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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No.: 0-22913
Rnethealth.com, Inc. (formerly The Recovery Network, Inc.)
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(Name of Small Business Issuer in Its Charter)
Colorado 39-1731029
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
506 Santa Monica Blvd. Suite 400,
Santa Monica, CA 90401
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (310) 393-3979
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
[ ] Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
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The issuer's revenues for its most recent fiscal year totaled
$1,533,922.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average of the bid and asked prices as
reported by the National Quotation Bureau as of October 6, 1999 was
approximately $6,195,561.
There were 17,922,102 shares of Common Stock outstanding as of October
6, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None
Rnethealth.com, Inc. hereby amends its annual report on Form 10-K for the
fiscal year ended June 30, 1999 by its signatures which were not contained in
the original filing.
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PART I
Item 1. Description of Business.
GENERAL
RnetHealth.com, Inc. (formerly The Recovery Network) (the "Company"),
(NASDAQ-RNET:OB), is a digital media company converging digital technologies of
the Internet and the cable television network to deliver behavioral health
support, programming, products and services to a national audience.
The Company will deliver, via converging multimedia platforms, market-driven
sponsorship, video rich content, and programming providing local, national and
personalized information, diagnostic/therapeutic tools and community; via an
integrated behavior health prevention and wellness package with unique
e-commerce and transactional applications.
RnetHealth.com, the internet component, will provide a branded, integrated,
Web-based solution via a public platform for consumers, as well as a platform
for the behavioral healthcare needs of individuals, employers, insurance
companies, managed care organizations, and health care organizations and
providers, universities and other organized communities.
The Recovery Network cable television programming service, the broadband
component, reaches approximately 5.0 million cable households. The Recovery
Television Network drives traffic to the Company's web site, thereby enhancing
the scope of web-based community and providing subscription and e-commerce
revenue generation opportunities.
MARKET OVERVIEW
The Company's primary market is individuals whose lives are impacted, either
directly or indirectly, by behavioral health issues (e.g., eating disorders,
depression, substance abuse, stress, anxiety, teen and domestic violence) as
well as by the chronic diseases associated with behavioral health issues
(including heart disease, hypertension, diabetes, hepatitis, and others). The
Company provides action plans for traditional forms of treatment, and as an
adjunct to those traditional forms, clinically based alternative health
solutions.
Alternative healthcare serves a diverse group of consumers. Studies in
mainstream journals support a statistic indicating that more than 45% of persons
aged 25 to 55 seek alternative medical treatment every year. THE NATIONAL
INSTITUTES OF HEALTH has funded an office to address this trend: THE NATIONAL
CENTER FOR COMPLEMENTARY AND ALTERNATIVE MEDICINE (NCCAM). An estimated $10
billion out-of-pocket expenses were spent by people according to a report by the
AMERICAN MEDICAL ASSOCIATION. These expenses included: acupuncture,
chiropractic, biofeedback, homeopathy, meditation, and various herbal and
nutritional therapies.
On an annual basis, 6 of the top 10 highest dollar expenditures for prescription
drugs are written for behavioral health related issues.
TELEVISION NETWORK OVERVIEW
Recovery Network Television (RNET TV) is distributed nationally by satellite
under a contract with Group W Network Services, a division of CBS. CBS holds
500,000 shares of the Company stock.
Recovery Network Television (RNET TV) is available to approximately five million
(5,000,000) cable television households through distribution by multiple-system
operators (MSOs), individual cable systems, government, and educational
institutions. MSOs include: Cablevision Systems, Telecommunications, Inc (now an
AT&T company), Time Warner Inc., Cox Communications, Cable One, Century
Communications, FrontierVision, Knology, and NCTC.
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INTERNET OVERVIEW
The Internet site will deliver alternative and behavioral healthcare information
to the public and to consumers. It will also provide a business-to-business
branded, integrated, web-based solution for the administration, communications,
and information of organizations. (such as: colleges and universities' student
health programs, insurance companies, managed care companies, health plans and
employers).
E-commerce is anticipated to provide the Company's most significant revenue
source in the future.
MEDIA SYNERGY
Recovery Network Television (RNET TV) provides an extremely valuable vehicle for
driving traffic to RnetHealth.com. Increasingly, non-Internet marketing tools
are being cited as providing highly effective techniques for driving traffic to
a web site (Forrester Research: Driving Site Traffic, 1999). Television ranks
among the most desirable methods for this marketing, but because of its high
cost, it is often employed on a limited basis or not employed at all.
RnetHealth.com, with its own television network, commands a highly valued asset
for promotion of visits to the web site.
Additionally, because of the targeted nature of the Recovery Network Television
(RNET TV) viewer demographic, the synergy between the broadcast medium and the
web site is amplified and enhanced. Broadly addressed concerns which are
presented on television can be explored in depth on the web site. Information
customized for the individual viewer's circumstances can personalize the
television content. The converse of the relationships between the media is also
valid: television provides the media-rich delivery of audio and visual
information which is currently constrained by the technology available to most
web users today. As broadband delivery becomes widely deployed, the television
content enjoys the role of a very valuable, exploitable asset.
CONTENT AND MARKETING RELATIONSHIPS
Over the course of developing programming for Recovery Network Television, the
Company has cultivated relationships with individuals and with organizations,
which will continue to play strategic roles in the further development of both
the television network and the Internet business. These include contributions in
the areas of content review and provision, service distribution and deployment,
market analysis, and community development.
Key elements of these relationships include:
The UNIVERSITY OF FLORIDA provides an academic affiliation for clinical
validation of information and programs. Under a grant for "alternative and
behavioral health Internet information", a wide range of contributions are
provided to the Company. Included is development of content, of electronic
models for delivering services, and of continuing professional on-line
education. Additionally, as an initial site for the company's Student Assistance
Program (SAP), University of Florida students will receive an alternative and
behavioral health care model, which is Internet based.
The NATIONAL PARTNERSHIP FOR RECOVERY AND PREVENTION (NPRP) consists of more
than 50 national recovery and prevention organizations representing over 40
million constituents. Providing information, advice, and communications, both to
and from, the organization's membership leverages established organizational
structures to further the goals of the organization and to promote the
distribution of the Company's media outlets.
THE BOARD OF ADVISORS provides professional and expert input to the Company
concerning editorial and content issues, current practices in clinical
environments, social and cultural viewpoints, and research perspectives. The
composition of the board includes highly respected individuals in the areas
associated with the Company's content.
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Public/Private partnerships with government organizations such as the NATIONAL
CLEARINGHOUSE FOR ALCOHOL AND DRUG INFORMATION provide additional resources in
support of providing services under the RnetHealth.com banner. Telephone
information referral services, cross-site promotion links, and media library
services add to the reach and value of Rnethealth.com. The community-based COPE
program jointly developed with the "COMMUNITY ANTI-DRUG COALITIONS OF AMERICA"
extends the direct reach of the Company's media to the local level. Examples of
successful national programs include the "24 Straight" initiative which was
jointly developed by SAMHSA, THE NATIONAL GUARD, and RnetHealth.com This program
focused schools and local communities on issues of substance abuse. Another
example is the "Recovery Month" project which targets workplace issues of
substance abuse in twenty cities. This year's conference is "Addiction
Treatment: Investing in People for Business Success" and is a coproduction of
the federal government's CENTER FOR SUBSTANCE ABUSE TREATMENT (CSAT) , THE
COMMUNITY ANTI-DRUG COALITIONS OF AMERICA (CADCA) and RnetHealth.com.
Recovery Network Television (RNET TV) holds one of the largest libraries of
behavioral health programming in the world. Original productions by Recovery
Network and its Recovery Direct subsidiary, and license agreements provide a
resource for broadcast operations. All electronic rights, including Internet
distribution, are reserved for original productions. Programs include celebrity
talent such as Whoopi Goldberg, Whitney Houston, Tom Selleck and John Bradshaw.
ECONOMIC BASIS OF BUSINESS ELEMENTS
RnetHealth.com bases its profit centers on both its television network and on
its Internet activities. The Internet-related activities include two major
elements: a business-to-business application and a public/consumer application.
These elements are discussed below.
HELP LINE:
In March 1996, the Company commenced operations of a toll free help-line and
referral service for the viewers of The Recovery Network (the "Help Line").
During the hours which The Recovery Network is airing, the Company displays a
toll-free telephone number for viewers to call for information about how to
obtain additional help in their communities. Telephone calls are answered seven
days a week during the hours of 6:30 to 7:30 a.m. (EST) and Mondays to Fridays
during the hours of 9:00 a.m. to 5:00 p.m. EST) by a trained crisis response
counselor provided to the Company by the Substance Abuse and Mental Health
Service Administration (SAMHSA) at no cost to the Company.
To the extent that the Company enters into affiliation agreements to air The
Recovery Network in additional communities, the Company expects to expand caller
capacity of the Help Line, as well as expand its existing national database of
local groups, treatment centers and other sources of help and information. The
Company also intends to use the projected expanded call center capacity to also
offer recovery and prevention-related products and services directly to its
viewers.
The Company does not generate any revenues from the Help Line, and does not
receive any fees or commissions for this service, including from referrals made
by the Help Line. The Company operates the Help Line solely to provide support
to its viewers and as a community service. The Company also expects that
providing the toll-free Help Line will help build and maintain viewer loyalty
and support for The Recovery Network.
NATIONAL PARTNERSHIP FOR RECOVERY AND PREVENTION:
National Partnership for Recovery & Prevention (the "Partnership"), an umbrella
coalition of national recovery and prevention organizations, was formed in
November 1996 to work in conjunction with the Company to employ the Company's
interactive media services to develop and distribute effective and accurate
information concerning alcoholism and addiction. The Company's goal is to
provide a Partnership of prominent national prevention and recovery
organizations, public figures who are passionate about recovery and prevention,
and corporations and institutions that are willing to support the Company's
mission.
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To date, the Company has identified and partnered with more than 50 recovery and
prevention organizations representing over 40 million constituents. Member
organizations of the Partnership currently include African American Parents for
Drug Prevention, Community Anti-Drug Coalitions of America,Dharma Associates,
Gateway Foundation, Hands Across Cultures, ISA Associates, National Asian
Pacific American Families Against Substance Abuse, National Association of
Addiction Treatment Providers, National Drug Prevention League, National
Families in Action, National Hispanic/Latino Community Prevention Network,
National Parents Resource Institute for Drug Education, National Treatment
Consortium, Physicians for Prevention, Prevention Intervention and Treatment
Coalition for Health, The Bralove Group, The Miami Coalition for a Safe and Drug
Free Community and The Village.
Depending on their interests and abilities, partners may have the opportunity to
review and comment on The Recovery Network's television programming and internet
content, provide ideas for programming and content that is of interest to their
constituencies and, in some cases, produce programming. The Recovery Network may
also air public service messages from the partners and otherwise help them
disseminate information that is important to them.
With a national platform, the Partnership will seek to help focus the attention
of government and society on the issues of interest to the Partnership's members
and also foster better communication among its members, their constituencies and
the communities they are designed to serve. The Company believes that the member
organizations of the Partnership will be instrumental in helping the Company
demonstrate to cable operators a high level of community support for The
Recovery Network and how carriage of the Company's programming can help the
local operator fulfill the promise of localism. The Company believes that the
individual constituents of the Partnership's member organizations will account
for a significant portion of the initial audience for The Recovery Network's
programming, and the Company expects that the Partnership will communicate to
its constituents information about The Recovery Network's programming schedule
and availability.
RECOVERY DIRECT:
The Company believes that the market for products and services addressing social
and behavioral health issues is significant. The Company also believes that,
because it is attempting to create a nationwide medium specifically targeting
this market, if successful, it will be in a unique position to offer such
recovery and prevention-related products and services. The Company has formed a
subsidiary, Recovery Direct, through which it will seek to develop recovery and
prevention-related products and services to market on The Recovery Network and
through RnetHealth.com. 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. In addition,
the Company intends for Recovery Direct to offer tapes and videos by other
well-known individuals in the recovery field. Recovery Direct currently sells
recovery-related audio and video tapes to the institutional market under the
trade name FMS Productions. The Company is expanding Recovery Direct's offerings
to consumers and simultaneously broadening its traditional marketing and
distribution(i.e. catalog and phone sales) to include and emphasize on-line
marketing and sales. The Company will also seek to enter into arrangements with
third parties to provide or develop recovery and prevention-related products and
services and to research opportunities for the direct marketing of products
advertised on The Recovery Network through a toll-free telephone number.
TELEVISION 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.
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Such networks include, America's Health Network and Discovery Health, which
provide daily live programming and prerecorded programming relating to health
issues, The Health Channel, which provides programming about health, medicine
and wellness, Health-Net, an interactive health-related program aimed at aging
baby boomers, and Jones Health Network, which provides instruction to persons
seeking credentials or accreditation in the health field. Moreover, because 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
airtime, channel capacity, advertiser time or viewership.
ONLINE COMPETITION
There are several potential competitors in the Behavioral Health and CAM or
alt.med. marketplace:
Healthshop.com is partnered with Lycos, and sells natural healthcare products
online. They carry over 6,000 brand-name items, offer a newsletter, and have
free shipping on offered products.
Naturemade.com sells products manufactured by Pharmvite Inc. Partnered with
national retailers, naturemade.com offers consumers in-store literature on
products and a toll-free number to call to determine their specific needs.
Founded in 1972, they are privately held.
PVSVitamins, a division of PharMor, has an anchor store at Shopnow.com; there,
this partner of Vitamin World and Rexall Sundown sells products from all
manufacturers. The emphasis is on advertising and marketing products rather than
providing content or community.
Mothernature.com, founded in 1995, they have raised $223 million in 1998-99 from
venture capital. They have a keen awareness of the importance of building a
credible content site with varied resources and attempts at community. They are
well financed and well marketed.
Greentree Nutrition has raised more than $14 million in venture capital and has
recently purchased Acumin and VitaSave. They see their main rivals as stores
like GNC and online newcomers such as mothernature.com.
RnetHealth.com is able to compete successfully against these comparative
newcomers to the field, because RnetHealth's online platform provides a
multimedia approach and behavioral health and altmed has a continuing interest
in promotional opportunities surrounding our "Drug World" feature. The
credibility this will bring to the sales division as it launches will be
significant.
Often competitors to RnetHealth.com are poorly established or sparsely attended.
The 12-Step and recovery groups online are long established on CompuServe, but
the total monthly attendance is less than the projected average week's
attendance on RnetHealth.com, and ad sales are non-existent. RnetHealth.com
provides a significant Sponsorship opportunity. CompuServe's fortunes have
declined sharply in the past five years, and Prodigy has virtually shut down
though is now relaunching after a recent IPO.
The Internet has dozens of active informational sites, mail lists, and
newsgroups for both behavioral health, alternative medicine content and
addiction recovery. As yet, none of these Internet sites has a professional,
well supported, and well attended content structure and community. The strongest
offerings on the Internet may have a small amount of interesting content, but no
sense of community, and weak advertising draw.
GOVERNMENT REGULATION:
The Television industry is subject to extensive and frequently changing federal,
state and local laws and substantial regulation under these laws by governmental
agencies, including the Federal Communications Commission ("FCC"). Regulations
governing the rates that can be charged to subscribers by cable systems not in
markets subject to effective competition from other multichannel video program
distributors could adversely affect the ability of cable systems with limited
channel capacity to finance rebuilding or upgrading efforts to increase channel
capacity or otherwise restrict their ability to add new programming such as The
Recovery Network.
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In addition, federal "must-carry" rules requiring cable operators to devote up
to one-third of their channels to carriage of local commercial TV broadcast
stations (and additional channels for noncommercial educational TV stations);
commercial leased access rules designating 10% to 15% of system channels for
lease by unaffiliated programmers; and local regulatory requirements mandating
additional channel set-asides for public, governmental and educational use could
reduce channel availability which might otherwise be available for The Recovery
Network on many cable systems. Statutory provisions and FCC rules governing
relationships among cable systems and competing forms of multichannel video
program distribution, as well as the relationships between the Company and its
cable system affiliates could adversely affect the marketability of the
Company's programming and the ability of the Company to enter into arrangements
for the distribution of its programming.
In addition, the cable systems and radio stations that carry the Company's
programs are regulated by the FCC and, therefore, are subject to its rules and
policies, such as those relating to sponsorship identification, broadcast of
indecent language, provision of equal opportunities for political candidates and
related measures pertaining to program content and format. Failure of the
Company's programs to comply with one or more of these rules could subject the
cable systems to FCC fines or other sanctions, adversely affect the Company's
relationship with such entities and result in the discontinuation of carriage of
the Company's programming by such entities.
INTERNET
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Internet and state regulation governing interactive or on-line information
services and potentially affecting the activities of the Internet business is
currently evolving. Regulations governing purchases of information services via
toll-free telephone calls and laws governing obscene, indecent, or otherwise
unlawful communications have been adopted, and there can be no assurance whether
such laws and regulations will be applied to, and therefore affect, the business
and operations of RnetHealth.com. Additional laws and regulations are currently
being considered by the federal government and many state and local governments.
There can be no assurance that these or existing laws or regulations will not be
applied in a manner that will adversely affect the Company's business or
operations. Moreover, the FCC currently is considering proposals that could
increase the charges most individuals and entities pay to access Internet and
on-line services, which, if adopted, could adversely affect the Company's
business or operations.
The FCC does regulate common carriers whose services are used for purchases of
information services via toll-free telephone calls or pay-per-call services,
which regulation could affect RnetHealth.com. The Federal Trade Commission also
has jurisdiction over the provision of such services. Among the FCC's
regulations are disclosure requirements and other prerequisites to charging
calling parties for such services.
The Communications Decency Act ("CD Act") would make it unlawful to: (i)
knowingly send to a minor or display in a manner available to a minor "obscene",
"indecent" or "patently offensive" communications using a telecommunications
device or on-line service, (ii) send such a communication to anyone with the
intent to annoy, threaten or harass; or (iii) allow a telecommunications
facility under one's control to be used for such purpose. A preliminary
injunction against enforcement of the CD Act with respect to indecent or
patently offensive communications has been affirmed by the United States Supreme
Court, which found the CD Act's provisions to violate the First Amendment.
Although it is unlikely that the enjoined provisions of the CD Act will ever
become effective, there can be no assurance that information content made
available on or through the RnetHealth.com's offerings, by the Company or by
users of those offerings would not violate the CD Act, if it were to become
effective, or similar legislation that Congress might enact in the future, or
that attempts to implement defenses to such legislation would not adversely
affect the Company's business or operations. Federal laws dealing with obscenity
and child pornography as well as various state laws similar to those laws or to
the CD Act may also apply to information content available on or through the
Internet business's offerings. There is no assurance that those laws will not be
applied in a manner that will adversely affect the Company's business or
operations.
Proposals for additional or revised statutory or regulatory requirements are
considered by Congress, the FCC and state and local governments from time to
time, and a number of such proposals are under consideration at this time. It is
possible that certain of the provisions and requirements described herein are
now, and in the future may be, the subject of federal or state legislation,
agency proceedings or court litigation. It is not possible to predict what
legislative, regulatory or judicial changes, if any, may occur or their impact
on the Company's business or operations.
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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 and
RnetHealth.com. 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, internet and interactive media business
subjects the Company to possible liability claims from others, including
viewers, listeners and callers to the Help Line for claims arising from the
unauthorized use of name or likeness, invasion of privacy, defamation and
slander. The Company maintains general liability insurance (with coverage in
amounts of up to $1,000,000 per occurrence and $1,000,000 per annum), including
insurance relating to personal injury and advertising injury, in amounts which
the Company currently considers adequate.
EMPLOYEES
The Company currently has 24 full time employees engaged in affiliate/marketing
sales, programming, accounting, and in general administration. The Company also
from time to time retains a number of marketing and political consultants to
support its grassroots marketing efforts nationwide and in local communities.
Item 2. Description of Property.
The Company leases offices of approximately 2,500 square feet in Santa Monica,
California pursuant to a five-year lease that expires in May 2001. The monthly
rental is currently $6,500 per month. The Company has an option to extend the
lease through May 2004 at a price to be negotiated by the parties based upon
then prevailing rental rates.
Our subsidiary Recovery Direct leases offices of approximately 2,805 square
feet in Carpinteria, California, pursuant to a three-year lease that expires
November 2001. There is no renewable option with this lease, but a renewed
lease has been offered.
Item 3. Legal Proceedings.
On March 23, 1999 Michele LeBlanc filed a lawsuit against the Company in United
States District Court for the Central District of California, Western Division.
The complaint lists 10 separate counts including wrongful termination and
violation of Federal securities laws. Generally, the plaintiff seeks unspecified
compensation damages, attorneys fees and costs.
The Company believes that Ms. LeBlanc's claims are completely without merit and
intends to seek summary judgment as to all claims contained in Ms. LeBlanc's
complaint.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS [VOTE TOTALS PER
ITEM
On June 24, 1999, the Company's annual meeting of shareholders was held (the
"Meeting"). At the Meeting, the shareholders approved the following matters:
1. Election of the following individuals as directors of the
Company for a term of one year:
George H Henry, William D. Moses, Brad Parobek, Jay Handline
and Charlotte Schiff Jones.
2. The ratification and approval of an ammendment to the
Company's Certificate of Incorporation to change the Company's
name to Rnethealth.com.
3. The ratification and approval of an amendment to the Company's
Certificate of Incorporation to effect a reverse stock split
of the Company's Common Stock.
4. The ratification and approval of the appointment of Arthur
Andersen LLP as the Company's independent public accountants
for the fiscal year ending June 30, 1999: subsequent to this
date Arthur Andersen was replaced by Corbin & Wertz (refer
to Item 8).
5. The transaction of such other business as may properly come
before the Meeting or any adjournment or postponement thereof.
There was no solicitation in opposition to the nominees of the Board of
Directors for election to the Board of Directors. All nominees of the Board of
Directors were elected.
The number of votes cast for or withheld were as follows:
The Inspector made her report, reporting that there were 9,138,755 shares of
Common Stock entitled to vote represented at the Meeting by proxy, comprising
approximately 70% of the outstanding aggregate Common Stock of the Company.
1. The Inspector reported that in the voting for the first proposal
8,989,024 votes were cast in favor, representing approximately 69.3% of the
votes of the outstanding shares of Common Stock of the Company that were present
in person or by proxy. The inspector declared that the proposal was approved.
2. The Inspector reported that in the voting for the second proposal
9,064,795 votes were cast in favor, representing approximately 69.8% of the
votes of the outstanding shares of Common Stock of the Company that were present
in person or by proxy. The inspector declared that the proposal was approved.
3. The Inspector reported that in the voting for the third proposal
8,862,521 votes were cast in favor, representing approximately 68.3% of the
votes of the outstanding shares of Common Stock of the Company that were present
in person or by proxy. The inspector declared that the proposal was approved.
4. The Inspector reported that in the voting for the fourth proposal
9,085,396 votes were cast in favor, representing approximately 70% of the votes
of the outstanding shares of Common Stock of the Company that were present in
person or by proxy. The inspector declared that the proposal was approved.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
Prior to September 29, 1997, there was no market for the Company's securities.
From September 29, 1997 until January 7, 1998, one share of the Company's Common
Stock and one Redeemable Warrant (which entitled the holder to purchase one
share of Common Stock at a price of $5.50 per share through the close of
business on September 29, 2002, or an earlier redemption date) (each, a
"Redeemable Warrant" and collectively, the "Redeemable Warrants") traded as a
unit (each, a "Unit" and collectively, the "Units"). Starting on January 9,
1998, shares of the Company's Common Stock and the Redeemable Warrants began
trading separately. In all cases, the Company's Units, Common Stock and
Redeemable Warrants traded on the Nasdaq SmallCap Market. The table below sets
forth the high and low closing bid prices for the Units, the Common Stock and
the Redeemable Warrants, as reported on the Nasdaq SmallCap Market, during the
period September 29, 1998 to April 21, 1999. The quotations represent
inter-dealer quotations without adjustment for retail mark-ups, mark-downs or
commissions and may not represent actual transactions: The Company's stock was
delisted on April 21,1999 and currently trades on the bulletin board.
<TABLE>
<CAPTION>
Redeemable
Common Stock 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 $4.06 $3.19 $1.00 $0.625 $3.875 $3.50
Quarter Ended June 30, 1998 $4.41 $2.75 $1.625 $0.4375 N/A N/A
Quarter Ended September 30, 1998 $2.63 $1.63 $0.625 $0.125 N/A N/A
Quarter Ended December 31, 1998 $1.50 $0.312 N/A N/A N/A N/A
Quarter Ended March 31, 1999 $0.875 $0.375 N/A N/A N/A N/A
Quarter Ended June 30, 1999 $0.49 $0.29 N/A N/A N/A N/A
</TABLE>
HOLDERS
As of October 6, 1999, the Company has outstanding 17,922,102 shares of Common
Stock owned by approximately 128 holders of record, and Redeemable 2,413,900
Warrants owned by approximately 5 holders of record.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock, and the Board
of Directors does not intend to declare or pay any dividends on its Common Stock
in the foreseeable future. The Board currently intends to retain all available
earnings (if any) generated by the Company's operations for the development and
growth of its business. The declaration in the future of any cash or stock
dividends on the Common Stock will be at the discretion of the Board and will
depend upon a variety of factors, including the earnings, capital requirements
and financial position of the Company and general economic conditions at the
time in question. In addition, the payment of cash dividends on the Common Stock
in the future could be limited or prohibited by the terms of financing
agreements that may be entered into by the Company (e.g., a bank line of credit
or an agreement relating to the issuance of debt securities of the Company) or
by the terms of any Preferred Stock that may be authorized and issued.
11
<PAGE> 12
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1999
Net sales of $1,533,922 for the fiscal year 1999 were 71% higher than the net
sales of $894,758 for the fiscal year 1998. The increase is primarily
attributable the acquisition of FMS in December 1997; as a result, the revenues
for fiscal year 1998 include only six months' of revenues from the subsidiary as
compared to 12 months' revenues in fiscal year 1999.
Operating expenses of $9,250,551 for fiscal year 1999 were 9% higher than the
operating expenses of $8,524,380 for the fiscal year 1998. The increase is
primarily attributed to $2,674,453 of non-cash expenses for employees and
consultants related to stock issuances in 1999, offset by a decrease of
$1,599,150 in the loss on investment in joint venture related to the sale of
this investment in fiscal year 1999.
Interest expense of $489,552 for fiscal year 1999 was 37% lower than the
interest expense of $775,611 in fiscal year 1998. The decrease is primarily
attributed the reduction in average debt balances from fiscal year 1998 to
fiscal year 1999.
As a result of the above factors, net losses for the fiscal year 1999 were
$8,141,287 or $0.96 per share as compared to new loss of $8,261,734 or $1.91 per
share in fiscal year 1998.
FINANCIAL POSITION
Total assets decreased from $3,784,920 at June 30, 1998 to $1,268,379 at June
30, 1999. The decrease is primarily attributed to a reduction in cash of
$2,083,087 and in capitalized programming costs of $437,814. Cash decreases are
primarily due to the net loss, offset by cash infusions, as explained in more
detail below. Capitalized programming costs decreased due to amortization of
existing costs in excess of new costs incurred during the fiscal year 1999.
Total liabilities increased from $1,296,139 at June 30, 1998 to $1,880,396 at
June 30, 1999. The increase in primarily attributed to short-term notes payable
of $481,015, which are explained in more detail below.
Shareholders' equity (deficit) decreased from $2,488,781 at June 30, 1998 to
$(612,017) at June 30, 1999. The decrease is primarily attributed to the net
loss of $8,141,287 in fiscal year 1999, offset by new issuances of stock,
warrants, and options to investors, employees and consultants.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements in the next twelve months will be to
fund the costs of developing its Internet operations and to fund its affiliate
marketing efforts, satellite transponder costs, costs for 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 continue to exceed its cash flow from
operations. At June 30, 1999, the Company had a working capital deficit of
$1,263,901. Due to (among other things) the lack of meaningful revenues and
costs associated with program development and affiliate marketing efforts, the
Company has been substantially dependent upon various debt and equity private
placements and its initial public offering to fund its operations.
12
<PAGE> 13
In fiscal 1999, the Company has obtained it's liquidity from the following
sources:
- - Optioned warrant holders exercised their options and warrants totaling
1,916,999 shares for $696,500.
- - Cash received from June 1998 private placement of $566,536 (after
offering cost.)
- - Cash received for June 1999 offering of $325,000 (after offering cost.)
- - Settled accounts payable for stock, plus issued stock for services,
freeing up cash for other purposes totaling $2,674,453.
- - Borrowed money from shareholders, totaling $825,000.
- - Cash received of $850,000 from the cell of the Company's interest in the
joint venture.
After fiscal 1999, the Company has obtained liquidity from the following
sources:
- - Borrowed from shareholders, totaling $225,000.
- - Cash received from stock subscription, totaling $50,000
The Warrants were exercisable at exercise prices between $4.00 and $6.00 per
share. An amendment to the Private Placement agreement that was executed in
December 1998 resulted in the Subscribers relinquishing their right to the
Warrants on January 4, 1999. The Warrants subsequently were allowed to lapse
without being exercised.
On October 13, 1999, the Company finalized a debt restructuring and infusion of
additional capital with the noteholders and certain shareholders, resulting in
the following: (1) conversion of all existing debt and accrued interest to
equity (estimated at approximately $756,000) at $0.25 per share; (2) commitment
to receive an equity infusion from key internal shareholders totaling up to
$600,000 at $0.25 per share; and (3) a 45-day option to noteholders to acquire
additional equity at $0.25 per share up to $756,000. This transaction will bring
up to $1.3 million in cash and an increase to equity of up to $2.1 million. The
Company projects that such additional cash will be sufficient to fund the
Company's operations and capital requirements until April 2000. In addition, the
increase in equity will assist the Company in its efforts to become re-listed on
the NASDAQ Small Cap exchange (see below). There are no assurances that the
Company will receive all the funds as contemplated in the agreements or that
such funds, if received, will not be expended prior to the Company's projections
due to unanticipated changes in economic conditions or other unforeseen
circumstances.
The Company has no current arrangements with respect to any additional
financing, and it is not anticipated that existing shareholders will provide any
substantial portion of the Company's future financing requirements.
Consequently, there can be no assurance that any additional financing will be
available to the Company when needed, on commercially reasonable terms, or at
all. An inability to obtain additional financing when needed would have 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. In addition, the Company's equity is currently below the $2
million minimum required for the listing of the Company's shares on the
NASDAQ-Small Cap exchange and has been delisted. Unless the Company can
demonstrate the ability to raise the Company's equity to an amount in excess of
$2 million, and present a plan that will satisfy NASDAQ's other standards
regarding profitability and stock price stability maintaining minimum bid price
over $1.00, the Company's shares may not be registered on the NASDAQ-Small Cap.
A continued delisting from NASDAQ SmallCap hurts the marketability of the
Company's stock, and by extension, the market price of the Company's stock,
which would further hinder the Company's ability to raise additional capital.
The Company's independent public accountants have included a explanatory
paragraph in their report on the Company's June 30, 1998 Financial Statements,
stating that certain factors raise substantial doubt about the Company's ability
to continue as a going concern.
YEAR 2000 COMPLIANCE
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from the dates in the "1900's". These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that makes us of the date field.
13
<PAGE> 14
STATE OF READINESS AND COST TO ADDRESS THE YEAR 2000 ISSUE
The Company's primary focus has been on its own internal systems. To date, the
Company is in the process of modifying or replacing software components that it
uses. The Company is also communicating with suppliers, distributors, financial
institutions and others with which it does business to evaluate their Year 2000
compliance plans and state of readiness and to determine the extent to which the
Company will be affected by the failure of others to remediate their own Year
2000 issues. There can be no assurance that the systems of other companies on
which the Company's systems rely will also be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems. Failure to complete the system conversion in a timely manner
could negatively impact the Company's business, financial condition and results
of operations. The cost for such modifications and replacements is not expected
to be material.
Item 7. Financial Statements.
The financial statements required hereby are located on pages F-1
through F-17.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Refer to 8-K insert Date on Exhibit 16.
14
<PAGE> 15
Part III
Item 9. Directors, Executive Officers, Promoters and Control Person;
Compliance with Section 16(a) of the Exchange Act.
DIRECTORS AND EXECUTIVE OFFICERS
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert E. Portrie........ 50 Chairman of the Executive Committee of the Board of Directors
George H. Henry.......... 45 Director and member of Executive Committee and Finance Committee
William D. Moses.......... 37 President, Director and member of Executive Committee and Finance
Marc D Guren.............. 44 Director, member of Executive Committee and Finance Committee
Wendy Borow-Johnson....... 48 President of Health Services
Stacey Romm............... 31 Chief Financial Officer
Jay Handline.............. 45 VP of Health Services, Director on the Board
Kevin Wall................ 47 Chairman of Board of Advisors and Director
Charlotte Schiff Jones.... 58 Director
</TABLE>
ROBERT E. PORTRIE has been Chairman of the Board of Directors since October,
1999. Mr. Portrie is also a Managing Partner of RCM Technologies, Inc., a New
Jersey based consulting and staffing company. Portrie is a former President and
CEO of InfoMation Publishing Corporation, a subsidiary of CMGI. Portrie spent 23
years at AT&T, where he served as President and Chairman of the Board of AT&T
InView. At AT&T, Portrie also chaired the product architecture committee
responsible for developing and integrating network based applications as part of
the Large User Study Program under the auspices of the Chairman's office at AT&T
and developed the first network based Wide Area Network (WAN) deployment in the
United States.
GEORGE H. HENRY served as Chairman of the Board of Directors from May 1997 to
November 1998, and has been a director of the Company since December 1995. Since
April 1986, Mr. Henry has been President of G. Howard Associates, Inc., a
private investment firm. Prior to April 1986, Mr. Henry was a Vice President in
the Corporate Finance Department of the predecessor of Schroder & 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 Access Television Network ("ATN").
Mr. Henry is also a trustee of Mitchell College.
WILLIAM D. MOSES serves as the Company's President of the Company. Mr. Moses is
co-founder of the Company and has been a director of the Company since 1995. Mr.
Moses is currently Honoree Chairman of Cable Positive. In January 1993, Mr.
Moses co-founded ATN and served as a director of Access Television Network from
June 1993 to June 1996. From July 1991 to December 1994, Mr. Moses was a
managing partner of Axiom Partners, a New York investment banking and brokerage
firm. From January 1992 to January 1994, Mr. Moses was a money manager for Oscar
Gruss & Co. From 1988 to 1991, Mr. Moses served as an independent financial
consultant. From 1986 through 1987, Mr. Moses was employed by Bear Stearns &
Co., Inc.
MARC D. GUREN has been a director of the Company since October, 1999. Mr. Guren
is also Manager and President of Acuity Capital, LLC, a venture investment and
advisory firm. Since 1984, Guren has been an independent business and financial
strategist and advisor for various computer and software companies and Internet,
online and healthcare companies, including BoxTop Interactive, iXL Enterprises,
and Personal Library Software. He was previously a Vice President of the Roy
Disney family's Shamrock Holdings, Inc. and subsequently worked with media
analyst Paul Kagan.
15
<PAGE> 16
WENDY BOROW-JOHNSON has been President, Health Care Services of RnetHealth.com
since October, 1999. Borow-Johnson is also President of Com-Med Strategic
Alliances, Inc. and was the former President and founder of Com-Med Interactive,
an electronic media packaging division for healthcare for Medicus/DMB&B.
Previously, Borow-Johnson was Vice President of Corporate Relations and Consumer
Affairs for the American Medical Association, founder and President of American
Medical Television, a joint venture of NBC and the AMA, and Vice President of
Marketing for Source Media's Interactive Channel.
KEVIN WALL has been a director of the Company since October, 1999 and Chairman
of the Board of Advisors of RnetHealth.com since August, 1999. Mr. Wall is Vice
Chairman of the Board and Director of iXL Enterprises and served as President of
iXL-West and head of new ventures for iXL. Mr. Wall also founded and served as
President of BoxTop Interactive, which was acquired by iXL in 1997.
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.
JAY HANDLINE serves as the Company's Executive Vice President and will be
overseeing the expansion of the Company's website and e-commerce move. Mr.
Handline successfully helped launch Lifescape 1-to-1, LLC (formerly
RecoveryNetInteractive, LLC) formed in August 1996, as a joint venture between
TCI Digital Health Group and The Recovery Network, Inc. Prior to this, Mr.
Handline was involved in the start-up of the Company. In 1995, he served as
Senior Vice President of Business Development, in this capacity, Mr. Handline
was able to secure private equity capital and forge successful partnerships to
aggregate products, services and information from dozens of world-class
partners.
STACEY ROMM joined the Company's Finance Department in September 1998. She
presently serves as the Chief Financial Officer. From 1995 to 1998, Ms. Romm
worked for International Home Improvement as the Financial Manager. Prior to
1995, Ms. Romm was in charge of the finance department for LaPlaya Plumbing.
All directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors. Non-employee directors do not
receive cash compensation for serving as directors. The Company reimburses
directors for reasonable travel expenses incurred in connection with their
activities on behalf of the Company. Each member of the Board of Directors is
eligible to participate in the Company's 1996 Board of Directors and Advisory
Board Stock Option Plan.
COMMITTEES OF THE BOARD OF DIRECTORS
In October 1996, the Company established a Finance and Compensation Committee of
the Board of Directors which reviews the compensation for all officers and
directors and affiliates of the Company. The Committee also administers the 1996
Employee and Consultants Stock Option Plan, the 1996 Board of Directors and
Advisory Board Retainer Plan, the 1997 Management Bonus Plan, and the 1998 Stock
Option Plan. Mr. Henry is Chairman of the Finance and Compensation Committee and
Messrs. Moses and Masters (until his resignation in May 1999) are also members
of the Finance and Compensation Committee. Members of the Finance and
Compensation Committee include Marc Gurin, Bill Moses and George Henry.
In May 1997, the Company established an Audit Committee of the Board of
Directors that meets with management and the Company's independent public
accountants to review the adequacy of internal controls and other financial
reporting matters. Mr. Henry is the Chairman of the Audit Committee.
In October 1996, the Company established an Executive Committee of the Board of
Directors which is responsible for overseeing strategic planning and operations
for the Company. Mr. Henry is the Chairman of the Executive Committee and
Messrs. Moses and Masters (until his resignation in May 1999) are also members
of the Executive Committee.
16
<PAGE> 17
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT SECTION 16(a) OF THE
SECURITIES ACT OF 1934, as amended, requires the Company's directors and
executive officers, and persons who own more than ten percent of the Company's
Common Stock, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company.
Based upon review of Forms 3, 4, and 5 (and amendments thereto) and written
representations provided to the Company by executive officers, directors and
shareholders beneficially owning 10% or greater of the outstanding shares, the
Company believes that such persons filed pursuant to the requirements of the
Securities and Exchange Commission on a timely basis.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company to
executive officers that received compensation in excess of $100,000 (the "Named
Executive Officers") during fiscal 1998, and 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- SHARES
SALARY($) UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ENDED (a) BONUS OPTIONS(#) COMPENSATION
- --------------------------- ---------- -------- ------- ------------- --------------
<S> <C> <C> <C> <C> <C>
William D. Moses..... 1998 $182,765 -- 50,000
1999 $336,037 316,667
John Wheeler......... 1998 $182,373 50,000
1999 $186,349 $22,420(c) 5,000 $85,179 (b)
Gary Horowitz........ 1999 $155,099 267,915
</TABLE>
(a) Includes compensation that was earned and paid with unregistered shares
earned during the fiscal year ending 6/30/99, but was deferred for two
month increments and paid off during the fiscal year ending 6/30/99.
(b) Compensation paid for vacation pay owed per Mr. Wheelers contract which
expired in 5/99 and Compensation for Letter agreement dated 1/26/99
disclosed in Item 11 Section III paid in unregistered shares.
(c) Bonus includes commission for subscriptions at a .01 per sub paid to Mr.
Wheeler in cash.
The following table sets forth information concerning the grant of stock options
to the Named Executive Officers during fiscal 1999:
OPTIONS GRANTED DURING LAST FISCAL YEAR 1999 (6/30/99)
<TABLE>
<CAPTION>
% OF TOTAL
SHARES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES
NAME OPTIONS IN FISCAL YEAR EXERCISE PRICE EXPIRATION DATE
- ---- ----------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
William Moses 200,000 13% 0.31 05/11/02
John Wheeler(b) 5,000 1% 0.59 01/12/04
William Moses 50,000 4% 1.625 08/03/02
Gary Horowitz(a) 5,000 1% 0.59 01/12/04
Gary Horowitz(a) 200,000 13% 0.43 01/02/04
Gary Horowitz(a) 12,915 1% 1.81 10/19/03
William Moses 66,667 5% 1.56 08/03/02
</TABLE>
(a) Mr. Gary Horowitz resigned March 1999
(b) John Wheelers contract ended May 31, 1999
No options issued to above Named Executives were exercised by such persons
during fiscal 1999.
17
<PAGE> 18
EMPLOYMENT AGREEMENTS
Effective December 1, 1996, the Company entered into an employment agreement
with William D. Moses, the Company's Chief Executive Officer, which expired on
September 30, 1998. The employment agreement provides for a base compensation
payable to Mr. Moses of $12,000 per month through September 30, 1998. Pursuant
to the agreement, Mr. Moses was entitled to participate in any employee benefit
plans and arrangements when and as implemented by the Company. In the event of
termination of Mr. Moses' employment by the Company, without "good cause" (as
defined in the employment agreement), Mr. Moses was entitled to severance
compensation equal to the lesser of his base salary and vacation compensation
due through September 30, 1998 and his base salary and vacation compensation for
one year, payable one-half upon termination and the balance ratably over the
following six months. In the event of termination of the employment agreement by
mutual agreement of the Company and Mr. Moses, Mr. Moses was entitled to such
compensation as is mutually agreed on between the Company and Mr. Moses but in
no event to exceed the amount of severance compensation payable in the event of
termination without "good cause." Mr. Moses agreed not to compete with the
Company during the term of the employment agreement and for a period of two
years after termination of his employment relationship with the Company in the
development or provision of media services or any other line of business which
the Company is engaged in or forms the intention to engage in during this
period. In the event of a "change in control" (as defined in the employment
agreement), Mr. Moses would have been deemed to have been terminated without
"good cause", and the covenant not to compete would have had no further effect.
Effective December 1, 1996, the Company entered into an employment agreement
with Donald J. Masters, the Executive Vice President of the Company, which
expired on November 30, 1998. The employment agreement provided for a base
compensation payable to Mr. Masters of $10,000 per month through November 30,
1998. Pursuant to the agreement, Mr. Masters was entitled to participate in any
employee benefit plans and arrangements when and as implemented by the Company.
In the event of termination of Mr. Master's employment by the Company, without
"good cause" (as defined in the employment agreement), Mr. Masters was entitled
to severance compensation, equal to his base salary and vacation compensation,
at the option of the Company, for such period of time between one year and two
years that the non-compete covenant described below is in effect and such
severance compensation shall be payable one-half on the date of termination and
the balance shall be payable ratably over six months following the date of
termination. In the event of termination of the employment agreement by mutual
agreement of the Company and Mr. Masters, Mr. Masters was entitled to such
compensation as mutually agreed on between the Company and Mr. Masters but in no
event to exceed the amount of severance compensation payable in the event of
termination without "good cause." In addition, Mr. Masters 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.
Effective May 13, 1997, the Company entered into an employment agreement with
John Wheeler, the Company's Senior Vice President of Sales and Marketing, which
expired on May 31, 1999. The employment agreement provided for a base
compensation payable to Mr. Wheeler of $12,000 per month through May 13, 1999.
In addition to the base salary, Mr. Wheeler received a commission payable
quarterly in the amount of $.01 for each additional subscriber household in
excess of one million subscriber households to which an affiliated cable system
service delivers a minimum of two hours of the Company's programming, so long as
the household subscriber did not already receive the programming through the
Company's Nesting Contract or through any other agreement under which the
Company purchases carriage rights. Pursuant to the agreement, Mr. Wheeler was
entitled to participate in any employee benefits plans and arrangements when and
as implemented by the Company. In the event of termination of Mr. Wheeler's
employment by the Company, without "good cause" (as defined in the employment
agreement), Mr. Wheeler was entitled to severance compensation equal to the
lesser of his base salary and vacation compensation due through March 13, 1999
and his base salary and vacation compensation for ninety days, payable one-half
upon termination and the balance ratably semi-monthly over the compensation
reference period. In the event of termination of the employment agreement by
mutual agreement of the Company and Mr. Wheeler, Mr. Wheeler was entitled to
such compensation as is mutually agreed on between the Company and Mr. Wheeler
but in no event to exceed the amount of severance compensation payable in the
event of termination without "good cause."
