<PAGE>
As filed with the Securities and Exchange Commission on September 8, 1997.
Registration No. 333-27787
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 2
TO
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
-------------------------
<PAGE>
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>
Units, each Unit to purchase one
share of Common Stock, par
value $.01 per share, and one
Redeemable Warrant to
purchase one share of Common
Stock ........................... 2,127,500(2) $ 5.10 $ 10,850,250 $ 3,287.95
- -------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the Warrants included in the
Units (3) ..................... 2,127,500(4) $ 5.50 $ 11,701,250 $ 3,545.83
- -------------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each to
purchase one share of Common
Stock (5) ..................... 185,000 $ .001 $ 185 (6)
- -------------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each to
purchase one warrant ............ 185,000 $ .001 $ 185 (6)
- -------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share (7) ..................... 185,000 $ 7.00 $ 1,295,000 $ 392.42
- -------------------------------------------------------------------------------------------------------------
Warrants, each to purchase one
share of Common Stock (7) ...... 185,000 $ .14 $ 25,900 $ 7.85
- -------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share (8) ..................... 185,000 $ 9.075 $ 1,678,875 $ 508.75
- -------------------------------------------------------------------------------------------------------------
Total Registration Fee ..................................................................... $ 7,742.80
- -------------------------------------------------------------------------------------------------------------
Previously Filed .......................................................................... $ 6,696.50
- -------------------------------------------------------------------------------------------------------------
Amount Due ................................................................................. $ 1,046.30
=============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Includes 277,500 shares of Common Stock which the Underwriter has the
option to purchase from the Registrant to cover over-allotments, if any.
(3) 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.
(4) Assumes the Underwriter's option to purchase 277,500 additional redeemable
warrants to cover over-allotments, if any, has been exercised.
(5) To be issued to the Underwriter at the time of delivery and acceptance of
the securities to be sold to the public hereunder.
(6) No fee due pursuant to Rule 457(g).
(7) Issuable upon exercise of the Underwriter's Warrants.
(8) 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 SEPTEMBER 8, 1997
SUBJECT TO COMPLETION
1,850,000 Units
[LOGO] THE RECOVERY NETWORK, INC.
1,850,000 Shares of Common Stock and
Redeemable Warrants to Purchase 1,850,000 Shares of Common Stock
Each Unit offered hereby consists of one share of common stock, par value
$.01 per share (the "Common Stock"), of The Recovery Network, Inc. (the
"Company"), and a redeemable warrant to purchase one share of Common Stock
(each, a "Warrant" and collectively, the "Warrants"). 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. The securities comprising the Units
will become detachable and separately transferable commencing 90 days from the
date of this Prospectus (or such earlier date as to which the Underwriter
consents). See "Description of Securities."
Prior to this offering there has been no public market for the Units,
Common Stock or Warrants and there can be no assurance that any such market
will develop. It is anticipated that the Units, Common Stock and Warrants will
be quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "RNETU,"
"RNET" and "RNETW," respectively. The offering price of the Units 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 8 AND "DILUTION" ON PAGE 19.
-------------------------
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.
================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Unit ........ $5.10(3) $.51 $4.59
- --------------------------------------------------------------------------------
Total(4) ........ $9,435,000 $943,500 $8,491,500
================================================================================
<PAGE>
(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 185,000 shares of Common
Stock and/or 185,000 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 $283,050 ($325,508 if the Underwriter's over-allotment
option is exercised in full), estimated at $883,500, payable by the
Company.
(3) Consisting of $5.00 per share of Common Stock and $.10 per Warrant.
(4) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 277,500 additional
shares of Common Stock and/or 277,500 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 $10,850,250, $1,085,025, $9,765,225, respectively. See
"Underwriting."
-------------------------
The Units 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 securities comprising the Units 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>
The Recovery Network, Inc. through its television and radio networks,
interactive media and a national 800 help line, serves, individuals, families
and communities across the nation by providing education, information,
interaction and support to those recovering from, affected by or confronting
alcoholism, substance abuse, eating disorders, depression and other behavioral
and mental health problems.
[PICTURE OF MAP OF THE UNITED STATES]
[LOGO]
o Current Television Markets
o Current Radio Markets
RECOVERY
NETWIRK
(Current television and radio markets reflect
the Company's markets as of June 30, 1997)
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 UNITS, COMMON STOCK AND
WARRANTS. SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE UNITS, SHARES OF COMMON STOCK AND
WARRANTS IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<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 277,500 additional shares of Common
Stock and/or 277,500 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 and select
positive lifestyle choices ("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 and is
currently airing on over 200 cable systems; Recovery Talk Radio(TM), a
nationally syndicated talk radio program introduced in December 1996 and
currently airing on 53 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 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 and 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 Americans who suffer
from depression as well as the 61 million Americans that the 1995 National
Household Survey on Drug Abuse estimates were current smokers, 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 16 million subscribers and one hour in the
evening to approximately 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 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 Issues 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 use 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>
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, such as videotapes, audio cassettes
and books to merchandise. 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 operation 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 21
"accredited investors" an aggregate of 40 units (the "Financing Units")
consisting of an aggregate of (i) $2,000,000 principal amount of unsecured non-
negotiable promissory notes (the "Financing Notes") which bear interest at the
rate of 9% per annum and are due on the earlier of the consummation of this
offering or March 6, 1998; (ii) 400,000 shares of Common Stock (the "Financing
Shares"); and (iii) warrants (the "Financing Warrants") to purchase an
aggregate of 500,000 shares of Common Stock at an exercise price of $4.00 per
share. The offering price was $50,000 per Financing 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 Financing Units. In August
1997, investors in the Private Financing agreed to increase the exercise price
of the Financing Warrants from $4.00 to $5.50 per share. 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 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."
From July through September 1997, the Company issued six 15% promissory
notes with an aggregate principal amount of $605,250 (the "Promissory Notes") to
five lenders. The Promissory Notes are due on the earlier of (i) the date which
is two business days following the consummation of this offering and (ii) one
year after their issuance; provided, however, that in the event that the
Promissory Notes are repaid prior to the one year anniversary, the lenders will
receive a full year's interest. The Company paid to the lenders loan origination
fees in an amount equal to 5% of the Promissory Notes, or $30,300. The net
proceeds from the issuance of the Promissory Notes were used for working
capital. The Company intends to repay the Promissory Notes, plus $90,800 of
interest thereon, from the net proceeds of this offering. See "Use of Proceeds"
and "Plan of Operation."
5
<PAGE>
The Offering
Securities offered ...... 1,850,000 Units, each Unit consisting of one share
of Common Stock and one Warrant to purchase one
share of Common Stock. The securities comprising the
Units will become detachable and separately
transferable commencing 90 days from the date of
this Prospectus (or such earlier date as to which
the Underwriter consents). See "Description of
Securities."
Common Stock to be
outstanding
after the offering...... 4,371,250 shares (1)
Warrants:
Number to be outstanding
after the offering...... 1,850,000 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 outstanding
indebtedness; marketing and affiliate sales;
programming expenses; sales and marketing; 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 Units -- RNETU
Common Stock -- RNET
Warrants -- RNETW
- ------------
(1) Does not include: (i) 1,850,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 370,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 15,506
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) 324,745 shares of Common Stock reserved
upon
6
<PAGE>
exercise of outstanding options granted under the Stock Option Plans; (v)
123,039 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 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,
---------------------------------
1996 1997
-------------- ----------------
<S> <C> <C>
Net loss .......................................... $(1,223,829) $ (3,817,652)
Net loss per share ................................. (.75) (1.52)
Weighted average number of shares outstanding ...... 1,633,028 2,504,887
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
At June 30, 1997
--------------------------------------------------
Actual Pro Forma(1) As Adjusted(2)
--------------- -------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Working capital (deficit) ............ $ (2,417,568) $ (2,447,828) $4,814,854
Total assets ........................ 799,252 1,349,518 6,085,949
Total liabilities .................. 2,500,076 3,050,342 924,660
Shareholders' equity (deficit) ...... (1,700,824) (1,700,824) 5,161,289
</TABLE>
- ------------
(1) Gives effect to (i) the issuance from July through September 1997 of the
$605,250 aggregate principal amount of Promissory Notes and the receipt of
approximately $575,000 of net proceeds therefrom and (ii) the payment of
approximately $55,000 of accrued interest on the Financing Notes through
July 31, 1997 (collectively, the "Pro Forma Adjustments"). See "Plan of
Operation."
(2) Gives effect to (i) the sale of the 1,850,000 Units offered hereby and the
application of the estimated net proceeds therefrom, including the repayment
of the Financing Notes plus $45,000 of interest expense to be incurred
subsequent to June 30, 1997, (ii) non-recurring charges of approximately
$479,568 representing the loan discount relating to the Private Financing
and $100,269 representing the issuance costs of the Financing Notes and
(iii) repayment of the Promissory Notes, including interest of approximately
$90,800 and a non-recurring charge of approximately $30,300 respresenting
deferred financing costs. See "Use of Proceeds."
7
<PAGE>
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 $3,817,652 for the years ended June 30, 1996 and 1997, respectively. At
June 30, 1997, the Company had a deficit accumulated in the development stage
of $5,897,119 and, since June 30, 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
operation 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 $610,137 relating to the Private
Financing and Promissory Notes. 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 June 30,
1997, the Company had a working capital deficit of $2,417,568 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
8
<PAGE>
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
9
<PAGE>
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.
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. See "Business -- The
Recovery Network" and "Certain Transactions."
8. Conflicts of Interest. 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
"Certain Transactions."
9. Risks Relating to Joint Venture. The Company 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. These contributions by the Company and TCII will not
be sufficient to fund Recovery Interactive's implementation of its business
plan. The Company is not required to contribute any additional funding to
Recovery Interactive and does not intend to make any additional contributions.
There can be no assurance that TCII will 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."
10
<PAGE>
10. 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."
11. 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.
12. 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."
13. 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
11
<PAGE>
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. Since ATN is a
cable program provider, the aforementioned regulatory constraints on the
availability of channel capacity on cable systems and FCC regulations governing
relationships between program providers and cable system affiliates also affect
distribution by ATN of The Recovery Network's programming as part of the
services provided to cable systems by ATN. 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 satellite uplink provided by ATN must be licensed by the FCC, and ATN must
operate and maintain the uplink in accordance with the FCC's technical
standards. If ATN does not comply with the FCC's licensing and technical
standards, ATN could lose the ability to use its uplink and would be unable to
deliver The Recovery Network's programming to ATN's cable system affiliates. In
addition, the cable systems and radio stations that carry the Company's
programs are regulated by the FCC and, therefore, are subject to its rules and
policies, such as those relating to sponsorship identification, broadcast of
indecent language, provision of equal opportunities for political candidates
and related measures pertaining to program content and format. Failure of the
Company's programs to comply with one or more of these rules could subject the
cable systems 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 or may be 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."
14. 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
12
<PAGE>
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."
15. 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" 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 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."
