U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1998
OR
[X} TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File No.: 0-22913
THE RECOVERY NETWORK, INC.
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(Name of Small Business Issuer in Its Charter)
Colorado 39-1731029
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1411 5th Street, Suite 250, Santa Monica, CA 90401
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (310) 393-3979
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
[ ] Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy information statements incorporated by reference in
Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
The issuer's revenues for its most recent fiscal year totaled $894,758.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average of the bid and asked prices as reported by the
National Quotation Bureau as of September 16, 1998 was approximately $9,999,944.
There were 5,977,920 shares of Common Stock outstanding as of September 16,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Description of Business.
General
The Recovery Network, Inc. (the "Company") is a digital media
company organized to address the social and behavioral health issues of persons
affected by alcoholism, substance abuse, nicotine addiction, eating disorders,
domestic violence and child abuse, depression, behavioral and mental health
problems. Drawing on the converging technologies of cable television, telephone
services and the Internet, the Company addresses the aforementioned social and
behavioral issues through broadcasting The Recovery Network(TM), a cable
television network which commenced test-broadcasting on a limited basis in March
1996, was launched nationally via satellite transmission in April 1997; airing
Recovery Talk Radio(TM), a nationally syndicated talk radio program introduced
in December 1996 and now available on 53 stations; and providing information to
viewers and listeners through a toll-free telephone help-line (the "Help Line")
about where to obtain information and help in their communities. The Help Line
has also led to the Company's developing Recovery TeleCare(TM), a specialized
telephone counseling service available to callers at a cost. 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 provide behavioral health care products and services to
managed care organizations, Health Management Organizations ("HMOs"), Employee
Assistance Programs ("EAPs"), and other organizations offering or providing
behavioral health care services, as well as to address the social and behavioral
health issues through an integrated multimedia platform.
Overview
The Recovery Market
The Company believes that the market for programming directed at
social and behavioral health issues consists of four groups: (i) friends,
families and co-workers (the "Affected Others") of persons afflicted with
alcoholism, substance abuse, nicotine addiction, eating disorders, domestic
violence and child abuse, depression, behavioral and mental health problems
("Recovery Issues"); (ii) persons who are already in recovery ("Persons in
Recovery") and seek the daily support and connection to others in recovery;
(iii) afflicted persons who are not yet in recovery either because they are
unaware of the resources that are available or are unwilling or unable to attend
meetings or seek help publicly ("Afflicted Persons"); and (iv) persons seeking
to prevent the onset of these problems and select positive life-style choices
("Prevention Issues"), particularly families with children. The Company believes
that these four groups make up a significant portion of the nation's population.
While the Company expects that its general viewing audience will
be those interested in reality based programming, a substantial portion of its
audience is expected to be the Affected Others. According to The American
Journal of Psychiatry Official Practice Guide published in November
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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.
With the recent substantial rise in drug use, especially among
adolescents, the Company believes that there is and will continue to be a
growing interest in Prevention Issues, particularly in families with adolescents
ages 13 to 18. According to the National Household Survey, the percentage of
adolescents using illegal drugs increased 105% from 1992 to 1995, and, in 1995,
approximately 18% of 18 to 20-year olds and approximately 15.6% of 16 and
17-year olds used illegal drugs. A recent survey by the National Center on
Addiction and Substance Abuse cited drugs as the number one problem facing
teenagers.
Despite the perceived size of the market for recovery and
prevention-related products and services, the Company believes that there is
currently no effective national marketplace to enable suppliers of such products
and services to reach their target consumers. The Company believes that, to
date, consumers seeking recovery and prevention-related products and services
have done so primarily through local support groups, such as Alcoholics
Anonymous, local treatment centers, counseling through health professionals,
churches and schools in their communities, and from self-help books and other
materials. A disadvantage of these traditional sources is that they all
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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.
These latter agreements are sometimes called "SSI Agreements". Many cable
systems also have local channels which are designed to serve the community's
needs and interests, and the decision to add programming to these channels is
typically left to the discretion of the local cable system manager. Some, but
not all, networks, receive license fees calculated on a per subscriber, per
month basis. According to an industry survey of 41 networks in 1996, 38 networks
received monthly fees ranging from $.03 per subscriber to $.70 per subscriber
and three networks did not receive license fees. Of those 38 networks that
received license fees, 22 networks received license fees ranging from $.10 to
$.29. Generally, networks that air less than 16 hours of
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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. Recently developed digital technologies offer
cable systems a cost effective method for expanding channel capacity. Digital
technologies enable the cable systems to compress multiple digital channels into
the bandwidth currently required for a single analog channel. The cable system
sends the compressed, multi-channel signal to a subscriber's home where it is
decompressed by a digital converter box ("digibox"). This new technology permits
a cable system to expand significantly its current channel capacity with a much
lower capital investment than would be required to install fiber optic cables or
to make other major infrastructure upgrades. TCI, one of the nation's largest
MSOs, has stated its intention to provide digiboxes to all of its subscribers,
and TCI, along with a consortium of other MSOs, recently announced an order for
25 million digiboxes to be delivered and installed over the next few years.
The recent introduction of direct satellite services ("DSS") has
also increased pressure on cable systems to offer more channels and services.
DSS systems offer their subscribers more than twice as many channels as all but
a small number of cable systems, with better audio and video quality. The price
of the satellite dishes required to receive programming has dropped to the point
that DSS is currently price competitive with premium cable. There were
approximately 4.5 million DSS subscribers in February 1997, and industry
analysts expect that number to reach approximately 19 million by the year 2000.
The Company believes that the combination of DSS and the
conversion of cable systems from analog to digital signal transmission will
create substantial additional channel capacity over the next several years. The
Company believes that these developments will hasten the full time launch of The
Recovery Network.
The Recovery Network
In April 1997, the Company launched The Recovery Network
nationally via satellite transmission under a nesting contract (the "Nesting
Contract") with Access Television Network ("ATN"). Pursuant to the Nesting
Contract, ATN provided satellite uplink, master control and other related
services (collectively, the "ATN Services") on its satellite transponder to The
Recovery Network for two hours of broadcast time every day to subscribers of
cable systems with which ATN had affiliation agreements. The Nesting Contract,
as amended, expired on August 31, 1998.
In May 1998, the Company entered into a five year contract with
Group W Network Services, a division of CBS Corporation, to provide program
origination, master control operations, uplink and C-Band Satellite transponder
services (the "Transponder Contract"). The Transponder Contract allows the
Company to broadcast 24 hours a day, rather than the 2 hours a day under the
Nesting Contract. On September 1, 1998, the Company began broadcasting a 4 hour
block of
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programming that it repeats 6 times a day to 16 cable systems with approximately
3,000,000 subscribers. The Company's programming schedule allows cable operators
the flexibility to receive the Company's signal transmission at any time.
The Transponder Contract, however, does not provide the Company
with access to subscribers as did the Nesting Contract. Therefore, in addition
to its current distribution, the Company is seeking 4 hours of broadcast time
per day in local cable systems in a large number of markets. The Company has
identified all local cable systems in the United States with at least 50,000
subscribers and is engaged in a general marketing campaign ("affiliate
marketing") directed at those approximately 250 systems.
Affiliate Marketing Strategy
The Company's strategy for obtaining affiliation agreements with
cable systems is based on the premises that cable systems are effectively
monopolies franchised by local governments, and in order to renew their
franchises, many cable systems will need to demonstrate a commitment to localism
by providing programming that benefits the local community, and that although it
will be difficult to obtain a full time dedicated channel for a new network
until new digital technologies expand channel capacity, more channel capacity
will become available over the next several years.
The first premise forms the basis for the Company's grassroots
affiliate marketing strategy. The Company believes that The Recovery Network's
programming offers local cable systems an opportunity to demonstrate their
commitment to localism. The Company's commitment to programming focusing on
social and behavioral health issues has helped to establish significant
community support for its programming. In addition, the formation by the Company
of The National Partnership for Recovery and Prevention (the "Partnership"), an
umbrella coalition of national recovery and prevention organizations, has helped
to establish The Recovery Network's credibility and social significance. Based
on such successes, the Company believes that its ability to enter into
affiliation agreements has significantly improved. The Company is also seeking
support from other grassroots organizations, local politicians and law
enforcement agencies and officials, and believes that the socially responsible
nature of The Recovery Network's programming will help it obtain that support.
The second premise accounts for the Company's strategy in
obtaining four hours of air time per day in a large number of markets. The
satellite transmission signal provided under the Transponder Contract is
available to all cable systems in the United States. Furthermore, because the
Company's programming is in a 4 hour block repeated 6 times a day, cable
operators are now able to receive the Company's signal at any time, rather than
only during the 2 hours its was carried under the Nesting Contract. This allows
cable operators much greater flexibility in fitting the Company's 4 hour block
into their existing schedules.
Many cable systems are aware of the potential benefits to them
from airing The Recovery Network's programming. Such benefits include a
demonstration of the cable system's support for localism and the political and
public relations benefits from offering socially responsible programming
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to its viewers. With channel capacity currently so limited, however, the cost of
committing a dedicated, full time channel to The Recovery Network in order to
receive those benefits could be too high for some cable systems. Therefore, the
Company is initially asking cable systems to carry The Recovery Network for only
4 hours per day. Many cable systems, including the 259 largest systems, have the
capacity to provide those hours. There can be no assurance, however, that such
systems will continue to have available channel capacity or otherwise be willing
to air The Recovery Network. With the support of local communities and
politicians for socially responsible programming, the Company believes, although
there can be no assurance, it will be able to enter into affiliation agreements
for these initial 4 hours.
With its programming now airing on a number of cable systems, the
Company can concentrate on building viewer loyalty and advertiser awareness and
promoting revenue opportunities including advertising sales through such Company
entities as Recovery Interactive, Recovery TeleCare and Recovery Direct. Since
many of the Company's viewers are "appointment viewers" (that is, they are aware
of when the Company's programming airs and schedule time to see it, rather than
finding it through "channel surfing"), the Company 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 digital
network.
The Company has identified all local cable systems with at least
50,000 subscribers and is engaged in a general marketing campaign directed at
those systems. The Company has established a promotional world wide web site,
which contains programming schedules, information about the Company and the
Partnership and links to sources of recovery information on the world wide web.
The Company will also rely on traditional marketing tools, such as mail,
telephone, trade advertisements, public relations and participation in trade
shows and conferences in connection with its general affiliate marketing
strategy.
The Company is initially seeking to enter into short-term
affiliation agreements with local cable systems with a term of one year that
provide for 4 hours of airing per day, 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.
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 provide behavioral health care products
and services ("Recovery Interactive Services") to managed
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care agencies, HMOs, EAPs, large group medical practices, state, local and
federal governments and governmental agencies, corporations and other
organizations offering or providing health care services (collectively, "Health
Care Entities") as well as to provide information, interaction and support
addressing social and behavioral issues through an integrated multimedia
platform, including a site on the world wide web. As of June 30, 1998, the
Company and TCII have each made a capital contribution in the amount of
approximately $668,000 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.
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.
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 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 Recovery Interactive's ability to enter into
license agreements with Health Care Entities and upon further development of
Recovery Interactive's products. As of June 30, 1998, Recovery Interactive has
not generated any revenues, and has incurred operating losses of approximately
$1,870,000 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 on-line business,
there can be no assurance that Recovery Interactive will be commercially
successful.
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 on 53 stations. Recovery
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Talk Radio is based in Boston, and listeners can call in to the program on a
toll-free 800 telephone number.
Recovery Talk Radio continues to be a marketing vehicle to drive
viewers to The Recovery Network in those areas where both Recovery Talk Radio
and The Recovery Network are available. In areas where only Recovery Talk Radio
is available, the show serves as the catalyst for listeners to request The
Recovery Network programming from their local cable operators or to seek out the
Help Line. The Company intends for the radio show to also drive listeners to
Recovery TeleCare and to the Recovery Interactive world wide web site.
Help Line / Recovery TeleCare
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 telephone number for viewers to call for information about
how to obtain additional help in their communities. Telephone calls are answered
seven days a week during the hours of 6:30 to 7:30 a.m. (EST) and Mondays to
Fridays during the hours of 9:00 a.m. to 5:00 p.m. (EST) by a trained crisis
response counselor provided to the Company by the Substance Abuse and Mental
Health Service Administration (SAMHSA) at no cost to the Company.
Recently, the Company has announced Recovery TeleCare, which is a
natural progression of the Help Line. Through Recovery TeleCare, a caller can
receive, for a fee, immediate specialized counseling that is discrete,
anonymous, and in the privacy of one's home.
To the extent that the Company enters into affiliation agreements
to air The Recovery Network in additional communities, the Company expects to
expand caller capacity of the Help Line, as well as expand its existing national
database of local groups, treatment centers and other sources of help and
information. The Company also intends to use the projected expanded call center
capacity to also offer recovery and prevention-related products and services
directly to its viewers.
The Company does not generate any revenues from the Help Line, and
does not receive any fees or commissions for this service, including from
referrals made by the Help Line. The Company operates the Help Line solely to
provide support to its viewers and as a community service. The Company also
expects that providing the toll-free Help Line will help build and maintain
viewer loyalty and support for The Recovery Network.
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 provide a Partnership of
prominent national prevention and recovery organizations, public figures who are
passionate about
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recovery and prevention, and corporations and institutions that are willing to
support the Company's mission. To date, the Company has identified and partnered
with more than 50 recovery and prevention organizations representing over 40
million constituents. Member organizations of the Partnership currently include
African American Parents for Drug Prevention, Community Anti-Drug Coalitions of
America, Dharma Associates, Gateway Foundation, Hands Across Cultures, ISA
Associates, National Asian Pacific American Families Against Substance Abuse,
National Association of Addiction Treatment Providers, National Drug Prevention
League, National Families in Action, National Hispanic/Latino Community
Prevention Network, National Parents Resource Institute for Drug Education,
National Treatment Consortium, Physicians for Prevention, Prevention
Intervention and Treatment Coalition for Health, The Bralove Group, The Miami
Coalition for a Safe and Drug Free Community and The Village.
Depending on their interests and abilities, partners may have the
opportunity to review and comment on The Recovery Network's 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 Direct
The Company believes that the market for products and services
addressing social and behavioral health issues is significant. The Company also
believes that, because it is attempting to create a nationwide medium
specifically targeting this market, if successful, it will be in a unique
position to offer such recovery and prevention-related products and services.
The Company has formed a subsidiary, Recovery Direct, through which it will seek
to develop recovery and prevention-related products and services to market on
The Recovery Network, as well as on Recovery Talk Radio, the Help Line and,
through Recovery Interactive, on the Internet. The Company intends for Recovery
Direct to offer a variety of self-help and recovery and prevention-related
products, including videos of the Company's programming aired on The Recovery
Network and audio tapes of programs aired on Recovery Talk Radio. In addition,
the Company intends for Recovery Direct to offer tapes and videos by other
well-known individuals in the recovery field.
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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 directed at social and behavioral health issues, there are an
increasing number of recently introduced or planned cable networks which focus
on overall life-style, self-improvement and health themes and there are numerous
programs which address social and behavioral health issues. Such networks
include, America's Health Network 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
social and behavioral health 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
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educational TV stations); commercial leased access rules designating 10% to 15%
of system channels for lease by unaffiliated programmers; and local regulatory
requirements mandating additional channel set-asides for public, governmental
and educational use could reduce channel availability which might otherwise be
available for The Recovery Network on many cable systems. Statutory provisions
and FCC rules governing relationships among cable systems and competing forms of
multichannel video program distribution, as well as the relationships between
the Company and its cable system affiliates could adversely affect the
marketability of the Company's programming and the ability of the Company to
enter into arrangements for the distribution of its programming. In addition,
the cable systems and radio stations that carry the Company's programs are
regulated by the FCC and, therefore, are subject to its rules and policies, such
as those relating to sponsorship identification, broadcast of indecent language,
provision of equal opportunities for political candidates and related measures
pertaining to program content and format. Failure of the Company's programs to
comply with one or more of these rules could subject the cable systems 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
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<PAGE>
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.
Proprietary Information
The Company has pending applications in the United States Patent
and Trademark Office for fifteen trademarks, including the "Recovery Network"
trademark. The Company has registered the trademark "R Net". The Company
believes that its trademarks and copyrights, including the "Recovery Network"
trademark and 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.
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<PAGE>
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 27 full time employees, of which six are
engaged in affiliate sales, four in programming, and seventeen in
administration. The Company also from time to time retains a number of marketing
and political consultants to support its grassroots marketing efforts nationwide
and in local communities.
Item 2. Description of 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.
Item 3. Legal Proceedings.
The Company is not a party to, nor is any of its property, the
subject of, any material pending legal proceeding.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
On May 28, 1998, the Company's annual meeting of shareholders was
held (the "Meeting"). At the Meeting, the shareholders approved the following
matters:
1. Election of the following individuals as directors of the
Company for a term of one year:
George Henry, William D. Moses, Donald J. Masters, Nimrod J.
Kovacs, Joe C. Wood, Jr., Mark S. Gold, M.D., and Morgan
Lambert Howe
Mr. Wood, Dr. Gold and Ms. Howe have since resigned from the
Company's Board of Directors. Charlotte Schiff-Jones was appointed to the
Company's Board of Directors by the remaining members of the Board of Directors
to replace Mr. Wood, Dr. Gold and Ms. Howe.
2. Approval of the Company's 1998 Stock Option Plan.
3. Ratification and approval of the appointment of Arthur Andersen
LLP as the Company's independent public accountants for the fiscal year ending
June 30, 1998.
At the Meeting, the Shareholders did not approve an amendment to
the Company's Certificate of Incorporation to create a new class of 4,000,000
shares of preferred stock that authorizes the Board of Directors to both issue
such preferred stock in series and fix the number of shares, designations,
preferences, rights and limitations of each series.
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors. All nominees of the
Board of Directors were elected. The number of votes cast for or withheld were
as follows:
Nominee Votes For Votes Against
-------------------- -------------- -------------------
George Henry 4,568,727 3,950
William D. Moses 4,568,727 3,950
Donald J. Masters 4,568,727 3,950
Nimrod J. Kovacs 4,568,727 3,950
Joe C. Wood, Jr., 4,568,727 3,950
Mark S. Gold, M.D. 4,568,727 3,950
Morgan Lambert Howe 4,568,727 3,950
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<PAGE>
The votes cast for ratification of the Company's 1998 Stock Option Plan
were as follows:
Abstentions and
Votes For Against Broker Non-Votes
-------------- ---------- ----------------------
2,435,805 14,450 240,510
The votes cast for ratification of Arthur Andersen LLP as the Company's
independent public accountants were as follows:
Abstentions and
Votes For Against Broker Non-Votes
-------------- ----------- -----------------------
4,567,977 1,000 3,700
The votes cast for an amendment to the Company's Certificate of
Incorporation to create a new class of 4,000,000 shares of preferred stock were
as follows:
Against, Abstentions and
Votes For * Broker Non-Votes
-------------- ------------------------------
2,432,515 265,250
* Approval of such matter required an affirmative vote of a majority of the
outstanding shares of the Company. On May 28, 1998, there were 4,980,250 shares
of Common Stock outstanding.
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<PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
Prior to September 29, 1997, there was no market for the Company's
securities. From September 29, 1997 until January 7, 1998, one share of the
Company's Common Stock and one Redeemable Warrant (which entitled the holder to
purchase one share of Common Stock at a price of $5.50 per share through the
close of business on September 29, 2002, or an earlier redemption date) (each, a
"Redeemable Warrant" and collectively, the "Redeemable Warrants") traded as a
unit (each, a "Unit" and collectively, the "Units"). Starting on January 9,
1998, shares of the Company's Common Stock and the Redeemable Warrants began
trading separately. In all cases, the Company's Units, Common Stock and
Redeemable Warrants traded on the Nasdaq SmallCap Market. The table below sets
forth the high and low closing bid prices for the Units, the Common Stock and
the Redeemable Warrants, as reported on the Nasdaq SmallCap Market, during the
period September 29, 1997 to June 30, 1998. The quotations represent
inter-dealer quotations without adjustment for retail mark-ups, mark-downs or
commissions and may not represent actual transactions:
<TABLE>
<CAPTION>
Common Stock Redeemable Units
------------ Warrants -----
--------
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended September 30, N/A N/A N/A N/A 75/8 51/4
1997....................................
Quarter Ended December 31, N/A N/A N/A N/A 71/4 35/8
1997....................................
Quarter Ended March 31, 1998............ 41/8 3 1 5/8 37/8 31/2
Quarter Ended June 30, 1998............. 61/2 23/4 15/8 7/16 N/A N/A
</TABLE>
Holders
As of September 16, 1998, the Company has outstanding 5,977,920 shares
of Common Stock owned by approximately 110 holders of record, and 2,413,900
Redeemable Warrants owned by approximately 2 holders of record.
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<PAGE>
Dividends
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 debt securities of the
Company) or by the terms of any Preferred Stock that may be authorized and
issued.
Item 6. Plan of Operation.
General
In April 1997, the Company nationally launched The Recovery Network, a
cable television network. Pursuant to a nesting contract (the "Nesting
Contract") with ATN, ATN provided satellite uplink, master control and other
related services (collectively, the "ATN Services") on its satellite transponder
to The Recovery Network for two hours of telecast time every day to subscribers
of cable systems with which ATN had affiliation agreements. The Nesting
Contract, as amended, expired on August 31, 1998.
The Company currently has affiliation agreements with 14 Cablevision
systems, Telecommunications, Inc. and CableOne (the "Affiliated Systems"). On
September 1, 1998, The Recovery Network began broadcasting a 4 hour block of
programming that repeats 6 times a day to approximately 3,000,000 subscribers of
the Affiliated Systems. The Company entered into a five year contract with Group
W Network Services, a division of CBS Corporation ("Group W"), pursuant to which
Group W is to supply a fully dedicated Digital Satellite Transponder master
control and uplink utilizing Scientific Atlanta's Power Vu equipment (the
"Transponder Contract"). The Transponder Contract affords the Company the
potential to transmit its signal throughout North America 24 hours a day, 7 days
a week.
The Company has also identified and is targeting all local cable
systems in the United States with at least 50,000 subscribers and is engaged in
a general marketing campaign ("affiliate marketing") directed at gaining more
viewers. The Company intends to evolve into a full-time cable network, and in
turn, generate the traditional licensing fees from cable operators.
The Company anticipates that the continuing evolution of the Company's
cable television network, together with its world wide web site on the Internet
and its radio show will enable the
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Company to eventually market and promote such revenue opportunities as
advertising sales and behavioral health products and services.
To date, the Company has incurred significant net losses, including net
losses of $1,223,829, $3,817,652 and $8,261,734 for the years ended June 30,
1996, 1997 and 1998, respectively. The Company anticipates that it will generate
revenues from advertising sales on The Recovery Network and Recovery Talk Radio,
merchandising recovery-related products and services on The Recovery Network,
Recovery Talk Radio, and 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 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, advertising and
merchandising although there can be no assurance that Recovery Interactive will
generate meaningful revenues or achieve profitable operations.
Liquidity and Capital Resources
The Company's primary capital requirements in the next twelve months
will be to fund the costs of its affiliate marketing efforts, sales of
advertising time and producing and acquiring programming, satellite transponder
costs, costs for uplink, master control and transmission services, and other
working capital expenses.
The Company's capital requirements have been and will continue to be
significant and its cash requirements have been exceeding its cash flow from
operations. At June 30, 1998, the Company had a working capital surplus of
$1,497,226. Due to, among other things, the lack of meaningful revenues, costs
associated with program development and affiliate marketing efforts, the Company
has been substantially dependent upon various private placements and its initial
public offering to fund its operations.
During the period from November 1995 through March 1, 1997, the Company
issued in private placements 745,674 shares of Common Stock at prices ranging
from $.77 per share to $3.48 per share for net proceeds of approximately
$1,433,767. Additionally, the Company raised debt proceeds of $310,000 through
another private placement. See the Company's registration statement on Form SB-2
dated September 29, 1997 for specifics of these financing activities.