18
<PAGE> 19
Mr. Wheeler agreed not to compete with the Company during the term of the
employment agreement for a period of one year after termination of his
employment relationship with the Company in the development or provision of
recovery media services or any other line of recovery media services which the
Company is engaged in or forms the intention to engage in during this period.
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 expired on
November 30, 1998. The employment agreement provided for a base compensation
payable to Mr. Megalos of $10,000 per month through November 30, 1998. Pursuant
to the agreement, Mr. Megalos was entitled to participate in any employee
benefit plans and arrangements when and as implemented by the Company. In the
event of termination of Mr. Megalos's employment by the Company, without "good
cause" (as defined in the employment agreement), Mr. Megalos was entitled to
severance compensation equal to his base salary and vacation compensation for 90
days, payable ratably over such 90 day period. In the event of termination of
the employment agreement by mutual agreement of the Company and Mr. Megalos, Mr.
Megalos was entitled to such compensation as is mutually agreed on between the
Company and Mr. Megalos but in no event to exceed the amount of severance
compensation payable in the event of termination without "good cause."
Mr. Megalos agreed not to compete with the Company during the term of the
employment agreement and for a period of one year after termination of his
employment relationship with the Company in the development or provision of
recovery media services or any other line of recovery media services which the
Company is engaged in or in which the Company forms the intention to engage with
the active participation of Mr. Megalos during this period.
Effective May 11, 1999, the Company entered into an employment agreement with
Jay Handline, the Company's Executive Vice President, for a term of three
years. The employment agreement provides for a base compensation payable to Mr.
Handline of $12,000 per month through May 11, 2002. In addition to the base
salary, Mr. Handline shall receive an option to purchase 400,000 shares of the
Company's common stock exercisable at the closing bid price on May 11, 1999.
The Option vests 1/4th upon execution of the agreement, 1/4th at the end of
year 1, 1/4th at the end of year 2, and 1/4th at the end of year 3. Pursuant to
the agreement, Mr. Handline 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. Handline's employment by the Company without cause, Mr.
Handline is entitled to severance compensation equal to six (6) months salary
if terminated within the first year, nine (9) months salary if terminated
within the second year, and twelve (12) months salary if terminated within the
third year. In the event of termination of Mr. Handline's employment by Mr.
Handline without cause, Mr. Handline is not entitled to severance allowance.
Mr. Handline agrees, during or after the term of his employment, not to reveal
confidential information, or trade secrets to any person, firm, corporation or
entity. For a period of two (2) years after the end of employment, Mr. Handline
shall not control, consult to or be employed by any business similar to that
conducted by the Company.
STOCK OPTION PLANS
The Company has adopted four stock option plans: the 1996 Employee and
Consultants Stock Option Plan (the "Employee and Consultants Plan"), the 1996
Board of Directors and Advisory Board Stock Option Plan (the "Directors and
Advisory Board Plan"), the 1997 Management Bonus Plan (the "Management Bonus
Plan") and the 1998 Stock Plan (the "Stock Plan"). The Company has reserved an
aggregate of 940,251 shares of Common Stock for future issuance under these
plans. All options granted or to be granted under these plans are non-qualified
stock options ("NQSOs") or incentive stock options ("ISOs") under the Internal
Revenue Code of 1986, as amended. The Management Bonus Plan and the Stock Plan
also provide for non-option awards, such as stock appreciation rights and
restricted stock awards.
1996 EMPLOYEE AND CONSULTANTS STOCK OPTION PLAN
Effective December 3, 1996, the Company established its Employee and Consultants
Plan for its employees and consultants. The purpose of the Employee and
Consultants Plan is to enable the Company to recognize the contributions made to
the Company by its employees and consultants and to provide such persons with
additional incentive to devote themselves to the future success of the Company.
An aggregate of 30,768 shares of Common Stock have been reserved for issuance
under the Plan. As of the date hereof, 30,351 options were granted at an
exercise price of $5.00 per share. During fiscal 1998, all options became fully
vested due to activation of a change of control provision or settlement terms
with former employees. The Employee and Consultants Plan is administered by the
Finance and Compensation Committee.
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.
19
<PAGE> 20
Effective January 16, 1997, each director of the Company on December 31, 1996,
was granted 12,915 options to acquire shares of Common Stock of the Company at
an exercise price of $5.00 per share. Also effective as of such date, each
member of the Advisory Board and each individual who became a member of the
Advisory Board before March 3, 1997, was granted 2,583 options to acquire shares
of Common Stock of the Company at an exercise price of $5.00 per share. 111,069
options have been granted under the Directors and Advisory Board Plan at an
exercise price of $5.00 per share of which options to purchase 12,915 shares
have been granted to each of Messrs. Henry, Moses, Masters and Kovacs and to two
former directors. During fiscal 1998, all options became fully vested due to
activation of a change of control provision. The Directors and Advisory Board
Plan is administered by the Finance and Compensation Committee.
1997 MANAGEMENT BONUS PLAN
Effective February 6, 1997, the Company's shareholders approved the Management
Bonus Plan to enable the Company to recognize the contributions made to the
Company by its directors and key personnel and to provide such persons with
additional incentive to devote themselves to the future success of the Company.
The Company has reserved 195,831 shares for issuance under the Management Bonus
Plan and has the right to grant either non-qualified or incentive stock options
and other stock-related awards. The exercise price of incentive stock options
granted under the Management Bonus Plan must be at least 100% of the fair market
value of the stock subject to the option on the date of grant or 110% with
respect to holders of more than 10% of the voting power of the Company's
outstanding Common Stock. Under the terms of the Management Bonus Plan, the
Finance and Compensation Committee determines the fair market value of the
Common Stock. The exercisability and term of each option and the manner in which
it may be exercised is determined by the Finance and Compensation Committee,
provided that no incentive stock option may be exercised more than five years
after the date of grant. The Company may grant options for any number of shares,
except that the value of the shares subject to one or more incentive stock
options first exercisable in any calendar year may not exceed $100,000
(determined at the grant date). The Finance and Compensation Committee
administers the Management Bonus Plan.
The Company has granted incentive stock options to purchase 35,067 shares of
Common Stock to several non-key employees of the Company and incentive stock
options to purchase 3,583 shares of Common Stock to two consultants, all of
which options are at an exercise price of $1.56 per share.
The Company has also granted incentive stock options at an exercise price of
$1.56 per share to purchase 35,000, 75,000, 22,601, 12,915 and 10,000 shares to
Messrs. Henry, Moses, Wheeler, Masters and Kovacs, respectively. As of June 30,
1998, there were 194,166 options outstanding under the Management Bonus Plan,
all of which were fully vested due to a change of control provision which was
activated during fiscal 1998.
1998 STOCK PLAN
Effective May 28, 1998, the Company's shareholders approved the Stock Plan. The
purpose of the Stock Plan is to provide participants an incentive to maintain
and enhance the long-term performance and profitability of the Company. Only key
employees, directors and independent contractors of the Company and certain of
its affiliates are initially eligible to receive awards under the Stock Plan.
Under the Stock Plan, a maximum of 600,000 shares of Common Stock are authorized
to be delivered by the Company. The Company has the right to deliver
nonqualified or incentive stock options or other stock-related awards. As of
June 30, 1998, under the Stock Plan, the Company has granted stock options to
purchase an aggregate of 494,580 shares at an exercise price of $1.56 per share.
Subsequent to June 30, 1998, options to acquire another 100,000 shares of Common
Stock were issued with an exercise price of $1.56 per share. In April 1999, the
Board of Directors of the Company voted to cancel outstanding options previously
issued to Executive Officers and Directors, holding such options for their
contributions to the Company. 655,925 shares will be reallocated to the 1998
Plan and other plans. These options may or may not be reissued.
20
<PAGE> 21
1999 STOCK OPTION PLAN
Effective May 11, 1999, the Board of Director's of the Company granted incentive
stock options to purchase in the aggregate 450,000 shares of Common Stock, to
employees of the Company at an exercise price per share of $0.31 per share, the
closing bid price on May 11, 1999. The options shall be granted from reallocated
shares underlying the Company's 1996, 1997, and 1998 Stock Option Plans. The
purpose of the 1999 Plan is to provide employees with an incentive to maintain
the long-term performance and profitability of the Company.
The Stock Plan is administered by the Board of Directors. The Board of Directors
has authority to determine when and to whom to make grants of awards, the number
of shares to be covered by the grants, the types and terms of options and other
stock-related awards granted and the exercise price of options and stock
appreciation rights, provided that the exercise price of an option and the
appreciation base of a stock appreciation right may not be less than the fair
market value of the shares of the Common Stock on the date of grant, except
that, in the case of an incentive stock option granted to an individual who, at
the time such incentive stock option is granted, owns shares possessing 10% or
more of the total combined voting power of all classes of Stock of the Company
or its parent or subsidiary corporations, the option exercise price may not be
less than 110% of such fair market value on the date of grant.
NON-PLAN STOCK OPTIONS
The Company has granted 237,256 non-plan stock options to acquire shares of
Common Stock, of which 87,176 were granted at an exercise price of $2.32 per
share, 18,000 were granted at an exercise price of $1.56 per share, 23,247 were
granted at an exercise price of $3.10 per share, 106,250 were granted at an
exercise price of $3.00 per share and 2,583 were granted at an exercise price of
$5.00 per share.
1999 STOCK COMPENSATION PLAN
Effective February 19, 1999, the Company established the 1999 Employee and
Consultant's Stock Compensation Plan (the "Plan"). The purpose of the Plan is to
compensate employees and certain consultants of the Company for services by
isssuing to them stock in lieu of cash payments. An aggregate of 1,500,000
shares of Common Stock are reserved for issuance under the Plan.
In June 1999, the Company established the Employee Stock Compensation Plan(the
"Employee Stock Plan") the purpose of the Employee Stock Plan is to provide
employees with an incentive to maintain the long-term performance and
profitability of the Company. A maximum of 1,300,000 shares may be issued under
the Employee Stock Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The articles of incorporation of the Company provide for the indemnification of
the Company's directors and officers to the fullest extent permitted by law.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Company pursuant
to the articles of incorporation and the corporation law of the State of
Colorado, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
21
<PAGE> 22
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:
David Bralove is the founder of a law firm representing substance abuse
and behavioral care providers nation-wide, and is Board President of The
National Treatment Consortium.
Dr. Mark Gold is a Professor of Neuroscience, Psychiatry and Community
Health and Family Medicine at the University of Florida College of Medicine. Dr.
Gold has been a national leader in the field for 25 years leading treatment and
the general public toward a greater understanding of the nature of addiction and
its successful treatment. Dr. Gold has done pioneering research in tobacco,
alcohol, cocaine and opiate addictions and has been granted several patents for
his discoveries. Dr. Gold is widely recognized by his peers, the government, the
business community and the general public as a best selling author and addiction
expert.
Earnie [Ernie] Larsen is a nationally known lecturer on managing
personal relationships and overcoming dysfunctional behaviors, and an author and
producer of over 55 motivational self-help books and videos. He is the
originator of the process known as "Stage II Recovery" where one attempts to
resolve life issues which often impede spiritual growth.
Robert Lindsey is a veteran of over 20 years in the field of alcoholism
and drug addiction treatment. Mr. Lindsey is currently the Vice President of
Longview Associates, Inc., a consulting firm specializing in the design and
implementation of employee assistance programs. Prior to this, Mr. Lindsey
served as the Community Relations Director at the Betty Ford Center and as the
Executive Director of the New York State Council on Alcoholism and Other Drug
Addictions.
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<PAGE> 23
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.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of September 29,
1999, 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>
NO. OF SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER(a) OWNED (b) OF CLASS
- ------------------- -------------------------- -------------------
<S> <C> <C>
William D. Moses(c) 3,017,570(c) 16.84%
George Henry(c) 1,922,974(e) 10.73%
Donald Masters(f) 294,074(g) 1.6%
Continental Capital(h) 600,000(i) 3.3%
John Wheeler(j) 122,951(k) *
Charlotte Schiff Jones(l) 67,915(m) *
Robert Portrie(n) 1,015,000(o) 5.7%
Stacey Romm(p) 50,000(q) *
Marc Guren (r) 1,015,000(s) 5.7%
Jay Handline (t) 224,484(u) 1.25%
All directors and executive officers 6.7%
as a group (10 persons or entities)
</TABLE>
* Less than 1%.
(a) Unless otherwise indicated, the address for each named individual or group
is in care of RnetHealth.com, Inc., 506 Santa Monica Blvd., Suite 400, Santa
Monica, California 90401.
(b) Each beneficial owner's percentage ownership is determined by assuming
that options, warrants or convertible securities that are held by such
person (but not those held by any other person) and which are exercisable
within 60 days of September 29, 1999 and those that have been exercised and
converted. Pursuant to a "change of control" provision, which defines a
"change of control" to have occurred if individuals who are directors at
the beginning of a 24-month period fail to constitute at least two-thirds
of all directors of the Company during such period, in the various stock
option contracts issued to certain of the beneficial owners, all stock
options beneficially owned by such person are currently exercisable.
Assumes a base of 17,922,102 shares of Common Stock before any
consideration is given to outstanding options, warrants or convertible
securities.
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<PAGE> 24
(c) Includes (i) options to purchase 454,582 shares of Common Stock and (ii)
warrants to purchase 399,999 shares of Common Stock.
(d) The address of the beneficial owner is 6860 Sunrise Court, Coral Gables, FL
33133.
(e) Includes (i) options to purchase 164,582 shares of Common Stock and (ii)
warrants to purchase 900,000 shares of Common Stock.
(f) The address of the beneficial owner is 333 Adams St., Denver, CO 80206.
(g) Includes (i) options to purchase 142,496 shares of Common Stock, (ii) 37,212
shares of Common Stock held jointly by Mr. Masters and his spouse, (iii)
14,259 shares of Common Stock held in the name of trusts for the benefit of
the children of Mr. Masters and his spouse (Mr. Masters disclaims beneficial
ownership of the shares of Common Stock held in trust) and (iv) warrants to
purchase 6,250 shares of Common Stock held jointly by Mr. Masters and his
spouse.
(h) The address of the beneficial owner is 195 Wekiva Springs Road, Suite 200,
Longwood, Florida 32779.
(i) Includes an option to purchase 200,000 shares of Common Stock.
(j) The address of the beneficial owner is 2628 Yellowwood Drive, Westlake
Village, California 91631.
(k) Includes an option to purchase 22,601 shares of the Common Stock.
(l) The address of the beneficial owner is 1687 Brickell Ave., #601, Miami, FL
33129.
(m) Includes options to purchase 17,915 shares of the Common Stock .
(n) The address of the beneficial owner is 8010 Mergaser Drive, Ponte Vedra, FL
32082.
(o) Includes a warrant to purchase 1,015,000 shares of the Common Stock.
(p) The address of the beneficial owner 19759 Schoolcraft Street, Winnetka,
California 91306
(q) Includes an option to purchase 50,000 shares of the Common Stock.
(r) The address of the beneficial owner is 12720 Hanover Street, Los Angeles,
California 90049.
(s) Includes a warrant to purchase 1,015,000 shares of the Common Stock.
(t) The address of the beneficial owner is 105 Tides Edge Place, Ponte Vedra
Beach, FL 32082.
(u) Includes options to purchase 11,569 and 200,000 shares of the Common Stock.
24
<PAGE> 25
Item 12. Certain Relationships and Related Transactions.
On January 26, 1998, Mr. Henry entered into an agreement with Recovery
Interactive. Pursuant to such agreement, Mr. Henry is entitled to a percentage
of any proceeds from a "change of control" (as defined in the agreement) of
Recovery Interactive which exceeds a base amount.
Charlotte Schiff-Jones, a director of the Company, provides consulting services
in the areas of affiliate marketing and strategic business development. During
the fiscal year ending June 30, 1998, Ms. Schiff-Jones received $58,314 as
compensation for such services.
On June 29, 1998, the Company entered into certain subscription agreements (the
"Agreements") with seven 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 reprices in 99 fiscal year
to $0.01.
On December 7, 1998, the Company entered into an agreement with G. Howard
Associates, Inc. ("Howard") wherein Howard would represent the Company, on an
exclusive basis with respect to certain investors in connection with raising
capital for the Company. For its services, Howard would receive a cash fee equal
to 6% of the total consideration received by the Company and to reimburse Howard
for its out-of-pocket expenses. The fee is due at the closing of a said
transaction. Such agreement with Howard was amended in April 1999. The amendment
expanded Howard's representation to include (a) the sale of the Company's 20%
ownership in Recovery Net Interactive; (b) the settlement with certain creditors
identified; and, (c) assistance in raising $300,000 of additional capital.
Pursuant to this amendment, Howard received 900,000 newly issued shares of the
Common Stock valued at $287,000 and a reduction in warrants held by Howard
and/or George Henry.
In December 1998, in connection with $725,000 notes payable waived by a group of
shareholders to the Company. The Company granted warrants to purchase 500,000
unregistered shares at $0.01 per share to a group of shareholders (the
"Noteholders"). In April 1999, the Company renegotiated the terms of the
$725,000 notes payable to certain shareholders. In exchange for extending the
due date to October 1999 (six months), the Company granted another 1,000,000
warrants at $0.01 per share. Approximately 999,999 shares to date have been
exercised. These warrrants have been recorded as a debt discount totalling
589,000 of which 181,000
On January 7, 1999 the Company engaged Ms. Jones, member of the Board of
Directors to act as a "Special Agent" to help the Company secure financing.
Pursuant to Ms. Jones proposal Ms. Jones received 50,000 shares of unregistered
common stock and is entitled to 5% of the first one million of value, 4% of the
second one million value, 3% of the third one million value, 2% of the fourth
one million value and 1% on all amounts of value excess of five million dollars
upon closing.
On January 26, 1999 the Company engaged Mr. Wheeler Executive in the Company as
a Agent to help secure financing . Pursuant to the Letter of Agreement Mr.
Wheeler will received 75,000 shares of unregistered common stock and is entitled
to a cash fee equal to four percent (4%) of the total financing apon closing.
In March 1999, in connection with an aggregate $100,000 investment by certain
investors, the Company agreed to issue notes convertible into Common Stock of
the Company.
25
<PAGE> 26
In April 1999, the Company entered into an agreement with third parties to sell
its interest in RecoveryNet Interactive, LLC ("RI") and to receive its web-site
back from RI.
On June 11, 1999, entered into a Subscription Agreement (the "Agreement") with
certain Subscribers (the "Private Placement"). The Private Placement provides
for the issuance upon closing by the Company of (i) 350,000 shares (the
"Shares") of Common Stock for $350,000, or $1.00 per share, (ii) additional
shares of Common Stock to the Subscribers pursuant to certain other provisions
of the Agreements, including shares issuable for no additional consideration
pursuant to the Reset Rights in the Agreements and shares issuable for up to
$1,500,000 pursuant to a "put" provision in the Agreement (the "Additional
Shares"), and (iii) 35,000 shares of Common Stock and 175,000 placement warrants
exercisable at $0.35 per common share, as partial compensation to the placement
agents in the Private Placement.
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 what 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.
26
<PAGE> 27
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Number Description of Exhibit
- ------ ----------------------
<S> <C>
2.1 Form of Subscription Agreement between Registrant and Austost Anstalt
Schaan, Balmore Funds S.A., Amro International, and Nesher dated as of
June 10, 1999
2.2 Amendment Agreement between Registrant and Guarantee & Finance Corp.
dated as of June 25, 1999
2.3 Funds Escrow Agreement between Registrant and Austost Anstalt Schaan,
Balmore Funds S.A., Amro International, and Nesher dated as of
June 10, 1999
2.4 Form of Subscription Agreement between Registrant and Austost Anstalt
Schaan, Balmore Funds, S.A., the Sargon Fund, L.P., and Martin Chopp
dated as of March 22, 1999
2.5 Convertible Note issued to Austost Anstalt Schaan, Balmore Funds, The
Sargon Fund, L.P., and Martin Chopp dated March 22, 1999
2.6 Funds Escrow Agreement between Registrant and Austost Anstalt Schaan,
Balmore Funds, The Sargon Fund, L.P., and Martin Chopp dated March 22,
1999
2.7 Promissory Note between Registrant and William Moses and George Henry
dated May 27, 1999
2.8 Promissory Notes between Registrant and George Henry, George Henry
III, Nicole Cox, William Moses, Martin Chopp and Michael Clurman dated
July 23, 1999
2.9 Promissory Note between Registrant and George Henry dated September
10, 1999
2.10 Agreement and Plan of Merger dated as of December 10, 1997 among the
Registrant, Recovery Direct, Inc., FMS Productions, Inc. and each of
John Frederick, P. Randall Frederick, Jan Smithers, Joe C. Wood, Jr.,
Sharon R. Irish and Charles S. Sapp.++
3.1 Articles of Incorporation of Registrant.**
3.2 By-laws of Registrant. **
4.1 Specimen Certificate of the Registrant's Common Stock.**
4.2 Form of Redeemable Warrant Agent Agreement (including Form of
Redeemable Warrant).**
4.3 Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant).**
4.4 1996 Employee and Consultants Stock Option Plan.**
4.5 Amendment to 1996 Employee and Consultants Stock Option Plan.**
4.6 1996 Board of Directors and Advisory Board Stock Option Plan.**
4.7 Amendment to 1996 Board of Directors and Advisory Board Stock Option
Plan.**
4.8 1997 Management Bonus Plan.**
4.9 Amendment to 1997 Management Bonus Plan.**
4.10 Form Stock Option Contract.**
4.11 Form of Promissory Note issued by the Registrant on July 2, 1997.
4.12 1998 Stock Plan.+
</TABLE>
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<PAGE> 28
4.13 1999 Stock Plan.
4.14 Form of Warrant.
4.15 Form of Registration Rights Agreement dated December 10, 1997
between the Registrant and each of the Sellers.++
10.1 Operating Agreement of Recovery Net Interactive, L.L.C. dated as
August 1, 1996.**
10.2 Channel Nesting Agreement between the Registrant and Access Television
Network, Inc. dated as of April 10, 1997.**
10.3 Employment Agreement between the Registrant and William D. Moses
effective as of December 1, 1996.**
10.4 Non-Disclosure and Inventions Agreement between the Registrant and
William Moses dated as of January 30, 1997.**
10.5 Employment Agreement between the Registrant and Donald Masters
Effective as of December 1, 1996.**
10.6 Non-Disclosure and Inventions Agreements between the Registrant and
Donald Masters dated as of February 3, 1997.**
10.7 Employment Agreement between the Registrant and John Wheeler dated as
of May 13, 1997.**
10.8 Employment Agreement between the Registrant and William Megalos
dated as of May 1, 1997.**
10.9 Employment Agreement between the Registrant and Jay Handline dated as
of May 11, 1999.
10.10 License Agreement between RecoveryNet Interactive, L.L.C. and Merit
Behavioral Care Corporation dated as of May 1, 1997.**
10.11 Services Agreement dated as of April 1, 1998, as amended on October
27, 1998 and April 15, 1999, by and between Registrant and Group W
Network Services.
10.12 Letter Agreement between Registrant and G. Howard Associates, Inc.
dated December 7, 1998, as amended on April 11, 1999.
10.13 Letter Agreement between Registrant and John Wheeler dated January
26, 1999.
10.14 Engagement Proposal between Registrant and Charlotte Schiff Jones
dated January 7, 1999.
10.15 Mutual Release and Nullification Agreement dated March 11, 1999
between Registrant and Teleservices International Group, Inc.
10.16 Agreement and General Releases dated as of April 15, 1999 between the
Registrant and TCI Online RN Holdings, Inc. FHC Internet Services, LC
and Lifescape 1 to LLC.
10.17 Settlement Agreement and General Release and Common Stock Purchase
Warrant between the Registrant and Michael Lennon dated January 1999.
10.18 Settlement Agreement and General Release and Common Stock Purchase
Warrant between the Registrant and George Henry dated October 26,
1998.
16 Letter regarding Change in Certifying Accountant.+++
21.1 List of Subsidiaries.**
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
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<PAGE> 29
* Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-61421.
** Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form SB-2, file number 333-27787.
+ Incorporated by Reference to Exhibit A to the Registrant's Definitive Proxy
Statement on Schedule 14A filed by the Registrant on April 29, 1998.
++ Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
1997 Form 8-K.
++ Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
1997 Form 8-K.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 10, 1999 (date of earliest
event reported). An 8-K was filed for change in accountants. Other than the
foregoing, the Company did not file any such reports during the fiscal year
ended June 30, 1999.
+++ Incorporated by reference to exhibit 16 to the Registrant's August 31,
1999 Form 8-K/A.
29
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports........................................... F-2
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheet as of June 30, 1999.......................... F-4
Consolidated Statements of Operations for the Years Ended
June 30, 1998 and 1999.............................................. F-5
Consolidated Statements of Shareholders' (Deficit) Equity
for the Years Ended June 30, 1998 and 1999.......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998 and 1999.............................................. F-8
Notes to Consolidated Financial Statements.............................. F-9
</TABLE>
F1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Shareholders of
Rnethealth.com, Inc.:
We have audited the accompanying consolidated balance sheet of Rnethealth.com,
Inc. (formerly known as The Recovery Network, Inc.) (the "Company") as of June
30, 1999, and the related consolidated statements of operations, shareholders'
(equity) deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rnethealth.com, Inc.
as of June 30, 1999, and the results of their operations and their cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has negative working capital,
reduced cash levels, recurring losses from operations and limited operating
revenues that raise substantial doubt about its ability to continue as a going
concern. The ability of the Company to continue operating as a going concern is
dependent upon its ability (1) to obtain sufficient additional debt or equity
capital, (2) to distribute its programming and services through multimedia
channels, (3) to achieve a critical mass of viewers to attract advertisers and
healthcare providers and (4) to acquire and develop appropriate content for its
multimedia channels. The Company plans to raise additional working capital
through private and public offerings. The success of future activities cannot be
determined at this time and there are no assurances that if achieved, the
Company will have sufficient funds to execute its intended business plan or
generate positive operating results. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
CORBIN & WERTZ
Irvine, California
October 9, 1999
F2
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rnethealth.com, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' (deficit) equity and cash flows for the year ended June 30, 1998
of Rnethealth.com, Inc. (formerly known as The Recovery Network, Inc.) (the
"Company"). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Rnethealth.com, Inc. for the year ended June 30, 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
F3
<PAGE> 33
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 136,058
Accounts receivable, net of allowance for doubtful accounts
of $32,000 256,499
Current portion of capitalized programming costs, net 98,000
Inventory 55,593
Prepaid expenses 70,345
------------
Total current assets 616,495
Capitalized programming costs, net 421,648
Furniture and equipment, net 177,550
Other 52,686
------------
Total assets $ 1,268,379
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term notes payable, net of unamortized debt discount
of $181,318 $ 481,015
Accounts payable 442,085
Accrued payroll and benefits 139,086
Other accrued liabilities 295,256
Accrued royalty expense 503,137
Current portion of capital lease obligations 19,817
------------
Total current liabilities 1,880,396
------------
Commitments
Shareholders' equity (deficit):
Common stock, $.01 par value; 25,000,000 shares authorized; 15,494,507
shares issued and outstanding 154,945
Additional paid-in capital 21,813,509
Prepaid consulting (230,331)
Common stock subscription receivable (50,000)
Accumulated deficit (22,300,140)
------------
Total shareholders' equity (deficit) (612,017)
------------
Total liabilities and shareholders' equity (deficit) $ 1,268,379
============
</TABLE>
See accompanying notes to consolidated financial statements
F4
<PAGE> 34
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Domestic sales $ 894,758 $ 1,533,922
----------- -----------
Operating expenses:
Salaries and consulting 3,346,720 4,819,488
General and administrative 2,326,807 2,659,700
Programming 1,543,997 2,172,385
Marketing 497,467 105,862
Loss (gain) on investment in joint venture 592,500 (1,006,650)
Cost of video and publication 216,889 499,766
----------- -----------
Total operating expenses 8,524,380 9,250,551
----------- -----------
Loss from operations (7,629,622) (7,716,629)
Other income (expense):
Interest 775,611 489,552
Other income (146,044) (65,694)
----------- -----------
Loss before provision for income taxes (8,259,189) (8,140,487)
Provision for income taxes 2,545 800
----------- -----------
Net loss $(8,261,734) $(8,141,287)
=========== ===========
Loss per share information:
Basic and diluted loss per share $ (1.91) $ (0.96)
=========== ===========
Weighted average number of common and common
equivalent shares outstanding 4,336,405 8,514,557
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F5
<PAGE> 35
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK PREPAID
---------------------- PAID-IN SUBSCRIPTION CONSULTING ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE COSTS DEFICIT TOTAL
--------- -------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 2,521,250 $ 25,212 $4,176,708 $ -- $ (5,625) $(5,897,119) $(1,700,824)
Initial public offering of
common stock and warrants,
net of offering costs
of $2,174,743 2,415,000 24,151 10,117,606 -- -- -- 10,141,757
Issuance of common stock and
warrants for cash, net of
offering costs of $205,000 and
including 30,601 shares issued
for placement services 808,377 8,083 1,536,917 -- -- 1,545,000
Services to be received in
exchange for options and shares
of common stock not yet issued -- -- 1,009,000 -- (1,009,000) -- --
Purchase of FMS Productions, Inc. 44,000 440 208,560 -- -- -- 209,000
Exercise of options 2,867 29 2,178 -- -- -- 2,207
Amortization of prepaid
consulting costs -- -- -- -- 553,375 -- 553,375
Net loss -- -- -- -- -- (8,261,734) (8,261,734)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 5,791,494 57,915 17,050,969 -- (461,250) (14,158,853) 2,488,781
Issuance of common stock
for cash, net of offering
costs of $150,000, including
35,000 shares issued for
placement services 3,795,150 37,951 853,585 -- -- -- 891,536
</TABLE>
Continued F6
<PAGE> 36
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) - CONTINUED
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK PREPAID
---------------------- PAID-IN SUBSCRIPTION CONSULTING ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE COSTS DEFICIT TOTAL
--------- -------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued for cash
to be received, including
5,000 shares issued for
placement services 55,000 550 49,450 (50,000) -- -- --
Exercise of options
and warrants 1,916,999 19,170 677,330 -- -- -- 696,500
Issuance of common stock
for compensation and services 3,935,864 39,359 1,828,928 -- (130,331) -- 1,737,956
Common stock to be issued
for compensation and services -- -- 415,577 -- -- -- 415,577
Issuance of detachable
warrants with short-term
notes payable -- -- 598,000 -- -- -- 598,000
Issuance of options and
warrants for services -- -- 964,670 -- (100,000) -- 864,670
Cancellation of options
related to settlement of
prior consulting agreement -- -- (625,000) -- 281,250 -- (343,750)
Amortization of prepaid
consulting costs -- -- -- -- 180,000 -- 180,000
Net loss -- -- -- -- -- (8,141,287) (8,141,287)
------------ ---------- ----------- ---------- ---------- ------------ ----------
Balance, June 30, 1999 15,494,507 $ 154,945 $21,813,509 $ (50,000) $ (230,331) $(22,300,140) $ (612,017)
============ ========== =========== ========== ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
F7
<PAGE> 37
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,261,734) $ (8,141,287)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock, options and warrants
for compensation and services -- 2,674,453
Amortization of notes payable discount 479,568 416,682
Amortization of prepaid consulting costs 553,375 180,000
Amortization of deferred financing costs 130,529 --
Amortization of capitalized programming costs 230,360 692,814
Note issued for payment of services -- 75,000
Depreciation and other amortization 166,956 89,446
Provision for doubtful accounts 16,000 --
Loss (gain) on investment in joint venture 592,500 (1,006,650)
Changes in operating assets and liabilities:
Accounts receivable (194,678) (1,749)
Inventory 25,325 31
Prepaid expenses (33,365) (11,125)
Other assets (3,887) (17,156)
Capitalized programming costs (565,783) (255,000)
Accounts payable, accrued payroll and benefits
and other accrued liabilities (317,545) 157,573
Accrued royalty expense 157,569 180,507
Deferred compensation (51,672) --
Due to shareholders and directors (65,751) --
------------ ------------
Net cash used in operating activities (7,142,233) (4,966,461)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment in joint venture -- 850,000
Cash paid for purchase of FMS Productions, Inc. (34,383) --
Purchases of furniture and equipment (206,569) (63,807)
Investment in joint venture (368,000) (67,850)
------------ ------------
Net cash provided by (used in) investing activities (608,952) 718,343
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 574,990 825,000
Payments on borrowings (2,605,250) (237,667)
Payments on capital lease obligation (17,175) (10,338)
Proceeds from the issuance of common stock,
warrants and stock subscriptions 12,332,547 1,588,036
Deferred offering and financing costs incurred (343,558) --
------------ ------------
Net cash provided by financing activities 9,941,554 2,165,031
------------ ------------
</TABLE>
Continued
F8
<PAGE> 38
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net increase (decrease) in cash 2,190,369 (2,083,087)
Cash, beginning of year 10,883 2,219,145
Cash from acquisition of FMS 17,893 --
----------- -----------
Cash, end of year $ 2,219,145 $ 136,058
=========== ===========
</TABLE>
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS
ORGANIZATION AND LINE OF BUSINESS
Rnethealth.com, Inc. (formerly known as The Recovery Network, Inc. changed as of
) (the "Company"), a Colorado corporation, is a digital media company
drawing on the converging digital technologies of the Internet and cable
television to deliver alternative and behavioral health programming products and
services to a national audience. The Company was incorporated in May 1992 and
commenced operations in February 1993.
ACQUISITIONS AND JOINT VENTURE
RECOVERY INTERACTIVE
The Company owned a 50% interest in Recovery Interactive ("RI"), a joint venture
with TCI Online Recovery Net Holdings, Inc. ("TCIR"), an affiliate of
Tele-Communications, Inc. ("TCI"), formed on August 1, 1996 to commence a
business to provide behavioral health care products and services to managed care
organizations and other organizations offering or providing health care
services, as well as to provide information, interaction and support regarding
recovery issues and prevention issues, through an integrated multimedia
platform. During 1998 and 1999, the Company and TCI each made capital
contributions to RI and incurred expenses on RI's behalf aggregating to
approximately $368,000 and $67,850, respectively. The Joint Venture agreement
was to continue through December 31, 2044. The Company's investment in the Joint
Venture was accounted for under the equity method of accounting. The Company
recorded a loss on investment in the joint venture for its entire investment of
$592,500 in 1998 which included amounts to be paid to RI for operating losses
incurred by RI through June 30, 1998.
In April 1999, the Company entered into an agreement with third parties to sell
its interest in RI for $850,000. The Company recognized a gain on this sale of
its investment of approximately $1,006,650, which is reflected in the
accompanying consolidated statement of operations.
FMS PRODUCTIONS
On December 10, 1997, the Company acquired 100 percent of the issued and
outstanding common stock of FMS Productions, Inc . ("FMS") for total
consideration of $225,490. Consideration included 44,000 shares of the Company's
common stock valued at $209,000 ($4.75 per share) and a cash payment totaling
$34,383, less $17,893 of cash received from FMS.
F9
<PAGE> 39
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS,
continued
Prior to the FMS acquisition, the Company was classified as a development stage
company, due to the lack of significant operating revenues. Effective for the
first quarter after the FMS acquisition (quarter ended March 31, 1998), the
Company emerged from the development stage as a result of the revenues generated
from FMS's operations subsequent to the purchase date.
The unaudited pro forma results of operations for the year ended June 30, 1998
(reflecting all adjustments which, in the opinion of management, are necessary
for a fair presentation) as if the FMS acquisition was consummated on July 1,
1998, respectively, are as follows:
<TABLE>
<S> <C>
Pro forma total revenues $ 1,593,000
===========
Pro forma net loss $(8,354,000)
===========
Pro forma weighted average number
of common shares 4,356,055
===========
Pro forma loss per common share $ (1.92)
===========
</TABLE>
SIGNIFICANT BUSINESS RISKS
GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has negative working capital,
reduced cash levels, recurring losses from operations and has limited operating
revenues, that raise substantial doubt about the Company's ability to continue
as a going concern. The ability of the Company to operate as a going concern is
dependent upon its ability (1) to obtain sufficient additional debt and equity
capital from public and private sources, (2) to distribute its programming and
services through multimedia channels, (3) to achieve a critical mass of viewers
to attract advertisers and healthcare providers and (4) to acquire and develop
appropriate content for internet and cable broadcastors. The Company plans to
raise additional working capital through private and public offerings. To
achieve this, the Company has embarked on a definitive plan to (1) get relisted
on the Nasdaq Smallcap Exchange; (2) convert certain debt to equity; (3) appoint
new members to the management team and board of advisors; and (4) receive an
equity infusion from board members and other shareholders (see Note 11). The
successful outcome of future activities cannot be determined at this time and
there are no assurances that if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating results.
F10
<PAGE> 40
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The financial statements do not include any adjustments related to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
NOTE 1 - ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS,
CONTINUED
GOVERNMENT REGULATIONS
The cable television industry is subject to extensive and frequently changing
federal, state and local laws and substantial regulation under these laws by
governmental agencies, including the Federal Communications Commission (the
"FCC"). Regulations governing the rates that can be charged to subscribers by
cable systems not in markets subject to effective competition from other
multichannel video program distributors could adversely affect the ability of
cable systems with limited channel capacity to finance rebuilding or upgrading
efforts to increase channel capacity or otherwise restrict their ability to add
new programming such as the Company's program offerings. In addition, federal
"must-carry" rules requiring cable operators to devote up to one-third of their
channels to carriage of local commercial TV broadcast stations (and additional
channels for noncommercial education TV stations); commercial leased access
rules designating 10 to 15 percent of system channels for lease by unaffiliated
programmers; and local regulatory requirements mandating further channel
set-asides for public, governmental and educational use could reduce channel
availability which might otherwise be available for the Company on many cable
systems. Statutory provisions and FCC rules governing relationships among cable
systems and competing forms of multichannel video program distribution, as well
as the relations between the Company and its cable system affiliates could
adversely affect the marketability of the Company's programming and the
flexibility of the Company in its business dealings with outlets for its
programming.
In addition, the Internet industry is subject to constantly evolving federal and
state regulation. It is possible that certain legislation or pending legislation
may adversely impact the Company's Internet operations.
DEPENDENCE UPON GROUP W NETWORK SERVICES
In May 1998, the Company entered into a five-year contract with Group W Network
Services, a division of CBS Corporation, to provide program origination, master
control operations, uplink and C-Band Satellite transponder services (the
"Transponder Contract"). It is possible that Group W Network Services or Company
affiliates could experience broadcast interruptions and equipment failures,
which could last for a significant period of time. The Transponder Contract, as
amended in April 1999 (see Note 10), allows the Company to broadcast 9 hours per
day.
Through June 30, 1998, substantially all the households which received broadcast
of The Recovery Network's programming were provided under the terms of the prior
transponder contract with ATN (see Note 7). Starting September 1, 1998, the
Company is entirely dependent on its own affiliate marketing efforts to obtain
affiliate agreements with cable operators.
F11
<PAGE> 41
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated statement of operations for 1998 includes the
operating results of FMS from December 10, 1997 (the acquisition date) to June
30, 1998. For 1999, the consolidated statement of operations includes the
operating results of FMS for the entire fiscal year. All intercompany
transactions and accounts between the Company and FMS have been eliminated in
consolidation.
USE OF ESTIMATES
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts or revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Advertising revenues are recognized when the advertisements are broadcast. Video
and publications revenues are recognized when the goods are shipped or later
when accepted by the customer if acceptance is required. During 1998, the
Company recorded approximately $695,000, $150,000 and $50,000 of video and
publications, advertising and other revenues, respectively. During 1999, the
Company recorded approximately $1,466,000, $26,000 and $41,000 of video and
publications, advertising and other revenues, respectively.
CASH
At times, the Company maintains cash balances over the Federal Depository
Insurance Corporation insurable limited of $100,000 per customer per financial
institution.
FURNITURE AND EQUIPMENT
Furniture and equipment is depreciated or amortized over the estimated useful
lives of the assets using straight-line and accelerated methods. Estimated
useful lives range from 3 to 7 years.
Furniture and equipment, at cost, consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Computer equipment $ 364,982
Leasehold improvements 10,000
Office furniture 58,275
---------
433,257
Less accumulated depreciation and amortization (255,707)
---------
$ 177,550
=========
</TABLE>
F12
<PAGE> 42
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS 109"), "Accounting for Income Taxes." Under SFAS
109, deferred income tax assets and liabilities are computed based on the
temporary difference between the financial statement and income tax basis of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse. Deferred income tax
expenses and credits are based on the changes in deferred income tax assets and
liabilities from period to period.
DEFERRED OFFERING COSTS
Costs associated with offerings of The Company common shares are initially
capitalized and then netted with the proceeds received from the sale of the
common shares when the offering is completed. If the intended offering is
terminated, these costs are charged to operations. At June 30, 1999, the Company
has no deferred offering costs.
DEFERRED FINANCING COSTS
Debt issuance costs are initially capitalized as deferred financing costs and
amortized over the terms of the notes using the effective interest rate method.
In the event the notes are repaid prior to their original maturity, any
unamortized portion of the debt issuance costs capitalized will be charged to
operations. At June 30, 1999, the Company has no deferred financing costs.
CAPITALIZED PROGRAMMING COSTS
Capitalized programming costs include direct costs of production, production
overhead and costs to acquire distribution rights. Production costs are
accumulated by each series produced or licensed. Production overhead is
allocated proportionately to each series produced based on the direct production
costs incurred for each series produced. The costs are charged to earnings as
the series are broadcast based on the estimated number of future showings in
accordance with SFAS No. 63, "Financial Reporting by Broadcasters."
Capitalized programming cost are stated at the lower of unamortized costs or
estimated net realizable value on a series-by-series basis. A series estimated
net realizable value is periodically reviewed by management and revised downward
when warranted by changing conditions. Once adjusted, the new estimated
realizable value establishes a new unamortized cost basis.
PREPAID CONSULTING COSTS
The value of common stock and options issued for consulting services is recorded
as prepaid consulting costs as a component of shareholders' (deficit) equity.
Such amounts are amortized, using the straight-line method, over the life of the
consulting agreements.
F13
<PAGE> 43
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
NON-MONETARY EXCHANGES
Accounting for the transfer or distribution of non-monetary assets or
liabilities is based on the fair value of the assets or liabilities received or
surrendered, which ever is more clearly evident. Where the fair value of the
non-monetary assets received or surrendered cannot be determined with reasonable
accuracy, the recorded book value of the non-monetary assets are used.
STATEMENT OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under SFAS No. 95, "Statement of Cash Flows." Required cash and non-cash
transaction disclosures are as follows:
During 1998, deferred offering costs of $573,508 were recorded against proceeds
from the Initial Public Offering. Deferred offering costs of $40,000, paid to
the underwriters, were credited toward a two-year consulting agreement and
recorded in other assets. The Company common stock of 44,000 shares was issued
in connection with the acquisition of FMS.
The Company made cash payments of $2,545 in 1998 and $2,322 in 1999 for state
income taxes. During 1998 and 1999, cash payments for interest expense were
approximately $166,000 and $18,000, respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. SFAS 130 has no impact on the financial
statements of the Company as it has no additional items of comprehensive income.
F14
<PAGE> 44
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. Company management has represented
that the Company currently operates in only one segment (i.e., the cable
television segment); therefore SFAS 131 has no impact on the financial
statements of the Company.
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share" ("EPS"), effective
for the quarter ending December 31, 1997 and has restated its earnings per share
disclosure for all prior periods presented to comply with SFAS No. 128. Under
SFAS No. 128, primary EPS is replaced by "Basic" EPS, which excludes dilution
and is computed by dividing income/loss available to common shareholders by the
weighted average number of common shares outstanding for the period. "Diluted"
EPS, which is computed similarly to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. When dilutive, stock options are
included as share equivalents in computed diluted earnings per share using the
treasury stock method.
