<PAGE>
As filed with the Securities and Exchange Commission on May 23, 1997.
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
THE RECOVERY NETWORK, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
Colorado 7812 39-173-1029
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
1411 5th Street
Suite 250
Santa Monica, California 90401
(310) 393-3979
(Address and Telephone Number of Principal Executive Offices)
-------------------------
WILLIAM D. MOSES
President and Chief Executive Officer
The Recovery Network, Inc.
1411 5th Street
Suite 250
Santa Monica, California 90401
(310) 393-3979
(Name, Address and Telephone Number of Agent For Service)
-------------------------
Copies of Communications to:
HENRY I. ROTHMAN, Esq. ROBERT J. MITTMAN, Esq.
Parker Chapin Flattau & Klimpl, LLP Tenzer Greenblatt LLP
1211 Avenue of the Americas The Chrysler Building
New York, New York 10036 New York, New York 10174
Telephone: (212) 704-6000 Telephone: (212) 885-5000
Telecopier: (212) 704-6288 Telecopier: (212) 885-5001
-------------------------
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. / /
-------------------------
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>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
Proposed Proposed
Maximum Maximum Amount Of
Title Of Each Class Of Amount To Offering Price Aggregate Registration
Securities To Be Registered Be Registered Per Security (1) Offering Price (1) Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share............... 1,840,000(2) $ 5.00 $ 9,200,000 $ 2,787.88
- ----------------------------------------------------------------------------------------------------------
Redeemable Warrants, each
to purchase one share of
Common Stock ............... 1,840,000(3) $ .10 $ 184,000 $ 55.76
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (4) ......... 1,840,000(5) $ 5.50 $ 10,120,000 $ 3,066.67
- ----------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each
to purchase one share of
Common Stock (6) ............ 160,000 $ .001 $ 160 (7)
- ----------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each
to purchase one warrant ... 160,000 $ .001 $ 160 (7)
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (8) ......... 160,000 $ 7.00 $ 1,120,000 $ 339.40
- ----------------------------------------------------------------------------------------------------------
Warrants, each to purchase
one share of Common
Stock (8) .................. 160,000 $ .14 $ 22,400 $ 6.79
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share (9) ......... 160,000 $ 9.075 $ 1,452,000 $ 440.00
- ----------------------------------------------------------------------------------------------------------
Total Registration Fee ......................................................................$ 6,696.50
==========================================================================================================
</TABLE>
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(1) Estimated solely for the purpose of calculating the filing fee.
(2) Includes 240,000 shares of Common Stock which the Underwriter has the option
to purchase from the Registrant to cover over-allotments, if any.
(3) Includes 240,000 redeemable warrants which the Underwriter has the option to
purchase from the Registrant to cover over-allotments, if any.
(4) Issuable upon exercise of the redeemable warrants to be sold to the public
hereunder, together with such indeterminate number of shares of Common Stock
as may be issuable by reason of the anti-dilution provisions contained
therein.
(5) Assumes the Underwriter's option to purchase 240,000 additional redeemable
warrants to cover over-allotments, if any, has been exercised.
(6) To be issued to the Underwriter at the time of delivery and acceptance of
the securities to be sold to the public hereunder.
(7) No fee due pursuant to Rule 457(g).
(8) Issuable upon exercise of the Underwriter's Warrants.
(9) Issuable upon exercise of the warrants underlying the Underwriter's
Warrants, together with such indeterminate number of shares of Common Stock
as may be issuable by reason of the anti-dilution provisions contained
therein.
<PAGE>
THE RECOVERY NETWORK, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number of Form SB-2 Location or Caption in Prospectus
--------------------------------------------------- ---------------------------------------------
<S> <C> <C>
1. Front of the Registration Statement and
Outside Front Cover Page of Prospectus ......... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus ....................................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information and Risk Factors ............ Prospectus Summary; Risk Factors
4. Use of Proceeds ................................. Use of Proceeds
5. Determination of Offering Price .................. Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution ....................................... Risk Factors; Dilution
7. Selling Security Holders ........................ Not Applicable
8. Plan of Distribution ........................... Outside Front Cover Page; Underwriting
9. Legal Proceedings .............................. Not applicable
10. Directors, Executive Officers, Promoters and
Control Persons. ................................. Management
11. Security Ownership of Certain Beneficial
Owners and Management ........................... Principal Shareholders
12. Description of Securities. ..................... Outside Front Cover Page; Description of
Securities
13. Interest of Named Experts and Counsel ............ Not applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities. . Management--Limitation of Liability and
Indemnification
15. Organization Within Last Five Years ............ Not Applicable
16. Description of Business ........................ Prospectus Summary; Risk Factors; Business
17. Management's Discussion and Analysis or
Plan of Operation .............................. Plan of Operation
18. Description of Property ........................ Business - Properties
19. Certain Relationships and Related
Transactions .................................... Certain Transactions
20. Market for Common Equity and Related
Shareholder Matters .............................. Dividend Policy; Description of Securities;
Shares Eligible for Future Sale
21. Executive Compensation ........................... Management - Executive Compensation;
Management - Stock Option Plans
22. Financial Statements ........................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure ....................................... Not Applicable
</TABLE>
<PAGE>
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.
PRELIMINARY PROSPECTUS DATED MAY 23, 1997
SUBJECT TO COMPLETION
[LOGO] THE RECOVERY NETWORK, INC.
1,600,000 Shares of Common Stock and
Redeemable Warrants to Purchase 1,600,000 Shares of Common Stock
The Recovery Network, Inc. (the "Company") is offering hereby 1,600,000
shares (the "Shares") of common stock, par value $.01 per share (the "Common
Stock"), of the Company and redeemable warrants to purchase 1,600,000 shares of
Common Stock (the "Warrants"). The Shares and Warrants may be purchased
separately. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at a price of $5.50, subject to adjustment in certain
circumstances, at any time commencing , 1998 (or such earlier date as to
which the Underwriter consents) through and including , 2002. The Warrants
are redeemable by the Company, at any time commencing , 1998, upon notice
of not less than 30 days, at a price of $.10 per 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 Warrants and the Company obtains the written
consent of the Underwriter to such redemption prior to the Call Date. See
"Description of Securities."
Prior to this offering there has been no public market for the Common Stock
or Warrants and there can be no assurance that any such market will develop. It
is anticipated that the Shares and Warrants will be quoted on the Nasdaq
SmallCap Market ("Nasdaq") under the symbols "RNET" and "RNETW," respectively.
The offering prices of the Shares and the Warrants and the exercise price of the
Warrants were determined pursuant to negotiations between the Company and the
Underwriter and do not necessarily relate to the Company's book value or any
other established criteria of value. For a discussion of the factors considered
in the determination of the offering prices of the Shares and Warrants, see
"Underwriting."
-------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING
ON PAGE 9 AND "DILUTION" ON PAGE 20.
-------------------------
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.
<PAGE>
==============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions (1) Company (2)
- ------------------------------------------------------------------------------
Per Share ........ $5.00 $.50 $4.50
- ------------------------------------------------------------------------------
Per Warrant ...... $ .10 $.01 $ .09
- ------------------------------------------------------------------------------
Total (3) ........ $8,160,000 $816,000 $7,344,000
==============================================================================
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance, to grant to the Underwriter warrants (the
"Underwriter's Warrants") to purchase up to 160,000 shares of Common Stock
and/or 160,000 Warrants and to retain the Underwriter as a financial
consultant. The Company has also agreed to indemnify the Underwriter against
certain civil liabilities, including those arising under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, including the nonaccountable expense allowance in
the amount of $244,800 ($281,520 if the Underwriter's over-allotment option
is exercised in full), estimated at $722,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 240,000 additional
shares of Common Stock and/or 240,000 additional Warrants on the same terms
set forth above, solely for the purpose of covering over-allotments, if any.
If the Underwriter's over-allotment option is exercised in full, the price
to public, underwriting discounts and commissions and proceeds to the
Company will be $9,384,000, $938,400, $8,445,600, respectively. See
"Underwriting."
-------------------------
The Shares and Warrants are being offered, subject to prior sale, when, as
and if delivered to, and accepted by, the Underwriter and subject to approval of
certain legal matters by counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering and to
reject any order in whole or in part. It is expected that delivery of
certificates representing the shares of Common Stock and Warrants offered hereby
will be made against payment therefor at the offices of the Underwriter, 650
Fifth Avenue, New York, New York 10019, on or about , 1997.
Whale Securities Co., L.P.
The date of this Prospectus is , 1997
<PAGE>
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish its shareholders with annual
reports containing audited financial statements certified by its independent
public accountants and such other periodic reports as the Company deems
appropriate or as may be required by law.
-------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK AND WARRANTS.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK AND WARRANTS IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
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. Except as otherwise noted, all information
contained in this Prospectus, including per share data and information relating
to the number of shares outstanding, (i) gives effect to a 1-for-7.7432 reverse
stock split of the Common Stock effected as of February 10, 1997 (the "Stock
Split") and (ii) assumes no exercise of the Underwriter's over-allotment option
to purchase up to 240,000 additional shares of Common Stock and/or 240,000
additional Warrants. See "Underwriting" and Note 1 of Notes to Financial
Statements.
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 include, but are not limited to, those discussed in "Risk
Factors."
The Company
The Recovery Network, Inc. (the "Company"), a development stage company,
was organized to provide information, interaction and support via television,
radio and interactive media services to persons affected by or afflicted with
alcoholism, drug and substance abuse, eating disorders, depression and a variety
of behavioral and mental health problems ("Recovery Issues"), as well as to
persons seeking to prevent the onset of these problems ("Prevention Issues").
The Company currently addresses Recovery Issues and Prevention Issues through
The Recovery Network(TM), a cable television network which commenced
test-broadcasting on a limited basis in March 1996 and was launched nationally
in April 1997 to 13 million subscribers in the morning and 3.5 million
subscribers in the evening; Recovery Talk Radio(TM), a nationally syndicated
talk radio program introduced in December 1996 and currently airing in 60 cities
nationwide; and a toll-free telephone helpline (the "Help Line") which offers
information to viewers of The Recovery Network about where to obtain information
and help in their communities. The Company also owns a 50% interest in
RecoveryNet Interactive, L.L.C. ("Recovery Interactive"), a joint venture with
TCI Online RecoveryNet Holdings, Inc. (an affiliate of TeleCommunications,
Inc.), formed in August 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.
The Company believes that the market for recovery and prevention-oriented
programming consists of four groups: (i) friends, families and co-workers of
persons afflicted with Recovery Issues (the "Affected Others"); (ii) persons who
are already in recovery ("Persons in Recovery") and seek the daily support and
connection to others in recovery; (iii) afflicted persons who are not yet in
recovery either because they are unaware of the resources that are available or
are unwilling or unable to attend meetings or seek help publicly ("Afflicted
Persons"); and (iv) persons concerned about Prevention Issues, particularly
families with children. The Company believes that these four groups constitute a
significant portion of the nation's population.
The Company expects that a substantial portion of its audience will be the
Affected Others, including the approximately 56 million people directly affected
by alcohol abuse or addiction, the approximately 26.8 million children of
alcoholics in the United States and others affected by their relationships with
persons suffering from substance abuse, eating disorders and depression. Persons
in Recovery include the millions of Americans who regularly attend meetings of
various support groups, such as Alcoholics Anonymous, Al-Anon, Overeaters
Anonymous, Cocaine Anonymous, Narcotics Anonymous, or are in some other form of
treatment, including counseling. Afflicted Persons include the estimated 43
million Americans who are either heavy or binge drinkers and the approximately
12.8 million Americans who use illegal drugs. Afflicted Persons also include the
approximately 20% of the female population between the ages of 12 and 30 that
have major eating disorders, the estimated 59% of the United States population
that
3
<PAGE>
is clinically obese, the estimated more than 11 million people who suffer from
depression as well as the 61 million Americans that the 1995 National Household
Survey on Drug Abuse estimates were current smokers in 1995, many of whom the
Company believes wish to quit smoking.
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under a "nesting" contract (the "Nesting Contract") with
Access Television Network ("ATN"). Pursuant to the Nesting Contract, ATN
provides satellite uplink, master control and other related services (the "ATN
Services") on its satellite transponder to The Recovery Network for two hours of
broadcast time every day to subscribers of cable systems with which ATN has
affiliation agreements. Currently, the Recovery Network is broadcast one hour in
the morning to approximately 13 million subscribers and one hour in the evening
to approximately 3.5 million subscribers. In addition to its distribution under
the Nesting Contract, the Company is seeking two hours of broadcast time per day
in other local cable systems in a large number of markets. The Company has
identified all local cable systems in the United States with at least 50,000
subscribers and is engaged in a general marketing campaign ("affiliate
marketing") directed at those 259 systems. The Company is also targeting a more
focused affiliate marketing effort on 11 major cities whose communities contain
103 of these 259 systems.
The Company has produced 59 episodes of its flagship program, Full Circle,
an on-going one-hour series that documents the recovery process by featuring
Persons in Recovery in actual meetings, 21 episodes of Testimony, in which
people describe their stories of addiction and recovery, and two episodes of
Bottoms, a comedy program that takes recovering alcoholics and addicts back to
the scenes of their lowest moments and turning points on the road to recovery.
The Company is currently producing additional episodes of these programs, as
well as developing several other half-hour series focusing on several Recovery
Issues and Prevention Issues. The Company is also airing two programs it has
licensed from third parties and is also seeking to license additional recovery
and prevention-oriented programming.
The Company intends for The Recovery Network to expand its hours of
operations as additional programing is developed, as it is able to demonstrate
viewer loyalty to local cable systems and as additional channel capacity becomes
available. The recent development of direct satellite services ("DSS"), which
currently offer more channel capacity than cable television, and the conversion
of cable systems from analog to digital signal transmission, which will enable
cable systems to offer more channels, are expected to create substantial
additional channel capacity over the next several years. The Company believes
that these developments will enable The Recovery Network to eventually become a
full time television network. The Company believes that the unique benefits of
its socially responsible programming to local communities and to cable systems
positions the Company to capitalize on this projected increase in channel
capacity.
The Company has developed relationships with local and national grassroots
organizations (such as groups whose members consist of recovery, prevention and
other health professionals, community activists and/or Persons in Recovery)
focused on Recovery and Prevention Issues. The Company is seeking support from
these organizations, and from local politicians and law enforcement agencies to
further demonstrate the credibility and social significance of The Recovery
Network to local cable systems. The Company has also formed The National
Partnership for Recovery and Prevention (the "Partnership"), an umbrella
coalition of national recovery and prevention organizations, which the Company
believes will assist the Company's affiliate marketing by obtaining the support
of the Partnership's members. The Company believes that demonstrating this
support to local cable systems will help in obtaining agreements to air The
Recovery Network's programming ("affiliation agreements"). In addition, the
Company intends to utilize Recovery Talk Radio to advertise and promote The
Recovery Network in markets in which The Recovery Network will air. The Company
also expects that providing the toll-free Help Line will help build and maintain
viewer loyalty and support for The Recovery Network. The Company's Board of
Advisors will from time to time 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.
4
<PAGE>
Recovery Interactive has developed, and is continuing to and develop
software, technology, interactive tools and information resources to help
provide behavorial health care products to managed care organizations, large
group medical practices, state, local and federal governments and governmental
organizations, employee assistance programs, corporations and other
organizations offering or providing health care services and their clients.
Recovery Interactive currently plans to deliver these services through a
platform allowing access by computer, telephone or television.
The Company is in the development stage and has not yet generated any
meaningful revenues. The Company believes that generation of meaningful revenues
will be dependent upon the Company entering into affiliation agreements with
local cable systems with a significant number of subscribers, developing
additional television programming to enable The Recovery Network to expand its
hours of broadcast, achieving significant viewer loyalty, attracting more
advertisers and developing or entering into arrangements for the supply of
recovery and prevention-related products to merchandise, such as videotapes,
audio cassettes and books. The Company requires proceeds substantially in excess
of the proceeds of this offering to implement its business plan. The Company
expects to incur substantial up-front expenditures and operating costs in
connection with the initial launch and expansion of The Recovery Network,
satellite transmission of its programming and the development and production of
television programming, which will result in significant losses for the
foreseeable future. There can be no assurance that the Company will be able to
enter into affiliation agreements with local cable systems with a sufficient
number of subscribers, achieve significant viewer loyalty or attract advertisers
for The Recovery Network, generate meaningful revenues or achieve profitable
operations.
The Company was incorporated under the laws of the State of Wisconsin in
May 1992 under the name Recovery Net, Inc., merged with and into a Colorado
corporation in December 1995 and changed its name to The Recovery Network, Inc.
in May 1996. Unless the context requires otherwise, all references to the
Company include Recovery Direct, Inc., a wholly-owned subsidiary of the Company
("Recovery Direct"). The Company's principal executive offices are located at
1411 5th Street, Suite 250, Santa Monica, California 90401, and its telephone
number is (310) 393-3979.
Private Financing
In March and April 1997, the Company completed a private financing (the
"Private Financing") pursuant to which the Company issued and sold to 20
"accredited investors" an aggregate of 40 units (the "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 $4.00 per share. The offering
price was $50,000 per Unit. After payment of $200,000 in placement agent fees to
the Underwriter, which acted as placement agent for the Company in connection
with the Private Financing, and other offering expenses of approximately
$262,000, the Company received net proceeds of approximately $1,538,000 from the
sale of the Units. The net proceeds of the Private Financing are being used by
the Company for the costs of, among other things, an affiliate marketing
campaign in connection with the national launch of The Recovery Network,
programming expenses for the production of Full Circle, Testimony and Bottoms, a
capital contribution in the amount of $200,000 to Recovery Interactive and for
payments under the Nesting Contract with ATN in the amount of $102,000. The
Company intends to use a portion of the proceeds of this offering to repay the
entire principal amount of, and accrued interest on, the Financing Notes. See
"Use of Proceeds" and "Description of Securities--Recent Financing."
5
<PAGE>
The Offering
Securities offered....... 1,600,000 shares of Common Stock and Warrants to
purchase 1,600,000 shares of Common Stock. See
"Description of Securities."
Common Stock to be
outstanding after
the offering........ 4,121,250 shares (1)
Warrants:
Number to be outstanding
after the offering.. 1,600,000 Warrants (2)
Exercise terms........... Exercisable commencing , 1998 (or such earlier
date as to which the Underwriter consents), each to
purchase one share of Common Stock at a price of
$5.50, subject to adjustment in certain
circumstances. See "Description of Securities --
Redeemable Warrants."
Expiration date.......... , 2002.
Redemption............... Redeemable by the Company at any time commencing
, 1998, upon notice of not less than 30 days,
at a price of $.10 per Warrant, provided that the
closing bid quotation of the Common Stock on all 20
trading days ending on the third day prior to the
date 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 Warrants and the Company
obtains the written consent of the Underwriter with
respect to such redemption prior to the Call Date.
The Warrants will be exercisable until the close of
business on the date fixed for redemption. See
"Description of Securities -- Redeemable Warrants."
Use of Proceeds.......... The Company intends to use the net proceeds of this
offering for the repayment of the Financing Notes;
marketing and affiliate sales; programming expenses;
the commencement of merchandising operations and the
balance for working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors............. The securities offered hereby involve a high degree
of risk and immediate substantial dilution to new
investors. The securities should not be purchased by
investors who cannot afford the loss of their entire
investment. See "Risk Factors" and "Dilution."
Proposed Nasdaq symbols.. Common Stock -- RNET
Warrants -- RNETW
- ------------
(1) Does not include: (i) 1,600,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) an aggregate of 320,000 shares of Common
Stock reserved for issuance upon exercise of the Underwriter's Warrants and
the warrants included therein; (iii) 159,641 shares of Common Stock reserved
for issuance upon exercise of stock options available for future grant under
the Company's stock option plans (the "Stock Option Plans"); (iv) 190,359
shares of Common Stock reserved upon exercise of outstanding options granted
under the Stock Option Plans; (v) 113,290 shares of Common Stock reserved
for issuance upon exercise of outstanding non-plan stock options; (vi)
515,498 shares of Common Stock reserved for issuance upon exercise of
warrants which have been
6
<PAGE>
issued by the Company, including 500,000 shares of Common Stock issuable upon
exercise of the Financing Warrants; and (vii) an indeterminable number of
shares of Common Stock reserved for issuance in the event the Company fails
under certain circumstances to register, or to maintain an effective
registration statement with respect to, the Financing Shares and the shares
of Common Stock issuable upon exercise of the Financing Warrants (the
"Financing Warrant Shares"). See "Plan of Operation -- Liquidity and Capital
Resources," "Management -- Stock Option Plans," "-- Non-Plan Stock Options,"
"Description of Securities" and "Underwriting."
(2) Does not include any Warrants referred to in clauses (ii) and (vi) of Note 1
above. See "Description of Securities -- Recent Financing."
Summary Financial Information
The summary financial data set forth below is derived from and should be
read in conjunction with the audited financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended June 30, Nine Months Ended March 31,
------------------------------- ------------------------------
1995 1996 1996(3) 1997(3)
-------------- -------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Net loss ........................ $ (490,341) $ (1,223,829) $ (569,110) $ (2,286,273)
Net loss per share ............... (.43) (.71) (.55) (1.13)
Weighted average number of shares
outstanding ..................... 1,145,962 1,733,028 1,629,831 2,023,852
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
At March 31, 1997 (unaudited)
--------------------------------------------------
Actual Pro Forma(1) As Adjusted(2)
--------------- -------------- ---------------
<S> <C> <C> <C>
Working capital (deficit) ............ $ (571,319) $ (549,703) $ 5,068,492
Total assets ........................ 1,114,462 1,161,802 5,521,978
Total liabilities .................. 1,323,388 1,346,772 290,370
Shareholders' equity (deficit) ...... (208,926) (184,970) 5,231,608
</TABLE>
------------
(1) Gives effect to the issuance and sale of one Unit in the Private Financing
for net proceeds of $45,000 (the "Pro Forma Adjustment"). The issuance and
sale of 39 Units in March 1997 in connection with the Private Financing for
which the Company received net proceeds of approximately $1,493,000 are
included in the Company's balance sheet at March 31, 1997 (actual). See
"Plan of Operation."
(2) Gives effect to (i) the sale of the 1,600,000 shares of Common Stock and
1,600,000 Warrants offered hereby and the application of the estimated net
proceeds therefrom, including the repayment of the Financing Notes, and (ii)
non-recurring charges of approximately $943,598 representing the loan
discount relating to the Private Financing and $201,617 representing the
issuance costs of the Financing Notes. See "Use of Proceeds."
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RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and therefore should not be purchased by anyone who cannot afford
a loss of his or her entire investment. Each prospective investor should
carefully review and consider the following risks before making an investment
decision.
1. Development Stage Company; Lack of Meaningful Revenues; Significant and
Continuing Losses; Explanatory Paragraph in Independent Public Accountants
Report. The Company was organized in 1992, was reorganized in 1995 and is in the
development stage. Since its inception, the Company has been primarily engaged
in test broadcasting of The Recovery Network in limited markets (which was
launched nationally in April 1997), affiliate marketing and development,
acquisition and production of programming, establishing Recovery Talk Radio and
the Help Line and forming relationships with individuals and organizations in
the recovery field. Accordingly, the Company has a limited relevant operating
history upon which an evaluation of the Company's performance and prospects can
be made. Such prospects must be considered in light of the numerous risks,
expenses, problems, and difficulties typically encountered in establishing a new
business and launching and expanding a cable television network. The Company has
not generated any meaningful revenues and does not expect to generate any
meaningful revenues for the foreseeable future. To date, the Company has
incurred significant net losses, including net losses of $1,223,829 and
$2,286,273 for the year ended June 30, 1996 and the nine months ended March 31,
1997, respectively. At March 31, 1997, the Company had a deficit accumulated in
the development stage of $(4,365,740) and, since March 31, 1997, the Company has
continued to incur significant and increasing losses. The Company expects to
incur substantial up-front capital expenditures and operating costs in
connection with the initial launch and expansion of The Recovery Network,
satellite transmission of its programming and the development and production of
television programming, which will result in significant losses for the
foreseeable future. The Company will also incur a non-recurring charge during
the fiscal quarter in which this offering is consummated of approximately
$1,205,215 relating to the Private Financing. There can be no assurance that the
Company will ever generate significant revenues or achieve profitable
operations. The Company's independent public accountants have included an
explanatory paragraph in their report on the Company's financial statements,
stating that certain factors raise substantial doubt about the Company's ability
to continue as a going concern. See "Plan of Operation" and Financial
Statements.
2. Significant Capital Requirements; Dependence on Proceeds for Plan of
Operation; Continuing Need for Additional Financing. The Company's capital
requirements have been and will continue to be significant and its cash
requirements have been exceeding its cash flow from operations. At March 31,
1997, the Company had a working capital deficit of $571,319 due to, among other
things, costs associated with program development and affiliate marketing
efforts. As a result, the Company has been substantially dependent on loans from
its shareholders and private placements of its securities to fund its
operations. The Company is dependent upon the proceeds of this offering to fund
its plan of operations, including the operation of The Recovery Network and
production of new programming, as well as to fund its other working capital
requirements. Although the Company anticipates that the net proceeds of this
offering, together with projected revenues from operations, will be sufficient
to fund the Company's operations and capital requirements for approximately 12
months following the consummation of this offering, there can be no assurance
that such funds will not be expended prior thereto due to unanticipated changes
in economic conditions or other unforeseen circumstances. In the event the
Company's plans change or its assumptions change or prove to be inaccurate, the
Company could be required to seek additional financing sooner than currently
anticipated. The Company has no current arrangements with respect to, or
potential sources of, any additional financing, and it is not anticipated that
existing shareholders will provide any portion of the Company's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all. Any inability to obtain additional financing when
needed would have a material adverse effect on the Company, requiring it to
curtail and possibly cease its operations. In addition, any additional equity
financing may involve substantial dilution to the interests of the Company's
then existing shareholders. See "Use of Proceeds" and "Plan of Operation."
3. Uncertainty of Ability to Implement Plan of Operation. The Company's
proposed plan of operation and prospects will be largely dependent on the
success of its affiliate marketing efforts, including its ability to enter into
affiliation agreements with operators of local cable systems with a significant
number of subscribers or other
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arrangements for the airing of The Recovery Network, its ability to successfully
operate under the Nesting Contract, develop or acquire sufficient television
programming to enable the Recovery Network to expand its hours of broadcast,
achieve significant viewer loyalty, attract advertisers and develop or enter
into arrangements for the supply of products, such as videotapes, audio
cassettes and books to merchandise. The Company has limited experience in
developing and operating a cable television network and marketing recovery and
prevention-related products and services, and there is limited information
available concerning the potential performance or market acceptance of The
Recovery Network and recovery and prevention-related products and services.
There can be no assurance that the Company will be able to implement its
business plan successfully or that unexpected expenses, problems, or technical
difficulties will not occur which would result in material delays in its
implementation. See "Business -- The Recovery Network."
4. New Concept; Uncertainty of Market Acceptance of The Recovery Network by
Cable System Operators, Viewers and Advertisers; Limited Affiliation
Arrangements. The Recovery Network and the Company's recovery and
prevention-related products and services involve a new business concept. As is
typical in the case of a new concept in the entertainment industry, demand and
market acceptance of The Recovery Network and recovery and prevention-related
products and services is subject to a high level of uncertainty. The Company has
not conducted and does not intend to conduct any independent market or concept
feasibility studies, nor does it currently expect to conduct any additional
market testing activities. The Company's prospects will be significantly
affected by the success of its affiliate marketing efforts, the acceptance of
its programming by potential viewers and its ability to attract advertisers.
Achieving market acceptance for The Recovery Network and the Company's recovery
and prevention-related products and services will require significant effort and
expenditures by the Company to create awareness and demand by viewers,
advertisers and cable operators that potentially will carry The Recovery
Network. The Company has only recently launched The Recovery Network nationally
via satellite transmission for two hours of broadcast time per day. In addition
to The Recovery Network's distribution under the Nesting Contract, it will be
important for the Company to enter into affiliation arrangements with a number
of cable systems to significantly increase its subscriber base. Although the
Company believes that the socially responsible nature of The Recovery Network's
programming provides a valuable community service, cable system operators may be
reluctant to provide air time for The Recovery Network and advertisers may be
reluctant to pay for advertising time until such time, if ever, as the Company
is able to demonstrate meaningful viewer loyalty. The Company's strategy and
preliminary and future marketing plans may be subject to change as a result of a
number of factors, including progress or delays in the Company's affiliate
marketing efforts, the nature of possible affiliation and other broadcast
arrangements which may become available to it in the future and factors
affecting the cable television industry. There can be no assurance that the
Company's strategy will result in initial or continued market acceptance for The
Recovery Network and the Company's recovery and prevention-related products and
services. See "Business -- The Recovery Network."
5. Uncertainty of Program Development and Production and Program
Acquisition. The Company has only recently commenced production of its first
television programs. The Company will be required to commit considerable time,
effort, and resources to continue development and production of its programming.
The Company's development and production efforts are subject to all of the risks
inherent in the development and production of new programming, including
unexpected delays, expenses, technical problems and difficulties, as well as the
possible insufficiency of funds to complete satisfactory development and
production of programming, which could result in abandonment or substantial
change in programming. There can be no assurance that the Company's program
development and production 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 program development and production and
delays in the Company's ability to air original programming. The Company's
success will also be partially dependent upon its ability to acquire or license
suitable programming. The Company currently has no specific arrangements for the
acquisition or licensing of any programming and has allocated only limited
proceeds to acquire or license programming. Accordingly, the Company's ability
to obtain programming is subject to a high degree of uncertainty. Failure to
obtain sufficient programming on acceptable terms would have a material adverse
effect on the Company. There can be no assurance that the Company will be able
to license suitable programming on acceptable terms, or at all. See "Business --
The Recovery Network -- Programming."
6. Dependence on Consultants and Third-Party Marketing Arrangements. The
Company has undertaken only limited marketing activities and has only limited
marketing experience and limited financial, personnel and
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other resources to undertake extensive marketing activities independently.
Accordingly, the Company has relied, and intends to continue to rely to a large
extent, on arrangements with third parties for the marketing and promotion of
The Recovery Network and the Company's recovery and prevention-related products
and services, including arrangements with political and marketing consultants,
grassroots organizations and the Partnership. The marketing efforts of the
Company's consultants and the support of local and national grassroots
organizations are important for obtaining the support of local communities which
the Company believes is necessary to persuade the operators of local cable
systems to carry The Recovery Network. The Company's success is substantially
dependent upon the efforts of these third parties and the continued availability
of their services as needed by the Company. While the Company believes that
third-party marketers and consultants will have an economic motivation to market
and promote The Recovery Network and the Company's recovery and
prevention-related products and services, the time and resources devoted to
these activities generally will be contributed and controlled by such third
parties and not by the Company. Many of these arrangements are relatively
short-term, or are informal arrangements. There can be no assurance that any
such third parties will continue to offer their services to the Company or that
the Company will be able to enter into other marketing arrangements on
commercially reasonable terms or at all. Moreover, there can be no assurance
that the efforts of any third parties will result in market acceptance by cable
system operators or viewers. See "Business -- The Recovery Network -- Affiliate
Marketing Strategy."
7. Dependence upon ATN; Broadcast Interruptions and Equipment Failures;
Conflicts of Interest. ATN's subscribers currently represent substantially all
of the households which receive broadcast of The Recovery Network's programming.
The Company is dependent upon ATN to broadcast its programming to ATN's
subscribers and to provide the necessary services to enable The Recovery Network
to broadcast its programming through cable systems with which the Company
directly enters into affiliation agreements. It is possible that ATN or its
affiliates could experience broadcast interruptions and equipment failures which
could last for a significant period of time. Broadcast interruptions or
equipment failures affecting broadcasting of The Recovery Network's programming
could adversely affect viewer perception of, and advertiser confidence in, The
Recovery Network and could result in loss of advertising revenue, which could
have a material adverse effect on the Company. The Company's prospects will be
affected by ATN's ability to maintain its existing subscriber base and to enter
into additional affiliation agreements to expand its subscriber base. Although
the Company believes that ATN has an economic motivation to enter into and
maintain affiliations with cable systems, ATN has complete discretion as to the
cable systems with which it enters into and maintains affiliations. There can be
no assurance that ATN will be able to increase its subscriber base or that ATN's
affiliates will not terminate their relationship with ATN. Moreover, the Nesting
Contract with ATN expires in April 1998 unless renewed by both parties and there
can be no assurance that it will be renewed on terms favorable to the Company or
at all. Failure to renew the Nesting Contract, in the absence of a similar
arrangement for the broadcast of The Recovery Network's programming would have a
material adverse effect on the Company. Mr. George H. Henry, the Chairman of the
Board of the Company, is the Chairman of the Board and Chief Executive Officer
and a principal shareholder of ATN. Mr. William D. Moses, the President and
Chief Executive Officer of the Company, is a principal shareholder of ATN. As a
result, conflicts of interest may arise from such officers' respective positions
with and interests in ATN. There can be no assurance that any conflict of
interest that arises will be resolved favorably to the Company. See "Business --
The Recovery Network" and "Certain Transactions."
8. Risks Relating to Joint Venture. The Company has only recently entered
into a joint venture arrangement with TCI Online RecoveryNet Holdings, Inc.
("TCII"), pursuant to which Recovery Interactive was formed. The prospects of
Recovery Interactive will be dependent on its ability to finish construction of
its web site and its ability to enter into arrangements with managed care and
insurance companies for the delivery of behavioral health products and services.
The Company and TCII have each made a capital contribution to Recovery
Interactive in the amount of $300,000. There can be no assurance that these
contributions by the Company and TCII will be sufficient to fund Recovery
Interactive's implementation of its business plan without significant additional
capital. There can be no assurance that either the Company or TCII will be able
to provide any additional funding for Recovery Interactive or that Recovery
Interactive will be able to obtain any additional capital it may require from
third parties. The joint venture arrangement is subject to termination by either
party under certain conditions. Although the Company believes that the joint
venture will provide the Company with significant opportunities relating to an
Internet business there can be no assurance that the joint venture will be
commercially successful or will not be terminated by TCII. See "Business --
Recovery Interactive."
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9. Risks Relating to the Development and Supply of Recovery Related
Products; Risks Related to Recovery Direct; Uncertainty of Commercial Acceptance
of Recovery Related Products. To date, the Company has not developed or entered
into any arrangements for the supply of recovery and prevention-related products
to market. Development of such products is subject to all of the risks
associated with the development of new products, including unexpected delays, as
well as insufficiency of funds to complete satisfactory development of a
product, which could result in abandonment or substantial change in the product.
To the extent the Company enters into arrangements for the supply of recovery
and prevention-related products with third parties, the Company will be
dependent upon its suppliers to, among other things, satisfy the Company's
quantity and performance specifications and to dedicate sufficient production
capacity to meet the Company's scheduled delivery requirements. Additionally,
the Company has not conducted and does not intend to conduct any formal market
studies or feasibility studies for any potential products. Achieving market
acceptance for recovery and prevention-related products will require substantial
marketing efforts, expenditure of significant funds and use of commercial time
on The Recovery Network and Recovery Talk Radio otherwise available for sale to
advertisers to inform potential customers of potential products. There can be no
assurance that the Company will develop or enter into arrangements for the
supply of recovery and prevention-related products or that the Company's efforts
will result in successful product commercialization or initial or continued
market acceptance for any potential recovery and prevention-related products.
See "Business -- Merchandise Sales."
10. Risks Relating to Possible Acquisitions. The Company may seek to expand
or compliment its operations through the possible acquisition or licensing of
programs or programming libraries or companies which the Company believes are
compatible with its business. While the Company is exploring acquisition
opportunities, as of the date of this Prospectus, the Company has no definitive
plans, agreements, commitments, arrangements or understandings with respect to
any acquisition. The Company has not established any minimum criteria for any
acquisition and management will have complete discretion in determining the
terms of any such acquisition. Consequently, there is no basis for the investors
in this offering to evaluate the specific merits or risks of any potential
acquisitions that the Company may undertake. There can be no assurance that the
Company will be able to ultimately effect any acquisition or successfully
integrate into its operations any business which it may acquire. Under Colorado
law, various forms of business combinations can be effected without shareholder
approval and, accordingly, investors in this offering will, in all likelihood,
neither receive nor otherwise have the opportunity to evaluate any financial or
other information which may be made available to the Company in connection with
any acquisition and must rely entirely upon the ability of management in
selecting, structuring and consummating acquisitions that are consistent with
the Company's business objectives. Although the Company will endeavor to
evaluate the risks inherent in a particular acquisition, there can be no
assurance that the Company will properly ascertain or assess all significant
risks factors prior to consummating any acquisition.
11. Factors Affecting Cable Television Industry. The Company's business is
concentrated in the cable television industry which is continually evolving and
subject to rapid change. Recently, direct satellite services ("DSS") and digital
cable deployment and advances in signal compression/decompression technologies
have begun to create additional channel capacity and new opportunities for
television networks. There can be no assurance, however, that DSS or such other
technologies will be further developed or utilized to expand channel capacity.
The Company's growth strategy is based, in part, upon the continued growth of
the cable and DSS industries and the expected increased availability of channel
capacity. If the cable industry grows slower than expected or ceases to grow or
if channel capacity does not expand as rapidly as expected, or ceases to grow,
or if channel capacity does not expand as rapidly as expected, or at all, the
Company may not be able to enter into a sufficient number of affiliation
agreements or other arrangements for the carriage of The Recovery Network, which
would have a material adverse effect on the Company. See "Business -- The Cable
Television Industry."
12. Government Regulation. The cable television industry is subject to
extensive and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the Federal
Communications Commission ("FCC"). Regulations governing the rates that can be
charged to subscribers by cable systems not in markets subject to effective
competition from other multichannel video program distributors could adversely
affect the ability of cable systems with limited channel capacity to finance
rebuilding or upgrading efforts to increase channel capacity or otherwise
restrict their ability to add new programming such as The Recovery Network. In
addition, federal "must-carry" rules requiring cable operators to devote up to
one-third of their channels to carriage of local commercial TV broadcast
stations (and additional channels for non-
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commercial educational TV stations); commercial leased access rules designating
10% to 15% of system channels for lease by unaffiliated programmers; and local
regulatory requirements mandating additional channel set-asides for public,
governmental and educational use could reduce channel availability which might
otherwise be available for The Recovery Network on many cable systems. Statutory
provisions and FCC rules governing relationships among cable systems and
competing forms of multichannel video program distribution, as well as the
relationships between the Company and its cable system affiliates could
adversely affect the marketability of the Company's programming and the ability
of the Company to enter into arrangements for the distribution of its
programming. Although program providers that do not hold FCC licenses or operate
distribution outlets, such as The Recovery Network and Recovery Talk Radio, are
not within the FCC's direct jurisdiction, 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 or radio stations to FCC fines or other
sanctions, adversely affect the Company's relationship with such entities and
result in the discontinuation of carriage of the Company's programming by such
entities.
Federal and state regulation governing interactive or on-line information
services and potentially affecting the activities of Recovery Interactive 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 Recovery Interactive. Additional laws and regulations are
currently being considered by the federal government and many state and local
governments. There can be no assurance that these or existing laws or
regulations will not be applied in a manner that will adversely affect the
Company's business or operations.
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 currently under consideration.
Amendments to or interpretations of existing statutes and regulations, adoption
of new statutes or regulations or expansion of the Company's operations could
further restrict channel availability for The Recovery Network, require the
Company to alter methods of operation (the cost of which may be prohibitive)
limit the types of programming or services that the Company intends to provide,
modify the content of its programming or require the Company to obtain
regulatory approvals, any of which could result in material interruptions of
operation. There can be no assurance that the Company will be able to comply
with additional applicable statutory or regulatory requirements. See "Business
- -- Government Regulation."
13. Competition. The Recovery Network will compete with all other existing
and planned television networks and other television programming for available
air time, channel capacity, advertiser revenue and revenue from license fees.
Many of these television networks and producers of television programming are
well-established, have reputations for success in the development and operation
of television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than the
Company. In addition, if cable television channel capacity increases as the
Company expects, competition from smaller competitors and other start-up
television networks could increase significantly. Although the Company is not
aware of any television network with programming 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 The Recovery Network's
programming is intended to provide information and support to persons facing
Recovery Issues and Prevention Issues, The Recovery Network and the Company's
recovery and prevention-related products and services will compete with other
products and services which perform similar functions, such as support groups,
self- help videos, audio cassettes and books and helplines. There can be no
assurance that the Company will be able to successfully compete for air, time,
channel capacity, advertiser time or viewership. See "Business -- Competition."
14. Uncertainty of Protection of Proprietary Information. The Company has
pending registration applications in the United States Patent and Trademark
Office for four trademarks, including the "Recovery Network" trademark. The
Company believes that its trademarks and copyrights, including "The Recovery
Network" trade
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name and the signature look of the network, have significant value and are
important to the marketing and promotion of The Recovery Network and the
Company's recovery and prevention-related products and services. Although the
Company believes that its trademarks and copyrights do not and will not infringe
trademarks or violate proprietary rights of others, it is possible that existing
trademarks and copyrights may not be valid or that infringement of existing or
future trademarks or proprietary rights may occur. In the event the Company's
trademarks or copyrights infringe trademarks or proprietary rights of others,
the Company may be required to change the name of its network, proposed
television shows, radio talk show or obtain a license. There can be no assurance
that the Company will be able to do so in a timely manner, on acceptable terms
and conditions, or at all. Failure to do any of the foregoing could have a
material adverse effect on the Company. In addition, there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend a trademark infringement or proprietary rights violation action.
Moreover, if the Company's trademarks or copyrights infringe the trademarks or
proprietary rights of others, the Company could, under certain circumstances,
become liable for damages, which could have a material adverse effect on the
Company.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts, ideas and the documentation of
its television programming and concepts in development. However, such methods
may not afford complete protection and there can be no assurance that others
will not independently develop similar know-how or obtain access to the
Company's know-how, concepts, ideas and documentation. Furthermore, although the
Company has and expects to have confidentiality and non-competition agreements
with its employees and appropriate consultants, there can be no assurance that
such arrangements will adequately protect the Company's trade secrets or that
others will not independently develop programming similar to that of the
Company. See "Business -- Proprietary Information."
15. Insurance and Potential Liability. The operation of a television, radio
and interactive media business subjects the Company to possible liability claims
from others, including viewers, listeners and callers to the Help Line for
claims arising from the unauthorized use of name or likeness, invasion of
privacy, defamation and slander. The Company maintains general liability
insurance (with coverage in amounts of up to $1,000,000 per occurrence and
$2,000,000 per annum), including insurance relating to personal injury and
advertising injury, in amounts which the Company currently considers adequate.
Nevertheless, a partially or completely uninsured claim against the Company, if
successful, could have a material adverse effect on the Company. See "Business
- -- Insurance."
16. Control by Management. Upon the consummation of this offering, the
Company's current officers and directors will in the aggregate, beneficially own
approximately 27.7% of the outstanding Common Stock. Accordingly, such persons
may have the ability to exert significant influence over the election of the
Company's Board of Directors and other matters submitted to the Company's
shareholders for approval. See "Management" and "Principal Shareholders."
17. Dependence on Key Personnel; Need for Qualified Personnel. The success
of the Company will be largely dependent on the personal efforts of George H.
Henry, Chairman of the Board of the Company, and William D. Moses, President,
Chief Executive Officer of the Company, and other key personnel. Although the
Company has entered into an employment agreement with Mr. Moses, the Company
does not have an employment agreement with Mr. Henry, and the loss of the
services of either of such officer or other key personnel would have a material
adverse effect on the Company's business and prospects. The Company has applied
for and intends to obtain key-man life insurance in the amount of $2,000,000 on
the life of each of Mr. Moses and Mr. Henry. There can be no assurance, however,
that the Company will be able to obtain such insurance on commercially
reasonable terms, or at all. The success of the Company will also be dependent
upon its ability to hire and retain additional qualified industry, programming,
marketing, financial and other personnel. Competition for qualified personnel is
intense, and there can be no assurance that the Company will be able to hire or
retain additional qualified personnel. Any inability to attract and retain
qualified personnel would have a material adverse effect on the Company. See
"Management."
18. Broad Discretion in Application of Use of Proceeds; Benefits to Related
Parties. Approximately, $555,000 (8.4%) of the estimated aggregate net proceeds
from this offering has been allocated to working capital and general corporate
purposes. Accordingly, the Company will have broad discretion as to the
application of such proceeds. The Company will use a portion of the proceeds
allocated to working capital to pay the sal-
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ary and benefits of the Company's officers estimated to be approximately
$442,000 over the twelve months following the consummation of this offering.
Additionally, the Company will be required to make payments under the Nesting
Contract to ATN, an affiliate of Messrs. Henry and Moses, for ATN Services (in
an amount not to exceed $60,000 per month during the first six months of the
contract and $65,000 per month during the seventh through twelfth months of the
contract). As a result, the Company has allocated approximately $1,014,500 of
the net proceeds of this offering to make required payments to ATN under the
Nesting Contract. See "Use of Proceeds," "Business -- Overview -- The Recovery
Network," "Management" and "Certain Transactions."
19. No Dividends. To date, the Company has not paid any cash dividends on
the Common Stock and does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. In addition, the payment of cash dividends may
be limited or prohibited by the terms of future loan agreements or the future
authorization and issuance of Preferred Stock. See "Dividend Policy."
20. Possible Adverse Effect of Outstanding Options and Warrants. As of the
date of this Prospectus, there are 113,290 shares reserved for issuance upon
exercise of outstanding non-plan stock options, of which 110,423 are exercisable
at an exercise price of $2.32 per share and 2,867 are exercisable at an exercise
price of $.77 per share; 30,768 shares are reserved for issuance upon exercise
of outstanding options under the Company's 1996 Employee and Consultants Stock
Option Plan which are exercisable at $5.00 per share; 113,652 shares are
reserved for issuance upon exercise of outstanding options under the Company's
1996 Board of Directors and Advisory Board Retainer Plan which are exercisable
at $5.00 per share; and 45,939 shares are reserved for issuance upon exercise of
outstanding options under the 1997 Management Bonus Plan, all of which are
exercisable at $5.00 per share. In addition, as of the date of this Prospectus,
there are 515,498 shares reserved for issuance upon exercise of outstanding
Warrants, including 500,000 shares reserved for issuance upon exercise of the
Financing Warrants. The Financing Warrants are exercisable until March 6, 2002
at a price of $4.00 per share. To the extent warrants or options are exercised,
dilution of the interests of the Company's Common Stock may occur. Moreover, the
terms upon which the Company will be able to obtain additional equity financing
may be adversely affected since the holders of outstanding options and warrants
can be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain capital on terms more favorable to the Company
than those provided by such options and warrants. See "Use of Proceeds", "Plan
of Operation" and "Description of Securities -- Recent Financing".
21. Substantial Dilution. Investors purchasing Common Stock in this
offering will incur immediate and substantial dilution of $3.73 (74.6%) per
share between the adjusted net tangible book value per share after this offering
and the initial public offering price of $5.00 per Share. See "Dilution."
22. No Assurance of Public Market; Arbitrary Determination of Offering
Prices; Possible Volatility of Market Price of Common Stock and Warrants. Prior
to this offering, there has been no public trading market for the Common Stock
or Warrants. There can be no assurance that a regular trading market for the
Common Stock or Warrants will develop after this offering or that, if developed,
it will be sustained. The initial public offering prices of the Shares and
Warrants and the exercise price of the Warrants have been determined arbitrarily
by negotiation between the Company and the Underwriter and are not necessarily
related to the Company's asset value, net worth, results of operations or any
other established criteria of value and may not be indicative of the prices that
may prevail in the public market. In addition, the market prices of the
Company's securities following this offering may be highly volatile as has been
the case with the securities of other emerging companies. Factors such as the
Company's operating results, announcements by the Company or its competitors,
introduction of new programs by the Company or its competitors, changes in
financial estimates of securities analysts and factors effecting the cable
television industry generally may have a significant impact on the market price
of the Company's securities. Additionally, in recent years, the stock market has
experienced a high level of price and volume volatility and market prices for
the stock of many companies, particularly of small and emerging growth
companies, the common stock of which trade in the over-the-counter market, have
experienced wide price fluctuations which have not necessarily been related to
the operating performance of such companies. See "Underwriting."
23. Possible Delisting of Securities from Nasdaq Systems; Risks Relating to
Low-Priced Stocks. It is currently anticipated that the Common Stock and
Warrants will be eligible for listing on the Nasdaq SmallCap Market upon the
completion of this offering. In order to continue to be listed on the Nasdaq
SmallCap Market, how-
14
<PAGE>
ever, the Company must maintain $2,000,000 in total assets, a $200,000 market
value on the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion requires two market-makers and a minimum bid price
of $1.00 per share; provided, however, that if the Common Stock falls below such
minimum bid price it will remain eligible for continued inclusion in the Nasdaq
SmallCap Market if the market value of the public float is at least $1,000,000
and the Company has $2,000,000 in capital and surplus. The Nasdaq SmallCap
Market has recently proposed new maintenance criteria which, if implemented,
would eliminate the exception to the minimum bid price of $1.00 per share and
require, among other things, $2,000,000 in net tangible assets, $1,000,000
market value on the public float and adherence to certain corporate governance
provisions. The failure to meet these maintenance criteria in the future may
result in the delisting of the Common stock and Warrants from the Nasdaq
SmallCap Market, and trading, if any, in the Common Stock and Warrants would
thereafter be conducted in the non-Nasdaq over-the-counter market. As a result
of such delisting, an investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Common Stock and
Warrants.
In addition, if the Common Stock and Warrants were to become delisted from
trading on the Nasdaq SmallCap Market and the trading price of the Common Stock
were to fall below $5.00 per share, trading in the Common Stock would also be
subject to the requirements of certain rules promulgated under the Exchange Act,
which require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally defined as an investor with a net worth in
excess of $1,000,000 or annual income exceeding $200,000 individually or
$300,000 together with a spouse). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
the sale. The broker-dealer also must disclose the commissions payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Such information
must be provided to the customer orally or in writing before or with the written
confirmation of trade sent to the customer. Monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. The additional burdens
imposed upon broker-dealers by such requirements could, in the event the Common
Stock were deemed to be a penny stock, discourage broker-dealers from effecting
transactions in the Common Stock which could severely limit the market liquidity
of the Common Stock and the ability of purchasers in this offering to sell the
Common Stock in the secondary market.
24. Potential Adverse Effect of Warrant Redemption. The Warrants are
subject to redemption by the Company, at any time commencing , 1998, upon
notice of not less than 30 days, at a price of $.10 per 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 Warrants and the Company obtains the
written consent of the Underwriter to such redemption prior to the Call Date.
Redemption of the Warrants could force the holders to exercise the Warrants and
pay the exercise price at a time when it may be disadvantageous for the holders
to do so, to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants, or to accept the redemption price, which is
likely to be substantially less than the market value of the Warrants at the
time of redemption. See "Description of Securities -- Redeemable Warrants."
25. Possible Inability to Exercise Warrants. The Company intends to qualify
the sale of the Common Stock and the Warrants in a limited number of states.
Although certain exemptions in the securities laws of certain states might
permit the Warrants to be transferred to purchasers in states other than those
in which the Warrants were initially qualified, the Company will be prevented
from issuing Common Stock in such states upon the exercise of the Warrants
unless an exemption from qualification is available or unless the issuance of
Common Stock upon exercise of the Warrants is qualified. The Company may decide
not to seek or may not be able to obtain qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the
Warrants reside. In such a case, the Warrants held by purchasers will expire and
have no value if such
15
<PAGE>
Warrants cannot be sold. Accordingly, the market for the Warrants may be limited
because of these restrictions. Further, a current prospectus covering the Common
Stock issuable upon exercise of the Warrants must be in effect before the
Company may accept Warrant exercises. There can be no assurance the Company will
be able to have a prospectus in effect when this Prospectus is no longer
current, notwithstanding the Company's commitment to use its best efforts to do
so. See "Description of Securities -- Redeemable Warrants."
26. Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have 4,121,250 shares of Common
Stock outstanding (assuming no exercise of the Warrants or the other outstanding
options or warrants), of which the 1,600,000 shares, being offered hereby, will
be freely tradeable without restriction or further registration under the
Securities Act. All of the remaining 2,521,250 shares of Common Stock
outstanding are "restricted securities", as that term is defined in Rule 144
promulgated under the Securities Act, and in the future may be sold only
pursuant to an effective registration statement under the Securities Act, in
compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Of the 2,521,250 restricted shares, an
aggregate of 1,681,139 shares will be eligible for sale, without registration,
under Rule 144 (subject to certain volume limitations prescribed by such rule
and to the contractual restrictions described below), commencing 90 days
following the date of this Prospectus. In addition, 833,223 of such restricted
shares (not including 500,000 shares issuable upon exercise of the Bridge
Warrants) are subject to certain registration rights, and the Company has
granted the Underwriter demand and piggyback registration rights with respect to
the securities issuable upon exercise of the Underwriter's Warrants. No
prediction can be made as to the effect, if any, that sales of such securities
or the availability of such securities for sale will have on the market prices
prevailing from time to time. While all of the Company's officers, directors and
securityholders have agreed not to (i) sell or otherwise dispose of any shares
of Common Stock in any public market transaction (including pursuant to Rule
144) or (ii) exercise any rights held by such holders to cause the Company to
register any shares of Common Stock for sale pursuant to the Securities Act for
a period of 12 months following the date of this Prospectus without the
Underwriter's prior written consent, the possibility that a substantial number
of the Company's securities may be sold in the public market may adversely
affect prevailing market prices for the Common Stock and Warrants and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Description of Securities," "Underwriting" and "Shares Eligible
for Future Sale."
27. Limitation of Liability of Directors and Officers. As permitted by the
Colorado Business Corporation Act, the Company's 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 or officer, except for liability for breach of a director's
or officer's duty of loyalty to the Company or its shareholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for acts relating to unlawful distributions or for any
transaction from which the director or officer derived an improper personal
benefit. The Company's 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. See "Management -- Limitation of Liability of Directors and
Officers."
28. Possible Restrictions on Market-Making Activities in the Company's
Securities. The Company believes that the Underwriter intends to make a market
in the Company's securities and may be responsible for a substantial portion of
the market making activities in such securities. Regulation M under the Exchange
Act may prohibit the Underwriter from engaging in any market-making activities
with regard to the Company's securities for the period from five business days
(or such other applicable period as Regulation M may provide) prior to any
solicitation by the Underwriter of the exercise of outstanding Warrants until
the termination (by
16
<PAGE>
waiver or otherwise) of any right that the Underwriter may have to receive a fee
for the exercise of the Warrants following such solicitations; and any period
during which the Underwriter, or any affiliated parties, participate in a
distribution of any securities of the Company for the account of the Underwriter
or any such affiliate. As a result, the Underwriter may be unable to provide a
market for the Company's securities during certain periods, including while the
Warrants are exercisable. Any temporary cessation of such market-making
activities could have an adverse effect on the liquidity of the Company's
securities. See "Underwriting."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,600,000 Shares and
1,600,000 Warrants offered hereby (after deducting underwriting discounts and
commissions and other expenses of the offering) are estimated to be
approximately $6,622,000 ($7,686,880 if the Underwriter's over-allotment option
is exercised in full). The Company expects to use the net proceeds (assuming no
exercise of the Underwriter's over-allotment option) approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage
Application of Net Proceeds Dollar Amount of Net Proceeds
- --------------------------- --------------- ----------------
<S> <C> <C>
Repayment of financing notes(1) ........................ $2,060,000 31.1%
Programming expenses(2) .............................. 2,000,000 30.2
Sales and marketing(3) ................................. 1,835,000 27.7
Working capital and general corporate purposes(4) ...... 555,000 8.4
Commencement of merchandising operations(5) ............ 172,000 2.6
----------- -------
Total ................................................ $6,622,000 100.0%
=========== =======
</TABLE>
- ------------
(1) Represents amounts to be used for the repayment of the $2,000,000 principal
amount of the Financing Notes plus accrued and unpaid interest thereon of
approximately $60,000. The Financing Notes bear interest at the rate of 9%
per annum and are repayable on the earlier of the consummation of this
offering or March 6, 1998. The Company is using the proceeds of the Private
Financing principally in connection with an affiliate marketing campaign in
connection with the national launch of The Recovery Network, programming
expenses for the production of Full Circle, Testimony and Bottoms, an
investment in Recovery Interactive and payments to ATN under the Nesting
Contract of approximately $102,000. See "Plan of Operation."
(2) Represents anticipated costs of approximately (i) $708,000 for the
production, editing and/or licensing of the Company's programming; (ii)
$38,000 for the production of programming for Recovery Talk Radio; (iii)
$1,014,000 for ATN Services under the Nesting Contract; and (iii)
approximately $240,000 for the salaries of three production personnel. See
"Business -- The Recovery Network -- Programming."
(3) Represents anticipated costs of approximately (i) $1,076,000 for an
affiliate marketing campaign and approximately $277,000 for salaries and
benefits of six marketing and sales personnel; (ii) $140,000 for the
development of the National Partnership for Recovery and Prevention; and
(iii) $342,000 associated with selling advertising time. See "Business --
The Recovery Network."
(4) Represents proceeds allocated to working capital and to general corporate
purposes. A portion of the proceeds allocated to working capital may be
utilized to pay the salary and benefits of the Company's officers estimated
to be approximately $442,000 over the twelve months following the
consummation of this offering.
(5) Represents expenses associated with the development of merchandising
operations for recovery and prevention-related products and services by the
Company's subsidiary, Recovery Direct and related services. See "Business --
Merchandise Sales."
If the Underwriter's over-allotment option in exercised full, the Company
will realize additional net proceeds of approximately $1,064,880. See
"Underwriting."
The allocation of the net proceeds from this offering set forth above
represents the Company's best estimate based upon its currently proposed plans
and assumptions relating to its operations and certain assumptions regarding
general economic conditions. If any of these factors change, the Company may
find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes.
18
<PAGE>
The Company anticipates that the net proceeds of this offering, together
with projected revenues from operations, will be sufficient to fund the
Company's operations and capital requirements for approximately 12 months
following the consummation of this offering. There can be no assurance, however,
that such funds will not be expended prior thereto due to unanticipated changes
in economic conditions or other unforeseen circumstances. In the event the
Company's plans change or its assumptions change or prove to be inaccurate, the
Company could be required to seek additional financing sooner than currently
anticipated. The Company has no current arrangements with respect to, or
potential sources of, any additional financing, and it is not anticipated that
existing shareholders will provide any portion of the Company's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in short-term bank certificates of deposit, short-term
securities, United States Government obligations, money market instruments
and/or other interest-bearing investments.
DILUTION
As of March 31, 1997, the net tangible book value of the Company was
$(208,926) or approximately $(.08) per share of Common Stock. After giving
retroactive effect to the Pro Forma Adjustment (see footnote 1 of "Prospectus
Summary -- Summary Financial Information"), the pro forma net tangible book
value of the Company as of March 31, 1997 was $(184,970) or $(.07) per share.
After also giving effect to (i) the sale of the 1,600,000 shares of Common Stock
and 1,600,000 Warrants being offered hereby (less underwriting discounts and
commissions and estimated expenses of this offering) and (ii) non-recurring
charges of $1,145,215 relating to the Private Financing, the adjusted net
tangible book value of the Company as of March 31, 1997 would have been
approximately $5,231,608, or $1.27 per share, representing an immediate increase
in net tangible book value of $1.34 per share of Common Stock to existing
shareholders and an immediate dilution of $3.73 per share to new investors. The
following table illustrates this dilution to new investors on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price ....................................... $5.00
Net tangible book value before Pro Forma Adjustment ...... $ (.08)
Increase attributable to Pro Forma Adjustment ............ .01
-------
Pro forma net tangible book value before this offering ...... (.07)
Increase attributable to new investors .................. $1.34
-------
Adjusted net tangible book value after offering ............ 1.27
------
Dilution to new investors ................................. $3.73
======
</TABLE>
The following table sets forth with respect to existing shareholders and
new investors in this offering, a comparison of the number of shares of Common
Stock acquired from the Company, the percentage of ownership of such shares, the
total cash consideration, the percentage of total cash consideration and the
average price per share.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Paid Average
----------------------- ------------------------- Price Per
Number Percent Amount Percent Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders ...... 2,521,250 61.2% $ 3,656,601 31.4% $1.45
New Investors ............... 1,600,000 38.8 8,000,000 68.6 5.00
---------- ------- ------------ ------- ------
Total ..................... 4,121,250 100.0% $11,656,601 100.0%
========== ======= ============ =======
</TABLE>
The above tables assume no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$9,200,000 for 1,840,000 shares of Common Stock, representing approximately
68.6% of the total consideration for 42.2% of the total number of shares of
Common Stock outstanding. In addition, the above table assumes no exercise of
other outstanding stock options or warrants. As of the date of this Prospectus,
there are also outstanding Financing Warrants to purchase 500,000 shares of
Common Stock at an exercise price of $4.00 per share, other warrants to purchase
15,498 shares of Common Stock
19
<PAGE>
at an exercise price of $3.87, outstanding stock options granted under the Stock
Option Plans to purchase an aggregate of 190,359 shares of Common Stock at an
exercise price of $5.00 per share and outstanding non-plan options to purchase
an aggregate of 113,290 shares of Common Stock at exercise prices ranging from
$.77 to $2.32.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock, and the
Board of Directors does not intend to declare or pay any dividends on its Common
Stock in the foreseeable future. The Board currently intends to retain all
available earnings (if any) generated by the Company's operations for the
development and growth of its business. 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 other debt securities of
the Company) or by the terms of any Preferred Stock that may be authorized and
issued. See "Description of Securities."
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1997, (ii) the pro forma capitalization at such date after giving
retroactive effect to the Pro Forma Adjustment (See footnote 1 of "Prospectus
Summary -- Summary Financial Information"), and (iii) the pro forma
capitalization as adjusted to give effect to the sale of the Common Stock and
Warrants offered hereby and the anticipated application of the estimated net
proceeds therefrom:
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------
Actual Pro Forma As Adjusted
--------------- -------------- ---------------------
<S> <C> <C> <C>
Short-term debt, including current portion of capital lease
obligation ................................................ $ 1,034,786 $ 1,058,170 $ 1,768
============ ============ ==============
Long-term debt and obligation under capital lease, net of
current maturities ....................................... $ 1,687 $ 1,687 $ 1,687
------------ ------------ --------------
Shareholders' equity (deficit):
Common Stock, $.01 par value: 10,000,000 shares
authorized; 2,511,250 shares issued and
outstanding, actual; 2,521,250 shares issued and
outstanding, pro forma; 4,121,250 shares issued
and outstanding, as adjusted(1) ........................ 25,112 25,212 41,212
Additional paid-in capital .............................. 4,152,852 4,176,708 10,782,501
Notes receivable .......................................... (9,900) (9,900) (9,900)
Prepaid consulting costs ................................. (11,250) (11,250) (11,250)
Deficit accumulated in the development stage ............ (4,365,740) (4,365,740) (5,570,955)(2)
------------ ------------ --------------
Total shareholders' equity (deficit) .................. (208,926) (184,970) 5,231,608
------------ ------------ --------------
Total capitalization .............................. $ (207,239) $ (183,283) $ 5,233,295
============ ============ ==============
</TABLE>
- ------------
(1) Does not include: (i) 1,600,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) an aggregate of 320,000 shares of Common
Stock reserved for issuance upon exercise of the Underwriter's Warrants and
the warrants included therein; (iii) 159,641 shares of Common Stock reserved
for issuance upon exercise of stock options available for future grant under
the Stock Option Plans; (iv) 190,359 shares of Common Stock reserved upon
exercise of outstanding options granted under the Stock Option Plans; (v)
113,290 Shares of Common Stock reserved for issuance upon exercise of
outstanding non-plan stock options; (vi) 515,498 Shares of Common Stock
reserved for issuance upon exercise of warrants which have been issued by
the Company, including 500,000 shares of Common Stock issuable upon exercise
of the Financing Warrants; and (vii) an indeterminable number of shares of
Common Stock reserved for issuance in the event the Company fails under
certain circumstances to register, or to maintain an effective registration
statement with respect to, the Financing Shares and the Financing Warrant
Shares. See "Plan of Operation -- Liquidity and Capital Resources,"
"Management -- Stock Option Plans," "Description of Securities" and
"Underwriting."
(2) Includes non-recurring charges of approximately $943,598 representing the
loan discount related to the Private Financing and $201,617 representing the
issuance costs of the Financing Notes.
21
<PAGE>
PLAN OF OPERATION
General
The Company was organized in 1992, was reorganized in 1995 and is in the
development stage. Since its inception, the Company has been primarily engaged
in test broadcasting of The Recovery Network in limited markets, affiliate
marketing, development, acquisition and production of programming, establishing
Radio Talk Recovery and the Help Line and forming relationships with individuals
and organizations in the recovery field.
The Company has not generated any meaningful revenues and does not expect
to generate any meaningful revenues for the foreseeable future. To date, the
Company has incurred significant net losses, including net losses of $1,223,829
and $2,286,273 for the year ended June 30, 1996 and nine months ended March 31,
1997, respectively. Since March 31, 1997, the Company has continued to incur
significant losses. The Company believes that generation of meaningful revenues
will be dependent upon the Company entering into affiliation agreements with
local cable systems with a significant number of subscribers, developing
television programming to enable The Recovery Network to expand its hours of
broadcast, achieving significant viewer loyalty, attracting advertisers and
developing or entering into arrangements for the supply of products, such as
videotapes, audio cassettes and books to merchandise. The Company expects to
incur substantial up-front capital expenditures and operating costs in
connection with the initial launch and expansion of The Recovery Network,
satellite transmission of its programming and the development and production of
television programming, which will result in significant losses for the
foreseeable future. The Company will also incur a non-recurring charge during
the fiscal quarter in which this offering is consummated of approximately
$1,205,215 relating to the Private Financing.
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under the Nesting Contract with ATN. Pursuant to the
Nesting Contract, ATN provides the ATN Services on its satellite transponder to
The Recovery Network for two hours of broadcast time every day to subscribers of
cable systems with which ATN has affiliation agreements. Currently, The Recovery
Network is broadcast one hour in the morning to approximately 13 million
subscribers and one hour in the evening to approximately 3.5 million
subscribers. In addition to the distribution under the Nesting Contract, the
Company is seeking two hours of broadcast time per day in other local cable
systems in a large number of markets. The Company has identified all local cable
systems in the United States with at least 50,000 subscribers and is engaged in
a general marketing campaign ("affiliate marketing") directed at those 259
systems. The Company is also targeting a more focused affiliate marketing effort
on 11 major cities whose communities contain 103 of those 259 systems.
The Company anticipates that it will generate revenues from sales of
advertising time, merchandising recovery-related products and services through
its various channels of distribution, by seeking sponsorships for its
programming and from license fees from cable systems for its programming. The
Company does not expect that it will generate any meaningful revenues from
license fees until such time, if ever, that The Recovery Network enters into
affiliation agreements providing the Company with a significant subscriber base.
There can be no assurance that the Company will be able to enter into
affiliation agreements with local cable systems with a sufficient number of
subscribers, achieve significant viewer loyalty or attract advertisers for The
Recovery Network, generate meaningful revenues or achieve profitable operations.
The Company also anticipates that Recovery Interactive will generate revenue
from monthly subscriber fees from managed care companies, insurance companies
and employers for delivering mental and behavioral health benefits to covered
individuals and merchandising.
Liquidity and Capital Resources
The Company's primary capital requirements will be to fund the costs of its
affiliate marketing efforts, sales of advertising time, producing its
programming, satellite transponder costs and costs for uplink and transmission
services under the Nesting Contract and working capital expenses.
The Company's capital requirements have been and will continue to be
significant and its cash requirements have been exceeding its cash flow from
operations. At March 31, 1997, the Company had a working capital
22
<PAGE>
deficit of $571,319 due to, among other things, costs associated with program
development and affiliate marketing efforts. As a result, the Company has been
substantially dependent on loans from its shareholders and private placements of
its debt and equity securities to fund its operations.
During the period from November 1995 through April 1996, the Company issued
in a private placement 322,663 shares of Common Stock at a price per share of
$2.32 for proceeds of approximately $749,500. The Company issued to a director
of the Company 17,220 shares of Common Stock valued at $2.32 per share in
consideration for certain strategic and operational consulting services rendered
by him from June 1995 to May 1996.
During April 1996, the Company issued, pursuant to a shareholder rights
offering, 259,281 shares of Common Stock and received proceeds of $200,767. In
connection with the shareholder rights offering, the Company granted each
shareholder of record one transferable right for each share of Common Stock
owned by such shareholder. Five rights entitled a shareholder to purchase one
share of Common Stock at a price of approximately $.77 per share.
During the period from July 1996 through October 1996, the Company issued
10% Convertible Promissory Notes (the "Convertible Notes") in the aggregate
principal amount of $310,000. The Convertible Notes bear interest at the rate of
10% per annum and became due and payable on the earlier of the first anniversary
of their issuance or the consummation of an equity offering with gross proceeds
of at least $1.5 million. Convertible Notes in the aggregate principal amount of
$60,000 were issued to two directors and/or officers of the Company. The
principal and interest on the Convertible Promissory Notes was convertible at
any time at the option of the holder into shares of Common Stock at a conversion
price of $3.87 per share of Common Stock. Upon conversion on or before maturity,
the noteholder was entitled to receive warrants to acquire shares of Common
Stock in an amount that equaled twice the number of shares issued upon
conversion. If the Convertible Notes were held to maturity and not converted,
the noteholder was entitled to receive warrants to purchase the number of shares
of Common Stock that equaled the number of shares the principal on the Note
would have been converted into. All of such warrants are exercisable at any time
during the period within two years after the date of issuance.
In October 1996, the holder of a convertible promissory note dated October
9, 1994 in the aggregate principal amount of $20,000 agreed to a modification of
the terms of the note pursuant to which interest was paid in cash and the
principal amount of the note was converted into 6,888 shares of Common Stock at
a price of $2.90 per share.
From October 1996 through January 1997, the Company issued in a private
placement 138,761 shares of Common Stock for a price per share of $3.48 for
proceeds of approximately $483,500. The Company issued 7,749 shares in
consideration of services rendered in connection with such offering. The
purchasers were granted certain registration rights with respect to the Common
Stock issued in the private placement. See "Description of Securities --
Registration Rights."
During November 1996, in order to induce the noteholders to convert the
Convertible Notes, the Company offered the noteholders who converted their
Convertible Notes and exercised the warrants issuable upon conversion of the
Convertible Notes, a reduction in the conversion price of $3.87 per share of
Common Stock to an effective price of approximately $3.68 and a reduction of the
exercise price of the warrants from $3.87 per share to $2.32 per share. The
converting noteholders were also granted certain registration rights with
respect to the shares of Common Stock issued upon conversion of the Convertible
Notes and shares received upon the exercise of the warrants. In November and
December 1996, Convertible Notes in the aggregate principal amount of $250,000
and interest of approximately $11,500 were converted into an aggregate of 71,033
shares of Common Stock. The noteholders also received and exercised warrants for
142,065 shares of Common Stock resulting in proceeds to the Company of
approximately $330,000. The remaining outstanding Convertible Note in the
principal amount of $60,000 was repaid in April 1997 from the net proceeds of
the Private Financing, and in connection with such repayment the Company issued
to the holder warrants to purchase 15,498 shares of Common Stock, exercisable at
a price of $3.87 per share.
In November and December 1996, certain directors and shareholders exercised
options to acquire 73,615 shares of Common Stock at an exercise price of $2.32
per share resulting in proceeds to the Company of approximately $171,000.
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In March and April 1997, the Company completed a private financing pursuant
to which it issued to 20 "accredited investors" an aggregate of 40 Units
consisting of an aggregate of (i) $2,000,000 principal amount of unsecured
non-negotiable promissory 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; and (iii) warrants to purchase an
aggregate of 500,000 shares of Common Stock at an exercise price of $4.00 per
share. The offering price was $50,000 per Unit. After payment of $200,000 in
placement agent fees to the Underwriter, which acted as placement agent for the
Company in connection with the Private Financing, and other offering expenses of
approximately $262,000, the Company received net proceeds of approximately
$1,538,000 from the sale of the Units. The net proceeds of the Private Financing
are being used by the Company for, among other things, an affiliate marketing
campaign in connection with the national launch of The Recovery Network,
programming expenses for the production of Full Circle, Testimony and Bottoms, a
capital contribution in the amount of $200,000 to Recovery Interactive and
payments under the Nesting Contract with ATN in the amount of $102,000. The
Company intends to use a portion of the proceeds of this offering to repay the
entire principal amount of, and accrued interest on, the Financing Notes. See
"Use of Proceeds" and "Description of Securities -- Recent Financing."
The Company anticipates that the net proceeds of this offering, together
with projected revenues from operations, will be sufficient to fund the
Company's operations and capital requirements for approximately 12 months
following the consummation of this offering. There can be no assurance, however,
that such funds will not be expended prior thereto due to unanticipated changes
in economic conditions or other unforeseen circumstances. In the event the
Company's plans change or its assumptions change or prove to be inaccurate, the
Company could be required to seek additional financing sooner than currently
anticipated. The Company has no current arrangements with respect to, or
potential sources of, any additional financing, and it is not anticipated that
existing shareholders will provide any portion of the Company's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all. Any inability to obtain additional financing when
needed would have a material adverse effect on the Company, requiring it to
curtail and possibly cease its operations. In addition, any additional equity
financing may involve substantial dilution to the interests of the Company's
then existing shareholders.
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BUSINESS
General
The Company, a development stage company, was organized to provide
information, interaction and support via television, radio and interactive media
services to persons affected by or afflicted with alcoholism, drug and substance
abuse, eating disorders, depression and a variety of behavioral and mental
health problems ("Recovery Issues"), as well as to persons seeking to prevent
the onset of these problems ("Prevention Issues"). The Company currently
addresses Recovery Issues and Prevention Issues through The Recovery Network, a
cable television network which commenced test-broadcasting on a limited basis in
March 1996 and launched nationally via satellite transmission in April 1997 and
currently airing on over 150 cable systems in 60 cities nationwide; Recovery
Talk Radio, a nationally syndicated talk radio program introduced in December
1996 is airing every Sunday morning from 8:00 a.m. to 9:00 a.m. (EST) on 56
stations and from 9:00 a.m. to 10:00 a.m. (EST) on 47 stations; and a toll-free
telephone helpline (the "Help Line") which offers information to viewers of The
Recovery Network about where to obtain information and help in their
communities. The Company also owns a 50% interest in RecoveryNet Interactive,
L.L.C. ("Recovery Interactive"), a joint venture with TCII (an affiliate of
Tele-Communications, Inc., "TCI") formed in August 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.
Overview
The Recovery Market
The Company believes that the market for recovery and prevention-oriented
programming consists of four groups: (i) friends, families and co-workers of
persons afflicted with Recovery Issues (the "Affected Others"); (ii) persons who
are already in recovery ("Persons in Recovery") and seek the daily support and
connection to others in recovery; (iii) afflicted persons who are not yet in
recovery either because they are unaware of the resources that are available or
are unwilling or unable to attend meetings or seek help publicly ("Afflicted
Persons"); and (iv) persons concerned about Prevention Issues, particularly
families with children. The Company believes that these four groups make up a
significant portion of the nation's population.
The Company expects that a substantial portion of its audience will be the
Affected Others. According to The American Journal of Psychiatry Official
Practice Guide published in November 1995, approximately 56 million persons in
the United States are directly affected by alcohol abuse or addiction alone. The
National Association for Children of Alcoholics estimated that in 1995 there
were approximately 26.8 million children of alcoholics in the United States. A
substantial number of employers and coworkers are affected by alcohol abuse in
the workplace.
Persons in Recovery include the millions of Americans who regularly attend
meetings of various support groups, such as Alcoholics Anonymous, Al-Anon,
Overeaters Anonymous, Cocaine Anonymous, Narcotics Anonymous, or are in some
other form of treatment, including counseling. While this group is smaller than
the Affected Others, the Company believes that The Recovery Network's
programming will provide a useful and important service to Persons in Recovery,
and that members of this group are likely to make an effort to seek out the
Company's programming and to inform others in their respective support groups
about The Recovery Network.
Afflicted Persons include the estimated 43 million Americans who, according
to the 1995 National Household Survey on Drug Abuse ( the "National Household
Survey"), are heavy or binge drinkers and the approximately 12.8 million who use
illegal drugs. Afflicted Persons also include approximately 20% of the female
population between the ages of 12 and 30 that Anorexia and Related Disorders,
Inc. in 1992 estimated had a major eating disorder such as anorexia or bulimia
or some of its symptoms, and the 59% of the adult population that Scientific
American, in August 1996, estimated met the current definition of clinical
obesity.
Afflicted Persons also include persons suffering from depression and
persons who wish to quit smoking. In 1993, The National Institute of Health
estimated that more than 11 million Americans suffered from depression and that
one in eight persons will be affected by depression sometime in their lives. The
National Household Survey estimates that there were 61 million Americans who
were current smokers in 1995, many of whom the Company believes wish to quit
smoking.
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With the recent substantial rise in drug use, especially among adolescents,
the Company believes that there is and will continue to be a growing interest in
Prevention Issues, particularly in families with adolescents ages 13 to 18.
According to the National Household Survey, the percentage of adolescents using
illegal drugs increased 105% from 1992 to 1995, and, in 1995, approximately 18%
of 18 to 20-year olds and approximately 15.6% of 16 and 17-year olds used
illegal drugs. A recent survey by the National Center on Addiction and Substance
Abuse cited drugs as the number one problem facing teenagers.
The economic and social impact of addiction on society is high. A study
conducted by Brandeis University in October 1993 estimated the annual negative
impact on the economy from substance abuse exceeded $230 billion. It is commonly
believed among industry experts that substance abuse is a major cause of crime
and family problems, especially family violence, and is a factor in one out of
three divorces.
Despite the perceived size of the market for recovery and
prevention-related products and services, the Company believes that there is
currently no effective national marketplace to enable suppliers of such products
and services to reach their target consumers. The Company believes that, to
date, consumers seeking recovery and prevention-related products and services
have done so primarily through local support groups, such as Alcoholics
Anonymous, local treatment centers, counseling through health professionals,
churches and schools in their communities, and from self-help books and other
materials. A disadvantage of these traditional sources is that they all require,
to some extent, that the consumer publicly acknowledge that he or she is seeking
information. The Company believes that many persons in its target audience may
be reluctant to seek help publicly.
The Cable Television Market
Cable television was first developed in the late 1940s primarily to serve
rural communities unable to receive broadcast television signals. By June 1995,
there were more than 11,200 cable systems serving over 60 million subscribers in
over 32,000 communities in the United States. Of these cable systems, 259 of
them have 50,000 or more subscribers. The largest cable system in the country
has over 1,000,000 subscribers, but only the 30 largest systems have 200,000
subscribers or more. Cable system operators range from large multiple system
operators ("MSOs") that own many systems to small, independent systems that
serve as few as several thousand households. The 10 largest MSOs control 231 of
the 259 largest systems and have approximately 80% of their subscribers. Despite
this concentration, each system operates under a franchise from the government
of the local community in which it is located. Thus, MSOs and other cable
operators have to contract with the local franchising authorities for each cable
system.
The cable industry is regulated by federal and state governments in part to
help local communities insure that their community receives some benefit from
the valuable local rights-of-way it grants to the cable system operator. Many
local franchising authorities require that cable systems devote a portion of
their channel capacity to public access, educational and governmental access
channels. Many communities also expect cable systems to offer a minimum amount
of channel capacity, certain system design features and programming that either
originates from or addresses the needs and interests of the local community.
This concept is commonly referred to in the industry as "localism." Prominent
individuals in the cable industry are aware that, for a variety of reasons, the
industry has not fulfilled on the promise of localism. The Company believes
that, as cable franchise contracts expire and are subject to renewal over the
next several years, many cable systems will need to upgrade and expand channel
capacity as well as to demonstrate to the communities their continued commitment
to localism to obtain renewal.
Most programming decisions for the majority of cable systems that are owned
by MSOs are made at the MSO level in negotiations between the MSO and the
various television networks. Typically, these negotiations, if successful,
result in one of two types of affiliation agreement. In one, the agreement
specifically identifies which local cable systems will carry the programming and
does not directly involve the cable system in negotiations. In the other, the
agreement specifies terms that are approved at the MSO level but requires the
network to negotiate affiliation agreements with each individual cable system.
Many cable systems also have local channels which are designed to serve the
community's needs and interests, and the decision to add programming to these
channels is typically left to the discretion of the local cable system manager.
Some, but not all, networks, receive license fees calculated on a per
subscriber, per month basis. According to an industry survey of 41 networks in
1996, 38 networks received monthly fees ranging from $.03 per subscriber to $.70
per subscriber and
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three networks did not receive license fees. Of those 38 networks that received
license fees, 22 networks received license fees ranging from $.10 to $.29.
Generally, networks that air less than 16 hours of programming per day do not
receive license fees. Also, new networks often offer their programming for some
period of time after their launch free to cable systems that sign affiliation
agreements within a certain time after launch. In some cases, newly-launched
networks also provide affiliates with monetary launch support or other financial
incentives in order to secure initial carriage.
Channel capacity on most cable systems is currently limited. Channel
capacity is generally a function of the bandwidth of the individual cable
system's infrastructure. There are three categories of cable systems: (i) low
capacity systems that can offer a maximum of 50 to 55 channels; (ii) medium
capacity systems that can offer a maximum of 80 channels; and (iii) high
capacity systems that can offer approximately 110 channels, effectively the
limit of the current analog infrastructure. Of the 259 largest systems,
approximately 107 have 55 channels or less, 132 have 80 channels or less, and
only 20 have more than 80 channels. Until the recent introduction of new digital
technologies, in order for a low or medium capacity cable system to expand
channel capacity it needed to upgrade its entire hardware infrastructure to a
higher capacity analog system. Another alternative is to install new fiber optic
cable wiring. Although industry analysts expect that fiber optic cable will
eventually be installed nationwide, this is not likely to occur until the next
century. Both of these approaches are expensive and time consuming.
