restricted
shares issued), the Company recorded total expense of approximately $1,737,956
in salaries and consultant expense, with an additional $100,000 being recorded
as a prepaid to be amortized to expense through April 2000. In addition, the
Company recorded an additional expense amount of $415,577 in fiscal 1999 for
shares issued after June 30, 1999 related to services performed through June 30,
1999.
EXERCISE OF OPTIONS AND WARRANTS
In fiscal 1998 and 1999, holders of options and warrants exercised 2,867 and
1,916,999 shares of common stock, respectively, for proceeds of $2,207 and
$696,500, respectively
OTHER STOCK TRANSACTIONS
During April 1998, the Company entered into a consulting agreement whereby
consulting services were to be rendered in exchange for 200,000 shares of common
stock and options to purchase 200,000 shares of common stock. The securities are
to vest through September 1998. No securities were issued under the agreement
through June 30, 1998 as the Company was negotiating to equity or cancel the
agreement, however, approximately 106,000 shares of common stock had vested
under the terms of the original agreement of June 30, 1998. In 1998, the Company
has recorded compensation expense of approximately $522,000 related to this
agreement. In 1999, the agreement was cancelled and a new agreement was executed
for only 200,000 options. As a result of the cancellation, $343,750 of
previously recognized consulting expense, was reversed along with a
corresponding amount in shareholders' equity (deficit).
In management's opinion, all of the above transactions have been recorded at the
estimated fair market value of the Company's common stock at the date of grant.
F-22
<PAGE> 64
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 7 - RELATED PARTY TRANSACTIONS
COMPENSATION
During fiscal years 1998 and 1999, cash payments of approximately $660,000 and
$0, respectively, were made to shareholders and directors, including affiliated
companies, for compensation in connection with services rendered.
SHARES ISSUED TO RELATED PARTIES
In April 1999, the Company issued 900,000 restricted shares to a director as
compensation for services rendered on behalf of the Company. The shares were
valued at approximately $287,000, which was recorded to salaries and consulting
expense in the accompanying consolidated statement of operations.
Beginning in December 1998, the Company issued shares to employees and directors
for a portion of their compensation and expense reimbursement. The total shares
issued to employees and directors (exlcuding the 900,000 shares referred to
above) was approximately 2,410,000, valued at approximately $1,031,000, which
was recorded to salaries and consulting expense in the accompanying consolidated
statement of operations.
ATN SATELLITE NESTING CONTRACT
In April 1997, the Company entered into the Nesting Contract with ATN (a related
company) under which ATN will provide the Company with satellite uplink, master
control and other related services on its satellite transponder for two hours of
broadcast time per day. The Nesting Contract expired on August 31, 1998.
During 1998 and 1999, the Company made cash payments of $57,000 and $0,
respectively, to ATN.
NOTES PAYABLE
See Note 4 for a discussion of these transactions.
F-23
<PAGE> 65
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 8 - EMPLOYMENT AGREEMENTS
The Company has two employment agreements with employees, which provide for base
salary and bonuses through fiscal 2003. The bonuses are payable annually and are
primarily calculated based on revenues of the subsidiary, as defined in the
agreements. The future minimum payments under these agreements are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
2000 $224,000
2001 224,000
2002 224,000
2003 112,000
--------
$784,000
========
</TABLE>
The employment agreements contain certain non-compete and severance pay clauses,
as defined in the agreements. Upon termination for cause, the agreements will be
cancelled with no additional amounts owing to the terminated party.
F-24
<PAGE> 66
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 9 - OPTIONS AND WARRANTS
STOCK OPTIONS
The Company has the following stock option plans: the 1996 Employee and
Consultants Stock Option Plan, the 1996 Board of Directors and Advisory Board
Retainer Stock Option Plan, the 1997 Management Bonus Plan, the 1998 Stock Plan,
the 1999 Stock Compensation Plan and the 1999 Stock Option Plan. A total of
2,890,251 shares of common stock are reserved for issuance, pursuant to options
granted and to be granted under these plans. 1,932,876 shares are available for
grant under the plans as of June 30, 1999. Options pursuant to the 1996 and 1997
plans have fully vested as of June 30, 1998, resulting from change of control
provisions being activated due to changes in the Board of Directors of the
Company. Options under the 1998 and 1999 plans both generally vest over three
years. All plan options generally expire in four to five years.
The plans provide for option grants at exercise prices not less than the fair
market value on the date of grant. All options granted under the 1996 plans were
at an exercise price of $5.00 per share. All grants under the 1997 and 1998
plans were repriced, effective August 3, 1998, as the Board of Directors of the
Company approved the repricing of options to purchase 806,746 shares granted
under these two plans, certain non-plan options and an option granted after June
30, 1998. Such repricing was effected by offering to exchange new options with
an exercise price of $1.56 per share, which was the fair market value of the
common stock on the date of repricing, for the options then held by such
optionees. The new options otherwise have identical terms and conditions as the
current original options.
As of April 1999, certain employee options were canceled in anticipation of
being reissued in early fiscal 2000 at a reduced price of $0.43 per share (the
issuance has not yet occurred). During 1998 and 1999, non-plan options to
purchase 109,833 and 2,286,830 shares, respectively, of common stock were
granted. The options' exercise prices ranged from $1.56 to $3.00 per share in
1998 and $0.23 and $5.00 per share in 1999. The vesting and expiration of these
options vary. During 1998, 1,000 of these options were cancelled upon
termination of employment of an optionee. Options granted to
non-employees,(totaling 1,577,915 shares) during fiscal 1999 were valued under
SFAS No. 123 using the Black-Scholes option pricing model (see below), totaling
$434,670 in fiscal 1999.
