As filed with the Securities and Exchange Commission on October 27, 1998
Registration No. 333-61421
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
AMENDMENT NO. 1
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THE RECOVERY NETWORK, INC.
(Name of Small Business Issuer in Its Charter)
Colorado 7812 39-1731029
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
1411 5th Street, Suite 250
Santa Monica, California 90401
(310) 393-3979
(Address and Telephone Number of Principal Executive Offices)
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WILLIAM D. MOSES
Chief Executive Officer
The Recovery Network, Inc.
1411 5th Street, Suite 250
Santa Monica, California 90401
(310) 393-3979
(Name, Address and Telephone Number of Agent For Service)
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Copies of Communications to:
HENRY I. ROTHMAN, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone: (212) 704-6000
Telecopier: (212) 704-6288
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Approximate Date of Proposed Sale to the Public: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
-----------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
-----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Maximum Proposed Maximum
Title Of Each Class Of Amount To Offering Price Aggregate Amount Of
Securities To Be Registered Be Registered Per Security Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock,
par value $.01 per share.............. 2,446,226 (1) $2.09375 (2) $5,121,786 $ 1423.86
Common Stock,
par value $.01 per share.............. 100,000 (3) $5.50 $ 550,000 $ 152.90
Common Stock,
par value $.01 per share.............. 325,000 (4) $2.00 $ 650,000 $ 180.70
Common Stock,
par value $.01 per share.............. 50,000 (4) $2.50 $ 125,000 $ 34.75
Common Stock,
par value $.01 per share.............. 200,000 (3) $4.00 $ 800,000 $ 222.40
Common Stock,
par value $.01 per share.............. 100,000 (3) $5.00 $ 500,000 $ 139.00
Common Stock, 100,000 (3) $6.00 $ 600,000 $ 166.80
par value $.01 per share..............
Total Registration Fee...................................................................................$ 2,320.41
Previously Paid..........................................................................................$ 1,144.05
Paid With This Filing....................................................................................$ 1,176.36
================================================================================
</TABLE>
(1) The shares of Common Stock offered hereby include the resale of such
presently indeterminate number of shares of Common Stock as shall be
issued upon exercise by the Selling Shareholders of certain Reset Rights.
The number of shares of Common Stock offered for resale hereby is an
estimate and represents the number of shares that the Company has agreed
to register in this Registration Statement. Such number of shares is
subject to adjustment and could be materially less than such estimated
amount depending upon factors that cannot be predicted by the Company at
this time, including, among others, the future market price of the Common
Stock. This presentation is not intended to constitute a prediction as to
the future market price of the Common Stock or as to the number of shares
of Common Stock issuable upon exercise of the Reset Rights.
(2) Pursuant to Rule 457(c) of the Securities Act, calculated based upon the
average of the bid and asked price of the Common Stock as of October 23,
1998.
(3) Issuable upon exercise of certain warrants.
(4) Issuable upon exercise of certain options.
------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 27, 1998
PROSPECTUS
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3,321,226 Shares of
THE RECOVERY NETWORK, INC.
Common Stock
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This Prospectus relates to an aggregate of 3,321,226 shares (the "Shares")
of Common Stock, $.01 par value per shares ("Common Stock"), of The Recovery
Network, Inc. (the "Company") which may be offered and sold from time to time,
by the Selling Shareholders named herein (the "Selling Shareholders"),
consisting of (i) 1,250,000 shares of Common Stock issued to certain subscribers
(the "Subscribers") pursuant to each Subscription Agreement dated June 29, 1998,
as amended, between the Company and each of the Subscribers (collectively, the
"Agreements"); (ii) 972,250 shares of Common Stock, representing an estimate of
shares issuable to the Subscribers pursuant to certain provisions of the
Agreements, including but not limited to exercise of the Reset Rights by the
Subscribers; (iii) 500,000 shares of Common Stock reserved for issuance to the
Subscribers upon their exercise of warrants issued pursuant to the Agreements
and exercisable at exercise prices between $4.00 and $6.00 per share (the
"Warrants"); (iv) an aggregate of 43,716 shares of Common Stock issued to
certain parties who served as placement agents (the "Placement Agents") in the
Private Placement (as defined herein); (v) an aggregate of 180,260 shares of
Common Stock issued to various third parties; and (vi) an aggregate of 375,000
shares of Common Stock issuable pursuant to exercise of options issued to
various third parties. See "Selling Shareholders".
The Shares may be offered for sale from time to time by the Selling
Shareholders or their pledges, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Shares may be sold
directly by the Selling Shareholders or through one or more broker-dealers. Such
broker-dealers may receive compensation in the form of commissions, discounts or
concessions from the Selling Shareholders and/or purchasers of Shares for whom
such broker-dealers may act as agent, or to whom they may sell as principal, or
both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The Selling Shareholders and such broker-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933
(the "Securities Act"), and any discounts, commissions and concessions and any
profits realized on any sale of the Shares may be deemed to be underwriting
compensation. See "Selling Shareholders" and "Plan of Distribution".
The Common Stock is listed on the Nasdaq SmallCap Market under the symbol
RNET.
------------------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" COMMENCING ON PAGE 8.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
The date of this Prospectus is _________ __, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained
at prescribed rates from the Public Reference Section of the Commission,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information electronically filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
The Common Stock is currently quoted on The Nasdaq Stock Market and such reports
and other information can also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (Registration No. 333-61421) under the Securities Act
with respect to the Shares (the "Registration Statement"). As permitted by the
rules of the Commission, this Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Shares offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus, and in any
document incorporated herein by reference, as to the contents of any contract or
any other document referred to are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such document, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected without charge at the Commission's
principal office, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part of the Registration
Statement may be obtained from such office upon the payment of the fees
prescribed by the Commission. The Registration Statement has been filed through
EDGAR and is publicly available through the Commission's Web site
(http://www.sec.gov).
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
The Company
The Recovery Network, Inc. (the "Company") is a digital media company
organized to address the social and behavioral health issues of persons affected
by substance abuse, eating disorders, domestic violence, depression and child
abuse, and other social and behavioral health issues. Drawing on the converging
digital technologies of cable television, the Internet, and telephony services,
the Company addresses the aforementioned social and behavioral issues through
broadcasting The Recovery Network(TM), a cable television network which was
relaunched nationally in September 1998 as a 4 hour per day program block
repeated 6 times a day. The Company has contracted with CBS/Group W's
Westinghouse Division to supply a fully dedicated Digital Satellite Transponder
master control and uplink utilizing Scientific Atlanta's Power Vu equipment. The
Company also owns a 20% interest in RecoveryNet Interactive, L.L.C. ("Recovery
Interactive"), a joint venture with TCI Online RN Holdings, Inc. ("TCII") (an
affiliate of Tele-Communications, Inc., "TCI") and FHC Internet Services, L.C.,
(an affiliate of FHC Health Systems, Inc.), formed in August 1996 and
recapitalized and reorganized in October 1998. The current strategy of Recovery
Interactive is to provide Internet and online behavioral health care products
and services to managed care organizations, Health Management Organizations
("HMOs"), Employee Assistance Programs ("EAPs"), as well as to address the
social and behavioral health issues through an integrated multimedia platform.
The Company also operates Recovery TeleCare(TM). Recovery TeleCare offers a
toll-free telephone help-line (the "Help Line"), which provides our audience
access both to information and help in their communities, and a specialized
telephone counseling service available to callers at a cost. The Company also
airs Recovery Talk Radio(TM), a nationally syndicated talk radio program
introduced in December 1996 and now available on 53 stations. Finally, Recovery
Direct is a wholly-owned subsidiary which markets products and services through
the above-mentioned digital media to television, Internet and radio audiences
and to institutional, educational and consumer markets.
The Company was incorporated under the laws of the State of Wisconsin in
May 1992 under the name Recovery Net, Inc., merged with and into a Colorado
corporation in December 1995 and changed its name to The Recovery Network, Inc.
in May 1996. Unless the context requires otherwise, all references to the
Company include FMS Productions, Inc., a wholly-owned subsidiary of the Company
("FMS"). The Company's principal executive offices are located at 1411 5th
Street, Suite 200, Santa Monica, California 90401, and its telephone number is
(310) 393-3979.
Private Placement
On June 29, 1998 (the "Subscription Date"), the Company entered into the
Agreements with each of the Subscribers (the "Private Placement"). The Company
and the Subscribers agreed to amend the Agreements in October 1998. Pursuant to
the Agreements, as amended, the Company is entitled to aggregate proceeds of up
to $5,500,000 in the Private Placement. The Agreements, as amended, provide for
the issuance by the Company of (i) 1,250,000 shares (the "Shares") of Common
Stock for $2,500,000, or $2.00 per share, (ii) additional
-3-
<PAGE>
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 (as defined herein) and shares issuable for up to
$3,000,000 pursuant to the Put Rights (as defined herein) (collectively, the
"Additional Shares"), and (iii) 500,000 shares of Common Stock upon the exercise
of warrants (the "Warrants"). The Warrants are exercisable as to 200,000,
100,000, 100,000 and 100,000 shares of Common Stock for $4.00, $5.00, $5.50 and
$6.00 per share, respectively. The Warrants exercisable for $5.50 per share are
exercisable until June 29, 2001. The remaining Warrants are exercisable until
December 2001.
The Company has also issued to certain placement agents in the Private
Placement (the "Placement Agents") an aggregate of 43,716 shares of Common Stock
(the "Placement Shares"), of which 30,601 shares were delivered on the
Subscription Date and 13,115 shares were delivered on October 2, 1998, after
shareholder approval of such, as required pursuant to the rules of Nasdaq
SmallCap Market, was obtained on September 24, 1998.
Common Stock and Warrants
The Shares and Warrants were sold at an initial price of $2.25 per share,
which was 75% of the average of the closing bid prices of the Common Stock for
the five day trading period immediately preceding the Subscription Date. Such
initial price was reset to $2.00 per share (the "Purchase Price") in October
1998. Of the 1,250,000 shares purchased, 777,776 shares were issued and
delivered to the Subscribers on the Subscription Date and 333,334 shares were
issued and delivered to the Subscribers, on October 2, 1998, after shareholder
approval of such, as required pursuant to the rules of Nasdaq SmallCap Market,
was obtained on September 24, 1998. The remaining 138,890 shares were issued and
delivered to the Subscribers at the time the Agreements were amended in October
1998. Of the $2,500,000 purchase price of the Shares and the Warrants,
$1,750,000 was delivered to the Company (net of approximately $200,000 in
expenses) on the Subscription Date and $750,000 (net of approximately $95,000 in
expenses) was delivered to the Company on October 2, 1998.
The Option and Lock-Up
In October 1998, the Company and the Subscribers agreed to amend the
Agreements. Pursuant to such amendment, the Subscribers agreed not to sell their
1,250,000 shares of Common Stock until December 21, 1998 (the "Lock-Up"), during
which period the Subscribers have granted an option to sell 900,000 of such
shares at $3.00 per share (the "Option"). If the Option is exercised, the
Lock-Up will be extended to February 16, 1999 for all unsold shares and none of
such unsold shares will be subject to the Reset Rights (as discussed and defined
below). The Option provides, however, that each of the Subscribers may elect to
restrict the exercise of the Option for up to one-half of the shares of Common
Stock owned by such Subscriber. The Lock-Up will not apply to any of the shares
of Common Stock the Subscribers elect to withhold from being sold pursuant to
the Option. In addition, the Lock-Up will expire if the closing bid price for
the Company's Common Stock is $5.00 or more for three consecutive trading days.
If the Option is not exercised, the Company will be required to pay
liquidated damages to the Subscribers of 3% per month (for such Lock-Up period)
on the $2,500,000 initial investment. In addition, if the Option is not
exercised, the Reset Rights will continue to be in effect.
-4-
<PAGE>
Reset Rights
Pursuant to the Agreements, as amended, the Subscribers received certain
reset rights (the "Reset Rights") that may require the Company to issue
additional shares of Common Stock to the Subscribers in the future (the "Reset
Shares"). The Subscribers are entitled to additional shares of Common Stock,
without the payment of additional consideration, to account for a decrease in
the market value of the Common Stock after the Subscription Date. The
Subscribers may first be entitled to such additional shares on January 2, 1999
("Trigger Date"). The Company may also be required to issue Reset Shares every
thirtieth day after the Trigger Date until the Subscriber has reset its entire
purchase price (the Trigger Date and each of such other dates, a "Repricing
Date"). If 77% of the average closing bid price for the Common Stock for the
five trading days immediately preceding, but not including, the Repricing Date
(the "Average Price") is lower than the Purchase Price, then, at each
Subscriber's election, not less than 5% and not more than 25% of the shares
received by such Subscriber for the purchase price paid to the Company for such
shares (the "Designated Portion"), shall be subject to the Reset Rights. To
account for any deficiency between the Average Price and the Purchase Price, the
Company will issue additional shares to the Subscribers equal to the number of
additional shares that could be purchased for the Designated Portion on the
Repricing Date.
In lieu of delivering additional shares pursuant to the Reset Rights, the
Company has received certain repurchase rights. The repurchase rights provide
that the Company may, in the event the average closing bid price for the Common
Stock on the Nasdaq SmallCap Market for the five trading days immediately
preceding, but not including, a Repricing Date (the "Redemption Price") is less
than $2.50 per share, deliver to each Subscriber a sum of money determined by
multiplying the number of additional shares otherwise deliverable by the
Redemption Price.
Put Rights
The Company also has the right to "put" up to $3,000,000 of its Common
Stock to the Subscribers during the two year period commencing on the
Subscription Date (the "Put Rights"). Such Put Rights contemplate the issuance
of shares of Common Stock required to be purchased from time to time by the
Subscribers (the "Put Shares") after delivery of a notice (a "Put Notice") from
the Company, at a price equal to 88% of the average closing bid prices of the
Company's Common Stock over the five-day trading period beginning two trading
days prior to the date the Put Notice is given and ending two trading days after
the Put Notice is given. The obligation of the Subscribers to purchase Common
Stock pursuant to the exercise by the Company of the Put Rights is subject to
various conditions, including conditions relating to minimum market price,
minimum trading volume and timing. The number of shares of Common Stock that the
Company may issue at any one time upon exercise by the Company of the Put Rights
is limited, depending upon the average closing bid price for the Common Stock
and the average daily Common Stock trading volume for the 15 days immediately
preceding the date of the Put Notice.
Right of First Refusal
If the Company seeks to sell shares of its Common Stock to prospective
investors at any time after the Subscription Date until the later of 90 days
after the effective date of a registration statement covering the Securities or
270 days after the Subscription Date, the Company must give the Subscribers (i)
prior written notice of such sale and (ii) an opportunity to purchase an amount
of Common Stock to maintain their respective proportionate interests in the
Company (the "Right of First Refusal"). The Right of First Refusal must be on
the same terms and conditions offered to the prospective investors.
-5-
<PAGE>
The Offering
Securities offered by the Selling Shareholders 3,321,226 shares (a)
Common Stock outstanding
before and after the offering hereby... 6,334,833 shares (b)
Nasdaq symbol............................... RNET
(a) Includes: (i) 1,250,000 shares of Common Stock issued to the Subscribers
pursuant to the Agreements; (ii) 972,250 shares of Common Stock,
representing an estimate of shares issuable to the Subscribers pursuant
to certain provisions of the Agreements, including but not limited to
exercise of the Reset Rights by the Subscribers; (iii) 500,000 shares of
Common Stock reserved for issuance pursuant to the Warrants; (iv) an
aggregate of 43,716 shares of Common Stock issued to the Placement Agents
in the Private Placement; (v) an aggregate of 180,260 shares of Common
Stock issued to various third parties; and (vi) an aggregate of 375,000
shares of Common Stock issuable pursuant to exercise of options issued to
various third parties.
(b) Does not include: (i) 930,166 shares of Common Stock issuable upon
exercise of stock options granted to employees, directors and consultants
of the Company under the Company's stock option plans and 531,006 shares
of Common Stock issuable upon exercise of various non-plan stock options
granted to employees and consultants of the Company; (ii) 2,415,000
shares of Common Stock issuable upon exercise of the Redeemable Warrants
(as defined herein); (iii) 420,000 shares of Common Stock issuable upon
exercise of warrants granted to Whale Securities Co., L.P.; (iv)
1,015,498 shares of Common Stock issuable upon exercise of warrants
issued by the Company, including 500,000 shares of Common Stock issuable
upon exercise of the Financing Warrants (as defined herein) and 500,000
shares issuable upon exercise of the Warrants; (v) an indeterminable
number of shares of Common Stock issuable by the Company if it fails to
register, or to maintain an effective registration statement with respect
to, the Financing Shares (as defined herein) and the shares of Common
Stock issuable upon exercise of the Financing Warrants; (vi) an
indeterminable number of shares of Common Stock over the number of shares
of Common Stock offered hereby that are issuable by the Company pursuant
to the Reset Rights and the Put Rights; and (vii) 200,000 shares of
Common Stock that may be issuable pursuant to a consulting agreement
between the Company and a third party and 200,000 shares of Common Stock
that may be issuable to such party upon exercise of a warrant granted
pursuant to such agreement.
Risk Factors
The securities offered hereby involve a high degree of risk. The
securities should not be purchased by investors who cannot afford the loss of
their entire investment. See "Risk Factors."
-6-
<PAGE>
Summary Financial Information
The summary financial data set forth below is derived from and should be
read in conjunction with the audited financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
Fiscal Year Ended June 30,
--------------------------------
1997 1998
---- ----
Net loss........................................ $(3,817,652) $(8,261,734)
Basic and diluted loss per share................ (1.87) (1.91)
Weighted average number of shares outstanding... 2,044,339 4,336,405
Balance Sheet Data:
At June 30, 1998
--------------------------------
Actual Pro Forma(a)
------ ------------
(unaudited)
Working capital................................. $1,497,226 $2,152,226
Total assets.................................... 3,784,920 4,439,920
Total liabilities............................... 1,296,139 1,296,139
Shareholders' equity............................ 2,488,781 3,143,781
- --------------
(a) Gives effect to the issuance of 333,334 shares of Common Stock to the
Subscribers for net proceeds of approximately $655,000 and 13,115 shares
of Common Stock issued to the Placement Agents, all of which was released
from escrow on October 2, 1998 after shareholder approval of such, as
required pursuant to the rules of the Nasdaq SmallCap Market, was
obtained on September 24, 1998. Also gives effects to the issuance of
138,890 shares of Common Stock to the Subscribers pursuant to the
Agreements, as amended. Does not give effect to any additional shares of
Common Stock that may be issuable pursuant to the exercise of the
Warrants or pursuant to any other provision of the Agreements or pursuant
to exercise of any outstanding options or warrants.
-7-
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and therefore should not be purchased by anyone who cannot afford
a loss of his or her entire investment. Each prospective investor should
carefully review and consider the following risks before making an investment
decision.
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are typically
identified by the words "believe," "expect," "intend," "estimate" and similar
expressions. Those statements appear in a number of places in this report and
include statements regarding the intent, belief or current expectation of the
Company or its directors or officers with respect to, among other things, trends
affecting the Company's financial conditions and results of operations and the
Company's business and growth strategies. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those projected, expressed or implied in the
forward-looking statements as a result of various factors (such factors are
referred to herein as "Cautionary Statements"). The accompanying information
contained in this Prospectus, including the information set forth under "Plan of
Operation" and "Business" identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
report, and the Company cautions potential investors not to place undue reliance
on such statements. The Company undertakes no obligation to update or revise any
forward-looking statements. All subsequent written or oral forward- looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
Development Stage Company; Lack of Meaningful Revenues; Significant and
Continuing Losses; Explanatory Paragraph in Independent Public Accountants
Report. The Company was organized in 1992, was reorganized in 1995 and was in
the development stage until its acquisition of FMS in December 1997. Since its
inception, the Company has been primarily engaged in test broadcasting of The
Recovery Network in limited markets (which was launched nationally in April
1997), affiliate marketing and development, acquisition and production of
programming, establishing Recovery Talk Radio and the Help Line and forming
relationships with individuals and organizations in the recovery field.
Accordingly, the Company has a limited relevant operating history upon which an
evaluation of the Company's performance and prospects can be made. Such
prospects must be considered in light of the numerous risks, expenses, problems,
and difficulties typically encountered in establishing a new business and
launching and expanding a cable television network. The Company has not
generated any meaningful revenues and does not expect to generate any meaningful
revenues for the foreseeable future. To date, the Company has incurred
significant net losses, including net losses of $1,223,829 and $3,817,652 and
$8,261,734 for the years ended June 30, 1996, 1997 and 1998, respectively. At
June 30, 1998, the Company had an accumulated deficit of $14,158,853 and, since
June 30, 1998, unaudited information indicates that the Company has continued to
incur significant losses. The Company expects to incur substantial up-front
capital expenditures and operating costs in connection with the operation and
expansion of The Recovery Network, satellite transmission of its programming and
the development and production of television programming, which will result in
significant losses for the foreseeable future. There can be no assurance that
the Company will ever generate significant revenues or achieve profitable
operations. The Company's independent public accountants have included an
explanatory paragraph in their report on the Company's financial statements,
stating that certain factors raise substantial doubt about the Company's ability
to continue as a going concern. See "Plan of Operation" and Financial
Statements.
Significant Capital Requirements; Continuing Need for Additional
Financing. The Company's capital requirements have been and will continue to be
significant, and its cash requirements have been exceeding
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<PAGE>
its cash flow from operations. During the fiscal period ended June 30, 1998, the
Company's operating cash flow requirements exceeded operating cash flow sources
by $7,142,233 due to, among other things, costs associated with program
development, reduction in accrued expenses and accounts payable and affiliate
marketing efforts. The proceeds from the Company's initial public offering
("IPO") have been substantially expended and the proceeds from the Private
Placement will provide the Company with sufficient capital only through
approximately November 30, 1998. The Company is therefore dependent on obtaining
additional financing. 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.