Recently developed digital technologies offer cable systems a less
expensive alternative for expanding channel capacity. Digital technologies
enable the cable systems to compress multiple digital channels into the
bandwidth currently required for a single analog channel. The cable system sends
the compressed, multi-channel signal to a subscriber's home where it is
decompressed by a digital converter box ("digibox"). This new technology permits
a cable system to expand significantly its current channel capacity with a much
lower capital investment than would be required to install fiber optic cables or
to make other major infrastructure upgrades. While the Company expects that
digiboxes will most likely be offered first to subscribers willing to pay an
additional fee to receive premium channels and other services, some, including
TCI, the nation's largest MSO, have stated their intention to provide digiboxes
to all of their subscriber base. Cable systems can install digiboxes on a
subscriber-by-subscriber basis at a rate determined by market demand and funded
in part by higher fees. A system can choose to convert only a portion of its
analog bandwidth to digital transmission, and thus continue to provide analog
service to its subscribers who do not want to pay a premium while offering
expanded programming and services to customers willing to pay for them.
The recent introduction of direct satellite services ("DSS") has also
increased pressure on cable systems to offer more channels and services. DSS
systems offer their subscribers more than twice as many channels as all but a
small number of cable systems, with better audio and video quality. The price of
the satellite dishes required to receive programming has dropped to the point
that DSS is currently price competitive with premium cable. There were
approximately 4.5 million DSS subscribers in February 1997, and industry
analysts expect that number to reach approximately 19 million by the year 2000.
The Company believes that the combination of DSS and the conversion of
cable systems from analog to digital signal transmission will create substantial
additional channel capacity over the next several years. The Company believes
that these developments will enable The Recovery Network to eventually become a
full time cable television network.
The Recovery Network
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under the Nesting Contract entered into with ATN.
Pursuant to the Nesting Contract, ATN provides the ATN Services on its satellite
transponder to The Recovery Network for two hours of broadcast time every day,
to subscribers of cable systems with which ATN has affiliation agreements.
Currently the Recovery Network is broadcast one hour in the morning to
approximately 13 million subscribers and one hour in the evening to
approximately 3.5 million subscribers. ATN provides distribution of the
Company's programming into cable systems through existing affiliation agreements
between ATN and those systems. In addition to its distribution under the Nesting
Contract, the Company is seeking two hours of broadcast time per day in other
local cable systems in a large number of
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markets. The Company has identified all local cable systems in the United States
with at least 50,000 subscribers and is engaged in a general marketing campaign
("affiliate marketing") directed at those 259 systems. The Company is also
targeting a more focused affiliate marketing effort on 11 major cities whose
communities contain 103 of those 259 systems.
Pursuant to the Nesting Contract, the Company is charged a daily rate for
broadcast time provided by ATN at an estimated rate of approximately $2,100 for
April 1997 which increases to an estimated rate of approximately $3,595 by March
1998. The actual charge for each calendar month is based on the actual monthly
number of households served by affiliates of ATN ("ATN Affiliates"). The Nesting
Contract provides, however, that the Company will not be charged more than
$60,000 per calendar month during the first six months of the Nesting Contract
or more than $65,000 during the subsequent six months of the Nesting Contract.
ATN has also agreed to provide the ATN Services for two additional hours of
broadcasting, if such time is available, to the Company at ATN's cost plus 20%,
which fee is in addition to the charges for broadcast time. ATN has also agreed
to provide authorization services for cable systems with which the Company
directly enters into affiliation agreements to enable the Company to broadcast
its programming on such affiliates' cable systems, provided that the Company
purchase the necessary equipment, if any. The Nesting Contract expires in April
1998, unless renewed by both parties. In the event the number of ATN Affiliates
decreases by 10%, the Company may terminate the Nesting Contract upon 30 days
written notice. The Company has granted ATN the right, for the term of the
Nesting Contract and for a period of one year thereafter, to match any other
nesting arrangement presented to the Company by a third party.
The Company is currently producing its flagship program, Full Circle, an
on-going one-hour program that documents the recovery process by featuring
Persons in Recovery in actual meetings, as well as Testimony and Bottoms. The
Company is also in various stages of development or production of several other
half-hour series focusing on several Recovery Issues and Prevention Issues.
The Company requires the proceeds of this offering for continued
transmission under the Nesting Contract and has allocated $1,014,000 of the
proceeds of this offering to make payments under the Nesting Contract. The
Company used $102,000 of the proceeds of the Private Financing for payments
under the Nesting Contract. Certain officers and directors of the Company are
officers, directors and/or principal shareholders of ATN. See "Management" and
"Certain Transactions."
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 and Help Line services that benefit the local community, and, that
although it will be difficult to obtain a full time dedicated channel for a new
network until new digital technologies expand channel capacity, more channel
capacity will become available over the next several years.
The first premise forms the basis for the Company's grassroots affiliate
marketing strategy. The Company believes that The Recovery Network's programming
offers local cable systems an opportunity to demonstrate their commitment to
localism. If The Recovery Network is successful in establishing significant
community support for its programming, the Company believes that its ability to
enter into affiliation agreements will be significantly improved. As part of its
strategy to demonstrate this support, the Company has formed The National
Partnership for Recovery and Prevention (the "Partnership"), an umbrella
coalition of national recovery and prevention organizations. The Company
believes that the members of the Partnership will help to establish The Recovery
Network's credibility and social significance. The Company is also seeking
support from other grassroots organizations, local politicians and law
enforcement agencies and officials, and believes that the socially responsible
nature of The Recovery Network's programming will help it obtain that support.
The second premise accounts for the Company's strategy to seek to obtain
two hours of air time per day in a large number of markets. The Company believes
that satellite transmission via its Nesting Contract will facilitate
distribution of The Recovery Network for two hours per day by additional cable
systems. Because the
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satellite transmission signal provided under the Nesting Contract is available
to all cable systems in the United States, the Company believes it will be able
to add additional cable systems beyond those that have an affiliation agreement
with ATN. The Company believes that most cable systems will readily perceive the
potential benefits to them from airing the Recovery Network's programming,
including a demonstration of the 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, the cost of committing
a dedicated, full time channel to The Recovery Network in order to receive those
benefits could be too high for many systems. Instead, the Company is initially
asking cable systems to carry The Recovery Network for only two hours per day,
and Company believes, based on discussions with operators of cable systems, that
most of the 259 largest systems have the capacity to provide those hours. There
can be no assurance, however, that such systems will continue to have available
channel capacity or otherwise be willing to air The Recovery Network. With the
support of local communities and politicians for socially responsible
programming, the Company believes, although there can be no assurance, it will
be able to enter into affiliation agreements for these initial two hours.
Once its programming is airing on a cable system, the Company can
concentrate on building viewer loyalty and advertiser awareness in that
community. Because many of the Company's viewers are likely to be "appointment
viewers" (that is, they will be aware of when the Company's programming airs and
schedule time to see it, rather than finding it through "channel surfing"), the
Company expects that it will be able to reach its target audience airing only
two hours per day. The Company also believes that by demonstrating an ability to
attract viewers and advertisers, it will create increased demand for The
Recovery Network's programming. As demand increases, the Company expects to
enter into additional affiliation agreements with new cable systems and increase
the number of daily programming hours with existing affiliates. As channel
capacity increases, the Company believes it will be able to expand into a full
time network. 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 network.
The Company is implementing a two-tiered affiliate marketing strategy to
expand distribution beyond that currently provided under the Nesting Contract.
The Company has identified all local cable systems with at least 50,000
subscribers and is engaged in a general marketing campaign directed at those 259
systems. The Company commenced this campaign in December 1996 by sending
informational mailings to the general managers, programming directors and
marketing directors at these systems. The Company expects the Recovery
Interactive web site, which is still being constructed and is expected to
contain programming schedules, information about the Company and the Partnership
and links to sources of recovery information on the web, to be launched at the
end of May 1997. The Company will also rely on traditional marketing tools, such
as mail, telephone, trade advertisements, public relations and participation in
trade shows and conferences in connection with its general affiliate marketing
strategy. See "-- Recovery Interactive."
The Company is also targeting a more in-depth affiliate marketing effort on
the 11 cities whose communities contain 103 of the 259 largest systems. Such
systems have an aggregate subscriber base of nearly 12 million households.
Company executives intend to visit each of these 11 cities to meet with cable
system managers, local grassroots organizations, and local politicians and
community leaders. The Company is seeking support from these organizations and
individuals to further demonstrate the credibility and social significance of
The Recovery Network to local cable systems.
The Company is initially seeking to enter into short-term affiliation
agreements with local cable systems with a term of one year and that provide for
two hours of airing per day (one hour in the morning, one hour in the evening),
with no license fees paid to the Company, and have a 30-day termination clause.
The agreements 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.
The Company intends to use approximately $1,076,000 of the net proceeds of
this offering for its affiliate marketing expenses during the 12 months
following the consummation of this offering.
Programming
The Company's programming goal is to create and maintain an open national
platform for airing a broad spectrum of information about Recovery Issues and
Prevention Issues. The Company will focus on producing
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informative, educational, inspirational, and preventive programming. The
programming will also be sensitive to the traditions and concerns of the many
support groups and treatment programs that also address Recovery Issues.
The Company believes that the market for recovery and prevention-oriented
programming consists of the Affected Others, Persons in Recovery, Afflicted
Persons and persons concerned about Prevention Issues. The Company believes its
target audience will respond best to ordinary people relating their own stories,
rather than to celebrities and actors. This belief underlies the network's
motto, "Real People, Real Solutions." By observing real people sharing the steps
they have taken to solve their problems, the Company believes its viewers will
receive the information and support they need to take the critical first steps
towards addressing similar problems in their own lives and in the lives of their
families and friends. The Company expects that its core concept of real people
sharing the solutions that worked for them to form the basis of documentaries,
talk shows, dramas, how-to instructional shows and even comedy. The Company's
programming is also expected to address the causes underlying many Recovery
Issues, such as sexual abuse, child abuse, family violence and depression.
In response to the recent substantial rise in drug and alcohol use among
young persons in the United States, the Company has identified this segment of
the population, together with their parents, as an important target audience and
is developing several prevention programs specifically for this audience. The
Company believes that creating programming with which young people can identify
will help them handle the difficult decisions they will encounter, as well as
help to foster better relations between the youths and their parents.
The Company has commenced in house production of original programming for
The Recovery Network. The Company is currently airing its flagship series, Full
Circle, as well as Testimony and Bottoms, all of which premiered upon the
national launch of The Recovery Network. As of the date of this Prospectus, the
Company has produced 59 episodes of Full Circle, 21 episodes of Testimony and
two episodes of Bottoms. The story lines of these three programs are as follows:
o Full Circle -- An on-going, one-hour program documenting the inner working
of the recovery group process. The program follows five separate groups of
persons struggling with their addictions to alcohol, drugs, food, nicotine,
or sex, through the course of one year. The audience will follow each
person's progress through recovery.
o Testimony -- A program in which individuals from diverse socioeconomic
backgrounds describe their stories of addiction and recovery.
o Bottoms -- A comedy program that takes recovering alcoholics and addicts
back to the scenes of their lowest moments and turning points on the road
to recovery. The programs shows the role humor plays in recovery. In each
episode, host Tom Kramer (formerly of Not Necessarily the News and Candid
Camera) joins one or more Persons in Recovery on a lighthearted yet
poignant tour of where they hit bottom and started turning their lives
around.
The Recovery Network is also currently airing programming that is licensed
from third parties, reformatted by the Company and "bumpered" with The Recovery
Network's logo and related program introductions and network promotions,
including the following programs:
o Stolen Lives: Children of Addicts -- A documentary about the violation,
neglect and abuse endured by children of substance abusers.
o Secrets: Women, Drugs and Alcohol -- A program where women speak intimately
and honestly about their abuse of and recovery from drugs and alcohol.
The Company currently has more than a dozen additional programs, in
addition to Full Circle, Testimony and Bottoms in various stages of production
and/or development. Some of the current titles and storylines representative of
the Company's programming are as follows:
o SLAM! -- A drug and alcohol abuse prevention program for middle and high
school students. While focusing on drug and alcohol prevention, SLAM! also
examines other issues adolescents must contend with, such as problems at
home, peer pressure, sexuality, life goals and growing up.
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o Family Counsel -- A program featuring an in-depth look at home life and
its role in addiction and recovery. The hosts will be therapists who
identify and demonstrate solutions to the problems specific to family
interaction.
o Behind the Badge -- A program exploring the daily traumas and stress
facing police officers and offering support and solutions for officers and
the communities they serve.
o Secrets -- A program that seeks to show victims of sexual abuse that they
are not alone and give them the strength they need to take the first steps
toward overcoming abuse. Sexual abuse is a leading cause of behavioral and
mental health problems, but the shame victims feel often makes it hard for
them to acknowledge what has happened to them and to seek help.
o What's Eating You? -- A program seeking to help viewers with eating
disorders, one of the most difficult compulsive behaviors because it
involves a relationship with a substance that cannot be given up entirely.
o Up in Smoke -- A program that is designed to help viewers quit smoking and
that reflects the Company's commitment to a broad range of Recovery Issues.
o Equilibrium -- A program featuring a panel of medical experts in the field
of, and persons afflicted with, depression discussing the causes of
depression and offering solutions to fight depression on a day-to-day
basis.
o Recovery Theatre -- A program that will seek to show popular classic and
current movies and excerpts from movies that address or illustrate Recovery
Issues and Prevention Issues with introductions, discussion and commentary
by experts on the issues illustrated by the program.
o Recovery America -- A nationwide project that will encourage producers and
community groups to create programming for The Recovery Network that is
relevant to the community's concerns and issues.
The Company believes that Recovery America will add a local component to
its programming. The Recovery Network intends to provide program format and
other production support to producers and community groups for producing
approximately 20 episodes of Recovery America. The Recovery Network will also
seek to work with local cable operators to use their production facilities to
produce episodes. The Recovery Network will also seek to involve local
grassroots organizations and members of the Partnership with this project. The
Company also expects the program to serve as a platform for members of the
Partnership to address issues of concern to their constituencies. The Company
expects Recovery America to provide another means for cable systems to
demonstrate a commitment to localism.
The Company believes its focus on reality-based programming that can be
produced without elaborate scripting, staging, equipment, talent and location
expenses will permit it to produce programming at a cost well below industry
standards. Programming costs for location, talent and post-production, but not
including Company staff costs and overhead, are expected to average $5,000 per
hour of Full Circle, $2,500 per one-half hour of Testimony, $5,000 per one-half
hour of Bottoms and $7,000 per episode of original programming in the future.
There can be no assurance that the Company's program development and
production 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 program development and production and delays in the
Company's ability to air original programming.
The Company intends to use approximately $708,000 of the net proceeds from
this offering for producing original programming and licensing and/or
acquisition of programming from third parties.
Advertising
The Company believes that its projected audience demographics will enable
it to attract both mainstream advertisers, as well as companies which offer
recovery and prevention-related products and services ("non-mainstream
advertisers"). Non-mainstream advertisers market their products to a large
market but have no effective medium to access this market nationally and,
therefore, have not traditionally advertised on television. Because the Company
expects to offer the only national medium focused on Recovery and Prevention
Issues,
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the Company believes that non-mainstream advertisers will purchase the Company's
advertising time upon The Recovery Network's launch. The Company has already
attracted several non-mainstream advertisers for The Recovery Network and
expects that such non-mainstream advertisers will account for substantially all
of The Recovery Network's advertising revenues in the short term. Although as of
March 31, 1997, the Company has generated only limited revenues from
advertising, the Company believes it will continue to attract additional
non-mainstream advertisers.
The Company is also focusing its marketing efforts on attracting mainstream
advertisers for The Recovery Network and has attracted such advertisers on a
limited basis. However, mainstream advertisers are generally ratings sensitive
when purchasing time to offer products and services, and the Company does not
expect to have ratings to generate sufficient advertising revenue from
mainstream advertisers until such time, if ever, that it enters into affiliation
agreements with cable systems with a significant number of subscribers. Many
mainstream advertisers, however, also purchase time for corporate responsibility
advertising, where the focus of the advertising is to create public relations
benefits, rather than marketing products or services. The Company believes its
socially responsible programming and the support of grassroots organizations
will improve its efforts to obtain corporate responsibility advertising. The
Company will also seek sponsorship from corporations for its programming.
As The Recovery Network enter into additional affiliation agreements and
the number of viewers increases, the Company believes its audience demographics
will be appealing to many mainstream advertisers. Based on a research study
commissioned by the Company and on its analysis of market research, the Company
expects that the majority of its audience will be female, well-educated, viewers
of day-time talk shows, buyers of self-help books and tapes and have an annual
household income in excess of $60,000. The Company believes that these
demographics are attractive for many mainstream advertisers. The Company also
believes it will be attractive to mainstream advertisers because its programming
is expected to attract "appointment viewers" from this demographic group. As a
result of an increase in programming narrowly targeted at specific interest
groups and the rise of "niche" networks, viewers now often tune in specifically
to watch programming tailored to their interest. Such viewers generally have a
higher level of interest in programming relating to their specific area of
interest, and the Company believes that these viewers will demonstrate loyalty
to advertisers who support that programming.
The Company expects that the majority of its advertising time will be sold
by contracts with advertisers and advertising agencies and that unsold
advertising time will be placed through arrangements with certain wholesale
agents. The Company expects that wholesale arrangements will provide the Company
compensation based on a percentage of sales made by the advertisers, or a small
fee based on customer inquiries, generated by the advertisement. There can be no
assurance that the made by the advertisers Company will generate any meaningful
revenues from the sale of advertising time.
Viewership
Upon distribution in a geographic market, either through an affiliation
agreement with a local system or under the Nesting Contract, marketing directly
to viewers in that community becomes important to the success of The Recovery
Network. The Company expects to advertise on other local networks and radio
stations. The Company is also seeking to promote viewership by working with a
well-known public relations firm to create national awareness for The Recovery
Network. Additionally, the Company will work with the members of the Partnership
to alert their respective constituencies to the availability and timing of The
Recovery Network's programming in their communities. The Company believes that
these promotion efforts will help build and retain viewer loyalty.
The Company believes that it will be the first national medium to provide
the Affected Others, Persons in Recovery and Afflicted Persons the information,
interaction and support they need in the privacy of their homes. Because the
Company believes many of those in its target audience are unable or unwilling to
seek help publicly, the Company hopes to build a loyal core audience among this
group. The Company believes its programming will also appeal to viewers outside
its core target audience, who will be intrigued by the opportunity to observe
real people struggling to find real solutions to their problems.
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Recovery Talk Radio
In December 1996, the Company launched Recovery Talk Radio, a nationally
syndicated audience participation talk radio program on the Talk America Radio
Network which focuses on Recovery Issues and Prevention Issues. Currently, the
Company is airing one program entitled The Meeting on Air on Recovery Talk Radio
every Sunday morning from 8:00 a.m. to 9:00 a.m. (EST) on 56 stations and from
9:00 a.m. to 10 a.m. (EST) on 47 stations. Recovery Talk Radio is based in
Boston, and listeners can call in to the program on a toll-free 800 telephone
number. The Meeting on Air features guest speakers who discuss their experiences
and perspectives with callers and the program's host. The Company currently
sells advertising time during such programming, although as of March 31, 1997,
the Company has generated only limited revenues from such advertising.
The Company has not yet generated any material revenues from Recovery Talk
Radio, and the Company does not expect that Recovery Talk Radio will account for
a material portion of the Company's revenues in the future. The Company intends
to utilize Recovery Talk Radio to help create support for and awareness of The
Recovery Network in markets in which The Recovery Network will or hopes to air.
The Company also intends to promote recovery-related merchandise on Recovery
Talk Radio. The Company intends to use approximately $38,400 of the net proceeds
from this offering to produce Recovery Talk Radio for approximately 12 months
following this offering.
Help Line
In March 1996, the Company commenced operations of a toll free help-line
and referral service for the viewers of The Recovery Network (the "Help Line").
During the hours which The Recovery Network is airing, the Company displays a
toll-free 800 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 an affiliate of Father Martin's Ashley
Treatment Center, a treatment center dedicated to the treatment of chemically
addicted persons. At times when the counselor is not available, viewers may
leave a message, and their calls will be returned. Father Joseph Martin, the
founder of the Ashley Treatment Center, is a member of the Company's Board of
Advisors. See "Management -- Advisory Board."
To the extent that the Company enters into affiliation agreements to air
The 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.
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 The Recovery Network. A portion of the proceeds of this offering
allocated to affiliate marketing will be used to operate the Help Line.
The National Partnership for Recovery and 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 television, radio and interactive media services
to develop and distribute effective and accurate information concerning
alcoholism and addiction. The Company's goal is to create 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 is in discussions with, more than 50 recovery and prevention
organizations. 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
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League, National Families in Action, National Hispanic/Latino Community
Prevention Network, National Parents Resource Institute for Drug Education,
National Treatment Consortium, Physicians for Prevention, Prevention
Intervention and Treatment Coalition for Health, The Bralove Group, The Miami
Coalition for a Safe and Drug Free Community and The Village.
Depending on their interests and abilities, partners may have the
opportunity to review and comment on The Recovery Network's programming, provide
ideas for programming that is of interest to their constituencies and, in some
cases, produce programming. The Recovery Network may also air public service
messages from the partners and otherwise help them disseminate information that
is important to them. With a national platform, the Partnership will seek to
help focus the attention of government and society on the issues of interest to
the Partnership's members and also foster better communication among its
members, their constituencies and the communities they are designed to serve.
The Company believes that the member organizations of the Partnership will be
instrumental in helping the Company demonstrate to cable operators a high level
of community support for The Recovery Network and how carriage of the Company's
programming can help the local operator fulfill the promise of localism. The
Company believes that the individual constituents of the Partnership's member
organizations will account for a significant portion of the initial audience for
The Recovery Network's programming, and the Company expects that the Partnership
will communicate to its constituents information about The Recovery Network's
programming schedule and availability.
Recovery Interactive
The Company owns a 50% interest in Recovery Interactive, a joint venture
with TCI Online RecoveryNet Holdings, Inc., an affiliate of TCI ("TCII"), formed
on August 1, 1996 to commence a business that expects to provide behavioral
health care products and services to managed care agencies, large group medical
practices, state, local and federal governments and governmental agencies,
employee assistance programs, corporations and other organizations offering or
providing health care services (collectively, "Health Care Entities") as well as
to provide information, interaction and support regarding Recovery Issues and
Prevention Issues, through an integrated multimedia platform, including a site
on the world wide web. The Company and TCII have each made a capital
contribution in the amount of $300,000 to Recovery Interactive. Neither party
may transfer its ownership interest in the joint venture until June 30, 1999.
After such date, the members have a right of first refusal with respect to the
sale of an ownership interest by the other member. Pursuant to the joint venture
agreement, to the extent distributions of cash are made by Recovery Interactive,
such distributions will be made equally to TCII and the Company. Jonathan Katch,
a principal stockholder and a former officer and director of the Company, is the
Chief Executive Officer of Recovery Interactive. See "Certain Transactions."
Recovery Interactive has developed and is continuing to develop behavioral
health care products and services ("Recovery Interactive Services") for Health
Care Entities and their clients. Recovery Interactive currently plans to deliver
these services through a platform allowing access by computer, telephone or
television.
In May 1997, Recovery Interactive entered into a five year license
agreement with Merit Behavioral Care Corporation ("Merit"). The license
agreement provides for Merit to distribute Recovery Interactive Services through
interactive multimedia platforms. During the term of the agreement, Recovery
Interactive may not make Recovery Interactive Services available to certain of
Merit's competitors unless such competitor makes an equity investment in
Recovery Interactive of not less than $2,000,000. The license agreement provides
for Merit to pay Recovery Interactive an amount equal to Merit's gross revenues
received from customers who use Recovery Interactive Services less 115% of
Merit's costs for merchandising such services. Recovery Interactive Services are
offered as a separate service to Merit's customers. None of Merit's existing
customers currently receive Recovery Interactive Services, and Merit does not
require its customers to agree to receive Recovery Interactive Services to
receive other services offered by Merit. The license agreement does not set a
specific or minimum fee. The Company expects that Recovery Interactive will
receive a per month, per customer license fee, based on a capitated rate for
every Merit customer that receives Recovery Interactive Services.
Recovery Interactive is also seeking to enter into additional license
agreements with other Health Care Entities whereby, for a per person fee, these
companies will be able to provide Recovery Interactive Services such as risk
assessments and evaluations, to individuals insured by such companies. In order
to provide this service, Recovery Interactive may provide this service on the
customer's intranet or may provide links from the
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Recovery Interactive web site to dedicated sections of the web site that can be
accessed only by customers who have paid a fee and have obtained clearance to
access that section of the web site. Industry sources estimate, with 102 million
members, behavioral health managed care organizations provided $81.2 billion
dollars in behavioral health benefits in 1994. The Company believes that
employers, schools and government institutions may also be interested in
establishing similar designated web sites for the delivery of behavioral health
products and services to their constituents. The Company believes Recovery
Interactive will be a more cost effective system for the delivery of many of
these behavioral benefits than more traditional, in person and paper form-based
methods.
Pursuant to the joint venture agreement, TCII agreed to cause its
affiliate, @Home Corp. ("@Home"), to enter into an affiliation agreement with
Recovery Interactive. @Home was formed to distribute interactive media content
by cable, utilizing recently developed cable modems. Cable modems are capable of
delivering data at rates far higher than the current telephone-based modems.
This higher speed is expected to allow delivery of much more sophisticated
interactive media, including high resolution, true color graphics, full motion
video and CD-quality audio. Current telephone-based modems are able to deliver
primarily text and low resolution graphics, with very limited audio and video
capability. @Home has begun limited trials, but does not to date have a
significant installed base of cable modems. There can be no any assurance that
Recovery Interactive and @Home will enter into an affiliation agreement on terms
favorable to Recovery Interactive, or at all, or that @Home will ever expand its
base beyond the current trials.
Recovery Interactive is a development stage company and has not yet
generated any revenues. The Company believes that the generation of meaningful
revenues will depend on Merit obtaining customers for Recovery Interactive
Services, Recovery Interactive's ability to enter into additional license
agreements with Health Care Entities and upon further development of Recovery
Interactive's products. As of the date of this Prospectus, Recovery Interactive
has not generated any revenues, and has incurred operating losses of
approximately $458,000 since its inception. Recovery Interactive will seek to
generate revenues from monthly subscriber fees generated from the Recovery
Interactive web site, merchandising and from Health Care Entities and employers
for delivering mental and behavioral health benefits to covered individuals.
Although the Company believes that Recovery Interactive will provide the Company
with significant opportunities relating to an interactive multimedia business,
there can be no assurance that Recovery Interactive will be commercially
successful.
Merchandise Sales
The Company believes that the market for products and services addressing
Recovery and Prevention Issues is significant. The Company also believes that,
because it is attempting to create a nationwide medium specifically targeting
this market, if successful, it will be in a unique position to offer such
recovery and prevention-related products and services. The Company has formed a
subsidiary, Recovery Direct, through which it will seek to develop recovery and
prevention- related products and services to market on The Recovery Network, as
well as on Recovery Talk Radio, the Help Line and, through Recovery Interactive,
on the Internet. The Company intends for Recovery Direct to offer a variety of
self-help and recovery and prevention-related products, including videos of the
Company's programming aired on The Recovery Network and audio tapes of programs
aired on Recovery Talk Radio. In addition, the Company intends for Recovery
Direct to offer tapes and videos by other well-known individuals in the recovery
field.
The Company expects to use approximately $172,000 of the proceeds from this
offering to fund the initial operations of Recovery Direct to commence the
merchandising of recovery and prevention-related products and services.
The Company will also seek to enter into arrangements with third parties to
provide or develop recovery and prevention-related products and services and to
research opportunities for the direct marketing of products advertised on The
Recovery Network and on Recovery Talk Radio through a toll-free 800 telephone
number.
Competition
The Recovery Network will compete with all other existing and planned
television networks and other television programming for available air time,
channel capacity, advertiser revenue and revenue from license fees.
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Many of these television networks and producers of television programming are
well-established, have reputations for success in the development and operation
of television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than the
Company. In addition, if cable television channel capacity increases as the
Company expects competition from smaller competitors and other start-up
television networks could increase significantly.
Although the Company is not aware of any television network with
programming focusing solely 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. Such
networks include, America's Health Network which provides daily live programming
and prerecorded programming relating to health issues, The Health Channel, which
provides programming about health, medicine and wellness, Health-Net, an
interactive health-related program aimed at aging baby boomers, and Jones Health
Network, which provides instruction to persons seeking credentials or
accreditation in the health field. Moreover, because The Recovery Network's
programming is intended to provide information and support to persons facing
Recovery Issues and Prevention Issues, The Recovery Network and the Company's
recovery and prevention-related products and services will compete with other
products and services which perform similar functions, such as support groups,
self-help videos, audio cassettes and books and helplines. There can be no
assurance that the Company will be able to successfully compete for air time,
channel capacity, advertiser time or viewership.
Government Regulation
The cable television industry is subject to extensive and frequently
changing federal, state and local laws and substantial regulation under these
laws by governmental agencies, including the Federal Communications Commission
("FCC"). Regulations governing the rates that can be charged to subscribers by
cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as The Recovery Network. In addition, federal "must-carry"
rules requiring cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional channels for
noncommercial educational TV stations); commercial leased access rules
designating 10% to 15% of system channels for lease by unaffiliated programmers;
and local regulatory requirements mandating additional channel set-asides for
public, governmental and educational use could reduce channel availability which
might otherwise be available for The Recovery Network on many cable systems.
Statutory provisions and FCC rules governing relationships among cable systems
and competing forms of multichannel video program distribution, as well as the
relationships between the Company and its cable system affiliates could
adversely affect the marketability of the Company's programming and the ability
of the Company to enter into arrangements for the distribution of its
programming. Although program providers that do not hold FCC licenses or operate
distribution outlets, such as The Recovery Network and Recovery Talk Radio, are
not within the FCC's direct jurisdiction, 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 measured 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 or radio stations to FCC fine or other
sanctions, adversely affect the Company's relationship with such entities and
result in the discontinuation of carriage of the Company's programming by such
entities.
Federal and state regulation governing interactive or on-line information
services and potentially affecting the activities of Recovery Interactive 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 Recovery Interactive. Additional laws and regulations are
currently being considered by the federal government and many state and local
governments. There can be no assurance that these or existing laws or
regulations will not be applied in a manner that will adversely affect the
Company's business or operations. Moreover, the FCC currently is considering
proposals that could increase the
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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 the Help Line, Recovery Interactive and certain
other products and services contemplated by the Company. 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 FCC also regulates certain
marketing methods such as the permissible time periods for telephone
solicitations to residences, the maintenance of do-not-call lists, and use of
autodialers, facsimile machines and artificial or prerecorded voice systems for
marketing purposes. It is uncertain at this time whether or how any of these
requirements can or will apply to or affect the Company's business or operations
or its business relationship with entities providing the communications links
used by it or its customers.
The Communications Decency Act ("CD Act") makes 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. Although the
effectiveness of the CD Act has been stayed, there can be no assurance of the
results of the United States Supreme Court's review of the CD Act or, should the
CDA become effective, that information content made available on or through
Recovery Interactive's offerings by the company or by users of those offerings
would not violate these prohibitions or that application of the CDA or attempts
to implement defenses to it will 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 communications Decency Act
may also apply to information content available on or through Recovery
Interactive'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 four trademarks, including the "Recovery
Network" trademark. The Company believes that its trademarks and copyrights,
including "The Recovery Network" tradename and the signature look of the
network, have significant value and are important to the marketing and promotion
of The Recovery Network 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,
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such methods may not afford complete protection and there can be no assurance
that others will not independently develop similar know-how or obtain access to
the Company's know-how, concepts, ideas and documentation. Furthermore, although
the Company has or expects to have confidentiality and non-competition
agreements with its employees, and appropriate consultants, there can be no
assurance that such arrangements will adequately protect the Company's trade
secrets or that others will not independently develop programming similar to
that of the Company.
Insurance
The operation of a television, radio 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 $2,000,000 per annum), including
insurance relating to personal injury and advertising injury, in amounts which
the Company currently considers adequate.
Employees
The Company currently has 14 full time employees and one part-time
employee, of which four are engaged in affiliate marketing sales, one in
advertising sales, four in programming, and six in administration. The Company
expects, depending upon its level of business activities, that it will hire
approximately three additional affiliate marketing employees during the three
months following this offering. 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 5,000 square feet in Santa
Monica, California pursuant to a five-year lease that expires in May 2002. The
monthly rental is currently $10,000 per month and will increase annually to a
maximum rental of $12,500 per month. The Company has an option to extend the
lease through May 2004 at a price to be negotiated by the parties based upon
then prevailing rental rates.
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MANAGEMENT
Directors and Executive Officers
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------- ----- -------------------------------------------
<S> <C> <C>
George H. Henry ......... 43 Chairman of the Board
William D. Moses ......... 34 President, Chief Executive Officer and
Director
Donald J. Masters ......... 51 Executive Vice President and Director
John Wheeler ............ 43 Senior Vice President of Sales and
Marketing and Vice President of Operations
Bill Megalos ............ 42 Vice President of Production
Carlene L. Feichter ...... 40 Vice President of Finance and
Administration
Jack W. Fuellhart ......... 54 Vice Chairman of the Board of Directors
Paul Graf ............... 29 Director
Nimrod J. Kovacs ......... 47 Director
</TABLE>
George H. Henry has been Chairman of the Board of Directors since May 1997
and a director of the Company since December 1995. Since April 1986, Mr. Henry
has been President of G. Howard Associates, Inc., a private investment firm.
Prior to April 1986, Mr. Henry was a Vice President in the Corporate Finance
Department of the predecessor of Schroder Wertheim & Co. Incorporated, an
investment banking firm. Mr. Henry is a director of Biovail International
Corporation, a publicly traded pharmaceutical company, and PhoneTel
Technologies, Inc., a publicly traded telecommunications company, and ATN. Mr.
Henry is also a trustee of Mitchell College.
William D. Moses has been President and Chief Executive Officer of the
Company since November 1994. Mr. Moses has been a director of the Company since
1995. In January 1993, Mr. Moses co-founded ATN and served as a director of ATN
from June 1993 to June 1996. From July 1991 to December 1994, Mr. Moses was a
managing partner of Axiom Partners, a New York investment banking and brokerage
firm. From January 1992 to January 1994, Mr. Moses was a money manager for Oscar
Gruss & Co. From 1988 to 1991, Mr. Moses served as an independent financial
consultant. From 1986 through 1987, Mr. Moses was employed by Bear Stearns &
Co., Inc.
Donald J. Masters has been Executive Vice President of the Company since
May 1997 and a director of the Company since November 1995. Mr. Masters also
serves as Chairman of the Advisory Board and is responsible for developing and
overseeing the activities of the National Partnership for Recovery and
Prevention. Mr. Masters co-founded ATN, and he served as a director of ATN from
January 1993 to March 1996. From May 1989 to April 1992, Mr. Masters was Vice
President of Corporate Development and a founding officer of United
International Holdings, Inc. From November 1985 to May 1989, Mr. Masters was
Vice President and General Counsel of United Cable Television Corp., where he
was engaged in the development of the Discovery Channel, E! Entertainment,
Preview Guide, and several home shopping channels.
John Wheeler has been Senior Vice President of Sales and Marketing since
March 1997 and Vice President of Operations since May 1997. From June 1994
through February 1997 Mr. Wheeler was the president of a cable network. From
November, 1989 through May, 1994, Mr. Wheeler served as President of Cellular
System Management, Inc., a builder and manager of cellular properties throughout
the United States. From February 1982 to July 1987, Mr. Wheeler was Vice
President of Marketing of Metro Mobile CTS, a cellular company. From 1979 to
1982, Mr. Wheeler served as Vice President of Vision Cable Communications Inc.
Mr. Wheeler served as Northeast Regional Marketing manager for Showtime
Entertainment in 1978. Mr. Wheeler began his career at Cablevision Systems of
Long Island in 1976.
Bill Megalos has been Vice President of Production since April 1997 and
Executive Producer of the Company since May 1996. From 1981 to 1986, Mr. Megalos
worked on various aspects of film production on a
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freelance basis, including producing comedy features and directing dramatic
films, commercials and music videos. Mr. Megalos' credits include numerous
documentaries, such as the Emmy Award winning "W. Eugene Smith" with Peter
Riegart for American Masters, "A Night in Havana--Dizzy Gillespie in Cuba"
(1986), the PBS series "Quest for the Killers" (1986-1988), "Legendary Trails"
(1992) and the Academy Award winning "Down and Out in America" (1990). His work
as a director ranges from commercials and music videos to dramatic films. His
biography of Jack Benny for HBO was awarded the Cine Golden Eagle Award in 1994,
and he has filmed nearly 50 full-length documentaries for BBC during the past
ten years.
Carlene L. Feichter has been Vice President of Finance and Administration
of the Company since April 1997 and has been employed by the Company since
January 1997. From January 1995 through December 1996, Ms. Feichter was
Assistant Finance Director for Jewish Family Service of Los Angeles. From
February 1994 to January 1995, Ms. Feichter was Assistant Controller for the
Writer's Guild of America, West, an entertainment industry labor union. From
April 1992 to January 1994, Ms. Feichter was the Finance Director for the
Institute for Policy Studies.
Jack W. Fuellhart has been Vice Chairman of the Board of Directors of the
Company since December 1995. Mr. Fuellhart founded Cable Systems USA Partners, a
partnership engaged in the production of cable television systems in 1984 and,
since July 1985, has been its Chairman, Chief Executive Officer and Managing
Partner. Since 1988, Mr. Fuellhart has served on the Board of Trustees of The
Kiski School; and since July 1, 1994, Mr. Fuellhart has served on the board of
directors of Clarion University.
Paul Graf has been a director of the Company since April 1997. Mr. Graf is
currently a private investor and since October of 1989 has been Chief Executive
Officer and founder of International Arts, a business specializing in antique
art from Asia. From December 1992 to September 1995, Mr. Graf was Vice President
of Marketing and Productions for Wizard Management, Inc., an independent
record/management company. Since January 1997, Mr. Graf has been a director of
Catamount Brewing Co.
Nimrod J. Kovacs has been a director of the Company since October 1996 and
serves as Chairman of the Company's Executive Committee. Since January 1995, Mr.
Kovacs has been President of Eastern European Electronic Distribution & Global
Programming Group of United International Holdings, Inc ("UIH"). From 1991 to
1996, Mr. Kovacs directed UIH's investments which included Kabelkom in Hungary,
Kabelvision in Sweden, Kabel Net in the Czech Republic, Multicanal in Portugal,
and HBO Czech/TV Max in the Czech Republic. From 1989 to 1992, Mr. Kovacs was
President of NJK International, an international media consulting company. From
1982 to 1989, Mr. Kovacs was responsible for the investments of United Cable,
and subsequently United Artists, in the Discovery Channel in the United States
and Europe, E! Entertainment, Think Entertainment, Preview Guide, Bravo UK, and
several home shopping channels.
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 Retainer 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 and the 1997 Management Bonus
Plan. Mr. Henry is Chairman of the Finance and Compensation Committee and
Messrs. Moses, Fuellhart and Graf are also members of the Finance and
Compensation Committee.
In May 1997, the Company established an Audit Committee of the Board of
Directors which 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 and Messrs.
Fuellhart, Graf and Kovacs are also members of the Audit Committee.
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<PAGE>
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. Masters is the Chairman of the Executive
Committee and Messrs. Henry, Moses and Kovacs are also members of the Executive
Committee.
Executive Compensation
For the fiscal year ended June 30, 1996, the executive officers were paid
an aggregate of approximately $123,332, and no executive officer received
aggregate cash compensation in excess of $100,000. William D. Moses, President
and Chief Executive Officer of the Company, received cash compensation during
the fiscal year ended June 30, 1996 of approximately $57,000, and no cash
compensation the preceding year. For the fiscal year ended June 30, 1997,
compensation paid to current executive officers of the Company was approximately
$343,000.
Employment Agreements
Effective December 1, 1996, the Company entered into an employment
agreement with William D. Moses, the Company's President and Chief Executive
Officer, which expires on September 30, 1998. The employment agreement provides
for a base compensation payable to Mr. Moses of $12,000 per month through
September 30, 1998. Pursuant to the agreement, Mr. Moses is entitled to
participate in any employee benefit plans and arrangements when and as
implemented by the Company. In the event of termination of Mr. Moses' employment
by the Company, without "good cause" (as defined in the employment agreement),
Mr. Moses is 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 is 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 has 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 will be deemed
to have been terminated without "good cause", and the covenant not to compete
will have no further effect.
Effective December 1, 1996, the Company entered into an employment
agreement with Donald J. Masters, the Executive Vice President of the Company,
which expires on November 30, 1998. The employment agreement provides for a base
compensation payable to Mr. Masters of $10,000 per month through November 30,
1998. Pursuant to the agreement, Mr. Masters is entitled to participate in any
employee benefit plans and arrangements when and as implemented by the Company.
In the event of termination of Mr. Master's employment by the Company, without
"good cause" (as defined in the employment agreement), Mr. Masters is 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 is 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 has 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.
In connection with his employment, Mr. Masters was granted an option (the
"Option") to purchase 12,915 shares of Common Stock at an exercise price of
$2.32 per share. The Option vests with respect to 10,770 shares on February 1,
1997 and the remainder vests ratably monthly thereafter. In the event of a
"change in control" (as defined in the employment agreement), Mr. Masters will
be deemed to have been terminated without "good
41
<PAGE>
cause," the covenant not to compete will have no further effect and the Option
will vest in full. In addition on April 16, 1997, Mr. Masters was granted an
option under the Company's Management Bonus Plan to purchase 12,915 shares of
Common Stock at an exercise price of $5.00 per share, which will vest quarterly
over one year commencing on October 1, 1997.
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 expires on May 31, 1999. The employment agreement provides for a base
compensation payable to Mr. Wheeler of $12,000 per month through May 13, 1999.
In addition to the base salary, Mr. Wheeler will receive 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 does not already receive the programming through the
Company's Nesting Contract with ATN or through any other agreement under which
the Company purchases carriage rights. Pursuant to the agreement, Mr. Wheeler is
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 is 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 is 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 has 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.
Effective May 1, 1997, the Company entered into an employment agreement
with Bill Megalos, the Company's Vice President of Production, which expires on
November 30, 1998. The employment agreement provides for a base compensation
payable to Mr. Megalos of $10,000 per month through November 30, 1998. Pursuant
to the agreement, Mr. Megalos is entitled to participate in any employee benefit
plans and arrangements when and as implemented by the Company. In the event of
termination of Mr. Megalos's employment by the Company, without "good cause" (as
defined in the employment agreement), Mr. Megalos is 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 is 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 has 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.
Stock Option Plans
The Company has adopted two stock option plans, the 1996 Employee and
Consultants Stock Option Plan (the "Employee and Consultants Plan") and the 1996
Board of Directors and Advisory Board Stock Option Plan (the "Directors and
Advisory Board Plan"). The Company has reserved an aggregate of 144,420 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 under the Internal
Revenue Code of 1986, as amended. On February 6, 1997, the Company's
shareholders approved the 1997 Management Bonus Plan (the "Management Bonus
Plan"). The Company has reserved 205,580 shares of Common Stock for issuance
under such plan. The options granted under the Management Bonus Plan are either
non-qualified or incentive stock options, at the discretion of the Company. The
Management Bonus Plan also provides for non-option awards, such as stock
appreciation rights and restricted stock awards.
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<PAGE>
1996 Employee and Consultants Stock Option Plan
Effective December 3, 1996, the Company established its Employee and
Consultants Plan for its employees and consultants. The purpose of the Employee
and Consultants Plan is to create a pool of options to acquire shares of Common
Stock for distribution to employees and consultants as bonuses in recognition
for their past and future services. An aggregate of 30,768 shares of Common
Stock have been reserved for issuance under the Plan. As of the date of this
Prospectus, all 30,768 authorized Employee and Consultants options have been
granted at an exercise price of $5.00 per share. Options granted to employees
vested approximately 8% on February 1, 1997 and vest monthly thereafter for a
period of 33 months. Options to purchase 3,045 shares of Common Stock granted to
two consultants are fully vested. The Employee and Consultants Plan is
administered by the Finance and Compensation Committee.
1996 Board of Directors and Advisory Board Retainer Plan
Effective December 3, 1996, the Company established its Directors and
Advisory Board Plan to provide a means by which the Company may attract and
retain directors and members of the Advisory Board. The purpose of the Directors
and Advisory Board Plan is to establish a pool of options to acquire shares of
Common Stock for distribution to members of the Board of Directors and the
Advisory Board as bonuses in recognition for their past and future services. An
aggregate of 113,652 shares of Common Stock are reserved for issuance under the
Directors and Advisory Board Plan.
Effective January 16, 1997, each director of the Company on December 31,
1996, was granted 12,915 options to acquire shares of Common Stock of the
Company at an exercise price of $5.00 per share. Also effective as of such date,
each member of the Advisory Board and each individual who became a member of the
Advisory Board before March 3, 1997, was granted 2,583 options to acquire shares
of Common Stock of the Company at an exercise price of $5.00 per share. As of
January 16, 1997, 113,652 options have been granted under the Directors and
Advisory Board Plan at an exercise price of $5.00 per share of which options to
purchase 12,915 shares have been granted to each of Messrs. Henry, Moses,
Masters, Fuellhart and Kovacs and to two former directors. Options granted to
directors vest approximately 22% on February 1, 1997 and ratably thereafter for
a period of 28 months, except that 12,915 options granted to a former director
are fully vested. Options granted to advisors vest approximately 6% on February
1, 1997, and monthly thereafter for a period of 34 months. The Directors and
Advisory Board Plan is administered by the Finance and Compensation Committee.
1997 Management Bonus Plan
Effective February 6, 1997, the Company 's shareholders approved the
Management Bonus Plan to create a pool of options to acquire shares of Common
Stock for distribution to the Company's directors and key employees as bonuses
in recognition for past and future services. The Company has reserved 205,580
shares for issuance under the Management Bonus Plan and has the right to grant
either non-qualified or incentive stock options and other stock-related awards.
The exercise price of incentive stock options granted under the Management Bonus
Plan must be at least 100% of the fair market value of the stock subject to the
option on the date of grant or 110% with respect to holders of more than 10% of
the voting power of the Company's outstanding Common Stock. Under the terms of
the Management Bonus Plan, the Finance and Compensation Committee determines the
fair market value of the Common Stock. The exercisability and term of each
option and the manner in which it may be exercised is determined by the Finance
and Compensation Committee, provided that no incentive stock option may be
exercised more than five years after the date of grant. The Company may grant
options for any number of shares, except that the value of the shares subject to
one or more incentive stock options first exercisable in any calendar year may
not exceed $100,000 (determined at the grant date). The Finance and Compensation
Committee administers the Management Bonus Plan.
The Company has granted to Mr. Graf a non-qualified stock option to
purchase 12,915 shares of Common Stock at an exercise price of $5.00 per share
under the Management Bonus Plan, which vests monthly over three years commencing
May 1, 1997. In addition, the Company has granted incentive stock options to
Messrs. Masters and Wheeler, each to purchase 12,915 shares of Common Stock, an
incentive stock option to Ms. Feichter to purchase 1,000 shares of Common Stock,
incentive stock options to purchase 3,300 shares of Common Stock
43
<PAGE>
to other employees of the Company and incentive stock options to purchase 2,894
shares of Common Stock to a consultant, all of which options are at an exercise
price of $5.00 per share under the Management Bonus Plan, all of which options
vest monthly over three years commencing May 1, 1997.
Non-Plan Stock Options
The Company has granted 113,290 non-plan stock options to acquire shares of
Common Stock, of which 110,423 are currently exercisable at an exercise price of
$2.32 per share and 2,867 are currently exercisable at an exercise price of $.77
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 eight noted professionals in the
field of recovery, with nationally recognized expertise for their commitment and
contributions in the treatment of alcoholism and drug
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<PAGE>
addiction, child welfare issues, and the treatment and recovery field generally
to serve on the Advisory Board. The following persons serve on the Advisory
Board:
Claudia Black, Ph.D. is a nationally-recognized expert and author on the
issues confronting children of addiction and past Chairperson and founder of the
National Association for Children of Alcoholics. Dr. Black designs and presents
workshops and seminars, and has published several best selling books in her
areas of expertise.
David Bralove is the founder of a law firm representing substance abuse and
behavioral care providers nation-wide, and is Board President of The National
Treatment Consortium.
Dr. Mark Gold is a Professor of Neuroscience, Psychiatry and Community
Health and Family Medicine at the University of Florida College of Medicine. Dr.
Gold has been a national leader in the field for 25 years leading treatment and
the general public toward a greater understanding of the nature of addiction and
its successful treatment. Dr. Gold has done pioneering research in tobacco,
alcohol, cocaine and opiate addictions and has been granted several patents for
his discoveries. Dr. Gold is widely recognized by his peers, the government, the
business community and the general public as a best selling author and addiction
expert.
Earnie Larsen is a nationally known lecturer on managing personal
relationships and overcoming dysfunctional behaviors, and an author and producer
of over 55 motivational self-help books and videos. He is the originator of the
process known as "Stage II Recovery" where one attempts to resolve life issues
which often impede spiritual growth.
Robert Lindsey is a veteran of over 20 years in the field of alcoholism and
drug addiction treatment. Mr. Lindsey is currently the Vice President of
Longview Associates, Inc., a consulting firm specializing in the design and
implementation of employee assistance programs. Prior to this, Mr. Lindsey
served as the Community Relations Director at the Betty Ford Center and as the
Executive Director of the New York State Council on Alcoholism and Other Drug
Addictions.
Father Joseph Martin is the founder of Ashley, Inc., a non-profit center
dedicated to the treatment of the chemically addicted. He is an internationally
recognized speaker and creator of the film "Chalk Talk", the principal
educational vehicle on alcoholism for most treatment centers in the country.
Joseph A Pursch, M.D. is a nationally-recognized psychiatrist involved,
since 1962, in the treatment and rehabilitation of individuals with addictive
behaviors. Dr. Pursch is the former Director of Alcohol Rehabilitation Service
at the Naval Regional Medical Center at Long Beach, California. An author and
syndicated columnist, Dr. Pursch has supervised drug testing programs for
numerous sports events and has treated many public figures. Dr. Pursch has been
on the President's Commission on Alcohol and Drugs since 1979.
David Smith, M.D. is the founder and president of the Haight-Ashbury free
clinics. A specialist in the field of addiction medicine and clinical
toxicology, Dr. Smith is also the founder and executive editor of the Journal of
Psychoactive Drugs and is the president of the American Society of Addiction
Medicine (ASAM). He is a leader in the areas of treatment of addictive disease,
the psychopharmacology of drugs, and new strategies in the management of drug
abuse problems.
The Advisory Board meets semi-annually on a formal basis, and deals with
individual issues as they arise. Advisors serve terms of three years, are
compensated for meetings attended, and are eligible to participate in the
Company's 1996 Board of Directors and Advisory Board Retainer Plan.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of the date of this
Prospectus and as adjusted to reflect the sale by the Company of 1,600,000
shares of Common Stock offered hereby (based on information obtained from the
persons named below), 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>
Percentage of Shares
Beneficially Owned (2)
----------------------
Number of Shares Before After
Name and address of Beneficial Owners(1) Beneficially Owned (2) Offering Offering
- ------------------------------------------ ------------------------ ---------- ---------
<S> <C> <C> <C>
William D. Moses ........................ 633,431(3) 24.7% 15.2%
George H. Henry ........................ 280,933(4) 10.9 6.7
6860 Sunrise Court
Coral Gables, Florida 33133
Terrance and Daryl Berman ............... 195,519(5) 7.6 4.7
15601 Cheswick Court
Tampa, Florida 33647
Jonathan Katch ........................... 161,798(6) 6.4 3.9
Paul Graf .............................. 135,100(7) 5.2 3.2
High Pine, Turk Hill Road
Brewster, New York 10509
Donald J. Masters ........................ 93,177(8) 3.4 2.1
Jack W. and Janice Fuellhart ............ 43,409(9) 1.7 1.1
Route 66 North
Crown, Pennsylvania 16220
Nimrod J. Kovacs ........................ 22,373(10) * *
50 Falcon Hills Drive
Highland Ranch, Colorado 80126
All directors and executive officers as a
group (9 persons) ..................... 1,213,146(11) 43.9 27.7
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address for each named individual or group
is in care of The Recovery Network, Inc.,1411 5th Street, Suite 250, Santa
Monica, California 90401.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. 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 the date of this
Memorandum have been exercised and converted. Assumes a base of 2,521,250
shares of Common Stock outstanding prior to this offering and a base of
4,121,250 shares of Common Stock outstanding immediately after this
offering, before any consideration is given to outstanding options,
warrants or convertible securities.
(3) Includes (i) currently exercisable options to purchase 4,665 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
43,750 shares of Common Stock. Does not include options to purchase 8,250
shares of Common Stock which are not currently exercisable.
(4) Includes (i) currently exercisable options to purchase 4,665 shares of
Common Stock and (ii) currently
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<PAGE>
exercisable Financing Warrants to purchase 62,500 shares of Common Stock.
Does not include options to purchase 8,250 shares of Common Stock which are
not currently exercisable.
(5) Includes currently exercisable Financing Warrants to purchase 43,750 shares
of Common Stock.
(6) Includes currently exercisable options to purchase 17,580 shares of Common
Stock. Does not include options to purchase 8,250 shares of Common Stock
which are not currently exercisable.
(7) Includes (i) currently exercisable options to purchase 1,075 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
62,500 shares of Common Stock. Does not include options to purchase 11,840
shares of Common Stock which are not currently exercisable. Does not
include 83,686 shares of Common Stock held by Mr. Graf's father as to which
Mr. Graf disclaims beneficial ownership.
(8) Includes (i) currently exercisable options to purchase 17,580 shares of
Common Stock (ii) 37,212 shares of Common Stock held jointly by Mr. Masters
and his spouse, (iii) 14,259 shares of Common Stock held in the name of
trusts for the benefit of the children of Mr. Masters and his spouse. Mr.
Masters disclaims beneficial ownership of the shares of Common Stock held
in trust and (iv) currently exercisable Financing Warrants to purchase
6,250 shares of Common Stock held jointly by Mr. Masters and his spouse.
Does not include options to purchase 21,165 shares of Common Stock held by
Mr. Masters which are not currently exercisable.
(9) Includes currently exercisable options to purchase 4,665 shares of Common
Stock. Does not include options to purchase 8,250 shares of Common Stock
held by Mr. Fuellhart which are not currently exercisable.
(10) Includes (i) currently exercisable options to purchase 4,665 shares of
Common Stock, and (ii) 5,000 shares of Common Stock and Financing Warrants
exercisable to purchase 6,250 shares of Common Stock held by Kovacs
Communication, Inc., of which Mr. Kovacs is a controlling shareholder. Does
not include options to purchase 8,250 shares of Common Stock which are not
currently exercisable.
(11) Includes (i) currently exercisable options to purchase 59,618 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
175,000 shares of Common Stock. Does not include options to purchase 98,647
shares of Common Stock which are not currently exercisable.
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<PAGE>
CERTAIN TRANSACTIONS
In May 1994, the Company entered into a one-year consulting agreement with
Masters, Smith & Co. pursuant to which Masters, Smith & Co. was engaged to
assist the Company in the financing and development of its business. Pursuant to
the agreement, Masters, Smith & Co. received 42,818 shares of Common Stock
valued at $.93 per share, $10,000 upon execution of the agreement and a monthly
retainer in the amount of $10,000 commencing June 1, 1994. During 1995, Masters,
Smith & Co. agreed to accept 64,424 shares of Common Stock valued at $.93 per
share in lieu of such cash payments. Donald J. Masters, Executive Vice President
of the Company, was a partner of Masters, Smith & Co. The Company believes that
its arrangements with Masters, Smith & Co. were fair and reasonable to the
Company and were on terms no less favorable than could have been obtained from
an unaffiliated party.
In November 1994, William D. Moses, the Company's President, Chief
Financial Officer and Acting Chief Financial Officer purchased 186,074 shares of
Common Stock from the Company at a purchase price of $.54 per share (or an
aggregate of $100,000). In June 1995, Mr. Moses was issued an additional 186,074
shares at $.54 per share for services rendered to the Company during the fiscal
year ended June 30, 1995.
In January 1995, Jonathan Katch, a principal stockholder and a former
director and officer of the Company and Chief Executive Officer of Recovery
Interactive, was issued 78,776 shares of Common Stock, valued at $.93 per share,
as reimbursement for expenses incurred by him on behalf of the Company.
During November 1995 and April 1996, the Company sold shares of Common
Stock at $2.32 per share in a private placement. Jack Fuellhart, a director of
the Company, purchased 10,763 shares of Common Stock and George H. Henry, a
director of the Company, purchased 32,288 shares of Common Stock in such
offering, at the same price and on the same terms as the other investors in such
offering. In May 1996, the Company issued to Mr. Henry 17,220 shares, valued at
$2.32 per share, of Common Stock in consideration for certain strategic and
operational consulting services rendered by him from June 1995 to May 1996. In
June 1996, Mr. Henry was also granted an option to purchase an additional 15,498
shares of Common Stock at an exercise price of $3.87 for certain strategic and
operational consulting services to be rendered by him from June 1996 to May
1997.
During April 1996, the Company issued shares of Common Stock in a
shareholders rights offering, pursuant to which the Company granted each
shareholder of record one transferable right for each share of Common Stock
owned by such shareholder. Five rights entitled a shareholder to purchase one
share of Common Stock at a price of $.77 per share. Mr. Moses exercised rights
to purchase 87,670 shares of Common Stock, Mr. Henry exercised rights to
purchase 31,581 shares of Common Stock, Mr. Katch exercised rights to purchase
10,020 shares of Common Stock and Mr. Fuellhart exercised rights to purchase
2,153 shares of Common Stock in such offering.
During the period from July 1996 through October 1996, the Company issued
an aggregate principal amount of $310,000 of Convertible Notes in a private
placement. The Company sold a Convertible Note in an aggregate principal amount
of $30,000 to each of Messrs. Henry and Moses on July 17, 1996 and October 14,
1996, respectively. In November 1996, Messrs. Henry and Moses each converted the
principal and interest on their Convertible Note into 8,524 shares of Common
Stock at an effective purchase price of $3.68 per share. Pursuant to the terms
of the Convertible Notes, as modified by a change in terms offered to all
noteholders, each of Messrs. Henry and Moses received and exercised warrants to
purchase an additional 17,048 shares of Common Stock at a purchase price of
$2.32 per share. In addition, Messrs. Moses and Henry were granted certain
registration rights with respect to the shares of Common Stock issued upon
conversion of the Convertible Notes and upon the exercise of the warrants.
Effective August 30, 1996, the Company entered into a consulting and bonus
agreement (the "Consulting Agreement") with Jonathan Katch. Mr. Katch was
granted a bonus of 12,915 stock options at an exercise price of $2.32 per share
for his services relating to the creation of Recovery Interactive and for his
services as a former officer and director of the Company. The stock options
vested upon execution of the Consulting Agreement. In addition, the Consulting
Agreement provides that Mr. Katch will serve as a consultant to the Company's
management for a period of three years for which Mr. Katch was granted an
additional 12,915 stock options at an exercise price of $2.32 per share. Such
stock options commenced vesting at the rate of 1,075 stock options per fiscal
quarter, on September 30, 1996.
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<PAGE>
From October to November 1996, the Company reduced the exercise price of
options granted to its non- employee directors from $3.87 to $2.32 to encourage
such directors to exercise their vested options. Mr. Fuellhart, Mr. Henry and
Mr. Kovacs exercised options to purchase 25,830, 28,412 and 6,458 shares of
Common Stock, respectively. Each director was granted certain registration
rights with respect to the shares of Common Stock issued upon exercise of the
options. See "Description of Securities -- Registration Rights."
During October and November 1996, Messrs. Katch and Moses were issued
10,763 and 32,287 shares of Common Stock, respectively, valued at $2.32 per
share as reimbursement for expenses incurred by them on behalf of the Company.
During October 1996 to January 1997, the Company sold shares of Common
Stock at $3.48 per share in a private placement. Messrs. Henry and Berman
purchased 28,699 shares and 71,891 shares of Common Stock, respectively, in such
offering at the same price and on the same terms as the other investors in such
offering. The purchasers in the private placement, including Messrs. Henry and
Berman, were granted certain registration rights with respect to the shares of
Common Stock purchased.
On November 22, 1996, Mr. Moses agreed to convert $49,000 of deferred
compensation earned by him from May 1996 to November 1996 into 21,094 shares of
Common Stock, at a price of $2.32 per share.
In March and April 1997, the Company sold an aggregate of 40 Units in the
Private Financing. Each Unit consisted of a $50,000 principal amount Financing
Note, 10,000 shares of Common Stock and 12,500 Financing Warrants. The offering
price was $50,000 per Unit. In connection with the Private Financing, Mr. Henry
purchased 5 Units; Paul Graf, a director of the Company, purchased 5 Units; Mr.
Masters and his spouse jointly purchased .5 Units; Mr. Moses purchased 3.5
Units; Terrance and Daryl Berman, principal shareholders of the Company,
purchased 3.5 Units; and Kovacs Communication, Inc., of which Mr. Nimrod Kovacs,
a director of the Company is a controlling shareholder, purchased .5 Units in
the Private Financing. See "Description of Securities -- Recent Financing."
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under the Nesting Contract entered into with ATN. Under
the Nesting Contract, ATN provides the ATN Services on its satellite transponder
to The Recovery Network for two hours of broadcast time per day, one hour in the
morning and one hour in the evening. ATN provides distribution of the Company's
programming into cable systems through existing affiliation agreements between
ATN and those systems. Under the Nesting Contract, the Company is charged a
daily rate for broadcast time provided by ATN to the Company with the actual
charges for each calendar month being based on the actual monthly number of
households served by ATN affiliates. However, the Nesting Contract provides that
in no event will charges exceed $60,000 per calendar month for the first six
months of the Nesting Contract, or $65,000 for the subsequent six months of the
Nesting Contract. ATN has also agreed to provide the ATN Services for two
additional hours of broadcasting, if such time is available, to the Company at
ATN's cost plus 20%, which fee is in addition to the charges for broadcast time.
ATN has also agreed to provide authorization services for cable systems with
which the Company directly enters into affiliation agreements to enable the
Company to broadcast its programming on such affiliates' cable systems, provided
that the Company purchase the necessary equipment, if any. The Nesting Contract
expires in April 1998, unless renewed by both parties. In the event the number
of ATN Affiliates decreases by 10%, the Company may terminate the Nesting
Contract upon 30 days written notice. The Company has granted ATN the right, for
the term of the Nesting Contract and for a period of one year thereafter, to
match any other nesting arrangement presented to the Company by a third party.
Mr. George H. Henry, the Chairman of the Board of the Company, is the Chairman
of the Board and Chief Executive Officer and a principal shareholder of ATN. Mr.
William D. Moses, the President and Chief Executive Officer, is a principal
shareholder of ATN.
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.
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DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 25,000,000 shares of Common Stock, par
value $.01 per share. As of the date of this Prospectus, the Company had
outstanding 2,521,250 shares of Common Stock owned by approximately 88 holders
of record.
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, and the shares of Common Stock
offered hereby will be, upon issuance and sale, 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.
Redeemable Warrants
Each Warrant offered hereby will entitle the registered holder thereof (the
"Warrant Holders") to purchase one share of Common Stock at a price of $5.50,
subject to adjustment in certain circumstances at any time commencing ,
1998 (or such earlier date as to which the Underwriter consents) through and
including , 2002. The Warrants will be separately transferable immediately
upon issuance.
The Warrants are redeemable by the Company at any time commencing on ,
1998 upon notice of not less than 30 days, at a price of $.10 per 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 Warrants and the Company
obtains the written consent of the Underwriter to such redemption prior to the
Call Date. The Warrant Holders shall have the right to exercise their Warrants
until the close of business on the date fixed for redemption.
The Warrants will be issued in registered form under a warrant agreement by
and among the Company, American Stock Transfer & Trust Company, as warrant agent
(the "Warrant Agent"), and the Underwriter (the "Warrant Agreement"). 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 Agreement (which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part)
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 certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the Warrant Agent for
the number of Warrants being exercised. The Warrant Holders do not have the
right or privileges of holders of Common Stock.
No 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 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 Warrant. The Company will use its best efforts
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<PAGE>
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 Warrants, subject to the terms of the 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.
No fractional shares will be issued upon exercise of the Warrants. However,
if a Warrant Holder exercises all Warrants then owned of record by him or her,
the Company will pay to such Warrant Holder, in lieu of the issuance of any
fractional share which is otherwise issuable, an amount in cash based on the
market value of the Common Stock on the last trading day prior to the exercise
date.
Recent Financing
In March and April 1997, the Company sold to 20 persons who qualify as
"accredited investors" 40 Units. Each Unit consisted of (i) a Financing Note in
the principal amount of $50,000 bearing interest at the rate of 9% per annum due
and payable on the earlier of the consummation of this offering or March 6,
1998; (ii) 10,000 Financing Shares; and (iii) Financing Warrants to purchase
12,500 shares of Common Stock. The Financing Warrants are exercisable until
March 6, 2002 at a price of $4.00 per share.
The aggregate $2,000,000 principal amount of Financing Notes of and accrued
interest thereon of approximately $60,000 will be repaid from the proceeds of
this offering.
Registration Rights
In connection with the Private Financing, the Company has 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 commencing
no later than 15 months following the effective date of the Registration
Statement of which this Prospectus is a part. If such registration statement is
not declared effective by the Commission within 15 months following the
consummation of this 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 12 months
following the effective date of the Registration Statement of which this
Prospectus is a part. See "Shares Eligible for Future Sale."
The Company has granted certain "demand" and "piggyback" registration
rights to the holders of an additional 433,223 shares of Common Stock. The
demand registration rights are exercisable, under certain circumstances,
commencing 12 months following the date of this Prospectus.
In connection with this offering, the Company has agreed to grant to the
Underwriter certain demand and piggyback registration rights in connection with
the 320,000 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants and the warrants included therein. See "Underwriting."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock, and the Warrant
Agent for the Warrants, is American Stock Transfer and Trust Company, 40 Wall
Street, New York, New York 10005.
Reports to Stockholders
The Company has agreed, subject to the sale of the shares of Common Stock
and Warrants offered hereby, that on or before the date of this Prospectus, it
will register its Common Stock and Warrants under the provisions of Section
12(g) of the Exchange Act and that it will use its best efforts to maintain such
registration. Such registration will require the Company to comply with periodic
reporting, proxy solicitation and certain other requirements of the Exchange
Act.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,121,250
shares of Common Stock outstanding (assuming no exercise of the Warrants or the
other outstanding options and warrants), of which the 1,600,000 shares being
offered hereby will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate of the Company" (in general, a person who has a controlling position
with regard to the Company), which will be subject to the resale limitations of
Rule 144 promulgated under the Securities Act.
All of the remaining 2,521,250 shares of Common Stock currently outstanding
are "restricted securities" or owned by "affiliates" (as those terms are defined
in Rule 144) and thus may not be sold publicly unless they are registered under
the Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. Of the 2,521,250 restricted shares, an aggregate of 1,681,139
shares will be eligible for sale, without registration, under Rule 144 (subject
to certain volume limitations prescribed by such rule and to the contractual
restrictions described below), commencing 90 days following the date of this
Prospectus and the balance of such shares will become eligible for sale at
various times commencing October 1997. Holders of all of the 2,521,250
outstanding shares of Common Stock have agreed not to (i) sell or otherwise
dispose of any shares of Common Stock in any public market transaction
(including pursuant to Rule 144) or (ii) exercise any rights held by such
holders to cause the Company to register any shares of Common Stock for sale
pursuant to the Securities Act, in each case, for a period of 12 months
following the date of this Prospectus, without the Underwriter's prior written
consent.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate) who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares of the issuer's
Common Stock or the average weekly trading volume during the four calendar weeks
preceding such sale, provided that certain public information about the issuer
as required by Rule 144 is then available and the seller complies with certain
other requirements. Affiliates may sell such shares in compliance with Rule 144,
other than the holding period requirement. A person who is not an affiliate, has
not been an affiliate within three months prior to sale, and has beneficially
owned the restricted shares for at least two years is entitled to sell such
shares under Rule 144 without regard to any of the limitations described above.
Prior to this offering, there has been no market for the Common Stock or
Warrants and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or Warrants or the availability of such shares
for sale will have on the market prices of the Common Stock and Warrants
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock and Warrants and could impair the
Company's ability to raise capital through the sale of its equity securities.
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<PAGE>
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the
terms and conditions contained in the underwriting agreement, to purchase
1,600,000 Shares and 1,600,000 Warrants from the Company. The Underwriter is
committed to purchase and pay for all of the Common Stock and Warrants offered
hereby if any of such securities are purchased. The Shares and Warrants are
being offered by the Underwriter, subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to approval of certain
legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Shares and Warrants to the public at the public offering prices set forth on the
cover page of this Prospectus. The Underwriter may allow to certain dealers who
are members of the National Association of Securities Dealers, Inc. (the "NASD")
concessions, not in the excess of $ per Warrant, of which not in excess of
$ per Share and $ per Warrant may be reallowed to the dealers who are
members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 240,000 additional
Shares and/or 240,000 additional Warrants at the public offering prices set
forth on the cover page of this Prospectus, less the underwriting discounts and
commissions. The Underwriter may exercise this option in whole or, from time to
time, in part, solely for the purpose of covering over-allotments, if any, made
in connection with the sale of the Shares and/or Warrants offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering, of which $50,000 has
been paid as of the date of this Prospectus. The Company has also agreed to pay
all expenses in connection with qualifying the Common Stock and Warrants offered
hereby for sale under the laws of such states as the Underwriter may designate,
including expenses of counsel retained for such purpose by the Underwriter. The
Company has agreed to sell to the Underwriter and its designees for an aggregate
of $176, warrants (the "Underwriter's Warrants") to purchase up to 160,000
shares of Common Stock at an exercise price of $7.00 per share (140% of the
public offering price per share) and up to 160,000 Warrants (each exercisable to
purchase one share of Common Stock at a price of $9.075 per share) at an
exercise price of $.14 per Warrant (140% of the public offering price per
Warrant). The Underwriter's Warrants may not be sold, transferred, assigned or
hypothecated for one year from the date of this Prospectus, except to the
officers and partners of the Underwriter and members of the selling group and
are exercisable at any time and from time to time, in whole or in part, during
the five-year period commencing on the date of this Prospectus (the "Warrant
Exercise Term"). During the Warrant Exercise Term, the holders of the
Underwriter's Warrants are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Common Stock. To the extent that the
Underwriter's Warrants are exercised, dilution to the interests of the Company's
shareholders will occur. Further, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since the holders
of the Underwriter's Warrants can be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the Underwriter's
Warrants. Any profit realized by the Underwriter on the sale of the
Underwriter's Warrants, the underlying shares of Common Stock or the underlying
warrants, or the shares of Common Stock issuable upon exercise of such
underlying warrants may be deemed additional underwriting compensation. The
Company has agreed, at the request of the holders of a majority of the
Underwriter's Warrants, at the Company's expense, to register the Underwriter's
Warrants, the shares of Common Stock and warrants underlying the Underwriter's
Warrants, and the shares of Common Stock issuable upon exercise of the
underlying warrants under the Securities Act on one occasion during the Warrant
Exercise Term and to include the Underwriter's Warrants, and all such underlying
securities in any appropriate registration statement which is filed by the
Company during the seven years following the date of this Prospectus.
In addition, the Company has agreed to enter into a consulting agreement to
retain the Underwriter as a financial consultant for a period of two years from
the consummation of this offering at an annual fee of $30,000, the entire
$60,000 payable in full, in advance. The consulting agreement will not require
the consultant to devote a specific amount of time to the performance of its
duties thereunder. In the event that the Underwriter originates a financing or a
merger, acquisition, joint venture or other transaction to which the Company is
a party, the Underwriter will be entitled to receive a finder's fee in
consideration for origination of such transaction.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this Prospectus),
to pay to the Underwriter for bona fide services provided a
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fee of 5% of the exercise price for each Warrant exercised; provided however,
that the Underwriter will not be entitled to receive such compensation in
Warrant exercise transactions in which (i) the market price of Common Stock at
the time of the exercise is lower than the exercise price of the Warrants; (ii)
the Warrants are held in any discretionary account; (iii) disclosure of
compensation arrangements is not made, in addition to the disclosure provided in
this Prospectus, in documents provided to holders of Warrants at the time of
exercise; (iv) the holder of the Warrants has not confirmed in writing that the
Underwriter solicited such exercise; or (v) the transaction was in violation of
Regulation M promulgated under the Exchange Act.
The Company has also agreed, for a period of five years following the date
of this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to select a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. All of the Company's current officers, directors
and shareholders beneficially owning 5% or more of the Common Stock have agreed
to vote their Common Stock in favor of such designee. The Underwriter has not
yet exercised its right to designate such a person.
The Underwriter acted as placement agent for the Company in connection with
the Private Financing and was paid a placement agent fee of $200,000,
constituting 10% of the gross proceeds of the Private Financing, plus a
non-accountable expense allowance of $25,000.
Regulation M promulgated under the Exchange Act may prohibit the
Underwriter from engaging in any market making activities with regard to the
Company's securities for the period from nine business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation; and any period during which the
Underwriter, or any affiliated parties, participate in a distribution of
securities of the Company for the account of the Underwriter or any such
affiliate. As a result, the Underwriter may be unable to provide a market for
the Company's securities during certain periods while the Warrants are
exercisable.
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 1% of the securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public trading market for the
Shares or the Warrants. Consequently, the initial public offering price of the
Shares and the Warrants and the exercise price of the Warrants have been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in determining the offering prices and the exercise price of
the Warrants were the Company's financial condition and prospects, certain
financial and operating information and market prices of companies engaged in
activities similar to those of the Company and the general condition of the
securities market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Common Stock and Warrants. Specifically, the Underwriter may over-allot in
connection with the offering, creating a short position in the Common Stock
and/or Warrants for its own account. In addition, to cover over-allotments or to
stabilize the price of the Common Stock and Warrants, the Underwriter may bid
for, and purchase, shares of Common Stock and Warrants in the open market. The
Underwriter may also reclaim selling concessions allowed to a dealer for
distributing the Common Stock and Warrants in the offering, if the Underwriter
repurchases previously distributed Common Stock and Warrants in transactions to
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common stock and
Warrants above independent market levels. The Underwriter is not required to
engage in these activities, and may end any of these activities at any time.
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LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Parker Chapin Flattau &
Klimpl, LLP, New York, New York. Certain legal matters will be passed upon for
the Underwriter by Tenzer Greenblatt LLP, New York, New York.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. Reference is made to said report which includes
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the
securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, 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 securities offered hereby,
reference is hereby made to the Registration Statement and the exhibits and
schedules thereto filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the office of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and the Commission's Regional
Offices at 7 World Trade Center, 13th Floor, New York, New York 10048, and
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering Analysis and Retrieval (EDGAR) system. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issues that file electronically with
the Commission. The address of that site is http://www.sec.gov.
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THE RECOVERY NETWORK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ...................................................... F-2
Balance Sheets at June 30, 1996 and March 31, 1997 .................................... F-3
Statements of Operations for the fiscal years ended June 30, 1995 and 1996, for the period
from inception (May 1992) to June 30, 1996 and for the nine months ended March 31, 1996
and 1997 .............................................................................. F-4
Statements of Shareholders' Deficit for the period from inception (May 1992) to June 30,
1996 and the nine months ended March 31, 1997 ........................................ F-5
Statements of Cash Flows for the fiscal years ended June 30, 1995 and 1996, for the period
from inception (May 1992) to June 30, 1996 and for the nine months ended March 31, 1996
and 1997 .............................................................................. F-7
Notes to Financial Statements ............................................................ F-8
</TABLE>
Information as of March 31, 1997 and for the
nine months ended March 31, 1996 and 1997 is unaudited.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Recovery Network, Inc.:
We have audited the accompanying balance sheet of The Recovery Network,
Inc. (a Colorado corporation in the development stage) as of June 30, 1996, and
the related statements of operations, shareholders' deficit and cash flows for
the years ended June 30, 1995 and 1996 and for the period from inception (May
1992) to June 30, 1996. 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 financial statements referred to above present fairly,
in all material respects, the financial position of The Recovery Network, Inc.
as of June 30, 1996 and the results of its operations and its cash flows for the
years ended June 30, 1995 and 1996 and for the period from inception (May 1992)
to June 30, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recurring losses from operations and has a
net capital deficiency 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, as well as attain listing of its stock for trading in the
NASDAQ Smallcap Market. 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 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.