F-25
<PAGE> 67
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The following is a summary of all options granted to employees, directors and
consultants to acquire the Company's common stock as of June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Shares Subject Price
To Option Exercisable Range
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, July 1, 1997 280,627 $1.30 - $5.00
Granted 890,209 $1.56 - $5.00
Exercised (2,867) $ 1.30
Canceled/expired (99,546) $1.56 - $5.00
---------
Balance, June 30, 1998 1,068,423 $1.56 - $5.00
Granted 2,724,665 $0.23 - $5.00
Exercised (917,000) $0.38 - $2.00
Canceled/expired (1,142,113) $0.38 - $3.00
---------
Balance, June 30, 1999 1,733,975 1,079,685 $0.23 - $5.00
========== ============= =============
</TABLE>
F-26
<PAGE> 68
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 9 - OPTIONS AND WARRANTS, CONTINUED
The following table summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------------
Weighted Weighted Weighted
Range of Total Average Average Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life Price Outstanding Price
------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.23 - $0.75 1,271,000 2 $ 0.39 596,002 $ 0.47
$1.00 - $1.56 210,853 3 1.42 210,312 1.42
$1.81 - $2.50 126,292 2 2.20 107,810 2.24
$3.00 - $5.00 125,830 2 3.85 125,830 3.85
--------- ---------
1,733,975 1,039,685
========= =========
</TABLE>
If the Company had elected to recognize compensation cost based on the fair
value of the options granted to employees as prescribed by SFAS No. 123, net
loss and loss per share would have been increased to the pro forma amounts
indicated in the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1998 1999
--------- ---------
<S> <C> <C>
Net loss - as reported $ (8,262) $ (8,141)
Net loss - pro forma $ (8,532) $ (8,539)
Loss per share - as reported $ (1.91) $ (0.96)
Loss per share - pro forma $ (1.97) $ (1.00)
</TABLE>
F-27
<PAGE> 69
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1999
-------- -------------------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 72% 30 - 214%
Risk free interest rate 6.0% 6.5%
Expected life of options 5 years 1 - 4 years
</TABLE>
The weighted average fair value of options granted during fiscal year 1998 is
$1.00. During 1999, the weighted average fair value of options granted to
employees was $0.41.
NOTE 9 - OPTIONS AND WARRANTS, CONTINUED
Stock Warrants
The following is a summary of all warrants granted to shareholders, consultants
and others to acquire the Company's common stock as of June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Shares Subject Price
To Warrants Exercisable Range
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, July 1, 1997 515,498 $3.87 - $5.50
Granted 2,835,000 $5.50 - $9.08
----------
Balance, June 30, 1998 3,350,498 $3.87 - $9.08
Granted 2,935,000 $0.01 - $5.50
Exercised (999,999) $ 0.01
Canceled/expired (15,498) $ 3.87
----------
Balance, June 30, 1999 5,270,001 5,270,001 $0.01 - $9.08
========== ============= =============
</TABLE>
F-28
<PAGE> 70
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The following table summarizes information about stock warrants outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------------
Weighted Weighted Weighted
Total Average Average Average
Exercise Warrants Remaining Exercise Warrants Exercise
Price Outstanding Life Price Outstanding Price
------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 950,001 2 $ 0.01 950,001 $ 0.01
0.25 500,000 3 0.25 500,000 0.25
0.35 385,000 3 0.35 385,000 0.35
5.50 3,015,000 3 5.50 3,515,000 5.50
9.08 420,000 3 9.08 420,000 9.08
--------- ---------
5,270,001 5,270,001
========= =========
</TABLE>
In connection with the granting of these warrants, the Company recorded
additional consulting expense of $0 and $430,000 in fiscal 1998 and 1999,
respectively. The value of the fiscal year warrants are estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Expected dividend yield 0%
Expected stock price volatility 133 - 214%
Risk free interest rate 6.5%
Expected life of warrants 1 - 3 years
</TABLE>
F-29
<PAGE> 71
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 10 - COMMITMENTS
Operating Leases
The Company has operating lease agreements for its facilities that expire at
various dates through 2001. Under one of the agreements, the Company has an
option to extend the lease through May 2004. The leases require that the Company
also pay for certain insurance coverages and common area charges throughout the
term of the lease. The aggregate minimum future commitments under operating
leases are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
2000 $138,000
2001 132,000
2002 20,000
--------
$290,000
========
</TABLE>
Rent expenses charged to operations in fiscal 1998 and 1999 were approximately
$79,600 and $232,400, respectively.
CAPITAL LEASES
The Company leases certain office equipment under a capital lease. At June 30,
1999, minimum lease payments under the terms of the lease agreement are as
follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
2000 $19,817
=======
</TABLE>
TRANSPONDER CONTRACT
In May 1998, the Company entered into a five year contract with Group W Network
Services to provide program origination, master control operations, uplink and
C-Band Satellite transponder services. The contract requires the Company to make
monthly payments of approximately $85,000.
F-30
<PAGE> 72
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 10 - COMMITMENTS, CONTINUED
In April 1999, the Company negotiated a settlement of its accounts payable
balance owing to Group W Network Services as follows: payment of $150,000 in
cash, issuance of 500,000 of the Company's restricted common stock valued at
$159,000, and a note payable for $75,000 with an interest rate of 10% due in
December 1999. Future payment obligations were reduced to $50,000 per month in
advance in exchange for a reduction in daily broadcasting to nine hours per day
(see Note 1).
CONSULTING AGREEMENTS
The Company is a party to various consulting agreements related to marketing,
website generally design, corporate development, strategic partnering,
technology, etc. These agreements range in term from 30 days to 2 years and
require varying amounts of cash and stock payments. Total estimated expenses to
be recognized under these contracts is $600,000, most of which will be
recognized in fiscal 2000. Total estimated shares and options/warrants to be
granted in the future under these agreements is approximately 450,000 shares and
1,115,000 shares, respectively.
UNIVERSITY OF FLORIDA GRANT
The Company entered into an agreement to provide funding for an unrestricted
educational grant of $120,000 during fiscal 2000 to the University of Florida
for research and development of a web site to provide alternative and behavioral
health and wellness assistance.
NOTE 11 - SUBSEQUENT EVENTS
Since year end, the Company has issued an additional 2,427,595 shares of stock,
primarily for the exercise of 418,000 warrants at $0.01 per share, employee
compensation, reimbursable employee expenses, consulting expense and debt
discount (on shareholder loans totaling $225,000).