Dilutive securities of 7,003,976 and 4,477,170 shares are not included in the
calculation of diluted EPS in the years ending June 30, 1999 and 1998,
respectively, because they are antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 107 ("SFAS 107"), "Disclosures About Fair Value of
Financial Instruments." SFAS 107 requires disclosure of fair value information
about financial instruments when it is practicable to estimate that value. The
carrying amount of the Company's cash, receivables, trade payables and accrued
expenses approximates their estimated fair values due to the short-term
maturities of those financial instruments. The fair value of short-term notes
payable is not determinable as these borrowings are with related parties or the
carrying amount approximates fair values due to the short-term maturity of the
notes (see Note 4).
F15
<PAGE> 45
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement, as amended by SFAS 137, is effective for
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect the adoption of this standard to have
a material impact on its results of operations, financial position or cash flows
as it currently does not engage in any derivative or hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 ("SOP 98-5"), "Reporting the Costs of Start-Up
Activities." SOP 98-5 requires that all non-governmental entities expense the
costs of start-up activities, including organization costs as those costs are
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company does not expect the adoption of
this standard to have a material effect on its results of operations, financial
position or cash flows.
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
YEAR 2000
The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of," which requires that long-lived assets and
certain indentifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In accordance with the
provisions of SFAS 121, the Company regularly reviews long-lived assets and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Based on
its analysis, the Company believes that no impairment of the carrying value of
its long-lived assets existed at June 30, 1999.
F16
<PAGE> 46
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," which defines a fair
value based method of accounting for stock-based compensation. However, SFAS 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB 25 must make proforma disclosures of net income (loss), as if the
fair value method of accounting defined in SFAS 123 has been applied. The
Company has elected to account for its stock-based compensation to employees
under APB 25.
RECLASSIFICATIONS
Certain 1998 financial statement amounts have been reclassified to conform to
the 1999 presentation.
F17
<PAGE> 47
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 3 - CAPITALIZED PRODUCTION COSTS
Capitalized production costs, net of amortization, are as follows:
Produced programs $ 691,274
FMS film library acquired 376,762
Licensed films 493,575
-----------
1,561,611
Less accumulated amortization (1,041,963)
-----------
Net capitalized production costs $ 519,648
===========
Based on the Company's estimates of future showings, approximately 90 percent of
the remaining unamortized costs will be amortized within the next three years.
NOTE 4 - NOTES PAYABLE
Notes payable consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Unsecured notes payable to shareholders, interest at 10%,
principal and interest due October 1999, net of
unamortized debt discount of $181,318 $306,015
Convertible notes payable to shareholders, interest at
12%, principal and interest due March 2000 100,000
Unsecured note payable to Group W Network Services,
interest at 10%, principal and interest due December 1999 75,000
--------
$481,015
========
</TABLE>
The Company originally borrowed $725,000 under unsecured notes payable to
shareholders, due April 1999. These notes had 500,000 detachable warrants at
$0.01 per share, which were valued at $326,000 (based on a Black-Scholes
computation under SFAS No. 123) and recorded as a debt discount. This discount
was amortized as additional interest expense through the maturity of the
original notes in April 1999. Upon maturity, the Company negotiated an extension
of $487,333 of the notes (along with accrued interest on the entire original
note balance totaling approximately $25,000) through October 1999 in exchange
for an additional 950,000 detachable warrants at $0.01 per share. The new
warrants were valued at $272,000 (based on a Black-Scholes computation under
SFAS No. 123) and recorded as a debt discount, which is being amortized as
additional interest expense through the maturity of the new notes. Through June
30, 1999, the Company recorded a total debt discount of $598,000, of which
$416,862 has been amortized to interest expense.
F18
<PAGE> 48
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The convertible notes payable to shareholders are convertible at any time into
common stock at the lower of (1) 70% of the average closing bid price for the
common stock for the five days immediately preceding the conversion date; or (2)
$0.50. These notes are in default due to the Company's de-listing from the
NASDAQ SmallCap exchange under the terms of the agreements. The Company has
negotiated the conversion of most notes with the note holders at $0.50 per
share, which will be completed in early fiscal year 2000.
F19
<PAGE> 49
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 5 - INCOME TAXES
The components of the net deferred income tax asset at June 30, 1999 are as
follows:
<TABLE>
<S> <C>
Carryforward of net operating losses $ 6,894,000
Development costs capitalized for tax purposes 403,000
Other temporary differences 131,000
-----------
7,428,000
Valuation allowance (7,428,000)
-----------
Deferred income tax asset $ --
===========
</TABLE>
The provision for income taxes of $2,545 and $800 for the fiscal years ended
June 1998 and 1999, respectively, consist only of the current state provision.
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended June 30, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------------- -----------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax benefit at federal
statutory rate $(2,808,124) (34.00)% $(2,768,038) (34.00)%
State taxes, net of federal income
tax effect 2,545 0.03 800 0.00
Net operating losses and other
deferred income tax assets not
benefited 2,808,124 34.00 2,768,038 34.00
----------- ----------- ----------- -----------
$ 2,545 0.03% $ 800 0.00%
=========== =========== =========== ===========
</TABLE>
As of June 30, 1999, the Company had approximately $18,700,000 of federal net
operating loss carryforwards, which will expire in fiscal years ending 2008 to
2013. As of June 30, 1999, the Company had approximately $9,300,000 of
California state net operating loss carryforwards, which will expire in fiscal
years ending 2001 to 2004. Under SFAS No. 109, the Company has recorded
valuation allowances against the realization of its deferred tax assets. The
valuation allowance is based on management's estimates and analysis, which
include the impact of tax laws which may limit the Company's ability to utilize
its tax loss carryforwards.
Additionally, pursuant to Internal Revenue Service code section 382, the
Company's existing net operating loss carryforwards, and other deferred tax
assets and liabilities, may be unavailable for future use due to significant
ownership changes of the Company's common stock.
F20
<PAGE> 50
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 6 - CAPITAL STOCK TRANSACTIONS
Initial Public Offering
On October 3, 1997, the Company consummated its Initial Public Offering pursuant
to which it issued 2,415,000 units. Each unit consisted of one share of common
stock and one warrant to purchase one share of common stock at $5.50 per share.
The units were sold for $5.10 each for net proceeds of approximately
$10,142,000.
1998 PRIVATE PLACEMENT
In June 1998, the Company issued (i) 808,377 shares of common stock for net
proceeds of approximately $1,545,000, and (ii) warrants to purchase 70,000
shares of common stock at an exercise price of $5.50 per share through June 29,
2001 (the "1998 Private Placement"). The shares were issued at a 25 percent
discount when compared to current public trading prices at the time of the
placement. The Company placed 346,449 shares of common stock into escrow, which
were released in fiscal year 1999 along with a warrant to purchase 30,000 shares
at $5.50 per share through 2001 once shareholder approval was obtained, for net
proceeds of approximately $720,000.
The 1998 Private Placement also provides for additional shares of common stock
to be issued pursuant to certain other provisions of the 1998 Private Placement
agreement, including shares issuable for no additional consideration pursuant to
certain reset rights (as defined in the agreement) and shares issuable for up to
$3,000,000 pursuant to the put rights (as defined in the agreement).
The 1998 Private Placement was amended twice in fiscal 1999. After the
amendments and shares issued under the reset rights through June 1999, the
transaction can be summarized as follows: net cash proceeds were approximately
$2,111,536 for 4,218,527 shares, with warrants to purchase another 100,000
shares of common stock at $5.50 per share, and 500,000 shares of common stock at
$0.01 per share (418,000 shares were exercised in Fiscal year 2000) exercisable
through June 2001. In May 1999, the Company issued additional warrants to
purchase 500,000 shares of common stock at $0.25 per share in exchange for a 90
day deferral of any further reset rights for 90 days. The Company is negotiating
the termination of the reset rights; however, there can be no assurances that
this negotiation will be successful. ( See Note)
ACQUISITION OF FMS
As discussed in Note 1, during fiscal 1998 the Company issued 44,000 shares to
shareholders of FMS in connection with the acquisition of FMS.
F21
<PAGE> 51
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
JUNE 1999 PRIVATE PLACEMENT
In June 1999, the Company issued 385,000 shares pursuant to a private placement
in exchange for $325,000 (net of offering costs). The Company issued another
55,000 shares to an escrow agent until the additional $50,000 in committed cash
was received, which occurred after June 30, 1999. In connection with this
private placement, 385,000 warrants were issued to the investors and placement
agents at $0.35 per share, exercisable through June 2002. The Company has a put
option in connection with this offering to the investor group for an additional
$1,500,000 in exchange for 1,500,000 shares exercisable within two weeks after
the Company gets re-listed on the NASDAQ SmallCap exchange, contingent upon
numerous other items as outlined in the agreement. If the put option is
exercised, additional warrants and shares will be issued to investors and
placement agents as defined in the agreement. The agreement also includes reset
rights for the investors after an initial 90 day waiting period, as referred in
the agreement.
NOTE 6 - CAPITAL STOCK TRANSACTIONS, CONTINUED
ISSUANCE OF STOCK FOR COMPENSATION AND SERVICES
During fiscal 1999, the Company issued 3,935,864 shares of common stock to
employees, directors, and consultants in connection with amounts owed to these
parties for compensation and other services rendered. Based on the trading price
of the stock on the dates of issuance (discounted up to 15% for restricted
shares issued), the Company recorded total expense of approximately $1,737,956
in salaries and consultant expense, with an additional $100,000 being recorded
as a prepaid to be amortized to expense through April 2000. In addition, the
Company recorded an additional expense amount of $415,577 in fiscal 1999 for
shares issued after June 30, 1999 related to services performed through June 30,
1999.
EXERCISE OF OPTIONS AND WARRANTS
In fiscal 1998 and 1999, holders of options and warrants exercised 2,867 and
1,916,999 shares of common stock, respectively, for proceeds of $2,207 and
$696,500, respectively
OTHER STOCK TRANSACTIONS
During April 1998, the Company entered into a consulting agreement whereby
consulting services were to be rendered in exchange for 200,000 shares of common
stock and options to purchase 200,000 shares of common stock. The securities are
to vest through September 1998. No securities were issued under the agreement
through June 30, 1998 as the Company was negotiating to equity or cancel the
agreement, however, approximately 106,000 shares of common stock had vested
under the terms of the original agreement of June 30, 1998. In 1998, the Company
has recorded compensation expense of approximately $522,000 related to this
agreement. In 1999, the agreement was cancelled and a new agreement was executed
for only 200,000 options. As a result of the cancellation, $343,750 of
previously recognized consulting expense, was reversed along with a
corresponding amount in shareholders' equity (deficit).
In management's opinion, all of the above transactions have been recorded at the
estimated fair market value of the Company's common stock at the date of grant.
F22
<PAGE> 52
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 7 - RELATED PARTY TRANSACTIONS
COMPENSATION
During fiscal years 1998 and 1999, cash payments of approximately $660,000 and
$0, respectively, were made to shareholders and directors, including affiliated
companies, for compensation in connection with services rendered.
SHARES ISSUED TO RELATED PARTIES
In April 1999, the Company issued 900,000 restricted shares to a director as
compensation for services rendered on behalf of the Company. The shares were
valued at approximately $287,000, which was recorded to salaries and consulting
expense in the accompanying consolidated statement of operations.
Beginning in December 1998, the Company issued shares to employees and directors
for a portion of their compensation and expense reimbursement. The total shares
issued to employees and directors (exlcuding the 900,000 shares referred to
above) was approximately 2,410,000, valued at approximately $1,031,000, which
was recorded to salaries and consulting expense in the accompanying consolidated
statement of operations.
ATN SATELLITE NESTING CONTRACT
In April 1997, the Company entered into the Nesting Contract with ATN (a related
company) under which ATN will provide the Company with satellite uplink, master
control and other related services on its satellite transponder for two hours of
broadcast time per day. The Nesting Contract expired on August 31, 1998.
During 1998 and 1999, the Company made cash payments of $57,000 and $0,
respectively, to ATN.
NOTES PAYABLE
See Note 4 for a discussion of these transactions.
F23
<PAGE> 53
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 8 - EMPLOYMENT AGREEMENTS
The Company has two employment agreements with employees, which provide for base
salary and bonuses through fiscal 2003. The bonuses are payable annually and are
primarily calculated based on revenues of the subsidiary, as defined in the
agreements. The future minimum payments under these agreements are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
2000 $224,000
2001 224,000
2002 224,000
2003 112,000
--------
$784,000
========
</TABLE>
The employment agreements contain certain non-compete and severance pay clauses,
as defined in the agreements. Upon termination for cause, the agreements will be
cancelled with no additional amounts owing to the terminated party.
F24
<PAGE> 54
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 9 - OPTIONS AND WARRANTS
STOCK OPTIONS
The Company has the following stock option plans: the 1996 Employee and
Consultants Stock Option Plan, the 1996 Board of Directors and Advisory Board
Retainer Stock Option Plan, the 1997 Management Bonus Plan, the 1998 Stock Plan,
the 1999 Stock Compensation Plan and the 1999 Stock Option Plan. A total of
2,890,251 shares of common stock are reserved for issuance, pursuant to options
granted and to be granted under these plans. 1,932,876 shares are available for
grant under the plans as of June 30, 1999. Options pursuant to the 1996 and 1997
plans have fully vested as of June 30, 1998, resulting from change of control
provisions being activated due to changes in the Board of Directors of the
Company. Options under the 1998 and 1999 plans both generally vest over three
years. All plan options generally expire in four to five years.
The plans provide for option grants at exercise prices not less than the fair
market value on the date of grant. All options granted under the 1996 plans were
at an exercise price of $5.00 per share. All grants under the 1997 and 1998
plans were repriced, effective August 3, 1998, as the Board of Directors of the
Company approved the repricing of options to purchase 806,746 shares granted
under these two plans, certain non-plan options and an option granted after June
30, 1998. Such repricing was effected by offering to exchange new options with
an exercise price of $1.56 per share, which was the fair market value of the
common stock on the date of repricing, for the options then held by such
optionees. The new options otherwise have identical terms and conditions as the
current original options.
As of April 1999, certain employee options were canceled in anticipation of
being reissued in early fiscal 2000 at a reduced price of $0.43 per share (the
issuance has not yet occurred). During 1998 and 1999, non-plan options to
purchase 109,833 and 2,286,830 shares, respectively, of common stock were
granted. The options' exercise prices ranged from $1.56 to $3.00 per share in
1998 and $0.23 and $5.00 per share in 1999. The vesting and expiration of these
options vary. During 1998, 1,000 of these options were cancelled upon
termination of employment of an optionee. Options granted to
non-employees,(totaling 1,577,915 shares) during fiscal 1999 were valued under
SFAS No. 123 using the Black-Scholes option pricing model (see below), totaling
$434,670 in fiscal 1999.
F25
<PAGE> 55
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The following is a summary of all options granted to employees, directors and
consultants to acquire the Company's common stock as of June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Shares Subject Price
To Option Exercisable Range
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, July 1, 1997 280,627 $1.30 - $5.00
Granted 890,209 $1.56 - $5.00
Exercised (2,867) $ 1.30
Canceled/expired (99,546) $1.56 - $5.00
---------
Balance, June 30, 1998 1,068,423 $1.56 - $5.00
Granted 2,724,665 $0.23 - $5.00
Exercised (917,000) $0.38 - $2.00
Canceled/expired (1,142,113) $0.38 - $3.00
---------
Balance, June 30, 1999 1,733,975 1,079,685 $0.23 - $5.00
========== ============= =============
</TABLE>
F26
<PAGE> 56
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 9 - OPTIONS AND WARRANTS, CONTINUED
The following table summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------------
Weighted Weighted Weighted
Range of Total Average Average Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life Price Outstanding Price
- ------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.23 - $0.75 1,271,000 2 $ 0.39 596,002 $ 0.47
$1.00 - $1.56 210,853 3 1.42 210,312 1.42
$1.81 - $2.50 126,292 2 2.20 107,810 2.24
$3.00 - $5.00 125,830 2 3.85 125,830 3.85
--------- ---------
1,733,975 1,039,685
========= =========
</TABLE>
If the Company had elected to recognize compensation cost based on the fair
value of the options granted to employees as prescribed by SFAS No. 123, net
loss and loss per share would have been increased to the pro forma amounts
indicated in the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1998 1999
--------- ---------
<S> <C> <C>
Net loss - as reported $ (8,262) $ (8,141)
Net loss - pro forma $ (8,532) $ (8,539)
Loss per share - as reported $ (1.91) $ (0.96)
Loss per share - pro forma $ (1.97) $ (1.00)
</TABLE>
F27
<PAGE> 57
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1999
-------- -------------------
<S> <C> <C>
Expected dividend yield 0% 0%
Expected stock price volatility 72% 30 - 214%
Risk free interest rate 6.0% 6.5%
Expected life of options 5 years 1 - 4 years
</TABLE>
The weighted average fair value of options granted during fiscal year 1998 is
$1.00. During 1999, the weighted average fair value of options granted to
employees was $0.41.
NOTE 9 - OPTIONS AND WARRANTS, CONTINUED
Stock Warrants
The following is a summary of all warrants granted to shareholders, consultants
and others to acquire the Company's common stock as of June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Shares Subject Price
To Warrants Exercisable Range
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, July 1, 1997 515,498 $3.87 - $5.50
Granted 2,835,000 $5.50 - $9.08
----------
Balance, June 30, 1998 3,350,498 $3.87 - $9.08
Granted 2,935,000 $0.01 - $5.50
Exercised (999,999) $ 0.01
Canceled/expired (15,498) $ 3.87
----------
Balance, June 30, 1999 5,270,001 5,270,001 $0.01 - $9.08
========== ============= =============
</TABLE>
F28
<PAGE> 58
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
The following table summarizes information about stock warrants outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- --------------------------
Weighted Weighted Weighted
Total Average Average Average
Exercise Warrants Remaining Exercise Warrants Exercise
Price Outstanding Life Price Outstanding Price
- ------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 950,001 2 $ 0.01 950,001 $ 0.01
0.25 500,000 3 0.25 500,000 0.25
0.35 385,000 3 0.35 385,000 0.35
5.50 3,015,000 3 5.50 3,515,000 5.50
9.08 420,000 3 9.08 420,000 9.08
--------- ---------
5,270,001 5,270,001
========= =========
</TABLE>
In connection with the granting of these warrants, the Company recorded
additional consulting expense of $0 and $430,000 in fiscal 1998 and 1999,
respectively. The value of the fiscal year warrants are estimated on the date of
grant using the Black-Scholes pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Expected dividend yield 0%
Expected stock price volatility 133 - 214%
Risk free interest rate 6.5%
Expected life of warrants 1 - 3 years
</TABLE>
F29
<PAGE> 59
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 10 - COMMITMENTS
Operating Leases
The Company has operating lease agreements for its facilities that expire at
various dates through 2001. Under one of the agreements, the Company has an
option to extend the lease through May 2004. The leases require that the Company
also pay for certain insurance coverages and common area charges throughout the
term of the lease. The aggregate minimum future commitments under operating
leases are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
2000 $138,000
2001 132,000
2002 20,000
--------
$290,000
========
</TABLE>
Rent expenses charged to operations in fiscal 1998 and 1999 were approximately
$79,600 and $232,400, respectively.
CAPITAL LEASES
The Company leases certain office equipment under a capital lease. At June 30,
1999, minimum lease payments under the terms of the lease agreement are as
follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
2000 $19,817
=======
</TABLE>
TRANSPONDER CONTRACT
In May 1998, the Company entered into a five year contract with Group W Network
Services to provide program origination, master control operations, uplink and
C-Band Satellite transponder services. The contract requires the Company to make
monthly payments of approximately $85,000.
F30
<PAGE> 60
RNETHEALTH.COM, INC.
(FORMERLY KNOWN AS THE RECOVERY NETWORK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1999
NOTE 10 - COMMITMENTS, CONTINUED
In April 1999, the Company negotiated a settlement of its accounts payable
balance owing to Group W Network Services as follows: payment of $150,000 in
cash, issuance of 500,000 of the Company's restricted common stock valued at
$159,000, and a note payable for $75,000 with an interest rate of 10% due in
December 1999. Future payment obligations were reduced to $50,000 per month in
advance in exchange for a reduction in daily broadcasting to nine hours per day
(see Note 1).
CONSULTING AGREEMENTS
The Company is a party to various consulting agreements related to marketing,
website generally design, corporate development, strategic partnering,
technology, etc. These agreements range in term from 30 days to 2 years and
require varying amounts of cash and stock payments. Total estimated expenses to
be recognized under these contracts is $600,000, most of which will be
recognized in fiscal 2000. Total estimated shares and options/warrants to be
granted in the future under these agreements is approximately 450,000 shares and
1,115,000 shares, respectively.
UNIVERSITY OF FLORIDA GRANT
The Company entered into an agreement to provide funding for an unrestricted
educational grant of $120,000 during fiscal 2000 to the University of Florida
for research and development of a web site to provide alternative and behavioral
health and wellness assistance.
NOTE 11 - SUBSEQUENT EVENTS
Since year end, the Company has issued an additional 2,427,595 shares of stock,
primarily for the exercise of 418,000 warrants at $0.01 per share, employee
compensation, reimbursable employee expenses, consulting expense and debt
discount (on shareholder loans totaling $225,000).
In addition, certain shareholders have loaned the Company $225,000. The loans
bear interest at 10%, with principal and interest due on the earlier of (1)
January 2000 or (2) immediately upon the closing of a debt or equity financing.
The notes are convertible to stock at $0.50 per share.
Company management is currently negotiating with noteholders and key internal
shareholders to raise additional capital by the following: (1) convert all
existing debt and accrued interest to equity (estimated at approximately
$756,000 at $0.25 per share; (2) receive an equity infusion from key internal
shareholders totaling $600,000 at $0.25 per share; and (3) offer noteholders an
opportunity to buy additional $756,000 of equity at $0.25 per share. There are
no assurances that management will be successful in negotiating this transaction
as contemplated.
F31
<PAGE> 61
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, Santa Monica
County, State of California, on October 13, 1999.
Rnethealth.com, Inc.
By: /s/ WILLIAM D. MOSES
------------------------------
William D. Moses
President
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT E. PORTRIE Chairman of the Board October 13, 1999
- ----------------------------- of Directors
Robert E. Portrie
/s/ GEORGE H. HENRY Chairman of Executive October 13, 1999
- ----------------------------- Committee and Director
George H. Henry
/s/ WILLIAM D. MOSES President October 13, 1999
- -----------------------------
William D. Moses
/s/ STACEY A. ROMM Chief Financial Officer October 13, 1999
- -----------------------------
Stacey A. Romm
/s/ MARC D. GUREN Director October 13, 1999
- -----------------------------
Marc D. Guren
/s/ KEVIN WALL Director October 13, 1999
- -----------------------------
Kevin Wall
/s/ JAY HANDLINE Director October 13, 1999
- -----------------------------
Jay Handline
/s/ CHARLOTTE SCHIFF JONES Director October 13, 1999
- -----------------------------
Charlotte Schiff Jones
</TABLE>
<PAGE> 1
EXHIBIT 2.1
SUBSCRIPTION AGREEMENT
Dear Subscriber:
You (the "Subscriber") hereby agree to purchase, and The Recovery
Network, Inc., a Colorado corporation (the "Company") hereby agrees to issue and
to sell to the Subscriber, the number of shares of the Company's $.01 par value
common stock (the "Company Shares") as set forth on the signature page hereof.
(The Company Shares are sometimes referred to herein as the "Shares" or "Common
Stock"). The Company will also issue to the Subscriber Common Stock Purchase
Warrants ("Warrants") pursuant to Section 7(f) herein for the aggregate
consideration as set forth on the signature page hereof ("Purchase Price"). The
Company Shares, Warrants, Commission Shares and Common Stock Purchase Warrants
issuable to the Placement Agents ("Placement Warrants"), identified on Schedule
A hereto, and the Common Stock issuable upon exercise of the Warrants and
Placement Warrants, the Additional Shares, and the Put Securities (as
hereinafter defined) are collectively referred to herein as, the "Securities").
Upon acceptance of this Agreement by the Subscriber, the Company shall issue and
deliver to the Subscriber the Company Shares against payment, by federal funds
(U.S.) wire transfer of the Purchase Price.
The following terms and conditions shall apply to this subscription.
1. Subscriber's Representations and Warranties. The Subscriber hereby
represents and warrants to and agrees with the Company that:
(a) Information on Company. The Subscriber has been furnished with
and has read the Company's Registration Statement on Form S-3, as amended (File
No. 333-27787) and subsequent Forms 10-QSB and 8-K, and Schedule 14A, each as
filed with the U.S. Securities and Exchange Commission (the "Commission")
(collectively, with exhibits thereto, hereinafter referred to as the
"Reports"). In addition, the Subscriber has received from the Company such
other information concerning its operations, financial condition and other
matters as the Subscriber has requested, and considered all factors the
Subscriber deems material in deciding on the advisability of investing in the
Securities (such information in writing is collectively, the "Other Written
Information").
(b) Information on Subscriber. The Subscriber is an "accredited
investor", as such term is defined in Regulation D promulgated by the
Commission under the Securities Act of 1933, as amended, is experienced in
investments and business matters, has made investments of a speculative nature
and has purchased securities of United States publicly-owned companies in
private placements in the past and, with its representatives, has such
knowledge and experience in financial, tax and other business matters as to
enable the Subscriber to utilize the information made available by the Company
to evaluate the merits and risks of and to make an informed investment decision
with respect to the proposed purchase, which represents a speculative
investment. The Subscriber has the authority and is duly and legally
1
<PAGE> 2
qualified to purchase and own the Securities being purchased by the Subscriber.
The Subscriber is able to bear the risk of such investment for an indefinite
period and to afford a complete loss thereof.
(c) Purchase of Securities. On the Closing Date, the
Subscriber will purchase the Company Shares and, if issued pursuant to the
terms hereof, the Warrants, for its own account and not with a view to any
distribution thereof.
(d) Compliance with Securities Act. The Subscriber understands
and agrees that the Securities have not been registered under the Securities
Act of 1933, as amended (the "1933 Act") by reason of their issuance in a
transaction that does not require registration under the 1933 Act, and that
such Securities must be held unless a subsequent disposition is registered
under the 1933 Act or is exempt from such registration.
(e) Company Shares Legend. The Company Shares, the Commission
Shares and the shares of Common Stock issuable upon the exercise of the
Warrants and Placement Warrants shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE RECOVERY NETWORK, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED."
(f) Warrants Legend. The Warrants and Placement Warrants shall
bear the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
RECOVERY NETWORK, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
2
<PAGE> 3
(g) Communication of Offer. The offer to sell the Securities
was directly communicated to the Subscriber. At no time was the Subscriber
presented with or solicited by any leaflet, newspaper or magazine article, radio
or television advertisement, or any other form of general advertising or
solicited or invited to attend a promotional meeting otherwise than in
connection and concurrently with such communicated offer.
(h) Correctness of Representations. The Subscriber represents
that the foregoing representations and warranties are true and correct as of
the date hereof and, unless the Subscriber otherwise notifies the Company prior
to the Closing Date (as hereinafter defined), shall be true and correct as of
the Closing Date. The foregoing representations and warranties shall survive
the Closing Date.
2. Company Representations and Warranties. The Company represents
and warrants to and agrees with the Subscriber that:
(a) Due Incorporation. The Company and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the respective jurisdictions of their incorporation
and have the requisite corporate power to own their properties and to carry on
their business as now being conducted. The Company and each of its subsidiaries
is duly qualified as a foreign corporation to do business and is in good
standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the business, operations or prospects or condition (financial
or otherwise) of the Company.
(b) Outstanding Stock. All issued and outstanding shares of
capital stock of the Company and each of its subsidiaries has been duly
authorized and validly issued and are fully paid and non-assessable.
(c) Authority; Enforceability. This Agreement and all
agreements related hereto and referred to herein have been duly authorized,
executed and delivered by the Company and is a valid and binding agreement
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights generally and to
general principles of equity. The Company has full corporate power and
authority necessary to enter into this Agreement and to perform its obligations
hereunder and all other agreement entered into by the Company relating hereto
and contemplated hereby.
(d) Additional Issuances. There are no outstanding agreements
or preemptive or similar rights affecting the Company's common stock or equity
and no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of common stock or equity of the
Company or other equity interest in any of the subsidiaries of the Company,
except as described in the Reports or Other Written Information.
3
<PAGE> 4
(e) Consents. No consent, approval, authorization or order of any court,
governmental agency or body or arbitrator having jurisdiction over the Company,
or any of its affiliates, the NASD, NASDAQ or the Company's Shareholders is
required for execution of this Agreement, and all other agreements entered into
by the Company relating thereto, including, without limitation the issuance and
sale of the Securities, and the performance of the Company's obligations
hereunder and pursuant to any agreement referred to herein or relating hereto.
(f) No Violation or Conflict. Neither the issuance and sale of the
Securities nor the performance of the Company's obligations under this
Agreement and all other agreements entered into by the Company relating thereto
by the Company will:
(i) violate, conflict with, result in a breach of, or constitute
a default (or an event which with the giving of notice or the lapse of time or
both would be reasonably likely to constitute a default) under (A) the articles
of incorporation, charter or bylaws of the Company, or any of its affiliates or
subsidiaries, (B) any decree, judgment, order, law, treaty, rule, regulation or
determination applicable to the Company, or any of its affiliates of any court,
governmental agency or body, or arbitrator having jurisdiction over the
Company, or any of its affiliates or over the properties or assets of the
Company, or any of its affiliates or subsidiaries, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any agreement, stock
option or other similar plan, indenture, lease, mortgage, deed of trust or
other instrument to which the Company, or any of its affiliates or subsidiaries
is a party, by which the Company, or any of its affiliates or subsidiaries is
bound, or to which any of the properties of the Company, or any of its
affiliates or subsidiaries is subject, or (D) the terms of any "lock-up" or
similar provision of any underwriting or similar agreement to which the
Company, or any of its affiliates or subsidiaries is a party; or
(ii) result in the creation of imposition of any lien, charge or
encumbrance upon the Securities or any of the assets of the Company, any of
its affiliates or subsidiaries.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security interests,
liens, claims or other encumbrances, subject to restrictions upon transfer
under the 1933 Act and State laws;
(ii) have been, or will be, duly and validly authorized and on the
date of issuance, on the Closing Date and Put Closing Date, and the date the
Warrants and Placement Warrants are exercised, the Securities will be duly and
validly issued, fully paid and nonassessable (and if registered pursuant to the
1933 Act, and resold pursuant to an effective registration statement or an
exemption from registration) free trading and unrestricted;
4
<PAGE> 5
(iii) will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities or
creditors of the Company;
(iv) will not subject the holders thereof to personal liability by
reason of being such holders; and
(h) Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the
Company, or any of its affiliates or subsidiaries that would affect the
execution by the Company or the performance by the Company of its obligations
under this Agreement, and all other agreements entered into by the Company
relating thereto.
(i) Reporting Company. The Company is publicly-held company whose
common stock is (and has been for the past 90 days) registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934
Act") and is duly listed for trading on the NASD OTC Bulletin Board. Pursuant
to the provisions of the 1934 Act, the Company has timely filed all reports and
other materials required to be filed thereunder with the Securities and
Exchange Commission during the preceding twelve months, and, is eligible to
file a Form S-3 or Form SB-2 to register the Securities.
(j) No Market Manipulation. The Company has not taken, and will not
take, directly or indirectly, any action designed to, or that might reasonably
be expected to, cause or result in stabilization or manipulation of the price of
the common stock of the Company to facilitate the sale or resale of the
Securities or affect the price at which the Securities may be issued or resold.
(k) Information Concerning Company. The Reports and Other Written
Information contain all material information relating to the Company and its
operations and financial condition as of their respective dates and include all
information required to be disclosed therein. Since the date of the financial
statements included in the Reports, and except as modified in the Other Written
Information, there has been no material adverse change in the Company's
business, financial condition or affairs not disclosed in the Reports. The
Reports and Other Written Information do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(l) Dilution. The number of Shares issuable upon Reset (as hereinafter
defined) and upon exercise of the Warrants and Placement Warrants may increase
substantially in certain circumstances, including, but not necessarily limited
to, the circumstance wherein the trading price of the Common Stock declines in
the future. The Company's executive officers and directors have studied and
fully understand the nature of the Securities being sold hereby and recognize
that they have a potential dilutive effect. The board of directors of the
Company has concluded, in its good faith business judgment, that such issuance
is in the best
5
<PAGE> 6
interests of the Company. The Company specifically acknowledges that its
obligation to issue Shares upon Reset and exercise of the Warrants and
Placement Warrants is binding upon the Company and enforceable, except as
otherwise described in this Subscription Agreement, regardless of the dilution
such issuance may have on the ownership interests of other shareholders of the
Company.
(m) Stop Transfer. The Securities are restricted securities as of
the date of this Agreement. The Company will not issue any stop transfer order
or other order impeding the sale and delivery of the Securities at such time as
the Securities are registered for public sale or an exemption from registration
is available.
(n) Defaults. Neither the Company nor any of its subsidiaries is
in violation of its Articles of Incorporation or Bylaws. Neither the Company
nor any of its subsidiaries is (i) in default under or in violation of any
other material agreement or instrument to which it is a party or by which it or
any of its properties are bound or affected, which default or violation would
have a material adverse effect on the Company, (ii) in default with respect to
any order of any court, arbitrator or governmental body or subject to or party
to any order of any court or governmental authority arising out of any action,
suit or proceeding under any statute or other law respecting antitrust,
monopoly, restraint of trade, unfair competition or similar matters, or (iii)
to its knowledge in violation of any statute, rule or regulation of any
governmental authority material to its business.
(o) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions. Nor will the Company or any of its affiliates or subsidiaries take
any action or steps that would cause the offering of the Securities to be
integrated with other offerings.
(p) Use of Proceeds. The proceeds of the Subscriber funds to be
released to the Company will be used for working capital and for expenses of
this offering.
(q) No General Solicitation. Neither the Company, nor any of its
affiliates, nor to its knowledge, any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Act) in connection with the offer or sale of
the Securities.
(r) Listing. The Company's common stock is listed for trading on
NASD OTC Bulletin Board. The Company has not received any notice that its
common stock will be delisted from the OTC Bulletin Board or that the common
stock does not meet all requirements for the continuation of such listing.
6
<PAGE> 7
(s) Correctness of Representations. The Company represents that
the foregoing representations and warranties are true and correct as of the
date hereof in all material respects and, unless the Company otherwise notifies
the Subscriber prior to the Closing Date and Put Closing Date, shall be true
and correct in all material respects as of the Closing Date and Put Closing
Date. The foregoing representations and warranties and all representations,
warranties and undertakings of the Company set forth in this Subscription
Agreement shall survive the Closing Date and Put Closing Date.
3. Regulation D Offering. This Offering is being made pursuant to the
exemption from the registration provisions of the Securities Act of 1933, as
amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion acceptable to Subscriber from
the Company's legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities. A form of
the legal opinion is annexed hereto as Exhibit B. The Company will provide, at
the Company's expense, such other legal opinions in the future as are
reasonably necessary for the issuance and/or exercise of the Commission Shares,
Warrants, Placement Warrants and Put Securities (as hereinafter defined).
4. Reissuance of Securities. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Sections 1(e) and 1(f) above at such time as (a) the holder thereof is permitted
to dispose of such Securities pursuant to Rule 144(k) under the Act, or (b)
upon resale subject to an effective registration statement after the Securities
are registered under the Act. The Company agrees to cooperate with the
Subscriber in connection with all resales pursuant to Rule 144(d) and Rule
144(k) and provide legal opinions necessary to allow such resales provided the
Company and its counsel receive reasonably requested certifications from the
Subscriber and selling broker, if any.
5. Redemption. The Company may not redeem any of the Securities
without the consent of the holder of the Securities, except as described in
Section 9.2 of this Subscription Agreement.
6. Legal Fees/Commissions. The Company shall pay to counsel to the
Subscriber its fee of $22,500 for services rendered to the Subscriber in
reviewing this Agreement and other subscription agreements for the aggregate
subscription amounts of up to $500,000 and acting as escrow agent. The legal
fees will be payable out of funds held pursuant to a Funds Escrow Agreement to
be entered into by the Company, Subscriber and an Escrow Agent. In connection
with Subscription Agreements relating to up to $500,000 of subscriber funds,
the Company will issue and deliver to the Placement Agents as compensation,
Common Stock of the Company ("Commission Shares") and Placement Warrants in the
form agreed to by Company and Placement Agents, in the amounts designated on
Schedule A hereto. The Commission Shares and Placement Warrants will be issued
to the Placement Agents when, as, and if the corresponding subscription
amount is released from escrow to the Company or on the Company's behalf. All
the representations, covenants, warranties, indemnifications and undertakings,
including but not limited to registration rights made or granted to or for the
benefit
7
<PAGE> 8
of the Subscriber are hereby also made and granted to the Placement Agents in
respect of the Commission Shares, Placement Warrants and Company Shares
issuable upon exercise of the Placement Warrants.
7.1 Covenants of the Company. The Company covenants and agrees with the
Subscriber as follows:
(a) The Company will advise the Subscriber, promptly after it
receives notice of issuance by the Securities and Exchange Commission, any
state securities commission or any other regulatory authority of any stop order
or of any order preventing or suspending any offering of any securities of the
Company, or of the suspension of the qualification of the common stock of the
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) The Company shall promptly secure the listing of the Company
Shares, Commission Shares and Common Stock issuable upon the exercise of the
Warrants and Placement Warrants upon each national securities exchange, or
automated quotation system, if any, upon which shares of common stock are then
listed (subject to official notice of issuance) and shall maintain such listing
so long as any other shares of common stock shall be so listed. The Company will
use its best efforts to maintain the listing and trading of its common stock on
the NASD OTC Bulletin Board, and within 90 days of the Closing Date obtain a
listing of its common stock and Company Shares on the NASDAQ SmallCap Market,
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers ("NASD") and such exchanges, as applicable. The Company will provide the
Subscriber copies of all notices it receives notifying the Company of the
threatened and actual delisting of the common stock on any exchange or quotation
system on which the common stock is listed. Failure to obtain a listing of the
common stock and Company Shares on the NASDAQ SmallCap Market within 90 days of
the Closing Date is a material default by the Company of its obligations
hereunder.
(c) The Company shall notify the SEC, NASD and applicable state
authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to the
Subscriber and Placement Agents and promptly provide copies thereof to
Subscriber.
(d) Until at least three (3) years after the effectiveness of the
Registration Statement on Form S-3 or such other Registration Statement
described in Section 10.1(iv) hereof, the Company will (i) cause its common
stock to continue to be registered under Sections 12(b) or 12(g) of the
Exchange Act, (ii) comply in all respects with its reporting and filing
obligations under the Exchange Act, and (iii) comply with all requirements
related to any registration statement filed pursuant to this Agreement. The
Company will not take any action or file any document (whether or not permitted
by the Act or the Exchange Act or the rules thereunder) to terminate or suspend
such registration or to terminate or suspend its reporting and
8
<PAGE> 9
filing obligations under said Acts until the later of (i) three (3) years after
the effective date of the Registration Statement on Form S-3 or such other
Registration Statement described in Section 10.1(iv) hereof, or (ii) the sale
by the Subscribers and Placement Agents of all the Company Shares issuable by
the Company pursuant to this Agreement. The Company agrees to obtain a listing
for its common stock on the NASDAQ SmallCap Market within 90 days of Closing.
Until at least two (2) years after the Warrants and Placement Warrants have
been exercised, the Company will maintain the listing or trading of its common
stock on NASDAQ SmallCap Market and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the NASD and NASDAQ, as appropriate.
(e) The Company undertakes to use the proceeds of the Subscriber's
funds for working capital and expenses of this offering.
(f) Warrant Issuance. On or before five (5) business days after
sixty (60) calendar days after the Effective Date (as described in Section
10.1(iv) hereof), the Company shall issue and deliver to the Subscriber,
Warrants to purchase 15,000 shares of Common Stock ("Warrants") for each
$100,000 of Purchase Price and Put Consideration for which the Subscriber is
the holder of the corresponding Company Shares or Put Shares, provided the
Subscriber is the holder of not less than one-half (1/2) of the Common Shares
Purchased, set forth on the signature page hereto, as of sixty (60) calendar
days after the Effective Date. The Warrants will be identical to the Placement
Warrants except that the Warrants will be exercisable for three years from the
issue date.
8. Covenants of the Company and Subscriber Regarding Indemnifications.
(a) The Company agrees to indemnify, hold harmless, reimburse and
defend Subscriber against any claim, cost, expense, liability, obligation, loss
or damage (including reasonable legal fees) of any nature, incurred by or
imposed upon Subscriber which results, arises out of or is based upon (i) any
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or Reports or other
Written Information; or (ii) any breach or default in performance by Company of
any covenant or undertaking to be performed by Company hereunder, or any other
agreement entered into by the Company and Subscribers relating hereto.
(b) Subscriber agrees to indemnify, hold harmless, reimburse and
defend the Company at all times against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company which results, arises out of or is
based upon (a) any misrepresentation by Subscriber in this Agreement or in any
Exhibits or Schedules attached hereto; or (b) any breach or default in
performance by Subscriber of any covenant or undertaking to be performed by
Subscriber hereunder, or any other agreement entered into by the Company and
Subscribers relating hereto.
9
<PAGE> 10
9.1 Reset.
(a) The amount of Company Shares issuable to the Subscriber shall be
redetermined from time to time as described herein (the "Reset") and if
appropriate, additional shares of Common Stock (the "Additional Shares") will be
issued and delivered to the Subscriber as provided herein. The original purchase
price set forth on the signature page of this Subscription Agreement (the
"Purchase Price") shall be deemed the purchase price of all the shares of
Common Stock to be delivered pursuant to this Subscription Agreement including
the Additional Shares. Provided the Additional Shares are issued after the
effective date of the Registration Statement described in Section 10.1 (iv)
hereof, such Additional Shares will be free-trading on the books and records of
the Company and issued without restrictive legend.
(b) The Reset shall be determined on the first NASDAQ SmallCap
Market trading day of each calendar month commencing October 1, 1999 (each a
"Reset Date") for an amount of the Purchase Price equal to up to 25% of the
Purchase Price, at the Subscriber's written election at any time during each
calendar month ("Designated Portion") per Reset Date.
(c) If the Company's common stock is listed for trading on the
NASDAQ SmallCap Market on a Reset Date and the Closing Bid Price of the common
stock on such Reset Date is less than 130% of the Issue Price set forth on the
signature page hereto, (subject to adjustment for stock splits, stock dividends
and similar events), then on each Reset Date a number of Company Shares will be
calculated for the Designated Portion of the Purchase Price by dividing the
Designated Portion of the Purchase Price by a number equal to eighty-five
percent (85%) of the lowest closing bid price for the common stock on the
NASDAQ SmallCap Market, or on any securities exchange or other securities
market on which the common stock was listed, traded or quoted for the calendar
month immediately preceding the Reset Date (the "Reset Price"). If the Reset
Price is less than the Issue Price designated on the signature page hereto,
then the Company will issue to the Subscriber the number of shares of Common
Stock obtained by subtracting (y) the number of shares obtained by dividing the
Designated Portion of Purchase Price by the Issue Price from (z) the number of
shares obtained by dividing the Designated Portion of Purchase Price by the
Reset Price.
(d) If the Company's Common Stock is not listed for trading on the
NASDAQ SmallCap Market or National Market System on a Reset Date and the
Closing Bid Price of the Common Stock on such Reset Date is less than 175% of
the Issue Price (subject to adjustment for stock split, stock dividends and
similar events), then on each Reset Date a number of Company Shares will be
calculated for the Designated Portion of the Purchase Price by Dividing the
Designated Portion of the Purchase Price by a number equal to eighty-five
percent (85%) of the lowest closing bid price for the common stock on the
NASDAQ SmallCap Market, or on any securities exchange or other securities
market on which the common stock was listed, traded or quoted for the calendar
month immediately preceding the Reset Date. If the Reset Price is less than the
Issue Price, then the Company will issue to the Subscriber the number of shares
of Common Stock obtained by subtracting (y) the number of shares obtained by
dividing the
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Designated Portion of Purchase Price by the Issue Price from (z) the number of
shares obtained by dividing the Designated Portion of Purchase Price by the
Reset Price.