In March and April 1997, the Company completed a private financing (the
"Private Financing") pursuant to which it issued an aggregate of (i) $2,000,000
principal amount of unsecured non-negotiable promissory notes bearing interest
at the rate of 9% per annum (the "Financing Notes"); (ii) 400,000 shares of
Common Stock; and (iii) warrants to purchase an aggregate of
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<PAGE>
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 placement agent for the Company in connection with
the Private Financing, and other offering expenses of approximately $262,000,
the Company received net proceeds of approximately $1,538,000 from the sale of
the financing units. The net proceeds of the Private Financing were used by the
Company for, among things, an affiliate marketing campaign in connection with
the national launch of The Recovery Network, programming expenses for the
production of "Full Circle", "Testimony" and "Bottoms", a capital contribution
in the amount of $200,000 to Recovery Interactive and payments under the Nesting
Contract with ATN in the amount of $102,000. The Company repaid the entire
principal amount of, and accrued interest on, the Financing Notes in October
1997 with proceeds received from its initial public offering.
During July and August 1997, the Company issued Promissory Notes with
an aggregate principal amount of $605,250 to five lenders (the "Promissory
Notes"). The Company paid to each lender a loan origination fee in an amount
equal to 5% of the Promissory Notes, or approximately $30,300. The Promissory
Notes plus $95,000 of interest thereon were repaid on October 3, 1997. The net
proceeds from the issuance of the Promissory Notes were used for working capital
purposes. The Company incurred financing costs during the fiscal year ended June
30, 1998 of approximately $670,000 relating to the Private Financing and the
Promissory Notes.
On October 3, 1997, the Company consummated its initial public offering
("IPO") pursuant to which it issued 2,415,000 units (each, a "Unit"). Each Unit
consisted of one share of Common Stock and one redeemable warrant to purchase
one share of Common Stock at $5.50 per share (each, a "Redeemable Warrant"). The
net proceeds received from the IPO were $10,141,757, and the amount of said
proceeds utilized by June 30, 1998 was approximately $9,540,000 used principally
to repay debt and pay operating expenses.
On June 29, 1998, the Company entered into certain subscription
agreements (the "Agreements") with 7 investors (collectively, the
"Subscribers"). Pursuant to the Agreements, the Company is entitled to aggregate
proceeds of up to $5,500,000 (the "Private Placement"). The Private Placement
provides for the issuance by the Company of (i) 1,111,110 shares (the "Shares")
of Common Stock for $2,500,000, or $2.25 per share, (ii) additional shares of
Common Stock to the Subscribers pursuant to certain other provisions of the
Agreements, including shares issuable for no additional consideration pursuant
to the Reset Rights in the Agreements and shares issuable for up to $3,000,000
pursuant to a "put" provision in the Agreements (the "Additional Shares"), and
(iii) 100,000 shares of Common Stock upon the exercise of warrants (the
"Warrants"). The Warrants are exercisable at an exercise price of $5.50 per
share and may be exercised at any time or from time to time on or before June
29, 2001.
The Company anticipates that the proceeds received from the sale of the
Shares to the Subscribers in the Private Placement (including net proceeds of
$720,000 currently deposited with an escrow agent), together with projected
revenues from operations, will be sufficient to fund the Company's operations
and capital requirements until December 31, 1998. There can be no assurance,
however, that such funds will not be expended prior thereto due to unanticipated
changes in economic
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<PAGE>
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.
Item 7. Financial Statements.
The financial statements required hereby are located on pages F-1
through F-23.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.
None
-21-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
<TABLE>
<CAPTION>
The following are the directors and executive officers of the Company:
Name Age Position
- ---- --- --------
<S> <C> <C>
William D. Moses............................... 36 Chief Executive Officer and Chairman of
the Board
Gary Horowitz.................................. 62 President
Donald J. Masters.............................. 52 Executive Vice President and Director
John Wheeler................................... 44 Vice President of Operations
Michael Clark.................................. 42 Vice President of Finance
Sandra J. Eddy................................. 46 Vice President of Marketing
Nimrod J. Kovacs............................... 48 Vice Chairman of the Board of Directors
George H. Henry................................ 42 Director
Charlotte Schiff-Jones......................... 58 Director
</TABLE>
William D. Moses has been Chief Executive Officer of the Company since
November 1994. Mr. Moses was named the Chairman of the Board of Directors in
August 1998 and has been a member of the Board of Directors 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. Mr. Moses is Honorary Chair of Cable Positive and a recipient of the
Ellis Island Gold Medal Award for Humanitarian Service.
Gary Horowitz has been President of the Company since July 1998. Mr.
Horowitz was a production consultant from March 1996 until July 1998. Mr.
Horowitz was President, Chief Executive Officer and a director of Harmony
Holdings, Inc., from March 1992 until February 1996. Mr. Horowitz was a director
of L.A. Weekly, a periodical, from 1986 until 1995, its publisher from 1989
until 1993 and its Chief Executive Officer from 1990 until 1993. Mr. Horowitz
was President of Jenkins, Covington, Newman, Inc., a television production
organization from 1980 until 1983.
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
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<PAGE>
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 the Company's 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.
Michael Clark is the Company's Vice President of Finance since August
1998. Mr. Clark served as Vice President/Treasurer of Associated Financial
Group, Inc. ("AFG") from 1988 to 1998, and prior to this position he served as
Controller of AFG from March 1986 to December 1987. From October 1984 until
March 1986, Mr. Clark served as Controller for Quest Resources, a Los Angeles
based syndicator and operator of alternative energy products. From March 1982
until September 1984, Mr. Clark served as Assistant Controller for Valley Cable
TV. Mr. Clark also served as an auditor for Arthur Young & Co. in Los Angeles
from July 1978 through March 1982. Mr. Clark is a graduate of the University of
California, Santa Barbara and has a Master of Science degree from the California
State University at Northridge.
Sandra J. Eddy has been the Company's Vice President of Marketing since
January 1998. Ms. Eddy has over twenty years of experience in sales, marketing,
advertising and sales training with several FORTUNE 500 companies, start-up
programming services and consulting. From 1992 to 1996, Ms. Eddy was a business
owner and consultant, responsible for all aspects of starting and operating a
small business. Ms. Eddy has held director positions with Pacific Sports
Network, The Fashion Channel, and the International Channel, where she aided in
the development of marketing and affiliate relations and sales.
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.
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<PAGE>
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.
George H. Henry served as Chairman of the Board of Directors from May
1997 to August 1998 and has been a director of the Company since December 1995.
Mr. Henry has recently been named Chairman of the Executive Committee. 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 & 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.
Charlotte Schiff-Jones has been a director of the Company since July
1998. Since 1997, Ms. Schiff-Jones has been a consultant to the Company,
concentrating on affiliate marketing strategy and community outreach projects.
From 1995 to 1997, she was the president of Gamut Media, a strategic marketing
and creative services agency. From 1993 to 1995, she was a consultant to the
President and CEO of Time Warner Cable Programming; and from 1988 to 1993, she
was the president of Schiff-Jones Ltd., a consulting firm.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Non-employee directors
do not receive cash compensation for serving as directors. The Company
reimburses directors for reasonable travel expenses incurred in connection with
their activities on behalf of the Company. Each member of the Board of Directors
is eligible to participate in the Company's 1996 Board of Directors and Advisory
Board Plan.
Committees of the Board of Directors
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 Board of Directors of the Company has
approved all grants of stock options since the Company's IPO. Mr. Henry is
Chairman of the Finance and Compensation Committee and Mr. Moses is also a
member of the Finance and Compensation Committee.
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 Mr. Kovacs is also a member
of the Audit Committee.
The Company established an Executive Committee of the Board of
Directors which is responsible for overseeing strategic planning and operations
for the Company. Mr. Henry is the
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<PAGE>
Chairman of the Executive Committee and Messrs. Masters and Moses are also
members of the Executive Committee.
Compliance with Section 16(a) of the Exchange Act
The following persons have failed to file on a timely basis certain
reports required by Section 16(a) of the Securities Exchange Act of 1934 as
follows: Each of Messrs. Moses, Masters and Kovacs has failed to file a Form 4
disclosing the grant of 50,000, 50,000 and 25,000 stock options pursuant to the
Company's 1998 Stock Option Plan.
During the fiscal year ended June 30, 1998, other than as listed above,
the Company is not aware of any late filings, or failure to file, any reports
required by Section 16(a) of the Exchange Act.
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<PAGE>
Item 10. Executive Compensation.
The following table sets forth the cash compensation paid by the
Company to the chief executive officer and all other executive officers who
received compensation in excess of $100,000 (the "Named Executive Officers")
during fiscal 1998:
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
-------------------- ---------------------
Shares
Year Ended Salary ($) Underlying All Other
Name and Principal Position June 30, (b) Bonus ($) Options (#) Compensation
- ------------------------------------ ----------- --------- --------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
William D. Moses, Chief Executive 1998 $182,765 -- 50,000 --
Officer...........................
Donald J. Masters, Executive Vice 1998 $148,420 -- 50,000 --
President.........................
John Wheeler, Vice President of 1998 $182,373 -- -- --
Operations........................
Gregory L. Richey, Chief Financial 1998 $163,335 -- 50,000 --
Officer (a).......................
- -------------------
</TABLE>
(a) Mr. Richey resigned from the Company effective September 18, 1998.
(b) Includes compensation that was earned during the fiscal year ending 6/30/97,
but was deferred until and paid during the fiscal year ending 6/30/98.
Option Grants in Fiscal Year 1998
The following table sets forth information concerning the grant of
stock options to the Named Executive Officers during fiscal 1998:
<TABLE>
<CAPTION>
Option Grants During Last Fiscal Year
Number of %of Total
Shares Options Granted
Underlying to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/sh) Date
- ------------------------------ --------------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
William D. Moses.............. 50,000 16.2% $1.56(a) 4/3/03
Donald J. Masters............. 50,000 16.2 1.56(a) 4/3/03
Gregory L. Richey (b)......... 50,000 16.2 1.56(a) 4/3/03
- -------------------
</TABLE>
(a) Such options were granted with an exercise price of $3.15 per share and were
subsequently repriced. (b) Mr. Richey resigned from the Company effective
September 18, 1998.
No options of the Company were exercised by such persons during fiscal
1998.
-26-
<PAGE>
Option Repricing
In August 1998, the Board of Directors of the Company voted to approve
the repricing of options to purchase 806,746 shares granted under the Management
Bonus Plan, the 1998 Stock Plan and certain non-plan options, including options
to purchase 241,667, 129,581 and 50,000 shares granted to Messrs. Moses, Masters
and Richey, respectively. Such repricing was effected by offering to exchange
new options with an exercise price of $1.56 per share, which was the fair market
value of the Common Stock on the date of repricing, for the options then held by
such optionees. The new options otherwise would have identical terms and
conditions as the current options. By repricing such options, the Company
intends to reward key employees, including the Named Executive Officers, holding
such options for their contributions to the Company.
Employment Agreements
Effective December 1, 1996, the Company entered into an employment
agreement with William D. Moses, the Company's Chief Executive Officer, which
expires on September 30, 1998. The employment agreement provides for a base
compensation payable to Mr. Moses of $12,000 per month through September 30,
1998. Pursuant to the agreement, Mr. Moses is entitled to participate in any
employee benefit plans and arrangements when and as implemented by the Company.
In the event of termination of Mr. Moses' employment by the Company, without
"good cause" (as defined in the employment agreement), Mr. Moses is entitled to
severance compensation equal to the lesser of his base salary and vacation
compensation due through September 30, 1998 and his base salary and vacation
compensation for one year, payable one-half upon termination and the balance
ratably over the following six months. In the event of termination of the
employment agreement by mutual agreement of the Company and Mr. Moses, Mr. Moses
is entitled to such compensation as is mutually agreed on between the Company
and Mr. Moses but in no event to exceed the amount of severance compensation
payable in the event of termination without "good cause." Mr. Moses has agreed
not to compete with the Company during the term of the employment agreement and
for a period of two years after termination of his employment relationship with
the Company in the development or provision of media services or any other line
of business which the Company is engaged in or forms the intention to engage in
during this period. In the event of a "change in control" (as defined in the
employment agreement), Mr. Moses will be deemed to have been terminated without
"good cause", and the covenant not to compete will have no further effect.
Effective December 1, 1996, the Company entered into an employment
agreement with Donald J. Masters, the Executive Vice President of the Company,
which expires on November 30, 1998. The employment agreement provides for a base
compensation payable to Mr. Masters of $10,000 per month through November 30,
1998. Pursuant to the agreement, Mr. Masters is entitled to participate in any
employee benefit plans and arrangements when and as implemented by the Company.
In the event of termination of Mr. Master's employment by the Company, without
"good cause" (as defined in the employment agreement), Mr. Masters is entitled
to severance compensation, equal to his base salary and vacation compensation,
at the option of the Company, for such period of time between one year and two
years that the non-compete covenant described below is in effect and such
severance compensation shall be payable one-half on the date of termination and
the balance
-27-
<PAGE>
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 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. The Company and Mr. Wheeler are
presently renegotiating Mr. Wheeler's employment agreement.
-28-
<PAGE>
Effective May 1, 1997, the Company entered into an employment agreement
with Bill Megalos, the Company's Vice President of Production, which expires on
November 30, 1998. The employment agreement provides for a base compensation
payable to Mr. Megalos of $10,000 per month through November 30, 1998. Pursuant
to the agreement, Mr. Megalos is entitled to participate in any employee benefit
plans and arrangements when and as implemented by the Company. In the event of
termination of Mr. Megalos's employment by the Company, without "good cause" (as
defined in the employment agreement), Mr. Megalos is entitled to severance
compensation equal to his base salary and vacation compensation for 90 days,
payable ratably over such 90 day period. In the event of termination of the
employment agreement by mutual agreement of the Company and Mr. Megalos, Mr.
Megalos is entitled to such compensation as is mutually agreed on between the
Company and Mr. Megalos but in no event to exceed the amount of severance
compensation payable in the event of termination without "good cause." Mr.
Megalos has agreed not to compete with the Company during the term of the
employment agreement and for a period of one year after termination of his
employment relationship with the Company in the development or provision of
recovery media services or any other line of recovery media services which the
Company is engaged in or in which the Company forms the intention to engage with
the active participation of Mr. Megalos during this period.
Stock Option Plans
The Company has adopted four stock option plans, the 1996 Employee and
Consultants Stock Option Plan (the "Employee and Consultants Plan"), the 1996
Board of Directors and Advisory Board Stock Option Plan (the "Directors and
Advisory Board Plan"), the 1997 Management Bonus Plan (the "Management Bonus
Plan") and the 1998 Stock Plan (the "Stock Plan"). The Company has reserved an
aggregate of 940,251 shares of Common Stock for future issuance under these
plans. All options granted or to be granted under these plans are non-qualified
stock options ("NQSOs") or incentive stock options ("ISOs") under the Internal
Revenue Code of 1986, as amended. The Management Bonus Plan and the Stock Plan
also provide for non-option awards, such as stock appreciation rights and
restricted stock awards.
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 hereof, 30,351 options were granted at
an exercise price of $5.00 per share. During fiscal 1998, all options became
fully vested due to activation of a change of control provision or settlement
terms with former employees. The Employee and Consultants Plan is administered
by the Finance and Compensation Committee.
-29-
<PAGE>
1996 Board of Directors and Advisory Board Stock Option 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. 111,069
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. During fiscal 1998, all options became fully vested due to
activation of a change of control provision. 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 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 incentive stock options to purchase 35,067
shares of Common Stock to several non-key employees of the Company and incentive
stock options to purchase 3,583 shares of Common Stock to two consultants, all
of which options are at an exercise price of $1.56 per share.
-30-
<PAGE>
The Company has also granted incentive stock options at an exercise
price of $1.56 per share to purchase 35,000, 75,000, 22,601, 12,915 and 10,000
shares to Messrs. Henry, Moses, Wheeler, Masters and Kovacs, respectively. As of
June 30, 1998, there were 194,166 options outstanding under the Management Bonus
Plan, all of which were fully vested due to a change of control provision which
was activated during fiscal 1998.
1998 Stock Plan
Effective May 28, 1998, the Company's shareholders approved the Stock
Plan. The purpose of the Stock Plan is to provide participants an incentive to
maintain and enhance the long-term performance and profitability of the Company.
Only key employees, directors and independent contractors of the Company and
certain of its affiliates are initially eligible to receive awards under the
Stock Plan. Under the Stock Plan, a maximum of 600,000 shares of Common Stock
are authorized to be delivered by the Company. The Company has the right to
deliver nonqualified or incentive stock options or other stock-related awards.
As of June 30, 1998, under the Stock Plan, the Company has granted stock options
to purchase an aggregate of 494,580 shares at an exercise price of $1.56 per
share. Subsequent to June 30, 1998, options to acquire another 100,000 shares of
Common Stock were issued with an exercise price of $1.56 per share.
The Stock Plan is administered by the Board of Directors. The Board of
Directors has authority to determine when and to whom to make grants of awards,
the number of shares to be covered by the grants, the types and terms of options
and other stock-related awards granted and the exercise price of options and
stock appreciation rights, provided that the exercise price of an option and the
appreciation base of a stock appreciation right may not be less than the fair
market value of the shares of the Common Stock on the date of grant, except
that, in the case of an incentive stock option granted to an individual who, at
the time such incentive stock option is granted, owns shares possessing 10% or
more of the total combined voting power of all classes of Stock of the Company
or its parent or subsidiary corporations, the option exercise price may not be
less than 110% of such fair market value on the date of grant.
Non-Plan Stock Options
The Company has granted 237,256 non-plan stock options to acquire
shares of Common Stock, of which 87,176 were granted at an exercise price of
$2.32 per share, 18,000 were granted at an exercise price of $1.56 per share,
23,247 were granted at an exercise price of $3.10 per share, 106,250 were
granted at an exercise price of $3.00 per share and 2,583 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
-31-
<PAGE>
Colorado, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Company will not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of a
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 7-108-403 of the Colorado statute relating
to unlawful distributions or (iv) for any transaction from which the director
derived an improper personal benefit. The Articles of Incorporation also provide
(subject to certain exceptions) that the Company shall, to the maximum extent
permitted from time to time under the law of the State of Colorado, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent permitted under such law as it may from time to time be in effect. The
Company's bylaws require the Company to indemnify, to the full extent permitted
by law, any director, officer, employee or agent of the Company for acts which
such person reasonably believes are not in violation of the Company's corporate
purposes as set forth in the Articles of Incorporation. As a result of these
provisions, shareholders may be unable to recover damages against the directors
and officers of the Company for actions taken by them which constitute
negligence, gross negligence, or a violation of their fiduciary duties, which
may reduce the likelihood of shareholders instituting derivative litigation
against directors and officers and may discourage or deter shareholders from
suing directors, officers, employees and agents of the Company for breaches of
their duty of care, even though such an action, if successful, might otherwise
benefit the Company and its shareholders.
Advisory Board
The Board of Directors of the Company has established a Board of
Advisors (the "Advisory Board") to assist the Company in the development and
implementation of its long-term strategy and goals and to propose, adopt and
audit compliance by the Company with programming and business standards that are
consistent with the delivery of effective, non- exploitative, and non-biased
recovery based services. The Advisory Board will recommend to the Company's
Board of Directors the adoption of standards and practices to provide guidance
for the Company's employees in determining appropriate programming and online
content, advertising, and merchandise sales. The Advisory Board will advise on
technical matters and also serve as an independent voice for the recovery
community.
-32-
<PAGE>
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 [Ernie] Larsen is a nationally known lecturer on managing
personal relationships and overcoming dysfunctional behaviors, and an author and
producer of over 55 motivational self-help books and videos. He is the
originator of the process known as "Stage II Recovery" where one attempts to
resolve life issues which often impede spiritual growth.
Robert Lindsey is a veteran of over 20 years in the field of alcoholism
and drug addiction treatment. Mr. Lindsey is currently the Vice President of
Longview Associates, Inc., a consulting firm specializing in the design and
implementation of employee assistance programs. Prior to this, Mr. Lindsey
served as the Community Relations Director at the Betty Ford Center and as the
Executive Director of the New York State Council on Alcoholism and Other Drug
Addictions.
Father Joseph Martin is the founder of Ashley, Inc., a non-profit
center dedicated to the treatment of the chemically addicted. He is an
internationally recognized speaker and creator of the film "Chalk Talk", the
principal educational vehicle on alcoholism for most treatment centers in the
country.
Joseph A Pursch, M.D. is a nationally-recognized psychiatrist involved,
since 1962, in the treatment and rehabilitation of individuals with addictive
behaviors. Dr. Pursch is the former Director of Alcohol Rehabilitation Service
at the Naval Regional Medical Center at Long Beach, California. An author and
syndicated columnist, Dr. Pursch has supervised drug testing programs for
numerous sports events and has treated many public figures. Dr. Pursch has been
on the President's Commission on Alcohol and Drugs since 1979.
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<PAGE>
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.
-34-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of
September 16, 1998, relating to the beneficial ownership of shares of Common
Stock by: (i) each person or entity who is known by the Company to own
beneficially five percent or more of the outstanding Common Stock, (ii) each of
the Company's directors and (iii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Number of shares Percentage
Name and address of beneficial owner(a) beneficially owned (b) of class
- --------------------------------------- ---------------------- -----------
<S> <C> <C>
William D. Moses..................................................... 716,681(c) 11.7%
George H. Henry(d)................................................... 344,183(e) 5.7%
Donald J. Masters.................................................... 114,342(f) 1.9%
Nimrod J. Kovacs(g).................................................. 40,623(h) *
Charlotte Schiff-Jones(i)............................................ 5,000(j) *
Austost Anstalt Schaan(k)............................................ 285,657(l) 4.8%
Balmore Funds S.A(m)................................................. 285,657(l) 4.8%
All directors and executive officers as 1,243,430(n) 19.7%
a group (9 persons).............................................
- ---------------------
* Less than 1%.
</TABLE>
(a) Unless otherwise indicated, the address for each named individual or
group is in care of The Recovery Network, Inc., 1411 5th Street, Suite
200, Santa Monica, California 90401.
(b) Each beneficial owner's percentage ownership is determined by assuming
that options, warrants or convertible securities that are held by such
person (but not those held by any other person) and which are
exercisable within 60 days of September 16, 1998 have been exercised
and converted. Pursuant to a "change of control" provision, which
defines a "change of control" to have occurred if individuals who are
directors at the beginning of a 24- month period fail to constitute at
least two-thirds of all directors of the Company during such period, in
the various stock option contracts issued to certain of the beneficial
owners, all stock options beneficially owned by such person other than
options granted under the Company's 1998 Stock Option Plan are
currently exercisable. Assumes a base of 5,977,920 shares of Common
Stock before any consideration is given to outstanding options,
warrants or convertible securities.
(c) Includes (i) options to purchase 87,915 shares of Common Stock, (ii)
warrants to purchase 43,750 shares of Common Stock and (iii) 387,356
shares of Common Stock held in the name of a trust for the benefit of
Mr. Moses' child.
-35-
<PAGE>
(d) The address of the beneficial owner is 6860 Sunrise Court, Coral
Gables, Florida 33133.
(e) Includes (i) options to purchase 47,915 shares of Common Stock and (ii)
warrants to purchase 62,500 shares of Common Stock.
(f) Includes (i) options to purchase 38,745 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) warrants to purchase 6,250 shares of Common
Stock held jointly by Mr. Masters and his spouse.
(g) The address of the beneficial owner is 50 Falcon Hills Drive, Highland
Ranch, Colorado 80126.
(h) Includes (i) options to purchase 22,915 shares of Common Stock, and
(ii) warrants to purchase 6,250 shares of Common Stock held by Kovacs
Communication, Inc., of which Mr. Kovacs is a controlling shareholder.
(i) The address of the beneficial owner is 1687 Brickell Avenue, Miami,
Florida 33129.
(j) Includes options to purchase 12,915 shares of Common Stock. (k) The
address of the beneficial owner is 7440 Fuerstentum, Lichenstein,
Landstrasse 163.
(l) Does not include 77,676 shares of Common Stock (30,000 of which are
issuable upon exercise of warrants) issuable only upon the filing of a
registration statement by the Company covering such securities and the
obtainment of shareholder approval.
(m) The address of the beneficial owner is P.O. Box 4603, Zurich,
Switzerland.
(n) Includes (i) options to purchase 225,091 shares of Common Stock and
(ii) warrants to purchase 118,750 shares of Common Stock.