In addition, certain shareholders have loaned the Company $225,000. The loans
bear interest at 10%, with principal and interest due on the earlier of (1)
January 2000 or (2) immediately upon the closing of a debt or equity financing.
The notes are convertible to stock at $0.50 per share.
Company management is currently negotiating with noteholders and key internal
shareholders to raise additional capital by the following: (1) convert all
existing debt and accrued interest to equity (estimated at approximately
$756,000 at $0.25 per share; (2) receive an equity infusion from key internal
shareholders totaling $600,000 at $0.25 per share; and (3) offer noteholders an
opportunity to buy additional $756,000 of equity at $0.25 per share. There are
no assurances that management will be successful in negotiating this transaction
as contemplated.
F-31
<PAGE> 73
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RNETHEALTH.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
2000
ASSETS (UNAUDITED) JUNE 30,1999
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 877,917 $ 136,058
Accounts receivable, net of allowance for doubtful
accounts of $16,000 as of March 31, 2000 and
$32,000 as of June 30, 1999 84,934 256,499
Current portion of capitalized programming costs, net 85,000 98,000
Inventory 63,978 55,593
Prepaid expenses 112,978 70,345
------------- -------------
Total current assets 1,224,807 616,495
Capitalized programming costs, net 110,577 421,648
Furniture and equipment, net 136,069 177,550
Capitalized website development costs, net 152,270 --
Other 52,185 52,686
------------- -------------
$ 1,675,908 $ 1,268,379
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term notes payable, net of unamortized debt
discount of $0 and $181,318 $ 37,500 $ 481,015
Accounts payable 406,613 442,085
Accrued payroll and benefits 179,861 139,086
Other accrued liabilities 240,656 295,256
Accrued royalty expense 273,275 503,137
Current portion of capital lease obligations -- 19,817
------------- -------------
Total current liabilities 1,137,905 1,880,396
------------- -------------
Commitments
Shareholders' equity (deficit):
Common stock, $0.01 par value; 50,000,000 shares authorized;
29,960,872 and 15,494,507 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively 299,606 154,945
Additional paid-in capital 29,641,294 21,813,509
Common stock subscription receivable -- (50,000)
Prepaid consulting -- (230,331)
Accumulated deficit (29,402,897) (22,300,140)
------------- -------------
Total shareholders' equity (deficit) 538,003 (612,017)
------------- -------------
$ 1,675,908 $ 1,268,379
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-32
<PAGE> 74
RNETHEALTH.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED NINE-MONTH PERIODS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Domestic sales $ 264,209 $ 268,433 $ 985,880 $ 947,392
------------ ----------- ------------ -----------
Operating expenses:
Salaries and consulting expenses 620,904 866,021 3,401,509 3,153,255
General and administrative expenses 557,283 222,274 1,156,428 1,592,613
Programming expenses 17,173 168,653 455,596 1,496,726
Cost of video and publication sales 160,668 91,313 412,763 309,377
Marketing expenses 3,077 233,401 22,061 396,506
------------ ----------- ------------ -----------
Total operating expenses 1,359,105 1,581,662 5,448,357 6,948,477
------------ ----------- ------------ -----------
Loss from operations (1,094,896) (1,313,229) (4,462,477) (6,001,085)
Other income (expense):
Interest expense (5,695) (285,375) (1,919,590) (299,253)
Gain on investment in joint venture -- 597,675 -- 597,675
Interest income -- 2,000 1,291 62,686
------------ ----------- ------------ -----------
Loss before provision for state income taxes (1,100,591) (998,929) (6,380,776) (5,639,977)
Provision for state income taxes -- -- -- 974
------------ ----------- ------------ -----------
Net loss $ (1,100,591) $ (998,929) $ (6,380,776) $(5,640,951)
============ =========== ============ ===========
Loss per share information - basic and
diluted loss per share $ (0.04) $ (0.14) $ (0.30) $ (0.75)
============ =========== ============ ===========
Weighted average number of common and
common equivalent shares outstanding 25,329,152 7,142,575 21,426,404 6,643,258
============ =========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-33
<PAGE> 75
RNETHEALTH.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
MARCH 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,380,776) $(5,640,951)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of prepaid consulting 230,331 --
Value of shares issued for interest expense,
compensation and other services 1,142,224 795,016
Imputed interest on beneficial conversion of debt 448,944 --
Value of options and warrants granted 2,226,879 --
Amortization of notes payable discount 181,318 255,000
Accrued interest on notes converted to stock 51,493 --
Amortization of capitalized programming costs 337,071 626,000
Depreciation and other amortization 63,343 90,056
Gain on investment in joint venture -- (597,675)
Changes in operating assets and liabilities:
Accounts receivable 171,565 181,215
Inventory (8,385) (7,072)
Prepaid expenses (42,633) 24,188
Other assets 501 (34,655)
Capitalized programming costs (13,000) (249,917)
Accounts payable, accrued payroll and benefits, and
other accrued liabilities (49,297) 699,643
Accrued royalty expense (229,862) --
Due to joint venture -- (74,500)
----------- -----------
Net cash used in operating activities (1,870,284) (3,933,652)
----------- -----------
Cash flows from investing activities:
Costs incurred for website development (152,270) --
Purchases of furniture and equipment (21,862) (101,079)
Investment in joint venture -- (150,000)
----------- -----------
Net cash used in investing activities (174,132) (251,079)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings from shareholders 230,000 499,000
Payments on borrowings (37,500) --
Payments on capital lease obligations (19,817) (7,121)
Deferred offering and financing costs incurred -- (100,000)
Net proceeds from the issuance of common stock, shares
committed to be issued and collections of
subscription receivable 2,613,592 1,664,536
----------- -----------
Net cash provided by financing activities 2,786,275 2,056,415
----------- -----------
Net increase (decrease) in cash 741,859 (2,128,316)
Cash, beginning of period 136,058 2,219,145
----------- -----------
Cash, end of period $ 877,917 $ 90,829
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-34
<PAGE> 76
RNETHEALTH.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
RnetHealth.com, Inc. (the "Company") 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/A (File No. 333-90481 dated November 12,
1999), and the Company's Annual Report on Form 10-KSB for the year ended June
30, 1999.