16. Insurance and Potential Liability. The operation of a television,
radio and interactive media business subjects the Company to possible liability
claims from others, including viewers, listeners and callers to the Help Line
for claims arising from the unauthorized use of name or likeness, invasion of
privacy, defamation and slander. The Company maintains general liability
insurance (with coverage in amounts of up to $1,000,000 per occurrence and
$1,000,000 per annum), including insurance relating to personal injury and
advertising injury, in amounts which the Company currently considers adequate.
Nevertheless, a partially or completely uninsured claim against the Company, if
successful, could have a material adverse effect on the Company. See "Business
- -- Insurance."
17. Control by Management. Upon the consummation of this offering, the
Company's current officers and directors will in the aggregate, beneficially
own approximately 26.0% 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."
18. 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. Neither of
such officers, nor any other officer of the Company, prior to joining the
Company, had been employed by a company in the areas of Recovery Issues or
Prevention Issues. 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 obtained key-man life insurance in the amount of
$2,000,000 on the life of Mr. Moses. The Company has applied for and intends to
obtain key-man life insurance in the amount of $2,000,000 on the life of Mr.
Henry. There can be no assurance, however, that the Company will be
13
<PAGE>
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."
19. Use of Proceeds to Repay Indebtedness; Benefits to Related Parties;
Broad Discretion in Application of Proceeds. The Company has allocated
approximately $2,741,000 (36.0%) of the net proceeds of this offering to repay
the Financing Notes (including an aggregate of $900,000 principal amount of
Financing Notes held by officers, directors and/or principal shareholders of
the Company) and the Promissory Notes, plus accrued interest thereon.
Accordingly, such proceeds will not be available for other purposes. In
addition, approximately $860,000 (11.3%) of the estimated net proceeds of this
offering has been allocated to working capital and general corporate purposes.
The Company will have broad discretion as to the application of such proceeds.
The Company will also 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 $1,014,000 of the net
proceeds of this offering to make required payments to ATN under the Nesting
Contract. Additionally, to the extent cash flow from operations is insufficient
for such purposes, a portion of the proceeds allocated to working capital may
be utilized to pay a portion of 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. See "Use of Proceeds," "Business
- -- Overview -- The Recovery Network," "Management" and "Certain Transactions."
20. 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."
21. Possible Adverse Effect of Outstanding Options and Warrants. As of the
date of this Prospectus, there are 123,039 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, 2,867 are exercisable at
an exercise price of $.77 per share and 9,749 are exercisable at an exercise
price of $5.00 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 195,831 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 $5.50 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".
22. Substantial Dilution; Disparity of Consideration. Investors purchasing
Common Stock in this offering will incur immediate and substantial dilution of
$3.82 (76.4%) per share between the adjusted net tangible book value per share
after this offering and the initial public offering price per share included in
the Units. Existing stockholders have paid an average price of $1.45 per share
for their shares of Common Stock, and, as a result, the investors purchasing
Units in this offering will bear most of the risk of economic loss. See
"Dilution."
23. Benefits of Offering to Existing Shareholders. Upon the consummation
of this offering, the existing shareholders of the Company will receive
substantial benefits, including the creation of a public trading market for
their securities (although substantially all of such shares are subject to a
12-month lock-up agreement with the Underwriter (the Financing Shares,
Financing Warrants and shares issuable upon exercise of the Financing
14
<PAGE>
Warrants will be subject to a 24-month lock-up agreement) and will not be
registered for sale under the Securities Act and will thus be "restricted
securities" as defined in Rule 144 promulgated under the Securities Act) and
the corresponding facilitation of sales by such shareholders of their shares of
Common Stock in the secondary market, as well as an immediate increase in net
tangible book value of $1.85 per share to such shareholders based upon the
adjusted net tangible book value per share after this offering and the initial
public offering price per share offered hereby. If, at the time the existing
shareholders are able to sell their shares of Common Stock in the public
market, the market price per share remains at the $5.00 initial public offering
price (of which there can be no assurance) such shareholders would realize an
aggregate gain of $8,949,649 ($3.55 per share) on the sale of all of their
existing shares. See "Use of Proceeds," "Dilution," "Underwriting" and "Shares
Eligible for Future Sale."
24. 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 Units, Common
Stock or Warrants. There can be no assurance that a regular trading market for
the Units, Common Stock or Warrants will develop after this offering or that,
if developed, it will be sustained. The initial public offering prices of the
Units 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."
25. Possible Delisting of Securities from Nasdaq Systems; Risks Relating
to Penny 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, however, the Company must maintain $2,000,000 in net tangible assets
and a $1,000,000 market value on the public float. In addition, continued
inclusion requires two market makers, a minimum bid price of $1.00 per share
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
15
<PAGE>
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.
26. 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."
27. Possible Inability to Exercise Warrants. The Company intends to
qualify the sale of the Units, Common Stock and 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 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."
28. Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have 4,371,250 shares of Common
Stock outstanding (assuming no exercise of the Warrants included in the Units
or the other outstanding options or warrants), of which the 1,850,000 shares
included in the Units 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
(24 months with respect to the Financing Shares, Financing Warrants and shares
issuable upon exercise of the Financing Warrants) 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."
16
<PAGE>
29. 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."
30. 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 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 1,850,000 Units offered
hereby (after deducting underwriting discounts and commissions and other
expenses of the offering) are estimated to be approximately $7,608,000
($8,839,268 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 outstanding indebtedness(1) ............... $2,741,000 36.0%
Programming expenses(2) .............................. 2,000,000 26.3
Sales and marketing(3) ................................. 1,835,000 24.1
Commencement of merchandising operations(4) ............ 172,000 2.3
Working capital and general corporate purposes(5) ...... 860,000 11.3
----------- ------
Total ................................................ $7,608,000 100.0%
=========== ======
</TABLE>
- ------------
(1) Represents amounts to be used for the repayment of (i) the $2,000,000
principal amount of the Financing Notes plus accrued and unpaid interest
thereon of approximately $45,000 and (ii) the $605,250 principal amount
of the Promissory Notes plus interest of $90,800. 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 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 payments under the
Nesting Contract with ATN in the amount of $102,000. The Promissory Notes
are due on the earlier of two business days after the consummation of this
offering or one year after their issuance. The net proceeds of the
Promissory Notes were used for working capital. 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 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 salaries. See
"Business -- Merchandise Sales."
(5) Represents proceeds allocated to working capital and to general corporate
purposes. To the extent cash flow from operations is insufficient for such
purposes, a portion of the proceeds allocated to working capital may be
utilized to pay a portion of the salaries and benefits of the Company's
officers estimated to be approximately $442,000 over the twelve months
following the consummation of this offering.
If the Underwriter's over-allotment option in exercised full, the Company
will realize additional net proceeds of approximately $1,231,268. 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
The difference between the public offering price per share of Common Stock
included in the Units and the net tangible book value per share of Common Stock
after this offering constitutes the dilution to investors in this offering. Net
tangible book value per share on any given date is determined by dividing the
net tangible book value of the Company (total tangible assets less total
liabilities) on such date by the number of then outstanding shares of Common
Stock.
As of June 30, 1997, the net tangible book value of the Company was
$(1,700,824) or approximately $(.67) per share of Common Stock. The Pro Forma
Adjustments (see footnote 1 of "Prospectus Summary -- Summary Financial
Information") had no effect on the Company's net tangible book value. After
giving effect to (i) the sale of the 1,850,000 Units being offered hereby (less
underwriting discounts and commissions and estimated expenses of this offering)
and (ii) non-recurring charges of $610,137 relating to the Private Financing
and the Promissory Notes, the adjusted net tangible book value of the Company
as of June 30, 1997 would have been approximately $5,161,289, or $1.18 per
share, representing an immediate increase in net tangible book value of $1.85
per share of Common Stock to existing shareholders and an immediate dilution of
$3.82 per share to new investors. The following table illustrates this dilution
to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price ................................. $5.00
Net tangible book value before offering ............ $ (.67)
Increase attributable to new investors ............ $ 1.85
------
Adjusted net tangible book value after offering ...... 1.18
------
Dilution to new investors ........................... $3.82
======
</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 (allocating $5.00 of the purchase price of each
Unit to the Common Stock included therein).
<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 57.7% $ 3,656,601 28.3% $1.45
New Investors ............... 1,850,000 42.3 9,250,000 71.7 5.00
--------- ------ ------------ ------
Total ..................... 4,371,250 100.0% $12,906,601 100.0%
========= ====== ============ ======
</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
$10,637,500 for 2,127,500 shares of Common Stock, representing
19
<PAGE>
approximately 74.4% of the total consideration for 45.8% 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 $5.50 per share, other warrants
to purchase 15,498 shares of Common Stock at an exercise price of $3.87,
outstanding stock options granted under the Stock Option Plans to purchase an
aggregate of 324,745 shares of Common Stock at an exercise price of $5.00 per
share and outstanding non-plan options to purchase an aggregate of 123,039
shares of Common Stock at exercise prices ranging from $.77 to $5.00.
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
June 30, 1997, (ii) the pro forma capitalization at such date after giving
retroactive effect to the Pro Forma Adjustments (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 (including the repayment of the Financing Notes and
Promissory Notes plus accrued interest thereon):
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------
Actual Pro Forma As Adjusted
---------------- ---------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Short-term debt, including current portion of capital lease
obligation ................................................ $ 1,537,461 $ 2,142,711 $ 17,029
============ ============ ===============
Long-term debt and obligation under capital lease, net of
current maturities ....................................... $ 30,301 $ 30,301 $ 30,301
------------ ------------ ---------------
Shareholders' equity (deficit):
Common Stock, $.01 par value: 25,000,000 shares
authorized; 2,521,250 shares issued and
outstanding, actual and pro forma; 4,371,250
shares issued and outstanding, as adjusted(1) ......... 25,212 25,212 43,712
Additional paid-in capital .............................. 4,176,708 4,176,708 11,766,208
Prepaid consulting costs ................................. (5,625) (5,625) (5,625)
Deficit accumulated in the development stage ............ (5,897,119) (5,897,119) (6,643,006)(2)
------------ ------------ ---------------
Total shareholders' equity (deficit) .................. (1,700,824) (1,700,824) 5,161,289
------------ ------------ ---------------
Total capitalization .............................. $ (1,670,523) $ (1,670,523) $ 5,191,590
============ ============ ===============
</TABLE>
- ------------
(1) Does not include: (i) 1,850,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 370,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 15,506
shares of Common Stock reserved for issuance upon exercise of stock
options available for future grant under the Stock Option Plans; (iv)
324,745 shares of Common Stock reserved upon exercise of outstanding
options granted under the Stock Option Plans; (v) 123,039 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 (i) $479,568 representing
the loan discount related to the Private Financing and $100,269
representing the issuance costs of the Financing Notes; (ii) $45,000
representing interest expense incurred subsequent to June 30, 1997 on the
Financing Notes; and (iii) $30,300 representing deferred financing costs
relating to the Promissory Notes and $90,800 representing interest expense
on the Promissory 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 (which was
launched nationally in 1997), 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 $3,817,652 for the year ended June 30, 1996 and 1997, respectively. Since
June 30, 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
operation 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 $610,137 relating to the Private
Financing.