(e) Reset rights described herein shall end on the sooner to occur
of two years after the Effective Date of the registration statement as
described in Section 10.1(iv) hereof, or upon the Subscriber having realized
net proceeds from sales of the Company Shares equal to 150% of the Purchase
Price and Put Consideration actually paid by the Subscriber, of which
occurrence the Subscriber shall notify the Company in writing.
(f) In no event will the Subscriber be required to return any
Company Shares to the Company. Each Reset calculation shall be made independent
of all other Reset calculations.
(g) The Company agrees to deliver the Additional Shares to the
Subscriber in hand, or Redemption Amount (as defined herein) if such payment of
the Redemption Amount is permitted hereunder, no later than ten (10) business
days, in the case of the Additional Shares, or five (5) business days in the
case of the Redemption Amount, after notice from the Subscriber of the
Designated Portion (each a "Delivery Date"). The Company understands that a
delay in the delivery of either the Additional Shares or failure to timely
deliver the Redemption Amount described in Sections 9.2 and 9.3 beyond the
required Delivery Date could result in economic loss to the Subscriber. As
compensation to the Subscriber for such loss, the Company agrees to pay as
liquidated damages payments to the Subscriber for late delivery of Additional
Shares or Redemption Amount beyond the required Delivery Date, in the amount of
$100 per business day after the Delivery Date for each $10,000 of Designated
Portion of Purchase Price for which a Reset has been calculated. The Company
shall pay any payments incurred under this Section in immediately available
funds upon demand. The late payment charges described in this Section 9.1(g)
shall be payable through the date the Additional Shares or Redemption Amount is
received in hand by the Subscriber.
(h) Securities and Company Shares as defined and employed in this
Subscription Agreement shall include Additional Shares for all purposes
including but not limited to Section 10 of this Subscription Agreement.
(i) Nothing contained herein or in any document referred to herein
or delivered in connection herewith shall be deemed to establish or require the
payment of a rate of interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest required to
be paid or other charges hereunder exceed the maximum permitted by such law,
any payments in excess of such maximum shall be credited against amounts owed
by the Company to the Subscriber and thus refunded to the Company.
9.2 Optional Redemption. In the event the Reset Price on a Reset Date is
less than $.50 per share (subject to adjustment for stock splits, stock
dividends and similar events), then at the Company's election, in lieu of
delivering the Additional Shares on the Delivery Date, the Company may deliver
no later than five business days after notice from the Subscriber of the
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Designated Portion a sum of money equal to 130% of the Designated Portion for
such Resent Date ("Redemption Amount"). In the event the Additional Shares or
payment of the Redemption Amount is not received by the Subscriber in US funds
on or before the required Delivery Date, then the Company shall thereafter no
longer have the right described in this paragraph to substitute cash payment in
lieu of delivery of Additional Shares. As a precondition to exercising the right
to substitute the Redemption Amount in lieu of delivering Additional Shares, the
Company must notify the Subscriber in writing of its intention to do so no later
than one (1) business day after notice from the Subscriber of the Designated
Portion.
9.3 Mandatory Redemption. In the event the Company does not issue and
deliver Additional Shares on a Delivery Date for any reason, then at the
Subscriber's election in lieu of delivering such Additional Shares the Company
must pay to the Subscriber immediately after request, a sum of money equal to
the Redemption Amount calculated in the manner described in Section 9.2 hereof.
9.4 Additional Reset. In addition to the other Reset rights described
herein, if within ninety (90) days from the Closing Date, the Company's Common
Stock is not listed or included for trading on any of the NASDAQ SmallCap
Market, National Market System, or American Stock Exchange, then the Company
shall issue and deliver to the Subscriber prior to ninety-six (96) days from
the Closing Date an amount of Company Shares equal to the Common Shares
Purchased, as designated on the signature page hereto so that the per share
Purchase Price will be reduced to $.50. After receipt of such shares, the per
share Purchase Price for purposes of Reset calculations described in this
Section 9 shall be equal to $.50 and the number of Company Shares actually
received shall be employed for Reset calculations.
9.5 Reset Limitation. The Company and Subscriber agree that the
Subscriber shall not be entitled to Reset on a Reset Date that amount of the
Purchase Price in connection with that number of shares of common stock which
would be in excess of the sum of (i) the number of shares of common stock
beneficially owned by the Subscriber and its affiliates on such Reset Date, and
(ii) the number of shares of common stock issuable upon such Reset with respect
to which the determination of this proviso is being made on such Reset Date,
which would result in beneficial ownership by the Subscriber and its affiliates
of more than 9.99% of the outstanding shares of common stock of the Company on
such Reset Date. For the purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3
thereunder. Subject to the foregoing, the Subscriber shall not be prohibited
from exercising over time of its Reset Rights in connection with the Reset of
an aggregate 100% Purchase Price. Subscriber may revoke the restriction
described in this paragraph upon seventy-five (75) days prior written notice to
the Company.
9.6 Buy-In. In addition to any other rights available to the Subscriber,
if the Company fails to deliver to the Subscriber such shares issuable upon
Reset or if applicable the Redemption Amount, by the Delivery Date and if after
the Delivery Date the Subscriber purchases (in an open market transaction or
otherwise) shares of common stock to deliver in
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satisfaction of a sale by such Subscriber of the common stock which the
Subscriber anticipated receiving upon such Reset (a "Buy-In"), then the Company
shall pay in cash to the Subscriber (in addition to any remedies available to
or elected by the Subscriber) the amount by which (A) the Subscriber's total
purchase price (including brokerage commissions, if any) for the shares of
common stock so purchased exceeds (B) the corresponding portion of Designated
Amount for which Additional Shares were not timely delivered, together with
interest thereon at a rate of 15% per annum, accruing until such amount and any
accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if the Subscriber
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted Reset of $10,000 of Designated
Amount, the Company shall be required to pay the Subscriber $1,000, plus
interest. The Subscriber shall provide the Company written notice indicating
the amounts payable to the Subscriber in respect of the Buy-In.
9.7. Injunction - Posting of Bond. In the event a Subscriber shall
exercise its Reset Rights, the Company may not refuse conversion based on any
claim that such Subscriber or any one associated or affiliated with such
Subscriber has been engaged in any violation of law, unless, an injunction from
a court, on notice, restraining and/or enjoining the exercise of the
Subscriber's Reset rights shall have been obtained and the Company posts a
surety bond for the benefit of such Subscriber in the amount of 130% of the
amount of the Designated Amount, which is subject to the injunction, which bond
shall remain in effect until the completion of arbitration/litigation of the
dispute and the proceeds of which shall be payable to such Subscriber to the
extent it obtains judgment.
10.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
(i) On one occasion, for a period commencing 31 days after the
Closing Date, but not later than three years after the Closing Date, the
Company, upon a written request therefor from any record holder or holders of
more than 50% of the aggregate of the Company's Shares issued in connection
with the $500,000 aggregate offering to which this Subscription Agreement
relates (the Securities, Additional Shares and securities issued or issuable by
virtue of ownership or exercise of the Securities, and the Put Securities
(defined in Section 11.1(a) hereof) if actually issued, being, the "Registrable
Securities"), shall prepare and file with the SEC a registration statement
under the Act covering the Registrable Securities which are the subject of such
request, unless such Registrable Securities are the subject of an effective
registration statement. In addition, upon the receipt of such request, the
Company shall promptly give written notice to all other record holders of the
Registrable Securities that such registration statement is to be filed and
shall include in such registration statement Registrable Securities for which
it has received written requests within 10 days after the Company gives such
written notice. Such other requesting record holders shall be deemed to have
exercised their demand registration right under this Section 10.1(i). As a
condition precedent to the inclusion of Registrable Securities, the holder
thereof shall provide the Company with such information as
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<PAGE> 14
the Company reasonably requests. The obligation of the Company under this
Section 10.1(i) shall be limited to one registration statement.
(ii) If the Company at any time proposes to register any of
its securities under the Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscriber or Holder pursuant to an effective registration statement, each
such time it will give at least 30 days' prior written notice to the record
holder of the Registrable Securities of its intention so to do. Upon the
written request of the holder, received by the Company within 30 days after the
giving of any such notice by the Company, to register any of the Registrable
Securities, the Company will cause such Registrable Securities as to which
registration shall have been so requested to be included with the securities to
be covered by the registration statement proposed to be filed by the Company,
all to the extent required to permit the sale or other disposition of the
Registrable Securities so registered by the holder of such Registrable
Securities (the "Seller"). In the event that any registration pursuant to this
Section 10.1(ii) shall be, in whole or in part, an underwritten public offering
of common stock of the Company, the number of shares of Registrable Securities
to be included in such an underwriting may be reduced by the managing
underwriter if and to the extent that the Company and the underwriter shall
reasonably be of the opinion that such inclusion would adversely affect the
marketing of the securities to be sold by the Company therein; provided,
however, that the Company shall notify the Seller in writing of any such
reduction. Notwithstanding the foregoing provisions, the Company may withdraw
any registration statement referred to in this Section 10.1(ii) without thereby
incurring any liability to the Seller.
(iii) If, at the time any written request for registration is
received by the Company pursuant to Section 10.1(i), the Company has determined
to proceed with the actual preparation and filing of a registration statement
under the 1933 Act in connection with the proposed offer and sale for cash of
any of its securities for the Company's own account, such written request
shall be deemed to have been given pursuant to Section 10.1(ii), rather than
Section 10.1(i), and the rights of the holders of Registrable Securities
covered by such written request shall be governed by Section 10.1(ii) except
that the Company or underwriter, if any, may not withdraw such registration or
limit the amount of Registrable Securities included in such registration.
(iv) The Company shall file with the Commission within thirty
(30) days of the Closing Date (the "Filing Date"), and use its reasonable
commercial efforts to cause to be declared effective a Form S-3 registration
statement (or such other form that it is eligible to use) within ninety (90)
days of the Closing Date in order to register the Registrable Securities for
resale and distribution under the Act. The registration statement described in
this paragraph must be declared effective by the Commission within ninety (90)
days of the Closing Date ("Effective Date"). The Company will register not
less than 120,000 shares of Common Stock in the aforedescribed registration
statement for each $25,000 of Purchase Price and one share of Common Stock for
each Commission Share and common share issuable upon exercise of the
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<PAGE> 15
Warrants and Placement Warrants. The Registrable Securities shall be reserved
and set aside exclusively for the benefit of the Subscriber and Placement
Agents, as the case may be, and not issued, employed or reserved for anyone
other than the Subscriber and Placement Agents, as the case may be. Such
registration statement will be promptly amended or additional registration
statements will be promptly filed by the Company as necessary to register
additional Company Shares to allow the public resale of all common stock
included in and issuable by virtue of the Registrable Securities.
10.2 Registration Procedures. If and whenever the Company is required
by the provisions hereof to effect the registration of any shares of Registrable
Securities under the Act, the Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as herein provided), and promptly
provide to the holders of Registrable Securities copies of all filings;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for not less than 6 months after the latest exercise period of any
common stock purchase warrant or other convertible instrument included in
the Registrable Securities, and comply with the provisions of the Act with
respect to the disposition of all of the Registrable Securities covered by such
registration statement in accordance with the Seller's intended method of
disposition set forth in such registration statement for such period;
(c) furnish to the Seller, and to each underwriter, if any,
such number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the
securities covered by such registration statement;
(d) use its best efforts to register or qualify the Seller's
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Seller and in the
case of an underwritten public offering, the managing underwriter shall
reasonably request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such registration
statement with any securities exchange on which the Common Stock of the
Company is then listed;
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(f) immediately notify the Seller and each underwriter under such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act, of the happening of any event of which
the Company has knowledge as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing;
(g) make available for inspection by the Seller, any underwriter
participating in any distribution pursuant to such registration statement, and
any attorney, accountant or other agent retained by the Seller or underwriter,
all publicly available, non-confidential financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all publicly available,
non-confidential information reasonably requested by the seller, underwriter,
attorney, accountant or agent in connection with such registration statement.
10.3 Provisions of Documents.
(a) At the request of the Seller, provided a demand for registration
has been made pursuant to Section 10.1(i) or a request for registration has
been made pursuant to Section 10.1(ii), the Registrable Securities will be
included in a registration statement filed pursuant to this Section 10. In the
event of a firm commitment underwritten public offering in which the
Registrable Securities are so included, the lockup, if any, requested by the
managing underwriter may not exceed ninety (90) days after the effective date
thereof.
(b) In connection with each registration hereunder, the Seller will
furnish to the Company in writing such information with respect to itself and
the proposed distribution by it as reasonably shall be necessary in order to
assure compliance with federal and applicable state securities laws. In
connection with each registration pursuant to Section 10.1(i) or 10.1(ii)
covering an underwritten public offering, the Company and the Seller agree to
enter into a written agreement with the managing underwriter in such form and
containing such provisions as are customary in the securities business for such
an arrangement between such underwriter and the companies of the Company's size
and investment stature.
10.4 Non-Registration Events. The Company and the Subscriber agree that
the Seller will suffer damages if any registration statement required under
Section 10.1(i) or 10.1(ii) above is not filed within 60 days after request by
the Holder and not declared effective by the Commission within 120 days after
such request [or the Filing Date and Effective Date, respectively, in reference
to the Registration Statement on Form S-3 or such other form described in
Section 10.1(iv)], and maintained in the manner and within the time periods
contemplated by Section 10 hereof, and it would not be feasible to ascertain
the extent of such damages with precision. Accordingly, if (i) the Registration
Statement described in Sections (10.1(i) or 10.1(ii) is not filed within 60
days of such request, or is not declared effective by the Commission on or
prior to the date that is 120 days after such request, or (ii) the registration
statement on Form S-3
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or such other form described in Section 10.1(iv) is not filed on or before the
Filing Date or not declared effective on or before the sooner of the Effective
Date, or within five days of receipt by the Company of a communication from the
Commission that the registration statement described in Section 10.1(iv) will
not be reviewed, or (iii) any registration statement described in Sections
10.1(i), 10.1(ii) or 10.1(iv) is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by an
additional registration statement filed and declared effective) for a period of
time which shall exceed 30 days in the aggregate per year but not more than 20
consecutive calendar days (defined as a period of 365 days commencing on the
date the Registration Statement is declared effective) (each such event
referred to in clauses (i), (ii) and (iii) of this Section 10.4 is referred to
herein as a "Non-Registration Event"), then, for so long as such
Non-Registration Event shall continue, the Company shall pay in cash as
Liquidated Damages to each holder of any Registrable Securities an amount equal
to three (3%) percent for each thirty (30) days or part thereof, of the
Purchase Price of the Company Shares, and the aggregate amount of the exercise
prices of the Warrants and Placement Warrants, whether or not exercised, then
owned of record by such holder as of the occurrence of such Non-Registration
Event. Payments to be made pursuant to Section 10.4 shall be due and payable
immediately upon demand in immediately available funds.
10.5. Expenses. All expenses incurred by the Company in complying
with Section 10, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, fee of one counsel, if any, to
represent all the Sellers, and costs of insurance are called "Registration
Expenses". All underwriting discounts and selling commissions applicable to
the sale of Registrable Securities, including any fees and disbursements of any
special counsel to the Seller, are called "Selling Expenses". The Seller shall
pay the fees of its own additional counsel, if any.
The Company will pay all Registration Expenses in connection
with the registration statement under Section 10. All Selling Expenses in
connection with each registration statement under Section 10 shall be borne by
the Seller and may be apportioned among the Sellers in proportion to the number
of shares sold by the Seller relative to the number of shares sold under each
registration statement or as all Sellers thereunder may agree.
10.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will indemnify and
hold harmless the Seller, each officer of the Seller, each director of the
Seller, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Seller or underwriter within the
meaning of the 1933 Act, against any losses, claims, damages or liabilities,
joint or several, to which the Seller, or such underwriter or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof)
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arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which such
Registrable Securities was registered under the Act pursuant to Section 10, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Seller, each such underwriter and each such controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case if and
to the extent that such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished by any such
Seller, the underwriter or any such controlling person in writing specifically
for use in such registration statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the Act pursuant to Section 10, the Seller will indemnify and
hold harmless the Company, and each person, if any, who controls the Company
within the meaning of the Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such officer, director, underwriter or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the Act pursuant to Section 10, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the Registrable
Securities sold by the Seller under such registration statement bears to the
total public offering price of all securities sold thereunder, but not in any
event to exceed the gross proceeds received by the Seller from the sale of
Registrable Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is
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to be made against the indemnifying party hereunder, notify the indemnifying
party in writing thereof, but the omission so to notify the indemnifying party
shall not relieve it from any liability which it may have to such indemnified
party other than under this Section 10.6(c) and shall only relieve it from any
liability which it may have to such indemnified party under this Section
10.6(c) if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the extent
it shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 10.6(c) for any legal expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the indemnifying
party or if the interests on the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the indemnified parties
shall have the right to select one separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party as
incurred.
(d) In order to provide for just and equitable contribution in the
event of joint liability under the Act in any case in which either (i) the
Seller, or any controlling person of the Seller, makes a claim for
indemnification pursuant to this Section 10.6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10.6 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of
the Seller or controlling person of the Seller in circumstances for which
indemnification is provided under this Section 10.6; then, and in each such
case, the Company and the Seller will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Seller is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (A) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities offered by it pursuant to such registration statement; and (B) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 10(f) of the Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
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11.1. Obligation To Purchase.
(a) The Subscriber agrees to purchase from the Company
additional Company Shares ("Put Shares") for up to the Maximum Put
Consideration designated on the signature page hereto. Collectively the Put
Shares and Put Commissions (as hereinafter defined) are referred to as the "Put
Securities".) The Holders of the Put Securities are granted all the rights,
remedies and indemnification granted to the Subscriber in connection with the
Securities, including but not limited to, the registration rights described in
Section 10 hereof, and the Reset Rights described in Section 9 hereof.
(b) The agreement to purchase the Put Shares is contingent on
the following (unless waived by the Subscriber):
(i) The timely filing and timely effectiveness of the
registration statement described in Section 10.1(iv) hereof relating to all the
Registrable Securities.
(ii) As of the Put Date and Put Closing Date (as defined
hereinafter), the Company will be a full reporting company with the class of
Shares registered pursuant to Section 12(g) of the Securities Exchange Act of
1934.
(iii) The closing bid price of the Company's common stock
on the NASDAQ SmallCap Market or such other securities exchange or market where
the Company's common stock is listed for trading ("Closing Bid Price") for
each of the ten trading days prior to the giving of a Put Notice (as defined
hereinafter) and until to the Put Closing Date will not be less than $1.00.
(iv) No material adverse change in the Company's business
or business prospects shall have occurred after the date of the most recent
financial statements included in the Reports. Material adverse change is
defined as any effect on the business, operations, properties, prospects, or
financial condition of the Company that is material and adverse to the Company
and its subsidiaries and affiliates, taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement, or any other agreement entered into or to be entered into in
connection herewith, in any material respect.
(v) There not being an adverse variation of 20% or more
from the quarterly and annual revenue, gross income and Net Profit projections
set forth on Schedule C hereto for the periods set forth on Schedule C hereto.
Schedule C will be retained by the Escrow Agent referred to in Section 6 hereof
and not delivered to the Subscriber unless the Escrow Agent determines in its
own discretion that the actual revenue and/or income differ from the
projections by 20% or more. In any event, the Escrow Agent may deliver the
projections to the Subscriber at the Escrow Agent's discretion. Until eighteen
months from the Closing Date, the Company undertakes to deliver to the Escrow
Agent copies of all periodic reports and other
20
<PAGE> 21
filings by the Company with the Securities and Exchange Commission within two
(2) business days of filing with the Securities and Exchange Commission.
(vi) The execution and delivery to the Subscriber of a
certificate signed by its chief executive officer representing the truth and
accuracy of all the Company's representations and warranties contained in this
Subscription Agreement as of the Put Date and the Put Closing Date and
confirming the undertakings contained herein, and representing the satisfaction
of all contingencies and conditions required for the exercise of the Put.
(vii) The Company's compliance after the date hereof with
the listing requirements of the NASD OTC Bulletin Board, and the Company's not
having received notice from the NASD OTC Bulletin Board (and any principal
market on which the Company's Common Stock is listed for trading) that the
Company is not in compliance with the requirements for continued listing.
(viii) The execution by the Company and delivery to the
Subscriber of all documents reasonably necessary to memorialize the rights and
obligations of each of the parties in relation to the Put.
(ix) There shall not have occurred a change in the current
members of the board of directors of the Company nor of the President,
Vice-President, Chief Financial Officer, Chief Executive Officer, or Chief
Operating Officer of the Company prior to the giving of a Put Notice or Put
Closing Date.
(x) A Closing shall have occurred on an aggregate of
$500,000 on the same terms and conditions described in this Subscription
Agreement.
(xi) The Company shall have obtained a listing for trading
of its Common Stock on the NASDAQ SmallCap Market on or before 90 days after
the Closing Date.
(c) The exercise of the Put is further contingent on the
non-occurrence of any of the following events, each an Event of Default:
(i) The Company shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for a substantial part of its property or business; or such a
receiver or trustee shall otherwise be appointed.
(ii) Any money judgment, writ or similar process shall be
entered or filed against Company or any of its property or other assets for
more than $50,000, and shall remain unvacated, unbonded or unstayed for a
period of forty-five (45) days.
21
<PAGE> 22
(iii) Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Company.
(iv) Delisting of any of the Company's securities from
the NASD OTC Bulletin Board or such other principal exchange on which such
security was listed for trading, or receipt by the Company of notice from NASDAQ
or such other principal exchange that the Company is not in compliance with its
listing requirements.
(v) A concession by the Company or a default by the
Company under any one or more obligations in an aggregate monetary amount in
excess of $50,000.
(vi) An SEC stop trade order or NASDAQ trading
suspension.
(vii) Any representation or warranty of the Company
made in this Subscription Agreement or in connection herewith, or in any
agreement, statement or certificate given in writing pursuant hereto or in any
other agreement to which the Company and Subscriber are parties, or in
connection herewith or therewith shall be materially false or misleading.
(viii) The occurrence of a Non-Registration Event.
(ix) Any material default by the Company of any
covenant or undertaking described in this Subscription Agreement or any document
delivered in connection herewith or under any other agreement to which the
Company and Subscriber are parties.
(d) The exercise of the Put is expressly contingent on the
declaration of effectiveness by the Securities and Exchange Commission and the
continued effectiveness of the Registration Statement on Form S-3 or such other
form as described in Section 10.1(iv) hereof relating to the Registrable
Securities and the Company's ability to issue Common Stock on the Put Closing
Date pursuant to an effective registration statement, with such Common Stock,
upon resale, being unlegended freely transferable Common Stock.
11.2. Exercise of Put.
(a) The Company's right to exercise the Put expires two weeks
after the obtention of a listing of the Company's Common Stock on the NASDAQ
SmallCap Market, which must occur within 90 days of the Closing Date ("Put
Exercise Period").
(b) The Put may be exercised by the Company by the giving to
the Subscriber of a written notice of exercise ("Put Notice") during the Put
Exercise Period in relation to all the subject Put Securities. The date a Put
Notice is given is a Put Date. Each Put Notice must be accompanied by the (i)
officer's certificate described in Section 11.1(b)(viii) above; (ii) a copy of
the filed registration statement; (iii) notice of declaration of effectiveness;
(iv) five copies of the final prospectus; (v) a legal opinion relating to the
Put Securities in form
22
<PAGE> 23
reasonably acceptable to Subscriber, and (vi) proof of timely listing on the
NASDAQ SmallCap Market.
(c) Unless otherwise agreed to by the Subscribers, Put Notices
must be given to all Subscribers in proportion to the amounts agreed to be
purchased by all Subscribers undertaking to purchase Put Shares in the $500,000
offering to which this Subscription Agreement relates. The aggregate amount of
all such Put Notices may not exceed $1,500,000. In the event the Company does
not exercise the Put during the Put Exercise Period, then the Subscriber may
exercise the Put on behalf of the Company, giving notice to the Company of such
exercise during the fourteen (14) business days following the Put Exercise
Period. Only one Put Notice may be given to the Subscriber.
(d) Payment by the Subscriber in relation to a Put Notice
relating to the Put must be made within 10 days of receipt of a Put Notice.
Payment will be made against delivery to the Subscriber or an escrow agent to
be agreed upon the Company and Subscriber, of the Put Shares and items set forth
in Section 11.2(b) above, and delivery to the Placement Agents of the Put
Commissions relating to the Put being exercised.
11.3. Put Price.
(a) If the Put is exercised by the Company, the price for each
Put Share shall be $1.00 for each Put Share ("Put Price").
(b) If the Put is exercised by the Subscriber on the Company's
behalf pursuant to Section 11.2(C) hereof and provided the Closing Bid Price for
each of the 20 trading days prior to the giving of a Put Notice by the
Subscriber is more than $1.75 and the aggregate trading volume in the Company's
common stock is more than 100,000 common shares per day for each of the 20
trading days prior to the giving of a Put Notice by the Subscriber, then the Put
Price shall be $1.00 plus one-half the difference between $1.75 and the Closing
Bid Price on the trading day preceding the Put Date.
(c) If the Put is exercised by the Subscriber on the Company's
behalf pursuant to Section 11.2(C) hereof and the Closing Bid Price for each of
the 20 trading days prior to the giving of a Put Notice by the Subscriber is
$1.75 or less or the aggregate trading volume in the Company's common stock is
less than 100,000 common share per day for each of the 20 trading days prior
to the giving of a Put Notice by the Subscriber, then the Put Price shall be
$1.00.
11.4. Put Commission Warrants. The Put Commission Warrants (as defined
herein) payable in connection with the Put will be identical to the Placement
Warrants except that such Put Warrants will be exercisable commencing on the
Put Closing Date and for three years thereafter at the lower of the exercise
price of the Placement Warrants or the closing bid price of the Company's
Common Stock on the NASDAQ SmallCap Market on the day prior to the Put Closing
Date.
23
<PAGE> 24
11.5. Put Commissions. The Placement Agents identified on Schedule A
hereto shall receive aggregate commissions in connection with the closing of the
Put as follows: (i) one Company Share for each ten (10) Put Shares purchased by
the Subscriber; and (ii) one Put Warrant for each $2 of Put purchase price paid
by a Subscriber in connection with the Put. Collectively, the foregoing are
referred to as Put Commissions. The aggregate Put Commissions are set forth on
Schedule A hereto. Put Commissions shall be payable only in connection with the
Put Purchase Price actually paid by a Subscriber. The attorney for the
Subscriber shall receive a payment at the Put Closing equal to one and one-half
(1.5%) of the Put Consideration.
11.6. Adjustments. The Put Price and number of Common Shares to be issued
pursuant to this Section shall be subject to adjustment from time to time upon
the happening of certain events while the Put right remains outstanding, as
follows:
(a) Stock Splits, Combinations and Dividends. If the shares of
common stock are subdivided or combined into a greater or smaller number of
shares of common stock, or if a dividend is paid on the common stock in shares
of common stock, the Put Price shall be proportionately reduced in case of
subdivision of shares or stock dividend or proportionately increased in the
case of combination of shares, in each such case by the ratio which the total
number of shares of common stock outstanding immediately after such event bears
to the total number of shares of common stock outstanding immediately prior to
such event.
(b) Share Issuance. Subject to the provisions of this Section, if
the Company at any time shall issue any shares of common stock prior to Put
Closings on up to $1,500,000 [otherwise than as provided in Section 11.6(a) or
this subparagraph 11.6(b) for a consideration less than the Put Price that
would be in effect at the time of such issue, then, and thereafter successively
upon each such issue, the Put Price shall be reduced as follows: (i) the number
of shares of common stock outstanding immediately prior to such issue shall be
multiplied by the Put Price in effect at the time of such issue and the product
shall be added to the aggregate consideration, if any, received by the Company
upon such issue of additional shares of common stock; and (ii) the sum so
obtained shall be divided by the number of shares of common stock outstanding
immediately after such issue. The resulting quotient shall be the adjusted Put
Price. For purposes of this adjustment, the issuance of any security of the
Company carrying the right to convert such security into shares of common stock
or of any warrant, right or option to purchase common stock shall result in an
adjustment to the Put Price upon the issuance of shares of common stock upon
exercise of such conversion of purchase rights.
11.7 The Company and Subscriber agree that the Company and Subscriber
may not exercise the Put in connection with the number of shares of common
stock which would be in excess of the sum of (i) the number of shares of common
stock beneficially owned by the Subscriber and its affiliates on the Closing
date, and (ii) the number of shares of common stock issuable upon the exercise
of the Put with respect to which the determination of this proviso is being
made on a Put Date, which would result in beneficial ownership by the
Subscriber and its
24
<PAGE> 25
affiliates of more than 9.99% of the outstanding shares of common stock of the
Company. For the purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder,
except as otherwise provided in clause (i) of such proviso. Any conflict between
this Section 11.7 and Section 9.5 hereof or the potential application of this
Section 11.7 and Section 9.5 at the same time shall be resolved by the
Subscriber at the Subscriber's election, provided that the aggregate maximum
amount of common shares that may be issued is not exceeded. The Subscriber may
revoke the restriction described in this paragraph upon seventy-five (75) days
prior written notice to the Company.
11.8. Put Reset Rights. The Subscriber is hereby granted identical Reset
Rights in relation to the Put Shares and aggregate Put Price as described in
Section 9 of this Subscription Agreement.
12. (a) Right of First Refusal. Until 180 days after the effective
date of the Registration Statement described in Section 10.1(iv) hereof, the
Subscriber shall be given not less than ten (10) business days prior written
notice of any proposed sale by the Company of its common stock or other
securities or debt obligations except as disclosed in the Reports or Other
Written Information. The Subscriber shall have the right during the ten (10)
business days following the notice to agree to purchase an amount of common
shares or other securities in the same proportion as the Company Shares being
purchased in the aggregate offering to which this Subscription Agreement
relates (i.e. $500,000 in the aggregate), of those securities proposed to be
issued and sold, in accordance with the terms and conditions set forth in the
notice of sale. In the event such terms and conditions are modified during the
notice period, the Subscriber shall be given promptly notice of such
modification and shall have the right during the original notice period or for
a period of ten (10) business days following the notice of modification,
whichever is longer, to exercise such right. In the event the right of first
refusal described in this Section is exercised by the Subscriber and the
Company thereby receives net proceeds from such exercise, then commissions and
fees will be paid by the Company to the Placement Agents in the same amounts as
specified in the notice of sale.
(b) Offering Restrictions. Except with respect to securities
otherwise disclosed in the Reports or Other Written Information, the Company
will not issue any equity, convertible debt or other securities prior to 120
days after the Effective Date.
13. Miscellaneous.
(a) Notices. All notices or other communications given or made
hereunder shall be in writing and shall be personally delivered or deemed
delivered the first business day after being telecopied (provided that a copy
is delivered by first class mail) to the party to receive the same at its
address set forth below or to such other address as either party shall
hereafter give to the other by notice duly made under this Section: (i) if to
the Company, to The Recovery Network, Inc., 1411 Fifth Street, Suite 200, Santa
Monica, CA 90401, telecopier number: (310) 393-5749, and (ii) if to the
Subscriber, to the name, address and telecopy number
25
<PAGE> 26
set forth on the signature page hereto. Any notice that may be given pursuant
to this Agreement, or any document delivered in connection with the foregoing
may be given by the Subscriber on the first business day after the observance
dates in the United States of America by Orthodox Jewry of Rosh Hashanah, Yom
Kippur, the first two days of the feast of Tabernacles, Shemini Atzeret Simchat
Torah, the first two and final two days of Passover and Pentecost, with such
notice to be deemed given and effective, at the election of the Subscriber on a
holiday date that precedes such notice. Any notice received by the Subscriber
on any of the aforedescribed holidays may be deemed by the Subscriber to be
received and effective as if such notice had been received on the first
business day after the holiday.
(b) Closing. The consummation of the transactions contemplated
herein shall take place at the offices of Grushko & Mittman, 277 Broadway,
Suite 801, New York, New York 10007, upon the satisfaction of all conditions to
Closing set forth in this Agreement. The closing date shall be the date that
subscriber funds representing the net amount due the Company from the Purchase
Price are transmitted by wire transfer to the Company (the "Closing Date"). The
Closing date for the Put shall be the date on which Subscriber funds
representing the net amount due the Company from the Put Consideration are
transmitted to or on behalf of the Company ("Put Closing Date").
(c) Entire Agreement; Assignment. This Agreement represents the
entire agreement between the parties hereto with respect to the subject matter
hereof and may be amended only by a writing executed by both parties. No right
or obligation of either party shall be assigned by that party without prior
notice to and the written consent of the other party.
(d) Execution. This Agreement may be executed by facsimile
transmission, and in counterparts, each of which will be deemed an original.
(e) Law Governing this Agreement. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York without
regard to principles of conflicts of laws. Any action brought by either party
against the other, concerning the transactions contemplated by this Agreement
shall be brought only in the state courts of New York or in the federal courts
located in the state of New York. Both parties and the individuals executing
this Agreement and other agreements on behalf of the Company agree to submit to
submit to the jurisdiction of such courts and waive trial by jury. The
prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
26
<PAGE> 27
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
----------------------------
Dated: June 10, 1999
Purchase Price: $100,000.00
Issue Price (per share): $1.00
Common Shares Purchase (aggregate): 100,000
Maximum Common Stock Purchase Warrants: 60,000
(Maximum) Put Consideration: $300,000.00
ACCEPTED: Dated as of June __, 1999
AUSTOST ANSTALT SCHAAN - Subscriber
7440 Fuerstentum
Lichenstein, Landstrasse 163
Fax: 011-431-534532895
By:
------------------------------
27
<PAGE> 28
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
----------------------------
Dated: June __, 1999
Purchase Price: $100,000.00
Issue Price (per share): $1.00
Common Shares Purchase (aggregate): 100,000
Maximum Common Stock Purchase Warrants: 60,000
(Maximum) Put Consideration: $300,000.00
ACCEPTED: Dated as of June 10, 1999
AUSTOST ANSTALT SCHAAN - Subscriber
7440 Fuerstentum
Lichenstein, Landstrasse 163
Fax: 011-431-534532895
By: /s/ [Signature Illegible]
------------------------------
27
<PAGE> 29
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
----------------------------
Dated: June 10, 1999
Purchase Price: $100,000.00
Issue Price (per share): $1.00
Common Shares Purchase (aggregate): 100,000
Maximum Common Stock Purchase Warrants: 60,000
(Maximum) Put Consideration: $300,000.00
ACCEPTED: Dated as of June __, 1999
BALMORE FUNDS S.A. - Subscriber
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
By:
------------------------------
27
<PAGE> 30
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
----------------------------
Dated: June __, 1999
Purchase Price: $100,000.00
Issue Price (per share): $1.00
Common Shares Purchase (aggregate): 100,000
Maximum Common Stock Purchase Warrants: 60,000
(Maximum) Put Consideration: $300,000.00
ACCEPTED: Dated as of June 10, 1999
BALMORE FUNDS S.A. - Subscriber
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
By: /s/ [Signature Illegible]
------------------------------
27
<PAGE> 31
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
---------------------------
Dated: June 10, 1999
Purchase Price: $100,000.00
Issue Price (per share): $1.00
Common Shares Purchased (aggregate): 100,000
Maximum Common Stock Purchase Warrants: 60,000
(Maximum) Put Consideration: $300,000.00
ACCEPTED: Dated as of June __, 1999
AMRO INTERNATIONAL, S.A. - Subscriber
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Fax: 011-411-262-5512
By:
---------------------------
27
<PAGE> 32
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
---------------------------
Dated: June __, 1999
Purchase Price: $100,000.00
Issue Price (per share): $1.00
Common Shares Purchased (aggregate): 100,000
Maximum Common Stock Purchase Warrants: 60,000
(Maximum) Put Consideration: $300,000.00
ACCEPTED: Dated as of June 10, 1999
AMRO INTERNATIONAL, S.A. - Subscriber
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Fax: 011-411-262-5512
By: /s/ [Signature Illegible]
---------------------------
27
<PAGE> 33
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
----------------------------
Dated: June 10, 1999
Purchase Price: $50,000.00
Issue Price (per share): $1.00
Common Shares Purchased (aggregate): 50,000
Maximum Common Stock Purchase Warrants: 30,000
(Maximum) Put Consideration: $150,000.00
ACCEPTED: Dated as of June __, 1999
NESHER, INC. -- Subscriber
c/o Ragnall House
18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
Fax: 011-972-36120639
By:
---------------------------
27
<PAGE> 34
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
----------------------------
Dated: June __, 1999
Purchase Price: $50,000.00
Issue Price (per share): $1.00
Common Shares Purchased (aggregate): 50,000
Maximum Common Stock Purchase Warrants: 30,000
(Maximum) Put Consideration: $150,000.00
ACCEPTED: Dated as of June 10, 1999
NESHER, INC. -- Subscriber
c/o Ragnall House
18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
Fax: 011-972-36120639
By: /s/ [Signature Illegible]
---------------------------
27
<PAGE> 35
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
-----------------------------------
Dated: June 10, 1999
Purchase Price: $50,000.00
Issue Price (per share): $1.00
Common Shares Purchased (aggregate): 50,000
Maximum Common Stock Purchase Warrants: 30,000
(Maximum) Put Consideration: $150,000.00
ACCEPTED: Dated as of June 10, 1999
GUARANTEE & FINANCE CORP. - Subscriber
Vallarino P.H.
Calle 52, Panama
Fax: 011-5252944675
By: /s/ [Signature Illegible]
-----------------------------------
27
<PAGE> 36
SCHEDULE A TO SUBSCRIPTION AGREEMENT
PLACEMENT COMMISSIONS
<TABLE>
<CAPTION>
PLACEMENT
PLACEMENT AGENT COMMISSION SHARES WARRANTS
<S> <C> <C>
LIBRA FINANCE S.A. 20,000 100,000
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
AMRO INTERNATIONAL S.A. 10,000 50,000
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Fax: 011-411-262-5512
TALBIYA B. INVESTMENTS LTD. 10,000 50,000
c/o Ragnall House
18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
Fax: 011-972-36120639
TO BE IDENTIFIED 10,000 50,000
TOTALS 50,000 250,000 (ON $500,000)
</TABLE>
28
<PAGE> 1
EXHIBIT 2.2
AMENDMENT AGREEMENT
AGREEMENT made as of this 25th day of June, 1999 between The Recovery
Network, Inc. ("RNET") and Guarantee & Finance Corp. ("Guarantee").
WHEREAS, RNET and Guarantee had entered into a Subscription Agreement and a
Funds Escrow Agreement dated as of June 10, 1999 relating to the sale by RNET
and purchase by Guarantee of RNET's $.01 par value common stock; and
WHEREAS, RNET and Guarantee are desirous of extending the time for each
party to comply with their respective obligations under the Subscription
Agreement and Funds Escrow Agreement.
It is therefore agreed:
1. Section 13(g) of the Subscription Agreement is deleted and replaced
with the following:
"(g) Automatic Termination. This Agreement shall automatically
terminate without any further action of either party hereto if
the Closing shall not have occurred by the thirtieth (30th)
business day following the date this Agreement is accepted by
the Subscriber."
2. Section 3.1(b) of the Funds Escrow Agreement is deleted and replaced
with the following:
"(b) In the event the Escrow Agent does not receive Company
Documents and the corresponding Subscriber Documents prior to
July 15, 1999, then the Escrow Agent will return the Company
Documents to the Company, and return the Subscriber Documents to
the Subscribers."
3. The Closing Date is deemed to have occurred on June 10, 1999. The
Escrow Agent is instructed to carry out the Company's instructions to the
Escrow Agent set forth in a letter dated June 10, 1999.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
------------------------------------
GUARANTEE & FINANCE, CORP.
By:
------------------------------------
<PAGE> 1
EXHIBIT 2.3
FUNDS ESCROW AGREEMENT
This Agreement is dated as of the 10th day of June, 1999 among The
Recovery Network, Inc. (the "Company"), the parties identified on Schedule A
hereto, ("Subscriber" or "Subscribers"), and Grushko & Mittman (the "Escrow
Agent"):
W I T N E S S E T H:
WHEREAS, the Company and Subscriber have entered into Subscription
Agreements ("Subscription Agreement") calling for the sale by the Company of
the Company's common stock ("Common Stock") to the Subscribers for the
aggregate purchase price of $500,000 and issuance of $.01 par value common
stock ("Commission Shares") set forth on Schedule A hereto and issuance of
Common Stock Purchase Warrants ("Placement Warrants") to Placement Agents in
the denominations set forth on Schedule A to the Subscription Agreement
(hereinafter defined), against payment of the aggregate purchase price; and
WHEREAS, the parties hereto require the Company to deliver the Common
Stock, Commission Shares, Placement Warrants and other documents against
payment therefor, with such Common Stock, Commission Shares, Placement
Warrants, documents and payment to be delivered to the Escrow Agent to be held
in escrow and released by the Escrow Agent in accordance with the terms and
conditions of this Agreement; and
WHEREAS, the Escrow Agent is willing to serve as escrow agent pursuant to
the terms and conditions of this Agreement;
NOW THEREFORE, the parties agree as follows:
ARTICLE I
INTERPRETATION
1.1. Definitions. Whenever used in this Agreement, the following terms
shall have the following respective meanings:
(a) "Agreement" means this Agreement and all amendments made hereto by
written agreement among the parties;
(b) "Common Stock" means $.01 par value common stock of the Company to be
issued to the Subscribers in the amounts designated on Schedule A hereto.
(c) "Commission Shares" means the $.01 par value common stock of the
Company to be issued to the Placement Agents in the amount designated on
Schedule A to the Subscription Agreement.
1
<PAGE> 2
(d) "Placement Warrants" means common stock purchase warrants of the
Company issued to the Placement Agents in the amount designated on Schedule A
to the Subscription Agreement.
(e) "Escrowed Payment" means the sum of up to $500,000 to be held in
escrow by the Escrow Agent on behalf of the Company and Subscribers.
(f) Subscription Agreement" means the Subscription Agreement entered or
to be entered into by the Company and Subscribers in reference to the Common
Stock, Commission Shares, and Placement Warrants, with the exhibits thereto.
(g) "Opinion" means the original legal opinion described in Section 3 of
the Subscription Agreement.
(h) Collectively, the Common Stock, Commission Shares, Placement
Warrants, Subscription Agreements signed on behalf of the Company, and Opinion
are referred to as "Company Documents."
(i) Collectively, the Escrowed Payment and Subscription Agreements
(without exhibits) signed on behalf of the Subscribers are referred to as
"Subscriber Documents."
1.2. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the Company Documents and Subscriber
Documents and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties. There are no warranties,
representations and other agreements made by the parties in connection with the
subject matter hereof except as specifically set forth in this Agreement.
1.3. Extended Meanings. In this Agreement words importing the singular
number include the plural and vice versa; words importing the masculine gender
include the feminine and neuter genders. The word "person" includes an
individual, body corporate, partnership, trustee or trust or unincorporated
association, executor, administrator or legal representative.
1.4. Waivers and Amendments. This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by all parties, or, in the
case of a waiver, by the party waiving compliance. Except as expressly stated
herein, no delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver on
the part of any party of any right, power or privilege hereunder preclude any
other or future exercise of any other right, power or privilege hereunder.
1.5. Headings. The division of this Agreement into articles, sections,
subsections and paragraphs and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement.
1.6. Governing Law. This Agreement shall be governed by and construed in
2
<PAGE> 3
accordance with the internal laws of the State of New York without regard to
principles of conflict of laws.
1.7. Jurisdiction and Consents to Service of Process. The Company and the
Subscriber each hereby irrevocably consent to the exclusive jurisdiction of the
courts of the State of New York and of any Federal Court located in the State
of New York, each as may have competent jurisdiction, in connection with any
action, suit or other proceeding arising out of or relating to this Agreement
or any action taken or omitted hereunder, waive trial by jury, and waive
personal service of any summons, complaint or other process and agree that the
service thereof may be made by certified or registered mail directed to such
person at such person's address for purpose of notice hereunder.
1.8. Fees. The Company shall pay the Escrow Agent the fee described in
Section 6 of the Subscription Agreement. This fee shall be paid by
proportionate deduction from the Escrowed Payment deliverable to the Company,
but only if a portion of the Escrowed Payment is to be released to the Company
pursuant to this Agreement.
ARTICLE II
DELIVERIES TO THE ESCROW AGENT
2.1. Delivery of Company Documents to Escrow Agent. On or about the date
hereof, the Company shall deliver to the Escrow Agent the Company Documents.