Web Site Development Costs
During the quarter ended March 31, 2000, the Company adopted EITF 00-02,
"Accounting for Web Site Development Costs," which states that all costs
relating to software used to operate a web site and relating to development of
initial graphics and web page design should be accounted for using Statement of
Position ("SOP") 98-1. SOP 98-1 allows the capitalization of these costs. As a
result, the Company has capitalized $152,270 of such costs during the quarter
ended March 31, 2000. These costs will be amortized over a two year period
beginning when the web site is operating (anticipated to be during the quarter
ending June 30, 2000).
NOTE 2 - ISSUANCE OF COMMON STOCK
In July 1999, the Company issued 931,687 shares of stock to employees and
consultants for services rendered in the Company's fiscal year ended June 30,
1999. The value of such shares was recorded previously as shares subscribed;
therefore, the issuance of these shares had no impact on operations or equity.
In addition, the Company received $50,000 from the June 1999 private placement
and the related shares were issued out of escrow.
From July 1999 to March 2000, the Company issued 999,612 shares of stock to
employees and consultants for employment and other consulting services,
recognizing expenses of $595,392. In that same period, the Company issued
1,064,445 shares to various related-party lenders who provided short-term
financing for the Company. The value of such shares (totaling $384,331) has been
recorded as additional interest expense in the accompanying consolidated
statement of operations for 1999 since the related short-term notes were
immediately convertible at the option of the note holder. In addition, the
Company has committed to issue 86,182 shares at March 31, 2000 to various
employees and service providers, the estimated value of which (totaling
$162,501) has been recognized in operating expenses in the quarter ended March
31, 2000.
From July to March 2000, option and warrant holders exercised their rights to
acquire 3,336,868 shares of common stock, resulting in proceeds of $739,859 to
the Company.
F-35
<PAGE> 77
RNETHEALTH.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
MARCH 31, 2000
NOTE 2 - ISSUANCE OF COMMON STOCK, CONTINUED
On September 28, 1999, the Company entered into a Restructuring Agreement with
various investors. Pursuant to the Restructuring Agreement, the Company agreed
to the following: (i) issue 500,000 shares to various investors in lieu of any
further reset rights under the June 1998 Private Placement Agreement; (ii) issue
400,000 shares as an initial reset of the purchase price of common stock under
the June 1999 subscription agreement, with all further resets based on a
purchase price of $0.50 with a subsequent issuance of 1,200,000 shares as a
further reset; (iii) fix the conversion price on the $100,000 convertible note
(see below) at $0.50; and (iv) reprice 500,000 warrants issued in May 1999 from
$0.01 to $0.25 per share (see Note 3), all of which were exercised during the
period ended March 31, 2000 (see above). The issuance of the 2,100,000 under
various reset rights described above were recorded as a stock dividend of
$721,980.
In January 2000, the Company issued 336,842 shares to an investor, resulting in
net proceeds of $200,000. Also in January 2000, the Company issued 2,221,606
shares to a group of existing investors, resulting in proceeds of $556,271. The
Company also received $1,067,462 in proceeds for stock that has not yet been
issued. See Note 8 for more details.
Debt Restructuring
On October 12, 1999, the Company entered into Debt Restructuring Agreements with
certain note holders. Pursuant to these agreements, the note holders agreed to
accept shares of the Company's common stock at the rate of $0.25 per share as
payment for the principal and interest owed. The total debt and accrued interest
balance converted was $760,826 for 3,043,305 shares. The Company recorded
interest expense of $191,728 related to this conversion. Also, the note holders
were given the right to acquire an additional 3,043,305 shares at $0.25 per
share for at least a minimum of 45 days, which was subsequently extended to
January 15, 2000. The value of these warrants was $760,826, which was recorded
as interest expense for the quarter ended December 31, 1999. In January 2000,
1,966,366 of these warrants were exercised. The remaining warrants have expired.
On November 18, 1999, additional notes and accrued interest totaling $108,000
were converted for 432,000 shares at a beneficial price of $0.25 per share
resulting in additional imputed interest expense of $27,216.
Authorized Shares
On February 24, 2000, the shareholders of the Company voted to increase common
stock authorized to 50,000,000 from 25,000,000.
F-36
<PAGE> 78
RNETHEALTH.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
MARCH 31, 2000
NOTE 3 - STOCK OPTIONS AND WARRANTS
In connection with various arrangements, the Company has granted options and
warrants to acquire a total of 9,638,717 shares of common stock to various
investors, employees, consultants and Board of Director members for the
nine-month period ended March 31, 2000. These options have exercise prices
between $0.15 and $1.50 per share and vest immediately through two years. The
estimated fair value of the non-employee options and warrants granted (under
SFAS No. 123) or amended during the nine-month period ended March 31, 2000 (see
Note 2) or the intrinsic value of employee options and warrants granted below
market value (under APB Opinion 25), at the time of grant, totaled approximately
$2,226,879 and has been included in equity. During the quarter ended March 31,
2000, the Company granted 450,000 options (50% of which vested by March 31, 2000
subject to further conditions) to an employee who resigned effective April 28,
2000. The fair value of the vested warrants (approximately $380,000) was not
recorded in the accompanying statement of operations as the termination (and
related expense reversal) occurred within one day of end of the fiscal quarter
and management believes that presenting the expense in one quarter and the
reversal in the following quarter would be misleading to the reader of these
statements.
In addition to the options mentioned above, approximately 1,569,552 options and
warrants expired during the period.
NOTE 4 - DEBT
Debt consists of an unsecured note payable to Group W Network Services, interest
at 10%, principal and interest due March 31, 2000, totaling $37,500. Management
believes that this obligation will be satisfied in the near future. The debt is
currently past due. However, management believes that there will not be a
material negative impact as a result of the late satisfaction of this note
payable.
The debt discount amortization totaled $181,318 during the period ended December
31, 1999. In connection with the $230,000 of promissory notes (which were
converted to common stock - see Note 2), the note holders received 1,064,445
shares of stock (valued at $384,331) that have been recorded as additional
interest expense for the period ended December 31, 1999. Also, the promissory
note holders were given a conversion option equivalent to 50% of the share price
on the date of conversion. This beneficial conversion was recorded as additional
interest expense of $230,000 during the quarter ended September 30, 1999 as the
notes were immediately convertible.