In April 1997, the Company launched The Recovery Network nationally via
satellite transmission under the Nesting Contract. 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 16
million subscribers and one hour in the evening to approximately 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 on The Recovery Network and Recovery Talk Radio, merchandising
recovery-related products and services on The Recovery Network, Recovery Talk
Radio and the Company's site on the world wide web 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 and producing its
programming, satellite transponder costs, 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 June 30, 1997, the Company had a working capital
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deficit of $2,417,568 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 of
$2.32 per share 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 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 at a price of $3.48 per share 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 per share 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 21 "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 $5.50 per
share. The offering price was $50,000 per Financing 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 Financing 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. During the three month period ended June 30, 1997, the Company
amortized approximately $713,000 of loan discount and deferred offering costs
related to the Financing Notes. See "Use of Proceeds" and "Description of
Securities -- Recent Financing."
From July through September 1997, the Company issued the Promissory Notes
with an aggregate principal amount of $605,250 to five lenders. The Promissory
Notes are due on the earlier of (i) the date which is two business days
following the consummation of this offering and (ii) one year after their
issuance; provided, however, that in the event that the Promissory Notes are
repaid prior to the one year anniversary, the lenders will receive a full year's
interest. The Company paid to the lender a loan origination fee in an amount
equal to 5% of the Promissory Notes, or approximately $30,300. The net proceeds
from the issuance of the Promissory Notes were used for working capital. The
Company intends to repay the Promissory Notes, plus $90,800 of interest thereon,
from the net proceeds of this offering.
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 and select positive life-style choices
("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, was
launched nationally via satellite transmission in April 1997 and is currently
airing on over 200 cable systems; Recovery Talk Radio, a nationally syndicated
talk radio program introduced in December 1996 currently airing every Sunday
morning from 8:00 a.m. to 9:00 a.m. (EST) on 45 stations and from 9:00 a.m. to
10:00 a.m. (EST) on 36 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 health care products
and services to managed care organizations and other organizations offering or
providing behavorial 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 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 16
million subscribers and one hour in the evening to approximately 5 million
subscribers. ATN provides distribution of the Company's programming into cable
systems through existing affiliation agreements between ATN and those systems.
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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.
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 those 259 systems.
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. See
"Programming."
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 has established a promotional
web site, which contains programming schedules, information about the Company
and the Partnership and links to sources of recovery information on the web.
The Company will also rely on traditional marketing tools, such as mail,
telephone, trade advertisements, public relations and participation in trade
shows and conferences in connection with its general affiliate marketing
strategy.
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 entertaining 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's programming mission is to first to help its viewers identify and
understand issues in their lives, to then provide them tools for effecting
solutions and finally to inspire them by example into making positive lifestyle
choices.
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 and
select positive lifestyle choices, and also 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:
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o Unhooked -- A series of music programs live from popular venues across
the country, featuring artists that have either made the decision not to
use drugs or those that are in recovery from alcohol or drug abuse.
Following the music, the artists will host question and answer discussions
with the young people in the audience.
o Let's Rap - Kids to Kids. A series of shows on location at schools,
street ball courts, neighborhoods and living rooms where a group of kids
will meet weekly to discuss how drugs and alcohol have affected their
lives and to share ideas for what they can do about it. Other variations
will include Let's Rap - Kids to Parents, which will give kids a chance to
raise issues they normally could not and to give parents a chance to
understand what their kids are facing and Let's Rap - Parent to Parent,
which will bring together parents of kids facing these issues to help them
understand and share their children's problems, concerns and solutions.
o SLAM! -- A documentary-style alcohol abuse prevention program for middle
and high school students, Slam will follow individual kids through their
daily lives, into their schools, neighborhoods and homes. While focusing
on drug and alcohol prevention, SLAM! will also examine other issues
adolescents must contend with, such as problems at home, peer pressure,
sexuality, life goals and growing up.
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
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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, 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 such 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 Company will generate any meaningful revenues from
the sale of advertising time.
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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.
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 45 stations and
from 9:00 a.m. to 10 a.m. (EST) on 36 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 June
30, 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.
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The Company does not generate any revenues from the Help Line, and does
not receive any fees or commissions for this service, including from referrals
made by the Help Line. The Company operates the Help Line solely to provide
support to its viewers and as a community service. The Company also expects
that providing the toll-free Help Line will help build and maintain viewer
loyalty and support for 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 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 ("Recovery Interactive 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 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.
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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 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 June 30, 1997, Recovery Interactive has not
generated any revenues, and has incurred operating losses of approximately
$757,000 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
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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. 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. Since ATN is a cable program provider, the
aforementioned regulatory constraints on the availability of channel
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capacity on cable systems and FCC regulations governing relationships between
program providers and cable system affiliates also affect distribution by ATN
of The Recovery Network's programming as part of the services provided to cable
systems by ATN. 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 satellite uplink
provided by ATN must be licensed by the FCC, and ATN must operate and maintain
the uplink in accordance with the FCC's technical standards. If ATN does not
comply with the FCC's licensing and technical standards, ATN could lose the
ability to use its uplink and would be unable to deliver The Recovery Network's
programming to ATN's cable system affiliates. In addition, the cable systems
and radio stations that carry the Company's programs are regulated by the FCC
and, therefore, are subject to its rules and policies, such as those relating
to sponsorship identification, broadcast of indecent language, provision of
equal opportunities for political candidates and related measures pertaining to
program content and format. Failure of the Company's programs to comply with
one or more of these rules could subject the cable systems 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 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") would make it unlawful to: (i)
knowingly send to a minor or display in a manner available to a minor
"obscene", "indecent" or "patently offensive" communications using a
telecommunications device or on-line service, (ii) send such a communication to
anyone with the intent to annoy, threaten or harass; or (iii) allow a
telecommunications facility under one's control to be used for such purpose. A
preliminary injunction against enforcement of the CD Act with respect to
indecent or patently offensive communications has been affirmed by the United
States Supreme Court, which found the CD Act's provisions to violate the First
Amendment. Although it is unlikely that the enjoined provisions of the CD Act
will ever become effective, there can be no assurance that information content
made available on or through Recovery Interactive's offerings, by the Company
or by users of those offerings would not violate the CD Act, if it were to
become effective, or similar legislation that Congress might enact in the
future, or that attempts to implement defenses to such legislation would not
adversely affect the Company's business or operations. Federal laws dealing
with obscenity and child pornography as well as various state laws similar to
those laws or to the CD Act may also apply to information content available on
or through 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.
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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, 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 $1,000,000 per annum), including
insurance relating to personal injury and advertising injury, in amounts which
the Company currently considers adequate.
Employees
The Company currently has 15 full time employees, of which five are
engaged in affiliate marketing sales, one in advertising sales, three 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 10,000 square feet in Santa
Monica, California pursuant to a five-year lease that expires in May 2002. The
monthly rental is currently $20,000 per month and will increase annually to a
maximum rental of $25,000 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.
38
<PAGE>
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 ......... 35 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
Nimrod J. Kovacs ......... 47 Vice Chairman of the Board of Directors
Paul Graf ............... 29 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 PhoneTel Technologies,
Inc., a publicly traded telecommunications company. Mr. Henry is also Chairman
and Chief Executive Officer of 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 April 1992 until January 1996, Mr. Masters was
a partner in Masters Smith & Co., a media consulting firm that provided
services to the Company. 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
39
<PAGE>
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.
Nimrod J. Kovacs has been a director of the Company since October 1996 and
serves as Vice Chairman of the Board of Directors and 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.
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.
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.
Graf and Kovacs are also members of the Audit Committee.
In October 1996, the Company established an Executive Committee of the
Board of Directors which is responsible for overseeing strategic planning and
operations for the Company. Mr. Masters is the Chairman of the Executive
Committee and Messrs. Henry, Moses and Kovacs are also members of the Executive
Committee.
40
<PAGE>
Executive Compensation
For the fiscal year ended June 30, 1997, the executive officers were paid
an aggregate of approximately $343,000. William D. Moses, President and Chief
Executive Officer of the Company, received cash compensation during the fiscal
year ended June 30, 1997 of approximately $97,000, and approximately $57,000 of
cash compensation the preceding year.
The following table sets forth the cash compensation paid by the Company
to the chief executive officer and all other officers who received compensation
in excess of $100,000 (the "Named Executive Officers") during fiscal 1997:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
-------------------------- --------------------
Shares
Year Ended Underlying All Other
Name and Principal Position June 30, Salary ($) Bonus ($) Options (#) Compensation
- --------------------------------- ------------ ------------ ----------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
William D. Moses, President and
Chief Executive Officer ...... 1997 $109,000 -- 75,000 --
Larry Namer, former Chief Operat-
ing Officer 1997 $120,000 -- 12,915 $ 33,263(1)
</TABLE>
- ------------
(1) Paid pursuant to termination of an employment agreement between the
Company and Mr. Namer.
The following table sets forth information concerning the grant of stock
options to the Named Executive Officers during fiscal 1997:
Option Grants During Last Fiscal Year
<TABLE>
<CAPTION>
Number of % of Total
Shares Options Granted
Underlying to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/sh) Date
- ------------------------ ----------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
William D. Moses ...... 75,000 47.6% $5.00 April 30, 2002
Larry Namer ............ 12,915 8.2% $5.00 April 30, 2002
</TABLE>
No options of the Company were exercised by such persons during fiscal
1997.
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.
41
<PAGE>
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 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
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<PAGE>
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 195,831 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.
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 enable the Company to recognize the contributions
made to the Company by its employees and consultants and to provide such
persons with additional incentive to devote themselves to the future success of
the Company. 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 5,583 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. The purpose of the Directors and Advisory Board Plan is to
enable the Company to recognize the contributions made to the Company by its
directors and members of the Advisory Board and to provide such persons with
additional incentive to devote themselves to the future success of the Company.
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 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 enable the Company to recognize the contributions made
to the Company by its directors and key personnel and to provide such persons
with additional incentive to devote themselves to the future success of the
Company. The
43
<PAGE>
Company has reserved 195,831 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. The Company has also 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 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.
The Company has also granted the following incentive stock options to
purchase an aggregate of 133,686 shares of Common Stock at an exercise price of
$5.00 per share, all of which options vest monthly over three years commencing
July 1, 1997, including options to purchase 35,000, 75,000, 9,686 and 10,000
shares to Messrs. Henry, Moses, Wheeler and Kovacs, respectively, and an option
to purchase 4,000 shares to Ms. Feichter.
Non-Plan Stock Options
The Company has granted 123,039 non-plan stock options to acquire shares
of Common Stock, of which 110,423 were granted at an exercise price of $2.32
per share, 2,867 were granted at an exercise price of $.77 per share and 9,749
were granted at an exercise price of $5.00 per share.