2.2. Delivery of Subscriber Documents to Escrow Agent. On or about the
date hereof, the Subscriber shall deliver to the Escrow Agent the Subscriber
Documents and the Escrowed Payment pursuant to the following wire transfer
instructions:
Citibank, N.A.
250 Broadway
New York, New York 10007, USA
ABA Number: 0210-00089
For Credit to: Grushko & Mittman
IOLA Trust Account
Account Number: 037-45208884
2.3. Intention to Create Escrow Over Company Documents and Subscriber
Documents. The Subscriber and Company intend that the Company Documents and
Subscriber Documents shall be held in escrow by the Escrow Agent pursuant to
this Agreement for their benefit as set forth herein.
2.4. Escrow Agent to Deliver Company Documents and Subscriber Documents.
The Escrow Agent shall hold and release the Company Documents and Subscriber
Documents only in accordance with the terms and conditions of this Agreement.
3
<PAGE> 4
ARTICLE III
RELEASE OF COMPANY DOCUMENTS AND SUBSCRIBER DOCUMENTS
3.1 Release of Escrow. Subject to the provisions of Section 4.2, the
Escrow Agent shall release the Company Documents and Subscriber Documents as
follows:
(a) Upon receipt by the Escrow Agent of the Company Documents and the
corresponding Subscriber Documents, the Escrow Agent will release the Company
Documents to the Subscribers and Placement Agents and the corresponding
Subscriber Documents will be released to the Company. The corresponding
Commission Shares, and Placement Warrants will be delivered to the Placement
Agents identified on Schedule A to the Subscription Agreement. The Company will
provide written facsimile or original instructions to the Escrow Agent as to
the disposition of all funds releasable to the Company. The fees described in
Section 1.8 hereof will be deducted from the funds releasable to the Company
and delivered to the Escrow Agent.
(b) In the event the Escrow Agent does not receive Company Documents and
the corresponding Subscriber Documents prior to June 22, 1999, then the Escrow
Agent will return the Company Documents to the Company, and return the
Subscriber Documents to the Subscribers.
(c) Upon receipt by the Escrow Agent of joint written instructions
("Joint Instructions") signed by the Company and the Subscriber, it shall
deliver the Company Documents and Subscriber Documents in accordance with the
terms of the Joint Instructions.
(d) Upon receipt by the Escrow Agent of a final and non-appealable
judgment, order, decree or award of a court of competent jurisdiction (a "Court
Order"), the Escrow Agent shall deliver the Company Documents and Subscriber
Documents in accordance with the Court Order. Any Court Order shall be
accompanied by an opinion of counsel for the party presenting the Court Order
to the Escrow Agent (which opinion must be reasonably satisfactory to the
Escrow Agent) to the effect that the court issuing the Court Order has
competent jurisdiction and that the Court Order is final and non-appealable.
3.2 Acknowledgment of Company and Subscriber; Disputes. The Company and
the Subscriber acknowledge that the only terms and conditions upon which the
Company Documents and Subscriber Documents are to be released are set forth in
Sections 3 and 4 of this Agreement. The Company and the Subscriber reaffirm
their agreement to abide by the terms and conditions of this Agreement with
respect to the release of the Company Documents and Subscriber Documents. Any
dispute with respect to the release of the Company Documents and Subscriber
Documents shall be resolved pursuant to Section 4.2 or by agreement between the
Company and Subscriber.
4
<PAGE> 5
ARTICLE IV
CONCERNING THE ESCROW AGENT
4.1. Duties and Responsibilities of the Escrow Agent. The Escrow Agent's
duties and responsibilities shall be subject to the following terms and
conditions:
(a) The Subscriber and Company acknowledge and agree that the Escrow
Agent (i) shall not be responsible for or bound by, and shall not be required
to inquire into whether either the Subscriber or Company is entitled to receipt
of the Company Documents and Subscriber Documents pursuant to, any other
agreement or otherwise; (ii) shall be obligated only for the performance of
such duties as are specifically assumed by the Escrow Agent pursuant to this
Agreement; (iii) may rely on and shall be protected in acting or refraining from
acting upon any written notice, instruction, instrument, statement, request or
document furnished to it hereunder and believed by the Escrow Agent in good
faith to be genuine and to have been signed or presented by the proper person
or party, without being required to determine the authenticity or correctness of
any fact stated therein or the propriety or validity or the service thereof;
(iv) may assume that any person purporting to give notice or make any statement
or execute any document in connection with the provisions hereof has been duly
authorized to do so; (v) shall not be under any duty to give the property held
by Escrow Agent hereunder any greater degree of care than Escrow Agent gives its
own similar property; and (vi) may consult counsel satisfactory to Escrow
Agent, the opinion of such counsel to be full and complete authorization and
protection in respect of any action taken, suffered or omitted by Escrow Agent
hereunder in good faith and in accordance with the opinion of such counsel.
(b) The Subscriber and Company acknowledge that the Escrow Agent is
acting solely as a stakeholder at their request and that the Escrow Agent shall
not be liable for any action taken by Escrow Agent in good faith and believed by
Escrow Agent to be authorized or within the rights or powers conferred upon
Escrow Agent by this Agreement. The Subscriber and Company, jointly and
severally, agree to indemnify and hold harmless the Escrow Agent and any of
Escrow Agent's partners, employees, agents and representatives for any action
taken or omitted to be taken by Escrow Agent or any of them hereunder, including
the fees of outside counsel and other costs and expenses of defending itself
against any claim or liability under this Agreement, except in the case of gross
negligence or willful misconduct on Escrow Agent's part committed in its
capacity as Escrow Agent under this Agreement. The Escrow Agent shall owe a duty
only to the Subscriber and Company under this Agreement and to no other person.
(c) In the event the Company does not receive its portion of the Escrowed
Payment, then the Subscriber and Company jointly and severally agree to
reimburse the Escrow Agent for its reasonable out-of-pocket expenses (including
counsel fees) incurred in connection with the performance of its duties and
responsibilities hereunder.
(d) The Escrow Agent may at any time resign as Escrow Agent hereunder by
giving five (5) days prior written notice of resignation to the Subscriber and
the Company. Prior to the effective date of the resignation as specified in such
notice, the Subscriber and Company will
5
<PAGE> 6
issue to the Escrow Agent a Joint Instruction authorizing delivery of the Notes
and Escrowed Payment to a substitute Escrow Agent selected by the Subscriber
and Company. If no successor Escrow Agent is named by the Subscriber and
Company, the Escrow Agent may apply to a court of competent jurisdiction in the
State of New York for appointment of a successor Escrow Agent, and to deposit
the Notes and Escrowed Payment with the clerk of any such court.
(e) The Escrow Agent does not have and will not have any interest in the
Company Documents and Subscriber Documents, but is serving only as escrow
Subscriber, having only possession thereof. The Escrow Agent shall not be
liable for any loss resulting from the making or retention of any investment in
accordance with this Escrow Agreement.
(f) This Agreement sets forth exclusively the duties of the Escrow Agent
with respect to any and all matters pertinent thereto and no implied duties or
obligations shall be read into this Agreement.
(g) The Escrow Agent shall be permitted to act as counsel for the
Subscriber or Placement Agent, as the case may be, in any dispute as to the
disposition of the Company Documents and Subscriber Documents, in any other
dispute between the Subscriber and Company, whether or not the Escrow Agent is
then holding the Company Documents and Subscriber Documents and continues to
act as the Escrow Agent hereunder.
(h) The provisions of this Section 4.1 shall survive the resignation of
the Escrow Agent or the termination of this Agreement.
4.2. Dispute Resolution; Judgments. Resolution of disputes arising under
this Agreement shall be subject to the following terms and conditions:
(a) If any dispute shall arise with respect to the delivery, ownership,
right of possession or disposition of the Company Documents and Subscriber
Documents, or if the Escrow Agent shall in good faith be uncertain as to its
duties or rights hereunder, the Escrow Agent shall be authorized, without
liability to anyone, to (i) refrain from taking any action other than to
continue to hold the Company Documents and Subscriber Documents pending receipt
of a Joint Instruction from the Subscriber and Company, or (ii) deposit the
Company Documents and Subscriber Documents with any court of competent
jurisdiction in the State of New York, in which event the Escrow Agent shall
give written notice thereof to the Subscriber and the Company and shall
thereupon be relieved and discharged from all further obligations pursuant to
this Agreement. The Escrow Agent may, but shall be under no duty to, institute
or defend any legal proceedings which relate to the Company Documents and
Subscriber Documents. The Escrow Agent shall have the right to retain counsel
if it becomes involved in any disagreement, dispute or litigation on account
of this Agreement or otherwise determines that it is necessary to consult
counsel.
(b) The Escrow Agent is hereby expressly authorized to comply with and
obey any Court Order. In case the Escrow Agent obeys or complies with a Court
Order, the Escrow Agent shall not be liable to the Subscriber and Company or to
any other person, firm, corporation or
6
<PAGE> 7
entity by reason of such compliance.
ARTICLE V
GENERAL MATTERS
5.1. Termination. This escrow shall terminate upon the release of all of
the Company Documents and Subscriber Documents or at any time upon the
agreement in writing of the Subscriber and Company.
5.2 Notices. All notices, request, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been received one (1) day after being sent by telecopy (with copy delivered by
regular mail):
(a) If to the Company, to:
The Recovery Network, Inc.
1411 Fifth Street, Suite 200
Santa Monica, CA 90401
(310) 393-5749 (Telecopier)
(b) If to the Subscriber, to: the addresses and telecopier
numbers listed on Schedule A hereto.
(c) If to the Escrow Agent, to:
Grushko & Mittman
Attorneys at Law
277 Broadway, Suite 801
New York, New York 10007
(212) 227-5865 (telecopier)
or to such other address as any of them shall give to the others by notice made
pursuant to this Section 5.2.
5.3 Interest. Interest will not be payable to the Subscriber or Company
in connection with the Escrowed Payment.
5.4 Assignment; Binding Agreement. Neither this Agreement nor any right
or obligation hereunder shall be assignable by any party without the prior
written consent of the other parties hereto. This Agreement shall enure to the
benefit of and be binding upon the parties hereto and their respective legal
representatives, successors and assigns.
5.5 Invalidity. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal, or unenforceable in any
7
<PAGE> 8
respect for any reason, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be in any way impaired thereby, it being intended that all of
the rights and privileges of the parties hereto shall be enforceable to the
fullest extent permitted by law.
5.6. Counterparts/Execution. This Agreement may be executed in any number
of counterparts and by different signatories hereto on separate counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument. This Agreement
may be executed by facsimile transmission.
[THIS SPACE INTENTIONALLY LEFT BLANK]
8
<PAGE> 9
5.7 AGREEMENT. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
-------------------------------------
THE RECOVERY NETWORK, INC.
/s/ [Signature Illegible]
-------------------------------------
AUSTOST ANSTALT SCHAAN
-------------------------------------
BALMORE FUNDS S.A.
-------------------------------------
AMRO INTERNATIONAL S.A.
-------------------------------------
NESHER, INC.
-------------------------------------
GUARANTEE & FINANCE CORP.
-------------------------------------
ESCROW AGENT:
By:
---------------------------------
GRUSHKO & MITTMAN
9
<PAGE> 10
5.7 AGREEMENT. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
- -------------------------------------
THE RECOVERY NETWORK, INC.
- -------------------------------------
AUSTOST ANSTALT SCHAAN
- -------------------------------------
BALMORE FUNDS S.A.
/s/ [Signature Illegible]
- -------------------------------------
AMRO INTERNATIONAL S.A.
- -------------------------------------
NESHER, INC.
- -------------------------------------
GUARANTEE & FINANCE CORP.
- -------------------------------------
ESCROW AGENT:
By:
---------------------------------
GRUSHKO & MITTMAN
9
<PAGE> 11
5.7 AGREEMENT. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
- -------------------------------------
THE RECOVERY NETWORK, INC.
- -------------------------------------
AUSTOST ANSTALT SCHAAN
- -------------------------------------
BALMORE FUNDS S.A.
/s/ [Signature Illegible]
- -------------------------------------
AMRO INTERNATIONAL S.A.
- -------------------------------------
NESHER, INC.
- -------------------------------------
GUARANTEE & FINANCE CORP.
- -------------------------------------
ESCROW AGENT:
By:
---------------------------------
GRUSHKO & MITTMAN
9
<PAGE> 12
5.7 AGREEMENT. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
- -------------------------------------
THE RECOVERY NETWORK, INC.
- -------------------------------------
AUSTOST ANSTALT SCHAAN
- -------------------------------------
BALMORE FUNDS S.A.
- -------------------------------------
AMRO INTERNATIONAL S.A.
/s/ [Signature Illegible]
- -------------------------------------
NESHER, INC.
- -------------------------------------
GUARANTEE & FINANCE CORP.
- -------------------------------------
ESCROW AGENT:
By:
---------------------------------
GRUSHKO & MITTMAN
9
<PAGE> 13
5.7 AGREEMENT. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
/s/ [Signature Illegible]
- -------------------------------------
THE RECOVERY NETWORK, INC.
- -------------------------------------
AUSTOST ANSTALT SCHAAN
- -------------------------------------
BALMORE FUNDS S.A.
- -------------------------------------
AMRO INTERNATIONAL S.A.
- -------------------------------------
NESHER, INC.
/s/ [Signature Illegible]
- -------------------------------------
GUARANTEE & FINANCE CORP.
- -------------------------------------
ESCROW AGENT:
By:
---------------------------------
GRUSHKO & MITTMAN
9
<PAGE> 14
SCHEDULE A TO FUNDS ESCROW AGREEMENT
<TABLE>
<CAPTION>
PURCHASE COMPANY
SUBSCRIBERS PRICE SHARES
<S> <C> <C>
AUSTOST ANSTALT SCHAAN $100,000.00 100,000
7440 Fuerstentum
Lichenstein
Landstrasse 163
Fax: 011-431-534532895
BALMORE FUNDS, S.A. $100,000.00 100,000
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
AMRO INTERNATIONAL, S.A. $100,000.00 100,000
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Fax: 011-411-262-55120
NESHER, INC. $ 50,000.00 50,000
c/o Ragnall House
18 Peel Road
Douglas, Isle of Man
1M1 4L2, United Kingdom
Fax: 011-972-36120639
GUARANTEE & FINANCE, CORP. $ 50,000.00 50,000
Vallarino P.H.
Calle 52, Panama
Fax: 011-5252944675
TO BE IDENTIFIED $100,000.00 100,000
TOTALS $500,000.00 500,000
</TABLE>
10
<PAGE> 1
EXHIBIT 2.4
SUBSCRIPTION AGREEMENT
Dear Subscriber:
You (the "Subscriber") hereby agree to purchase, and THE RECOVERY
NETWORK, INC., a Colorado corporation (the "Company") hereby agrees to issue and
to sell to the Subscriber, a convertible note of the Company in the principal
amount as set forth on the signature page hereof and in the form annexed as
Exhibit A (the "Note"), convertible in accordance with the terms thereof into
shares of the Company's common stock (the "Company Shares"). (The Company
Shares are sometimes referred to herein as the "Shares"). (The Note, the Company
Shares and Commission Shares [as hereinafter defined] are collectively referred
to herein as, the "Securities"). Upon acceptance of this Agreement by the
Subscriber, the Company shall issue and deliver to the Subscriber the Note
against payment, by federal funds (U.S.) wire transfer of the principal amount
of the Note.
The following terms and conditions shall apply to this subscription.
1. Subscriber's Representations and Warranties. The Subscriber hereby
represents and to and agrees with the Company that:
(a) Information on Company. The Subscriber has been furnished with
and has read the Company's Form 10-K for the year ended June 30, 1998 and
subsequent Forms 10-Q and 8-K, each as filed with the U.S. Securities and
Exchange Commission (the "Commission") (with exhibits thereto, hereinafter
referred to as the "Reports"). In addition, the Subscriber has received from
the Company such other information concerning its operations, financial
condition and other matters as the Subscriber has requested, and considered all
factors the Subscriber deems material in deciding on the advisability of
investing in the Securities (such information in writing is collectively, the
"Other Written Information").
(b) Information on Subscriber. The Subscriber is an "accredited
investor", as such term is defined in Regulation D promulgated by the Commission
under the Securities Act of 1933, as amended, is experienced in investments and
business matters, has made investments of a speculative nature and has purchased
securities of United States publicly-owned companies in private placements in
the past and, with its representatives, has such knowledge and experience in
financial, tax and other business matters as to enable the Subscriber to utilize
the information made available by the Company to evaluate the merits and risks
of and to make an informed investment decision with respect to the proposed
purchase, which represents a speculative investment. The Subscriber has the
authority and is duly and legally qualified to purchase and own the Securities.
The Subscriber is able to bear the risk of such investment for an indefinite
period and to afford a complete loss thereof.
<PAGE> 2
(c) Purchase of Note. On the Closing Date, the Subscriber will
purchase the Note for its own account and not with a view to any distribution
thereof.
(d) Compliance with Securities Act. The Subscriber understands and
agrees that the Securities have not been registered under the Securities Act of
1933, as amended (the "1933 Act") by reason of their issuance in a transaction
that does not require registration under the 1933 Act, and that such Securities
must be held unless a subsequent disposition is registered under the 1933 Act or
is exempt from such registration.
(e) Company Shares Legend. The Company Shares and the Commission
Shares (as defined hereinafter) shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THESE SHARES MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO THE RECOVERY NETWORK, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(f) Communication of Offer. The offer to sell the Securities was
directly communicated to the Subscriber. At no time was the Subscriber presented
with or solicited by any leaflet, newspaper or magazine article, radio or
television advertisement, or any other form of general advertising or solicited
or invited to attend a promotional meeting otherwise than in connection and
concurrently with such communicated offer.
(g) Correctness of Representations. The Subscriber represents that
the foregoing representations and warranties are true and correct as of the date
hereof and, unless the Subscriber otherwise notifies the Company prior to the
Closing Date (as hereinafter defined), shall be true and correct as of the
Closing Date. The foregoing representations and warranties shall survive the
Closing Date.
2. Company Representations and Warranties. The Company represents and
to and agrees with the Subscriber that:
(a) Due Incorporation. The Company and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the respective jurisdictions of their incorporation and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification
2
<PAGE> 3
necessary, other than those jurisdictions in which the failure to so qualify
would not have a material adverse effect on the business, operations or
prospects or condition (financial or otherwise) of the Company.
(b) Outstanding Stock. All issued and outstanding shares of capital
stock of the Company and each of its subsidiaries has been duly authorized and
validly issued and are fully paid and non-assessable.
(c) Authority; Enforceability. This Agreement has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights generally and
to general principles of equity; and the Company has full corporate power and
authority necessary to enter into this Agreement and to perform its obligations
hereunder and all other agreements entered into by the Company relating hereto.
(d) Additional Issuances. There are no outstanding agreements or
preemptive or similar rights affecting the Company's common stock or equity and
no outstanding rights, or options to acquire, or instruments convertible into or
exchangeable for, or agreements or understandings with respect to the sale or
issuance of any shares of common stock or equity of the Company or other equity
interest in any of the subsidiaries of the Company, except as described in the
Reports or Other Written Information.
(e) Consents. No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over the
Company, or any of its affiliates, the NASD, NASDAQ or the Company's
Shareholders is required for execution of this Agreement, and all other
agreements entered into by the Company relating thereto, including, without
limitation issuance and sale of the Securities, and the performance of the
Company's obligations hereunder.
(f) No Violation or Conflict. Assuming the representations and
warranties of the Subscriber in Paragraph 1 are true and correct and the
Subscriber complies with its obligations under this Agreement, neither the
issuance and sale of the Securities nor the performance of its obligations under
this Agreement and all other agreements entered into by the Company relating
thereto by the Company will:
(i) violate, conflict with, result in a breach of, or constitute
a default (or an event which with the giving of notice or the lapse of time or
both would be reasonably likely to constitute a default) under (A) the articles
of incorporation, charter or bylaws of the Company, or any of its affiliates,
(B) to the Company's knowledge, any decree, judgment, order, law, treaty, rule,
regulation or determination applicable to the Company, or any
3
<PAGE> 4
of its affiliates of any court, governmental agency or body, or arbitrator
having jurisdiction over the Company, or any of its affiliates or over the
properties or assets of the Company, or any of its affiliates, (C) the terms of
any bond, debenture, note or any other evidence of indebtedness, or any
agreement, stock option or other similar plan, indenture, lease, mortgage, deed
of trust or other instrument to which the Company, or any of its affiliates is a
party, by which the Company, or any of its affiliates is bound, or to which any
of the properties of the Company, or any of its affiliates is subject, or (D)
the terms of any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company, or any of its affiliates is a party; or
(ii) result in the creation or imposition of any lien, charge or
encumbrance upon the Securities or any of the assets of the Company, or any of
its affiliates.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security interests,
liens, claims or other encumbrances, subject to restrictions upon transfer under
the 1933 Act and State laws;
(ii) have been, or will be, duly and validly authorized and on
the date of issuance and on the Closing Date, as hereinafter defined, and the
date the is converted, the Securities will be duly and validly issued, fully
paid and nonassessable (and if registered pursuant to the 1933 Act, and resold
pursuant to an effective registration statement will be free trading and
unrestricted);
(iii) will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities of the
Company;
(iv) will not subject the holders thereof to personal liability
by reason of being such holders; and
(h) Litigation. There is no pending or, to the best knowledge of the
Company, threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the Company,
or any of its affiliates that would affect the execution by the Company or the
performance by the Company of its obligations under this Agreement, and all
other agreements entered into by the Company relating hereto.
(i) Reporting Company. The Company is a publicly-held company whose
common stock is (and has been for the past 90 days) registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the 1934 Act")
and is duly listed for trading on the NASDAQ SmallCap Market. Pursuant to the
provisions of the 1934 Act, the Company has timely filed all reports and other
materials required to be filed thereunder with
4
<PAGE> 5
the Securities and Exchange Commission during the preceding twelve months, and
is eligible to file a Form S-3 to register the Securities.
(j) No Market Manipulation. The Company has not taken, and will not
take, directly or indirectly, any action designed to, or that might reasonably
be expected to, cause or result in stabilization or manipulation of the price of
the common stock of the Company to facilitate the sale or resale of the
Securities or affect the price at which the Securities may be issued.
(k) Information Concerning Company. The Reports and Other Written
Information contain all material information relating to the Company and its
operations and financial condition as of their respective dates which
information is required to be disclosed therein. Since the date of the financial
statements included in the Reports, and except as modified in the Other Written
Information, there has been no material adverse change in the Company's
business, financial condition or affairs not disclosed in the Reports. The
Reports and Other Written Information do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(l) Dilution. The number of Company Shares issuable upon conversion
(as hereinafter defined) may increase substantially in certain circumstances,
including, but not necessarily limited to, the circumstance wherein the trading
price of the Common Stock declines prior to conversion of the Note. The
Company's executive officers and directors have studied and fully understand the
nature of the Securities being sold hereby and recognize that they have a
potential dilutive effect. The board of directors of the Company has concluded,
in its good faith business judgement, that such issuance is in the best
interests of the Company. The Company specifically acknowledges that its
obligation to issue the Shares upon conversion of the Note is binding upon the
Company and enforceable, except as otherwise described in this Subscription
Agreement, regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.
(m) Stop Transfer. The Securities are restricted securities as of
the date of this Agreement. The Company will not issue any stop transfer order
or other order impeding the sale and delivery of the Securities at such time as
the Securities are registered for public sale or an exemption from registration
is available.
(n) Defaults. Neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation or ByLaws. Neither the Company nor
any of its subsidiaries is (i) in default under or in violation of any other
material agreement or instrument to which it is a party or by which it or any of
its
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properties are bound or affected, which default or violation would have a
material adverse effect on the Company, (ii) in default with respect to any
order of any court, arbitrator or governmental body or subject to or party to
any order of any court or governmental authority arising out of any action, suit
or proceeding under any statute or other law respecting antitrust, monopoly,
restraint of trade, unfair competition or similar matters, or (iii) to its
knowledge in violation of any statute, rule or regulation of any governmental
authority material to its business.
(o) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions. Nor will the Company or any of its affiliates or subsidiaries take
any action or steps that would cause the offering of the Securities to be
integrated with other offerings.
(p) Use of Proceeds. The proceeds of the Subscriber funds to be
released to the Company will be used for working capital and for expenses of
this offering.
(q) No General Solicitation. Neither the Company, nor any of its
affiliates, nor to its knowledge, any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Act) in connection with the offer or sale of
the Securities.
(r) Listing. The Company's common stock is listed for trading on the
NASDAQ SmallCap Market. The Company has not received any notice that its common
stock will be delisted from the NASDAQ SmallCap Market or that the common stock
does not meet all requirements for the continuation of such listing.
(s) Correctness of Representations. The Company represents that the
foregoing representations and warranties are true and correct as of the date
hereof in all material respects and, unless the Company otherwise notifies the
Subscriber prior to the Closing Date, shall be true and correct in all material
respects as of the Closing Date. The foregoing representations and warranties
shall survive the Closing Date.
3. Regulation D Offering. This Offering is being made pursuant to the
exemption from the registration provisions of the Securities Act of 1933, as
amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion acceptable to Subscriber from
the Company's legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of
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the Securities. A form of the legal opinion is annexed hereto as Exhibit B. The
Company will provide, at the Company's expense; such other legal opinions in the
future as are reasonably necessary for the conversion of the Note and resale of
the Commission Shares.
4. Reissuance of Securities. The Company agrees to reissue certificates
representing the Company Shares without the legends set forth in Sections 1(e)
and 1(f) above at such time as (a) the holder thereof is permitted to dispose of
such Securities pursuant to Rule 144(k) under the Act, or (b) upon resale
subject to an effective registration statement after the Securities are
registered under the Act. The Company agrees to cooperate with the Subscriber in
connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide
legal opinions necessary to allow such resales provided the Company and its
counsel receive reasonably requested certifications from the Subscriber and
selling broker, if any.
5. Redemption. The Company may not redeem the Note without the consent
of the Noteholder.
6. Legal Fees/Commissions. The Company shall pay to counsel to the
Subscriber its fee of $4,000 for services rendered to the Subscriber in
reviewing this Agreement and other subscription agreements for the aggregate
subscription amounts of up to $100,000. The Company will pay a commission
consisting of common shares of the Company to the entities ("Placement Agents")
and in the amounts designated on Schedule C hereto ("Commission Shares"). The
legal fees will be payable out of funds held pursuant to a Funds Escrow
Agreement to be entered into by the Company, Subscriber and an Escrow Agent. The
Commission Shares will be issued to the Placement Agents only when, as, and if
the corresponding subscription amount is released from escrow to the Company.
All the representations, covenants, warranties and undertakings, including but
not limited to registration rights made or granted to or for the benefit of the
Subscriber are also made and granted to the Placement Agents.
7.1. Covenants of the Company. The Company covenants and agrees with
the Subscriber as follows:
(a) The Company will advise the Subscriber, promptly after it
receives notice of issuance by the Securities and Exchange Commission, any state
securities commission or any other regulatory authority of any stop order or of
any order preventing or suspending any offering of any securities of the
Company, or of the suspension of the qualification of the common stock of the
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) The Company shall promptly secure the listing of the
Company Shares and Commission Shares upon each securities exchange, or automated
quotation system, if any, upon which shares of Common Stock are then listed
(subject to official notice of
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<PAGE> 8
issuance) and shall maintain such listing so long as any other shares of Common
Stock shall be so listed. The Company will use its best efforts to maintain the
listing and trading of its Common Stock on the NASDAQ SmallCap Market, and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers ("NASD"), NASDAQ, and such exchanges, as applicable. The Company will
provide the Subscriber copies of all notices it receives notifying the Company
of the threatened and actual delisting of the Common Stock on any exchange or
quotation system on which the Common Stock is listed.
(c) The Company shall notify the SEC, NASD and applicable
state authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to the Subscriber
and Placement Agents and promptly provide copies thereof to Subscriber.
(d) Until at least three (3) years after the effectiveness of
the Registration Statement on Form S-3 or such other Registration Statement
described in Section 10.1(iv) hereof, the Company will (i) cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, (ii) comply in all respects with its reporting and filing obligations under
the Exchange Act, and (iii) comply with all requirements related to any
registration statement filed pursuant to this Agreement. The Company will not
take any action or file any document (whether or not permitted by the Act or the
Exchange Act or the rules thereunder) to terminate or suspend such registration
or to terminate or suspend its reporting and filing obligations under said Acts
until the later of (i) three (3) years after the effective date of the
Registration Statement on Form S-3 or such other Registration Statement
described in Section 10.1(iv) hereof, or (ii) the sale by the Subscribers and
Placement Agents of all the Company Shares and Commission Shares issuable by the
Company pursuant to this Agreement. Until at least two (2) years after the Notes
have been converted, the Company will use its best efforts to continue the
listing or trading of its Common Stock on the NASDAQ SmallCap Market and will
comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the NASD and NASDAQ, as appropriate.
(e) The Company undertakes to use the proceeds of the
Subscriber's funds for working capital and expenses of this offering.
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8. Covenants of the Company and Subscriber Regarding Indemnifications.
(a) The Company agrees to indemnify, hold harmless, reimburse
and defend Subscriber against any claim, cost, expense, liability, obligation,
loss or damage (including reasonable legal fees) of any nature, incurred by or
imposed upon Subscriber which results, arises out of or is based upon (i) any
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or Reports or other
Written Information; or (ii) any breach or default in performance by Company of
any covenant or undertaking to be performed by Company hereunder, or any other
agreement entered into by the Company and Subscribers relating hereto.
(b) Subscriber agrees to indemnify, hold harmless, reimburse
and defend the Company at all times against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company which results, arises out of or is based
upon (a) any misrepresentation by Subscriber in this Agreement or in any
Exhibits or Schedules attached hereto; or (b) any breach or default in
performance by Subscriber of any covenant or undertaking to be performed by
Subscriber hereunder, or any other agreement entered into by the Company and
Subscribers relating hereto.
9. Conversion of Note.
a. Upon the conversion of the Note or part thereof, the
Company shall, at its expense, take all necessary action (including the issuance
of an opinion of counsel) to assure that the Company's transfer agent shall
issue stock certificates in the name of Subscriber (or its nominee) or such
other persons as designated by Subscriber and in such denominations to be
specified at conversion representing the number of shares of common stock
issuable upon such conversion, as applicable. The Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company's Common Stock and that the Shares, if included in
an effective registration statement, will be unlegended, free-trading, and
freely transferable on the transfer books of the Company, and will not contain a
legend restricting their resale or transferability under Federal or other
securities laws.
b. Subscriber will give notice of its decision to exercise its
right to convert the Note or part thereof by telecopying an executed and
completed notice of Conversion to the Company. The Subscriber will not be
required to surrender the Note until the Note has been fully converted or
satisfied. Each date on which a Notice of Conversion is telecopied to the
Company in accordance with the provisions hereof shall be deemed a Conversion
Date. The Company will or cause its transfer agent to transmit the Company's
common stock certificates representing the Company Shares issuable upon
conversion of the Note (and a Note representing the
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<PAGE> 10
balance of the Note not so converted, if requested by Subscriber) to the
Subscriber via express courier for receipt by such Subscriber within five
business days after receipt by the Company of the Notice of Conversion (the
"Delivery Date").
c. The Company understands that a delay in the delivery of the
Shares in the form required pursuant to Section 9 hereof, or the Mandatory
Redemption Payment described in Section 9.2 hereof, beyond the Delivery Date
could result in economic loss to the Subscriber. As compensation to the
Subscriber for such loss, the Company agrees to pay late payments to the
Subscriber for late issuance of Shares in the form required pursuant to Section
9 hereof upon Conversion of the Note or late payment of the Mandatory Redemption
Amount, in the amount of $100 per business day after the Delivery Date for each
$10,000 of Note principal amount being converted or redeemed. The Company shall
pay any payments incurred under this Section in immediately available funds upon
demand. Furthermore, in addition to any other remedies which may be available to
the Subscriber, in the event that the Company fails for any reason to effect
delivery of the Shares by the Delivery Date, the Subscriber will be entitled to
revoke the relevant Notice of Conversion or rescind the notice of Mandatory
Redemption by delivery of a notice to such effect to the Company whereupon the
Company and the Subscriber shall each be restored to their respective positions
immediately prior to the delivery of such notice of revocation, except that late
payment charges described above shall be payable through the date notice of
revocation or rescission is given to the Company.
d. Nothing contained herein or in any document referred to
herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Company to the Subscriber and thus refunded to the Company.
e. on and after the date hereof and only during the pendency
of the Company having a class of securities registered under Section 12 of the
Exchange Act, so that the Subscriber or his assignee is subject to Section 16 of
the Exchange Act, the Subscriber shall not be entitled to convert on a
Conversion Date that amount of Note principal and/or interest in connection with
that number of shares of Common Stock which would be in excess of the sum of (i)
the number of shares of Common Stock beneficially owned by the Subscriber and
its affiliates on a Conversion Date, and (ii) the number of shares of Common
Stock issuable upon the conversion of the Note with respect to which the
determination of this proviso is being made on a Conversion Date, which would
result in beneficial ownership by the Subscriber and its affiliates of more than
9.99% of the outstanding shares of Common Stock of the Company. For the purposes
of the proviso to the immediately
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preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder.
f. In the event a Subscriber shall elect to convert a Note or
part thereof, the Company cannot refuse conversion based on any claim that such
Subscriber or any one associated or affiliated with such Subscriber has been
engaged in any violation of law, unless, an injunction from a court, on notice,
restraining and or enjoining conversion of all or part of said Note shall have
been obtained and the Company posts a surety bond for the benefit of such
Subscriber in the amount of 125% of the amount of the Note, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Subscriber to the extent it
obtains judgment.
g. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after the
Delivery Date the Subscriber purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such
Subscriber of the Common Stock which the Subscriber anticipated receiving upon
such conversion (a "Buy-In") , then the Company shall pay in cash to the
Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the Note
for which such conversion was not timely honored, together with interest thereon
at a rate of 15% per annum, accruing until such amount and any accrued interest
thereon is paid in full (which amount shall be paid as liquidated damages and
not as a penalty). For example, if the Subscriber purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of $10,000 of note principal and/or interest, the
Company shall be required to pay the Subscriber $1,000, plus interest. The
Subscriber shall provide the Company written notice indicating the amounts
payable to the Subscriber in respect of the Buy-In.
9.2. Mandatory Redemption. In the event the Company may not issue
Shares on a Delivery Date for any reason, whether or not a Notice of Conversion
has been given to the Company, then at the Subscriber's election, the Company
must pay to the Subscriber on the Delivery Date or within seven (7) days after
demand a sum of money determined by multiplying the principal amount of the Note
designated by the Subscriber by 130%, together with accrued but unpaid interest
thereon ("Mandatory Redemption Payment"). Upon receipt of the Mandatory
Redemption Payment, the corresponding Note principal will be deemed paid and no
longer outstanding.
10.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
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(i) On one occasion, for a period commencing 10 days after the
Closing Date, but not later than three years after the Closing Date, the
Company, upon a written request therefor from any record holder or holders of
more than 50% of the aggregate of the Company's Shares issued and issuable upon
Conversion of the Note, which are not then freely transferable (the Securities
and securities issued or issuable by virtue of ownership of the Securities,
being, the "Registrable Securities"), shall prepare and file with the SEC a
registration statement under the Act covering the Registrable Securities which
are the subject of such request, unless such Registrable Securities are the
subject of an effective registration statement. In addition, upon the receipt of
such request, the Company shall promptly give written notice to all other record
holders of the Registrable Securities that such registration statement is to be
filed and shall include in such registration statement Registrable Securities
for which it has received written requests within 10 days after the Company
gives such written notice. Such other requesting record holders shall be deemed
to have exercised their demand registration right under this Section 10.1(i). As
a condition precedent to the inclusion of Registrable Securities, the holder
thereof shall provide the Company with such information as the Company
reasonably requests. The obligation of the Company under this Section 10.1(i)
shall be limited to one registration statement.
(ii) If the Company at any time proposes to register any of
its securities under the Act for sale to the public, whether for its own account
or for the account of other security holders or both, except with respect to
registration statements on Forms S-4, S-8 or another form not available for
registering the Registrable Securities for sale to the public, provided the
Registrable Securities are not otherwise registered for resale by the Subscriber
or Holder pursuant to an effective registration statement, each such time it
will give at least 30 days' prior written notice to the record holder of the
Registrable Securities of its intention so to do. Upon the written request of
the holder, received by the Company within 30 days after the giving of any such
notice by the Company, to register any of the Registrable Securities, the
Company will cause such Registrable Securities as to which registration shall
have been so requested to be included with the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
required to permit the sale or other disposition of the Registrable Securities
so registered by the holder of such Registrable Securities (the "Seller"). In
the event that any registration pursuant to this Section 10.1(ii) shall be, in
whole or in part, an underwritten public offering of common stock of the
Company, the number of shares of Registrable Securities to be included in such
an underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the Company shall notify the
Seller in writing of any such reduction. Notwithstanding the forgoing
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provisions, the Company may withdraw any registration statement referred to in
this Section 10.1(ii) without thereby incurring any liability to the Seller.
(iii) If, at the time any written request for registration is
received by the Company pursuant to Section 10.1(i), the Company has determined
to proceed with the actual preparation and filing of a registration statement
under the 1933 Act in connection with the proposed offer and sale for cash of
any of its securities for the Company's own account, such written request shall
be deemed to have been given pursuant to Section 10.1 (ii) rather than Section
10.1 (i), and the rights of the holders of Registrable Securities covered by
such written request shall be governed by Section 10.1 (ii) except that the
Company or underwriter, if any, may not withdraw such registration or limit the
amount of Registrable Securities included in such registration.
(iv) The Company shall file with the Commission no later than
April 15, 1999 (the "Filing Date"), and use its reasonable commercial efforts
to cause to be declared effective a Form S-3 registration statement (or such
other form that it is eligible to use) on or before June 15, 1999 in order to
register the Registrable Securities for resale and distribution under the Act.
The registration statement described in this paragraph must be declared
effective by the Commission on or before June 15, 1999 ("Effective Date"). The
Company will register not less than 64,000 shares of Common Stock in the
aforedescribed registration statement for each $10,000 of Note principal
subscribed for and one share of Common Stock for each Commission Share. The
Registrable Securities shall be reserved and set aside exclusively for the
benefit of the Subscriber and Placement Agents, as the case may be, and not
issued, employed or reserved for anyone other than the Subscriber and Placement
Agents, as the case may be. Such registration statement will be promptly amended
or additional registration statements will be promptly filed by the Company as
necessary to register additional Company Shares to allow the public resale of
all Common Stock included in and issuable by virtue of the Registrable
Securities.
10.2. Registration Procedures. If and whenever the Company is
required by the provisions hereof to effect the registration of any shares of
Registrable Securities under the Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as herein provided), and promptly
provide to the holders of Registrable Securities copies of all filings;
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(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Act with respect to the disposition of all of the Registrable Securities
covered by such registration statement in accordance with the Seller's intended
method of disposition set forth in such registration statement for such period;
(c) furnish to the Seller, and to each underwriter if any,
such number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the
securities covered by such registration statement;
(d) use its best efforts to register or qualify the Seller's
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Seller and in the
case of an underwritten public offering, the managing underwriter shall
reasonably request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify the Seller and each underwriter under
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act, of the happening of any event of which
the Company has knowledge as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing;
(g) make available for inspection by the Seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by the Seller or
underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
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10.3. Provision of Documents.
(a) At the request of the Seller, provided a demand for
registration has been made pursuant to Section 10.1(i) or a request for
registration has been made pursuant to Section 10.1(ii), the Registrable
Securities will be included in a registration statement filed pursuant to this
Section 10. In the event of a firm commitment underwritten public offering in
which the Registrable Securities are so included, the lockup, if any, requested
by the managing underwriter may not exceed ninety (90) days after the effective
date thereof.
(b) In connection with each registration hereunder, the Seller
will furnish to the Company in writing such information with respect to itself
and the proposed distribution by it as reasonably shall be necessary in order to
assure compliance with federal and applicable state securities laws. In
connection with each registration pursuant to Section 10.1(i) or 10.1(ii)
covering an underwritten public offering, the Company and the Seller agree to
enter into a written agreement with the managing underwriter in such form and
containing such provisions as are customary in the securities business for such
an arrangement between such underwriter and companies of the Company's size and
investment stature.
10.4. Non-Registration Events. The Company and the Subscriber agree
that the Seller will suffer damages if any registration statement required under
Section 10.1(i) or 10.1(ii) above is not filed within 60 days after request by
the Holder and not declared effective by the Commission within 120 days after
such request [or the Filing Date and Effective Date, respectively, in reference
to the Registration Statement on Form S-3 or such other form described in
Section 10.1(iv)], and maintained in the manner and within the time periods
contemplated by Section 10 hereof, and it would not be feasible to ascertain the
extent of such damages with precision. Accordingly, if (i) the Registration
Statement described in Sections 10.1(i) or 10.1(ii) is not filed within 60 days
of such request, or is not declared effective by the Commission on or prior to
the date that is 120 days after such request, or (ii) the registration statement
on Form S-3 or such other form described in Section 10.1(iv) is not filed on or
before the Filing Date or not declared effective on or before the sooner of the
Effective Date, or within five days of receipt by the Company of a communication
from the Commission that the registration statement described in Section
10.1(iv) will not be reviewed, or (iii) any registration statement described in
Sections 10.1(i), 10.1(ii) or 10.1(iv) is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by an
additional registration statement filed and declared effective) for a period of
time which shall exceed 30 days in the aggregate per year but not more than 20
consecutive calendar days (defined as a period of 365 days commencing on the
date the Registration Statement is declared effective) (each such event referred
to in clauses (i), (ii) and (iii) of this Section 10.4 is
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referred to herein as a "Non-Registration Event"), then, for so long as such
Non-Registration Event shall continue, the Company shall pay in cash as
Liquidated Damages to each holder of the Note or any Registrable Securities an
amount equal to three (3%) percent for each thirty (30) days or part thereof, of
the principal amount of the Note and the corresponding principal amount of the
Note converted to obtain Company Shares, then owned of record by such holder as
of the occurrence and continuation of such Non-Registration Event. Payments to
be made pursuant to this Section 10.4 shall be due and payable immediately upon
demand in immediately available funds. It shall also be deemed a Non-
Registration Event in relation to any portion of the Company Shares which are
issued or issuable upon conversion of the Note at the then applicable Conversion
Price, which are not included in the Registration Statement as of the Filing
Date or at any time thereafter.
10.5. Expenses. All expenses incurred by the Company in complying
with Section 10, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, fee of one counsel, if any, to represent
all the Sellers, and costs of insurance are called "Registration Expenses". All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities, including any fees and disbursements of any special
counsel to the Seller, are called "Selling Expenses". The Seller shall pay the
fees of its own additional counsel, if any.
The Company will pay all Registration Expenses in connection with
the registration statement under Section 10. All Selling Expenses in connection
with each registration statement under Section 10 shall be borne by the Seller
and may be apportioned among the Sellers in proportion to the number of shares
sold by the Seller relative to the number of shares sold under such registration
statement or as all Sellers thereunder may agree.