/s/ ARTHUR ANDERSEN LLP
----------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
November 26, 1996
F-2
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
BALANCE SHEETS
AS OF JUNE 30, 1996
AND MARCH 31, 1997 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1997
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................ $ 137,492 $ 733,932
Prepaid expenses ................................................ 700 11,522
Accounts receivable ............................................. -- 4,928
---------- ------------
Total current assets ....................................... 138,192 750,382
FURNITURE AND EQUIPMENT, net ....................................... 45,249 61,017
SECURITY DEPOSIT ................................................... 25,000 32,710
INVESTMENT IN JOINT VENTURE ....................................... -- 71,015
DEFERRED OFFERING COSTS .......................................... -- 199,277
OTHER ASSETS, net of accumulated amortization of $984 as of June 30,
1996 and $1,168 as of March 31, 1997 .............................. 246 61
---------- ------------
$ 208,687 $ 1,114,462
========== ============
</TABLE>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
June 30, March 31,
1996 1997
------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ........................... $ 99,500 $ 177,663
Accrued professional fees ....................................... 14,286 99,398
Current portion of capital lease obligation ..................... 1,571 1,768
Notes payable ................................................... -- 1,033,018
Deferred compensation ............................................. 24,167 --
Due to shareholders ............................................. 202,168 9,854
------------ ------------
Total current liabilities ................................. 341,692 1,321,701
CAPITAL LEASE OBLIGATION .......................................... 2,702 1,687
CONVERTIBLE NOTES PAYABLE .......................................... 20,000 --
------------ ------------
Total Liabilities .......................................... 364,394 1,323,388
------------ ------------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value:
Authorized--10,000,000 shares issued and outstanding, 1,591,969
shares at June 30, 1996 and 2,511,250 shares at March 31, 1997 15,920 25,112
Additional paid-in capital .................................... 1,908,590 4,152,852
Stock subscriptions (notes receivable) ........................ 500 (9,900)
Prepaid consulting costs ....................................... (1,250) (11,250)
Deficit accumulated in the development stage .................. (2,079,467) (4,365,740)
------------ ------------
Shareholders' deficit ....................................... (155,707) (208,926)
------------ ------------
$ 208,687 $ 1,114,462
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996, FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996, AND FOR THE
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
For the For the Nine Months
Years Ended June 30, From inception Ended March 31,
---------------------------- (May 1992) ----------------------------
1995 1996 to June 30, 1996 1996 1997
------------- ------------- ------------------ ------------ --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
DOMESTIC ADVERTISEMENT SALES ........... $ -- $ -- $ -- $ -- $ 28,718
---------- ----------- ------------- ---------- -----------
SALARIES AND CONSULTING EXPENSES ....... 423,820 680,205 1,362,985 324,157 812,861
GENERAL AND ADMINISTRATIVE EXPENSES .... 57,410 328,754 478,782 108,143 588,428
PROGRAMMING EXPENSES .................. -- 192,349 192,349 131,107 282,724
MARKETING EXPENSES ..................... 1,000 28,135 40,865 11,178 230,916
LOSS ON INVESTMENT IN JOINT VENTURE ... -- -- -- -- 228,985
---------- ----------- ------------- ---------- -----------
Operating Expenses .................. 482,230 1,229,443 2,074,981 574,585 2,143,914
---------- ----------- ------------- ---------- -----------
Loss from operations .................. 482,230 1,229,443 2,074,981 574,585 2,115,196
INTEREST (INCOME) EXPENSE, net .......... 7,311 (6,414) 2,886 (5,475) 171,077
---------- ----------- ------------- ---------- -----------
Loss before provision for state income
taxes .............................. 489,541 1,223,029 2,077,867 569,110 2,286,273
PROVISION FOR STATE INCOME TAXES ....... 800 800 1,600 -- --
---------- ----------- ------------- ---------- -----------
NET LOSS .............................. $ 490,341 $ 1,223,829 $2,079,467 $ 569,110 $ 2,286,273
========== =========== ============= ========== ===========
LOSS PER SHARE INFORMATION:
Loss per share ........................ $ (0.43) $ (0.71) $ (0.35) $ (1.13)
========== =========== ========== ===========
Weighted average number of common
and common equivalent shares out-
standing ........................... 1,145,962 1,733,028 1,629,831 2,023,852
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996
AND FOR THE NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in
Shares Amount Capital
--------- --------- ------------
<S> <C> <C> <C>
Issuance of common stock for
cash:
August 1992 at $0.45 per share ... 192,669 $ 1,927 $ 85,573
June 1993 at $23.36 per share ... 1,714 17 39,983
November 1993 at $32.70 per
share ........................ 2,141 21 69,979
Issuance of common stock for
consulting services issued:
May 1993 at $0.62 per share ...... 10,704 107 6,524
August 1993 at $5.92 per share ... 7,600 76 44,924
May 1994 at $0.93 per share ...... 23,764 238 21,842
Stock subscriptions for:
Purchase of common stock issued
July 1994 at $11.62 per share . -- -- --
Shares to be issued for payment
of consulting services rendered
at $0.93 per share ............ -- -- --
Amortization of prepaid consult-
ing costs ..................... -- -- --
Net loss ........................ -- -- --
-------- -------- ---------
BALANCE, June 30, 1994 ............ 238,592 2,386 268,825
Issuance of common stock for
cash and stock subscription:
July 1994 at $11.62 per share. 5,595 56 64,944
January 1995 at $0.54 per
share ........................ 186,074 1,861 98,139
Issuance of common stock for
consulting services and stock
subscription issued November
1994 through June 1995:
at $0.54 per share............... 186,074 1,861 98,139
at $0.93 per share ............ 261,239 2,612 241,328
at $2.32 per share ............ 2,583 26 5,974
Issuance of common stock for
conversion of debt and accrued
interest issued on November
1994 at $0.93 per share ......... 52,793 528 48,524
Amortization of prepaid consult-
ing costs ..................... -- -- --
Net loss ........................ -- -- --
-------- -------- ---------
BALANCE, June 30, 1995 ......... 932,950 9,330 825,873
Issuance of common stock for
cash:
November 1995 through April
1996 at $2.32 per share,
including 17,220 shares
issued for services for stock
offering ..................... 339,883 3,399 746,101
April 1996 at $0.77 per share . 259,281 2,593 198,174
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Stock Prepaid Accumulated in
Subscriptions Consulting the Development
(Notes Receivable) Costs Stage Total
-------------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Issuance of common stock for
cash:
August 1992 at $0.45 per share ... $ -- $ -- $ -- $ 87,500
June 1993 at $23.36 per share ... -- -- -- 40,000
November 1993 at $32.70 per
share ........................ -- -- -- 70,000
Issuance of common stock for
consulting services issued:
May 1993 at $0.62 per share ...... -- -- -- 6,631
August 1993 at $5.92 per share ... -- (45,000) -- --
May 1994 at $0.93 per share ...... -- (22,080) -- --
Stock subscriptions for:
Purchase of common stock issued
July 1994 at $11.62 per share . 15,000 -- -- 15,000
Shares to be issued for payment
of consulting services rendered
at $0.93 per share ............ 17,703 (17,703) -- --
Amortization of prepaid consult-
ing costs ..................... -- 20,380 -- 20,380
Net loss ........................ -- -- (365,297) (365,297)
--------- --------- ---------- ----------
BALANCE, June 30, 1994 ............ 32,703 (64,403) (365,297) (125,786)
Issuance of common stock for
cash and stock subscription:
July 1994 at $11.62 per share. (15,000) -- -- 50,000
January 1995 at $0.54 per
share ........................ -- -- -- 100,000
Issuance of common stock for
consulting services and stock
subscription issued November
1994 through June 1995:
at $0.54 per share............... -- -- -- 100,000
at $0.93 per share ............ (17,703) -- -- 226,237
at $2.32 per share ............ -- -- -- 6,000
Issuance of common stock for
conversion of debt and accrued
interest issued on November
1994 at $0.93 per share ......... -- -- -- 49,052
Amortization of prepaid consult-
ing costs ..................... -- 48,153 -- 48,153
Net loss ........................ -- -- (490,341) (490,341)
--------- --------- ---------- ----------
BALANCE, June 30, 1995 ......... -- (16,250) (855,638) (36,685)
Issuance of common stock for
cash:
November 1995 through April
1996 at $2.32 per share,
including 17,220 shares
issued for services for stock
offering ..................... -- -- -- 749,500
April 1996 at $0.77 per share . -- -- -- 200,767
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF SHAREHOLDERS' DEFICIT (continued)
FOR THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996
AND FOR THE NINE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-in
Shares Amount Capital
------------- ---------- -------------
<S> <C> <C> <C>
Issuance of common stock for
consulting services January,
May and June 1996 at $2.32
per share ..................... 59,855 598 138,442
Cash received for shares to be
issued at $2.32 per share ...... -- -- --
Amortization of prepaid consult-
ing costs ..................... -- -- --
Net loss ........................ -- -- --
---------- --------- -----------
BALANCE, June 30, 1996 ......... 1,591,969 15,920 1,908,590
Issuance of common stock for
consulting services issued dur-
ing October and November
1996 at $2.32 .................. 59,194 592 136,908
Issuance of common stock for
conversion of debt, accrued
interest and deferred compen-
sation during November 1996:
at $2.32 per share ............ 31,857 319 73,681
at $2.90 per share ............ 6,888 69 19,931
at $3.68 per share ............ 71,033 710 260,790
Issuance of common stock for
cash and notes receivable:
during November 1996, 73,615
options exercised at $2.32
per share ..................... 73,615 736 170,264
during November 1996 through
January 1997, warrants exer-
cised under convertible notes
payable at $2.32 per share . 142,065 1,420 328,580
during November 1996 through
January 1997, shares issued
at $3.48 per share, including
7,749 shares issued for ser-
vices for stock offering ...... 146,510 1,465 482,035
during December 1996, 44
options exercised at $0.77
per share ..................... 44 -- 33
Issuance of common stock for an
outstanding stock subscription
during December 1996 ......... 216 2 498
Shares retired during December
1996 pursuant to a settlement
with a shareholder valued at
$2.32 per share ............... (2,141) (21) (4,952)
Issuance of common stock and
warrants for cash net of offer-
ing costs of $243,456 under
the February 1997 private
placement at $2.02 and $0.51
per share, respectively ......... 390,000 3,900 776,494
Amortization of prepaid consult-
ing costs ..................... -- -- --
Net loss for the nine months
ended March 31, 1997
(unaudited) .................. -- --
---------- --------- -----------
BALANCE,
March 31, 1997 (unaudited) ...... 2,511,250 $ 25,112 $ 4,152,852
========== ========= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Stock Prepaid Accumulated in
Subscriptions Consulting the Development
(Notes Receivable) Costs Stage Total
-------------------- ------------ ---------------- ----------
<S> <C> <C> <C> <C>
Issuance of common stock for
consulting services January,
May and June 1996 at $2.32
per share ..................... -- -- -- 139,040
Cash received for shares to be
issued at $2.32 per share ...... 500 -- -- 500
Amortization of prepaid consult-
ing costs ..................... -- 15,000 -- 15,000
Net loss ........................ -- -- (1,223,829) (1,223,829)
--------- ----------- ------------- ------------
BALANCE, June 30, 1996 ......... 500 (1,250) (2,079,467) (155,707)
Issuance of common stock for
consulting services issued dur-
ing October and November
1996 at $2.32 .................. -- (22,500) -- 115,000
Issuance of common stock for
conversion of debt, accrued
interest and deferred compen-
sation during November 1996:
at $2.32 per share ............ -- -- -- 74,000
at $2.90 per share ............ -- -- -- 20,000
at $3.68 per share ............ -- -- -- 261,500
Issuance of common stock for
cash and notes receivable:
during November 1996, 73,615
options exercised at $2.32
per share ..................... -- -- -- 171,000
during November 1996 through
January 1997, warrants exer-
cised under convertible notes
payable at $2.32 per share . (9,900) -- -- 320,100
during November 1996 through
January 1997, shares issued
at $3.48 per share, including
7,749 shares issued for ser-
vices for stock offering ...... -- -- -- 483,500
during December 1996, 44
options exercised at $0.77
per share ..................... -- -- -- 33
Issuance of common stock for an
outstanding stock subscription
during December 1996 ......... (500) -- -- --
Shares retired during December
1996 pursuant to a settlement
with a shareholder valued at
$2.32 per share ............... -- -- -- (4,973)
Issuance of common stock and
warrants for cash net of offer-
ing costs of $243,456 under
the February 1997 private
placement at $2.02 and $0.51
per share, respectively ......... -- -- -- 780,394
Amortization of prepaid consult-
ing costs ..................... -- 12,500 -- 12,500
Net loss for the nine months
ended March 31, 1997
(unaudited) .................. -- -- (2,286,273) (2,286,273)
--------- ----------- ------------- ------------
BALANCE,
March 31, 1997 (unaudited) ...... $ (9,900) $ (11,250) $ (4,365,740) $ (208,926)
========= =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996, FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1996, AND
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
For the
Years Ended June 30,
-------------------------------
1995 1996
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ................................. $ (490,341) $ (1,223,829)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 810 10,081
Common stock issued for consulting
services and interest expense ............ 328,932 126,900
Provision for deferred compensation ...... -- 24,167
Provision for settlement of shareholder
dispute ................................. -- 95,027
Loss on investment in joint venture ...... -- --
Changes in assets and liabilities:
Accounts receivable ..................... -- --
Prepaid expenses ........................ -- (700)
Security deposit and other assets ......... 986 (25,000)
Accounts payable and accrued liabilities 1,067 112,719
Deferred compensation ..................... -- --
Due to shareholders ........................ (5,162) 107,141
------------ -------------
Net cash used in operating activities ...... (163,708) (773,494)
------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of furniture and equipment ...... -- (49,721)
Net proceeds from an officer ............ -- 10,200
Investment in joint venture ............... -- --
------------ -------------
Net cash provided by (used in) investing
activities .............................. -- (39,521)
------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings .................. 20,000 --
Payments on borrowings ..................... -- --
Payments on capital lease obligation ...... -- (292)
Proceeds from the issuance of common
stock, warrants and stock subscriptions 139,800 950,767
Repurchase of common stock ............... -- --
Deferred offering costs incurred ......... -- --
------------ -------------
Net cash provided by financing
activities .............................. 159,800 950,475
------------ -------------
NET INCREASE (DECREASE) IN CASH (3,908) 137,460
CASH, beginning of period .................. 3,940 32
------------ -------------
CASH, end of period ........................ $ 32 $ 137,492
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in Cash For the Nine Months
From Inception Ended March 31,
(May 1992) ---------------------------
to June 30, 1996 1996 1997
----------------------------- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ................................. $ (2,079,467) $ (569,110) $ (2,286,273)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 14,824 -- 158,096
Common stock issued for consulting
services and interest expense ............ 570,493 11,250 27,000
Provision for deferred compensation ...... 24,167 -- 84,833
Provision for settlement of shareholder
dispute ................................. 92,541 -- --
Loss on investment in joint venture ...... -- -- 228,985
Changes in assets and liabilities:
Accounts receivable ..................... -- -- (4,928)
Prepaid expenses ........................ (700) -- (10,822)
Security deposit and other assets ......... (26,230) -- (7,710)
Accounts payable and accrued liabilities 116,272 37,334 178,275
Deferred compensation ..................... -- -- (35,000)
Due to shareholders ........................ 107,141 60,318 (95,314)
------------- ------------ -------------
Net cash used in operating activities ...... (1,180,959) (460,208) (1,762,858)
------------- ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of furniture and equipment ...... (54,524) -- (26,332)
Net proceeds from an officer ............ -- 10,200 --
Investment in joint venture ............... -- -- (300,000)
------------- ------------ -------------
Net cash provided by (used in) investing
activities .............................. (54,524) 10,200 (326,332)
------------- ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings .................. 60,000 -- 1,221,976
Payments on borrowings ..................... -- -- (60,000)
Payments on capital lease obligation ...... (292) -- (818)
Proceeds from the issuance of common
stock, warrants and stock subscriptions 1,313,267 575,000 1,755,027
Repurchase of common stock ............... -- -- (4,973)
Deferred offering costs incurred ......... -- -- (225,582)
------------- ------------ -------------
Net cash provided by financing
activities .............................. 1,372,975 575,000 2,685,630
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH 137,492 124,992 596,440
CASH, beginning of period .................. -- 32 137,492
------------- ------------ -------------
CASH, end of period ........................ $ 137,492 $ 125,024 $ 733,932
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT
JUNE 30, 1996
(Information as of March 31, 1996 and 1997 is unaudited)
1. Organization and Line of Business and Significant Business Risks
a. Organization and Line of Business
The Recovery Network, Inc. (the "Company"), a Colorado corporation in the
development stage, was organized to provide information, interaction and support
via television, radio and interactive media services to persons affected by or
afflicted with alcoholism, drug and substance abuse, eating disorders,
depression and a variety of behavioral and mental health problems, as well as
to persons seeking to prevent the onset of these problems. The Company was
incorporated in May 1992 and commenced operations in February 1993. The Company
has defined and developed its marketing concept, has procured and produced
programming, and is conducting its initial test market cablecast launch in the
Boston market.
The Company owns an inactive subsidiary with no assets or operations as of
year end. However, the Company intends to start selling merchandising products
through its subsidiary.
Subsequent to June 30, 1996, the Company approved a one for 7.7432 reverse
split of common stock. Unless otherwise indicated, all information relating to
the number and price per share of common stock has been retroactively adjusted
for to reflect the stock split.
b. Significant Business Risks
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has recurring losses from
operations, has no operating revenues, and has a net capital deficiency that
raises substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to operate as a going concern is dependent
upon its ability (1) to obtain sufficient additional capital, (2) to distribute
its programming and services through multimedia channels, (3) to achieve a
critical mass of viewers to attract advertisers and healthcare providers and (4)
to acquire and develop appropriate programming for broadcast. The Company plans
to raise additional working capital through private and public offerings, as
well as attain listing of its stock for trading in the NASDAQ Smallcap Market.
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.
2. Summary of Significant Accounting Policies
a. 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 of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
b. Cash
At times, the Company maintains cash balances over the Federal Depository
Insurance Corporation insurable limit of $100,000 per customer per financial
institution.
F-8
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
c. Furniture and Equipment
Furniture and equipment is depreciated over the estimated useful lives of
the assets using accelerated methods. Estimated useful lives range from 3 to 7
years.
Furniture and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1997
--------------- ---------------
<S> <C> <C>
Computer equipment ................ $ 30,687 $ 52,925
Office furniture .................. 28,403 32,497
--------- ---------
59,090 85,422
Less accumulated depreciation ...... (13,841) (24,405)
--------- ---------
$ 45,249 $ 61,017
========= =========
</TABLE>
d. Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Under SFAS 109, deferred income tax assets or 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 the deferred income
tax assets and liabilities from period to period.
e. Deferred Offering Costs
Costs associated with offerings of Company common shares are initially
capitalized and then netted with the proceeds received from the sale of these
common shares when the offering is completed. If the intended offering is
terminated these costs are charged to operations. There are no offering costs
capitalized as of June 30, 1996.
Debt issuance costs are initially capitalized as other assets and amortized
over the terms of the notes. 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. There are no offering costs
capitalized as of June 30, 1996.
Deferred offering costs of $225,582, net of amortization of $26,305, have
been capitalized as of March 31, 1997.
f. Prepaid Consulting Costs
The value of common stock issued for consulting services is recorded as
prepaid consulting costs as a component of shareholders' deficit. Such amounts
are amortized, using the straight-line method, over the life of the consulting
agreements.
g. 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
surrender, 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.
h. Statements 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 1996, common stock valued at $27,140 was issued as payment for
consulting services performed prior to fiscal 1995 by a shareholder. The Company
issued 17,220 shares of common stock valued at $40,000 ($2.32 per share) in
connection with an offering of common stock (see Note 6). The Company also
entered into a $4,565 capital lease for computer equipment.
F-9
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
During 1995, common stock valued at $43,589, $32,703, and $56,921 was
issued as payment for shareholder notes payable and interest, stock
subscriptions, and consulting services performed prior to fiscal 1995 by certain
shareholders, respectively. An officer receivable was also recorded for amounts
owed pursuant to the Moses transaction (see Note 6). Prior to 1995, common stock
and stock subscriptions valued at $91,414 were issued for consulting services of
which $84,783 was recorded to prepaid consulting costs as a component of
shareholders' deficit and amortized over the life of the consulting agreements.
As of June 30, 1996, the unamortized portion is $1,250. The Company also accrued
expenses for consulting services and interest expense of $87,650 which was
converted into common stock during 1995 and 1996.
During the nine months ended March 31, 1997, the Company issued shares of
common stock in connection with the conversion of $270,000 of notes payable, the
settlement of deferred compensation of $74,000 and amounts due to consultants
and shareholders for both past and future services of $137,500.
For 1996 and 1995, the Company made cash payments of $800 for state income
taxes. Inception to date payments for income taxes is $1,600. During 1996, cash
payments for interest expense was approximately $200. The Company made no cash
payments for interest expense during 1995.
For the nine months ended March 31, 1996 and 1997, the Company made no cash
payments for income taxes. For the nine months ended March 31, 1997, the Company
made cash payments for interest expense of $15,264. No cash payments were made
for interest expense for the nine months ended March 31, 1996.
i. New Financial Accounting Pronouncements
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," must be adopted for fiscal years beginning
after December 15, 1995. The Company adopted the new standard effective July 1,
1996. The adoption of SFAS No. 121 was not material to the Financial Statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for
transactions entered into fiscal years that begin after December 15, 1995. The
Company adopted the disclosure requirements of SFAS No. 123 effective July 1,
1996.
SFAS No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of
Information about Capital Structure" are effective for fiscal years ending after
December 15, 1997. The Company will adopt the new standards in the fiscal year
ending June 30, 1998. The effects of these new standards have not yet been
determined.
j. 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
("FCC"). Regulations governing the rates that can be charged to subscribers by
cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as The Recovery Network. In addition, federal "must-carry"
rules requiring cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional channels for
noncommercial educational TV stations); commercial leased access rules
designating 10% to 15% of system channels for lease by unaffiliated programmers;
and local regulatory requirements mandating further channel set-asides for
public, governmental and educational use could reduce channel availability which
might otherwise be available for The Recovery Network on many cable systems.
Statutory provisions and FCC rules governing relationships among cable systems
and competing forms of multichannel video program distribution, as well as the
relationships 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.
F-10
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Although program providers that do not hold FCC licenses or operate distribution
outlets, such as The Recovery Network and Recovery Talk Radio, are outside the
FCC's direct jurisdiction, 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 or radio stations to FCC fine or other sanction
and thus could adversely affect the Company's relationship with such entities
and could result in the discontinuation of carriage of the Company's programming
by such entities.
k. Dependence upon Access Television Network (ATN, a related company)
ATN's subscribers currently represent substantially all of the households
which receive broadcast of the Company's programming. The Company is dependent
upon ATN to broadcast its programming to ATN's subscribers and to provide the
necessary services to enable the Company to broadcast its programming through
cable systems with which the Company directly enters into affiliation
agreements. It is possible that ATN or its affiliates could experience broadcast
interruptions and equipment failures which could last for a significant period
of time. The Company's prospects will be affected by ATN's ability to maintain
its existing subscriber base and to enter into additional affiliation agreements
to expand its subscriber base. Moreover, the Nesting Contract with ATN expires
April 1998 unless renewed by both parties.
l. Unaudited Information as of March 31, 1996 and 1997
The accompanying unaudited financial statements as of March 31, 1996 and
1997 reflect all adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial statements of such interim periods.
Such adjustments consist only of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
m. 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.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
common stock issued for consideration below the offering price of $5.00 per
share (the "Offering Price") and stock options and warrants issued with exercise
prices below the Offering Price during the twelve-month period preceding the
initial filing of the proposed May 1997 initial public offering (the "IPO"),
have been included in the calculation of common stock, using the treasury stock
method, as if they were outstanding for all periods presented. The effect of the
stock, options and warrants issued at consideration below the IPO price was to
increase the weighted average shares outstanding by 560,548 shares for the
periods ended June 30, 1996 and prior. The weighted average shares outstanding
increased by 163,938 shares for the period ended March 31, 1997.
3. Convertible Note Payable
Convertible note payable at June 30, 1996, consists of a $20,000 unsecured
note payable, bearing interest at 8 percent, is due October 1996, and is subject
to certain conversion rights. Accrued interest related to this note payable is
$1,067 at June 30, 1996. The holder of the note payable also received an option
to purchase additional shares of common stock.
In November 1996, all amounts owed for interest were paid and the principal
balance was converted into 6,888 shares of common stock valued at $2.90 per
share by the Company. The above option was canceled upon conversion.
4. Deferred Compensation
During May and June 1996, three officers (two of which are shareholders)
earned compensation in excess of amounts paid by approximately $5,000 to $7,000
each month for each officer.
F-11
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
4. Deferred Compensation -- (Continued)
Earned compensation in excess of amounts paid continued until November
1996, at which time, an officer and a former officer (subsequent to December 31,
1996) converted $74,000 in deferred compensation due them into 31,857 shares of
common stock valued at $2.32 per share by the Company. As of November 1996, the
Company began making cash payments to the officers that were equal to
compensation earned.
5. Income Taxes
The components of the net deferred income tax asset at June 30, 1996 are as
follows:
1996
----------
Development costs capitalized for tax purposes .. $ 743,167
Carryforward of net operating losses ......... 59,899
Other temporary differences .................. 45,667
----------
848,733
Valuation allowance ........................... (848,733)
----------
Deferred income tax asset ..................... $ --
==========
The provision for income taxes of $800 for the fiscal years ended June 30,
1995 and 1996 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, 1995 and 1996 are
as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------- ---------------------------
Amount Percent Amount Percent
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Income tax benefit at federal statutory
rate ................................. $(166,444) (34.00)% $(415,829) (34.00)%
State taxes, net of federal income tax
effect .............................. 800 0.16 800 0.07
Financial reporting operating losses not
currently available for use ......... 166,444 34.00 415,829 34.00
----------- ---------- ----------- ----------
$ 800 0.16% $ 800 0.07%
=========== ========== =========== ==========
</TABLE>
As of June 30, 1996, the Company had approximately $59,000 of federal net
operating loss carryforwards, which will expire in fiscal years ending 2008 to
2011. As of June 30, 1996, the Company had less than $1,000 of California state
net operating loss carryforwards, which will expire as of fiscal year 2001.
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 possible
significant ownership changes after year end in connection with the sale of the
Company's common stock under a planned initial public offering.
6. Capital Stock Transactions
a. The Moses Transaction
In November 1994, the Company issued 186,074 shares of common stock to
William Moses Jr. for $100,000 ($0.54 per share) of which $10,200 was paid in
1996. Afterwards, Mr. Moses was issued another 186,074 shares for achieving
certain other terms during 1995 which were also valued at $100,000 ($0.54 per
share) by the Company.
F-12
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company
NOTES TO FINANCIAL STATEMENT -- (Continued)
6. Capital Stock Transactions -- (Continued)
b. Other Stock Transactions
During January 1996, an unrelated company was issued 45,523 shares of
common stock for consulting services valued at $105,748 ($2.32 per share) by the
Company.
During 1995, unrelated individuals were issued 22,500 and 2,583 shares of
common stock for consulting services. The shares were valued at $21,000 ($0.93
per share) and $6,000 ($2.32 per share), respectively.
c. The $2.32 Placement
During November 1995 through April 1996, the Company sold 322,663 shares of
its common stock (of which 107,625 shares were sold to certain Directors of the
Company) in a private offering for $2.32 per share (the $2.32 Placement)
resulting in net proceeds of $749,500. A Director of the Board rendered certain
services directly related to this private offering and was given 17,220 shares
of common stock. The shares were valued, by the Company, at $40,000 ($2.32 per
share) and treated as direct costs of the offering resulting in no net impact on
shareholders' deficit. The Director was also granted an option for services to
be rendered in the future (see Note 10).
Certain shareholders purchased a total of 216 share of common stock for
$500 during the $2.32 Placement which were not issued. The $500 has been
recorded as stock subscriptions as of June 30, 1996. During December 1996, these
shares and the 44 related shares entitled under the below $0.77 per share
offering were issued.
d. The $0.77 Placement and Other Related Matters
After the $2.32 Placement, the Company granted every shareholder of record
a right to purchase common stock for each share owned. Five rights could buy one
share of common stock for $0.77 per share.
During June 1996, the Company issued 14,332 shares of common stock to a
shareholder for consulting services performed prior to the $2.32 Placement. The
shares were valued by the Company at $2.32 per share and deemed to be eligible
for the $0.77 per share offering but not issued in time to participate. The
Company issued the shareholder an option to purchase 2,867 shares of common
stock at $0.77 per share which was exercised in December 1996.
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.
7. Related Party Transactions
a. Compensation
During 1995, the Company issued certain shareholders 98,920 shares of
common stock for consulting services valued at $91,931 ($0.93 per share) by the
Company and was recorded as salaries and consulting expenses in the accompanying
financial statements.
During fiscal years 1995 and 1996, cash payments of approximately $87,000
and $210,000 were made to shareholders and Directors for compensation in
connection with services rendered.
During the nine months ended March 31, 1996 and March 31, 1997, cash
payments of approximately $198,000 and $679,000, respectively, were made to
shareholders and Directors for compensation for services rendered.
b. Due to Shareholders
As of June 30, 1996, amounts due to shareholders consist of expense
reimbursements due, shareholder claims, and other amounts of $100,000, $95,027,
and $7,141, respectively. As of March 31, 1997, amounts due to shareholders
consist of other amounts of $9,854.
F-13
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
7. Related Party Transactions -- (Continued)
During October and November 1996, the Company issued existing shareholders
a total of 43,050 shares of common stock valued by the Company at $2.32 per
share for expense reimbursements. During February and March 1997, the
shareholder claims were settled for $100,000, however, the shareholder
surrendered 2,141 shares of common stock. When tendered in December 1996, the
shares were valued at $4,973 ($2.32 per share) by the Company.
8. Consulting Agreements
a. Comspan
During August 1993, the Company entered into a three year consulting
agreement with Comspan, an unrelated company at the time the agreement was
executed. Under the agreement, Comspan received 7,600 shares of common stock
(valued at $5.92 per share or $45,000). The $45,000 was recorded as prepaid
consulting costs as a component of shareholders' deficit in the accompanying
financial statements and is being amortized over the life of the agreement to
salaries and consulting expenses.
Under the agreement, Comspan was also to receive certain monthly cash
payments as defined in the agreement. During November 1994, the Company issued
Comspan 56,291 shares of common stock (valued at $0.93 per share or $52,305) in
satisfaction of amounts owed as of November 1994. The Company recorded
consulting expense pertaining to the agreement of $36,921 and $15,384 in fiscal
years 1994 and 1995, respectively.
Subsequent to June 30, 1996, the Company has made monthly cash payments of
$3,300 to Comspan for consulting service.
b. Masters, Smith & Co.
During May 1994, the Company entered into a twelve month consulting
agreement with Masters, Smith & Co. (or MSC), an unrelated company at the time
the agreement was executed. Under the agreement, MSC received 42,818 shares of
common stock (valued at $0.93 per share or $39,783). MSC received 23,764 shares
in May 1994 and the other 19,054 shares in January 1995. During 1994, the entire
$39,783 was recorded as prepaid consulting costs as a component of shareholders'
deficit in the accompanying financial statements and amortized over the life of
the agreement to salaries and consulting expenses. The shares received in
January 1995 were recorded as stock subscriptions in 1994.
Under the agreement, MSC was also to receive certain monthly cash payments
as defined in the agreement. The Company issued 64,424 shares of common stock
(valued at $0.93 per share or $60,000) in settlement of amounts owed. The
Company recorded salaries and consulting expenses of $20,000 and $40,000 in
fiscal year 1994 and 1995, respectively.
9. Licensing Fees
During March 1995 through February 1996, the Company entered into certain
license agreements whereby the Company is granted the right to broadcast or
exhibit certain programs ranging between two to five years and expiring between
December 1997 and March 2001. In consideration for the rights granted, the
Company has agreed to either pay for each program and/or provide available space
for advertisements. Fees paid of approximately $118,000 which relate to these
agreements have been recorded as programming expenses in the accompanying
financial statements during fiscal year 1996.
10. Options and Warrants
During January 1996, options to purchase a total of 51,659 shares of common
stock at $3.87 per share were issued to three members of the Board of Directors
who joined the Board in fiscal year 1996. Half the options vest at once and are
exercisable over three years. The other half of the options vest over three
years.
F-14
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
10. Options and Warrants -- (Continued)
During fiscal year 1996, a Director was granted an option to purchase
15,498 shares of common stock at $3.87 per share for consulting services to be
rendered. The option was fully vested when granted.
See Note 13 for subsequent option activity and summary of options granted
as of May 1, 1997.
11. Commitments and Contingencies
a. Operating Leases
The Company leases its offices under an operating lease agreement that
expires May 2001. Under this agreement, the Company has an option to extend the
lease through May 2004. The lease requires that the Company also pay for certain
insurance coverages throughout the term of the lease. The aggregate minimum
future commitments under operating leases are as follows:
Year Ending June 30,
1997 .................................. $ 62,000
1998 .................................. 73,000
1999 .................................. 78,000
2000 .................................. 78,000
2001 .................................. 65,000
---------
$356,000
=========
Rent expense charged to operations in fiscal 1995 and 1996 were
approximately $11,000 and $11,500, respectively.
During March 1997, the Company assigned its rights and obligations under
the lease to its joint venture (see Note 12) and executed a new operating lease
agreement for its office facilities (see Note 13).
b. Capital Leases
The Company leases certain office equipment under a capital lease. At June
30, 1996, minimum lease payments under the terms of the lease agreement are as
follows:
Year Ending June 30,
1997 .................................... $1,755
1998 .................................... 1,755
1999 .................................... 1,460
-------
4,970
Less--amounts representing interest ...... 697
Less--Current portion ..................... 1,571
-------
$2,702
=======
12. Subsequent Events
a. Notes Payable
In July 1996, the Company issued $310,000 of 10 percent convertible
debentures (a total of $120,000 to certain shareholders and Directors), maturing
the earlier of the first anniversary of their issuance or the consummation of an
equity offering with gross proceeds of at least $1,500,000.
The notes are convertible, at the option of the holder, into such number of
shares of common stock that equals principal and accrued interest due divided by
approximately 3.87. Upon conversion, a warrant will also be issued to allow the
note holder to acquire shares of common stock at $3.87 per share, in an amount
that equals twice the numbers of shares issued upon conversion. Warrants are
exercisable at any time for two years after the date of issuance.
F-15
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
12. Subsequent Events -- (Continued)
If the notes are held to maturity and not converted, the holder is entitled
to a warrant to acquire shares of common stock at $3.87 per share, in an amount
that equals the principal amount due divided by approximately 3.87.
Subsequent to the date of the Auditors' Report, $250,000 of the above notes
payable were converted (see Note 13).
b. Joint Venture Agreement
The Company owns a 50% interest in Recovery Interactive, a joint venture
with TCI OnLine RecoveryNet Holdings, Inc., an affiliate of Tele-Communications,
Inc. ("TCI"), formed on August 1, 1996 to commence a business that expects to
provide behavioral health products and services to managed care and insurance
companies and their customers, as well as to provide information, interaction
and support regarding recovery issues and prevention issues, via the Internet.
The Company and TCI each made a capital contribution in the amount of $300,000
to Recovery Interactive. The Joint Venture agreement is to continue through
December 31, 2044. The Company's investment in the Joint Venture is to be
accounted for under the equity method of accounting. During the nine month
period ended March 31, 1997, the Company recorded a loss on investment in the
joint venture of $228,985.
The Joint Venture has incurred operating losses of approximately $458,000
since its inception and has no meaningful operating revenue. This and the lack
of operating history raises substantial doubt about the Joint Venture's ability
to continue as a going concern.
c. Capital Transactions
During October 1996, the Company issued 6,458 shares of common stock valued
at $15,000 ($2.32 per share) for consulting services rendered during 1996.
During October 1996, the Company entered into a consulting agreement with
an unrelated individual, whereby 9,686 shares of common stock were issued as
compensation to help create and maintain a call center for one year. The shares
were valued by the Company at $22,500 ($2.32 per share).
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
a. Capital Transactions
During November 1996 through January 1997, the Company issued 138,761
shares of common stock for cash of $473,600 and a $9,900 60 day promissory note
($3.48 per share). The Company also issued 7,749 shares in consideration of
services rendered in connection with such offering.
During November 1996 the exercise price of certain options granted in
fiscal year 1996 to three members of the Board of Directors (see Note 10) was
reduced to $2.32 (estimated market price at date of repricing) per share and
vesting was accelerated so that all options became fully vested. At that time,
options to purchase 67,157 shares of common stock were exercised.
During November 1996, certain holders who converted their notes payable
(see Note 12) and exercised the resulting warrants, were given a reduced
conversion rate of one share for each $3.68 in outstanding principal and
interest. The warrant exercise price was also reduced to $2.32 per share
(estimated market price at date of repricing). Notes totaling $250,000 in
principal, accrued interest of $11,500 and the resulting warrants were converted
into 213,098 shares of common stock. Cash of $330,000 was received when the
warrants were exercised.
In March 1997, the Company consummated a private financing pursuant to
which it issued 40 units (39 units in March and one unit in April) of the
Company's securities at $50,000 per unit. The private financing included an
aggregate of i) 2,000,000 principal amount of promissory notes which bear
interest at the stated rate
F-16
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
-- (Continued)
of 9 percent per annum (estimated effective rate is 146 percent) and are due on
the earlier of the consummation of an initial public offering or one year; ii)
400,000 shares of common stock; and iii) warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $4.00 per share. The net
proceeds for the offering were $1,537,654. A loan discount of $1,064,640 was
recorded and allocated to the Common Stock issued and warrants granted in the
private placement based upon the relative fair values of the debt and equity
issued instruments. $121,042 of the loan discount has been amortized to
operations as interest expense as of March 31, 1997. Offering costs of
approximately $462,000 were incurred of which approximately $216,000 was
capitalized as debt offering costs. The balance of $246,000 was charged to
equity as cost of raising the equity proceeds.
b. Consulting Agreements
The Company has entered into a consulting agreement with Comspan (a related
company) effective December 1996 and expiring during May 1997, pursuant to which
Comspan will handle affiliate sales and marketing efforts on behalf of the
Company for a consulting fee of approximately $8,900 per month.
c. Employment Agreements
Effective December 1, 1996 and after, the Company entered into certain
employment agreements with employees, shareholders and/or Directors. The
agreements expire at various dates from November 30, 1997 to March 13, 1999. The
agreements provide for minimum monthly cash compensation ranging from
approximately $8,000 to $12,000, and quarterly commissions to an officer of
$0.01 for each subscriber household, as defined, in excess of one million
households.
The Company canceled one of the above agreements and its wholly owned
subsidiary entered into a new agreement with the officer under similar terms
through January 31, 1999.
The employment agreements provide certain option rights (see below) and
contain certain non-compete and severance pay clauses, as defined, in the
agreements. Future minimum payments required under the amended and revised
employment agreements, entered into as of May 1, 1997, are approximately
$398,000, $570,000 and $258,000 in fiscal years 1997, 1998, and 1999,
respectively.
d. Stock Options and Warrants
Stock Options
The Company has three stock option plans: the 1996 Employee and Consultants
Stock Option Plan, the 1996 Board of Directors and Advisory Board Retainer Stock
Option Plan and the 1997 Management Bonus Plan. A total of 350,000 shares of
common stock are reserved for issuance pursuant to options granted and to be
granted under these plans. 159,641 shares are available for grant, including an
option to purchase 12,915 shares which has been terminated, as of March 31,
1997. Options pursuant to the plans generally vest over three years and 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 these plans
are at an exercise price of $5.00 per share.
Effective December 1996 and after, the Company granted non-plan options to
acquire 110,423 shares of common stock for services rendered and pursuant to
certain employment agreements. Options to purchase 66,513 shares are fully
vested as of March 31, 1997. Options to purchase 43,910 shares vest over 1.5 to
2 years. All non-plan options expire in 2001.
F-17
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
-- (Continued)
The following is a summary of all options granted to employees, directors
and consultants to acquire the Company's common stock as of May 1, 1997:
Shares Exercise Shares Shares Shares
Granted Price Vested Exercised Terminated
- ------------ ---------- -------- ----------- -----------
203,274 $5.00 53,344 -- 12,915
110,423 $2.32 79,987 -- --
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, issued in October 1995. In accordance with provisions of SFAS No.
123, the Company applies APB Opinion 25 and related interpretations in
accounting for its stock options plans and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date 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):
Nine Months Ended
March 31, 1997
------------------
Net loss -- as reported ............ $2,286
Net loss -- pro forma ............... $2,378
Loss per share -- as reported ...... $(1.13)
Loss per share -- pro forma ...... $(1.17)
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:
Expected dividend yield ............... 0.00%
Expected stock price volatility ...... 0.00%
Risk free interest rate ............ 6.00%
Expected life of options ............ 5 years
The weighted average fair value of options granted during the nine months
ended March 31, 1997 is $0.32. During 1996, the weighted average fair value of
options granted was zero.
Warrants
At March 31, 1997, there were 515,498 warrants outstanding related to the
Company's prior debt and equity offerings. 500,000 warrants are exercisable
through March 2002 at $4.00 per share and 15,498 warrants are exercisable
through March 1999 at $3.78 per share.
e. 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. Under the Nesting Contract, the Company is
charged a daily rate for programming time provided by ATN to the Company
starting at an estimated rate of approximately $2,100 for April 1997 which
increases to approximately $3,600 by March 1998. The actual charge is based on
the monthly number of households served by ATN affiliates. The Nesting Contract
provides, however, that in no event will the Company be charged more than
$60,000 per month for the first six months or $65,000 for the subsequent six
months of the Nesting Contract. In addition, ATN will provide the Company with
other required services at cost plus 20 percent. The Nesting Contract expires in
April 1998 unless extended by mutual consent.
F-18
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENT -- (Continued)
13. Events Subsequent to the Date of the Auditors' Report (Unaudited)
-- (Continued)
f. Operating Leases
During March 1997, the Company executed a new operating lease agreement for
its new office facilities that expires in April 2002. Under the new agreement,
the Company has an option to extend the lease through May, 2004. The lease
requires 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:
Year Ending June 30,
1997 .................................. $ 20,000
1998 .................................. 121,000
1999 .................................. 128,000
2000 .................................. 139,000
2001 .................................. 145,000
2002 .................................. 125,000
---------
$678,000
=========
F-19
<PAGE>
===============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this Prospectus, or an
offer to sell or a solicitation of an offer to buy any securities by anyone in
any jurisdiction in which such offer or solicitation is not authorized or is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
-----------------------------------------------------
TABLE OF CONTENTS
Page
-----
Available Information ............... 2
Prospectus Summary .................. 3
Risk Factors ........................ 8
Use of Proceeds ..................... 18
Dilution .............................. 19
Dividend Policy ..................... 20
Capitalization ........................ 21
Plan of Operation ..................... 22
Business. ........................... 25
Management. ........................... 39
Principal Shareholders. ............... 46
Certain Transactions .................. 48
Description of Securities. ............ 50
Shares Eligible for Future Sale ...... 52
Underwriting ........................ 53
Legal Matters. ........................ 55
Experts .............................. 55
Additional Information ............... 55
Index to Financial Statements. ...... F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the shares of Common Stock offered hereby, whether or
not participating in this distribution may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
===============================================================================
<PAGE>
===============================================================================
[LOGO]
THE RECOVERY
NETWORK, INC.
1,600,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
1,600,000 Shares of Common Stock
-------------------------
PROSPECTUS
-------------------------
Whale Securities Co., L.P.
, 1997
===============================================================================
<PAGE>
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 statue
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 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 Registrant's bylaws require the Registrant, 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 (other than selling
commissions and other fees paid to the underwriter) 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>
<CAPTION>
<S> <C>
Registration fee ................................................ $ 6,696.50
NASD filing fee ................................................... 2,710.00
Nasdaq listing expenses .......................................... *
Blue sky fees and expenses (including legal and filing fees) ...... *
Printing expenses (other than stock certificates) ............... *
Printing and engraving of stock certificates ..................... *
Legal fees and expenses (other than Blue Sky) ..................... *
Consulting fee ................................................... 60,000.00
Accounting fees and expenses .................................... *
Transfer Agent and Registrar fees and expenses .................. *
Miscellaneous expenses .......................................... *
------------
Total ......................................................... $477,200.00
============
</TABLE>
- ------------
* To be provided by amendment.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
From May 1994 through January 1995, the Registrant issued 42,818 shares of
Common Stock valued at $.93 per share for consulting services rendered by a
third party. In issuing such securities, the Registrant relied on the exemption
provided by Section 4(2) of the Securities Act of 1933 (the "Securities Act").
From June 1994 to June 1995, the Registrant issued 28,973 shares of Common
Stock valued at $.93 for consulting services rendered by third parties. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
In July 1994, the Registrant sold 5,595 shares of Common Stock at a price
of $11.62 per share. In issuing such securities, the Registrant relied on the
exemption provided by Section 4(2) of the Securities Act.
In November 1994, the Registrant sold 186,074 shares of Common Stock at a
purchase price of $.54 per share. In issuing such securities, the Registrant
relied on the exemption provided by Section 4(2) of the Securities Act.
In November 1994, the Registrant issued 56,291 shares of Common Stock
valued at $.93 per share to a consultant in lieu of cash payments and any other
amounts owed to such consultant. In issuing such securities, the Registrant
relied on the exemption provided by Section 4(2) of the Securities Act.
In January 1995, the Registrant issued 66,514 shares of Common Stock valued
at $.93 per share, whereby 20,156 shares of Common Stock were issued for
consulting services rendered by third parties and 46,358 shares of Common Stock
were issued upon conversion of outstanding promissory notes held by these third
parties. In issuing such securities, the Registrant relied on the exemption
provided by Section 4(2) of the Securities Act.
In January 1995, the Registrant issued to an officer of the Registrant
78,776 shares of Common Stock, valued at $.93 per share, as reimbursement for
expenses incurred by such officer, on behalf of the Company. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
In June 1995, the Registrant issued to an officer of the Registrant 186,074
shares of Common Stock valued at $.54 per share for services rendered to the
Registrant by such officer during the fiscal year ended June 30, 1995. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
During 1995, the Registrant issued 64,424 shares of Common Stock valued at
$.93 per share to a consultant in lieu of cash payments. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
During the period from November 1995 through April 1996, the Registrant
sold 322,663 shares of Common Stock at a price per share of $2.32 for proceeds
of approximately $749,500. In issuing such securities, the Registrant relied on
the exemption provided by Section 4(2) of the Securities Act.
In January 1996, the Registrant issued 48,106 shares of Common Stock valued
at $2.32 per share for consulting services rendered by third parties. In issuing
such securities, the Registrant relied on the exemption provided by Section 4(2)
of the Securities Act.
During April 1996, the Registrant issued, pursuant to a shareholder rights
offering, 259,281 shares of Common Stock and received proceeds of $200,767. In
connection with the shareholder rights offering, the Registrant granted each
shareholder of record one transferable right for each share of Common Stock
owned by such shareholder. Five rights entitled a shareholder to purchase one
share of Common Stock at a price of approximately $.77 per share. In issuing
such securities, the Registrant relied on the exemption provided by Section 4(2)
of the Securities Act and Rule 505 of Regulation D promulgated under the
Securities Act.
In May 1996, the Registrant issued to a director of the Registrant 17,220
shares of Common Stock, valued at $2.32 per share, for consulting services. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
II-2
<PAGE>
During June 1996, the Registrant issued 14,332 shares of Common Stock
valued at $2.32 per share for consulting services performed and expenses
incurred by such consultant prior to November 1995. In issuing such securities,
the Registrant relied on the exemption provided by Section 4(2) of the
Securities Act.
During the period from July 1996 through October 1996, the Registrant sold
10% Convertible Promissory Notes (the "Convertible Notes") in the aggregate
principal amount of $310,000. From November 1996 through January 1997,
Convertible Notes in the aggregate principal amount of $250,000 and interest of
approximately $11,500 were converted into an aggregate of 71,033 shares of
Common Stock. The noteholders also received and exercised warrants for 142,065
shares of Common Stock resulting in proceeds to the Registrant of approximately
$330,000. The remaining outstanding Convertible Note in the principal amount of
$60,000 was repaid in March 1997 from the net proceeds of a private financing
(the "Private Financing"), and in connection with such repayment the Registrant
issued to the holder warrants to purchase 15,498 shares of Common Stock,
exercisable at a price of $3.87 per share. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
In October 1996, the Registrant issued to two shareholders of the
Registrant 16,144 shares of Common Stock valued at $2.32 per share for
consulting services rendered by such shareholders, and the Registrant issued
7,749 shares of Common Stock valued at $3.48 per share for consulting services.
In issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
During October and November 1996, an officer and a former officer of the
Registrant were issued 43,050 shares of Common Stock, respectively, valued at
$2.32 per share as reimbursement for expenses incurred by them on behalf of the
Registrant, and the Registrant reduced the exercise price of 73,615 options from
$3.87 to $2.32 and all of such options were exercised. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
From October 1996 through January 1997, the Registrant sold 138,761 shares
of Common Stock for a price per share of $3.48 for proceeds of approximately
$483,500. The Registrant issued 7,749 shares in consideration of services
rendered in connection with such offering. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
In November 1996, the Registrant issued 31,857 shares of Common Stock,
valued at $2.32 per share to officers of the Registrant upon conversion of
deferred compensation earned by such officers. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
In November 1996, the Registrant issued 6,888 shares of Common Stock valued
at a price of $2.90 upon the conversion of a promissory note. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
In March and April 1997, the Registrant sold to 20 "accredited investors"
in the Private Financing an aggregate of (i) $2,000,000 principal amount of
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; and (iii) Warrants (the
"Financing Warrants") to purchase an aggregate of 500,000 shares of Common Stock
at an exercise price of $4.00 per share. The Underwriter acted as placement
agent in connection with the Private Financing and received a placement agent
fee of $200,000 in connection with such offering. In issuing such securities,
the Registrant relied on the exemption provided by Section 4(2) of the
Securities Act and Rule 505 of Regulation D promulgated under the Securities
Act.
In issuing securities under the exemption provided by Section 4(2) of the
Securities Act, the Registrant relied on representations made by each purchaser
that such purchaser was either an "accredited investor" as such term is defined
in Rule 501 of Regulation D promulgated under the Securities Act or that such
purchaser has such knowledge and experience in financial and business matters
that such person was capable of evaluating the merits and risks of the
investment.
II-3
<PAGE>
Item 27. Exhibits.
<TABLE>
<CAPTION>
Number Description of Exhibit
- -------- ----------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Registrant.
3.2 By-Laws of the Registrant.
4.1 Specimen Certificate of the Registrant's Common Stock.*
4.2 Form of Warrant Agent 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 Retainer Plan.
4.7 Amendment to 1996 Board of Directors and Advisory Board Retainer Plan
4.8 1997 Management Bonus Plan.
4.9 Admendment to 1997 Management Bonus Plan
4.10 Form of Stock Option Contract.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.*
10.1 Operating Agreement of RecoveryNet Interactive, L.L.C. dated as of August 1, 1996.
10.2 Channel Nesting Agreement between the Registrant and Access Television Network, Inc. dated as
of April 10, 1977.
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 Agreement 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 Megalos dated as of May 1, 1997.
10.9 License Agreement between RecoveryNet Interactive L.L.C. and Merit Behavioral Care
Corporation dated as of May 1, 1997.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing as specified in the Underwriting Agreement Common Stock
certificates in such denominations and registered in such names as required by
the Underwriting Agreement to permit prompt delivery to each purchaser.
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 asserted 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-4
<PAGE>
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 May, 1997.
THE RECOVERY NETWORK, INC.
By: /s/ William D. Moses
-----------------------------------
William D. Moses
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William D. Moses, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign 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 unto
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/ George H. Henry Chairman of the Board of Directors May 23, 1997
- -----------------------------
George H. Henry
/s/ William D. Moses President, Chief Executive Officer and May 23, 1997
- ----------------------------- Director (principal accounting officer and
William D. Moses principal financial officer)
/s/ Donald J. Masters Executive Vice President and Director May 23, 1997
- -----------------------------
Donald J. Masters
/s/ Jack W. Fuelhart Vice Chairman of the Board of Directors May 23, 1997
- -----------------------------
Jack W. Fuelhart
/s/ Paul Graf Director May 23, 1997
- ------------------------------
Paul Graf
/s/ Nimrod J. Kovacs Director May 23, 1997
- ------------------------------
Nimrod J. Kovacs
</TABLE>
II-5
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
EXHIBITS
TO
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE RECOVERY NETWORK, INC.
(Exact name of issuer as specified in its charter)
===============================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Exhibit
- -------- ----------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Registrant.
3.2 By-Laws of the Registrant.
4.1 Specimen Certificate of the Registrant's Common Stock.*
4.2 Form of Warrant Agent 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 Retainer Plan.
4.7 Amendment to 1996 Board of Directors and Advisory Board Retainer Plan
4.8 1997 Management Bonus Plan.
4.9 Admendment to 1997 Management Bonus Plan
4.10 Form of Stock Option Contract.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.*
10.1 Operating Agreement of RecoveryNet Interactive, L.L.C. dated as of August 1, 1996.
10.2 Channel Nesting Agreement between the Registrant and Access Television Network, Inc. dated as
of April 10, 1977.
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 Agreement 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 Megalos dated as of May 1, 1997.
10.9 License Agreement between RecoveryNet Interactive L.L.C. and Merit Behavioral Care
Corporation dated as of May 1, 1997.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
<PAGE>
THE RECOVERY NETWORK, INC.
1,600,000 Shares of Common Stock
(Par Value $.01 Per Share)
and
Warrants to Purchase 1,600,000 Shares of Common Stock
UNDERWRITING AGREEMENT
Whale Securities Co., L.P. _______________, 1997
650 Fifth Avenue
New York, New York 10019
Dear Sirs:
The Recovery Network, Inc., a Colorado corporation (the
"Company"), proposes to issue and sell to Whale Securities Co., L.P. (the
"Underwriter") an aggregate of one million six hundred thousand (1,600,000)
shares of common stock of the Company, par value $.01 per share (the "Offered
Shares"), which Offered Shares are presently authorized but unissued shares of
the common stock, par value $.01 per share (individually, a "Common Share" and
collectively the "Common Shares"), of the Company, and one million six hundred
thousand (1,600,000) Common Share purchase warrants (the "Offered Warrants"),
entitling the holder of each Offered Warrant to purchase, at any time commencing
________, 1998 (or such earlier date as to which the Underwriter consents) until
__________, 2002, one (1) Common Share, at an exercise price of Five Dollars
Fifty Cents ($5.50) (subject to adjustment in certain circumstances). The
Company shall have the right to call each Offered Warrant for redemption upon
not less than thirty (30) days' written notice at any time commencing twelve
(12) months from the Effective Date (as hereinafter defined) at a redemption
price of Ten Cents ($.10) per Offered Warrant; provided, that the closing bid
quotation of the Common Stock on all twenty (20) of the trading days ending on
the third trading day prior to the day on which the Company gives notice (the
"Call Date") of redemption has been at least 150% (currently $8.25, subject to
adjustment) of the then effective exercise price of the Warrants and the Company
obtains the written consent of the Underwriter with respect to such redemption
prior to the Call Date. In addition, the Underwriter, in order to cover
over-allotments in the sale of the Offered Shares and/or Offered Warrants, may
purchase up to an aggregate of two hundred forty thousand (240,000) Common
Shares (the "Optional
<PAGE>
Shares") and/or two hundred forty thousand (240,000) Common Share purchase
warrants (the "Optional Warrants") entitling the holder of each Optional Warrant
to purchase one (1) Common Share on the same terms as the Offered Warrants. The
Offered Shares and the Optional Shares are hereinafter sometimes collectively
referred to as the "Shares"; and the Offered Warrants and the Optional Warrants
are hereinafter sometimes collectively referred to as the "Warrants." The
Warrants will be issued pursuant to a Warrant Agreement (the "Warrant
Agreement") to be dated as of the Closing Date (as hereinafter defined) by and
among the Company, the Underwriter and American Stock Transfer & Trust Company,
as warrant agent (the "Warrant Agent").
The Company also proposes to issue and sell to the
Underwriter, for its own account and the accounts of its designees, warrants
(the "Underwriter's Warrants") to purchase up to an aggregate of one hundred
sixty thousand (160,000) Common Share(s) (collectively, the "Underlying Shares")
and/or one hundred sixty thousand (160,000) warrant(s) similar but not identical
to the Warrants (collectively, the "Underlying Warrants"), which sale will be
consummated in accordance with the terms and conditions of the form of
Underwriter's Warrant Agreement filed as an exhibit to the Registration
Statement (as hereinafter defined). The Underlying Shares, the Common Shares
issuable upon exercise of the Warrants and the Common Shares issuable upon
exercise of the Underlying Warrants are hereinafter sometimes referred to as the
"Warrant Shares". The Shares, the Warrants, the Underwriter's Warrants, the
Underlying Warrants and the Warrant Shares (collectively, the "Securities") are
more fully described in the Registration Statement and the Prospectus, as
defined below.
The Company hereby confirms its agreement with the Underwriter
as follows:
1. Purchase and Sale of Offered Shares and Offered Warrants.
On the basis of the representations and warranties herein contained, but subject
to the terms and conditions herein set forth, the Company hereby agrees to sell
the Offered Shares and Offered Warrants to the Underwriter, and the Underwriter
agrees to purchase the Offered Shares and Offered Warrants from the Company, at
a purchase price of $4.50 per Offered Share and $.09 per Offered Warrant. The
Underwriter plans to offer the Offered Shares and Offered Warrants to the public
at a public offering price of $5.00 per Offered Share and $.10 per Offered
Warrant.
2. Payment and Delivery.
(a) Payment for the Offered Shares and Offered
Warrants will be made to the Company by wire transfer or certified or official
bank check or checks payable to its order in New York Clearing House funds, at
the offices of the Underwriter, Whale Securities Co., L.P., 650 Fifth Avenue,
New York, New York 10019, against delivery of the Offered Shares and Offered
Warrants to the
-2-
<PAGE>
Underwriter. Such payment and delivery will be made at A.M., New York City time,
on the third business day following the Effective Date (the fourth business day
following the Effective Date in the event that trading of the Offered Shares and
Offered Warrants commences on the day following the Effective Date), the date
and time of such payment and delivery being herein called the "Closing Date."
The certificates representing the Offered Shares and Offered Warrants to be
delivered will be in such denominations and registered in such names as the
Underwriter may request not less than two full business days prior to the
Closing Date, and will be made available to the Underwriter for inspection,
checking and packaging at the office of the Company's transfer agent or
correspondent in New York City, American Stock Transfer & Trust Company, 40 Wall
Street, New York, New york 10005 not less than one full business day prior to
the Closing Date.
(b) On the Closing Date, the Company will sell the
Underwriter's Warrants to the Underwriter or to the Underwriter's designees,
limited to officers and partners of the Underwriter and/or members of the
selling group and/or their officers, directors or partners (collectively, the
"Underwriter's Designees"). The Underwriter's Warrants will be in the form of,
and in accordance with, the provisions of the Underwriter's Warrant Agreement
attached as an exhibit to the Registration Statement. The aggregate purchase
price for the Underwriter's Warrants is One Hundred Seventy Six Dollars
($176.00). The Underwriter's Warrants will be restricted from sale, transfer,
assignment or hypothecation for a period of one (1) year from the Effective
Date, except to the Underwriter's Designees. Payment for the Underwriter's
Warrants will be made to the Company by check or checks payable to its order on
the Closing Date against delivery of the certificates representing the
Underwriter's Warrants. The certificates representing the Underwriter's Warrants
will be in such denominations and such names as the Underwriter may request
prior to the Closing Date.
3. Option to Purchase Optional Shares and/or Optional
Warrants.
(a) For the purposes of covering any overallotments
in connection with the distribution and sale of the Offered Shares and Offered
Warrants as contemplated by the Prospectus, the Underwriter is hereby granted an
option to purchase all or any part of the Optional Shares and/or Optional
Warrants from the Company. The purchase price to be paid for the Optional Shares
and Optional Warrants will be the same price per Optional Share and Optional
Warrant as the price per Offered Share or Offered Warrant, as the case may be,
set forth in Section 1 hereof. The option granted hereby may be exercised by the
Underwriter as to all or any part of the Optional Shares and/or the Optional
Warrants at any time within 45 days after the Effective Date. The Underwriter
will not be under any obligation to purchase any Optional Shares or Optional
Warrants prior to the exercise of such option.
-3-
<PAGE>
(b) The option granted hereby may be exercised by
the Underwriter by giving oral notice to the Company, which must be confirmed by
a letter, telex or telegraph setting forth the number of Optional Shares and
Optional Warrants to be purchased, the date and time for delivery of and payment
for the Optional Shares and Optional Warrants to be purchased and stating that
the Optional Shares and Optional Warrants referred to therein are to be used for
the purpose of covering over-allotments in connection with the distribution and
sale of the Offered Shares and Offered Warrants. If such notice is given prior
to the Closing Date, the date set forth therein for such delivery and payment
will not be earlier than either two full business days thereafter or the Closing
Date, whichever occurs later. If such notice is given on or after the Closing
Date, the date set forth therein for such delivery and payment will not be
earlier than two full business days thereafter. In either event, the date so set
forth will not be more than 15 full business days after the date of such notice.
The date and time set forth in such notice is herein called the "Option Closing
Date." Upon exercise of such option, the Company will become obligated to convey
to the Underwriter, and, subject to the terms and conditions set forth in
Section 3(d) hereof, the Underwriter will become obligated to purchase, the
number of Optional Shares and Optional Warrants specified in such notice.
(c) Payment for any Optional Shares and Optional
Warrants purchased will be made to the Company by wire transfer or certified or
official bank check or checks payable to its order in New York Clearing House
funds, at the office of the Underwriter, against delivery of the Optional Shares
and Optional Warrants purchased to the Underwriter. The certificates
representing the Optional Shares and Optional Warrants to be delivered will be
in such denominations and registered in such names as the Underwriter requests
not less than two full business days prior to the Option Closing Date, and will
be made available to the Underwriter for inspection, checking and packaging at
the aforesaid office of the Company's transfer agent or correspondent not less
than one full business day prior to the Option Closing Date.
(d) The obligation of the Underwriter to purchase
and pay for any of the Optional Shares or Optional Warrants is subject to the
accuracy and completeness (as of the date hereof and as of the Option Closing
Date) of and compliance in all material respects with the representations and
warranties of the Company herein, to the accuracy and completeness of the
statements of the Company or its officers made in any certificate or other
document to be delivered by the Company pursuant to this Agreement, to the
performance in all material respects by the Company of its obligations
hereunder, to the satisfaction by the Company of the conditions, as of the date
hereof and as of the Option Closing Date, set forth in Section 3(b) hereof, and
to the delivery to the Underwriter of opinions, certificates and letters dated
the Option Closing Date substantially similar in scope to those specified in
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Section 5, 6(b), (c), (d) and (e) hereof, but with each reference to "Offered
Shares," "Offered Warrants" and "Closing Date" to be, respectively, to the
Optional Shares, Optional Warrants and the Option Closing Date.
4. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, the Under-
writer that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Colorado,
with full power and authority, corporate and other, to own or lease, as the case
may be, and operate its properties, whether tangible or intangible, and to
conduct its business as described in the Registration Statement and to execute,
deliver and perform this Agreement, the Warrant Agreement and the Underwriter's
Warrant Agreement and to consummate the transactions contemplated hereby and
thereby. The Company has no subsidiaries other than RecoveryNet Direct, Inc., a
corporation duly organized and validly existing under the laws of Colorado (the
"Subsidiary"), and the Company has no equity interests in any other entity,
other than its membership interest in Recovery Net Interactive, LLC ("RNI"), a
limited liability company duly formed and validly existing under the laws of
Colorado, as described in the Prospectus. Unless the context otherwise requires,
all references to the "Company" in this Agreement shall include the Subsidiary
and RNI. Each of the Company, the Subsidiary and RNI is duly qualified to do
business as a foreign corporation and is in good standing in all jurisdictions
wherein such qualification is necessary and where failure so to qualify could
have a material adverse effect on the financial condition, results of
operations, business or properties of the Company, the Subsidiary and RNI taken
as a whole. Each of the Subsidiary and RNI has full power and authority,
corporate to own or lease, as the case may be, and operate its properties and to
conduct its business as described in the Prospectus.
The Company owns all of the issued and outstanding
shares of capital stock of the Subsidiary and its equity interest in RNI, as
described in the Prospectus, free and clear of any security interests, liens,
encumbrances, claims and charges, and all of such shares have been duly
authorized and validly issued and are fully paid and nonassessable. There are no
options or warrants for the purchase of, or other rights to purchase, or
outstanding securities convertible into or exchangeable for, any capital stock
or other securities of the Subsidiary or RNI.
(b) This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, and each of the Warrant Agreement, the Underwriter's Warrant Agreement
and the Consulting Agreement described in Section 5(r) hereof (the "Consulting
Agreement"), when executed and delivered by the Company on the Closing Date,
will be the valid and binding obligations of the Company, enforceable
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against the Company in accordance with their respective terms. The execution,
delivery and performance of this Agreement, the Consulting Agreement, the
Warrant Agreement and the Underwriter's Warrant Agreement by the Company, the
consummation by the Company of the transactions herein and therein contemplated
and the compliance by the Company with the terms of this Agreement, the
Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant
Agreement have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time, or
both, (i) result in any violation of the Articles of Incorporation or By-Laws,
each as amended, of the Company or the Subsidiary, or the Certificate of
Formation or Operating Agreement of RNI; (ii) result in a breach of or conflict
with any of the terms or provisions of, or constitute a default under, or result
in the modification or termination of, or result in the creation or imposition
of any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Company, the Subsidiary or RNI pursuant to any indenture,
mortgage, note, contract, commitment or other agreement or instrument to which
the Company, the Subsidiary or RNI is a party or by which the Company, the
Subsidiary or RNI or any of their respective properties or assets are or may be
bound or affected; (iii) violate any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company, the Subsidiary or RNI or any of
their respective properties or business; or (iv) have any effect on any permit,
certification, registration, approval, consent, order, license, franchise or
other authorization (collectively, "Permits") necessary for the Company, the
Subsidiary or RNI to own or lease and operate their respective properties and to
conduct their respective businesses or the ability of the Company to make use
thereof.
(c) No Permits of any court or governmental agency
or body, other than under the Securities Act of 1933, as amended (the "Act"),
the Regulations (as hereinafter defined) and applicable state securities or Blue
Sky laws, are required for (i) the valid authorization, issuance, sale and
delivery of the Shares and Warrants to the Underwriter, or (ii) the consummation
by the Company of the transactions contemplated by this Agreement, the
Consulting Agreement, the Warrant Agreement or the Underwriter's Warrant
Agreement.
(d) The conditions for use of a registration
statement on Form SB-2 set forth in the General Instructions to Form SB-2 have
been satisfied with respect to the Company, the transactions contemplated herein
and in the Registration Statement. The Company has prepared in conformity with
the requirements of the Act and the rules and regulations (the "Regulations") of
the Securities and Exchange Commission (the "Commission") and filed with the
Commission a registration statement (File No. 333- ) on Form SB-2 and has
filed one or more amendments thereto, covering the registration of the
Securities under the Act, including the
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related preliminary prospectus or preliminary prospectuses (each thereof being
herein called a "Preliminary Prospectus") and a proposed final prospectus. Each
Preliminary Prospectus was endorsed with the legend required by Item 501(a)(5)
of Regulation S-B of the Regulations and, if applicable, Rule 430A of the
Regulations. Such registration statement including any documents incorporated by
reference therein and all financial schedules and exhibits thereto, as amended
at the time it becomes effective, and the final prospectus included therein are
herein, respectively, called the "Registration Statement" and the "Prospectus,"
except that, (i) if the prospectus filed by the Company pursuant to Rule 424(b)
of the Regulations differs from the Prospectus, the term "Prospectus" will also
include the prospectus filed pursuant to Rule 424(b), and (ii) if the
Registration Statement is amended or such Prospectus is supplemented after the
date the Registration Statement is declared effective by the Commission (the
"Effective Date") and prior to the Option Closing Date, the terms "Registration
Statement" and "Prospectus" shall include the Registration Statement as amended
or supplemented.
(e) Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
(f) The Registration Statement when it becomes
effective, the Prospectus (and any amendment or supplement thereto) when it is
filed with the Commission pursuant to Rule 424(b), and both documents as of the
Closing Date and the Option Closing Date, referred to below, will contain all
statements which are required to be stated therein in accordance with the Act
and the Regulations and will in all material respects conform to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, on such
dates, will contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that this representation and warranty does not apply to
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company in connection with the Registration
Statement or Prospectus or any amendment or supplement thereto by the
Underwriter expressly for use therein.
(g) The Company had at the date or dates indicated
in the Prospectus a duly authorized and outstanding capitalization as set forth
in the Registration Statement and the Prospectus. Based on the assumptions
stated in the Registration Statement and the Prospectus, the Company will have
on the Closing Date the adjusted stock capitalization set forth therein. Except
as set forth in the Registration Statement or the Prospectus, on the
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Effective Date and on the Closing Date, there will be no options to purchase,
warrants or other rights to subscribe for, or any securities or obligations
convertible into, or any contracts or commitments to issue or sell shares of the
Company's capital stock or any such warrants, convertible securities or
obligations. Except as set forth in the Prospectus, no holders of any of the
Company's securities has any rights, "demand," "piggyback" or otherwise, to have
such securities registered under the Act.
(h) The descriptions in the Registration Statement
and the Prospectus of contracts and other documents are accurate and present
fairly the information required to be disclosed, and there are no contracts or
other documents required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement under the
Act or the Regulations which have not been so described or filed as required.
(i) Arthur Andersen LLP, the accountants who have
certified certain of the consolidated financial statements filed and to be filed
with the Commission as part of the Registration Statement and the Prospectus,
are independent public accountants within the meaning of the Act and
Regulations. The consolidated financial statements and schedules and the notes
thereto filed as part of the Registration Statement and included in the
Prospectus are complete, correct and present fairly the financial position of
the Company as of the dates thereof, and the results of operations and changes
in financial position of the Company for the periods indicated therein, all in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods involved except as otherwise stated in the
Registration Statement and the Prospectus. The selected financial data set forth
in the Registration Statement and the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with that of the
audited and unaudited financial statements included in the Registration
Statement and the Prospectus.
(j) Each of the Company, the Subsidiary and RNI has
filed with the appropriate federal, state and local governmental agencies, and
all appropriate foreign countries and political subdivisions thereof, all tax
returns, including franchise tax returns, which are required to be filed or has
duly obtained extensions of time for the filing thereof and has paid all taxes
shown on such returns and all assessments received by it to the extent that the
same have become due; and the provisions for income taxes payable, if any, shown
on the consolidated financial statements filed with or as part of the
Registration Statement are sufficient for all accrued and unpaid foreign and
domestic taxes, whether or not disputed, and for all periods to and including
the dates of such consolidated financial statements. Except as disclosed in
writing to the Underwriter, none of the Company, the Subsidiary nor RNI has
executed or filed with any taxing authority, foreign or domestic, any agreement
extending the period for
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<PAGE>
assessment or collection of any income taxes and is not a party to any pending
action or proceeding by any foreign or domestic governmental agency for
assessment or collection of taxes; and no claims for assessment or collection of
taxes have been asserted against the Company, the Subsidiary or RNI.
(k) The outstanding Common Shares and outstanding
options and warrants to purchase Common Shares have been duly authorized and
validly issued. The outstanding Common Shares are fully paid and nonassessable.
The outstanding options and warrants to purchase Common Shares constitute the
valid and binding obligations of the Company, enforceable in accordance with
their terms. None of the outstanding Common Shares or options or warrants to
purchase Common Shares has been issued in violation of the preemptive rights of
any shareholder of the Company. None of the holders of the outstanding Common
Shares is subject to personal liability solely by reason of being such a holder.
The offers and sales of the outstanding Common Shares and outstanding options
and warrants to purchase Common Shares were at all relevant times either
registered under the Act and the applicable state securities or Blue Sky laws or
exempt from such registration requirements. The authorized Common Shares and
outstanding options and warrants to purchase Common Shares conform to the
descriptions thereof contained in the Registration Statement and Prospectus.
Except as set forth in the Registration Statement and the Prospectus, on the
Effective Date and the Closing Date, there will be no outstanding options or
warrants for the purchase of, or other outstanding rights to purchase, Common
Shares or securities convertible into Common Shares.
(l) No securities of the Company have been sold by
the Company or by or on behalf of, or for the benefit of, any person or persons
controlling, controlled by, or under common control with the Company within the
three years prior to the date hereof, except as disclosed in the Registration
Statement.
(m) The issuance and sale of the Shares and the
Warrant Shares have been duly authorized and, when the Shares and the Warrant
Shares have been issued and duly delivered against payment therefor as
contemplated by this Agreement, the Underwriter's Warrant Agreement or the
Warrant Agreement, as the case may be, the Shares and the Warrant Shares will be
validly issued, fully paid and nonassessable. The holders of the Securities will
not be subject to personal liability solely by reason of being such holders and
none of the Securities will be subject to preemptive rights of any shareholder
of the Company.
(n) The issuance and sale of the Warrants, the
Underwriter's Warrants and the Underlying Warrants have been duly authorized
and, when issued, paid for and delivered pursuant to the terms of this
Agreement, the Underwriter's Warrant Agreement or the Warrant Agreement, as the
case may be, the Warrants, the Underwriter's Warrants and the Underlying
Warrants will constitute
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<PAGE>
valid and binding obligations of the Company, enforceable as to the Company in
accordance with their terms. The Warrant Shares have been duly reserved for
issuance upon exercise of the Warrants, the Underwriter's Warrants and the
Underlying Warrants in accordance with the provisions of the Warrant Agreement
and the Underwriter's Warrant Agreement. The Warrants, Underwriter's Warrants
and Underlying Warrants will conform to the descriptions thereof contained in
the Registration Statement and the Prospectus.
(o) None of the Company, the Subsidiary nor RNI is
in violation of, or in default under, (i) any term or provision of its Articles
of Incorporation or By-Laws, each as amended, or Certificate of Formation or
Operating Agreement, as the case may be; (ii) any material term or provision or
any financial covenants of any indenture, mortgage, contract, commitment or
other agreement or instrument to which it is a party or by which it or any of
its property or business is or may be bound or affected; or (iii) any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company, the
Subsidiary or RNI or any of the Company's, the Subsidiary's or RNI's properties
or business. Each of the Company, Subsidiary or RNI owns, possesses or has
obtained all governmental and other (including those obtainable from third
parties) Permits necessary to own or lease, as the case may be, and to operate
its properties, whether tangible or intangible, and to conduct any of the
business or operations of the Company as presently conducted, and all such
Permits are outstanding and in good standing, and there are no proceedings
pending or, to the best of the Company's knowledge, threatened (nor, to the best
of the Company's knowledge, is there any basis therefor), which seeking to
cancel, terminate or limit such Permits.
(p) Except as set forth in the Prospectus, there are
no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or tribunal, domestic or
foreign, or before any private arbitration tribunal, pending, or, to the best of
the Company's knowledge, threatened against the Company, the Subsidiary or RNI
or involving the Company's, the Subsidiary's or RNI's properties or business
which, if determined adversely to the Company, the Subsidiary or RNI, would,
individually or in the aggregate, result in any material adverse change in the
financial position, shareholders' equity, results of operations, properties,
business, management or affairs or business prospects of the Company, the
Subsidiary or RNI or which question the validity of the capital stock of the
Company or this Agreement or of any action taken or to be taken by the Company
pursuant to, or in connection with, this Agreement; nor, to the best of the
Company's knowledge, is there any basis for any such claim, action, suit,
proceeding, arbitration, investigation or inquiry. There are no outstanding
orders, judgments or decrees of any court, governmental agency or other tribunal
naming the Company, the Subsidiary or RNI and enjoining the Company, the
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<PAGE>
Subsidiary or RNI from taking, or requiring the Company, the Subsidiary or RNI
to take, any action, or to which the Company, the Subsidiary or RNI, or the
Company's, the Subsidiary's or RNI's properties or businesses, is bound or
subject.
(q) Neither the Company nor any of its affiliates
has incurred any liability for any finder's fees or similar payments in
connection with the transactions herein contemplated.
(r) Each of the Company, the Subsidiary and RNI owns
or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of their businesses as described in the Prospectus (collectively
the "Intangibles"); to the best of the Company's knowledge, none of the Company,
the Subsidiary nor RNI has infringed nor is infringing upon the rights of others
with respect to the Intangibles; and none of the Company, the Subsidiary nor RNI
has received any notice of conflict with the asserted rights of others with
respect to the Intangibles which could, singly or in the aggregate, materially
adversely affect its business as presently conducted or the prospects, financial
condition or results of operations of the Company, the Subsidiary or RNI, and
the Company knows of no basis therefor; and, to the best of the Company's
knowledge, no others have infringed upon the Intangibles of the Company, the
Subsidiary or RNI.
(s) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus and the
Company's latest consolidated financial statements, none of the Company, the
Subsidiary nor RNI has incurred any material liability or obligation, direct or
contingent, or entered into any material transaction, whether or not incurred in
the ordinary course of business, and has not sustained any material loss or
interference with its business from fire, storm, explosion, flood or other
casualty, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree; and since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
there have not been, and prior to the Closing Date referred to below there will
not be, any changes in the capital stock or any material increases in the
long-term debt of the Company or any material adverse change in or affecting the
general affairs, management, financial condition, shareholders' equity, results
of operations or prospects of the Company, the Subsidiary nor RNI, otherwise
than as set forth or contemplated in the Prospectus.
(t) Each of the Company, the Subsidiary and RNI has
good and marketable title in fee simple to all real property and good title to
all personal property (tangible and intangible) owned by it, free and clear of
all security interests, charges,
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<PAGE>
mortgages, liens, encumbrances and defects, except such as are described in the
Registration Statement and Prospectus or such as do not materially affect the
value or transferability of such property and do not interfere with the use of
such property made, or proposed to be made, by the Company, the Subsidiary or
RNI. The leases, licenses or other contracts or instruments under which the
Company, the Subsidiary and RNI leases, holds or is entitled to use any
property, real or personal, are valid, subsisting and enforceable only with such
exceptions as are not material and do not interfere with the use of such
property made, or proposed to be made, by the Company, the Subsidiary or RNI,
and all rentals, royalties or other payments accruing thereunder which became
due prior to the date of this Agreement have been duly paid, and none of the
Company, the Subsidiary nor RNI, nor, to the best of the Company's knowledge,
any other party is in default thereunder and, to the best of the Company's
knowledge, no event has occurred which, with the passage of time or the giving
of notice, or both, would constitute a default thereunder. None of the Company,
the Subsidiary nor RNI has received notice of any violation of any applicable
law, ordinance, regulation, order or requirement relating to its owned or leased
properties. Each of the Company, the Subsidiary and RNI has adequately insured
its properties against loss or damage by fire or other casualty and maintains,
in adequate amounts, such other insurance as is usually maintained by companies
engaged in the same or similar businesses located in its geographic area.
(u) Each contract or other instrument (however
characterized or described) to which the Company, the Subsidiary and RNI is a
party or by which its property their properties or businesses is or may be bound
or affected and to which reference is made in the Prospectus has been duly and
validly executed, is in full force and effect in all material respects and is
enforceable against the parties thereto in accordance with its terms, and none
of such contracts or instruments has been assigned by the Company, the
Subsidiary or RNI, and neither the Company, the Subsidiary nor RNI, nor, to the
best of the Company's knowledge, any other party, is in default thereunder and,
to the best of the Company's knowledge, no event has occurred which, with the
lapse of time or the giving of notice, or both, would constitute a default
thereunder.
None of the material provisions of such contracts or
instruments violates any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court having jurisdiction over the
Company, the Subsidiary or RNI or any of their respective assets or businesses,
including, without limitation, those promulgated by the Federal Communications
Commission (the "FCC") and comparable state and local regulatory authorities,
including without limitation, the Communications Act of 1934, the Cable
Communications Policy Act of 1984, the Cable Television Consumer Protection and
Competition Act of 1992 and the Telecommunications Act of 1996 (collectively,
the FCC Acts") and the published rules and regulations promulgated thereunder.
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<PAGE>
(v) The employment, consulting, confidentiality and
non-competition agreements between the Company (and between the Subsidiary and
RNI and its officers, employees and consultants, described in the Registration
Statement, are binding and enforceable obligations upon the respective parties
thereto in accordance with their respective terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, moratorium or other similar
laws or arrangements affecting creditors' rights generally and subject to
principles of equity.
(w) Except as set forth in the Prospectus, the
Company has no employee benefit plans (including, without limitation, profit
sharing and welfare benefit plans) or deferred compensation arrangements that
are subject to the provisions of the Employee Retirement Income Security Act of
1974.
(x) To the best of the Company's knowledge, no labor
problem exists with any of the Company's, the Subsidiary's or RNI's employees or
is imminent which could adversely affect the Company, the Subsidiary or RNI.
(y) The Company has not, directly or indirectly, at
any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(z) The Shares and Warrants have been approved for
listing on the Nasdaq SmallCap Market of the National Association of Securities
Dealers, Inc. ("NASDAQ").
(aa) The Company has provided Tenzer Greenblatt
LLP, counsel to the Underwriter ("Underwriter's Counsel"), all agreements,
certificates, correspondence and other items, documents and information
requested by such counsel's Corporate Review Memorandum dated October 29, 1996.
Any certificate signed by an officer of the Company,
the Subsidiary or RNI and delivered to the Underwriter or to Underwriter's
Counsel shall be deemed to be a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
5. Certain Covenants of the Company. The Company
covenants with the Underwriter as follows:
(a) The Company will not at any time, whether before
the Effective Date or thereafter during such period as the
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Prospectus is required by law to be delivered in connection with the sales of
the Shares and Warrants by the Underwriter or a dealer, file or publish any
amendment or supplement to the Registration Statement or Prospectus of which the
Underwriter has not been previously advised and furnished a copy, or to which
the Underwriter shall object in writing.
(b) The Company will use its best efforts to cause
the Registration Statement to become effective and will advise the Underwriter
immediately, and, if requested by the Underwriter, confirm such advice in
writing, (i) when the RegistrAti lSmd* op(a~s Gq
amendment to the Registration Statement or any supplemented
Prospectus is filed with the Commission; (ii) of the receipt
of any comments from the Commission; (iii) of any request of
the Commission for amendment or supplementation of the
Registration Statement or Prospectus or for additional
information; and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of
any Preliminary Prospectus, or of the suspension of the
qualification of the Shares and/or the Warrants for offering
or sale in any jurisdiction, or of the initiation of any
proceedings for any of such purposes. The Company will use its
best efforts to prevent the issuance of any such stop order or
of any order preventing or suspending such use and to obtain
as soon as possible the lifting thereof, if any such order is
issued.
(c) The Company will deliver to the Underwriter,
without charge, from time to time until the Effective Date, as many copies of
each Preliminary Prospectus as the Underwriter may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to the Underwriter, without charge, as soon as the
Registration Statement becomes effective, and thereafter from time to time as
requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as the Underwriter may
reasonably request. The Company has furnished or will furnish to the Underwriter
two signed copies of the Registration Statement as originally filed and of all
amendments thereto, whether filed before or after the Registration
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<PAGE>
Statement becomes effective, two copies of all exhibits filed therewith and two
signed copies of all consents and certificates of experts.
(d) The Company will comply with the Act, the
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder so as to permit the continuance
of sales of and dealings in the Offered Shares and Offered Warrants, in any
Optional Shares and Optional Warrants which may be issued and sold, and in the
Warrant Shares underlying such Warrants. If, at any time when a prospectus
relating to any of the Securities is required to be delivered under the Act, any
event occurs as a result of which the Registration Statement and Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, or if
it shall be necessary to amend or supplement the Registration Statement and
Prospectus to comply with the Act or the regulations thereunder, the Company
will promptly file with the Commission, subject to Section 5(a) hereof, an
amendment or supplement which will correct such statement or omission or which
will effect such compliance.
(e) The Company will furnish such proper informa-
tion as may be required and otherwise cooperate in qualifying the Securities for
offering and sale under the securities or Blue Sky laws relating to the offering
in such jurisdictions as the Underwriter may reasonably designate, provided that
no such qualification will be required in any jurisdiction where, solely as a
result thereof, the Company would be subject to service of general process or to
taxation or qualification as a foreign corporation doing business in such
jurisdiction.
(f) The Company will make generally available to its
security holders, in the manner specified in Rule 158(b) under the Act, and
deliver to the Underwriter and Underwriter's Counsel as soon as practicable and
in any event not later than 45 days after the end of its fiscal quarter in which
the first anniversary date of the effective date of the Registration Statement
occurs, an earning statement meeting the requirements of Rule 158(a) under the
Act covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement.
(g) For a period of five years from the Effective
Date, the Company will deliver to the Underwriter and to Underwriter's Counsel
on a timely basis (i) a copy of each report or document, including, without
limitation, reports on Forms 8-K, 10-C, 10-K (or 10-KSB), 10-Q (or 10-QSB) and
10-C and exhibits thereto, filed or furnished to the Commission, any securities
exchange or the National Association of Securities Dealers, Inc. (the " NASD")
on the date each such report or document is so filed or furnished; (ii) as soon
as practicable, copies of any reports or
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communications (financial or other) of the Company mailed to its security
holders; (iii) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1 or
13E-3 received or prepared by the Company from time to time; (iv) monthly
statements setting forth such information regarding the Company's results of
operations and financial position (including balance sheet, profit and loss
statements and data regarding outstanding purchase orders) as is regularly
prepared by management of the Company; and (v) such additional information
concerning the business and financial condition of the Company as the
Underwriter may from time to time reasonably request and which can be prepared
or obtained by the Company without unreasonable effort or expense. The Company
will furnish to its shareholders annual reports containing audited financial
statements and such other periodic reports as it may determine to be appropriate
or as may be required by law.
(h) Neither the Company nor any person that con-
trols, is controlled by or is under common control with the Company will take
any action designed to or which might be reasonably expected to cause or result
in the stabilization or manipulation of the price of the Common Shares or
Warrants.