Item 12. Certain Relationships and Related 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.
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 George H. Henry, a director of the Company and
William D. Moses, the Company's Chief Executive Officer 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
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<PAGE>
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, a former
principal stockholder and a former director and officer of the Company and Chief
Executive Officer of Recovery Interactive. 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.
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.
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 former director of the Company, purchased 5 Financing Units; Mr.
Masters and
-37-
<PAGE>
his spouse jointly purchased .5 Financing Units; Mr. Moses purchased 3.5
Financing Units; Terrance and Daryl Berman, former 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.
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 provided 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 provided
distribution of the Company's programming into cable systems through existing
affiliation agreements between ATN and those systems. Under the Nesting
Contract, the Company was 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 provided 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 had also agreed to
provide the ATN Services for two additional hours of broadcasting, if such time
was available, to the Company at ATN's cost plus 20%, which fee was in addition
to the charges for broadcast time. ATN had 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 purchased the
necessary equipment, if any. On February 26, 1998, the Company executed a
contract to extend the Nesting Contract. The extension provided for an extension
of services on a month-to-month basis through and until August 31, 1998, at a
monthly fee of $65,000 and a one-time payment of $150,000 to reflect
unanticipated costs incurred by ATN in the course of performance under the
Nesting Contract. The Company also granted ATN the right, for the term of the
Nesting Contract and for a period of one year thereafter, to match any other
nesting arrangement presented to the Company by a third party. The Nesting
Contract, as amended, expired on August 31, 1998. 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
Chief Executive Officer of the Company, is a principal shareholder of ATN.
On January 26, 1998, Mr. Henry entered into an agreement with
Recovery Interactive. Pursuant to such agreement, Mr. Henry is entitled to a
percentage of any proceeds from a "change of control" (as defined in the
agreement) of Recovery Interactive which exceeds a base amount.
Charlotte Schiff-Jones, a director of the Company, provides
consulting services in the areas of affiliate marketing and strategic business
development. During the fiscal year ending June 30, 1998, Ms. Schiff-Jones
received $58,314 as compensation for such services.
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
-38-
<PAGE>
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.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description of Exhibit
- ------ ----------------------
2.1 Form of Subscription Agreement between Registrant and each of
Austost Anstalt Schann, Balmore Funds S.A., Zakeni Ltd., BL
Squared Foundation, Martin Chopp, The Sargon Fund, L.P. and TLG
Realty dated as of June 29, 1998.
2.3 Funds Escrow Agreement between the Registrant, Austost Anstalt
Schaan, Balmore Funds S.A., Zakeni Ltd., BL Squared Foundation,
Martin Chopp, The Sargon Fund, L.P., TLG Realty and Grushko &
Mittman dated as of June 29, 1998.
2.4 Shares Escrow Agreement between the Registrant, Austost Anstalt
Schaan, Balmore Funds S.A., Zakeni Ltd., BL Squared Foundation,
Martin Chopp, The Sargon Fund, L.P., TLG Realty and Grushko &
Mittman dated as of June 29, 1998.
2.5 Agreement and Plan of Merger dated as of December 10, 1997 among
the Registrant, Recovery Direct, Inc., FMS Productions, Inc. and
each of John Frederick, P. Randall Frederick, Jan Smithers, Joe C.
Wood, Jr., Sharon R. Irish and Charles S. Sapp. ++
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 Redeemable Warrant Agent Agreement (including Form of
Redeemable Warrant). **
4.3 Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant). **
4.4 1996 Employee and Consultants Stock Option Plan. **
4.5 Amendment to 1996 Employee and Consultants Stock Option Plan. **
4.6 1996 Board of Directors and Advisory Board Stock Option Plan. **
4.7 Amendment to 1996 Board of Directors and Advisory Board Stock
Option Plan. **
4.8 1997 Management Bonus Plan. **
4.9 Amendment to 1997 Management Bonus Plan. **
4.10 Form Stock Option Contract. **
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997.
**
4.12 1998 Stock Plan. +
4.13 Form of Warrant.
4.14 Form of Registration Rights Agreement dated December 10, 1997
between the Registrant
and each of the Sellers.++
10.1 Operating Agreement of RecoveryNet Interactive, L.L.C. dated as of
August 1, 1996. **
-39-
<PAGE>
10.2 Channel Nesting Agreement between the Registrant and Access
Television Network, Inc. dated as of April 10, 1997. **
10.3 Employment Agreement between the Registrant and William D. Moses
effective as of December 1, 1996. **
10.4 Non-Disclosure and Inventions Agreement between the Registrant and
William Moses dated as of January 30, 1977. **
10.5 Employment Agreement between the Registrant and Donald Masters
effective as of December 1, 1996. **
10.6 Non-Disclosure and Inventions Agreements between the Registrant
and Donald Masters dated as of February 3, 1997. **
10.7 Employment Agreement between the Registrant and John Wheeler dated
as of May 13, 1997. **
10.8 Employment Agreement between the Registrant and William 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. **
27.1 Financial Data Schedule.
- ---------------------------------
* Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form SB-2, file number 333-61421.
** Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form SB-2, file number 333-27787.
+ Incorporated by Reference to Exhibit A to the Registrant's Definitive
Proxy Statement on Schedule 14A filed by the Registrant on April 29,
1998.
++ Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
1997 Form 8-K.
++ Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
1997 Form 8-K.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on December 15, 1997 (date of
earliest event reported). Other than the foregoing, the Company did not file any
such reports during the fiscal year ended June 30, 1998.
-40-
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
<S> <C>
Report of Independent Public Accountants........................................ F-2
Consolidated Balance Sheet as of June 30, 1998.................................. F-3
Consolidated Statements of Operations for the years ended June 30, 1997
and 1998................................................................... F-4
Consolidated Statements of Shareholders' (Deficit) Equity for the years ended
June 30, 1997 and 1998..................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1997
and 1998................................................................... F-7
Notes to Consolidated Financial Statements...................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Recovery Network, Inc.:
We have audited the accompanying consolidated balance sheet of The Recovery
Network, Inc. (a Colorado corporation) and Subsidiary as of June 30,1998, and
the related statements of operations, shareholders' (deficit) equity and cash
flows for the years ended June 30, 1997 and 1998. 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. and
Subsidiary as of June 30, 1998 and the results of their operations and their
cash flows for the years ended June 30, 1997 and 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has recurring losses from
operations that raises substantial doubt about its ability to continue as a
going concern. The ability of the Company to operate as a going concern is
dependent upon its ability (1) to obtain sufficient additional capital, (2) to
distribute its programming and services through multimedia channels, (3) to
achieve a critical mass of viewers to attract advertisers and healthcare
providers and (4) to acquire and develop appropriate programming for broadcast.
The Company plans to raise additional working capital through private and public
offerings. The success of future activities cannot be determined at this time
and there are no assurances that if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
September 23, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
<S>
CURRENT ASSETS: <C>
Cash....................................................................... $2,219,145
Accounts receivable, net of allowance of $35,000........................... 254,750
Current portion of capitalized programming costs, net...................... 191,500
Inventory.................................................................. 55,624
Prepaid expenses........................................................... 59,220
---------
Total current assets................................................... 2,780,239
CAPITALIZED PROGRAMMING COSTS, net.............................................. 765,962
FURNITURE AND EQUIPMENT, net.................................................... 203,189
INVESTMENT IN JOINT VENTURE..................................................... -
OTHER........................................................................... 35,530
---------
$3,784,920
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 323,391
Accrued payroll and benefits............................................... 152,322
Accrued professional fees.................................................. 131,647
Other accrued liabilities.................................................. 111,494
Accrued royalty expense.................................................... 322,630
Due to joint venture....................................................... 224,500
Current portion of capital lease obligation................................ 17,029
-------------
Total current liabilities..................................... 1,283,013
CAPITAL LEASE OBLIGATION, net of current portion................................ 13,126
-------------
Total liabilities............................................. 1,296,139
-------------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
Authorized 25,000,000 shares, issued and outstanding 5,791,494 shares.. 57,915
Additional paid in capital................................................. 17,050,969
Prepaid consulting......................................................... (461,250)
Deficit.................................................................... (14,158,853)
-------------
Shareholders' equity.......................................... 2,488,781
-------------
Total liabilities and shareholders' equity.................... $ 3,784,920
=============
</TABLE>
The accompanying notes are an integral part of this consolidated
statement.
F-3
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
DOMESTIC SALES......................................................... $33,464 $894,758
--------- ---------
SALARIES AND CONSULTING EXPENSES....................................... 1,175,362 3,346,720
GENERAL AND ADMINISTRATIVE EXPENSES.................................... 768,938 2,326,807
PROGRAMMING EXPENSES................................................... 358,447 1,543,997
MARKETING EXPENSES..................................................... 468,017 497,467
LOSS ON INVESTMENT IN JOINT VENTURE.................................... 300,000 592,500
COST OF VIDEO AND PUBLICATION EXPENSE.................................. - 216,889
--------- ---------
Operating Expenses................................................. 3,070,764 8,524,380
--------- ---------
Loss from operations............................................... 3,037,300 7,629,622
INTEREST EXPENSE....................................................... 788,235 775,611
INTEREST INCOME........................................................ ( 9,683) (146,044)
--------- ---------
Loss before provision for state income taxes....................... 3,815,852 8,259,189
PROVISION FOR STATE INCOME TAXES....................................... 1,800 2,545
--------- ---------
NET LOSS............................................................... $3,817,652 $8,261,734
========== ==========
LOSS PER SHARE INFORMATION:
Basic and diluted loss per share................................... $ (1.87) $ (1.91)
========== ===========
Weighted average number of common and common equivalent shares
outstanding........................................................ 2,044,339 4,336,405
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-4
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
Stock
Common Stock Additional Subscriptions Prepaid
------------------ Paid-in (Notes Consulting
Shares Amount Capital Receivable) Costs Deficit Total
----------------------- ------------ ----------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996 1,591,969 $15,920 $1,908,590 $500 $ (1,250) $(2,079,467) $(155,707)
Issuance of common stock
for consulting services 59,194 592 136,908 - (22,500) - 115,000
Issuance of common stock
for conversion of debt,
accrued interest and
deferred compensation:
at $2.32 per share... 31,857 319 73,681 - - - 74,000
at $2.90 per share... 6,888 69 19,931 - - - 20,000
at $3.68 per share... 71,033 710 260,790 - - - 261,500
Issuance of common stock
for cash:
options exercised:
at $2.32 per share... 73,615 736 170,264 - - - 171,000
at $0.77 per share... 44 - 33 - - - 33
warrants exercised under 142,065
convertible notes payable 1,420 328,580 - - - 330,000
private placement
including 7,749 share
issued for services for
stock offering....... 146,510 1,465 482,035 - - - 483,500
Issuance of common stock
for an outstanding stock
subscription......... 216 2 498 (500) - - -
Shares retired pursuant to a
settlement with a
shareholder.......... (2,141) (21) (4,952) - - - (4,973)
Issuance of common stock
and warrants for cash net
of offering costs of
$260,290 under the
February 1997 private
placement............ 400,000 4,000 800,350 - - - 804,350
Amortization of prepaid
consulting costs..... - - - - 18,125 - 18,125
Net loss............... - - - - - (3,817,652) (3,817,652)
----------- ---------- ------------ ----------------- ------------- --------------- ------------
BALANCE, June 30, 1997 2,521,250 25,212 4,176,708 - (5,625) (5,897,119) (1,700,824)
Initial public offering of
common stock and
warrants, net of offerring
costs of $2,174,743.. 2,415,000 24,151 10,117,606 - - 10,141,757
Issuance of common stock
and warrants for cash and
subscription receivable,
net of offering costs of
$205,000 and including
30,601 shares issued for
placement services... 808,377 8,083 1,536,917 - - - 1,545,000
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
Stock
Common Stock Additional Subscriptions Prepaid
--------------------- Paid-in (Notes Consulting
Shares Amount Capital Receivable) Costs Deficit Total
---------- ----------- ----------- ---------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Services to be received in
exchange for options and
shares of common stock
not yet issued....... - - 1,009,000 - (1,009,000) - -
Purchase of FMS........ 44,000 440 208,560 - - - 209,000
Exercise of options.... 2,867 29 2,178 - - - 2,207
Amortization of prepaid
consulting costs..... - - - - 553,375 - 553,375
Net loss............... - - - - - (8,261,734) (8,261,734)
----------- ---------- ------------ ----------------- ------------- --------------- ------------
BALANCE, June 30, 1998 5,791,494 $57,915 $17,050,969 $ - (461,250) $(14,158,853) $2,488,781
=========== ========== ============ ================= ============= =============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
Increase (Decrease) in Cash
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (3,817,652) $ (8,261,734)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of notes payable discount............ 585,072 479,568
Amortization of prepaid consulting costs.......... 18,125 553,375
Amortization of deferred financing costs.......... 127,653 130,529
Amortization of capitalized programming costs..... 118,789 230,360
Depreciation and other amortization............... 7,584 166,956
Common stock issued for services and interest expense 32,625 -
Provision for deferred compensation............... 136,505 -
Provision for doubtful accounts................... - 16,000
Loss on investment in joint venture............... 300,000 592,500
Changes in assets and liabilities:
Accounts receivable............................... (25,631) (194,678)
Inventory......................................... - 25,325
Prepaid expenses.................................. (14,993) (33,365)
Other assets...................................... (1,386) (3,887)
Capitalized programming costs..................... (356,389) (565,783)
Accounts payable, accrued payroll and benefits and other accrued
liabilities....................................... 418,142 (66,958)
Accrued royalty expense........................... - 157,569
Deferred compensation............................. (35,000) (51,672)
Accrued professional fees......................... 297,963 (250,587)
Due to shareholders and directors................. (39,417) (65,751)
------------ -----------
Net cash used in operating activities......... (2,248,010) (7,142,233)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of FMS......................... - (34,383)
Purchases of furniture and equipment.................. (45,396) (206,569)
Investment in joint venture........................... (300,000) (368,000)
------------ -----------
Net cash used in investing activities............. (345,396) (608,952)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.............................. 1,245,360 574,990
Payments on borrowings................................ (60,000) (2,605,250)
Payments on capital lease obligation.................. (4,511) (17,175)
Proceeds from the issuance of common stock, warrants and stock
subscriptions..................................... 1,788,883 12,332,547
Deferred offering and financing costs incurred........ (497,962) (343,558)
Repurchase of common stock............................ (4,973) -
------------ -----------
Net cash provided by financing activities......... 2,466,797 9,941,554
============ ===========
NET INCREASE (DECREASE) IN CASH (126,609) 2,190,369
CASH, beginning of period................................... 137,492 10,883
CASH FROM ACQUISITION OF FMS................................ - 17,893
------------ -----------
CASH, end of period......................................... $ 10,883 $ 2,219,145
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-7
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Organization, Line of Business and Significant Business Risks
a. Organization and Line of Business
The Recovery Network, Inc. ("Recovery"), a Colorado corporation, 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.
Recovery was incorporated in May 1992 and commenced operations in February 1993.
Recovery has defined and developed its marketing concept and has procured and
produced programming. Recovery commenced test broadcasting on a limited basis in
March 1996 and was launched nationally for two hours a day in April 1997.
b. Acquisitions and Joint Venture
Recovery Interactive
Recovery owns a 50% interest in Recovery Interactive ("RI"), a joint
venture with TCI Online Recovery Net Holdings, Inc. ("TCIR"), an affiliate of
Tele-Communications, Inc. ("TCI"), formed on August 1, 1996 to commence a
business to provide behavioral health care products and services to managed care
organizations and other organizations offering or providing health care
services, as well as to provide information, interaction and support regarding
recovery issues and prevention issues, through an integrated multimedia
platform. During 1997 and 1998, Recovery and TCI each made capital contributions
to RI and incurred expenses on RI's behalf aggregating to approximately $300,000
and $368,000, respectively. The Joint Venture agreement is to continue through
December 31, 2044. Recovery's investment in the Joint Venture is accounted for
under the equity method of accounting. Recovery recorded a loss on investment in
the joint venture for its entire investment of $300,000 in 1997 and $592,500 in
1998 which includes amounts to be paid to RI for operating losses incurred by RI
through June 30, 1998.
FMS Productions
On December 10, 1997, Recovery acquired 100 percent of the issued and
outstanding common stock of FMS Productions, Inc. ("FMS" and collectively, the
"Company") for total consideration of $225,490. Consideration included 44,000
shares of Recovery's common stock valued at $209,000 ($4.75 per share) and a
cash payment totaling $34,383, less $17,893 of cash received from FMS. In
conjunction with the acquisition, which has been accounted for under the
purchase method, acquired net assets were as follows:
F-8
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Organization, Line of Business and Significant Business Risks - (Continued)
Accounts Receivable.................................. $ 50,441
Prepaid expenses..................................... 10,162
Inventory............................................ 80,949
Capitalized programming costs........................ 384,439
Furniture and Equipment.............................. 10,826
Other assets......................................... 5,257
-----------
Fair Value of acquired assets, excluding cash........ 542,074
Accounts payable..................................... (151,523)
Accrued royalty expense.............................. (165,061)
---------
Net purchase price................................... $225,490
========
Prior to the FMS acquisition, Recovery was classified as a development
stage company, due to the lack of significant operating revenues. Effective for
the first quarter after the FMS acquisition (quarter ended March 31, 1998),
Recovery emerged from the development stage as a result of the revenues
generated from FMS's operations subsequent to the purchase date.
The unaudited pro forma results of operations for the years ended June
30, 1997 and 1998 (reflecting all adjustments which, in the opinion of
management, are necessary for a fair presentation) as if the FMS acquisition was
consummated on July 1, 1997 and 1998, respectively, are as follows:
1997 1998
----------- ----------
Pro forma total revenues $ 1,214,000 $ 1,593,000
=========== ==========
Pro forma net loss $(3,915,000) $(8,354,000)
============ ============
Pro forma weighted average
number of common shares 2,088,339 4,356,055
========= =========
Pro forma loss per common share $ (1.87) $ (1.92)
============ ===========
c. 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 and has limited operating revenues, that raises substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to operate as a going concern is dependent upon its ability (1) to
obtain sufficient additional capital, (2) to distribute its programming and
services through multimedia channels, (3) to achieve a critical mass of viewers
to attract
F-9
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Organization, Line of Business and Significant Business Risks - (Continued)
advertisers and healthcare providers and (4) to acquire and develop appropriate
programming for broadcast. The Company plans to raise additional working capital
through private and public offerings. The successful outcome of future
activities cannot be determined at this time and there are no assurances that if
achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
The financial statements do not include any adjustments related to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Government Regulations
The cable television industry is subject to extensive and frequently
changing federal, state and local laws and substantial regulation under these
laws by governmental agencies, including the Federal Communications Commission
(the "FCC"). Regulations governing the rates that can be charged to subscribers
by cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as The Recovery Network. In addition, federal "must-carry"
rules requiring cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional channels for
noncommercial education TV stations); commercial leased access rules designating
10 to 15 percent of system channels for lease by unaffiliated programmers; and
local regulatory requirements mandating further channel set-asides for public,
governmental and educational use could reduce channel availability which might
otherwise be available for The Recovery Network on many cable systems. Statutory
provisions and FCC rules governing relationships among cable systems and
competing forms of multichannel video program distribution, as well as the
relations between the Company and its cable system affiliates could adversely
affect the marketability of the Company's programming and the flexibility of the
Company in its business dealings with outlets for its programming.
Dependence upon Group W Network Services
In May 1998, the Company entered into a five year contract with Group W
Network Service, a division of CBS Corporation, to provide program origination,
master control operations, uplink and C-Band Satellite transponder services (the
"Transponder Contract"). It is possible that Group W Network Services or Company
affiliates could experience broadcast interruptions and equipment failures,
which could last for a significant period of time. The Transponder Contract will
allow the Company to broadcast 24 hours a day, rather than the 12 hours a day
under the ATN nesting contract (the "Nesting Contract" - see Note 8). The
Transponder Contract, however, does not provide the Company with access to
subscribers as did the Nesting Contract.
Through June 30, 1998, substantially all the households which received
broadcast of The Recovery Network's programming were provided under the terms of
the Nesting Contract. Starting September 1, 1998, the Company is entirely
dependent on its own affiliate marketing efforts to obtain affiliate agreements
with cable
F-10
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Organization, Line of Business and Significant Business Risks - (Continued)
operators. Currently, the Company's only significant arrangement is with
Cablevision, which provides the Company with approximately 2 million subscribers
in New York and Boston metropolitan areas.
2. Principles of Consolidation and Summary of Significant Accounting Policies
a. Principles of Consolidation
The accompanying consolidated statement of operations for 1998 includes
the operating results of FMS from December 10, 1997 (the acquisition date) to
June 30, 1998. All intercompany transactions and accounts between Recovery and
its subsidiary have been eliminated in consolidation.
b. 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.
c. Revenue Recognition
Advertising revenues are recognized when the advertisements are
broadcast. Video and publications revenues are recognized when the goods are
shipped or later when accepted by the customer if acceptance is required. During
1998, the Company recorded approximately $695,000, $150,000 and $50,000 of video
and publications, advertising and other revenues, respectively. During 1997, the
Company recorded $33,000 of advertising revenues.
d. Cash
At times, the Company maintains cash balances over the Federal
Depository Insurance Corporation insurable limit of $100,000 per customer per
financial institution.
e. Furniture and Equipment
Furniture and equipment is depreciated over the estimated useful lives
of the assets using straight-line and accelerated methods. Estimated useful
lives range from 3 to 7 years.
F-11
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
2. Principles of Consolidation and Summary of Significant Accounting Policies -
(Continued)
Furniture and equipment, at cost, consist of the following at June 30,
1998:
Computer Equipment........................... $ 301,175
Leasehold improvements....................... 10,000
Office furniture............................. 58,275
---------
369,450
---------
Less accumulated depreciation................ (166,261)
---------
$ 203,189
==========
f. 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 and liabilities are computed
based on the temporary difference between the financial statement and income tax
basis of assets and liabilities using the enacted marginal income tax rate in
effect for the year in which the differences are expected to reverse. Deferred
income tax expenses and credits are based on the changes in the deferred income
tax assets and liabilities from period to period.
g. Deferred Offering Costs
Costs associated with offerings of Recovery 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.
h. 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.
i. Capitalized Programming Costs
Capitalized programming costs include direct costs of production,
production overhead and costs to acquire distribution rights. Production costs
are accumulated by each series produced or licensed. Production overhead is
allocated proportionately to each series produced based on the direct production
costs incurred for each series produced. The costs are charged to earnings as
the series are broadcast based on the estimated number of future showings in
accordance with SFAS No. 63, "Financial Reporting by Broadcasters."
F-12
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
2. Principles of Consolidation and Summary of Significant Accounting Policies -
(Continued)
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.
j. Prepaid Consulting Costs
The value of common stock and options issued for consulting services is
recorded as prepaid consulting costs as a component of shareholders' (deficit)
equity. Such amounts are amortized, using the straight-line method, over the
life of the consulting agreements.
k. 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.
l. 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 1998, deferred offering costs of $573,508 were recorded against
proceeds from the IPO. Deferred offering costs of $40,000, paid to the
underwriters, were credited toward a two year consulting agreement and recorded
in other assets. Recovery common stock of 44,000 shares was issued in connection
with the acquisition of FMS.
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.
The Company made cash payments of $2,545 in 1998 and $1,800 in 1997 for
state income taxes. During 1998 and 1997, cash payments for interest expense
were approximately $166,000 and $13,000, respectively.
m. New Financial Accounting Pronouncements
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
F-13
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
2. Principles of Consolidation and Summary of Significant Accounting Policies -
(Continued)
Company will adopt the new standards upon their required effective dates. The
effects of these new standards have not yet been determined.
n. Loss per Share
The Company has adopted SFAS No. 128, "Earnings Per Share" ("EPS"),
effective for the quarter ending December 31, 1997 and has restated its earnings
per share disclosure for all prior periods presented to comply with SFAS No.
128. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS, which excludes
dilution and is computed by dividing income/loss available to common
shareholders by the weighted average number of common shares outstanding for the
period. "Diluted" EPS, which is computed similarly to fully diluted EPS,
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
When dilutive, stock options are included as share equivalents in computing
diluted earnings per share using the treasury stock method.