Dilution; Impact of the Exercise of Reset Rights, Put Rights and
Warrants. The purchasers of the Shares offered hereby will experience immediate
and substantial dilution in the net tangible value of their shares of Common
Stock in the event of the exercise of the Reset Rights by the Subscribers or the
Put Rights by the Company, each of which is available in certain circumstances
pursuant to the Agreements, as amended, or in the event of the exercise of the
Warrants by the Subscribers. The exercise of any of the Reset Rights, the Put
Rights and the Warrants will result in the issuance of Common Stock, at
discounts from future market prices of the Common Stock, which could result in
substantial dilution to existing holders of Common Stock. The sale of such
Common Stock acquired at a discount could have a negative impact on the trading
price of the Common Stock and could increase the volatility in the trading price
of the Common Stock. Moreover, if the trading price of the Common Stock were to
decrease significantly, the issuance of Common Stock pursuant to the Reset
Rights could conceivably effect a change of control of the Company.
Uncertainty of Ability to Implement Plan of Operation. The Company's
proposed plan of operation and prospects will be largely dependent on the
success of its affiliate marketing efforts, including its ability to enter into
affiliation agreements with operators of local cable systems with a significant
number of subscribers or other arrangements for the airing of The Recovery
Network, its ability to successfully operate under the Transponder Contract,
develop or acquire sufficient television programming to enable the Recovery
Network to expand its hours of broadcast, achieve significant viewer loyalty,
attract advertisers and develop or enter into arrangements for the supply of
products, such as videotapes, audio cassettes and books to merchandise. The
Company has limited experience in developing and operating a cable television
network and marketing recovery and prevention-related products and services, and
there is limited information available concerning the potential performance or
market acceptance of The Recovery Network and recovery and prevention-related
products and services. There can be no assurance that the Company will be able
to implement its business plan successfully or that unexpected expenses,
problems, or technical difficulties will not occur which would result in
material delays in its implementation.
New Concept; Uncertainty of Market Acceptance of The Recovery Network
by Cable System Operators, Viewers and Advertisers; Limited Affiliation
Arrangements. The Recovery Network and the Company's recovery and
prevention-related products and services involve a new business concept. As is
typical in the case of a new concept in the entertainment industry, demand and
market acceptance of The Recovery Network and recovery and prevention-related
products and services are subject to a high level of uncertainty. The Company
has not conducted and does not intend to conduct any independent market or
concept feasibility studies, nor does it currently expect to conduct any
additional market testing activities. The Company's prospects will be
significantly affected by the success of its affiliate marketing efforts, the
acceptance of its programming by potential viewers and its ability to attract
advertisers. Achieving market acceptance for The Recovery Network and the
Company's recovery and prevention-related products and services will require
significant effort and expenditures by the Company to create awareness and
demand by viewers, advertisers and cable operators that
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potentially will carry The Recovery Network. Until August 31, 1998, ATN's
subscribers represented the majority of all of the households which received
broadcast of The Recovery Network's programming. After the termination of the
Nesting Contract in August 1998, the Company is entirely dependent on its own
affiliate marketing efforts to obtain affiliate agreements with cable operators.
Currently, the Company's only such arrangements are with Cablevision, Cox
Communications, Telecommunications, Inc. and Cable One, which provide the
Company in the aggregate with approximately 3 million subscribers. Although the
Company believes that the socially responsible nature of The Recovery Network's
programming provides a valuable community service, cable system operators may be
reluctant to provide air time for The Recovery Network and advertisers may be
reluctant to pay for advertising time until such time, if ever, as the Company
is able to demonstrate meaningful viewer loyalty. The Company's strategy and
preliminary and future marketing plans may be subject to change as a result of a
number of factors, including progress or delays in the Company's affiliate
marketing efforts, the nature of possible affiliation and other broadcast
arrangements which may become available to it in the future and factors
affecting the cable television industry. There can be no assurance that the
Company's strategy will result in initial or continued market acceptance for The
Recovery Network and the Company's recovery and prevention-related products and
services.
Uncertainty of Program Development and Production and Program
Acquisition. The Company will be required to commit considerable time, effort,
and resources to continue development and production of its programming. The
Company's development and production efforts are subject to all of the risks
inherent in the development and production of new programming, including
unexpected delays, expenses, technical problems and difficulties, as well as the
possible insufficiency of funds to complete satisfactory development and
production of programming, which could result in abandonment or substantial
change in programming. There can be no assurance that the Company's program
development and production efforts will be successfully completed on a timely
basis, or at all, or that unexpected events will not occur which would result in
increased costs or material delays in program development and production and
delays in the Company's ability to air original programming. The Company's
success will also be partially dependent upon its continued ability to acquire
or license suitable programming. Although the Company has been successful in
licensing over 125 hours of programming to date, there can be no assurance that
it will be able to continue to license suitable programming on acceptable terms,
or at all. Accordingly, the Company's ability to obtain programming is subject
to a high degree of uncertainty. Failure to obtain sufficient programming on
acceptable terms would have a material adverse effect on the Company.
Broadcast Interruptions and Equipment Failures. The Company is
dependent upon the Transponder Contract to provide the necessary services to
enable The Recovery Network to broadcast its programming through cable systems
with which the Company directly enters into affiliation agreements. It is
possible that the Company could experience broadcast interruptions and equipment
failures which could last for a significant period of time. Broadcast
interruptions or equipment failures affecting broadcasting of The Recovery
Network's programming could adversely affect viewer perception of, and
advertiser confidence in, The Recovery Network and could result in loss of
advertising revenue, which could have a material adverse effect on the Company.
Risks Relating to Joint Venture. As of June 30, 1998, the Company and
TCII have each made capital contributions to Recovery Interactive of
approximately $668,000, substantially all of which have been expended. These
contributions by the Company and TCII were not sufficient to fund Recovery
Interactive's implementation of its business plan. In October 1998, the Company
and TCII amended the joint venture to admit FHC Internet Services, L.C. as a
member, and each party made cash and non-cash contributions to capital. The
joint venture arrangement is subject to termination by any party under certain
conditions. Although the Company believes that the joint venture will provide
the Company with significant opportunities relating to an Internet business,
there can be no assurance that the joint venture will be commercially successful
or will not be terminated.
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Risks Relating to the Development and Supply of Recovery Related
Products; Risks Related to Recovery Direct; Uncertainty of Commercial Acceptance
of Recovery Related Products. The Company has just recently begun to enter into
arrangements for the supply of recovery and prevention-related products to
market and to offer them to the public, and has generated approximately $695,000
of revenues through June 30, 1998 from its product sales activities. Development
of such business is subject to all of the risks associated with the development
of a new line of business, including unexpected delays, as well as insufficiency
of funds to complete satisfactory development of products and services. To the
extent the Company enters into arrangements for the supply of recovery and
prevention-related products with third parties, the Company will be dependent
upon its suppliers to, among other things, satisfy the Company's quantity and
performance specifications and to dedicate sufficient production capacity to
meet the Company's scheduled delivery requirements. Additionally, the Company
has not conducted and does not intend to conduct any formal market studies or
feasibility studies for any potential products. Achieving market acceptance for
recovery and prevention-related products will require substantial marketing
efforts, expenditure of significant funds and use of commercial time on The
Recovery Network and Recovery Talk Radio otherwise available for sale to
advertisers to inform potential customers of potential products. There can be no
assurance that the Company will continue to be able to develop or enter into
arrangements for the supply of recovery and prevention-related products or that
the Company's efforts will result in successful product commercialization or
initial or continued market acceptance for any potential recovery and
prevention-related products.
Risks Relating to FMS Acquisition. In December of 1997, the Company
acquired all of the outstanding stock of FMS. FMS's revenues from the
educational, institutional and correctional markets, which are its primary
markets, have been declining steadily for several years. It is likely that FMS
will require substantial additional capital in order to produce new products and
expand its sales and marketing efforts. Under the terms of the Merger Agreement,
the Company is required to contribute up to $150,000 per year to produce
additional films, but does not intend to make any additional capital
contributions beyond that. There can be no assurance that the $150,000 will be
adequate to develop sufficient new product or that FMS will otherwise be able to
fund its ongoing operations.
Factors Affecting Cable Television Industry. The Company's business is
concentrated in the cable television industry which is continually evolving and
subject to rapid change. Recently, direct satellite services ("DSS") and digital
cable deployment and advances in signal compression/decompression technologies
have begun to create additional channel capacity and new opportunities for
television networks. There can be no assurance, however, that DSS or such other
technologies will be further developed or utilized to expand channel capacity.
The Company's growth strategy is based, in part, upon the continued growth of
the cable and DSS industries and the expected increased availability of channel
capacity. If the cable industry grows slower than expected or ceases to grow or
if channel capacity does not expand as rapidly as expected, or ceases to grow,
the Company may not be able to enter into a sufficient number of affiliation
agreements or other arrangements for the carriage of The Recovery Network, which
would have a material adverse effect on the Company.
Government Regulation. The cable television industry is subject to
extensive and frequently changing federal, state and local laws and substantial
regulation under these laws by governmental agencies, including the Federal
Communications Commission ("FCC"). Regulations governing the rates that can be
charged to subscribers by cable systems not in markets subject to effective
competition from other multichannel video program distributors could adversely
affect the ability of cable systems with limited channel capacity to finance
rebuilding or upgrading efforts to increase channel capacity or otherwise
restrict their ability to add new programming such as The Recovery Network. In
addition, federal "must-carry" rules requiring cable operators to devote up to
one-third of their channels to carriage of local commercial TV broadcast
stations (and additional channels for non-commercial educational TV stations);
commercial leased access rules designating 10% to 15%
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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.
Federal and state regulation governing interactive or on-line
information services and potentially affecting the activities of Recovery
Interactive is currently evolving. Regulations governing purchases of
information services via toll-free telephone calls and laws governing obscene,
indecent, or otherwise unlawful communications have been or may be adopted, and
there can be no assurance whether such laws and regulations will be applied to,
and therefore affect, the business and operations of Recovery Interactive.
Additional laws and regulations are currently being considered by the federal
government and many state and local governments. There can be no assurance that
these or existing laws or regulations will not be applied in a manner that will
adversely affect the Company's business or operations.
Proposals for additional or revised statutory or regulatory
requirements are considered by Congress, the FCC and state and local governments
from time to time, and a number of such proposals are currently under
consideration. Amendments to or interpretations of existing statutes and
regulations, adoption of new statutes or regulations or expansion of the
Company's operations could further restrict channel availability for The
Recovery Network, require the Company to alter methods of operation (the cost of
which may be prohibitive) limit the types of programming or services that the
Company intends to provide, modify the content of its programming or require the
Company to obtain regulatory approvals, any of which could result in material
interruptions of operation. There can be no assurance that the Company will be
able to comply with additional applicable statutory or regulatory requirements.
Competition. The Recovery Network will compete with all other existing
and planned television networks and other television programming for available
air time, channel capacity, advertiser revenue and revenue from license fees.
Many of these television networks and producers of television programming are
well-established, have reputations for success in the development and operation
of television networks and/or development of television programming, have
established significant viewer loyalty and have significantly greater industry,
financial, marketing, programming, personnel and other resources than the
Company. In addition, if cable television channel capacity increases as the
Company expects, competition from smaller competitors and other start-up
television networks could increase significantly. Although the Company is not
aware of any television network with programming focusing principally on
Recovery Issues and Prevention Issues, there are an increasing number of
recently introduced or planned cable networks which focus on overall life-style,
self-improvement and health themes and there are numerous programs which address
Recovery Issues and Prevention Issues. Moreover, because The Recovery Network's
programming is intended to provide information and support to persons facing
Recovery Issues and Prevention Issues, The Recovery Network and the Company's
recovery and prevention-related products and services will compete with other
products and services which perform similar functions, such as support groups,
self-help videos, audio cassettes and books and helplines. There can be no
assurance that the Company will be able to successfully compete for air time,
channel capacity, advertiser time or viewership.
Uncertainty of Protection of Proprietary Information. The Company has
pending registration applications in the United States Patent and Trademark
Office for fifteen trademarks, including the "Recovery Network" trademark. The
Company believes that its trademarks and copyrights, including "The Recovery
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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.
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts, ideas and the documentation of
its television programming and concepts in development. However, such methods
may not afford complete protection and there can be no assurance that others
will not independently develop similar know-how or obtain access to the
Company's know-how, concepts, ideas and documentation. Furthermore, although the
Company has and expects to have confidentiality and non-competition agreements
with its employees and appropriate consultants, there can be no assurance that
such arrangements will adequately protect the Company's trade secrets or that
others will not independently develop programming similar to that of the
Company.
Insurance and Potential Liability. The operation of a television, radio
and interactive media business subjects the Company to possible liability claims
from others, including viewers, listeners and callers to the Help Line for
claims arising from the unauthorized use of name or likeness, invasion of
privacy, defamation and slander. The Company maintains general liability
insurance (with coverage in amounts of up to $1,000,000 per occurrence and
$1,000,000 per annum), including insurance relating to personal injury and
advertising injury, in amounts which the Company currently considers adequate.
Nevertheless, a partially or completely uninsured claim against the Company, if
successful, could have a material adverse effect on the Company.
Control by Management. The Company's current executive officers and
directors in the aggregate, beneficially own approximately 20.8% of the
outstanding Common Stock. Accordingly, such persons may have the ability to
exert significant influence over the election of the Company's Board of
Directors and other matters submitted to the Company's shareholders for
approval.
Dependence on Key Personnel; Need for Qualified Personnel. The success
of the Company will be largely dependent on the personal efforts of William D.
Moses, Chairman of the Board and Chief Executive Officer of the Company, and
other key personnel. Neither Mr. Moses nor any officer of the Company, prior to
joining the Company, had been employed by a company in the areas of social and
behavioral health issues. The Company entered into an employment agreement with
Mr. Moses which expired on September 30, 1998. The Company and Mr. Moses are
currently holding conversations regarding the terms of a new employment
agreement. The loss of the services of Mr. Moses or other key personnel would
have a material adverse effect on the Company's business and prospects. The
Company has obtained key-man life insurance in the amount of $2,000,000 on the
life of Mr. Moses. The success of the Company will also be dependent upon its
ability to hire and retain additional qualified industry, programming,
marketing, financial and other personnel. Competition for qualified personnel is
intense, and there can be no assurance that the Company will be able to hire or
retain
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additional qualified personnel. Any inability to attract and retain qualified
personnel would have a material adverse effect on the Company.
No Dividends. To date, the Company has not paid any cash dividends on
the Common Stock and does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. In addition, the payment of cash dividends may
be limited or prohibited by the terms of future loan agreements or the future
authorization and issuance of Preferred Stock.
Possible Adverse Effect of Outstanding Options and Warrants. As of the
date of this Prospectus, there are 531,006 shares reserved for issuance upon
exercise of outstanding non-plan stock options, of which 87,176 are exercisable
at an exercise price of $2.32 per share, 18,000 are exercisable at an exercise
price of $1.56 per share, 23,247 are exercisable at an exercise price of $3.10
per share, 50,000 are exercisable at an exercise price of $2.50 per share,
350,000 are exercisable at an exercise price of $2.00 per share and 2,583 are
exercisable at an exercise price of $5.00 per share; 930,166 shares are reserved
for issuance upon exercise of outstanding options under the Company's stock
option plans of which 141,420 are exercisable at $5.00 per share and 788,746 are
exercisable at $1.56 per share. In addition, as of the date of this Prospectus,
there are 1,015,498 shares reserved for issuance upon exercise of outstanding
warrants, including 500,000 shares reserved for issuance upon exercise of the
Financing Warrants (as defined herein) and 500,000 shares reserved for issuance
upon exercise of the Warrants. The Financing Warrants are exercisable until
March 6, 2002 at a price of $5.50 per share. To the extent warrants or options
are exercised, dilution of the interests of the Company's Common Stock may
occur. Moreover, the terms upon which the Company will be able to obtain
additional equity financing may be adversely affected since the holders of
outstanding options and warrants can be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain capital on terms more
favorable to the Company than those provided by such options and warrants.
No Assurance of Public Market; Possible Volatility of Market Price of
Common Stock and Warrants. Prior to the Company's IPO, there was no public
trading market for the Common Stock or Redeemable Warrants (as defined herein).
There can be no assurance that a regular trading market for the Common Stock or
Redeemable Warrants (as defined herein) will be sustained. The market prices of
the Company's securities following this offering may be highly volatile as has
been the case with the securities of other emerging companies. Factors such as
the Company's operating results, announcements by the Company or its
competitors, introduction of new programs by the Company or its competitors,
changes in financial estimates of securities analysts and factors effecting the
cable television industry generally may have a significant impact on the market
price of the Company's securities. Additionally, in recent years, the stock
market has experienced a high level of price and volume volatility and market
prices for the stock of many companies, particularly of small and emerging
growth companies, the common stock of which trade in the over-the-counter
market, have experienced wide price fluctuations which have not necessarily been
related to the operating performance of such companies.
Possible Delisting of Securities from Nasdaq Systems; Risks Relating to
Penny Stocks. In order to continue to be listed on the Nasdaq SmallCap Market,
the Company must maintain $2,000,000 in net tangible assets and a $1,000,000
market value on the public float. In addition, continued inclusion requires two
market makers, a minimum bid price of $1.00 per share and adherence to certain
corporate governance provisions. The failure to meet these maintenance criteria
in the future may result in the delisting of the Common Stock and Redeemable
Warrants from the Nasdaq SmallCap Market, and trading, if any, in the Common
Stock and Redeemable Warrants would thereafter be conducted in the non-Nasdaq
over-the-counter market. As a result of such delisting, an investor could find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Common Stock and Redeemable Warrants. As of the October 23,
1998, the bid price for
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the Common Stock was $2.06 per share. There can be no assurance that the minimum
bid price of the Common Stock will remain above $1.00 per share.
In addition, if the Common Stock and Redeemable Warrants were to become
delisted from trading on the Nasdaq SmallCap Market and the trading price of the
Common Stock were to remain below $5.00 per share, trading in the Common Stock
would also be subject to the requirements of certain rules promulgated under the
Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
defined as an investor with a net worth in excess of $1,000,000 or annual income
exceeding $200,000 individually or $300,000 together with a spouse). For these
types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to the sale. The broker-dealer also must
disclose the commissions payable to the broker-dealer, current bid and offer
quotations for the penny stock and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing before or with the written confirmation of trade
sent to the customer. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements could, in the event the Common Stock were
deemed to be a penny stock, discourage broker-dealers from effecting
transactions in the Common Stock which could severely limit the market liquidity
of the Common Stock and the ability of purchasers in this offering to sell the
Common Stock in the secondary market.
Shares Eligible for Future Sale; Registration Rights. The Company has
6,334,833 shares of Common Stock outstanding (assuming no exercise of
outstanding options or warrants). Of such shares 2,521,250 shares of Common
Stock are "restricted securities", as that term is defined in Rule 144
promulgated under the Securities Act, and in the future may be sold only
pursuant to an effective registration statement under the Securities Act, in
compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Of the 2,521,250 restricted shares, an
aggregate of 1,681,139 shares are eligible for sale, without registration, under
Rule 144 (subject to certain volume limitations prescribed by such rule and to
the contractual restrictions described below). In addition, 833,223 of such
restricted shares (not including 500,000 shares issuable upon exercise of the
Financing Warrants) are subject to certain registration rights, and the Company
has granted Whale Securities Co., L.P. demand and piggyback registration rights
with respect to the securities issuable upon exercise of certain warrants issued
thereto. No prediction can be made as to the effect, if any, that sales of such
securities or the availability of such securities for sale will have on the
market prices prevailing from time to time. Substantially all of the Company's
officers, directors and security holders have agreed not to (i) sell or
otherwise dispose of any shares of Common Stock in any public market transaction
(including pursuant to Rule 144) or (ii) exercise any rights held by such
holders to cause the Company to register any shares of Common Stock for sale
pursuant to the Securities Act until September 29, 1998 (September 29, 1999 with
respect to the Financing Shares, Financing Warrants and shares issuable upon
exercise of the Financing Warrants). The possibility that a substantial number
of the Company's securities may be sold in the public market may adversely
affect prevailing market prices for the Common Stock and Redeemable Warrants and
could impair the Company's ability to raise capital through the sale of its
equity securities.
Limitation of Liability of Directors and Officers. As permitted by the
Colorado Business Corporation Act, the Company's Articles of Incorporation
provide that directors and officers of the Company will not be
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personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director or officer, except for liability for
breach of a director's or officer's duty of loyalty to the Company or its
shareholders, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for acts relating to
unlawful distributions or for any transaction from which the director or officer
derived an improper personal benefit. The Company's Articles of Incorporation
also provide (subject to certain exceptions) that the Company shall, to the
maximum extent permitted from time to time under the law of the State of
Colorado, indemnify, and upon request shall advance expenses to, any director or
officer to the extent permitted under such law as it may from time to time be in
effect. The Company's bylaws require the Company to indemnify, to the full
extent permitted by law, any director, officer, employee or agent of the Company
for acts which such person reasonably believes are not in violation of the
Company's corporate purposes as set forth in the Articles of Incorporation. As a
result of these provisions, shareholders may be unable to recover damages
against the directors and officers of the Company for actions taken by them
which constitute negligence, gross negligence, or a violation of their fiduciary
duties, which may reduce the likelihood of shareholders instituting derivative
litigation against directors and officers and may discourage or deter
shareholders from suing directors, officers, employees and agents of the Company
for breaches of their duty of care, even though such an action, if successful,
might otherwise benefit the Company and its shareholders.