(i) If the transactions contemplated by this
Agreement are consummated, the Underwriter shall retain the $50.00 previously
paid to it, and the Company will pay or cause to be paid the following: all
costs and expenses incident to the performance of the obligations of the Company
under this Agreement, including, but not limited to, the fees and expenses of
accountants and counsel for the Company; the preparation, printing, mailing and
filing of the Registration Statement (including financial statements and
exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or
supplements thereto; the printing and mailing of the Selected Dealer Agreement;
the issuance and delivery of the Shares and Warrants to the Underwriter; all
taxes, if any, on the issuance of the Shares and Warrants; the fees, expenses
and other costs of qualifying the Shares and Warrants for sale under the Blue
Sky or securities laws of those states in which the Shares and Warrants are to
be offered or sold, including the fees and disbursements of Underwriter's
Counsel in connection therewith, and including those of such local counsel as
may have been retained for such purpose; the cost of printing and mailing the
"Blue Sky Survey;" and the filing fees incident to securing any required review
by the NASD and either the Boston Stock Exchange or Pacific Stock Exchange; the
cost of furnishing to the Underwriter copies of the Registration Statement,
Preliminary Prospectuses and the Prospectus as herein provided; the costs of
placing "tombstone advertisements" in any publications which may be selected by
the Underwriter (up to a maximum of $10,000); and all other costs and expenses
incident to the performance of the Company's obligations hereunder which are not
otherwise specifically provided for in this Section 5(i).
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In addition, at the Closing Date or the Option
Closing Date, as the case may be, the Underwriter will deduct from the payment
for the Offered Shares and Offered Warrants or any Optional Shares and/or
Optional Warrants purchased three percent (3%) of the gross proceeds of the
offering (less the sum of Fifty Thousand Dollars ($50,000) previously paid to
the Underwriter), as payment for the Underwriter's nonaccountable expense
allowance relating to the transactions contemplated hereby, which amount will
include the fees and expenses of Underwriter's Counsel (other than the fees and
expenses of Underwriter's Counsel relating to Blue Sky qualifications and
registrations, which, as provided for above, shall be in addition to the three
percent (3%) nonaccountable expense allowance and shall be payable directly by
the Company to Underwriter's Counsel on or prior to the Closing Date).
(j) If the transactions contemplated by this
Agreement or related hereto are not consummated because the Company decides not
to proceed with the offering for any reason or because the Underwriter decides
not to proceed with the offering as a result of a breach by the Company of its
representations, warranties or covenants in the Agreement or as a result of
adverse changes in the affairs of the Company, then the Company will be
obligated to reimburse the Underwriter for its accountable out-of-pocket
expenses up to the sum of Seventy Five Thousand Dollars ($75,000), inclusive of
Fifty Thousand Dollars ($50,000) previously paid to the Underwriter by the
Company. In all case other than those set forth in the preceding sentence, if
the Company or the Underwriter decide not to proceed with the offering, the
Company will only be obligated to reimburse the Underwriter for its accountable
out-of-pocket expenses up to Fifty Thousand Dollars ($50,000), and inclusive of,
Fifty Thousand Dollars ($50,000) previously paid to the Underwriter by the
Company. In no event, however, will the Underwriter, in the event the offering
is terminated, be entitled to retain or receive more than an amount equal to its
actual accountable out-of-pocket expenses.
(k) The Company intends to apply the net proceeds
from the sale of the Shares and Warrants for the purposes set forth in the
Prospectus. Except for the repayment of the Financing Notes (as defined in the
Prospectus), no portion of the net proceeds from the sale of the Shares and
Warrants will be used to repay any indebtedness. The Company will file with the
Commission all required reports on Form S-R in accordance with the provisions of
Rule 463 promulgated under the Act and will provide a copy of each such report
to the Underwriter and its counsel.
(l) During the period of twelve (12) months from the
date hereof, neither the Company nor any of the Company's officers, directors or
security holders, will offer for sale or sell or otherwise dispose of, directly
or indirectly, any securities of the Company, in any manner whatsoever, whether
pursuant to Rule 144 of the Regulations or otherwise, and no holder of
registration rights relating to any securities of the Company
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will exercise any such registration rights, in either case, without the prior
written consent of the Underwriter. In addition, for the first year following
the foregoing lock-up period, no officer, director or securityholder
beneficially owning 5% or more of the outstanding Common Stock of the Company
(each, a "Principal") may, without the Underwriter's prior written consent, sell
any of its shares of Common Stock during any three-month period in excess of the
amount that the Principal would be allowed to sell if it were deemed an
"affiliate" of the Company and its shares were deemed "restricted," as those
terms are defined in Rule 144 promulgated under the Act (i.e., in general, no
more than the greater of (a) 1% of the then outstanding shares of Common Stock
and (b) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale).
(m) The Company will not file any registration
statement relating to the offer or sale of any of the Company's securities,
including any registration statement on Form S-8, during the twelve (12) months
from the Effective Date, without the Underwriter's prior written consent.
(n) The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(o) The Company will use its best efforts to main-
tain the listing of the Shares and Warrants on NASDAQ and, if so qualified, list
the Shares and Warrants, and maintain such listing for so long as qualified, on
the NASDAQ National Market System.
(p) The Company will, concurrently with the
Effective Date, register the class of equity securities of which the Shares are
a part under Section 12(g) of the Exchange Act and the Company will maintain
such registration for a minimum of five (5) years from the Effective Date.
(q) Subject to the sale of the Offered Shares and
Offered Warrants, the Underwriter and its successors will have the right to
designate a nominee for election, at its or their option, either as a member of
or a non-voting advisor to the Board of Directors of the Company, and the
Company will use its best efforts to cause such nominee to be elected and
continued in office as a director of the Company or as such advisor until the
expiration of five (5) years from the Effective Date. Each of the Company's
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current officers, directors and shareholders agrees to vote all of the Common
Shares owned by such person or entity so as to elect and continue in office such
nominee of the Underwriter. Following the election of such nominee as a director
or advisor, such person shall receive no more or less compensation than is paid
to other non-officer directors of the Company for attendance at meetings of the
Board of Directors of the Company and shall be entitled to receive reimbursement
for all reasonable costs incurred in attending such meetings including, but not
limited to, food, lodging and transportation. The Company agrees to indemnify
and hold such director or advisor harmless, to the maximum extent permitted by
law, against any and all claims, actions, awards and judgments arising out of
his service as a director or advisor and, in the event the Company maintains a
liability insurance policy affording coverage for the acts of its officers and
directors, to include such director or advisor as an insured under such policy.
The rights and benefits of such indemnification and the benefits of such
insurance shall, to the extent possible, extend to the Underwriter insofar as it
may be or may be alleged to be responsible for such director or advisor.
If the Underwriter does not exercise its option to
designate a member of or advisor to the Company's Board of Directors, the
Underwriter shall nonetheless have the right to send a representative (who need
not be the same individual from meeting to meeting) to observe each meeting of
the Board of Directors. The Company agrees to give the Underwriter notice of
each such meeting and to provide the Underwriter with an agenda and minutes of
the meeting no later than it gives such notice and provides such items to the
directors.
(r) The Company agrees to employ the Underwriter or
a designee of the Underwriter as a financial consultant on a non-exclusive basis
for a period of two (2) years from the Closing Date, pursuant to a separate
written consulting agreement between the Company and the Underwriter and/or such
designee (the "Consulting Agreement"), at an annual rate of Thirty Thousand
Dollars ($30,000) (exclusive of any accountable out-of-pocket expenses), payable
in full, in advance on the Closing Date. In addition, the Consulting Agreement
shall provide that the Company will pay the Underwriter a finder's fee in the
event that the Underwriter originates a merger, acquisition, joint venture or
other transaction to which the Company is a party. The Company further agrees to
deliver a duly and validly executed copy of said Consulting Agreement, in form
and substance acceptable to the Underwriter, on the Closing Date.
(s) Subject to the provisions of applicable law, the
Underwriter shall be entitled to receive a warrant solicitation fee of five
percent (5%) of the aggregate exercise price of the Warrants for each Warrant
exercised during the period commencing one year after the Effective Date;
provided, however, that the Underwriter will not be entitled to receive such
compensation in Warrant exercise transactions in which (i) the market price of
the
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Common Shares at the time of exercise is lower than the exercise price of the
Warrants; (ii) the Warrants are held in any discretionary account; (iii)
disclosure of compensation arrangements is not made in the Registration
Statement and in documents provided to holders of Warrants at the time of
exercise; (iv) the holder thereof has not confirmed in writing that the
Underwriter solicited the exercise of the Warrants; or (v) the solicitation or
exercise of the Warrants was in violation of Regulation M promulgated under the
Exchange Act.
(t) The Company shall retain a transfer agent for
the Common Shares and Warrants, reasonably acceptable to the Underwriter, for a
period of five (5) years from the Effective Date. In addition, for a period of
five (5) years from the Effective Date, the Company, at its own expense, shall
cause such transfer agent to provide the Underwriter with copies of the
Company's daily transfer sheets, and, when requested by the Underwriter, a
current list of the Company's securityholders, including a list of the
beneficial owners of securities held by a depository trust company and other
nominees.
(u) The Company hereby agrees, at its sole cost and
expense, to supply and deliver to the Underwriter and Underwriter's Counsel,
within a reasonable period from the date hereof, four bound volumes, including
the Registration Statement, as amended or supplemented, all exhibits to the
Registration Statement, the Prospectus and all other underwriting documents.
(v) The Company shall, as of the date hereof, have
applied for listing in Standard & Poor's Corporation Records Service (including
annual report information) or Moody's Industrial Manual (Moody's OTC Industrial
Manual not being sufficient for these purposes) and shall use its best efforts
to have the Company listed in such manual and shall maintain such listing for a
period of five (5) years from the Effective Date.
(w) For a period of five (5) years from the
Effective Date, the Company shall provide the Underwriter, on a not less than
annual basis, with internal forecasts setting forth projected results of
operations for each quarterly and annual period in the two (2) fiscal years
following the respective dates of such forecasts. Such forecasts shall be
provided to the Underwriter more frequently than annually if prepared more
frequently by management, and revised forecasts shall be prepared and provided
to the Underwriter when required to reflect more current information, revised
assumptions or actual results that differ materially from those set forth in the
forecasts.
(x) For a period of five (5) years from the
Effective Date, or until such earlier time as the Common Shares and Warrants are
listed on the New York Stock Exchange or the American Stock Exchange, the
Company shall cause its legal counsel to provide the Underwriter with a list, to
be updated at least
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annually, of those states in which the Common Shares and Warrants may be traded
in non-issuer transactions under the Blue Sky laws of the 50 states.
(y) For a period of five (5) years from the
Effective Date, the Company shall continue to retain Arthur Andersen LLP (or
such other nationally recognized accounting firm as is acceptable to the
Underwriter) as the Company's independent public accountants.
(z) For a period of five (5) years from the
Effective Date, the Company, at its expense, shall cause its then independent
certified public accountants, as described in Section 5(aa) above, to review
(but not audit) the Company's financial statements for each of the first three
fiscal quarters prior to the announcement of quarterly financial information,
the filing of the Company's 10-Q (or 10-QSB) quarterly report (or other
equivalent report) and the mailing of quarterly financial information to
shareholders.
(aa) So long as any Warrants are outstanding,
the Company shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act as shall
be necessary to enable the sale of the Common Shares underlying the Warrants and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant as they request and as otherwise required by law and, to
furnish to the Underwriter and dealers as many copies of each such Prospectus as
the Underwriter or dealer may reasonably request. In addition, for so long as
any Warrant is outstanding, the Company will promptly notify the Underwriter of
any material change in the financial condition, business, results of operations
or properties of the Company.
(ab) For a period of twenty-five (25) days from
the Effective Date, the Company will not issue press releases or engage in any
other publicity without the Underwriter's prior written consent, other than
normal and customary releases issued in the ordinary course of the Company's
business or those releases required by law.
(ac) The Company will not increase or authorize
an increase in the cash compensation of its (and the Subsidiary's) five (5) most
highly paid employees greater than those increases provided for in their
employment agreements with the Company or the Subsidiary in effect as of the
Effective Date and disclosed in the Prospectus, without the prior written
consent of the Underwriter, for a period of five (5) years from the Effective
Date.
(ad) For a period of five (5) years from the
Effective Date, the Company will promptly submit to the Underwriter copies of
accountant's management reports and similar correspondence between the Company's
accountants and the Company.
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(ae) For a period of three (3) years from the
Effective Date, the Company will not offer or sell any of its securities
pursuant to Regulation S promulgated under the Act without the prior written
consent of the Underwriter.
(af) For a period of three (3) years from the
Effective Date, the Company will provide to the Underwriter ten day's written
notice prior to any issuance by the Company or its subsidiaries of any equity
securities or securities exchangeable for or convertible into equity securities
of the Company, except for (i) shares of Common Stock issuable upon exercise of
currently outstanding options and warrants or conversion of currently
outstanding convertible securities and (ii) options (and shares issuable upon
exercise of such options) available for future grant pursuant to any stock
option plan in effect on the Effective Date and the issuance of shares of Common
Stock upon the exercise of such options.
(ag) Prior to the Effective Date and for a
period of three (3) years thereafter, the Company will retain a financial public
relations firm reasonably acceptable to the Underwriter.
(ah) For a period of three (3) years from the
Effective Date, the Company will cause its Board of Directors to meet, either in
person or telephonically, a minimum of four (4) times per year and will hold a
shareholder's meeting at least once per annum.
(ai) The Company obtaining directors' and
officers' insurance naming the Underwriter as an additional insured party, in an
amount equal to twenty-five percent (25%) of the gross proceeds of the offering,
and maintaining such insurance for a period of at least three (3) years from the
Closing Date.
6. Conditions of the Underwriter's Obligation to Purchase the
Offered Shares and Offered Warrants from the Company. The obligation of the
Underwriter to purchase and pay for the Offered Shares and Offered Warrants
which it has agreed to purchase from the Company is subject (as of the date
hereof and the Closing Date) to the accuracy of and compliance in all material
respects with the representations and warranties of the Company herein, to the
accuracy of the statements of the Company or its officers made pursuant hereto,
to the performance in all material respects by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement will have become
effective not later than __.M., New York City time, on the day following the
date of this Agreement, or at such later time or on such later date as the
Underwriter may agree to in writing; prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement will have been issued
and no proceedings
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for that purpose will have been initiated or will be pending or, to the best of
the Underwriter's or the Company's knowledge, will be contemplated by the
Commission; and any request on the part of the Commission for additional
information will have been complied with to the satisfaction of Underwriter's
Counsel.
(b) At the time that this Agreement is executed and
at the Closing Date, there will have been delivered to the Underwriter a signed
opinion of Parker Chapin Flattau & Klimpl, LLP and Holme Roberts & Owen LLP,
counsels for the Company (together, "Company Counsel"), dated as of the date
hereof or the Closing Date, as the case may be (and any other opinions of
counsel referred to in such opinion of Company Counsel or relied upon by Company
Counsel in rendering their opinion), reasonably satisfactory to Underwriter's
Counsel, to the effect that:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Colorado,
with full power and authority, corporate and other, and with all Permits
necessary to own or lease, as the case may be, and operate its properties,
whether tangible or intangible, and to conduct its business as described in the
Registration Statement. The Company has no subsidiaries other than the
Subsidiary and the Company has no equity interests in any other entity other
than its equity interest in RNI. The Subsidiary is a corporation duly organized
and validly existing under the laws of Colorado and RNI is a limited liability
company duly formed and validly existing under the laws of Delaware. The Company
owns all of the capital stock of the Subsidiary and the capital stock, as
described in the Prospectus, of RNI, in each case, free and clear of all liens,
security interests and other encumbrances of any nature whatsoever, except as
set forth in the Prospectus. Unless the context otherwise requires, all
references to the "Company" in this opinion shall include the Subsidiary and
RNI. Each of the Company, the Subsidiary and RNI is duly qualified to do
business as a foreign corporation and is in good standing in all jurisdictions
wherein such qualification is necessary and the failure to so qualify could have
a material adverse effect on the financial condition, results of operations,
business or properties of the Company, the Subsidiary and RNI taken as a whole.
Each of the Subsidiary and RNI has full power and authority, corporate and
other, with all Permits necessary to own or lease, as the case may be, and
operate its properties and to conduct its business as described in the
Prospectus.
The Company owns all of the issued and outstanding
shares of capital stock of the Subsidiary and the capital stock of RNI as
described in the Prospectus, in each case, free and clear of any security
interests, liens, encumbrances, claims and charges, and all of such shares have
been duly authorized and validly issued and are fully paid and nonassessable.
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(ii) The Company has full power and authority,
corporate and other, to execute, deliver and perform this Agreement, the
Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant
Agreement and to consummate the transactions contemplated hereby and thereby.
The execution, delivery and performance of this Agreement, the Consulting
Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement by the
Company, the consummation by the Company of the transactions herein and therein
contemplated and the compliance by the Company with the terms of this Agreement,
the Consulting Agreement, the Warrant Agreement and the Underwriter's Warrant
Agreement have been duly authorized by all necessary corporate action, and this
Agreement [for Closing Date opinion add: and each of the Consulting Agreement,
the Warrant Agreement and the Underwriter's Warrant Agreement] has been duly
executed and delivered by the Company. This Agreement is (assuming for the
purposes of this opinion that it is valid and binding upon the other party
thereto), and each of the Warrant Agreement, the Underwriter's Warrant Agreement
and the Consulting Agreement, when executed and delivered by the Company on the
Closing Date, will be, valid and binding obligations of the Company, enforceable
in accordance with their respective terms, subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and
other laws affecting the rights of creditors generally and the discretion of
courts in granting equitable remedies and except that enforceability of the
indemnification provisions set forth in Section 7 hereof and the contribution
provisions set forth in Section 8 hereof may be limited by the federal
securities laws or public policy underlying such laws.
(iii) The execution, delivery and perfor- mance
of this Agreement, the Consulting Agreement, the Warrant Agreement and the
Underwriter's Warrant Agreement by the Company, the consummation by the Company
of the transactions herein and therein contemplated and the compliance by the
Company with the terms of this Agreement, the Consulting Agreement, the Warrant
Agreement and the Underwriter's Warrant Agreement do not, and will not, with or
without the giving of notice or the lapse of time, or both, (A) result in a
violation of the Articles of Incorporation or By-Laws, each as amended, of the
Company or the Subsidiary, or the Certificate of Formation or Operating
Agreement of RNI, (B) result in a breach of or conflict with any terms or
provisions of, or constitute a default under, or result in the modification or
termination of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company, the Subsidiary or RNI pursuant to any indenture, mortgage, note,
contract, commitment or other material agreement or instrument to which the
Company, the Subsidiary or RNI is a party or by which the Company, the
Subsidiary or RNI or any of the Company's, Subsidiary's or RNI's properties or
assets are or may be bound or affected; (C) violate any existing applicable law,
rule, regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign,
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having jurisdiction over the Company, the Subsidiary or RNI or any of the
Company's, the Subsidiary's or RNI's properties or business; or (D) have any
effect on any Permit necessary for the Company, the Subsidiary or RNI to own or
lease and operate their respective properties or conduct their businesses or the
ability of the Company to make use thereof.
(iv) To the best of Company Counsel's knowledge,
no Permits of any court or governmental agency or body (other than under the
Act, the Regulations and applicable state securities or Blue Sky laws) are
required for the valid authorization, issuance, sale and delivery of the Shares
and Warrants or the Underwriter's Warrants to the Underwriter, and the
consummation by the Company of the transactions contemplated by this Agreement,
the Consulting Agreement, the Warrant Agreement or the Underwriter's Warrant
Agreement.
(v) The Registration Statement has become
effective under the Act; to the best of Company Counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are pending,
threatened or contemplated under the Act or applicable state securities laws.
(vi) The Registration Statement and the
Prospectus, as of the Effective Date, and each amendment or supplement thereto
as of its effective or issue date (except for the financial statements and other
financial data included therein or omitted therefrom, as to which Company
Counsel need not express an opinion) comply as to form in all material respects
with the requirements of the Act and Regulations and the conditions for use of a
registration statement on Form SB-2 have been satisfied by the Company.
(vii) The descriptions in the Registration
Statement and the Prospectus of statutes, regulations, government
classifications, contracts and other documents (including opinions of such
counsel); and the response to Item 13 for Form SB-2 have been reviewed by
Company Counsel, and, based upon such review, are accurate in all material
respects and present fairly the information required to be disclosed, and there
are no material statutes, regulations or government classifications, or, to the
best of Company Counsel's knowledge, material contracts or documents, of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement, which are
not so described or filed as required.
None of the material provisions of the contracts
or instruments described above violates any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court having
jurisdiction over the Company, the Subsidiary or RNI or any of their assets or
businesses. To the best of Company Counsel's knowledge, the Company is not in
default
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under any contract or agreement material to its business or under any promissory
note or other evidence of indebtedness for borrowed funds.
(viii) The outstanding Common Shares and
outstanding options and warrants to purchase Common Shares have been duly
authorized and validly issued. The outstanding Common Shares are fully paid and
nonassessable. The outstanding options and warrants to purchase Common Shares
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms. None of the outstanding Common Shares or options or
warrants to purchase Common Shares has been issued in violation of the
preemptive rights of any shareholder of the Company. None of the holders of the
outstanding Common Shares is subject to personal liability solely by reason of
being such a holder. The offers and sales of the outstanding Common Shares and
outstanding options and warrants to purchase Common Shares were at all relevant
times either registered under the Act and the applicable state securities or
Blue Sky laws or exempt from such registration requirements. The authorized
Common Shares and outstanding options and warrants to purchase Common Shares
conform to the descriptions thereof contained in the Registration Statement and
Prospectus. To the best of Company Counsel's knowledge, except as set forth in
the Prospectus, no holders of any of the Company's securities has any rights,
"demand", "piggyback" or otherwise, to have such securities registered under the
Act.
(ix) The issuance and sale of the Shares and the
Warrant Shares have been duly authorized and, when the Shares and the Warrant
Shares have been issued and duly delivered against payment therefor as
contemplated by this Agreement, the Underwriter's Warrant Agreement or the
Warrant Agreement, as the case may be, the Shares and the Warrant Shares will be
validly issued, fully paid and nonassessable, and the holders thereof will not
be subject to personal liability solely by reason of being such holders. Neither
the Shares nor the Warrant Shares are subject to preemptive rights of any
shareholder of the Company. The certificates representing the Securities are in
proper legal form.
(x) The issuance and sale of the Warrants, the
Underwriter's Warrants and the Underlying Warrants have been duly authorized
and, when paid for, issued and delivered pursuant to the terms of this
Agreement, the Underwriter's Warrant Agreement and the Warrant Agreement, as the
case may be, the Warrants, the Underwriter's Warrants and the Underlying
Warrants will constitute the valid and binding obligations of the Company,
enforceable in accordance with their terms, to issue and sell the Warrant Shares
and/or Underlying Warrants. The Warrant Shares have been duly reserved for
issuance upon exercise of the Underwriter's Warrants and the Warrants in
accordance with the provisions of the Underwriter's Warrant Agreement and the
Warrant Agreement, as the case may be. The Warrants, Underwriter's Warrants and
Underlying
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Warrants conform to the descriptions thereof contained in the Registration
Statement and Prospectus.
(xi) Upon delivery of the Offered Shares and
Offered Warrants to the Underwriter against payment therefor as provided in this
Agreement, the Underwriter (assuming it is a bona fide purchaser within the
meaning of the Uniform Commercial Code) will acquire good title to the Offered
Shares and Offered Warrants, free and clear of all liens, encumbrances,
equities, security interests and claims.
(xii) Assuming that the Underwriter exer- cises
the over-allotment option to purchase any of the Optional Shares and Offered
Warrants and makes payment therefor in accordance with the terms of this
Agreement, upon delivery of the Optional Shares and Optional Warrants so
purchased to the Underwriter hereunder, the Underwriter (assuming it is a bona
fide purchaser within the meaning of the Uniform Commercial Code) will acquire
good title to such Optional Shares and Optional Warrants, free and clear of any
liens, encumbrances, equities, security interests and claims.
(xiii) To the best of Company Counsel's
knowledge, there are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries before any governmental agency, court or tribunal,
foreign or domestic, or before any private arbitration tribunal, pending or
threatened against the Company, the Subsidiary or RNI, or involving the
Company's, the Subsidiary's or RNI's properties or business, other than as
described in the Prospectus, such description being accurate, and other than
litigation incident to the kind of business conducted by the Company which,
individually and in the aggregate, is not material.
(xiv) Each of the Company, the Subsidiary and
RNI owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of its business as described in the Prospectus (collectively the
"Intangibles"); to the best of Company Counsel's knowledge, none of the Company,
the Subsidiary nor RNI has infringed nor is infringing upon the rights of others
with respect to the Intangibles; and, to the best of Company Counsel's
knowledge, none of the Company, the Subsidiary nor RNI has received any notice
that it has or may have infringed, is infringing upon or is conflicting with the
asserted rights of others with respect to the Intangibles which might, singly or
in the aggregate, materially adversely affect its business, results of
operations or financial condition and such counsel is not aware of any licenses
with respect to the Intangibles which are required to be obtained by the
Company, the Subsidiary or RNI.
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Company Counsel has participated in reviews and
discussions in connection with the preparation of the Registration Statement and
the Prospectus, and in the course of such reviews and discussions and such other
investigation as Company Counsel deemed necessary, no facts came to its
attention which lead it to believe that (A) the Registration Statement (except
as to the financial statements and other financial data contained therein, as t
which Company Counsel need not express an opinion), on the Effective Date,
contained any untrue statement of a material fact required to be stated therein
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, or that (B) the Prospectus contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering its opinion pursuant to this Section
6(b), Company Counsel may rely upon the certificates of government officials and
officers of the Company as to matters of fact, provided that Company Counsel
shall state that they have no reason to believe, and do not believe, that they
are not justified in relying upon such opinions or such certificates of
government officials and officers of the Company as to matters of fact, as the
case may be.
The opinion letters delivered pursuant to this
Section 6(b) shall state that any opinion given therein qualified by the phrase
"to the best of our knowledge" is being given by Company Counsel after due
investigation of the matters therein discussed.
(c) At the time this Agreement is executed and
at the Closing Date, there will have been delivered to the Underwriter a signed
opinion of Wiley, Rein & Fielding, special communications counsel for the
Company ("Special Counsel") dated as of the date hereof, or the Closing Date, as
the case may be, reasonably satisfactory to Underwriter's Counsel, to the effect
that:
(i) Each of the Company and the Subsidiary has
all Permits required by the FCC and comparable state regulatory authorities to
conduct its business as described in the Memorandum;
(ii) Each of the Company and the Subsidiary is
in compliance, in all material respects with the FCC Acts and the published
rules and regulations promulgated thereunder by the FCC and the rules and
regulations promulgated by comparable state regulatory authorities.
Special Counsel has participated in reviews and
discussions in connection with the preparation of the Registration Statement and
the Prospectus, and in the course of such reviews and discussions and such other
investigation as Special Counsel deemed necessary, no facts came to its
attention which lead it to believe
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that (A) the sections of the Registration Statement entitled "Risks Factors -
Government Regulation" and "Business - Government Regulation", on the Effective
Date, contained any untrue statement of a material fact required to be stated
therein or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or that (B) the sections of the Prospectus
entitled "Risk Factors - Government Regulation" and "Business - Government
Regulation" contains any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(d) At the Closing Date, there will have been
delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as
of the Closing Date, to the effect that the opinions delivered pursuant to
Sections 6(b) and (c) hereof appear on their face to be appropriately responsive
to the requirements of this Agreement, except to the extent waived by the
Underwriter, specifying the same, and with respect to such related matters as
the Underwriter may require.
(e) At the Closing Date (i) the Registration State-
ment and the Prospectus and any amendments or supplements thereto will contain
all material statements which are required to be stated therein in accordance
with the Act and the Regulations and will conform in all material respects to
the requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; (ii)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there will not have been any material adverse
change in the financial condition, results of operations or general affairs of
the Company from that set forth or contemplated in the Registration Statement
and the Prospectus, except changes which the Registration Statement and the
Prospectus indicate might occur after the Effective Date; (iii) since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall have been no material transaction, contract or
agreement entered into by the Company, other than in the ordinary course of
business, which would be required to be set forth in the Registration Statement
and the Prospectus, other than as set forth therein; and (iv) no action, suit or
proceeding at law or in equity will be pending or, to the best of the Company's
knowledge, threatened against the Company which is required to be set forth in
the Registration Statement and the Prospectus, other than as set forth therein,
and no proceedings will be pending or, to the best of the Company's knowledge,
threatened against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable decision,
ruling or
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finding would materially adversely affect the business, property, financial
condition or results of operations of the Company, other than as set forth in
the Registration Statement and the Prospectus. At the Closing Date, there will
be delivered to the Underwriter a certificate signed by the Chairman of the
Board or the President or a Vice President of the Company, dated the Closing
Date, evidencing compliance with the provisions of this Section 6(e) and stating
that the representations and warranties of the Company set forth in Section 4
hereof were accurate and complete in all material respects when made on the date
hereof and are accurate and complete in all material respects on the Closing
Date as if then made; that the Company has performed all covenants and complied
with all conditions required by this Agreement to be performed or complied with
by the Company prior to or as of the Closing Date; and that, as of the Closing
Date, no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been initiated or, to
the best of his knowledge, are contemplated or threatened. In addition, the
Underwriter will have received such other and further certificates of officers
of the Company as the Underwriter or Underwriter's Counsel may reasonably
request.
(f) At the time that this Agreement is executed and
at the Closing Date, the Underwriter will have received a signed letter from
Arthur Andersen LLP, dated the date such letter is to be received by the
Underwriter and addressed to it, confirming that it is a firm of independent
public accountants within the meaning of the Act and Regulations and stating
that: (i) insofar as reported on by them, in their opinion, the financial
statements of the Company included in the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable Regulations; (ii) on the basis of procedures and inquiries (not
constituting an examination in accordance with generally accepted auditing
standards) consisting of a reading of the unaudited interim financial statements
of the Company, if any, appearing in the Registration Statement and the
Prospectus and the latest available unaudited interim financial statements of
the Company, if more recent than that appearing in the Registration Statement
and Prospectus, inquiries of officers of the Company responsible for financial
and accounting matters as to the transactions and events subsequent to the date
of the latest audited financial statements of the Company, and a reading of the
minutes of meetings of the shareholders, the Board of Directors of the Company
and any committees of the Board of Directors, as set forth in the minute books
of the Company, nothing has come to their attention which, in their judgment,
would indicate that (A) during the period from the date of the latest financial
statements of the Company appearing in the Registration Statement and Prospectus
to a specified date not more than three business days prior to the date of such
letter, there have been any decreases in net current assets or net assets as
compared with amounts shown in such financial statements or decreases in net
sales or decreases [increases] in total or per share net income [loss] compared
with
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the corresponding period in the preceding year or any change in the
capitalization or long-term debt of the Company, except in all cases as set
forth in or contemplated by the Registration Statement and the Prospectus, and
(B) the unaudited interim financial statements of the Company, if any, appearing
in the Registration Statement and the Prospectus, do not comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Regulations or are not fairly presented in conformity with generally
accepted accounting principles and practices on a basis substantially consistent
with the audited financial statements included in the Registration Statement or
the Prospectus; and (iii) they have compared specific dollar amounts, numbers of
shares, numerical data, percentages of revenues and earnings, and other
financial information pertaining to the Company set forth in the Prospectus
(with respect to all dollar amounts, numbers of shares, percentages and other
financial information contained in the Prospectus, to the extent that such
amounts, numbers, percentages and information may be derived from the general
accounting records of the Company, and excluding any questions requiring an
interpretation by legal counsel) with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(g) There shall have been duly tendered to the
Underwriter certificates representing the Offered Shares and the Offered
Warrants to be sold on the Closing Date.
(h) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of the Shares
and Warrants by the Underwriter.
(i) No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any time
prior to the Closing Date or the Option Closing Date, as the case may be, for
any member firm of the NASD to execute transactions (as principal or as agent)
in the Shares or Warrants, and no proceedings for the purpose of taking such
action shall have been instituted or shall be pending, or, to the best of the
Underwriter's or the Company's knowledge, shall be contemplated by the
Commission or the NASD. The Company represents at the date hereof, and shall
represent as of the Closing Date or Option Closing Date, as the case may be,
that it has no knowledge that any such action is in fact contemplated by the
Commission or the NASD.
(j) The Company meets the current and any existing
and proposed criteria for inclusion of the Shares and Warrants in Nasdaq.
(k) All proceedings taken at or prior to the Closing
Date or the Option Closing Date, as the case may be, in
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connection with the authorization, issuance and sale of the Shares or Warrants
shall be reasonably satisfactory in form and substance to the Underwriter and to
Underwriter's Counsel, and such counsel shall have been furnished with all such
documents, certificates and opinions as they may request for the purpose of
enabling them to pass upon the matters referred to in Section 6(c) hereof and in
order to evidence the accuracy and completeness of any of the representations,
warranties or statements of the Company, the performance of any covenants of the
Company, or the compliance by the Company with any of the conditions herein
contained.
(l) As of the date hereof, the Company will have
delivered to the Underwriter the written undertakings of its officers, directors
and security holders and/or registration rights holders, as the case may be, to
the effect of the matters set forth in Sections 5(l) and (q).
If any of the conditions specified in this Section 6
have not been fulfilled, this Agreement may be terminated by the Underwriter on
notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold
harmless the Underwriter, each officer, director, partner, employee and agent of
the Underwriter, and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several (and actions in respect thereof), to which they or any of them may
become subject under the Act or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Underwriter
and each such person, if any, for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions, whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in the Registration Statement, in any Preliminary Prospectus or in the
Prospectus (or the Registration Statement or Prospectus as from time to time
amended or supplemented) or (ii) in any application or other document executed
by the Company, or based upon written information furnished by or on behalf of
the Company, filed in any jurisdiction in order to qualify the Shares and
Warrants under the securities laws thereof (hereinafter "application"), or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
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statements therein not misleading, in light of the circumstances under which
they were made, unless such untrue statement or omission was made in such
Registration Statement, Preliminary Prospectus, Prospectus or application in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by the Underwriter or any such person through
the Underwriter expressly for use therein; provided, however, that the indemnity
agreement contained in this Section 7(a) with respect to any Preliminary
Prospectus will not inure to the benefit of the Underwriter (or to the benefit
of any other person that may be indemnified pursuant to this Section 7(a)) if
(A) the person asserting any such losses, claims, damages, expenses or
liabilities purchased the Shares and/or Warrants which are the subject thereof
from the Underwriter or other indemnified person; (B) the Underwriter or other
indemnified person failed to send or give a copy of the Prospectus to such
person at or prior to the written confirmation of the sale of such Shares and/or
Warrants to such person; and (C) the Prospectus did not contain any untrue
statement or alleged untrue statement or omission or alleged omission giving
rise to such cause, claim, damage, expense or liability.
(b) The Underwriter agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), to which they or
any of them may become subject under the Act or under any other statute or at
common law or otherwise, and, except as hereinafter provided, will reimburse the
Company and each such director, officer or controlling person for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in any
Preliminary Prospectus or in the Prospectus (or the Registration Statement or
Prospectus as from time to time amended or supplemented) or (ii) in any
application (including any application for registration of the Shares and
Warrants under state securities or Blue Sky laws), or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, in light of the circumstances under which they were made, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by the Underwriter expressly for use therein.
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(c) Promptly after receipt of notice of the
commencement of any action in respect of which indemnity may be sought against
any indemnifying party under this Section 7, the indemnified party will notify
the indemnifying party in writing of the commencement thereof, and the
indemnifying party will, subject to the provisions hereinafter stated, assume
the defense of such action (including the employment of counsel satisfactory to
the indemnified party and the payment of expenses) insofar as such action
relates to an alleged liability in respect of which indemnity may be sought
against the indemnifying party. After notice from the indemnifying party of its
election to assume the defense of such claim or action, the indemnifying party
shall no longer be liable to the indemnified party under this Section 7 for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of the
indemnified party or parties, it is advisable for the indemnified party or
parties to be represented by separate counsel, the indemnified party or parties
shall have the right to employ a single counsel to represent the indemnified
parties who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the indemnified parties thereof against the
indemnifying party, in which event the fees and expenses of such separate
counsel shall be borne by the indemnifying party. Any party against whom
indemnification may be sought under this Section 7 shall not be liable to
indemnify any person that might otherwise be indemnified pursuant hereto for any
settlement of any action effected without such indemnifying party's consent,
which consent shall not be unreasonably withheld.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 7 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for indemnification may not be enforced, even though
this Agreement expressly provides for indemnification in such case; or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including, for this purpose, any
contribution made by or on behalf of any director of the Company, any officer of
the Company who signed the Registration Statement and any controlling person of
the Company) as one entity and the Underwriter (including, for this purpose, any
contribution by or on behalf of each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and each officer, director, partner, employee and agent of the
Underwriter) as a second entity, shall contribute to the losses, liabilities,
claims, damages and expenses whatsoever to which any of them may be subject, so
that the Underwriter is responsible for the proportion thereof equal to the
percentage which the underwriting discount per Share and per Warrant set forth
on the cover page of the Prospectus represents of the initial public offering
price per Share and per Warrant set
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forth on the cover page of the Prospectus and the Company is responsible for the
remaining portion; provided, however, that if applicable law does not permit
such allocation, then, if applicable law permits, other relevant equitable
considerations such as the relative fault of the Company and the Underwriter in
connection with the facts which resulted in such losses, liabilities, claims,
damages and expenses shall also be considered. The relative fault, in the case
of an untrue statement, alleged untrue statement, omission or alleged omission,
shall be determined by, among other things, whether such statement, alleged
statement, omission or alleged omission relates to information supplied by the
Company or by the Underwriter, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement,
alleged statement, omission or alleged omission. The Company and the Underwriter
agree that it would be unjust and inequitable if the respective obligations of
the Company and the Underwriter for contribution were determined by pro rata or
per capita allocation of the aggregate losses, liabilities, claims, damages and
expenses or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 8. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls the Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee
and agent of the Under-writer will have the same rights to contribution as the
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company will have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 8. Anything in
this Section 8 to the contrary notwithstanding, no party will be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 8 is intended to supersede, to the
extent permitted by law, any right to contribution under the Act or the Exchange
Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained herein shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of the
Underwriter, the Company or any of its directors and officers, or any
controlling person referred to in said Sections, and shall survive the delivery
of, and payment for, the Shares and the Warrants.
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10. Termination of Agreement.
(a) The Company, by written or telegraphic notice to
the Underwriter, or the Underwriter, by written or telegraphic notice to the
Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M.,
New York City time, on the first full business day after the Effective Date; or
(ii) the time when the Underwriter, after the Registration Statement becomes
effective, releases the Offered Shares and Offered Warrants for public offering.
The time when the Underwriter "releases the Offered Shares and Offered Warrants
for public offering" for the purposes of this Section 10 means the time when the
Underwriter releases for publication the first newspaper advertisement, which is
subsequently published, relating to the Offered Shares and Offered Warrants, or
the time when the Underwriter releases for delivery to members of a selling
group copies of the Prospectus and an offering letter or an offering telegram
relating to the Offered Shares and Offered Warrants, whichever will first occur.
(b) This Agreement, including without limitation,
the obligation to purchase the Offered Shares and the Offered Warrants and the
obligation to purchase the Optional Shares and/or Optional Warrants after
exercise of the option referred to in Section 3 hereof, are subject to
termination in the absolute discretion of the Underwriter, by notice given to
the Company prior to delivery of and payment for all the Offered Shares and
Offered Warrants or such Optional Shares and Optional Warrants, as the case may
be, if, prior to such time, any of the following shall have occurred: (i) the
Company withdraws the Registration Statement from the Commission or the Company
does not or cannot expeditiously proceed with the public offering; (ii) the
representations and warranties in Section 4 hereof are not materially correct or
cannot be complied with; (iii) trading in securities generally on the New York
Stock Exchange or the American Stock Exchange will have been suspended; (iv)
limited or minimum prices will have been established on either such Exchange;
(v) a banking moratorium will have been declared either by federal or New York
State authorities; (vi) any other restrictions on transactions in securities
materially affecting the free market for securities or the payment for such
securities, including the Offered Shares and Offered Warrants or the Optional
Shares and Optional Warrants, will be established by either of such Exchanges,
by the Commission, by any other federal or state agency, by action of the
Congress or by Executive Order; (vii) trading in any securities of the Company
shall have been suspended or halted by any national securities exchange, the
NASD or the Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured, by
reason of fire, flood, accident or other calamity; (x) any action has been taken
by the government of the United States or any department or agency thereof
which, in the judgment of the Underwriter, has had a material adverse effect
upon the market or potential market for securities
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in general; or (xi) the market for securities in general or political, financial
or economic conditions will have so materially adversely changed that, in the
judgment of the Underwriter, it will be impracticable to offer for sale, or to
enforce contracts made by the Underwriter for the resale of, the Offered Shares
and Offered Warrants or the Optional Shares and Offered Warrants, as the case
may be.
(c) If this Agreement is terminated pursuant to
Section 6 hereof or this Section 10 or if the purchases provided for herein are
not consummated because any condition of the Underwriter's obligations hereunder
is not satisfied or because of any refusal, inability or failure on the part of
the Company to comply with any of the terms or to fulfill any of the conditions
of this Agreement, or if for any reason the Company shall be unable to or does
not perform all of its obligations under this Agreement, the Company will not be
liable to the Underwriter for damages on account of loss of anticipated profits
arising out of the transactions covered by this Agreement, but the Company will
remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this
Agreement.
11. Information Furnished by the Underwriter to the Company.
It is hereby acknowledged and agreed by the parties hereto that for the purposes
of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and
8 hereof, the only information given by the Underwriter to the Company for use
in the Prospectus are the statements set forth in the last sentence of the last
paragraph on the cover page, the statement appearing in the last paragraph on
page __ with respect to stabilizing the market price of Shares and Warrants, the
information in the __ paragraph on page __ with respect to concessions and
reallowances, and the information in the ___ paragraph on page ___ with respect
to the determination of the public offering price, as such information appears
in any Preliminary Prospectus and in the Prospectus.
12. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at, or
mailed by certified mail, return receipt requested, or telegraphed to, the
following addresses: if to the Underwriter, to Whale Securities Co., L.P., 650
Fifth Avenue, New York, New York 10019 with a copy to Tenzer Greenblatt LLP,
Attention: Robert J. Mittman, Esq., 405 Lexington Avenue, New York, New York
10174; if to the Company, addressed to it at 1411 5th Street, Suite 250, Santa
Monica, California 90401, Attention: William D. Moses, President and Chief
Executive Officer, with a copy to Parker Chapin Flattau & Klimpl, LLP, 1211
Avenue of the Americas, New York, New York 10036, Attention: Henry I. Rothman,
Esq.
This Agreement shall be deemed to have been made and delivered
in New York City and shall be governed as to validity, interpretation,
construction, effect and in all other respects by
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the internal laws of the State of New York. The Company (1) agrees that any
legal suit, action or proceeding arising out of or relating to this Agreement
shall be instituted exclusively in New York State Supreme Court, County of New
York, or in the United States District Court for the Southern District of New
York, (2) waives any objection which the Company may have now or hereafter to
the venue of any such suit, action or proceeding, and (3) irrevocably consents
to the jurisdiction of the New York State Supreme Court, County of New York, and
the United States District Court for the Southern District of New York in any
such suit, action or proceeding. The Company further agrees to accept and
acknowledge service of any and all process which may be served in any such suit,
action or proceeding in the New York State Supreme Court, County of New York, or
in the United States District Court for the Southern District of New York and
agrees that service of process upon the Company mailed by certified mail to the
Company's address shall be deemed in every respect effective service of process
upon the Company, in any such suit, action or proceeding.
13. Parties in Interest. This Agreement is made solely for the
benefit of the Underwriter, the Company and, to the extent expressed, any person
controlling the Company or the Underwriter, each officer, director, partner,
employee and agent of the Underwriter, the directors of the Company, its
officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares or
Warrants from the Underwriter, as such purchaser.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement
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between the Company and the Underwriter in accordance with its terms.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:_______________________
Name:
Title:
Confirmed and accepted in
New York, N.Y., as of the
date first above written:
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:________________________
Name:
Title:
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EXHIBIT 3.1
[SEAL] STATE OF COLORADO
I, VICTORIA BUCKLEY, SECRETARY OF STATE OF THE STATE OF
COLORADO HEREBY CERTIFY THAT THE ATTACHED IS A FULL,
TRUE AND COMPLETE COPY OF ARTICLES OF INCORPORATION AND ALL
AMENDMENTS THERETO OF
THE RECOVERY NETWORK, INC.
(COLORADO CORPORATION)
AS FILED IN THIS OFFICE AND ADMITTED TO RECORD.
Dated: February 20, 1997
/s/ Victoria Buckley
- -------------------------------
SECRETARY OF STATE
<PAGE>
951159834 C $50.00
SECRETARY OF STATE
12-28-95 16:53
ARTICLES OF INCORPORATION
OF
RECOVERYNET, INC.
The undersigned natural person, being more than 18 years of age, hereby
establishes a corporation pursuant to the Colorado Business Corporation Act (the
"Act") and adopts the following articles of incorporation:
ARTICLE I
Name
The name of the corporation is RecoveryNet, Inc.
ARTICLE II
Capital; Shareholders
2.1 Authorized Capital. The aggregate number of shares that the corporation
shall have authority to issue is 25,000,000 shares of common stock, each having
a par value of $.01.
2.2 Voting of Shares. Each shareholder of record entitled to vote shall
have one vote for each share of stock standing in his name on the books of the
corporation, except that in the election of directors he shall have the right to
vote such number of shares for as many persons as there are directors to be
elected. Cumulative voting shall not be allowed in the election of directors or
for any other purpose.
2.3 Quorum; Vote Required. At all meetings of shareholders, a majority of
the shares entitled to vote at such meeting, represented in person or by proxy,
shall constitute a quorum; and at any meeting at which a quorum is present the
affirmative vote of a majority of the votes cast on the matter represented at
such meeting and entitled to vote on the subject matter shall be the act of the
shareholders, unless the vote of a greater proportion or number is required by
the laws of Colorado.
ARTICLE III
No Preemptive Rights
No shareholder of the corporation shall have any preemptive or similar
right to acquire or subscribe for any additional unissued shares of stock, or
other securities of any class, or rights, warrants or options to purchase stock
or scrip, or securities of any kind convertible into stock or carrying stock
purchase warrants or privileges.
<PAGE>
ARTICLE IV
Board of Directors
The corporate powers shall be exercised by or under the authority of, and
the business and affairs of the corporation shall be managed under the direction
of, a board of directors. The initial board of directors of the corporation
shall consist of 8 persons.
ARTICLE V
Limitation on Liability
To the fullest extent permitted by the Act, as the same exists or may
hereafter be amended, a director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for breach of
fiduciary duty as a director, except that this provision shall not eliminate or
limit the liability of a director to the Corporation or to its shareholders for
monetary damages otherwise existing for (i) any breach of the director's duty of
loyalty to the Corporation or to its shareholders; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) acts specified in Section 7-108-403 of the Act relating to any
unlawful distribution; or (iv) any transaction from which the director directly
or indirectly derived any improper personal benefit. If the Act is hereafter
amended to eliminate or limit further the liability of a director, then, in
addition to the elimination and limitation of liability provided by the
preceding sentence, the liability of each director shall be eliminated or
limited to the fullest extent permitted by the Act as so amended. Any repeal or
modification of this Article by the shareholders of the corporation shall be
prospective only and shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or modification.
ARTICLE VI
Indemnification
The corporation shall indemnify, to the fullest extent permitted by
applicable law in effect from time to time, any person, and the estate and
personal representative of any such person, against all liability and expense
(including attorneys' fees) incurred by reason of the fact that he is or was a
director of the corporation or, while serving as a director of the corporation,
he is or was serving at the request of the corporation as a director, officer,
partner, trustee, employee, fiduciary or agent of, or in any similar managerial
or fiduciary position of, another domestic or foreign corporation or other
individual or entity or of an employee benefit plan. The corporation shall also
indemnify any person who is serving or has served the corporation as a director,
officer, employee, fiduciary or agent, and that person's estate and personal
representative, to the extent and in the manner provided in any bylaw,
resolution of the shareholders or directors, contract or otherwise, so long as
such provision is legally permissible.
-2-
<PAGE>
ARTICLE VII
Offices
7.1 Registered Agent. The street address of the initial registered office
of the corporation is 4 East Belleview Place, Englewood, Colorado 80110. The
name of its initial registered agent at such address is Charles R. Duke. The
written consent of the initial registered agent to the appointment as such is
stated below.
7.2 Principal Office. The address of the corporation's initial principal
office is 4 East Belleview Place, Englewood, Colorado 80110.
ARTICLE VIII
Incorporator
The name and address of the incorporator is:
Kristen L. Alleman, Esq.
1700 Lincoln Street #4100
Denver, Colorado 80203
Dated: December 28, 1995
/s/ Kristen L. Alleman
---------------------------------
REGISTERED AGENT'S ACCEPTANCE OF APPOINTMENT
Charles R. Duke hereby consents to appointment as the initial registered
agent for RecoveryNet, Inc.
/s/ Charles R. Duke
---------------------------------
Initial Registered Agent
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<PAGE>
961002461 C $25.00
SECRETARY OF STATE
01-05-96 15:36
DP951159834
AMENDMENT BY SOLE INCORPORATOR
OF
ARTICLES OF INCORPORATION
OF
RECOVERYNET, INC.
The undersigned, being the sole incorporator of RecoveryNet, Inc., a
Colorado corporation (the "Company"), hereby adopts the following:
RESOLVED, that Article IV of the Articles of Incorporation of the
Company is hereby amended to read in its entirety as follows:
The corporate powers shall be exercised by or under the
authority of, and the business and affairs of the corporation
shall be managed under the direction of, a board of directors.
The number of directors on the board of directors shall be as
set forth in the Company's bylaws.
Executed this 2nd day of January, 1996.
/s/ Kristen L. Alleman
---------------------------------
Kristen L. Alleman
<PAGE>
DP951159834 961002462 C $60.00
SECRETARY OF STATE
01-05-96 15:37
ARTICLES OF MERGER
FOR THE MERGER
OF
RECOVERYNET, INC.,
A WISCONSIN CORPORATION
INTO
RECOVERYNET, INC.,
A COLORADO CORPORATION
Pursuant to the provisions of Section 7-111-105 of the Colorado Business
Corporation Act and Section 180.1101 of the Wisconsin Business Corporation Law,
RecoveryNet, Inc., a Colorado corporation ("RNet Colorado") and RecoveryNet,
Inc., a Wisconsin corporation ("RNet Wisconsin"), have each caused their Chief
Executive Officer to execute these Articles of Merger in duplicate for the
purpose of filing them with the Secretaries of States of Colorado and Wisconsin.
ARTICLE I
The Agreement and Plan of Merger attached hereto as Exhibit A, pursuant to
which RNet Wisconsin will merge into RNet Colorado, was duly adopted by
resolutions of the Boards of Directors of RNet Wisconsin and RNet Colorado.
ARTICLE II
The number of votes cast in favor of the Agreement and Plan of Merger of
RNet Wisconsin into RNet Colorado by the shareholders of RNet Wisconsin and RNet
Colorado was sufficient for approval of the merger. The Consent of Shareholders
for each corporation approving the merger were each executed on January 4th,
1996.
ARTICLE III
The effective time of the Merger shall be at 12:01 p.m. (Denver time) on
January 9th, 1996.
Dated as of the 4th of January, 1996.
RECOVERYNET, INC., a Wisconsin corporation,
By: /s/ William D. Moses
----------------------------------------
William D. Moses
Chief Executive Officer
<PAGE>
RECOVERYNET, INC., a Colorado corporation,
By: /s/ William D. Moses
----------------------------------------
William D. Moses
Chief Executive Officer
2
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January
4, 1996, is by and among RECOVERYNET, INC., a Colorado corporation ("Surviving
Corporation"), and RECOVERYNET, INC., a Wisconsin corporation ("Merger
Corporation").
Recitals
A. Surviving Corporation is a corporation duly organized and validly
existing under the laws of the State of Colorado. On the date hereof, Surviving
Corporation has authorized capital stock consisting of 25,000,000 shares of
common stock, $.01 par value ("Surviving Corporation Common Stock"), of which
100 shares of Common Stock are issued and outstanding and held by Merger
Corporation, the sole shareholder of Surviving Corporation.
B. Merger Corporation is a corporation duly organized and validly existing
under the laws of the State of Wisconsin. On the date hereof, Merger Corporation
has authorized capital stock consisting of 9000 shares of common stock, no par
value, of which 4,771.31 shares are issued and outstanding.
C. The boards of directors of Surviving Corporation and Merger Corporation
each deem it advisable and in the best interests of said corporations for the
following transactions to occur:
(1) Merger Corporation shall be merged into Surviving Corporation (the
"Merger");
(2) the outstanding shares of common stock of Surviving Corporation
held by Merger Corporation immediately prior to the effective time of the
Merger shall be canceled; and
(3) each share of common stock of Merger Corporation outstanding
immediately prior to the effective time of the Merger shall be converted
into the right to receive 1657.6309 shares of Surviving Corporation Common
Stock.
Agreement
NOW, THEREFORE, Surviving Corporation and Merger Corporation agree
that pursuant to the laws of the States of Colorado and Wisconsin, the
above-described transactions shall be consummated subject to and in accordance
with the following terms and conditions of this Agreement and that Surviving
Corporation and Merger Corporation will execute and file articles of merger (the
"Articles of Merger") with the Colorado Secretary of State and the Wisconsin
Secretary of State as required by law.
<PAGE>
ARTICLE I
Merger
1.1 Merger. At the Effective Time (as hereinafter defined), (a) Merger
Corporation shall be merged with and into Surviving Corporation, which latter
corporation shall survive the merger and (b) the separate existence and
corporate organization of Merger Corporation shall cease.
1.2 Articles of Merger. Subject to the conditions set forth in Article III
hereof and subject to the rights to terminate as set forth in Article IV hereof,
the Articles of Merger shall be filed with the Secretary of State of the State
of Colorado and the Secretary of State of the State of Wisconsin and recorded,
all in accordance with the applicable provisions of the respective laws of the
State of Colorado and State of Wisconsin, promptly following approval of the
Merger by the shareholders of Merger Corporation and Surviving Corporation or at
such other time as the duly authorized representatives of the parties hereto
shall agree.
1.3 Effect of Merger. The Merger shall have the effect specified in
Colorado Business Corporation Act ss.7-111-105 and Wisconsin Business
Corporation Law ss.180.1106.
1.4 Effective Time. The "Effective Time" for purposes of this Agreement
shall be 12:01 p.m. (Denver time) on January _____, 1996.
ARTICLE II
The Status and Conversion of Shares
2.1 Conversion of Shares. At the Effective Time, (a) each share of common
stock of Surviving Corporation issued and outstanding immediately prior to the
Effective Time that is held by the Merger Corporation shall be cancelled and
retired without payment of any consideration thereof, and (b) each share of
common stock of Merger Corporation outstanding immediately prior to the
Effective Time shall be converted into and represent the right to receive, and
shall be exchangeable for 1657.6309 validly issued, fully paid and
non-assessable shares of Surviving Corporation Common Stock.
2.2 Surrender of Shares. (a) As soon as practicable after the Effective
Time and upon surrender to Surviving Corporation of any certificate representing
shares of common stock of Merger Corporation outstanding immediately prior to
the Effective Time, Surviving Corporation shall distribute to the person in
whose name such certificate shall have been issued in exchange therefore a
certificate representing the number of shares of Surviving Corporation Common
Stock calculated pursuant to Section 2.1 above.
2
<PAGE>
(b) If any certificate representing shares of common stock of Merger
Corporation shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such certificate to be lost,
stolen or destroyed satisfactory to Surviving Corporation and complying with any
other reasonable requirements imposed by Surviving Corporation, Surviving
Corporation will cause to be delivered in exchange for such lost, stolen or
destroyed certificate, a certificate evidencing Surviving Corporation Common
Stock deliverable in respect thereof.
2.3 Status of Shares. The shares of Surviving Corporation Common Stock to
be received by the shareholders of Merger Corporation pursuant to this Agreement
shall not be registered under the Securities Act of 1933, as amended, nor shall
they be registered or qualified under the securities laws of any state. The
certificates representing such shares shall bear appropriate restrictive
legends.
ARTICLE III
Conditions Precedent
The parties' obligations to complete and consummate this Agreement and the
transactions contemplated hereby shall be subject to the following conditions
precedent:
3.1 No Action to Prevent Completion. No investigation, suit, action or
proceeding shall be threatened or pending before any court or governmental
agency or instrumentality on or prior to the Effective Time that is likely to
result in the restraint, prohibition, subsequent divestiture of assets or the
obtaining of damages or other relief in connection with this Agreement or
consummation of the transactions contemplated hereby.
3.2 Shareholders' Approval. On or before the Effective Time, the consent to
or approval of this Agreement and the transactions contemplated herein shall
have been obtained by the required vote at meetings of (or in lieu thereof, by
consents executed by) the shareholders of Merger Corporation, duly obtained in
accordance with the applicable provisions of law and the Articles of
Incorporation and Bylaws of Merger Corporation.
ARTICLE IV
Termination of Agreement
This Agreement may be terminated, and the Merger herein set forth
abandoned, without further obligation or liability of any party to any other
party (all of which obligations and liabilities hereunder shall be terminated by
such termination and abandonment of such plan) at any time before or after the
satisfaction of the conditions precedent hereto by mutual consent of the board
of directors of Surviving Corporation and Merger Corporation.
3
<PAGE>
ARTICLE V
Miscellaneous
5.1 Entire Agreement. This Agreement constitutes and contains the entire
agreement of the parties and supersedes any and all prior negotiations,
correspondence, understandings and agreements between the parties respecting the
subject matter hereof.
5.2 Governing Law. This Agreement and the transactions contemplated hereby
shall be governed by, and shall be construed in accordance with, the laws of the
State of Colorado.
IN WITNESS WHEREOF, the parties hereto have each caused their duly
authorized representatives to execute this Agreement as of the day and year
first above written.
RECOVERYNET, INC., a Colorado corporation
By: /s/ William D. Moses
-----------------------------------------
William D. Moses
Chief Executive Officer
RECOVERYNET, INC., a Wisconsin corporation
By: /s/ William D. Moses
----------------------------------------
William D. Moses
Chief Executive Officer
4
<PAGE>
MERGER XX CONSOLIDATION
CANCELLATION OF LIMITED PARTNERSHIP DUE TO MERGER____________________________
DOMESTIC XX FOREIGN XX PROFIT XX NONPROFIT_____________
================================================================================
MERGER #961002462
RECOVERYNET, INC.
(WISCONSIN CORPORATION NONQUALIFIED)
INTO
RECOVERYNET, INC.
(COLORADO CORPORATION DP951159834), THE SURVIVOR.
<PAGE>
CHANGE OF NAME 961081634 C $25.00
SECRETARY OF STATE
06-18-96 15:16
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
DP951159834
Pursuant to section 7-110-106 of the Colorado Business Corporation Act,
RECOVERYNET, INC., a Colorado corporation, hereby amends its articles of
incorporation:
1. The name of the corporation is RecoveryNet, Inc. NCGS
2. The articles of incorporation are amended to change the name of the
corporation. Article I of the articles of incorporation shall be amended in full
to read:
The name of the corporation is The Recovery Network, Inc.
3. The amendment was adopted on May 29, 1996.
4. The amendment was adopted by the shareholders at the recommendation
of the board of directors in accordance with section 7-110-103(2) of the
Colorado Business Corporation Act at a meeting held on May 29, 1996. At such
meeting, the number of votes cast for the amendment by the shareholders was
sufficient for approval of the amendment.
DATED May 29, 1996.
RECOVERYNET, INC.
By: /s/William D. Moses
----------------------------------
William D. Moses, President and
Chief Executive Officer
<PAGE>
STOCK CHANGE
DP 951159834
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
Pursuant to section 7-110-106 of the Colorado Business Corporation Act, THE
RECOVERY NETWORK, INC., a Colorado corporation, hereby amends its articles of
incorporation:
1. The name of the corporation is The Recovery Network, Inc. ncgs
2. The articles of incorporation are amended to change the number of
shares of Common Stock of the corporation. Section 2.1 of Article II of the
articles of incorporation shall be amended in full to read:
Authorized Capital. (a)., The aggregate number of shares that the
corporation shall have authority to issue is 25,000,000, each having a par value
of $0.01.
(b) Upon the filing of these articles of amendment to the articles of
incorporation, each 7.7432 shares of the Common Stock, par value $0.01
per share, of the Company shall be automatically reclassified, changed,
combined, and converted into one share of the Common Stock, par value
$0.01 per share, of the Company.
(c)No fractional shares of Common Stock or scrip certificates therefore
shall be issued to the holders of the shares of Common Stock after the
amendment. All fractional shares of Common Stock that a shareholder
would hold after the amendment shall be rounded up to the next largest
whole number of shares so as to avoid the issuance of fractional shares
or scrip.
(d) When these articles of amendment become effective, the aggregate amount
of capital represented by all shares of Common Stock issued immediately
after the amendment shall not be less than the aggregate amount of
capital represented by all shares of Common Stock issued immediately
before the amendment. The capital of the corporation shall not be
reduced under or by reason of the amendment.
3. The amendment was adopted on January 16, 1997.
4. The amendment was adopted by the shareholders at the recommendation
of the board of directors in accordance with section 7-110-103(2) of the
Colorado Business Corporation Act at a meeting held on December 9, 1996. At such
meeting, the number of votes cast for the amendment by the shareholders was
sufficient for approval of the amendment.
971020334 C $25.00
SECRETARY OF STATE
02-10-97 14:54
<PAGE>
DATED January 16, 1997.
THE RECOVERY NETWORK, INC.
By: /s/William D. Moses
-------------------------------------
President and Chief Executive Officer
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
RECOVERYNET, INC.
Adopted January 4, 1996
#140208
<PAGE>
INDEX TO BYLAWS
OF
RECOVERYNET, INC.
<TABLE>
<CAPTION>
Page
----
ARTICLE I
Offices
<S> <C> <C>
Section 1.01 Business Offices...................................................1
Section 1.02 Registered Office..................................................1
ARTICLE II
Shareholders
Section 2.01 Annual Meeting.....................................................1
Section 2.02 Special Meetings...................................................1
Section 2.03 Place of Meetings..................................................2
Section 2.04 Notice of Meetings.................................................2
Section 2.05 Waiver of Notice...................................................2
Section 2.06 Fixing of Record Date..............................................2
Section 2.07 Shareholders' List.................................................3
Section 2.08 Proxies............................................................3
Section 2.09 Quorum and Voting Rights...........................................4
Section 2.10 Extraordinary Matters; Voting Rights...............................4
Section 2.11 Conflicting Interest Transaction; Notice Rights....................4
Section 2.12 Voting of Shares...................................................5
Section 2.13 Voting of Shares by Certain Holders................................5
Section 2.14 Action Without a Meeting...........................................6
ARTICLE III
Board of Directors
Section 3.01 General Powers.....................................................7
Section 3.02 Number, Tenure and Qualifications..................................7
Section 3.03 Resignation........................................................7
Section 3.04 Removal............................................................7
Section 3.05 Vacancies..........................................................8
Section 3.06 Regular Meetings...................................................8
Section 3.07 Special Meetings...................................................8
Section 3.08 Meetings by Telephone..............................................8
Section 3.09 Notice of Meetings; Waiver of Notice...............................9
Section 3.10 Presumption of Assent..............................................9
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
Section 3.11 Quorum and Voting Rights...........................................9
Section 3.12 Action Without a Meeting..........................................10
Section 3.13 Executive and Other Committees....................................10
Section 3.14 Compensation......................................................10
ARTICLE IV
Officers
Section 4.01 Number and Qualifications.........................................11
Section 4.02 Appointment and Term of Office....................................11
Section 4.03 Compensation......................................................11
Section 4.04 Resignation.......................................................11
Section 4.05 Removal...........................................................12
Section 4.06 Vacancies.........................................................12
Section 4.07 Authority and Duties..............................................12
Section 4.08 Surety Bonds......................................................13
ARTICLE V
Stock
Section 5.01 Issuance of Shares................................................13
Section 5.02 Stock Certificates; Uncertificated Shares.........................13
Section 5.03 Consideration for Shares..........................................14
Section 5.04 Lost Certificates.................................................14
Section 5.05 Transfer of Shares................................................14
Section 5.06 Holders of Record.................................................15
Section 5.07 Shares Held for Account of Another................................15
Section 5.08 Transfer Agents, Registrars and Paying Agents.....................15
ARTICLE VI
Indemnification
Section 6.01 Definitions.......................................................15
Section 6.02 Right to Indemnification..........................................16
Section 6.03 Advancement of Expenses...........................................17
Section 6.04 Burden of Proof...................................................17
Section 6.05 Notification and Defense of Claim.................................17
Section 6.06 Notice to Shareholders of Indemnification of Director.............18
Section 6.07 Enforcement.......................................................18
Section 6.08 Proceedings by a Party............................................19
Section 6.09 Subrogation.......................................................19
Section 6.10 Other Payments....................................................19
Section 6.11 Insurance.........................................................19
Section 6.12 Indemnification of Officers, Employees, Fiduciaries and Agents....19
Section 6.13 Other Rights and Remedies.........................................20
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
Section 6.14 Applicability; Effect.............................................20
Section 6.15 Severability......................................................20
ARTICLE VII
Miscellaneous
Section 7.01 Voting of Securities by the Corporation...........................20
Section 7.02 Seal..............................................................21
Section 7.03 Fiscal Year.......................................................21
Section 7.04 Amendments........................................................21
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
RECOVERYNET, INC.
ARTICLE I
Offices
Section 1.01 Business Offices. The corporation may have such offices,
either within or outside Colorado, as the board of directors may from time to
time determine or as the business of the corporation may require.
Section 1.02 Registered Office. The registered office of the corporation
required by the Colorado Business Corporation Act (the "Act") to be maintained
in Colorado shall be as set forth in the articles of incorporation, unless
changed as provided by law.
ARTICLE II
Shareholders
Section 2.01 Annual Meeting. An annual meeting of the shareholders shall be
held on the 15th day in the month of September in each year, or on such other
date as may be determined by the board of directors, beginning with the year
1996, for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the day fixed for the annual
meeting is a legal holiday in Colorado, the meeting shall be held on the next
succeeding business day. If the election of directors shall not be held on the
day designated herein for any annual meeting of the shareholders, or at any
adjournment thereof, the board of directors shall cause the election to be held
at a meeting of the shareholders as soon thereafter as conveniently may be
possible. Failure to hold an annual meeting as required by these bylaws shall
not invalidate any action taken by the board of directors or officers of the
corporation.
Section 2.02 Special Meetings. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by statute, may be called
by the chief executive officer or the board of directors, and shall be called by
the chief executive officer or the board of directors at the written, dated and
executed, demand of the holders of not less than one-tenth of all the votes of
the corporation entitled to be cast on any proposed issue to be considered. A
written demand shall contain the purpose or purposes for which the meeting shall
be held. Notice of the special meeting must be given within 30 days after the
date of the call or demand in accordance with Section 2.04.
<PAGE>
Section 2.03 Place of Meetings. Each meeting of the shareholders shall be
held at such place, either within or outside Colorado, as may be designated in
the notice of meeting, or, if no place is designated in the notice, at the
principal office of the corporation if in Colorado or, if the principal office
is not located in Colorado, at the registered office of the corporation in
Colorado.
Section 2.04 Notice of Meetings. Except as otherwise required by law,
written notice of each meeting of the shareholders stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called shall be given, either personally
(including delivery by private courier) or by first class, certified or
registered mail, to each shareholder of record entitled to notice of such
meeting, not less than 10 nor more than 60 days before the date of the meeting,
except that if the authorized shares of the corporation are to be increased, at
least 30 days notice shall be given, and, if the sale, lease, exchange or other
disposition of all or substantially all of the property and assets of the
corporation not in the usual and regular course of business is to be voted on,
at least 20 days notice shall be given. Such notice shall be deemed to be given
in person when delivered to the shareholder by telephone, telegraph, teletype,
electronically transmitted facsimile or other form of wire or wireless
communication or by mail or private carrier. If mailed, such notice shall be
deemed to be given as to each shareholder when deposited in the United States
mail, addressed to the shareholder at the shareholder's address shown in the
corporation's current record of shareholders, with postage thereon prepaid, but,
if three successive notices mailed to the lastknown address of any shareholder
of record are returned as undeliverable, no further notices to such shareholder
shall be necessary until another address for such shareholder is made known to
the corporation. If a meeting is adjourned to another time or place, notice need
not be given if the time and place thereof are announced at the meeting, unless
the adjournment is for more than 30 days or if after the adjournment a new
record date is fixed, in either of which case notice of the adjourned meeting
shall be given to each shareholder of record entitled to vote at the meeting in
accordance with the foregoing provisions of this Section 2.04.
Section 2.05 Waiver of Notice. Whenever notice is required by law, the
articles of incorporation or these bylaws to be given to any shareholder, a
waiver thereof in writing signed by the shareholder entitled to such notice,
whether before, at or after the time stated therein, shall be equivalent to the
giving of such notice. By attending a meeting, a shareholder (a) waives
objection to lack of notice or defective notice of such meeting unless the
shareholder, at the beginning of the meeting, objects to the holding of the
meeting or the transacting of business at the meeting because of lack of notice
or defective notice, and (b) waives objection to consideration at such meeting
of a particular matter not within the purpose or purposes described in the
notice of such meeting unless the shareholder objects to considering the matter
when it is presented.
Section 2.06 Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of the shareholders
or any adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the board of directors may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be not
more than
-2-
<PAGE>
70 days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. A record date fixed for the
purpose of determining shareholders entitled to notice of a meeting of the
shareholders shall be fixed not less than 10 days immediately preceding such
meeting (30 days if the authorized stock is to be increased, 20 days if the
sale, lease, exchange or other disposition of all or substantially all of the
property and assets of the corporation not in the usual and regular course of
business is to be considered). If no record date is so fixed, the date on which
notice of the meeting is mailed or the date on which the resolution of the board
of directors declaring the dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of the shareholders has been made
as provided in this Section, such determination shall apply to any adjournment
thereof. Notwithstanding the foregoing provisions of this Section, the record
date for determining shareholders entitled to take action without a meeting as
provided in Section 2.13 below shall be the date specified in such Section.
Section 2.07 Shareholders' List. After fixing the record date, the officer
or agent having charge of the stock transfer books for shares of the corporation
shall make a complete record of the shareholders entitled to be given notice of
the meeting or any adjournment thereof. The list shall be arranged by voting
groups and within each voting group by class or series of shares, shall be
alphabetical within each class or series, and shall show the address of, and the
number of shares of each class and series that are held by, each shareholder.
For a period of 10 days before such meeting or two business days after notice of
the meeting is given, whichever is earlier, this record shall be kept on file at
the principal office of the corporation, whether within or outside Colorado, and
shall be subject to inspection by any shareholder or his agent or attorney for
any purpose germane to the meeting at any time during usual business hours. Such
record shall also be produced and kept open at the time and place of the meeting
and any adjournment thereof and shall be subject to the inspection of any
shareholder or his agent or attorney for any purpose germane to the meeting
during the whole time of the meeting. The original stock transfer books shall be
prima facie evidence as to who are the shareholders entitled to examine such
record or transfer books or to vote at any meeting of the shareholders.
Section 2.08 Proxies. At any meeting of the shareholders, a shareholder may
vote by proxy. Without limiting the manner in which a shareholder may appoint a
proxy to vote or otherwise act for the shareholder, the following shall
constitute valid means of such appointment: (a) a shareholder may appoint a
proxy by signing an appointment form, either personally or by the shareholder's
attorney-in-fact; or (b) a shareholder may appoint a proxy by transmitting or
authorizing the transmission of a telegram, teletype or other electronic
transmission providing a written statement of the appointment to the proxy, to a
proxy solicitor, proxy support service organization or other person duly
authorized by the proxy to receive appointments as agent for the proxy, or to
the corporation; except that the transmitted appointment shall set forth or be
transmitted with written evidence from which it can be determined that the
shareholder transmitted or authorized the transmission of the appointment. Such
appointment of a proxy shall be filed with the corporation before or at the time
of the meeting. No appointment of a proxy shall be valid after 11 months from
the date of its execution, unless otherwise provided in the appointment form.
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Section 2.09 Quorum and Voting Rights. At all meetings of shareholders, 64%
of the outstanding shares of the corporation entitled to vote on a matter,
represented in person or by proxy, shall constitute a quorum with respect to
each matter. If a quorum is present, action on a matter, other than the election
of directors, by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group opposing
the action, unless the vote of a greater proportion or number is otherwise
required by the Act, the articles of incorporation or these bylaws.
Notwithstanding the foregoing, an amendment to the articles of incorporation
that adds, changes or deletes a greater quorum or voting requirement shall meet
the same quorum requirement and be adopted by the same vote and voting groups
required to take action under the quorum and voting requirements then in effect
or proposed to be adopted, whichever is greater. In the absence of a quorum on
any matter, a majority of the shares so represented may adjourn the meeting with
respect to such matter from time to time for a period not to exceed 60 days at
any one adjournment. At any such adjourned meeting, at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the original meeting.
Section 2.10 Extraordinary Matters; Voting Rights. Notwithstanding the
provisions of Section 2.08, the following actions shall be approved by each
voting group entitled to vote separately on the subject matter by 80% of all of
the votes entitled to be cast by such voting group: (a) adopting an amendment or
amendments to the articles of incorporation which would create dissenters'
rights; (b) authorizing the sale, lease, exchange or other disposition of all or
substantially all of the property and assets of the corporation, with or without
its goodwill, not in the usual and regular course of business; (c) approving a
plan of merger, consolidation or exchange that is required to be approved by the
shareholders; (d) adopting a resolution submitted by the board of directors to
dissolve the corporation; and (e) adopting a resolution submitted by the board
of directors to revoke voluntary dissolution proceedings.
Section 2.11 Conflicting Interest Transaction; Notice Rights. A conflicting
interest transaction is any loan or other assistance by the corporation to a
director or to an entity in which a director of the corporation is a director or
officer or has a financial interest; a guaranty by the corporation of an
obligation of a director or of an obligation of an entity in which a director of
the corporation is a director or officer or has a financial interest; or a
contract or transaction between the corporation and a director or between the
corporation and an entity in which a director of the corporation is a director
or officer or has a financial interest.
No conflicting interest transaction shall be void or voidable or be
enjoined, set aside or give rise to an award of damages or other sanctions in a
proceeding by a shareholder or by or in the right of the corporation, solely
because the conflicting interest transaction involves a director of the
corporation or an entity in which a director of the corporation is a director or
officer or has a financial interest or solely because the director is present at
or participates in the meeting of the corporation's board of directors or of the
committee of the board of directors which authorizes, approves or ratifies the
conflicting interest transaction or solely because the director's vote is
counted for such purpose, if: (a) the material facts as to the director's
relationship or interest and as to the conflicting interest transaction are
disclosed or are known to the board of directors or the committee, and the board
of directors or committee in good faith
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authorizes, approves or ratifies the conflicting interest transaction by the
affirmative vote of a majority of the disinterested directors, even though the
disinterested directors are less than a quorum; or (b) the material facts as to
the director's relationship or interest and as to the conflicting interest
transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the conflicting interest transaction is specifically authorized,
approved or ratified in good faith by a vote of the shareholders; or (c) the
conflicting interest transaction is fair as to the corporation as of the time it
is authorized, approved or ratified by the board of directors, a committee
thereof or the shareholders.
A board of directors or a committee thereof shall not authorize a loan, by
the corporation to a director of the corporation or to an entity in which a
director of the corporation is a director or officer or has a financial
interest, or a guaranty, by the corporation of an obligation of a director of
the corporation or of an obligation of an entity in which a director of the
corporation is a director or officer or has a financial interest, pursuant to
(a) until at least 10 days after written notice of the proposed authorization of
the loan or guaranty has been given to the shareholders who would be entitled to
vote thereon if the issue of the loan or guaranty were submitted to a vote of
the shareholders.
Section 2.12 Voting of Shares. Subject to the provisions of Section 2.05,
each outstanding share of record, regardless of class, is entitled to one vote,
and each outstanding fractional share of record is entitled to a corresponding
fractional vote, on each matter submitted to a vote of the shareholders either
at a meeting thereof or pursuant to Section 2.13, except to the extent that the
voting rights of the shares of any class or classes are limited, increased or
denied by the articles of incorporation as permitted by the Act. In the election
of directors, each record holder of stock entitled to vote at such election
shall have the right to vote the number of shares owned by him for as many
persons as there are directors to be elected, and for whose election he has the
right to vote. Cumulative voting shall not be allowed.
Section 2.13 Voting of Shares by Certain Holders.
(a) Shares Held or Controlled by the Corporation. No shares held by another
corporation shall be voted at any meeting or counted in determining a quorum if
a majority of the shares entitled to vote for the election of directors of such
other corporation is held by this corporation.
(b) Shares Held by Another Corporation. Shares standing in the name of
another corporation may be voted by such officer, agent or proxy as the bylaws
of such corporation may prescribe or, in the absence of such provision, as the
board of directors of such corporation may determine.
(c) Shares Held by More Than One Person. Shares standing of record in the
names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, voting with respect to the shares shall have the following effects: (i)
if only one person votes, his act binds all; (ii) if two or more persons vote,
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the act of the majority so voting binds all; (iii) if two or more persons vote,
but the vote is evenly split on any particular matter, each faction may vote the
shares in question proportionally, or any person voting the shares of a
beneficiary, if any, may apply to any court of competent jurisdiction in
Colorado to appoint an additional person to act with the persons so voting the
shares, in which case the shares shall be voted as determined by a majority of
such persons; and (iv) if a tenancy is held in unequal interests, a majority or
even split for the purposes of subparagraph (iii) shall be a majority or even
split in interest. The foregoing effects of voting shall not be applicable if
the secretary of the corporation is given written notice of alternative voting
provisions and is furnished with a copy of the instrument or order wherein the
alternative voting provisions are stated.
(d) Shares Held in Trust or by a Personal Representative. Shares held by an
administrator, executor, guardian, conservator or other personal representative
may be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him without a transfer of such shares into his name.
(e) Shares Held by a Receiver. Shares standing in the name of a receiver
may be voted by such receiver and shares held by or under the control of a
receiver may be voted by such receiver without the transfer thereof into his
name if authority so to do is contained in an appropriate order of the court by
which such receiver was appointed.
(f) Pledged Shares. A shareholder whose shares are pledged shall be
entitled to vote such shares until the shares have been transferred into the
name of the pledgee, and thereafter the pledgee shall be entitled to vote the
shares so transferred.
(g) Redeemable Shares Called for Redemption. Redeemable shares that have
been called for redemption shall not be entitled to vote on any matter and shall
not be deemed outstanding shares on and after the date on which written notice
of redemption has been mailed to shareholders and a sum sufficient to redeem
such shares has been deposited with a bank, trust company or other financial
institution with irrevocable instruction and authority to pay the redemption
price to the holders of the shares upon surrender of certificates therefor.
(h) Shares Held in a Fiduciary Capacity. The corporation may vote any
shares, including its own shares, held by it in a fiduciary capacity.
Section 2.14 Action Without a Meeting. Any action required or permitted to
be taken at a meeting of the shareholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by all of the shareholders entitled to vote
with respect to the subject matter thereof. Such consent (which may be signed in
counterparts) shall have the same force and effect as a unanimous vote of the
shareholders and may be stated as such in any document. Unless the consent
specifies a different effective date, action taken without a meeting pursuant to
a consent in writing as provided herein shall be effective when all shareholders
entitled to vote on the subject matter have signed the
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consent. The record date for determining shareholders entitled to take action
without a meeting or entitled to be given notice is the date a writing upon
which the action is taken is first received by the corporation. All consents
signed pursuant to this Section 2.14 shall be either delivered to the
corporation or received by the corporation by electronically transmitted
facsimile or other form of wire or wireless communication providing the
corporation with a complete copy thereof, including a copy of the signatures for
inclusion in the minutes or for filing with the corporate records. Any
shareholder who has signed a writing describing and consenting to action taken
pursuant to this section may revoke such consent by a writing signed by the
shareholder describing the action and stating that the shareholder's prior
consent thereto is revoked, if such writing is received by the corporation
before the corporation has actually received consents signed by all
shareholders, regardless of the effective date reflected in the consents or at
any time before a specified effective date if the date specified in the consent
is subsequent to the date the signed consents are received. Unless otherwise
provided by the articles of incorporation, one or more shareholders may
participate in a meeting of the shareholders by, or the meeting may be conducted
through the use of, any means of communication equipment by which all persons
participating in the meeting can hear each other at the same time. Such
participation shall constitute presence in person at the meeting.
ARTICLE III
Board of Directors
Section 3.01 General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the board of directors, except as otherwise
provided in the Act, the articles of incorporation or these bylaws.
Section 3.02 Number, Tenure and Qualifications. The number of directors of
the corporation shall be as fixed from time to time by resolution of the board
of directors or shareholders. Except as provided in Sections 2.01 and 3.05,
directors shall be elected at each annual meeting of the shareholders. Each
director shall hold office until the next annual meeting of the shareholders and
thereafter until his successor shall have been elected and qualified, or until
his earlier death, resignation or removal. Directors must be natural persons at
least 18 years old but need not be residents of Colorado or shareholders of the
corporation.
Section 3.03 Resignation. Any director may resign at any time by giving
written notice to the corporation. A director's resignation is effective when it
is received by the corporation unless the notice specifies a later effective
date, and the acceptance of such resignation shall not be necessary to make it
effective.
Section 3.04 Removal. At a meeting called expressly for that purpose, the
entire board of directors or any lesser number may be removed, with or without
cause, only if the number of votes cast in favor of removal exceeds the number
of votes cast against removal by those shares then entitled to vote at an
election of directors; except that if the holders of shares of
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any class of stock are entitled to elect one or more directors by the provisions
of the articles of incorporation, the provisions of this Section 3.04 shall
apply, with respect to the removal of a director or directors so elected by such
class, to the vote of the holders of the outstanding shares of that class and
not to the vote of the outstanding shares as a whole. Any reduction in the
authorized number of directors shall not have the effect of shortening the term
of any incumbent director unless such director is also removed from office in
accordance with this Section 3.04.