Prior to adoption of SFAS No. 128, the Company computed net loss per
share in accordance with APB No. 15 and Securities and Exchange Commission Staff
Accounting Bulletin No. 83 (SAB No. 83). Pursuant to SAB 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 IPO, were
previously included in the calculation of common stock, using the treasury stock
method, as if they were outstanding for all periods presented (the "Cheap
Shares"). The effect of adopting SFAS No. 128 was to decrease the weighted
average shares outstanding by 460, 548 shares for the periods ended June 30,
1997 and prior, as the Cheap Shares are no longer includable in the calculation
of earnings per share. The effect of adoption of SFAS No. 128 was to increase
the loss per share by $0.35 for the year ended June 30, 1997.
Dilutive securities of 4,477,170 and 963,282 shares are not included in
the calculation of diluted EPS in the years ending June 30, 1998 and 1997,
respectively, because they are antidilutive.
o. Reclassifications
Certain 1997 financial statement amounts have been reclassified to
conform to the 1998 presentation.
F-14
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
3. Capitalized Production Costs
Capitalized production costs, net of amortization, are summarized as
follows:
Produced programs................................. $ 683,597
FMS film library acquired......................... 376,762
Licensed films.................................... 238,575
---------
1,298,934
Amortization...................................... (349,149)
---------
Net capitalized production costs............. 949,785
Productions in progress........................... 7,677
---------
Net production costs.............................. $ 957,462
=========
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
During July and August 1997, Recovery borrowed $605,250 under one year,
15 percent notes payable to unrelated parties. The notes provide for a minimum
of $90,790 of interest. Recovery incurred $30,260 of deferred financing costs
related to these notes. These notes were paid with the proceeds from the IPO
(see Note 7c).
During 1997 the Company issued $2,000,000 of promissory notes in
connection with the Company's March 1997 private placement. The notes bear
interest at 9 percent per annum (estimated effective rate is 125 percent) and
were due on the earlier of the consummation of an initial public offering or one
year. These notes and related interest were paid with the proceeds from the IPO.
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.
F-15
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
5. Deferred Compensation
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, 1998,
are as follows:
Carryforward of net operating losses................. $3,663,000
Development costs capitalized for tax purposes....... 403,000
Investment in RI not expensed for tax purposes....... 288,000
Other temporary differences.......................... 131,000
----------
4,485,000
Valuation allowance.................................. (4,485,000)
----------
Deferred income tax asset............................ $ -
==========
The provision for income taxes of $2,545 and $1,800 for the fiscal
years ended June 30, 1998 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, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Income tax benefit at federal statutory rate....... $(1,297,390) (34.00)% $(2,808,124) (34.00)%
State taxes, net of federal income tax effect...... 1,800 0.05 2,545 0.03
Net operating losses and other deferred
income tax assets not benefited................ 1,297,390 34.00 2,808,124 34.00
$ 1,800 0.05% $ 2,545 0.03%
=============== ============ ============== ==============
</TABLE>
As of June 30, 1998, the Company had approximately $9,900,000 of
federal net operating loss carryforwards, which will expire in fiscal years
ending 2008 to 2013. As of June 30, 1998, the Company had approximately
$4,880,000 of California state net operating loss carryforwards, which will
expire in fiscal years ending 2001 and 2003. 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.
F-16
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
6. Income Taxes - (Continued)
Additionally, pursuant to Internal Revenue Service code section 382,
the Company's existing net operating loss carryforwards, and other deferred tax
assets and liabilities, may be unavailable for future use due to significant
ownership changes of Recovery's common stock.
7. Capital Stock Transactions
a. The $3.48 Placement
During November 1996 through January 1997, Recovery issued 138,761
shares of common stock for cash of $483,500 ($3.48 per share). Recovery also
issued 7,749 shares in consideration of services rendered in connection with
such placement.
b. The March 1997 Private Placement
In March 1997, Recovery consummated a private financing pursuant to
which it issued 40 units of Recovery'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 and $479,568 of the loan discount
has been charged to operations as interest expense during 1997 and 1998,
respectively. Offering costs of approximately $487,000 were incurred of which
approximately $228,000 was capitalized as debt offering costs and amortized as
interest expense in 1997 and 1998. The balance of $259,000 was charged to equity
as cost of raising the equity proceeds.
c. Initial Public Offering
On October 3, 1997, Recovery consummated its IPO pursuant to which it
issued 2,415,000 units. Each unit consisted of one share of common stock and one
warrant to purchase one share of common stock at $5.50 per share. The units were
sold for $5.10 per unit for net proceeds of approximately $10,142,000.
F-17
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
7. Capital Stock Transactions - (Continued)
d. 1998 Private Placement
In June 1998, the Company issued (i) 808,377 shares of common stock for
net proceeds of approximately $1,545,000, and (ii) warrants to purchase 70,000
shares of common stock at an exercise price of $5.50 per share through June 29,
2001 (the "1998 Private Placement"). The shares were issued at a 25 percent
discount when compared to current public trading prices at the time of the
placement. The Company placed or is to place 346,449 shares of common stock into
escrow. Once shareholder approval is obtained, the shares and a warrant to
purchase 30,000 shares will be released from escrow for net proceeds of
approximately $720,000.
The 1998 Private Placement also provides for additional shares of
common stock to be issued pursuant to certain other provisions of the 1998
Private Placement agreement, including shares issuable for no additional
consideration pursuant to certain reset rights (as defined in the agreement) and
shares issuable for up to $3,000,000 pursuant to the put rights (as defined in
the agreement).
e. Other Stock Transactions
During April 1998, the Company entered into a consulting agreement
whereby consulting services were to be rendered in exchange for 200,000 shares
of common stock and options to purchase 200,000 shares of common stock. The
securities are to vest through September 1998. No securities have been issued
under the agreement, however, approximately 106,000 shares of common stock and
options to purchase approximately 106,000 shares of common stock have vested as
of June 30, 1998. In 1998, the Company has recorded compensation expense of
approximately $522,000 related to this agreement.
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.
f. Other
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.
In management's opinion, all of the above transactions have been
recorded at the estimated fair market value of Recovery's common stock at the
date of grant.
F-18
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
8. Related Party Transactions
a. Compensation
During fiscal years 1997 and 1998, cash payments of approximately
$708,000 and $660,000, respectively, were made to shareholders and Directors,
including affiliated companies, for compensation in connection with services
rendered.
b. Shares issued to shareholders
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. The Nesting Contract expired on August
31, 1998.
During 1997 and 1998, the Company made cash payments of $57,000 and
$847,585, respectively to ATN.
9. Employment Agreements
The Company and its wholly-owned subsidiary have entered into certain
employment agreements with employees, shareholders and/or Directors. The
agreements expire at various dates from September 30, 1998 to February 28, 2000.
The agreements provide for minimum monthly cash compensation ranging from
approximately $10,000 to $12,500, 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 are approximately $721,000 and $170,000 in fiscal years 1999 and
2000, respectively.
F-19
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
10. Options and Warrants
Stock Options
The Company has four stock option plans: the 1996 Employee and
Consultants Stock Option Plan, the 1996 Board of Directors and Advisory Board
Retainer Stock Option Plan, the 1997 Management Bonus Plan, and the 1998 Stock
Plan. A total of 940,251 shares of common stock are reserved for issuance,
pursuant to options granted and to be granted under these plans. 110,085 shares
are available for grant under the plans as of June 30, 1997. Options pursuant to
the 1996 and 1997 plans have fully vested as of June 30, 1998, resulting from
change of control provisions being activated due to changes in the Board of
Directors of the Company. Options under the 1998 plan generally vest over three
years. All plan options generally expire in four to five years.
The plans provide for option grants at exercise prices not less than
the fair market value on the date of grant. All options granted under the 1996
plans were at an exercise price of $5.00 per share. All grants under the 1997
and 1998 plans were repriced, effective August 3, 1998, as the Board of
Directors of the Company approved the repricing of options to purchase 806,746
shares granted under these two plans, certain non-plan options and an option
granted after June 30, 1998. Such repricing was effected by offering to exchange
new options with an exercise price of $1.56 per share, which was the fair market
value of the common stock on the date of repricing, for the options then held by
such optionees. The new options otherwise have identical terms and conditions as
the current original options.
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. All options are fully vested as of June 30, 1998,
resulting from change of control provisions being activated due to changes in
the Board of Directors of the Company. All options expire in 2001.
During 1997 and 1998, non-plan options to purchase 3,583 and 18,000
shares, respectively, of common stock were granted. The options' exercise prices
are $5.00 per share in 1997 and $1.56 per share in 1998. Options vest monthly
commencing July 1997 and April 1998. The options expire five years from the date
of grant. During 1998, 1,000 of these options reverted back to the Company upon
termination of employment of an optionee.
During April 1998, the Company granted 106,250 non-plan options for
consulting services at an exercise price of $3.00 per share. Options are vested
when granted and expire in five years.
The following is a summary of all options granted to employees,
directors and consultants to acquire the Recovery's common stock as of June 30,
1998:
F-20
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
10. Options and Warrants - (Continued)
Shares Exercise Shares Shares Shares
Granted Price Vested Exercised Terminated
------- ----- ------ --------- ----------
147,586 $5.00 144,003 - 3,583
23,247 $3.10 23,247 -
106,250 $3.00 106,250 -
87,176 $2.32 87,176 -
806,576 $1.56 267,993 - 98,830
The Company has adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," issued in October 1995. In accordance with the
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 Year Ended
June 30, 1997 June 30, 1998
------------- -------------
Net loss as reported $ 3,818 $ 8,262
Net loss pro forma $ 3,911 $ 8,532
Loss per share as reported $ (1.87) $ (1.91)
Loss per share pro forma $ (1.91) $ (1.97)
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:
1997 1998
---- ----
Expected dividend yield 0.00% 0.00%
Expected stock price volatility 0.00% 72.32%
Risk free interest rate 6.00% 6.00%
Expected life of options 5 years 5 years
The weighted average fair value of options granted during fiscal year
1998 is $1.00. During 1997, the weighted average fair value of options granted
was $0.31.
F-21
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
11. Options and Warrants- (Continued)
Warrants
At June 30, 1998, there were 3,350,498 warrants outstanding related to
the Company's debt and equity offerings, including the IPO. 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. 2,415,000 warrants were
issued in connection with the Company's IPO and are exercisable through
September 2002 at $5.50 per share. 420,000 underwriter warrants were also issued
in connection with the IPO and are exercisable through September 2002 at $8.25
to $9.075 per share.
11. Commitments
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,
1999........................... $236,000
2000........................... 247,000
2001........................... 254,000
2002........................... 225,000
--------
$962,000
========
Rent expense charged to operations in fiscal 1997 and 1998 were
approximately $79,600 and $339,000, respectively.
F-22
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
11. Commitments - (Continued)
b. Capital Leases
The Company leases certain office equipment under a capital lease. At
June 30, 1998, minimum lease payments under the terms of the lease agreement are
as follows:
Year Ending June 30,
1999............................................ $22,350
2000............................................ 18,711
-------
41,061
Less amounts representing interest.............. (10,906)
Less Current portion............................ (17,029)
-------
$13,126
=======
c. Transponder Contract
In May 1998, the Company entered into a five year contract with Group W
Network Services to provide program origination, master control operations,
uplink and C-Band Satellite transponder services. The contract requires the
Company to make monthly payments of approximately $85,000.
F-23
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, Santa Monica
County, State of California, on September 27, 1998.
THE RECOVERY NETWORK, INC.
By: /s/ William D. Moses
----------------------
William D. Moses
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Title
<S> <C>
/s/ William D. Moses September 27, 1998
- ------------------------------------------------------
William D. Moses, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
/s/ Donald J. Masters September 27, 1998
- -------------------------------------------------------
Donald J. Masters,
Executive Vice President and Director
/s/ Michael Clark September 27, 1998
- -------------------------------------------------------
Michael Clark, Vice President of Finance
(principal accounting and financial officer)
<PAGE>
/s/ Nimrod J. Kovacs September 27, 1998
- -------------------------------------------------------
Nimrod J. Kovacs,
Vice Chairman of the Board of Directors
/s/ George H. Henry September 27, 1998
- ------------------------------------------------------
George H. Henry, Director
/s/ Charlotte Schiff Jones September 27, 1998
- ------------------------------------------------------
Charlotte Schiff Jones, Director
</TABLE>
<PAGE>
Exhibit Index
Number Description of Exhibit
- ------ ----------------------
2.1 Form of Subscription Agreement between Registrant and each
of Austost Anstalt Schann, Balmore Funds S.A., Zakeni Ltd.,
BL Squared Foundation, Martin Chopp, The Sargon Fund, L.P.
and TLG Realty dated as of June 29, 1998.
2.3 Funds Escrow Agreement between the Registrant, Austost
Anstalt Schaan, Balmore Funds S.A., Zakeni Ltd., BL Squared
Foundation, Martin Chopp, The Sargon Fund, L.P., TLG Realty
and Grushko & Mittman dated as of June 29, 1998.
2.4 Shares Escrow Agreement between the Registrant, Austost
Anstalt Schaan, Balmore Funds S.A., Zakeni Ltd., BL Squared
Foundation, Martin Chopp, The Sargon Fund, L.P., TLG Realty
and Grushko & Mittman dated as of June 29, 1998.
2.5 Agreement and Plan of Merger dated as of December 10, 1997
among the Registrant, Recovery Direct, Inc., FMS
Productions, Inc. and each of John Frederick, P. Randall
Frederick, Jan Smithers, Joe C. Wood, Jr., Sharon R. Irish
and Charles S. Sapp. ++
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 Redeemable Warrant Agent Agreement (including Form
of Redeemable Warrant). **
4.3 Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant). **
4.4 1996 Employee and Consultants Stock Option Plan. **
4.5 Amendment to 1996 Employee and Consultants Stock Option
Plan. **
4.6 1996 Board of Directors and Advisory Board Stock Option
Plan. **
4.7 Amendment to 1996 Board of Directors and Advisory Board
Stock Option Plan. **
4.8 1997 Management Bonus Plan. **
4.9 Amendment to 1997 Management Bonus Plan. **
4.10 Form Stock Option Contract. **
4.11 Form of Promissory Note issued by the Registrant on July 2,
1997. **
4.12 1998 Stock Plan. +
4.13 Form of Warrant.
4.14 Form of Registration Rights Agreement dated December 10,
1997 between the Registrant and each of the Sellers.++
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, 1997. **
<PAGE>
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, 1977.
**
10.5 Employment Agreement between the Registrant and Donald
Masters effective as of December 1, 1996. **
10.6 Non-Disclosure and Inventions Agreements between the
Registrant and Donald Masters dated as of February 3, 1997.
**
10.7 Employment Agreement between the Registrant and John Wheeler
dated as of May 13, 1997. **
10.8 Employment Agreement between the Registrant and William
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. **
27.1 Financial Data Schedule
- ---------------------------------
* Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form SB-2, file number 333-61421.
** Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form SB-2, file number 333-27787.
+ Incorporated by Reference to Exhibit A to the Registrant's Definitive
Proxy Statement on Schedule 14A filed by the Registrant on April 29,
1998.
++ Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
1997 Form 8-K.
++ Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
1997 Form 8-K.
EXHIBIT 2.1
FORM OF SUBSCRIPTION AGREEMENT
You (the "Subscriber" or "Purchaser" or "Holder") hereby agree
to purchase, and THE RECOVERY NETWORK, INC., a Colorado corporation (the
"Company"), hereby agrees to issue and to sell to the Subscriber, the number of
shares (the "Company Shares") of the Company's Common Stock, $.01 par value per
share ("Company Stock"), and a Common Stock Purchase Warrant to purchase the
number of shares of Common Stock (the "Warrant") designated on the signature
page hereof, in the form annexed hereto as Exhibit A. (The Company Shares are
sometimes referred to herein as the "Shares" or "Common Shares"). (The Company
Shares, the Warrants and the shares of Common Stock issuable upon exercise of
the Warrants and the Additional Shares [as hereinafter defined] and Put Shares
[as hereinafter defined] are collectively referred to herein as, the
"Securities"). Upon acceptance of this Agreement on the Closing Date (as defined
herein) by the Subscriber, the Company shall issue and deliver to the Subscriber
the Company Shares and Warrants against payment, by federal funds (U.S.) wire
transfer of the amount designated on the signature page hereof pursuant to the
terms of a Funds Escrow Agreement annexed hereto as Exhibit B.
The following terms and conditions shall apply to this
subscription.
1. Subscriber's Representations and Warranties. The Subscriber
hereby represents and warrants to and agrees with the Company that:
(a) Information on Company. The Subscriber has been
furnished with and has read the Company's Registration Statement on Form SB-2,
as amended (File No. 333-27787) and subsequent Forms 10-QSB and 8-K, and
Schedule 14A, each as filed with the U.S. Securities and Exchange Commission
(the "Commission") (collectively, with exhibits thereto, hereinafter referred to
as the "Reports"). In addition, the Subscriber has received from the Company
such other information concerning its operations, financial condition and other
matters as the Subscriber has requested, and considered all factors the
Subscriber deems material in deciding on the advisability of investing in the
Securities (such information in writing is collectively, the "Other Written
Information").
(b) Information on Subscriber. The Subscriber is an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the Securities Act of 1933, as amended, is experienced in
investments and business matters, has made investments of a speculative nature
and has purchased securities of United States publicly-owned companies in
private placements in the past and, with its representatives, has such knowledge
and experience in financial, tax and other business matters as to enable the
Subscriber to utilize the information made available by the Company to evaluate
the merits and risks of and to make an informed investment decision with respect
to the proposed purchase, which represents a speculative investment. The
Subscriber has the authority and is duly and legally qualified to purchase and
own the Securities. The Subscriber is able to bear the risk of such investment
for an indefinite period and to afford a complete loss thereof.
<PAGE>
(c) Purchase of Company Shares and Warrants. On the
Closing Date, the Subscriber will purchase the Company Shares and Warrants for
its own account and not with a view to any distribution thereof.
(d) Compliance with Securities Act. The Subscriber
understands and agrees that the Securities have not been registered under the
Securities Act of 1933, as amended (the "1933 Act") by reason of their issuance
in a transaction that does not require registration under the 1933 Act, and that
such Securities must be held unless a subsequent disposition is registered under
the 1933 Act or is exempt from such registration. The Subscriber agrees that if,
in the future, the Subscriber should decide to dispose of any of the Securities
acquired by it pursuant to this Agreement, the Subscriber will do so only
pursuant to a registration statement or by disposition exempt from registration
requirements under the 1933 Act.
(e) Common Shares Legend. The Company Shares and the
shares of Common Stock issuable upon the exercise of the Warrants which the
Subscriber is acquiring pursuant to this Agreement shall bear the following
legend:
"THESE SHARES OF COMMON STOCK HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THESE SHARES OF COMMON STOCK MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO RECOVERY NETWORK,
INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
(f) Warrants Legend. The Warrants which the
Subscriber is acquiring pursuant to this Agreement shall bear the following
legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE RECOVERY NETWORK, INC. THAT
SUCH REGISTRATION IS NOT REQUIRED."
(g) Correctness of Representations. The Subscriber
represents that the foregoing representations and warranties are true and
correct as of the date hereof and, unless the Subscriber otherwise notifies the
Company prior to the Closing Date (as hereinafter defined), shall 9/23/98
<PAGE>
be true and correct as of the Closing Date. The foregoing representations and
warranties shall survive the Closing Date.
2. Company Representations and Warranties. The Company
represents and warrants to and agrees with the Subscriber that:
(a) Due Incorporation. The Company and each of its
wholly-owned subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation and has the
requisite corporate power to own its properties and to carry on its business as
now being conducted. The Company and each of its wholly-owned subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in each jurisdiction where the nature of the business conducted or property
owned by it makes such qualification necessary, other than those jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the business, operations or prospects or condition (financial or otherwise) of
the Company.
(b) Outstanding Stock. All issued and outstanding
shares of capital stock of the Company and each of its wholly-owned subsidiaries
has been duly authorized and validly issued and are fully paid and
non-assessable.
(c) Authority; Enforceability. This Agreement has
been duly authorized, executed and delivered by the Company and is a valid and
binding agreement enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity; and the Company has full
corporate power and authority necessary to enter into this Agreement and to
perform its obligations hereunder and all other agreements entered into by the
Company relating hereto.
(d) Additional Issuances. There are no outstanding
agreements or preemptive or similar rights affecting the Company's common stock
and no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of common stock or equity of the
Company or other equity interest in any of the subsidiaries of the Company,
except (i) as described in the Reports or Other Written Information, and (ii)
for 200,000 shares of Common Stock and a warrant to purchase 200,000 shares of
Common Stock, each issued to TeleServices International Group Inc.
(e) Consents. No consent, approval, authorization or
order of any court, governmental agency or body or arbitrator having
jurisdiction over the Company, or any of its affiliates is required for
execution of this Agreement, including, without limitation issuance and sale of
the Securities, or the performance of the Company's obligations hereunder,
except as described or otherwise referenced herein. 9/23/98
<PAGE>
(f) No Violation or Conflict. Assuming the
representations and warranties of the Subscriber in Paragraph 1 are true and
correct and the Subscriber complies with its obligations under this Agreement,
neither the issuance and sale of the Securities nor the performance of its
obligations under this Agreement by the Company will:
(i) violate, conflict with, result in a
breach of, or constitute a default (or an event which with the giving of notice
of the lapse of time or both would be reasonably likely to constitute a default)
under (A) the articles of incorporation, charter or bylaws of the Company, or
any of its affiliates, (B) to the Company's knowledge, any decree, judgment,
order, law, treaty, rule, regulation or determination applicable to the Company,
or any of its affiliates of any court, governmental agency or body, or
arbitrator having jurisdiction over the Company, or any of its affiliates or
over the properties or assets of the Company, or any of its affiliates, (C) the
terms of any bond, debenture, note or any other evidence of indebtedness, or any
agreement, stock option or other similar plan, indenture, lease, mortgage, deed
of trust or other instrument to which the Company, or any of its affiliates is a
party, by which the Company, or any of its affiliates is bound, or to which any
of the properties of the Company, or any of its affiliates is subject, or (D)
the terms of any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company, or any of its affiliates is a party; or
(ii) result in the creation or imposition of
any lien, charge or encumbrance upon the Securities or any of the assets of the
Company, or any of its affiliates.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any
security interests, liens, claims or other encumbrances;
(ii) have been, or will be, duly and validly
authorized and on the date of issuance and on the Closing Date, as hereinafter
defined, and the date the Warrants are exercised according to their terms, as
the case may be, the Securities will be duly and validly issued, fully paid and
nonassessable, and if registered pursuant to the 1933 Act, free trading and
unrestricted;
(iii) will not have been issued or sold in
violation of any preemptive or other similar rights of the holders of any
securities of the Company;
(iv) will not subject the holders thereof to
personal liability by reason of being such holders; and
(h) Litigation. There is no pending or, to the best
knowledge of the Company, threatened action, suit, proceeding or investigation
before any court, governmental agency or body, or arbitrator having jurisdiction
over the Company, or any of its affiliates that would affect the execution by
the Company or the performance by the Company of its obligations under this
Agreement, or which was not disclosed in the Reports and Other Written
Information.
<PAGE>
(i) Reporting Company. The Company is a publicly-held
company whose common stock is (and has been for the past 90 days) registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "1934 Act") and is duly listed for trading on the NASDAQ SmallCap Market.
Pursuant to the provisions of the 1934 Act, the Company has timely filed all
reports and other materials required to be filed thereunder with the Securities
and Exchange Commission during the preceding twelve months, and, subject to
compliance with General Instruction I.A. of Form S-3, will be eligible as of
September 30, 1998 to file a Form S-3 to register the Securities.
(j) No Market Manipulation. The Company has not
taken, and will not take, directly or indirectly, any action designed to, or
that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of the common stock of the Company to facilitate the
sale or resale of the Company Shares or affect the price at which the Securities
may be issued.
(k) Information Concerning Company. The Reports and
Other Written Information contain all material information relating to the
Company and its operations and financial condition as of their respective dates
which information is required to be disclosed therein. Since the date of the
financial statements set forth in the Reports, and except as modified in the
Other Written Information, there has been no material adverse change in the
Company's business, financial condition or affairs not disclosed in the Reports.