NOTE 5 - 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 11,736,273 shares of common stock (at prices
ranging from $.01 to $9.075 per share) and 5,450,835 shares of common stock (at
prices ranging from $0.01 to $9.075 per share) were outstanding as of March 31,
2000 and 1999, respectively, and were excluded from the computation of loss per
share assuming dilution as they would have been anti-dilutive.
F-37
<PAGE> 79
RNETHEALTH.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
MARCH 31, 2000
NOTE 6 - 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 and limited operating revenues.
These factors (among others) raise substantial doubt about the Company's ability
to continue as a going concern. The ability of the Company to operate as a going
concern is dependent upon its ability to obtain sufficient additional debt
and/or equity capital. The Company plans to raise additional working capital
through strategic alliances and 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.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company has a consulting agreement with an unrelated company. In connection
with the agreement, the Company is obligated to reserve for issuance 200,000
shares, which will be paid to the consultant over a twenty-four month period at
8,333 shares per month. If the agreement is terminated prior to the conclusion
of the twenty-four month period, the consultant has no right to receive any
additional shares that have not yet been granted. Through December 31, 1999,
57,331 shares have been granted under this agreement. An additional 25,000
shares are committed to be issued as of March 31, 2000, valued at $55,389, which
is included in shareholders' equity.
NOTE 8 - SUBSEQUENT EVENTS
Stock Activity
Through April 13, 2000, the Company has issued an additional 1,831,835 shares of
common stock, as follows: (1) 800,000 shares issued to investors for $800,000
that was received prior to March 31, 2000; (2) 875,653 shares issued in
connection with the exercise of warrants totaling $237,500 that was received
prior to March 31, 2000; (3) 150,000 shares issued to investors for $150,000
that was received after March 31, 2000; and (4) 6,182 shares issued to an
employee for services rendered prior to March 31, 2000 (and recognized at March
31, 2000).
The Company is committed to issue an additional 80,000 shares for services that
were accrued at March 31, 2000 (see Note 2). In addition, the Company is
committed to issue an additional 119,848 shares in connection with $29,962
received from existing shareholders.
Commitments and Contingencies
The Company has entered into an agreement with the University of Florida to
research, prepare and compile or create certain clinical materials for the
Company. The agreement is for a one-year period, requiring minimum payments of
$50,000 and maximum payments of $300,000.
The Company is involved in various legal proceedings generally incidental to
its business. Because litigation contains an element of uncertainty, there can
be no assurance that the Company will be able to achieve a favorable resolution
for these proceedings. An unfavorable resolution or prolonged litigation, the
cost of which may be substantial, could have a material adverse affect on the
Company's financial position or results of operations.
F-38
<PAGE> 80
RNETHEALTH.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
MARCH 31, 2000
NOTE 9 - SEGMENT REPORTING
The Company is currently operating under one business segment and developing two
other segments. Thus, no additional segment reporting is required.
F-39
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The articles of incorporation of the Registrant provide for the
indemnification of the Registrant's directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the articles of incorporation and the
corporation law of the State of Colorado, the Registrant has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Registrant will not be
personally liable to the Registrant or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of a
director's duty of loyalty to the Registrant or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 7-108-403 of the Colorado statute
relating to unlawful distributions or (iv) for any transaction from which the
director derived an improper personal benefit. The Articles of Incorporation
also provide (subject to certain exceptions) that the Registrant shall, to the
maximum extent permitted form time to time under the law of the State of
Colorado, indemnify, and upon request shall advance expenses to, any director or
officer to the extent permitted under such law as it may from time to time be in
effect. The Registrant's bylaws require the Registrant to indemnify, to the full
extent permitted by law, any director, officer, employee or agent of the
Registrant for acts which such person reasonably believes are not in violation
of the Registrant's corporate purposes as set forth in the Articles of
Incorporation. As a result of these provisions, shareholders may be unable to
recover damages against the directors and officers of the Registrant for actions
taken by them which constitute negligence, gross negligence, or a violation of
their fiduciary duties, which may reduce the likelihood of shareholders
instituting derivative litigation against directors and officers and may
discourage or deter shareholders from suing directors, officers, employees and
agents of the Registrant for breaches of their duty of care, even though such an
action, if successful, might otherwise benefit the Registrant and its
shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, which will be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered. With the exception of the registration fee and the
NASD filing fee, all amounts shown are estimates.
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Registration fee $ 696.00
--------------------------------------------------------------------------------
Nasdaq listing expenses fee 0
--------------------------------------------------------------------------------
Blue Sky fees and expenses (including legal and filings fees) 0
--------------------------------------------------------------------------------
Printing expenses (other than stock certificates) $ 1,000.00
--------------------------------------------------------------------------------
Legal fees and expenses (other than Blue Sky) $ 5,000.00
--------------------------------------------------------------------------------
Accounting fees and expenses $10,000.00
--------------------------------------------------------------------------------
Miscellaneous expenses $ 2,000.00
--------------------------------------------------------------------------------
Total $18,696.00
--------------------------------------------------------------------------------
</TABLE>
II-1
<PAGE> 82
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In June 1998, the Registrant issued (i) 1,111,110 shares of Common Stock,
valued at $2.25 per share, to 7 "accredited investors" and (ii) warrants to
purchase 100,000 shares of Common Stock at an exercise price of $5.50 per share
(the "Private Placement"). In issuing such securities, the Registrant relied on
the exemption provided by Rule 506 of Regulation D promulgated under the
Securities Act.