Limitation of Liability and Indemnification
The articles of incorporation of the Company provide for the
indemnification of the Company's directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers or controlling persons
of the Company pursuant to the articles of incorporation and the corporation
law of the State of Colorado, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in such Act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Company will not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of
a director's duty of loyalty to the Company or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 7-108-403 of the Colorado statute
relating to unlawful distributions or (iv) for any transaction from which the
director derived an improper personal benefit. The
44
<PAGE>
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 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.
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<PAGE>
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.
46
<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 1,850,000
shares of Common Stock included in the Units 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 ........................ 645,282(3) 25.0% 14.6%
George H. Henry ........................ 287,234(4) 11.1 6.5
6860 Sunrise Court
Coral Gables, Florida 33133
Terrance and Daryl Berman ............... 195,519(5) 7.6 4.4
15601 Cheswick Court
Tampa, Florida 33647
Jonathan Katch ........................... 165,388(6) 6.5 3.8
Paul Graf .............................. 136,538(7) 5.3 3.1
High Pine, Turk Hill Road
Brewster, New York 10509
Robert P. Gordon ........................ 132,648(8) 5.2 3.0
234 21st Avenue, NE
St. Petersburg, FL 33704
Donald J. Masters ........................ 97,842(9) 3.8 2.2
Nimrod J. Kovacs ........................ 25,199(10) * *
50 Falcon Hills Drive
Highland Ranch, Colorado 80126
All directors and executive officers as a
group (8 persons) ..................... 1,203,226(11) 43.4% 26.0%
</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
4,371,250 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 16,516 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
43,750 shares of Common Stock. Does not include options to purchase 71,399
shares of Common Stock which are not currently exercisable.
(4) Includes (i) currently exercisable options to purchase 10,966 shares of
Common Stock and (ii) currently
47
<PAGE>
exercisable Financing Warrants to purchase 62,500 shares of Common Stock.
Does not include options to purchase 36,949 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 21,170 shares of Common
Stock. Does not include options to purchase 4,660 shares of Common Stock
which are not currently exercisable.
(7) Includes (i) currently exercisable options to purchase 2,513 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
62,500 shares of Common Stock. Does not include options to purchase 10,402
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 15,498 shares of
Common Stock, (ii) currently exercisable Financing Warrants to purchase
6,250 shares of Common Stock and (iii) currently exercisable warrants to
purchase 15,498 shares of Common Stock.
(9) Includes (i) currently exercisable options to purchase 22,245 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 16,500 shares of Common Stock
held by Mr. Masters which are not currently exercisable.
(10) Includes (i) currently exercisable options to purchase 7,491 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 15,424 shares of Common Stock which
are not currently exercisable.
(11) Includes (i) currently exercisable options to purchase 70,862 shares of
Common Stock and (ii) currently exercisable Financing Warrants to purchase
181,250 shares of Common Stock. Does not include options to purchase
183,588 shares of Common Stock which are not currently exercisable.
48
<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. 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 and Mr. Katch exercised rights to
purchase 10,020 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.
49
<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. Henry and Mr. Kovacs
exercised options to purchase 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 Financing
Units in the Private Financing. Each Financing 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 Financing Unit. In
connection with the Private Financing, Mr. Henry purchased 5 Financing Units;
Paul Graf, a director of the Company, purchased 5 Financing Units; Mr. Masters
and his spouse jointly purchased .5 Financing Units; Mr. Moses purchased 3.5
Financing Units; Terrance and Daryl Berman, principal shareholders of the
Company, purchased 3.5 Financing Units; and Kovacs Communication, Inc., of
which Mr. Nimrod Kovacs, a director of the Company is a controlling
shareholder, purchased .5 Financing 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.
50
<PAGE>
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.
Units
Each Unit consists of one share of Common Stock and one Warrant to
purchase one share of Common Stock. The securities comprising the Units will
become detachable and separately transferable commencing 90 days from the date
of this Prospectus (or such earlier date as to which the Underwriter consents).
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 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
rights or privileges of holders of Common Stock.
51
<PAGE>
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
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 21 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 and
accrued interest thereon of approximately $45,000 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 and the shares issuable upon exercise of the Financing Warrants for
a period of 24 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, at
various times 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 370,000 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 Units and Common Stock, and the
Warrant Agent for the Warrants, is American Stock Transfer and Trust Company,
40 Wall Street, New York, New York 10005.
52
<PAGE>
Reports to Stockholders
The Company has agreed, subject to the sale of the Units offered hereby,
that on or before the date of this Prospectus, it will register its Units,
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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,371,250
shares of Common Stock outstanding (assuming no exercise of the Warrants
included in the Units or the other outstanding options and warrants), of which
the 1,850,000 shares included in the Units 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.
53
<PAGE>
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the
terms and conditions contained in the underwriting agreement, to purchase
1,850,000 Units from the Company. The Underwriter is committed to purchase and
pay for all of the Units offered hereby if any of such securities are
purchased. The Units 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
Units to the public at the public offering price 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 Unit, of which not in excess of
$ per Unit 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 277,500 additional
Shares and/or 277,500 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 Units 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 Units, 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 $203.50, warrants (the "Underwriter's Warrants")
to purchase up to (i) 185,000 shares of Common Stock at an exercise price of
$8.00 per share (160% of the public offering price per Unit attributed to each
share) and (ii) up to 185,000 Warrants (each exercisable to purchase one share
of Common Stock at a price of $8.91 per share) at an exercise price of $.16 per
Warrant (160% of the public offering price per Unit attributed to each
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
54
<PAGE>
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
Units, the Common Stock or the Warrants. Consequently, the initial public
offering price of the Units 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 price of the Units 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
Units, Common Stock and Warrants. Specifically, the Underwriter may over-allot
in connection with the offering, creating a short position in the Units, 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, Units, Common Stock and Warrants in the
open market. The Underwriter may also reclaim selling concessions allowed to a
dealer for distributing the Units in the offering, if the Underwriter
repurchases previously distributed Units in transactions to cover short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Units, 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.
55
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
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.
56
<PAGE>
THE RECOVERY NETWORK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants ................................................ F-2
Balance Sheet at June 30, 1997 ......................................................... F-3
Statements of Operations for the fiscal years ended June 30, 1996 and 1997 and for the
period from inception (May 1992) to June 30, 1997 ...................................... F-4
Statements of Shareholders' Deficit for the period from inception (May 1992) to
June 30, 1997 .......................................................................... F-5
Statements of Cash Flows for the fiscal years ended June 30, 1996 and 1997 and for the
period from inception (May 1992) to June 30, 1997 ...................................... F-7
Notes to Financial Statements ............................................................ F-8
</TABLE>
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 30,1997, and the
related statements of operations, shareholders' deficit and cash flows for the
years ended June 30, 1996 and 1997 and for the period from inception (May 1992)
to June 30, 1997. 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 audits.
We conducted our audits 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 audits provide 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, 1997 and the results of its operations and its cash flows for the
years ended June 30, 1996 and 1997 and for the period from inception (May 1992)
to June 30, 1997, 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 success of future activities cannot be
determined at this time and there are no assurances that if achieved, the
Company will have sufficient funds to execute its intended business plan or
generate positive operating results. The 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
September 5, 1997
F-2
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
BALANCE SHEET
AS OF JUNE 30, 1997
ASSETS
CURRENT ASSETS:
Cash ................................................... $ 10,883
Accounts receivable .................................... 25,631
Prepaid expenses ....................................... 15,693
---------
Total current assets ................................. 52,207
CAPITALIZED PROGRAMMING COSTS .............................. 237,600
FURNITURE AND EQUIPMENT, net .............................. 112,750
INVESTMENT IN JOINT VENTURE ................................. --
DEFERRED FINANCING COSTS .................................... 100,269
DEFERRED OFFERING COSTS .................................... 270,040
OTHER ...................................................... 26,386
---------
$799,252
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable ....................................... $ 1,520,432
Accounts payable and accrued liabilities ............ 502,642
Accrued professional fees ........................... 312,249
Current portion of capital lease obligation ......... 17,029
Deferred compensation .............................. 51,672
Due to shareholders and directors .................. 65,751
------------
Total current liabilities ..................... 2,469,775
CAPITAL LEASE OBLIGATION, net of current portion ...... 30,301
------------
Total Liabilities ........................... 2,500,076
------------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value:
Authorized--25,000,000 shares
Issued and outstanding, 2,521,250 shares ......... 25,212
Additional paid-in capital ........................ 4,176,708
Prepaid consulting costs ........................... (5,625)
Deficit accumulated in the development stage ...... (5,897,119)
------------
Shareholders' deficit ........................ (1,700,824)
------------
$ 799,252
============
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997, AND FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1997
<TABLE>
<CAPTION>
For the
Years Ended June 30, From inception
----------------------------- (May 1992)
1996 1997 to June 30, 1997
-------------- ------------ -----------------
<S> <C> <C> <C>
DOMESTIC ADVERTISEMENT SALES ........................ $ -- $ 33,464 $ 33,464
---------- ---------- -----------
SALARIES AND CONSULTING EXPENSES .................. 680,205 1,175,362 2,538,347
GENERAL AND ADMINISTRATIVE EXPENSES ............... 328,754 768,938 1,247,720
PROGRAMMING EXPENSES .............................. 192,349 358,447 550,796
MARKETING EXPENSES ................................. 28,135 468,017 508,882
LOSS ON INVESTMENT IN JOINT VENTURE ............... -- 300,000 300,000
---------- ---------- -----------
Operating Expenses ................................. 1,229,443 3,070,764 5,145,745
---------- ---------- -----------
Loss from operations .............................. 1,229,443 3,037,300 5,112,281
INTEREST (INCOME) EXPENSE, net ..................... (6,414) 778,552 781,438
---------- ---------- -----------
Loss before provision for state income taxes ...... 1,223,029 3,815,852 5,893,719
PROVISION FOR STATE INCOME TAXES .................. 800 1,800 3,400
---------- ---------- -----------
NET LOSS .......................................... $1,223,829 $3,817,652 $5,897,119
========== ========== ===========
LOSS PER SHARE INFORMATION:
Loss per share .................................... $ (0.75) $ (1.52)
========== ==========
Weighted average number of common and common
equivalent shares outstanding ..................... 1,633,028 2,504,887
========== ==========
</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, 1997
<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, 1997
<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:
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 $260,290 under
the February 1997 private
placement at $2.02 and $0.51
per share, respectively ......... 400,000 4,000 800,350
Amortization of prepaid consult-
ing costs ........................ -- -- --
Net loss ........................ -- -- --
-------- -------- ----------
BALANCE,
March 31, 1997 .................. 2,521,250 $ 25,212 $4,176,708
========= ======== ==========
</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:
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 ..... -- -- -- 330,000
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 $260,290 under
the February 1997 private
placement at $2.02 and $0.51
per share, respectively ......... -- -- -- 804,350
Amortization of prepaid consult-
ing costs ........................ -- 18,125 -- 18,125
Net loss ........................ -- -- (3,817,652) (3,817,652)
------- --------- ------------ -------------
BALANCE,
June 30, 1997 .................. $ -- $ (5,625) $ (5,897,119) $ (1,700,824)
======= ========= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997, AND FOR
THE PERIOD FROM INCEPTION (MAY 1992) TO JUNE 30, 1997
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
For the
Years Ended June 30, From inception
------------------------------- (May 1992)
1996 1997 to June 30, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $(1,223,829) $ (3,817,652) (5,897,119)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of notes payable discount .............. -- 585,072 585,072
Amortization of deferred financing costs............. -- 127,653 127,653
Amortization of capitalized programming costs ....... -- 118,789 118,789
Depreciation and other amortization ................ 10,081 25,709 40,533
Common stock issued for services and interest
expense ........................................... 126,900 32,625 789,118
Provision for deferred compensation ................ 24,167 136,505 51,672
Provision for settlement of shareholder dispute .... 95,027 -- --
Loss on investment in joint venture ................ -- 300,000 300,000
Changes in assets and liabilities:
Accounts receivable ............................... -- (25,631) (25,631)
Prepaid expenses .................................. (700) (14,993) (15,693)
Security deposit and other assets ................ (25,000) (1,386) (27,616)
Capitalized programming costs ...................... -- (356,389) (356,389)
Accounts payable and accrued liabilities .......... 98,433 418,142 502,642
Deferred compensation ............................... -- (35,000) --
Accrued professional fees ......................... 14,286 297,963 312,249
Due to shareholders and directors ................ 107,141 (39,417) 65,751
------------ ------------ ------------
Net cash used in operating activities ............. (773,494) (2,248,010) (3,428,969)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment .................. (49,721) (45,396) (99,920)
Net proceeds from an officer ........................... 10,200 -- --
Investment in joint venture ........................... -- (300,000) (300,000)
------------ ------------ ------------
Net cash used in investing activities ............... (39,521) (345,396) (399,920)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .............................. -- 1,245,360 1,305,360
Payments on borrowings ................................. -- (60,000) (60,000)
Payments on capital lease obligation .................. (292) (4,511) (4,803)
Proceeds from the issuance of common stock, warrants
and stock subscriptions .............................. 950,767 1,788,883 3,102,150
Repurchase of common stock ........................... -- (4,973) (4,973)
Deferred offering and financing costs incurred ......... -- (497,962) (497,962)
------------ ------------ ------------
Net cash provided by financing activities ............ 950,475 2,466,797 3,839,772
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH ........................ 137,460 (126,609) 10,883
CASH, beginning of period .............................. 32 137,492 --
------------ ------------ ------------
CASH, end of period .................................... $ 137,492 $ 10,883 $ 10,883
============ ============ ============
</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 STATEMENTS
JUNE 30, 1997
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 and select
positive lifestyle choices. The Company was incorporated in May 1992 and
commenced operations in February 1993. The Company has defined and developed
its marketing concept and has procured and produced programming. The Company
commenced test broadcasting on a limited basis in March 1996 and was launched
nationally for two hours a day in April 1997.