The Reports and Other Written Information do not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
(l) Dilution. The number of Shares issuable upon
Reset (as hereinafter defined) and exercise of the Put (as hereinafter defined)
may increase substantially in certain circumstances, including, but not
necessarily limited to, the circumstance wherein the trading price of the Common
Stock declines prior to a Reset or exercise of the Company of the Put.
(m) Stop Transfer. The Company has not issued, and
will not issue any stop transfer order or other order impeding the sale and
delivery of the Securities.
(n) Defaults. Neither the Company nor any of its
wholly-owned subsidiaries is in violation of its Certificate of Incorporation or
ByLaws. Except as described in the Reports and Other Written Information,
neither the Company nor any of its subsidiaries is (i) in default under or in
violation of any other material agreement or instrument to which it is a party
or by which it or any of its properties are bound or affected, which default or
violation would have a material adverse effect on the Company, (ii) in default
with respect to any order of any court, arbitrator or governmental body or
subject to or party to any order of any court or governmental authority arising
out of any action, suit or proceeding under any statute or other law respecting
antitrust, monopoly, restraint of trade, unfair competition or similar matters,
or (iii) to its knowledge in violation of any statute, rule or regulation of any
governmental authority material to its business.
(o) No Integrated Offering. Neither the Comany, nor
any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any
<PAGE>
security or solicited any offers to buy any security under circumstances that
would require registration of any of the Securities under the 1933 Act or cause
the offering of the Securities pursuant to this Agreement to be integrated with
prior offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of The NASDAQ SmallCap Market ("NASDAQ SmallCap"), as
applicable, nor will the Company or any of its subsidiaries take any action or
steps that would require registration of the Securities under the 1933 Act or
cause the offering of the Securities to be integrated with other offerings. The
Company has not conducted and will not conduct any offering other than the
transactions contemplated hereby that will be integrated with the issuance of
the Securities solely for purposes of Rule 4460(i) of the NASDAQ Stock Market,
Inc.'s Marketplace Rules.
(p) Use of Proceeds. The proceeds of the Subscriber
funds to be released to the Company will be used for working capital, general
corporate purposes and for expenses of this offering.
(q) No General Solicitation. Neither the Company, nor
any of its affiliates, nor to its knowledge, any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Act) in connection with the offer
or sale of the Securities.
(r) Listing. The Company's common stock is quoted on,
and listed for trading on NASDAQ SmallCap. The Company has received no notice,
either oral or written, with respect to the continued eligibility of the common
stock for such listing, and the Company has maintained all requirements for the
continuation of such listing.
(s) Correctness of Representations. The Company
represents that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects and, unless the Company
otherwise notifies the Subscriber prior to the Closing Date, shall be true and
correct in all material respects as of the Closing Date. The foregoing
representations and warranties shall survive the Closing Date.
3. Regulation D Offering. This Offering is being made pursuant
to the exemption from the registration provisions of the Securities Act of 1933,
as amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion acceptable to Subscriber from
the Company's legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities. A form of
the legal opinion is annexed hereto as Exhibit C.
4. Reissuance of Securities. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Sections 1(e) and 1(f) above at such time as (a) the holder thereof is permitted
to dispose of such Securities pursuant to Rule 144(k) under the Act, or (b) the
Securities are registered under the Act.
<PAGE>
5. Redemption. The Company may not redeem the Securities
without the consent of the holder of the Securities, except as otherwise
described in Section 9.2 of this Subscription Agreement.
6. Legal Fees/Commissions. The Company shall pay to counsel to
the Subscriber its fee of $25,000 for services rendered to the Subscriber in
reviewing this Agreement and other subscription agreements for the aggregate
subscription amounts of up to $2,500,000. The Company will pay a cash commission
of four percent (4%) of the Purchase Price designated on the signature page
hereto to certain placement agents. The commissions and legal fees will be
payable out of funds held pursuant to a Funds Escrow Agreement and Shares Escrow
Agreement to be entered into by the Company and Subscriber. The cash commissions
will be payable proportionately as Subscriber funds are released to the Company.
Additional cash commissions of eight percent (8%) will be payable to the
placement agents in connection with gross proceeds from the Company's exercise
of the Put described in Section 11 of this Subscription Agreement. The Company
will also issue to the placement agents as additional compensation, common stock
of the Company at the time Subscriber funds are released to the Company equal in
value to four percent (4%) of the Purchase Price designated on the signature
page hereto at a per share value equal to the Issue Price (per share) designated
on the signature page hereto ("Placement Shares"). Seventy percent (70%) of
Placement Shares will be issued at the Closing and thirty percent (30%) of the
Placement Shares will be issued if and when the funds portion of the
Registration Escrow (as defined in Section 10.2(j) herein) is released to the
Company. All the representations, covenants, warranties and undertakings,
including but not limited to registration rights made or granted to or for the
benefit of the Subscriber are hereby also made and granted to the Placement
Agents in respect of the Placement Shares.
7.1. Covenants of the Company. The Company covenants and
agrees with the Subscriber as follows:
(a) The Company will advise the Subscriber, promptly
after it receives notice of issuance by the Securities and Exchange Commission,
any state securities commission or any other regulatory authority of any stop
order or of any order preventing or suspending any offering of any securities of
the Company, or of the suspension of the qualification of the common stock of
the Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) The Company shall promptly secure the listing of
the Company Shares and Common Stock issuable upon the exercise of the Warrants
upon each national securities exchange, or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain such listing so long as any other shares of Common
Stock shall be so listed, such listing of all Common Stock from time to time
issuable upon exercise of the Put, exercise of the Warrants and upon Reset. The
Company will obtain and maintain the listing and trading of its Common Stock on
NASDAQ SmallCap, and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the National
Association of Securities Dealers ("NASD") and such exchanges, as applicable.
The Company shall promptly provide to each Purchaser copies of any notices it
receives regarding the continued
<PAGE>
eligibility of the Common Stock for listing on such exchanges or quotation
systems, or any other exchange or quotation system on which the Common Stock is
then listed.
(c) The Company shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Subscriber and promptly provide copies thereof to Subscriber.
(d) Until at least three (3) years after the
effectiveness of the Registration Statement on Form S-3 or such other
Registration Statement described in Section 10.1(iv) hereof, the Company will
use its reasonable efforts (i) to cause its Common Stock to continue to be
registered under Sections 12(b) or 12(g) of the Exchange Act, (ii) to comply in
all respects with its reporting and filing obligations under such Exchange Act,
and (iii) to comply with all requirements related to any registration statement
filed pursuant to this Agreement. The Company will not take any action or file
any document (whether or not permitted by the Act or the Exchange Act or the
rules thereunder) to terminate or suspend such registration or to terminate or
suspend its reporting and filing obligations under said Acts, except as
permitted herein, until the earlier of (i) three (3) years after the effective
date of the Registration Statement on Form S-3 or such other Registration
Statement described in Section 10.1(iv) hereof, or (ii) the sale by the
Subscribers and Placement Agents of all the shares of common stock issuable by
the Company pursuant to this Agreement. Until at least three (3) years after the
Warrants have been converted into Common Stock, the Company will take all action
within its power to continue the listing or trading of its Common Stock on
NASDAQ SmallCap and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the NASD and NASDAQ.
(e) The Company and Subscriber agree that until the
Company either obtains shareholder approval of the issuance of the Securities
and Placement Shares, or an exemption from NASDAQ's corporate governance rules
as they may apply to the foregoing, if such approval or exemption is required in
the reasonable opinion of the Subscriber, the Company may not exercise the Put.
The Company represents that the Section 7.1(e) Shares designated on the
signature page hereto, together with the aggregate of such amounts designated
for all investors in the $2,500,000 offering to which this Subscription
Agreement relates, and together with all Placement Shares issuable in connection
with the $2,500,000 offering, is not greater than 19.99% of the shares of
Company's common stock outstanding on the Closing Date. The Company undertakes
to obtain the approval of its shareholders required pursuant to the NASDAQ's
corporate governance rules to allow issuance of all the Securities and Placement
Shares. The Company covenants to obtain the shareholder approval no later than
90 days from the Closing Date.
7.2. Covenants of Subscriber. The Subscriber covenants and
agrees with the Company as follows:
(a) The Subscriber will provide for itself and any
beneficial holder of the Securities, information and documents reasonably
required by the Company for the Company to
<PAGE>
comply with its governmental and regulatory obligations including but not
limited to the Securities and Exchange Commission, blue sky and NASDAQ
requirements.
(b) The Subscriber will not directly or indirectly
engage in the uncovered short selling of the Common Stock until 180 days after
the Closing Date.
8. Covenants of the Company and Subscriber Regarding
Indemnifications.
(a) The Company agrees to indemnify, hold harmless,
reimburse and defend Subscriber against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon Subscriber which results, arises out of or is based
upon (i) any misrepresentation by Company or breach of any warranty by Company
in this Agreement or in any Exhibits or Schedules attached hereto, or Reports or
other Written Information; or (ii) any breach or default in performance by
Company of any covenant or undertaking to be performed by Company hereunder.
(b) Subscriber agrees to indemnify, hold harmless,
reimburse and defend the Company at all times against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Company which results, arises out of or
is based upon (a) any misrepresentation by Subscriber in this Agreement or in
any Exhibits or Schedules attached hereto; or (b) any breach or default in
performance by Subscriber of any covenant or undertaking to be performed by
Subscriber hereunder.
9.1. Reset.
(a) The amount of Company Shares issuable to the
Subscriber shall be redetermined from time to time as described herein (the
"Reset") and if appropriate, additional shares of Common Stock (the "Additional
Shares") will be issued and delivered to the Subscriber as provided herein. The
original purchase price set forth on the signature page of this Subscription
Agreement (the "Purchase Price") shall be deemed the purchase price of all the
shares of Common Stock to be delivered pursuant to this Subscription Agreement.
Provided the Additional Shares are issued after the effective date of the
Registration Statement described in Section 10.1(iv) hereof, such Additional
Shares will be free-trading on the books and records of the Company and issued
without restrictive legend.
(b) The Reset shall be determined on the dates
identified below (each a "Reset Date") for an amount of the Purchase Price equal
to not less than 10% and not more than 25% of the Purchase Price, at the
Subscriber's election ("Designated Portion") per Reset Date. The initial Reset
Date shall be the effective date of the Registration Statement described in
Section 10.1(iv) of this Subscription Agreement or at the Subscriber's election
on the 180th day after the Closing Date if the Registration Statement required
to be filed pursuant to Section 10.1(iv) hereof has not been declared effective
by the Securities and Exchange Commission on such date ("Trigger Date").
Subsequent Reset Dates shall be on the 30th, 60th, 90th, 120th, 150th, 180th,
210th, 240th, and 270th day following the Trigger Date. If any such date is not
a trading day on the NASDAQ
<PAGE>
SmallCap Market, then the Reset Date shall be the first trading day thereafter.
In the event any portion of the Common Shares comprising the Registration Escrow
(as hereinafter defined) is released to the Company pursuant to Section
10.1(iv), then the aggregate Designated Portions of the Purchase Price shall not
be greater than that portion of the Purchase Price set forth on the signature
page to this Subscription Agreement less the corresponding amount of Purchase
Price returned to the Subscriber. In no event may the aggregate Designated
Portions of the Purchase Price exceed the Purchase Price. To the extent a
Registration Escrow is held in escrow on a Reset Date, then such Common Shares
issuable in connection with such Registration Escrow will be deposited in escrow
to be held pursuant to the Funds Escrow Agreement.
(c) On each Reset Date a number of Company Shares
will be calculated for the Designated Portion of the Purchase Price by dividing
the Designated Portion of the Purchase Price by a number equal to seventy-seven
percent (77%) of the average closing bid prices for the Common Stock on the
NASDAQ SmallCap Market, or on any securities exchange or other securities market
on which the Common Stock is then being traded, for the five trading days
immediately preceding, but not including, the Reset Date (the "Average Price").
If the Average Price is less than the Issue Price designated on the signature
page hereto, then the Company will issue to the Subscriber the number of shares
of Common Stock obtained by subtracting (y) the number of shares obtained by
dividing the Designated Portion of Purchase Price by the Issue Price from (z)
the number of shares obtained by dividing the Designated Portion of Purchase
Price by the Average Price.
(d) In the event the Average Price calculated on a
Reset Date is more than 130% but less than 200% of the Issue Price, then 20% of
the Purchase Price will no longer be subject to Reset. In the event the Average
Price calculated on a Reset Date is 200% or more than the Issue Price, then 50%
of the Purchase Price shall no longer be subject to Reset.
(e) In no event will the Subscriber be required to
return any Company Shares to the Company. Each Reset calculation shall be made
independent of all other Reset calculations.
(f) The Company agrees to deliver the Additional
Shares to the Subscriber in hand, or Redemption Amount (as defined herein), if
such payment of the Redemption Amount is permitted hereunder, no later than ten
(10) business days after notice from the Subscriber of the Designated Portion
amount (the "Delivery Date"). The Company understands that a delay in the
delivery of either the Additional Shares or failure to deliver the Redemption
Amount described in Sections 9.2 and 9.3 beyond the Delivery Date could result
in economic loss to the Subscriber. As compensation to the Subscriber for such
loss, the Company agrees to pay as liquidated damages payments to the Subscriber
for late delivery of Additional Shares or Redemption Amount beyond the Delivery
Date, in the amount of $100 per business day after the Delivery Date for each
$10,000 of Designated Portion of Purchase Price for which a Reset has been
calculated. Additionally, in the case of late payment of the Redemption Amount,
the Company will pay on additional sum equal to 10% of the Designated Portion of
the Purchase Price. The Company shall pay any payments incurred under this
Section in immediately available funds upon demand. The late payment charges
described
<PAGE>
in this Section 9.1(f) shall be payable through the date the Additional Shares
or Redemption Amount is received in hand by the Subscriber.
(g) Company Shares as defined and employed in this
Subscription Agreement shall mean and include Additional Shares for all purposes
including but not limited to Section 10 of this Subscription Agreement.
(h) Nothing contained herein or in any document
referred to herein shall be deemed to establish or require the payment of a rate
of interest or other charges in excess of the maximum permitted by applicable
law. In the event a rate of interest required or imputed to be paid or other
charges hereunder exceed the maximum permitted by such law, any payments in
excess of such maximum shall be credited against amounts owed by the Company to
the Subscriber and thus refunded to the Company.
9.2. Optional Redemption. In the event the average closing bid
price for the Common Stock on NASDAQ SmallCap or any securities exchange or
other securities market on which the Common Stock is then being traded for the
five trading days immediately preceding, but not including a Reset Date
("Redemption Price") is less than $2.50 per share, then at the Company's
election, in lieu of delivering the Additional Shares on the Delivery Date, the
Company may deliver on the Delivery Date a sum of money determined by
multiplying the number of Additional Shares otherwise deliverable, by the
Redemption Price ("Redemption Amount"). In the event the Additional Shares or
payment of the Redemption Amount is not received by the Subscriber in US funds
on or before a Delivery Date, then the Company shall no longer have the right
described in this paragraph to substitute cash payment in lieu of delivery of
Additional Shares. As a precondition to exercising the right to substitute the
Redemption Amount in lieu of delivering Additional Shares, the Company must
notify the Subscriber in writing of its intention to do so no later than ten
(10) business days after notice from the Subscriber of the Designated Portion
Amount.
9.3. Mandatory Redemption. In the event the Company may not
issue Additional Shares on a Reset Date because such issuance and delivery would
be contrary to NASDAQ's Corporate Governance Rules, or for any other reason,
then the Company must pay to the Subscriber on the Delivery Date the Redemption
Amount calculated as described in Section 9.2 hereof.
10. Registration Rights; Procedure; Indemnification.
10.1. Registration Rights. The Company hereby grants the
following registration rights to holders of the Company Shares and the Warrants.
(i) On one occasion, for a period commencing
61 days after the Closing Date, but not later than three years from the date
hereof, the Company, upon a written request therefor from any record holder or
holders of more than 50% of the aggregate of the Company's Shares and Common
Stock issuable upon exercise of the Warrants (the Securities and Placement
Shares and securities issued or issuable by virtue of ownership of the
Securities and Placement Shares being, the "Registrable Securities"), shall
prepare and file with the SEC a
<PAGE>
registration statement under the Act covering the Registrable Securities which
are the subject of such request, unless such Registrable Securities are the
subject of an effective registration statement. In addition, upon the receipt of
such request, the Company shall promptly give written notice to all other record
holders of the Registrable Securities that such registration statement is to be
filed and shall include in such registration statement Registrable Securities
for which it has received written requests within 10 days after the Company
gives such written notice. Such other requesting record holders shall be deemed
to have exercised their demand registration right under this Section 10.1. As a
condition precedent to the inclusion of Registrable Securities, the holder
thereof shall provide the Company with such information as the Company
reasonably requests. The obligation of the Company under this Section 10.1(i)
shall be limited to one registration statement.
(ii) If the Company at any time proposes to
register any of its securities under the Act for sale to the public, whether for
its own account or for the account of other security holders or both, except
with respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscriber pursuant to an effective registration statement, each such time
it will give at least 10 days' prior written notice to the record holder of the
Registrable Securities of its intention so to do. Upon the written request of
the holder, received by the Company within 10 days after the giving of any such
notice by the Company, to register any of the Registrable Securities, the
Company will cause such Registrable Securities as to which registration shall
have been so requested to be included with the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
required to permit the sale or other disposition of the Registrable Securities
so registered by the holder of such Registrable Securities (the "Seller"). In
the event that any registration pursuant to this Section 10.1(ii) shall be, in
whole or in part, an underwritten public offering of common stock of the
Company, the number of shares of Registrable Securities to be included in such
an underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the Company shall notify the
Seller in writing of any such reduction. Notwithstanding the forgoing
provisions, the Company may withdraw any registration statement referred to in
this Section 10.1(ii) without thereby incurring any liability to the Seller.
(iii) If, at the time any written request
for registration is received by the Company pursuant to Section 10.1(i), the
Company has determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the proposed offer
and sale for cash of any of its securities for the Company's own account, such
written request shall be deemed to have been given pursuant to Section 10.1(ii)
rather than Section 10.1(i), and the rights of the holders of Registrable
Securities covered by such written request shall be governed by Section 10.1(ii)
except that the Company or underwriter, if any, may not withdraw such
registration or limit the amount of Registrable Securities included in such
registration.
(iv) The Company shall file with the
Commission, within sixty (60) days of the Closing Date, and use its reasonable
commercial efforts to cause to be declared effective
<PAGE>
a Form SB-2 registration statement (or such other form that it is eligible to
use) in order to register the Registrable Securities for resale and distribution
under the Act. The registration statement described in this paragraph must be
declared effective by the Commission within 120 days of the Closing Date. The
Company will register not less than 8,889 shares of Common Stock in the SB-2
registration statement for each $10,000 of Purchase Price as set forth on the
signature page hereto and one share of Common Stock for each share of Common
Stock issuable upon exercise of the Warrants and one common share for each
Placement Share. These shares to be registered shall be reserved and set aside
exclusively for the benefit of the Subscriber and Placement Agents, as the case
may be, and not issued, employed or reserved for anyone other than the
Subscriber and Placement Agents, as the case may be. It is the intention of the
parties that the registration statement include the Additional Shares described
in Section 9 hereof and the Put Shares described in Section 11 hereof. Such
registration statement will be promptly amended or additional registration
statements will be promptly filed by the Company as necessary to register
additional shares of Common Stock issuable upon Reset. Thirty percent (30%) of
the Purchase Price, and up to thirty percent (30%) of the Common Shares and
thirty percent (30%) of the Warrants purchased by the Subscriber as set forth on
the signature page of this Subscription Agreement and thirty percent (30%) of
the Placement Shares shall be held in escrow pursuant to the Funds Escrow
Agreement annexed hereto as Exhibit B until the acceptance for filing by the
Securities and Exchange Commission of the registration statement described in
this Section 10.1(iv) and obtainment of the shareholder approval or NASDAQ
exemption described in Section 7.1(e) hereof ("Registration Escrow"). In the
event the registration statement relating to the Registrable Securities is not
filed within 60 days from the Closing Date or the shareholder approval or NASDAQ
exemption described in Section 7.1(e) hereof is not obtained within 90 days of
the Closing Date, then the Registration Escrow shall be employed as a
non-exclusive remedy, to pay the damages described in Section 10.2(j) of this
Subscription Agreement. In the event the Registration Statement is not filed
within 60 days from the Closing Date, and/or if the Company fails to obtain
within 90 days of the Closing Date, the shareholder approval or exemption from
NASDAQ's Corporate Governance Rules as described in Section 7.1(e) hereof,
unless otherwise agreed to in writing by the Subscriber, then thirty percent
(30%) of the Purchase Price shall be released to the Subscriber, and up to
thirty percent (30%) of the Common Shares, thirty percent (30%) of the Warrants
and thirty percent (30%) of the Placement Shares shall be returned to the
Company. In such event the Company shall not be released from any of its
obligations under this Subscription Agreement or any agreement delivered in
connection herewith including the Company's obligations pursuant to this Section
10 and Reset provisions described in Section 9 of this Subscription Agreement
except that the Company shall no longer be required to file a registration
statement in connection with only those Securities released to the Company and
damages shall not accrue to the Subscriber in relation to the Common Shares
released to the Company from and after the date the corresponding portion of the
Purchase Price is returned to the Subscriber. To the extent any part of the
Purchase Price portion of the Registration Escrow is released to a Subscriber,
then that portion of the Registration Escrow may, at the Subscriber's election,
first be applied in satisfaction of payment by the Company of sums payable to
such Subscriber pursuant to Section 9.1(f) and Section 10.2(j) hereof. Anything
to the contrary herein or in the Shares Escrow Agreement notwithstanding, the
Company Shares component of the Registration Escrow will not be released to the
Company until all outstanding monetary obligations to the Subscriber are
satisfied. Within ten (10) business days of receipt of shareholder approval or
NASDAQ exemption described in Secton
<PAGE>
7.1(e) hereof, the Company agrees to deliver additional Common Shares to the
Escrow Agent, to be held pursuant to the Shares Escrow Agreement representing
the balance of the Common Shares portion of the Registration Escrow so that the
Escrow Agent will be in possession of Common Shares representing 30% of the
aggregate Common Shares Purchased designated on the signature page hereto.
Failure by the Company to timely deposit such additional shares will void the
Company's right to receive a proportionate amount of the funds portion of the
Registration Escrow. Releases of the components of the Registration Escrow will
be in proportion to the amount of Common Stock held by the Escrow Agent.
10.2. Registration Procedures. If and whenever the Company is
required by the provisions hereof to effect the registration of any shares of
Registrable Securities under the Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for the
period of the distribution contemplated thereby (determined as hereinafter
provided);
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for the period specified in paragraph (a) above and comply
with the provisions of the Act with respect to the disposition of all of the
Registrable Securities covered by such registration statement in accordance with
the Seller's intended method of disposition set forth in such registration
statement for such period;
(c) furnish to the Seller, and to each underwriter if
any, such number of copies of the registration statement and the prospectus
included therein (including each preliminary prospectus) as such persons
reasonably may request in order to facilitate the public sale or their
disposition of the securities covered by such registration statement;
(d) use its best efforts to register or qualify the
Seller's Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Seller or, in the
case of an underwritten public offering, the managing underwriter shall
reasonably request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify the Seller and each
underwriter under such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Act, of the happening of
any event of which the Company has knowledge as a result of which the prospectus
contained in such registration statement, as then in effect, includes an untrue
statement
<PAGE>
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing;
(g) make available for inspection by the Seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by the Seller or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
(h) at the request of the Seller, provided a demand
for registration has been made pursuant to Section 10.1(i) or a request for
registration has been made pursuant to Section 10.1(ii), the Registrable
Securities will be included in a registration statement filed pursuant to this
Section 10. In the event of a firm commitment underwritten public offering in
which the Registrable Securities are so included, the lockup, if any, requested
by the managing underwriter may not exceed ninety (90) days after the effective
date thereof.
(i) In connection with each registration hereunder,
the Seller will furnish to the Company in writing such information with respect
to itself and the proposed distribution by it as reasonably shall be necessary
in order to assure compliance with federal and applicable state securities laws.