10.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will indemnify and
hold harmless the Seller, each officer of the Seller, each director of the
Seller, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Seller or underwriter within the meaning
of the 1933 Act, against any losses, claims, damages or liabilities, joint or
several, to which the Seller, or such underwriter or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
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contained in any registration statement under which such Registrable Securities
was registered under the Act pursuant to Section 10, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereof,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Seller, each such
underwriter and each such controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by any such Seller, the underwriter or any
such controlling person in writing specifically for use in such registration
statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the Act pursuant to Section 10, the Seller will indemnify and
hold harmless the Company, and each person, if any, who controls the Company
within the meaning of the Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such officer, director, underwriter or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the Act pursuant to Section 10, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the Registrable
17
<PAGE> 18
Securities sold by the Seller under such registration statement bears to the
total public offering price of all securities sold thereunder, but not in any
event to exceed the gross proceeds received by the Seller from the sale of
Registrable Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 10.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 10.6(c) if and to the extent the indemnifying party is prejudiced
by such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in and, to the
extent it shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 10.6(c) for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the indemnifying
party or if the interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the indemnified parties
shall have the right to select one separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable expenses and fees of such separate counsel and other expenses related
to such participation to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in
the event of joint liability under the Act in any case in which either (i) the
Seller, or any controlling person of the Seller, makes a claim for
indemnification pursuant to this Section 10.6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 10.6 provides for indemnification in such case, or (ii)
contribution under the Act may be required on the part of the Seller or
controlling person of the Seller in circumstances for which indemnification is
provided
18
<PAGE> 19
under this Section 10.6; then, and in each such case, the Company and the Seller
will contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (after contribution from others) in such proportion so
that the Seller is responsible only for the portion represented by the
percentage that the public offering price of its securities offered by the
registration statement bears to the public offering price of all securities
offered by such registration statement, provided, however, that, in any such
case, (A) the Seller will not be required to contribute any amount in excess of
the public offering price of all such securities offered by it pursuant to such
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 10(f) of the Act) will be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
11. Miscellaneous.
(a) Notices. All notices or other communications given or made
hereunder shall be in writing and shall be personally delivered or deemed
delivered the first business day after being telecopied (provided that a copy is
delivered by first class mail) to the party to receive the same at its address
set forth below or to such other address as either party shall hereafter give to
the other by notice duly made under this Section: (i) if to the Company, to The
Recovery Network, Inc., 1411 5th Street, Suite 250, Santa Monica, California
90401, telecopier number: (310) 393-5749, and (ii) if to the Subscriber, to the
name, address and telecopy number set forth on the signature page hereto, with a
copy by telecopier only to Grushko & Mittman, 277 Broadway, Suite 801, New York,
New York 10007, telecopier number: (212) 227-5865. Any notice that may be given
pursuant to this Agreement, or any document delivered in connection with the
foregoing may be given by the Subscriber on the first business day after the
observance dates in the United States of America by Orthodox Jewry of Rosh
Hashanah, Yom Kippur, the first two days of the Feast of Tabernacles, Shemini
Atzeret Simchat Torah, the first two and final two days of Passover and
Pentecost, with such notice to be deemed given and effective, at the election of
the Subscriber on a holiday date that precedes such notice. Any notice received
by the Subscriber on any of the aforedescribed holidays may be deemed by the
Subscriber to be received and effective as if such notice had been received on
the first business day after the holiday.
(b) Closing. The consummation of the transactions contemplated
herein shall take place at the offices of Grushko & Mittman, 277 Broadway, Suite
801, New York, New York 10007, upon the satisfaction of all conditions to
Closing set forth in this Agreement. The closing date shall be the date that
subscriber funds representing the net amount due the Company from the Purchase
Price are transmitted by wire transfer to the Company (the "Closing Date").
19
<PAGE> 20
(c) Entire Agreement; Assignment. This Agreement represents the
entire agreement between the parties hereto with respect to the subject matter
hereof and may be amended only by a writing executed by both parties. No right
or obligation of either party shall be assigned by that party without prior
notice to and the written consent of the other party.
(d) Execution. This Agreement may be executed by facsimile
transmission, and in counterparts, each of which will be deemed an original.
(e) Law Governing this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York without
regard to principles of conflicts of laws. Any action brought by either party
against the other concerning the transactions contemplated by this Agreement
shall be brought only in the state courts of New York or in the federal courts
located in the state of New York. Both parties and the individuals executing
this Agreement and other agreements on behalf of the Company agree to submit to
the jurisdiction of such courts and waive trial by jury. The prevailing party
shall be entitled to recover from the other party its reasonable attorney's fees
and costs. In the event that any provision of this Agreement or any other
agreement delivered in connection herewith is invalid or unenforceable under any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of any agreement.
(f) Specific Enforcement, Consent to Jurisdiction. The Company and
Subscriber acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof or thereof, this being
in addition to any other remedy to which any of them may be entitled by law or
equity. Subject to Section 13(e) hereof, each of the Company and Subscriber
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper. Nothing in this Section
shall affect or limit any right to serve process in any other manner permitted
by law.
(g) Automatic Termination. This Agreement shall automatically
terminate without any further action of either party hereto if the Closing shall
not have occurred by the tenth (10th) business day following the date this
Agreement is accepted by the Subscriber.
20
<PAGE> 21
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become
a binding agreement between us.
THE RECOVERY NETWORK, INC.
By: [SIGNATURE ILLEGIBLE]
------------------------------------
Dated: March 18, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
AUSTOST ANSTALT SCHAAN - Subscriber
(A Lichenstein corporation)
7440 Fuerstentum
Lichenstein Landstrasse 163
Fax: 011-431-534532895
By:
---------------------------------
Dated as of March ____, 1999
Principal Amount of Note: $30,000.00
21
<PAGE> 22
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become
a binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
------------------------------------
Dated: March __, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
AUSTOST ANSTALT SCHAAN - Subscriber
(A Lichenstein corporation)
7440 Fuerstentum
Lichenstein Landstrasse 163
Fax: 011-431-534532895
By: /s/ THOMAS HACKL
---------------------------------
Thomas Hackl, Director
Dated as of March 16, 1999
Principal Amount of Note: $30,000.00
21
<PAGE> 23
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By: [Signature Illegible]
------------------------------------
Dated: March 18, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
BALMORE FUNDS S.A. - Subscriber
(A B.V.I. corporation)
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
By:
---------------------------------
Dated as of March ____, 1999
Principal Amount of Note: $30,000.00
22
<PAGE> 24
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
------------------------------------
Dated: March __, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
BALMORE FUNDS S.A. - Subscriber
(A B.V.I. corporation)
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
By: /s/ [Signature Illegible]
---------------------------------
Francois [Illegible]
Dated as of March 16, 1999
Principal Amount of Note: $30,000.00
22
<PAGE> 25
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
--------------------------------
Dated: March 18, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
THE SARGON FUND, L.P. - Subscriber
(A New York corporation)
20 Adele Road
Cedarhurst, New York 11516
Fax: 516-371-6999
By:
------------------------------
Dated as of March __, 1999
Principal Amount of Note: $30,000.00
23
<PAGE> 26
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
--------------------------------
Dated: March __, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
THE SARGON FUND, L.P. - Subscriber
(A New York corporation)
20 Adele Road
Cedarhurst, New York 11516
Fax: 516-371-6999
By: /s/ [Signature Illegible]
------------------------------
Dated as of March 16, 1999
Principal Amount of Note: $30,000.00
23
<PAGE> 27
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
--------------------------------
Dated: March 18, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
MARTIN CHOPP - Subscriber
1129 East 22nd Street
Brooklyn, New York 11210
Fax: 718-854-3342
By:
------------------------------
Dated as of March __, 1999
Principal Amount of Note: $10,000.00
<PAGE> 28
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By:
------------------------
Dated: March __, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
MARTIN CHOPP - Subscriber
1129 East 22nd Street
Brooklyn, New York 11210
Fax: 718-854-3342
By:/s/ MARTIN CHOPP
-------------------
Dated as of March 16, 1999
Principal Amount of Note: $10,000.00
<PAGE> 29
SCHEDULE B TO SUBSCRIPTION AGREEMENT
<TABLE>
<CAPTION>
=================================================================
PLACEMENT AGENT COMMISSION SHARES
- -----------------------------------------------------------------
<S> <C>
LIBRA FINANCE S.A. 11,591
P.O. Box 4603
Zurich, Switzerland
Fax: 011-441-201-6262
- -----------------------------------------------------------------
ELLIS ENTERPRISES 7,727
42A Waterloo Road
London, England
NW2 7UF
Fax: 011-441-814509004
- -----------------------------------------------------------------
TOTALS 19,318
=================================================================
</TABLE>
<PAGE> 1
EXHIBIT 2.5
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE RECOVERY NETWORK, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.
CONVERTIBLE NOTE
FOR VALUE RECEIVED, THE RECOVERY NETWORK, INC., a Colorado corporation
(hereinafter called "Borrower"), hereby promises to pay to AUSTOST ANSTALT
SCHANN, 7440 Fuerstentum, Lichenstein Landstrasse 163, Fax No.:
011-431-534532895 (the "Holder") or order, without demand, the sum of
$30,000.00, with simple interest accruing at the annual rate of 12%, on March
__, 2000 (the "Maturity Date"), as such date may be extended by agreement of
the parties hereto.
The following terms shall apply to this Note:
ARTICLE I
DEFAULT RELATED PROVISIONS
1.1 Payment Grace Period. The Borrower shall have a ten (10) day
grace period to pay any monetary amounts due under this Note, after which grace
period a default interest rate of 16% per annum shall apply to the amounts owed
hereunder.
1.2 Conversion Privileges. The conversion Privileges shall remain in
full force and effect as set forth in Article II and until the Note principal
and interest are paid in full.
1.3 Interest Rate. At the election of the Holder, on or after the
earlier of each Conversion Date (as hereinafter defined), or the Maturity Date,
accelerated or otherwise, the Borrower shall pay interest at the annual rate of
12% per annum.
ARTICLE II
CONVERSION RIGHTS
The Holder shall have the right to convert the principal amount and
interest due under this Note into Shares of the Borrower's Common Stock as set
forth below.
1
<PAGE> 2
The Sargon Fund
4.4 Assignability. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder.
4.5 Cost of Collection. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the
federal courts located in the State of New York. Both parties and the individual
signing this Agreement on behalf of the Borrower agree to submit to the
jurisdiction of such courts. The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs.
4.7 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by its Chief Executive Officer on this _______ day of March, 1999.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
` ---------------------------------------
WITNESS:
- ---------------------------------------
6
<PAGE> 3
Balmore Funds
4.4 Assignability. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder.
4.5 Cost of Collection. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the
federal courts located in the State of New York. Both parties and the individual
signing this Agreement on behalf of the Borrower agree to submit to the
jurisdiction of such courts. The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs.
4.7 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by its Chief Executive Officer on this _______ day of March, 1999.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
---------------------------------------
WITNESS:
- ---------------------------------------
6
<PAGE> 4
Austost Anstalt Schaan
4.4 Assignability. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder.
4.5 Cost of Collection. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the
federal courts located in the State of New York. Both parties and the individual
signing this Agreement on behalf of the Borrower agree to submit to the
jurisdiction of such courts. The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs.
4.7 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by its Chief Executive Officer on this _______ day of March, 1999.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
---------------------------------------
WITNESS:
- ---------------------------------------
6
<PAGE> 5
Martin Chopp
4.4 Assignability. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder.
4.5 Cost of Collection. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
46. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. Both parties and the individual
signing this Agreement on behalf of the Borrower agree to submit to the
jurisdiction of such courts. The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs.
4.7 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by its Chief Executive Officer on this ____ day of March, 1999.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
---------------------------------
WITNESS:
- ------------------------------
6
<PAGE> 6
provisions, the Company may withdraw any registration statement referred to in
this Section 10.1(ii) without thereby incurring any liability to the Seller.
(iii) If, at the time any written request for registration is
received by the Company pursuant to Section 10.1(i), the Company has determined
to proceed with the actual preparation and filing of a registration statement
under the 1933 Act in connection with the proposed offer and sale for cash of
any of its securities for the Company's own account, such written request shall
be deemed to have been given pursuant to Section 10.1(ii) rather than Section
10.1(i), and the rights of the holders of Registrable Securities covered by such
written request shall be governed by Section 10.1(ii) except that the Company or
underwriter, if any, may not withdraw such registration or limit the amount of
Registrable Securities included in such registration.
(iv) The Company shall file with the Commission no later than
April 15, 1999 (the "Filing Date"), and use its reasonable commercial efforts to
cause to be declared effective a Form S-3 registration statement (or such other
form that it is eligible to use) on or before June 15, 1999 in order to register
the Registrable Securities for resale and distribution under the Act. The
registration statement described in this paragraph must be declared effective by
the Commission on or before June 15, 1999 ("Effective Date"). The Company will
register not less than 64,000 shares of Common Stock in the aforedescribed
registration statement for each $10,000 of Note principal subscribed for and one
share of Common Stock for each Commission Share. The Registrable Securities
shall be reserved and set aside exclusively for the benefit of the Subscriber
and Placement Agents, as the case may be, and not issued, employed or reserved
for anyone other than the Subscriber and Placement Agents, as the case may be.
Such registration statements will be promptly amended or additional registration
statements will be promptly filed by the Company as necessary to register
additional Company Shares to allow the public resale of all Common Stock
included in and issuable by virtue of the Registrable Securities.
10.2. Registration Procedures. If and whenever the Company is
required by the provisions hereof to effect the registration of any shares of
Registrable Securities under the Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best effort to cause
such registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as herein provided), and promptly
provide to the holders of Registrable Securities copies of all filings;
13
<PAGE> 7
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
-----------------------------------
Dated: March , 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
AUSTOST ANSTALT SCHAAN - Subscriber
(A Lichenstein corporation)
7440 Fuerstentum
Lichenstein Landstrasse 163
Fax: 011-431-534532895
By:
-----------------------------------
Dated as of March , 1999
Principal Amount of Note: $30,000.00
21
<PAGE> 8
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
----------------------------------
Dated: March __, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
BALMORE FUNDS S.A. - Subscriber
(A B.V.I. corporation)
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
By:
-------------------------------------
Dated as of March __, 1999
Principal Amount of Note: $30,000.00
22
<PAGE> 9
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
----------------------------------
Dated; March __, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
THE SARGON FUND, L.P. - Subscriber
(A New York corporation)
20 Adele Road
Cedarhurst, New York 11516
Fax: 516-371-6999
By:
-------------------------------------
Dated as of March __, 1999
Principal Amount of Note: $30,000.00
23
<PAGE> 10
Please acknowledge your acceptance of the foregoing Subscription Agreement
by signing and returning a copy to the undersigned whereupon it shall become a
binding agreement between us.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
----------------------------------
Dated; March __, 1999
The undersigned Subscriber waives the provision by the Company on the Closing
Date of the legal opinion referred to in Section 3 hereof.
Accepted:
MARTIN CHOPP - Subscriber
1129 East 22nd Street
Brooklyn, New York 11210
Fax: 718-854-3342
By:
-------------------------------------
Dated as of March __, 1999
Principal Amount of Note: $10,000.00
<PAGE> 1
EXHIBIT 2.6
FUNDS ESCROW AGREEMENT
This Agreement is dated as of the _____ day of March, 1999 among
The Recovery Network, Inc. (the "Company"), the Subscribers identified on
Schedule A hereto ("Subscriber" or "Subscribers"), and Crushko & Mittman (the
"Escrow Agent"):
WITNESSETH
WHEREAS, the Company and Subscriber have entered into a Subscription
Agreement ("Subscription Agreement") calling for the sale by the Company to the
Subscribers of Convertible Notes ("Notes") in the aggregate principal amounts,
in the denominations set forth on Schedule A hereto, against payment therefor,
and the issuance and delivery of Commission Shares as described in the
Subscription Agreement; and
WHEREAS, the parties hereto require the Company to deliver the Notes
against payment therefor, with such Notes and payment to be delivered to the
Escrow Agent to be held in escrow and released by the Escrow Agent in
accordance with the terms and conditions of this Agreement; and
WHEREAS, the Escrow Agent is willing to serve as escrow agent pursuant
to the terms and conditions of this Agreement;
NOW THEREFORE, the parties agree as follows:
ARTICLE I
INTERPRETATION
1.1 Definitions. Whenever used in this Agreement, the following
terms shall have the following respective meanings:
(a) "Agreement" means this Agreement and all amendments
made hereto and thereto by written agreement between the parties;
(b) "Notes" means convertible Notes of the Company issued
to the Subscribers in the aggregate amount of up to $100,000 in the form of
Exhibit A annexed to the Subscription Agreement.
(c) "Escrowed Payment" means the sums set forth on Schedule
A hereto.
(d) "Subscription Agreement" means the Subscription
Agreement to be entered into by the parties in reference to the Notes and the
exhibits thereto.
1
<PAGE> 2
(e) "Commission Shares" means the shares of the Company's
common stock to be issued to the Placement Agents as described in the
Subscription Agreement.
(f) Collectively, this Agreement, Notes, Subscription
Agreement, and Commission Shares are referred to as "Company Documents."
(g) Collectively, this Agreement, Escrowed Payment and
Subscription Agreement without exhibits thereto are referred to as "Subscriber
Documents."
1.2. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the Company Documents and
Subscriber Documents and supersedes all prior agreements, understandings,
negotiations and discussions, whether oral or written, of the parties. There
are no warranties, representations and other agreements made by the parties in
connection with the subject matter hereof except as specifically set forth in
this Agreement.
1.3. Extended Meanings. In this Agreement words importing the
singular number include the plural and vice versa; words importing the masculine
gender include the feminine and neuter genders. The word "person" includes an
individual, body corporate, partnership, trustee or trust or incorporated
association, executor, administrator or legal representative.
1.4. Waivers and Amendments. This Agreement may be amended,
modified, superseded, cancelled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by all
parties, or, in the case of a waiver, by the party waiving compliance. Except
as expressly stated herein, no delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any waiver on the part of any party of any right, power or privilege
hereunder preclude any other or future exercise of any other right, power or
privilege hereunder.
1.5. Headings. The division of this Agreement into articles,
sections, subsections and paragraphs and the insertion of headings are for
convenience of reference only and shall not affect the construction or
interpretation of this Agreement.
1.6. Law Governing this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York without
regard to principles of conflicts of laws. Any action brought by either party
against the other concerning the transactions contemplated by this Agreement
shall be brought only in the state courts of New York or in the federal courts
located in the state of New York. Both parties and the individuals executing
this Agreement and other agreements on behalf of the Company agree
2
<PAGE> 3
5.6. Counterparts/Execution. This Agreement may be executed in any number
of counterparts and by different signatories hereto on separate counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument. This Agreement
may be executed by facsimile transmission.
5.7. Agreement. Each of the undersigned states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.
THE RECOVERY NETWORK, INC.
"Company"
By: /s/ [Signature Illegible]
---------------------------------
AUSTOST ANSTALT SCHAAN
"Subscriber"
By:
---------------------------------
BALMORE FUNDS S.A.
"Subscriber"
By:
---------------------------------
THE SARGON FUND, L.P.
"Subscriber"
By:
---------------------------------
-------------------------------------
MARTIN CHOPP - "Subscriber"
ESCROW AGENT:
GRUSHKO & MITTMAN
By:
---------------------------------
9
<PAGE> 4
SCHEDULE B TO SUBSCRIPTION AGREEMENT
<TABLE>
<CAPTION>
PLACEMENT AGENT COMMISSION SHARES
------------------------------------------------------------
<S> <C>
LIBRA FINANCE S.A. 11,591
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
------------------------------------------------------------
ELLIS ENTERPRISES 7,727
42A Waterloo Road
London, England
NW2 7UF
Fax: 011-441-814509004
------------------------------------------------------------
TOTALS 19,318
------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 2.7
PROMISSORY NOTE
$50,000 SANTA MONICA, CALIFORNIA May 27, 1999
For VALUE RECEIVED, THE RECOVERY NETWORK, INC., promises to pay to GEORGE HENRY
and WILLIAM MOSES, in the aggregate, the principal sum of FIFTY THOUSAND
DOLLARS, ($50,000.00), Twenty-five Thousand Dollars payable to Mr. Henry and
Twenty-five Thousand Dollars payable to Mr. Moses, with interest from date
above first written at the rate of TEN percent (10%) per annum on the balance
from time to time remaining unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the
date and in the manner following:
PAYABLE IMMEDIATELY UPON THE COMPANY'S RECEIVING OF AUSTIAN FUNDING.
By: /s/ [ILLEGIBLE]
-----------------------
The Recovery Network, Inc.
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 1
EXHIBIT 2.8
PROMISSORY NOTE
$50,000 SANTA MONICA, CALIFORNIA July 23, 1999
For VALUE RECEIVED, THE RECOVERY NETWORK, INC., a Colorado corporation
("Maker"), promises to pay to WILLIAM MOSES ("Holder"), the principal sum of
FIFTY THOUSAND DOLLARS, ($50,000.00), with interest from date above first
written at the rate of TEN percent (10%) per annum on the balance from time to
time remaining unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the date
and in the manner following:
The principal balance of this Note and all accrued interest hereon shall be due
and payable, in full (the "Maturity Date"), on the earlier of either of (i)
January 23, 2000, or (ii) immediately upon the closing by Maker of a debt and/or
equity financing.
MAKER HOLDER
By: By: /s/ WILLIAM MOSES
----------------------- ---------------------------
The Recovery Network, Inc. William Moses
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 2
PROMISSORY NOTE
$45,000 SANTA MONICA, CALIFORNIA July 23, 1999
For VALUE RECEIVED, THE RECOVERY NETWORK, INC., a Colorado corporation
("Maker"), promises to pay to GEORGE HENRY ("Holder"), the principal sum of
FORTY-FIVE THOUSAND DOLLARS, ($45,000.00), with interest from date above first
written at the rate of TEN percent (10%) per annum on the balance from time to
time remaining unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the date
and in the manner following:
The principal balance of this Note and all accrued interest thereon shall be due
and payable, in full (the "Maturity Date"), on the earlier of either of (i)
January 23, 2000, or (ii) immediately upon the closing by Maker of a debt and/or
equity financing.
MAKER HOLDER
By: By: /s/ GEORGE HENRY
--------------------------------- ------------------------------------
The Recovery Network, Inc. George Henry
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 3
PROMISSORY NOTE
$2,500 SANTA MONICA, CALIFORNIA July 23, 1999
For VALUE RECEIVED, THE RECOVERY NETWORK, INC., a Colorado corporation
("Maker"), promises to pay to NICOLE COX ("Holder), the principal sum of TWO
THOUSAND, FIVE HUNDRED DOLLARS, ($2,500.00), with interest from date above first
written at the rate of TEN percent (10%) per annum on the balance from time to
time remaining unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the date
and in the manner following:
The principal balance of this Note and all accrued interest thereon shall be due
and payable, in full (the "Maturity Date"), on the earlier of either of (i)
January 23, 2000, or (ii) immediately upon the closing by Maker of a debt and/or
equity financing.
MAKER HOLDER
By: By: /s/ NICOLE COX
--------------------------------- ------------------------------------
The Recovery Network, Inc. Nicole Cox
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 4
PROMISSORY NOTE
$2,500 SANTA MONICA, CALIFORNIA July 23, 1999
For VALUE RECEIVED, THE RECOVERY NETWORK, INC., a Colorado corporation
("Maker"), promises to pay to GEORGE H. HENRY, III, ("Holder"), the principal
sum of TWO THOUSAND, FIVE HUNDRED DOLLARS, ($2,500.00), with interest from date
above first written at the rate of TEN percent (10%) per annum on the balance
from time to time remaining unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the date
and in the manner following:
The principal balance of this Note and all accrued interest thereon shall be due
and payable, in full (the "Maturity Date"), on the earlier of either of (i)
January 23, 2000, or (ii) immediately upon the closing by Maker of a debt and/or
equity financing.
MAKER HOLDER
By: By: /s/ GEORGE HENRY, III
--------------------------------- ------------------------------------
The Recovery Network, Inc. George H. Henry, III
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 5
PROMISSORY NOTE
$50,000 SANTA MONICA, CALIFORNIA July 23, 1999
For VALUE RECEIVED, THE RECOVERY NETWORK, INC., a Colorado corporation
("Maker"), promises to pay to MARTIN CHOPP ("Holder"), the principal sum of
FIFTY THOUSAND DOLLARS, ($50,000.00), with interest from date above first
written at the rate of TEN percent (10%) per annum on the balance from time to
time remaining unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the date
and in the manner following:
The principal balance of this Note and all accrued interest thereon shall be due
and payable, in full (the "Maturity Date"), on the earlier of either of (i)
January 23, 2000, or (ii) immediately upon the closing by Maker of a debt and/or
equity financing.
MAKER HOLDER
By: By: /s/ MARTIN CHOPP
--------------------------------- ------------------------------------
The Recovery Network, Inc. Martin Chopp
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 6
PROMISSORY NOTE
$25,000 SANTA MONICA, CALIFORNIA July 23, 1999
For VALUE RECEIVED, THE RECOVERY NETWORK, INC., a Colorado corporation
("Maker"), promises to pay to MICHAEL CLURMAN ("Holder"), the principal sum of
TWENTY-FIVE THOUSAND DOLLARS, ($25,000.00), with interest from date above first
written at the rate of TEN percent (10%) per annum on the balance from time to
time remaining unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the date
and in the manner following:
The principal balance of this Note and all accrued interest thereon shall be due
and payable, in full (the "Maturity Date"), on the earlier of either of (i)
January 23, 2000, or (ii) immediately upon the closing by Maker of a debt and/or
equity financing.
MAKER HOLDER
By: By: /s/ MICHAEL CLURMAN
--------------------------------- ------------------------------------
The Recovery Network, Inc. Michael Clurman
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 1
EXHIBIT 2.9
PROMISSORY NOTE
NO. 2
$55,000 SANTA MONICA, CALIFORNIA September 10, 1999
For VALUE RECEIVED, RNETHEALTH, INC., a Colorado corporation ("Maker"), promises
to pay to GEORGE HENRY ("Holder"), the principal sum of FIFTY-FIVE THOUSAND
DOLLARS, ($55,000.00), with interest from the date above first written at the
rate of TEN percent (10%) per annum on the balance from time to time remaining
unpaid.
The said principal and interest shall be payable in lawful money of the United
States of America at SANTA MONICA, CALIFORNIA or at such place as may hereafter
be designated by written notice from the holder to the maker hereof, on the date
and in the manner following:
The principal balance of this Note and all accrued interest hereon shall be due
and payable, in full (the "Maturity Date"), on the earlier of either of (i)
January 31, 2000, or (ii) immediately upon the closing by Maker of a debt and/or
equity financing.
MAKER HOLDER
By: By: /s/ GEORGE HENRY
----------------------- ---------------------------
RnetHealth.com, Inc. George Henry
1411 Fifth Street, Suite 200
Santa Monica, California 90401
(310) 393-3979
<PAGE> 1
EXHIBIT 4.13
THE RECOVERY NETWORK, INC.
1999 STOCK OPTION BONUS PLAN
ARTICLE I
INTRODUCTION
1.1 ESTABLISHMENT. THE RECOVERY NETWORK, INC., a Colorado corporation,
hereby establishes the 1999 Stock Option Plan, which permits the grant of stock
options, restricted stock awards, stock appreciation rights, stock units, and
other stock grants to certain directors and key employees of RNET.
1.2 PURPOSES. The purpose of the Plan is to provide employees with an
incentive to maintain the long term performance and profitability of the
Company.
1.3 EFFECTIVE DATE. The effective date of the Plan shall be the Effective
Date, which is the date on which it was approved by the Board of Directors of
RNET in accordance with section 422 of the Code.
ARTICLE II
DEFINITIONS
Throughout the Plan, except when the context indicates otherwise, the
masculine gender shall include the feminine, and the use of any term in the
singular shall include the plural. The following terms shall have the meanings
set forth:
"Affiliated Corporation" shall mean any corporation or other entity
(including without limitation a partnership) that is affiliated with RNET
through stock ownership or otherwise and is treated as a common employer under
sections 414(b) and 414(c) of the Code, including without limitation means any
parent or subsidiary of RNET as defined in section 424 of the Code.
"RNET" shall mean The Recovery Network, Inc., a Colorado corporation, and
any Affiliated Corporation.
"Award" shall mean an Option, a Restricted Stock Award, a Stock
Appreciation Right, a Stock Unit, a grant of Shares pursuant to article XI, or
another issuance of Shares hereunder.
"Board" shall mean the board of directors of RNET.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
<PAGE> 2
"Committee" shall mean members of the Finance & Compensation Committee of
the Board who are empowered hereunder to take action in the administration of
the Plan, except that the full Board shall act as the Committee with respect to
any matter in its sole discretion.
"Disabled" or "Disability" shall have the meaning set forth in section
22(e)(3) of the Code.
"Effective Date" shall mean May 11, 1999.
"Eligible Parties" shall mean employees of RNET.
"Fair Market Value" of a Share shall mean its fair market value as
determined by the Committee in good faith in accordance with section 422 of the
Code.
"Incentive Option" shall mean an Option designated as such and granted in
accordance with section 422 of the Code.
"Non-Qualified Option" shall mean any Option other than an Incentive
Option.
"Option" shall mean a right to purchase Shares at a stated or formula
price for a specified period of time and shall be either an Incentive Option or
a Non-Qualified Option.
"Option Certificate" shall mean a written stock option certificate issued
by RNET in the name of the Option Holder and in such form as may be approved by
the Committee. An Option Certificate shall incorporate and conform to the
conditions set forth in section 7.2 and other terms and conditions consistent
with the Plan as the Committee may deem appropriate.
"Option Holder" shall mean a Participant who has been granted one or more
Options.
"Option Price" shall mean the price at which Shares subject to an Option
may be purchased, as determined in accordance with section 7.2(b).
"Participant" shall mean an Eligible Party designated by the Committee
from time to time during the term of the Plan to receive one or more Awards.
"Plan" shall mean this 1999 Stock Option Plan.
"Restricted Stock Award" shall mean an Award of Shares granted pursuant to
article VIII that is subject to restrictions imposed in article VIII.
"Share" shall mean a share of the Common Stock, par value $0.01 per share,
of RNET.
"Stock Appreciation Right" shall mean the right, granted by the Committee
pursuant to the Plan, to receive a payment equal to the increase in the Fair
Market Value of a Share subsequent to the grant of such right. A Stock
Appreciation Right may entitle a Participant to
2
<PAGE> 3
receive a number of Shares (without any payment to RNET, except for applicable
withholding taxes), cash, or Shares and cash, as determined by the Committee in
accordance with section 10.3.
"Stock Unit" shall mean a measurement component equal to the Fair Market
Value of a Share on the date of determination.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Board or a Committee of the Board.
Consistent with the Plan, the Committee in its sole discretion shall select
Participants from among the Eligible Parties, shall determine Awards, the number
of Stock Units, Stock Appreciation Rights, or Shares to be subject to Awards,
and the time at which Awards are to be made, shall fix the Option Price and the
period and manner in which an Option becomes exercisable, and shall establish
the duration and nature of the restrictions in Restricted Stock Awards, the
terms and conditions applicable to Stock Units, and such other terms and
requirements of the compensation incentives under the Plan as the Committee may
deem necessary or desirable. The Committee shall determine the form or forms of
the agreements with Participants that evidence the particular provisions, terms,
conditions, rights, and duties of RNET and the Participants with respect to
Awards, which provisions need not be identical except as may be provided herein.
The Committee may from time to time adopt such rules and regulations to carry
out the purposes of the Plan as it may deem proper and in the best interests of
RNET. The Committee in its sole discretion may correct any defect, supply any
omission, or reconcile any inconsistency in the Plan or in any agreement entered
into hereunder in the manner and to the extent it deems expedient. No member of
the Committee shall be liable for any action or determination made in good
faith. The determinations, interpretations, and other actions of the Committee
pursuant to the Plan shall be binding and conclusive for all purposes.
3
<PAGE> 4
ARTICLE IV
SUBJECT SHARES
4.1 NUMBER. The number of Shares that are authorized for issuance under
the Plan shall not exceed 450,000. This number may be increased from time to
time by the Board, with the approval of the shareholders of RNET if, in the
opinion of counsel to RNET, shareholder approval is required. Shares that may be
issued upon exercise of Options or Stock Appreciation Rights or that are issued
with respect to Stock Units or as Restricted Stock Awards, incentive
compensation, or other grants under the Plan shall reduce the number of Shares
available for issuance under the Plan. RNET shall at all times during the term
of the Plan and while any Options or Stock Units are outstanding reserve as
authorized but unissued at least the number of Shares from time to time required
under the Plan. Any Shares subject to an Option that expires or is terminated
before exercise shall become available for issuance under the Plan.
4.2 ADJUSTMENTS FOR STOCK SPLIT, STOCK DIVIDEND, ETC. If at any time RNET
increases or decreases the number of Shares outstanding or changes the rights
and privileges of such Shares through the payment of a stock dividend, the
making of any other distribution payable in Shares, a stock split, subdivision,
consolidation, or combination of Shares, or a reclassification or
recapitalization involving the Shares, then the numbers, rights, and privileges
of Shares as to which Awards may be granted and Shares then subject to an Award
shall be increased, decreased, or changed in like manner as if such Shares had
been issued and outstanding.
4.3 OTHER DISTRIBUTIONS AND CHANGES. If at any time (a) RNET distributes
with respect to the Shares assets or securities of persons other than RNET
(excluding cash or distributions described in section 4.3), or (b) RNET grants
to the holders of its Shares generally rights to subscribe pro rata for
additional Shares or other securities of RNET, or (c) any other change (except
as described in section 4.2) occurs in the number or kind of outstanding Shares
or other securities into which the Shares are changed or for which they are
exchanged, and if the Committee in its discretion determines that such event
equitably requires an adjustment in the number or kind of Shares subject to an
Award, an adjustment in an Option Price, or the taking of other action by the
Committee, including without limitation the setting aside of property for
delivery to the Participant upon the exercise of an Option or the full vesting
of an Award, then such adjustments shall be made and such other action shall be
taken by the Committee and shall be effective for all purposes and on each
outstanding Award affected. Notwithstanding the foregoing and pursuant to
section 8.3, a Participant holding Shares received as a Restricted Stock Award
shall have the right to receive all amounts, including cash and property of any
kind, distributed with respect to the Shares upon becoming a holder of record of
the Shares.
4.5 GENERAL ADJUSTMENT RULES. No adjustment or substitution provided for
in this article IV shall require RNET to issue a fractional Share, and the total
substitution or adjustment with respect to each Award shall be limited by
deleting any fractional Share. In such case, the total Option Price for Shares
then subject to an Option shall remain unchanged, but the Option Price per Share
shall be equitably adjusted by the Committee to reflect the greater or lesser
number of Shares or other securities into which the Shares subject to the Option
may have been
4
<PAGE> 5
changed. Appropriate adjustments shall be made to other Awards to reflect any
such substitution or adjustment. All adjustments under this article IV shall be
made by the Committee, whose determination shall be final and binding upon all
parties.
ARTICLE V
CORPORATE REORGANIZATION
5.1 REORGANIZATION. Upon the occurrence of any of the following events, if
the notice provided in section 5.2 has been given, the Plan and all outstanding
Options shall terminate and be of no further force and effect, and all other
outstanding Awards shall be treated in accordance with sections 5.2 and 5.3,
without the necessity for any additional action by the Board or RNET:
(a) the merger or consolidation of RNET with or into another
corporation or other reorganization (other than a reorganization under the
United States Bankruptcy Code) of RNET (other than a consolidation,
merger, or reorganization in which RNET is the surviving corporation and
which does not result in any reclassification or change of outstanding
Shares);
(b) the sale or conveyance of the property of RNET as an entirety or
substantially as an entirety (other than a sale or conveyance in which
RNET continues as holding company of an entity or entities that conduct
the business or business formerly conducted by RNET); or
(c) the dissolution or liquidation of RNET.
5.2 REQUIRED NOTICE. At least 30 days' written notice of an event
described in section 5.1 shall be given by RNET to each Option Holder and
Participant unless (a) in the case of events described in sections 5.1(a) and
5.1(b), RNET or the successor or purchaser shall make adequate provision for the
assumption of the outstanding Options or the substitution of new options on
comparable terms, except that an Option Holder shall have the right thereafter
to purchase the kind and amount of securities or property or cash receivable
upon such event by a holder of the number of Shares that would have been
received upon exercise of the Option immediately prior to the occurrence of such
event (assuming that such holder failed to exercise any rights of election and
received per Share the kind and amount of property received per Share by the
holders of a majority of the non-electing Shares) or (b) RNET or the successor
or purchaser shall make adequate provision for the adjustment of outstanding
Awards other than Options so that such Awards shall entitle the Participant to
receive the kind and amount of securities or property or cash receivable upon
such event by a holder of the number of Shares that would have been received
with respect to such Award immediately prior to the occurrence of such event
(assuming that such holder failed to exercise any rights of election and
received per share the kind and amount of property received per Share by the
holders of a majority of the nonelecting Shares). This article V shall
similarly apply to successive mergers, consolidations, reorganizations, sales,
or conveyances. Notice shall be deemed to have been given when
5
<PAGE> 6
delivered personally to a Participant or when mailed to a Participant by
certified mail, postage prepaid, at such Participant's address last known to
RNET.
5.3 ACCELERATION OF EXERCISE. Participants notified in accordance with
section 5.2 may exercise their Options at any time before the occurrence of the
event requiring the giving of notice (but subject to occurrence of such event),
regardless of whether all conditions of exercise relating to length of service,
attainment of financial performance goals, or otherwise have been satisfied.
Upon the giving of notice in accordance with section 5.2, all restrictions with
respect to Restricted Stock Awards and other Awards shall lapse immediately, all
Stock Units shall become payable immediately, and all Stock Appreciation Rights
shall become exercisable. Any Options, Stock Appreciation Rights, or Stock Units
that are not assumed or substituted under section 5.2(a) or 5.2(b) and that have
not been exercised prior to the event described in section 5.1 shall
automatically terminate upon the occurrence of such event.
5.4 LIMITATION ON PAYMENTS. If this article V would result in the receipt
by any Participant of a payment within the meaning of section 2806 of the Code
and the regulations promulgated thereunder and if the receipt of such payment by
any Participant would, in the opinion to counsel to RNET, result in the payment
by such Participant of any excise tax provided for in sections 2806 and 4999 of
the Code, then the amount of such payment shall be reduced to the extent
required, in the opinion of independent tax counsel, to prevent the imposition
of such excise tax, except that the Committee, in its sole discretion, may
authorize the payment of all or part of the amount of such reduction to the
Participant.
ARTICLE VI
PARTICIPATION
Participants shall be those Eligible Parties who, in the judgment of the
Committee, are performing, or during the term of their incentive arrangement
will perform, vital services in the management, operation, and development of
RNET or an Affiliated Corporation and contribute significantly, or are expected
to contribute significantly, to the achievement of long-term corporate economic
objectives. Participants may be granted from time to time one or more Awards,
except that the grant of each Award shall be separately approved by the
Committee, and receipt of one Award shall not result in automatic receipt of any
other Award. Upon determination by the Committee that an Award is to be granted
to a Participant, written notice shall be given specifying the terms,
conditions, rights, and duties related thereto. Each Participant shall, if
required by the Committee, enter into an agreement with RNET, in such form as
the Committee shall determine consistent with the Plan specifying such terms,
conditions, rights, and duties. Awards shall be deemed to be granted as of the
date specified in the grant resolution of the Committee, which date shall be the
date of any related agreement with the Participant. In the event of any
inconsistency between the Plan and any such agreement, the provisions of the
Plan shall govern.
6
<PAGE> 7
ARTICLE VII
OPTIONS
7.1 GRANT OF OPTIONS. Coincident with or following designation for
participation in the Plan, a Participant may be granted one or more Options. The
Committee in its sole discretion shall designate whether an Option is an
Incentive Option or a Non-Qualified Option. The Committee may grant both an
Incentive Option and a Non-Qualified Option to a Participant at the same time or
at different times. Incentive Options and Non-Qualified Options, whether granted
at the same time or at different times, shall be deemed to have been awarded in
separate grants and shall be clearly identified, and in no event shall the
exercise of one Option affect the right to exercise any other Option or affect
the number of Shares for which any other Option may be exercised, except as
provided in section 7.2(b).
7.2 OPTION CERTIFICATE. Each Option granted under the Plan shall be
evidenced by an Option Certificate, incorporating and conforming to the
following:
(a) Number of Shares. Each Option Certificate shall state that it
covers a specified number of Shares, as determined by the Committee. The maximum
number of Shares subject to Options granted to any one Participant during the
term of the Plan shall be 500,000 Shares.
(b) Price. The price at which each Share may be purchased shall be
determined in each case by the Committee and set forth in the Option
Certificate, but in no event shall the price be less than 100 percent of the
Fair Market Value of the Shares on the date of grant.
(c) Duration of Options; Restrictions on Exercise. Each Option
Certificate shall state the period, as determined by the Committee, within which
the Option may be exercised. Such period shall end no more than ten years from
the date the Option is granted. The Option Certificate shall also set forth such
restrictions on exercise of the Option during such period, if any, as may be
determined by the Committee. No Option may be exercised for at least six months
after the date of grant. Each Option shall become exercisable over such period
of time, if any, or upon such events, as may be determined by the Committee.
(d) Termination of Service, Death, Disability, etc. The Committee
may specify the period, if any, after which an Option may be exercised following
termination of the Option Holder's employment or service as a director. The
effect of this section 7.2(d) shall be limited to determining the consequences
of a termination, and nothing in this section 7.2(d) shall restrict or otherwise
interfere with RNET's discretion with respect to the termination of any
individual's employment or the shareholders' discretion with respect to the
election of directors. If the Committee does not otherwise specify, the
following shall apply:
(i) If the employment or service of the Option Holder
terminates for any reason other than death or Disability within six months
after the date the Option is granted or if the employment or service of
the Option Holder is terminated within the
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Option Period for "cause," as determined by RNET, the Option shall
thereafter be void for all purposes. As used in this section 7.2(d),
"cause" shall mean a gross violation, as determined by RNET, of RNET's
established policies and procedures or willful misconduct.
(ii) The Option may be exercised by the Option Holder if he
becomes Disabled, and the Option may by the persons specified in section
7.2(d)(iv) if the Option Holder dies, within one year following his
Disability (except that exercise shall occur during the duration of the
Option) but not thereafter. In any such case, the Option may be exercised
only as to Shares as to which it had become exercisable on or before the
date of the termination of the Option Holder's employment because of
Disability or death.
(iii) If the Option Holder is no longer a director of RNET or
employed by RNET or an Affiliated Corporation during the duration of the
Option for any reason other than "cause," Disability or death, and such
termination occurs more than six months after the Option is granted, the
Option may be exercised by the Option Holder within three months following
the date of such termination (except that such exercise shall occur during
the duration of the Option) but not thereafter. In any such case, the
Option may be exercised only as to the shares as to which the Option had
become exercisable on or before the date of termination of employment.
(iv) If the Option Holder dies during the duration of the
Option while still employed or within the one-year period referred to in
section 7.2(d)(ii) or the three-month period referred to in section
7.2(d)(iii), the Option may be exercised by those entitled to do so under
the Option Holder's will or by the laws of descent and distribution.
(e) Transferability. No Option shall be transferable by the Option
Holder except by will or the laws of descent and distribution. Each Option is
exercisable during the Option Holder's lifetime only by him, or in the event of
Disability or incapacity, by his guardian or legal representative.
(f) Consideration for Grant of Option. Each Option Holder agrees to
remain in the service of RNET as a director or in the employment of RNET, at the
pleasure of RNET, for a continuous period of at least one year after the date
the Option is granted, and in the case of an employee at the salary rate in
effect on the date of the Option Certificate or at such changed rate as may be
fixed from time to time by RNET. Nothing in this paragraph shall limit or impair
RNET's right to terminate the employment of any employee or the shareholders'
rights with respect to the election of directors.
(g) Manner of Exercise. An Option shall be exercised by delivery to
RNET of written notice specifying the number of Shares with respect to which
such Option is exercised. The purchase of such Shares shall take place at the
principal offices of RNET within 30 days following delivery of such notice, at
which time the Option Price of the Shares with respect to which the Option is
exercised shall be paid in full by any of the methods set forth below or a
combination thereof. Except as set forth in the next sentence, the Option shall
be exercised when
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<PAGE> 9
the Option Price for the number of Shares as to which the Option is exercised is
paid to RNET in full. If the Option Price is paid by means of a broker's loan
transaction as described in section 7.2(h)(iv), in whole or in part, the closing
of the purchase of the Shares under the Option shall take place (and the Option
shall be treated as exercised) on the date on which, and only if, the sale of
Shares upon which the broker's loan was based has been closed and settled,
unless the Option Holder makes an irrevocable written election at the time of
exercise of the Option to have the exercise treated as fully effective for all
purposes upon receipt of the Option Price by RNET, regardless of whether the
sale of the Shares by the broker is closed and settled. A properly executed
certificate or certificates representing the Shares shall be delivered to or at
the direction of the Option Holder upon payment therefor. If Options on less
than all Shares subject to an Option are exercised, RNET shall deliver a new
Option Certificate evidencing the Option on the remaining Shares.