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USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
by the Selling Shareholders. However, on June 29, 1998, the Company entered into
the Agreements with the Subscribers (the "Private Placement"). The Company
received net proceeds of approximately $2,200,000 from the sale of the Shares to
the Subscribers pursuant to the Private Placement. In addition to the proceeds
received in the Private Placement, the Company may receive $3 million pursuant
to a "put" provision in the Agreements that is subject to various conditions,
including those relating to minimum market price, minimum trading volume and
timing. There can be no assurance that the Company will exercise the Put Rights
or receive any of the proceeds therefrom. The net proceeds from the sale of the
Shares to the Subscribers are being used by the Company for working capital and
general corporate purposes. The proceeds from the exercise of the Warrants or
the options issued to certain of the Selling Shareholders, if any, will be used
by the Company for working capital and general corporate purposes.
The Company anticipates that the proceeds of the Private Placement,
together with projected revenues from operations, will be sufficient to fund the
Company's operations and capital requirements until approximately November 30,
1998. There can be no assurance, however, that such funds will not be expended
prior thereto due to unanticipated changes in economic conditions or other
unforeseen circumstances. There can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will
be invested principally in short-term bank certificates of deposit, short-term
securities, United States Government obligations, money market instruments
and/or other interest-bearing investments.
DIVIDEND POLICY
The Company has 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.
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PLAN OF DISTRIBUTION
The Shares may be offered for sale from time to time by the Selling
Stockholder or their pledgees, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Shares may be sold
directly by the Selling Shareholders or through one or more broker-dealers. Such
broker-dealers may receive compensation in the form of commissions, discounts or
concessions from the Selling Shareholders and/or purchasers of Shares for whom
such broker-dealers may act as agent, or to whom they may sell as principal, or
both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The Selling Shareholders and such broker-dealers may be
deemed to be "underwriters" within the meaning of the of Securities Act, and any
discounts, commissions and concessions and any profit realized on any sales of
the Shares may be deemed to be underwriting compensation.
LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property, the subject
of, any material pending legal proceedings.
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as
of June 30, 1998, and (ii) the pro forma capitalization at such date after
giving retroactive effect to the issuance of 333,334 shares of Common Stock to
the Subscribers for net proceeds of approximately $655,000, 13,115 shares of
Common Stock to the Placement Agents and 138,890 shares of Common Stock to the
Subscribers for no additional proceeds.
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------
Actual Pro Forma (a)
------ -------------
(unaudited)
<S> <C> <C>
Short-term debt, including current portion of capital lease
obligation............................................... $17,029 $17,029
=============== =================
Long-term obligation under capital lease, net of current
maturities............................................... $13,126 13,126
--------------- ------------------
Shareholders' equity:
Common Stock, $.01 par value: 25,000,000 shares
authorized; 5,791,494 shares issued and
outstanding, actual and 6,334,833 shares issued
and outstanding, pro forma ........................... 57,915 63,348
Additional paid-in capital............................ 17,050,969 17,700,536
Prepaid consulting ................................... (461,250) (461,250)
Deficit accumulated in the development stage.......... (14,158,853) (14,158,853)
--------------- --------------
Total shareholders' equity (deficit).................. 2,488,781 3,143,781
--------------- --------------
Total capitalization.................................. $2,501,907 $3,156,907
=============== ==============
</TABLE>
(a) Gives effect to the issuance of 333,334 shares of Common Stock to the
Subscribers for net proceeds of approximately $655,000 and 13,115 shares
of Common Stock to the Placement Agents, all of which was released from
escrow on October 2, 1998 after shareholder approval of such, as
required pursuant to the rules of the Nasdaq SmallCap Market, was
obtained on September 24, 1998. Also gives effect to the issuance of
138,890 shares of Common Stock to the Subscribers pursuant to the
Agreements, as amended. Does not give effect to any additional shares of
Common Stock that may be issuable pursuant to the exercise of the
Warrants or pursuant to any other provision of the Agreements or
pursuant to exercise of any outstanding options or warrants.
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<PAGE>
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Prior to September 29, 1997, there was no market for the Company's
securities. From September 29, 1997 until January 7, 1998, one share of the
Company's Common Stock and one Redeemable Warrant (which entitled the holder to
purchase one share of Common Stock at a price of $5.50 per share through the
close of business on September 29, 2002, or an earlier redemption date) (each, a
"Redeemable Warrant" and collectively, the "Redeemable Warrants") traded as a
unit (each, a "Unit" and collectively, the "Units"). 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 September 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 Warrants Units
------------ ------------------- ------
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended September 30, 1997........ N/A N/A N/A N/A 7 5/8 5 1/4
Quarter Ended December 31, 1997......... N/A N/A N/A N/A 7 1/4 3 5/8
Quarter Ended March 31, 1998............ 4 1/8 3 1 5/8 3 7/8 3 1/2
Quarter Ended June 30, 1998............. 6 1/2 2 3/4 1 5/8 7/16 N/A N/A
Quarter Ended September 30, 1998........ 2 3/16 1 5/8 1/8 N/A N/A
</TABLE>
As of the date of this Prospectus, the Company has outstanding
6,334,833 shares of Common Stock owned by approximately 108 holders of record,
and 2,413,900 Redeemable Warrants owned by approximately 3 holders of record.
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<PAGE>
PLAN OF OPERATION
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.
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. The Company entered into a five year contract with Group W Network
Services, a division of CBS corporation ("Group W"), pursuant to which Group W
is to supply a fully dedicated Digital Satellite Transponder master control and
uplink utilizing Scientific Atlanta's Power Vu equipment (the "Transponder
Contract"). The Transponder Contract affords the Company the potential to
transmit its signal throughout North America 24 hours a day, 7 days a week. The
Company currently has obtained distribution of its programming with Cablevision,
Cox Communications, Telecommunications, Inc. and CableOne (the "Affiliated
Systems").
The Company has also identified and is targeting all local cable
systems in the United States with at least 50,000 subscribers and is engaged in
a general marketing campaign ("affiliate marketing") directed at gaining more
viewers. The Company intends to evolve into a full-time digital cable network,
and in turn, generate the traditional licensing fees from cable operators.
To date, the Company has incurred significant net losses, including net
losses of $1,223,829, $3,817,652 and $8,261,734 for the years ended June 30,
1996, 1997 and 1998, respectively. The Company anticipates that the continuing
evolution of the Company's cable television network, together with its world
wide web site on the Internet and its radio show will enable the Company to
achieve greater distribution of both its programming and the other products and
services it offers. In turn, the Company expects to market and promote its
revenue opportunities. The Company anticipates that it will generate revenues
from advertising sales on The Recovery Network, Recovery Interactive and
Recovery Talk Radio, merchandising recovery-related products and services on The
Recovery Network, Recovery Interactive, Recovery Talk Radio, and through
Recovery Direct. The Company expects to generate revenues from Recovery TeleCare
by providing callers with telephone counseling. The Company also expects to
generate revenues from license fees from cable operators for its programming as
Recovery Network evolves into a full-time digital cable network. The Company
does not expect that it will generate any meaningful revenues from fees until
such time, if ever, that it enters into affiliation agreements providing the
Company with a significant subscriber base. There can be no assurance that the
Company will be able to enter into affiliation agreements with local cable
systems with a sufficient number of subscribers, achieve significant viewer
loyalty or attract advertisers for The Recovery Network, generate meaningful
revenues or achieve profitable operations. 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. Finally, the
Company has in the past obtained federal grant moneys of an aggregate of $63,200
from the Center for Substance Abuse Treatment and the Center for Substance Abuse
Prevention and expects to continue to obtain federal grant moneys in the future.
There can be no assurance, however, that the Company will be able to obtain
federal grant moneys.
Liquidity and Capital Resources
The Company's primary capital requirements in the next twelve months
will be to fund the costs of its affiliate marketing efforts, sales of
advertising time and producing and acquiring programming, satellite transponder
costs, costs for uplink, master control and transmission services, and other
working capital expenses.
The Company's capital requirements have been and will continue to be
significant and its cash requirements have been exceeding its cash flow from
operations. At June 30, 1998, the Company had a working capital surplus of
$1,497,226.
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<PAGE>
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 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 $750,000 relating to the Private Financing and the
Promissory Notes.
On October 3, 1997, the Company consummated its initial public offering
("IPO") pursuant to which it issued 2,415,000 units (each, a "Unit"). Each Unit
consisted of one share of Common Stock and one redeemable warrant to purchase
one share of Common Stock at $5.50 per share (each, a "Redeemable Warrant"). The
net proceeds received from the IPO were $10,141,757, and the amount of said
proceeds utilized by June 30, 1998 was approximately $9,540,000 used principally
to repay debt and pay operating expenses.
On June 29, 1998, the Company entered into certain subscription
agreements (the "Agreements") with 7 investors (collectively, the
"Subscribers"). Such Agreements were amended in October 1998. Pursuant to the
Agreements, the Company is entitled to aggregate proceeds of up to $5,500,000
(the "Private Placement"). The Private Placement provides for the issuance by
the Company of (i) 1,250,000 shares (the "Shares") of Common Stock for
$2,500,000, or $2.00 per share, (ii) additional shares of Common Stock to the
Subscribers pursuant to certain other provisions of the Agreements, including
shares issuable for no additional consideration pursuant to the Reset Rights in
the Agreements and shares issuable for up to $3,000,000 pursuant to a "put"
provision in the Agreements (the "Additional Shares"), and (iii) 500,000 shares
of Common Stock upon the exercise of warrants (the "Warrants"). The Warrants are
exercisable at exercise prices between $4.00 and $6.00 per share.
In October 1998, in connection with various consulting and service
agreements, the Company agreed to issue, in exchange for consulting and other
services, a total of 58,000 shares of Common Stock, options to purchase 400,000
shares of Common Stock, 75,000 of which are exercisable at $2.50 per share and
325,000 of which are exercisable at $2.00 per share. The options immediately
vest, and have various registration rights. If fully exercised, the aggregate
proceeds from the exercise of the stock options and warrants will be $837,500.
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<PAGE>
The Company anticipates that the proceeds received from the sale of the
Shares to the Subscribers in the Private Placement, together with projected
revenues from operations, will be sufficient to fund the Company's operations
and capital requirements until approximately November 30, 1998. There can be no
assurance, however, that such funds will not be expended prior thereto due to
unanticipated changes in economic conditions or other unforeseen circumstances.
In the event the Company's plans change or its assumptions change or prove to be
inaccurate, the Company could be required to seek additional financing sooner
than currently anticipated. The Company has no current arrangements with respect
to, or potential sources of, any additional financing, and it is not anticipated
that existing shareholders will provide any portion of the Company's future
financing requirements. Consequently, there can be no assurance that any
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all. Any inability to obtain additional
financing when needed would have a material adverse effect on the Company,
requiring it to curtail and possibly cease its operations. In addition, any
additional equity financing may involve substantial dilution to the interests of
the Company's then existing shareholders.
Year 2000 Compliance
The Company is in the process of modifying or replacing software
components that it uses so that such software will properly recognize dates
beyond December 31, 1999 ("Year 2000 Compliance"). The cost for such
modifications and replacements is not expected to be material. There can be no
guarantee that the systems of such other companies will be timely converted, or
that their conversion will be compatible with information included in the
Company's systems, without a material adverse effect on the Company's business,
financial condition or results of operations.
-23-
<PAGE>
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
substance abuse, eating disorders, domestic violence, depression and child
abuse, and other social and behavioral health issues. Drawing on the converging
digital technologies of cable television, the Internet, and telephony services,
the Company addresses the aforementioned social and behavioral issues through
broadcasting The Recovery Network(TM), a cable television network which was
relaunched nationally in September 1998 as a 4 hour per day program block
repeated 6 times a day. The Company has contracted with CBS/Group W's
Westinghouse Division to supply a fully dedicated Digital Satellite Transponder
master control and uplink utilizing Scientific Atlanta's Power Vu equipment. The
Company also owns a 20% interest in RecoveryNet Interactive, L.L.C. ("Recovery
Interactive"), a joint venture with TCI Online RN Holdings, Inc. ("TCII") (an
affiliate of Tele-Communications, Inc., "TCI") and FHC Internet Services, L.C.,
(an affiliate of FHC Health Systems, Inc.), formed in August 1996 and
recapitalized and reorganized in October 1998. The current strategy of Recovery
Interactive is to provide Internet and online behavioral health care products
and services to managed care organizations, Health Management Organizations
("HMOs"), Employee Assistance Programs ("EAPs"), as well as to address the
social and behavioral health issues through an integrated multimedia platform.
The Company also operates Recovery TeleCare(TM). Recovery TeleCare offers a
toll-fee telephone help-line (the "Help Line"), which provides our audience
access both to information and help in their communities, and a specialized
telephone counseling service available to callers at a cost. The Company also
airs Recovery Talk Radio(TM), a nationally syndicated talk radio program
introduced in December 1996 and now available on 53 stations. Finally, Recovery
Direct is a wholly-owned subsidiary which markets products and services through
the above-mentioned digital media to television, Internet and radio audiences
and to institutional, educational and correctional markets.
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 substance abuse,
eating disorders, domestic violence, depression and child abuse, and other
social and behavioral health issues ("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.
The Company expects that a substantial portion of its audience will be
the Affected Others. According to The American Journal of Psychiatry Official
Practice Guide published in November 1995, approximately 56 million persons in
the United States are directly affected by alcohol abuse or addiction alone. The
National Association for Children of Alcoholics estimated that in 1995 there
were approximately 26.8 million children of alcoholics in the United States. A
substantial number of employers and coworkers are affected by alcohol abuse in
the workplace.
Persons in Recovery include the millions of Americans who regularly
attend meetings of various support groups, such as Alcoholics Anonymous,
Al-Anon, Overeaters Anonymous, Cocaine Anonymous, Narcotics Anonymous, or are in
some other form of treatment, including counseling. While this group is smaller
than the Affected Others, the Company believes that The Recovery Network's
programming will provide a useful and important service to Persons in Recovery,
and that members of this group are likely to make an effort to seek out the
Company's programming and to inform others in their respective support groups
about The Recovery Network.
Afflicted Persons include the estimated 43 million Americans who,
according to the 1995 National Household Survey on Drug Abuse (the "National
Household Survey"), are heavy or binge drinkers and the approximately 12.8
million
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<PAGE>
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 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
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<PAGE>
the programming and does not directly involve the cable system in negotiations.
In the other, the agreement specifies terms that are approved at the MSO level
but requires the network to negotiate affiliation agreements with each
individual cable system. Many cable systems also have local channels which are
designed to serve the community's needs and interests, and the decision to add
programming to these channels is typically left to the discretion of the local
cable system manager. Some, but not all, networks, receive license fees
calculated on a per subscriber, per month basis. According to an industry survey
of 41 networks in 1996, 38 networks received monthly fees ranging from $.03 per
subscriber to $.70 per subscriber and three networks did not receive license
fees. Of those 38 networks that received license fees, 22 networks received
license fees ranging from $.10 to $.29. Generally, networks that air less than
16 hours of programming per day do not receive license fees. Also, new networks
often offer their programming for some period of time after their launch free to
cable systems that sign affiliation agreements within a certain time after
launch. In some cases, newly-launched networks also provide affiliates with
monetary launch support or other financial incentives in order to secure initial
carriage.
Channel capacity on most cable systems is currently limited. Channel
capacity is generally a function of the bandwidth of the individual cable
system's infrastructure. 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
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
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<PAGE>
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, which provides cable operators a competitive advantage
over other multi-channel programming services. The Company's commitment to
programming focusing on social and behavioral health issues has helped to
establish significant community support for its programming. In addition, the
formation by the Company of The National Partnership for Recovery and Prevention
(the "Partnership"), an umbrella coalition of national recovery and prevention
organizations, has helped to establish 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 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 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.
As demand increases, the Company expects to enter into additional
affiliation agreements with new cable systems. As digital channel capacity
increases, the Company believes it will be able to expand into a full time
digital network with associated license fees from cable operators. With its
programming now airing on a number of cable systems, the Company can concentrate
on generating advertising sales through such Company entities as The Recovery
Network, Recovery Interactive, Recovery TeleCare and Recovery Talk Radio. The
Company can also promote product sales through Recovery Direct through the
aforementioned multiple media, and promote Recovery TeleCare service which
provides viewers of the aforementioned media an opportunity to receive telephone
counseling for a fee in the privacy of their home. There can be no assurance,
however, that the Company will be able to enter into additional affiliation
agreements with new cable systems or increase the number of daily programming
hours with existing affiliates or that the Company will be able to expand into a
full time digital network. There also can be no assurance that the Company will
be able to generate significant advertising or product sales.
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<PAGE>
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.
As of the date of this prospectus, the Company has secured distribution
agreements with two MSOs, National Cable Television Cooperative, Inc. ("NCTC")
and Satellite Services, Inc. ("SSI"). The agreement with NCTC was entered into
on May 18, 1998 (the "NCTC Agreement"). NCTC represents over 8 million cable
households comprising over 1,200 cable systems. Pursuant to the terms of the
NCTC Agreement, the Company has granted to NCTC the non-exclusive right to
distribute the Company's programming to its affiliate systems. The Company does
not receive a license fee for its programming. The NCTC Agreement has a term of
five years.
The agreement with SSI was finalized on October 5, 1998 (the "SSI
Agreement", and collectively with the NCTC Agreement, the "MSO Agreements").
Pursuant to the terms of the SSI Agreement, the Company has granted to SSI the
non-exclusive right to distribute the Company's programming to systems owned by
Telecommunications, Inc. or Liberty Media Corporation. The SSI Agreement is
effective for an initial term of seven years and may be renewed for successive
five year periods. The Company does not receive a license fee for its
programming during the initial term, but is entitled to negotiate for fees
during any renewal terms.
In addition to the foregoing, the Company is currently negotiating
agreements with two other MSOs, Cablevision and Time Warner Cable. Although the
Company has not signed a written agreement with Cablevision, the Company's
programming is currently carried in approximately 1,600,000 households served by
Cablevision.
The MSO Agreements represent terms which have been agreed to between
the Company and the respective MSO. By reaching agreement with the MSOs, the
Company is now free to approach the affiliated local systems of NCTC and SSI
regarding the airing of its programming. Neither the MSOs nor the affiliated
local systems are required, pursuant to the MSO Agreements, to provide the
Company with any subscribers. The Company is initially seeking to enter into
short-term affiliation agreements with local cable systems with a term of one
year that provide for four hours of airing per day, with no license fees paid to
the Company, and have a 30-day termination clause. The agreements would also
provide that the programming can be aired on local origination and on public,
educational and government access channels or on other channels at the cable
system's discretion.
Recovery Interactive
Until September 1998, the Company owned a 50% interest in Recovery
Interactive, a joint venture initially entered into with TCI Online RN Holdings,
Inc., an affiliate of TCI ("TCII"). Recovery Interactive was formed on August 1,
1996 and was reorganized and recapitalized in October 1998. Recovery
Interactive's current strategy is to provide behavioral health care products and
services ("Recovery Interactive Services") to managed 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. Through September 1998, the Company and TCII had each made a capital
contribution in the amount of approximately $668,000 to Recovery Interactive. In
October 1998, the Company and TCII agreed to amend the joint venture to admit
FHC Internet Services, L.C. ("FHC"), an affiliate of FHC Health Systems, Inc.,
as a member. In connection with such amendment, the Company agreed to contribute
warrants to purchase 295,000 shares of Common Stock and 25,000 shares of Common
Stock to Recovery Interactive. The Company also agreed to contribute cash of
$150,000 to Recovery Interactive, $75,000 of which is to be paid in October 1998
and 75,000 of which is to be paid in February 1999. TCII agreed to contribute
additional cash of $1,200,000 to Recovery Interactive, $600,000 of which is to
be paid in October 1998 and $600,000 of which is to be paid in February 1999.
TCII also agreed to lend Recovery Interactive $225,000 in exchange for a
subordinated note. FHC agreed to contribute cash of $1,200,000 to Recovery
Interactive, $600,000 of which is to be
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paid in October 1998 and $600,000 of which is to be paid in February 1999. FHC
also agreed to lend Recovery Interactive $225,000 in exchange for a subordinated
note. Pursuant to the terms of the amendment, TCII, the Company and FHC became
entitled to ownership interests of 40%, 20% and 40%, respectively, in Recovery
Interactive. Up to 10% of the Company's ownership interest, however, is subject
to reallocation to TCII and FHC in like amounts of 5% each if the Company does
not satisfy certain performance guidelines.
Pursuant to the terms of the joint venture agreement, the Chief
Executive Officer of Recovery Interactive is required to deliver, in January
1999, a written report on the operation of the joint venture. If such report
discloses that the cost of the operations of Recovery Interactive for such
fiscal year will exceed the budgeted costs for such year or that Recovery
Interactive is not progressing with developing its commercial products as
described in its business plan, each of the Company, TCII and FHC may not be
required to make their February 1999 contributions to Recovery Interactive of
$75,000, $600,000 and $600,000, respectively. Neither party may transfer its
ownership interest in the joint venture until October 2003. 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 proportionately to TCII, FHC 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. @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 advertising sales, monthly subscriber fees generated from the
Recovery Interactive web site, merchandising and from Health Care Entities and
employers for delivering mental and behavioral health information and service to
their members. Although the Company believes that 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.
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 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.
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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 a telemedicine initiative which is
a natural progression of the Help Line pursuant to which a caller can receive,
for a fee, specialized counseling that is discrete, anonymous, and in the
privacy of one's home. The services will be promoted by The Recovery Network,
Recovery Interactive, and Recovery Talk Radio.