In connection with each registration pursuant to Section 10.1(i) or 10.1(ii)
covering an underwritten public offering, the Company and the Seller agree to
enter into a written agreement with the managing underwriter in such form and
containing such provisions as are customary in the securities business for such
an arrangement between such underwriter and companies of the Company's size and
investment stature.
(j) The Company and the Subscriber agree that the
Seller will suffer damages if any registration statement required under Section
10.1(i) or 10.1(ii) above is not filed within 45 days after request by the
Holder and not declared effective by the Commission within 130 days after such
request [or 60 days and 120 days, respectively, after the Closing Date in
reference to the Registration Statement on Form SB-2 or such other form
described in Section 10.1(iv)], and maintained in the manner and within the time
periods contemplated by Section 10 hereof, and it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, if (i) the
Registration Statement described in Sections 10.1(i) or 10.1(ii) is not filed
within 45 days of such request, or is not declared effective by the Commission
on or prior to the date that is 130 days after such request, or (ii) the
registration statement on Form SB-2 or such other form described in Section
10.1(iv) is not filed within 60 days after the Closing Date or not declared
effective within 120 days of the Closing Date, or (iii) any registration
statement described in Sections 10.1(i), 10.1(ii) or 10.1(iv) is filed and
declared effective but shall thereafter cease to be effective (without being
succeeded immediately by an additional registration statement filed and declared
effective) for a period of time which shall exceed 30 days in the aggregate per
year but not more than 20 consecutive calendar days (defined as a period of 365
days commencing on the date the Registration Statement is declared effective)
(each such event referred to in clauses (i), (ii) and (iii) of this Section
10.2(j) is referred to herein as a "Non-Registration Event"), then, for so long
as such Non-Registration Event
<PAGE>
shall continue, the Company shall pay in cash as Liquidated Damages to each
holder of any Securities an amount equal to three (3%) percent per month, or
part thereof, of the Purchase Price of the Company Shares then owned of record
by such holder as of immediately following the occurrence of such
Non-Registration Event, unless such Non-Registration Event arises from
Subscriber's material default of Subscriber's obligations hereunder. Payments to
be made pursuant to this Section 10.2(j) shall be due and payable immediately
upon demand in immediately available funds. The Subscriber may elect to satisfy
any outstanding Company obligations arising under Section 9.1(f) hereof or this
Section 10.2(j) by demanding the release from escrow of cash funds and/or
Company Shares at a per share value equivalent to 75% of the lowest bid price of
the Company's Common Stock on NASDAQ SmallCap or on any exchange or other
securities market on which the Common Stock is then being traded, for the five
trading days prior to the date notice of such election is given to the Company.
The Liquidated Damages payable in connection with the initial 60 day period
after the occurrence of a Non-Registration Event arising from a Registration
Statement required pursuant to Section 10.1(iv) hereof not being declared
effective by the Commission on or before 120 days after the Closing Date, may be
paid by the Company, at its option, in common stock at a per share value
equivalent to 75% of the lowest bid price of the Company's Common Stock on
NASDAQ SmallCap or on any exchange or other securities market on which the
Common Stock is then being traded, for the five trading days preceding the
effective date of the Registration Statement or the 180th day after the Closing
Date, whichever is sooner. The Company agrees to deliver to Subscriber the
Common Stock deliverable in satisfaction of Company's monetary obligations
described in this Section 10.2(j) within five business days after written demand
by Subscriber. Common Shares delivered to Subscriber in satisfaction of
Company's monetary obligations are granted all registration rights described
herein, including but not limited to the registration rights described in
Section 10.1(iv) hereof.
10.3. Expenses. All expenses incurred by the Company in
complying with Section 10, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, fee of one counsel, if
any, to represent all the Sellers, and costs of insurance are called
"Registration Expenses". All underwriting discounts and selling commissions
applicable to the sale of Registrable Securities, including any fees and
disbursements of any special counsel to the Seller, are called "Selling
Expenses". The Seller shall pay the fees of its own additional counsel, if any.
The Company will pay all Registration Expenses in connection
with the registration statement under Section 10. All Selling Expenses in
connection with each registration statement under Section 10 shall be borne by
the Seller in proportion to the number of shares sold by the Seller relative to
the number of shares sold under such registration statement or as all Sellers
thereunder may agree.
<PAGE>
10.4. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will indemnify and
hold harmless the Seller, each officer of the Seller, each director of the
Seller, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Seller or underwriter within the meaning
of the 1933 Act, against any losses, claims, damages or liabilities, joint or
several, to which the Seller, or such underwriter or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Registrable Securities
was registered under the Act pursuant to Section 10, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereof,
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 to make the
statements therein not misleading, and will reimburse the Seller, each such
underwriter and each such controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by any such Seller, the underwriter or any
such controlling person in writing specifically for use in such registration
statement or prospectus.
(b) In the event of a registration of any of the
Registrable Securities under the Act pursuant to Section 10, the Seller will
indemnify and hold harmless the Company, and each person, if any, who controls
the Company within the meaning of the Act, each officer of the Company who signs
the registration statement, each director of the Company, each underwriter and
each person who controls any underwriter within the meaning of the Act, against
all losses, claims, damages or liabilities, joint or several, to which the
Company or such officer, director, underwriter or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the Act pursuant to Section 10, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, 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 to make the
statements therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereuder shall be limited to
the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion
<PAGE>
that the public offering price of the Registrable Securities sold by the Seller
under such registration statement bears to the total public offering price of
all securities sold thereunder, but not in any event to exceed the gross
proceeds received by the Seller from the sale of Registrable Securities covered
by such registration statement.
(c) Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party hereunder, notify the indemnifying party in writing thereof, but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to such indemnified party other than under this
Section 10.4(c) and shall only relieve it from any liability which it may have
to such indemnified party under this Section 10.4(c) if and to the extent the
indemnifying party is prejudiced by such omission. In case any such action shall
be brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel satisfactory to such indemnified party, and, after
notice from the indemnifying party to such indemnified party of its election so
to assume and undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 10.4(c) for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected, provided, however, that, if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified parties shall have the right to select one separate
counsel and to assume such legal defenses and otherwise to participate in the
defense of such action, with the reasonable expenses and fes of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In order to provide for just and equitable
contribution in the event of joint liability under the Act in any case in which
either (i) the Seller, or any controlling person of the Seller, makes a claim
for indemnification pursuant to this Section 10.4 but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10.4 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of the
Seller or controlling person of the Seller in circumstances for which
indemnification is provided under this Section 10.4; then, and in each such
case, the Company and the Seller will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Seller is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (A) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities offered by it pursuant to such registration statement; and (B) no
person or entity guilty
<PAGE>
of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
11.1. Future Offerings.
(a) Offering Restriction. Until the later of (i) 90
days after the effective date of the SB-2 Registration Statement or such other
form of registration statement described in Section 10.1(iv) hereof, or (ii) 270
days after the Closing Date, and so long as Subscriber is not in material
default under Section 11.2, the Company and its subsidiaries will not issue any
equity, or convertible debt or other securities other than pursuant to Section
11.1(b) without the consent of the Subscribers investing a majority of the
Purchase Price of the subscriptions in the $2,500,000 offering to which this
Subscription Agreement relates, if such offering would or could result in the
issuance of Common Stock or any other security of the Company that would be
freely tradable on the books of the Company, with or without registration with
the Securities and Exchange Commission or in reliance on any exemption from
registration prior to 90 days after the effective date of a Registration
Statement described in Sections 10.1(i) or 10.1(iv) relating to all the
Registrable Securities.
(b) Right of First Refusal. Until the end of the
period described in Section 11.1(a) above, the Subscriber shall be given not
less than ten (10) business days prior written notice of any proposed sale by
the Company of its common stock or other securities, other than any investment
in the Company in exchange for securities of the Company that may not either be
registered pursuant to the 1933 Act for at least 270 days after the date of such
investment or resold for at least 270 days after the date of such investment.
The Subscriber shall have the right during the ten (10) business days following
the notice to agree to purchase an amount of Company Shares in the same
proportion as being purchased in the aggregate offering to which this
Subscription Agreement relates (i.e. $2,500,000 in the aggregate), of those
securities proposed to be issued and sold, in accordance with the terms and
conditions set forth in the notice of sale. In the event such terms and
conditions are modified during the notice period, the Subscriber shall be given
prompt notice of such modification and shall have the right during the original
notice period or for a period of ten (10) business days following the notice of
modification, whichever is longer, to exercise such right.
11.2. Obligation To Purchase.
(a) The Subscriber agrees to purchase from the
Company additional shares of common stock of the Company (the "Put Shares") for
the aggregate consideration designated on the signature page hereof (the "Put").
The Put may be exercised by the Company only during the two (2) year period
commencing on the Closing Date ("Put Period").
(b) The agreement to purchase the Put Shares is
contingent on the Company filing a registration statement relating to the Put
Shares issuable upon exercise of the Put with the Securities and Exchange
Commission on Form S-3 or such other registration statement described in Section
10.1(iv) of this Subscription Agreement or another form suitable for such
purpose and reasonably designated by the Purchaser on or before 60 days from the
Closing Date, and
<PAGE>
such registration statement being declared effective by the Securities and
Exchange Commission on or before 120 days from the Closing Date.
(c) The exercise of the Put is further contingent on
the following:
(1) As of the effective date of the
registration statement described in Section 11.2(b), and the Put Date (as
hereinafter defined), the Company will be a full reporting company with the
class of Shares registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934.
(2) The Company's Common Stock will have
traded at an average daily trading volume of 75,000 shares for the thirty
trading days prior to each Put Date with an average daily closing bid price of
not less than $1.00 per share for the same period.
(3) The Company's financial condition will
be at least equivalent to the Company's financial condition as reported in the
Company's most recent financial statements included in the Reports and Other
Information.
(4) None of the following events of default
shall have occurred or be continuing:
(i) The Company shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed.
(ii) Any money judgment, writ or similar
process shall be entered or filed against Company or any of its property or
other assets for more than $50,000, and shall remain unvacated, unbonded or
unstayed for a period of forty-five (45) days.
(iii) Bankruptcy, insolvency, reorganization
or liquidation proceedings or other proceedings or relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or against the
Company.
(iv) Delisting of any of the Company's
securities from the NASDAQ SmallCap Market or such other principal exchange on
which such security was listed for trading, or receipt by the Company of notice
from NASDAQ or such other principal exchange that the Company is not in
compliance with its listing requirements.
(v) A concession by the Company or a default
by the Company under any one or more obligation in an aggregate monetary amount
in excess of $50,000.
(vi) An SEC stop trade order or NASDAQ
trading suspension.
<PAGE>
(vii) Any representation or warranty of the
Company made in this Subscription Agreement or in connection herewith, or in any
agreement, statement or certificate given in writing pursuant hereto or in
connection herewith shall be materially false or misleading.
(viii) The occurrence of a Non-Registration
Event.
(ix) Any material default by the Company of
any covenant or undertaking described in this Subscription Agreement or any
document delivered in connection herewith.
(5) A Closing shall have occurred on an
aggregate of $2,500,000 on the same terms and conditions described in this
Subscription Agreement.
(6) The Put Shares on the Put Date (as
hereinafter defined) will be free-trading, unrestricted, unlegended and not
subject to volume or other resale limitations.
(7) The obtainment prior to 90 days from the
Closing Date of an exemption from NASDAQ's Corporate Governance Rules or the
approval of its shareholders of the issuance of the Securities and Placement
Shares as described in Section 7.1(e) hereof.
(d) The Subscriber is required to purchase Put Shares
within ten (10) business days of notice by the Company that the Company is
exercising the Put ("Put Notice"). The date notice is given is the "Put Date".
The Company's right to give a Put Notice expires two years from the Closing
Date. The Company may not give such notice more often than once each twenty-one
(21) calendar days, nor within five (5) business days before or after a Reset
Date or effective date of a reverse split of the Company's Common Stock. Unless
otherwise agreed to by the Subscribers, Put Notices must be given to all
Subscribers in the same proportion to the amounts agreed to be purchased by all
Subscribers undertaking to purchase Put Shares in the $2,500,000 offering to
which this Subscription Agreement relates. The aggregate amount of all such Put
Notices may not exceed $3,000,000. Payment for the Put Shares will be made upon
receipt of the Put Shares by the Subscriber or an escrow agent to be designated
by the Company and Subscriber.
(e) The price per common share for each Put Share
shall be 88% of the average closing bid prices of the Company's Common Stock on
the NASDAQ SmallCap Market, or on any securities exchange or other securities
market on which the Common Stock is then being traded, for the five trading days
commencing two trading days prior to the Put Date and ending two trading days
after the Put Date (the "Put Price").
(f) The aggregate purchase price of Put Shares for
which each Put Notice may be given to all Subscribers in the $2,500,000 offering
to which this Subscription Agreement relates, is as follows: 9/23/98
<PAGE>
Average Per Common Average Daily Aggregate Dollar
Share Closing Common Stock Purchase Price of
Bid Price For Trading Volume For Put Shares For
15 Trading Days 15 Trading Days All Put Notices
Prior to Put Date Prior to Put Date On a Put Date
- ----------------- ------------------ -----------------
Between $1.00 Not Less Than Up to $400,000
and $2.00 75,000 Common Shares
Between $2.00 Not Less Than Up to $600,000
and $3.00 75,000 Common Shares
More than $3.00 Not Less Than Up to $750,000
100,000 Common Shares
(g) The Put Price and number of Common Shares to be
issued pursuant to this Section shall be subject to adjustment from time to time
upon the happening of certain events while the Put right remains outstanding, as
follows:
(1) Stock Splits, Combinations and
Dividends. If the shares of Common Stock are subdivided or combined into a
greater or smaller number of shares of Common Stock, or if a dividend is paid on
the Common Stock in shares of Common Stock, the Put Price shall be
proportionately reduced in case of subdivision of shares or stock dividend or
proportionately increased in the case of combination of shares, in each such
case by the ratio which the total number of shares of Common Stock outstanding
immediately after such event bears to the total number of shares of Common Stock
outstanding immediately prior to such event.
(2) Share Issuance. Subject to the
provisions of this Section, if the Company at any time shall issue any shares of
Common Stock prior to the exercise of the aggregate Put amounts (otherwise than
as provided in Section 11.2(f)(1) or this subparagraph 11.2(f)(2) for a
consideration less than the Put Price that would be in effect at the time of
such issue, then, and thereafter successively upon each such issue, the Put
Price shall be reduced as follows: (i) the number of shares of Common Stock
outstanding immediately prior to such issue shall be multiplied by the Put Price
in effect at the time of such issue and the product shall be added to the
aggregate consideration, if any, received by the Company upon such issue of
additional shares of Common Stock; and (ii) the sum so obtained shall be divided
by the number of shares of Common Stock outstanding immediately after such
issue. The resulting quotient shall be the adjusted Put Price. For purposes of
this adjustment, the issuance of any security of the Company carrying the right
to convert such security into shares of Common Stock or of any warrant, right or
option to purchase Common Stock shall result in an adjustment to the Put Price
upon the issuance of shares of Common Stock upon exercise of such conversion or
purchase rights.
(h) The Company may not exercise the Put without the
consent of the Subscriber, in connection with that number of shares of Common
Stock which would be in excess
<PAGE>
of the sum of (i) the number of shares of Common Stock beneficially owned by the
Subscriber and its affiliates on the Closing Date, and (ii) the number of shares
of Common Stock issuable upon the exercise of the Put with respect to which the
determination of this proviso is being made on a Put Date, which would result in
beneficial ownership by the Subscriber and its affiliates of more than 4.99% of
the outstanding shares of Common Stock of the Company. For the purposes of the
proviso to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13d-3 thereunder, except as otherwise provided
in clause (i) of such proviso.
12. Miscellaneous.
(a) Notices. All notices or other communications
given or made hereunder shall be in writing and shall be personally delivered or
deemed delivered the first business day after being telecopied (provided that a
copy is delivered by overnight courier) to the party to receive the same at its
address set forth below or to such other address as either party shall hereafter
give to the other by notice duly made under this Section: (i) if to the Company,
to The Recovery Network, Inc., 1411 5th Street, Suite 250, Santa Monica,
California 90401, telecopier number: (310) 393-5749, with a copy via telecopier
to: Parker, Chapin, Flattau & Klimpl, Attn: Henry Rothman, Esq., (212) 704-
6288, and (ii) if to the Subscriber, to the name, address and telecopy number
set forth on the signature page hereto.
(b) Closing. The consummation of the transactions
contemplated herein shall take place at the offices of Grushko & Mittman, 277
Broadway, Suite 801, New York, New York 10007, upon the satisfaction of all
conditions to Closing set forth in this Agreement. The closing date shall be the
date that subscriber funds representing the net amount due the Company from
aggregate subscriptions of $2,500,000 are transmitted by wire transfer to the
Company and the Registration Escrow is received by the Escrow Agent identified
in the Funds Escrow Agreement (the "Closing Date").
(c) Entire Agreement; Assignment. This Agreement
represents the entire agreement between the parties hereto with respect to the
subject matter hereof and may be amended only by a writing executed by both
parties. No right or obligation of either party shall be assigned by that party
without prior notice to and the written consent of the other party.
(d) Execution. This Agreement may be executed by
facsimile transmission, and in counterparts, each of which will be deemed an
original.
(e) Law Governing this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to principles of conflicts of laws. Any action brought
by either party against the other concerning the transactions contemplated by
this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. Both parties agree to submit to
the jurisdiction of such courts and waive trial by jury. The prevailing party
shall be entitled to recover from the other party its reasonable attorney's fees
and costs. In the event that any provision of this Agreement or 9/23/98
<PAGE>
any other agreement delivered in connection herewith is invalid or unenforceable
under any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of any agreement.
(f) Cancellation. Until a Closing actually takes
place, either or both the Company or Subscriber may withdraw without penalty
from the transactions described herein.
(g) Automatic Termination. This Agreement shall
automatically terminate without any further action of either party hereto if the
Closing shall not have occurred by the seventh (7th) business day following the
date this Agreement is accepted by the Subscriber, provided, however, that any
such termination shall not terminate the liability of any party which is then in
breach of the Agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:________________________________
Dated: June ____, 1998
Purchase Price: $750,000.00
Issue Price (per share): $2.2875
Common Shares Purchased (aggregate): 327,869
Common Stock Purchase Warrants Obtained: 30,000
Aggregate Put Consideration: $900,000
Section 7.1(e) Shares: 285,656
ACCEPTED:
AUSTOST ANSTALT SCHAAN
7440 Fuerstentum
Lichenstein
Landstrasse 163
Fax No.: 011-431-534532895
By:____________________________
Dated as of June ____, 1998
<PAGE>
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:________________________________
Dated: June ____, 1998
Purchase Price: $750,000.00
Issue Price (per share): $2.2875
Common Shares Purchased (aggregate): 327,869
Common Stock Purchase Warrants Obtained: 30,000
Aggregate Put Consideration: $900,000
Section 7.1(e) Shares: 285,656
ACCEPTED:
BALMORE FUNDS S.A.
P.O. Box 4603
Zurich, Switzerland
Fax No.: 011-411-201-6262
By:____________________________
Dated as of June ____, 1998
<PAGE>
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:________________________________
Dated: June ____, 1998
Purchase Price: $500,000.00
Issue Price (per share): $2.2875
Common Shares Purchased (aggregate): 218,579
Common Stock Purchase Warrants Obtained: 20,000
Aggregate Put Consideration: $600,000
Section 7.1(e) Shares: 190,437
ACCEPTED:
ZAKENI LTD.
c/o Betuvo AG
Baarer Strasse
73 Postsach 2121
6302 ZUG, Switzerland
Fax No.: 416-638-5023
By:____________________________
Dated as of June ____, 1998
<PAGE>
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:________________________________
Dated: June ____, 1998
Purchase Price: $200,000.00
Issue Price (per share): $2.2875
Common Shares Purchased (aggregate): 87,432
Common Stock Purchase Warrants Obtained: 8,000
Aggregate Put Consideration: $240,000
Section 7.1(e) Shares: 76,175
ACCEPTED:
BL SQUARED FOUNDATION
274 Madison Avenue
New York, New York 10016
Fax No.: 212-770-3218
By:____________________________
Dated as of June ____, 1998
<PAGE>
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:________________________________
Dated: June ____, 1998
Purchase Price: $150,000.00
Issue Price (per share): $2.2875
Common Shares Purchased (aggregate): 65,574
Common Stock Purchase Warrants Obtained: 6,000
Aggregate Put Consideration: $180,000
Section 7.1(e) Shares: 57,131
ACCEPTED:
THE SARGON FUND, L.P.
20 Adele Road
Cedarhurst, New York 11516
Fax No.: 516-371-6999
By:____________________________
Dated as of June ____, 1998
<PAGE>
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:________________________________
Dated: June ____, 1998
Purchase Price: $100,000.00
Issue Price (per share): $2.2875
Common Shares Purchased (aggregate): 43,716
Common Stock Purchase Warrants Obtained: 4,000
Aggregate Put Consideration: $120,000
Section 7.1(e) Shares: 38,087
ACCEPTED:
MARTIN CHOPP
1129 East 22nd Street
Brooklyn, New York 11210
Fax No.: 718-854-3342
- -------------------------------
Dated as of June ____, 1998
<PAGE>
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
Very truly yours,
THE RECOVERY NETWORK, INC.
By:________________________________
Dated: June ____, 1998
Purchase Price: $50,000.00
Issue Price (per share): $2.2875
Common Shares Purchased (aggregate): 21,858
Common Stock Purchase Warrants Obtained: 2,000
Aggregate Put Consideration: $60,000
Section 7.1(e) Shares: 19,044
ACCEPTED:
TLG REALTY
c/o Melo
525 West 52nd Street
New York, New York 10019
Fax No.: 212-974-8315
- -------------------------------
Dated as of June ____, 1998
EXHIBIT 2.3
FORM OF FUNDS ESCROW AGREEMENT
This Agreement is dated as of the 29th day of June, 1998 among The
Recovery Network, Inc. (the "Company"), the parties identified on Schedule A
hereto, ("Subscriber" or "Subscribers"), and Grushko & Mittman (the "Escrow
Agent"):
W I T N E S S E T H:
WHEREAS, the Company and Subscriber have entered into a Subscription
Agreement ("Subscription Agreement") calling for the sale by the Company of the
Company's Common Stock ("Company Shares") and Warrants ("Warrants") for the
aggregate purchase price of $2,500,000 to the Subscribers in the denominations
set forth on Schedule A hereto, against payment therefor; and
WHEREAS, the parties hereto require the Company to deliver the Company
Shares, Warrants and other documents against payment therefor, with such Company
Shares, Warrants, documents and payment to be delivered to the Escrow Agent to
be held in escrow and released by the Escrow Agent in accordance with the terms
and conditions of this Agreement; and
WHEREAS, the Escrow Agent is willing to serve as escrow agent pursuant
to the terms and conditions of this Agreement;
NOW THEREFORE, the parties agree as follows:
ARTICLE I
INTERPRETATION
1.1 Definitions. Whenever used in this Agreement, the following terms
shall have the following respective meanings:
(a) "Agreement" means this Agreement and all amendments made
hereto by written agreement among the parties;
(b) "Company Shares" means common stock of the Company to be
issued to the Subscribers in the amounts designated on Schedule A hereto.
(c) "Warrants" means common stock purchase warrants of the
Company issued to the Subscribers in the amounts designated on Schedule A
hereto.
(d) "Escrowed Payment" means the sum of up to $2,500,000 to be
held in escrow by the Escrow Agent on behalf of the Company and Subscribers.
<PAGE>
(e) "Subscription Agreement" means the Subscription Agreement
to be entered into by the parties in reference to the Company Shares and
Warrants, with the exhibits thereto.
(f) "Shares Escrow Agreement" means the Escrow Agreement to be
entered into by the parties and referred to in the Subscription Agreement.
(g) "Escrowed Securities" means the Company Shares, Company
Warrants and Placement Shares components of the Registration Escrow described in
Section 10.1(iv) of the Subscription Agreement.
(h) "Registration Funds Escrow" means the portion of the
Escrowed Payment to be held in escrow pursuant to Section 10.1(iv) of the
Subscription Agreement.