Section 3.05 Vacancies. Unless otherwise required in the articles of
incorporation, any vacancy occurring in the board of directors, including
vacancies due to an increase in the number of directors, may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum, or by the affirmative vote of two directors if there are only two
directors remaining, or by a sole remaining director, or by the shareholders if
there are no directors remaining. The term of a director elected by the
directors in office to fill a vacancy expires at the next annual shareholders'
meeting at which directors are elected. The term of a director elected by the
shareholders to fill a vacancy shall be the unexpired term of his or her
predecessor in office; except that, if the director's predecessor had been
elected by the directors in office to fill a vacancy, the term of a director
elected by the shareholders shall be the unexpired term of the last predecessor
elected by the shareholders. If the vacant office was held by a director elected
by a voting group of shareholders: (a) if one or more of the remaining directors
were elected by the same voting group, only such directors are entitled to vote
to fill the vacancy if it is filled by directors, and they may do so by the
affirmative vote of a majority of such directors remaining in office; and (b)
only the holders of shares of that voting group are entitled to vote to fill the
vacancy if it is filled by the shareholders.
Section 3.06 Regular Meetings. A regular meeting of the board of directors
shall be held immediately after and at the same place as the annual meeting of
the shareholders, or as soon thereafter as conveniently may be possible, at the
time and place, either within or outside Colorado, determined by the board, for
the purpose of electing officers and for the transaction of such other business
as may come before the meeting. Failure to hold such meeting, however, shall not
invalidate any action taken by any officer then or thereafter in office. The
board of directors may provide, by resolution, the time and place, either within
or outside Colorado, for the holding of additional regular meetings without
other notice than such resolution.
Section 3.07 Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chief executive officer or any two
directors. The person or persons authorized to call special meetings of the
board of directors may fix any convenient place, either within or outside
Colorado, as the place for holding any special meeting of the board called by
them.
Section 3.08 Meetings by Telephone. Unless otherwise provided by the
articles of incorporation, one or more members of the board of directors may
participate in a meeting of the board by, or the meeting may be conducted
through the use of, any communications equipment by which all persons
participating in the meeting can hear each other at the same time. Such
participation shall constitute presence in person at the meeting.
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Section 3.09 Notice of Meetings; Waiver of Notice.
(a) Notice of each meeting of the board of directors (except those regular
meetings for which notice is not required) stating the place, day and hour of
the meeting shall be given to each director at least five (5) days prior thereto
by the mailing of written notice by first class mail, or at least (3) days prior
thereto by personal delivery (including delivery by courier) of written notice
or by telephone, telegram, facsimile or other similar form of communication,
except that in the case of a meeting to be held pursuant to Section 3.07 notice
may be given by personal delivery or by facsimile, telegram or telephone
twenty-four (24) hours prior thereto. The method of notice need not be the same
to each director. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, with postage thereon prepaid, addressed to
the director at his business or residence address. If sent by telegram,
facsimile or similar form of communication, such notice shall be deemed to be
given when sent by such method to the director during normal business hours at
the location of the recipient at the last address or facsimile number of the
director furnished by him to the Corporation for such purpose. If communicated
by telephone, such notice shall be deemed to be given when communicated directly
to the director or to the person designated by the director as a person
authorized to receive such notice. Neither the business to be transacted at nor
the purpose of any meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
(b) Whenever notice is required to be given pursuant to Section 3.08(a), a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
Section 3.10 Presumption of Assent. A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
the director: (a) objects at the beginning of the meeting, or promptly upon his
or her arrival, to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to any action taken at the meeting;
(b) contemporaneously requests that his dissent or abstention as to any specific
action taken be entered in the minutes of such meeting; or (c) causes written
notice of his dissent or abstention as to any specific action to be received by
the presiding officer of such meeting before its adjournment or by the
corporation immediately after adjournment of such meeting. The right of dissent
or abstention as to a specific action taken at a meeting of the board is not
available to a director who votes in favor of such action.
Section 3.11 Quorum and Voting Rights. Except as otherwise may be required
by law, the articles of incorporation or these bylaws, a majority of the number
of directors fixed in accordance with these bylaws, present in person, shall
constitute a quorum for the transaction of business at any meeting of the board
of directors, and the vote of a majority of the directors present at a meeting
at which a quorum is present shall be the act of the board of directors . If
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less than such majority is present at a meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice other
than an announcement at the meeting, until a quorum shall be present. No
director may vote or act by proxy or power of attorney at any meeting of
directors.
Section 3.12 Action Without a Meeting. Any action required or permitted to
be taken at a meeting of the directors may be taken without a meeting and
without prior notice if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors. Such consent (which may be signed in
counterparts) shall have the same force and effect as a unanimous vote of the
directors and may be stated as such in any document. Unless the consent
specifies a different effective date, action taken without a meeting pursuant to
a consent in writing as provided herein is effective when all directors have
signed the consent; however, the consent shall not be effective if, before all
of the directors have signed the consent, any director has revoked his or her
consent by a writing signed by the director and received by the secretary or any
other person authorized by the bylaws or the board of directors to receive such
a revocation. All consents signed pursuant to this Section 3.13 shall be
delivered to the secretary of the corporation for inclusion in the minutes or
for filing with the corporate records.
Section 3.13 Executive and Other Committees. The board of directors, by
resolution adopted by a majority of the directors in office when the action is
taken, may designate from among its members an executive committee and one or
more other committees, each of which, to the extent provided in the resolution
establishing such committee, shall have and may exercise all of the authority of
the board of directors in the management of the business and affairs of the
corporation, except that no such committee shall have the power or authority to
(a) authorize distributions, (b) approve or propose to the shareholders actions
or proposals required by law to be approved by the shareholders, (c) fill
vacancies on the board of directors or any committee thereof, including any
committee authorized by this Section 3.14, (d) adopt, amend or repeal the
bylaws, (e) approve a plan of merger not requiring shareholder approval, (f)
amend articles of incorporation to the extent permitted by law to be amended by
the full board of directors, (g) authorize or approve reacquisition of shares of
the corporation, except according to a formula or method prescribed by the board
of directors, or (h) authorize or approve the issuance or sale of shares, or any
contract for the sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares; except that
the board of directors may authorize a committee or an officer to do so within
limits specifically prescribed by the board of directors. The delegation of
authority to any committee shall not operate to relieve the board of directors
or any member of the board from any responsibility imposed by law. Subject to
the foregoing, the board of directors may provide such powers, limitations and
procedures for such committees as the board deems advisable; except that each
committee shall be governed by the procedures set forth in Sections 3.06 (except
as they relate to an annual meeting) and 3.07 through 3.13 as if the committee
were the board of directors. Each committee shall keep regular minutes of its
meetings, which shall be reported to the board of directors when required and
submitted to the corporation for inclusion in the corporate records.
Section 3.14 Compensation. By resolution of the board of directors,
notwithstanding the provisions of Section 2.11, a director may be paid his
expenses, if any, of
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attendance at each meeting of the board of directors and each meeting of any
committee of the board of which he is a member and may be paid a fixed sum for
attendance at each such meeting or a stated salary, or both a fixed sum and a
stated salary. Subject to Section 2.11, no such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefore.
ARTICLE IV
Officers
Section 4.01 Number and Qualifications. The officers of the corporation
shall consist of a chairman of the board, a chief executive officer, a
president, a secretary, an assistant secretary, and such other officers,
including a treasurer and one or more vice-presidents, as may from time to time
be elected by the board. In addition, the board of directors or the chief
executive officer may elect or appoint such assistant and other subordinate
officers, including assistant vice-presidents, assistant treasurers and
assistant secretaries, as it or he shall deem necessary or appropriate. Any
number of offices may be held by the same person. An officer shall be a natural
person who is at least 18 years old.
Section 4.02 Election and Term of Office. Except as provided in Sections
4.01 and 4.06, the officers of the corporation shall be elected by the board of
directors annually at the first meeting of the board held after each annual
meeting of the shareholders as provided in Section 3.06. If the election of
officers shall not be held as provided herein, such election shall be held as
soon thereafter as conveniently may be possible. Each officer shall hold office
until his successor shall have been duly elected and shall have qualified, or
until the expiration of his term in office if elected or appointed for a
specified period of time, or until his earlier death, resignation or removal.
Section 4.03 Compensation. Officers shall receive such compensation for
their services as may be authorized or ratified by the board of directors and no
officer shall be prevented from receiving compensation by reason of the fact
that he is also a director of the corporation. Election or appointment as an
officer shall not of itself create a contract or other right to compensation for
services performed as such officer.
Section 4.04 Resignation. Any officer may resign at any time, subject to
any rights or obligations under any existing contracts between the officer and
the corporation, by giving written notice of resignation to the corporation. An
officer's resignation shall take effect at the time stated therein, and unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective. An officer's resignation does not affect the
corporation's contract rights, if any, with the officer.
Section 4.05 Removal. Any officer may be removed with or without cause at
any time by the board of directors, or, in the case of assistant and other
subordinate officers, by the board of directors or the chief executive officer
(whether or not such officer was appointed by the
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chief executive officer) whenever in its or his judgment, as the case may be,
the best interests of the corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. The election or appointment of an officer shall not in itself create
contract rights.
Section 4.06 Vacancies. A vacancy in any office, however occurring, may be
filled by the board of directors, or, if such office may be filled by the chief
executive officer as provided in Section 4.01, by the chief executive officer,
for the unexpired portion of the term.
Section 4.07 Authority and Duties. The officers of the corporation shall
have the authority and shall exercise the powers and perform the duties
specified below and as may be additionally specified by the chief executive
officer, the board of directors or these bylaws (and, in all cases where the
duties of any officer are not prescribed by the bylaws or by the board of
directors, such officer shall follow the orders and instructions of the chief
executive officer), except that in any event each officer shall exercise such
powers and perform such duties as may be required by law:
(a) Chairman of the Board. The chairman of the board shall preside at
all meetings of the stockholders and directors of the corporation and shall
have and may exercise all such powers and perform such other duties as may
be assigned to him from time to time by the board of directors.
(b) Chief Executive Officer. The chief executive officer shall,
subject to the direction and supervision of the board of directors, (i)
have general and active control of the corporation's affairs and business
and general supervision of its officers, agents and employees; (ii) in the
absence of the chairman of the board, preside at all meetings of the
shareholders and the board of directors; (iii) see that all orders and
resolutions of the board of directors are carried into effect; and (iv)
perform all other duties incident to the office of chief executive officer
and as from time to time may be assigned to him by the board of directors.
(c) President. The president, if not the chief executive officer,
shall assist and shall perform such duties as may be assigned to him by the
chief executive officer or by the board of directors. The president shall,
at the request of the chief executive officer, perform the duties of the
chief executive officer and when so acting shall have all the powers of and
be subject to all the restrictions upon the chief executive officer.
(d) Vice President. The vice-president, if any (or if there is more
than one then each vice-president), shall assist the chief executive
officer or shall assist the president at the direction of the chief
executive officer, and shall perform such duties as may be assigned to him
by the chief executive officer, the president, or by the board of
directors. Assistant vice-presidents, if any, shall have the powers and
perform the duties as may be assigned to them by the chief executive
officer, the president, or the board of directors.
(e) Secretary. The secretary shall: (i) prepare and maintain the
minutes of the proceedings of the shareholders, the board of directors and
any committees of the board;
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(ii) see that all notices are duly given in accordance with the provisions
of these bylaws or as required by law; (iii) be custodian of the corporate
records and of the seal of the corporation; (iv) keep at the corporation's
registered office or principal place of business within or outside Colorado
a record containing the names and addresses of all shareholders and the
number and class of shares held by each, unless such a record shall be kept
at the office of the corporation's transfer agent or registrar; (v) have
general charge of the stock books of the corporation, unless the
corporation has a transfer agent; (vi) authenticate records of the
corporation; and (vii) in general, perform all duties incident to the
office of secretary and such other duties as from time to time may be
assigned to him by the chief executive officer or by the board of
directors. Assistant secretaries, if any, shall have the same duties and
powers, subject to supervision by the secretary.
(f) Treasurer. The treasurer, if any, shall: (i) be the principal
financial officer of the corporation and have the care and custody of all
its funds, securities, evidences of indebtedness and other personal
property and deposit the same in accordance with the instructions of the
board of directors; (ii) receive and give receipts and acquittances for
moneys paid in on account of the corporation, and pay out of the funds on
hand all bills, payrolls and other just debts of the corporation of
whatever nature upon maturity; (iii) unless there is a controller, be the
principal accounting officer of the corporation and as such prescribe and
maintain the methods and systems of accounting to be followed, keep
complete books and records of account, prepare and file all local, state
and federal tax returns, prescribe and maintain an adequate system of
internal audit and prepare and furnish to the chief executive officer and
the board of directors statements of account showing the financial position
of the corporation and the results of its operations; (iv) upon request of
the board, make such reports to it as may be required at any time; and (v)
perform all other duties incident to the office of treasurer and such other
duties as from time to time may be assigned to him by the board of
directors or the chief executive officer. Assistant treasurers, if any,
shall have the same powers and duties, subject to the supervision by the
treasurer.
Section 4.08 Surety Bonds. The board of directors may require any officer
or agent of the corporation to execute to the corporation a bond in such sums
and with such sureties as shall be satisfactory to the board, conditioned upon
the faithful performance of his duties and for the restoration to the
corporation of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
ARTICLE V
Stock
Section 5.01 Issuance of Shares. The issuance or sale by the corporation of
any shares of its authorized capital stock of any class shall be made only upon
authorization by the board of directors, except as otherwise may be provided by
law. No shares shall be issued until full consideration has been received
therefor. Every issuance of shares shall be recorded on the books maintained for
such purpose by or on behalf of the corporation.
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Section 5.02 Stock Certificates; Uncertificated Shares. The shares of stock
of the corporation shall be represented by certificates, except that the board
of directors may authorize the issuance of any class or series of stock of the
corporation without certificates as provided by law. If shares are represented
by certificates, such certificates shall be signed either manually or in
facsimile in the name of the corporation by one or more officers designated in
the bylaws or by the board of directors and sealed with the seal of the
corporation or with a facsimile thereof. If the issuing corporation is
authorized to issue different classes of shares or different series within a
class, the share certificate shall contain a summary, on the front or the back,
of the designations, preferences, limitations and relative rights applicable to
each class, the variations in preferences, limitations and rights determined for
each series, and the authority of the board of directors to determine variations
for future classes or series. Alternatively, each certificate may state
conspicuously on its front or back that the corporation will furnish to the
shareholder this information on request in writing and without charge. If the
person who signed, either manually or in facsimile, a share certificate no
longer holds office when the certificate is issued, the certificate is
nevertheless valid. Certificates of stock shall be in such form consistent with
law as shall be prescribed by the board of directors.
Section 5.03 Consideration for Shares. Shares shall be issued for such
consideration expressed in dollars as shall be fixed from time to time by the
board of directors. Such consideration shall consist of any tangible or
intangible property or benefit to the corporation, including cash, promissory
notes, services performed and other securities of the corporation; however, the
promissory note of a subscriber or an affiliate of the subscriber for shares
shall not constitute consideration for the shares unless the note is negotiable
and is secured by collateral, other than the shares, having a fair market value
at least equal to the principal amount of the note. For the purposes of this
Section, "promissory note" means a negotiable instrument on which there is an
obligation to pay independent of collateral and does not include a nonrecourse
note.
Section 5.04 Lost Certificates. In case of the alleged loss, destruction or
mutilation of a certificate of stock, the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions in
conformity with law as it may prescribe. The board of directors may in its
discretion require a bond in such form and amount and with such surety as it may
determine before issuing a new certificate.
Section 5.05 Transfer of Shares. Upon presentation and surrender to the
corporation or to the corporation's transfer agent of a certificate of stock
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, payment of all transfer taxes, if any, and the
satisfaction of any other requirements of law, including inquiry into and
discharge of any adverse claims of which the corporation has notice, the
corporation or the transfer agent shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transfer on the
books maintained for such purpose by or on behalf of the corporation. No
transfer of shares shall be effective until it has been entered on such books.
The corporation or the corporation's transfer agent may require a signature
guaranty or other
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reasonable evidence that any signature is genuine and effective before making
any transfer. Transfers of uncertificated shares shall be made in accordance
with applicable provisions of law.
Section 5.06 Holders of Record. The corporation shall be entitled to treat
the holder of record of any share of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person whether or not it shall
have express or other notice thereof, except as may be required by the laws of
Colorado.
Section 5.07 Shares Held for Account of Another. The board of directors, in
the manner provided by the Act, may adopt a procedure whereby a shareholder of
the corporation may certify in writing to the corporation that all or a portion
of the shares registered in the name of such shareholder are held for the
account of a specified person or persons. Upon receipt by the corporation of a
certification complying with such procedure, the persons specified in the
certification shall be deemed, for the purpose or purposes set forth therein, to
be the holders of record of the number of shares specified in place of the
shareholder making the certification.
Section 5.08 Transfer Agents, Registrars and Paying Agents. The board of
directors may at its discretion appoint one or more transfer agents, registrars
or agents for making payment upon any class of stock, bond, debenture or other
security of the corporation. Such agents and registrars may be located either
within or outside Colorado. They shall have such rights and duties and shall be
entitled to such compensation as may be agreed.
ARTICLE VI
Indemnification
Section 6.01 Definitions. For purposes of this Article, the following terms
shall have the meanings set forth below:
(a) "Corporation" includes any domestic or foreign entity that is a
predecessor of the Corporation by reason of a merger or other transaction
in which the predecessor's existence ceased upon consummation of the
transaction.
(b) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation, is
or was serving at the Corporation's request as a director, officer,
partner, trustee, employee, fiduciary or agent of another domestic or
foreign corporation or other person or of an employee benefit plan. A
director is considered to be serving an employee benefit plan at the
Corporation's request if his or her duties to the Corporation also impose
duties on, or otherwise involve services by, the director to the plan or to
participants in or beneficiaries of the plan. "Director" includes, unless
the context requires otherwise, the estate or personal representative of a
director.
(c) "Expenses" includes counsel fees.
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(d) "Liability" means the obligation incurred with respect to a
proceeding to pay a judgment, settlement, penalty, fine, including an
excise tax assessed with respect to an employee benefit plan, or reasonable
Expenses.
(e) "Official Capacity" means, when used with respect to a Director,
the office of Director in the Corporation and, when used with respect to a
person other than a Director as contemplated in section 7-109-107 of the
Act (an officer, employee, fiduciary and agent), the office in the
Corporation held by the officer or the employment, fiduciary or agency
relationship undertaken by the employee, fiduciary or agent on behalf of
the Corporation. "Official Capacity" does not include service for any other
domestic or foreign corporation or other person or employee benefit plan.
(f) "Party" includes a person who was, is or is threatened to be made
a named defendant or respondent in a proceeding.
(g) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal.
Section 6.02 Right to Indemnification. Subject to Section 6.04, the
Corporation shall indemnify any person made a Party because the person is or was
a Director to a Proceeding against Liability incurred in, relating to, or as a
result of, the Proceeding to the fullest extent permitted by law, including
without limitation in circumstances in which, in the absence of this Section
6.02, indemnification would be discretionary under the Act if: (a) the person
conducted himself or herself in good faith; (b) the person reasonably believed:
(I) in the case of conduct in an Official Capacity with the Corporation, that
his or her conduct was in the Corporation's best interests; and (II) in all
other cases, that his or her conduct was at least not opposed to the
Corporation's best interests; and (c) in the case of any criminal Proceeding,
the person had no reasonable cause to believe his or her conduct was unlawful. A
Director's conduct with respect to an employee benefit plan for a purpose the
Director reasonably believed to be in the interests of the participants in or
beneficiaries of the plan is conduct that satisfies the requirement of (b)(II)
above. A Director's conduct with respect to an employee benefit plan for a
purpose that the Director did not reasonably believe to be in the interests of
the participants in or beneficiaries of the plan shall be deemed not to satisfy
the requirements of (a) above. The termination of a Proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the Director did not meet the
standard of conduct described in this section. However, the Corporation may not
indemnify a Director under this section: (a) in connection with a Proceeding by
or in the right of the Corporation in which the Director was adjudged liable to
the Corporation; or (b) in connection with any other Proceeding charging that
the Director derived an improper personal benefit, whether or not involving
action in an Official Capacity, in which Proceeding the Director was adjudged
liable on the basis that he or she derived an improper personal benefit.
Indemnification permitted under this section in connection with a Proceeding by
or in the right of the Corporation is limited to reasonable Expenses incurred in
connection with the Proceeding.
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In addition to the foregoing, the Corporation shall indemnify a person who
was wholly successful, on the merits or otherwise, in the defense of any
Proceeding to which the person was a Party because the person is or was a
Director, against reasonable Expenses incurred by him or her in connection with
the Proceeding.
Section 6.03 Advancement of Expenses. The Corporation may pay for or
reimburse the reasonable Expenses incurred by a Director who is a Party to a
Proceeding in advance of final disposition of the Proceeding if: (a) the
Director furnishes to the Corporation a written affirmation of the Director's
good faith belief that he or she has met the standard of conduct described in
section 6.02; (b) the Director furnishes to the Corporation a written
undertaking, executed personally or on the Director's behalf, to repay the
advance if it is ultimately determined that he or she did not meet the standard
of conduct; and (c) a determination is made that the facts then known to those
making the determination would not preclude indemnification under this article.
The undertaking required by (b) of this section shall be an unlimited general
obligation of the Director but need not be secured and may be accepted without
reference to financial ability to make repayment.
Section 6.04 Burden of Proof. The Corporation may not indemnify a Director
under Section 6.02 unless authorized in the specific case after a determination
has been made that indemnification of the Director is permissible in the
circumstances because the Director has met the standard of conduct set forth in
Section 6.02. The Corporation shall not advance Expenses to a Director under
Section 6.03 unless authorized in the specific case after the written
affirmation and undertaking are received and the determination required by
Section 6.03 has been made. The determinations required by this section shall be
made: (a) by the board of directors by a majority vote of those present at a
meeting at which a quorum is present, and only those Directors not parties to
the Proceeding shall be counted in satisfying the quorum; or (b) if a quorum
cannot be obtained, by a majority vote of a committee of the board of directors
designated by the board of directors, which committee shall consist of two or
more Directors not parties to the Proceeding; except that Directors who are
parties to the Proceeding may participate in the designation of Directors for
the committee. If a quorum cannot be obtained as contemplated in (a) above, and
a committee cannot be established under (b) above, or, even if a quorum is
obtained or a committee is designated, if a majority of the Directors
constituting such quorum or such committee so directs, the determination
required to be made by this section shall be made: by independent legal counsel
selected by a vote of the board of directors or the committee or, if a quorum of
the full board cannot be obtained and a committee cannot be established, by
independent legal counsel selected by a majority vote of the full board of
directors; or by the shareholders. Authorization or indemnification and advance
of Expenses shall be made in the same manner as the determination that
indemnification or advance of Expenses is permissible; except that, if the
determination that indemnification or advance of Expenses is permissible is made
by independent legal counsel, authorization of indemnification and advance of
Expenses shall be made by the body that selected such counsel.
Section 6.05 Notification and Defense of Claim. Promptly after receipt by a
Party of notice of the commencement of any Proceeding, the Party shall, if a
claim in respect thereof is to be made against the Corporation under this
Article, notify the Corporation in writing of the
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commencement thereof; provided, however, that delay in so notifying the
Corporation shall not constitute a waiver or release by the Party of any rights
under this Article. With respect to any such Proceeding: (a) the Corporation
shall be entitled to participate therein at its own expense; (b) any counsel
representing the Party to be indemnified in connection with the defense or
settlement thereof shall be counsel mutually agreeable to the Party and to the
Corporation; and (c) the Corporation shall have the right, at its option, to
assume and control the defense or settlement thereof, with counsel satisfactory
to the Party. If the Corporation assumes the defense of the Proceeding, the
Party shall have the right to employ its own counsel, but the fees and Expenses
of such counsel incurred after notice from the Corporation of its assumption of
the defense of such Proceeding shall be at the expense of the Party unless (i)
the employment of such counsel has been specifically authorized by the
Corporation, (ii) the Party shall have reasonably concluded that there may be a
conflict of interest between the Corporation and the Party in the conduct of the
defense of such Proceeding, or (iii) the Corporation shall not in fact have
employed counsel to assume the defense of such Proceeding. Notwithstanding the
foregoing, if an insurance carrier has supplied directors' and officers'
liability insurance covering a Proceeding and is entitled to retain counsel for
the defense of such Proceeding, then the insurance carrier shall retain counsel
to conduct the defense of such Proceeding unless the Party and the Corporation
concur in writing that the insurance carrier's doing so is undesirable. The
Corporation shall not be liable under this Article for any amounts paid in
settlement of any Proceeding effected without its written consent. The
Corporation shall not settle any Proceeding in any manner that would impose any
penalty or limitation on a Party without the Party's written consent. Consent to
a proposed settlement of any Proceeding shall not be unreasonably withheld by
either the Corporation or the Party.
Section 6.06 Notice to Shareholders of Indemnification of Director. If the
Corporation indemnifies or advances Expenses to a Director under this Article in
connection with a Proceeding by or in the right of the Corporation, the
Corporation shall give written notice of the indemnification or advance to the
shareholders with or before the notice of the next shareholders' meeting. If the
next shareholder action is taken without a meeting at the instigation of the
board of directors, such notice shall be given to the shareholders at or before
the time the first shareholder signs a writing consenting to such action.
Section 6.07 Enforcement. The right to indemnification and advancement of
Expenses granted by this Article shall be enforceable in any court of competent
jurisdiction if the Corporation denies the claim, in whole or in part, or if no
disposition of such claim is made within 90 days after the written request for
indemnification or advancement of Expenses is received. If successful in whole
or in part in such suit, the Party's Expenses incurred in bringing and
prosecuting such claim shall also be paid by the Corporation. Whether or not the
Party has met any applicable standard of conduct, been adjudged liable to the
Corporation or derived improper personal benefit, the court in such suit may
order indemnification or the advancement of Expenses as the court deems proper
(subject to any express limitation of the Act). Further, the Corporation shall
indemnify a Party from and against any and all Expenses and, if requested by the
Party, shall (within 10 business days of such request) advance such Expenses to
the Party which are incurred by the Party in connection with any claim asserted
against or suit brought by the Party for recovery under any directors' and
officers' liability insurance policies maintained by
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the Corporation, regardless of whether the Party is unsuccessful in whole or in
part in such claim or suit.
Section 6.08 Proceedings by a Party. The Corporation shall indemnify,
advance or reimburse Expenses incurred by a Director in connection with an
appearance as a witness in a Proceeding at a time when he or she has not been
made a named defendant or respondent in the Proceeding.
Section 6.09 Subrogation. In the event of any payment under this Article,
the Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the indemnified Party, who shall execute all papers and do
everything that may be necessary to assure such rights of subrogation to the
Corporation.
Section 6.10 Other Payments. The Corporation shall not be liable under this
Article to make any payment in connection with any Proceeding against or
involving a Party to the extent the Party has otherwise actually received
payment (under any insurance policy, agreement or otherwise) of the amounts
otherwise indemnifiable hereunder. A Party shall repay to the Corporation the
amount of any payment the Corporation makes to the Party under this Article in
connection with any Proceeding against or involving the Party, to the extent the
Party has otherwise actually received payment (under any insurance policy,
agreement or otherwise) of such amount.
Section 6.11 Insurance. The Corporation may purchase and maintain insurance
on behalf of a person who is or was a Director, officer, employee, fiduciary or
agent of the Corporation, or who, while a Director, officer, employee, fiduciary
or agent of the Corporation, is or was serving at the request of the Corporation
as a Director, officer, partner, trustee, employee, fiduciary or agent of
another domestic or foreign corporation or other person or of an employee
benefit plan, against liability asserted against or incurred by the person in
that capacity or arising from his or her status as a Director, officer,
employee, fiduciary or agent, whether or not the Corporation would have power to
indemnify the person against the same liability under Section 6.02 or 6.12. Any
such insurance may be procured from any insurance company designated by the
board of directors, whether such insurance company is formed under the laws of
Colorado or any other jurisdiction of the United States or elsewhere, including
any insurance company in which the Corporation has an equity or any other
interest through stock ownership or otherwise.
Section 6.12 Indemnification of Officers, Employees, Fiduciaries and
Agents. An officer is entitled to mandatory indemnification and to apply for
court-ordered indemnification under the Act, in each case to the same extent as
a Director. The Corporation shall indemnify and advance expenses to an officer,
employee, fiduciary or agent of the Corporation to the same extent as to a
Director. In addition, the Corporation may also indemnify and advance expenses
to an officer, employee, fiduciary or agent who is not a Director to a greater
extent than provided to a Director, if not inconsistent with public policy, and
if provided for by general or specific action of its board of directors or
shareholders, or contract.
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Section 6.13 Other Rights and Remedies. The rights to indemnification and
advancement of Expenses provided in this Article shall be in addition to any
other rights to which a Party may have or hereafter acquire under any law,
provision of the articles of incorporation, any other or further provision of
these bylaws, vote of the shareholders or Directors, agreement or otherwise. The
Corporation shall have the right, but shall not be obligated, to indemnify or
advance Expenses to any agent of the Corporation not otherwise covered by this
Article in accordance with and to the fullest extent permitted by the Act.
Section 6.14 Applicability; Effect. The rights to indemnification and
advancement of Expenses provided in this Article shall be applicable to acts or
omissions that occurred prior to the adoption of this Article, shall continue as
to any Party during the period such Party serves in any one or more of the
capacities covered by this Article, shall continue thereafter so long as the
Party may be subject to any possible Proceeding by reason of the fact that he
served in any one or more of the capacities covered by this Article, and shall
inure to the benefit of the estate and personal representatives of each such
person. Any repeal or modification of this Article or of any section or
provision hereof shall not affect any rights or obligations then existing. All
rights to indemnification under this Article shall be deemed to be provided by a
contract between the Corporation and each Party covered hereby.
Section 6.15 Severability. If any provision of this Article shall be held
to be invalid, illegal or unenforceable for any reason whatsoever (a) the
validity, legality and enforceability of the remaining provisions of this
Article (including without limitation, all portions of any sections of this
Article containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (b) to the fullest extent
possible, the provisions of this Article (including, without limitation, all
portions of any section of this Article containing any such provision held to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent of this
Article that each Party covered hereby is entitled to the fullest protection
permitted by law.
ARTICLE VII
Miscellaneous
Section 7.01 Voting of Securities by the Corporation. Unless otherwise
provided by resolution of the board of directors, on behalf of the corporation
the chairman of the board, or the chief executive officer, or the president, or
any vice-president shall attend in person or by substitute appointed by him, or
shall execute written instruments appointing a proxy or proxies to represent the
corporation at, all meetings of the shareholders of any other corporation,
association or other entity in which the corporation holds any stock or other
securities, and may execute written waivers of notice with respect to any such
meetings. At all such meetings and otherwise, the chairman of the board, the
chief executive officer, the president or any vice-president, in person or by
substitute or proxy as aforesaid, may vote the stock or other securities so held
by the corporation and may execute written consents and any other instruments
with respect to such
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stock or securities and may exercise any and all rights and powers incident to
the ownership of said stock or securities, subject, however, to the
instructions, if any, of the board of directors.
Section 7.02 Seal. The corporate seal of the corporation shall be in such
form as adopted by the board of directors, and any officer of the corporation
may, when and as required, affix or impress the seal, or a facsimile thereof, to
or on any instrument or document of the corporation.
Section 7.03 Fiscal Year. The fiscal year of the corporation shall be as
established by the board of directors.
Section 7.04 Amendments. The directors may amend or repeal these bylaws
unless the articles of incorporation reserve such power exclusively to the
shareholders in whole or in part or the shareholders, in amending or repealing a
particular bylaw provision, provide expressly that the directors may not amend
or repeal such bylaw. The shareholders may amend or repeal the bylaws even
though the bylaws may also be amended or repealed by the directors.
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THE RECOVERY NETWORK, INC.
a Colorado corporation
and
American Stock Transfer & Trust Company
Warrant Agent
and
Whale Securities Co., L.P.
Underwriter
WARRANT AGREEMENT
<PAGE>
Table of Contents
Section Page
1 Appointment of Warrant Agent ................... 1
2 Form of Warrant ............................... 2
3 Countersignature and Registration .............. 3
4 Transfers and Exchanges ........................ 3
5 Exercise of Warrants; Payment of Warrant
Solicitation Fee ............................ 4
6 Payment of Taxes ............................... 8
7 Mutilated or Missing Warrants .................. 9
8 Reservation of Common Stock .................... 9
9 Warrant Price; Adjustments ..................... 11
10 Fractional Interest ............................ 18
11 Notices to Warrantholders ...................... 18
12 Disposition of Proceeds on Exercise of
Warrants ....................................... 20
13 Redemption of Warrants ......................... 21
14 Merger or Consolidation or Change of Name
of Warrant Agent ............................... 21
15 Duties of Warrant Agent ........................ 22
16 Change of Warrant Agent ........................ 26
17 Identity of Transfer Agent ..................... 27
18 Notices ........................................ 27
19 Supplements and Amendments ..................... 29
20 New York Contract .............................. 29
21 Benefits of this Agreement ..................... 30
22 Successors ..................................... 30
Exhibit A - Form of Warrant ....................
<PAGE>
WARRANT AGENT AGREEMENT dated as of ____________, 1997, by and
among The Recovery Network, Inc., a Colorado corporation (the "Company"), Whale
Securities Co., L.P. (the "Underwriter") and American Stock Transfer & Trust
Company, as warrant agent (hereinafter called the "Warrant Agent").
WHEREAS, the Company proposes to issue and sell to the public
up to 1,840,000 shares of the common stock of the Company, par value $.01 per
share (hereinafter, together with the stock of any other class to which such
shares may hereafter have been changed, called "Common Stock"), and up to
1,840,000 Common Stock Purchase Warrants (the "Warrants");
WHEREAS, each Warrant will entitle the holder to pur-
chase one share of Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer, exchange and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in accordance
with the instructions hereinafter set forth in this Agreement, and the Warrant
Agent hereby accepts such appointment.
<PAGE>
Section 2. Form of Warrant. The text of the Warrants and of
the form of election to purchase Common Stock to be printed on the reverse
thereof shall be substantially as set forth in Exhibit A attached hereto. Each
Warrant shall entitle the registered holder thereof to purchase one share of
Common Stock at a purchase price of Five Dollars Fifty Cents ($5.50), at any
time from ___________, 1998 (or such earlier date as to which the Underwriter
consents) until 5:00 p.m. Eastern time, on __________, 2002 (the "Warrant
Exercise Period"). The warrant price and the number of shares of Common Stock
issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall be
executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chief Executive Officer, President or Vice President of
the Company, attested to by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant
Agent either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration dates of the Warrants
fall on a Saturday or Sunday, or on a legal holiday on which the New York Stock
Exchange is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on
the next succeeding business day.
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Section 3. Countersignature and Registration. The Warrant
Agent shall maintain books for the transfer and registration of the Warrants.
Upon the initial issuance of the Warrants, the Warrant Agent shall issue and
register the Warrants in the names of the respective holders thereof. The
Warrants shall be countersigned manually or by facsimile by the Warrant Agent
(or by any successor to the Warrant Agent then acting as warrant agent under
this Agreement) and shall not be valid for any purpose unless so countersigned.
Warrants may, however, be so countersigned by the Warrant Agent (or by its
successor as Warrant Agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall
transfer, from time to time, any outstanding Warrants upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender thereof for
transfer properly endorsed or accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant shall be issued to the
transferee and the surrendered Warrant shall be cancelled by the Warrant Agent.
Warrants so cancelled shall be delivered by the Warrant Agent to the Company
from time to time upon request. Warrants may be exchanged at the option of the
holder thereof, when sur-
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<PAGE>
rendered at the office of the Warrant Agent, for another Warrant, or other
Warrants of different denominations of like tenor and representing in the
aggregate the right to purchase a like number of shares of Common Stock.
Section 5. Exercise of Warrants; Payment of Warrant
Solicitation Fee.
(a) Subject to the provisions of this
Agreement, each registered holder of Warrants shall have the right, which may be
exercised commencing at the opening of business on the first day of the Warrant
Exercise Period, to purchase from the Company (and the Company shall issue and
sell to such registered holder of Warrants) the number of fully paid and
non-assessable shares of Common Stock specified in such Warrants upon surrender
of such Warrants to the Company at the office of the Warrant Agent, with the
form of election to purchase on the reverse thereof duly filled in and signed,
and upon payment to the Company of the warrant price, determined in accordance
with the provisions of Sections 9 and 10 of this Agreement, for the number of
shares of Common Stock in respect of which such Warrants are then exercised.
Payment of such warrant price shall be made in cash or by certified check or
bank draft to the order of the Company. Subject to Section 6, upon such
surrender of Warrants and payment of the warrant price, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the registered holder of
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such Warrants and in such name or names as such registered holder may designate,
a certificate or certificates for the number of full shares of Common Stock so
purchased upon the exercise of such Warrants. Such certificate or certificates
shall be deemed to have been issued, and any person so designated to be named
therein shall be deemed to have become a holder of record of such shares of
Common Stock, as of the date of the surrender of such Warrants and payment of
the warrant price as aforesaid. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered holders
thereof, either as an entirety or from time to time for a portion of the shares
specified therein and, in the event that any Warrant is exercised in respect of
less than all of the shares of Common Stock specified therein at any time prior
to the date of expiration of the Warrants, a new Warrant or Warrants will be
issued to the registered holder for the remaining number of shares of Common
Stock specified in the Warrant so surrendered, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrants
pursuant to the provisions of this Section and of Section 3 of this Agreement
and the Company, whenever requested by the Warrant Agent, will supply the
Warrant Agent with Warrants duly executed on behalf of the Company for such
purpose. Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable unless at the time of exercise the Company has filed with
the Securities
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and Exchange Commission a registration statement under the Securities Act of
1933, as amended (the "Act"), covering the shares of Common Stock issuable upon
exercise of such Warrant and such shares have been so registered or qualified or
deemed to be exempt under the securities laws of the state of residence of the
holder of such Warrant. The Company shall use its best efforts to have all
shares so registered or qualified on or before the date on which the Warrants
become exercisable.
(b) If at the time of exercise of any Warrant after
________, 1998 (i) the market price of the Company's Common Stock is equal to or
greater than the then purchase price of the Warrant, (ii) the exercise of the
Warrant is solicited by the Underwriter at such time while the Underwriter is a
member of the National Association of Securities Dealers, Inc. ("NASD"), (iii)
the Warrant is not held in a discretionary account, (iv) disclosure of the
compensation arrangement is made in documents provided to the holders of the
Warrants; and (v) the solicitation of the exercise of the Warrant is not in
violation of Regulation M (as such regulation or any successor regulation or
rule may be in effect as of such time of exercise) promulgated under the
Securities Exchange Act of 1934, then the Underwriter shall be entitled to
receive from the Company upon exercise of each of the Warrant(s) so exercised a
fee of five percent (5%) of the aggregate price of the Warrants
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so exercised (the "Exercise Fee"). The procedures for payment of
the warrant solicitation fee are set forth in Section 5(c) below.
(c) (1) Within five (5) days of the last day of each month
commencing with _______, 1998, the Warrant Agent will notify the Underwriter of
each Warrant Certificate which has been properly completed for exercise by
holders of Warrants during the last month. The Company and Warrant Agent shall
determine, in their sole and absolute discretion, whether a Warrant Certificate
has been properly completed. The Warrant Agent will provide the Underwriter with
such information, in connection with the exercise of each Warrant, as the
Underwriter shall reasonably request.
(2) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the Underwriter the Exercise Fee promptly after
receipt by the Warrant Agent from the Company of a check payable to the order of
the Underwriter in the amount of the Exercise Fee. In the event that an Exercise
Fee is paid to the Underwriter with respect to a Warrant which the Company or
the Warrant agent determines is not properly completed for exercise or in
respect of which the Underwriter is not entitled to an Exercise Fee, the
Underwriter will promptly return such Exercise Fee to the Warrant Agent which
shall forthwith return such fee to the Company.
The Underwriter and the Company may at any time, after
____________, 1998, and during business hours, examine the
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records of the Warrant Agent, including its ledger of original Warrant
certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of paragraphs 5(b)
and 5(c) may not be modified, amended or deleted without the prior written
consent of the Underwriter.
Section 6. Payment of Taxes. The Company will pay any
documentary stamp taxes attributable to the initial issuance of Common Stock
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of any certificates of shares of
Common Stock in a name other than that of the registered holder of Warrants in
respect of which such shares are issued, and in such case neither the Company
nor the Warrant Agent shall be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid.
Section 7. Mutilated or Missing Warrants. In case any of the
Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen or
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destroyed, a new Warrant of like tenor and representing an equivalent right or
interest, but only upon receipt of evidence satisfactory to the Company and the
Warrant Agent of such loss, theft or destruction and, in case of a lost, stolen
or destroyed Warrant, indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrants shall also comply with such other
reasonable regulations and pay such reasonable charges as the Company or the
Warrant Agent may prescribe.
Section 8. Reservation of Common Stock. There have been
reserved, and the Company shall at all times keep reserved, out of the
authorized and unissued shares of Common Stock, a number of shares of Common
Stock sufficient to provide for the exercise of the rights of purchase
represented by the Warrants, and the transfer agent for the shares of Common
Stock and every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of any of the rights of purchase aforesaid are
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates of such
shares, validly issued and outstanding, fully paid and non-assessable and listed
on any national securities exchange upon which the other shares of Common Stock
are then listed. So long as any unexpired Warrants remain outstanding, the
Company will
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file such post-effective amendments to the registration statement (Form SB-2,
Registration No. 333-________) (the "Registration Statement") filed pursuant to
the Act with respect to the Warrants (or other appropriate registration
statements or post-effective amendment or supplements) as may be necessary to
permit it to deliver to each person exercising a Warrant, a prospectus meeting
the requirements of Section 10(a)(3) of the Act and otherwise complying
therewith, and will deliver such a prospectus to each such person. To the extent
that during any period it is not reasonably likely that the Warrants will be
exercised, due to market price or otherwise, the Company need not file such a
post-effective amendment during such period. The Company will keep a copy of
this Agreement on file with the transfer agent for the shares of Common Stock
and with every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is irrevocably authorized to requisition from time
to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed stock certificates for that purpose. All Warrants surrendered in the
exercise of the rights thereby evidenced shall be cancelled by the Warrant Agent
and shall thereafter be delivered to the Company, and such cancelled Warrants
shall constitute sufficient evidence of the number of shares of Common Stock
which have been issued upon the exercise
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of such Warrants. Promptly after the date of expiration of the Warrants, the
Warrant Agent shall certify to the Company the total aggregate amount of
Warrants then outstanding, and thereafter no shares of Common Stock shall be
subject to reservation in respect of such Warrants which shall have expired.
Section 9. Warrant Price; Adjustments.
(a) The warrant price at which Common Stock shall be
purchasable upon the exercise of the Warrants shall be $5.50 per share or after
adjustment, as provided in this Section, shall be such price as so adjusted (the
"Warrant Price").
(b) The Warrant Price shall be subject to adjustment
from time to time as follows:
(i) In case the Company shall at any time after the
date hereof pay a dividend in shares of Common Stock or make a distribution in
shares of Common Stock, then upon such dividend or distribution the Warrant
Price in effect immediately prior to such dividend or distribution shall
forthwith be reduced to a price determined by dividing:
(A) an amount equal to the total number of shares
of Common Stock outstanding immediately prior to such dividend or distribution
multiplied by the Warrant Price in effect immediately prior to such dividend or
distribution, by
(B) the total number of shares of Common Stock
outstanding immediately after such issuance or sale.
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For the purposes of any computation to be made in accordance
with the provisions of this Section 9(b)(i), the following provisions shall be
applicable: Common Stock issuable by way of dividend or other distribution on
any stock of the Company shall be deemed to have been issued immediately after
the opening of business on the date following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution.
(ii) In case the Company shall at any time subdivide
or combine the outstanding Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case of
combination to the nearest one cent. Any such adjustment shall become effective
at the time such subdivision or combination shall become effective.
(iii) Within a reasonable time after the close of each
quarterly fiscal period of the Company during which the Warrant Price has been
adjusted as herein provided, the Company shall:
(A) file with the Warrant Agent a certificate
signed by the Chief Executive Officer, President or Vice President of the
Company and by the Treasurer or Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company, showing in detail the facts requiring all
such adjustments occurring during such period and the Warrant Price after each
such adjustment; and
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(B) the Warrant Agent shall have no duty with
respect to any such certificate filed with it except to keep the same on file
and available for inspection by holders of Warrants during reasonable business
hours, and the Warrant Agent may conclusively rely upon the latest certificate
furnished to it hereunder. The Warrant Agent shall not at any time be under any
duty or responsibility to any holder of a Warrant to determine whether any facts
exist which may require any adjustment of the Warrant Price, or with respect to
the nature or extent of any adjustment of the Warrant Price when made, or with
respect to the method employed in making any such adjustment, or with respect to
the nature or extent of the property or securities deliverable hereunder. In the
absence of a certificate having been furnished, the Warrant Agent may
conclusively rely upon the provisions of the Warrants with respect to the Common
Stock deliverable upon the exercise of the Warrants and the applicable Warrant
Price thereof.
(iv) Notwithstanding anything contained herein to the
contrary, no adjustment of the Warrant Price shall be made if the amount of such
adjustment shall be less than $.05, but in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which, together
with any adjustment so carried forward, shall amount to not less than $.02.
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<PAGE>
(v) In the event that the number of outstanding shares
of Common Stock is increased by a stock dividend payable in Common Stock or by a
subdivision of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of
this Section by reason of such dividend or subdivision, the number of shares of
Common Stock issuable upon the exercise of each Warrant shall be increased in
proportion to such increase in outstanding shares. In the event that the number
of shares of Common Stock outstanding is decreased by a combination of the
outstanding Common Stock, then, from and after the time at which the adjusted
Warrant Price becomes effective pursuant to this Section 9(b) by reason of such
combination, the number of shares of Common Stock issuable upon the exercise of
each Warrant shall be decreased in proportion to such decrease in the
outstanding shares of Common Stock.
(vi) In case of any reorganization or reclassifi-
cation of the outstanding Common Stock (other than a change in par value, or
from par value to no par value, or as a result of a subdivision or combination),
or in case of any consolidation of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding Common Stock), or in case of any sale or
conveyance to another corporation of the property of
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<PAGE>
the Company as an entirety or substantially as an entirety, the holder of each
Warrant then outstanding shall thereafter have the right to purchase the kind
and amount of shares of Common Stock and other securities and property
receivable upon such reorganization, reclassification, consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock which the
holder of such Warrant shall then be entitled to purchase; such adjustments
shall apply with respect to all such changes occurring between the date of this
Warrant Agreement and the date of exercise of such Warrant.
(vii) Subject to the provisions of this Section 9, in
case the Company shall, at any time prior to the exercise of the Warrants, make
any distribution of its assets to holders of its Common Stock as a liquidating
or a partial liquidating dividend, then the holder of Warrants who exercises its
Warrants after the record date for the determination of those holders of Common
Stock entitled to such distribution of assets as a liquidating or partial
liquidating dividend shall be entitled to receive for the Warrant Price per
Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would have been payable to such
holder had he been the holder of record of the Common Stock receivable upon
exercise of its Warrant on
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<PAGE>
the record date for the determination of those entitled to such distribution.
(viii) In case of the dissolution, liquidation or
winding up of the Company, all rights under the Warrants shall terminate on a
date fixed by the Company, such date to be no earlier than ten (10) days prior
to the effectiveness of such dissolution, liquidation or winding up and not
later than five (5) days prior to such effectiveness. Notice of such termination
of purchase rights shall be given to the last registered holder of the Warrants,
as the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(ix) In case the Company shall, at any time prior to
the expiration of the Warrants and prior to the exercise thereof, offer to the
holders of its Common Stock any rights to subscribe for additional shares of any
class of the Company, then the Company shall give written notice thereof to the
last registered holder thereof not less than thirty (30) days prior to the date
on which the books of the Company are closed or a record date is fixed for the
determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date fixed with respect to such offer of subscription and the right of the
holder thereof to participate in such offer of subscription shall termi-
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nate if the Warrant shall not be exercised on or before the date of such closing
of the books or such record date.
(x) Any adjustment pursuant to the aforesaid pro-
visions of this Section 9 shall be made on the basis of the number of shares of
Common Stock which the holder thereof would have been entitled to acquire by the
exercise of the Warrant immediately prior to the event giving rise to such
adjustment.
(xi) Irrespective of any adjustments in the Warrant
Price or the number or kind of shares purchasable upon exercise of the Warrants,
Warrants previously or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant Agreement.
(xii) The Company may retain a firm of independent
public accountants (who may be any such firm regularly employed by the Company)
to make any computation required under this Section 9, and any certificate
setting forth such computation signed by such firm shall be conclusive evidence
of the correctness of any computation made under this Section 9.
(xiii) If at any time, as a result of an adjustment
made pursuant to Section 9(b)(vi) above, the holders of a Warrant or Warrants
shall become entitled to purchase any securities other than shares of Common
Stock, thereafter the number of such securities so purchasable upon exercise of
each Warrant and the Warrant Price for such shares shall be subject to
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adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
Sections 9(b)(ii) through (v).
Section 10. Fractional Interest. The Warrants may only be
exercised to purchase full shares of Common Stock and the Company shall not be
required to issue fractions of shares of Common Stock on the exercise of
Warrants. However, if a Warrant holder exercises all Warrants then owned of
record by it and such exercise would result in the issuance of a fractional
share, the Company will pay to such Warrant holder, in lieu of the issuance of
any fractional share otherwise issuable, an amount of cash based on the market
value of the Common Stock of the Company on the last trading day prior to the
exercise date.
Section 11. Notices to Warrantholders.
(a) Upon any adjustment of the Warrant Price and the
number of shares of Common Stock issuable upon exercise of a Warrant, then and
in each such case the Company shall give written notice thereof to the Warrant
Agent, which notice shall state the Warrant Price resulting from such adjustment
and the increase or decrease, if any, in the number of shares purchasable at
such price upon the exercise of a Warrant, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is based.
The Company shall also mail such notice to the holders of the Warrants at their
addresses appearing in the
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Warrant register. Failure to give or mail such notice, or any defect therein,
shall not affect the validity of the adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable in stock
upon its Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock; or
(ii) the Company shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of stock of any
class or other rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale or substantially all of its assets to, another
corporation; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company; then in any one or more
of such cases, the Company shall give written notice in the manner set forth in
Section 11(a) of the date on which (A) a record shall be taken for such
dividend, distribution or subscription rights, or (B) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights, or shall be entitled to
exchange their
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Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up as the case may be. Such notice shall be given at
least thirty (30) days prior to the action in question and not less than thirty
(30) days prior to the record date in respect thereof. Failure to give such
notice, or any defect therein, shall not affect the legality or validity of any
of the matters set forth in this Section 11(b).
(c) The Company shall cause copies of all financial
statements and reports, proxy statements and other documents that are sent to
its stockholders to be sent by first-class mail, postage prepaid, on the date of
mailing to such stockholders, to each registered holder of Warrants at his
address appearing in the warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of Warrants.
(i) The Warrant Agent shall promptly forward to the
Company all monies received by the Warrant Agent for the purchase of shares of
Common Stock through the exercise of such Warrants; provided, however, that the
Warrant Agent may retain an amount equal to the Exercise Fee, if any, until the
Company has satisfied its obligations under Section 5(c)(ii).
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(ii) The Warrant Agent shall keep copies of this
Agreement available for inspection by holders of Warrants during normal business
hours.
Section 13. Redemption of Warrants. The Warrants are
redeemable by the Company, in whole or in part, on not less than thirty (30)
days' prior written notice at a redemption price of $.10 per Warrant at any time
commencing _________, 1998; provided that (i) the closing bid quotation of the
Common Stock on all twenty (20) trading days ending on the third trading day
prior to the day on which the Company gives notice (the "Call Date") of
redemption has been at least 150% of the then effective exercise price of the
Warrants (the "Target Redemption Price") and the Company obtains the written
consent of the Underwriter with respect to such redemption prior to the Call
Date and (ii) the Warrants are currently exercisable. The redemption notice
shall be mailed to the holders of the Warrants at their addresses appearing in
the Warrant register. Holders of the Warrants will have exercise rights until
the close of business on the date fixed for redemption.
Section 14. Merger or Consolidation or Change of Name of
Warrant Agent. Any corporation or company which may succeed to the corporate
trust business of the Warrant Agent by any merger or consolidation or otherwise
shall be the successor to the Warrant Agent hereunder without the execution or
filing of any paper or any further act on the part of any of the parties
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hereto, provided that such corporation would be eligible to serve as a successor
Warrant Agent under the provisions of Section 16 of this Agreement. In case at
the time such successor to the Warrant Agent shall succeed to the agency created
by this Agreement, any of the Warrants shall have been countersigned but not
delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrants so
countersigned.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrants shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrants so countersigned. In all such cases such Warrants
shall have the full force provided in the Warrants and in the Agreement.
Section 15. Duties of Warrant Agent. The Warrant Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein
and in the Warrants shall be taken as statements of the Company, and the Warrant
Agent assumes no responsibility for the correctness of any of the same except
such as describe the Warrant Agent or action taken or to be taken by it. The
Warrant
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Agent assumes no responsibility with respect to the distribution of the Warrants
except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for any
failure of the Company to comply with any of the covenants in this Agreement or
in the Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all expenses,
taxes and governmental charges and other charges incurred by the Warrant Agent
in the execution of this Agreement and to indemnify the Warrant Agent
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and save it harmless against any and all liabilities, including judgments, costs
and reasonable counsel fees, for anything done or omitted by the Warrant Agent
in the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director,
officer, partner or employee of the Warrant Agent may buy, sell or deal in any
of the Warrants or other securities of the
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Company or become pecuniarily interested in any transaction in which the Company
may be interested, or contract with or lend money to or otherwise act as fully
and freely as though it were not the Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent
and its duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys, agents or employees, and the Warrant Agent shall
not be answerable or accountable for any such attorneys, agents or employees or
for any loss to the Company resulting from such neglect or misconduct, provided
reasonable care had been exercised in the selection and continued employment
thereof.
(j) Any request, direction, election, order or demand of
the Company shall be sufficiently evidenced by an instrument signed in the name
of the Company by its Chief Executive Officer, President or a Vice President or
its Secretary or an Assistant Secretary or its Treasurer or an Assistant
Treasurer (unless other evidence in respect thereof be herein specifically
prescribed); and any resolution of the Board of Directors may be evidenced to
the Warrant Agent by a copy thereof
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certified by the Secretary or an Assistant Secretary of the Company.
Section 16. Change of Warrant Agent. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving to the
Company notice in writing, and to the holders of the Warrants notice by mailing
such notice to the holders at their addresses appearing on the Warrant register,
of such resignation, specifying a date when such resignation shall take effect.
The Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and the like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after such removal or after it has been notified in writing of such resignation
or incapacity by the resigning or incapacitated Warrant Agent or after the
Company has received such notice from a registered holder of a Warrant (who
shall, with such notice, submit his Warrant for inspection by the Company), then
the registered holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, incorporated under New York
or federal law. After appointment, the successor Warrant
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Agent shall be vested with the same powers, rights, duties and responsibilities
as if it had been originally named as Warrant Agent without further act or deed
and the former Warrant Agent shall deliver and transfer to the successor Warrant
Agent all cancelled Warrants, records and property at the time held by it
hereunder, and execute and deliver any further assurance or conveyance necessary
for the purpose. Failure to file or mail any notice provided for in this
Section, however, or any defect therein, shall not affect the validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
Warrant Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith upon the
appointment of any transfer agent for the shares of Common Stock or of any
subsequent transfer agent for the shares of Common Stock or other shares of the
Company's Common Stock issuable upon the exercise of the rights of purchase
represented by the Warrants, the Company will file with the Warrant Agent a
statement setting forth the name and address of such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to
be given by the Warrant Agent, by the Underwriter or by the registered holder of
any Warrant to the Company, shall be sufficiently given if sent by first-class
mail, postage prepaid, addressed (until another is filed in writing by the
Company with the Warrant Agent) as follows:
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The Recovery Network, Inc.
506 Santa Monica Boulevard, Suite 400
Santa Monica, California 90401
Attention: William D. Moses
Chief Executive Officer
and a copy thereof to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: Henry I. Rothman, Esq.
Any notice pursuant to this Agreement to be given by the
Company, by the Underwriter or by the registered holder of any Warrant to the
Warrant Agent shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the Warrant
Agent with the Company) as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: Michael Karfunkel
Any notice pursuant to this Agreement to be given by the
Warrant Agent or by the Company to the Underwriter shall be sufficiently given
if sent by first-class mail, postage prepaid, addressed (until another address
if filed in writing with the Warrant agent) as follows:
Whale Securities Co., L.P.
650 Fifth Avenue
New York, New York 10019
Attention: William G. Walters
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<PAGE>
and a copy thereof to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
Section 19. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement in order
to cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Warrant Agent may deem necessary or desirable and
which shall not be inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the holders of Warrants.
Section 20. New York Contract. This Agreement and each Warrant
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and shall be construed in accordance with the laws of New York
applicable to agreements to be performed wholly within New York.
Section 21. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Warrant Agent and the registered holders of the Warrants any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be
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for the sole and exclusive benefit of the Company, the Warrant
Agent and the registered holders of the Warrants.
Section 22. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company, the Warrant Agent or the
Underwriter shall bind and inure to the benefit of their respective successors
and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
THE RECOVERY NETWORK, INC.
By: ________________________________
Name:
Title:
AMERICAN STOCK TRANSFER TRUST
COMPANY
By: ________________________________
Name:
Title:
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By: ________________________________
Name:
Title:
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<PAGE>
WARRANT AGREEMENT dated as of __________, 1997 between The
Recovery Network, Inc., a Colorado corporation (the "Company"), and Whale
Securities Co., L.P. (hereinafter referred to as the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter
160,000 warrants (the "Warrants") to purchase up to 1,600,000 (as such number
may be adjusted from time to time pursuant to Article 8 of this Warrant
Agreement) shares (the "Shares") of Common Stock par value $.01 per share (the
"Common Stock"), of the Company, and up to 160,000 (as such number may be
adjusted from time to time pursuant to Article 8 of this Warrant Agreement)
Common Stock purchase warrants (the "Underlying Warrants"); and
WHEREAS, the Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated _____________, 1997
between the Underwriter and the Company, to act as the underwriter in connection
with the Company's proposed public offering (the "Public Offering") of 1,600,000
shares of Common Stock (the "Public Shares") at an initial public offering price
of $5.00 per Public Share and 1,600,000 warrants (the "Public Warrants") at an
initial public offering price of $.10 per Public Warrant; and
<PAGE>
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriter or to its designees who are
officers and partners of the Underwriter or to members of the selling group
participating in the distribution of the Public Shares and Public Warrants to
the public in the Public Offering and/or their respective directors, officers or
partners (collectively, the "Designees"), in consideration for, and as part of
the Underwriter's compensation in connection with, the Underwriter acting as the
Underwriter pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriter or its designees to the Company of ONE HUNDRED SEVENTY SIX
DOLLARS ($176.00), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Underwriter and/or the Designees are hereby
granted the right to purchase, at any time from _____________, 1997 until 5:00
P.M., New York time, on _________, 2002 (the "Warrant Exercise Term"), up to
160,000 fully-paid and non-assessable Shares at an initial exercise price
(subject to adjustment as provided in Article 6 hereof) of $7.00 per Share and
up to 160,000 Underlying Warrants at an initial exercise price (subject to
adjustment as provided in Article 6 hereof) of $.14 per Underlying Warrant. The
Underlying Warrants are each exercisable
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to purchase one fully-paid and non-assessable share of Common Stock at a price
of $9.075 per share (the "Underlying Warrant Shares"). The Underlying Warrants
are exercisable at any time commencing _________, 1998 (or such earlier date as
to which the Underwriter consents to the exercise of the Public Warrants by the
holders thereof) until 5:00 P.M., New York City time on ________, 2002. The
Holder may purchase, upon exercise of this Warrant, either the Shares or the
Underlying Warrants or both. Except as provided in Article 13 hereof, the Shares
and the Underlying Warrants are in all respects identical to the Public Shares
and Public Warrants being sold to the public pursuant to the terms and
provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates delivered
and to be delivered pursuant to this Agreement (the "Warrant Certificates")
shall be, for the Warrants exercisable for the purchase of Underlying Shares, in
the form set forth in Exhibit A attached hereto and made a part hereof, and, for
the Warrants exercisable for the purchase of Underlying Warrants, in the form of
Exhibit B attached hereto and made a part hereof, each with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrant.
3.1. Cash Exercise. The Warrants initially are
exercisable at a price of $7.00 per Share purchased and $.14 per Underlying
Warrant purchased, payable in cash or by check to the
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order of the Company, or any combination thereof, subject to adjustment as
provided in Article 8 hereof. Upon surrender of the Warrant Certificate(s) with
the annexed Form of Election to Purchase duly executed, together with payment of
the Exercise Price (as hereinafter defined) for the Shares and Underlying
Warrants purchased, at the Company's principal offices in California (currently
located at 506 Santa Monica Boulevard, Suite 400, Santa Monica, California
90401) the registered holder of a Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the Shares so
purchased and/or a certificate or certificates for the Underlying Warrants so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder hereof, in whole or in part (but not as
to fractional Shares or fractional Underlying Warrants). In the case of the
purchase of less than all Shares or Underlying Warrants purchasable under any
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Shares or Underlying Warrants purchasable
thereunder.
3.2. Cashless Exercise. At any time during the
Warrant Exercise Term, the Holder may, at the Holder's option, exchange, in
whole or in part, the Warrants represented by such Holder's Warrant Certificate
which are exercisable for the purchase of Shares (a "Warrant Exchange"), into
the number of Shares and
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<PAGE>
Underlying Warrants determined in accordance with this Section 3.2, by
surrendering such Warrant Certificate at the principal office of the Company or
at the office of its transfer agent, accompanied by a notice stating such
Holder's intent to effect such exchange, the number of Warrants to be so
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant
Certificate of like tenor representing the Warrants which were subject to the
surrendered Warrant Certificate and not included in the Warrant Exchange, shall
be issued as of the Exchange Date and delivered to the Holder within three (3)
days following the Exchange Date. In connection with any Warrant Exchange, the
Holder shall be entitled to subscribe for and acquire (i) the number of Shares
(rounded to the next highest integer) which would, but for such Warrant
Exchange, than be issuable pursuant to the provisions of Section 3.1 above upon
the exercise of the Warrants specified by the Holder in its Notice of Exchange
(the "Total Share Number") less (ii) the number of Shares equal to the quotient
obtained by dividing (a) the product of the Total Share Number and the existing
Exercise Price per Share (as hereinafter defined) by (b) the Market Price (as
hereinafter defined) of a Public Share on the day preceding the
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<PAGE>
Warrant Exchange. "Market Price" at any date shall be deemed to be the last
reported sale price, or, in case no such reported sales takes place on such day,
the average of the last reported sale prices for the last three (3) trading
days, in either case as officially reported by the principal securities exchange
on which the Common Stock is listed or admitted to trading or as reported in the
NASDAQ National Market System, or, if the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted on the NASDAQ National
Market System, the closing bid price as furnished by (i) the National
Association of Securities Dealers, Inc. through NASDAQ or (ii) a similar
organization if NASDAQ is no longer reporting such information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares purchased and certificates for the Underlying
Warrants purchased, and upon the exercise of the Underlying Warrants, the
issuance of certificates for the Underlying Warrant Shares purchased, shall be
made forthwith (and in any event within three (3) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Article 5 hereof) be issued in the name of,
or in such names as may be directed by, the Holder thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any
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<PAGE>
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the
Shares and the Underlying Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the present or any future Chairman or Vice
Chairman of the Board of Directors or Chief Executive Officer, President or Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the present or any future Secretary
or Assistant Secretary of the Company. Warrant Certificates and certificates
representing the Underlying Warrants shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares and the Underlying Warrants purchased, and
upon exercise, in whole or in part, of the Underlying Warrants, certificates
representing the Underlying Warrant Shares purchased (collectively, the "Warrant
Securities"), shall bear a legend substantially similar to the following:
"The securities represented by this certificate and
the other securities issuable
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<PAGE>
upon exercise thereof have not been registered for
purposes of public distribution under the Securities
Act of 1933, as amended (the "Act"), and may not be
offered or sold except (i) pursuant to an effective
registration statement under the Act, (ii) to the
extent applicable, pursuant to Rule 144 under the
Act (or any similar rule under such Act relating to
the disposition of securities), or (iii) upon the
delivery by the holder to the Company of an opinion
of counsel, reasonably satisfactory to counsel to
the Company, stating that an exemption from
registration under such Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof [the Effective Date], except to the Underwriter or to the Designees.
6. Price.
6.1. Initial and Adjusted Exercise Price. The initial
exercise price of each Warrant shall be $7.00 per Share and $.14 per Underlying
Warrant. The adjusted exercise price per Share and the adjusted exercise price
per Underlying Warrant shall be the prices which shall result from time to time
from any and all adjustments of the initial exercise price per Share or per
Underlying Warrant, as the case may be, in accordance with the provisions of
Article 8 hereof.
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<PAGE>
6.2. Exercise Price. The term "Exercise Price" herein
shall mean the initial exercise price or the adjusted exercise price, depending
upon the context.
7. Registration Rights.
7.1. Registration Under the Securities Act of 1933.
None of the Warrants, the Shares, the Underlying Warrants, or the Underlying
Warrant Shares have been registered for purposes of public distribution under
the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the term
"Registrable Security" means each of the Warrants, the Shares, the Underlying
Warrants, the Underlying Warrant Shares and any shares of Common Stock issued
upon any stock split or stock dividend in respect of such Shares or Underlying
Warrant Shares; provided, however, that with respect to any particular
Registrable Security, such security shall cease to be a Registrable Security
when, as of the date of determination, (i) it has been effectively registered
under the Act and disposed of pursuant thereto, (ii) registration under the Act
is no longer required for subsequent public distribution of such security, or
(iii) it has ceased to be outstanding. The term "Registrable Securities" means
any and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the Common Stock, such adjustment
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<PAGE>
shall be made in the definition of "Registrable Security" as is appropriate in
order to prevent any dilution or enlargement of the rights granted pursuant to
this Article 7.
7.3. Piggyback Registration. If, at any time during
the seven years following the effective date of the Public Offering, the Company
proposes to prepare and file one or more post-effective amendments to the
registration statement filed in connection with the Public Offering or any new
registration statement or post-effective amendments thereto covering equity or
debt securities of the Company, or any such securities of the Company held by
its shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form) (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) business days after
receipt of the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement, the Company
shall, as to each such Requesting Holder, use its best efforts to effect the
registration under the Act of the Registrable Securities which it has been so
requested to register ("Piggyback Registration"), at the Company's sole cost and
expense and at no
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<PAGE>
cost or expense to the Requesting Holders (except as provided in Section 7.5(b)
hereof).
Notwithstanding the provisions of this Section 7.3,
the Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.3 (irrespective of whether any written request
for inclusion of Registrable Securities shall have already been made) to elect
not to file any such proposed Registration Statement, or to withdraw the same
after the filing but prior to the effective date thereof.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise
Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of
the Registrable Securities shall have the right (which right is in addition to
the piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission") on one occasion, at the sole expense of the
Company (except as provided in Section 7.5(b) hereof), a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for the Company and counsel for such Majority Holder) in
order to comply with the provisions of the Act, so as to permit a public
offering and sale of the Registrable Securities by the holders thereof. The
Company shall use its best efforts to cause the
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<PAGE>
Registration Statement to become effective under the Act, so as to permit a
public offering and sale of the Registrable Securities by the holders thereof.
Once effective, the Company will use its best efforts to maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
that all of the Registrable Securities have been sold or (ii) the date the
holders thereof receive an opinion of counsel to the Company that all of the
Registrable Securities may be freely traded without registration under the Act,
under Rule 144(k) promulgated under the Act or otherwise. [Nothing herein
contained shall require the Company to undergo an audit, other than in the
ordinary course of business.]
(b) The Company covenants and agrees to give
written notice of any Demand Registration Request to all holders of the
Registrable Securities within ten (10) business days from the date of the
Company's receipt of any such Demand Registration Request. After receiving
notice from the Company as provided in this Section 7.4(b), holders of
Registrable Securities may request the Company to include their Registrable
Securities in the Registration Statement to be filed pursuant to Section 7.4(a)
hereof by notifying the Company of their decision to have such securities
included within ten (10) days of their receipt of the Company's notice.
(c) In addition to the registration rights
provided for under Section 7.3 hereof and subsection (a) of this Section 7.4, at
any time during the Warrant Exercise Term, any
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<PAGE>
Majority Holder (as defined below in Section 7.4(d)) of Registrable Securities
shall have the right, exercisable by written request to the Company, to have the
Company prepare and file with the Commission, on one occasion in respect of all
holders of Registrable Securities, a Registration Statement so as to permit a
public offering and sale of such Registrable Securities for nine (9) consecutive
months, provided, however, that all costs incident thereto shall be at the
expense of the holders of the Registrable Securities included in such
Registration Statement. If a Majority Holder shall give notice to the Company at
any time of its or their desire to exercise the registration right granted
pursuant to this Section 7.4(c), then within ten (10) days after the Company's
receipt of such notice, the Company shall give notice to the other holders of
Registrable Securities advising them that the Company is proceeding with such
registration and offering to include therein the Registrable Securities of such
holders, provided they furnish the Company with such appropriate information in
connection therewith as the Company shall reasonably request in writing.
(d) The term "Majority Holder" as used in
Section 7.4 hereof shall mean any holder or any combination of holders of
Registrable Securities, if included in such holders' Registrable Securities are
that aggregate number of shares of Common Stock (including Shares already
issued, Shares issuable pursuant to the exercise of outstanding Warrants,
Underlying Warrant Shares already issued and Underlying Warrant Shares
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<PAGE>
issuable pursuant to the exercise of outstanding Underlying Warrants) as would
constitute a majority of the aggregate number of shares of Common Stock
(including Shares already issued, Shares issuable pursuant to the exercise of
outstanding Warrants, Underlying Warrant Shares already issued and Underlying
Warrant Shares issuable pursuant to the exercise of outstanding Underlying
Warrants) included in all the Registrable Securities.
7.5. Covenants of the Company With Respect to
Registration. The Company covenants and agrees as follows:
(a) In connection with any registration
under Section 7.4 hereof, the Company shall file the Registration Statement as
expeditiously as possible, but in any event no later than twenty (20) days
following receipt of any demand therefor, shall use its best efforts to have any
such Registration Statement declared effective at the earliest possible time,
and shall furnish each holder of Registrable Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees
and expenses (other than underwriting fees, discounts and nonaccountable expense
allowance applicable to the Registrable Securities and fees and expenses of
counsel retained by the holders of Registrable Securities) in connection with
all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, and blue sky fees and expenses.
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(c) The Company will take all necessary
action which may be required in qualifying or registering the Registrable
Securities included in the Registration Statement, for offering and sale under
the securities or blue sky laws of such states as are reasonably requested by
the holders of such securities.
(d) The Company shall indemnify any holder
of the Registrable Securities to be sold pursuant to any Registration Statement
and any underwriter or person deemed to be an underwriter under the Act and each
person, if any, who controls such holder or underwriter or person deemed to be
an underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter as set forth in Section 7 of the Underwriting
Agreement and to provide for just and equitable contribution as set forth in
Section 8 of the Underwriting Agreement.
(e) Any holder of Registrable Securities to
be sold pursuant to a registration statement, and such Holder's
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successors and assigns, shall severally, and not jointly, indemnify, the
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject under the Act,
the Exchange Act or otherwise, arising from information furnished by or on
behalf of such holder, or such Holder's successors or assigns, for specific
inclusion in such Registration Statement to the same extent and with the same
effect as the provisions pursuant to which the Underwriter has agreed to
indemnify the Company as set forth in Section 7 of the Underwriting Agreement
and to provide for just and equitable contribution as set forth in Section 8 of
the Underwriting Agreement.
(f) Nothing contained in this Agreement
shall be construed as requiring any holder to exercise the Warrants or the
Underlying Warrants held by such Holder prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) If the Company shall fail to comply with
the provisions of this Article 7, the Company shall, in addition to any other
equitable or other relief available to the holders of Registrable Securities, be
liable for any or all incidental, special and consequential damages sustained by
the holders of Registrable Securities, requesting registration of their
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Registrable Securities.
(h) The Company shall not permit the
inclusion of any securities other than the Registrable Securities to be included
in any Registration Statement filed pursuant to Section 7.4 hereof, without the
prior written consent of the Majority Holders, which consent shall not be
unreasonably withheld.
(i) The Company shall promptly deliver
copies of all correspondence between the Commission and the Company, its counsel
or auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the Registration Statement to each holder of Registrable
Securities included for such registration in such Registration Statement
pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such
correspondence and memoranda and to the managing underwriter, if any, of the
offering in connection with which such Holder's Registrable Securities are being
registered and shall permit each holder of Registrable Securities and such
underwriter to do such reasonable investigation, upon reasonable advance notice,
with respect to information contained in or omitted from the Registration
Statement as it deems reasonably necessary to comply with applicable securities
laws or rules of the National Association of Securities Dealers, Inc. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such
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reasonable times and as often as any such holder of Registrable Securities or
underwriter shall reasonably request.
8. Adjustments of Exercise Price and Number of Securities. The
following adjustments apply to the Exercise Price of the Warrants with respect
to the Shares and the number of Shares purchasable upon exercise of the
Warrants. In the event the Exercise Price per Share and/or the number of Shares
so purchasable is adjusted, then the Exercise Price of the Warrants relating to
the Underlying Warrants and the number of underlying Warrants purchasable
hereunder shall be adjusted in the same proportion.
8.1. Computation of Adjusted Price. In case the
Company shall at any time after the date hereof pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, then upon such
dividend or distribution the Exercise Price in effect immediately prior to such
dividend or distribution shall forthwith be reduced to a price determined by
dividing:
(a) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Exercise Price in effect immediately prior to
such dividend or distribution, by
(b) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be
made in accordance with the provisions of this Section 8.1, the Common Stock
issuable by way of dividend or other distribution on any
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stock of the Company shall be deemed to have been issued immediately after the
opening of business on the date following the date fixed for the determination
of stockholders entitled to receive such dividend or other distribution.
8.2. Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of Common Stock,
the Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.3. Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Article 8,
the number of Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest full number by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the number of
Shares issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price,
provided, however, that if an event occurs that results in an adjustment of the
number and/or price of the shares of Common Stock issuable upon exercise of the
Public Warrants pursuant to Section 9 of the Warrant Agreement by and among the
Company, the Underwriter and American Transfer & Trust Company dated as of
___________, 1997 ("Public Warrant Agreement"), resulting in automatic
adjustment in the number and/or price of the Underlying Warrant Shares issuable
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upon exercise of the Underlying Warrants pursuant to Section 8.5 hereof, then
the adjustment provided for in this Section 8.3 shall not, in such instance,
result in any further adjustment in the aggregate number of shares of Common
Stock ultimately issuable upon exercise of the Underlying Warrants.
8.4. Reclassification, Consolidation, Merger, etc. In
case of any reclassification or change of the outstanding shares of Common Stock
(other than a change in par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or in the case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an entirety, the Holders shall thereafter have the
right to purchase the kind and number of shares of stock and other securities
and property receivable upon such reclassification, change, consolidation,
merger, sale or conveyance as if the Holders were the owners of both the Shares
and the Underlying Warrant Shares immediately prior to any such events, at a
price equal to the product of (x) the number of shares of Common Stock issuable
upon exercise of the Holders' Warrants and the
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Underlying Warrants and (y) the exercise prices for the Warrants and the
Underlying Warrants in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holders had exercised the Warrants and the Underlying Warrants.
8.5. Determination of Outstanding Common Shares. The
number of Common Shares at any one time outstanding shall include the aggregate
number of shares issued and the aggregate number of shares issuable upon the
exercise of options, rights, warrants and upon the conversion or exchange of
convertible or exchangeable securities.
8.6. Adjustment of Underlying Warrants' Exercise
Price and Securities Issuable Upon Exercise of Underlying Warrants. With respect
to any of the Underlying Warrants, whether or not the Warrants have been
exercised and whether or not the Warrants are issued and outstanding, the
exercise price for, and the number of, Underlying Warrant Shares issuable upon
exercise of the Underlying Warrants shall be automatically adjusted in
accordance with Section 9 of the Public Warrant Agreement, upon the occurrence
of any of the events described therein. Thereafter, until the next such
adjustment or until otherwise adjusted in accordance with this Section 8, the
Underlying Warrants shall be exercisable at such adjusted exercise price and for
such adjusted number of Underlying Warrant Shares.
-21-
<PAGE>
8.7. Dividends and Other Distributions with Respect
to Outstanding Securities. In the event that the Company shall at any time prior
to the exercise of all Warrants make any distribution of its assets to holders
of its Common Stock as a liquidating or a partial liquidating dividend, then the
holder of Warrants who exercises its Warrants after the record date for the
determination of those holders of Common Stock entitled to such distribution of
assets as a liquidating or partial liquidating dividend shall be entitled to
receive for the Warrant Price per Warrant, in addition to each share of Common
Stock, the amount of such distribution (or, at the option of the Company, a sum
equal to the value of any such assets at the time of such distribution as
determined by the Board of Directors of the Company in good faith) which would
have been payable to such holder had he been the holder of record of the Common
Stock receivable upon exercise of his Warrant on the record date for the
determination of those entitled to such distribution. At the time of any such
dividend or distribution, the Company shall make appropriate reserves to ensure
the timely performance of the provisions of this Subsection 8.7.
8.8. Subscription Rights for Shares of Common Stock
or Other Securities. In the case that the Company or an affiliate of the Company
shall at any time after the date hereof and prior to the exercise of all the
Warrants issue any rights, warrants or options to subscribe for shares of Common
Stock or any other securities of the Company or of such affiliate to all the
-22-
<PAGE>
shareholders of the Company, the Holders of unexercised Warrants on the record
date set by the Company or such affiliate in connection with such issuance of
rights, warrants or options shall be entitled, in addition to the shares of
Common Stock or other securities receivable upon the exercise of the Warrants,
to receive such rights, warrants or options shall be entitled, in addition to
the shares of Common Stock or other securities receivable upon the exercise of
the Warrants, to receive such rights at the time such rights, warrants or
options that such Holders would have been entitled to receive had they been, on
such record date, the holders of record of the number of whole shares of Common
Stock then issuable upon exercise of their outstanding Warrants (assuming for
purposes of this Section 8.8), that the exercise of the Warrants is permissible
immediately upon issuance).
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense,
upon the surrender thereof by the registered Holder at the principal executive
office of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or
-23-
<PAGE>
destruction, of indemnity or security reasonably satisfactory to it, and
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of the Warrant Certificate, if mutilated, the
Company will make and deliver a new Warrant Certificate of like tenor, in lieu
thereof.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates
representing fractions of Shares or fractions of Underlying Warrants upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Shares and Underlying Warrants.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available
out of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants and the Underlying Warrants, such number of
shares of Common Stock as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of the Warrants and payment of
the Exercise Price therefor, all Shares issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any shareholder. The Company further covenants and agrees
that upon exercise of the Underlying Warrants and payment of the respective
Underlying
-24-
<PAGE>
Warrant exercise price therefor, all Underlying Warrant Shares issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any shareholder. As long as the Warrants
shall be outstanding, the Company shall use its best efforts to cause all shares
of Common Stock issuable upon the exercise of the Warrants and the Underlying
Warrants and all Underlying Warrants to be listed on or quoted by NASDAQ or
listed on such national securities exchange, in the event the Common Stock is
listed on a national securities exchange.
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holders
of its shares of Common Stock for the purpose of entitling
them to receive a dividend or distribution payable otherwise
than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or
distribution on the books
-25-
<PAGE>
of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed; or
(d) reclassification or change of the outstanding
shares of Common Stock (other than a change in par value to no
par value, or from no par value to par value, or as a result
of a subdivision or combination), consolidation of the Company
with, or merger of the Company into, another corporation
(other than a consolidation or merger in which the Company is
the surviving corporation and which does not result in any
reclassification or change of the outstanding shares of Common
Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of
the property of the Company as an entirety is proposed; or
-26-
<PAGE>
(e) The Company or an affiliate of the Company shall
propose to issue any rights to subscribe for shares of Common
Stock or any other securities of the Company or of such
affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Underlying Warrants.
The form of the certificates representing the Underlying
Warrants (and the form of election to purchase shares of Common Stock upon the
exercise of the Underlying Warrants and the form of assignment printed on the
reverse thereof) shall be substantially as set forth in Exhibit "A" to the
Public Warrant Agreement;
-27-
<PAGE>
provided, however, (i) each Underlying Warrant issuable upon exercise of the
Warrants shall evidence the right to initially purchase one fully paid and
non-assessable share of Common Stock in respect of the Underlying Warrant at an
initial purchase price of $9.075 per share at any time commencing _________,
1998 (or such earlier date as to which the Underwriter consents to the exercise
of the Public Warrants by the holders thereof) until __________, 2002 and (ii)
the Target Redemption Price (as defined in the Public Warrant Agreement) of the
Underlying Warrants is 150% of the then effective exercise price of the
Underlying Warrants. As set forth in Section 8.5 of this Agreement, the exercise
price of the Underlying Warrants and the number of shares of Common Stock
issuable upon the exercise of the Underlying Warrants are subject to adjustment,
whether or not the Warrants have been exercised and the Underlying Warrants have
been issued, in the manner and upon the occurrence of the events set forth in
Section 9 of the Public Warrant Agreement, which is hereby incorporated herein
by reference and made a part hereof as if set forth in its entirety herein.