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, fees or commissions from
the Help Line, 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 expects that providing the toll-free Help Line
will help build and maintain viewer loyalty and support for The Recovery
Network. The Company also expects to generate revenues from Recovery TeleCare,
but there can be no assurances that the Company will be able to do so.
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.
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.
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 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
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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.
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 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
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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
telecommunications facility under one's control to be used for such purpose. A
preliminary injunction against enforcement of the CD Act with respect to
indecent or patently offensive communications has been affirmed by the United
States Supreme Court, which found the CD Act's provisions to violate the First
Amendment. Although it is unlikely that the enjoined provisions of the CD Act
will ever become effective, there can be no assurance that information content
made available on or through Recovery Interactive's offerings, by the Company or
by users of those offerings would not violate the CD Act, if it were to become
effective, or similar legislation that Congress might enact in the future, or
that attempts to implement defenses to such legislation would not adversely
affect the Company's business or operations. Federal laws dealing with obscenity
and child pornography as well as various state laws similar to those laws or to
the CD Act may also apply to information content available on or through
Recovery Interactive's offerings. There is no assurance that those laws will not
be applied in a manner that will adversely affect the Company's business or
operations.
Proposals for additional or revised statutory or regulatory
requirements are considered by Congress, the FCC and state and local governments
from time to time, and a number of such proposals are under consideration at
this time. It is possible that certain of the provisions and requirements
described herein are now, and in the future may be, the subject of federal or
state legislation, agency proceedings or court litigation. It is not possible to
predict what legislative, regulatory or judicial changes, if any, may occur or
their impact on the Company's business or operations.
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Proprietary Information
The Company has pending 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.
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.
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.
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MANAGEMENT
Directors and Executive Officers
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
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 and Chairman of the Executive Committee
Charlotte Schiff-Jones........ 58 Director
Mitchell E. Sahn.............. 43 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 1988 to January 1991, Mr. Moses was a money manager for Oscar
Gruss & Co. 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 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 has been 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
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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. 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.
Mitchell E. Sahn has been a director of the Company since October 1998.
Mr. Sahn has served as Mayor of the Village of Hewlett Bay Park, New York from
June 1994 to the present, and is currently in his third two-year term of office.
Mr. Sahn was responsible for the trading of all cash products in the Western
Hemisphere at Citibank Private Bank Group from April 1998 to September 1988.
Prior to that, Mr. Sahn was General Partner of the Latin Tactical Trading Group
LLP, a specialized regional investment vehicle. From June 1992 to June 1994, Mr.
Sahn was President and a member of the Board of Directors for Valores Mexicanos
International, a Latin American investment group. From June 1981 to June 1991,
Mr. Sahn held various positions of responsibility with the Belforte Group,
Morgan Grenfell, Inc., and Kellner Dileo, Inc., all prominent Wall Street firms.
Mr. Sahn has been active in speaking and advocacy on the topics of addition, and
is active with the Hazeldon Foundation of Minnesota and the Tempo Group of New
York State. Mr. Sahn is a graduate of the State University of New York at
Binghamton, and has a Master of Arts degree from the University of Michigan.
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
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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 Chairman of the Executive Committee and
Messrs. Masters and Moses are also members of the Executive Committee.
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 $100,000 (the "Named Executive Officers")
during fiscal 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
-------------------- ---------------------
Shares
Year Ended Salary ($) 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 $163,335 -- 50,000 --
Officer (a).......................
- -------------------
</TABLE>
(a) Mr. Richey resigned from the Company effective September 18, 1998.
(b) Includes compensation that was earned during the fiscal year ending 6/30/97,
but was deferred until and paid during the fiscal year ending 6/30/98.
-36-
<PAGE>
Option Grants in Fiscal Year 1998
The following table sets forth information concerning the grant of
stock options to the Named Executive Officers during fiscal 1998:
Option Grants During Last Fiscal Year
<TABLE>
<CAPTION>
Number of %of Total
Shares Options Granted
Underlying to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/sh) Date
- ------------------------------ --------------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
William D. Moses.............. 50,000 16.2% $1.56(a) 2/4/03
Donald J. Masters............. 50,000 16.2 1.56(a) 2/4/03
Gregory L. Richey (b)......... 50,000 16.2 1.56(a) 2/4/03
- -------------------
</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.
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
expired on September 30, 1998. The Company and Mr. Moses are currently holding
conversations regarding the terms of a new employment agreement. 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
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<PAGE>
a base compensation payable to Mr. Masters of $10,000 per month through November
30, 1998. Pursuant to the agreement, Mr. Masters is entitled to participate in
any employee benefit plans and arrangements when and as implemented by the
Company. In the event of termination of Mr. Master's employment by the Company,
without "good cause" (as defined in the employment agreement), Mr. Masters is
entitled to severance compensation, equal to his base salary and vacation
compensation, at the option of the Company, for such period of time between one
year and two years that the non-compete covenant described below is in effect
and such severance compensation shall be payable one-half on the date of
termination and the balance shall be payable ratably over six months following
the date of termination. In the event of termination of the employment agreement
by mutual agreement of the Company and Mr. Masters, Mr. Masters is entitled to
such compensation as mutually agreed on between the Company and Mr. Masters but
in no event to exceed the amount of severance compensation payable in the event
of termination without "good cause." In addition, Mr. Masters has agreed under
certain circumstances not to compete with the Company during the term of the
employment agreement and for up to two years after termination of his employment
relationship with the Company in any media business whose programming, content
or services address or relate to Recovery Issues or in any organization whose
primary business is offering products and services relating to Recovery Issues.
In connection with his employment, Mr. Masters was granted an option (the
"Option") to purchase 12,915 shares of Common Stock at an exercise price of
$2.32 per share. The Option vests with respect to 10,770 shares on February 1,
1997 and the remainder vests ratably monthly thereafter. In the event of a
"change in control" (as defined in the employment agreement), Mr. Masters will
be deemed to have been terminated without "good cause," the covenant not to
compete will have no further effect and the Option will vest in full. In
addition on April 16, 1997, Mr. Masters was granted an option under the
Company's Management Bonus Plan to purchase 12,915 shares of Common Stock at an
exercise price of $5.00 per share, which will vest quarterly over one year
commencing on October 1, 1997.
Effective May 13, 1997, the Company entered into an employment
agreement with John Wheeler, the Company's Senior Vice President of Sales and
Marketing, which expires on May 31, 1999. The employment agreement provides for
a base compensation payable to Mr. Wheeler of $12,000 per month through May 13,
1999. In addition to the base salary, Mr. Wheeler will receive a commission
payable quarterly in the amount of $.01 for each additional subscriber household
in excess of one million subscriber households to which an affiliated cable
system service delivers a minimum of two hours of the Company's programming, so
long as the household subscriber does not already receive the programming
through the Company's Nesting Contract 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.
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
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<PAGE>
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. All options are fully vested due to
activation of a change of control provision during fiscal 1998 or pursuant to
settlement terms with former employees. The Employee and Consultants Plan is
administered by the Finance and Compensation Committee.
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. All options are fully vested due to activation of a change of
control provision during fiscal 1998. 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
-39-
<PAGE>
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.
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
the date of this Prospectus, there are 194,166 options outstanding under the
Management Bonus Plan, all of which were fully vested during fiscal 1998 due to
a change of control provision which was activated.
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 the date of this Prospectus, under the Stock Plan, the Company has granted
stock options to purchase an aggregate of 594,580 shares at 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 531,006 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, 50,000 were granted
at an exercise price of $2.50 per share, 350,000 were granted at an exercise
price of $2.00 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 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
-40-
<PAGE>
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Company will not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of a
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 7-108-403 of the Colorado statute relating
to unlawful distributions or (iv) for any transaction from which the director
derived an improper personal benefit. The Articles of Incorporation also provide
(subject to certain exceptions) that the Company shall, to the maximum extent
permitted from time to time under the law of the State of Colorado, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent permitted under such law as it may from time to time be in effect. The
Company's bylaws require the Company to indemnify, to the full extent permitted
by law, any director, officer, employee or agent of the Company for acts which
such person reasonably believes are not in violation of the Company's corporate
purposes as set forth in the Articles of Incorporation. As a result of these
provisions, shareholders may be unable to recover damages against the directors
and officers of the Company for actions taken by them which constitute
negligence, gross negligence, or a violation of their fiduciary duties, which
may reduce the likelihood of shareholders instituting derivative litigation
against directors and officers and may discourage or deter shareholders from
suing directors, officers, employees and agents of the Company for breaches of
their duty of care, even though such an action, if successful, might otherwise
benefit the Company and its shareholders.
Advisory Board
The Board of Directors of the Company has established a Board of
Advisors (the "Advisory Board") to assist the Company in the development and
implementation of its long-term strategy and goals and to propose, adopt and
audit compliance by the Company with programming and business standards that are
consistent with the delivery of effective, non- exploitative, and non-biased
recovery based services. The Advisory Board will recommend to the Company's
Board of Directors the adoption of standards and practices to provide guidance
for the Company's employees in determining appropriate programming and online
content, advertising, and merchandise sales. The Advisory Board will advise on
technical matters and also serve as an independent voice for the recovery
community.
The Company has enlisted the membership of eight noted professionals in
the field of recovery, with nationally recognized expertise for their commitment
and contributions in the treatment of alcoholism and drug 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.
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<PAGE>
Robert Lindsey is a veteran of over 20 years in the field of alcoholism
and drug addiction treatment. Mr. Lindsey is currently the Vice President of
Longview Associates, Inc., a consulting firm specializing in the design and
implementation of employee assistance programs. Prior to this, Mr. Lindsey
served as the Community Relations Director at the Betty Ford Center and as the
Executive Director of the New York State Council on Alcoholism and Other Drug
Addictions.
Father Joseph Martin is the founder of Ashley, Inc., a non-profit
center dedicated to the treatment of the chemically addicted. He is an
internationally recognized speaker and creator of the film "Chalk Talk", the
principal educational vehicle on alcoholism for most treatment centers in the
country.
Joseph A Pursch, M.D. is a nationally-recognized psychiatrist involved,
since 1962, in the treatment and rehabilitation of individuals with addictive
behaviors. Dr. Pursch is the former Director of Alcohol Rehabilitation Service
at the Naval Regional Medical Center at Long Beach, California. An author and
syndicated columnist, Dr. Pursch has supervised drug testing programs for
numerous sports events and has treated many public figures. Dr. Pursch has been
on the President's Commission on Alcohol and Drugs since 1979.
David Smith, M.D. is the founder and president of the Haight-Ashbury
free clinics. A specialist in the field of addiction medicine and clinical
toxicology, Dr. Smith is also the founder and executive editor of the Journal of
Psychoactive Drugs and is the president of the American Society of Addiction
Medicine (ASAM). He is a leader in the areas of treatment of addictive disease,
the psychopharmacology of drugs, and new strategies in the management of drug
abuse problems.
The Advisory Board meets semi-annually on a formal basis, and deals
with individual issues as they arise. Advisors serve terms of three years, are
compensated for meetings attended, and are eligible to participate in the
Company's 1996 Board of Directors and Advisory Board Retainer Plan.
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<PAGE>
SELLING SHAREHOLDERS
Relationship of Selling Shareholders with the Company
None of the Selling Shareholders currently has, or within the past
three years has had, any position, office, or other material relationship with
the Company or any predecessor or affiliate of the Company.
Sales of Outstanding Shares by Selling Shareholders
None of the Selling Shareholders have advised the Company, and the
Company is unable to predict, if, when, and the extent to which they intend to
sell the Shares being registered hereunder for their respective accounts.
Notwithstanding the foregoing, for purposes of the following Selling
Shareholders Table, all of the Shares are deemed to be offered hereby by the
Selling Shareholders for sale to the public. Based upon the foregoing
assumption, the following table sets forth information, as at October 26, 1998,
with respect to (i) each Selling Shareholder's beneficial ownership of the
Company's Common Stock prior to the offering of any Shares hereunder by such
Selling Shareholder, (ii) the number of Shares which may be offered for sale
hereunder and (iii) the number shares of the Company's Common Stock to be
beneficially owned by each Selling Shareholder after the offering (assuming the
sale of all Shares being offered hereunder).
There can be no assurance that any of the Selling Shareholders will
offer for sale any or all of the Common Stock offered by them pursuant to this
Prospectus.
<TABLE>
<CAPTION>
Shares of Shares of
Common Stock Common Shares of Common
Beneficially Owned Stock to be Stock Beneficially
Name of Selling Shareholder Prior to Offering Offered Hereunder Owned After Offering
--------------------------- ----------------- ----------------- --------------------
Subscribers
- -----------
<S> <C> <C> <C>
Austost Anstalt Schaan (a).................... 816,675 816,675 --
Balmore Funds S.A. (a)......................... 816,675 816,675 --
Zakeni Ltd. (a)................................ 544,450 544,450 --
BL Squared Foundation (a)...................... 217,780 217,780 --
The Sargon Fund, L.P........................... 163,335 163,335 --
Martin Chopp................................... 108,890 108,890 --
TLG Realty (a)................................. 54,445 54,445 --
Placement Agents
- ----------------
Ellis Enterprises Ltd. (b)..................... 32,787 32,787 --
Libra Finance S.A. (b)......................... 10,929 10,929 --
Additional Selling Shareholders
- -------------------------------
Janice Fuellhart............................... 35,874 35,874 --
Peter Graf..................................... 86,386 86,386 --
Granger Whitelaw............................... 125,000 125,000 --
Strategic Network Development, Inc............. 25,000 25,000 --
Seabord Creations of California, Inc........... 50,000 50,000 --
Route Messenger Service........................ 25,000 25,000 --
S. Heart & Associates.......................... 100,000 100,000 --
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<PAGE>
Shares of Shares of
Common Stock Common Shares of Common
Beneficially Owned Stock to be Stock Beneficially
Name of Selling Shareholder Prior to Offering Offered Hereunder Owned After Offering
--------------------------- ----------------- ----------------- --------------------
Highborough Services Ltd....................... 100,000 100,000 --
The Investor Communications Group, Inc......... 8,000 8,000 --
- -----------------------
</TABLE>
(a) Shares deemed beneficially owned prior to the offering include shares
issued or issuable to the Selling Shareholder in the Private Placement
(including shares issuable pursuant to any provision of the Agreements,
including but not limited to those shares issuable pursuant to certain
Reset Rights and Put Rights in the Agreements) and shares reserved for
issuance upon exercise of the Warrants.
(b) Shares deemed beneficially owned prior to the offering include shares
issued to the Selling Shareholder as partial compensation for services
as placement agent of the Shares and the Warrants.
The Private Placement
On June 29, 1998 (the "Subscription Date"), the Company entered into
the Agreements with each of the Subscribers (the "Private Placement"). The
Company and the Subscribers agreed to amend the Agreements in October 1998.
Pursuant to the Agreements, as amended, the Company is entitled to aggregate
proceeds of up to $5,500,000 in the Private Placement. The Agreements, as
amended, provide for the issuance by the Company of (i) 1,250,000 shares (the
"Shares") of Common Stock for $2,500,000, or $2.00 per share, (ii) additional
shares of Common Stock to the Subscribers pursuant to certain other provisions
of the Agreements, including the Additional Shares, and (iii) 500,000 shares of
Common Stock upon the exercise of the Warrants. The Warrants are exercisable as
to 200,000, 100,000, 100,000 and 100,000 shares of Common Stock for $4.00,
$5.00, $5.50, and $6.00 per share, respectively. The Warrants exercisable for
$5.50 per share are exercisable until June 29, 2001. The remaining Warrants are
exercisable until December 2001.
The Company has also issued to certain placement agents an aggregate of
43,716 shares of Common Stock (the "Placement Shares"), of which 30,601 shares
were delivered on the Subscription Date and 13,115 were delivered on October 2,
1998, after shareholder approval of such, as required pursuant to the rules of
the Nasdaq SmallCap Market, was obtained on September 24, 1998.
Common Stock and Warrants
The Shares and Warrants were sold at an initial price of $2.25 per
share, which was 75% of the average of the closing bid prices of the Common
Stock for the five day trading period immediately preceding the Subscription
Date. Such initial price was reset to $2.00 per share (the "Purchase Price") in
October 1998. Of the 1,250,000 shares purchased, 777,776 shares were issued and
delivered to the Subscribers on the Subscription Date and 333,334 shares were
issued and delivered to the Subscribers on October 2, 1998, after shareholder
approval of such, as required pursuant to the rules of the Nasdaq SmallCap
Market, was obtained on September 24, 1998. The remaining 138,890 shares were
issued and delivered to the Subscribers at the time the Agreements were amended
in October 1998. Of the $2,500,000 purchase price of the Shares and the
Warrants, $1,750,000 was delivered to the Company (net of approximately $200,000
in expenses) on the Subscription Date and $750,000 (net of approximately $95,000
in expenses) was delivered to the Company on October 2, 1998.
The Option and Lock-Up
In October 1998, the Company and the Subscribers agreed to amend the
Agreements. Pursuant to such amendment, the Subscribers agreed not to sell their
1,250,000 shares of Common Stock until December 21, 1998 (the "Lock-Up"), during
which period the Subscribers have granted an option to sell 900,000 of such
shares at $3.00 per share (the "Option"). If the Option is exercised, the
Lock-Up will be extended to February 16, 1999 for all unsold shares and none of
such unsold
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shares will be subject to the Reset Rights (as discussed and defined below). The
Option provides, however, that each of the Subscribers may elect to restrict the
exercise of the Option for up to one-half of the shares of Common Stock owned by
such Subscriber. The Lock-Up will not apply to any of the shares of Common Stock
the Subscribers elect to withhold from being sold pursuant to the Option. In
addition, the Lock-Up will expire if the closing bid price for the Company's
Common Stock is $5.00 or more for three consecutive trading days.
If the Option is not exercised, the Company will be required to pay
liquidated damages to the Subscribers of 3% per month (for such Lock-Up period)
on the $2,500,000 initial investment. In addition, if the Option is not
exercised, the Reset Rights will continue to be in effect.
Reset Rights
Pursuant to the Agreements, as amended, the Subscribers received
certain reset rights (the "Reset Rights") that may require the Company to issue
additional shares of Common Stock to the Subscribers in the future (the "Reset
Shares"). The Subscribers are entitled to additional shares of Common Stock,
without the payment of additional consideration, to account for a decrease in
the market value of the Common Stock after the Subscription Date. The
Subscribers may first be entitled to such additional shares on January 2, 1999
("Trigger Date"). The Company may also be required to issue Reset Shares every
thirtieth day after the Trigger Date until the Subscriber has reset its entire
purchase price (the Trigger Date and each of such other dates, a "Repricing
Date"). If 77% of the average closing bid price for the Common Stock for the
five trading days immediately preceding, but not including, the Repricing Date
(the "Average Price") is lower than the Purchase Price, then, at each
Subscriber's election, not less than 5% and not more than 25% of the shares
received by such Subscriber for the purchase price paid to the Company for such
shares (the "Designated Portion"), shall be subject to the Reset Rights. To
account for any deficiency between the Average Price and the Purchase Price, the
Company will issue additional shares to the Subscribers equal to the number of
additional shares that could be purchased for the Designated Portion on the
Repricing Date.
In lieu of delivering additional shares pursuant to the Reset Rights,
the Company has received certain repurchase rights. The repurchase rights
provide that the Company may, in the event the average closing bid price for the
Common Stock on the NASDAQ SmallCap Market for the five trading days immediately
preceding, but not including, a Repricing Date (the "Redemption Price") is less
than $2.50 per share, deliver to each Subscriber a sum of money determined by
multiplying the number of additional shares otherwise deliverable by the
Redemption Price.
Put Rights
The Company also has the right to "put" up to $3,000,000 of its Common
Stock to the Subscribers during the two year period commencing on the
Subscription Date (the "Put Rights"). Such Put Rights contemplate the issuance
of shares of Common Stock required to be purchased from time to time by the
Subscribers (the "Put Shares") after delivery of a notice (a "Put Notice") from
the Company, at a price equal to 88% of the average closing bid prices of the
Company's Common Stock over the five-day trading period beginning two trading
days prior to the date the Put Notice is given and ending two trading days after
the Put Notice is given. The obligation of the Subscribers to purchase Common
Stock pursuant to the exercise by the Company of the Put Rights is subject to
various conditions, including conditions relating to minimum market price,
minimum trading volume and timing. The number of shares of Common Stock that the
Company may issue at any one time upon exercise by the Company of the Put Rights
is limited, depending upon the average closing bid price for the Common Stock
and the average daily Common Stock trading volume for the 15 days immediately
preceding the date of the Put Notice.
Right of First Refusal
If the Company seeks to sell shares of its Common Stock to prospective
investors at any time after the Subscription Date until the later of 90 days
after the effective date of a registration statement covering the Securities or
270 days after the Subscription Date, the Company must give the Subscribers (i)
prior written notice of such sale and (ii) an opportunity to
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purchase an amount of Common Stock to maintain their respective proportionate
interests in the Company (the "Right of First Refusal"). The Right of First
Refusal must be on the same terms and conditions offered to the prospective
investors.
The Additional Selling Shareholders
The Additional Selling Shareholders did not receive their shares in the
Private Placement but are including the shares of Common Stock beneficially
owned by them in this Prospectus and the Registration Statement of which this
Prospectus is a part.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of October
26, 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.............................. 761,126(c) 11.7%
George H. Henry(d)............................ 410,850(e) 6.3%
Donald J. Masters............................. 146,287(f) 2.3%
Nimrod J. Kovacs(g)........................... 65,623(h) 1.0%
Charlotte Schiff-Jones(i)..................... 12,915(j) *
Mitchell E. Sahn.............................. 0 --
Austost Anstalt Schaan(k)..................... 595,001(l) 9.1%
Balmore Funds S.A(m).......................... 595,001(l) 9.1%
All directors and executive officers as 1,426,323(n) 20.8%
a group (10 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 October 26, 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 6,334,833 shares of Common
Stock before any consideration is given to outstanding options,
warrants or convertible securities.