(i) "Placement Shares" means common stock of the Company
deliverable to Placement Agents as described in Section 6 of the Subscription
Agreement, and as set forth on Schedule B hereto.
(j) "Placement Agent Commissions" means the commissions
payable by the Company to Placement Agents as described in Section 6 of the
Subscription Agreement, and as set forth on Schedule B hereto.
(k) "Opinion" means the original legal opinion described in
Section 3 of the Subscription Agreement.
(l) Collectively, the Company Shares, Warrants, Subscription
Agreement signed on behalf of the Company, Shares Escrow Agreement, Placement
Shares, Placement Agent Commissions, Escrowed Securities, and Opinion are
referred to as "Company Documents."
(m) Collectively, the Escrowed Payment and Subscription
Agreement signed on behalf of the Subscribers without exhibits thereto are
referred to as "Subscriber Documents."
1.2 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the Company Documents and Subscriber
Documents and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties. There are no warranties,
representations and other agreements made by the parties in connection with the
subject matter hereof except as specifically set forth in this Agreement.
1.3 Extended Meanings. In this Agreement words importing the singular
number include the plural and vice versa; words importing the masculine gender
include the feminine and neuter genders. The word "person" includes an
individual, body corporate, partnership, trustee or trust or unincorporated
association, executor, administrator or legal representative.
-2-
<PAGE>
1.4 Waivers and Amendments. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by all parties, or, in the
case of a waiver, by the party waiving compliance. Except as expressly stated
herein, no delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver on
the part of any party of any right, power or privilege hereunder preclude any
other or future exercise of any other right, power or privilege hereunder.
1.5 Headings. The division of this Agreement into articles, sections,
subsections and paragraphs and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement.
1.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York without regard to
principles of conflict of laws.
1.7 Consents to Service of Process. The Company and the Subscriber each
hereby irrevocably consent to the exclusive jurisdiction of the courts of the
State of New York and of any Federal Court located in the State of New York,
each as may have competent jurisdiction, in connection with any action, suit or
other proceeding arising out of or relating to this Agreement or any action
taken or omitted hereunder, waive trial by jury, and waive personal service of
any summons, complaint or other process and agree that the service thereof may
be made by certified or registered mail directed to such person at such person's
address for purpose of notice hereunder.
1.8 Fees. The Company shall pay the Escrow Agent a fee of $5,000 in
connection with the Escrow Agent's services hereunder. This fee and other fees
due the Escrow Agent pursuant to the Subscription Agreement shall be paid by
deduction from the Escrowed Payment, but only if the balance of the Escrowed
Payment is to be released pursuant to this Agreement. The Escrow Agent shall be
paid an additional fee of $2,500 (without apportionment) on each anniversary of
the date of this Agreement upon which the Escrow Agent is holding any Company
Documents or Subscriber Documents.
ARTICLE II
DELIVERIES TO THE ESCROW AGENT
2.1 Delivery of Company Documents to Escrow Agent. On or about the date
hereof, the Company shall deliver to the Escrow Agent the Company Documents.
2.2 Delivery of Subscriber Documents to Escrow Agent. On or about the
date hereof, the Subscriber shall deliver to the Escrow Agent the Subscriber
Documents and the Escrowed Payment pursuant to the following wire transfer
instructions:
-3-
<PAGE>
Citibank, N.A.
250 Broadway
New York, New York 10007, USA
ABA Number: 0210-00089
For Credit to: Grushko & Mittman
IOLA Trust Account
Account Number: 037-45208884
2.3 Intention to Create Escrow Over Company Documents and Subscriber
Documents. The Subscriber and Company intend that the Company Documents and
Subscriber Documents shall be held in escrow by the Escrow Agent pursuant to
this Agreement for their benefit as set forth herein.
2.4 Escrow Agent to Deliver Company Documents and Subscriber Documents.
The Escrow Agent shall hold and release the Company Documents and Subscriber
Documents only in accordance with the terms and conditions of this Agreement.
ARTICLE III
RELEASE OF COMPANY DOCUMENTS AND SUBSCRIBER DOCUMENTS
3.1 Release of Escrow. Subject to the provisions of Section 4.2, the
Escrow Agent shall release the Company Documents and Subscriber Documents as
follows:
(a) Upon receipt by the Escrow Agent of the Company Documents
and the corresponding Subscriber Documents, the Escrow Agent will release
Escrowed Securities and Registration Funds Escrow to the Escrow Agent identified
in the Shares Escrow Agreement. Simultaneously, the balance of the Company
Documents will be released to the Subscribers and the balance of the
corresponding Subscriber Documents (less the portion to be delivered to the
Escrow Agent pursuant to the Shares Escrow Agreement) will be released to the
Company. The Placement Shares and Placement Agent Commissions (less the portions
to be delivered to the Escrow Agent pursuant to the Shares Escrow Agreement)
will be delivered to the Placement Agents identified on Schedule B hereto. The
Company will provide written facsimile or original instructions to the Escrow
Agent as to the disposition of all funds releasable to the Company.
(b) In the event the Escrow Agent does not receive Company
Documents and the corresponding Subscriber Documents prior to July 10, 1998,
then the Escrow Agent will return the Company Documents to the Company, and
return the Subscriber Documents to the Subscribers.
-4-
<PAGE>
(c) Upon receipt by the Escrow Agent of joint written
instructions ("Joint Instructions") signed by the Company and the Subscriber, it
shall deliver the Company Documents and Subscriber Documents in accordance with
the terms of the Joint Instructions.
(d) Upon receipt by the Escrow Agent of a final and
non-appealable judgment, order, decree or award of a court of competent
jurisdiction (a "Court Order"), the Escrow Agent shall deliver the Company
Documents and Subscriber Documents in accordance with the Court Order. Any Court
Order shall be accompanied by an opinion of counsel for the party presenting the
Court Order to the Escrow Agent (which opinion shall be satisfactory to the
Escrow Agent) to the effect that the court issuing the Court Order has competent
jurisdiction and that the Court Order is final and non-appealable.
3.2 Acknowledgement of Company and Subscriber; Disputes. The Company
and the Subscriber acknowledge that the only terms and conditions upon which the
Company Documents and Subscriber Documents are to be released are set forth in
Sections 3 and 4 of this Agreement. The Company and the Subscriber reaffirm
their agreement to abide by the terms and conditions of this Agreement with
respect to the release of the Company Documents and Subscriber Documents. Any
dispute with respect to the release of the Company Documents and Subscriber
Documents shall be resolved pursuant to Section 4.2 or by agreement between the
Company and Subscriber.
ARTICLE IV
CONCERNING THE ESCROW AGENT
4.1 Duties and Responsibilities of the Escrow Agent. The Escrow Agent's
duties and responsibilities shall be subject to the following terms and
conditions:
(a) The Subscriber and Company acknowledge and agree that the
Escrow Agent (i) shall not be responsible for or bound by, and shall not be
required to inquire into whether either the Subscriber or Company is entitled to
receipt of the Company Documents and Subscriber Documents pursuant to, any other
agreement or otherwise; (ii) shall be obligated only for the performance of such
duties as are specifically assumed by the Escrow Agent pursuant to this
Agreement; (iii) may rely on and shall be protected in acting or refraining from
acting upon any written notice, instruction, instrument, statement, request or
document furnished to it hereunder and believed by the Escrow Agent in good
faith to be genuine and to have been signed or presented by the proper person or
party, without being required to determine the authenticity or correctness of
any fact stated therein or the propriety or validity or the service thereof;
(iv) may assume that any person purporting to give notice or make any statement
or execute any document in connection with the provisions hereof has been duly
authorized to do so; (v) shall not be under any duty to give the property held
by Escrow Agent hereunder any greater degree of care than Escrow Agent gives its
own similar property; and (vi) may consult counsel satisfactory to Escrow Agent,
the opinion of such counsel to be full and complete authorization and protection
in respect of any action taken, suffered
-5-
<PAGE>
or omitted by Escrow Agent hereunder in good faith and in accordance with the
opinion of such counsel.
(b) The Subscriber and Company acknowledge that the Escrow
Agent is acting solely as a stakeholder at their request and that the Escrow
Agent shall not be liable for any action taken by Escrow Agent in good faith and
believed by Escrow Agent to be authorized or within the rights or powers
conferred upon Escrow Agent by this Agreement. The Subscriber and Company,
jointly and severally, agree to indemnify and hold harmless the Escrow Agent and
any of Escrow Agent's partners, employees, agents and representatives for any
action taken or omitted to be taken by Escrow Agent or any of them hereunder,
including the fees of outside counsel and other costs and expenses of defending
itself against any claim or liability under this Agreement, except in the case
of gross negligence or willful misconduct on Escrow Agent's part committed in
its capacity as Escrow Agent under this Agreement. The Escrow Agent shall owe a
duty only to the Subscriber and Company under this Agreement and to no other
person.
(c) The Subscriber and Company jointly and severally agree to
reimburse the Escrow Agent for its reasonable out-of-pocket expenses (including
counsel fees) incurred in connection with the performance of its duties and
responsibilities hereunder.
(d) The Escrow Agent may at any time resign as Escrow Agent
hereunder by giving five (5) days prior written notice of resignation to the
Subscriber and the Company. Prior to the effective date of the resignation as
specified in such notice, the Subscriber and Company will issue to the Escrow
Agent a Joint Instruction authorizing delivery of the Notes and Escrowed Payment
to a substitute Escrow Agent selected by the Subscriber and Company. If no
successor Escrow Agent is named by the Subscriber and Company, the Escrow Agent
may apply to a court of competent jurisdiction in the State of New York for
appointment of a successor Escrow Agent, and to deposit the Notes and Escrowed
Payment with the clerk of any such court.
(e) The Escrow Agent does not have and will not have any
interest in the Company Documents and Subscriber Documents, but is serving only
as escrow Subscriber, having only possession thereof. The Escrow Agent shall not
be liable for any loss resulting from the making or retention of any investment
in accordance with this Escrow Agreement.
(f) This Agreement sets forth exclusively the duties of the
Escrow Agent with respect to any and all matters pertinent thereto and no
implied duties or obligations shall be read into this Agreement.
(g) The Escrow Agent shall be permitted to act as counsel for
the Subscriber or the Company, as the case may be, in any dispute as to the
disposition of the Company Documents and Subscriber Documents, in any other
dispute between the Subscriber and Company, whether or not the Escrow Agent is
then holding the Company Documents and Subscriber Documents and continues to act
as the Escrow Agent hereunder.
-6-
<PAGE>
(h) The provisions of this Section 4.1 shall survive the
resignation of the Escrow Agent or the termination of this Agreement.
4.2 Dispute Resolution: Judgments. Resolution of disputes arising under
this Agreement shall be subject to the following terms and conditions:
(a) If any dispute shall arise with respect to the delivery,
ownership, right of possession or disposition of the Company Documents and
Subscriber Documents, or if the Escrow Agent shall in good faith be uncertain as
to its duties or rights hereunder, the Escrow Agent shall be authorized, without
liability to anyone, to (i) refrain from taking any action other than to
continue to hold the Company Documents and Subscriber Documents pending receipt
of a Joint Instruction from the Subscriber and Company, or (ii) deposit the
Company Documents and Subscriber Documents with any court of competent
jurisdiction in the State of New York, in which event the Escrow Agent shall
give written notice thereof to the Subscriber and the Company and shall
thereupon be relieved and discharged from all further obligations pursuant to
this Agreement. The Escrow Agent may, but shall be under no duty to, institute
or defend any legal proceedings which relate to the Company Documents and
Subscriber Documents. The Escrow Agent shall have the right to retain counsel if
it becomes involved in any disagreement, dispute or litigation on account of
this Agreement or otherwise determines that it is necessary to consult counsel.
(b) The Escrow Agent is hereby expressly authorized to comply
with and obey any Court Order. In case the Escrow Agent obeys or complies with a
Court Order, the Escrow Agent shall not be liable to the Subscriber and Company
or to any other person, firm, corporation or entity by reason of such
compliance.
ARTICLE V
GENERAL MATTERS
5.1 Termination. This escrow shall terminate upon the release of all of
the Company Documents and Subscriber Documents or at any time upon the agreement
in writing of the Subscriber and Company.
5.2 Notices. All notices, request, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been received one (1) day after being sent by telecopy (with copy delivered by
overnight courier):
-7-
<PAGE>
(a) If to the Company, to:
The Recovery Network, Inc.
1411 5th Street, Suite 250
Santa Monica, California 90401
(310) 393-5749 (Telecopier)
With a Copy by telecopier only to:
Parker, Chapin, Flattau & Klimpl, LLP
Attn: Henry Rothman, Esq.
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6288 (Telecopier)
(b) If to the Subscriber, to: the addresses and
telecopier numbers listed on Schedule A hereto.
(c) If to the Escrow Agent, to:
Grushko & Mittman
Attorneys at Law
277 Broadway, Suite 801
New York, New York 10007
(212) 227-5865 (telecopier)
or to such other address as any of them shall give to the others by notice made
pursuant to this Section 5.2.
5.3 Interest. The Escrowed Payment shall not be held in an interest
bearing account nor will interest be payable in connection therewith.
5.4 Assignment; Binding Agreement. Neither this Agreement nor any right
or obligation hereunder shall be assignable by any party without the prior
written consent of the other parties hereto. This Agreement shall enure to the
benefit of and be binding upon the parties hereto and their respective legal
representatives, successors and assigns.
5.5 Invalidity. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal, or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being
-8-
<PAGE>
intended that all of the rights and privileges of the parties hereto shall be
enforceable to the fullest extent permitted by law.
5.6 Counterparts/Execution. This Agreement may be executed in any
number of counterparts and by different signatories hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. This
Agreement may be executed by facsimile transmission.
5.7 Agreement. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
THE RECOVERY NETWORK, INC.
"Company"
By:________________________________
AUSTOST ANSTALT SCHAAN
"Subscriber"
By:________________________________
BALMORE FUNDS S.A.
"Subscriber"
By:________________________________
ESCROW AGENT:
GRUSHKO & MITTMAN
By:________________________________
-9-
<PAGE>
5.7. Agreement. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
THE RECOVERY NETWORK, INC.
"Company"
By:________________________________
BL SQUARED FOUNDATION
"Subscriber"
By:________________________________
THE SARGON FUND, L.P.
"Subscriber"
By:_________________________________
TLG REALTY
"Subscriber"
By:_________________________________
------------------------------------
MARTIN CHOPP -"Subscriber"
ZAKENI LTD.
"Subscriber"
By:________________________________
-10-
<PAGE>
ESCROW AGENT:
GRUSHKO & MITTMAN
By:________________________________
-11-
<PAGE>
FUNDS -SCHEDULE A
<TABLE>
<CAPTION>
SUBSCRIBERS AGGREGATE AGGREGATE AGGREGATE
COMPANY SHARES WARRANTS ESCROWED
PAYMENT
- ---------------------------------------- --------------------------- ------------------------- -----------------------
<S> <C> <C> <C>
AUSTOST ANSTALT SCHAAN 327,869 30,000 $750,000.00
7440 Fuerstentum
Lichenstein
Landstrasse 163
Fax: 011-431-534532895
- ---------------------------------------- --------------------------- ------------------------- -----------------------
BALMORE FUNDS S.A. 327,869 30,000 $750,000.00
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
- ---------------------------------------- --------------------------- ------------------------- -----------------------
ZAKENI LTD. 218,579 20,000 $500,000.00
c/o Betuvo AG
Baarer Strasse
73 Postsach 2121
6302 ZUG
Switzerland
Fax: 416-638-5023
- ---------------------------------------- --------------------------- ------------------------- -----------------------
BL SQUARED FOUNDATION 87,432 8,000 $200,000.00
274 Madison Avenue
New York, NY 10016
Tax ID: 13-7104062
Fax: 212-770-3218
- ---------------------------------------- --------------------------- ------------------------- -----------------------
THE SARGON FUND, L.P. 65,574 6,000 $150,000.00
20 Adele Road
Cedarhurst, NY 11516
Attn: Jennifer Spinner
Tax ID:
Fax: 516-371-6999
- ---------------------------------------- --------------------------- ------------------------- -----------------------
MARTIN CHOPP 43,716 4,000 $100,000.00
1129 East 22nd Street
Brooklyn, NY 11210
Tax ID: ###-##-####
Fax: 718-854-3342
- ---------------------------------------- --------------------------- ------------------------- -----------------------
TLG REALTY 21,858 2,000 $50,000.00
c/o Melo
525 West 52nd Street
New York, NY 10019
Fax: 212-974-8315
- ---------------------------------------- --------------------------- ------------------------- -----------------------
TOTALS 1,092,897 100,000 $2,500,000.00
======================================== =========================== ========================= =======================
</TABLE>
-12-
<PAGE>
FUNDS -SCHEDULE B
PLACEMENT AGENT PLACEMENT SHARES PLACEMENT AGENT
COMMISSIONS
- ----------------------------- ------------------ --------------------
ELLIS ENTERPRISES LTD. 32,787 $75,000.00
42A Waterloo Road
London, England
NW2 7UF
Fax: 011-441-814509004
- ----------------------------- ------------------ --------------------
LIBRA FINANCE S.A. 10,929 $25,000.00
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
- ----------------------------- ------------------ --------------------
TOTALS 43,716 $100,000.00
============================= ================== ====================
-13-
EXHIBIT 2.4
FORM OF SHARES ESCROW AGREEMENT
THIS AGREEMENT dated the 29th day of June, 1998, between The
Recovery Network, Inc., a Colorado corporation (the "Company"), the parties
identified on Schedule A hereto (the "Holder" or "Holders") and Grushko &
Mittman (the "Escrow Agent"):
W I T N E S S E T H:
WHEREAS, the Company and Holder have entered into a
Subscription Agreement ("Subscription Agreement") calling for the sale by the
Company of the Company's Common Stock ("Company Shares") and Warrants
("Warrants") for the aggregate purchase price of $2,500,000 to the Holders in
the denominations set forth on Schedule A hereto, against payment therefor; and
WHEREAS, Section 10.1(iv) of the Subscription Agreement
requires the Company to deposit the Registration Escrow (as defined in the
Subscription Agreement) with the Escrow Agent to be held in escrow and released
by the Escrow Agent in accordance with the terms and conditions of this
Agreement; and
WHEREAS, the Escrow Agent is willing to serve as escrow agent
pursuant to the terms and conditions of this Agreement;
NOW THEREFORE, the parties agree as follows:
ARTICLE I
INTERPRETATION
1.1 Definitions. Whenever used in this Agreement, the following terms
shall have the following respective meanings:
(a) "Agreement" means this Agreement and all amendments made
hereto and thereto by written agreement between the parties;
(b) "Registration Escrow" means the Registration Escrow
described in Section 10.1(iv) of the Subscription Agreement.
(c) "Funds Escrow" means the funds portion of the Registration
Escrow as described in and to be held in escrow pursuant to Section 10.1(iv) of
the Subscription Agreement.
(d) "Escrowed Securities" means the Company Shares, Company
Warrants, Placement Shares and Placement Agent Commissions components of the
Registration Escrow
<PAGE>
described in Sections 6 and 10.1(iv) of the Subscription Agreement, together
with Additional Shares, as defined in Section 9.1(a) of the Registration Escrow
and the additional shares described in Section 10.1(iv) of the Subscription
Agreement.
1.2 Entire Agreement. This Agreement together with the Subscription
Agreement and Convertible Note constitute the entire agreement between the
parties hereto pertaining to the Escrowed Stock and Registration Escrow and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written of the parties. There are no warranties, representations
and other agreements made by the parties in connection with the subject matter
hereof except as specifically set forth in this Agreement.
1.3 Extended Meanings. In this Agreement words importing the singular
number include the plural and vice versa; words importing the masculine gender
include the feminine and neuter genders. The word "person" includes an
individual, body corporate, partnership, trustee or trust or unincorporated
association, executor, administrator or legal representative.
1.4 Waivers and Amendments. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by all parties or, in the
case of a waiver, by the party waiving compliance. Except as expressly stated
herein, no delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver on
the part of any party of any right, power or privilege hereunder preclude any
other or future exercise of any other right, power or privilege hereunder.
1.5 Headings. The division of this Agreement into articles, sections,
subsections and paragraphs and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement.
1.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York without regard to
principles of conflict of laws.
1.7 Consents to Service of Process. The Company and the Holder each
hereby irrevocably consent to the exclusive jurisdiction of the courts of the
State of New York and of any federal court located in the State of New York,
each as may have competent jurisdiction, in connection with any action, submit
or other proceeding arising out of or relating to this Agreement or any action
taken or omitted hereunder, and waive personal service of any summons, complaint
or other process and agree that the service hereto may be made by certified or
registered mail directed to such person at such person's address for purpose of
notice hereunder.
1.8 Fees. The Company shall pay the Escrow Agent a fee of $5,000 in
connection with the Escrow Agent's services hereunder. The Escrow Agent shall be
paid by the Company an additional fee of $2,500 (without apportionment) on each
anniversary of the date of this Agreement upon which the Escrow Agent is holding
any Company Documents or Subscriber Documents.
-2-
<PAGE>
ARTICLE II
STOCK TO BE DELIVERED TO THE ESCROW AGENT
2.1 Delivery of Company's Stock to Escrow Agent. As required under
Section 10.1(iv) of the Subscription Agreement, the Company and Holder shall
deliver to the Escrow Agent the Registration Escrow at or prior to the Closing
Date. Such additional common stock of the Company as is required to be delivered
to the Escrow Agent pursuant to the Subscription Agreement shall be delivered to
the Escrow Agent and shall be a portion of the Registration Escrow.
2.2 Intention to Create Escrow Over Registration Escrow. The Holder and
Company intend that the Registration Escrow shall be held in escrow by the
Escrow Agent pursuant to this Agreement for their respective benefits as set
forth herein.
2.3 Escrow Agent to Hold Registration Escrow. The Escrow Agent shall
hold and release the Registration Escrow only in accordance with the terms and
conditions of this Agreement.
ARTICLE III
RELEASE OF REGISTRATION ESCROW
3.1 Subject to the provisions of Section 4.2, the Escrow Agent shall
release the Registration Escrow as follows:
(a) Upon receipt by the Escrow Agent of a notice ("Notice of
Release") signed by a Holder, reciting that a Holder is entitled to receive all
or part of the Registration Escrow designated on Schedule A hereto in accordance
with the terms of the Subscription Agreement, the Escrow Agent shall promptly
deliver a copy of such Notice of Release to the Company. If the Escrow Agent
does not receive from the Company within three (3) business days after notice is
given to the Company by the Escrow Agent, a written notice of objection stating
the reasons for the objection in accordance with the terms of the Subscription
Agreement ("Notice of Objection") signed by the Company, or if the Escrow Agent
shall within such period receive a written consent signed by the Company to such
return, then the Escrow Agent shall deliver to the Holder that amount of the
Registration Escrow as is called for in the Notice of Release; deliver to the
Company the complementary portion of the Registration Escrow; and deliver to the
Placement Agent the corresponding portion of the Placement Shares and Placement
Agent Commissions as described in the Subscription Agreement and set forth on
Schedule B hereto. If the Escrow Agent receives Notice of Objection from the
Company within such three (3) business day period, the Escrow Agent shall
continue to hold the Registration Escrow until otherwise authorized and directed
to distribute the same pursuant to the provisions of Sections 3.3(c) or 3.3(d).
-3-
<PAGE>
(b) Upon receipt by the Escrow Agent of a notice ("Notice of
Delivery") signed by the Company stating that the Company is entitled to receipt
of the Registration Escrow or any portion thereof, in accordance with the
provisions of the Subscription Agreement, and stating the reasons therefor, the
Escrow Agent shall promptly send a copy of such Notice of Delivery to the
Holder. If the Escrow Agent does not receive from the Holder within three (3)
business days after notice is given to the Holder by the Escrow Agent, a written
Notice of Objection stating the reasons for the objection in accordance with the
terms of the Subscription Agreement signed by the Holder, or if the Escrow Agent
shall within such period receive a written consent signed by the Holder, then
the Escrow Agent shall deliver the Registration Escrow or such portion thereof
to the Company in accordance with the Notice of Delivery, deliver to the Holder
the complementary portion of the Registration Escrow, and deliver to the
Placement Agent the corresponding portion of the Placement Shares and Placement
Agent Commissions described in the Subscription Agreement and set forth on
Schedule B hereto. If the Escrow Agent receives a Notice of Objection from the
Holder within such three (3) day period, then the Escrow Agent shall continue to
hold the Registration Escrow until otherwise authorized and directed to
distribute the same pursuant to the provision of Sections 3.3(c) or 3.3(d).