Subject to the provisions of this Agreement and upon issuance of the Underlying
Warrants, each registered holder of such Underlying Warrants shall have the
right to purchase from the Company (and the Company shall issue to such
registered holders) up to the number of fully paid and non-assessable Underlying
Warrant Shares (subject to adjustment as provided herein and in the Public
Warrant Agreement), free and clear of all preemptive rights of shareholders,
provided
-28-
<PAGE>
that such registered holder complies, in connection with the exercise of such
holders' Underlying Warrants, with the terms governing exercise of the Public
Warrants set forth in the Public Warrant Agreement, and pays the applicable
exercise price, determined in accordance with the terms of the Public Warrant
Agreement. Upon exercise of the Underlying Warrants, the Company shall forthwith
issue to the registered holder of any such Underlying Warrants, in such holder's
name or in such name as may be directed by such holder, certificates for the
number of Underlying Warrant Shares so purchased. The Underlying Warrants shall
be transferable in the manner provided in the Public Warrant Agreement, and upon
any such transfer, a new Underlying Warrant shall be issued promptly to the
transferee. The Company covenants to, and agrees with, each Holder that without
the prior written consent of all the Holders, the Public Warrant Agreement will
not be modified, amended, cancelled, altered or superseded, and that the Company
will send to each Holder, irrespective of whether or not the Warrants have been
exercised, any and all notices required by the Public Warrant Agreement to be
sent to holders of the Public Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to
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<PAGE>
the address of such Holder as shown on the books of the
Company; or
(b) If to the Company, to the address set forth in
Section 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.
15. Supplements and Amendments.
The Company and the Underwriter may from time to time
supplement or amend this Agreement without the approval of any Holders of the
Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
or questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem not to
adversely affect the interests of the Holders of Warrant Certificates.
16. Successors.
All the covenants and provisions of this Agreement by or for
the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
17. Termination.
This Agreement shall terminate at the close of business on
_________, 2005. Notwithstanding the foregoing, this Agreement will terminate on
any earlier date when all Warrants and Underlying Warrants have been exercised
and all Warrant Securities have been
-30-
<PAGE>
resold to the public; provided, however, that the provisions of Section 7 shall
survive any termination pursuant to this Section 17 until the close of business
on __________, 2008.
18. Governing Law.
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the laws of said
State.
19. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Underwriter and any other
registered holder or holders of the Warrant Certificates or Warrant Securities
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Underwriter and any other holder or holders of the Warrant Certificates or
Warrant Securities.
20. Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
-31-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] THE RECOVERY NETWORK, INC.
By:________________________________
Name:
Title:
Attest:
- -----------------------
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:________________________________
Name:
Title:
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<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______, 2002
No. W- _______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________
_____________________________ or registered assigns, is the registered holder of
__________ Warrants to purchase, at any time from _______, 1997 until 5:00 P.M.
New York City time on _______, 2002 ("Expiration Date"), up to _______
fully-paid and non-assessable shares (the "Shares") of the common stock, par
value $.01 per share (the "Common Stock"), of The Recovery Network, Inc., a
Colorado corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $____ per Share, upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the warrant agreement dated as of _______, 1997 between the Company and
Whale Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise
Price may be made in cash, or by certified or official bank check in New York
Clearing House funds payable to the order of the Company, or any combination
thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 199__ THE RECOVERY NETWORK, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
- ----------------------
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Shares of
Common Stock and herewith tenders in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of The Recovery Network, Inc. in the amount of $__________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of
_______________________________, whose address is __________________________,
and that such Certificate be delivered to ____________________________________,
whose address is _____________________________.
Dated: Signature:
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
--------------------------------
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________________________________
hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:____________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate)
- -------------------------------
- -------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
EXHIBIT B
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______, 2002
No. W- _________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________
____________________, or registered assigns, is the registered holder of
___________________________ (_______) Warrants to purchase, at any time from
_______, 1997 until 5:00 P.M. New York City time on _______, 2002 ("Expiration
Date"), an aggregate of up to ___________________________ (_______) common stock
purchase warrants, each common stock purchase warrant entitling the holder
thereof to purchase one share of common stock, par value $.__ per share
(collectively, the "Underlying Warrants"), of The Recovery Network, Inc., a
Colorado corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $.14 per Underlying
Warrant, upon surrender of this Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the warrant agreement dated as of _______, 1997 between the
Company and Whale Securities Co., L.P. ("Whale") (the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the Company,
or any combination thereof.
The Underlying Warrants issuable upon exercise of the Warrants
will be exercisable at any time from _______, 1998 (or such earlier date as to
which Whale consents to the exercise of the
<PAGE>
Public Warrants (as defined in the Warrant Agreement) by the holders thereof)
until 5:00 P.M. Eastern Time _______, 2002 each Underlying Warrant entitling the
holder thereof to purchase one fully-paid and non-assessable share of common
stock of the Company, at an initial exercise price, subject to adjustment in
certain events, of $9.075 per share. The Underlying Warrants are issuable
pursuant to the terms and provisions of a certain agreement dated as of _______,
1997 by and among the Company, Whale and American Stock Transfer & Trust Company
(the "Public Warrant Agreement"). The Public Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to (except as otherwise provided in the Warrant Agreement) for a
description of the rights, limitations of rights, manner of exercise,
anti-dilution provisions and other provisions with respect to the Underlying
Warrants.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that, upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection therewith.
<PAGE>
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 199__ THE RECOVERY NETWORK, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
- ----------------------
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Underlying
Warrants and herewith tenders, in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of The Recovery Network, Inc. in the amount of $ , all in accordance with
the terms hereof. The undersigned requests that a certificate for such
securities be registered in the name of , whose address is , and that such
Certificate be delivered to , whose address is _____________.
Dated: Signature:___________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
--------------------------------
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________________________________
hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:__________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate)
- --------------------------------
- --------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
1996 EMPLOYEES AND CONSULTANTS STOCK OPTION PLAN
PURPOSE
The purpose of this 1996 Employees and Consultants Stock Option Plan ("Plan") is
to provide a pool of shares of the Common Stock, par value $0.01 per share
("Bonus Shares"), of The Recovery Network, Inc., a Colorado corporation
("Company"), for distribution as bonuses hereunder to employees of the Company
as a performance incentive in recognition of loyal and exemplary service.
GOVERNING PROVISIONS
1. Number of Bonus Shares. The total number of shares of Common Stock
of the Company available for grant as Bonus Shares hereunder shall be 245,000 in
the aggregate. The number of Bonus Shares available at any time for grant
hereunder shall be adjusted for stock dividends, stock splits, subdivisions,
consolidations, combinations, reclassifications, recapitalizations, and the like
affecting the Common Stock after the effective date of the Plan. The Company
shall be under no obligation to grant all or any portion of such shares as
bonuses to employees hereunder.
2. Administration. (a) The Plan shall be administered by the president
and chief executive officer or such other officer of the Company as shall be
designated expressly by the board of directors of the Company to administer the
Plan ("Administrator").
(b) Subject to the other provisions of the Plan, the
Administrator shall have full and final authority and power to determine all
matters relating to the grant of Bonus Shares hereunder, including without
limitation the employees of the Company to whom Bonus Shares shall be granted,
the number of shares in each such grant, the amount of payment, if any, by the
grantee for the Bonus Shares and the applicable restrictions (including vesting
schedules), if any, with respect to such Bonus Shares. At the Administrator's
discretion, a grantee may be required to execute a Non-Qualified Stock Option
Agreement and other applicable documentation, including a stock power, in form
satisfactory to the Administrator, setting forth any such applicable
restrictions. If Bonus Shares are subject to a vesting schedule, the unvested
shares shall be subject, in the Administrator's discretion, to prohibitions on
transfer and to cancellation upon the occurrence of certain circumstances more
particularly described in the Non-Qualified Stock Option Agreement. Nothing
herein shall be construed to give any individual the right to be granted Bonus
Shares. The Administrator shall have the authority and power to adopt such rules
and regulations and to take such other action as is considered advisable for
administration of the Plan.
3. Eligibility. Employees of the Company other than the Administrator
may be granted Bonus Shares for loyal and exemplary past or future services to
the Company. Other than initial grants of Bonus Shares made hereunder prior to
November 30, 1996 (which may be made to an employee of the Company without
regard to the period he has been employed by the Company), grants of Bonus
Shares may be made hereunder only to employees who have completed one year or
more as a full-time employee of the Company. Where Bonus Shares are granted as
an incentive for the performance of future services, the grantee shall agree
that if his employment with the Company is terminated for any reason other than
death or disability within six months after the date the Bonus Shares are
granted, the Company may, in its sole discretion, rescind the transfer of any
shares of Common Stock to the grantee that was made upon the grant of the Bonus
Shares.
<PAGE>
4. Reoffer of Bonus Shares to the Company. Prior to any sale or other
transfer of Bonus Shares by the grantee thereof within one year of the date of
grant, the grantee shall first offer to sell such Bonus Shares to the Company at
their then Fair Market Value by delivering written notice thereof to the
Company. The "Fair Market Value" of a share of the Common Stock shall be (a) the
last reported sales price of a share of the Common Stock on the NASD Automated
Quotation System ("NASDAQ") on the date of determination, or if no sale took
place on such date, the average of the closing bid and asked prices for a share
of the Common Stock on NASDAQ on such date, or (b) if NASDAQ is closed on the
date of determination, then as provided in clause (a) on the last day prior to
the date of determination on which NASDAQ shall report transactions. If,
however, the Common Stock shall be listed or admitted for trading on a national
securities exchange, the "Fair Market Value" of a share of the Common Stock
shall be (x) the last reported sales price of a share of Common Stock on such
exchange, or if no sale took place on such date, the average of the closing bid
and asked prices for a share of the Common Stock on such exchange on such date,
or (y) if the exchange is closed on the date of determination, then as provided
in clause (x) on the last day prior to the date of determination on which the
exchange shall be open for the transaction of business, in each case as reported
in the principal consolidated transaction reporting system for the principal
national securities exchange on which the Common Stock shall be listed or
admitted for trading. If the Common Stock is not listed or traded on NASDAQ or
on any national securities exchange, then "Fair Market Value" shall be as
determined by the Administrator, or in accordance with procedures established by
him, in good faith. If the Company does not accept the grantee's offer within
ten business days after receipt thereof, the grantee shall be free to sell such
shares to a third party at a price equal to or greater than Fair Market Value,
subject to applicable restrictions on transfer.
5. Payment of Taxes. At such time as the grant of Bonus Shares
hereunder becomes taxable for federal income tax purposes, the grantee shall
make arrangements, satisfactory to the Company, for the payment of applicable
federal, state, and local taxes (including withholding taxes) that become
payable with respect to such Bonus Shares. If the grant is subject to a vesting
schedule or certain other restrictions, and the grantee files an election under
Section 83(b) of the Internal Revenue Code with respect to the Bonus Shares, the
grantee shall inform the Company of such election and shall furnish the Company
with a copy of such election statement within 30 days after submission thereof
to the Internal Revenue Service.
6. Term; Amendment. The Plan shall be effective from the date of its
adoption by the board of directors of the Company on October 22, 1996 and shall
terminate upon the earlier of the grant of all shares authorized hereunder or
the adoption by the board of directors of a resolution terminating the Plan. The
Plan may be amended at any time and from time to time by the board of directors.
2
<PAGE>
AMENDMENT TO
1996 EMPLOYEES AND CONSULTANTS STOCK OPTION PLAN
Pursuant to Section 6 of the 1996 Employees and Consultants Stock
Option Plan (the "Plan") of The Recovery Network, Inc. (the "Company") and
pursuant to the action taken on April 15, 1997, by the Finance and Compensation
Committee of the Board of Directions of the Company, the first sentence of
Section 1 of the Plan is hereby amended to read in its entirety as follows: "The
total number of shares of Common Stock of the Company available for grant as
Bonus Shares hereunder shall be 30,768 in the aggregate."
Executed to be effective as of April 15, 1997.
THE RECOVERY NETWORK, INC.
By:/s/ William D. Moses
-----------------------
William D. Moses
<PAGE>
THE RECOVERY NETWORK, INC.
1996 BOARD OF DIRECTORS AND ADVISORY BOARD RETAINER PLAN
1. PURPOSE OF PLAN
The purpose of 1996 Board of Directors and Advisory Board Retainer Plan (the
"Plan") is to provide a means by which The Recovery Network, Inc. may attract
and retain directors and members of the Advisory Board by providing such persons
with an opportunity to participate in the growth, development and financial
success of the company which their efforts, initiative, and skill have helped to
produce.
2. DEFINITIONS
Wherever the following capitalized terms are used in the Plan, they shall have
the following respective meaning:
"Award" means a grant of Options to acquire shares of Common Stock under the
Plan.
"Board of Directors" means the board of directors of the Company.
"Change in Control" shall be deemed to have occurred if:
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, as defined below), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, a corporation owned directly or indirectly by the shareholders
of the Company in substantially the same proportions as their current
ownership of the Common Stock, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding securities
which vote generally in the election of Directors (referred to herein
as "Voting Securities"); or
(b) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors and any new
Directors whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at
least two-thirds of the Directors then still in office who either were
Directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or
(c) the shareholders of the Company approve a merger or consolidation of
the Company with any other entity, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of surviving
entity) more then 50% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or
(d) the shareholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the
Company of (in one transaction or a series of transactions) all or
substantially all of the Company's assets.
<PAGE>
"Committee" means the Finance & Compensation Committee of the Board of
Directors.
"Common Stock" means the Common Stock, par value $0.01 per share, of the
Company.
"Company" means The Recovery Network, Inc., a Colorado corporation.
"Director" means a member of the Board of Directors.
"Disability" or "disabled" means, with respect to a Participant, a physical or
mental condition resulting from any medically determinable physical or mental
impairment that renders such person incapable of engaging in any substantial
gainful employment and that can be expected to result in death or that has
lasted or can be expected to last for a continuous period of not less than six
consecutive months.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means the per share value of the Common Stock as of
a given date, determined as follows:
(a) If the Common Stock is listed or admitted for trading on any national
securities exchange, the Fair Market Value of the Common Stock is the
closing quotation for such stock on the day preceding such date, or, if
shares were not traded on the day preceding such date, then on the next
preceding trading day during which a sale occurred; or
(b) If the Common Stock is not traded on any national securities exchange,
but is quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System (NASDAQ System) or any similar system of
automated dissemination of quotations of prices in common use, the Fair
Market Value of the Common Stock is the last sales price (if the stock
is then listed as a national market issue under the NASDAQ System) or
the average of the closing bid and asked prices (in all other cases)
for the stock on the day preceding such date as reported by NASDAQ
System (or such similar quotation system); or
(c) If neither clause (a) nor clause (b) applies, the Fair Market Value of
the Common Stock is the fair market value per share as of such
valuation date, as determined by the Committee in good faith and in
accordance with uniform principles consistently applied; Fair Market
Value under this Section 2.10(c) shall be determined on a regular
basis, not less than annually.
"Member of the Advisory Board" means a member of the Board of Advisors of the
Company.
"Officer" means an officer of the Company, as defined in Rule 16a-1(f) under the
Exchange Act, as such rule may be amended from time to time.
"Options" means options to acquire shares of Common Stock at Fair Market Value.
"Participant" means an Director or Member of the Advisory Board to whom an award
is granted under this Plan.
"Plan" means this 1996 Board of Directors and Advisory Board Retainer Plan, as
it may be amended from time to time.
"Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as such rule
may be amended from time to time.
2
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Termination of Relationship" means with respect to any Director or Member of
the Advisory Board, the time when such person ceases to be a Director or Member
of the Advisory Board of the Company for any reason, with or without cause,
including without limitation, a termination by resignation, removal, death,
disability, or failure to be nominated or reelected by the Company's
shareholders. Nothing in this Plan shall confer upon any such Director or Member
of the Advisory Board, any right to continue his or her association with the
Company or shall interfere with or restrict in any way the rights of the Company
and its shareholders, which are hereby expressly reserved, to remove any such
person at any time for any reason whatsoever, with or without cause.
3. STOCK SUBJECT TO PLAN
3.1 STOCK SUBJECT TO PLAN
The stock subject to an Award shall be shares of Common Stock. The aggregate
number of such shares reserved for issuance pursuant to Awards shall not exceed
950,000.
3.2 CHANGES IN COMPANY CAPITALIZATION
In the event that:
(a) the outstanding shares of Common Stock are hereafter changed into or
exchanged for a different number or kind of shares or other securities
of the Company, or of another entity, by reason of reorganization,
merger, consolidation, recapitalization, or reclassification; or,
(b) the number of shares is increased or decreased by reason of a stock
split, stock dividend, combination of shares or any other increase or
decrease in the number of such shares of Common Stock effected without
receipt of consideration by the Company (provided, however, that
conversion or exchange of any convertible or exchangeable securities of
the Company shall not be deemed to have been "effected without receipt
of consideration"),
then the Committee shall make appropriate adjustments in the number and kind of
shares available for Awards, including adjustments to the limitations in Section
3.1 on the maximum number and kind of shares which may be issued and outstanding
pursuant to Awards.
4. GRANTING OF AWARDS
4.1 ELIGIBILITY
Any Director or Member of the Advisory Board shall be eligible for an Award.
4.2 GRANTS
(a) Each person who is an Director on October 22, 1996 shall be granted an
Award of an Option to acquire 100,000 shares of Common Stock at Fair
Market Value.
(b) Each person who is a Member of the Advisory Board at the date of the
adoption of this Plan or who becomes a Member of the Advisory Board
3
<PAGE>
within ninety (90) days of such date shall be granted an Award of an
Option to acquire 20,000 shares of Common Stock at Fair Market Value.
4.3 ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee.
(b) Except as otherwise provided in the Plan and except as otherwise
expressly stated to the contrary in the Company's Articles of
Incorporation, Bylaws, or elsewhere, the Committee shall have the sole
discretionary authority (i) to impose such conditions and restrictions
on Awards as it determines appropriate, (ii) to interpret the Plan,
(iii) to prescribe, amend, and rescind rules and regulations relating
to the Plan, (iv) to determine Fair Market Value in accordance with
Section 2.10(c), and (v) to take any other actions in connection with
the Plan and to make all determinations under the Plan as it may deem
necessary or advisable for the administration of the Plan. The
determinations of the Committee on the matters referred to in this
Section 4 shall be binding and conclusive on all persons.
(c) The Committee may delegate to one or more persons any of its powers, or
designate one or more persons to do or perform those matters to be done
or performed by the Committee, including administration of the Plan.
Any person or persons delegated or designated by the Committee shall be
subject to the same obligations and requirements imposed on the
Committee and its members under the Plan.
(d) All expenses and liabilities incurred by members of the Committee in
connection with the administration of the Plan shall be borne by the
Company. The Committee may employ attorneys, consultants, accountants,
appraisers, brokers, or other persons. The Committee, the Company, and
its Officers and Directors shall be entitled to rely upon the advice,
opinions, or valuations of any such persons. All decisions made and all
interpretations and determinations made by the Committee in good faith
shall be final and binding upon all Participants, the Company, and all
other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made
in good faith with respect to the Plan. Members of the Committee and
each person or persons designated or delegated by the Committee shall
be entitled to indemnification by the Company for any action or any
failure to act in connection with services performed by or on behalf of
the Committee for the benefit of the Company to the fullest extent
provided or permitted by the Company's Articles of Incorporation,
Bylaws, any insurance policy, or other agreement intended for the
benefit of the Committee, or by any applicable law.
5. TERMS OF GRANTS
5.1 GRANT AGREEMENT
Each Grant shall be evidenced by a written Grant Agreement, which shall be
signed by the Participant and by an authorized Officer of the Company and which
shall refer to such terms and conditions as the Committee shall determine,
consistent with the Plan.
4
<PAGE>
5.2 ISSUANCE OF SHARES
Upon exercise of any Options granted as an Award, Participants shall be issued a
certificate for fully paid and non-assessable shares of Common Stock for the
number of shares for which such Options are exercised, which certificate may
contain a legend referring to restrictions on vesting and transfer and such
other terms and conditions as the Committee shall determine, consistent with the
Plan.
5.3 FORFEITURE OF UNVESTED SHARES
Options which have been awarded but not yet vested under this Section 5.3 shall
be forfeited if the Participant ceases to be a Director or Member of the
Advisory Board of the Company for any reason, with or without cause, including
without limitation, a termination by resignation, removal, death, disability, or
failure to be nominated or reelected by the Company's shareholders, unless
provided to the contrary in any Grant Agreement approved by the Committee
between the Participant and the Company, which Agreement shall govern any
further vesting of shares pursuant to Awards.
5.4 TRANSFER RESTRICTIONS; VESTING
(a) Unless otherwise approved in writing by the Committee, no Options and
no shares of Common Stock issued pursuant to an Award may be sold,
assigned, pledged, encumbered, or otherwise transferred until either
the Company has made an offering of its shares to the public pursuant
to a registration statement under the Securities Act or there has been
a Change of Control of the Company, except as may be provided in
Section 5.4(c) or as may otherwise be provided for in an Grant
Agreement which has been approved by the Committee. The Committee, in
its absolute discretion, may impose such other restrictions on the
transferability of the shares issued pursuant to an Award as it deems
appropriate. Any such other restriction shall be set forth in the
respective Grant Agreement and may be referred to on the certificates
evidencing such shares.
(b) Options issued to Directors shall vest monthly over three years
beginning on June 1, 1996. Subject to the provisions of Sections 5.3,
5.4(c), and 5.4(d), Awards shall otherwise become vested at such times
and in such installments (which may be cumulative) as the Committee
shall provide in the terms of each individual Grant Agreement;
provided, however, that by resolution adopted after an Award is granted
the Committee may, on such terms and conditions as it may determine to
be appropriate and subject to Sections 5.3, 5.4(c), and 5.4(d),
accelerate the time at which such Award or any portion thereof may be
vested, or such rights may be set forth in an agreement between the
Participant and the Company which has been approved by the Committee.
(c) No portion of an Award which is unvested at Termination of Relationship
shall thereafter become vested; provided, however, that provision may
be made that such Award shall become vested in the event of a
Termination of Relationship as may be determined by the Committee, or
such rights may be set forth in a Grant Agreement between the
Participant and the Company which has been approved by the Committee.
5
<PAGE>
(d) Subject to the provisions of Section 5.4(a), the Committee shall
provide, in terms of each individual Grant Agreement when such Award
becomes vested, and (without limiting the generality of the foregoing)
the Committee may provide in the terms of individual Grant Agreements
that unvested shares shall be forfeited immediately upon a Termination
of Relationship; provided, however, that provision may be made that
such shares shall become vested in the event of a Termination of
Relationship because of the Participant's retirement, death,
disability, or as may otherwise be determined by the Committee.
5.5 NO RIGHT TO CONTINUED RELATIONSHIP
Nothing in this Plan or in any Grant Agreement issued hereunder shall confer
upon any Participant, any right to continue his or her association with the
Company or shall interfere with or restrict in any way the rights of the Company
and its shareholders, which are hereby expressly reserved, to remove any such
person at any time for any reason whatsoever, with or without cause.
6. ADDITIONAL PROVISIONS
6.1 NONTRANSFERABILITY
No unvested shares issued pursuant to an Award or interest or right therein or
part thereof shall be liable for the debts, contracts or engagements of the
Plan.
6.2 RESTRICTIONS ON MODIFICATIONS
Notwithstanding anything to the contrary contained herein, the Committee shall
not amend or modify the Plan more than once every six (6) months or in any other
manner inconsistent with the requirements of Rule 16b-3(c)(2)(ii) except to the
extent required by changes in the Internal Revenue Code, the Employee Retirement
Income Security Act of 1974, or regulations and rules issued thereunder. No
termination or amendment of the Plan may, without the consent of a Participant,
adversely affect the rights of such Participant notwithstanding anything to the
contrary herein. No Award may be granted during any period of suspension of the
Plan nor after termination of the Plan, and in no event may any Award be granted
under this Plan after August 30, 2006.
6.3 DUTIES OF THE COMPANY
The Company shall pay all original issue taxes with respect to the issuance or
delivery of shares pursuant to an Award and all other fees and expenses
necessarily incurred by the Company in connection therewith.
6.4 ABSENCE OF A COMMITTEE
Should the Board of Directors fail to appoint the Committee or should there be
no Committee for any other reason, then the Plan shall be administered by the
Board of Directors. In the absence of a Committee, the Board of Directors shall
have all the powers of the Committee as set forth herein in administration of
the Plan.
6
<PAGE>
7. GENERAL PROVISIONS
7.1 NO RIGHTS
Neither the adoption and maintenance of the Plan, the granting of Awards
pursuant to the Plan, nor issuance of shares pursuant to Awards shall be deemed
to constitute a contract of employment between the Company and any Participant
or to be a condition of the employment of any person. The Plan and any Awards
granted under the Plan shall not confer upon any Participant any right with
respect to a continued relationship with the Company, nor shall they interfere
in any way with the right of the Company or its shareholders to terminate the
relationship of any Participant with the Company at any time, and for any
reason, with or without cause.
7.2 COSTS OF ADMINISTRATION
The Company shall pay all costs and expenses of administering the Plan.
7.3 CONTROLLING LAWS
The issuance of shares of Common Stock under the Plan shall be subject to all
applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required. The
provisions of this Plan shall be interpreted so as to comply with the conditions
and requirements of the Securities Act, the Exchange Act, and rules and
regulations issued thereunder, including without limitation Rule 16b-3, unless a
contrary interpretation of any such provisions is otherwise required by
applicable law. Except to the extent preempted by Federal law, this Plan and all
Grant Agreements entered into pursuant hereto shall be construed and enforced in
accordance with, and governed by, the laws of the State of Colorado, determined
without regard to its conflict of laws rules.
7
<PAGE>
AMENDMENT TO
THE RECOVERY NETWORK, INC.
1996 DIRECTOR RETAINER PLAN
Pursuant to the action taken on April 15, 1997, by the Finance and
Compensation Committee of the Board of Directors of The Recovery Network, Inc.
(the "Company"), the 1996 Board of Directors and Advisory Board Retainer Plan
(the "Plan") is hereby amended by replacing the second sentence of Section 3.1
of the Plan with the following: "The aggregate number of such shares reserved
for issuance pursuant to Awards shall not exceed 113,652."
Executed to be effective as of April 15, 1997.
THE RECOVERY NETWORK, INC.
By:/s/ William D. Moses
----------------------
William D. Moses
<PAGE>
THE RECOVERY NETWORK, INC.
1997 MANAGEMENT BONUS PLAN
ARTICLE I
INTRODUCTION
1.1 Establishment. THE RECOVERY NETWORK, INC., a Colorado corporation,
hereby establishes the 1997 Management Bonus Plan, which permits the grant of
stock options, restricted stock awards, stock appreciation rights, stock units,
and other stock grants to certain directors and key employees of RNET.
1.2 Purposes. The purposes of the Plan are (a) to provide directors and
key employees selected for participation in the Plan with added incentives to
continue in the service of RNET, (b) to create in such directors and employees a
more direct interest in the success of the operations of RNET by relating
compensation to the achievement of long-term corporate economic objectives, and
(c) to attract and retain directors and key employees by providing an
opportunity for investment in RNET.
1.3 Effective Date. The effective date of the Plan shall be the
Effective Date, which is the date on which it was approved by the shareholders
of RNET in accordance with section 422 of the Code.
ARTICLE II
DEFINITIONS
Throughout the Plan, except when the context indicates otherwise, the
masculine gender shall include the feminine, and the use of any term in the
singular shall include the plural. The following terms shall have the meanings
set forth:
"Affiliated Corporation" shall mean any corporation or other entity
(including without limitation a partnership) that is affiliated with RNET
through stock ownership or otherwise and is treated as a common employer under
sections 414(b) and 414(c) of the Code, including without limitation means any
parent or subsidiary of RNET as defined in section 424 of the Code.
"RNET" shall mean The Recovery Network, Inc., a Colorado corporation,
and any Affiliated Corporation.
"Award" shall mean an Option, a Restricted Stock Award, a Stock
Appreciation Right, a Stock Unit, a grant of Shares pursuant to article XI, or
another issuance of Shares hereunder.
"Board" shall mean the board of directors of RNET.
A "Change in Control" shall have occurred if (a) a "person" (within the
meaning of section 13(d) of the Securities Exchange Act of 1934) becomes the
"beneficial owner" (as defined
<PAGE>
in Rule 13d-3 promulgated thereunder) of Shares or capital stock of RNET or
RNET's successor having 30 percent or more of the total number of votes that may
be cast for the election of directors or (b) individuals who are directors of
RNET at the beginning of a 24-month period cease to constitute at least
two-thirds of all directors at any time during such period.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Committee" shall mean members of the Finance & Compensation Committee
of the Board who are empowered hereunder to take action in the administration of
the Plan, except that the full Board shall act as the Committee with respect to
any matter in its sole discretion.
"Disabled" or "Disability" shall have the meaning set forth in section
22(e)(3) of the Code.
"Effective Date" shall mean February 4, 1997.
"Eligible Parties" shall mean directors and key employees of RNET.
"Fair Market Value" of a Share shall mean its fair market value as
determined by the Committee in good faith in accordance with section 422 of the
Code.
"Incentive Option" shall mean an Option designated as such and granted
in accordance with section 422 of the Code.
"Non-Qualified Option" shall mean any Option other than an Incentive
Option.
"Option" shall mean a right to purchase Shares at a stated or formula
price for a specified period of time and shall be either an Incentive Option or
a Non-Qualified Option.
"Option Certificate" shall mean a written stock option certificate
issued by RNET in the name of the Option Holder and in such form as may be
approved by the Committee. An Option Certificate shall incorporate and conform
to the conditions set forth in section 7.2 and other terms and conditions
consistent with the Plan as the Committee may deem appropriate.
"Option Holder" shall mean a Participant who has been granted one or
more Options.
"Option Price" shall mean the price at which Shares subject to an
Option may be purchased, as determined in accordance with section 7.2(b).
"Participant" shall mean an Eligible Party designated by the Committee
from time to time during the term of the Plan to receive one or more Awards.
"Plan" shall mean this 1997 Management Bonus Plan.
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<PAGE>
"Restricted Stock Award" shall mean an Award of Shares granted pursuant
to article VIII that is subject to restrictions imposed in article VIII.
"Share" shall mean a share of the Common Stock, par value $0.01 per
share, of RNET.
"Stock Appreciation Right" shall mean the right, granted by the
Committee pursuant to the Plan, to receive a payment equal to the increase in
the Fair Market Value of a Share subsequent to the grant of such right. A Stock
Appreciation Right may entitle a Participant to receive a number of Shares
(without any payment to RNET, except for applicable withholding taxes), cash, or
Shares and cash, as determined by the Committee in accordance with section 10.3.
"Stock Unit" shall mean a measurement component equal to the Fair
Market Value of a Share on the date of determination.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee. Members of the
Committee shall be appointed from time to time by the Board, shall serve at the
pleasure of the Board, and may resign at any time upon written notice to the
Board. Consistent with the Plan, the Committee in its sole discretion shall
select Participants from among the Eligible Parties, shall determine Awards, the
number of Stock Units, Stock Appreciation Rights, or Shares to be subject to
Awards, and the time at which Awards are to be made, shall fix the Option Price
and the period and manner in which an Option becomes exercisable, and shall
establish the duration and nature of the restrictions in Restricted Stock
Awards, the terms and conditions applicable to Stock Units, and such other terms
and requirements of the compensation incentives under the Plan as the Committee
may deem necessary or desirable. The Committee shall determine the form or forms
of the agreements with Participants that evidence the particular provisions,
terms, conditions, rights, and duties of RNET and the Participants with respect
to Awards, which provisions need not be identical except as may be provided
herein. The Committee may from time to time adopt such rules and regulations to
carry out the purposes of the Plan as it may deem proper and in the best
interests of RNET. The Committee in its sole discretion may correct any defect,
supply any omission, or reconcile any inconsistency in the Plan or in any
agreement entered into hereunder in the manner and to the extent it deems
expedient. No member of the Committee shall be liable for any action or
determination made in good faith. The determinations, interpretations, and other
actions of the Committee pursuant to the Plan shall be binding and conclusive
for all purposes.
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ARTICLE IV
SUBJECT SHARES
4.1 Number. The number of Shares that are authorized for issuance under
the Plan shall not exceed 179,020. This number may be increased from time to
time by the Board, with the approval of the shareholders of RNET if, in the
opinion of counsel to RNET, shareholder approval is required. Shares that may be
issued upon exercise of Options or Stock Appreciation Rights or that are issued
with respect to Stock Units or as Restricted Stock Awards, incentive
compensation, or other grants under the Plan shall reduce the number of Shares
available for issuance under the Plan. RNET shall at all times during the term
of the Plan and while any Options or Stock Units are outstanding reserve as
authorized but unissued at least the number of Shares from time to time required
under the Plan. Any Shares subject to an Option that expires or is terminated
before exercise shall become available for issuance under the Plan.
4.2 Adjustments for Stock Split, Stock Dividend, Etc. If at any time
RNET increases or decreases the number of Shares outstanding or changes the
rights and privileges of such Shares through the payment of a stock dividend,
the making of any other distribution payable in Shares, a stock split,
subdivision, consolidation, or combination of Shares, or a reclassification or
recapitalization involving the Shares, then the numbers, rights, and privileges
of Shares as to which Awards may be granted and Shares then subject to an Award
shall be increased, decreased, or changed in like manner as if such Shares had
been issued and outstanding.
4.3 Other Distributions and Changes. If at any time (a) RNET
distributes with respect to the Shares assets or securities of persons other
than RNET (excluding cash or distributions described in section 4.3), or (b)
RNET grants to the holders of its Shares generally rights to subscribe pro rata
for additional Shares or other securities of RNET, or (c) any other change
(except as described in section 4.2) occurs in the number or kind of outstanding
Shares or other securities into which the Shares are changed or for which they
are exchanged, and if the Committee in its discretion determines that such event
equitably requires an adjustment in the number or kind of Shares subject to an
Award, an adjustment in an Option Price, or the taking of other action by the
Committee, including without limitation the setting aside of property for
delivery to the Participant upon the exercise of an Option or the full vesting
of an Award, then such adjustments shall be made and such other action shall be
taken by the Committee and shall be effective for all purposes and on each
outstanding Award affected. Notwithstanding the foregoing and pursuant to
section 8.3, a Participant holding Shares received as a Restricted Stock Award
shall have the right to receive all amounts, including cash and property of any
kind, distributed with respect to the Shares upon becoming a holder of record of
the Shares.
4.5 General Adjustment Rules. No adjustment or substitution provided
for in this article IV shall require RNET to issue a fractional Share, and the
total substitution or adjustment with respect to each Award shall be limited by
deleting any fractional Share. In such case, the total Option Price for Shares
then subject to an Option shall remain unchanged, but the Option Price per Share
shall be equitably adjusted by the Committee to reflect the greater or lesser
number of Shares or other securities into which the Shares subject to the Option
may have been changed. Appropriate adjustments shall be made to other Awards to
reflect any such substitution
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or adjustment. All adjustments under this article IV shall be made by the
Committee, whose determination shall be final and binding upon all parties.
ARTICLE V
CORPORATE REORGANIZATION
5.1 Reorganization. Upon the occurrence of any of the following events,
if the notice provided in section 5.2 has been given, the Plan and all
outstanding Options shall terminate and be of no further force and effect, and
all other outstanding Awards shall be treated in accordance with sections 5.2
and 5.3, without the necessity for any additional action by the Board or RNET:
(a) the merger or consolidation of RNET with or into another
corporation or other reorganization (other than a reorganization under
the United States Bankruptcy Code) of RNET (other than a consolidation,
merger, or reorganization in which RNET is the surviving corporation
and which does not result in any reclassification or change of
outstanding Shares);
(b) the sale or conveyance of the property of RNET as an
entirety or substantially as an entirety (other than a sale or
conveyance in which RNET continues as holding company of an entity or
entities that conduct the business or business formerly conducted by
RNET); or
(c) the dissolution or liquidation of RNET.
5.2 Required Notice. At least 30 days' written notice of an event
described in section 5.1 shall be given by RNET to each Option Holder and
Participant unless (a) in the case of events described in sections 5.1(a) and
5.1(b), RNET or the successor or purchaser shall make adequate provision for the
assumption of the outstanding Options or the substitution of new options on
comparable terms, except that an Option Holder shall have the right thereafter
to purchase the kind and amount of securities or property or cash receivable
upon such event by a holder of the number of Shares that would have been
received upon exercise of the Option immediately prior to the occurrence of such
event (assuming that such holder failed to exercise any rights of election and
received per Share the kind and amount of property received per Share by the
holders of a majority of the non-electing Shares) or (b) RNET or the successor
or purchaser shall make adequate provision for the adjustment of outstanding
Awards other than Options so that such Awards shall entitle the Participant to
receive the kind and amount of securities or property or cash receivable upon
such event by a holder of the number of Shares that would have been received
with respect to such Award immediately prior to the occurrence of such event
(assuming that such holder failed to exercise any rights of election and
received per share the kind and amount of property received per Share by the
holders of a majority of the non-electing Shares). This article V shall
similarly apply to successive mergers, consolidations, reorganizations, sales,
or conveyances. Notice shall be deemed to have been given when delivered
personally to a Participant or when mailed to a Participant by certified mail,
postage prepaid, at such Participant's address last known to RNET.
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5.3 Acceleration of Exercise. Participants notified in accordance with
section 5.2 may exercise their Options at any time before the occurrence of the
event requiring the giving of notice (but subject to occurrence of such event),
regardless of whether all conditions of exercise relating to length of service,
attainment of financial performance goals, or otherwise have been satisfied.
Upon the giving of notice in accordance with section 5.2, all restrictions with
respect to Restricted Stock Awards and other Awards shall lapse immediately, all
Stock Units shall become payable immediately, and all Stock Appreciation Rights
shall become exercisable. Any Options, Stock Appreciation Rights, or Stock Units
that are not assumed or substituted under section 5.2(a) or 5.2(b) and that have
not been exercised prior to the event described in section 5.1 shall
automatically terminate upon the occurrence of such event.
5.4 Limitation on Payments. If this article V would result in the
receipt by any Participant of a payment within the meaning of section 2806 of
the Code and the regulations promulgated thereunder and if the receipt of such
payment by any Participant would, in the opinion to counsel to RNET, result in
the payment by such Participant of any excise tax provided for in sections 2806
and 4999 of the Code, then the amount of such payment shall be reduced to the
extent required, in the opinion of independent tax counsel, to prevent the
imposition of such excise tax, except that the Committee, in its sole
discretion, may authorize the payment of all or part of the amount of such
reduction to the Participant.
ARTICLE VI
PARTICIPATION
Participants shall be those Eligible Parties who, in the judgment of
the Committee, are performing, or during the term of their incentive arrangement
will perform, vital services in the management, operation, and development of
RNET or an Affiliated Corporation and contribute significantly, or are expected
to contribute significantly, to the achievement of long-term corporate economic
objectives. Participants may be granted from time to time one or more Awards,
except that the grant of each Award shall be separately approved by the
Committee, and receipt of one Award shall not result in automatic receipt of any
other Award. Upon determination by the Committee that an Award is to be granted
to a Participant, written notice shall be given specifying the terms,
conditions, rights, and duties related thereto. Each Participant shall, if
required by the Committee, enter into an agreement with RNET, in such form as
the Committee shall determine consistent with the Plan specifying such terms,
conditions, rights, and duties. Awards shall be deemed to be granted as of the
date specified in the grant resolution of the Committee, which date shall be the
date of any related agreement with the Participant. In the event of any
inconsistency between the Plan and any such agreement, the provisions of the
Plan shall govern.
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ARTICLE VII
OPTIONS
7.1 Grant of Options. Coincident with or following designation for
participation in the Plan, a Participant may be granted one or more Options. The
Committee in its sole discretion shall designate whether an Option is an
Incentive Option or a Non-Qualified Option. The Committee may grant both an
Incentive Option and a Non-Qualified Option to a Participant at the same time or
at different times. Incentive Options and Non-Qualified Options, whether granted
at the same time or at different times, shall be deemed to have been awarded in
separate grants and shall be clearly identified, and in no event shall the
exercise of one Option affect the right to exercise any other Option or affect
the number of Shares for which any other Option may be exercised, except as
provided in section 7.2(b).
7.2 Option Certificate. Each Option granted under the Plan shall be
evidenced by an Option Certificate, incorporating and conforming to the
following:
(a) Number of Shares. Each Option Certificate shall state that
it covers a specified number of Shares, as determined by the Committee. The
maximum number of Shares subject to Options granted to any one Participant
during the term of the Plan shall be 500,000 Shares.
(b) Price. The price at which each Share may be purchased
shall be determined in each case by the Committee and set forth in the Option
Certificate, but in no event shall the price be less than 100 percent of the
Fair Market Value of the Shares on the date of grant.
(c) Duration of Options; Restrictions on Exercise. Each Option
Certificate shall state the period, as determined by the Committee, within which
the Option may be exercised. Such period shall end no more than ten years from
the date the Option is granted. The Option Certificate shall also set forth such
restrictions on exercise of the Option during such period, if any, as may be
determined by the Committee. No Option may be exercised for at least six months
after the date of grant. Each Option shall become exercisable over such period
of time, if any, or upon such events, as may be determined by the Committee.
(d) Termination of Service, Death, Disability, etc. The
Committee may specify the period, if any, after which an Option may be exercised
following termination of the Option Holder's employment or service as a
director. The effect of this section 7.2(d) shall be limited to determining the
consequences of a termination, and nothing in this section 7.2(d) shall restrict
or otherwise interfere with RNET's discretion with respect to the termination of
any individual's employment or the shareholders' discretion with respect to the
election of directors. If the Committee does not otherwise specify, the
following shall apply:
(i) If the employment or service of the Option Holder
terminates for any reason other than death or Disability within six
months after the date the Option is granted or if the employment or
service of the Option Holder is terminated within the
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Option Period for "cause," as determined by RNET, the Option shall
thereafter be void for all purposes. As used in this section 7.2(d),
"cause" shall mean a gross violation, as determined by RNET, of RNET's
established policies and procedures or willful misconduct.
(ii) The Option may be exercised by the Option Holder
if he becomes Disabled, and the Option may by the persons specified in
section 7.2(d)(iv) if the Option Holder dies, within one year following
his Disability (except that exercise shall occur during the duration of
the Option) but not thereafter. In any such case, the Option may be
exercised only as to Shares as to which it had become exercisable on or
before the date of the termination of the Option Holder's employment
because of Disability or death.
(iii) If the Option Holder is no longer a director of
RNET or employed by RNET or an Affiliated Corporation during the
duration of the Option for any reason other than "cause," Disability or
death, and such termination occurs more than six months after the
Option is granted, the Option may be exercised by the Option Holder
within three months following the date of such termination (except that
such exercise shall occur during the duration of the Option) but not
thereafter. In any such case, the Option may be exercised only as to
the shares as to which the Option had become exercisable on or before
the date of termination of employment.
(iv) If the Option Holder dies during the duration of
the Option while still employed or within the one-year period referred
to in section 7.2(d)(ii) or the three-month period referred to in
section 7.2(d)(iii), the Option may be exercised by those entitled to
do so under the Option Holder's will or by the laws of descent and
distribution.
(e) Transferability. No Option shall be transferable by the
Option Holder except by will or the laws of descent and distribution. Each
Option is exercisable during the Option Holder's lifetime only by him, or in the
event of Disability or incapacity, by his guardian or legal representative.
(f) Consideration for Grant of Option. Each Option Holder
agrees to remain in the service of RNET as a director or in the employment of
RNET, at the pleasure of RNET, for a continuous period of at least one year
after the date the Option is granted, and in the case of an employee at the
salary rate in effect on the date of the Option Certificate or at such changed
rate as may be fixed from time to time by RNET. Nothing in this paragraph shall
limit or impair RNET's right to terminate the employment of any employee or the
shareholders' rights with respect to the election of directors.
(g) Manner of Exercise. An Option shall be exercised by
delivery to RNET of written notice specifying the number of Shares with respect
to which such Option is exercised. The purchase of such Shares shall take place
at the principal offices of RNET within 30 days following delivery of such
notice, at which time the Option Price of the Shares with respect to which the
Option is exercised shall be paid in full by any of the methods set forth below
or a combination thereof. Except as set forth in the next sentence, the Option
shall be exercised when
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the Option Price for the number of Shares as to which the Option is exercised is
paid to RNET in full. If the Option Price is paid by means of a broker's loan
transaction as described in section 7.2(h)(iv), in whole or in part, the closing
of the purchase of the Shares under the Option shall take place (and the Option
shall be treated as exercised) on the date on which, and only if, the sale of
Shares upon which the broker's loan was based has been closed and settled,
unless the Option Holder makes an irrevocable written election at the time of
exercise of the Option to have the exercise treated as fully effective for all
purposes upon receipt of the Option Price by RNET, regardless of whether the
sale of the Shares by the broker is closed and settled. A properly executed
certificate or certificates representing the Shares shall be delivered to or at
the direction of the Option Holder upon payment therefor. If Options on less
than all Shares subject to an Option are exercised, RNET shall deliver a new
Option Certificate evidencing the Option on the remaining Shares.
(h) Payment. The Option Price for the Shares as to which the
Option is exercised shall be paid by any of the following methods or any
combination of the following methods at the election of the Option Holder, or by
any other method approved by the Committee upon the request of the Option
Holder:
(i) in cash;
(ii) by certified, cashier's check, or other check
acceptable to RNET, payable to the order of RNET;
(iii) by delivery of certificates representing a
number of Shares then owned by the Option Holder, the Fair
Market Value of which on the date of delivery of the
certificates at least equals the Option Price for the Shares
as to which the Option is exercised, properly endorsed for
transfer to RNET, except that no Option may be exercised by
delivery to RNET of certificates representing Shares held by
the Option Holder for less than six months; or
(iv) by delivery of a properly executed notice of
exercise, together with irrevocable instructions to a broker
to deliver to RNET promptly the amount of the proceeds of the
sale of all or part of the Shares or of a loan from the broker
to the Option Holder in an amount sufficient to pay the Option
Price for the Shares as to which the Option is exercised.
(i) Date of Grant. An Option shall be deemed to be granted on
the date specified in the grant resolution of the Committee.
(j) Issuance of Additional Option. If an Option Holder pays
all or part of the exercise price of an Option with Shares, or pays all or any
part of the applicable withholding taxes with respect to the exercise of an
Option with Shares that has been held by the Option Holder for more than a
period (no shorter than six months) to be determined by the Committee, the
Committee in its sole discretion may grant to such Option Holder a new Option
covering the number of shares of Shares used to pay such exercise price or
withholding tax. The new Option
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shall have an Option Price per Share equal to the Fair Market Value of a Share
on the date of exercise of the exercised Option and shall encompass the same
terms and conditions as the exercised option, except as otherwise provided by
the Committee in its sole discretion.
7.3 Restrictions on Incentive Options. The aggregate Fair Market Value
of the Shares with respect to which Incentive Options are exercisable for the
first time by an Option Holder in any calendar year, under the Plan or
otherwise, shall not exceed $100,000. For this purpose, the Fair Market Value of
the Shares shall be determined as of the date of grant of the Option. Incentive
Options granted to an Option Holder who is the holder of record of 10 percent or
more of the outstanding capital stock of RNET shall have an Option Price equal
to 110 percent of the Fair Market Value of the Shares on the date of grant of
the Option, and the Option Period for any such Option shall not exceed five
years.
7.4 Shareholder Privileges. No Option Holder shall have any rights as a
shareholder with respect to any Shares subject to an Option until the Option
Holder becomes the holder of record of such Shares. No adjustments shall be made
for dividends or other distributions or other rights as to which there is a
record date preceding the date such Option Holder becomes the holder of record
of such Shares, except as provided in article IV.
ARTICLE VIII
RESTRICTED STOCK AWARDS
8.1 Grant. Coincident with or following designation for participation
in the Plan, the Committee may grant a Participant one or more Restricted Stock
Awards as may be determined by the Committee.
8.2 Restrictions. A Restricted Stock Award shall be subject to such
restrictions, including without limitation a Participant's continuous service as
a director or continuous employment by RNET or an Affiliated Corporation for a
restriction period specified by the Committee or the attainment of specified
performance goals and objectives determined by the Committee with respect to
such Award. The Committee in its sole discretion may require different periods
of employment or different performance goals and objectives with respect to
different Participants, to different Restricted Stock Awards, or to separate,
designated portions of the Shares comprising a Restricted Stock Award. In the
event of the death or Disability of a Participant, or the retirement of a
Participant in accordance with RNET's established retirement policy, all
employment period and other restrictions applicable to a Restricted Stock Award
shall lapse with respect to a pro rata portion of such Restricted Stock Award
based on the ratio between the number of full months of employment completed at
the time of termination of employment from the grant of the Restricted Stock
Award and the total number of months of employment required for such Restricted
Stock Award to be fully nonforfeitable, and such portion of the Restricted Stock
Award shall become fully nonforfeitable. The remaining portion of such
Restricted Stock Award shall be forfeited and immediately returned to RNET. In
the event of a Participant's termination of employment for any other reason, any
Restricted Stock Awards as to which the employment period or other restrictions
have not been satisfied (or waived or
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accelerated as provided herein) shall be forfeited, and all Shares related
thereto shall be immediately returned to RNET.
8.3 Privileges of a Shareholder; Transferability. A Participant shall
have all voting, dividend, liquidation, and other rights with respect to Shares
received a Restricted Stock Award under this article VIII upon his becoming the
holder of record of such Shares, except that the Participant's right to sell,
encumber, or otherwise transfer such Shares shall be subject to the limitations
of section 13.2.
8.4 Enforcement of Restrictions. The Committee shall cause a legend to
be placed on the certificates evidencing Shares issued pursuant to a Restricted
Stock Award referring to the restrictions provided by sections 8.2 and 8.3 and,
in addition, may in its sole discretion require the Participant to keep the
certificates evidencing such Shares, duly endorsed, in the custody of RNET or a
third party while the restrictions remain in effect.
ARTICLE IX
STOCK UNITS
Coincident with or following designation for participation in the Plan,
the Committee may grant a Participant one or more Stock Units as may be
determined by the Committee. The number of Stock Units, the goals and objectives
to be satisfied with respect to each grant of Stock Units, the time and manner
of payment for each Stock Unit, and the other terms and conditions applicable to
a grant of Stock Units shall be determined by the Committee.
ARTICLE X
STOCK APPRECIATION RIGHTS
10.1 Grant. Coincident with or following designation for participation
in the Plan, the Committee may grant a Participant one or more Stock
Appreciation Rights as may be determined by the Committee. The Committee shall
determine at the time of grant the period during which the Stock Appreciation
Right may be exercised, which period may not commence until six months after the
date of grant.
10.2 Exercise. If a Stock Appreciation Right is issued in tandem with
an Option, except as may otherwise be provided by the Committee, the Stock
Appreciation Right shall be exercisable during the period that its related
Option is exercisable. A Participant desiring to exercise a Stock Appreciation
Right shall give written notice stating the proportion of Shares and cash that
the Participant desires to receive pursuant to the Stock Appreciation Right
exercised. Within 30 days after receipt of the notice, RNET shall deliver to the
Participant a certificate or certificates for Shares and/or a cash payment in
accordance with section 10.3. The date on which RNET receives the written notice
shall be deemed the exercise date.
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10.3 Number of Shares or Amount of Cash. Subject to the discretion of
the Committee to substitute cash for Shares or Shares for cash, the number of
Shares to be issued pursuant to the exercise of a Stock Appreciation Right shall
be determined by dividing (a) the total number of Shares as to which the Stock
Appreciation Right is exercised, multiplied by the amount by which the Fair
Market Value of a Share on the exercise date exceeds the Fair Market Value of a
Share on the date of grant of the Stock Appreciation Right, by (b) the Fair
Market Value of a Share on the exercise date. Fractional shares shall not be
issued, and in lieu thereof a cash adjustment shall be paid. In lieu of issuing
Shares upon the exercise of a Stock Appreciation Right, the Committee in its
sole discretion may elect to pay the cash equivalent of the Fair Market Value of
the Shares on the exercise date for any or all Shares that would otherwise be
issuable upon exercise of the Stock Appreciation Right.
10.4 Effect of Exercise. If a Stock Appreciation Right is issued in
tandem with an Option, the exercise of the Stock Appreciation Right or the
related Option shall result in an equal reduction in the number of corresponding
Stock Appreciation Rights and Shares subject to the related Option.
10.5 Termination of Employment. Upon a Participant's termination of
service as a director or employment, any Stock Appreciation Rights then held by
such Participant shall be exercisable within the time periods, and upon the same
conditions with respect to the reasons for termination of employment, as are
specified in section 7.2(d) with respect to Options.
ARTICLE XI
OTHER STOCK GRANTS
From time to time during the duration of this Plan, the Committee in
its sole discretion may adopt one or more incentive compensation arrangements
for Participants pursuant to which the Participants may acquire shares of Shares
by purchase, outright grant, or otherwise. Any such arrangements shall be
subject to the general provisions of this Plan, and all Shares issued pursuant
to such arrangements shall be issued under this Plan.
ARTICLE XII
CHANGE IN CONTROL
Upon a Change of Control, (a) all Options shall become immediately
exercisable in full during the remaining duration thereof and shall remain so,
whether or not the Option Holders remain directors or employees of RNET or an
Affiliated Corporation, (b) all restrictions with respect to outstanding
Restricted Stock Awards shall immediately lapse, (c) all Stock Units shall
become immediately payable, and (d) all other Awards shall immediately become
exercisable or shall vest, as the case may be, without any further action or
passage of time.
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ARTICLE XIII
RIGHTS OF PARTICIPANTS
13.1 Employment. Nothing contained in the Plan or any Award shall
confer upon any Participant any right with respect to the continuation of his
employment by RNET or an Affiliated Corporation, or interfere in any way with
the right of RNET or an Affiliated Corporation, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the Participant from
the rate in existence at the time of the grant of an Award. Whether an
authorized leave of absence, or absence in military or government service, shall
constitute a termination of employment shall be determined by the Committee at
the time.
13.2 Transferability. No right or interest of any Participant in an
Award shall be assigned or transferred during the lifetime of the Participant,
voluntarily or involuntarily, or subjected to any lien, directly or indirectly,
by operation of law, or otherwise, including execution, levy, garnishment,
attachment, pledge, or bankruptcy. In the event of a Participant's death, his
rights and interests in Awards shall, to the extent provided in the Plan, be
transferable by will or the laws of descent and distribution, and payment of any
amounts due under the Plan shall be made to, and exercise of any Options may be
made by, the Participant's legal representatives, heirs, or legatees. If in the
opinion of the Committee a person entitled to payments or to exercise rights
with respect to the Plan is disabled from caring for his affairs because of
mental condition, physical condition, or age, payment due such person may be
made to, and such rights shall be exercised by, such person's guardian,
conservator, or other legal personal representative upon furnishing the
Committee with evidence satisfactory to the Committee of such status.
13.3 No Plan Funding. Obligations to Participants under the Plan shall
not be funded, trusteed, insured, or secured in any manner. Participants shall
have no security interest in any assets of RNET or any Affiliated Corporation
and shall be only general creditors of RNET.
ARTICLE XIV
GENERAL
14.1 Investment Representations. RNET may require any Participant, as a
condition of exercising an Option or a Stock Appreciation Right or receiving a
Restricted Stock Award, Stock Unit, or grant of Shares, to give written
assurances in substance and form satisfactory to RNET that he is acquiring the
Shares for his own account for investment purposes and not with a present
intention of selling or otherwise distributing the same and to such other effect
as RNET deems necessary or appropriate in order to comply with applicable
securities laws.
14.2 Securities Laws. (a) Each Award shall be subject to the
requirement that, if at any time RNET determines that the listing, registration,
or qualification of the Shares subject to such Award upon any securities
exchange or under any state or federal law, or the consent or approval of any
governmental or regulatory body, is necessary as a condition of or in connection
with the issuance or purchase of Shares thereunder, such Award may not be
accepted or exercised in whole or in part unless such listing, registration,
qualification, consent, or approval has been
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effected or obtained on conditions acceptable to the Committee. Nothing herein
shall be deemed to require RNET to apply for or to obtain such listing,
registration, or qualification.
(b) If a Participant is an officer or director of RNET within
the meaning of section 16 of the Securities Exchange Act of 1934, then to the
extent that section 16 is applicable, Awards shall be subject to all conditions
required under Rule 16b-3 or any successor rule to qualify the Award for an
exception from the provisions of section 16(b). Such conditions shall be set
forth in the agreement with the Participant which describes the Award.
14.3 Changes in Accounting Rules. Notwithstanding any other provision
of the Plan to the contrary, if, during the term of the Plan, any changes in the
financial or tax accounting rules applicable to Awards occurs which, in the sole
judgment of the Committee, may have a material adverse effect on the reported
earnings, assets, or liabilities of RNET, the Committee shall have the right and
power to modify as necessary any then outstanding Awards as to which the
applicable employment or other restrictions have not been satisfied.
14.4 Other Employee Benefits. The amount of any compensation deemed to
be received by a Participant as a result of the exercise of an Option or Stock
Appreciation Right, the sale of shares received upon such exercise, the vesting
of any Restricted Stock Award, distributions with respect to Stock Units, or the
grant of Shares shall not constitute "earnings" or "compensation" with respect
to which any other employee benefits of such Participant are determined,
including without limitation benefits under any pension, profit sharing, life
insurance, or salary continuation plan.
14.5 Plan Amendment, Modification, and Termination. The Committee may
at any time terminate, and from time to time may amend or modify the Plan,
except that no amendment or modification may become effective without approval
of the shareholders if shareholder approval is required to enable the Plan to
satisfy any applicable statutory or regulatory requirements, or if RNET on the
advice of counsel determines that shareholder approval is otherwise necessary or
desirable. No amendment, modification, or termination of the Plan shall
adversely affect any Award theretofore granted without the consent of the
Participant holding such Award.
14.6 Withholding. (a) Requirement. RNET's obligation to deliver Shares
upon the exercise of any Option or Stock Appreciation Right, the vesting of any
Restricted Stock Award, payment with respect to Stock Units, or a grant of
Shares shall be subject to the Participant's satisfaction of all applicable
federal, state, and local income and other tax withholding requirements.
(b) Withholding with Shares. At the time an Award is granted,
the Committee in its sole discretion may grant the Participant an election to
pay all or part of such tax withholding by electing to transfer to RNET, or to
have RNET withhold from Shares otherwise issuable to the Participant, Shares
having a Fair Market Value on the date of withholding equal to the amount
required to be withheld or such lesser amount as may be elected by the
Participant. All elections shall be subject to the approval or disapproval of
the Committee. Any such election
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by a Participant (a) shall be made prior to the date of withholding, (b) shall
be irrevocable, and (c) if the Participant is an officer or director of RNET
within the meaning of section 16 of the Securities Exchange Act of 1934, then to
the extent that section 16 is applicable the Participant shall satisfy the
requirements of section 16 and any applicable rules thereunder.
(c) Withholding for Non-Qualified Options. Upon exercise of a
Non-Qualified Option, the Option Holder shall make appropriate arrangements with
RNET to provide for the amount of additional withholding required by sections
3102 and 3402 of the Code and applicable state income tax laws, including
payment of such taxes through delivery of Shares or by withholding Shares to be
issued under the Option.
(d) Withholding for Incentive Options. If an Option Holder
makes a disposition (as defined in section 424(c) of the Code) of any Shares
acquired pursuant to the exercise of an Incentive Option before the expiration
of two years from the date on which the Incentive Option was granted or prior
to the expiration of one year from the date on which the Option was exercised,
the Option Holder shall send written notice to RNET at its principal office of
the date of such disposition, the number of Shares disposed of, the amount of
proceeds received from such disposition, and any other information relating to
such disposition as RNET may reasonably request. The Option Holder shall then
make appropriate arrangements with RNET to provide for the amount of additional
withholding, if any, required by sections 3102 and 3402 of the Code and
applicable state income tax laws.
14.7 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
14.8 Duration. Unless sooner terminated by the Board, the Plan shall
terminate on December 31, 2006, and no Award shall be made after such
termination. Awards outstanding at the time of Plan termination may continue to
be exercised, or become free of restrictions, or be paid in accordance with
their terms.
15
<PAGE>
AMENDMENT TO
THE RECOVERY NETWORK, INC.
1997 MANAGEMENT BONUS PLAN
Pursuant to the action taken on April 15, 1997, by the Finance and
Compensation Committee of the Board of Directors of The Recovery Network, Inc.
(the "Company"), the 1997 Management Bonus Plan of the Company (the "Plan") is
hereby amended by replacing the first sentence of Section 4.1 of the Plan with
the following: "The number of Shares that are authorzed for issuance under the
Plan shall not exceed 206,086."
Executed to be effective as of April 15, 1997.
THE RECOVERY NETWORK, INC.
By:/s/ William D. Moses
--------------------------
William D. Moses
<PAGE>
FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT
This NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") dated as of _______
("Date of Grant"), is made by and between THE RECOVERY NETWORK, INC., a Colorado
corporation ("RNET"), and ____________, an individual residing in
______________, California ("Option Holder").
1. Grant. In consideration of his employment by RNET, RNET hereby
grants Option Holder a non-qualified stock option ("Option") to purchase, at any
time after the Option becomes exercisable as provided in section 2 and on or
before _____________, ______ shares of the Common Stock, par value $0.01 per
share, of RNET ("Common Stock") at $5.00 per share ("Option Price"). The Option
is not intended to qualify as an incentive stock option within the meaning of
section 422 of the Internal Revenue Code of 1986 ("Code"). The Option shall
expire on ____________.
2. Exercise. (a) The Option shall become exercisable with respect to
___ shares of Common Stock on __________ and with respect to an additional ___
shares of Common Stock on the first day of each calendar month thereafter until
the Option is exercisable for all ____ shares of Common Stock. If Option Holder
ceases to be an employee of RNET, then the Option shall be exercisable for only
the number of shares of Common Stock as to which it was exercisable on the date
on which Option Holder ceases to be an employee of RNET.
(b) The Option may be exercised by delivery to RNET of written
notice specifying the number of shares with respect to which the Option is
exercised and the Option Price for such number of shares. The notice shall
contain Option Holder's representation that he is purchasing such the shares for
investment purposes only and his agreement not to sell any shares so purchased
in violation of the Securities Act of 1933 or other applicable law. Such
restrictions or notice thereof shall be placed on the certificates representing
the shares so purchased, and RNET may refuse to issue the certificates or to
transfer the shares on its books unless it is satisfied that no violation of
such restrictions will occur. The Option Price shall be paid (i) in cash, (ii)
by certified or cashier's check payable to the order of RNET, or (iii) by
delivery of certificates representing a number of shares of Common Stock, the
fair market value of which (as determined in the sole discretion of the board of
directors of RNET) at least equals the Option Price of the shares purchased
pursuant to the Option. No shares of Common Stock acquired through the exercise
of an incentive stock option or an option granted under an employee stock
purchase plan may be used to purchase shares pursuant to the Option until the
holding period applicable to such shares has expired. Furthermore, in no case
may shares of Common Stock be used to purchase shares pursuant to the Option
until the shares have been held for at least six months. Upon issuance, a
certificate or certificates representing the shares so purchased shall be
delivered to Option Holder.
3. Adjustments. (a) Stock Split, Stock Dividend, etc. If at any time
RNET increases or decreases the number of shares of Common Stock outstanding or
changes the rights and privileges of such shares, by means of the payment of a
stock dividend or the making of any other distribution on such shares payable in
Common Stock, or through a stock split, subdivision
<PAGE>
of shares, consolidation, or combination of shares, or through a
reclassification or recapitalization involving the Common Stock, the number,
rights, and privileges of the shares covered by the Option shall be increased,
decreased, or changed in like manner as if such shares had been outstanding at
the time. In such event, the total Option Price shall remain unchanged and shall
be apportioned ratably over the increased or decreased number or changed kind of
securities or other property subject to the Option.
(b) Other Changes. If any change (other than as described in
section 3(a)) occurs in the number or kind of outstanding shares of Common Stock
or other securities into which the Common Stock shall be changed or for which
the Common Stock shall have been exchanged, then an equitable adjustments shall
be made to the number of shares subject to the Option.
(c) Adjustments for Certain Distributions of Property. If at
any time RNET distributes securities or other property (except money or shares
of Common Stock) with respect to the Common Stock, then a proportionate part of
such securities or other property shall be set aside and delivered to Option
Holder when he exercises the Option, in the same ratio to the total securities
and property set aside for Option Holder as the number of shares of Common Stock
with respect to which the Option is then exercised bears to the total shares of
Common Stock subject to the Option. Upon any occurrence described in this
section 3(c), the total Option Price shall remain unchanged but shall be
apportioned ratably over the increased or decreased number of shares of Common
Stock subject to the Option.
(d) Rights to Subscribe. If at any time RNET grants to the
holders of its Common Stock generally rights to subscribe pro rata for
additional shares thereof or for any other securities of RNET or any other
corporation at a price below the then fair market value thereof, then there
shall be added to the number of shares subject to the Option the number of
shares of Common Stock or other securities that Option Holder would have been
entitled to subscribe for if, immediately prior to such grant, Option Holder had
exercised the Option in full, and the Option Price shall be increased by the
amount of the price that would have been payable by Option Holder for such
Common Stock or other securities.
(e) No Adjustment. Except as expressly provided in this
section 3, the issuance by RNET of shares of capital stock of any class or
securities convertible into or exchangeable for shares of capital stock of any
class for cash, property, labor, or services, either upon sale or upon exercise
of rights or warrants to subscribe therefor, or upon conversion of obligations
of RNET convertible into or exchangeable for shares of capital stock of any
class shall not affect, and no adjustment by reason thereof shall be made with
respect to, the number of shares subject to the Option.
(f) Determinations. Adjustments under this section 3 shall be
made by the finance and compensation committee of the board of directors of
RNET, whose determinations with respect thereto shall be final and binding. No
fractional shares shall be issued on account of any adjustment.
2
<PAGE>
4. Termination. Upon the occurrence of any of the following events, if
the notice hereafter provided has been given, the Option shall automatically
terminate and be of no further force or effect:
(a) the merger or consolidation of RNET, if (i) RNET is not the
surviving corporation and the shareholders of RNET immediately
before the merger or consolidation do not own a majority of the
voting securities of the surviving corporation outstanding
immediately after the effectiveness of the merger or
consolidation or (ii) RNET becomes a subsidiary of another
corporation;
(b) the acquisition of the assets or capital stock of RNET pursuant
to a non-taxable reorganization, unless the acquiring corporation
assumes the obligations of RNET under this Agreement or
substitutes a new option in accordance with the regulations
promulgated under section 425(a) of the Code as if the Option
were an incentive stock option;
(c) the dissolution or liquidation of RNET;
(d) the appointment of a receiver for all or substantially all of the
assets or business of RNET;
(e) the appointment of a trustee for RNET after a petition has been
filed for the reorganization of RNET under applicable law; or
(f) the sale, lease, or exchange of all or substantially all of the
assets or business of RNET.
At least 30 days written notice of any event described in clause (a), (b), (e),
or (f) shall be given by RNET to Option Holder. No notice is required of the
events described in clauses (c) and (d). Such notice shall be deemed to have
been given when delivered personally to Option Holder or when mailed by
certified mail, postage prepaid, to Option Holder's last known address. If
Option Holder is notified of an event described in clause (b), he may exercise
his Option in whole or in part at any time before the occurrence of the event
requiring the giving of notice (but subject to occurrence of such event),
regardless of whether all conditions of exercise relating to continuance of
service as an employee have been satisfied.
5. Change of Control. If a Change in Control (as hereinafter defined)
occurs, the Option shall become exercisable in full, regardless of whether all
conditions of exercise have been satisfied. A "Change in Control" is deemed to
have occurred if (a) a "person" (as defined in section 13(d) of the Securities
Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3
under the Securities Exchange Act of 1934) of shares of Common Stock
representing 30 percent or more of the shares as to which votes may be cast for
the election of directors of RNET or (b) individuals who are directors of RNET
at the beginning of a 24-month period cease to constitute at least two-thirds of
all directors of RNET at any time during such period.
3
<PAGE>
6. Restrictions on Sale. The Option and any shares issued or issuable
upon the exercise of the Option may not be sold, transferred, or otherwise
disposed of for at least six months from the Date of Grant.
7. Transferability. No right or interest of Option Holder in the Option
may be assigned or transferred during the lifetime of Option Holder, either
voluntarily or involuntarily, or be subjected to any lien, directly or
indirectly, by operation of law or otherwise, including execution, levy,
garnishment, attachment, pledge, or bankruptcy. In the event of Option Holder's
death, Option Holder's rights and interest in the Option shall be transferable
by will or pursuant to the laws of descent and distribution. The Option shall be
exercisable during Option Holder's lifetime only by Option Holder or, in the
event of disability or incapacity, by Option Holder's guardian or legal
representative.
8. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be given by personal delivery or by
registered or certified mail, postage prepaid, addressed:
If to RNET:
THE RECOVERY NETWORK, INC.
506 Santa Monica Boulevard, Suite 400
Santa Monica, CA 90401
Attn: William D. Moses
with a copy to:
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4100
Denver, CO 80203
Attn: Francis Wheeler, Esq.
If to Option Holder:
or at such other address as may have been furnished to the other party in
writing. Any such notice shall be deemed to have been given as of the date so
delivered or mailed.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE RECOVERY NETWORK, INC.
By: ______________________________________
William D. Moses
President and Chief Executive Officer
______________________________________
[Name of option holder]
5
<PAGE>
EXHIBIT 10.1
================================================================================
OPERATING AGREEMENT
of RecoveryNet Interactive, L.L.C.
a Delaware Limited Liability Company
August 1, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I -- DEFINITIONS
1.1 Definitions............................................................1
1.2 Additional Definitions.................................................4
1.3 Terms Generally........................................................4
ARTICLE II -- ORGANIZATION
2.1 Formation of Company...................................................5
2.2 Name...................................................................5
2.3 Principal Place of Business............................................5
2.4 Registered Agent and Registered Office.................................5
2.5 Term...................................................................5
2.6 Purpose................................................................6
ARTICLE III -- CAPITAL CONTRIBUTIONS
3.1 Ownership Interests; Initial Capital Contributions.....................6
3.2 Additional Capital Contributions.......................................6
3.3 Effect of Failure to Contribute........................................6
3.4 No Right to Withdraw...................................................8
3.5 No Third Party Beneficiaries...........................................8
ARTICLE IV -- CAPITAL ACCOUNTS
4.1 Capital Accounts.......................................................9
4.2 Adjustments............................................................9
4.3 Market Value Adjustments...............................................9
4.4 Transfer..............................................................10
ARTICLE V -- ALLOCATION OF PROFITS AND LOSSES
5.1 Determination.........................................................10
5.2 Losses................................................................10
5.3 Profits...............................................................10
5.4 Nonrecourse Deductions................................................10
5.5 Minimum Gain Chargeback...............................................10
5.6 Qualified Income Offset...............................................11
(i)
<PAGE>
Page
----
5.7 Gain Chargeback.......................................................11
5.8 Tax Allocations.......................................................11
5.9 Transfer..............................................................11
5.10 Contributed Property..................................................12
5.11 Tax Credits...........................................................12
5.12 Distributions of Cash.................................................13
5.13 Distributions Subject to Expenses.....................................13
ARTICLE VI -- MANAGEMENT AND CONTROL
6.1 Officers of the Company...............................................13
6.2 Matters Requiring Member Consent......................................14
6.3 Matters Requiring Unanimous Consent...................................15
6.4 Budgets and Business Plans............................................16
6.5 Meetings of the Members...............................................17
ARTICLE VII -- TRANSFER OF OWNERSHIP INTERESTS
7.1 Transfer Restrictions; Permitted Transfers............................18
7.2 Right of First Refusal................................................19
7.3 General Conditions on Transfers.......................................20
7.4 Rights of Transferees.................................................20
7.5 Effect of Attempted Transfer..........................................21
7.6 Indemnification in Case of Unauthorized Transfers.....................21
ARTICLE VIII -- DISSOLUTION
8.1 Dissolution...........................................................21
8.2 Continuation after Certain Withdrawals................................21
ARTICLE IX -- LIQUIDATION
9.1 Liquidation...........................................................22
9.2 Priority of Payment...................................................22
9.3 Capital Account Deficit Make-Up Requirement...........................22
9.4 Liquidating Distributions to Members..................................23
(ii)
<PAGE>
Page
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ARTICLE X -- COVENANTS, REPRESENTATIONS AND WARRANTIES
10.1 Confidentiality......................................................23
10.2 Representations......................................................24
ARTICLE XI -- INDEMNIFICATION
11.1 Members' Indemnification.............................................24
11.2 Indemnification as to Actions or Omissions in Company's Business.....25
11.3 Cross Indemnification................................................25
11.4 Indemnification Procedures...........................................25
ARTICLE XII -- BOOKS, RECORDS, ACCOUNTING AND REPORTS
12.1 Maintenance of Books and Records.....................................26
12.2 Operating and Financial Statements...................................26
12.3 Other Information....................................................26
12.4 Tax Matters Member...................................................26
ARTICLE XIII -- MISCELLANEOUS
13.1 Governing Law........................................................27
13.2 Notice...............................................................27
13.3 Counterparts.........................................................28
13.4 Entirety.............................................................28
13.5 Amendment............................................................28
13.6 Waiver of Partition and Dissolution..................................28
13.7 Severability.........................................................28
13.8 Parties in Interest..................................................28
13.9 Further Assurances...................................................28
13.10 No Right of Set Off..................................................29
13.11 No Strict Construction...............................................29
13.12 No Waiver............................................................29
13.13 Headings.............................................................29
13.14 Costs and Expenses of Agreement......................................30
13.15 Dealing with Related Parties.........................................30
13.16 Other Activities.....................................................30
Exhibit A - Initial Budget and Three-Year Business Plan................... A-1
(iii)
<PAGE>
OPERATING AGREEMENT OF
RECOVERYNET INTERACTIVE, L.L.C.
This Operating Agreement (this "Agreement") is made and entered into as of
August 1, 1996 by and among TCI Online RecoveryNet Holdings, Inc. ("TCII"), a
Colorado corporation, and Recovery Network, Inc., a Colorado corporation
("RTV").
In consideration of the mutual covenants and agreements contained in this
Agreement and other good and valuable consideration, the receipt and adequacy of
which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. The following terms used in this Agreement will have the
meanings specified below, unless otherwise provided in this Agreement:
"Accountant" means the Company's independent public accountant or
accounting firm that audits the Company's financial statements and prepares any
financial or tax determination required under this Agreement.
"Act" means the Delaware Limited Liability Company Act.
"Additional Capital Contribution" means a capital contribution that a
Member makes pursuant to Section 3.2 or 3.3, including any Excess Contribution.
"Affiliate" of a Person means any Person that controls, is controlled by or
is under common control with, such Person. For purposes of this definition,
"control" means (i) the ownership, directly or indirectly, of equity securities
or other ownership interests in a Person by another Person, which represent more
than 50% of the voting power in such Person, or (ii) the power to direct the
management and policies of any Person, whether through the ability to elect or
appoint a majority of the directors or similar officials of such Person, by
contract or otherwise.
"Bankruptcy" of a Member will be deemed to have occurred upon the happening
of any of the following:
(1) the valid appointment of a receiver or trustee to administer all
or a substantial portion of such Member's assets or its Ownership Interest;
<PAGE>
(2) the filing by such Member of a voluntary petition for relief under
the Bankruptcy Code or of a pleading in any court of record admitting in
writing its inability to pay its debts as they become due;
(3) the making by such Member of a general assignment for the benefit
of creditors;
(4) the filing by such Member of an answer admitting the material
allegations of, or its consenting to or defaulting in answering, a petition
for relief filed against it in any proceeding under the Bankruptcy Code; or
(5) the entry of an order, judgment or decree by any court of
competent jurisdiction, granting relief against such Member in a proceeding
under the Bankruptcy Code if such order, judgment or decree continues
unstayed and in effect for a period of 30 days after such entry.
"Bankruptcy Code" means the Bankruptcy Code of 1978, as amended.
"Business Day" means any day (other than a day which is a Saturday, Sunday
or legal holiday in the State of Colorado) on which banks are open for business
in Denver, Colorado.
"Business Plan" means the overall business plan of the Company prepared and
approved in accordance with Article VI, to include the Budget, marketing and
advertising plans, developmental plans, merchandising plans, distribution plans
and such other matters as may be deemed appropriate.
"Capital Account" means the capital account maintained for each Member in
accordance with the provisions of this Agreement and the ss.704(b) Regulations.
"Capital Contribution" means any contribution by a Member to the Company
which is either an Initial Capital Contribution or an Additional Capital
Contribution.
"Code" means the Internal Revenue Code of 1986 (including corresponding
provisions of subsequent revenue laws).
"Company" means the limited liability company formed pursuant to this
Agreement.
"Confidential Information" means confidential or proprietary information
developed or acquired by the Company other than information which (i) is or
becomes publicly known, through no wrongful act on the part of any person who
shall have received such information, (ii) is independently developed by such
person or (iii) is explicitly approved for release by the Company.
"Controlled Affiliate" means an Affiliate of a Person which such Person
controls, whether by ownership of voting securities, contract or otherwise.
2
<PAGE>
"Distribution" means any cash or other property distributed by the Company
to the Members in accordance with Section 5.12, 9.2(d) or 9.4.
"Fair Market Value" means as to any property, the price at which a willing
seller would sell and a willing buyer would buy such property having full
knowledge of the facts, in an arm's-length transaction without time constraints,
and without being under any compulsion to buy or sell.
"Fiscal Year" means the fiscal year of the Company.
"Initial Capital Contribution" means the initial capital contribution made
by a Member pursuant to Section 3.1.
"License Agreement" means the Distribution Agreement dated as of July ___,
1996 between the Company and RTV.
"Liquidation" means the process of terminating the Company under Article IX
after its dissolution.
"Losses" means the Company's net loss (including deductions) for any Tax
Year, determined under Section 5.1.
"Member Consent" means the written consent of Members owning at least 66
2/3% of the Ownership Interests.
"Member" or "Members" means any or all of TCII, RTV and any other Person
hereafter admitted to the Company in accordance with the terms of this
Agreement.
"Ownership Interest" means, with respect to each Member, the entire
interest of such Member in the Company, including its interest in the Profits
and Losses of the Company, its Capital Account, its rights to a distributive
share of the Company's assets, and all other rights and obligations of such
Member under this Agreement, expressed as a percentage interest, as initially
specified in Schedule 1, as amended from time to time as provided in this
Agreement.
"Person" means an individual or corporation, partnership, limited liability
company, trust, unincorporated organization, association or other entity.
"Profits" means the Company's taxable income for federal income tax
purposes for any Fiscal Year, as adjusted for book items and determined under
Section 5.1.
"Regulations" means the Treasury Regulations (including temporary and, at
the option of the Tax Matters Member, proposed, regulations) promulgated under
any section of the Code, as amended from time to time (including corresponding
provisions of succeeding regulations). The
3
<PAGE>
"ss.704(b) Regulations" and "ss.704(c) Regulations" refer to such Treasury
Regulations promulgated under those two sections of the Code, respectively.
"Service" means the provision of on-line information addressing interests
of individuals recovering from or affected by substance abuse, addiction or
related mental health disorders.
"Tax Year" means the taxable year of the Company, including both 12-month
and short taxable years.
"Transfer" means a sale, assignment, mortgage, hypothecation, pledge,
encumbrance, transfer or other disposition, whether voluntary or by operation of
law.
1.2 Additional Definitions. The following terms are defined in the Sections
indicated below:
Defined Term Section
------------ -------
Budget 6.4
Capital Call 3.2
CEO 6.1
Company Subordinated Loan 3.3
Contributing Member 3.3
Contribution Date 3.3
Covering Member 3.3
Default Budget 6.4
Default Budget Year 6.4
Effective Date 7.4
Election Period 7.2
Excess Contribution 3.3
First Year Commitment 3.2
Liability 11.1
Liquidating Agent 9.1
Non-Contributing Member 3.3
Offer Notice 7.2
Offeree 7.2
Offeror 7.2
Restricted Transfer Period 7.1
Sponsored Health Information Business 13.1
Tax Matters Member 12.4
Third Party Offer 7.2
1.3 Terms Generally. The definitions in Sections 1.1 and 1.2 will apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any
4
<PAGE>
pronoun will include the corresponding masculine, feminine and neuter forms. The
words "include," "includes" and "including" will be deemed to be followed by the
phrase "without limitation." All references to Articles, Sections, Exhibits and
Schedules will be deemed references to Articles and Sections of, and Exhibits
and Schedules to, this Agreement unless the context otherwise requires. Unless
the context otherwise requires, any references to any agreement or other
instrument or statute or regulation are to it as amended and supplemented from
time to time (and, in the case of a statute or regulation, to any successor
provisions). Any reference in this Agreement to a "day" or number of "days"
(without the explicit qualification of "Business") will be interpreted as a
reference to a calendar day or number of calendar days. If any action or notice
is to be taken or given on or by a particular calendar day, and such calendar
day is not a Business Day, then such action or notice will be deferred until, or
may be taken or given on, the next Business Day.
ARTICLE II
ORGANIZATION
2.1 Formation of Company. The Members formed the Company pursuant to the
Act for the purposes and upon the terms and conditions set forth in this
Agreement on August 6, 1996, by filing a Certificate of Formation with the
Delaware Secretary of State. The Company will sign, file and record any
documents required under applicable law and take such other appropriate actions
to comply with the requirements of formation and operation of a limited
liability company and the conduct of business under the laws of the State of
Delaware and any other appropriate jurisdiction.
2.2 Name. The name of the Company will be RecoveryNet Interactive, L.L.C.
The business of the Company may be conducted under such other name or names as
the Members may from time to time determine pursuant to Section 6.2. The name
and any trade or service names, marks, emblems or logos used by the Company will
be the exclusive property of the Company (except as otherwise provided in the
License Agreement), and no Member will have the right to use any such name,
mark, emblem or logo other than on behalf of the Company.