The Company owns a 50% interest in Recovery Interactive ("RI"), a joint
venture with TCI OnLine RecoveryNet Holdings, Inc. ("TCIR"), an affiliate of
Tele-Communications, Inc. ("TCI"), formed on August 1, 1996 to commence a
business to provide behavioral health care products and services to managed
care organizations and other organizations offering or providing health care
services, as well as to provide information, interaction and support regarding
recovery issues and prevention issues, through an integrated multimedia
platform. 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
accounted for under the equity method of accounting. During the year ended June
30, 1997, the Company recorded a loss on investment in the joint venture for
its entire investment of $300,000. The Company is not required to contribute
any additional funding to RI and does not intend to make any additional
contributions. Should RI require additional funding and TCIR agree to
contribute additional funds, the Company's 50 percent interest would be reduced
accordingly.
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.
Effective February 10, 1997, 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
to reflect the stock split.
b. Significant Business Risks
Going Concern
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has recurring losses from
operations, has minimal 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.
F-8
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
1. Organization and Line of Business and Significant Business Risks--(Continued)
Government Regulations
The cable television industry is subject to extensive and frequently
changing federal, state and local laws and substantial regulation under these
laws by governmental agencies, including the Federal Communications Commission
(the "FCC"). Regulations governing the rates that can be charged to subscribers
by cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as The Recovery Network. In addition, federal "must-carry"
rules requiring cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional channels for
noncommercial education TV stations); commercial leased access rules
designating 10 to 15 percent of system channels for lease by unaffiliated
programmers; and local regulatory requirements mandating further channel
set-asides for public, governmental and educational use could reduce channel
availability which might otherwise be available for The Recovery Network on
many cable systems. Statutory provisions and FCC rules governing relationships
among cable systems and competing forms of multichannel video program
distribution, as well as the relations between the Company and its cable system
affiliates could adversely affect the marketability of the Company's
programming and the flexibility of the Company in its business dealings with
outlets for its programming. Although program providers that do not hold FCC
licenses or operate distribution outlets, such as The Recovery Network and
Recovery 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.
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.
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-9
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
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 at June 30,
1997:
Computer equipment .................. $ 76,083
Office furniture ..................... 75,971
---------
152,054
Less--accumulated depreciation ...... (39,304)
---------
$ 112,750
=========
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 the
common shares when the offering is completed. If the intended offering is
terminated these costs are charged to operations. Offering costs of $270,040
are capitalized as of June 30, 1997.
f. Deferred Financing Costs
Debt issuance costs are initially capitalized as deferred financing costs
and amortized over the terms of the notes using the effective interest rate
method. In the event the notes are repaid prior to their original maturity, any
unamortized portion of the debt issuance costs capitalized will be charged to
operations. Debt issuance costs of $227,922, net amortization of $127,653, have
been capitalized as of June 30, 1997.
g. Capitalized Programming Costs
Capitalized programming costs include direct costs of production and
production overhead. Production costs are accumulated by each series produced.
Production overhead is allocated proportionately to each series based on the
direct production costs incurred for each series. The costs are charged to
earnings as the series are broadcast based on the estimated number of future
showings in accordance with SFAS 63, "Financial Reporting by Broadcasters."
Capitalized programming costs are stated at the lower of unamortized costs
or estimated net realizable value on a series-by-series basis. A series
estimated net realizable value is periodically reviewed by management and
revised downward when warranted by changing conditions. Once adjusted, the new
estimated realizable value establishes a new unamortized cost basis.
h. 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.
F-10
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
2. Summary of Significant Accounting Policies -- (Continued)
i. Non-Monetary Exchanges
Accounting for the transfer or distribution of non-monetary assets or
liabilities is based on the fair value of the assets or liabilities received or
surrendered, which ever is more clearly evident. Where the fair value of the
non-monetary assets received or surrendered cannot be determined with reasonable
accuracy, the recorded book value of the non-monetary assets are used.
j. 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 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. The Company also entered into
$47,568 of capital lease arrangements in connection with the purchase of
furniture and equipment during the year.
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 7). The Company
also entered into a $4,565 capital lease for computer equipment.
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 7). 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. The Company also accrued expenses for consulting
services and interest expense of $87,650, which was converted into common stock
during 1995 and 1996.
The Company made cash payments of $1,800 in 1997 and $800 in 1996 for
state income taxes. Inception to date payments for income taxes is $3,400.
During 1997 and 1996, cash payments for interest expense was approximately
$12,762 and $200, respectively.
k. 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" is 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.
SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosure
About Segments of an Enterprise and Related Information" are effective for
fiscal years beginning after December 15, 1997. The Company will adopt the new
standards in the fiscal year ending June 30, 1999. The effects of these new
standards have not yet been determined.
l. 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
F-11
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
2. Summary of Significant Accounting Policies -- (Continued)
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 September 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 460,548 shares for the periods ended June 30, 1997 and prior.
3. Capitalized Production Costs
Capitalized production costs, net of amortization, are summarized by
series as follows:
Full Circle ................................. $194,631
Testimony .................................... 42,969
---------
$237,600
=========
These series were released on a limited basis in 1997. Based on the
Company's estimates of future showings, 75 percent of the costs will be
amortized within the next three years.
4. Note Payables
At June 30, 1997, notes payable consist of $2,000,000 promissory notes
issued in the Company's March 1997 private placement, net of $479,568 of
unamortized loan discount (see Note 7). The notes bear interest at 9 percent
per annum (estimated effective rate is 125 percent) and are due on the earlier
of the consummation of an initial public offering or one year. The discount is
being amortized using the effective interest rate method through September 30,
1997, the date the notes are expected to be repaid.
In July 1996, the Company issued $310,000 of 10 percent convertible
debentures (a total of $120,000 to certain shareholders and Directors). In
November and December 1996, certain note holders who converted their notes
payable 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). Original conversion rate and exercise price was
$3.87. 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.
The remaining $60,000 note payable and accrued interest was paid in April
1997. The note holder received a warrant to purchase 15,498 shares of common
stock at $3.87 per share. The warrant expires in April 1999.
In November 1996, a $20,000 note payable was converted into 6,888 shares
of common stock valued at $2.90 per share by the Company. Accrued interest
thereon was paid at the time of conversion.
5. Deferred Compensation
During May and June 1997, five officers (three of which are shareholders)
earned compensation in excess of amounts paid by approximately $5,400 to $6,500
each month for each officer. At the option of the employees, amounts are to be
repaid with either the proceeds from the subsequent notes payable (see Note 14)
or the IPO. If repayment of the amounts is deferred until the IPO is completed,
then the employees are entitled to interest under terms identical to that of
the subsequent noteholders.
F-12
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
5. Deferred Compensation -- (Continued)
During 1997, an officer and a former officer converted $74,000 in deferred
compensation due them into 31,857 shares of common stock valued at $2.32 per
share by the Company.
6. Income Taxes
The components of the net deferred income tax asset at June 30, 1997 are
as follows:
Development costs capitalized for tax purposes ...... $2,045,130
Carryforward of net operating losses ............... 252,620
Other temporary differences ........................ 46,670
----------
2,344,420
Valuation allowance ................................. (2,344,420)
----------
Deferred income tax asset ........................... $ 0
==========
The provision for income taxes of $800 and $1,800 for the fiscal years
ended June 30, 1996 and 1997, 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, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------- ---------------------
Amount Percent Amount Percent
------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Income tax benefit at federal statutory rate ...... $ (415,829) (34.00)% $(1,297,390) (34.00)%
State taxes, net of federal income tax effect ...... 800 0.07 1,800 0.05
Net operating losses and other deferred
income tax assets not benefited ........ 415,829 34.00 1,297,390 34.00
---------- ---------- ----------- --------
$ 800 0.07% $ 1,800 0.05%
========== ========== ----------- --------
</TABLE>
As of June 30, 1997, the Company had approximately $236,000 of federal net
operating loss carryforwards, which will expire in fiscal years ending 2008 to
2012. As of June 30, 1997, the Company had approximately $17,000 of California
state net operating loss carryforwards, which will expire in fiscal years ending
2001 and 2002. 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.