(c) Upon receipt by the Escrow Agent of a joint written
instruction (a "Joint Instruction") signed by the Company and the Holder, it
shall deliver the Registration Escrow in accordance with the terms of the Joint
Instruction.
(d) Upon receipt by the Escrow Agent of a final and
non-appealable judgment, order, decree or award of a court of competent
jurisdiction (a "Court Order"), the Escrow Agent shall deliver the Registration
Escrow in accordance with the Court Order. Any Court Order shall be accompanied
by an opinion of counsel for the party presenting the Court Order to the Escrow
Agent (which opinion shall be satisfactory to the Escrow Agent) to the effect
that the court issuing the Court Order has competent jurisdiction and that the
Court Order is final and non-appealable.
3.2 Acknowledgement of Company and Holder; Disputes. The Company and
the Holder acknowledge that the only terms and conditions upon which the
Registration Escrow are to be released are set forth in Section 3 and 4 of this
Agreement. The Company and the Holder reaffirm their agreement to abide by the
terms and conditions of this Agreement with respect to the release of the
Registration Escrow. Any dispute with respect to the release of the Registration
Escrow shall be resolved pursuant to Section 4.2 or by agreement between the
Company and Holder.
ARTICLE IV
CONCERNING THE ESCROW AGENT
4.1 Duties and Responsibilities of the Escrow Agent. The Escrow Agent's
duties and responsibilities shall be subject to the following terms and
conditions:
-4-
<PAGE>
(a) The Holder and Company acknowledge and agree that the
Escrow Agent (i) shall not be responsible for or bound by, and shall not be
required to inquire into whether either the Holder or Company is entitled to
receipt of the Registration Escrow pursuant to, the Subscription Agreement or
otherwise; (ii) shall be obligated only for the performance of such duties as
are specifically assumed by the Escrow Agent pursuant to this Agreement; (iii)
may rely on and shall be protected in acting or refraining from acting upon any
written notice, instruction, instrument, statement, request or document
furnished to it hereunder and believed by it in good faith to be genuine and to
have been signed or presented by the proper person or party, without being
required to determine the authenticity or correctness of any fact stated therein
or the propriety or validity or the service thereof; (iv) may assume that any
person purporting to give notice or make any statement or execute any document
in connection with the provisions hereof has been duly authorized to do so; (v)
shall not be under any duty to give the property held by Escrow Agent hereunder
any greater degree of care than Escrow Agent gives its own similar property; and
(vi) may consult counsel satisfactory to Escrow Agent, the opinion of such
counsel to be full and complete authorization and protection in respect of any
action taken, suffered or omitted by Escrow Agent hereunder in good faith and in
accordance with the opinion of such counsel.
(b) The Holder and Company acknowledge that the Escrow Agent
is acting solely as a stakeholder at their request and that the Escrow Agent
shall not be liable for any action taken by Escrow Agent in good faith and
believed by Escrow Agent to be authorized or within the right or powers
conferred upon Escrow Agent by this Agreement. The Holder and Company, jointly
and severally, agree to indemnify and hold harmless the Escrow Agent and any of
Escrow Agent's partners, employees, agents and representatives for any action
taken or omitted to be taken by Escrow Agent or any of them hereunder, including
the reasonable fees and costs of outside counsel in defending itself against any
claim or liability under this Agreement, except in the case of gross negligence
or willful misconduct on Escrow Agent's part committed in its capacity as Escrow
Agent under this Agreement. The Escrow Agent shall owe a duty only to the Holder
and Company under this Agreement and to no other person.
(c) The Holder and Company jointly and severally agree to
reimburse the Escrow Agent for its reasonable out-of-pocket expenses (including
reasonable counsel fees) incurred in connection with the performance of its
duties and responsibilities hereunder.
(d) The Escrow Agent may at any time resign as Escrow Agent
hereunder by giving five (5) days' prior written notice of resignation to the
Holder and the Company. Prior to the effective date of the resignation as
specified in such notice, the Holder and Company will issue to the Escrow Agent
a Joint Instruction authorizing delivery of the Registration Escrow to a
substitute Escrow Agent selected by the Holder and Company. If no successor
Escrow Agent is named by the Holder and Company, the Escrow Agent may apply to a
court of competent jurisdiction in the state of New York or any federal court
located in the state of New York for appointment of a successor Escrow Agent.
-5-
<PAGE>
(e) The Escrow Agent does not have and will not have any
interest in the Escrowed Stock or Registration Escrow, but is serving only as
escrow holder, having only possession thereof. The Escrow Agent shall not be
liable for any loss resulting from the making or retention of any investment in
accordance with this Escrow Agreement.
(f) This Agreement sets forth exclusively the duties of the
Escrow Agent with respect to any and all matters pertinent thereto and no
implied duties or obligations shall be read into this Agreement.
(g) The Escrow Agent shall be permitted to act as counsel for
the Holder or the Company, as the case may be, in any dispute as to the
disbursement of the Escrowed Stock or Registration Escrow or in any other
dispute between the Holder and Company, whether or not the Escrow Agent is then
holding the Escrowed Stock or Registration Escrow and continues to act as the
Escrow Agent hereunder.
(h) The provisions of this Section 4.1 shall survive the
resignation of the Escrow Agent or the termination of this Agreement.
4.2 Dispute Resolution: Judgments. Resolution of disputes arising under
this Agreement shall be subject to the following terms and conditions:
(a) If any dispute shall arise with respect to the delivery,
ownership, right of possession or disposition of the Escrowed Stock or
Registration Escrow, or if the Escrow Agent shall in good faith be uncertain as
to its duties or rights hereunder, the Escrow Agent shall be authorized, without
liability to anyone, to (i) refrain from taking any action other than to
continue to hold the Registration Escrow pending receipt of a Joint Instruction
from the Holder and Company, or (ii) deposit the Registration Escrow with any
court of competent jurisdiction in the state of New York, in which event the
Escrow Agent shall give written notice thereof to the Holder and the Company and
shall thereupon be relieved and discharged from all further obligations pursuant
to this Agreement. The Escrow Agent may, but shall be under no duty to,
institute or defend any legal proceedings which relate to the Escrowed Stock or
Registration Escrow. The Escrow Agent shall have the right to retain counsel if
Escrow Agent becomes involved in any disagreement, dispute or litigation on
account of this Agreement or otherwise determines that it is necessary to
consult counsel.
(b) The Escrow Agent is hereby expressly authorized to comply
with and obey any Court Order. In case the Escrow Agent obeys or complies with a
Court Order, the Escrow Agent shall not be liable to the Holder and Company or
to any other person, firm, corporation or entity by reason of such compliance.
-6-
<PAGE>
ARTICLE V
GENERAL MATTERS
5.1 Termination. This escrow shall terminate upon the release of all of
the Registration Escrow or at any time upon the agreement in writing of the
Holder and Company.
5.2 Notices. All notices, request, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been received one (1) day after being sent by telecopy (with copy delivered by
overnight courier):
(a) If to the Company, to:
The Recovery Network, Inc.
1411 5th Street, Suite 250
Santa Monica, California 90401
(310) 393-5749 (Telecopier)
With a Copy by telecopier only to:
Parker, Chapin, Flattau & Klimpl, LLP
Attn: Henry Rothman, Esq.
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6288 (Telecopier)
(b) If to the Holder, to: the addresses and telecopier
numbers listed on Schedule A hereto.
(c) If to the Escrow Agent, to:
Grushko & Mittman
Attorneys at Law
277 Broadway, Suite 801
New York, New York 10007
(212) 227-5865 (telecopier)
or to such other address as any of them shall give to the others by notice made
pursuant to this Section 5.2.
-7-
<PAGE>
5.3 Interest. Within fifteen days after receipt by the Escrow Agent of
the Registration Escrow, the Registration Escrow will be deposited and held in
an interest bearing attorney's trust account. Interest will be payable in
connection therewith to the party or parties entitled to receive the principal
of the Registration Escrow (but not the Placement Agents), but only if such
party has provided to the Escrow Agent a United States taxpayer identification
number, reasonably requested documents and forms or satisfactory evidence that
the intended recipient is exempt from United States and local taxation. The
Escrow Agent may deduct from any amount due a party hereto the maximum amount
reasonably believed by the Escrow Agent that will be charged to the Escrow Agent
as tax by the United States and local tax authorities.
5.4 Assignment; Binding Agreement. Neither this Agreement nor any right
or obligation hereunder shall be assignable by any party without the prior
written consent of the other parties hereto. This Agreement shall enure to the
benefit of and be binding upon the parties hereto and their respective legal
representatives, successors and assigns.
5.5 Counterparts/Execution. This Agreement may be executed in any
number of counterparts and by the different signatories hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. This
Agreement may be executed by facsimile transmission.
5.6 Invalidity. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal, or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the parties
hereto shall be enforceable to the fullest extent permitted by law.
5.7 Agreement. Each of the undersigned states that he has read the
foregoing Shares Escrow Agreement and understands and agrees to it.
THE RECOVERY NETWORK, INC.
"Company"
By:________________________________
AUSTOST ANSTALT SCHAAN
"Subscriber"
By:________________________________
-8-
<PAGE>
BALMORE FUNDS S.A.
"Subscriber"
By:________________________________
ESCROW AGENT:
GRUSHKO & MITTMAN
By:________________________________
-9-
<PAGE>
5.7. Agreement. Each of the undersigned states that he has read the
foregoing Shares Escrow Agreement and understands and agrees to it.
THE RECOVERY NETWORK, INC.
"Company"
By:________________________________
BL SQUARED FOUNDATION
"Subscriber"
By:________________________________
THE SARGON FUND, L.P.
"Subscriber"
By:_________________________________
ZAKENI LTD.
"Subscriber"
By:________________________________
-----------------------------------
MARTIN CHOPP -"Subscriber"
TLG REALTY
"Subscriber"
By:________________________________
-10-
<PAGE>
ESCROW AGENT:
GRUSHKO & MITTMAN
By:________________________________
-11-
<PAGE>
SHARES -SCHEDULE A
<TABLE>
<CAPTION>
SUBSCRIBERS REGISTRATION ESCROW REGISTRATION REGISTRATION
COMPANY SHARES ESCROW ESCROW FUNDS
WARRANTS
- --------------------------------------- -------------------------------- ------------------------ ----------------------
<S> <C> <C> <C>
AUSTOST ANSTALT SCHAAN Needed: 98,361 9,000 $225,000
7440 Fuerstentum Short: 42,213
Lichenstein
Landstrasse 163 Deposited: 56,148
Fax: 011-431-534532895
- --------------------------------------- -------------------------------- ------------------------ ----------------------
BALMORE FUNDS S.A. Needed: 98,361 9,000 $225,000
P.O. Box 4603 Short: 42,213
Zurich, Switzerland
Fax: 011-411-201-6262 Deposited: 56,148
- --------------------------------------- -------------------------------- ------------------------ ----------------------
ZAKENI LTD. Needed: 65,573 6,000 $150,000
c/o Betuvo AG Short: 28,141
Baarer Strasse
73 Postsach 2121 Deposited: 37,432
6302 ZUG, Switzerland
Fax: 416-638-5023
- --------------------------------------- -------------------------------- ------------------------ ----------------------
BL SQUARED FOUNDATION Needed: 26,229 2,400 $ 60,000
274 Madison Avenue Short: 11,256
New York, NY 10016
Tax ID: 13-7104062 Deposited: 14,973
Fax: 212-770-3218
- --------------------------------------- -------------------------------- ------------------------ ----------------------
THE SARGON FUND, L.P. Needed: 19,672 1,800 $ 45,000
20 Adele Road Short: 8,442
Cedarhurst, NY 11516
Attn: Jennifer Spinner Deposited: 11,230
Tax ID:
Fax: 516-371-6999
- --------------------------------------- -------------------------------- ------------------------ ----------------------
MARTIN CHOPP Needed: 13,114 1,200 $ 30,000
1129 East 22nd Street Short: 5,628
Brooklyn, NY 11210
Tax ID: ###-##-#### Deposited: 7,486
Fax: 718-854-3342
- --------------------------------------- -------------------------------- ------------------------ ----------------------
TLG REALTY Needed: 6,557 600 $ 15,000
c/o Melo Short: 2,814
525 West 52nd Street
New York, NY 10019 Deposited: 3,743
Fax: 212-974-8315
- --------------------------------------- -------------------------------- ------------------------ ----------------------
TOTALS Needed: 327,867 30,000 $750,000
Short: 140,707
Deposited: 187,160
======================================= ================================ ======================== ======================
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
SHARES -SCHEDULE B
PLACEMENT AGENT REGISTRATION ESCROW - REGISTRATION ESCROW
PLACEMENT SHARES -PLACEMENT AGENT
COMMISSIONS
- --------------------------------------- ------------------------------------------- ---------------------------------
<S> <C> <C>
ELLIS ENTERPRISES LTD. 9,836 $22,500
London, England
NW2 7UF
Fax: 011-441-814509004
- --------------------------------------- ------------------------------------------- ---------------------------------
LIBRA FINANCE S.A. 3,279 $ 7,500
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
- --------------------------------------- ------------------------------------------- ---------------------------------
TOTALS 13,115 $30,000
======================================= =========================================== =================================
</TABLE>
-13-
EXHIBIT 4.13
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE RECOVERY NETWORK, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.
Right to Purchase 21,000 Shares of
Common Stock of The Recovery Network,
Inc. (subject to adjustment as provided
herein)
FORM OF COMMON STOCK PURCHASE WARRANT
No. 1 June 29, 1998
The Recovery Network, Inc., a corporation organized under the laws of
the State of Colorado (the "Company"), hereby certifies that, for value
received, AUSTOST ANSTALT SCHAAN, or assigns, is entitled, subject to the terms
set forth below, to purchase from the Company after June 29, 1998 at any time or
from time to time before 5:00 p.m., New York time, on June 29, 2001 (the
"Expiration Date"), up to 21,000 fully paid and nonassessable shares of Common
Stock (as hereinafter defined), $.01 par value per share, of the Company, at a
purchase price of $5.50 per share (such purchase price per share as adjusted
from time to time as herein provided is referred to herein as the "Purchase
Price"). The number and character of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term Company shall include The Recovery Network, Inc.
and any corporation which shall succeed or assume the obligations
of The Recovery Network, Inc. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized on the date of the Agreement, (b) any
other capital stock of any class or classes (however designated) of the Company,
authorized on or after such date, the holders of which shall have the right,
without limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even if the right so to vote
has been suspended by the
<PAGE>
happening of such a contingency) and (c) any other securities into which or for
which any of the securities described in (a) or (b) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger, sale
of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5 or otherwise.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after
the date hereof through and including the Expiration Date, the holder hereof
shall be entitled to receive, upon exercise of this Warrant in whole in
accordance with the terms of subsection 1.2 or upon exercise of this Warrant in
part in accordance with subsection 1.3, the number of shares of Common Stock of
the Company identified on Page 1 hereof, subject to adjustment pursuant to
Section 4. The Warrant may not be exercised unless the Company has obtained
approval of its shareholders of the issuance of the Common Stock upon exercise
of this Warrant or an exemption from NASDAQ's corporate governance rules as they
may apply.
1.2. Full Exercise. This Warrant may be exercised in full by
the holder hereof by surrender of this Warrant, with the form of subscription
attached as Exhibit A hereto (the Subscription Form") duly executed by such
holder, to the Company at its principal office or at the office of its Warrant
agent (as provided in Section 11), accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common Stock for which
this Warrant is then exercisable by the Purchase Price (as hereinafter defined)
then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part
(but not for a fractional share) by surrender of this Warrant in the manner and
at the place provided in subsection 1.2 except that the amount payable by the
holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of shares of Common Stock designated by the holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the holder hereof a new Warrant of like tenor, in the name of
the holder hereof or as such holder (upon payment by such holder of any
applicable transfer taxes), may
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<PAGE>
request, the number of shares of Common Stock for which such Warrant may still
be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean the Fair
Market Value of a share of the Company's Common Stock. Fair Market Value of a
share of Common Stock as of a Determination Date shall mean:
(a) If the Company's Common Stock is traded on an
exchange or is quoted on the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap
Market, then the closing or last sale price, respectively, reported for the last
business day immediately preceding the Determination Date.
(b) If the Company's Common Stock is not traded on an
exchange or on the NASDAQ National Market System or the NASDAQ SmallCap Market
but is traded in the over-the-counter market, then the mean of the closing bid
and asked prices reported for the last business day immediately preceding the
Determination Date.
(c) Except as provided in clause (d) below, if the
Company's Common Stock is not publicly traded, then as the Holder and the
Company agree or in the absence of agreement by arbitration in accordance with
the rules then standing of the American Arbitration Association, before a single
arbitrator to be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided.
(d) If the Determination Date is the date of a
liquidation, dissolution or winding up, or any event deemed to be a liquidation,
dissolution or winding up pursuant to the Company's charter, then all amounts to
be payable per share to holders of the Common Stock pursuant to the charter in
the event of such liquidation, dissolution or winding up, plus all other amounts
to be payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of
the exercise of the Warrant, upon the request of the holder hereof acknowledge
in writing its continuing obligation to afford to such holder any rights to
which such holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such holder any such rights.
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<PAGE>
1.6. Trustee for Warrant Holders. In the event that a bank or
trust company shall have been appointed as trustee for the holders of the
Warrants pursuant to Subsection 3.1, such bank or trust company shall have all
the powers and duties of a warrant agent appointed pursuant to Section 10 and
shall accept, in its own name for the account of the Company or such successor
person as may be entitled thereto, all amounts otherwise payable to the Company
or such successor, as the case may be, on exercise of this Warrant pursuant to
this Section 1.
2. Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall be
deemed to be issued to the holder hereof as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of Common Stock (or Other Securities) to which such holder
shall be entitled on such exercise, plus, in lieu of any fractional share to
which such holder would otherwise be entitled, cash equal to such fraction
multiplied by the then Fair Market Value of one full share, together with any
other stock or other securities and property (including cash, where applicable)
to which such holder is entitled upon such exercise pursuant to Section 1 or
otherwise.
3. Adjustment for Reorganization, Consolidation, Merger,
etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at
any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon such
consummation or in connection with
-4-
<PAGE>
such dissolution, as the case may be, if such holder had so exercised this
Warrant, immediately prior thereto, all subject to further adjustment thereafter
as provided in Section 5.
3.2. Dissolution. In the event of any dissolution of the
Company following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution, shall at its expense deliver or
cause to be delivered the stock and other securities and property (including
cash, where applicable) receivable by the holders of the Warrants, if exercised,
after the effective date of such dissolution pursuant to this Section 3 to a
bank or trust company having its principal office in New York, NY, as trustee
for the holder or holders of the Warrants.
3.3. Continuation of Terms. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the shares of stock and other
securities and property receivable on the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger or the effective
date of dissolution following any such transfer, as the case may be, and shall
be binding upon the issuer of any such stock or other securities, including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 5.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be increased to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that would otherwise (but for the provisions of this
Section 4) be in
-5-
<PAGE>
effect, and (b) the denominator is the Purchase Price in effect on the date of
such exercise.
5. Chief Financial Officer's Certificate as to Adjustments. In each
case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrants, the Company at its expense
will promptly cause its Chief Financial Officer to compute such adjustment or
readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 10 hereof).
6. Reservation of Stock, etc. Issuable on Exercise of Warrant;
Financial Statements. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant. This Warrant entitles the holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with
applicable Securities laws, and delivery of such representations and warranties
as shall reasonably be requested by the Company, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor") with respect to any or all of the Shares. On the surrender for
exchange of this Warrant, with the Transferor's endorsement in the form of
Exhibit B attached hereto (the Transferor Endorsement Form"), to the Company,
the Company at its expense but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant or Warrants of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor.
8. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or
-6-
<PAGE>
mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of this Warrant, the Company at
its expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
9. Registration Rights and Exercise Limitations.
9.1. Registration Rights. The holder of this Warrant has been
granted certain registration rights by the Company. These registration rights
are set forth in a Subscription Agreement entered into by the Company and the
initial holder of this Warrant ("Subscription Agreement"), at or about the issue
date of this Warrant. The terms of the Subscription Agreement are incorporated
herein by this reference.
9.2. Exercise Limitations. The Subscription Agreement at
Section 7.1(e) requires the Company to obtain shareholder approval or the waiver
of certain NASDAQ Corporate Governance Rules. In the event such shareholder
approval or waiver is not obtained, then the Company will not issue Common Stock
upon exercise of this Warrant. In such event, upon receipt by the Company of
notice that the Holder of this Warrant would exercise this Warrant but for the
Company's inability to issue Common Stock upon exercise of this Warrant, then
the Company will pay to the Holder of this Warrant, in lieu of delivering Common
Stock, a sum equal to the closing ask price of the Company's Common Stock on
NASDAQ SmallCap or such other principal trading market for the Company's Common
Stock on the trading date immediately preceding the date notice is given by the
Holder, less the exercise price of this Warrant for each shares of Common Stock
designated in such notice from the Holder.
10. Warrant Agent. The Company may, by written notice to the each
holder of the Warrant, appoint an agent having an office in New York, NY for the
purpose of issuing Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7,
and replacing this Warrant pursuant to Section 8, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
11. Transfer on the Company's Books. Until this Warrant is transferred
on the books of the Company, the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
12. Notices, etc. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by
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<PAGE>
such holder or, until any such holder furnishes to the Company an address, then
to, and at the address of, the last holder of this Warrant who has so furnished
an address to the Company.
13. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York State. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms hereof.
The invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provision.
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as
of the date first written above.
THE RECOVERY NETWORK, INC.
By:_____________________________
Title:____________________________
Witness:
- ------------------------------
-8-
<PAGE>
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: The Recovery Network, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably elects to
exercise this Warrant for, and to purchase thereunder, _____________ shares of
Common Stock of The Recovery Network, Inc. and herewith makes payment of
$_____________ therefor, and requests that the certificates for such shares be
issued in the name of, and delivered to whose address is
________________________________________________________________________________
____________________ .
Dated:___________________
- --------------------------------------
(Signature must conform to name of
holder as specified on the face of
the Warrant)
------------------------------------
(Address)
-9-
<PAGE>
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of The Recovery Network, Inc. to which the within Warrant
relates specified under the headings "Percentage Transferred" and "Number
Transferred," respectively, opposite the name(s) of such person(s) and appoints
each such person Attorney to transfer its respective right on the books of The
Recovery Network, Inc. with full power of substitution in the premises.
======================== =================== =======================
Transferees Percentage Number
Transferred Transferred
======================== =================== =======================
Dated: , 19___ _______________________________
(Signature must conform to name
of holder as specified on the
face of the warrant)
Signed in the presence of:
- ------------------------------- -------------------------------
(Name) (address)
-------------------------------
ACCEPTED AND AGREED: (address)
[TRANSFEREE]
- ---------------------------------
(Name)
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001017822
<NAME> The Recovery Network, Inc.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,219,145
<SECURITIES> 0
<RECEIVABLES> 254,750
<ALLOWANCES> 35,000
<INVENTORY> 55,624
<CURRENT-ASSETS> 2,780,239
<PP&E> 369,450
<DEPRECIATION> 166,261
<TOTAL-ASSETS> 3,784,920
<CURRENT-LIABILITIES> 1,283,013
<BONDS> 0
0
0
<COMMON> 57,915
<OTHER-SE> 2,430,866
<TOTAL-LIABILITY-AND-EQUITY> 2,488,781
<SALES> 894,758
<TOTAL-REVENUES> 894,758
<CGS> 0
<TOTAL-COSTS> 8,524,380
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (775,611)
<INCOME-PRETAX> (8,259,189)
<INCOME-TAX> 2,545
<INCOME-CONTINUING> (8,261,734)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,261,734)
<EPS-PRIMARY> (1.91)
<EPS-DILUTED> (1.91)
</TABLE>