2.3 Principal Place of Business. The principal place of business of the
Company will be at 506 Santa Monica Boulevard, Suite 400, Santa Monica,
California 90401, or such other place designated from time to time by the
Members.
2.4 Registered Agent and Registered Office. The registered agent of the
Company for service of process will be the Corporation Service Company. The
registered office of the Company will be 1013 Centre Road, Wilmington, New
Castle County, Delaware 19805. The Company may change its registered office or
registered agent in Delaware in accordance with the Act.
2.5 Term. The term of the Company will commence on the date of this
Agreement and will continue through December 31, 2044, unless earlier terminated
in accordance with this Agreement.
5
<PAGE>
2.6 Purpose. The principal purposes of the Company are (i) to acquire,
develop, market and distribute programming, information and services (including,
without limitation, the Service) related to the needs of individuals affected by
alcohol, drug, and other addictive behavioral issues such as depression, anxiety
, eating or stress disorders and (ii) to engage in related activities and to
conduct such other related businesses or activities as are incidental, related,
convenient or appropriate to such purposes. The Company will have all powers
necessary to engage in any and all activities which the Members deem necessary
or desirable to accomplish the purposes of the Company.
ARTICLE III
CAPITAL CONTRIBUTIONS
3.1 Ownership Interests; Initial Capital Contributions.
(a) The initial Ownership Interest of each Member is the percentage
set forth in Schedule 1. Except as expressly provided in this Agreement or
as may result from a transfer of Ownership Interests required or permitted
by this Agreement, the Ownership Interest of a Member will not be subject
to increase or decrease without such Member's prior consent.
(b) Contemporaneously with the execution of this Agreement, each
Member will contribute or cause to be contributed to the Company as its
Initial Capital Contribution the cash or other property set forth opposite
its name in Schedule 1. The value of such contribution as specified in
Schedule 1 will be credited to the applicable Member's Capital Account and
such value will be treated as the amount contributed as such Member's
Initial Capital Contribution.
3.2 Additional Capital Contributions. Except as provided in this Article
III or Sections 6.3 or 9.3, the Members will not be required to make Additional
Capital Contributions to the Company. The Members will be required to make
Additional Capital Contributions in cash to the Company in the amount of
$200,000 each at such time during the initial Fiscal Year of the company as
specified by the CEO and in amounts as specified in the Budget for each Fiscal
Year following the initial Fiscal Year (or the Default Budget, as applicable),
and the Members will instruct the CEO to cause such Additional Capital
Contributions to be applied in a manner consistent with such Budget. The
responsibility for the payment of required Additional Capital Contributions will
be allocated among the Members pro rata according to their Ownership Interests.
The Additional Capital Contributions required of the Members under this
Section 3.2 will be due and payable on the date specified in the applicable
Budget or authorization for such Additional Capital Contribution, or, in the
case of the initial Fiscal Year, the date specified by the CEO (the
"Contribution Date"). The aggregate Additional Capital Contribution due and
payable on each Contribution Date shall constitute a "Capital Call."
3.3 Effect of Failure to Contribute.
6
<PAGE>
(a) If any Member (the "Non-Contributing Member") fails to contribute
its full pro rata share of an Additional Capital Contribution on or before
the Contribution Date, the provisions of Section 3.3(c) will apply. In
addition, a Member may cause a written notice to be provided within 30 days
after the Contribution Date to each of the Member(s) which contributed its
full pro rata share of the Additional Capital Contribution (the
"Contributing Member(s)"), offering to each Contributing Member, on a pro
rata basis (based upon the proportion that such Contributing Member's
Profits Interest bears to the aggregate Profits Interests of all
Contributing Members), the opportunity to advance or contribute to the
Company, all or a portion of the unpaid amount of the Additional Capital
Contribution during the period ending 20 days after the receipt of such
written notice (the "Additional Contribution Period"). If a Contributing
Member (the "Covering Member") pays a share of a Non-Contributing Member's
Additional Capital Contribution within the Additional Contribution Period,
the amount so paid will be deemed at the option of such Covering Member (to
be stated in writing at the time such payment is made) to be either (i) a
loan made by such Covering Member to the Company (a "Company Subordinated
Loan") to be governed by Section 3.3(b), or (ii) an Additional Capital
Contribution to the Company by the Covering Member in excess of its pro
rata share of an Additional Capital Contribution (an "Excess
Contribution"). If a Covering Member does not indicate an election of
treatment pursuant to the preceding sentence, the Covering Member will be
deemed to have made the Excess Contribution election. If the entire unpaid
amount of Additional Capital Contributions is not advanced or contributed
within the Additional Contribution Period, the Covering Member(s) which
advanced or contributed their full pro rata share of such unpaid amount
may, within 10 days after the end of the Additional Contribution Period,
advance or contribute the remaining unpaid amount on a pro rata basis
(based upon the proportion that each such Covering Member's Ownership
Interest immediately prior to such Excess Contribution bears to the
aggregate Ownership Interests of all such Covering Members immediately
prior to such Excess Contribution) or on such basis as such Covering
Members may otherwise agree.
Notwithstanding the foregoing, if all of the Contributing Members agree,
then one or more Contributing Members may, on or before the date 15 days after
the expiration of the Additional Contribution Period, advance to the Company as
a Company Subordinated Loan amounts which in the aggregate equal the full amount
of Additional Capital Contributions originally requested from all Members in the
applicable Capital Call, in which case upon the funding of such Company
Subordinated Loan, the Capital Call in question will be rescinded and all
amounts previously contributed by Members in response to the Capital Call will
be returned promptly without interest. The Contributing Members shall agree
among themselves as the amount, if any, to be so advanced by each Contributing
Member.
(b) In the event Covering Member(s) elect to advance a share of one or
more Non-Contributing Members' Additional Capital Contribution(s) as
Company Subordinated Loan(s) pursuant to Section 3.3(a), then the amount so
advanced will (i) become an obligation of the Company to such lending
Covering Member(s), (ii) will bear interest, at an annual rate of [3.0]
percentage points above the interest rate announced publicly from time to
time by The Bank of New York as its prime lending rate (adjusted as and
when changes in such prime lending rate occur), or the highest rate of
interest legally permitted, whichever interest rate is lower, compounded
quarterly,
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(iii) will be repaid to the lending Covering Member(s), if permitted by the
terms of all loan(s) and credit agreement(s) entered into by the Company
with any lender which is not a Member or an Affiliate of any Member, at
such time as the Company generates sufficient net income, other sources of
borrowed funds are available, or Additional Capital Contributions have been
made, to permit such repayment without impairing the solvency of the
Company, and (iv) will be repaid prior to any Distributions to the Members.
Notwithstanding the foregoing, any unpaid Company Subordinated Loans will
become immediately due and payable in full upon dissolution of the Company,
upon a merger of the Company into another Person or upon consummation of a
sale or other disposition of all or substantially all of the Company's
assets. The Members will cause the Company promptly to deliver to each
lending Covering Member a promissory note evidencing the Company
Subordinated Loan made by such Member. All Company Subordinated Loans will
be deemed loans by such lending Covering Members to the Company and will
not be deemed Capital Contributions.
(c) If one or more Members is a Non-Contributing Member, then after
expiration of the periods referred to in Section 3.3(a) for the making of
Excess Contributions and Company Subordinated Loans, unless the applicable
Capital Call is rescinded as specified in Section 3.3(a), each of the
Member's respective Ownership Interest shall be reduced or increased to a
fraction, the numerator of which is (i) the cumulative sum of all Capital
Contributions (including Initial Capital Contributions and Additional
Capital Contributions), if any, made by such Member (including Capital
Contributions made by such Member in response to the Capital Call in
question), and the denominator of which is (ii) the cumulative sum of all
Capital Contributions (including Initial Capital Contributions, Additional
Capital Contributions, and Excess Contributions) made by all Members
(including Capital Contributions made by all Members in response to the
Capital Call in question). Such adjustments to the Ownership Interests of
the Members shall be effective as of the Contribution Date for the
Additional Capital Contributions in question.
(d) Whenever any Member's Ownership Interest is adjusted pursuant to
this Section or Section 3.4, or there is a Transfer of an Ownership
Interest, the CEO will amend Schedule 1 as of the effective date of such
adjustment or Transfer to reflect the new Ownership Interests of all
Members.
3.4 No Right to Withdraw. No Member will have the right to withdraw any
amount from its Capital Account or to receive any Distribution, except in
accordance with the terms of this Agreement. No Member will have the right to
demand or, except as otherwise provided in this Agreement, receive a
Distribution of property other than cash. No Member will be entitled to interest
on its Capital Contributions or on the positive balance in its Capital Account.
No Member will be entitled to resign or retire from the Company except upon the
Company's dissolution or except as provided in Section 3.6.
3.5 No Third Party Beneficiaries. The obligations of the Members to make
Capital Contributions under the terms of this Agreement will not be construed as
conferring any rights or benefits on any third party, including the holder of
any obligation or indebtedness of the Company
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or any obligation secured by a mortgage, deed of trust or other encumbrance upon
the assets of the Company.
ARTICLE IV
CAPITAL ACCOUNTS
4.1 Capital Accounts. A Capital Account will be maintained for each Member
and will be credited, charged and otherwise adjusted as required by Code ss.
704(b) and the ss. 704(b) Regulations. Each Member's Capital Account will be:
(a) Credited with (i) the amount of cash and the Fair Market Value of
any property contributed by the Member to the capital of the Company, (ii)
the Member's allocable share of Profits, (iii) the amount of any
liabilities of the Company assumed by the Member or secured by any property
distributed to the Member, and (iv) all other items properly credited to
Capital Account as required by the ss. 704(b) Regulations; and
(b) Charged with (i) the Member's allocable share of Losses, (ii) the
Distributions made to the Member, (iii) the amount of liabilities of the
Member assumed by the Company or secured by property contributed to the
Company by the Member, and (iv) all other items properly charged to Capital
Account as required by the ss. 704(b) Regulations.
All credits and charges to Capital Accounts with respect to Profits and Losses
will be allocated among the Members in accordance with the provisions of Article
5. Any unrealized appreciation or depreciation with respect to any asset
distributed in kind will be allocated among the Members in accordance with the
provisions of Article 5 as if such asset had been sold for its Fair Market Value
on the date of distribution, and the Members' Capital Accounts will be adjusted
to reflect both the deemed realization of such appreciation or depreciation and
the Distribution of such property.
4.2 Adjustments. The Members intend to comply with the ss. 704(b)
Regulations in all respects, and the Members agree to adjust the Capital
Accounts of the Members to the full extent that the ss. 704(b) Regulations may
apply (including applying the concepts of qualified income offsets and minimum
gain chargebacks). To this end, the Members agree to make any Capital Account
adjustment that is necessary or appropriate to maintain equality between the
aggregate Capital Accounts of the Members and the amount of capital of the
Company reflected on its balance sheet (as computed for book purposes), as long
as such adjustments are consistent with the underlying economic arrangement of
the Members and are based, wherever practicable, on federal tax accounting
principles.
4.3 Market Value Adjustments. The Members agree to make appropriate capital
account adjustments upon any transfer of an Ownership Interest, including those
that apply upon the
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constructive liquidation of the Company under ss. 708(b) of the Code, all in
accordance with the ss. 704(b) Regulations.
4.4 Transfer. If all or part of any Ownership Interest is transferred in
accordance with the terms of this Agreement, the Capital Account of the
transferor that is attributable to the transferred interest will carry over to
the transferee.
ARTICLE V
ALLOCATION OF PROFITS AND LOSSES
5.1 Determination. The terms "Profits" and "Losses" shall mean,
respectively, the net profits and losses of the Company determined on a yearly
basis in accordance with the method of accounting for federal income tax
purposes except that such net profit or loss will be determined (a) by including
as an item of income any income that is exempt from taxation, (b) by deducting
as an expense any expenditure of the Company not deductible in computing its
taxable income and not properly chargeable to a Capital Account, or deemed not
deductible in computing its taxable income and not properly chargeable to a
Capital Account in accordance with the ss.704(b) Regulations and (c) by
calculating the gain, loss, depreciation and amortization on property which is
reflected in the Capital Accounts at a book basis different from the basis of
such property for federal income tax purposes based on the book basis of such
property in accordance with the ss.704(b) Regulations. Any allocation of Profits
or Losses will be considered a pro rata allocation of each item entering into
the computation of Profits and Losses.
5.2 Losses. Losses of the Company for each Tax Year will be allocated to
the Members in proportion to their respective Ownership Interests.
5.3 Profits. Profits of the Company for each Tax Year will be allocated to
the Members in proportion to their respective Ownership Interests.
5.4 Nonrecourse Deductions. Losses attributable to Company nonrecourse
liabilities (for which no Member bears the economic risk of loss) will be
allocated in the same manner as Losses are allocated pursuant to Section 5.2,
and Losses of the Company attributable to Member nonrecourse liabilities (which
are nonrecourse to the Company, but for which one or more Member bears the
economic risk of loss) will be allocated, notwithstanding the general rule on
allocation of Losses stated in Section 5.2, to those Members bearing the
economic risk of loss for the liability. The allocation of liabilities to
property, the determination of nonrecourse deductions, the effect of property
revaluations and all other issues affecting the allocation of nonrecourse
deductions will be determined in accordance with the ss. 704 Regulations.
5.5 Minimum Gain Chargeback. Notwithstanding the general rule on allocation
of Profits stated in Section 5.3, if there is a net decrease in Company minimum
gain for any Tax Year, each Member will be allocated items of Company Profits
for such year equal to such Member's share of the net decrease in Company
minimum gain. If there is a net decrease in Member nonrecourse debt
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minimum gain for any Tax Year, each Member having a share of such minimum gain
will be allocated items of Company Profits equal to such Member's share of such
net decrease in Company nonrecourse minimum gain. The determination of net
decreases in Company minimum gain and Member nonrecourse debt minimum gain,
allocations of such net decreases, exceptions to minimum gain chargebacks and
all other issues affecting the minimum gain chargeback requirements will be
determined in accordance with the ss. 704(b) Regulations.
5.6 Qualified Income Offset. If any Member unexpectedly receives an
adjustment, allocation or distribution described in the qualified income offset
provisions of the ss. 704(b) Regulations, then such Member will be allocated
items of income and gain in an amount and manner sufficient to eliminate any
adjusted negative balance (determined under the ss. 704(b) Regulations,
including adjustments to reflect reasonably expected future items) in such
Member's Capital Account as quickly as possible. Such items will consist of a
pro rata portion of each item of Company income (including gross income) and
gain of the Company for such Tax Year. If more than one Member receives such an
allocation, such items will be allocated among them in the ratio of the adjusted
negative balances in their Capital Accounts.
5.7 Gain Chargeback. Notwithstanding the general rule stated in Section 5.3
but subject to the prior application of the minimum gain chargeback and
qualified income offset rules stated in Sections 5.5 and 5.6, Profits of the
Company incident to its dissolution and Liquidation will be allocated among the
Members as follows: (a) if one or more Members have a negative Capital Account
balance, to such Members in proportion to and to the extent of such negative
balance until all such negative balances are eliminated, (b) if the positive
balances in the Members' Capital Account balances are not in proportion to their
respective Ownership Interests, to the Members to the minimum extent and in the
proportion necessary to make positive Capital Account balances of the Members be
in proportion to their respective Ownership Interests, and (c) to the Members in
proportion to their respective Ownership Interests.
5.8 Tax Allocations. Allocation of items of income, gain, loss and
deduction of the Company for federal income tax purposes for a Tax Year will be
allocated, as nearly as is practicable, in accordance with the manner in which
such items are reflected in the allocations of Profits and Losses among the
Members for such Tax Year. To the extent possible, principles identical to those
that apply to allocations for federal income tax purposes will apply for state
and local income tax purposes.
5.9 Transfer. If any Ownership Interest is transferred during any Tax Year
of the Company (whether by liquidation of an Ownership Interest, transfer of all
or part of an Ownership Interest or otherwise), the books of the Company will be
closed as of the Effective Date of transfer. The Profits or Losses attributed to
the period from the first day of such Tax Year through the Effective Date of
transfer will be allocated to the transferor, and the Profits or Losses
attributed to the period commencing on the effective date of transfer will be
allocated to the transferee. In lieu of an interim closing of the books of the
Company and with the agreement of the transferor and transferee, the Members may
agree to allocate Profits and Losses for such Tax Year between the
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transferor and transferee based on a daily proration of items for such Tax Year
or any other reasonable method of allocation (including an allocation of
extraordinary Company items, as determined by the Members, based on when such
items are recognized for federal income tax purposes).
5.10 Contributed Property. All items of gain, loss and deduction with
respect to property that is reflected in the Capital Accounts of the Members at
a basis different from such property's adjusted tax basis will, solely for tax
purposes, be allocated among the Members so as to take into account the
variation between the adjusted tax basis of the property and the basis reflected
in the Member's Capital Account according to the principles of the ss.704(c)
Regulations. For example, if there is built-in gain with respect to certain
property at the time of such property's contribution to the Company, upon the
Company's sale of that property the pre-contribution taxable gain (as
subsequently adjusted under the ss. 704(c) Regulations during the period such
property was held by the Company) would be allocated to the contributing Member
(and such pre-contribution gain would not again create a Capital Account
adjustment since the property was credited to Capital Account upon contribution
at its Fair Market Value). Except as limited by the following sentence, the
allocation of tax items with respect to ss. 704(c) property to Members that do
not reflect a basis difference with respect to such property in their Capital
Accounts will, to the extent possible, be equal to the allocation of the
corresponding book items made to such Members with respect to such property. If
book allocations of cost recovery deductions (such as amortization or
depreciation) exceed the tax allocations of those items so that the ceiling rule
of the ss. 704(c) Regulations applies, the Company will make curative
allocations or remedial allocations of tax items only with the consent of all
Members. All tax allocations made under this Section 5.10 will be made in
accordance with ss. 704(c) of the Code and the ss. 704(c) Regulations.
5.11 Tax Credits. To the extent that the federal income tax basis of an
asset is allocated to the Members in accordance with the Regulations promulgated
under ss. 46 of the Code, any tax credit attributable to such tax basis will be
allocated to the Members in the same ratio as such tax basis. With respect to
any other tax credit, to the extent that a Company expenditure gives rise to an
allocation of loss or deduction, any tax credit attributable to such expenditure
will be allocated to the Members in the same ratio as such loss or deduction.
Consistent principles will apply in determining the Members' interests in tax
credits that arise from taxable or non-taxable receipts of the Company. All
allocations of tax credits will be made as of the time such credit arises. Any
recapture of a tax credit will to the extent possible, be allocated to the
Members in the same manner as the tax credit was allocated to them. Except as
otherwise specifically provided in the ss. 704(b) Regulations (such as the
adjustments required when there is an upward or downward adjustment in the tax
basis of investment credit property), allocations of tax credits and their
recapture will not be reflected by any adjustment to Capital Accounts.
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5.12 Distributions of Cash.
(a) No cash Distributions may be made by the Company until after the
date on which all Company Subordinated Loans, including interest accrued
thereon to the date of payment, have been paid in full.
(b) Notwithstanding the foregoing, on or before each March 15th prior
to the date on which Distributions are first permitted under Section
5.12(a), the Members will cause the Company to make Distributions to each
Member in an amount (as estimated by the Accountant) equal to the federal
income taxes payable by such Member (assuming taxation of such Member at
the highest applicable federal corporate tax rate) with respect to the
portion of the Company's taxable income or gain for such Tax Year that was
allocated to the Members in proportion to their respective Ownership
Interests, but such Distributions will be made only to the extent of cash
available to the Company (if any) from sources other than Company
Subordinated Loans or other Company borrowings or Capital Contributions.
(c) Once distributions are permitted to be made by the Company
pursuant to Section 5.12(a), cash from operations, refinancing and sales or
dispositions of Company property will be distributed to the Members at such
times and in such amounts as the Members may determine pursuant to Section
6.2. Except with respect to distributions incident to the Company's
dissolution and Liquidation (which will be governed by Section 9.2), any
such amounts that the Members determine to distribute pursuant to this
Section 5.12(c) will be distributed to the Members in proportion to their
respective percentage Ownership Interests at the time of such Distribution.
5.13 Distributions Subject to Expenses. All Distributions are subject to
the payment of Company obligations and expenses and to the establishment of
reserves in the reasonable discretion of the Members for working capital,
construction and other capital expenditures, maintenance, repair, operation,
programming, development, expansion, replacements, loan amortization and
interest payments and for any other reason the Members determine to be in the
best interests of the Company pursuant to Section 6.2.
ARTICLE VI
MANAGEMENT AND CONTROL
6.1 Officers of the Company. The Company will be managed by the Members.
Subject to the foregoing, the Members may appoint a Chief Executive Officer
("CEO"), who shall be responsible for the day-to-day operations of the Company
subject to the oversight and control of the Members. The CEO shall serve for a
term of a calendar year and be appointed by Member Consent. Vacancies may only
be filled by unanimous consent of the Members and day-to-day operations of the
Company shall be managed by the Members during any period when the office of the
CEO is vacant. Any CEO may be appointed to an unlimited number of terms if
agreed by the Members. The initial CEO shall be Jonathan Katch. The Company will
have such additional officers
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including a President, Vice Presidents, Secretary and Chief Financial Officer,
as may be determined pursuant to Section 6.3. The CEO and any such other
officers will have no authority to take any action with respect to any of the
matters enumerated in Sections 6.2 or 6.3 without first obtaining the requisite
approval of the Members as provided in those Sections with respect to the
transaction in question. Except as provided above or as otherwise determined
pursuant to Section 6.3, the CEO and any such other officers will (i) have such
powers as are usually exercised by comparably designated officers of a Delaware
corporation and (ii) have the power to bind the Company through the exercise of
such powers to the extent consistent with the terms of this Agreement.
6.2 Matters Requiring Member Consent. Subject to Sections 6.1 and 6.3 and
except to the extent expressly provided for in the then applicable Budget, all
action by the Company will require Member Consent, including the following:
(a) The incurrence of any expense, obligation or other liability of
the Company of any kind not provided for in the then current Budget (other
than loans or indebtedness for borrowed money subject to Section 6.3(p));
(b) The modification of the name of the Service;
(c) The modification of the name of the Company;
(d) The sale or other transfer of any assets of the Company other than
assets of immaterial value or assets sold in the ordinary course of
business;
(e) The making of Distributions to Members other than as required by
Section 5.12(b);
(f) Except in the case of purchase money financing approved in the
Budget or otherwise obtained in an immaterial amount in the ordinary course
of business, the mortgage, pledge, or grant of a security interest in any
property of the Company;
(g) The institution of any lawsuit or proceeding involving the Company
or the settlement of any such matter pending or threatened against the
Company;
(h) The appointment of or a change in the Accountants for the Company;
and
(i) The adoption of or the making of a change in a significant tax or
accounting practice or principle of the Company or the making of a
significant tax or accounting election by the Company (other than an
election under Section 754 of the Code made by the Tax Matters Member) or
the adoption of any position for purposes of any tax return that would have
a material effect on any Member (unless the taking of such position is
expressly contemplated by this Agreement).
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6.3 Matters Requiring Unanimous Consent. No action may be taken by the
Company in connection with any of the following matters without the prior
approval of the owners of all of the Ownership Interests:
(a) The adoption of each annual Budget, and the adoption of any
modifications to such Budgets;
(b) The adoption of each Business Plan and any modifications to such
Business Plans;
(c) The requesting of any Additional Capital Contributions not
provided for in the then current Budget;
(d) The dissolution of the Company pursuant to Section 8.1(a);
(e) The sale or issuance of any additional ownership interest in the
Company;
(f) The lending of money to, or guaranteeing of obligations of, any
other Person;
(g) The amendment of this Agreement;
(h) Acting other than in accordance with the purposes of the Company
set forth in Section 2.6, or engaging in any business other than the
businesses intended to be conducted by the Company as described in such
Section, or the making of commitments on behalf of the Company to specific
projects other than as provided for in the then current approved Business
Plan;
(i) The modification or termination of the License Agreement or any
other material contract of or affecting the Company;
(j) The entering into or modification of any transaction with a Member
or an Affiliate of a Member;
(k) The acquisition by the Company of an interest in any other Person;
(l) The merger or consolidation of the Company with any other Person;
(m) The selection of a Liquidating Agent pursuant to Section 9.1;
(n) The filing for bankruptcy of the Company or the making of any
assignment for the benefit of its creditors;
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(o) The sale, transfer or other disposition of all or substantially
all of the assets of the Company;
(p) the incurrence of loans or other indebtedness for borrowed money
on behalf of the Company, except as provided for in the current Budget or
in Section 3.2;
(q) The appointment of any successor to the initial CEO, the
authorization of additional officers of the Company or the delegation of
powers to a CEO or such additional officers other than as contemplated in
Section 6.1; and
(r) All matters relating to (i) the employment, compensation or
removal of any CEO prior to the expiration of his term of office or (ii)
the payment or agreement by the Company to pay cash compensation to any
officer or employee of the Company whose aggregate annual cash compensation
exceeds, or would exceed by reason of a contemplated increase exceed,
$100,000.
6.4 Budgets and Business Plans.
(a) Attached to this Agreement as Exhibit A is the Company's capital
expenditure and operating budget (a "Budget") for the period ending June
30, 1997 and the Business Plan for such period, which has been approved by
the Members.
(b) At least 60 days prior to July 1, 1997 and each succeeding July 1,
the CEO will provide the Members with a proposed Budget for the forthcoming
Fiscal Year (or such longer period as the Members may agree to pursuant to
Section 6.3), for approval in accordance with Section 6.3, which Budget
will include (i) an income statement prepared on an accrual basis which
will show in reasonable detail the revenues and expenses projected for the
Company's business for such Fiscal Year, (ii) a cash flows statement which
will show in reasonable detail the receipts and disbursements projected for
the Company's business for such Fiscal Year and the amount of any
corresponding cash deficiency or surplus, (iii) any contemplated borrowings
of the Company, (iv) the Additional Capital Contributions required of the
Members and (v) in the case of the Budget for the 1997 Fiscal Year, all
items contained in the Budget attached as Exhibit A for the six-month
period ending June 30, 1997.
(c) If the Budget for Fiscal Year beginning on July 1, 1997 or any
year thereafter has not been approved by the Members by June 30 of the
preceding Fiscal Year, the Budget for the preceding year will remain in
effect (the "Default Budget") for such new year (the "Default Budget
Year"), as adjusted (without duplication) to reflect increases or decreases
resulting from the following events:
(i) the operation of escalation or de-escalation provisions in
contracts in effect at the time of approval of the prior Fiscal Year's
Budget solely as a result of the
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passage of time or the occurrence of events beyond the control of the
Company to the extent such contracts are still in effect and have not
been terminated;
(ii) elections made in any prior Fiscal Year under contracts
contemplated by the Budget for the prior Fiscal Year regardless of
which party to such contracts makes such election;
(iii) increases or decreases in expenses attributable to the
annualized effect of employee additions or reductions during the prior
Fiscal Year contemplated by the Budget for the prior Fiscal Year;
(iv) interest expense attributable to any loans made to the
Company (including Member loans);
(v) increases or decreases in overhead expenses in an amount
equal to the total of overhead expenses reflected in the Budget for
the prior Fiscal Year (excluding nonrecurring items) multiplied by the
increase or decrease in the Consumer Price Index for the prior year
(but in no event will such change be more than 5% of the corresponding
items in the prior Fiscal Year Budget); and
(vi) decreases in expense attributable to non-recurring items
reflected in the prior Fiscal Year's Budget.
(d) Following the approval of the Budget for a Fiscal Year (or deemed
approval in the case of a Default Budget), the CEO will cause a copy of
such Budget to be delivered to each Member. In the event any modification
to the Budget is adopted in accordance with this Agreement, the CEO will
promptly issue a revised Budget reflecting such modification for the
remainder of such Fiscal Year and deliver a copy of it to each Member.
(e) At the time of submission of each Budget, the CEO will provide the
Members with a three-year Business Plan for the following three Fiscal
Years for approval in accordance with Section 6.3.
6.5 Meetings of the Members.
(a) The Members will hold regular meetings no less frequently than
quarterly and will establish meeting times, dates and places and requisite
notice requirements and adopt rules or procedures consistent with the terms
of this Agreement. The Members may meet by means of telephone, conference
telephone or similar communications equipment. A Member or Members owning
not less than 33-1/3% of the Ownership Interests will have the right to
call a special meeting of the Members at any time or from time to time by
giving prior written notice of the time, date and location (which will be
at the principal office of the Company unless otherwise agreed) or means of
conducting such meeting to each other Member. Unless a longer notice period
is
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established by the Members owning a majority of the Ownership Interests, at
least three Business Days' prior notice of a special meeting will be required.
Any Member may waive notice to such Member of any meeting in writing before, at
or after such meeting. The attendance of a Member at a meeting will constitute a
waiver of notice of such meeting, except when a Member attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting was not properly called. Except as otherwise determined by the Members
owning a majority of the Ownership Interests, all regular meetings of the
Members will be held at the principal office of the Company.
(b) A quorum for the taking of action at any meeting of the Members
will exist if owners of a majority of the Ownership Interests are present
at such meeting, provided that all Members have received prior written
notice of such meeting or have waived such notice as provided in Section
6.5(a), except that a quorum for a meeting at which matters described in
Section 6.3 will be voted on will exist if owners of at least 66-2/3% of
the Ownership Interests are present. Except where a greater vote is
required by the terms of this Agreement, any action required or permitted
to be taken by the Members must be by the affirmative vote of the owners of
a majority of the Ownership Interests or, in lieu of a meeting, by the
written consent (which may be executed in counterparts) of the owners of a
percentage of the Ownership Interests which would be required to approve
such action at a meeting of the Members. Notice specifying any action taken
by written consent shall promptly be given to all Members. Each Member
entitled to vote at a meeting of the Members may authorize another Person
to act for such Member by proxy, provided that such proxy must be signed by
the Member and will be revocable by such Member at any time prior to such
meeting. Minutes of each meeting of the Members will be prepared and
circulated to the Members. Written consents to any action taken by the
Members will be filed with the minutes.
ARTICLE VII
TRANSFER OF OWNERSHIP INTERESTS
7.1 Transfer Restrictions; Permitted Transfers. No Member may Transfer all
or any part of its Ownership Interest in any manner whatsoever during the period
from the date of this Agreement through June 30, 1999 (the "Restricted Transfer
Period"), and a Member at any time may make:
(a) A Transfer of all or a portion of its Ownership Interest with the
prior written consent of the other Members,
(b) A Transfer of all of its Ownership Interest to an Affiliate of
such Member or,
(c) A Transfer consisting of the pledge or granting of a security
interest by a Member in its Ownership Interest or its right to
Distributions from the Company, provided that no transfer of the Member's
Ownership Interest will be permitted in connection with the foreclosure
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or other enforcement of such pledge or security interest or otherwise, except in
full compliance with all of the transfer restrictions in this Agreement
(including the provisions of Section 7.2).
7.2 Right of First Refusal.
(a) Following expiration of the Restricted Transfer Period, a Member
may Transfer all of its Ownership Interest in accordance with this Section
7.2. If a Member has received and wishes to accept a bona fide written
offer from a prospective third party purchaser (including another Member)
to purchase all (but not less than all) of such Member's Ownership Interest
for cash consideration (a "Third Party Offer"), such Member (the "Offeror")
must first offer the other Members (the "Offeree"), on a pro rata basis in
proportion to their respective Ownership Interests, the opportunity to
purchase the Offeror's Ownership Interest for the consideration and on the
other terms and conditions contained in the Third Party Offer. The offer
will be made by a written notice (an "Offer Notice") to the Offeree in
which the Offeror will (i) state its bona fide intention to transfer all of
its Ownership Interest pursuant to the Third Party Offer, (ii) specify the
percentage of the Offeror's Ownership Interest being offered to each
Offeree and (iii) agree to provide such information as may reasonably be
requested by the Offeree to evaluate the prospective transferee. The Offer
Notice will be accompanied by a copy of the Third Party Offer which
specifically identifies the Person making the Third Party Offer. Each
Offeree will respond to the Offeror in writing, with a copy to the other
Members, within 30 days after its receipt of the Offer Notice (the
"Election Period") stating whether it elects to purchase all (but not less
than all) of the Ownership Interest offered to it for purchase. Within five
days after expiration of the Election Period, the Offeror will notify each
subscribing Offeree in writing of the amount, if any, of the Offeror's
Ownership Interest not subscribed for during such Election Period, and such
subscribing Offeree may subscribe for a pro rata (or greater) share of such
available Ownership Interest by giving written notice of its desired
subscription to the Offeror within 15 days after the end of the Election
Period. If more than the available Ownership Interest is subscribed for
during such post-Election Period time, each such subscribing Offeree will
have a right to its pro rata share of the applicable portion of the
Offeree's Ownership Interest or such other share as may be agreed among
them.
(b) The Offeror will not be obligated to sell any portion of its
Ownership Interest to the Offerees unless the Offerees have agreed to
purchase, collectively, all of the Offeror's Ownership Interest. If the
Offerees, collectively, fail to elect to purchase all of the Offeror's
Ownership Interest, the Offeror will be free for a period of 90 days after
the end of the Election Period (or post-Election Period, if applicable) to
sell all (but not less than all) of its Ownership Interest to the Person
which made the Third Party Offer for the cash consideration and upon the
terms and conditions set forth in the Third Party Offer. If the Ownership
Interest is not so sold during such 90-day period, the Offeror's right to
transfer such Ownership Interest will again be subject to the provisions of
this Section 7.2.
(c) Unless the participating Members otherwise agree, the closing of
any purchase by one or more Members pursuant to this Section 7.2 will be
held at the principal office of the Company at 11:00 a.m. (local time) on
the date that is the first Business Day that is more than 20
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days after the date on which all of the Offeror's Ownership Interest has
been subscribed for by the Offerees. At the closing the Offeror will
transfer its Ownership Interest, free and clear of all liens, claims and
encumbrances, and will deliver such bills of sale, assignments and other
agreements and instruments and will take all such other reasonable actions
as the purchasing Member or Members may request.
(d) The provisions of this Section 7.2 will not apply to any Transfer
of all of a Member's Ownership Interest permitted by Section 7.1(b).
7.3 General Conditions on Transfers. No Transfer of an Ownership Interest
will be effective nor will any purported transferee of an Ownership Interest
become a Member or otherwise be entitled to any of the attributes of ownership
(including the right to inspect the books or records of the Company, the right
to vote or consent in any manner whatsoever on Company matters, or the right to
receive any Distributions from the Company) applicable to the Ownership Interest
which is the subject of the purported or attempted Transfer, unless such
Transfer is permitted pursuant to Section 7.1 and 7.2 and the conditions set
forth in subsections (a), (b) and (c) below are satisfied:
(a) The transferor has executed, and delivers to the Company, a copy
of the assignment of the Ownership Interest to the transferee in form and
substance satisfactory to the Company;
(b) The transferee, if not already a party to this Agreement, executes
and delivers to the Company a counterpart of this Agreement; and
(c) If required by the other Members, the transferee (other than a
transferee Member) delivers an opinion of counsel, satisfactory in form and
substance to such Members, to the effect that the Transfer would not cause
the Company to lose its status as a partnership for federal income tax
purposes and would not violate or result in the violation of any applicable
law (including, federal, state and, if applicable, foreign securities laws
and regulations).
7.4 Rights of Transferees. Upon a Transfer of an Ownership Interest
effected in compliance with this Agreement, a transferee will be entitled to
allocations of Profits and Losses and to receive Distributions from the Company
attributable to the Ownership Interest acquired from and after the Effective
Date of the Transfer of such Ownership Interest to the transferee. The Company
and the Members will be entitled to treat the transferor of such Ownership
Interest as the absolute owner thereof in all respects and will incur no
liability for allocations of Profits and Losses or Distributions or transmittal
of reports and notices required to be given to Members which are made to the
transferor until such time as all the conditions of Section 7.3 have been
complied with and the Effective Date of the Transfer has passed. The "Effective
Date" of such Transfer, and the date on which a transferee which is not a Member
will become a Member, will be the first day following completion of all of the
requirements set forth in Section 7.3.
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7.5 Effect of Attempted Transfer. A Member which attempts to Transfer all
or any part of its Ownership Interest without complying with this Agreement will
not cease to be a Member upon such purported Transfer.
7.6 Indemnification in Case of Unauthorized Transfers. Each Member agrees
to indemnify and save harmless the Company and the Members against any and all
loss, damage and expense (including tax liabilities or loss of tax benefits)
arising, directly or indirectly, as a result of any Transfer or purported
Transfer by such Member in violation of any provision contained in this
Agreement.
ARTICLE VIII
DISSOLUTION
8.1 Dissolution. The Company will continue in existence until dissolved by
the occurrence of any one of the following events:
(a) The decision of the Members to dissolve the Company pursuant to
Section 6.3;
(b) The insolvency or bankruptcy or dissolution of the Company or a
general assignment by the Company for the benefit of its creditors;
(c) The Bankruptcy or dissolution of a Member or such other change in
the relationship of the Members causing dissolution under the Act, provided
that the Company will be deemed to be continued as specified in Section
8.2;
(d) The occurrence of any event which makes it unlawful for the
business of the Company to be carried on or for the Members to carry it on
in limited liability company form;
(e) The entry of a decree of judicial dissolution under the Act;
(f) The sale or other disposition of all or substantially all of the
Company's assets (other than cash); or
(g) The expiration of the term of the Company specified in Section
2.5.
8.2 Continuation after Certain Withdrawals. If a dissolution of the Company
results from an event described in Section 8.1(c), the business of the Company
will be deemed to be continued (without liquidation or winding up of the
Company's affairs) by the Persons that are Members immediately following such
event.
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ARTICLE IX
LIQUIDATION
9.1 Liquidation. Upon dissolution of the Company, a Person (the
"Liquidating Agent") selected by the Members pursuant to Section 6.3 will
immediately proceed to wind up the affairs of the Company and liquidate all or
any part of the Company's assets it deems appropriate. Any gain or loss on the
disposition of Company property in liquidation will be credited or charged to
the Members as provided in Articles IV and V.
9.2 Priority of Payment. Except as otherwise required by Section 9.1, the
Company assets will be distributed in liquidation of the Company in the
following order:
(a) To the payment or provision for the payment of the debts and
liabilities of the Company including any amounts which may be owed to any
Members (except Company Subordinated Loans) and the expenses of
liquidation;
(b) To the payment of Company Subordinated Loans;
(c) To the establishment of any reserves which the Members or the
Liquidating Agent, as the case may be, may deem reasonably necessary for
any contingent or unforeseen liabilities or obligations of the Company;
(d) To the payment to the Members of their respective Capital Accounts
as adjusted for their respective shares of the liquidation Profits and
Losses and after taking into account any required Capital Contributions
pursuant to Section 9.3.
9.3 Capital Account Deficit Make-Up Requirement. Upon an actual or
constructive Liquidation of the Company, any Member with a negative balance in
such Member's Capital Account will pay to the Company an amount of money equal
to such negative balance by the end of the Company taxable year during which
such event occurs (or, if later, within 90 days after the date of such event).
For purposes of determining a Member's obligation to restore a negative Capital
Account balance upon an actual or constructive Liquidation of the Company, the
negative balance in such Member's Capital Account will be determined after the
allocation of all Profits and Losses of the Company for the Company taxable year
during which such Liquidation occurs (including any gain or loss with respect to
assets distributed in kind, and any income or gain allocated to such Member
pursuant to the qualified income offset and minimum gain chargeback provisions,
if applicable), and after the Company pays or provides for the payment of
Company liabilities and the Company sets up reasonable reserves as provided in
Section 9.2 (but immediately prior to the Company making distributions to
Members with respect to their Capital Accounts).
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9.4 Liquidating Distributions to Members.
(a) The liquidating Distributions due to the Members may be made by
either or both of the following methods at the election of the Liquidating
Agent: (i) selling the Company assets and distributing the net proceeds; or
(ii) distributing the Company assets in kind to the Members in proportion
to the amounts distributable to them pursuant to Section 9.2, and
calculating the value of such assets at their Fair Market Value (reduced by
the amount of associated liabilities) on the date of distribution. Any
Distribution in kind to the Members may be made, if the Members unanimously
agree, by non pro rata distribution of specific assets at Fair Market Value
(reduced by the amount of associated liabilities) on the effective date of
Distribution. Appropriate and customary prorations and adjustments will be
made incident to any Distribution in kind. All liquidating distributions
will be made by the end of the Company's taxable year during which the
actual Liquidation occurs (or, if later, within 90 days after the date of
such event).
(b) Any Distribution in kind may be made subject to, or require
assumption of, liabilities to which such property may be subject, but in
the case of any non-pro rata Distribution in kind only upon the express
written consent of the Member receiving such Distribution.
(c) Each Member hereby agrees to save and hold harmless the other
Members from such Member's proportionate share of any and all liabilities
which are assumed in accordance with Section 9.4(b).
(d) Subject to Section 9.4(c), the Members will look solely to the
assets of the Company for the return of their Capital Contributions to the
Company, and if the assets of the Company remaining after the payment or
discharge of the debts and liabilities of the Company are insufficient to
return such contributions, they will have no recourse against any other
Member.
ARTICLE X
COVENANTS, REPRESENTATIONS AND WARRANTIES
10.1 Confidentiality. No Member or Affiliate of such Member will disclose
to any third party (other than their respective employees in their capacity as
such) any information with respect to the terms and provisions of this
Agreement, except: (a) to the extent necessary to comply with law or the valid
order of a court of competent jurisdiction, in which event, the party making
such disclosure will so notify the others and will seek confidential treatment
of such information, (b) to the extent necessary to comply with applicable
securities or other laws, or the rules of the Federal Communications Commission
or of any national stock exchange or stock association, so long as the party
making such disclosure will so notify the others and discuss in good faith with
the others the exact wording of such disclosure, (c) as part of its normal
reporting or review procedure to its parent company, its auditors and its
attorneys, provided, however, that such parent company, auditors and attorneys
agree to be bound by the provisions of this Section, (d) in order to enforce its
rights pursuant to this Agreement, or (e) to any bona fide prospective purchaser
of the stock or assets of
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such party, or merger partner of such party, provided that such purchaser or
merger partner agrees to be bound by the provisions of this Section.
10.2 Representations. Each Member represents and warrants to the other
Member that, as of its signing of this Agreement:
(a) It is duly incorporated and is validly existing and in good
standing under the laws of the jurisdiction of its incorporation, and is
duly qualified or registered to do business in each state or other
jurisdiction in which the failure to so qualify or register would have a
material adverse effect upon such Member or the Company;
(b) It has full corporate power and authority to enter into and
perform this Agreement;
(c) All actions necessary to authorize the signing and delivery of
this Agreement, and the performance of its obligations under this
Agreement, have been duly taken;
(d) This Agreement has been duly signed and delivered by an authorized
officer of such Member and constitutes the legal, valid and binding
obligation of such Member enforceable in accordance with its terms, except
as such enforceability may be affected by applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws affecting
creditors' rights generally, and except that the availability of equitable
remedies is subject to judicial discretion;
(e) No consent or approval of any other Person is required in
connection with the signing, delivery and performance of this Agreement by
such Member or, to the best of such Member's knowledge, the consummation of
the transactions contemplated by this Agreement; and
(f) The signing, delivery and performance of this Agreement do not
violate the articles of incorporation or bylaws of such Member or any
material agreement to which such Member is a party or by which it is bound.
ARTICLE XI
INDEMNIFICATION
11.1 Members' Indemnification. No Member will have any authority to act for
or to assume any obligation or responsibility on behalf of another Member or the
Company except as expressly provided in this Agreement. In addition to the other
remedies specified in this Agreement, each Member agrees to indemnify and hold
each other Member harmless from and against any claim, demand, loss, damage,
liability or expense of any kind or nature whatsoever, including attorneys' fees
("Liabilities"), incurred by or against such other Member and arising out of or
resulting from any action taken by the indemnifying Member in violation of this
Section 11.1.
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11.2 Indemnification as to Actions or Omissions in Company's Business.
Except to the extent otherwise provided in Section 11.1, the Company will
indemnify and hold harmless each Member from any Liabilities incurred or
suffered by such Member with respect to any third-party claim by reason of any
act performed or omitted to be performed, or alleged to have been performed or
omitted, by the Member in connection with the business of the Company; provided
that, if the Member's action or omission to act caused the Liability incurred or
suffered, the Member may not receive indemnification or avoid liability by
reason of this provision with respect to any claim as to which the Member is
adjudged by a final nonappealable decision of a court of competent jurisdiction
to have acted in or with fraud, bad faith, gross negligence or willful
misconduct. Any such indemnification will be made promptly following the fixing
of the Liability incurred or suffered by final nonappealable decision,
settlement, contract or otherwise (except that any attorneys' fees and the
expenses of defense will be paid as incurred).
11.3 Cross Indemnification. As among the Members, no Member will be liable
or bear responsibility for more than its proportionate share (based on its
Ownership Interest at the time such liability or obligation arises) of each of
the liabilities and obligations of the Company. In the event that any Member is
required to pay, discharge or otherwise bear responsibility for any amount of
any Loss in excess of such Member's proportionate share (otherwise than by
reason of such Member's violation of this Agreement, fraud, bad faith, gross
negligence or willful misconduct), the other Members agree to indemnify, hold
harmless and reimburse (directly or through the Company) such Member against and
for such other Members' proportionate share of such excess. It is the intention
of the Members that, following the operation of this Section, each Member will
have borne exactly its proportionate share of the Loss at issue.
11.4 Indemnification Procedures. Any Person asserting a right to
indemnification under this Article XI will so notify the other Member(s) in
writing. If the facts giving rise to such indemnification involve any actual or
threatened claim or demand by or against a third party, the indemnifying Person
will be entitled to control the defense or prosecution of such claim or demand
in the name of the indemnified Person, with counsel satisfactory to the
indemnified Person, if the indemnifying Person notifies the indemnified Person
in writing of its intention to do so within 20 days of receipt of such notice.
Notwithstanding the preceding, the indemnified Person will have the right to
participate in the defense or prosecution of the claim or demand through counsel
of its own choosing, and such participation will be at the indemnified Person's
expense unless (i) the indemnified Person has been advised by its counsel that
use of the same counsel to represent both the indemnifying Person and the
indemnified Person would present a conflict of interest (which will be deemed to
include any case where there may be a legal defense or claim available to the
indemnified Person which is different from or additional to those available to
the indemnifying Person), in which case the indemnifying Person will not have
the right to direct the defense of such action on behalf of the indemnified
Person, or (ii) the indemnifying Person fails to commence to defend or prosecute
such claim or demand within a reasonable time or fails to continue to defend or
prosecute vigorously such claim or demand. Whether or not the indemnifying
Person chooses to defend or prosecute such claim, the parties will cooperate in
the prosecution or defense of such claim and will furnish such records,
information and testimony and attend such conferences, discovery proceedings,
hearings,
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trials and appeals as may reasonably be requested in connection with such claim.
The indemnifying Person will not settle or permit the settlement of any such
third party claim or action (i) in each case other than a settlement involving
the payment of money only by the indemnifying Person, without the prior written
consent of the indemnified Person, which consent will not be unreasonably
withheld and (ii) unless it obtains the unconditional release of all indemnified
parties. Any right of indemnification of a Member hereunder shall also extend to
such Member's officers, directors, shareholders, employees and agents.
ARTICLE XII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
12.1 Maintenance of Books and Records. The Company's books and records will
be maintained in accordance with generally accepted accounting principles on a
basis consistently applied. The Fiscal Year of the Company will be the one year
period (or shorter period beginning on the date of this Agreement) ending on
June 30 of each year. The Company's books and records, this Agreement, as
amended, and any other records or instruments required by applicable law, will
be maintained at the principal place of business of the Company and will be open
to inspection by the Members or their duly authorized representatives during
business hours. Such records will fully and accurately reflect all transactions
of the Company and include all documents and materials with respect to the
Company's business as are usually maintained by Persons engaged in similar
businesses. Accounts, books and other relevant Company records will be
maintained and preserved for such period as may be required by law. Accounts and
funds of the Company will be kept separate from those of the Members.
12.2 Operating and Financial Statements. The Company will provide the
Members with monthly internal operating statements within 20 days after the end
of each calendar month. The Company will provide the Members with unaudited
financial statements (balance sheet, statements of income or loss, Members'
equity and changes in financial position) prepared in accordance with generally
accepted accounting principles on a basis consistently applied (subject to
normal year-end adjustments), within 45 days after the end of each calendar
quarter. The Company will cause audited financial statements to be prepared by
the Accountant for each Fiscal Year, and such statements will be distributed to
the Members on an annual basis within 90 days of the end of such Fiscal Year.
12.3 Other Information. The Company will deliver to each Member such other
information as required for filing the tax returns of such Member and will also
from time to time furnish such other information as such Member may reasonably
request for the purpose of enabling such Member to comply with any reporting or
filing requirements imposed by any governmental agency or authority pursuant to
any statute, rule, regulation or otherwise.
12.4 Tax Matters Member. RTV is hereby designated as the "Tax Matters
Partner" within the meaning of Section 6231(a)(7) of the Code (the "Tax Matters
Member"). The Tax Matters Member will take reasonable action to cause each other
Member to be treated as a "notice member"
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within the meaning of Section 6231(a)(8) of the Code. All expenses incurred by
the Tax Matters Member while acting in its capacity as such will be paid or
reimbursed by the Company. Each Member will have the right to participate in (a)
any administrative proceeding relating to the determination of Company items at
the Company level, and (b) any discussions with the Internal Revenue Service
relating to the allocations of Profits and Losses pursuant to this Agreement,
and no settlement or compromise of any issue related to such allocations will be
made without the consent of all affected Members.
ARTICLE XIII
MISCELLANEOUS
13.1 Governing Law. The terms of this Agreement and all rights and
obligations of the Members under this Agreement will be governed by the internal
laws of the State of Delaware, without regard to its conflicts of law rules.
13.2 Notice. All notices under this Agreement will be in writing and will
be deemed to have been duly given when delivered in person, by telecopy or
commercial courier or three days after being mailed by registered or certified
mail, return receipt requested, as follows:
To TCII at:
1040 North Las Palmas, Building 27
Los Angeles, CA 90038
Attention: Allen De Bevoise
Telecopy: (213) 871-8282
With a copy to:
Steven D. Miller, Esq.
Sherman & Howard L.L.C.
633 17th Street, Suite 3000
Denver, CO 80202
Telecopy: (303) 298-0490
To RTV at:
506 Santa Monica Boulevard
Suite 400
Santa Monica, CA 90401
Attention: Greg Ritchey
Telecopy: (310) 393-5749
With a copy to:
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Garth Jensen, Esq.
Holme Roberts & Owen LLC
1700 Lincoln Street, Suite 4100
Denver, CO 80202
Telecopy: (303) 866-0200
Any Member may change the address(es) to which notices are required to be sent
by giving notice of such changes in the manner provided in this Section,
provided that such notice will not be effective until actual receipt by the
other Member(s).
13.3 Counterparts. This Agreement may be executed in multiple counterparts,
all of which together will constitute one single original instrument.
13.4 Entirety. This Agreement (including the attached Schedules and
Exhibits which are incorporated by this reference) sets forth the entire
agreement and understanding of the Members and supersede all prior or
contemporaneous agreements among the parties, in each case with respect to the
subject matter of this Agreement.
13.5 Amendment. This Agreement may be amended only by written consent in
accordance with Section 6.3.
13.6 Waiver of Partition and Dissolution. Each Member irrevocably waives,
during the term of the Company, any right that it may have to maintain any
action for partition with respect to any Company property or, subject to the
terms of this Agreement, for the judicial dissolution of the Company.
13.7 Severability. Any term or provision of this Agreement which is invalid
or unenforceable will be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining rights
of the Members intended to be benefitted by such provision or any other
provisions of this Agreement.
13.8 Parties in Interest. The terms of this Agreement will be binding upon
and inure to the benefit of the parties to this Agreement and their permitted
successors and assigns. Nothing in this Agreement, whether express or implied,
will be construed to give any Person (other than the parties to this Agreement
and their permitted successors and assigns) any legal or equitable right, remedy
or claim under or with respect to this Agreement or any covenants, conditions or
provisions contained in it.
13.9 Further Assurances. Upon reasonable request from time to time, each
Member will execute and deliver all documents and instruments and do all other
acts that may be reasonably necessary or desirable to carry out the intent and
purposes of this Agreement.
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13.10 No Right of Set Off. Except as otherwise agreed to by the Company and
a Member, no Member will be entitled to offset against any of its financial
obligations to the Company under this Agreement, any obligation owed to it or
any of its Affiliates by or for any other Member or any other such Member's
Affiliates.
13.11 No Strict Construction. This Agreement has been negotiated by the
parties and their legal counsel, and legal or equitable principles that might
otherwise require the construction of this Agreement or any provision of this
Agreement against the party who drafted this Agreement will not apply in any
construction or interpretation of this Agreement.
13.12 No Waiver. No delay on the part of any party to this Agreement in
exercising any right, power or privilege under this Agreement will operate as a
waiver thereof, nor will any waiver on the part of any party of any right, power
or privilege under this Agreement operate as a waiver of any other right, power
or privilege under this Agreement, nor will any single or partial exercise of
any right, power or privilege under this Agreement preclude any other or further
exercise thereof or the exercise of any other right, power or privilege under
this Agreement.
13.13 Headings. The headings in this Agreement are intended only for
convenience and do not constitute a part of this Agreement and will not be
considered in the interpretation of this Agreement or any of its provisions.
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13.14 Costs and Expenses of Agreement. Each of the parties to this
Agreement will be responsible for its own costs and expenses (including fees of
attorneys, accountants and other consultants) in connection with the
negotiation, preparation and execution of this Agreement.
13.15 Dealing with Related Parties. The Company will not be prohibited from
or otherwise limited in employing, contracting with (including contracts for the
sale, exchange, or lease of the Company's property otherwise permitted under
this Agreement), or otherwise dealing with any person or entity by reason of the
fact that such person or entity is an Affiliate of any Member, or is an entity
in which any Member has an interest, whether such relationship, affiliation, or
interest is direct or indirect, provided that the terms and conditions,
including the price, of such employment, contract, or other dealing are fair and
reasonable and in the best interests of the Company.
13.16 Other Activities. The Members and their present and future
shareholders, directors, officers, agents and employees, and present and future
Affiliates of any of the foregoing, may engage in or possess interests in other
businesses or ventures of any nature and description, independently or with
others (whether or not such businesses are in competition with the business or
any activities of the Company), and neither the Company nor any other Member
will have any right by virtue of this Agreement in such independent ventures.
Each Member, by the execution of this Agreement, acknowledges that each other
Member and its present and future shareholders, directors, officers, agents and
employees, and present and future Affiliates of each of the foregoing, are or
may be engaged in business ventures that are or may be competitive with the
business or other activities of the Company and agrees that none of such Persons
shall have any duty to present to the Company any opportunity, or to account to
the Company or share with the Company any profits from any business or venture,
and for all purposes related to the foregoing shall be treated as if each such
Person were not a Member of the Company and were not a shareholder, director,
officer, agent or employee of such Member, or an Affiliate of any of the
foregoing. In addition, each Member or its Affiliate may do business with any
client, customer or supplier of the Company or employ or otherwise engage any
former officer or employee of the Company provided that the foregoing does not
authorize any person to use the Company's Confidential Information in a
competing business.
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The parties have executed this Operating Agreement of RecoveryNet
Interactive, L.L.C. as of the date first written above.
TCI ONLINE RECOVERYNET HOLDINGS, INC.
By: __________________________________
Name: __________________________________
Title:__________________________________
RECOVERY NETWORK, INC.
By: __________________________________
Name: __________________________________
Title:__________________________________
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SCHEDULE 1
Initial Capital Contributions and Ownership Interests
- ------------ ---------------------------------- -------------------------------
Member Initial Capital Contribution Ownership Interest
- ------------ ---------------------------------- -------------------------------
TCII $100,000 50%
TCII will cause the Company to
be offered the opportunity to
enter into an affiliation
agreement with an affiliate of
TCII known as @Home in the form
of Exhibit B.
- ------------ ---------------------------------- -------------------------------
RTV $100,000 50%
All rights associated with the
World Wide Web site with a
domain name of "recovery.com".
License Agreement pursuant to
which RTV will grant (i)
exclusive rights to distribute
products which RTV owns,
controls or licenses; and (ii)
use of RTV logo and such
agreement will provide that RTV
will provide cross promotional
spots and product placement in
RTV's programming for a fee at a
favorable rate and that RTV will
use commercially reasonable
efforts to promote the Service
with professional groups and
organizations which address
substance abuse and addiction.
- ------------ ---------------------------------- -------------------------------
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Exhibit 10.2
ACCESS TELEVISION NETWORK, INC.
CHANNEL NESTING AGREEMENT
This agreement made as of this 23rd day of April, 1997, by and between
Access Television Network, Inc., a Delaware corporation with its principal place
of business at 2600 Michelson Drive, Suite 1650, Irvine, CA 92715 (hereinafter
referred to as "Access") and The Recovery Network, a California Corporation,
with its principal place of business at 506 Santa Monica Blvd., Suite 400, Santa
Monica CA 90401, (hereinafter referred to as "Programmer").
In consideration of the mutual and several covenants set forth in this
Agreement, the parties hereby agree to the following:
ARTICLE 1. DEFINITIONS
As used herein, the following terms shall have the respective meanings stated
below:
1.01 Access Affiliates. Cable Television Systems that utilize Access as
their national sales representatives for certain times made available on
channels delivered to their Subscribers.
1.02 Cable Television System. An entity delivering multi-channel
programming services to Subscribers that directly or indirectly controls the
management of the programming carried; a Cable Television System may consist of
more than one franchise and more than one headend, and is usually characterized
as a business which serves a geographical area under common management and which
sets its own rates for services.
1.03 Programming Exhibition Inventory. Specifically identifiable times
made available for sale by Access on all or parts of the Access Network.
1.04 Subscriber. For the purposes of this definition, the number of
subscribers at any time shall equal the number of active separate billing
addresses (excluding commercial accounts) shown at the close of business on such
day in the billing records for the tiers of service on the Cable Television
System that include the channel on which the Program Exhibition Inventory is
carried.
1.05 Programming Service. Video programming provided by Programmer to
Access for distribution on the Access Network.
1.06 Access Network. The system for delivering Access programming to
Subscribers of Access Affiliates.
1.07 Rate. The dollar rate per thirty (30) minute time period on the
Access Network charged by Access to Programmer as identified in Exhibit "A" of
this Channel Nesting Agreement.
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1.08 Program Schedule. The daily and weekly schedule of times that the
Programming Service will be run on the Access Network as identified in Exhibit
"A" of this Channel Nesting Agreement.
1.09 Program Log. A complete log of all elements of a program broken
down into 1 second intervals, with identification of each element which
corresponds to identification on the actual program videotapes.
1.10 Discrepancy Report. A report detailing service interruptions and
signal degradation which is filed within 24 hours of the occurrence.
ARTICLE 2. NATURE OF AGREEMENT
2.01 Purpose. The purpose of this Channel Nesting Agreement is to set
forth the terms and conditions by which Access will distribute the Programming
Service.
2.02 Right of Last Refusal. For the term of this Agreement, and for a
period of one (1) year from its (i) expiration, or (ii) any period of extension
should Access still be in delivey and distribution of programming as set forth
in this agreement, Programmer agrees to grant Access the right to match in all
material terms any bona fide offer presented to Programmer for uplinking,
playback, encoding and/or transponder leasing services required by Programmer in
delivering the same service or services in the same manner and scope as in this
agreement and so long as such service or services are continued without
interruption. Upon receipt of notification of such an offer to Programmer,
Access shall have thirty (30) days with which to meet all material terms of such
offer. If Access fails to respond to or to meet the material terms of such an
offer within this thirty (30) day period, Access waives all rights granted to
Access by this Section 2.02 of this Agreement.
2.03 Terms of Agreement. This Channel Nesting Agreement shall begin as
of the date first written above, and shall continue for fifty two (52) weeks
unless otherwise terminated as provided herein.
ARTICLE 3. PROGRAMMER RESPONSIBILITIES
3.01 Delivery of Programming Service. Programmer is responsible for
the delivery of the Programming Service to Access and costs associated with
such, either by (i) providing one (1) complete set of video tapes in the Beta-SP
format to Access no later than 5:00 pm (PST) on the Thursday preceding the
(Monday-Sunday) week of the Program Schedule for those programs; or (ii)
causing to be delivered to the satellite uplinking facility as designated by
Access, a feed of the Programming Service in a manner consistent with other
video signals received by such facility. Access reserves the right to refuse any
programming delivered by Programmer if such programming fails to meet generally
acceptable technical or content standards. Such content standards shall not
violate the general standards of the National Cable television Association or
National Association of Broadcasters as they relate to contests, sweepstakes,
profanity
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or any other type of programming which might violate or encourage the violation
of any state or federal law. Programmer will provide Access with one (1)
complete set of video tapes representing one day's programming to be used in the
event Access fails to receive video tapes for any given week.
3.01.1 Element Log. Programmer shall provide a log of all elements
which make up the scheduled programming for each day of the program schedule
along with the programming. The log will describe the events comprising the
programming in as little as one second intervals, each event will correspond to
an identifier on the programming tapes.
3.01.2 Programmer Expansion. Programmer may contact cable systems,
wireless cable, LMDS, MMDS, and other forms of television distribution for the
purpose of expanding its audience.
3.02 Programmer Representations and Warranties. Programmer represents
and warrants that it is duly organized and authorized to conduct business, to
bind itself to this agreement and has in good standing all necessary
authorizations, franchises, permits and licenses with respect to the Programming
Service it provides, including but not limited to copyright, right of privacy,
trade name, dramatic right, motion picture right, literary right, music
performance right, music synchronization right or any other right of any person
or entity, and that the Programming Service will not knowingly provide
programming containing any libelous, slanderous, defamatory or otherwise
objectionable material including without limitation, any material that would
constitute illegal competition or violation of trade practice.
ARTICLE 4. ACCESS RESPONSIBILITIES
4.01 Distribution of Programming Service. Access agrees to cause the
distribution of the Programming Service to all Access Affiliates according to
the days and times as specified in the Program Schedule. Such programming shall
be distributed as identified in the Program Schedule and in a form which meets
technical specifications as described in Exhibit B. Access and any Access
Affiliate shall not be liable to Programmer for any failure to run the Program
Service as identified in the Program Schedule and the daily program log or any
schedule of commercial or promotional announcements as identified in Section
4.02 of this Agreement, but shall make best efforts to satisfy the Program
Schedule and/or schedule of commercial and promotional announcements as
identified in Section 4.02 of this Agreement. In the event, for whatever reason,
that the Program Service does not run according to the Program Schedule, and
such failure is not the result of any action or omission on the part of
Programmer, Access shall immediately notify Programmer and Programmer shall have
the right to either (i) reschedule such portions of the Programming Service to
both parties satisfaction, or (ii) to receive a pro rata reduction in the
charges for such portion of the omitted Program Schedule. Access hereby
acknowledges that Programmer relies on any such reschedule as being comparable
because of sale of advertising.
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4.01.1 Recovery Network. The programming shall be separately
identified as Recovery Network. The programming shall not be subject to
disclaimers as attached to "info-mercials" identifying content as commercial in
nature.
4.02 Insertion of Commercial Announcements. Access agrees in accordance
with the Programming Log to cause the insertion of up to fourteen (14) minutes
per hour of commercial and/or promotional announcements into the Programming
Service along with channel Id's, network promos and other customary features and
elements, such announcements to be delivered to Access with a schedule for their
insertion and in the format as contained for the Programming Service in Section
3.01 of this Agreement.
4.02.1 Program Log and As Aired Log. Access shall monitor all
programming distributed and provide Programmer with an "as aired" log detailing
any deviation from the Program Log and the actual programming aired. This report
shall include a description of any corrective action taken by Access if any and
shall be signed by Access' operator at the beginning and end of each hour of
programming and all details initialed. This original log shall be submitted to
Programmer within 24 hours of airing. Access will provide an electronic, machine
readable report of the aired log. The format of this report will be jointly
developed by Access and Programmer.
4.02.2 Transmission Path Monitoring and Reporting. Access shall monitor
its Network during transmission of programming for purposes of verifying
transmission to subscribers. Any service interruption or failure of distribution
will be documented by Access and reported, in writing, to Programmer. Such
discrepancy report shall contain details including but not limited to time,
duration, nature of interruption or degradation of reception. Such reports will
be submitted upon the event of interruption within 24 hours.
4.02.3 During the term of the agreement, Access shall provide
Programmer a monthly report detailing Access's subscriber base. Access grants
Programmer the right to verify such a report by granting Programmer reasonable
access to its data base monthly for the sole purpose of such verification.
Access will provide a separate report of all systems added or deleted. Access
will notify the Network of all new affiliate agreements or cancellations within
ten (10) days of receipts regardless of the planned date of launch or
termination.
4.03 Access shall provide quality control and experienced personnel to
maintain a high quality on-air look including:
(a) engineering management personnel to design, construct, and assure
overall technical quality;
(b) operation management to supervise operations, personnel and
equipment performance and to maintain equipment within the performance
parameters specified herein;
(c) a designated management-level person as a contact acceptable to
Programmer who will address all business and contractual issues including the
on-air
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look to insure that Programmer's reasonable expectations for network operations
are being met.
4.02.5 Access shall furnish, operate and maintain origination
facilities for the origination of programming as described in Exhibit "C".
4.04 Access Representations and Warranties. Access represents and
warrants that it is duly organized and authorized to conduct business in the
locations where its Affiliate Cable systems are providing cable television
services. It has in good standing all necessary authorizations, franchises,
permits and licenses of Federal, State and local authorities to conduct all its
businesses and has taken all necessary corporate or other action to authorize
the execution and delivery of the Programming Service subject to this Agreement.
Access has in existence all facilities, equipment and personnel to distribute
Programmer's programming to Access Affiliates at technical standards equal to
the usual and customary standards in the industry and that it has facilities
available to assemble and integrate all the elements required to produce
finished programming as described in Exhibits "B" and "C" attached. Access is
duly authorized to execute this Agreement and the undersigned is duly authorized
to bind Affiliate hereto, this Agreement is a valid and binding obligation of
Access, enforceable in accordance with its terms.
4.05 Authorization Services. Access will provide authorization and
deauthorization services to all affiliates of Recovery network who are not
otherwise receiving the Access feed for Recovery Network Programming.
Authorization and deauthorization actions shall be executed in a timely manner
upon written or verbal communication from designated Recovery Network
personnel. The Recovery Network will pay for equipment required at affiliate
location in order to add Recovery Network programming, provided that other
Access programming is not transmitted to affiliate subscribers. Access will pay
for equipment if Access programming is also transmitted to subscribers. If
Access programming is added to the transmission within the duration of this
contract or within six months of commencing of transmission for the new
affiliate. Access will reimburse the Recovery Network for any expenditures made
for equipment. Access will coordinate and install the equipment at the affiliate
locations and will bear the costs.
ARTICLE 5. FINANCIAL
5.01 Payment. For each month in which the Program Service is run on the
Access Network, Programmer agrees to remit to Access 75% of the payment for that
month no later than 10 days prior to the beginning of that month, except that
payment due for May shall include 75% of the prorated amount due for the period
April 23rd to April 30th. Such payment shall be based on the Program Schedule
contained on Exhibit "A" to this Agreement. Within 30 days of the expiration of
this Agreement, Programmer agrees to provide Access with the entire 25% balance
due for all months in which the Programming Service was distributed by Access.
5.02 Limitations of Financial Liabilities. Each party shall be liable
for any taxes assessed to each. Access shall not be liable for and programmer
shall forever hold
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Access harmless from any and all taxes, fees, licenses which result from
distribution of the Programming Service.
ARTICLE 6. MISCELLANEOUS
6.01 Notices. All notices provided for in the agreement shall be in
writing, sent by registered or certified mail, by overnight express, or personal
delivery, postage prepaid, to Access and Programmer at the addresses set forth
at the beginning of this Agreement, unless otherwise notified in writing.
6.02 Right to Amend Agreement. This Agreement may be amended or added
to at any time only with the written consent of both parties.
6.03 Right to Extend Agreement. The term of this Agreement may be
extended upon the written consent of both parties for a period of one (1) year
provided that the rate for time per million homes served, as contained in
Exhibit "A" to this Agreement, does not increase more than 15%, in which case
both parties agree to negotiate such extension of term in good faith. Each party
must notify the other, in writing, sixty (60) days prior to the end of the Term
of its intention to extend the term.
6.04 Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California.
6.05 Agreement Binding on Successors. This Agreement shall be binding
on and inure to the benefit of the respective successor and assigns of the
parties, except to the extent of any contrary provision in this Agreement.
6.06 Indemnification.
(a) Each party hereto shall indemnify and forever hold harmless the
other, its successors and assigns, for, from and against any claims, loss or
damage, cost or expense (including without limitation, reasonable attorney's
fees), resulting from any misrepresentation made by each or any breach or
alleged breach by it of any representation or warranty or any other provision of
this Agreement.
(b) In any case in which indemnification is being sought hereunder, the
Party seeking indemnification shall afford the Indemnifying Party the
opportunity of participating in the litigation, settlement or other disposition
of such claim. The Indemnified Party shall fully cooperate with the Indemnifying
Party in connection which such litigation, settlement or other disposition.
6.07 Attorney's Fees. Should any litigation or arbitration be commenced
between or among the parties hereto or their representative concerning any
provisions of this Agreement or the rights and duties of any person or entity in
relation thereto, the party or parties prevailing in such litigation or
arbitration shall be entitled, in addition to such other relief as may be
granted, to such reasonable sums as have actually been paid as and for their or
its attorney's fees, costs of suit, witness fees and other costs, disbursements
and expenses reasonable incurred in preparation of litigation or
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arbitration which shall be determined by the court in such litigation or
arbitration in such arbitration or in a separate action brought for that
purpose.
6.08 Force Majeure. No party to this Agreement shall have any claims
against the other for failure to provide or exhibit any of the Programming
Service provided such failure is a result of Acts of God or such other
unforeseeable occurrence(s) and/or outside the control of Access or the
Affiliate, and provided further that if such an event should occur, the party
experiencing the failure shall immediately notify the other party and shall take
corrective action at the first opportunity.
6.09 Relationship Between Parties. This is an Agreement for
representation for the sale of Program Exhibition Inventory. No provision or
provisions of the agreement expressed or implied shall be construed to create a
legal partnership, joint venture, or other business entity among the parties
hereto. For the purposes herein, Access and Programmer shall each be treated as
a corporation. Programmer agrees that it shall have its sole recourse against
Access as an entity, and not against Access's individual partners or their
respective assets either jointly or severally, and Access shall likewise have
recourse against Recovery Network, Inc. and not against any individual.
6.10 Termination. This Agreement may be terminated by either party at
the end of the Term or as set forth below in this section 6.10. If either party
hereto should file a petition for bankruptcy, or shall become insolvent,
reorganized or make any assignment for the benefit of creditors, or make any
arrangement to be subject to any other proceeding under the bankruptcy laws of
the United States or the bankruptcy or insolvency laws of any state, then the
other party shall, at its option, have the right to terminate this agreement
upon thirty (30) days written notice and the other party's obligation hereunder
shall cease thirty (30) days from the date of such notice. In the event of a
material breach of this Agreement by Access, Programmer shall have the right
upon seven (7) days written notice, to terminate this Agreement and all
obligations hereunder shall cease seven (7) days after the date of such notice.
Access may terminate this Agreement upon material breach by Programmer if such
material breach is not cured within thirty (30) days of receiving written
notice. Should Access's subscriber base diminish by 10% or more, Programmer may
elect to terminate the agreement upon thirty days written notice. Programmer in
any instance may delete either hour specified by giving Access seven (7) days
written notice.
6.11 Entire Agreement. This instrument contains the entire agreement of
the parties relating to the rights granted and obligations assumed in this
instrument, and supersedes any and all prior Affiliation or other Agreements
between the parties on the subject matter. Any oral representations or
modifications concerning this instrument shall be of no force or effect unless
contained in a subsequent written modification signed by the parties hereto.
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IN WITNESS WHEREOF, the parties have executed this Amendment to the Affiliation
Agreement on the date first stated above.
ACCESS TELEVISION NETWORK, INC.
By: ______________________________
William H. Bemard, President
PROGRAMMER
__________________________________
By:_______________________________
Name:_____________________________
Title:____________________________
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EXHIBIT A
The following contains the schedule of rates for time provided by Access to
Programmer. This schedule contains the maximum rate to be charged Programmer
based on anticipated 5% monthly growth in the number of households served by
Access Affiliates which carry programming. In no event shall Programmer be
charged more than $60,000 per calendar month for the first six (6) months of
this Agreement, or $65,000 per calendar month for the subsequent six (6)
months of this Agreement. The actual charge for each calendar month shall be
based on the actual monthly number of households served by Access
Affiliates, charges for such growth shall not exceed 5% per month. The
number of billable households receiving programming shall be determined by
adding the number of subscribers reported at the beginning of each month to
the number at the end of each month and dividing by two (2).
Access Television Network, Inc. Satellite Channel 2 Signal:
Monday through Sunday, 6 am - 7 am (EST) Channel 2
Month Daily Rate
- ----- ----------
April 1997 $1,576
May $1,655
June $1,738
July $1,825
August $1,916
September $2,012
October $2,112
November S2,217
December $2,328
January 1998 $2,445
February $2,567
March $2,696
Access Television Network. Inc. Satellite Channel 1 Signal:
Monday through Sunday, 10 pm - 11 pm (EST) Channel 1
Month Daily Rate
- ----- ----------
April 1997 S525
May $551
dune $579
July $608
August $638
September $670
October $703
November S739
December $775
January 1998 $814
February $855
March $898
In addition, Access shall provide Programmer with playback, encoding, uplinking
and satellite transponder time on its satellite Channel 2 for the hours 9pm -
10pm (EST) and 11 pm - 12 am (EST), Monday through Sunday at cost plus 20%
which shall be in addition to any charges detailed above and shall be exempted
from the $60,000 and $65,000 monthly maximum contained in the above paragraph.
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EXHIBIT B
TRANSMISSION SERVICES. Transmission Services shall be provided for the
Programmer channel to be transmitted in a digital compressed mode to the
transponder on a 24 hour per day basis, as follows:
1. The satellite transmission facility shall consist of a 9.0 meter
antenna or its equivalent or larger, that complies with 2% spacing.
2. Access shall provide a protected microwave and/or fiber path from
its origination facility to its transmission facility, if inter-facility
transport is required, with equipment meeting the Technical Specifications. One
or more redundant paths shall be provided and switched into service if a failure
occurs in the primary paths.
3. Appropriate testing will be conducted by Access prior to the
invitation of specific Services in order to ensure that the facilities provided
by Access meet the following Technical Specifications:
A. There will be a full-time channel with video exciter or
upconverter and HPA in a fully automatic 2:N switching configuration.
There will be two protection HPAs and upconverters or exciters
protecting the Programmer's services as well as others up to a maximum
of 12 services per protection configuration.
B. Sufficient uninterrupted (UPS) and back-up generator power and
HVAC for all technical and equipment areas shall be provided.
C. the design goal for analog services shall be broadcast quality
standard EIA RS-250-B satellite relay from the input of the protection
switch, including a satellite loop using a 9 meter or larger antenna,
to the output of the receive monitoring switch. The loop performance is
subject to the transponder used meeting minimum performance as set
forth below.
D. The design goal for compressed services, if any, shall be video
and audio performance as specified by the compression system
manufacturer. Industry standards for compressed video services are not
available and manufacturer specifications shall be used until
appropriate standards have been accepted. Specification manuals will be
available for inspection and review at the Access offices and copies
may be obtained from General Instrument Corp.
E. The maintenance limits of the analog system, and where
appropriate the compression system, shall be:
Video channel signal to noise (greater than) 10kHz) 52.0dB
Video channel differential gain 10%
Video channel differential phase 4%
Video channel chrominance to luminance delay 60nS
Audio channel signal to noise (greater than) 1kHz) 54.0 dB
Audio channel harmonic distortion (1 kHz) 1%
(Audio channels shall be tested at peak program level of + 18 dBm)
F. The microwave and/or fiber optics facility used to transport the
channels from the origination facility to the compression/transmission
facility, if any, shall be protected, including automatic protection
switching. The design goal for microwave systems shall be ANSI
T1.502-1988 short haul and the maintenance limit shall be ANSI
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T1.502-1988 medium haul performance. The design goal for fiber optics
systems shall be ANSI T1.502-1998 medium haul and the maintenance limit
shall be as follows: (Audi channels shall be tested at peak program level of
+1 Bdm)
Video channel signal to noise (greater than 10kHz) 50.0 dB
Video channel differential gain 8%
Video channel differential phase 2%
Video channel chrominance to luminance delay 50 nS
Audio channel signal to noise (greater than 1 kHz) 54.0 dB
Audio channel harmonic distortion (1 kHz) 1%
(Audio channels shall be tested at peak program level of +18 dBm)
COMPRESSION SERVICES. Access shall use a Digicypher I compression and
encryption system on the transponder specified until June 1997 and at that
time shall commence using Digicypher II. Access shall accomplish transition
to Digicypher II without interruption to delivery of Programming. Access
shall bear all costs of all change of equipment for all Programmer
Affiliates operational at the time of transition.
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EXHIBIT C
ORIGINATION SERVICES:
1. Origination Services shall be provided for two (2) Channels entitled
Recovery Network as follows:
Air Playback. The origination shall consist of the playback of video
tapes, the airing of satellite turn-around programming and automated DTMF tone
insertion.
1.1 Traffic Services shall be provided as follows:
Access shall provide one full-time traffic assistant. Initially traffic
will be accomplished on a system operated by technicians, provided by Access. At
Programmer's option and with sixty (60) days prior notice Access will transfer
traffic functions to a traffic software system.
2. Source tapes for primary and back-up programming, promotional and
interstitial material supplied to Access by Programmer shall be Beta SP video
tape stock and shall be manufactured in accordance with NTSC broadcast
standards. All tape stock shall be supplied by and shall remain the property of
Programmer. Programmer acknowledges that it is directly responsible for
arranging for and paying the costs of the following: (i) costs for shipping of
its tape material to and from the origination facility in Irvine, CA; (ii) the
delivery of any satellite turnaround programming to the origination facility;
and (iii) any third party-provided fiber optic, transponder or microwave
transport. Access will provide climatically-controlled storage for library video
tapes, not to exceed 2,500 tapes.
3. Access shall use an equipment configuration in the provision of
Origination Services to Programmer substantially as follows:
(a) an automated switcher with audio follow video and manual backup
capability with character generator, down stream keying capability and
audio-over capabilities for announce insertion;
(b) an automated playback system with five (5) Beta SP tape machines
for air play and two (2) record decks for the Channels;
(c) associated synchronization equipment conforming to broadcast
EIA-RS-170-A standards, including sync generators, signal generators, and time
base correctors;
(d) associated audio/video distribution and routing equipment, racks,
consoles and test equipment;
(e) a comprehensive monitoring system to view outgoing and return
signals to monitor the signal at various points throughout the transmission
path;
(f) sufficient uninterrupted (UPS) and back-up generator power and HVAC
for all technical and equipment areas;
(g) equipment providing output signals, per channel, of discrete stereo
audio and standard NTSC video for delivery to its compression and/or
transmission facility in accordance with the technical specifications.
All origination equipment shall meet manufacturers specifications in effect
at the time of purchase. Unless specific brand type or model of equipment is
specified above, access shall have the right to use such equipment as Access
deems appropriate to perform the services.
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AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") dated January 16,
1997 but effective as of December 1, 1996 by and between THE RECOVERY NETWORK,
INC., a Colorado corporation ("Company"),and WILLIAM D. MOSES, an individual
residing in Ojai, California ("Employee"),
WITNESSETH:
WHEREAS, Company desires to employ Employee to serve as its president and chief
executive officer on the terms and conditions set forth herein; and
WHEREAS, as an inducement to Company to offer such employment, Employee desires
to enter into certain covenants, including without limitation a covenant not to
compete with Company if his employment is terminated;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties agree as follows:
1. Employment. Company shall employ Employee, and Employee shall be
employed by Company, on the terms and conditions set forth herein for the period
commencing on October 1, 1996 and (unless sooner terminated pursuant to section
4) ending on September 30, 1998.
2. Position and Duties. Employee shall serve as president and chief
executive officer of Company. Employee shall report to and be responsible
directly to the board of directors of Company and shall have and perform such
duties and responsibilities relating to the business and operations of Company
as may be appropriate to Employee's position and as the board of directors of
Company from time to time may assign to him. In addition, Employee shall serve
on the executive committee of the board of directors of Company. During his
employment, Employee shall devote his full time, attention, and best efforts to
Company and to the furtherance of its interests and shall not directly or
indirectly engage in, or enter into the employment of, or otherwise render
services to or for, or act as a director, manager, member, or officer of, any
other business (other than and established trade associations of which Company
is a member), except for non-remunerative participation in charitable
organizations.
3. Compensation. (a) Employee shall receive a base salary of $12,000
per month through September 30, 1998, payable in substantially equal
semi-monthly installments on the fifteenth and the last day of each calendar
month during the term of this Agreement.
(b) Employee shall be entitled to participate in and receive
benefits under any employee benefit plans and arrangements from time to time
made available to the employees of Company, when and as implemented and subject
to and on a basis consistent with the terms, conditions, and overall
administration of such plans and arrangements. Amounts paid to
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Employee under any such plan or arrangement shall not be deemed to be in lieu of
the base salary payable to Employee under section 3(a).
(c) Employee shall be entitled to fifteen business days of
paid vacation and holidays in accordance with Company policy, as determined by
the chief operating officer of Company from time to time. Vacation days shall
accrue at the rate of 1.25 days per month commencing on October 1, 1996, but no
vacation may be taken until April 1, 1997.