(h) Payment. The Option Price for the Shares as to which the Option
is exercised shall be paid by any of the following methods or any combination of
the following methods at the election of the Option Holder, or by any other
method approved by the Committee upon the request of the Option Holder:
(i) in cash;
(ii) by certified, cashier's check, or other check acceptable
to RNET, payable to the order of RNET;
(iii) by delivery of certificates representing a number of
Shares then owned by the Option Holder, the Fair Market Value of which on
the date of delivery of the certificates at least equals the Option Price
for the Shares as to which the Option is exercised, properly endorsed for
transfer to RNET, except that no Option may be exercised by delivery to
RNET of certificates representing Shares held by the Option Holder for
less than six months; or
(iv) by delivery of a properly executed notice of exercise,
together with irrevocable instructions to a broker to deliver to RNET
promptly the amount of the proceeds of the sale of all or part of the
Shares or of a loan from the broker to the Option Holder in an amount
sufficient to pay the Option Price for the Shares as to which the Option
is exercised.
(i) Date of Grant. An Option shall be deemed to be granted on the
date specified in the grant resolution of the Committee.
(j) Issuance of Additional Option. If an Option Holder pays all or
part of the exercise price of an Option with Shares, or pays all or any part of
the applicable withholding taxes with respect to the exercise of an Option with
Shares that has been held by the Option Holder for more than a period (no
shorter than six months) to be determined by the Committee, the Committee in its
sole discretion may grant to such Option Holder a new Option covering the number
of shares of Shares used to pay such exercise price or withholding tax. The new
Option
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<PAGE> 10
shall have an Option Price per Share equal to the Fair Market Value of a Share
on the date of exercise of the exercised Option and shall encompass the same
terms and conditions as the exercised option, except as otherwise provided by
the Committee in its sole discretion.
7.3 RESTRICTIONS ON INCENTIVE OPTIONS. The aggregate Fair Market Value of
the Shares with respect to which Incentive Options are exercisable for the first
time by an Option Holder in any calendar year, under the Plan or otherwise,
shall not exceed $100,000. For this purpose, the Fair Market Value of the Shares
shall be determined as of the date of grant of the Option. Incentive Options
granted to an Option Holder who is the holder of record of 10 percent or more of
the outstanding capital stock of RNET shall have an Option Price equal to 110
percent of the Fair Market Value of the Shares on the date of grant of the
Option, and the Option Period for any such Option shall not exceed five years.
7.4 SHAREHOLDER PRIVILEGES. No Option Holder shall have any rights as a
shareholder with respect to any Shares subject to an Option until the Option
Holder becomes the holder of record of such Shares. No adjustments shall be made
for dividends or other distributions or other rights as to which there is a
record date preceding the date such Option Holder becomes the holder of record
of such Shares, except as provided in article IV.
ARTICLE VIII
RESTRICTED STOCK AWARDS
8.1 GRANT. Coincident with or following designation for participation in
the Plan, the Committee may grant a Participant one or more Restricted Stock
Awards as may be determined by the Committee.
8.2 RESTRICTIONS. A Restricted Stock Award shall be subject to such
restrictions, including without limitation a Participant's continuous service as
a director or continuous employment by RNET or an Affiliated Corporation for a
restriction period specified by the Committee or the attainment of specified
performance goals and objectives determined by the Committee with respect to
such Award. The Committee in its sole discretion may require different periods
of employment or different performance goals and objectives with respect to
different Participants, to different Restricted Stock Awards, or to separate,
designated portions of the Shares comprising a Restricted Stock Award. In the
event of the death or Disability of a Participant, or the retirement of a
Participant in accordance with RNET's established retirement policy, all
employment period and other restrictions applicable to a Restricted Stock Award
shall lapse with respect to a pro rata portion of such Restricted Stock Award
based on the ratio between the number of full months of employment completed at
the time of termination of employment from the grant of the Restricted Stock
Award and the total number of months of employment required for such Restricted
Stock Award to be fully nonforfeitable, and such portion of the Restricted Stock
Award shall become fully nonforfeitable. The remaining portion of such
Restricted Stock Award shall be forfeited and immediately returned to RNET. In
the event of a Participant's termination of employment for any other reason, any
Restricted Stock Awards as to which the employment period or other restrictions
have not been satisfied (or
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<PAGE> 11
waived or accelerated as provided herein) shall be forfeited, and all Shares
related thereto shall be immediately returned to RNET.
8.3 PRIVILEGES OF A SHAREHOLDER; TRANSFERABILITY. A Participant shall have
all voting, dividend, liquidation, and other rights with respect to Shares
received a Restricted Stock Award under this article VIII upon his becoming the
holder of record of such Shares, except that the Participant's right to sell,
encumber, or otherwise transfer such Shares shall be subject to the limitations
of section 13.2.
8.4 ENFORCEMENT OF RESTRICTIONS. The Committee shall cause a legend to be
placed on the certificates evidencing Shares issued pursuant to a Restricted
Stock Award referring to the restrictions provided by sections 8.2 and 8.3 and,
in addition, may in its sole discretion require the Participant to keep the
certificates evidencing such Shares, duly endorsed, in the custody of RNET or a
third party while the restrictions remain in effect.
ARTICLE IX
STOCK UNITS
Coincident with or following designation for participation in the Plan,
the Committee may grant a Participant one or more Stock Units as may be
determined by the Committee. The number of Stock Units, the goals and objectives
to be satisfied with respect to each grant of Stock Units, the time and manner
of payment for each Stock Unit, and the other terms and conditions applicable to
a grant of Stock Units shall be determined by the Committee.
ARTICLE X
STOCK APPRECIATION RIGHTS
10.1 GRANT. Coincident with or following designation for participation in
the Plan, the Committee may grant a Participant one or more Stock Appreciation
Rights as may be determined by the Committee. The Committee shall determine at
the time of grant the period during which the Stock Appreciation Right may be
exercised, which period may not commence until six months after the date of
grant.
10.2 EXERCISE. If a Stock Appreciation Right is issued in tandem with an
Option, except as may otherwise be provided by the Committee, the Stock
Appreciation Right shall be exercisable during the period that its related
Option is exercisable. A Participant desiring to exercise a Stock Appreciation
Right shall give written notice stating the proportion of Shares and cash that
the Participant desires to receive pursuant to the Stock Appreciation Right
exercised. Within 30 days after receipt of the notice, RNET shall deliver to the
Participant a certificate or certificates for Shares and/or a cash payment in
accordance with section 10.3. The date on which RNET receives the written notice
shall be deemed the exercise date.
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10.3 NUMBER OF SHARES OR AMOUNT OF CASH. Subject to the discretion of the
Committee to substitute cash for Shares or Shares for cash, the number of Shares
to be issued pursuant to the exercise of a Stock Appreciation Right shall be
determined by dividing (a) the total number of Shares as to which the Stock
Appreciation Right is exercised, multiplied by the amount by which the Fair
Market Value of a Share on the exercise date exceeds the Fair Market Value of a
Share on the date of grant of the Stock Appreciation Right, by (b) the Fair
Market Value of a Share on the exercise date. Fractional shares shall not be
issued, and in lieu thereof a cash adjustment shall be paid. In lieu of issuing
Shares upon the exercise of a Stock Appreciation Right, the Committee in its
sole discretion may elect to pay the cash equivalent of the Fair Market Value of
the Shares on the exercise date for any or all Shares that would otherwise be
issuable upon exercise of the Stock Appreciation Right.
10.4 EFFECT OF EXERCISE. If a Stock Appreciation Right is issued in tandem
with an Option, the exercise of the Stock Appreciation Right or the related
Option shall result in an equal reduction in the number of corresponding Stock
Appreciation Rights and Shares subject to the related Option.
10.5 TERMINATION OF EMPLOYMENT. Upon a Participant's termination of
service as a director or employment, any Stock Appreciation Rights then held by
such Participant shall be exercisable within the time periods, and upon the same
conditions with respect to the reasons for termination of employment, as are
specified in section 7.2(d) with respect to Options.
ARTICLE XI
OTHER STOCK GRANTS
From time to time during the duration of this Plan, the Committee in its
sole discretion may adopt one or more incentive compensation arrangements for
Participants pursuant to which the Participants may acquire shares of Shares by
purchase, outright grant, or otherwise. Any such arrangements shall be subject
to the general provisions of this Plan, and all Shares issued pursuant to such
arrangements shall be issued under this Plan.
ARTICLE XII
RIGHTS OF PARTICIPANTS
12.1 EMPLOYMENT. Nothing contained in the Plan or any Award shall confer
upon any Participant any right with respect to the continuation of his
employment by RNET or an Affiliated Corporation, or interfere in any way with
the right of RNET or an Affiliated Corporation, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the Participant from
the rate in existence at the time of the grant of an Award. Whether an
authorized leave of absence, or absence in military or government service, shall
constitute a termination of employment shall be determined by the Committee at
the time.
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<PAGE> 13
12.2 TRANSFERABILITY. No right or interest of any Participant in an Award
shall be assigned or transferred during the lifetime of the Participant,
voluntarily or involuntarily, or subjected to any lien, directly or indirectly,
by operation of law, or otherwise, including execution, levy, garnishment,
attachment, pledge, or bankruptcy. In the event of a Participant's death, his
rights and interests in Awards shall, to the extent provided in the Plan, be
transferable by will or the laws of descent and distribution, and payment of any
amounts due under the Plan shall be made to, and exercise of any Options may be
made by, the Participant's legal representatives, heirs, or legatees. If in the
opinion of the Committee a person entitled to payments or to exercise rights
with respect to the Plan is disabled from caring for his affairs because of
mental condition, physical condition, or age, payment due such person may be
made to, and such rights shall be exercised by, such person's guardian,
conservator, or other legal personal representative upon furnishing the
Committee with evidence satisfactory to the Committee of such status.
12.3 NO PLAN FUNDING. Obligations to Participants under the Plan shall not
be funded, trusteed, insured, or secured in any manner. Participants shall have
no security interest in any assets of RNET or any Affiliated Corporation and
shall be only general creditors of RNET.
ARTICLE XIII
GENERAL
13.1 INVESTMENT REPRESENTATIONS. RNET may require any Participant, as a
condition of exercising an Option or a Stock Appreciation Right or receiving a
Restricted Stock Award, Stock Unit, or grant of Shares, to give written
assurances in substance and form satisfactory to RNET that he is acquiring the
Shares for his own account for investment purposes and not with a present
intention of selling or otherwise distributing the same and to such other effect
as RNET deems necessary or appropriate in order to comply with applicable
securities laws.
13.2 SECURITIES LAWS. (a) Each Award shall be subject to the requirement
that, if at any time RNET determines that the listing, registration, or
qualification of the Shares subject to such Award upon any securities exchange
or under any state or federal law, or the consent or approval of any
governmental or regulatory body, is necessary as a condition of or in connection
with the issuance or purchase of Shares thereunder, such Award may not be
accepted or exercised in whole or in part unless such listing, registration,
qualification, consent, or approval has been effected or obtained on conditions
acceptable to the Committee. Nothing herein shall be deemed to require RNET to
apply for or to obtain such listing, registration, or qualification.
(b) If a Participant is an officer or director of RNET within the
meaning of section 16 of the Securities Exchange Act of 1934, then to the extent
that section 16 is applicable, Awards shall be subject to all conditions
required under Rule 16b-3 or any successor rule to qualify the Award for an
exception from the provisions of section 16(b). Such conditions shall be set
forth in the agreement with the Participant which describes the Award.
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13.3 CHANGES IN ACCOUNTING RULES. Notwithstanding any other provision of
the Plan to the contrary, if, during the term of the Plan, any changes in the
financial or tax accounting rules applicable to Awards occurs which, in the sole
judgment of the Committee, may have a material adverse effect on the reported
earnings, assets, or liabilities of RNET, the Committee shall have the right and
power to modify as necessary any then outstanding Awards as to which the
applicable employment or other restrictions have not been satisfied.
13.4 OTHER EMPLOYEE BENEFITS. The amount of any compensation deemed to be
received by a Participant as a result of the exercise of an Option or Stock
Appreciation Right, the sale of shares received upon such exercise, the vesting
of any Restricted Stock Award, distributions with respect to Stock Units, or the
grant of Shares shall not constitute "earnings" or " compensation" with respect
to which any other employee benefits of such Participant are determined,
including without limitation benefits under any pension, profit sharing, life
insurance, or salary continuation plan.
13.5 PLAN AMENDMENT, MODIFICATION, AND TERMINATION. The Committee may at
any time terminate, and from time to time may amend or modify the Plan, except
that no amendment or modification may become effective without approval of the
shareholders if shareholder approval is required to enable the Plan to satisfy
any applicable statutory or regulatory requirements, or if RNET on the advice of
counsel determines that shareholder approval is otherwise necessary or
desirable. No amendment, modification, or termination of the Plan shall
adversely affect any Award theretofore granted without the consent of the
Participant holding such Award.
13.6 WITHHOLDING. (a) Requirement. RNET's obligation to deliver Shares
upon the exercise of any Option or Stock Appreciation Right, the vesting of any
Restricted Stock Award, payment with respect to Stock Units, or a grant of
Shares shall be subject to the Participant's satisfaction of all applicable
federal, state, and local income and other tax withholding requirements.
(b) Withholding with Shares. At the time an Award is granted, the
Committee in its sole discretion may grant the Participant an election to pay
all or part of such tax withholding by electing to transfer to RNET, or to have
RNET withhold from Shares otherwise issuable to the Participant, Shares having a
Fair Market Value on the date of withholding equal to the amount required to be
withheld or such lesser amount as may be elected by the Participant. All
elections shall be subject to the approval or disapproval of the Committee. Any
such election by a Participant (a) shall be made prior to the date of
withholding, (b) shall be irrevocable, and (c) if the Participant is an officer
or director of RNET within the meaning of section 16 of the Securities Exchange
Act of 1934, then to the extent that section 16 is applicable the Participant
shall satisfy the requirements of section 16 and any applicable rules
thereunder.
(c) Withholding for Non-Qualified Options. Upon exercise of a
NonQualified Option, the Option Holder shall make appropriate arrangements with
RNET to provide for the amount of additional withholding required by sections
3102 and 3402 of the Code and
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applicable state income tax laws, including payment of such taxes through
delivery of Shares or by withholding Shares to be issued under the Option.
(d) Withholding for Incentive Options. If an Option Holder makes a
disposition (as defined in section 424(c) of the Code) of any Shares acquired
pursuant to the exercise of an Incentive Option before the expiration of two
years from the date on which the Incentive Option was granted or prior to the
expiration of one year from the date on which the Option was exercised, the
Option Holder shall send written notice to RNET at its principal office of the
date of such disposition, the number of Shares disposed of, the amount of
proceeds received from such disposition, and any other information relating to
such disposition as RNET may reasonably request. The Option Holder shall then
make appropriate arrangements with RNET to provide for the amount of additional
withholding, if any, required by sections 3102 and 3402 of the Code and
applicable state income tax laws.
13.7 GOVERNING LAW. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
13.8 DURATION. Unless sooner terminated by the Board, the Plan shall
terminate on May 11, 2003, and no Award shall be made after such termination.
Awards outstanding at the time of Plan termination may continue to be exercised,
or become free of restrictions, or be paid in accordance with their terms.
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<PAGE> 1
EXHIBIT 4.14
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE RECOVERY NETWORK, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.
Right to Purchase 100,000 Shares of Common Stock of The
Recovery Network, Inc. (subject to adjustment as
provided herein)
COMMON STOCK PURCHASE WARRANT
No. 1 June 10, 1999
The Recovery Network, Inc., a corporation organized under the laws of the
State of Colorado (the "Company"), hereby certifies that, for value received,
LIBRA FINANCE S.A., or assigns, is entitled, subject to the terms set forth
below, to purchase from the Company after June 10, 1999 at any time or from
time to time before 5:00 p.m., New York time, on June 10, 2002 (the "Expiration
Date"), up to 100,000 fully paid and nonassessable shares of Common Stock (as
hereinafter defined), $.01 par value per share, of the Company, at a purchase
price of $0.35 per share (such purchase price per share as adjusted from time
to time as herein provided is referred to herein as the "Purchase Price"). The
number and character of such shares of Common Stock and the Purchase Price are
subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term Company shall include The Recovery Network, Inc. and any
corporation which shall succeed or assume the obligations of The Recovery
Network, Inc. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized on the date of the Agreement, (b) any
other capital stock of any class or classes (however designated) of the
Company, authorized on or after such date, the holders of which shall have the
right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies, be entitled
to vote for the election of a majority of directors of the Company (even if the
right so to vote has been suspended by the happening of such a contingency) and
(c) any other securities into which or for which any of the securities
described
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in (a) or (b) may be converted or exchanged pursuant to a plan or
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5 or otherwise.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the
date hereof through and including the Expiration Date, the holder hereof shall
be entitled to receive, upon exercise of this Warrant in whole in accordance
with the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, the number of shares of Common Stock of the
Company identified on Page 1 hereof, subject to adjustment pursuant to
Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the
holder hereof by surrender of this Warrant, with the form of subscription
attached as Exhibit A hereto (the "Subscription Form") duly executed by such
holder, to the Company at its principal office or at the office of its Warrant
agent (as provided in Section 11), accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common Stock for which
this Warrant is then exercisable by the Purchase Price (as hereinafter defined)
then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but
not for a fractional share) by surrender of this Warrant in the manner and at
the place provided in subsection 1.2 except that the amount payable by the
holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of shares of Common Stock designated by the holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the holder hereof a new Warrant of like tenor, in the name of
the holder hereof or as such holder (upon payment by such holder of any
applicable transfer taxes), may request, the number of shares of Common Stock
for which such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common
stock as of a particular date (the "Determination Date") shall mean the Fair
Market Value of a share of the Company's Common Stock. Fair Market Value of a
share of Common Stock as of a Determination Date shall mean:
(a) If the Company's Common Stock is traded on an exchange
or is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market, then
the closing or
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last sale price, respectively, reported for the last business day immediately
preceding the Determination Date.
(b) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System or the NASDAQ SmallCap Market but is
traded in the over-the-counter market, then the mean of the closing bid and
asked prices reported for the last business day immediately preceding the
Determination Date.
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree
or in the absence of agreement by arbitration in accordance with the rules then
standing of the American Arbitration Association, before a single arbitrator to
be chosen from a panel of persons qualified by education and training to pass
on the matter to be decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event
of such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of the
exercise of the Warrant, upon the request of the holder hereof acknowledge in
writing its continuing obligation to afford to such holder any rights to which
such holder shall continue to be entitled after such exercise in accordance
with the provisions of this Warrant. If the holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the holders of the Warrants
pursuant to Subsection 3.1, such bank or trust company shall have all the
powers and duties of a warrant agent appointed pursuant to Section 10 and shall
accept, in its own name for the account of the Company or such successor person
as may be entitled thereto, all amounts otherwise payable to the Company or
such successor, as the case may be, on exercise of this Warrant pursuant to
this Section 1.
2. Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall
be deemed to be issued to the holder hereof as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the
name of and delivered to the holder hereof, or as such holder (upon payment by
such holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of
-3-
<PAGE> 4
Common Stock (or Other Securities) to which such holder shall be entitled on
such exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any time
or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any
plan or arrangement contemplating the dissolution of the Company, then, in each
such case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and
property (including cash) to which such holder would have been entitled upon
such consummation or in connection with such dissolution, as the case may be,
if such holder had so exercised this Warrant, immediately prior thereto, all
subject to further adjustment thereafter as provided in Section 5.
3.2. Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause
to be delivered the stock and other securities and property (including cash,
where applicable) receivable by the holders of the Warrants, if exercised,
after the effective date of such dissolution pursuant to this Section 3 to a
bank or trust company having its principal office in New York, NY, as trustee
for the holder or holders of the Warrants.
3.3. Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities
and property receivable on the exercise of this Warrant after the consummation
of such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 5.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the
-4-
<PAGE> 5
happening of such event, be adjusted by multiplying the then Purchase Price by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such event and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
such event, and the product so obtained shall thereafter be the Purchase Price
then in effect. The Purchase Price, as so adjusted, shall be readjusted in the
same manner upon the happening of any successive event or events described
herein in this Section 4. The number of shares of Common Stock that the holder
of this Warrant shall thereafter, on the exercise hereof as provided in Section
1, be entitled to receive shall be increased to a number determined by
multiplying the number of shares of Common Stock that would otherwise (but for
the provisions of this Section 4) be issuable on such exercise by a fraction of
which (a) the numerator is the Purchase Price that would otherwise (but for the
provisions of this Section 4) be in effect, and (b) the denominator is the
Purchase Price in effect on the date of such exercise.
5. Chief Financial Officer's Certificate as to Adjustments. In each case
of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrants, the Company at its
expense will promptly cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the terms of the Warrant and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based,
including a statement of (a) the consideration received or receivable by the
Company for any additional shares of Common Stock (or Other Securities) issued
or sold or deemed to have been issued or sold, (b) the number of shares of
Common Stock (or Other Securities) outstanding or deemed to be outstanding, and
(c) the Purchase Price and the number of shares of Common Stock to be received
upon exercise of this Warrant, in effect immediately prior to such adjustment
or readjustment and as adjusted or readjusted as provided in this Warrant. The
Company will forthwith mail a copy of each such certificate to the holder of
the Warrant and any Warrant agent of the Company (appointed pursuant to Section
10 hereof).
6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial
Statements. The Company will at all times reserve and keep available, solely
for issuance and delivery on the exercise of the Warrants, all shares of Common
Stock (or Other Securities) from time to time issuable on the exercise of the
Warrant. This Warrant entitles the holder hereof to receive copies of all
financial and other information distributed or required to be distributed to
the holders of the Company's Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with
applicable Securities laws, and delivery of such representations and warranties
as shall reasonably be requested by the Company, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor") with respect to any or all of the Shares. On the surrender for
exchange of this Warrant, with the Transferor's endorsement in the form of
Exhibit B attached hereto (the "Transferor Endorsement Form"), to the Company,
the Company at its expense but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant or Warrants of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form
-5-
<PAGE> 6
(each a "Transferee"), calling in the aggregate on the face or faces thereof
for the number of shares of Common Stock called for on the face or faces of the
Warrant so surrendered by the Transferor.
8. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in a Subscription Agreement entered into by the Company and the initial
holder of this Warrant at or about the issue date of this Warrant. The terms of
the Subscription Agreement are incorporated herein by this reference.
10. Warrant Agent. The Company may, by written notice to the each holder
of the Warrant, appoint an agent having an office in New York, NY for the
purpose of issuing Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7,
and replacing this Warrant pursuant to Section 8, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be,
shall be made at such office by such agent.
11. Transfer on the Company's Books. Until this Warrant is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
12. Notices, etc. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder or, until any such holder furnishes to
the Company an address, then to, and at the address of, the last holder of this
Warrant who has so furnished an address to the Company.
13. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the laws of New York. Any dispute relating
to this Warrant shall be adjudicated in New York State. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as
of the date first written above.
THE RECOVERY NETWORK, INC.
By: [SIGNATURE ILLEGIBLE]
--------------------------------------
Title: Chairman
-----------------------------------
Witness:
[SIGNATURE ILLEGIBLE]
- -----------------------------------
-7-
<PAGE> 8
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE RECOVERY NETWORK, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.
Right to Purchase 50,000 Shares of Common
Stock of The Recovery Network, Inc. (subject
to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. 2 June 10, 1999
The Recovery Network, Inc., a corporation organized under the laws of the
State of Colorado (the "Company"), hereby certifies that, for value received,
AMRO INTERNATIONAL, S.A., or assigns, is entitled, subject to the terms set
forth below, to purchase from the Company after June 10, 1999 at any time or
from time to time before 5:00 p.m., New York time, on June 10, 2002 (the
"Expiration Date"), up to 50,000 fully paid and nonassessable shares of Common
Stock (as hereinafter defined), $.01 par value per share, of the Company, at a
purchase price of $0.35 per share (such purchase price per share as adjusted
from time to time as herein provided is referred to herein as the "Purchase
Price"). The number and character of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term Company shall include The Recovery Network, Inc. and any
corporation which shall succeed or assume the obligations of The Recovery
Network, Inc. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.01 par value per share, as authorized on the date of the Agreement, (b) any
other capital stock of any class or classes (however designated) of the
Company, authorized on or after such date, the holders of which shall have the
right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies, be entitled
to vote for the election of a majority of directors of the Company (even if the
right so to vote has been suspended by the happening of such a contingency) and
(c) any other securities into which or for which any of the securities
described
-1-
<PAGE> 9
in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or
shall have been issued in exchange for or in replacement of Common Stock or
Other Securities pursuant to Section 5 or otherwise.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the date
hereof through and including the Expiration Date, the holder hereof shall be
entitled to receive, upon exercise of this Warrant in whole in accordance with
the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, the number of shares of Common Stock of the
Company identified on Page 1 hereof, subject to adjustment pursuant to
Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the
holder hereof by surrender of this Warrant, with the form of subscription
attached as Exhibit A hereto (the "Subscription Form") duly executed by such
holder, to the Company at its principal office or at the office of its Warrant
agent (as provided in Section 11), accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common Stock for which
this Warrant is then exercisable by the Purchase Price (as hereinafter defined)
then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but not
for a fractional share) by surrender of this Warrant in the manner and at the
place provided in subsection 1.2 except that the amount payable by the holder
on such partial exercise shall be the amount obtained by multiplying (a) the
number of shares of Common Stock designated by the holder in the Subscription
Form by (b) the Purchase Price then in effect. On any such partial exercise,
the Company, at its expense, will forthwith issue and deliver to or upon the
order of the holder hereof a new Warrant of like tenor, in the name of the
holder hereof or as such holder (upon payment by such holder of any applicable
transfer taxes), may request, the number of shares of Common Stock for which
such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean the Fair
Market Value of a share of the Company's Common Stock. Fair Market Value of a
share of Common Stock as of a Determination Date shall mean:
(a) If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market, then
the closing or
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<PAGE> 10
last sale price, respectively, reported for the last business day immediately
preceding the Determination Date.
(b) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System or the NASDAQ SmallCap Market but is
traded in the over-the-counter market, then the mean of the closing bid and
asked prices reported for the last business day immediately preceding the
Determination Date.
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree
or in the absence of agreement by arbitration in accordance with the rules then
standing of the American Arbitration Association, before a single arbitrator to
be chosen from a panel of persons qualified by education and training to pass
on the matter to be decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event of
such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of the
exercise of the Warrant, upon the request of the holder hereof acknowledge in
writing its continuing obligation to afford to such holder any rights to which
such holder shall continue to be entitled after such exercise in accordance
with the provisions of this Warrant. If the holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the holders of the Warrants
pursuant to Subsection 3.1, such bank or trust company shall have all the
powers and duties of a warrant agent appointed pursuant to Section 10 and shall
accept, in its own name for the account of the Company or such successor person
as may be entitled thereto, all amounts otherwise payable to the Company or
such successor, as the case may be, on exercise of this Warrant pursuant to
this Section 1.
2. Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall
be deemed to be issued to the holder hereof as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the
name of and delivered to the holder hereof, or as such holder (upon payment by
such holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of
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<PAGE> 11
Common Stock (or Other Securities) to which such holder shall be entitled on
such exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 5.
3.2. Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause to
be delivered the stock and other securities and property (including cash, where
applicable) receivable by the holders of the Warrants, if exercised, after the
effective date of such dissolution pursuant to this Section 3 to a bank or trust
company having its principal office in New York, NY, as trustee for the holder
or holders of the Warrants.
3.3. Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially all of the
properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 5.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combined its outstanding shares of the Common
stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the
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<PAGE> 12
happening of such event, be adjusted by multiplying the then Purchase Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event and the denominator of which shall
be the number of shares of Common Stock outstanding immediately after such
event, and the product so obtained shall thereafter be the Purchase Price then
in effect. The Purchase Price, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive event or events described herein in
this Section 4. The number of shares of Common Stock that the holder of this
Warrant shall thereafter, on the exercise hereof as provided in Section 1, be
entitled to receive shall be increased to a number determined by multiplying the
number of shares of Common Stock that would otherwise (but for the provisions of
this Section 4) be issuable on such exercise by a fraction of which (a) the
numerator is the Purchase Price that would otherwise (but for the provisions of
this Section 4) be in effect, and (b) the denominator is the Purchase Price in
effect on the date of such exercise.
5. Chief Financial Officer's Certificate as to Adjustments. In each
case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrants, the Company at its expense
will promptly cause its Chief Financial Officer to compute such adjustment or
readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common stock to be received upon exercise of the
Purchase Price and the number of shares of Common Stock to be received upon
exercise of this Warrant, in effect immediately prior to such adjustment or
readjustment and as adjusted or readjusted as provided in this Warrant. The
Company will forthwith mail a copy of each such certificate to the holder of the
Warrant and any Warrant agent of the Company (appointed pursuant to Section 10
hereof).
6. Reservation of Stock, etc. Issuable on Exercise of Warrant;
Financial Statements. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant. This Warrant entitles the holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with
applicable Securities laws, and delivery of such representations and warranties
as shall reasonably be requested by the Company, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor") with respect to any or all of the Shares. On the surrender for
exchange of this Warrant, with the Transferor's endorsement in the form of
Exhibit B attached hereto (the "Transferor Endorsement Form"), to the Company,
the Company at its expense but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant or Warrants of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form
-5-
<PAGE> 13
(each a "Transferee"), calling in the aggregate on the face or faces thereof
for the number of shares of Common Stock called for on the face or faces of the
Warrant so surrendered by the Transferor.
8. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in a Subscription Agreement entered into by the Company and the initial
holder of this Warrant at or about the issue date of this Warrant. The terms of
the Subscription Agreement are incorporated herein by this reference.
10. Warrant Agent. The Company may, by written notice to each holder of
the Warrant, appoint an agent having an office in New York, NY for the purpose
of issuing Common Stock (or Other Securities) on the exercise of this Warrant
pursuant to Section 1, exchanging this Warrant pursuant to section 7, and
replacing this Warrant pursuant to section 8, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be,
shall be made at such office by such agent.
11. Transfer on the Company's Books. Until this Warrant is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
12. Notices, etc. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder or, until any such holder furnishes to the
Company an address, then to, and at the address of, the last holder of this
Warrant who has so furnished an address to the Company.
13. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the laws of New York. Any dispute relating to
this Warrant shall be adjudicated in New York State. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
-6-
<PAGE> 14
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of
the date first written above.
THE RECOVERY NETWORK, INC.
By: /s/ [Signature Illegible]
--------------------------------
Title: Chairman
-----------------------------
Witness:
/s/ ANNE YARD
- ----------------------------
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<PAGE> 15
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: The Recovery Network, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably elects to
exercise this Warrant for, and to purchase thereunder, __________ shares of
Common Stock of The Recovery Network, Inc. and herewith makes payment of
$________ therefor, and requests that the certificates for such shares be
issued in the name of, and delivered to ____________________ whose address is
______________________________________________ .
Dated: ____________________
____________________________________________
(Signature must conform to name of holder as
specified on the face of the Warrant)
____________________________________________
(Address)
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<PAGE> 16
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto the person(s) named below under the heading "Transferees" the right
represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of The Recovery Network, Inc. to which the within
Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred," respectively, opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the
books of The Recovery Network, Inc. with full power of substitution in the
premises.
<TABLE>
<CAPTION>
Percentage Number
Transferees Transferred Transferred
- ----------- ----------- -----------
<S> <C> <C>
- ----------------------------------------------------
- ----------------------------------------------------
- ----------------------------------------------------
- ----------------------------------------------------
</TABLE>
Dated: ___________, 19__ __________________________
(Signature must conform
to name of holder as
specified on the face
of the warrant)
Signed in the presence of:
- ----------------------- ------------------------------
(Name) (address)
------------------------------
(address)
ACCEPTED AND AGREED:
[TRANSFEREE]
- -----------------------
(Name)
-9-
<PAGE> 17
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE RECOVERY NETWORK, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.
Right to Purchase 25,000 Shares of Common Stock of The
Recovery Network, Inc. (subject to adjustment as provided
herein)
COMMON STOCK PURCHASE WARRANT
No. 3 June 10, 1999
The Recovery Network, Inc., a corporation organized under the laws of the
State of Colorado (the "Company"), hereby certifies that, for value received,
TALBIYA B. INVESTMENTS LTD., or assigns, is entitled, subject to the terms set
forth below, to purchase from the Company after June 10, 1999 at any time or
from time to time before 5:00 p.m., New York time, on June 10, 2002 (the
"Expiration Date"), up to 25,000 fully paid and nonassessable shares of Common
Stock (as hereinafter defined), $.01 par value per share, of the Company, at a
purchase price of $0.35 per share (such purchase price per share as adjusted
from time to time as herein provided is referred to herein as the "Purchase
Price"). The number and character of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term Company shall include The Recovery Network, Inc. and any
corporation which shall succeed or assume the obligations of The Recovery
Network, Inc. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock, $.01
par value per share, as authorized on the date of the Agreement, (b) any other
capital stock of any class or classes (however designated) of the Company,
authorized on or after such date, the holders of which shall have the right,
without limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even if the right so to vote
has been suspended by the happening of such a contingency) and (c) any other
securities into which or for which any of the securities described
-1-
<PAGE> 18
in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5 or otherwise.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the date
hereof through and including the Expiration Date, the holder hereof shall be
entitled to receive, upon exercise of this Warrant in whole in accordance with
the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, the number of shares of Common Stock of the
Company identified on Page 1 hereof, subject to adjustment pursuant to Section
4.
1.2. Full Exercise. This Warrant may be exercised in full by the holder
hereof by surrender of this Warrant, with the form of subscription attached as
Exhibit A hereto (the Subscription Form") duly executed by such holder, to the
Company at its principal office or at the office of its Warrant agent (as
provided in Section 11), accompanied by payment, in cash or by certified or
official bank check payable to the order of the Company, in the amount obtained
by multiplying the number of shares of Common Stock for which this Warrant is
then exercisable by the Purchase Price (as hereinafter defined) then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but not for
a fractional share) by surrender of this Warrant in the manner and the place
provided in subsection 1.2. except that the amount payable by the holder on
such partial exercise shall be the amount obtained by multiplying (a) the
number of shares of Common Stock designated by the holder in the Subscription
Form by (b) the Purchase Price then in effect. On any such partial exercise,
the Company, at its expense, will forthwith issue and deliver to or upon the
order of the holder hereof a new Warrant of like tenor, in the name of the
holder hereof or as such holder (upon payment by such holder of any applicable
transfer taxes), may request, the number of shares of Common Stock for which
such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common stock as of
a particular date (the "Determination Date") shall mean the Fair Market Value
of a share of the Company's Common Stock. Fair Market Value of a share of
Common Stock as of a Determination Date shall mean:
(a) If the Company's Common Stock is traded on an exchange or is quoted
on the National Association of Securities Dealers, Inc. Automated Quotation
("NASDAQ") National Market System or the NASDAQ SmallCap Market, then the
closing or
-2-
<PAGE> 19
last sale price, respectively, reported for the last business day immediately
preceding the Determination Date.
(b) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System or the NASDAQ SmallCap Market but is
traded in the over-the-counter market, then the mean of the closing bid and
asked prices reported for the last business day immediately preceding the
Determination Date.
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree
or in the absence of agreement by arbitration in accordance with the rules then
standing of the American Arbitration Association, before a single arbitrator to
be chosen from a panel of persons qualified by education and training to pass
on the matter to be decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event
of such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of the
exercise of the Warrant, upon the request of the holder hereof acknowledge in
writing its continuing obligation to afford to such holder any rights to which
such holder shall continue to be entitled after such exercise in accordance with
the provisions of this Warrant. If the holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or trust
company shall have been appointed as trustee for the holders of the Warrants
pursuant to Subsection 3.1, such bank or trust company shall have all the powers
and duties of a warrant agent appointed pursuant to Section 10 and shall accept,
in its own name for the account of the Company or such successor person as may
be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
2. Delivery of Stock Certificates, etc. on Exercise. The Company agrees
that the shares of Common Stock purchased upon exercise of this Warrant shall
be deemed to be issued to the holder hereof as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the
name of and delivered to the holder hereof, or as such holder (upon payment by
such holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of
-3-
<PAGE> 20
Common Stock (or Other Securities) to which such holder shall be entitled on
such exercise plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In the case at any
time or from time to time, the Company shall (a) affect a reorganization, (b)
consolidate with or merger into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any
plan or arrangement contemplating the dissolution of the Company, then, in each
such case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and
property (including cash) to which such holder would have been entitled upon
such consummation or in connection with such dissolution, as the case may be,
if such holder had so exercised this Warrant, immediately prior thereto, all
subject to further adjustment thereafter as provided in Section 5.
3.2 Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, prior to such dissolution, shall at its expense deliver or cause
to be delivered the stock and other securities and property (including cash,
where applicable) receivable by the holders of the Warrants, if exercised,
after the effective date of such dissolution pursuant to this Section 3 to a
bank or trust company having its principal office in New York, NY, as trustee
for the holder or holders of the Warrants.
3.3 Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities
and property receivable on the exercise of this Warrant after the dissolution
following any such transfer, as the case may be, and shall be binding upon the
issuer of any such stock or other securities, including, in the case of any
such transfer, the person acquiring all or substantially all of the properties
or assets of the Company, whether or not such person shall have expressly
assumed the terms of this Warrant as provided in Section 5.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (b) subdivide its outstanding
shares of Common Stock, or (c) combine its outstanding shares of the Common
Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the
-4-
<PAGE> 21
happening of such event, be adjusted by multiplying the then Purchase Price by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such event and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
such event, and the product so obtained shall thereafter be the Purchase Price
then in effect. The Purchase Price, as so adjusted, shall be readjusted in the
same manner upon the happening of any successive event or events described
herein in this Section 4. The number of shares of Common Stock that the holder
of this Warrant shall thereafter, on the exercise hereof as provided in Section
1, be entitled to receive shall be increased to a number determined by
multiplying the number of shares of Common Stock that would otherwise (but for
the provisions of this Section 4) be issuable on such exercise by a fraction of
which (a) the numerator is the Purchase Price that would otherwise (but for
the provisions of Section 4) be in effect, and (b) the denominator is the
Purchase Price in effect on the date of such exercise.
5. Chief Financial Officer's Certificate as to Adjustments. In each
case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrants, the Company at its expense
will promptly cause its Chief Financial Officer to compute such adjustment or
readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 10 hereof).
6. Reservation of Stock,etc. Issuable on Exercise of Warrant;
Financial Statements. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise
of the Warrant. This Warrant entitles the holder hereof to receive copies of
all financial and other information distributed or required to be distributed
to the holders of the Company's Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with
applicable Securities laws, and delivery of such representations and warranties
as shall reasonably be requested by the Company, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor") with respect to any or all of the Shares. On the surrender for
exchange of this Warrant, with the Transferor's endorsement in the form of
Exhibit B attached hereto (the "Transferor Endorsement Form"), to the Company,
the Company at its expense but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant or Warrants of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form
-5-
<PAGE> 22
(each a "Transferee"), calling in the aggregate on the face or faces thereof
for the number of shares of Common Stock called for on the face or faces of the
Warrant so surrendered by the Transferor.
8. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights. The holder of this Warrant has been granted
certain registration rights by the Company. These registration rights are set
forth in a Subscription Agreement entered into by the Company and the initial
holder of this Warrant at or about the issue date of this Warrant. The terms of
the Subscription Agreement are incorporated herein by this reference.
10. Warrant Agent. The Company may, by written notice to the each
holder of the Warrant, appoint an agent having an office in New York, NY for
the purpose of issuing Common Stock (or Other Securities) on the exercise of
this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section
7,and replacing this Warrant pursuant to Section 8, or any of the foregoing,
and thereafter any such issuance, exchange or replacement, as the case may be,
shall be made at such office by such agent.
11. Transfer on the Company's Books. Until this Warrant is transferred
on the books of the Company, the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to
the contrary.
12. Notices, etc. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder or, until any such holder furnishes to
the Company an address, then to, and at the address of, the last holder of this
Warrant who has so furnished an address to the Company.
13. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the laws of New York. Any dispute relating to
this Warrant shall be adjudicated in New York State. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
-6-
<PAGE> 23
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of
the date first written above.
THE RECOVERY NETWORK, INC.
By: [SIGNATURE ILLEGIBLE]
---------------------------
Title: Chairman
------------------------
Witness:
[SIGNATURE ILLEGIBLE]
- ---------------------
-7-
<PAGE> 24
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: The Recovery Network, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably elects to
exercise this Warrant for, and to purchase thereunder, _________ shares of
Common Stock of The Recovery Network, Inc. and herewith makes payments of
$______ therefor, and requests that the certificates for such shares be issued
in the name of, and delivered to ________ whose address is____________________.
Dated:______________
-------------------------------------
(Signature must conform to name of
holder as specified on the face of the
Warrant)
-------------------------------------
(Address)
-8-
<PAGE> 25
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number
of shares of Common Stock of The Recovery Network, Inc. to which the within
Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred," respectively, opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the
books of The Recovery Network, Inc. with full power of substitution in the
premises.
================================================================================
Transferees Percentage Number
Transferred Transferred
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Dated: __________, 19____ _________________________________________
(Signature must conform to name of holder
as specified on the face of the warrant)
Signed in the presence of:
_________________________________ ________________________________
(Name) (address)
ACCEPTED AND AGREED: _________________________________
[TRANSFEREE] (address)
_________________________________
(Name)
-9-
<PAGE> 1
EXHIBIT 10.9
[RECOVERY NETWORK LOGO]
EMPLOYMENT AGREEMENT
This Employment Agreement, by and between THE RECOVERY NETWORK, INC. (the
"Company") and JAY HANDLINE (the "Employee").
For good consideration, the Company employees the Employee on the following
terms and conditions:
1. Term of Employment. Subject to the provisions for termination set forth
below this agreement will begin on May 11, 1999, and continue thereafter for a
term of three (3) years, unless sooner terminated.
2. Salary. $12,000 per month. The Company shall pay Employee twice month
in accordance with the Company's standard payroll procedure.
3. Stock Options. Employee shall receive an option to purchase Four
Hundred Thousand (400,000) shares of the Company's common stock (the "Option")
exercisable at the closing bid price on May 11, 1999, the date of execution of
this agreement. The Option shall vest, as follows:
1/4th (100,000) upon execution of this Agreement
1/4th (100,000) at the end of year 1
1/4th (100,000) at the end of year 2
1/4th (100,000) at the end of year 3
If Employee's employment relationship with the Company is terminated for
any reason other than for cause or Employee's refusal to carry out his duties,
dishonesty or criminal conduct, then Employees Option will fully vest, as of
the date of termination.
4. Duties and Position. The Company hires the Employee in the capacity of
Executive Vice President. Employee shall oversee the Company's Internet
activities. The Employee's duties may be reasonably modified at the Company's
discretion from time to time.
Company shall use its best effort to provide to Employee office space
located in Florida and an Executive Assistant.
5. Employee to Devote Full Time to Company. The Employee will devote full
time, attention, and energies to the business of the Company, and, during this
employment, will not engage in any other business activity, regardless of
whether such activity is pursued for profit, gain, or other pecuniary
advantage. Employee is not prohibited from making personal investments in any
other businesses provided those investments do not require active involvement
in the operation of said companies.
1411 5th Street, Suite 200, Santa Monica, CA 90401
t 310 393 3979 f 310 393 5749
www.recoverynetwork.com
<PAGE> 2
6. Confidentiality or Proprietary Information. Employee agrees, during or
after the term of this employment, not to reveal confidential information, or
trade secrets to any person, firm, corporation, or entity. Should Employee
reveal or threaten to reveal this information, the Company shall be entitled to
an injunction restraining the Employee from disclosing the same, or from
rendering any services to any entity to whom said information has been or is
threatened to be disclosed. The right to secure an injunction is not exclusive,
and the Company may pursue any other remedies it has against the Employee for a
breach or threatened breach of this condition, including the recovery of damages
from the Employee.
7. Reimbursement of Expenses. The Employee may incur reasonable expenses
for furthering the Company's business, including expenses for entertainment,
travel, and similar items. The Company shall reimburse Employee for all
reasonable business expenses after the Employee presents an itemized account of
expenditures, pursuant to Company policy.
9. Benefits. Employee will participate in the Company's benefits program.
Employee will receive enrollment forms and other benefits information upon
acceptance of the terms of this Agreement.