In June 1998, the Registrant issued 43,716 shares of Common Stock as
partial compensation to the placement agents in the Private Placement. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
In October 1998, the Registrant issued a total of 58,000 shares of Common
Stock, options to purchase 400,000 shares of Common Stock, 50,000 of which are
exercisable at $2.50 per share and 350,000 of which are exercisable at$2.00 per
share, in connection with various consulting and service agreements. If all
options and warrants were exercised, proceeds from the exercise of the stock
options and warrants would be $825,000. As of June 30, 1999, a total of$775,000
of the options had been exercised
On December 7, 1998, the Company entered into an agreement with G. Howard
Associates, Inc. ("Howard") wherein Howard would represent the Company, on an
exclusive basis with respect to certain investors in connection with raising
capital for the Company. For its services, Howard would receive a cash fee equal
to 6% of the total consideration received by the Company and to reimburse Howard
for its out-of-pocket expenses. The fee is due at the closing of a said
transaction. Such agreement with Howard was amended in April 1999. The amendment
expanded Howard's representation to include (a) the sale of the Company's 20%
ownership in Recovery Interactive; (b) the settlement with certain creditors
identified; and, (c) assistance in raising $300,000 of additional capital.
Pursuant to this amendment, Howard received 900,000 newly issued shares of the
Common Stock valued at $287,000 and a reduction in warrants held by Howard
and/or Mr. Henry.
In December 1998, in connection with $725,000 notes payable by the Company,
the Company granted warrants to purchase 500,000 unregistered shares at $0.01
per share to a group of shareholders (the "Noteholders"). In April 1999, the
Company renegotiated the terms of the $725,000 notes payable to certain
shareholders. In exchange for extending the due date to October 1999 (six
months), the Company granted another 1,000,000 warrants at $0.01 per share.
Approximately 999,999 shares to date have been exercised.
On January 7, 1999 the Company engaged Ms. Jones, member of the Board of
Directors to act as a "Special Agent" to help the Company secure financing.
Pursuant to Ms. Jones' proposal, Ms. Jones received 50,000 shares of
unregistered common stock and is entitled to 5% of the first one million of
value, 4% of the second one million value, 3% of the third one million value, 2%
of the fourth one million value and 1% on all amounts of value in excess of five
million dollars upon closing.
On January 26, 1999 the Company engaged Mr. Wheeler, Executive in the
Company, as an Agent to help secure financing. Pursuant to the Letter of
Agreement, Mr. Wheeler will receive 75,000 shares of unregistered common stock
and is entitled to a cash fee equal to four percent (4%) of the total financing
upon closing.
Beginning in February 1999, executive officers and other employees of the
Company have received stock in lieu of salaries. To date, the Company has
issued 270,971 shares in lieu of salaries.
In March 1999, in connection with an aggregate $100,000 investment by
certain investors, the Company agreed to issue notes convertible into Common
Stock of the Company.
On June 11, 1999, the Company entered into a Subscription Agreement (the
"Agreement") with certain Subscribers (the "1999 Private Placement"). The 1999
Private Placement provides for the issuance upon closing by the Company of (i)
350,000 shares (the "Shares") of Common Stock for $350,000, or $1.00 per share,
(ii) additional shares of Common Stock to the Subscribers pursuant to certain
other provisions of the Agreements, including shares issuable for no additional
consideration pursuant to the Reset Rights in the Agreements and shares issuable
for up to $1,500,000 pursuant to a "put" provision in the Agreement (the
"Additional Shares"), and (iii) 35,000 shares of Common Stock and 175,000
placement warrants exercisable at $0.35 per common share, as partial
compensation to the placement agents in the Private Placement.
II-2
<PAGE> 83
In September 1999, the Company entered undertook to restructure existing
transactions relating to (i) the Subscription Agreement entered into by
Investors with the Company for investment by such Investors in the securities of
the Company dated June 29, 1998, as amended by Amendment No. 1 dated as of
October 27, 1998; (ii) the subscription agreements dated March 18, 1999 where
certain of the Investors invested in an aggregate $100,000 of principal amount
Convertible Notes of the Company; and, (iii) the 1999 Private Placement (see
above). On September 28, 1999, the Company entered into a Restructuring
Agreement with the Investors to the above-mentioned transactions, wherein, among
other things, upon issuance of 2,100,000 of additional shares (i) there would be
no further resets pursuant to the June 29, 1998 investment; (ii) any further
resets, if any, in connection with the June 1999 investment would be determined
based on a purchase price of $0.50 per shares; and (iii) Convertible Notes
issued on March 1999 would be converted at the conversion price of $0.50.
On October 13, 1999, the Company finalized a debt restructuring and
infusion of additional capital with certain noteholders and shareholders,
resulting in the following: (1) conversion of all existing debt and accrued
interest to equity (estimated at approximately $756,000) at $0.25 per share; (2)
commitment to receive an equity infusion from key internal shareholders totaling
up to $600,000 at $0.25 per share; and (3) a 45-day option to noteholders to
acquire additional equity at $0.25 per share up to $756,000. This transaction
will bring up to $1.3 million in cash and an increase to equity of up to $2.1
million.
In January 2000, the Company issued 336,842 shares to an investor,
resulting in net proceeds of $200,000. Also in January 2000, the Company issued
2,221,606 shares to a group of existing investors, resulting in proceeds of
$556,271.
In February certain option holders exercised 875,653 options for the net
proceeds of $237,500.
In March and April 2000, the Company issued 950,000 shares to investors
resulting in net proceeds of $950,000.