7. 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.
b. 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
F-13
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
7. Capital Stock Transactions -- (Continued)
(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.
c. 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.
d. The $3.48 Placement
During November 1996 through January 1997, the Company issued 138,761
shares of common stock for cash of $483,500 ($3.48 per share). The Company also
issued 7,749 shares in consideration of services rendered in connection with
such placement.
e. The March 1997 Private Placement
In March 1997, the Company consummated a private financing pursuant to
which it issued 40 units 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; (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, which was subsequently changed to $5.50 per share. The net
proceeds for the offering were $1,512,654. 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
instruments issued. Amortization of $585,072 of the loan discount has been
charged to operations as interest expense as of June 30, 1997. Offering costs
of approximately $487,000 were incurred of which approximately $228,000 was
capitalized as debt offering costs. The balance of $259,000 was charged to
equity as cost of raising the equity proceeds.
f. Other Stock Transactions
During November 1996 the exercise price of 67,157 options granted in
fiscal year 1996 to three members of the Board of Directors 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, the options
to purchase 67,157 shares of common stock were exercised. Other options to
purchase 6,458 shares of common stock at $2.32 per share were also exercised.
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).
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
fiscal year 1996.
During January 1996, the Company issued 45,523 shares of common stock for
consulting services valued at $105,748 ($2.32 per share) by the Company.
F-14
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
7. Capital Stock Transactions -- (Continued)
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.
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.
8. 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 1996 and 1997, cash payments of approximately $210,000
and $708,000 were made to shareholders and Directors, including affiliated
companies, for compensation in connection with services rendered.
b. Due to Shareholders and Directors
As of June 30, 1997, amounts due to shareholders and directors consist of
expense reimbursements due of $52,751 and other amounts of $13,000.
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 reimbursement of $100,000 of expenses paid for by these shareholders.
During February and March 1997, other shareholder claims were settled for
$100,000 and 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.
c. 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.
During 1997, the Company made cash payments of $57,000 to ATN. Accounts
payable and accrued expenses include approximately $100,000 due to ATN as of
June 30, 1997.
9. 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.
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.
F-15
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
9. Consulting Agreements -- (Continued)
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.
10. Employment Agreements
Effective December 1, 1996 through May 13, 1997, the Company and its
wholly-owned subsidiary entered into certain employment agreements with
employees, shareholders and/or Directors. The agreements expire at various
dates from September 30, 1998 to May 31, 1999. The agreements provide for
minimum monthly cash compensation ranging from approximately $10,000 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 employment agreements provide certain option rights 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 June 30, 1997, are approximately $648,000 and
$332,000 in fiscal years 1998 and 1999, respectively.
11. 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 $21,000 and $118,000 which
relate to these agreements have been recorded as programming expenses in the
accompanying financial statements during fiscal year 1997 and 1996,
respectively.
12. 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
340,251 shares of common stock are reserved for issuance, pursuant to options
granted and to be granted under these plans. 15,506 shares are available for
grant, including an option to purchase 12,915 shares which has been terminated,
as of June 30, 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 during fiscal year 1997, 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 June 30, 1997. Options to purchase 43,910 shares vest over 1.5 to
2 years. All non-plan options expire in 2001.
During June 1997, non-plan options to purchase 9,749 shares of common
stock were granted. The options' exercise price is $5.00 per share, monthly
vesting commences July 1997, and they expire in five years.
F-16
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
12. Options and Warrants -- (Continued)
The following is a summary of all options granted to employees, directors
and consultants to acquire the Company's common stock as of June 30, 1997:
Shares Exercise Shares Shares Shares
Granted Price Vested Exercised Terminated
- -------------- ---------- -------- ----------- -----------
347,409 $5.00 67,511 -- 12,915
110,423 $2.32 81,728 -- --
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):
Year Ended
June 30, 1997
--------------
Net loss - as reported ............ $ 3,818
Net loss - pro forma ............... $ 3,911
Loss per share - as reported ...... $ (1.52)
Loss per share - pro forma ......... $ (1.55)
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 fiscal year 1997
is $0.31. During 1996, the weighted average fair value of options granted was
zero.
Warrants
At June 30, 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 $5.50 per share and 15,498 warrants are exercisable
through March 1999 at $3.87 per share.
13. Commitments and Contingencies
a. Operating Leases
During March 1997, the Company executed an operating lease agreement for
its office facilities that expires in April 2002. Under the 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,
1998 ................................. 93,000
1999 ................................. 125,000
2000 ................................. 132,000
2001 ................................. 142,000
2002 ................................. 145,000
---------
$637,000
=========
F-17
<PAGE>
THE RECOVERY NETWORK, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
JUNE 30, 1997
13. Commitments and Contingencies -- (Continued)
Rent expense charged to operations in fiscal 1996 and 1997 were
approximately $11,500 and $79,600, respectively.
b. Capital Leases
The Company leases certain office equipment under a capital lease. At June
30, 1997, minimum lease payments under the terms of the lease agreement are as
follows:
Year Ending June 30,
1998 .................................... $22,997
1999 .................................... 22,350
2000 .................................... 18,711
--------
64,058
Less--amounts representing interest ...... 16,728
Less--Current portion ..................... 17,029
--------
$30,301
========
14. Subsequent Events
During July and August 1997, the Company borrowed $605,250 under one year,
15 percent notes payable to unrelated parties. The notes provide for a minimum
of $90,790 of interest. The Company incurred $30,260 of deferred financing
costs related to these notes.
F-18
<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. .................................... 47
Certain Transactions ....................................... 49
Description of Securities. ................................. 51
Shares Eligible for Future Sale ........................... 53
Underwriting ............................................. 54
Legal Matters. ............................................. 56
Experts ................................................... 56
Additional Information .................................... 56
Index to Financial Statements. .......................... F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the securities 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>
================================================================================
1,850,000 Units
[LOGO]
THE RECOVERY
NETWORK, INC.
1,850,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
1,850,000 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>
<S> <C>
Registration fee ................................................ $ 7,742.80
NASD filing fee ................................................ 3,055.16
Nasdaq listing expenses .......................................... 10,000.00
Blue sky fees and expenses (including legal and filing fees) ... 51,000.00
Printing expenses (other than stock certificates) ............... 100,000.00
Printing and engraving of stock certificates ..................... 2,500.00
Legal fees and expenses (other than Blue Sky) .................. 250,000.00
Consulting fee ................................................... 60,000.00
Accounting fees and expenses .................................... 90,000.00
Transfer Agent and Registrar fees and expenses .................. 2,500.00
Miscellaneous expenses .......................................... 23,652.04
------------
Total ........................................................ . $600,450.00
============
</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 21 "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.
From July through September 1997, the Registrant sold $605,250 aggregate
principal amount of promissory notes which bear interest at 15% due on the
earlier of two business days after the consummation of this offering and one
year after their issuance. The lender received an origination fee of 5% paid out
of the proceeds of the notes. In issuing the notes, the Registrant relied on the
exemption provided by Section 4(2) of 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 Amendment to 1997 Management Bonus Plan.*
4.10 Form of Stock Option Contract.*
4.11 Form of Promissory Note issued by the Registrant.*
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.*
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Filed previously.
+ To be filed by amendment.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the
II-4
<PAGE>
registration statement; (2) that, for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and (3) to remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
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.
The Registrant hereby undertakes that it will: (1) for determining any
liability under the Securities Act of 1933 (the "Act"), treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the
Act as part of this registration statement as of the time the Commission
declared it effective; (2) for determining any liability under the Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial bona
fide offering of those securities.
II-5
<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 Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in Santa Monica County, State of California, on the 8th day of
September, 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 George H. Henry, 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
Amendment No. 2 to the 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 September 8, 1997
George H. Henry
President, Chief Executive Officer and September 8, 1997
/s/ William D. Moses Director (principal accounting officer and
- ----------------------- principal financial officer)
William D. Moses
/s/ Donald J. Masters
- ----------------------- Executive Vice President and Director September 8, 1997
Donald J. Masters
/s/ Nimrod J. Kovacs
- ----------------------- Vice Chairman of the Board of Directors September 8, 1997
Nimrod J. Kovacs
/s/ Paul Graf
- ----------------------- Director September 8, 1997
Paul Graf
</TABLE>
II-6
<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 Amendment to 1997 Management Bonus Plan.*
4.10 Form of Stock Option Contract.*
4.11 Form of Promissory Note issued by the Registrant.*
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.*
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Filed previously.
+ To be filed by amendment.
<PAGE>
EXHIBIT 1.1
THE RECOVERY NETWORK, INC.
1,850,000 Units
1,850,000 Shares of Common Stock
(Par Value $.01 Per Share)
and
Redeemable Warrants to Purchase 1,850,000 Shares of Common Stock
UNDERWRITING AGREEMENT
Whale Securities Co., L.P. August , 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 eight hundred fifty thousand
(1,850,000) units (the "Offered Units") at a price of $5.10 per Offered Unit,
consisting of an aggregate of one million eight hundred fifty thousand
(1,850,000) 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 August __, 1998 (or such earlier date as to which the
Underwriter consents) until August __, 2002, one (1) Common Share, at an
exercise price of Five Dollars Fifty Cents ($5.50) (subject to adjustment in
certain circumstances). The Offered Shares and the Offered Warrants will be
offered to the public in Offered Units consisting of one Offered Share and one
Offered Warrant at a public offering price of Five Dollars and ten cents ($5.10)
per Offered Unit. The securities comprising the Offered Units will become
detachable and separately transferable commencing ninety (90) days from the
<PAGE>
Effective Date (as hereinafter defined) or such earlier date as to which the
Underwriter consents. The Company shall have the right to call each Offered
Warrant for redemption upon not less than thirty (30) days' written notice at
any time commencing twelve (12) months from the Effective Date at a redemption
price of Ten Cents ($.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 Units, may purchase up to an
aggregate of two hundred seventy-seven thousand five hundred (277,500) Common
Shares (the "Optional Shares") and/or two hundred seventy-seven thousand five
hundred (277,500) 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 filed as Exhibit 4.2 to the Registration
Statement (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
eighty five thousand (185,000) Common Share(s) (collectively, the "Underlying
Shares") and/or one hundred eighty five thousand (185,000) 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 Offered Units, 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:
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1. Purchase and Sale of Offered Units. 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 Units
to the Underwriter, and the Underwriter agrees to purchase the Offered Units
from the Company, at a purchase price of $4.59 per Offered Unit of which $4.50
shall be ascribed to each Offered Share and $.09 shall be ascribed to each
Offered Warrant. The Underwriter shall, subject to the terms of this Agreement,
offer the Offered Units to the public at a public offering price of $5.10 per
Offered Unit of which $5.00 shall be ascribed to each Offered Share and $.10
shall be ascribed to each Offered Warrant.