(c) Includes (i) options to purchase 132,360 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.
(d) The address of the beneficial owner is 6860 Sunrise Court, Coral
Gables, Florida 33133.
(e) Includes (i) options to purchase 114,582 shares of Common Stock and
(ii) warrants to purchase 62,500 shares of Common Stock.
(f) Includes (i) options to purchase 70,690 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
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<PAGE>
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 47,915 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) Consists of options to purchase 12,915 shares of Common Stock.
(k) The address of the beneficial owner is 7440 Fuerstentum, Lichenstein,
Landstrasse 163. (l) Includes warrants to purchase 220,000 shares of
Common Stock.
(m) The address of the beneficial owner is P.O. Box 4603, Zurich,
Switzerland.
(n) Includes (i) options to purchase 407,984 shares of Common Stock and
(ii) warrants to purchase 118,750 shares of Common Stock.
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<PAGE>
CERTAIN TRANSACTIONS
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 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 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. ATN provided distribution of the Company's programming
into cable systems through existing
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<PAGE>
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. 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 Nesting Contract, as amended,
expired on August 31, 1998. Mr. George H. Henry, a director of the Company and
the Chairman of its Executive Committee, 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 conflicts do arise, they will be resolved in a
manner favorable to the Company. Any such future transactions will be on terms
no less favorable to the Company than could be obtained from unaffiliated
parties and will be approved by the Company's Finance and Compensation
Committee.
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<PAGE>
DESCRIPTION OF SECURITIES
General
The aggregate number of shares that the Company is authorized to issue
is 25,000,000 shares of Common Stock, par value $.01 per share. As of the date
of this Prospectus, the Company has outstanding 6,334,833 shares of Common
Stock.
Common Stock
The holders of the Common Stock are entitled to one vote for each share
held of record in the election of directors of the Company and in all other
matters to be voted on by the shareholders. There is no cumulative voting with
respect to the election of directors, with the result that the holders of more
than 50 percent of the shares voting for the election of directors can elect all
of the directors. Holders of Common Stock are entitled (i) to receive such
dividends as may be declared from time to time by the board of directors out of
funds legally available for such purpose, and (ii) in the event of the
liquidation, dissolution, or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities and after provision has been made
for each class of stock, if any, having preference over the Common Stock. All of
the outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable. Holders of Common Stock have no preemptive right to subscribe for
or purchase additional shares of any class of the Company's capital stock.
Warrants
Each Warrant issued pursuant to the Agreements, as amended, entitles
the holder thereof (the "Warrant Holders") to purchase one share of Common
Stock. The Warrants are exercisable as to 200,000, 100,000, 100,000 and 100,000
shares of Common Stock for $4.00, $5.00, $5.50, and $6.00 per share,
respectively. The Warrants exercisable for $5.50 per share are exercisable until
June 29, 2001. The remaining Warrants are exercisable until December 2001. The
Warrants are not redeemable by the Company at any time.
The exercise price and number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, the Warrants are not subject to adjustment for issuances of Common
Stock at prices below the exercise price of the Warrants. Reference is made to
the Warrant (which has been filed as an exhibit to this Registration Statement)
for a complete description of the terms and conditions therein (the description
herein contained being qualified in its entirety by reference thereto).
The Warrants may be exercised upon surrender of the Warrant on or prior
to the expiration date to the Company at its principal office or at the office
of the Warrant agent appointed by the Company in accordance with the terms of
the Warrant, with the subscription form attached thereto completed and executed
as indicated, accompanied by full payment of the exercise price (in cash or by
certified check or official bank check payable to the order of the Company) for
the number of Warrants being exercised. The Warrant Holders do not have the
right or privileges of holders of Common Stock.
Redeemable Warrants
Each Redeemable Warrant outstanding entitles the registered holder
thereof (the "Redeemable Warrant Holders") to purchase one share of Common Stock
at a price of $5.50, subject to adjustment in certain circumstances, through and
including September 29, 2002.
Each Redeemable Warrant is redeemable by the Company at any time, upon
notice of not less than 30 days, at a price of $.10 per Redeemable Warrant,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives notice
(the "Call Date") has been at least 150% (currently, $8.25, subject to
adjustment) of the then effective exercise price of the Redeemable Warrants and
the Company obtains the written consent of Whale Securities Co., L.P., the
underwriter in the Company's initial public offering (the
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<PAGE>
"Underwriter") to such redemption prior to the Call Date. The Redeemable Warrant
Holders shall have the right to exercise their Redeemable Warrants until the
close of business on the date fixed for redemption.
The Redeemable Warrants are issued in registered form under a warrant
agreement by and among the Company, American Stock Transfer & Trust Company, as
warrant agent (the "Redeemable Warrant Agent"), and the Underwriter (the
"Redeemable Warrant Agreement"). The exercise price and number of shares of
Common Stock or other securities issuable on exercise of the Redeemable Warrants
are subject to adjustment in certain circumstances, including in the event of a
stock dividend, recapitalization, reorganization, merger or consolidation of the
Company. However, the Redeemable Warrants are not subject to adjustment for
issuances of Common Stock at prices below the exercise price of the Redeemable
Warrants. Reference is made to the Redeemable Warrant Agreement (which has been
filed as an exhibit to the Company's Registration Statement on Form SB-2, as
amended (File No. 333-27787)) for a complete description of the terms and
conditions therein (the description herein contained being qualified in its
entirety by reference thereto).
The Redeemable Warrants may be exercised upon surrender of the
Redeemable Warrant certificate on or prior to the expiration date at the offices
of the Redeemable Warrant Agent, with the exercise form on the reverse side of
the Redeemable Warrant certificate completed and executed as indicated,
accompanied by full payment of the exercise price (by certified check or bank
draft payable to the Company) to the Redeemable Warrant Agent for the number of
Redeemable Warrants being exercised. The Redeemable Warrant Holders do not have
the right or privileges of holders of Common Stock.
No Redeemable Warrant will be exercisable unless, at the time of
exercise, the Company has filed a current registration statement with the
Commission covering the shares of Common Stock issuable upon exercise of such
Redeemable Warrant and such shares have been registered or qualified or deemed
to be exempt from registration or qualification under the securities laws of the
state of residence of the holder of such Redeemable Warrant. The Company will
use its best efforts to have all such shares so registered or qualified on or
before the exercise date and to maintain a current prospectus relating thereto
until the expiration of the Redeemable Warrants, subject to the terms of the
Redeemable Warrant Agreement. While it is the Company's intention to do so,
there can be no assurance that the Company will be able to do so.
No fractional shares will be issued upon exercise of the Redeemable
Warrants. However, if a Redeemable Warrant Holder exercises all Redeemable
Warrants then owned of record by him or her, the Company will pay to such
Redeemable Warrant Holder, in lieu of the issuance of any fractional share which
is otherwise issuable, an amount in cash based on the market value of the Common
Stock on the last trading day prior to the exercise date.
Registration Rights
In March and April 1997, the Company completed a private financing
(the"Private Financing") pursuant to which the Company issued and sold to 21
"accredited investors" an aggregate of 40 units (the "Financing Units")
consisting of an aggregate of (i) $2,000,000 principal amount of unsecured
non-negotiable promissory notes (the "Financing Notes") which bear interest at
the rate of 9% per annum and are due on the earlier of the consummation of this
offering or March 6, 1998; (ii) 400,000 shares of Common Stock (the "Financing
Shares"); and (iii) warrants (the "Financing Warrants") to purchase an aggregate
of 500,000 shares of Common Stock at an exercise price of $5.50 per share. In
connection with the Private Financing, the Company agreed, pursuant to a
mandatory registration right, to include the 400,000 Financing Shares and the
500,000 shares issuable upon exercise of the Financing Warrants (the "Financing
Warrant Shares") in a registration statement which the Company will prepare and
file with, and use its best efforts to have declared effective by, the
Commission so as to permit the public trading of the Financing Shares and
Financing Warrant Shares pursuant thereto. If such registration statement is not
declared effective by the Commission within 15 months following the consummation
of the Company's initial public offering, then commencing on the first day of
the 16th month following the consummation of this offering, the Company shall
issue to each holder of Financing Shares and Financing Warrant Shares, on the
first day of each month a registration statement continues not to have declared
effective by the Commission, such number of additional shares of Common Stock as
is equal to 10% of the number of Financing Shares and Financing Warrant Shares
issued to and held by such holder and such number of additional warrants as is
equal to 10% of the number of Financing Warrants issued
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<PAGE>
to and held by such holder. The holders of the Financing Shares and Financing
Warrants have agreed not to sell or otherwise dispose of any of such securities
for a period of 24 months following the effective date (September 29, 1997) of
the Company's Registration Statement on Form SB-2.
The Company has granted certain "demand" and "piggyback" registration
rights to the holders of an additional 433,223 shares of Common Stock. The
demand registration rights are exercisable, under certain circumstances,
commencing September 29, 1998.
In connection with its initial public offering, the Company has agreed
to grant to the Whale Securities Co., L.P. certain demand and piggyback
registration rights in connection with the 400,000 shares of Common Stock
issuable upon exercise of certain warrants and the additional warrants included
therein.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Parker
Chapin Flattau & Klimpl, LLP, New York, New York.
EXPERTS
The audited financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
said report which includes an explanatory paragraph regarding the Company's
ability to continue as a going concern.
The audited financial statement of FMS Productions, Inc. included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Bartlett, Pringle & Wolf, LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein as reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
said report which includes an explanatory paragraph regarding the ability of FMS
Productions, Inc. to continue as a going concern.
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INDEX TO FINANCIAL STATEMENTS
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
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-6
Notes to Consolidated Financial Statements..................................F-7
FMS PRODUCTIONS, INC.
Report of Independent Auditors..............................................F-23
Balance Sheets at April 30, 1997 and 1996...................................F-24
Statements of Income and Retained Earnings for the years ended
April 30, 1997 and 1996................................................F-25
Statements of Cash Flows for the years ended April 30, 1997 and 1996........F-26
Notes to Financial Statements...............................................F-27
THE RECOVERY NETWORK, INC. PRO FORMA FINANCIAL INFORMATION
Pro Forma Condensed Consolidated Statements of Operations for the year
ended June 30, 1998....................................................F-31
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.
ARTHUR ANDERSEN LLP
Los Angeles, California
September 23, 1998
F-2
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
CURRENT ASSETS:
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
============
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
Additional Subscription Prepaid
Paid-in (Notes Consulting
Common Stock Capital Receivable) Costs Deficit Total
---------------------- ----------- ------------ ----------- ---------- -----------
Shares Amount
-------- -------------
<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 convertible notes
payable............................ 142,065 1,420 328,580 - - - 330,000
private placement including 7,749 shares
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
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 offering costs of $2,174,743 2,415,000 24,151 10,117,606 - - 10,141,757
Issuance of common stock and warrants for cash
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
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-5
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
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-6
<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-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 - (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) $(8,265,000)
============== ==============
Pro forma weighted average
number of common shares 2,088,339 4,356,055
============== ==============
Pro forma loss per common share $ (1.87) $ (1.90)
============== ==============
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 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
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)
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 operators. Currently, the Company's only significant arrangement is
with Cablevision, which provides the Company with approximately 2 million
subscribers in the New York and Boston metropolitan areas.
F-9
<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
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.
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-10
<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)
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."
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.
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)
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 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
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)
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.
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
F-13
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
4. Note Payables (continued)
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.
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-14
<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.
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.
F-15
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
7. Capital Stock Transactions (continued)
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 (the "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.
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.
F-16
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
8. Related Party Transactions (continued)
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.
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.
F-17
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
10. Options and Warrants (continued)
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:
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
F-18
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
10. Options and Warrants (continued)
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-19
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
10. 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-20
<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.
12. Events Subsequent to the Date of the Auditors Report (Unaudited)
Issuance of Common Stock
On September 24, 1998, and in connection with the 1998 Private
Placement, the shareholders of the Company approved the issuance of 346,449
shares of common stock (including 13,115 shares of common stock for placement
services) and a three year warrant to purchase 30,000 shares of common stock at
$5.50 per share for gross proceeds of $750,000. Expenses associated with this
offering are approximately $95,000. The shares and warrant were issued on
October 2, 1998.
In October 1998, the 1998 Private Placement agreement was amended (the
"Amendment"), whereby an additional 138,890 shares of common stock were issued.
Total shares of common stock issued under the 1998 Private Placement, including
the Amendment shares, were 1,250,000 shares for gross proceeds of $2,500,000 (or
$2.00 per share). Warrants to purchase an additional 400,000 shares of common
stock were also granted at exercise prices ranging from $4.00 to $6.00 per
share. These additional warrants are exercisable until December 2001.
F-21
<PAGE>
THE RECOVERY NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
12. Events Subsequent to the Date of the Auditors Report (Unaudited)
(continued)
Pursuant to the Amendment, 1998 Private Placement subscribers (the
"Subscribers") agreed not to sell their 1,250,000 shares of common stock until
December 21, 1998 (the "Lock-Up"), during which period the Subscribers have
granted a transferable option to sell 900,000 of such shares at $3.00 per share
(the "Option") to a minority shareholder of the Company. The Subscribers may
elect not to sell up to 450,000 shares of common stock under the Option. If the
Option is exercised, the Lock-Up will be extended until February 16, 1999 for
all unsold shares and Subscriber Reset Rights (see Note 7) will be forfeited.
The Lock-Up will expire if the closing bid price for the Company's common stock
is $5.00 or more for three consecutive trading days.
If the Option is not exercised, the Company will be required to pay
liquidated damages to the Subscribers of up to $150,000.
The Company has placed 1 million shares of common stock into escrow as
security for additional shares that may be required to be issued pursuant to the
Reset Rights.
Options
During October 1998, the Board of Directors granted options to purchase
350,000 and 50,000 shares of common stock at $2.00 and $2.50 per share,
respectively. The Board of Directors also granted 58,000 shares of common stock.
All shares and options to purchase 375,000 shares of common stock were granted
for consulting services rendered or to be rendered. Options to purchase 25,000
shares of common stock were granted for past Director services. Consulting
options vest immediately and director service options vest over three years.
Recovery Interactive
During October 1998, the Company and TCI agreed to amend the joint
venture to admit FHC Internet Services, L.C. ("FHC") as a member. In connection
with the amendment, the Company agreed to contribute warrants to purchase
295,000 shares of common stock at $2.125 per share, and 25,000 shares of common
stock to RI. The Company's ownership interest was reduced to 20 percent from 50
percent and may be reduced another 10 percent if the Company does not satisfy
certain performance guidelines.
F-22
<PAGE>
June 30, 1997
Santa Barbara, California
To the Board of Directors
of FMS Productions, Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying balance sheet of FMS Productions, Inc. as of
April 30, 1997 and 1996 and the related statements of income, retained earnings,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 FMS Productions, Inc. as of
April 30, 1997 and 1996 and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered losses from operations and its
total liabilities exceeds its total assets. This raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Bartlett, Pringle & Wolf, LLP
F-23
<PAGE>
<TABLE>
<CAPTION>
FMS PRODUCTIONS, INC.
BALANCE SHEET
April 30, 1997 and 1996
================================================================================
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Current Assets:
Cash: Unrestricted $ 12,122 $ 12,951
Restricted 8,502 9,864
--------- ---------
Total cash 20,624 22,815
Accounts receivable, less allowance for uncollectible
accounts of $18,500 in 1997 and 1996 78,353 108,758
Other receivables -- 1,620
Inventories 48,168 42,334
Production costs, net of amortization of $457,399 and
$450,953 for 1997 and 1996, respectively 55,410 56,497
Prepaid expenses 2,989 2,454
--------- ---------
Total current assets 205,544 234,478
--------- ---------
Equipment
Machinery and equipment 32,049 35,495
Furniture and fixtures 22,773 22,985
Automobiles 28,500 28,500
Office equipment 14,784 14,306
--------- ---------
98,106 101,286
Less accumulated depreciation (88,043) (89,883)
--------- ---------
Net equipment 10,063 11,403
Other Assets:
Refundable deposits 5,257 6,398
--------- ---------
Total assets $ 220,864 $ 252,279
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable $ 65,849 $ 60,862
Accrued royalties 160,428 156,155
Accrued payroll and related tax liabilities 33,681 38,225
Deferred revenue 7,181 8,765
Current portion of long term debt 12,205 38,208
--------- ---------
Total current liabilities 279,344 302,215
Long term debt, net of current portion 22,846 29,057
--------- ---------
Total liabilities 302,190 331,272
--------- ---------
Stockholders' Equity:
Common stock no par value; authorized 2,500 shares;
Issued and outstanding 100 shares 700 700
Retained earnings (deficit) (82,026) (79,693)
Total stockholders' equity (deficit) (81,326) (78,993)
Total liabilities and stockholders' equity $ 220,864 $ 252,279
=============== ================
</TABLE>
See accompanying notes
F-24
<PAGE>
FMS PRODUCTIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the Years Ended April 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Sales $1,180,926 $ 1,286,710
Cost of Sales 378,096 406,198
------------- -------------
Gross profit 802,830 880,512
------------- -------------
Operating Expenses
Selling 379,495 481,347
General and administrative 420,316 488,986
Interest 10,208 14,072
------------- -------------
Total operating expenses 810,019 984,405
------------- -------------
Operating loss (7,189) (103,893)
------------- -------------
Other Income:
Net gain on disposal of assets -- 112
Interest income 305 593
Miscellaneous income 5,351 5,000
------------- -------------
Total other income 5,656 5,705
------------- -------------
Loss before income taxes (1,533) (98,188)
Provision for income taxes (800) (800)
------------- -------------
Net loss.................................... (2,333) (98,988)
Retained earnings (deficit), beginning of year (79,693) 19,295
------------- -------------
Retained earnings (deficit), end of year $ (82,026) $ (79,693)
============= =============
</TABLE>
See accompanying notes
F-25
<PAGE>
FMS PRODUCTIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended April 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
Cash Flows from Operating Activities: 1997 1996
-------------- ----------------
<S> <C> <C>
Net loss $ (2,333) $ (98,988)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 11,587 13,439
Gain on disposal of assets -- (112)
Decrease (increase) in:
Accounts receivable 30,404 20,003
Other receivables 1,620 63
Inventories (5,834) 12,283
Production costs (5,359) (781)
Prepaid expenses and refundable deposits 606 27,049
Increase (decrease) in:
Accounts payable 4,987 (9,798)
Accrued royalties 4,273 14,138
Accrued payroll and related taxes (4,544) (2,665)
Deferred revenue (1,584) --
-------------- ----------------
Net cash provided (used) by operating activities 33,823 (25,369)
-------------- ----------------
Cash Flows from Investing Activities:
Purchase of equipment (3,800) (5,053)
-------------- ----------------
Net cash used in investing activities (3,800) (5,053)
-------------- ----------------
Cash Flows from Financing Activities:
Repayments under line of credit -- (42,500)
Principal payments on long-term borrowing (32,214) (28,946)
Proceeds from long-term borrowing -- 34,494
-------------- ----------------
Net cash used in financing activities (32,214) (36,952)
-------------- ----------------
Net decrease in cash (2,191) (67,374)
Cash at beginning of year 22,815 90,189
-------------- ----------------
Cash at end of year $ 20,624 $ 22,815
============== ================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 10,208 $ 14,072
Income taxes 800 800
See accompanying notes
</TABLE>
F-26
<PAGE>
FMS PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Note 1 - Nature of Business and Summary of Significant Accounting Policies
A) Nature of Business
FMS Productions, Inc., located in Carpinteria, California, is a
nationwide distributor of educational films and videos. The
Company grants credit to its customers including educational,
correctional, and counseling institutions throughout the United
States, many of which rely on governmental funding.
B) Restricted Cash
Restricted cash represents amounts received from third parties
for the production of films.
C) Inventories
Inventories are stated at the lower of cost (first in, first
out) or market (net realizable value).
D) Equipment
Equipment is stated at cost with depreciation provided over the
estimated useful lives utilizing the straight line and 150%
declining balance methods.
The estimated useful lives of all of the assets range from five
to seven years.
E) Production Costs
Production costs consist of negative costs, which are the costs
the Company incurs to produce a film, and other production costs
that the Company incurs to produce books and cassette tapes.
Negative costs are amortized under the individual film-forecast-
computation method. This method amortizes the film costs in
relation to an estimate of the film's revenues over the sales
life of the film. Other production costs are amortized in a
similar manner. It is reasonably possible that those estimates
of anticipated gross revenues will be reduced in the near term.
As a result, the carrying amount of the capitalized production
costs would be reduced.
F) Income Taxes
Income taxes are provided for the tax effect of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to
differences between methods of depreciating fixed assets,
allowances for doubtful accounts, and reporting of lawsuit
settlement expense for financial and income tax reporting. The
deferred tax assets represent the future tax return consequences
of those differences, which will be deductible when the assets
are recovered. Deferred taxes also are recognized for operating
losses that are available to offset future taxable income.
G) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management 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. Estimates
also affect the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
F-27
<PAGE>
Note 2 - Inventories
Amounts included in inventory are as follows:
1997 1996
----------------- ----------------
Pre-production costs $ 1,836 $ 677
Finished goods 46,332 41,657
----------------- ----------------
$ 48,168 $ 42,334
================= ================
Note 3 - Notes Payable and long-term Debt
The note payable represents a line of credit secured by accounts
receivable, business assets, inventories and a trust deed on property
owned by a stockholder under a general security agreement. The note
was paid off on February 16, 1996. The company had available a
$50,000 line of credit which expired August 15, 1996.
At April 30, 1996 the Company was in violation of certain restrictive
covenants of its loan agreement with the bank under its term loan.
Therefore, the term loan is classified as current as of April 30,
1996.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Unsecured 9% note payable to a stockholder of the Company,
payments of principal and interest due in monthly installments
of $532, note was due in full and paid by January 1, 1997. $ $ 4,612
Loan payable to bank in monthly principal installments of $1,042 plus
interest. The interest rate is the Wall Street Journal prime rate plus 2%,
which equaled 10.5% and 11%
at April 30,1997 and 1996, respectively. The loan is secured by all
corporate assets and a Company officer's home. $ 5,993 $ 18,497
The company officer is a guarantor.
Lawsuit settlement, payable in monthly installments of $1,000,
including interest, plus a final payment of $3,000, which was paid in
full December 1, 1996. Interest is imputed at 8% based on the
Company's incremental borrowing rate. $ 9,662
13.4% note payable to a stockholder of the Company in monthly
principal and interest payments of $811. Note is due in full on
February 25, 2001. The note is secured by accounts receivable,
inventories and all other assets of the Company. The loan is
subordinate to the loan payable to the bank
Described above. 29,058 34,494
----------- ----------
Total long-term debt 35,051 67,265
Less current portion of long-term debt 12,205 38,208
----------- ----------
Long-term debt, net of current portion $ 22,846 $ 29,057
=========== ==========
</TABLE>
Principal repayments are scheduled as follows for the years ending April 30:
1998 $ 12,205
1999 7,097
2000 8,106
2001 7,643
-------------------
$ 35,051
===================
F-28
<PAGE>
Note 4 - Lease Commitments
The Company leases its facilities and equipment under month to month
operating lease arrangements. The total expense for the year ended
April 30, 1997 and 1996 was $47,378 and $50,390, respectively.
Note 5 - Income Taxes
Temporary differences giving rise to the deferred tax assets consist
primarily of the excess of depreciation for financial reporting
purposes over the amount for tax purposes, allowances for accounts
receivable reported differently for financial reporting and tax
purposes, and lawsuit settlement expense accounted for differently
for financial reporting and tax purposes.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996
--------------- -----------------
<S> <C> <C>
Current tax expense -- state $ 800 $ 800
--------------- -----------------
The net deferred tax assets include the following components:
Deferred tax assets:
Federal $ 29,346 $ 30,415
State 12,252 12,888
--------------- -----------------
Deferred tax asset valuation account:
Federal (29,346) (30,415)
State (12,252) (12,888)
--------------- -----------------
Total deferred tax asset $ $ 0
=============== =================
Valuation allowance, beginning of year $ 43,303 $ 23,808
Increase (decrease) in allowance (1,705) 19,495
--------------- -----------------
Valuation allowance, end of year $ 41,598 $ 43,303
=============== =================
</TABLE>
The Company has available at April 30, 1997 an unused operating loss
carryforward of approximately $206,000 which may be applied against
future federal taxable income; and approximately $142,000 which may
be applied against future state taxable income. These operating loss
carryforwards expire in the years ending April 30, 2011 and 2001,
respectively.
Note 6 - Depreciation and Amortization Expense
Included in the financial statements for the years ending April 30 are:
1997 1996
---------------- ----------------
Depreciation expense $ 5,140 $ 5,380
Amortization of production costs 6,447 8,059
---------------- ----------------
$ 11,587 $ 13,439
================ ================
Note 7 - Related Party Transactions
The Company purchased consulting services from a 20% shareholder. For
the year ending April 30, 1996, the Company paid this shareholder
$10,800. There were no amounts paid to this shareholder during the
year ending April 30, 1997. Amounts due to this shareholder and
included in trade payables totaled $1,350 as of April 30, 1997 and
1996.
F-29
<PAGE>
Also included in trade payables are amounts due to shareholders and
employees for unreimbursed expenses totaling $13,813 as of April 30,
1997.
Note 8 - Employment Contract
The Company has entered into an employment contract with its
president through June 30, 1999 that provides for a minimum annual
salary of $65,000 plus a bonus based on the Company's attainment of
specified levels of sales and earnings. In addition, if the president
is terminated for other than cause as specified in the terms of the
contract, the president will be paid severance in an amount equal to
his base salary payable from the date of the event causing the
termination through the expiration date of the agreement plus two
times his bonus for the immediately preceding year. In no event will
the amount of severance payable be less than his base salary for the
twelve month period immediately preceding the date of such
termination plus two times his bonus for the immediately preceding
fiscal year, if any such termination is made with in the final twelve
months of the term of the employment contract.
Note 9 - Subsequent Event
The Company received a letter of intent form a potential buyer who
would acquire all of the outstanding stock of the Company, subject to
certain conditions, in exchange for the issuance of the purchasing
company's common stock to the shareholders of FMS Productions, Inc.
The Company's shareholders have accepted this offer. After closing,
the Company would be a wholly owned subsidiary of the purchasing
company.
Note 10 - Going Concern
The Company experienced significant declines in sales during the
years ended April 30, 1997 and 1996. In addition, as of April 30,
1997 and 1996, total liabilities exceeded total assets. As mentioned
in Note 9, the Company's shareholders have accepted an offer to sell
all of their outstanding stock. In addition, management has
undertaken a cost reduction plan that has reduced monthly operating
expenses. The success of the pending sale of the Company and
management's cost reduction plan, as well as increasing sales and the
Company's continued ability to obtain necessary short and long-term
financing, will be critical factors in the Company's ability to
continue as a going concern.
F-30
<PAGE>
THE RECOVERY NETWORK, INC.
PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
The following unaudited pro forma condensed combining statements of
operations for the year ended June 30, 1998 illustrate the effect of the
acquisition by the Company of FMS Productions, Inc. (FMS) on December 10, 1998
for total consideration of $225,490. Consideration included 44,000 shares of the
Company's common stock valued at $209,000 ($4.75 per share) and a net cash
payment of $16,490. The FMS acquisition is being accounted for as a purchase,
with the assets acquired and liabilities assumed being recorded at estimated
fair market value. The unaudited pro forma combining statements of operations
assumes that this transaction occurred at the beginning of the period presented.
The pro forma adjustments are based upon currently available
information and upon certain assumptions that the Company believes are
reasonable. The acquisition of FMS has been recorded based upon the estimated
fair market value of the tangible assets acquired at the date of acquisition.
The adjustments included in the unaudited pro forma combining financial
statements represents the Company's preliminary determination of these
adjustments based upon available information. There can be no assurance that the
actual adjustments will not differ significantly from the pro forma adjustments
reflected in the pro forma financial information.
The unaudited pro forma combining financial statements are not
necessarily indicative of either future results of operations or results that
might have been achieved if the foregoing transaction had been consummated as of
the indicated dates. The unaudited pro forma combining financial statements
should be read in conjunction with the historical financial statements of the
Company and FMS, together with the related notes thereto, included elsewhere in
this Prospectus and the Registration Statement of which this Prospectus is a
part.
F-31
<PAGE>
THE RECOVERY NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Recovery
Network(1) FMS(2) Adjustments Consolidated
---------- ------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Advertising.......................... $ 150,780 $ - $ - $ 150,780
Video and publication................ 694,078 698,195 - 1,392,273
Other................................ 49,900 - - 49,900
---------- ------------ ----------- ----------
Total revenues.................... 894,758 698,195 - 1,592,953
---------- ------------ ----------- ----------
OPERATING EXPENSES:
Salaries and consulting.............. 3,346,720 272,606 19,500(3) 3,638,826
Marketing............................ 497,467 82,828 - 580,295
General and administrative........... 2,326,807 83,111 - 2,409,918
Programming.......................... 1,543,997 - - 1,543,997
Loss on investment in joint
venture........................... 592,500 - - 592,500
Cost of book and publication
sales............................. 216,889 210,768 30,000(4) 457,657
---------- --------- ----------- ----------
Operating expenses............. 8,524,380 649,313 49,500 9,223,193
---------- --------- ----------- ----------
Income (loss) from operations........ (7,629,622) 48,882 (49,500) (7,630,240)
INTEREST EXPENSE........................ (775,611) (3,661) 2,000(5) (777,272)
INTEREST INCOME......................... 146,044 - - 146,044
------------ ------------ ----------- -------------
Income (loss) before provisions
for income taxes.................. (8,259,189) 45,221 (47,500) (8,261,468)
PROVISION FOR STATE INCOME
TAXES................................ (2,545) (800) - (3,345)
------------- ------------- ------------ -------------
Net income (loss).................... $(8,261,734) $ 44,421 $ (47,500) $(8,264,813)
============= ============= ============ =============
LOSS PER SHARE INFORMATION:
Loss per share and loss per share
assuming dilution.................... $(1,91) $(1.90)
======== =============
Weighted average number of common 4,336.405 19,650(6) 4,356,055
============= ============ =============
and common equivalent shares
outstanding..........................
</TABLE>
- --------------------------
(1) Includes the historical results of operations of the Company for the year
ended June 30, 1998, which includes the results of FMS from the date of
acquisition (December 10, 1997).
(2) Includes the historical results of operations of FMS for the period from
May 1, 1997 through October 31, 1997.
(3) Increase in officers' salaries based upon new employment agreements.
(4) Amortization of FMS's television rights
(5) Reduction in interest expense due to retirement of note payable to
FMS Shareholder.
(6) Increase in weighted average shares to acquire FMS as if consummated on
July 1, 1997.
F-32
<PAGE>
======================================= =======================================
No dealer, salesperson or other 3,321,226 Shares
person has been authorized to give any
information or to make any
representations other than those
contained in this Prospectus, and, if
given or made, such information or
representations must not be relied upon
as having been authorized by the Company
or the Underwriter. This Prospectus does
not constitute an offer to sell or a
solicitation of an offer to buy any
security other than the securities THE RECOVERY
offered by this Prospectus, or an offer NETWORK, INC.
to sell or a solicitation of an offer to
buy any securities by anyone in any
jurisdiction in which such offer or 3,321,226 Shares of Common Stock
solicitation is not authorized or is
unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder
shall, under any circumstances, create
any implication that the information ---------------------------
contained herein is correct as of any
time subsequent to the date hereof.
PROSPECTUS
------------------------------------
---------------------------
TABLE OF CONTENTS
Page
Available Information.................2
Prospectus Summary....................3
Risk Factors..........................8
Use of Proceeds......................17
Dividend Policy......................17
Plan of Distribution.................18
Legal Proceedings....................18
Capitalization.......................19
Market for the Company's Common
Equity and Related __________ __, 1998
Shareholder Matters...............20
Plan of Operation....................21
Business.............................24
Management...........................34
Selling Shareholders.................43
Principal Shareholders...............47
Certain Transactions.................49
Description of Securities............51
Legal Matters........................53
Experts..............................53
Index to Financial Statements.......F-1
======================================== =====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The articles of incorporation of the Registrant provide for the
indemnification of the Registrant's directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the articles of incorporation and the
corporation law of the State of Colorado, the Registrant has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Registrant will not be
personally liable to the Registrant or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of a
director's duty of loyalty to the Registrant or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 7-108-403 of the Colorado statute
relating to unlawful distributions or (iv) for any transaction from which the
director derived an improper personal benefit. The Articles of Incorporation
also provide (subject to certain exceptions) that the Registrant shall, to the
maximum extent permitted form time to time under the law of the State of
Colorado, indemnify, and upon request shall advance expenses to, any director or
officer to the extent permitted under such law as it may from time to time be in
effect. The Registrant's bylaws require the Registrant to indemnify, to the full
extent permitted by law, any director, officer, employee or agent of the
Registrant for acts which such person reasonably believes are not in violation
of the Registrant's corporate purposes as set forth in the Articles of
Incorporation. As a result of these provisions, shareholders may be unable to
recover damages against the directors and officers of the Registrant for actions
taken by them which constitute negligence, gross negligence, or a violation of
their fiduciary duties, which may reduce the likelihood of shareholders
instituting derivative litigation against directors and officers and may
discourage or deter shareholders from suing directors, officers, employees and
agents of the Registrant for breaches of their duty of care, even though such an
action, if successful, might otherwise benefit the Registrant and its
shareholders.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses which will be paid
by the Registrant in connection with the issuance and distribution of the
securities being registered. With the exception of the registration fee and the
NASD filing fee, all amounts shown are estimates.
Registration fee............................................ 2,320
Nasdaq listing expenses fee................................. 7,500
Blue sky fees and expenses (including legal and filing fees) 2,000
Printing expenses (other than stock certificates)........... 5,000
Legal fees and expenses (other than Blue Sky)............... 50,000
Accounting fees and expenses................................ 37,500
Miscellaneous expenses...................................... 680
--------
Total.............................................. $105,000
========
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
During the period from November 1995 through April 1996, the Registrant
sold 322,663 shares of Common Stock at a price per share of $2.32 for proceeds
of approximately $749,500. In issuing such securities, the Registrant relied on
the exemption provided by Section 4(2) of the Securities Act.
In January 1996, the Registrant issued 48,106 shares of Common Stock
valued at $2.32 per share for consulting services rendered by third parties. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
During April 1996, the Registrant issued, pursuant to a shareholder
rights offering, 259,281 shares of Common Stock and received proceeds of
$200,767. In connection with the shareholder rights offering, the Registrant
granted each shareholder of record one transferable right for each share of
Common Stock owed by such shareholder. Five rights entitled a shareholder to
purchase one share of Common Stock at a price of approximately $.77 per share.
In issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act and Rule 505 of Regulation D promulgated
under the Securities Act.
In May 1996, the Registrant issued to a director of the Registrant
17,220 shares of Common Stock, valued at $2.32 per share, for consulting
services. In issuing such securities, the Registrant relied on the exemption
provided by Section 4(2) of the Securities Act.
During June 1996, the Registrant issued 14,332 shares of Common Stock
valued at $2.32 per share for consulting services performed and expenses
incurred by such consultant prior to November 1995. In issuing such securities,
the Registrant relied on the exemption provided by Section 4(2) of the
Securities Act.
During the period from July 1996 through October 1996, the Registrant
sold 10% Convertible Promissory Notes (the "Convertible Notes") in the aggregate
principal amount of $310,000. From November 1996 through January 1997,
Convertible Notes in the aggregate principal amount of $250,000 and interest of
approximately $11,500 were converted into an aggregate of 71,033 shares of
Common Stock. The noteholders also received and exercised warrants for 142,065
shares of Common Stock resulting in proceeds to the Registrant of approximately
$330,000. The remaining outstanding Convertible Note in the principal amount of
$60,000 was repaid in March 1997 from the net proceeds of a private financing
(the "Private Financing"), and in connection with such repayment the Registrant
issued to the holder warrants to purchase 15,498 shares of Common Stock,
exercisable at a price of $3.87 per share. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
In October 1996, the Registrant issued to two shareholders of the
Registrant 16,144 shares of Common Stock valued at $2.32 per share for
consulting services rendered by such shareholders, and the Registrant issued
7,749 shares of Common Stock valued at $3.48 per share for consulting services.
In issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
During October and November 1996, an officer and a former officer of
the Registrant were issued 43,050 shares of Common Stock, respectively, valued
at $2.32 per share as reimbursement for expenses incurred by them on behalf of
the Registrant, and the Registrant reduced the exercise price of 73,615 options
from $3.87 to $2.32 and all of such options were exercised. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.
From October 1996 through January 1997, the Registrant sold 138,761
shares of Common Stock for a price per share of $3.48 for proceeds of
approximately $483,500. The Registrant issued 7,749 shares in consideration of
services rendered in connection with such offering. In issuing such securities,
the Registrant relied on the exemption provided by Section 4(2) of the
Securities Act.
In November 1996, the Registrant issued 31,857 shares of Common Stock,
valued at $2.32 per share to officers of the Registrant upon conversion of
deferred compensation earned by such officers. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.
II-2
<PAGE>
In November 1996, the Registrant issued 6,888 shares of Common Stock
valued at a price of $2.90 upon the conversion of a promissory note. In issuing
such securities, the Registrant relied on the exemption provided by Section 4(2)
of the Securities Act.
In March and April 1997, the Registrant sold to 21 "accredited
investors" in the Private Financing an aggregate of (i) $2,000,000 principal
amount of promissory notes (the "Financing Notes") which bear interest at the
rate of 9% per annum and are due on the earlier of the consummation of this
offering or March 6, 1998; (ii) 400,000 shares of Common Stock; and (iii)
Warrants (the "Financing Warrants") to purchase an aggregate of 500,000 shares
of Common Stock at an exercise price of $5.50 per share. Whale Securities, L.P.,
the underwriter in the Registrant's initial public offering, acted as placement
agent in connection with the Private Financing and received a placement agent
fee of $200,000 in connection with such offering. In issuing such securities,
the Registrant relied on the exemption provided by Section 4(2) of the
Securities Act and Rule 505 of Regulation D promulgated under the Securities
Act.
In June 1997, the Registrant sold $105,250 aggregate principal amount
of promissory notes which bear interest at 15% due on the earlier of two
business days after the consummation of the Registrant's initial public offering
and July 2, 1997. The lender received an origination fee of 5% paid out of the
proceeds of the note. In issuing the note, the Registrant relied on the
exemption provided by Section 4(2) of the Securities Act.
In June 1998, the Registrant issued (i) 1,111,110 shares of Common
Stock to 7 "accredited investors" and (ii) warrants to purchase 100,000 shares
of Common Stock at an exercise price of $5.50 per share (the "Private
Placement"). In October 1998, the Registrant issued an additional 138,990 shares
of Common Stock and additional warrants to purchase 400,000 shares of Common
Stock at exercise prices between $4.00 and $6.00 per share. In issuing such
securities, the Registrant relied on the exemption provided by Rule 506 of
Regulation D promulgated under the Securities Act.
In June 1998, the Registrant issued 43,716 shares of Common Stock as
partial compensation to the placement agents in the Private Placement. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.
II-3
<PAGE>
Item 27. 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 (collectively, the "Subscribers") 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 Production, Inc. and
each of John Frederick, P. Randall Frederick, Jan Smithers, Joe
C. Wood, Jr., Sharon R. Irish and Charles S. Sapp. ++
2.6 Amendment No. 1 dated October 27, 1998 to the Subscription
Agreement dated as of June 29,1998.
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 Redeemable Warrant Agreement ( including Form of
Redeemable 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.++
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
10.1 Operating Agreement of Recovery Net 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.**
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 Recovery Net Interactive L.L.C. and
Merit Behavioral Care Incorporated dated as of May 1, 1997.**
10.10 Services Agreement dated as of April 1, 1998 between the
Registrant and Group W Network Services.
21.1 List of Subsidiaries.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Bartlett, Pringle & Wolf, LLP
23.3 Consent of Parker Chapin Flattau & Klimpl, LLP ( included in
Exhibit 5.1).
II-4
<PAGE>
27.1 Financial Data Schedule.
- ---------------------------------
* Incorporated by reference to the same number exhibit to the Registrant's
Form 10-KSB for the fiscal year ended June 30, 1998 filed on September
28, 1998.
** 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.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement or the most recent
post-effective amendment thereof which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement; provided, however, that paragraphs (1)(i)
and (1)(ii) do not apply if the registration statement is on Form
S-3, Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the Company pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities herein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
this offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserting by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
Santa Monica County, State of California, on the 26th day of October, 1998.
THE RECOVERY NETWORK, INC.
By: /s/William D. Moses
----------------------
William D. Moses
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement was signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/William D. Moses Chief Executive Officer and Chairman of the Board of October 26, 1998
- ------------------- Directors (principal executive officer)
William D. Moses
* Executive Vice President and Director October __, 1998
- -------------------
Donald J. Masters
/s/ Michael Clark Vice President of Finance (principal accounting and October 27, 1998
- ------------------- financial officer)
Michael Clark
- ------------------- Vice Chairman of the Board of Directors October __, 1998
Nimrod J. Kovacs
* Director and Chairman of the Executive Committee October __, 1998
- --------------------
George Henry
* Director October __, 1998
- ----------------------
Charlotte Schiff Jones
Director October __, 1998
- --------------------
Mitchell E. Sahn
</TABLE>
*By: /s/William D. Moses
William D. Moses
Attorney-in-fact
II-6
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
THE RECOVERY NETWORK, INC.
(Exact name of issuer as specified in its charter)
------------
------------------
<PAGE>
EXHIBIT INDEX
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 (collectively, the
"Subscribers") 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 Production, Inc. and each of
John Frederick, P. Randall Frederick, Jan Smithers, Joe C. Wood, Jr.,
Sharon R. Irish and Charles S. Sapp. ++
2.6 Amendment No. 1 dated October 27, 1998 to the Subscription Agreement
dated as of June 29, 1998.
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 Redeemable Warrant Agreement (including Form of Redeemable
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.++
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
10.1 Operating Agreement of Recovery Net 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.**
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.**
<PAGE>
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 Recovery Net Interactive L.L.C. and Merit
Behavioral Care Incorporated dated as of May 1, 1997.**
10.10 Services Agreement dated as of April 1, 1998 between the Registrant and
Group W Network Services.
21.1 List of Subsidiaries.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Bartlett, Pringle & Wolf, LLP
23.3 Consent of Parker Chapin Flattau & Klimpl, LLP (included in Exhibit
5.1).