ITEM 27. EXHIBITS
--------------------------------------------------------------------------------
Number Description of Exhibit
--------------------------------------------------------------------------------
2.5 Agreement and Plan of Merger dated as of December 10, 1997 among
the Registrant, Recovery Direct, Inc., FMS Productions, Inc. and
each of John Frederick, P. Randall Frederick, Jan Smithers, Joe
C. Wood, Jr., Sharon R. Irish and Charles S. Sapp. ++
--------------------------------------------------------------------------------
2.7 Common Stock Purchase Agreement
--------------------------------------------------------------------------------
3.1 Articles of Incorporation of Registrant**
--------------------------------------------------------------------------------
3.2 Bylaws of Registrant**
--------------------------------------------------------------------------------
4.1 Specimen Certificate of the Registrant's Common Stock**
--------------------------------------------------------------------------------
4.2 Form of Redeemable Warrant Agreement (including Form of
Warrant)**
--------------------------------------------------------------------------------
4.3 Form of Underwriter's Warrant Agreement (including form of
Underwriter's Warrant)
--------------------------------------------------------------------------------
4.4 1996 Employee and Consultants Stock Option Plan**
--------------------------------------------------------------------------------
4.5 Amendment to 1996 Employee and Consultants Stock Option Plan**
--------------------------------------------------------------------------------
4.6 1996 Board of Directors and Advisory Board Stock Option Plan. **
--------------------------------------------------------------------------------
4.7 Amendment to 1996 Board of Directors and Advisory Board Stock
Plan**
--------------------------------------------------------------------------------
4.8 1997 Management Bonus Plan**
--------------------------------------------------------------------------------
4.9 Amendment to 1997 Management Bonus Plan**
--------------------------------------------------------------------------------
4.10 Form of Stock Option Contract **
--------------------------------------------------------------------------------
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997
****
--------------------------------------------------------------------------------
4.12 1998 Stock Plan****
--------------------------------------------------------------------------------
4.12 1999 Stock Plan****
--------------------------------------------------------------------------------
4.14 Form of Warrant****
--------------------------------------------------------------------------------
4.15 Form of Registration Rights Agreement dated December 10, 1997
between Registrant and each of the Sellers++
--------------------------------------------------------------------------------
5.1 Opinion of Beckman, Millman and Sanders, LLP
--------------------------------------------------------------------------------
10.1 Operating Agreement of RecoveryNet Interactive, LLC, dated as of
August 1, 1996**
--------------------------------------------------------------------------------
10.2 Channel Nesting Agreement between the Registrant and Access
Television Network, Inc. dated as of April 10, 1997**
--------------------------------------------------------------------------------
10.3 Employment Agreement between the Registrant and William D. Moses
effective as of December 1, 1996. **
--------------------------------------------------------------------------------
10.4 Non-Disclosure and Inventions Agreement between the Registrant
and William Moses dated as of January 30, 1997. **
--------------------------------------------------------------------------------
10.5 Employment Agreement between the Registrant and Donald Masters
effective as of December 1, 1996. **
--------------------------------------------------------------------------------
10.6 Non-Disclosure and Inventions Agreements between the Registrant
and Donald Masters dated as of February 3, 1997. **
--------------------------------------------------------------------------------
10.7 Employment Agreement between the Registrant and John Wheeler
dated as of May 13, 1997. **
--------------------------------------------------------------------------------
II-3
<PAGE> 84
--------------------------------------------------------------------------------
10.8 Employment Agreement between the Registrant and William Magellos
dated as of May 1, 1997. **
--------------------------------------------------------------------------------
10.9 Employment Agreement between the Registrant and Jay Handline
dated as of May 11, 1999.****
--------------------------------------------------------------------------------
10.10 License Agreement between RecoveryNet Interactive, L.L.C. and
Merit Behavioral Care Corporation dated as of May 1, 1997. **
--------------------------------------------------------------------------------
10.11 Services Agreement dated as of April 1, 1998, as amended on
October 27, 1998 and April 15, 1999, by and between Registrant
and Group W Network Services.****
--------------------------------------------------------------------------------
10.12 Letter Agreement between Registrant and G. Howard Associates,
Inc. dated December 7, 1998, as amended on April 11, 1999.
****
--------------------------------------------------------------------------------
10.13 Engagement Proposal between Registrant and Charlotte Schiff
Jones dated January 7, 1999.****
--------------------------------------------------------------------------------
10.14 Letter Agreement between Registrant and John Wheeler dated
January 26, 1999.
--------------------------------------------------------------------------------
10.16 Agreement and General Releases dated as of April 15, 1999
between the Registrant and TCI Online RN Holdings, Inc. FHC
Internet Services, LC and Lifescape 1 to 1, LLC.****
--------------------------------------------------------------------------------
10.17 Settlement Agreement and General Release and Common Stock
Purchase Warrant between the Registrant and Michael Lennon dated
January 1999.****
--------------------------------------------------------------------------------
10.18 Settlement Agreement and General Release and Common Stock
Purchase Warrant between the Registrant and George Henry dated
October 26, 1998.****
--------------------------------------------------------------------------------
10.19 Promissory Note between Registrant and William Moses and George
Henry dated May 27, 1999.****
--------------------------------------------------------------------------------
10.20 Promissory Notes between Registrant and George Henry, George
Henry III, Nicole Cox, William Moses, Martin Chopp and Michael
Clurman dated July 23, 1999.****
--------------------------------------------------------------------------------
10.21 Promissory Note between Registrant and George Henry dated
September 10, 1999.****
--------------------------------------------------------------------------------
10.22 Form of Debt Restructuring Agreement dated October 13, 1999
relating to $725,000 and $100,000 debt.****
--------------------------------------------------------------------------------
16 Letter regarding Charge in Certifying Accountant.+++
--------------------------------------------------------------------------------
21.1 List of Subsidiaries.**
--------------------------------------------------------------------------------
23.1 Consent of Arthur Andersen LLP
--------------------------------------------------------------------------------
23.2 Consent of Corbin & Wertz
--------------------------------------------------------------------------------
23.3 Consent of Beckman, Millman and Sanders, LLP (included in
Exhibit 5.1)
--------------------------------------------------------------------------------
27.1 Financial Data Schedule
--------------------------------------------------------------------------------
* Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-61421.
** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-27787.
*** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-82299.
**** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-90481.
+ Incorporated by Reference to Exhibit A to the Registrant's Definitive Proxy
Statement on Schedule 14A filed by the Registrant on April 29, 1998.
++ Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
1997 Form 8-K.
++ Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
1997 Form 8-K.
+++ Incorporated by Reference to Exhibit 16 to the Registrant's August 31, 1999
Form 8-K/A.
II-4
<PAGE> 85
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising afterthe
effective date of the Registration Statement or the most recent post-effective
amendment thereof which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration
statement is on Form S-3, Form S-8, and the Information required to be included
in a post-effective amendment by those paragraphs is contained in periodic
reports filed by the Company pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities herein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered, which remain, unsold at the termination of
this offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserting by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 86
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, in Santa Monica County,
State of California, on the 23rd day of June, 2000.
RNETHEALTH.COM, INC.