2. Payment and Delivery.
(a) Payment for the Offered Units 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, 650 Fifth Avenue, New York, New York 10019, against delivery of the
Offered Units to the 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 Units 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 Two Hundred Three Dollars and Fifty
Cents ($203.50). 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
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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 ascribed to the 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.
(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
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<PAGE>
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
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 Underwriter 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 Recovery 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
Delaware, 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
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<PAGE>
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, 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 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
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<PAGE>
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) the requirements of the National
Association of Securities Dealers, Inc. ("NASD") and applicable state securities
or Blue Sky laws, are required for (i) the valid authorization, issuance, sale
and delivery of the Offered Units, 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. 333-27787) on Form SB-2 and has
filed one or more amendments thereto, covering the registration of the
Securities under the Act, including the 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.
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<PAGE>
(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 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 have 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
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<PAGE>
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 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 assessment or collection of any income taxes and is not
a party to any pending action or proceeding by any 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.
(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
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<PAGE>
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 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 seek to cancel,
terminate or limit such Permits.
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(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
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
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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, 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 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
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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.
(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.
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(z) The Offered Units, Shares , Warrants and Warrant
Shares 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 Prospectus is
required by law to be delivered in connection with the sales of the Offered
Units, 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 Registration Statement, or any post-effective 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
Offered Units, 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
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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 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 Units, 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 information
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.
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(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) and 10-Q (or 10-QSB)
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 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 controls,
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 Offered Units, 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 Offered Units to the Underwriter; all taxes, if
any, on the issuance of the Offered Units; the fees, expenses and other costs of
qualifying the Offered Units, Shares and Warrants for sale under the Blue Sky or
securities laws of those states in which the Offered Units, 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
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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).
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 Units, 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 cases 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
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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 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
maintain the listing of the Offered Units, Shares and Warrants on NASDAQ and,
if so qualified, list the Offered Units, 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
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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 Units, 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 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
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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 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
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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 annually, of those states in which the Offered Units, 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.
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(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.
(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 has obtained 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 will maintain 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 Units from the Company. The obligation of the Underwriter
to purchase and pay for the Offered Units which it has agreed to purchase from
the Company is subject (as of the date hereof and the Closing Date) to the
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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 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.
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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 its ownership in 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.
(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 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 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
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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, 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 Offered
Units, 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
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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 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 Offered Units,
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. None of the Offered Units, 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.
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(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 Warrants conform to the descriptions thereof contained in the
Registration Statement and Prospectus.
(xi) Upon delivery of the Offered Units 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 Units, free and
clear of all liens, encumbrances, equities, security interests and claims.
(xii) Assuming that the Underwriter exercises the
over-allotment option to purchase any of the Optional Shares and/or Optional
Warrants and makes payment therefor in accordance with the terms of this
Agreement, upon delivery of the Optional Shares and/or 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/or 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
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"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.
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 to
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:
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(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 that (A) the sections of the Registration
Statement entitled "Risk 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
Statement 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
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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 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
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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 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 Units 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 Offered
Units, 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
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of the NASD to execute transactions (as principal or as agent) in the Offered
Units, 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 Offered Units, 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 connection with the
authorization, issuance and sale of the Offered Units, 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
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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 Offered Units,
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 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 Offered Units, 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 Offered Units, 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
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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 Offered Units,
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.
(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
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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 Offered Unit set forth on the
cover page of the Prospectus represents of the initial public offering price per
Offered Unit set 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 Underwriter 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
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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.
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 Units for public offering. The time when the
Underwriter "releases the Offered Units 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 Units, 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 Units, whichever will first occur.
(b) This Agreement, including without limitation, the
obligation to purchase the Offered Units 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 Units 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;
-36-
<PAGE>
(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 Units 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 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 Units or the Optional Shares and
Optional 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
Offered Units, 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
-37-
<PAGE>
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 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 Offered Units,
Shares or Warrants from the Underwriter, as such purchaser.
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<PAGE>
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 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:
-39-
<PAGE>
VOID AFTER
UNIT CERTIFICATE
EACH UNIT CONSISTS OF ONE SHARE OF COMMON STOCK AND ONE WARRANT
NUMBER SHARES
THE RECOVERY NETWORK, INC.
See Reverse Side For
Certain Definitions
CUSIP
THIS IS TO CERTIFY THAT,
or registered assigns (the "Registered Holder") is the owner of the number of
fully paid and non-assessable Units specified above, transferable on the books
of The Recovery Network, Inc., a Colorado corporation (the "Company"), by the
Registered Holder hereof in person or by his or her duly authorized attorney, on
surrender of this Unit Certificate properly endorsed.
Each Unit consists of one (1) share of the Company's common stock, par
value $.01 per share (the "Common Stock"), and one (1) redeemable Common Stock
purchase warrant (the "Warrants") to purchase one share of Common Stock for
$5.50 per share, subject to certain adjustments, from , 1998 until 2002 (the
"Expiration Date"). The terms of the Warrants are governed by the Warrant
Agreement dated , 1997 among the Company, Whale Securities Co., L.P. and
American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent")
and subject to the terms and conditions contained therein. The Registered Holder
of this Certificate consents to all the terms and conditions therein. Copies of
the Warrant Agreement are at the office of the Warrant Agent, 40 Wall Street,
New York, New York 10004 and are available to any holder on written request. The
Warrants shall be void unless exercised before the Expiration Date.
This Certificate is not valid unless countersigned and registered by
the Transfer Agent, Warrant Agent and Registrar of the Company.
The Warrants and shares of Common Stock of the Company represented by
this Unit Certificate shall not be separately transferable until , 199
or such earlier date as determined by Whale Securities Co., L.P. (the
"Separation Date").
WITNESS the facsimile seal of the Company and the facsimile signature
of its duly authorized officers.
DATED:
/s/ William D. Moses [SEAL] /s/ George H. Henry
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
<PAGE>
THE RECOVERY NETWORK, INC.
The Company will furnish without charge to each stockholder who so
requests, the designations, powers, preferences and relative, participating,
optional or special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Any such request may be made to the Company or to the Transfer Agent.
ADDITIONAL PROVISIONS
This Certificate certifies that for value received the Registered
Holder hereby is entitled at any time on or after , 199 (or such earlier date as
determined by Whale Securities Co., L.P. that the warrants and Common Stock that
comprise the Units shall be separately transferable (the "Separation Date")), to
exchange each Unit represented by this Unit Certificate for Common Stock
Certificates representing one share of Common Stock and Warrant Certificates
representing one Warrant upon surrender of this Unit Certificate to the Transfer
Agent at the officer of the Transfer Agent, together with any documentation
required by such Transfer Agent. At any time on or after ,1998 and before the
Expiration Date, upon surrender of the Warrant Certificate at the office of the
Warrant Agent for the Warrants, with the subscription form on the reverse side
thereof completed and duly executed and accompanied by payment in cash or check
payable to the Warrant Agent for the account of the Company, the Registered
Holder of such Warrant Certificate shall be entitled to purchase from the
Company one share of Common Stock at the exercise price of $5.50 per share. The
exercise price and the number of shares purchasable upon exercise of each
Warrant are subject to adjustment and the Warrants are redeemable by the
Company, each upon the occurrence of certain events set forth in the Warrant
Agreement.
After , 2002, the Warrant shall become null and void and of no
value.
REFERENCE IS MADE TO THE WARRANT AGREEMENT REFERRED TO ON THE FRONT
SIDE HEREOF AND THE PROVISIONS OF SUCH WARRANT AGREEMENT SHALL FOR ALL PURPOSES
HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE.
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate shall be construed as thought they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT _______ Custodian _____
under Uniform Gifts to
Minors Act ________
TEN ENT -- as tenants by the
entireties
JT TEN -- as joint tenants with
right of survivorship and
not as tenants in common
COM PROP -- as community property
UNIF TRF MIN ACT _______ Custodian until
age ______ under
Uniform Transfers to
Minors Act _________
</TABLE>
Additional abbreviations may also be used though not on the above list
For Value Received, _____________________________________ hereby sell,
assign and transfer unto
_______________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________ Units
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
_______________________________________________________________________________
Attorney to transfer the said Unit(s) on the books of the within named Company
with full power of substitution in the premises
Dated ______________________ ________________________________________
The signature to this assignment must
correspond with the name as written upon
the face of this Certificate in every
particular without alteration or
enlargement or any change whatever
IMPORTANT: ALL SIGNATURES MUST BE GUARANTEED IN THE SPACE PROVIDED BELOW
BY A FIRM THAT IS A MEMBER OF THE NATIONAL SECURITIES EXCHANGE
OR OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR
BY A COMMERCIAL BANK OR TRUST COMPANY LOCATED IN THE UNITED
STATES.
SIGNATURE GUARANTEE:
Name:_________________________________________________________________________
(Please Print)
By:___________________________________________________________________________
Title:________________________________________________________________________
<PAGE>
NUMBER SHARES
RC
THE RECOVERY NETWORK, INC.
INCORPORATED UNDER THE LAWS CUSIP 75627A 10 2
OF THE STATE OF COLORADO SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE
PAR VALUE OF $.01 PER SHARE OF
THE RECOVERY NETWORK, INC.
CERTIFICATE OF STOCK
transferable on the books of the Corporation by the holder hereof, in person or
by duly authorized Attorney, upon surrender of this Certificate, properly
endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the fascimile
signatures of its duly authorized officers.
Dated:
THE RECOVERY NETWORK, INC.
CORPORATE
SEAL
COLORADO
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED OFFICER
- -----------------------------------------------
AMERICAN BANKNOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
215-657-3480
- -----------------------------------------------
SALES PERSON R. JOHNS 212-557-9100
- -----------------------------------------------
/home/LARRY/inprogress/home 14/RECOVERY51607
- -----------------------------------------------
- --------------------------------------------------
PRODUCTION COORDINATOR - TRICIA LUNA 215-830-2197
PROOF OF AUGUST 18, 1997
RECOVERY
H 51607face1
- -----------------------------------------------
Opr. Ir?HJ/eg REV2
- -----------------------------------------------
/net/banknote/home41/H2
- -----------------------------------------------
<PAGE>
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT- _____Custodian______
TEN ENT - as tenants by the entireties (cust) (Minor)
JT TEN - as joint tenants
with right of survivorship Under Uniform Gifts to Minors
and not as tenants in common Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
| |
| |
|_______________________________________|
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint____________________________________________
___________________________Attorney to transfer the said stock on the books of
the within named Corporation with full power of substitution in the premises.
Dated:________________________________
________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
__________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17 Ad-15.
<PAGE>
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 1,850,000 units (the "Units") each Unit consisting of one share 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 one Common Stock Purchase Warrant (the
"Warrants");
WHEREAS, each Warrant will entitle the holder to purchase 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 securities comprising the Units will become detachable
and separately transferable commencing ninety (90) days from the effective date
of the Company's initial public offering (or such earlier date as to which the
Underwriter consents). 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.
-2-
<PAGE>
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.