27.1 Financial Data Schedule.
- ---------------------------------
* Incorporated by reference to the same number exhibit to the Registrant's
Form 10-KSB for the fiscal year ended June 30, 1998 filed on September
28, 1998.
** 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 2.6
AMENDMENT NO. 1 TO SUBSCRIPTION AGREEMENT
-----------------------------------------
WHEREAS on June 29, 1998 each of the investors identified on Schedule A
hereto ("Investor" or "Investors") had entered into a subscription agreement
with The Recovery Network, Inc. (the "Company") relating to the investment by
the Investors in securities of the Company (the "Subscription Agreement"); and
WHEREAS, each of the Investors has purchased the securities
for the Purchase Price identified on Schedule A hereto; and
WHEREAS, the Company and Investors are desirous of amending the
Subscription Agreements.
NOW THEREFORE, for the mutual promises contained herein and other good
and valuable mutual consideration, receipt of which is acknowledged, the parties
agree as follows:
1. Capitalized terms employed in this Amendment No. 1 (the "Amendment")
shall have the same meanings as attributed to them in the Subscription
Agreement.
2. Except as modified herein, the Subscription Agreement and documents
referred to therein, and all its terms and conditions remain in full force and
effect. Unless otherwise indicated, the amendments set forth herein shall be
deemed effective as of the date of the Subscription Agreement and the date
hereof.
3. Concurrently with the execution of this Amendment, the Company shall
deliver to the Investors the amount of Company Stock ("Additional Company
Shares") and Class B, C, and D common stock purchase warrants ("New B, C, or D
Warrants" or "New Warrants") set forth on Schedule B hereto. The New Warrants
are exercisable for the designated amounts of Company Stock until December 21,
2001 at per common share prices of $4.00, $5.00, or $6.00, respectively. The
Additional Company Shares and New Warrants are granted all the rights and
benefits accorded the Company Shares and Warrants, respectively, including but
not limited to the reissuance of the Securities without restrictive legend as
described in Section 4 of the Subscription Agreement, and the registration
rights described in Section 10 of the Subscription Agreement. The Purchase Price
set forth in Schedule A hereto shall be deemed the Purchase Price for all the
Company Shares set forth on Schedule A and the Additional Company Shares (i.e.
$2.00 per Company Share).
<PAGE>
4. The Investors agree not to sell the Company Shares and Additional
Company Shares until after December 21, 1998, except for 900,000 common shares
which may be proportionately sold by the Investors to Darryl Gurwich, or his
assigns ("Optionee") as the holder of the option to purchase all but not less
than all such 900,000 common shares at $3.00 per common share (the "Option").
However, upon exercise of the Option, each Investor shall have the right to
restrict the exercise of the Option in relation to up to half of the Company
Shares owned by the Investor which are deposited in Escrow and subject to the
Option. A lock-up shall not apply to any of the shares subject to the Option
which the Investor has withheld from being sold to the Optionee pursuant to the
previous sentence. The terms of the Option are memorialized in an Option Escrow
Agreement dated on or about the date of this Amendment.
5. In the event the Option is exercised pursuant to the terms of the
Option Escrow Agreement, then (i) the Investors agree to extend the lock-up
period described in the previous paragraph until February 16, 1999; and (ii) the
Reset rights of the Investors described in Section 9.1 of the Subscription
Agreement will, on such date, be eliminated entirely. In the event the Closing
Bid Price of the Company's Common Stock as reported by the NASDAQ SmallCap
Market or such other principal market upon which the Common Stock is listed for
trading is $5.00 or more for three consecutive trading days, then the Company
Shares and Additional Company Shares will not be subject to any lock-up after
such date.
6. In the event the Option is not exercised pursuant to the terms of
the Option Escrow Agreement then the Investors will be entitled to all Reset
rights described in the Subscription Agreement and as amended herein. If the
Registration Statement described in Section 10.1(iv) of the Subscription
Agreement relating to all the Registrable Securities is declared effective on or
before December 31, 1998, then the Trigger Date shall be January 2, 1999. Reset
Dates shall be every thirtieth day after the Trigger Date until the Investor has
Reset the entire Purchase Price. If any such date is not a trading day on the
NASDAQ SmallCap Market or such other principal market where the Common Stock is
listed for trading, then that Reset Date shall be the first trading day
thereafter. Designated Portions to be determined by each Investor shall be not
less than 5% nor more than 25% of the Purchase Price.
2
<PAGE>
7. In the event the Option is not exercised, then regardless of whether
the Registration Statement described in Section 10.1(iv) of the Subscription
Agreement was declared effective or not declared effective, Liquidated Damages
in accordance with Section 10.2(j) of the Subscription Agreement for a
Non-Registration Event will be assessed against the Company, and be immediately
payable by the Company to the Investors as if such Registration Statement had
not been declared effective as of December 21, 1998, (i.e. damages will accrue
for a period of not less than October 27, 1998 through December 21, 1998).
8. In the event the Option is exercised then the Investors waive
damages with respect to the Non-Registration Event described in Paragraph "7"
above.
9. In the event a Registration Statement relating to all the
Registrable Securities (which includes the Additional Company Shares and New B,
C, and D Warrants) (i) is not filed with the Securities and Exchange Commission
on or before October 30, 1998; or (ii) if not reviewed and commented upon in
writing by the Securities and Exchange Commission and not declared effective on
or before November 4, 1998; or (iii) if reviewed and commented upon in writing
by the Securities and Exchange Commission and not declared effective on or
before December 15, 1998, then the lock-up and Option described in Paragraph "4"
of this Amendment shall be void.
10. The Company shall deliver to Grushko & Mittman (the "Escrow
Agent"), upon the execution hereof 1,000,000 shares of Common Stock of the
Company (the "Escrowed Shares") in the names of the Investors in the
denominations set forth on Schedule A to be held in escrow. While held in
escrow, the Escrowed Shares shall not be deemed issued and outstanding for any
purpose nor shall any Investor have any voting or dispositive rights thereto.
The certificate representing the Escrowed Shares shall be imprinted with the
legend described in Section 1(e) of the Subscription Agreement which is subject
to removal pursuant to Section 4 of the Subscription Agreement. Any restrictive
legend imprinted on the Escrowed Shares will be removed immediately upon
effectiveness of a Registration Statement relating to such Escrowed Shares. The
terms and conditions of escrow shall be set forth in an escrow agreement in the
form annexed as Exhibit 1 hereto (the "Escrow Agreement"). The Company shall
deliver to the Escrow Agent, from time to time, at the request of the Investor,
within seven (7) business days after notice to the Company of such request, such
additional Company Shares as would be necessary to offset any dilutive events as
described in Section 11.2(g) of the Subscription Agreement affecting the
Escrowed Shares. The Escrowed Shares are to be employed to satisfy the Company's
obligation to deliver shares to the Investors upon Reset and to satisfy any
outstanding
3
<PAGE>
monetary obligations of the Company pursuant to Sections 9.1(f), 9.3 and 10.2(j)
of the Subscription Agreement. The Investor may elect to satisfy any outstanding
Company obligation arising under Section 9.1(f), 9.3, or Section 10.2(j) of the
Subscription Agreement and Paragraph 7 of this Amendment by demanding the
release from escrow of 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. Upon execution of this Amendment, the Company shall pay
the Escrow Agent a fee of $15,000 as compensation for the services of the Escrow
Agent.
11. The Company will remove Put Shares from the pending registration
statement and not register any common shares issuable upon exercise of the Put
in any registration statement filed prior to December 22, 1998. Nevertheless,
the Company will register the same amount of Common Stock required to be
registered pursuant to Section 10.1(iv) of the Subscription Agreement and one
share of Common Stock for each Additional Company Share and each share of Common
Stock issuable upon exercise of the New Warrants.
12. The Company will provide an updated legal opinion acceptable to the
Investors relating to the Additional Company Shares, New Class B, C, and D
Warrants and this Amendment in substantially similar form to the legal opinion
previously provided pursuant to Section 3 of the Subscription Agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK]
4
<PAGE>
13. This Amendment may be executed in multiple counterparts, and by
facsimile signature and may be delivered via telecopier.
THE RECOVERY NETWORK, INC.
By:_________________________________
AUSTOST ANSTALT SCHAAN
By:_________________________________
BALMORE FUNDS S.A.
By:_________________________________
5
<PAGE>
13. This Amendment may be executed in multiple counterparts, and by
facsimile signature and may be delivered via telecopier.
THE RECOVERY NETWORK, INC.
By:_________________________________
ZAKENI LTD.
By:_________________________________
BL SQUARED FOUNDATION
By:_________________________________
THE SARGON FUND, L.P.
By:_________________________________
TLG REALTY
By:_________________________________
------------------------------------
MARTIN CHOPP
6
<PAGE>
AMENDMENT NO. 1 SCHEDULE A
--------------------------
<TABLE>
<CAPTION>
INVESTORS PURCHASE COMPANY SHARES ALLOCATION OF
PRICE PREVIOUSLY ESCROWED
RECEIVED SHARES
<S> <C> <C> <C>
AUSTOST ANSTALT SCHAAN 750,000.00 333,333 300,000
7440 Fuerstentum
Lichenstein
Landstrasse 163
Fax: 011-431-534532895
BALMORE FUNDS S.A. 750,000.00 333,333 300,000
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
ZAKENI LTD. 500,000.00 222,222 200,000
c/o Betuvo AG
Baarer Strasse
73 Postsach 2121
6302 ZUG, Switzerland
Fax: 416-638-5023
BL SQUARED FOUNDATION 200,000.00 88,889 80,000
274 Madison Avenue
New York, NY 10016
Attn: Mel Lifschitz
Fax: 212-779-3218
THE SARGON FUND, L.P. 150,000.00 66,667 60,000
20 Adele Road
Cedarhurst, NY 11516
Fax: 516-371-6999
TLG REALTY 50,000.00 22,222 20,000
c/o Melo
525 West 52nd Street
New York, NY 10019
Attn: Bob Fischbein
Fax: 212-974-8315
MARTIN CHOPP 100,000.00 44,444 40,000
1129 East 22nd Street
Brooklyn, NY 11210
Fax: 718-854-3342
TOTALS 2,500,000 1,111,110 1,000,000
7
<PAGE>
AMENDMENT NO. 1 SCHEDULE B
INVESTORS ADDITIONAL B WARRANTS C WARRANTS D WARRANTS
COMPANY
SHARES
AUSTOST ANSTALT SCHAAN 41,667 60,000 30,000 30,000
7440 Fuerstentum
Lichenstein
Landstrasse 163
Fax: 011-431-534532895
BALMORE FUNDS S.A. 41,667 60,000 30,000 30,000
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
ZAKENI LTD. 27,778 40,000 20,000 20,000
c/o Betuvo AG
Baarer Strasse
73 Postsach 2121
6302 ZUG, Switzerland
Fax: 416-638-5023
BL SQUARED FOUNDATION 11,111 16,000 8,000 8,000
274 Madison Avenue
New York, NY 10016
Attn: Mel Lifschitz
Fax: 212-779-3218
THE SARGON FUND, L.P. 8,333 12,000 6,000 6,000
20 Adele Road
Cedarhurst, NY 11516
Attn: Jennifer Spinner
Fax: 516-371-6999
TLG REALTY 2,778 4,000 2,000 2,000
c/o Melo
525 West 52nd Street
New York, NY 10019
Attn: Bob Fischbein
Fax: 212-974-8315
MARTIN CHOPP 5,556 8,000 4,000 4,000
1129 East 22nd Street
Brooklyn, NY 11210
Fax: 718-854-3342
TOTALS 138,890 200,000 100,000 100,000
8
</TABLE>
EXHIBIT 5.1
PARKER CHAPIN FLATTAU & KLIMPL LLP.
1211 Avenue of the Americas
New York, NY 10036
(212) 704-6000
October 28, 1998
The Recovery Network, Inc.
1411 5th Street
Suite 250
Santa Monica, California 90401
Dear Sir or Madam:
We have acted as counsel to The Recovery Network, Inc., a Colorado
corporation (the "Company"), in connection with the Registration Statement on
Form SB-2 (the "Registration Statement") being filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. On June 29,
1998, the Company entered into a series of Subscription Agreements (the
"Agreements") with seven subscribers (the "Subscribers") relating to the receipt
by the Company of proceeds of up to $5,500,000 (the "Private Placement"). The
Registration Statement relates to the offering of 3,321,226 shares of the
Company's common stock, par value $.01 per share (the "Common Stock") of which
(i) 1,250,000 were issued to the Subscribers in the Private Placement, 43,716
were issued to the placement agents in the Private Placement and 122,260 were
issued to various third parties in various transactions unrelated to the Private
Placement (collectively, the "Issued Shares") and (ii) 972,250 are issuable to
the Subscribers pursuant to certain provisions of the Agreements, 500,000 are
issuable to the Subscribers upon exercise of certain warrants issued to the
Subscribers in the Private Placement, 58,000 are issuable to certain consultants
in various transactions unrelated to the Private Placement, and 375,000 are
issuable upon exercise of certain options issued to various consultants in
various transactions unrelated to the Private Placement (collectively, the
"Issuable Shares").
In connection with the foregoing, we have examined originals or copies,
satisfactory to us, of the Company's (i) Certificate of Incorporation as amended
and restated to date, (ii) By-laws as amended to date and (iii) resolutions of
the Company's board of directors. We have also reviewed such other matters of
law as we have deemed relevant and necessary as a basis for the opinion
hereinafter expressed. In such examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals
and the conformity with the original documents of all documents submitted to us
as copies or facsimiles. As to any facts material to such opinion, we have, to
the extent that relevant facts were not independently established by us, relied
on certificates of public officials and certificates of officers or other
representatives of the Company.
Based upon and subject to the foregoing, we are of the opinion that the
Issued Shares have been validly issued and are fully paid and non-assessable and
that the Issuable Shares, when issued and upon payment in accordance with the
terms of the respective warrant agreements, option agreements or relevant
provisions of the Agreements, as the case may be, will be validly issued, fully
paid and non-assessable.
<PAGE>
-2-
The Recovery Network, Inc. October 28, 1998
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ PARKER CHAPIN FLATTAU & KLIMPL, LLP
PARKER CHAPIN FLATTAU & KLIMPL, LLP
EXHIBIT 10.10
SERVICES AGREEMENT ("Agreement") dated as of April 1, 1998 (the
"Effective Date") by and between Group W Network Services, a division of Group W
Broadcasting, Inc., a Delaware corporation, with offices at 250 Harbor Drive,
Stamford, Connecticut 06904 ("GWNS") and Recovery Network, Inc., a Colorado
corporation with offices at 1411 5th Street, Suite 250, Santa Monica, California
90401 ("Customer").
WHEREAS, GWNS provides traffic, playback, uplink and compressed
satellite space segment services, facilities and equipment to support television
programming; and
WHEREAS, Customer owns the "Recovery Network" program service
("Network"); and
WHEREAS, Customer desires to purchase, and GWNS desires to provide
Customer, certain Services to be used in Customer's operation of Network;
NOW, THEREFORE, GWNS and Customer hereby agree as follows:
1. Services.
Subject to all of the terms and conditions of this Agreement, GWNS
agrees to provide for Customer, and Customer agrees to obtain from GWNS, the
following services ("Services") 24 hours per day, 7 days per week:
1.1. Master Control/Playback Services as described in Exhibit 1
hereto.
1.2. Traffic Services as described in Exhibit 2 hereto.
1.3. Compressed Satellite Space Segment, Uplink and Encryption
Services as described in Exhibit 3 hereto.
2. Additional Services; Consumable Goods.
In addition to the Services set forth in Section 1, GWNS shall provide
such other services, facilities and equipment as may from time to time
be agreed upon between Customer and GWNS ("Additional Services").
Consumables may be purchased on a non-exclusive basis as described in
Exhibit 4 hereto.
3. Term.
3.1. This Agreement shall be effective and enforceable as of the
Effective Date and shall continue in full force and effect for
a period of five (5) years from the Commencement Date (as
defined below) (the "Term"), unless the Agreement is
<PAGE>
sooner terminated or extended in accordance with its terms.
The Services shall commence at the earliest on July 1, 1998
and at the latest on September 1, 1998 (the "Commencement
Date"). Customer shall select the Commencement Date and notify
GWNS in writing forty-five (45) days in advance of the
Commencement Date it selects. If Customer does not select a
Commencement Date, then for purposes of payment the
Commencement Date shall be deemed to be September 1, 1998.
3.2. GWNS shall have a right of first negotiation and a right to
match any third party offer to provide services similar to the
Services for the Network and Customer's other networks, if
any, upon expiration of the Term.
4. Charges and Payment.
4.1. In consideration of the Services to be performed by GWNS
during the Term, from the Commencement Date Customer shall pay
to GWNS the amounts described in the Side Letter, as adjusted
in accordance with Section 4.2. All one-time, monthly and
other fees shall be due and payable thirty (30) days in
advance, except to the extent indicated otherwise in this
Agreement.
4.2. Past due payments shall incur a late payment charge of 1.5%
thereof per month (or the maximum permitted by law, if less).
Any costs, including legal fees and disbursements, incurred by
GWNS in enforcing this Agreement shall be paid by Customer.
Billing disputes shall be submitted in writing to GWNS (to the
attention of "Vice President, Finance - Group W Network
Services") within thirty (30) days of Customer's receipt of
the applicable invoice.
5. Termination.
5.1. Either party may terminate this Agreement in whole but not in
part (a) upon at least thirty (30) days' prior written notice
by the terminating party specifying that the other party has
breached any of its material obligations or any representation
or warranty hereunder, if such breach is not cured within
thirty (30) days after delivery of such notice or (b) upon
prior written notice by the terminating party if (i) the other
party files a petition in bankruptcy or if such a petition is
filed against such party, (ii) the other party takes advantage
of any insolvency law, (iii) the other party generally fails
to pay its debts as such debts become due, (iv) the other
party makes an assignment for the benefit of creditors or (v)
a receiver, liquidator or trustee is appointed in respect of
all or a substantial portion of the other party's property or
affairs.
5.2. Without limitation of the provisions of Section 5.1, GWNS may
terminate this Agreement in whole but not in part upon prior
written notice to Customer, if
2
<PAGE>
Customer fails to pay any amount otherwise due and payable
hereunder within thirty (30) days of notice from GWNS that
such amount has not been paid.
5.3. Without limitation of the provisions of Section 5.1, Customer
may terminate this Agreement in whole but not in part upon at
least one hundred and twenty (120) days prior written notice
to GWNS.
5.4. In the event that Customer terminates this Agreement as
described in Section 5.3, or GWNS terminates this Agreement as
described in Section 5.1 or Section 5.2, Customer shall pay to
GWNS (without limitation to any other amounts due or payable
to GWNS under this Agreement, at law or in equity) (a) all
amounts owing to GWNS but unpaid as of the effective date of
termination and (b) as further consideration for the provision
of Services and Additional Services by GWNS hereunder and not
as a penalty, the applicable "Termination Liability" set forth
on the Side Letter, adjusted in accordance with this Section
5.4, and (c) a "Cancellation Charge" equal to twice the
applicable monthly Services and Additional Services fees under
this Agreement as of the effective date of termination. The
Termination Liability shall decrease on a prorated basis
between annual permitted termination dates. Any amount
required to be paid pursuant to this Section 5.4 shall be due
and payable within thirty (30) days following the effective
date of termination of this Agreement.
6. Representations and Warranties.
6.1. Each of Customer and GWNS represents and warrants to the other
that:
6.1.1. It has the right, power and authority to enter into
and to fully perform this Agreement;
6.1.2. When executed and delivered, this Agreement shall
constitute a valid and binding obligation of such
party;
6.1.3. It has not entered and shall not enter into any
agreement or arrangement that could reasonably be
expected to limit the performance of its obligations,
or diminish or impair the rights of the other party,
hereunder;
6.1.4. Except as previously disclosed, there are no liens,
encumbrances, actions, suits or proceedings pending
before any Governmental Authority (as defined in
Section 11) or, to the knowledge of such party,
threatened against it, that could reasonably be
expected to limit the performance of its obligations,
or to diminish or impair the rights of the other
party, hereunder;
3
<PAGE>
6.1.5. It is, and during the Term shall remain, in full
compliance with all applicable treaties and other
international agreements, laws, statutes, rules,
regulations, ordinances and orders (collectively,
"Laws"');
6.1.6. No approvals, consents, authorizations, permissions,
licenses, certificates or permits (collectively,
"Approvals") of any third party are needed for the
performance of its obligations hereunder that have
not been obtained and do not remain in full force and
effect as of the execution hereof, and
6.1.7. As of the Effective Date of this Agreement, (a) it
has neither sought nor has any intention voluntarily
to seek the protection of any bankruptcy law; (b) it
has no reason to believe that any of its creditors
has caused or intends to cause it to become the
subject of any proceedings under any bankruptcy law;
and (c) it has no knowledge of any state of facts
which, if known to its creditors, (i) would cause it
voluntarily to seek the protection of any bankruptcy
law or (ii) might reasonably cause any such creditor
to cause it to become the subject of any proceeding
under any bankruptcy law.
Except as expressly set forth above, GWNS makes no
representation or warranty to Customer and hereby expressly
disclaims all other warranties, express or implied, including
but not limited to any warranty of merchantability or fitness
for a particular purpose.
6.2. Customer represents and warrants to GWNS that:
6.2.1. The content of all Customer programming produced or
post-produced by GWNS or on GWNS's facilities or
transmitted by GWNS hereunder ("Customer Programing")
shall not violate or infringe any Law, civil right,
property right, right of privacy, right of publicity,
copyright, trademark right, or other right of any
person, firm or corporation, or constitute
defamation, obscenity or indecency; and
6.2.2. Customer has all rights in and to all Customer
Programming hereunder.