4. Termination. The term of Employee's employment hereunder may be
terminated before September 30, 1998 on the following terms and conditions:
(a) By Employee for any reason, upon at least 30 days advance written
notice, or upon Employee's death, with Company's only liability
being the payment of base salary and vacation compensation earned
and unpaid as of Employee's last day of work;
(b) By mutual agreement of Company and Employee, with such
compensation as may be mutually agreed upon, but in no event to
exceed the amount of severance compensation to which Employee
would be entitled if the termination occurred pursuant to section
4(d);
(c) By Company for "good cause" (as hereinafter defined), upon 30
days written notice, with Company's only liability being the
payment of base salary and vacation compensation earned and
unpaid as of Employee's last day of work; or
(d) By Company without "good cause," upon 30 days written notice, and
with severance compensation equal to the lesser of (i) base
salary and vacation compensation due through September 30, 1998
and (ii) base salary and vacation compensation for one year;
provided that one-half of such severance compensation shall be
payable on the date of termination and the balance shall be
payable ratably over the six months following the date of
termination.
For purposes of this section 4, "good cause" shall mean any act or omission of
Employee constituting gross negligence or willful misconduct in the conduct of
his duties for Company, any breach by Employee of the terms of his
Nondisclosure/Inventions Agreement, or (given the nature of Company's mission)
alcohol or substance abuse.
5. Competitive Activity. (a) During the term of this Agreement and for
two years after the termination of this Agreement for any reason, whether or not
such termination shall be alleged or later found to be unlawful, wrongful, or in
breach of contract, Employee shall not, directly or indirectly (as an officer,
director, employee, consultant, owner, shareholder, adviser, joint venturer, or
otherwise), engage in any activities that could be deemed a conflict of interest
or in any way compete with Company or its affiliates within the United States in
(i) the development or provision of television, radio, interactive and other new
media services, (ii) any other line of business in which Company or its
affiliates shall be engaged at any time during the
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term of Employee's covenant not to compete, including without limitation sales
and merchandising of recovery related material, or (iii) any other line of
business into which Company or its affiliates shall form an intention to enter
during the term of Employee's covenant not to compete, including without
limitation sales and merchandising of recovery related material. Employee shall
not be precluded from owning less than one percent of the securities of any
competitor of Company or its affiliates if such securities are publicly traded
on a national securities exchange. Employee represents and warrants that he is
under no competitive restrictions or obligations to third parties that affect
his performance hereunder.
(b) During the term of this Agreement and for two years after
the termination of this Agreement for any reason, whether or not such
termination shall be alleged or later found to be unlawful, wrongful, or in
breach of contract, Employee shall not contact, directly or indirectly, any
customer of Company with whom Employee had contact during the term of this
Agreement.
(c) Employee acknowledges that, through his employment with
Company, he will acquire access to information suited to immediate application
by a business in competition with Company. Employee acknowledges that he has
executed concurrently with this Agreement a Non-Disclosure and Inventions
Agreement, the terms of which are incorporated herein by reference as if set
forth herein verbatim, that imposes obligations on Employee with respect to
information about Company. Employee considers the restrictions on his future
employment or business activities contained in this section 5 to be in all
respects reasonable and necessary. Employee acknowledges that Company and its
affiliates and competitors operate throughout the United States, expressly
consents to the geographic restriction on competition contained in this section
5, and believes that such restriction is reasonable given the nature of
Company's business.
(d) Employee acknowledges the following provision of Colorado
law, as set forth in section 8-2-113(2) of the Colorado Revised Statutes:
Any covenant not to compete which restricts the right of any person to
receive compensation for performance of skilled or unskilled labor for
any employer shall be void, but this subsection (2) shall not apply
to:
(a) Any contract for the purchase and sale of a business or
the assets of a business;
(b) Any contract for the protection of trade secrets;
(c) Any contractual provision providing for the recovery of
the expense of educating and training an employee who has served an
employer for a period of less than two years;
(d) Executive and management personnel and officers and
employees who constitute professional staff to executing and management
personnel.
3
<PAGE>
Employee acknowledges that this Agreement is a contract for the protection of
trade secrets under clause (b) and that he is an executive and management
employee within the meaning of clause (d).
(e) Employee acknowledges the possibility that his standard of
living may be reduced during the two years following the termination of this
Agreement and assumes the risk associated with that possibility.
(f) Employee acknowledges that, upon a breach of this section
5, Company will suffer immediate and irreparable harm and damage for which money
damages alone cannot fully compensate. Employee therefore agrees that, upon such
breach or threat thereof, Company shall be entitled to a temporary restraining
order, preliminary injunction, permanent injunction, and all other injunctive
relief, without posting any bond or other security, to bar Employee from
violating this Agreement. Nothing in this section shall be construed as an
election of remedies or waiver of any right available to Company under this
Agreement or by law, including without limitation the right to seek damages from
Employee for breach of this Agreement.
6. Change of Control. If a Change in Control (as hereinafter defined)
occurs, Employee shall be considered to have been terminated without "good
cause" as provided in section 4(d) and the covenant not to compete set forth in
section 5 shall have no further force and effect. A Change in Control" is deemed
to have occurred if (a) a "person" (as defined in section 13(d) of the
Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of shares of Common Stock
representing 30 percent or more of the shares as to which votes may be cast for
the election of directors of Company or (b) individuals who are directors of
Company at the begging of a 24-month period cease to constitute at least
two-thirds of all directors of Company at any time during such period.
7. Successors and Assigns. This Agreement and all rights hereunder
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, heirs, distributees, devisees, and
legatees and by Company's successors and assigns. This Agreement is personal in
nature, and neither party shall, without the prior written consent of the other,
assign or transfer this Agreement or any right or obligation hereunder.
8. Notice. Any notice or other communication hereunder to either party
shall be in writing and shall be deemed to have been duly given when delivered
personally or mailed by certified mail, return receipt requested, postage
prepaid, addressed (a) if to Company at 506 Santa Monica Boulevard, Suite 400,
Santa Monica, California 90401 and (b) if to Employee at 506 Santa Monica
Boulevard, Suite 400, Santa Monica, California 90401, or to such other address
as either party may have furnished to the other in writing in accordance
herewith.
9. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Colorado. Venue for any action arising
out of this Agreement shall be proper in Denver County, Colorado.
4
<PAGE>
10. Severability. If any court of competent jurisdiction shall declare
any provision of this Agreement to be invalid or unenforceable, the remainder of
this Agreement shall remain fully enforceable. To the extent that any court
shall conclude that any provision of this Agreement is void or voidable, the
court shall reform such provision only to the extent necessary to render the
provision enforceable with a view to the parties' desire that Company be
protected to the greatest extent possible under applicable law from improper
competition and the disclosure of its trade secrets.
11. Integration. This Agreement constitutes the entire agreement of the
parties and a complete merger of poor negotiations and agreements. This
Agreement may be modified only in a writing signed by the parties.
12. Waiver, No term or condition of this Agreement shall be deemed to
have been waived, nor shall there be an estoppel against the enforcement of any
provision of this Agreement, except by a written instrument signed by both
parties. No written waiver shall be deemed a continuing waiver unless
specifically stated therein, and a written waiver shall operate only as to the
specific term or condition waived and not for the future or as to any act other
than that specifically waived.
13. Construction. The parties have reviewed this Agreement in its
entirety and acknowledge that each has had a full opportunity to negotiate its
terms and to consult concerning this Agreement with counsel of its own choosing.
The parties expressly waive any and all applicable common law and statutory
rules of construction to the effect that any provision of a contract should be
construed against the drafter. This Agreement and all provisions hereof shall in
all cases be construed as a whole, according to the fair meaning of the language
used. Any party contesting the validity, existence, adequacy, or terms of this
Agreement shall have the burden of proof as to fraud, concealment, the failure
to disclose material information, unconscionability, misrepresentation, mistake
of fact or law, and any other matters. The headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to bean original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE RECOVERY NETWORK, INC.
By: /s/ Donald J. Masters, Jr.
------------------------------
Donald J. Masters, Jr.
Chairman of the Board
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<PAGE>
/s/ William D. Moses
--------------------
William D. Moses
6
<PAGE>
NON-DISCLOSURE AND INVENTIONS AGREEMENT
Non Disclosure and Inventions Agreement (the "Agreement") between The Recovery
Network ("Company"), and William Moses ("Employee"), dated as of January 30,
1997. For their mutual benefit and in consideration of the employment or
continued employment of Employee by Company, or its subsidiaries, affiliates or
successors, Company and Employee hereby agree as follows:
1. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
(A) ACCESS TO CONFIDENTAL INFORMATION; DEFINITIONS
Employee acknowledges and agrees that Employee may have access to or may create
or aid in the creation of information or material that is commercially valuable
to Company and not generally known in the industry (Company's "Confidential
Information"). Confidential Information includes but is not limited to:
(i) any and all versions of any Company proprietary computer
software and any documentation related thereto;
(ii) technical information concerning Company's products and
services, including product data and specifications, know-how,
formulae, diagrams, flow charts, drawings, source code, object
code, program listings, test results, processes, inventions,
research projects and product development;
(iii) any and all versions of any Company designs, patents,
trademarks or copyrightable works, discoveries, formulae,
processes, manufacturing techniques, trade secrets,
inventions, improvements, ideas, business plans
(iv) information concerning Company's business, including cost
information, profits, sales information, accounting and
unpublished financial information, business plans or
strategies, markets and marketing methods, customer lists and
customer information, sponsor lists and sponsor information,
purchasing techniques, supplier lists and supplier information
and advertising strategies;
(v) information concerning Company's employees, including
salaries, strengths, weaknesses and skills;
(vi) information submitted by Company's customers, suppliers,
employees, Employees or co-venturers with the Company for
study, evaluation or use; and,
(vii) any other information not generally known to the public or by
actual or potential competitors of the Company, which, if
misused or disclosed, could reasonably be expected to
adversely affect Company's business.
(B) EMPLOYEE'S OBLIGATIONS TO MAINTAIN CONFIDENTIALITY
Employee acknowledges and agrees that:
(i) all Confidential Information, whether written or unwritten,
whether created by or conveyed to Employee, and however
conveyed to Employee, is the sole and exclusive property of
the Company and is regularly used by Company in the operation
and conduct of its business, and that the unauthorized
disclosure of Confidential Information would have a material
adverse effect on the Company's business, operations and
competitive position;
(ii) Employee will not at any time divulge to any person, firm, or
corporation, orally or in writing, directly or indirectly, in
whole or in part, any Confidential Information, without the
Company's explicit prior written consent;
<PAGE>
Non-Disclosure & Inventions Agreement
Page 2
- -------------------------------------------------------------------------------
(iii) Employee will receive and maintain all Confidential
Information in strictest confidence using reasonable care;
(iv) that any violation or breach of this Agreement may result in
significant and irreparable injury to the Company, that a
remedy at law may be inadequate, and that, in the event of any
such violation or breach, the Company, in addition to any
other relief to which it may be entitled, shall be entitled to
temporary and permanent injunctive relief.
(C) EXCLUSIONS
Notwithstanding anything in this Agreement to the Contrary, Employee has no duty
of non-disclosure with respect to Confidential Information that:
(i) was in Employee's possession or already known to Employee
without an obligation to keep it confidential, before such
information was disclosed to Employee by Company, is publicly
available at the time of disclosure or that becomes publicly
available after disclosure other than through breach of this
Agreement or other wrongful act;
(ii) is disclosed by Employee with Company's prior written
approval;
(iii) is disclosed to Employee by a third party who is not in breach
of an obligation of confidentiality to Employee; or,
(iv) Employee develops independently other than through breach of
this Agreement, or,
(v) is disclosed under operation of law.
(D) RETURN OF MATERIALS
Upon termination of employment or upon Company request at any time, Employee
agrees to promptly deliver to Company:
(i) all originals and copies of all memoranda, documents, notes,
records, software programs, and other materials containing any
of Company's Confidential Information, including all written
or digital records and copies thereof; and,
(ii) all equipment, files, software programs and any other tangible
or intangible personal property belonging to Company.
(E) TERM
The provisions of this Section 2 shall apply to the entire term of Employee's
employment with Company, including any period of employment or consulting prior
to the date of this Agreement periods, shall survive the termination of the
Employee's employment and shall continue for so long as the Employee remains in
possession of Confidential Information.
2. INVENTIONS; COMPANY PROPERTY AND EXCLUSIONS
(A) DEFINITION OF INVENTIONS
As used in this Agreement, the term "Inventions" means designs, trademarks,
discoveries, formulae, processes, manufacturing techniques, trade secrets,
inventions, improvements, ideas, business plans or strategies, or patentable or
copyrightable works, including all rights to obtain, register, perfect and
enforce these proprietary interests; provided that the term "Inventions" shall
not be deemed to include those inventions, if any, listed on Schedule A
attached hereto and incorporated herein by reference.
<PAGE>
Non-Disclosure & Inventions Agreement
Page 3
- -------------------------------------------------------------------------------
(B) OWNERSHIP OF INVENTIONS
Without further compensation, Employee hereby agrees promptly to disclose to the
Company, and hereby assigns and grants and agrees to assign and grant to the
Company or its designee, its entire right, title, and interest in and to all
Inventions which Employee may solely or jointly develop or reduce to practice
during the period of employment and:
(i) which pertain to any line of business activity of the Company;
(ii) which are aided by the use of time, material or facilities of
the Company, whether or not during working hours; or,
(iii) which relate to any of Employee's work of during the period of
this Agreement, whether or not performed during normal working
hours.
Notwithstanding anything else in this Section 2 to the contrary, no rights are
hereby conveyed in Inventions, if any, made by Employee prior to the period of
this Agreement and which are identified in Schedule A attached hereto and
incorporated herein by reference (which Schedule attachment contains no
confidential information).
(C) SECTION 2870 OF THE CALIFORNIA LABOR CODE
This Agreement does not apply to an Invention which qualifies fully under the
provisions of Section 2870 of the Labor Code, a copy of which is attached hereto
as Exhibit A. Employee agree to disclose all Inventions made by Employee during
the term of this Agreement in confidence to the Company to permit a
determination as to whether or not the Inventions should be the property of the
Company.
(D) COPYRIGHTS, TRADEMARKS AND PATENTS
Company shall have the right to have all or any of the Inventions assigned and
granted to Company pursuant to Section 2(b) above copyrighted, trademarked or
patented with the government of the United States or any applicable state or
foreign government agency in the name of Company and at Company's expense.
(E) EMPLOYEE'S ASSISTANCE
Employee agrees to provide all reasonable assistance to Company in preparing and
prosecuting any and all proprietary rights applications pursuant to Section
2(d) above. In particular:
(i) Employee agrees to perform, during and after the term of this
Agreement, all acts deemed necessary or desirable by Company
to permit and assist it, at its expense, in obtaining and
enforcing the full benefits, enjoyment, rights and title
throughout the world in all or any of the Inventions assigned
and granted to Company pursuant to Section 2(b) above. Such
acts may include, but are not limited to, execution of
documents and assistance or cooperation in legal proceedings;
(ii) If Company is unable for any reason to secure any signatures
from Employee, its partners or staff, to apply for or to
pursue any application for any United States or foreign
letters patent or mask work or copyright registration covering
inventions, mask works or original works of authorship
assigned to Company as above, then Employee hereby irrevocably
designates and appoints Company and its duly authorized
officers and agents as its agent and attorney-in-fact, to act
for and in Employee's behalf and stead to execute and file any
such applications and to do all other lawfully permitted acts
to further the prosecution and issuance of letters patent or
mask work or copyright registrations thereon with the same
legal force and effect as if executed by Employee. Employee
hereby waives and quitclaims to Company any and all claims, of
any nature whatsoever, which Employee now or may hereafter
have for infringement of any
<PAGE>
Non-Disclosure & Inventions Agreement
Page 4
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patents, mask works or copyrights resulting from any such
application for letters patent or mask work or copyright
registrations assigned hereunder to Company; and,
(iii) Employee's obligation to provide such assistance shall beyond
the termination of other services provided to Company under
this Agreement, but Company shall compensate Employee at a
reasonable rate for the time spent by Employee in rendering
such assistance.
(F) RETURN OF MATERIALS
Upon termination of employment or upon Company request at any time while
employed by the Company or thereafter, Employee agrees to promptly deliver to
the Company all originals and copies of all memoranda, documents, notes,
records, software programs, and other materials, including all written or
digital records and copies thereof, containing or related to any of the
Inventions assigned and granted to Company pursuant to Section 2(b) above,
including any and all versions of any Company designs, patents, trademarks or
copyrightable works, discoveries, formulae, processes, manufacturing techniques,
trade secrets, improvements, ideas, business plans, product data and
specifications, know-how, formulae, diagrams, flow charts, drawings, source
code, object code, program listings, test results, processes, inventions,
research projects and product development and any and all versions of any
Company proprietary computer software and any documentation related thereto,
without retaining any copies, notices or excerpts thereof.
3. MISCELLANEOUS
This Agreement:
(i) is the entire Agreement between the Company and Employee shall
supersede all prior agreements and understandings between the
parties regarding these subjects;
(ii) inures to the benefits of successors and assigns of Company
and is binding on Employee's heirs and legal representatives;
(iii) may not be changed or terminated orally, by or on behalf of
either party, nor may it be modified by any oral
representations or agreement;
(iv) This Agreement shall be governed by the laws of the State of
California excluding that body of law pertaining to conflicts
of law, and if any provision of this Agreement is held to be
invalid or unenforceable, such invalidity or unenforceability
shall not affect or impair the validity or enforceability of
the remaining provisions of the Agreement;
(v) does not create any agency or partnership relationship; and,
(vi) does not in any way restrict the right of Company and Employee
to terminate the employment relationship at will.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
THE RECOVERY NETWORK:
/s/ Donald Masters
- ------------------------
Donald Masters
Chairman of the Board
EMPLOYEE:
/s/ William Moses
- -----------------------
William Moses
<PAGE>
SCHEDULE A
List of Inventions:
If none, initial here: __________
Otherwise, list inventions below:
<PAGE>
EXHIBIT A
Section 2870 of the California Labor Code provides as follows:
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either;
(1) relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or,
(2) result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an
employee to assign an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable.
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") dated January 16, 1997 but effective as
of December 1, 1996 by and between THE RECOVERY NETWORK, INC., a Colorado
corporation ("Company"), and DONALD J. MASTERS, JR., an individual residing in
Denver, Colorado ("Employee"),
WITNESSETH:
WHEREAS, Company desires to employ Employee to serve as He chairman of its board
of directors on the terms and conditions set forth herein; and
WHEREAS, as an inducement to Company to offer such employment, Employee agrees
to enter into certain covenants, including without limitation a covenant not to
compete with Company if his employment is terminated;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties agree as follows:
1. Employment. Company shall employ Employee, and Employee shall be
employed by Company, on the terms and conditions set forth herein for the period
commencing on December 1, 1996 and (unless sooner terminated pursuant to
section 4) ending on November 30, 1998.
2. Position and Duties. Employee shall serve as chairman of the board
of directors of Company, and he shall be principally responsible for interaction
between Company and the recovery and prevention community as more specifically
described in clauses (a) and (b) below. Employee shall report to and be
responsible directly to the board of directors of Company and shall have and
perform such duties and responsibilities relating to the business and operations
of Company as may be appropriate to Employee's position and as the board of
directors of Company from time to time may assign to him, in each case not
inconsistent with his principal responsibility. In addition, Employee shall
serve on the executive committee of the board of directors of Company. Without
limiting the generality of the foregoing, Employee shall have the following
duties:
(a) Advisory Board. Oversee Company's efforts to create and utilize an
advisory board;
(b) National Recovery and Prevention Partnership. Oversee Company's
efforts to create and sponsor a national recovery and prevention partnership;
and
(c) Execive Committee. Serve on the executive committee of Company.
Except with the prior written consent of the board of directors, which consent
shall not be unreasonably withheld, during his employment Employee shall devote
such of his time, attention, and best efforts to Company as he and the president
and chief executive officer deem
<PAGE>
necessary and appropriate and to the furtherance of its interests and shall not
directly or indirectly engage in, or enter into the employment of, or otherwise
render services to or for, or act as a director, manager, member, or officer of,
any other business (other than established trade associations of which Company
is a member), except for non-remunerative participation in charitable
organizations.
3. Compensation. (a) Employee shall receive a base salary of $10,000
per month through November 30, 1997, payable in substantially equal semi-monthly
installments on the fifteenth and the last day of each calendar month during the
term of this Agreement.
(b) Employee shall be entitled to participate in and receive
benefits under any employee benefit plans and arrangements from time to time
made available to the senior officers of Company or the employees of Company,
when and as implemented and subject to and on a basis consistent with the terms,
conditions, and overall administration of such plans and arrangements. Amounts
paid to Employee under any such plan or arrangement shall not be deemed to be in
lieu of the base salary payable to Employee under section 3(a).
(c) Employee shall be entitled to 15 business days of paid
vacation and holidays in accordance with Company policy, as determined by the
chief operating officer of Company from time to time. Vacation days shall accrue
at the rate of 1.25 days per month commencing on December 1, 1996, but no
vacation may be taken until June 1, 1997.
(d) If and when the 1997 Management Bonus is adopted by the
board of directors and the shareholders, Company shall grant Employee an option
to purchase 12,915 shares of the Common Stock, par value $0.01 per share, of
Company at a price of $5.00 per share. Such option shall vest monthly over one
year commencing as of December 1, 1996.
4. Termination. The term of Employee's employment hereunder may be
terminated before November 30, 1998 on the following terms and conditions:
(a) By Employee for any reason, upon at least 30 days advance written
notice, or upon Employee's death, with Company's only liability
being the payment of base salary and vacation compensation earned
and unpaid as of Employee's last day of work;
(b) By mutual agreement of Company and Employee, with such
compensation as may be mutually agreed upon, but in no event to
exceed the amount of severance compensation to which Employee
would be entitled if the termination occurred pursuant to section
4(d);
(c) By Company for "good cause" (as hereinafter defined), upon 30
days written notice, with Company's only liability being the
payment of base salary and vacation compensation earned and
unpaid as of Employee's last day of work;
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<PAGE>
(d) By Company without "good cause," upon 30 days written notice, and
with severance compensation, at the option of Company, equal to
any of the following: (i) base salary and vacation compensation
due through November 30, 1998, (ii) base salary and vacation
compensation for one year, or (iii) base salary and vacation
compensation for two years; provided with respect to the
compensation described in clauses (i) and (ii) that one-half of
such severance compensation shall be payable on the date of
termination and the balance shall be payable ratably over the six
months following the date of termination and with respect to the
compensation described in clause (iii) that one-quarter of such
compensation shall be payable on the date of termination,
one-quarter shall be payable one year thereafter, and the balance
shall be payable ratably over the six months following one year
from the date of termination; or
(e) If a private placement of equity securities of Company with gross
proceeds of at least $1,000,000 has not been consummated by March
31, 1997.
For purposes of this section 4, "good cause" shall mean any act or omission of
Employee constituting gross negligence or willful misconduct in the conduct of
his duties for Company, any breach by Employee of the terms of his
Nondisclosure/Inventions Agreement, or (given the nature of Company's mission)
alcohol or substance abuse.
5. Competitive Activity. (a) During the term of this Agreement and for
two years after the termination of this Agreement for any reason, whether or not
such termination shall be alleged or later found to be unlawful, wrongful, or in
breach of contract, Employee shall not, directly or indirectly (as an officer,
director, employee, consultant, owner, shareholder, adviser, joint venturer, or
otherwise), engage in any activities that could be deemed a conflict of interest
or in any way compete with Company or its affiliates within the United States by
(i) working for or otherwise affiliating with a for-profit television network
whose programming primarily addresses or relates to issues regarding people
afflicted with or affected by alcoholism, substance abuse, eating disorders,
depression, and other behavioral health problems ("Recovery Issues"), (ii)
acting as a host or regularly scheduled guest on a nationally syndicated
for-profit radio program whose regular focus is primarily to address Recovery
Issues, (iii) working for or otherwise affiliating with a for-profit interactive
media company whose content or services primarily address or relate to Recovery
Issues, or (iv) working for or otherwise affiliating with a for-profit
organization or company whose primary business is offering goods or services
that address or relate to Recovery Issues. Employee shall not be precluded from
owning less than one percent of the securities of any competitor of Company or
its affiliates if such securities are publicly traded on a national securities
exchange. Employee represents and warrants that he is under no competitive
restrictions or obligations to third parties that affect his performance
hereunder.
(b) During the term of this Agreement and for two years after the
termination of this Agreement for any reason, whether or not such termination
shall be alleged or later found to be unlawful, wrongful, or in breach of
contract, Employee shall not contact, directly or
3
<PAGE>
indirectly, any customer of Company with whom Employee had contact during the
term of this Agreement.
(c) Employee acknowledges that, through his employment with Company, he
will acquire access to information suited to immediate application by a business
in competition with Company. Employee acknowledges that he has executed
concurrently with this Agreement a Non-Disclosure and Inventions Agreement, the
terms of which are incorporated herein by reference as if set forth herein
verbatim, that imposes obligations on Employee with respect to information about
Company. Employee considers the restrictions on his future employment or
business activities contained in this section 5 to be in all respects reasonable
and necessary. Employee acknowledges that Company and its affiliates and
competitors operate throughout the United States, expressly consents to the
geographic restriction on competition contained in this section 5, and believes
that such restriction is reasonable given the nature of Company's business.
(d) Employee acknowledges the following provision of Colorado law, as
set forth in section 8-2-113(2) of the Colorado Revised Statutes:
Any covenant not to compete which restricts the right of any person to
receive compensation for performance of skilled or unskilled labor for
any employer shall be void, but this subsection (2) shall not apply
to:
(a) Any contract for the purchase and sale of a business or the
assets of a business;
(b) Any contract for the protection of trade secrets;
(c) Any contractual provision providing for the recovery of the
expense of educating and training an employee who has served an
employer for a period of less than two years;
(d) Executive and management personnel and officers and employees who
constitute professional staff to executive and management
personnel.
Employee acknowledges that this Agreement is a contract for the protection of
trade secrets under clause (b) and that he is an executive and management
employee within the meaning of clause (d).
(e) Employee acknowledges the possibility that his standard of living
may be reduced during the two years following the termination of this Agreement
and assumes the risk associated with that possibility.
(f) Employee acknowledges that, upon a breach of this section 5,
Company will suffer immediate and irreparable harm and damage for which money
damages alone cannot fully compensate. Employee therefore agrees that, upon such
breach or threat thereof, Company shall be entitled to a temporary restraining
order, preliminary injunction, permanent injunction, and all other injunctive
relief, without posting any bond or other security, to bar Employee from
violating this Agreement. Nothing in this section shall be construed as an
election of remedies or
4
<PAGE>
waiver of any right available to Company under this Agreement or by law,
including without limitation the right to seek damages from Employee for breach
of this Agreement.
(g) Notwithstanding anything to the contrary in this Agreement, the
covenant not to compete set forth in this section 5 shall not apply to Employee
(i) if, without the consent of Employee, Company significantly modifies its
existing mission statement or its commitment to the board of advisors or the
National Recovery Partnership as contemplated on the date hereof, (ii) if
Company breaches section 4(d) by failure to pay any installment of the severance
described therein within 10 days after written demand therefor by Employee,
(iii) if the employment of Employee is terminated and thereafter Company
abandons its commitment to the board of advisors or the National Recovery and
Prevention Partnership as contemplated on the date hereof, or (iv) this
Agreement is terminated pursuant to section 4(e). Additionally, in the event
that this Agreement is terminated by Company without "good cause," then the term
of the covenant not to compete shall last for the period of time for which
Company pays severance compensation to Employee under section 4(d).
6. Change of Control. If a Change in Control (as hereinafter defined)
occurs, Employee shall be considered to have been terminated without "good
cause" as provided in section 4(d) and the covenant not to compete set forth in
section 5 shall have no further force and effect. A "Change in Control" is
deemed to have occurred if (a) a "person" (as defined in section 13(d) of the
Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of shares of Common Stock
representing 30 percent or more of the shares as to which votes may be cast for
the election of directors of Company or (b) individuals who are directors of
Company at the beginning of a 24-month period cease to constitute at least
two-thirds of all directors of Company at any time during such period.
7. Successors and Assigns. This Agreement and all rights hereunder
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, heirs, distributees, devisees, and
legatees and by Company's successors and assigns. This Agreement is personal in
nature, and neither party shall, without the prior written consent of the other,
assign or transfer this Agreement or any right or obligation hereunder.
8. Notice. Any notice or other communication hereunder to either party
shall be in writing and shall be deemed to have been duly given when delivered
personally or mailed by certified mail, return receipt requested, postage
prepaid, addressed (a) if to Company at 506 Santa Monica Boulevard, Suite 400,
Santa Monica, California 90401 and (b) if to Employee at 333 Adams Street,
Denver, Colorado 80206, or to such other address as either party may have
furnished to the other in writing in accordance herewith.
9. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Colorado. Venue for any action arising
out of this Agreement shall be proper in Denver County, Colorado.
5
<PAGE>
10. Severability. If any court of competent jurisdiction shall declare
any provision of this Agreement to be invalid or unenforceable, the remainder of
this Agreement shall remain fully enforceable. To the extent that any court
shall conclude that any provision of this Agreement is void or voidable, the
court shall reform such provision only to the extent necessary to render the
provision enforceable with a view to the parties' desire that Company be
protected to the greatest extent possible under applicable law from improper
competition and the disclosure of its trade secrets.
11. Integration. This Agreement constitutes the entire agreement of the
parties and a complete merger of prior negotiations and agreements. This
Agreement may be modified only in a writing signed by the parties.
12. Waiver. No term or condition of this Agreement shall be deemed to
have been waived, nor shall there be an estoppel against the enforcement of any
provision of this Agreement, except by a written instrument signed by both
parties. No written waiver shall be deemed a continuing waiver unless
specifically stated therein, and a written waiver shall operate only as to the
specific term or condition waived and not for the future or as to any act other
than that specifically waived.
13. Construction. The parties have reviewed this Agreement in its
entirety and acknowledge that each has had a full opportunity to negotiate its
terms and to consult concerning this Agreement with counsel of its own choosing.
The parties expressly waive any and all applicable common law and statutory
rules of construction to the effect that any provision of a contract should be
construed against the drafter. This Agreement and all provisions hereof shall in
all cases be construed as a whole, according to the fair meaning of the language
used. Any party contesting the validity, existence, adequacy, or terms of this
Agreement shall have the burden of proof as to fraud, concealment, the failure
to disclose material information, unconscionability, misrepresentation, mistake
of fact or law, and any other matters. The headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE RECOVERY NETWORK, INC.
By /s/ William D. Moses
-----------------------
William D. Moses
President and Chief Executive Officer
6
<PAGE>
/s/ Donald J. Masters, Jr.
--------------------------
Donald J. Masters, Jr.
7
<PAGE>
Exhibit 10.6
NON-DISCLOSURE AND INVENTIONS AGREEMENT
Non Disclosure and Inventions Agreement (the "Agreement") between The Recovery
Network ("Company"), and William Moses ("Employee"), dated as of January 30,
1997. For their mutual benefit and in consideration of the employment or
continued employment of Employee by Company, or its subsidiaries, affiliates or
successors, Company and Employee hereby agree as follows:
1. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
(A) ACCESS TO CONFIDENTAL INFORMATION; DEFINITIONS
Employee acknowledges and agrees that Employee may have access to or may create
or aid in the creation of information or material that is commercially valuable
to Company and not generally known in the industry (Company's "Confidential
Information"). Confidential Information includes but is not limited to:
(i) any and all versions of any Company proprietary computer
software and any documentation related thereto;
(ii) technical information concerning Company's products and
services, including product data and specifications, know-how,
formulae, diagrams, flow charts, drawings, source code, object
code, program listings, test results, processes, inventions,
research projects and product development;
(iii) any and all versions of any Company designs, patents,
trademarks or copyrightable works, discoveries, formulae,
processes, manufacturing techniques, trade secrets,
inventions, improvements, ideas, business plans
(iv) information concerning Company's business, including cost
information, profits, sales information, accounting and
unpublished financial information, business plans or
strategies, markets and marketing methods, customer lists and
customer information, sponsor lists and sponsor information,
purchasing techniques, supplier lists and supplier information
and advertising strategies;
(v) information concerning Company's employees, including
salaries, strengths, weaknesses and skills;
(vi) information submitted by Company's customers, suppliers,
employees, Employees or co-venturers with the Company for
study, evaluation or use; and,
(vii) any other information not generally known to the public or by
actual or potential competitors of the Company, which, if
misused or disclosed, could reasonably be expected to
adversely affect Company's business.
(B) EMPLOYEE'S OBLIGATIONS TO MAINTAIN CONFIDENTIALITY
Employee acknowledges and agrees that:
(i) all Confidential Information, whether written or unwritten,
whether created by or conveyed to Employee, and however
conveyed to Employee, is the sole and exclusive property of
the Company and is regularly used by Company in the operation
and conduct of its business, and that the unauthorized
disclosure of Confidential Information would have a material
adverse effect on the Company's business, operations and
competitive position;
(ii) Employee will not at any time divulge to any person, firm, or
corporation, orally or in writing, directly or indirectly, in
whole or in part, any Confidential Information, without the
Company's explicit prior written consent;
<PAGE>
Non-Disclosure & Inventions Agreement
Page 2
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(iii) Employee will receive and maintain all Confidential
Information in strictest confidence using reasonable care;
(iv) that any violation or breach of this Agreement may result in
significant and irreparable injury to the Company, that a
remedy at law may be inadequate, and that, in the event of any
such violation or breach, the Company, in addition to any
other relief to which it may be entitled, shall be entitled to
temporary and permanent injunctive relief.
(C) EXCLUSIONS
Notwithstanding anything in this Agreement to the Contrary, Employee has no duty
of non-disclosure with respect to Confidential Information that:
(i) was in Employee's possession or already known to Employee
without an obligation to keep it confidential, before such
information was disclosed to Employee by Company, is publicly
available at the time of disclosure or that becomes publicly
available after disclosure other than through breach of this
Agreement or other wrongful act;
(ii) is disclosed by Employee with Company's prior written
approval;
(iii) is disclosed to Employee by a third party who is not in breach
of an obligation of confidentiality to Employee; or,
(iv) Employee develops independently other than through breach of
this Agreement, or,
(v) is disclosed under operation of law.
(D) RETURN OF MATERIALS
Upon termination of employment or upon Company request at any time, Employee
agrees to promptly deliver to Company:
(i) all originals and copies of all memoranda, documents, notes,
records, software programs, and other materials containing any
of Company's Confidential Information, including all written
or digital records and copies thereof; and,
(ii) all equipment, files, software programs and any other tangible
or intangible personal property belonging to Company.
(E) TERM
The provisions of this Section 2 shall apply to the entire term of Employee's
employment with Company, including any period of employment or consulting prior
to the date of this Agreement periods, shall survive the termination of the
Employee's employment and shall continue for so long as the Employee remains in
possession of Confidential Information.
2. INVENTIONS; COMPANY PROPERTY AND EXCLUSIONS
(A) DEFINITION OF INVENTIONS
As used in this Agreement, the term "Inventions" means designs, trademarks,
discoveries, formulae, processes, manufacturing techniques, trade secrets,
inventions, improvements, ideas, business plans or strategies, or patentable or
copyrightable works, including all rights to obtain, register, perfect and
enforce these proprietary interests; provided that the term "Inventions" shall
not be deemed to include those inventions, if any, listed on Schedule A
attached hereto and incorporated herein by reference.
<PAGE>
Non-Disclosure & Inventions Agreement
Page 3
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(B) OWNERSHIP OF INVENTIONS
Without further compensation, Employee hereby agrees promptly to disclose to the
Company, and hereby assigns and grants and agrees to assign and grant to the
Company or its designee, its entire right, title, and interest in and to all
Inventions which Employee may solely or jointly develop or reduce to practice
during the period of employment and:
(i) which pertain to any line of business activity of the Company;
(ii) which are aided by the use of time, material or facilities of
the Company, whether or not during working hours; or,
(iii) which relate to any of Employee's work of during the period of
this Agreement, whether or not performed during normal working
hours.
Notwithstanding anything else in this Section 2 to the contrary, no rights are
hereby conveyed in Inventions, if any, made by Employee prior to the period of
this Agreement and which are identified in Schedule A attached hereto and
incorporated herein by reference (which Schedule attachment contains no
confidential information).
(C) SECTION 2870 OF THE CALIFORNIA LABOR CODE
This Agreement does not apply to an Invention which qualifies fully under the
provisions of Section 2870 of the Labor Code, a copy of which is attached hereto
as Exhibit A. Employee agree to disclose all Inventions made by Employee during
the term of this Agreement in confidence to the Company to permit a
determination as to whether or not the Inventions should be the property of the
Company.
(D) COPYRIGHTS, TRADEMARKS AND PATENTS
Company shall have the right to have all or any of the Inventions assigned and
granted to Company pursuant to Section 2(b) above copyrighted, trademarked or
patented with the government of the United States or any applicable state or
foreign government agency in the name of Company and at Company's expense.
(E) EMPLOYEE'S ASSISTANCE
Employee agrees to provide all reasonable assistance to Company in preparing and
prosecuting any and all proprietary rights applications pursuant to Section
2(d) above. In particular:
(i) Employee agrees to perform, during and after the term of this
Agreement, all acts deemed necessary or desirable by Company
to permit and assist it, at its expense, in obtaining and
enforcing the full benefits, enjoyment, rights and title
throughout the world in all or any of the Inventions assigned
and granted to Company pursuant to Section 2(b) above. Such
acts may include, but are not limited to, execution of
documents and assistance or cooperation in legal proceedings;
(ii) If Company is unable for any reason to secure any signatures
from Employee, its partners or staff, to apply for or to
pursue any application for any United States or foreign
letters patent or mask work or copyright registration covering
inventions, mask works or original works of authorship
assigned to Company as above, then Employee hereby irrevocably
designates and appoints Company and its duly authorized
officers and agents as its agent and attorney-in-fact, to act
for and in Employee's behalf and stead to execute and file any
such applications and to do all other lawfully permitted acts
to further the prosecution and issuance of letters patent or
mask work or copyright registrations thereon with the same
legal force and effect as if executed by Employee. Employee
hereby waives and quitclaims to Company any and all claims, of
any nature whatsoever, which Employee now or may hereafter
have for infringement of any
<PAGE>
Non-Disclosure & Inventions Agreement
Page 4
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patents, mask works or copyrights resulting from any such
application for letters patent or mask work or copyright
registrations assigned hereunder to Company; and,
(iii) Employee's obligation to provide such assistance shall beyond
the termination of other services provided to Company under
this Agreement, but Company shall compensate Employee at a
reasonable rate for the time spent by Employee in rendering
such assistance.
(F) RETURN OF MATERIALS
Upon termination of employment or upon Company request at any time while
employed by the Company or thereafter, Employee agrees to promptly deliver to
the Company all originals and copies of all memoranda, documents, notes,
records, software programs, and other materials, including all written or
digital records and copies thereof, containing or related to any of the
Inventions assigned and granted to Company pursuant to Section 2(b) above,
including any and all versions of any Company designs, patents, trademarks or
copyrightable works, discoveries, formulae, processes, manufacturing techniques,
trade secrets, improvements, ideas, business plans, product data and
specifications, know-how, formulae, diagrams, flow charts, drawings, source
code, object code, program listings, test results, processes, inventions,
research projects and product development and any and all versions of any
Company proprietary computer software and any documentation related thereto,
without retaining any copies, notices or excerpts thereof.
3. MISCELLANEOUS
This Agreement:
(i) is the entire Agreement between the Company and Employee shall
supersede all prior agreements and understandings between the
parties regarding these subjects;
(ii) inures to the benefits of successors and assigns of Company
and is binding on Employee's heirs and legal representatives;
(iii) may not be changed or terminated orally, by or on behalf of
either party, nor may it be modified by any oral
representations or agreement;
(iv) This Agreement shall be governed by the laws of the State of
California excluding that body of law pertaining to conflicts
of law, and if any provision of this Agreement is held to be
invalid or unenforceable, such invalidity or unenforceability
shall not affect or impair the validity or enforceability of
the remaining provisions of the Agreement;
(v) does not create any agency or partnership relationship; and,
(vi) does not in any way restrict the right of Company and Employee
to terminate the employment relationship at will.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
THE RECOVERY NETWORK:
/s/ Donald Masters
- ------------------------
Donald Masters
Chairman of the Board
EMPLOYEE:
/s/ William Moses
- -----------------------
William Moses
<PAGE>
SCHEDULE A
List of Inventions:
If none, initial here: __________
Otherwise, list inventions below:
<PAGE>
EXHIBIT A
Section 2870 of the California Labor Code provides as follows:
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either;
(1) relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or,
(2) result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an
employee to assign an invention otherwise excluded from being required to be
assigned under subdivision (a), the provision is against the public policy of
this state and is unenforceable.
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), dated as of May 13, 1997, is by and
between THE RECOVERY NETWORK, INC., a Colorado corporation ("Company"), and JOHN
WHEELER ("Employee").
WITNESSETH
WHEREAS, Company desires to employ Employee to manage and supervise all of its
sales and marketing operations and activities on the terms and conditions set
forth herein; and
WHEREAS, as an inducement to Company to offer such employment, Employee desires
to enter into certain covenants, including without limitation a covenant not to
compete with Company if his employment is terminated under certain circumstances
set forth below.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties agree as follows:
1. Employment. Company shall employ Employee, and Employee shall be
employed by Company, on the terms and conditions set forth herein for the period
commencing as of the date hereof and (unless sooner terminated pursuant to
Section 4) ending on May 31, 1999.
2. Position and Duties. Employee shall manage and supervise all of the
sales and marketing operations and activities of Company. Employee shall report
to and be responsible directly to the Chief Executive or Chief Operating Officer
of Company and shall have and perform such duties and responsibilities relating
to the business and operations of Company as may be appropriate to Employee's
position and as the Chief Executive or Chief Operating Officer of Company from
time to time may assign to him, which are not inconsistent therewith. Without
limiting the generality of the foregoing, Employee shall have the following
duties:
(a) To supervise and conduct strategic planning for the
acquisition of new affiliates; to negotiate and execute affiliate agreements and
use his best efforts to maintain these relationships when acquired; to develop a
comprehensive data base containing all cable television operators and the status
of their affiliations.
(b) To supervise and oversee creation of all collateral sales
and marketing materials, affiliate kits, presentations (affiliate and ad sales)
and all advertising; to develop community awareness and cross promotional
concepts with cable operators and partners.
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(c) To supervise and oversee affiliate relations; to solicit,
maintain, care for and preserve trafficking procedures and billings; to develop
market analysis and "hot lists" of potential affiliates and tie-ins.
(d) To monitor support of the Recovery Network web site as it
relates to marketing; to keep the web site fresh and current, while exploring
potential new avenues of merchandising and distribution.
(e) To supervise and oversee coordination and oversight of all
public relations for the Network; to disseminate information internally; to be
responsible for partnership relations and a Company newsletter.
(f) To supervise exploration of outside merchandising
regarding books, music, videos, etc.
(g) To supervise development of budgets and variance
procedures regarding such budgets for each of the areas under the control of
sales and marketing.
During the term of his employment, Employee shall
devote his full time, attention, and best efforts to Company and to the
furtherance of its interests and shall not directly or indirectly engage in, or
enter into the employment of, or otherwise render services to or for, or act as
a manager, member or officer of, any other business (other than established
trade associations of which Company is a member) except for non-remunerative
participation in charitable organizations, service as a director of
non-competitive businesses and occasional consulting for Parenthood Television
and Working America so long as those consulting duties do not materially
interfere with employee's duties under this Agreement.
3. Compensation.
(a) Company shall pay to Employee an annual base salary of
$144,000, payable $12,000 per month in equal semi-monthly installments during
the term of his employment.
(b) In addition to Employee's base salary, Company shall pay
to Employee a commission on the following basis:
(i) Company shall pay to Employee one cent for each
incremental household to which at least two hours per day of Company programming
is delivered during the term of his employment or within the first calendar
quarter thereafter other than pursuant to the existing agreement between Company
and Access TV or pursuant to any other agreement under which Company purchases
carriage rights for cash, equity in Company or other
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<PAGE>
consideration (together with Access TV, a "Company Cost Service"). Households
that receive Company programming through a Company Cost Service shall not be
deemed "households" for any purpose in connection with the calculation of the
commission payable hereunder. Accordingly, households that formerly received
Company programming through a Company Cost Service and thereafter receive
Company programming other than through a Company Cost Service shall be deemed
incremental households at the time they first receive Company programming other
than through a Company Cost Service. Each household that receives Company
programming other than through a Company Cost Service is referred to herein as a
"Company Household."
(ii) The amount of such commission shall be
increased, subject to the mutual agreement of Company and Employee, at such time
as the number of hours per day of Company programming is increased above two
hours. In addition, the terms of the delivery of Company programming shall be
subject to the approval of Company; and the amount of such commission may be
increased or decreased if the terms of the delivery of Company programming to
any particular household or group of households deviate from the standard terms
approved by Company ("Non-Standard Terms"). If Company is required to pay a fee,
commission or other compensation to any person or entity other than Employee (a
"Third Party") in connection with the delivery of Company programming to any
particular Company Households, the amount thereof shall be deducted from the
commission payable to Employee hereunder with respect to such Company
Households. Employee shall negotiate the terms of such fee, commission or other
compensation with the Third Party.
(iii) If Employee and Company are unable to reach
agreement on the amount of any adjustment to the commission payable hereunder to
Employee with respect to the delivery of Company programming to Company
Households on Non-Standard Terms or if Employee and a Third Party are unable to
reach agreement on the amount of the commission or other compensation payable to
the Third Party, in each case at least ten calendar days prior to the date
Company is required to pay to Employee the commission to which he is entitled
hereunder with respect to such incremental Company Households, the executive
committee of the Board of Directors shall determine the amount of the adjustment
to the commission payable to Employee hereunder, which, in the case of an
adjustment because of a fee, commission or other compensation payable to a Third
Party, shall be a deduction no greater than the amount of the fee, commission or
other compensation payable to such Third Party. Any such determination by the
executive committee shall be conclusive, final and binding on Employee and
Company.
(iv) Not later than fifteen days following the end of
each calendar quarter that ends during the term of Employee's employment or
within 120
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<PAGE>
calendar days immediately following the end of the term of Employee's
employment, Company shall deliver to Employee a statement of the number of
Company Households as of the last day of such calendar quarter, the number of
Company Households as to which Company has theretofore paid a commission
hereunder, any other fees, commissions or other compensation payable by Company
in connection with the delivery of Company programming to incremental Company
Households reflected on such statement and a calculation of the amount of the
commission then payable to Employee. Such calculation shall be the product of
$.01 times the excess of (a) the number of Company Households at the end of such
calendar quarter over (b) the number of Company Households as to which a
commission has theretofore been paid hereunder, subject to adjustment under
clauses (ii) and (iii) above. Company shall deliver to Employee, together with
such statement, payment of the commission shown to be payable pursuant thereto.
Delivery and acceptance of such payment shall not be deemed acceptance by
Employee of the accuracy of any statement delivered to Employee hereunder or the
waiver by Employee of any rights hereunder except with respect to the conclusive
determination of the executive committee of the Board of Directors of Company
referred to in clause (iii) above.
(c) Employee shall be entitled to participate in and receive
benefits under any employee benefit plans and arrangements from time to time
made available to the executive employees of Company, when and as implemented
and subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Amounts paid to Employee under
any such plan or arrangement shall not be deemed to be made in lieu of any other
compensation payable to Employee hereunder.
(d) Employee shall be entitled to fifteen business days of
paid vacation each year during the term of his employment hereunder commencing
as of March 1, 1997 and additional holidays in accordance with Company policy,
as determined by the Chief Operating Officer of Company from time to time. The
timing of vacation days is subject to the reasonable advance approval of the
Chief Operating Officer of Company.
(e) Company shall pay directly, or reimburse Employee for, the
reasonable moving expenses, including carrier costs, short-term housing and
other incidental expenses, incurred by Employee in relocating himself and his
family to the Los Angeles metropolitan area in an amount not to exceed $15,000.
(f) Company shall pay directly, or shall reimburse Employee
for, the travel, food and lodging costs incurred by Employee to enable Employee
to be present at the offices of Company in Santa Monica, California, during
regular business hours prior to his relocation to the Los Angeles metropolitan
area,
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<PAGE>
provided, however, that Company shall be under no obligation to pay directly, or
to reimburse Employee for, any such costs incurred after June 30, 1997.
(g) Subject to the standard expense reimbursement policies of
Company. Company shall reimburse Employee for all reasonable expenses incurred
by Employee in connection with the performance of his duties and the discharge
of his responsibilities hereunder. Employee shall submit to the Chief Financial
Officer of Company, not more than thirty (30) days following the end of each
calendar month during the term of his employment, such information on such forms
as Company may request, which may include, but need not be limited to, an
itemized list of all expenses incurred by him during the preceding calendar
month, setting forth dates, the purposes for which incurred and the amounts
thereof, together with such receipts as Employee may reasonably be able to
obtain and such other documentation as may be required from time to time to
enable Company to deduct such expenses under the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
4. Termination. The term of this Agreement and Employee's employment
hereunder may be terminated before May 31, 1999, on the following terms and
conditions:
(a) By Employee for any reason, upon at least 30 days' advance
written notice, or upon Employee's death, with Company's only liability being
the payment of base salary, reimbursement for accrued and unpaid expenses and
vacation compensation earned and unpaid as of Employee's last day of work;
(b) By mutual agreement of Company and Employee, on such terms
and with such compensation as may be mutually agreed upon; provided however that
such severance compensation shall not exceed the amount payable under Section
4.(d) hereof;
(c) By Company for "good cause" (as hereinafter defined), such
termination to be effective immediately upon notice of such termination from
Company to Employee, with Company's only liability being the payment of base
salary, reimbursement for accrued and unpaid expenses and vacation compensation
earned and unpaid through the date of such termination; or
(d) By Company without "good cause," upon not less than 30
days' prior written notice, with reimbursement for accrued and unpaid expenses
plus severance compensation equal to the greater of (i) the base salary and
vacation compensation for which Company would have been liable hereunder had
such termination not occurred until the earlier of May 31, 1999, or one year
after the effective date of such termination, and (ii) base salary and vacation
compensation for 90 days following the effective date of such termination;
provided that one-half
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<PAGE>
of such severance compensation shall be payable on the effective date of such
termination and the balance shall be payable semi-monthly ratably over the
compensation reference period. If Company terminates the term of Employee's
employment hereunder without "good cause," the vesting of all options
theretofore granted to Employee shall be immediately accelerated to the
effective date of such termination and all such options shall then be
exercisable with respect to all shares covered thereby for the full term of such
options then remaining.
In addition, if Company terminates the term of Employee's
employment hereunder without "good cause" and, following the effective date of
such termination, Employee is required to relocate in order to accept new
employment, Company shall pay directly, or reimburse Employee for, the
reasonable moving expenses, including carrier costs, short-term housing and
other incidental expenses, incurred by Employee in such relocation of himself
and his family in an amount not to exceed $15,000.
For purposes of this Section 4, "good cause" shall
mean any act or omission of Employee constituting gross negligence or willful
misconduct in the conduct of his duties for Company, any breach by Employee of
the terms of his Non-Disclosure and Inventions Agreement, or (given the nature
of Company's mission as a disseminator of information, programs and the culture
of recovery from such abuse) alcohol or substance abuse.
5. Competitive Activity.
(a) During the term of this Agreement and for one year after
the termination of this Agreement for any reason set forth in Sections 4(a) or
(c) above only, Employee shall not directly or indirectly (as an officer,
director, employee, consultant, owner, shareholder, adviser, joint venturer or
otherwise), engage in any activities that could be deemed a conflict of interest
or in any way compete with Company or its affiliates within the United States in
(i) the development or provision of television, radio, interactive and other new
media programming services primarily offering information, direction or support
to people afflicted with or affected by alcoholism, chemical dependency, eating
disorders and other behavioral health problems ("Recovery Media Business"), (ii)
any other line of Recovery Media Business in which Company or its affiliates
shall be engaged, or shall have formed an intention to engage with the active
participation of Employee in planning or evaluation, at any time during the term
of Employee's employment, including without limitation sales and merchandising
of recovery related material. Employee shall not be precluded from owning less
than one percent of the securities of any competitor of Company or its
affiliates if such securities are publicly traded on a national securities
exchange or are quoted on an automated quotation system. Employee represents and
warrants that he is under no competitive restrictions or obligations to third
parties that affect his performance hereunder.
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<PAGE>
(b) During the term of this Agreement and for one year after
the termination of this Agreement for any reason, whether or not such
termination shall be alleged or later found to be unlawful, wrongful or in
breach of contract. Employee shall not contact, directly or indirectly, any
customer of Company with whom Employee had contact during the term of this
Agreement unless such contact by Employee is not related to the Recovery Media
Business.
(c) Employee acknowledges that, through his employment with
Company, he will acquire access to information suited to immediate application
by a business in competition with Company. Employee acknowledges that he has
executed concurrently with this Agreement a Non-Disclosure and Inventions
Agreement, the terms of which are incorporated herein by reference as if set
forth herein verbatim, that imposes obligations on Employee with respect to
information about Company. Employee considers the restrictions on his future
employment or business activities contained in this Section 5 to be in all
respects reasonable and necessary. Employee acknowledges that Company and its
affiliates and competitors operate throughout the United States, expressly
consents to the geographic restriction on competition contained in this Section
5, and believes that such restriction is reasonable given the nature of
Company's business.
(d) Employee acknowledges the possibility that his standard of
living may be reduced during the one year following the termination of this
Agreement and assumes the risk associated with that possibility.
(e) Employee acknowledges that, upon a breach of this Section
5, Company will suffer immediate and irreparable harm and damage for which money
damages alone cannot fully compensate. Employee therefore agrees that, upon such
breach or threat thereof, Company shall be entitled to a temporary restraining
order, preliminary injunction, permanent injunction and all other injunctive
relief, without posting any bond or other security, to bar employee from
violating this Agreement. Nothing in this section shall be construed as an
election of remedies or waiver of any right available to Company under this
Agreement or by law, including without limitation the right to seek damages from
Employee for breach of this Agreement.
(f) To the extent possible or required under applicable law,
including, without limitation, the U.S. Copyright Act, the results and proceeds
of any and all services and materials (collectively "Materials") written,
produced or created by Employee during the term of his employment hereunder
relating to the Recovery Media Business, and the content and use thereof, shall
be considered Works Made For Hire or, if not legally capable of being considered
as such, then and in such event Employee hereby assigns to Company in perpetuity
all right, title and interest, including copyright, he may have in or to such
Materials throughout the
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<PAGE>
universe free and clear of any and all claims for royalties or other
compensation other than that specified herein. Should Employee develop ideas,
scripts, concepts or other creative properties which do not relate to the
Recovery Media Business during the term of his employment, Employee shall give
Company the first right of negotiation and last matching right to develop such
property.
6. Successors and Assigns. This Agreement and all rights hereunder
shall inure to the benefit of and be enforceable by Employee's personal and
legal representatives, executors, administrators, heirs, distributees, devisees
and legatees and by Company's successors and assigns. This Agreement is personal
in nature, and neither party shall, without the prior written consent of the
other, assign or transfer this Agreement or any right or obligation hereunder.
7. Notice. Any notice or other communication hereunder to either party
shall be in writing and shall be deemed to have been duly given when delivered
personally or mailed by certified mail, return receipt requested, postage
prepaid, addressed (a) if to Company at 1411 5th Street, Suite 250, Santa
Monica, CA 90401 and (b) if to Employee at his address sent forth on the
personnel records of Company, or to such other address as either party may have
furnished to the other in writing in accordance herewith.
8. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the internal laws of the State of California
applicable to agreements made and to be performed entirely in such state without
giving effect to the conflicts of laws and principles thereof. Venue for any
action arising out of this Agreement shall be proper in Los Angeles County,
California.
9. Severability. If any court of competent jurisdiction shall declare
any provision of this Agreement to be invalid or unenforceable, the remainder of
this Agreement shall remain fully enforceable. To the extent that any court
shall conclude that any provision of this Agreement is void or voidable, the
court shall reform such provision only to the extent necessary to render the
provision enforceable with a view to the parties' desire that Company be
protected to the greatest extent possible under applicable law from improper
competition and the disclosure of its trade secrets.
10. Integration. This Agreement constitutes the entire agreement of the
parties and a complete merger of prior negotiations and agreements. This
Agreement may be modified only in a writing signed by the parties.
11. Arbitration. Should the parties have a dispute regarding matters
which are the subject matter of this Agreement which they cannot resolve between
themselves, such dispute shall be submitted to binding arbitration pursuant to
local
-8-
<PAGE>
rules in Los Angeles County in either Superior or Municipal Court. The
prevailing party in such an arbitration shall be entitled to legal fees and
costs of such arbitration.
12. Waiver. No term or condition of this Agreement shall be deemed to
have been waived nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by a written instrument signed by both
parties. No written waiver shall be deemed a continuing waiver unless
specifically stated therein, and a written waiver shall operate only as to the
specific term or condition waived and not for the future or as to any act other
than specifically waived.
13. Construction. The parties have reviewed this Agreement in its
entirety and acknowledge that each has had a full opportunity to negotiate its
terms and to consult concerning this Agreement with counsel of its own choosing.
The parties expressly waive any and all applicable common law and statutory
rules of construction to the effect that any provision of a contract should be
construed against the drafter. This Agreement and all provisions hereof shall in
all cases be construed as a whole, according to the fair meaning of the language
used. Any party contesting the validity, existence, adequacy, or terms of this
Agreement shall have the burden of proof as to fraud, concealment, the failure
to disclose material information, unconscionability, misrepresentation, mistake
of fact or law and any other matters. The headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE RECOVERY NETWORK, INC.
BY: /s/ William D. Moses
--------------------------------------
William D. Moses
President and Chief Executive Officer
/s/ John Wheeler
--------------------------------------
John Wheeler
-9-
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), dated as of May 1, 1997, is by and
between THE RECOVERY NETWORK, INC., a Colorado corporation ("Company"), and
WILLIAM MEGALOS ("Employee").
WITNESSETH
WHEREAS, Company desires to employ Employee to manage and supervise all of its
production activities on the terms and conditions set forth herein; and
WHEREAS, as an inducement to Company to offer such employment, Employee desires
to enter into certain covenants, including without limitation a covenant not to
compete with Company if his employment is terminated under certain circumstances
set forth below.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties agree as follows:
1. Employment. Company shall employ Employee, and Employee shall be
employed by Company, on the terms and conditions set forth herein for the period
commencing as of the date hereof and (unless sooner terminated pursuant to
Section 4) ending on November 30, 1998.
2. Position and Duties. Employee shall manage and supervise all of the
production operations and activities of Company. Employee shall report and be
responsible directly to the Chief Operating Officer of Company or his designee
and shall have and perform such duties and responsibilities relating to the
business and operations of Company as may be appropriate to Employee's position
and as the Chief Operating Officer of Company or his designee from time to time
may assign to him, which are not inconsistent therewith. Without limiting the
generality of the foregoing, Employee shall have the following duties:
(a) To develop programming and programming concepts for
Company consistent with the guidelines and goals of Company as articulated by
its President, its Chief Executive Officer, its Chief Operating Officer and its
board of directors.
(b) To produce all programming that Company elects to produce
other than through third-party contractors.
-1-
<PAGE>
(c) To serve as executive producer when Company elects to
produce programming through third-party contractors, including without
limitation retaining and supervising contractors.
(d) To identify and acquire suitable existing programming,
including without limitation through the negotiation of fees for and the
reformatting of such programming.
(e) To identify and develop program formats.
(f) To identify, develop and monitor the "look and feel" of
Company programming by first utilizing in-house resources and, if those are not
sufficient, by the retention and supervision of third-party contractors.
(g) To retain and supervise all production of music including
third-party providers and, under the supervision of Company's senior legal
officer, to obtain all proper copyright permission and any other rights
necessary for all music used in Company programming.
(h) To produce or executive produce all promotional material
used by Company whether produced in-house or by third-party providers or
vendors.
(i) To act as liaison with local cable operators and
programmers on "Recovery America" and other Company programming.
(j) To screen and evaluate programming submitted by members of
the National Recovery Partnership.
(k) To obtain proper copyright permission and negotiate fees
and all other rights for programming accepted from members of the National
Recovery Partnership under the supervision of Company's senior legal officer.
(l) To evaluate and establish a "master control" procedure and
monitor its daily functioning.
(m) To manage and control departmental budgets and provide to
Company's comptroller all information necessary to produce variance reporting on
a monthly basis as directed.
During the term of his employment, Employee shall devote his
full time, attention, and best efforts to Company and to the furtherance of its
interests and shall not directly or indirectly engage in, or enter into the
employment of, or otherwise render services to or for, or act as a manager,
member or officer of, any other business (other than established trade
associations of which Company is a
-2-
<PAGE>
member) except for non-remunerative participation in charitable organizations
and service as a director of non-competitive businesses.
3. Compensation.
(a) Company shall pay to Employee an annual base salary of
$120,000, payable $10,000 per month in equal semi-monthly installments during
the term of his employment.
(b) Employee shall be entitled to participate in and receive
benefits under any employee benefit plans and arrangements from time to time
made available to the employees of Company generally, when and as implemented
and subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Amounts paid to Employee under
any such plan or arrangement shall not be deemed to be made in lieu of any other
compensation payable to Employee hereunder.
(c) Employee shall be entitled to ten business days of paid
vacation and additional holidays in accordance with Company policy, as
determined by the Chief Operating Officer of Company from time to time. Vacation
days shall accrue at the rate of 0.833 days per month commencing as of November
1, 1996. The timing of vacation days is subject to the reasonable advance
approval of the Chief Operating Officer of the Company.
(d) Subject to the standard expense reimbursement policies of
Company, Company shall reimburse Employee for all reasonable expenses incurred
by Employee in connection with the performance of his duties and the discharge
of his responsibilities hereunder. Employee shall submit to the Chief Financial
Officer of the Company, not more than thirty (30) days following the end of each
calendar month during the term of his employment, such information on such forms
as Company may request, which may include, but need not be limited to, an
itemized list of all expenses incurred by him during the preceding calendar
month, setting forth dates, the purposes for which incurred and the amounts
thereof, together with such receipts as Employee may reasonably be able to
obtain and such other documentation as may be required from time to time to
enable Company to deduct such expenses under the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
4. Termination. The term of this Agreement and of Employee's employment
hereunder may be terminated before November 30, 1998, on the following terms and
conditions:
(a) By Employee for any reason, upon at least 30 days' advance
written notice, or upon Employee's death, with Company's only liability being
the
-3-
<PAGE>
payment of base salary, reimbursement for accrued and unpaid expenses and
vacation compensation earned and unpaid as of Employee's last day of work;
(b) By mutual agreement of Company and Employee, on such terms
and with such compensation as may be mutually agreed upon; provided, however,
that such severance compensation shall not exceed the amount payable under
Section 4.(d) hereof;
(c) By Company for "good cause" (as hereinafter defined), such
termination to be effective immediately upon notice of such termination from
Company to Employee, with Company's only liability being the payment of base
salary, reimbursement for accrued and unpaid expenses and vacation compensation
earned and unpaid through the date of such termination; or
(d) By Company without "good cause," upon not less than 30
days' prior written notice, with reimbursement for accrued and unpaid expenses
plus severance compensation equal to base salary and vacation compensation for
90 days following the effective date of such termination; which Company shall
pay to Employee ratably during such 90 day period and otherwise in accordance
with its ordinary payroll procedures.
For purposes of this Section 4, "good cause" shall mean any
act or omission of Employee constituting gross negligence or willful misconduct
in the conduct of his duties for Company; any breach by Employee of the terms of
his Non-Disclosure and Inventions Agreement; Employee's conviction (which
conviction, through lapse of time or otherwise is not subject to appeal) in a
court of law of a felony or a crime involving moral turpitude; Employee's taking
or failing to take any action, or engaging or failing to engage in any conduct
or activity, which taking or engaging or failing to do so (i) has, or could
reasonably be expected to have, a material adverse effect on the business,
operation or condition (financial or other) of Company or (ii) subjects, or
could reasonably be expected to subject, Company to public disrepute or to
statutory or tort liability; or (given the nature of Company's mission as a
disseminator of information, programs and the culture of recovery from such
abuse) alcohol or substance abuse.
5. Competitive Activity.
(a) During the term of this Agreement and for one year after
the termination of this Agreement for any reason set forth in Sections 4(a) or
(c) above only, Employee shall not directly or indirectly (as an officer,
director, employee, consultant, owner, shareholder, adviser, joint venturer or
otherwise), engage in any activities that could be deemed a conflict of interest
or in any way compete with Company or its affiliates within the United States in
(i) the development or provision of television, radio, interactive and other new
media programming
-4-
<PAGE>
services primarily offering information, direction or support to people
afflicted with or affected by alcoholism, chemical dependency, eating disorders
and other behavioral health problems ("Recovery Media Business"), (ii) any other
line of Recovery Media Business in which Company or its affiliates shall be
engaged, or shall have formed an intention to engage with the active
participation of Employee in planning or evaluation, at any time during the term
of Employee's employment, including without limitation sales and merchandising
of recovery related material. Employee shall not be precluded from owning less
than one percent of the securities of any competitor of Company or its
affiliates if such securities are publicly traded on a national securities
exchange or are quoted on an automated quotation system. Employee represents and
warrants that he is under no competitive restrictions or obligations to third
parties that affect his performance hereunder.
(b) During the term of this Agreement and for one year after
the termination of this Agreement for any reason, whether or not such
termination shall be alleged or later found to be unlawful, wrongful or in
breach of contract. Employee shall not contact, directly or indirectly, any
customer of Company or supplier of programming or production services to Company
with whom Employee had contact during the term of this Agreement unless such
contact by Employee is not related to the Recovery Media Business.
(c) Employee acknowledges that, through his employment with
Company, he will acquire access to information suited to immediate application
by a business in competition with Company. Employee acknowledges that he has
executed concurrently with this Agreement a Non-Disclosure and Inventions
Agreement, the terms of which are incorporated herein by reference as if set
forth herein verbatim, that imposes obligations on Employee with respect to
information about Company. Employee considers the restrictions on his future
employment or business activities contained in this Section 5 to be in all
respects reasonable and necessary. Employee acknowledges that Company and its
affiliates and competitors operate throughout the United States, expressly
consents to the geographic restriction on competition contained in this Section
5, and believes that such restriction is reasonable given the nature of
Company's business.
(d) Employee acknowledges the possibility that his standard of
living may be reduced during the one year following the termination of this
Agreement and assumes the risk associated with that possibility.
(e) Employee acknowledges that, upon a breach of this Section
5, Company will suffer immediate and irreparable harm and damage for which money
damages alone cannot fully compensate. Employee therefore agrees that, upon such
breach or threat thereof, Company shall be entitled to a temporary restraining
order, preliminary injunction, permanent injunction and all other injunctive
relief, without posting any bond or other security, to bar employee from
violating this
-5-
<PAGE>
Agreement. Nothing in this section shall be construed as an election of remedies
or waiver of any right available to Company under this Agreement or by law,
including without limitation the right to seek damages from Employee for breach
of this Agreement.
(f) To the extent possible or required under applicable law,
including, without limitation, the U.S. Copyright Act, the results and proceeds
of any and all services and materials (collectively "Materials") written,
produced or created by Employee during the term of his employment hereunder
relating to the Recovery Media Business, and the content and use thereof, shall
be considered Works Made For Hire or, if not legally capable of being considered
as such, then and in such event Employee hereby assigns to Company in perpetuity
all right, title and interest, including copyright, he may have in or to such
Materials throughout the universe free and clear of any and all claims for
royalties or other compensation other than that specified herein. Should
Employee develop ideas, scripts, concepts or other creative properties which do
not relate to the Recovery Media Business during the term of his employment,
Employee shall give Company the first right of negotiation and last matching
right to develop such property.
6. Successors and Assigns. This Agreement and all rights hereunder
shall inure to the benefit of and be enforceable by Employee's personal and
legal representatives, executors, administrators, heirs, distributees, devisees
and legatees and by Company's successors and assigns. This Agreement is personal
in nature, and neither party shall, without the prior written consent of the
other, assign or transfer this Agreement or any right or obligation hereunder.
7. Notice. Any notice or other communication hereunder to either party
shall be in writing and shall be deemed to have been duly given when delivered
personally or mailed by certified mail, return receipt requested, postage
prepaid, addressed (a) if to Company at 1411 5th Street, Suite 250, Santa
Monica, CA 90401 and (b) if to Employee at his address sent forth on the
personnel records of Company, or to such other address as either party may have
furnished to the other in writing in accordance herewith.
8. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the internal laws of the State of California
applicable to agreements made and to be performed entirely in such state without
giving effect to the conflicts of laws and principles thereof. Venue for any
action arising out of this Agreement shall be proper in Los Angeles County,
California.
9. Severability. If any court of competent jurisdiction shall declare
any provision of this Agreement to be invalid or unenforceable, the remainder of
this Agreement shall remain fully enforceable. To the extent that any court
shall
-6-
<PAGE>
conclude that any provision of this Agreement is void or voidable, the court
shall reform such provision only to the extent necessary to render the provision
enforceable with a view to the parties' desire that Company be protected to the
greatest extent possible under applicable law from improper competition and the
disclosure of its trade secrets.
10. Integration. This Agreement constitutes the entire agreement of the
parties and a complete merger of prior negotiations and agreements. This
Agreement may be modified only in a writing signed by the parties.
11. Arbitration. Should the parties have a dispute regarding matters
which are the subject matter of this Agreement which they cannot resolve between
themselves, such dispute shall be submitted to binding arbitration pursuant to
local rules in Los Angeles County in either Superior or Municipal Court. The
prevailing party in such an arbitration shall be entitled to legal fees and
costs of such arbitration.
12. Waiver. No term or condition of this Agreement shall be deemed to
have been waived nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by a written instrument signed by both
parties. No written waiver shall be deemed a continuing waiver unless
specifically stated therein, and a written waiver shall operate only as to the
specific term or condition waived and not for the future or as to any act other
than specifically waived.
13. Construction. The parties have reviewed this Agreement in its
entirety and acknowledge that each has had a full opportunity to negotiate its
terms and to consult concerning this Agreement with counsel of its own choosing.
The parties expressly waive any and all applicable common law and statutory
rules of construction to the effect that any provision of a contract should be
construed against the drafter. This Agreement and all provisions hereof shall in
all cases be construed as a whole, according to the fair meaning of the language
used. Any party contesting the validity, existence, adequacy, or terms of this
Agreement shall have the burden of proof as to fraud, concealment, the failure
to disclose material information, unconscionability, misrepresentation, mistake
of fact or law and any other matters. The headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE RECOVERY NETWORK, INC.
BY: /s/ William D. Moses
-------------------------------------
William D. Moses
President and Chief Executive Officer
/s/ William Megalos
--------------------------------------
William Megalos
-8-
<PAGE>
EXHIBIT 10.9
LICENSE AGREEMENT
THIS LICENSE AGREEMENT is entered into as of this 1st day of May, 1997
between RECOVERYNET INTERACTIVE, L.L.C. ("Licensor"), 506 Santa Monica
Boulevard, Suite 225, Santa Monica, CA 90401, and MERIT BEHAVORIAL CARE
CORPORATION ("Licensee"), 1 Maynard Drive, Park Ridge, NJ 07656.
RECITALS
A. Licensor has developed and will develop various behavioral health care
services and products to be distributed via satellite, computer website,
interactive television, private computer networks and such other means of
distribution as may be mutually agreed upon by Licensor and Licensee (all of
such services and products being hereinafter referred to as the "Licensed
Materials".
B. Licensor and Licensee each desire that the Licensed Materials be
available to Licensee's customers for their use.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS;
1. License: Licensor hereby grants to Licensee a non-exclusive license to
cause the Licensed Materials to be transmitted to Licensee's customers during
the Term and throughout the Territory by such means of distribution as are
specified below. Notwithstanding that the license herein granted is
non-exclusive, Licensor agrees it will not make available the Licensed Materials
to Licensee's competitors listed in Schedule 1 attached hereto and by this
reference made a part hereof; provided, however, that if an entity referred to
in Schedule 1 makes an equity investment in Licensor in an aggregate amount of
not less than two million dollars ($2,000,000) than such entity shall be deemed
deleted from Schedule 1. Licensee agrees to make the Licensed Materials
available to its customers which Licensee determines in its sole discretion are
appropriate for such Licensed Materials, in such form as made available by
Licensor, without alteration except as provided in Paragraph 6 hereof.
2. Term: The term of this License Agreement shall be five (5) years,
commencing on the date hereof ("Term"), provided that Licensor and Licensee may
hereafter agree in writing to end the Term on an earlier termination date.
1
<PAGE>
3. Territory: The Territory covered by this License Agreement shall be the
world ("Territory").
4. Distribution Media: Licensee may distribute the Licensed Materials to
its customers by means of satellite transmission, computer website, interactive
television, private computer networks, and such other means of distribution as
may be mutually agreed upon by Licensor and Licensee.
5. License Fee Payments and Statements:
a. Licensor and Licensee shall use best efforts to establish mutually
agreed pricing to Licensee's customers for the Licensed Materials. Licensee
shall pay Licensor an amount equal to the gross revenues received by Licensee
from its customers for the use of such Licensed Materials less an amount equal
to one hundred fifteen percent (115%) of Licensee's costs in connection with
such Licensed Materials (unless Licensor and Licensee agree in writing to
another payment method). Licensee's costs shall consist of so-called "conversion
costs" (those related to merchandising of the product and/or service, e.g.,
direct labor and variable overhead (e.g., add-on promotional costs, add-on
marketing costs, travel, office expenses, computer, support personnel and sales
commissions).
b. Payments shall be made and statements rendered by Licensee by the
tenth day of each month for sums received the preceding month. Statements shall
specify the sums received by Licensee and the deductions therefrom in such
detail as may be reasonably required by Licensor. Licensor shall have the right
to audit Licensee's books and records relating to the Licensed Materials at any
time during regular business hours on reasonable notice, but not more than once
per year. Licensor shall have no right to examine Licensee's books and records
not relating solely to the Licensed Materials unless the Licensed Materials are
included with any other product(s) or service(s) in a sale of such other
product(s) or service(s) with such Licensed Materials. If any audit(s) shall
disclose an underpayment to Licensor of ten percent (10%) or more for the period
audited, Licensee shall pay Licensor an amount equal to all costs incurred by
Licensor in connection with such audit(s).
2
<PAGE>
6. Editorial Control: Licensor shall determine the content of all Licensed
Materials presented to Licensee. However, Licensed Materials as made available
to Licensee's customers shall be subject to Licensee's approval. Licensee shall
consult with Licensor relating to the Licensed Materials and products and
services which may be or are developed by Licensor. Licensee shall provide
Licensor with its written policies and guidelines from time to time in effect.
If any segment(s) of the Licensed Materials are inconsistent with Licensee's
guidelines or policies which have been provided to Licensor then Licensee may
elect to eliminate such segment(s) from the Licensed Materials made available to
Licensee's customers.
7. Branding: All Licensed Materials shall contain Licensor's logo or such
other identifying materials as Licensor shall determine. If Licensee or its
customers shall so request and pay Licensor such sum as may be reasonably
required by Licensor to cover the cost thereof, Licensor shall add identifying
material requested by Licensee and/or its customers which is approved by
Licensor to the Licensed Materials.
8. Promotion: Where Licensee in its sole discretion determines that such
inclusion is appropriate, Licensee shall include the Licensed Materials in its
advertising, marketing and promotion of products and services relating to
behavioral health care offered to its customers. Where appropriate, in
Licensee's sole discretion, the Licensed Materials shall be included in
Licensee's price sheets and in contract proposals to its customers and
prospective customers.
9. Usage Data: Licensor and Licensee shall each make available to the
other, to the extent their respective technical capabilities permit, data
relating to use of the Licensed Materials; provided, however, that the identity
and E-mail addresses of end-users need not be disclosed to Licensor.
10. Representations and Warranties: Except for Licensor's representation
and warranty that the Licensed Materials do not infringe on any copyright of any
third party and Licensee's representations and warranties that it will not add
any material to the Licensed Materials without Licensor's written consent and
that such added materials will not infringe on any copyright of any third party,
neither Licensor nor Licensee makes any representation or warranty, express or
3
<PAGE>
implied, to the other of any kind or nature whatsoever. Licensor and Licensee
each agree to indemnify and hold the other and their respective officers,
directors, employees, shareholders and representatives harmless from and against
any and all claims, liabilities, damage, cost and expense (including reasonable
attorneys' fees and costs) arising by reason of the breach of any warranty or
representation made by such party hereunder.
11. Breach: If a Licensor or Licensee shall commit a breach or any term or
provision of this License Agreement the other party shall provide the breaching
party with written notice thereof specifying the details of such breach. If a
material breach of this License Agreement is not cured within thirty (30) days
after the breaching party's receipt of such notice, the other party may
terminate this License Agreement at any time thereafter prior to the curing of
such material breach; provided, however, that Licensor may terminate this
License Agreement on account of Licensee's failure to pay any undisputed portion
of the license fee which continues for more than five (5) business days after
Licensor shall have notified Licensee in writing of such failure to pay. In
order to effect the termination right referred to in this Paragraph 11, such
written notification shall expressly reference this Paragraph 11 and that the
failure to pay an undisputed portion of the license fee will result in a
termination right in favor of Licensor.
12. Limitation of Liability: Neither party shall be liable to the other for
any consequential, incidental, special or indirect damages suffered by the other
relating to this License Agreement, it being the parties understanding that
liability shall exist only for actual damages.
13. General Provisions:
a. Governing Law. This Agreement and any disputes arising under, in
connection with, or relating to this Agreement will be governed by the laws of
the State of California, applicable to agreements entered into and to be fully
performed in California.
b. Compliance with Laws. Subject to the express provisions of this
paragraph, each party agrees to comply with applicable law in connection with
4
<PAGE>
the development and publication of the Licensed Materials, including without
limitation laws concerning obscenity, defamation, infringement, rights of
privacy, harassment and export controls.
c. Assignment. Neither party may assign this License Agreement or any
rights or obligations hereunder to any third party, without the other party's
prior written consent; provided, however, that either party may assign its
rights and obligations hereunder to a third party without the other party's
consent in connection with: (i) any merger or acquisition by such party, (ii)
such party's sale of all or a substantial portion of its assets, or (iii) the
assignment of such rights and obligations to a majority-owned subsidiary of such
party. In the event of such assignment, such party shall be relieved of its
obligations hereunder only to the extent such obligations are performed by the
assignee. Any assignment without consent attempted by either party
notwithstanding the foregoing prohibition will be deemed to be material breach
of this License Agreement.
d. Relationship of Parties. Neither this License Agreement nor the
parties' business relationship established hereunder will be construed as a
partnership, joint venture or agency relationship or as granting a franchise.
The parties warrant to one another that they have consulted legal counsel in
reviewing and/or negotiating this License Agreement and have concluded that no
business plan or franchise fee is conveyed or provided for in this Agreement or
otherwise by the relationship established by this Agreement or by its
performance.
e. Waiver. No waiver of any breach of any provision of this License
Agreement will be considered to be a waiver of any prior, concurrent or later
breach of the same provisions or difference provisions, and will not be
effective unless made in writing and signed by an officer of the waiving party.
f. Amendments. This License Agreement may only be amended by a written
agreement signed by officers of both parties.
g. Notices. Any notice which either party desires or is required to
give the other pursuant to this License Agreement shall be given by United
States mail, postage prepaid, by overnight delivery (such as Federal Express),
5
<PAGE>
or by facsimile transmission or personal delivery, and shall be deemed effective
when mailed, transmitted (provided the sender receive a confirmation of
receipt), or personally delivered.
h. Entire Agreement. This License Agreement constitutes the entire
understanding of Licensor and Licensee with respect to its subject matter and
supersedes all prior agreements between them and shall be effective when
executed by the parties; provided, however, that if the transaction contemplated
by the February 18, 1997 letter of intent (or a similar transaction) among
Licensor, Licensee, Tele-Communications, Inc. and Recoverynet Television is
consummated then the parties will in good faith renegotiate the terms and
provisions of this License Agreement.
IN WITNESS WHEREOF, the parties have executed this License Agreement as of
the above date.
"Licensor" "Licensee"
RECOVERYNET INTERACTIVE, LLC MERIT BEHAVIORAL CARE CORPORATION
By /s/ By /s/
-------------------------- --------------------------------
Its CEO Its EVP
----------------------- -----------------------------
6
<PAGE>
SCHEDULE 1
1. Value Behavioral Health, Inc.
2. United Behavioral Health (UBH)
3. Foundation Health PsychCare Services, Inc.
4. Green Spring Health Services, Inc.
5. Human Affairs International, Inc.
7
<PAGE>
Exhibit 21.1
List of Subsidiaries
Name State of Incorporation
----- ----------------------
Recovery Direct, Inc. Colorado
RecoveryNet Interactive, L.L.C. Delaware
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
------------------------
Arthur Andersen LLP
Los Angeles California
May 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1997 JUN-30-1996
<CASH> 733,932 137,492
<SECURITIES> 71,015 0
<RECEIVABLES> 4,928 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 750,382 138,192
<PP&E> 85,422 59,090
<DEPRECIATION> (24,405) (13,841)
<TOTAL-ASSETS> 1,114,462 208,687
<CURRENT-LIABILITIES> 1,321,701 341,692
<BONDS> 1,033,018 20,000
0 0
0 0
<COMMON> 4,177,964 1,924,510
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,114,462 208,687
<SALES> 28,718 0
<TOTAL-REVENUES> 28,718 0
<CGS> 0 0
<TOTAL-COSTS> 2,143,914 1,229,443
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 171,077 (6,414)
<INCOME-PRETAX> (2,286,273) (1,223,029)
<INCOME-TAX> 0 800
<INCOME-CONTINUING> (2,286,273) (1,223,829)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,286,273) (1,223,829)
<EPS-PRIMARY> (1.13) (.71)
<EPS-DILUTED> (1.13) (.71)
</TABLE>