By: /s/ WENDY BOROW JOHNSON
---------------------------
Wendy Borow Johnson
President and Chief Executive Officer
II-6
<PAGE> 87
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wendy Borow Johnson, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all amendments (including
post-effective amendments) to this registration statement (or any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting upon said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
------------------------------ ----------------------------------------- -----------------
SIGNATURE TITLE DATE
------------------------------ ------------------------------------------ -----------------
<S> <C> <C>
/s/ ROBERT PORTRIE Chairman of the Board of Directors June 23, 2000
------------------------------
Robert Portrie
/s/ GEORGE HENRY Chairman of the Executive Committee June 23, 2000
------------------------------ of the Board of Directors
George Henry
/s/ WILLIAM D. MOSES Director June 23, 2000
------------------------------
William D. Moses
/s/ WENDY BOROW JOHNSON President, Chief Executive Officer June 23, 2000
------------------------------ and Director
Wendy Borow Johnson
/s/ KEVIN WALL Director June 23, 2000
------------------------------
Kevin Wall
/s/ MARC GUREN Director June 23, 2000
------------------------------
Marc Guren
/s/ W. THOMAS OLIVER Director June 23, 2000
------------------------------
W. Thomas Oliver
</TABLE>
II-7
<PAGE> 88
EXHIBIT INDEX
--------------------------------------------------------------------------------
Number Description of Exhibit
--------------------------------------------------------------------------------
2.5 Agreement and Plan of Merger dated as of December 10, 1997 among
the Registrant, Recovery Direct, Inc., FMS Productions, Inc. and
each of John Frederick, P. Randall Frederick, Jan Smithers, Joe
C. Wood, Jr., Sharon R. Irish and Charles S. Sapp. ++
2.7 Common Stock Purchase Agreement
3.1 Articles of Incorporation of Registrant**
3.2 Bylaws of Registrant**
4.1 Specimen Certificate of the Registrant's Common Stock**
4.2 Form of Redeemable Warrant Agreement (including Form of
Warrant)**
4.3 Form of Underwriter's Warrant Agreement (including form of
Underwriter's Warrant)*
4.4 1996 Employee and Consultants Stock Option Plan**
4.5 Amendment to 1996 Employee and Consultants Stock Option Plan**
4.6 1996 Board of Directors and Advisory Board Stock Option Plan. **
4.7 Amendment to 1996 Board of Directors and Advisory Board Stock
Plan**
4.8 1997 Management Bonus Plan**
4.9 Amendment to 1997 Management Bonus Plan**
4.10 Form of Stock Option Contract **
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997
****
4.12 1998 Stock Plan****
4.12 1999 Stock Plan****
4.14 Form of Warrant****
4.15 Form of Registration Rights Agreement dated December 10, 1997
between Registrant and each of the Sellers++
5.1 Opinion of Beckman, Millman and Sanders, LLP
10.1 Operating Agreement of RecoveryNet Interactive, LLC, dated as of
August 1, 1996**
10.2 Channel Nesting Agreement between the Registrant and Access
Television Network, Inc. dated as of April 10, 1997**
10.3 Employment Agreement between the Registrant and William D. Moses
effective as of December 1, 1996. **
10.4 Non-Disclosure and Inventions Agreement between the Registrant
and William Moses dated as of January 30, 1997. **
10.5 Employment Agreement between the Registrant and Donald Masters
effective as of December 1, 1996. **
10.6 Non-Disclosure and Inventions Agreements between the Registrant
and Donald Masters dated as of February 3, 1997. **
10.7 Employment Agreement between the Registrant and John Wheeler
dated as of May 13, 1997. **
10.8 Employment Agreement between the Registrant and William Magellos
dated as of May 1, 1997. **
10.9 Employment Agreement between the Registrant and Jay Handline
dated as of May 11, 1999.****
10.10 License Agreement between RecoveryNet Interactive, L.L.C. and
Merit Behavioral Care Corporation dated as of May 1, 1997. **
10.11 Services Agreement dated as of April 1, 1998, as amended on
October 27, 1998 and April 15, 1999, by and between Registrant
and Group W Network Services.****
10.12 Letter Agreement between Registrant and G. Howard Associates,
Inc. dated December 7, 1998, as amended on April 11, 1999.
****
10.13 Engagement Proposal between Registrant and Charlotte Schiff
Jones dated January 7, 1999.****
10.14 Letter Agreement between Registrant and John Wheeler dated
January 26, 1999.****
10.16 Agreement and General Releases dated as of April 15, 1999
between the Registrant and TCI Online RN Holdings, Inc. FHC
Internet Services, LC and Lifescape 1 to 1, LLC.****
10.17 Settlement Agreement and General Release and Common Stock
Purchase Warrant between the Registrant and Michael Lennon dated
January1999.****
II-8
<PAGE> 89
10.18 Settlement Agreement and General Release and Common Stock
Purchase Warrant between the Registrant and George Henry dated
October 26, 1998.****
10.19 Promissory Note between Registrant and William Moses and George
Henry dated May 27, 1999.****
10.20 Promissory Notes between Registrant and George Henry, George
Henry III, Nicole Cox, William Moses, Martin Chopp and Michael
Clurman dated July 23, 1999.****
10.21 Promissory Note between Registrant and George Henry dated
September 10, 1999.****
10.22 Form of Debt Restructuring Agreement dated October 13, 1999
relating to $725,000 and $100,000 debt.****
16 Letter regarding Charge in Certifying Accountant.+++
21.1 List of Subsidiaries.**
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Corbin & Wertz
23.3 Consent of Beckman, Millman and Sanders, LLP (included in
Exhibit 5.1)
27.1 Financial Data Schedule
--------------------------
* Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-61421.
** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-27787.
*** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-82299.
**** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-90481.
+ Incorporated by Reference to Exhibit A to the Registrant's Definitive Proxy
Statement on Schedule 14A filed by the Registrant on April 29, 1998.
++ Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
1997 Form 8-K.
++ Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
1997 Form 8-K.
+++ Incorporated by Reference to Exhibit 16 to the Registrant's August 31, 1999
Form 8-K/A.
II-9