7. Indemnification.
7.1. Each of GWNS and Customer agrees to indemnify, defend and hold
the other party, its parent and affiliated entities, and the
officers, directors, employees and agents of each of the
foregoing, harmless from and against any and all claims,
demands, damages, liabilities, costs and expenses (including
reasonable attorneys' fees and disbursements) arising out of
or caused by the breach of any representation, warranty or
undertaking made by such party hereunder.
4
<PAGE>
7.2. The party seeking indemnification hereunder shall notify the
indemnifying party in writing of any claim or action to which
such indemnification applies. The indemnifying party may, at
its option, undertake the defense of any such claim or action
and permit the party seeking indemnification to participate
therein at its own expense. The settlement of any such claim
or action by the party seeking indemnification without the
indemnifying party's prior written consent (which shall not be
unreasonably withheld) shall release the indemnifying party
from its obligations hereunder with respect to the claim or
action so settled. The settlement of any such claim or action
by the indemnifying party shall not, without the indemnified
party's consent, require the indemnified party to render any
performance other than the payment of money.
7.3. The provisions of Sections 7.1 and 7.2 shall survive the
expiration or earlier termination of this Agreement.
8. Notices.
8.1. Any notice which a party hereto is required to give or may
desire to give in connection with this Agreement shall be in
writing and delivered by hand; by overnight delivery service;
independently confirmed telecopy; or by certified or
registered mail, return receipt requested, postage and charges
prepaid; addressed as follows:
If to GWNS:
Group W Network Services
Attention: Altan C. Stalker
President
250 Harbor Drive
Stamford, CT 06904
Facsimile: 203-965-6320
with a copy to:
Group W Network Services
Attention: Law Department
250 Harbor Drive
Stamford, CT 06904
Facsimile: 203-965-6020
If to Customer:
5
<PAGE>
Recovery Network
Attention: John Wheeler
Vice President of Operations
1411 5th Street, Suite 250
Santa Monica, California 90401
Facsimile: (310) 393-5749
with a copy to:
Recovery Network
Attention: Greg Richey
General Counsel
1411 5th Street, Suite 250
Santa Monica, California 90401
Facsimile: (310) 393-5749
8.2. Either party may change its address for notice purposes by
notifying the other party in accordance with Section 8.1.
9. Confidentiality; Public Announcement.
9.1. Each party hereto agrees that it shall not, without the prior
written consent of the other, disclose or communicate to any
third party any Information (as defined in this Section 9.1)
that is disclosed to it by the other party, and the party
receiving such Information shall use reasonable efforts (which
need not include the commencement of any action or proceeding
against any unauthorized user of such Information) to prevent
the unauthorized disclosure or communication of such
Information. For purposes of this Agreement, the term
"Information" shall mean information that is conspicuously
identified as being confidential or proprietary. All
Information shall remain the property of the party furnishing
same. Nothing contained herein shall be construed as
restricting, or creating any liability for, the disclosure,
communication or use of Information that (a) is or becomes
publicly known through no wrongful act of the receiving party;
(b) is received from a third party without restriction and
without breach of this Agreement; (c) is independently
developed by the receiving party; or (d) is disclosed pursuant
to governmental or judicial requirement.
9.2. Neither party hereto shall disclose to any third party (other
than its respective employees, in their capacity as such) any
information with respect to the financial provisions of this
Agreement except (a) to the extent necessary to comply with
applicable Laws or appropriate Governmental Authorities, in
which case the party making such disclosure shall so notify
the other and shall seek confidential
6
<PAGE>
treatment of such information; (b) as part of its normal
reporting or review procedure to its parent companies,
auditors or attorneys, provided, however, that such parent
companies, auditors or attorneys agree to be bound by the
provisions of this Section 9.2; or (c) in order to enforce its
rights pursuant to this Agreement.
9.3. Any press release or other publicity materials concerning this
Agreement shall be issued only with the mutual consent of the
parties; provided, however, that neither party shall be
prohibited from stating, in the normal course of its business,
that it does business with the other and the general nature of
such business.
10. Employee Matters.
Neither party's employees shall be deemed to be employees or agents of
the other party for any purpose, and shall not be entitled to receive
any benefits or to participate in any employee benefits plan of the
other party. Customer and GWNS shall be solely responsible for payment
of all salaries, benefits, worker's compensation and all related costs
with respect to their respective employees and agents, and each party
shall indemnify the other party for any costs incurred in connection
with any of the foregoing.
11. Subject to Law.
This Agreement is subject to all applicable Laws of all international,
foreign, United States, state and local governmental authorities,
regulatory bodies and courts having jurisdiction (collectively,
"Governmental Authorities"). The performance of this Agreement by both
parties hereto is expressly contingent upon, and subject to, the
obtaining and continuance of such Approvals from such Governmental
Authorities as may be required or necessary for the purposes hereof,
and such terms and conditions as may be imposed therein. Each party
shall use all reasonable efforts (and the other party shall cooperate
with such party) to obtain in a timely manner, and maintain in effect,
any Approvals that may hereafter be required by any Governmental
Authority having jurisdiction with respect to such party's obligations
hereunder.
12. Limitation of Liability.
12.1. Notwithstanding any other provision of this Agreement, under
no circumstances shall (a) GWNS be liable to Customer or to
any third party for any loss of revenue, lost profits, lost
capital, overhead, claims of third parties for service
interruption, or any special, indirect, incidental or
consequential damages of any type or (b) GWNS's total
liability in connection with the performance of this Agreement
exceed the aggregate sum of all fees actually paid by Customer
to GWNS pursuant to this Agreement.
12.2. GWNS shall not be liable or responsible for (a) any
interception, or damages
7
<PAGE>
caused by interception, of a scrambled signal or (b) any
Customer Programming signal outside the points where such
signal enters into or departs from GWNS's transmission system.
13. Assignment.
Neither party may assign or otherwise transfer any of its rights or
obligations under this Agreement without the prior written consent of
the other. Consent will not be unreasonably withheld or delayed.
14. Force Majeure.
Notwithstanding any other provision of this Agreement, neither party
shall have any liability to the other for any failure to fulfill its
obligations hereunder if such failure is due to any labor dispute,
delays caused by equipment suppliers, fire, flood, Law, political
action, act of God or any other cause beyond the reasonable control of
the party unable to perform. In the event of any such occurrence, the
time period for performance under this Agreement shall be
correspondingly extended.
15. General.
15.1. Nothing contained herein shall be deemed to create, and the
parties do not intend to create, any relationship of partners
or joint venturers or agent and principal, and neither party
shall represent the contrary to any third party.
15.2. A waiver by either party of any of the terms or conditions of
this Agreement in any one instance or a waiver by either party
of a breach of this Agreement shall not be deemed or construed
to be a waiver of such terms or conditions for the future or a
waiver of any subsequent breach.
15.3. All remedies contained in this Agreement shall be in addition
to other remedies available at law or in equity, by statute or
otherwise, except as herein otherwise provided.
15.4. This Agreement and all matters or issues collateral hereto
shall be interpreted in accordance with the laws of the State
of New York applicable to agreements made and performed wholly
therein.
15.5. The Exhibits annexed to this Agreement are an integral part
hereof and are incorporated herein by this reference.
15.6. This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and
may be modified only by a writing
8
<PAGE>
executed by both of the parties hereto. Any purchase order or
similar order or request for the provision of Services or
Additional Services hereunder shall be subject to this
Agreement.
15.7. The titles of the sections of this Agreement are for
convenience only and shall not in any manner affect the
interpretation of any section of this Agreement.
15.8. Nothing contained in this Agreement shall be construed so as
to require the commission of any act contrary to law, and
wherever there is any conflict between any provision of this
Agreement and any Law, such Law shall prevail; provided,
however, that in such event the provision(s) of this Agreement
so affected shall be curtailed and limited only to the extent
necessary to permit compliance with the minimum legal
requirement, no other provisions of this Agreement shall be
affected thereby and all of such other provisions shall
continue in full force and effect.
15.9. The provisions of this Agreement are only for the benefit of
the parties hereto, and no third party may seek to enforce or
benefit from such provisions.
15.10. This Agreement may be executed in counterparts, each of which
shall be deemed an original, and all such counterparts
together shall constitute but one and the same instrument.
16. Certain Definitions.
Except as specified otherwise, when used in this Agreement or any
Exhibits or amendments hereto, the following terms shall have the
meanings specified in the respective sections cited below. Defined
terms shall include both the singular and the plural, as the context
requires.
"Additional Services" is as defined in Section 2.
"Agreement" is as defined in the recitals.
"Approvals is as defined in Section 6.1.6.
"Cancellation Charge" is as defined in Section 5.4.
"Commencement Date" is as defined in Section 3.1.
"Customer" is as defined in the recitals.
"Customer Programming" is as defined in Section 6.2.1.
9
<PAGE>
"Effective Date" is as defined in the recitals.
"Governmental Authorities" is as defined in Section 11.
"GWNS" is as defined in the recitals.
"Information" is as described in Section 9.1.
"ISCI" is as defined in Exhibit 2.
"Laws" is as defined in Section 6.1.5.
"Network" is as defined in the recitals.
"Renewal Date" is as defined in Section 4.3.
"Services" is as defined in Section 1.
"Technical Specifications" is as defined in Exhibit 3.
"Term" is as defined in Section 3.1.
"Termination Liability" is as defined in Section 5.4.
IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date first set forth above.
GROUP W NETWORK SERVICES RECOVERY NETWORK, INC.
By: /s/ Altan C. Stalker By: /s/ John R. Wheeler
Name: Altan C. Stalker Name: John R. Wheeler
Title: President Title: Senior Vice President of Operations
Date signed: 5/21/98 Date signed: 5/21/98
10
<PAGE>
Exhibit I - Master Control/Playback Services
The master control function designed for Customer provides a facility which
produces both high quality dual channel (stereo) audio and video. The master
control will be operated by a master control operator who will be responsible
for loading program material into an automated playback system (a shift
supervisor will also be on duty at all times who will supervise the operations
of the Network and other GWNS clients). The operator's primary responsibility
will be the playback of program material via an automated system. The playback
system will provide a system for both the preparation of the daily program logs
and needed program certifications, as well as assisting the operator in actual
switching.
The master control facility will also have full access to the "house" router
system. Having access to the central router allows the control room operation
access to such areas as the studio operation video tape rooms, GWNS's satellite
receiving capability and the ability to access GWNS's terrestrial interconnect
system into many points in New York City including The Switch, Waterfront
Communications and AT&T "NR". Attached as Exhibit 6 is a schematic diagram of
the GWNS Stamford complex indicating antenna and terrestrial Facilities.
As stated above, the master control area will contain an automated playback
system for the playback of programming. Primary programming, commercial and
interstitial material originate from five (5) betacam SP units controlled by the
automated system. The basic complement of equipment used in the control room is
the following:
5 - Sony PVW 2800 betacam SP units I - Automated control unit
I - Playback room video and audio monitoring system
In addition to the facilities stated above, equipment such as audio and video
test generators, patch panels, and WWV synchronization are included in the
overall master control equipment complement.
The playback facility hardware design is based on the premise that primary
programming material will be supplied on betacam SP video tape and be nominally
between 30 minutes and 60 minutes in length and be ready for playback to air.
The playback facility will transition consistent with GWNS's overall client
transition plan from a tape playback to a file server based system during the
Term of this Agreement. Customer will continue to supply GWNS betacam SP tapes
or materials in other standard industry formats as mutually agreed, during and
after the transition.
GWNS shall use an equipment configuration in the provision of Master
Control/Playback Services
11
<PAGE>
to Customer substantially as follows:
A. An automated switcher with audio follow video and manual
backup capability with downstream keying capability.
B. An automated playback system with five(5) beta SP tape
machines for air play.
C. Associated synchronization equipment conforming to broadcast
EIA-RS-170-A standards, including sync generators, signal
generators, and time base correctors.
D. Associated audio/video distribution and routing equipment,
racks, consoles and test equipment.
E. Comprehensive monitoring system to view outgoing and return
signals to monitor the signal at various points throughout the
transmission path.
F. Sufficient uninterrupted (UPS) and back-up generator power and
HVAC for all technical and equipment areas.
G. Equipment providing output signals, per channel, of discrete
stereo audio and standard NTSC video for delivery to its
compression and/or transmission facility in accordance with
the technical specifications.
All origination equipment shall meet manufacturer's specifications in effect at
the time of GWNS's purchase. Unless specific brand type or model or equipment is
specified above GWNS shall have the right to use such equipment as GWNS deems
appropriate to perform the services.
GWNS will execute the delivery of the Customer signal according to schedules
based on a program log supplied by Customer. The programming will consist of
videotape elements supplied to GWNS in advance of the air date. Occasional live
feeds may be required, but shall be treated on a project-by- project basis
separate from this Agreement, with responsibility for delivering the feed to
GWNS antenna or terrestrial interconnections assumed by Customer.
In addition to program signal, GWNS will transmit DTMF cue tones or other
signaling elements according to times and specifications provided by Customer.
GWNS will provide facilities for down-stream keying of the network
identification bug and will insert as directed on the program log.
GWNS shall monitor all programming distributed and provide Customer with an "as
aired" log. Included in this report, on an element-by-element basis, will be
details of any deviation from the program log, and details indicating the actual
programming which was transmitted. This report will include a description of the
deviation from the scheduled log and any corrective action taken by
12
<PAGE>
GWNS.
GWNS will monitor the transmission path, including downlink returns, to verify
transmission integrity. Any service interruption, transmission signal
degradation, or failure of the distribution will be documented and reported in
writing to Customer. Reports will contain details including, but not limited to:
time, duration, nature of interruption or degradation. Notice of problems shall
take place as expediently as possible and complete reports shall be submitted
within forty-eight (48) hours of the occurrence.
GWNS will designate a management level person as a contact who will address all
business and contractual issues including the "on-air look" to insure that
Customer's reasonable expectations for Network operations are being met.
GWNS will provide authorization and deauthorization services for commercial
(cable headend) decoders for Network affiliates of Customer. Required actions
will be executed in a timely manner upon written or verbal communication from
designated Customer personnel.
13
<PAGE>
Exhibit 2 - Traffic Services
The traffic operation will have the responsibility to prepare the daily program
log in accordance with a "run sheet" (log instructions in electronic form)
provided by Customer. GWNS will accept and return all video tape (any shipping
charges are billable to Customer). GWNS will also maintain a reasonable tape
library consisting of up to 1,000 hours of program content to support the
Network.
Customer will have the following obligations in respect of the traffic function:
A. Customer will be responsible for securing and shipping all
programming material that will be used in programming the
Network to GWNS.
B. All programming delivered on video tape will be delivered on
beta SP stock. Upon mutual agreement other formats may be
used.
C. All video tape will arrive at GWNS's facility a minimum of 72
hours prior to air. Shorter lead times will occasionally be
accommodated with time sensitive material.
D. All programming will be delivered in the NTSC analog format.
Upon mutual agreement other formats may be used.
The fees in the Side Letter are based on the foregoing and may be
raised, if necessary, to compensate for Customer's failure to perform
any of such obligations in a timely manner.
GWNS will electronically accept the data comprising the log for
Customer's programming elements. GWNS will convert this information
into a format required by GWNS's traffic management/real time
controller or functionally equivalent automation system.
GWNS will cross-reference Customer's log elements against the GWNS
database by the following: Industry Standard Commercial Identification
("ISCI") numbers, house number, element duration, and other traffic
management codes as appropriate. GWNS will confirm that all elements
required by the Customer log are in-house, active, and properly
prepared for playback. Missing elements or other problems will be
flagged and appropriate actions to resolve the problem will be taken in
an expedient manner.
Log events will be monitored on a real-time basis during playback to
air. A certified feedback, or "as aired," report will be generated and
returned to Customer within twenty-four (24) hours of actual airdate.
This report will be transferred electronically in a format specified by
Customer in order to seamlessly confirm the distribution of programming
elements. The electronic reporting will conform to specifications and
requirements of the traffic and billing computer and information
systems utilized by Customer. Hard copy logs and reports related to the
transmission of the Network may also be required.
14
<PAGE>
GWNS shall provide one (1) full-time traffic assistant. Traffic will be
accomplished on a system operated by technicians, provided by GWNS.
Source tapes for primary and back-up programming, promotional and interstitial
material supplied to GWNS by customer shall be beta SP video tape stock and
shall be manufactured in accordance with NTSC broadcast standards. All tape
stock shall be supplied by and shall remain the property of Customer. Customer
acknowledges that it is directly responsible for arranging for and paying the
costs of the following: (i) costs for shipping of its tape material to and from
the origination facility (currently in Irvine, CA); (ii) the delivery of any
satellite turnaround programming to the origination facility; and (iii) any
third party-provided fiber optic, transponder or microwave transport. GWNS will
provide climatically-controlled storage for library video tapes, not to exceed
1,000 hours.
15
<PAGE>
Exhibit 3 - Compressed Satellite Space Segment, Uplink and Encryption Services
GWNS will provide a digitally compressed uplink service via a
transponder-protected transponder on the Galaxy VII satellite, for distribution
of the Network on a twenty-four (24) hour basis.
This compressed transponder capacity utilizes Scientific Atlanta PowerVu
compression technology which GWNS has purchased, installed, operates and
maintains. This compression hardware is physically located at the GWNS Glenbrook
earth station facility where uplinking to the Galaxy VII satellite will occur.
The satellite transmission facility shall consist of a 9.0 meter antenna or its
equivalent or larger, that complies with 2(degree) spacing.
GWNS shall provide a protected microwave and/or fiber path from its origination
facility, if inter- facility transport is required, with equipment meeting the
Technical Specifications. One or more redundant paths shall be provided and
switched into service if a failure occurs in the primary paths.
Appropriate testing will be conducted by GWNS prior to the distribution of
specific services in order to ensure that the facilities provided by GWNS meet
the following "Technical Specifications":
A. There will be a full-time channel with video exciter or
upconverter and HPA in a fully automatic 1:1 switching
configuration. There will be one (1) primary and one (1)
protection HPA, upconverter or exciter protecting the
programmer's services
B. Sufficient uninterrupted (UPS) and back-up generator power and
HVAC for all technical and equipment areas shall be provided.
C. The design goal for analog services shall be broadcast quality
standard EIA RS-250B satellite relay from the input of the
protection switch, including a satellite loop using a 9.0
meter or larger antenna, to the output of the receive
monitoring switch. The loop performance is subject to the
transponder used meeting minimum performance specifications as
specified by PanAmSat.
D. The design goal for compressed services, if any, shall be
video and audio performance as specified by the compression
system manufacturer. Industry standards for compressed video
services are not available and manufacturer specifications
shall be used until appropriate standards have been accepted.
E. The maintenance limits of the analog system, and where
appropriate the compression system, shall be:
Video channel signal to noise (>10KHz) 52.0db
Video channel differential gain 10%
16
<PAGE>
Video channel differential phase 4% Video channel chrominance
to luminance delay 60nS Audio channel signal to noise
(>1KHz)54.0 dB Audio channel harmonic distortion (1KHZ) 1%
(Audio channels shall be tested at peak program level of
+18dBm)
F. The microwave and/or fiber optic facility used to transport
the channels from the origination facility to the
compression/transmission facility, if any, shall be protected,
including automatic protection switching. The design goal for
microwave systems shall be ANSI T1.502 - 1988 short haul and
the maintenance limit shall be ANSI T1.502-1988 medium haul
performance. The design goal for fiber optics systems shall be
ANSI T1.502-1988 medium haul and the maintenance limit shall
be as follows:
(Audio channels shall be tested at peak program level of + 1 dBm)
Video channel signal to noise (>10KHz) 50.0 dB Video channel
differential gain 8% Video channel differential phase 2% Video
channel chrominance to luminance delay 50 nS Audio channel
signal to noise (>1KHz) 54.0 dB Audio channel harmonic
distortion (1KHz) %
In the case of the digitally compressed channel, baseband video and associated
audio will be fed into the input of the compression equipment. One (1) video and
up to four (4) audio subcarriers can be accommodated. The output of the PowerVu
equipment will consist of a single data stream which will carry Network's signal
and those of other GWNS clients. This combined data stream will be transmitted
into the exciter and HPA uplink chain through to Galaxy VII, transponder #9. The
compressed satellite space segment will consist of a data channel not less than
6.71 Mbps.
GWNS will also provide encryption management services for the authorization of
Network affiliates' decoders. Customer represents that it has approximately 300
affiliates as of December 1997.
The entire transmission path is made up of redundant hardware for maximum system
reliability. The Glenbrook facility is staffed on a full-time basis with both
fully qualified operations and engineering personnel (who provide service to
both Customer and other GWNS clients).
17
<PAGE>
Exhibit 4 - Consumable Goods
Consumables have not been included in the service pricing. Major consumables are
video tape stock and shipping. In the case of video tape stock, GWNS will
invoice Customer its cost plus a 20% administrative fee. Since the price of
consumables cannot be projected over the course of a five (5) year service
contract, GWNS will invoice Customer on a monthly basis for any consumables.
Payment for consumables is due net thirty (30) days from the receipt of invoice.
18
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our
report for The Recovery Network, Inc. included in this Form SB-2 registration
statement and to all references to our Firm included in this registration
statement.
/s/ Arthur Andersen LLP
Los Angeles, California
October 27, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of The Recovery Network, Inc. of our report
dated June 30, 1997 relating to the financial statements of FMS Productions,
Inc. as of and for the years ended April 30, 1997 and 1996, which appears in
such Prospectus.
/s/ Bartlett, Pringle & Wolf, LLP
Santa Barbara, California
October 19, 1998
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