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
-3-
<PAGE>
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 surrendered 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
-4-
<PAGE>
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 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,
-5-
<PAGE>
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 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
-6-
<PAGE>
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 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
-7-
<PAGE>
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 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
-8-
<PAGE>
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 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
-9-
<PAGE>
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
nonassessable 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 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
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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 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
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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.
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
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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
(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
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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.
(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
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be decreased in proportion to such decrease in the outstanding shares of Common
Stock.
(vi) In case of any reorganization or reclassification 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 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
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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 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
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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 terminate 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 provisions 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
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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 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.
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(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 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
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(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 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
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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)(2).
(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
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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 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.
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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 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
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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 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
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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 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
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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 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
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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 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
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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:
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:
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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
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.
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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 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:
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WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By: ___________________________________
Name:
Title:
<PAGE>
VOID AFTER
WARRANT CERTIFICATE FOR PURCHASE OF
COMMON STOCK
NUMBER WARRANTS
RW
THE RECOVERY NETWORK, INC.
CUSIP 75627A 11 2
THIS CERTIFIES THAT
or registered assigns, is the owner of the number of warrants set forth above.
Each Warrant (subject to adjustments as hereinafter referred to) entitles the
owner hereof to purchase at any time from , 1998 until 5:00 p.m. Eastern
Time on , 2002 one fully paid and non-assessable share of common
stock (the "Common Stock") of The Recovery Network, Inc., a Colorado corporation
(the "Company) (such shares of Common Stock being hereby referred to as the
"Shares" or a "Share"), upon payment of the warrant price (as hereinafter
described), provided, however, that under certain conditions set forth in the
Warrant Agreement hereinafter mentioned, the number of Shares purchasable upon
the exercise of this Warrant may be increased or reduced and the warrant price
may be adjusted. Subject to adjustment as aforesaid, the warrant price per Share
(hereinafter called the "Warrant Price") shall be $5.50 per Share if exercised
on or before 5:00 p.m. Eastern Time on , 2002. As provided in said Warrant
Agreement, the Warrant Price is payable upon the exercise of the Warrant, either
in cash or by certified check or bank draft to the order of the Company.
Under certain conditions set forth in the Warrant Agreement, this Warrant
may be called for redemption on or after , 1998, at a redemption
price of $.10 per Warrant upon written notice of not less than 30 days.
Upon the exercise of this Warrant, the form of election to purchase on the
reverse hereof must be properly completed and executed. In the event that this
Warrant is exercised in respect to less than all of such Shares, a new Warrant
for the remaining number of Shares will be issued on such surrender.
This Warrant is issued under and the rights represented hereby are subject
to the terms and provisions contained in a Warrant Agreement dated as of
, 1997, by and among the Company, American Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agent") and Whale Securities Co., L.P.,
all of the terms and provisions of which the registered holder of this Warrant,
by acceptance hereof, assents. Reference is hereby made to said Warrant
Agreement for a more complete statement of the rights and limitations of rights
of the registered holders hereof, the rights and duties of the Warrant Agent
and the rights and obligations of the Company thereunder. Copies of said Warrant
Agreement are on file at the office of the Warrant Agent.
The Company shall not be required upon the exercise of this Warrant to
issue fractions of Shares, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.
This Warrant is transferable at the office of the Warrant Agent (or its
successor as Warrant Agent) by the registered holder hereof in person or by
attorney duly authorized in writing, but only in the manner and subject to the
limitations provided in the Warrant Agreement and upon surrender of this
Warrant and the payment of any transfer taxes. Upon any such transfer, a new
Warrant, or new Warrants of different denominations, of this tenor and
representing in the aggregate the right to purchase a like number of Shares will
be issued to the transferee in exchange for this Warrant.
This Warrant, when surrendered at the office of the Warrant Agent (or its
successor as Warrant Agent) by the registered holder hereof in person or by
attorney duly authorized in writing, may be exchanged in the manner and subject
to the limitations provided in the Warrant Agreement, 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 equal to the number
of such Warrants.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock or other
securities purchasable upon the exercise of the Warrants are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon such exercise until the date of the reopening
of said transfer books.
The holder of this Warrant shall not be entitled to any of the rights of a
shareholder of the Company prior to the exercise hereof.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
<PAGE>
WITNESS the facsimile seal of the Company and the facsimile signature of
its duly authorized officers.
DATED:
THE RECOVERY NETWORK, INC.
CORPORATE
SEAL
COLORADO
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
WARRANT AGENT
BY:
AUTHORIZED OFFICER
<PAGE>
THE RECOVERY NETWORK, INC.
ELECTION TO PURCHASE
To Be Executed by the Registered Holder In Order to Exercise Warrants
To: THE RECOVERY NETWORK, INC.
c/o: American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant(s) for and to purchase thereunder,
__________________ shares of Common Stock provided for therein and tenders
herewith payment of the purchase price in full to the order of the Corporation
and requests that certificates for such shares shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________________
| |
| |
|_______________________________________|
_______________________________________________________________________________
(Please Print or Typewrite)
and be delivered to ___________________________________________________________
(Name)
at ____________________________________________________________________________
(Street Address) (City) (State) (Zip Code)
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
The undersigned represents that the exercise of the within Warrant was solicited
by a member of the National Association of Securities Dealers, Inc. If not
solicited by a NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm,
it will be assumed that the exercise was solicited by Whale Securities Co., L.P.
Dated: _________________ Signature: ________________________________________
NOTE: The above signature must correspond
with the name as written upon the face of
this Warrant or with the name of the
assignee appearing in the assignment form
below in every particular without
alteration or enlargement or any change
whatever.
Name: _________________________________________________________________________
(Please Print or Typewrite)
Address: _______________________________________________________________________
(Street)
________________________________________________________________________________
(City) (State) (Zip Code)
*Signature Guaranteed: _____________________________________________________
_______________________________________
| |
| |
|_______________________________________|
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
ASSIGNMENT
For value received, _________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
_______________________________________
| |
| |
|_______________________________________|
<PAGE>
________________________________________________________________________________
Please Print or typewrite name and address including postal zip code of assignee
________________________________________________________________________________
________________________________________________________(_____________) Warrants
represented by the within Warrant Certificate, together with all right, title
and interest therein, and do hereby irrevocably constitute and appoint
_______________________________________________________________________ attorney
to transfer said Warrant on the books of the within named Corporation, with
full power of substitution in the premises.
Dated: ________, _______ Signature: ________________________________________
NOTE: The above signature must correspond
with the name as written upon the face of
this Warrant in every particular without
alteration or enlargement or any change
whatever.
*Signature Guaranteed:_____________________
* In case of assignment, or if the Common Stock issued upon exercise is to be
registered in the name of a person other than the holder, the holder's
signature must be guaranteed by a commercial bank, trust company or an NASD
member firm.
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AMERICAN BANKNOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
215-657-3480
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SALES PERSON R. JOHNS 212-557-9100
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/home/joew/inprogress/home 14/RECOVERY51607
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PRODUCTION COORDINATOR - TRICIA LUNA 215-830-2197
PROOF OF JULY 15, 1997
THE RECOVERY NETWORK
H 516070bk2
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Opr. JW REV. 1
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/net/banknote/home46/O2
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<PAGE>
WARRANT AGREEMENT dated as of August __, 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
185,000 warrants (the "Warrants") to purchase up to 185,000 (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 185,000 (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 August __, 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 1,850,000
units (the "Units") consisting of 1,850,000 shares of Common Stock (the "Public
Shares") and 1,850,000 warrants (the "Public Warrants") at an initial public
offering price of $5.10 per Unit; 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 Units 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 TWO HUNDRED THREE DOLLARS AND
FIFTY CENTS ($203.50), 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 185,000
fully-paid and non-assessable Shares at an initial exercise price (subject to
adjustment as provided in Article 6 hereof) of $8.00 per Share and up to 185,000
Underlying Warrants at an initial exercise price (subject to adjustment as
provided in
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<PAGE>
Article 6 hereof) of $.16 per Underlying Warrant. The Underlying Warrants are
each exercisable to purchase one fully-paid and non-assessable share of Common
Stock at a price of $8.91 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
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<PAGE>
exercisable at a price of $8.00 per Share purchased and $.16 per Underlying
Warrant purchased, payable in cash or by check to the 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 1411 5th Street,
Suite 250, 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
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<PAGE>
Holder's Warrant Certificate which are exercisable for the purchase of Shares (a
"Warrant Exchange"), into the number of Shares and 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, then 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
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<PAGE>
per Share (as hereinafter defined) by (b) the Market Price (as hereinafter
defined) of a Public Share on the day preceding the 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,
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<PAGE>
the Holder thereof; 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
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"),
-7-
<PAGE>
shall bear a legend substantially similar to the following:
"The securities represented by this certificate and the other
securities issuable 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 $8.00 per Share and $.16 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
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<PAGE>
Share or per Underlying Warrant, as the case may be, in accordance with the
provisions of Article 8 hereof.
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,
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<PAGE>
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment 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
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<PAGE>
which it has been so requested to register ("Piggyback Registration"), at the
Company's sole cost and expense and at no 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
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<PAGE>
offering and sale of the Registrable Securities by the holders thereof. The
Company shall use its best efforts to cause the 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
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<PAGE>
provided for under Section 7.3 hereof and subsection (a) of this Section 7.4, at
any time during the Warrant Exercise Term, any 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 not covered by a then current Registration Statement, if included in
such holders' Registrable Securities are that aggregate number of shares of
Common Stock
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<PAGE>
(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) 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 such 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
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<PAGE>
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.
(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.
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<PAGE>
(e) Any holder of Registrable Securities to be sold
pursuant to a registration statement, and such Holder's 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
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<PAGE>
Registrable Securities, be liable for any or all incidental, special and
consequential damages sustained by the holders of Registrable Securities,
requesting registration of their 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
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<PAGE>
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 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.
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<PAGE>
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 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 Stock Transfer & Trust Company dated as of____________,
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<PAGE>
1997 ("Public Warrant Agreement"), resulting in automatic adjustment in the
number and/or price of the Underlying Warrant Shares issuable 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
-20-
<PAGE>
a price equal to the product of (x) the number of shares of Common Stock
issuable upon exercise of the Holders' Warrants and the 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.
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<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
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<PAGE>
options 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, 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
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<PAGE>
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or 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
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<PAGE>
Company further covenants and agrees that upon exercise of the Underlying
Warrants and payment of the respective Underlying 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
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<PAGE>
retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books
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
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<PAGE>
property of the Company as an entirety is proposed; or
(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
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<PAGE>
as set forth in Exhibit "A" to the Public Warrant Agreement; 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 $8.91 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),
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<PAGE>
free and clear of all preemptive rights of shareholders, provided 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:
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<PAGE>
(a) If to a registered Holder of the Warrants, to
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
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<PAGE>
Warrants have been exercised and all Warrant Securities have been 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.
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<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 $8.00 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 $.16 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 $8.91 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>
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
September 5, 1997
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0
0
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