10. Termination of Agreement. Without cause, the Company may terminate this
agreement at any time upon thirty (30) days written notice to the Employee. If
the Company requests, the Employee will continue to perform his/her duties and
may be paid his/her regular salary up to the date of termination. In addition,
the Company will pay the Employee the following:
If Employee is terminated within the first year of the term of
employment a severance allowance equal to Six (6) months salary less taxes and
social security required to be withheld.
If Employee is terminated within the second year of the term of
employment a severance allowance equal to Nine (9) months salary less taxes and
social security required to be withheld.
If Employee is terminated with the third year of the term of
employment a severance allowance equal to Twelve (12) months salary less taxes
and social security required to be withheld.
Without cause, the Employee may terminate employment upon thirty (30)
days' written notice to the Company. Employee may be required to perform his or
her duties and will be paid the regular salary to date of termination but shall
not receive severance allowance. Notwithstanding anything to the contrary
contained in this agreement, the
<PAGE> 3
Company may terminate the Employee's employment upon thirty (30) days' notice
to the Employee should any of the following events occur:
a) The sale of substantially all of the Company's assets to a single
purchaser or group of associated purchasers; or
b) The sale, exchange, or other disposition, in one transaction of the
majority of the Company's outstanding corporate shares; or
c) The Company's decision to terminate its business and liquidate its
assets;
d) The merger or consolidation of the Company with another company;
e) Bankruptcy or chapter 11 reorganization.
11. Restriction on Post Employment Compensation. For a period of two (2)
years after the end of employment, the Employee shall not control, consult to or
be employed by any business similar to that conducted by the company, either by
soliciting any of its accounts or by operating within Employer's general trading
area.
Notwithstanding the foregoing, this restriction shall not apply, in
the event that Company terminates Employee with our without cause or in the
event any of the enumerated conditions in Section 10 shall occur.
12. Assistance in Litigation. Employee shall upon reasonable notice,
furnish such information and proper assistance to the Company as it may
reasonably require in connection with any litigation in which it is, or may
become a party either during or after employment.
13. Effect or Prior Agreements. This Agreement supersedes any prior
agreement between the Company and any predecessor of the Company and the
Employee, except that this agreement shall not affect or operate to reduce any
benefit or compensation inuring to the Employee of a kind elsewhere provided and
not expressly provided in this agreement.
14. Settlement by Arbitration. Any claim or controversy that arises out of
or relates to this agreement, or the breach of it, shall be settled by
arbitration in accordance with the rules of the American Arbitration
Association. Judgment upon the award rendered may be entered in any court with
jurisdiction.
15. Limited Effect of Waiver by Company. Should Company waive breach of any
provision of this agreement by the Employee, that waiver will not operate or be
construed as a waiver of further breach by the Employee.
16. Severability. If, for any reason, any provision of this agreement is
held invalid,
<PAGE> 4
all other provisions of this agreement shall remain in effect. If this
agreement is held invalid or cannot be enforced, then to the full extent
permitted by law any prior agreement between the Company (or any predecessor
thereof) and the Employee shall be deemed reinstated as if this agreement had
not been executed.
17. Assumption of Agreement by Company's Successors and Assignees. The
Company's rights and obligations under this agreement will inure to the benefit
and be binding upon the Company's successors and assignees.
18. Oral Modifications Not Binding. This instrument is the entire agreement
of the Company and the Employee. Oral changes have no effect. It may be altered
only by a written agreement signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is sought.
Signed this 11 day of May 1999.
THE RECOVERY NETWORK, INC. JAY HANDLINE
/s/ WILLIAM D. MOSES /s/ JAY HANDLINE
- ----------------------------- -----------------------------
Company Employee
<PAGE> 1
EXHIBIT 10.11
Services Agreement
-between-
Group W Network Services
-and-
Recovery Network, Inc.
dated as of April 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Services. ..............................................................1
2. Additional Services ....................................................1
3. Term ...................................................................1
4. Charges and Payment ....................................................2
5. Termination ............................................................2
6. Representations and Warranties .........................................3
7. Indemnification ........................................................5
8. Notices ................................................................5
9. Confidentiality; Public Announcement ...................................6
10. Employee Matters........................................................7
11. Subject to Law..........................................................8
12. Limitation of Liability.................................................8
13. Assignment..............................................................8
14. Force Majeure...........................................................8
15. General.................................................................9
16. Certain Definitions....................................................10
Exhibit 1 - Master Control/Playback Services...........................12
Exhibit 2 - Traffic Services...........................................15
Exhibit 3 - Compressed Satellite Space Segment, Uplink and Encryption
Services ..................................................17
Exhibit 4 - Consumable Goods...........................................19
Exhibit 5 - Service Fees...............................................20
Exhibit 6 - New York-Stamford Interconnect/Earth Station Facilities....21
</TABLE>
-i-
<PAGE> 3
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 sooner terminated
or extended in accordance
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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 Exhibit 5 hereto, 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
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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 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 Exhibit 5
hereto, 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
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<PAGE> 6
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;
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
postproduced by GWNS or on GWNS's facilities or
transmitted by GWNS hereunder ("Customer Programming")
shall not violate or infringe any Law, civil right,
property right, right of privacy,
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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.
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:
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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:
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
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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 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.
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<PAGE> 10
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 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
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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 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
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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.
"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.
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"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: SR. V.P. of Operations
Date signed: 5/21/98 Date signed: May 21, 1998
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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
1 - Automated control unit
1 - 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.
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GWNS shall use an equipment configuration in the provision Of Master
Control/Playback Services 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.
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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 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.
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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 Exhibit 5 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.
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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.
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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.
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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%
Video channel differential phase 4%
Video channel chrominance to luminance delay 60nS
Audio channel signal to noise (>1KHz)54.0dB
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 TI.502-1988 medium haul
performance. The design goal for fiber optics systems shall be ANSI
TI.502-1988 medium haul and the maintenance limit shall be as follows:
(Audio channels shall be tested at peak program level of +1dBm)
Video channel signal to noise (>10KHz) 50.0dB
Video channel differential gain 8%
Video channel differential phase 2%
Video channel chrominance to luminance delay 50nS
Audio channel signal to noise (>1KHz) 54.0dB
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
6.7 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).
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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.
-19-
<PAGE> 22
EXHIBIT 5 - SERVICE FEES
1. Monthly Service Fee and annual cost escalation for Master
Control/Playback, Traffic, Uplink, Encryption and Compressed Satellite
Space Segment Services:
<TABLE>
<CAPTION>
Year Monthly Service Fee Annual Cost Escalation
<S> <C> <C>
1 $83,500.00 0%
2 $83,500.00 0%
3 $85,170.00 2%
4 $87,725.00 3%
5 $90,795.00 3.5%
</TABLE>
2. Termination Liability(1): $150,000.00
3. Cancellation Charge: In the event that contracted
service is canceled, an additional
charge equal to two (2) months
service fee will be added to the
relevant Termination Liability.
4. Payment:
Service Fee: Payable monthly, 30 days in
advance.
Consumables: Payable net 30 days.
- --------------
(1) In the event that the contracted service is canceled prior to the
conclusion of a sixty (60) month service commitment, a termination charge equal
to 1/60 of the Termination Liability will be assessed for each unused month, or
fraction thereof, out of the sixty (60) month commitment.
-20-
<PAGE> 23
EXHIBIT 6
NEW YORK-STAMFORD Interconnect/Earth Station Facilities
[image]
<PAGE> 24
THE RECOVERY NETWORK, INC.
1411 5TH STREET, SUITE 250
SANTA MONICA, CALIFORNIA 90401
October 27, 1998
Group W Network Services
Attention: Altan C. Stalker, President
250 Harbor Drive
Stamford, CT 06904
Facsimile: 203-965-6320
Group W Network Services
Attention: Law Department
250 Harbor Drive
Stamford, CT 06904
Facsimile: 203-965-6020
Re: Services Agreement dated as of April 1, 1998 (the "Agreement")
between Group W Network Services ("Group W"), a division of
Group W Broadcasting, Inc. and The Recovery Network, Inc.
("Recovery").
Ladies and Gentlemen:
All capitalized terms used but not defined in this side letter
(including the Schedule hereto) shall have the meaning assigned to such terms in
the Agreement.
Exhibit 5 and each reference thereto in the Agreement is hereby deleted.
In lieu of each reference to Exhibit 5, each such reference in the Agreement is
hereby amended to refer to "the Side Letter," which shall mean this letter and
Schedule 1 hereto (the "Side Letter").
The fees, charges and/or payments under the Agreement are as set forth
at Schedule 1 hereto.
Section 9 of the Agreement shall apply to this Side Letter and Schedule
1 hereto.
Except as amended hereby, the Agreement is ratified and confirmed in all
respects by the parties hereto. Nothing herein shall confer or be deemed
to confer any right, remedy, benefit or
<PAGE> 25
Group W Network Services
Altan C. Stalker October 27, 1998
Page 2
entitlement on any third-party. This amendment shall be construed pursuant to
and in accordance with the laws of the State of New York, without regard to
conflict of laws principles, and may be executed in counterparts, including by
telecopy, each of which shall be deemed an original, all of which taken together
shall constitute one and the same amendment.
Very truly yours,
THE RECOVERY NETWORK, INC.
/s/ JOHN WHEELER
-----------------------------------
By: John Wheeler
Title: Vice President of Operations
ACCEPTED AND AGREED
this 27th day of October, 1998
GROUP W NETWORK SERVICES
- -------------------------------
By:
Title:
<PAGE> 26
SCHEDULE 1
----------
1. Monthly Service Fee and annual cost escalation for Master
Control/Playback, Traffic, Uplink, Encryption and Compressed Satellite
Space Segment Services:
<TABLE>
<CAPTION>
Year Monthly Service Fee Annual Cost Escalation
<S> <C> <C>
1 $83,500.00 0%
2 $83,500.00 0%
3 $85,170.00 2%
4 $87,725.00 3%
5 $90,795.00 3.5%
</TABLE>
2. Termination Liability(1): $150,000.00
3. Cancellation Charge: In the event that contracted
service is canceled, an additional
charge equal to two (2) months
service fee will be added to the
relevant Termination Liability.
4. Payment:
Service Fee: Payable monthly, 30 days in
advance.
Consumables: Payable net 30 days.
- ---------------
(1) In the event that the contracted service is canceled prior to the
conclusion of a sixty (60) month service commitment, a termination
charge equal to 1/60 of the Termination Liability will be assessed for
each unused month, or fraction thereof, out of the sixty (60) month
commitment.
<PAGE> 27
[GROUP W NETWORK SERVICES-LETTERHEAD]
As of May 1, 1999
The Recovery Network, Inc.
Attention: Mr. William D. Moses
President
Recovery Network
506 Santa Monica Boulevard, Suite 4
Santa Monica, CA 90401
Re: Services Agreement between Group W Network Services, a business
unit of CBS Corporation ("GWNS"), and The Recovery Network, Inc.
("Recovery") dated as of April 1, 1998, as amended by Side
Letter dated October 27, 1998 (the "Agreement")
Dear Bill:
This letter sets forth certain terms and conditions modifying the
referenced Agreement. By way of background: by notice dated February 9, 1999
GWNS terminated the Agreement effective March 12, 1999 based on Recovery's
breach of its payment obligations. By subsequent letters GWNS extended the
effective date of termination while the parties discussed terms and conditions
pursuant to which the Agreement might be modified. Having concluded such
discussions to their mutual satisfaction, Recovery and GWNS hereby agree to
modify the Agreement on the terms and conditions set forth below.
1. GWNS hereby withdraws its termination notice.
2. The parties to the Agreement hereby ratify the letter agreement dated
April 15, 1999, proffered by the undersigned to Mr. George H. Henry and
countersigned by Mr. Henry, as an effective and legally binding
modification of the Agreement. A copy of such letter agreement as
executed is annexed hereto as Exhibit A and incorporated herein by this
reference.
3. Recovery represents to GWNS that the 500,000 shares of its stock
transferred pursuant to the above letter agreement's penultimate
paragraph represent less that 4.9% of its total outstanding shares.
<PAGE> 28
4. Recovery acknowledges that free transferability of Recovery's shares
transferred to GWNS as contemplated in the above letter agreement is
material in order for GWNS to realize the benefit of its bargain
hereunder. GWNS shall have the right to request registration thereof
(but not more than one (1) such registration every twelve months),
including effectuation of all appropriate related notices,
qualifications and compliances, at Recovery's sole cost and expense, in
order to permit or facilitate the sale thereof. Recovery shall effect
such registration and related matters promptly upon receipt of GWNS's
request. In addition, should Recovery determine to register any of its
securities, it shall so notify GWNS and include in such registration and
in any underwriting involved therein, such of GWNS's shares in Recovery
as GWNS shall have specified by written request(s) made within twenty
(20) days after GWNS's receipt of Recovery's notice. Recovery shall
indemnify and hold harmless GWNS, its affiliates and their officers and
directors with respect to all claims, losses, expenses, damages, and
liabilities arising out of any untrue or allegedly untrue statement of a
material fact contained in any prospectus, offering circular or other
document incident to any such registration, qualification or compliance,
or omission of a material fact therefrom.
5. The promissory note contemplated by point number 5 of the above letter
agreement (the "Note") is executed and delivered contemporaneously
herewith. Recovery hereby represents to GWNS that Recovery has no
indebtedness or obligation which is superior in right or time to the
Note and that there exists no mortgage, pledge, lien, or other security
interest of any kind upon any of Recovery's property or assets of any
character, whether now owned or hereafter acquired, in respect of any
indebtedness or obligation of Recovery, except as disclosed herein.
Recovery has outstanding certain Secured Promissory Notes dated April
13, 1999 (the "Secured Notes"), which Secured Notes are secured by the
company's website RecoveryNetwork.com. The principal balance of the
Secured Notes is $725,000; such principal and all accrued interest
thereon is due and payable in full October 31, 1999.
6. Recovery hereby reiterates specifically with application to the
Agreement and this amendment each of the representations and warranties
made by it in Section 6.1 of the Agreement.
Capitalized terms used and not defined in this amendment shall have the meanings
assigned to such terms in the Agreement. The parties acknowledge that the above
letter agreement is written in a vernacular that does not uniformly utilize
capitalized
<PAGE> 29
terms defined in the Agreement and agree that such vernacular shall not be
grounds for any dispute or argument concerning construction or interpretation of
the Agreement.
The Agreement as amended hereby is ratified and confirmed in all respects.
Nothing herein shall confer or be deemed to confer any right, remedy, BENEFIT or
entitlement on any third party. This amendment shall be construed pursuant to
and in accordance with the laws of the State of New York, without regard to
conflict of laws principles, and may be executed in counterparts, each of which
shall be deemed an original, all of which taken together shall constitute one
and the same instrument.
Sincerely yours,
/s/ ALTAN C. STALKER
- --------------------------
Altan C. Stalker
Enclosure
Ratified and Agreed:
THE RECOVERY NETWORK, INC.
By: /s/ WILLIAM MOSES
--------------------------
Name: William Moses
Title: PRESIDENT
<PAGE> 30
NON-SUBORDINATED PROMISSORY NOTE
$75,000 Dated: May 1, 1999
FOR VALUE RECEIVED, THE RECOVERY NETWORK, INC. ("Maker"), a Colorado corporation
with its principal offices at 1411 5th Street, Suite 250, Santa Monica,
California 90401 UNCONDITIONALLY PROMISES TO PAY to GROUP W NETWORK SERVICES, a
business unit of CBS Corporation ("Holder"), the principal amount of
Seventy-Five Thousand Dollars ($75,000), together with interest as set forth
below. Principal and interest shall be payable in lawful money of the United
States of America to Holder at its office at 250 Harbor Drive, Post Office Box
10210, Stamford, Connecticut 06904-2210 or at such other address as may be
designated by Holder in writing to Maker.
1. Payment of Principal and Interest. The principal balance of
this Note, together with interest thereon, shall be due and payable on December
30, 1999.
2. Interest Rate. The principal amount shall bear interest at the
fixed rate of ten percent (10%) per annum, based on a 360-day year.
3. Default. If any default hereunder shall have occurred and be
continuing, Holder may proceed to protect and enforce its rights either by suit
in equity or by action at law, or both, whether for specific performance of any
covenant or agreement contained in this Note or in aid of the exercise of any
power granted pursuant to this Note, or may proceed to enforce any other legal
or equitable right as the holder of this Note. No remedy is intended to be
exclusive and each remedy shall be cumulative. If Maker shall default in the
payment of principal of or interest on this Note, it will pay to Holder further
amounts, to the extent lawful, as shall be sufficient to pay the reasonable
costs and expenses of collection, including reasonable lawyers' fees,
disbursements and other charges.
4. Covenants. Maker hereby agrees that, so long as any principal
amount of this Note remains outstanding and unpaid or any other amount is owing
to Holder hereunder:
(a) Financial Statements. Maker shall furnish to Holder:
(i) As soon as available, but in any event within 90
days after the end of each fiscal year of Maker, a copy of the audited balance
sheet of Maker as at the end of such year and the related audited statements of
income and statements of stockholders' equity and cash flow for such year,
setting forth in each case in comparative form the corresponding figures for the
previous year; and
<PAGE> 31
2
(ii) As soon as available, but in any event within 45
days after the end of each of the first three quarterly periods of each fiscal
year of Maker, the unaudited balance sheet of Maker as at the end of such
quarter and the related unaudited statements of income and statements of
stockholders' equity and of cash flows of Maker for such quarter and the portion
of the fiscal year through the end of such quarter, setting forth in each case
in comparative form the corresponding figures for the previous year. If the
financial statements described in this subsection 4(a)(ii) are audited by
Maker's certified public accountants, Maker shall furnish to Holder such audited
financial statements;
all such financial statements to be certified by a responsible officer of Maker
as fairly stating the financial position of Maker at the dates and for the
periods referred to therein and as having been prepared in accordance with
generally accepted accounting principles consistently applied (subject, in the
case of quarterly financial statements, to normal year-end audit adjustments and
the absence of footnotes).
(b) Certificates. Maker shall furnish to Holder,
concurrently with the delivery of the financial statements referred to in
Subsection 4(a)(i) and (ii) above, a certificate of a responsible officer of
Maker stating that, to the best of such officer's knowledge, during the period
since the delivery of the previous such certificate (or if no such certificate
has been previously delivered, since May 1, 1999) Maker has observed or
performed in all material respects all of its covenants and other agreements
contained in this Note, and that such officer has obtained no knowledge of any
default except as specified in such certificate.
(c) No Superior Obligation. Maker shall not incur or suffer
to be incurred any obligation to which this Note would be subordinate.
(d) Restriction on Liens. Maker will not directly or
indirectly create or incur, or suffer to be created or incurred or to exist, any
mortgage, pledge, lien, or other security interest of any kind upon any of its
property or assets of any character, whether now owned or hereafter acquired, in
respect of any indebtedness or obligation of Maker.
(e) When Maker May Merge, Etc. Maker shall not consolidate
with or merge into, or transfer all or substantially all of its assets to, a
third party unless:
(i) such third party is a corporation organized
under the laws of the United States, one of the
States thereof or the District of Columbia;
<PAGE> 32
3
(ii) the resulting, surviving or transferee third
party assumes all the obligations of Maker under
this Note; and
(iii) immediately before and after giving effect to
such transaction, no default shall have occurred
and be continuing under this Note.
(f) Substitution of Successor: Maker Not Released. Upon any
consolidation or merger, or any transfer of all or substantially all of the
assets, of Maker in accordance with Subsection 4(d), the successor third party
formed by such consolidation or into which Maker is merged or to which such
transfer is made shall succeed to, and be substituted for and may exercise every
right and power of, Maker under this Note with the same effect as if such
successor third party had been named as Maker herein, provided Maker shall not
be released from its obligation under this Note.
5. Obligation of Maker Unconditional. Nothing herein is intended
to or shall impair the obligation of Maker, which is absolute and unconditional,
to pay to Holder the principal of and interest on this Note as and when the same
shall become due and payable in accordance with its terms, nor shall anything
herein prevent Holder from exercising all remedies otherwise permitted by
applicable law upon default under this Note.
6. Waiver. Maker hereby waives presentment for payment, demand,
notice of dishonor and protest, and all other demands or notices in connection
with the delivery, performance, default or enforcement of this Note. No failure
on the part of the Holder to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or the
exercise of any other right.
7. Prepayment. The Maker may prepay all or part of the
indebtedness (principal and interest) evidenced by this Note at any time without
penalty.
8. Binding Effect. This Note shall be the binding and valid legal
obligation of the Maker and its legal representatives, executors, heirs,
successors and assigns.
9. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York.
10 Waiver of Trial by Jury. THE MAKER HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY IN CONNECTION WITH ANY MATTERS ARISING OUT OF THIS TRANSACTION.
<PAGE> 33
4
11. Jurisdiction. THIS NOTE SHALL BE GOVERNED BY THE LAW OF THE
STATE OF NEW YORK. THE MAKER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW YORK OVER ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE, AND THE MAKER
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL
COURT. THE MAKER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN
ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE
MAKER, VIA REGISTERED- OR CERTIFIED MAIL, AT ITS ADDRESS SPECIFIED IN THIS NOTE.
THE MAKER AGREES THAT A FINAL, UNAPPEALABLE JUDGEMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON THE JUDGEMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. THE
<PAGE> 34
MAKER FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO
AN ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS.
THE RECOVERY NETWORK, INC.
By: /s/ TRACY R. NEAL
------------------------
Name Tracy R. Neal
Title: In House Counsel
STATE OF CALIFORNIA )
)
) ss: July 20, 1999
)
COUNTY OF LOS ANGELES )
-------------- )
On this the 20 day of July, 1999 before me Barbara J. Sullivan the undersigned
-------------------
(Name of Notary)
officer, personally appeared Tracy R. Neal who acknowledged himself to be the
-------------
(Name of Officer)
IN HOUSE COUNSEL of The Recovery Network, Inc., a corporation, and that he as
- ------------------
(Title of Officer)
such officer, being authorized so to do, executed the foregoing instrument for
the purposes therein contained, by signing the name of the corporation by
himself as such officer. In witness whereof I hereunto set my hand.
[NOTARY SEAL]
/s/ BARBARA J. SULLIVAN
-------------------------------
Notary Public
My Commission Expires: 12/12/02
<PAGE> 1
EXHIBIT 10.12
G. HOWARD ASSOCIATES, INC.
800 Fifth Avenue
New York, NY 10021
Mr. Gary Horowitz
The Recovery Network
1411 5th Street Suite 200
Santa Monica, CA 90401
December 7, 1998
Dear Gary:
We are writing this letter (the "Letter Agreement") to confirm our
understanding that G. Howard Associates, Inc. ("Howard") has been retained by
The Recovery Network ("RNet" or the "Company") to represent the Company, on an
exclusive basis with respect to certain investors Howard has identified
("Howard's Investors"), in connection with capital raising for RNet. Howard will
act as RNet's financial advisor for a period of one year, in all negotiations
leading to the possible purchase of a portion of RNet's capital stock or
otherwise by Howard's Investors (the "Transaction").
For purposes of this Letter Agreement, RNet shall be subject to a fee
(the "Fee"), payable to Howard in the event of a Transaction with Howard's
Investors. Howard's Investors currently include: Grady & Hatch; Liberty Media;
George Soros; Time Warner; Paul Allen's Vulcan Venturess and the Mashantucket
Pequots. Howard and RNet agree that Howard may present, in writing, additional
investors to RNet for inclusion as Howard's Investors and upon acceptance by
RNet will be subject to a Fee.
In November of 1998, RNet initiated discussions with Howard concerning
their interest in, and their willingness, to represent RNet in the Transaction.
Howard has met on several occasions with RNet, and has produced a list of
Howard's Investors for the placement of the Transaction. Howard will act as
RNet's financial advisor during the period to place the equity interest in RNet
with Howard's Investors. In their capacity as financial advisor to RNet, Howard
will assist, as needed in all matters necessary to result in a successful
closing of the Transaction.
For our services, it is agreed that RNet will pay, or cause to be paid,
a cash Fee equal to the 6% (six percent) of the total consideration received by
RNet and to reimburse Howard for its out-of-pocket expenses.
The Fee shall be payable to Howard in cash upon closing of any portion
of the Transaction.
<PAGE> 2
G. HOWARD ASSOCIATES, INC.
Mr. Gary Horowitz
December 7, 1998
page two
The aggregate consideration shall be deemed to be the total amount
received by RNet upon consummation of the Transaction. The aggregate
consideration paid shall be deemed to include those amounts paid in cash, notes,
stock or other evidence of indebtedness, in connection with the Transaction.
Should a portion of the aggregate consideration be in the form of an "earn-out",
Howard agrees that only the initial face value paid in consideration of the
earn-out shall be subject to the Fee. In the event that the consideration is
paid in whole or in part in the form of securities, the value of such
securities, for purposes of calculating our Fee, shall be the face value
thereof.
This authorization may be terminated by the Company or Howard, at any
time with or without cause, upon written advice to that effect to the other
party. Howard shall be entitled to its full compensation that would have been
payable under this Letter Agreement in the event a Transaction between the
Company is consummated prior to the expiration of two years after termination of
this authorization.
Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the duplicate of this Letter
Agreement enclosed.
Sincerely,
By: /s/ GEORGE H. HENRY
------------------------------
George H. Henry
G. Howard Associates, Inc.
Agreed to and Accepted:
The Recovery Network
/s/ GARY HOROWITZ Date: 12-14-98
----------------------------------- ------------------------
By: Gary Horowitz
<PAGE> 3
G. HOWARD ASSOCIATES, INC.
800 Fifth Avenue
New York, NY 10021
Mr. William D. Moses
Chairman
The Recovery Network
1411 5th Street Suite 200
Santa Monica, CA 90401
April 11, 1999
Dear Bill:
We are writing this letter (the "Letter Agreement") to confirm our
understanding that G. Howard Associates, Inc. ("Howard") has been retained by
The Recovery Network ("RNet" or the "Company") to represent the Company, on an
exclusive basis with respect to; a) the sale of the Company's 20% ownership in
RecoveryNet Interactive ("RI Sale"); and b) the settlement with certain
creditors identified by the Company, ("Howard's Creditors"), in connection with
RI Sale and the settling of RNet's obligations to Howard's Creditors ("RNet's
Debts") and; c) assistance, on a best efforts basis, in raising $300,000 of
additional capital. Howard will act as RNet's financial advisor for a period of
two months, in all negotiations leading to the possible settlement of all, or a
portion, of RNet's Debts owed Howard's Creditors by full payment, payment in
part, forgiveness and, or the issuance of capital stock (collectively a
"Transaction").
For purposes of this Letter Agreement, RNet shall be subject to a fee
(the "Fee"), payable to Howard in the event of a Transaction with Howard's
Creditors. The current list of Howard's Creditors are listed in the attached
Exhibit A. Howard and RNet agree that Howard may be given additional creditors
by RNet for inclusion as Howard's Creditors.
During April 1999 Howard has been in discussion with a prospective
buyer concerning the purchase of RI Sale which has resulted in an $850,000 cash
offer. The Company has expressed interest in accepting such an offer, contingent
on a satisfactory resolution, with Howard's Creditors. On April 9, 1999, RNet
and Howard have produced a list of Howard's Creditors for the Transaction (see
Exhibit A attached). Howard will act as RNet's financial advisor during the next
two month period to settle RNet's Debts and accept the purchase of RI Sale. In
their capacity as financial advisor to RNet, Howard will assist, as needed in
all matters necessary to result in a successful closing of a Transaction.
For our services, it is agreed that RNet will pay, or cause to be paid,
a Fee of; 1) 900,000 newly issued common shares of RNet common stock; 2) reduce
all warrants held by Howard, and, or George H. Henry, to $.43 per warrant,
("Warrant Reduction") and; 3) will reimburse Howard for its out-of-pocket
expenses.
<PAGE> 4
G. HOWARD ASSOCIATES, INC.
Mr. William D. Moses
April 11, 1999
page two
The Warrant Reduction shall be made upon acceptance of this Letter
Agreement. The Fee shall be paid to Howard in RNet common stock at the closing
of the Transaction. The Company will reimburse Howard for any out-of-pocket cash
expenses.
This authorization may be terminated by the Company or Howard, at any
time with or without cause, upon written advice to that effect to the other
party. Howard shall be entitled to its full compensation that would have been
payable under this Letter Agreement in the event a Transaction between the
Company is consummated prior to the expiration of six months after termination
of this authorization.
Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the duplicate of this Letter
Agreement enclosed.
Sincerely,
By: /s/ GEORGE H. HENRY
------------------------------
George H. Henry
G. Howard Associates, Inc.
Agreed to and Accepted:
The Recovery Network
/s/ WILLIAM D. MOSES Date: 4/15/99
----------------------------------- ------------------------
By: William D. Moses
<PAGE> 5
EXHIBIT A
1. American Express
2. Arthur Andersen
3. Bowne
4. Bradshaw Cassettes
5. Business Wire
6. Cahners Business Information
7. Co-op Temporary Services
8. Colonial Pacifid Leasing
9. CS Associates
10. CT & C
11. CyberMotion
12. Dystar Television, Inc.
13. Excelsior
14. Flower Box
15. Galanty & Company, Inc.
16. Geneen Roth & Associates, Inc.
17. Great North International, Inc.
18. Greenberg, Glusker, Fields, Claman & Machtinger
19. Group W Network services
20. Hall Dickler Kent Friendman & Wood LLP
21. Holme Roberts & Owen, LLP
22. Horizon Consulting Group
23. Horizon Film and Video
24. Kaleidoscope Entertainment, Inc.
25. KCSA
26. Kinkos
27. Levine Thall Plotkin & Menin, LLP
28. MCI-LD
29. Micro System Warehouse
30. Millennium Broadway
31. NASDAQ Stock Market
32. Omni Offices
33. OTOL
34. Parker, Chapin, Flattau, & Klimpl, LLP
35. Planet Pictures
36. Printing Palace
37. R.R. Bowker
38. Rubenstein Associates, Inc.
39. Sahn, Mitchell
40. Santa Monica Video, Inc.
41. Scientific Atlanta
42. Sovereign Ventures
43. Sprint
44. Stapleton Communications, Inc.
45. University of Florida
46. Varied Directions, Inc.
47. VCI Communications, Inc.
48. Wyland Group
49. Zia Film Distribution, LLC
50. Autost Anstalt Schaan
51. Balmore Funds
52. Zakeni Ltd
53. Sargon Fund
54. Willaim Moses Marital Trust II
55. Peter Graf
56. Highborough
57. Stephen Richmond
58. Gerhardt Waldschudt
59. Janice Gold
60. Rob Gordon
<PAGE> 1
EXHIBIT 10.13
[RECOVERY NETWORK LOGO]
January 26, 1999
John Wheeler
The Recovery Network, Inc.
1411 Fifth Street, Suite 200
Santa Monica, California 90401
Re: Letter Agreement
Dear John:
We are pleased to confirm by this Letter Agreement (the "Agreement")
the terms and conditions upon which The Recovery Network, Inc. (the "Company")
has engaged agent ("Agent") to assist us in the financing generally described as
the "Cable TV Industry Proposal" (the "Financing"). The Company engages Agent
upon the terms and conditions set forth below.
1. THE SERVICES
Agent shall render the following services (hereinafter, "Services") to the
Company and provide written reports to the Company with respect thereto as
requested by the Company at reasonable benchmarks throughout the term hereof.
a. Agent will use his best efforts to assist and represent the Company in
obtaining long term financing.
b. Agent agrees to use his best efforts to assist in the introduction to,
and negotiation of the financing with certain potential investors
("Investors"). Said Investors are listed on EXHIBIT A, attached hereto.
This Agreement applies only to these Investors.
c. Agent shall render the services described above, under direct
supervision by the Company and at such time and in such manner as Agent
and the Company may deem appropriate.
2. COMPENSATION, FEES AND EXPENSES
a. Agent shall be paid, as follows:
(i.) A cash fee ("Fee") equal to Four percent (4%) of the total
financing received by the Company.
(ii.) The Board of Directors of the Company or a representative
selected by the Board of Directors, reserves the right to
negotiate whatever financing terms it deems are in its best
interest and shall be under no obligation to accept any
financing or offers from any Investors.
b. Payment of the Fee shall be due only upon receipt by the Company of
some or all of the financing amount from Investors, and accepted by the
Company, and such payment shall be made at the time of closing of such
financing. If there are multiple closings, payment shall be made at
each such closing in an amount equal to the applicable Fee relating to
the value of the financing involved at such closing.
1411 5th Street, Suite 200, Santa Monica, CA 90401
t 310 393 3979 f 310 393 5749
www.recoverynetwork.com
<PAGE> 2
Letter Agreement
Page 2
c. All expenses, approved in advance, incurred by Agent in connection with
your performance of this agreement shall be immediately payable upon
submission by Agent of an expense report accompanied by appropriate
receipts. Upon mutual agreement, arrangements will be made to provide
Agent with an advance on expenses, on the condition, that Agent will
promptly submit expense reports in the customary format of the Company
relating to such advances.
d. Notwithstanding the foregoing, as additional compensation for Agent's
efforts to introduce and participate in negotiations with the
Investors, the Company agrees to issue and deliver to Agent
Seventy-five Thousand (75,000) shares of Company' Common Stock,
immediately upon acceptance of this Agreement.
3. TERM
Either party may terminate this Agreement and the Services provided hereunder.
In the event, that the Company terminates this Agreement and the Services
provided hereunder, and within one (1) year from the date of such termination
die Company effects a financing or sale of the assets or completes a transaction
with Investors introduced to the Company by Agent, the Company shall pay to
Agent the incentive fees payable with respect to such financing or sale of
assets or completed transaction, as the case may be, upon the Closing of such
financing or sale, or completed transaction.
4. GENERAL TERMS
This Letter Agreement (i) constitutes the entire agreement between the parties
and may be amended only in writing executed by both parties; (ii) shall be
governed in accordance with the laws of the state of Colorado without giving
effect to the principles of conflicts of laws; and (iii) shall be effective as
of the date hereof.
Enclosed are two copies of this Letter Agreement executed by the Company. Please
sign and return one copy to the Company to acknowledge acceptance of its terms,
and retain one copy for your records. Each copy shall constitute a duplicate
original execution.
Sincerely,
THE RECOVERY NETWORK, INC.
/s/ GARY HOROWITZ
- --------------------------------
Gary Horowitz
President & CEO
Accepted and Agreed this 29th day of January , 1999.
AGENT
/s/ JOHN WHELLER
- ----------------------------------
John Wheller
<PAGE> 3
Letter Agreement
Page 3
EXHIBIT A
<TABLE>
Investor(s) RNet Approval
- ----------- -------------
<S> <C>
Cablevision - Dolan Yes
Insight Communications Yes
Sutton/Waller Fund Yes
Adelphia Yes
Steeplechase Yes
Microsoft Yes
Bill Daniels Yes
</TABLE>
*Other names may be added upon mutual consent.
Initialed:
/s/ JOHN Wheeler
- ----------------------------------
John Wheeler
- ----------------------------------
Gary Horowitz
<PAGE> 1
EXHIBIT 10.14
[RECOVERY NETWORK LOGO]
January 7, 1999
Ms. Charlotte Schiff-Jones
Special Advisor, The Recovery Network, Inc.
1627 Brickell Avenue, Suite 601
Miami, FL 33129
Re: ENGAGEMENT PROPOSAL
Dear Charlotte:
We are pleased to confirm by this Letter Agreement (the "Agreement") the terms
and conditions upon which The Recovery Network, Inc. (the "Company") has engaged
you ("Special Advisor") to assist us in the financing generally described as the
"Cable TV Industry Proposal" (the "financing"). The Company agrees to engage you
upon the terms and conditions set forth below.
1. THE SERVICES
Special Advisor shall render the following services (hereinafter, "Services") to
the Company and provide written reports to the Company with respect thereto as
requested by the Company at reasonable benchmarks throughout the term hereof:
a. Special Advisor will use her best efforts to assist and represent the
Company in obtaining both long term financing.
b. Special Advisor agrees to use her best efforts to assist in the
introduction to, and negotiation of the financing with certain
potential investors, subject to the prior approval of the Company. Such
investors ("Investors"), shall be those listed on Exhibit A attached
hereto, as accepted by the Company at its sole discretion, and as
updated from time to time, and this Agreement applies only to such
Investors.
c. Special Advisor shall render the services described above, with direct
supervision by the Company and at such time and in such manner as
Consultant and the Company may deem appropriate.
2. COMPENSATION, FEES AND EXPENSES
a. Special Advisor shall be paid, as follows:
(i.) In the event that the introduction by Agent to Investors
results in a financing, the Company agrees to pay to Special
Advisor an incentive fee equal to the "Lehman Formula" of any
cash or equivalent value received by the Company as a direct
result of
1411 5th Street, Suite 200, Santa Monica, CA 90401
t 310 393 3979 f 310 393 5749
www.recoverynetwork.com
<PAGE> 2
Engagement Proposal
Page 2
such introduction, earned and payable to you at the time and
in the manner set forth in subparagraph (b) below. The
incentive fee described in the preceding sentence shall be
payable in cash.
(ii.) The Board of Directors of the Company or a representative
selected by the Board of Directors, reserves the right to
negotiate whatever financing terms it deems are in its best
interest and shall be under no obligation to accept any
financing or offers from any Investors.
(iii.) The Lehman Formula shall mean an incentive fee equal to 5% of
the first $1 million of value; 4% of the second $1 million of
value; 3% of the third $1 million of value; 2% of the fourth
$1 million of value; and 1% on all amounts of value in excess
of $5 million.
b. Payment of the incentive fee shall be earned only upon receipt by the
Company of some or all of the financing amount from Investors, and
accepted by the Company, and such payment shall be made at the Closing
of such financing. If there are multiple Closings, payment shall be
made at each such Closing in an amount equal to the applicable
incentive fee relating to the value of the financing involved at such
Closing.
c. All expenses, approved in advance, incurred by you in connection with
your performance of this agreement shall be immediately payable upon
submission by you of an expense report accompanied by appropriate
receipts. Upon mutual agreement, arrangements will be made to provide
you with an advance on expenses, on the condition, that expense reports
will be promptly submitted by you in the customary format of the
Company relating to such advances.
d. Notwithstanding anything else to the contrary herein, as additional
compensation for your efforts to introduce and participate in
negotiations with the Investors, the Company agrees to issue and
deliver to you 50,000 shares of The Recovery Network, Inc. Common
Stock, immediately upon your acceptance of this Agreement.
3. TERM
Either party may terminate this Agreement and the Services provided hereunder.
In the event, that the Company terminates this Agreement and the Services
provided hereunder, and within one (1) year from the date of such termination
the Company effects a financing or sale of the assets or completes a transaction
with Investors introduced to the Company by you, the Company shall pay to you
the incentive fees payable with respect to such financing or sale of assets or
completed transaction, as the case may be, upon the Closing of such financing or
sale, or completed transaction.
4. GENERAL TERMS
This Letter Agreement (i) constitutes the entire agreement between the parties
and may be amended only in writing executed by both parties; (ii) shall be
governed in accordance with the
<PAGE> 3
Engagement Proposal
Page 3
laws of the state of Colorado without giving effect to the principles of
conflicts of laws; and (iii) shall be effective as of the date hereof.
Enclosed are two copies of this Letter Agreement executed by the Company. Please
sign and return one copy to the Company to acknowledge acceptance of its terms,
and retain one copy for yourself. Each copy shall constitute a duplicate
original execution.
Sincerely,
THE RECOVERY NETWORK, INC.
/s/ GARY HOROWITZ
- ----------------------------------
Gary Horowitz
President & CEO
Accepted and Agreed this 25th day of January, 1999.
SPECIAL ADVISOR
/s/ CHARLOTTE SCHIFF-JONES
- ----------------------------------
Charlotte Schiff-Jones
<PAGE> 4
Engagement Proposal
Page 4
EXHIBIT A
INVESTORS
<TABLE>
<CAPTION>
Investor RNet Approval
- -------- -------------
<S> <C>
Time Warner, Jerry Levin and Affiliates Yes
Jeffrey Marcus, Charter Cable and Affiliates Yes
Leonard Tow, Century Cable and Affiliates Yes
Marc Nathanson, Falcon Cable and Affiliates Yes
William Bresnan, Bresnan Communications and Affiliates Yes
</TABLE>
Other names may be added upon mutual consent.
Initialed:
/s/ CHARLOTTE SCHIFF-JONES
- -------------------------------------
Charlotte Schiff-Jones
/s/ GARY HOROWITZ
- -------------------------------------
Gary Horowitz
<PAGE> 1
EXHIBIT 10.15
MUTUAL RELEASE AND NULLIFICATION AGREEMENT
THIS MUTUAL RELEASE AND NULLIFICATION AGREEMENT ("Release") is made and
entered into as of the 11th day of March 1999, by and between THE RECOVERY
NETWORK, INC., a Colorado corporation ("Company") and TELESERVICES
INTERNATIONAL GROUP, INC. ("Consultant").
W I T N E S S E T H
WHEREAS, the Company and the Consultant (collectively, the "Parties")
entered into a Letter of Understanding ("Agreement") as of April 17, 1998; and
WHEREAS, the Parties mutually agree that it is to their mutual best
interests to void said Agreement and to return the Parties to their respective
positions relative to the subject matter of the agreement prior to its execution
of the Agreement on April 17, 1998.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration, the receipt and
efficiency of which is hereby acknowledged, the Parties hereto agree as
follows:
ARTICLE I
TERMINATION
1.1 The Parties hereby agree that the Agreement is null and void, and
that all actions under, and effects of, said Agreement are nullified and voided
as if said Agreement had never been executed by the Parties.
ARTICLE II
WAIVER OF PERFORMANCE AND COMPENSATION
2.1 In addition to any other agreement made herein, the Consultant
specifically waives all rights to any compensation, including, but not limited
to, warrants to the Company, and the Company waives all rights to any
performance by the Consultant.
ARTICLE III
WAIVER
3.1 Each Party hereby waives, irrevocably and in perpetuity, any and all
losses, settlements, claims, actions, suits, proceedings, investigations,
judgments, awards, damages and liabilities, including reasonable attorneys'
fees (collectively "Losses" and, individually, a "Loss"), whether or not
known, anticipated, or foreseen, which are sustained or incurred by or
asserted against any of them and which arise out of the Agreement, any such
action or inaction hereunder or the termination thereof, as against the other
Party and its affiliates, their successors and assigns, and their respective
officers, directors, shareholders, employees and agents.
IN WITNESS WHEREOF, the parties have duly executed and delivered the
Release and Indemnification Agreement, effective as of the day and year first
above-written.
THE RECOVERY NETWORK, INC. TELESERVICES INTERNATIONAL GROUP, INC.
BY: /s/ GARY HOROWITZ BY: /s/ JAMES H. GUILD
------------------------ -------------------------
Gary Horowitz James H. Guild
President and Chief Executive Officer President
<PAGE> 1
EXHIBIT 10.16
AGREEMENT AND GENERAL RELEASES
This Agreement and General Releases ("Agreement") is made and entered into
as of the 15th day of April, 1999 by and among RECOVERY NETWORK, INC., a
Colorado corporation ("RTV"), TCI ONLINE RN HOLDINGS, INC. ("TCI"), FHC INTERNET
SERVICES, LC, a Virginia limited liability company ("FHC"), and LIFESCAPE 1 TO
1, LLC, a Delaware limited liability company f/k/a RecoveryNet Interactive, LLC
("RI") with reference to the following facts:
A. RTV, TCI and FHC are parties to (i) that certain Amended and Restated
Operating Agreement of RecoveryNet Interactive, LLC dated as of October 26,
1998 ("Operating Agreement") pursuant to which they agreed to be, and are, the
members of RI, and (ii) that certain Adjustment Agreement dated October 26,
1998 ("Adjustment Agreement").
B. RTV and RI are parties to that certain Services Agreement dated as of
October 26, 1998 ("Services Agreement").
C. RTV has asserted in a letter dated March 24, 1999 from its legal
counsel, that it has various claims against TCI and FHC (collectively "RTV's
Claims"). TCI and FHC deny that RTV's Claims have any merit.
D. Despite good faith efforts, TCI and FHC, on the one hand, and RTV, on
the other hand, are unable to resolve certain differences concerning the
operation and management of RI.
E. Solely to avoid time consuming and expensive litigation and to
resolve the current differences concerning the operation and management of RI,
the parties to this Agreement have agreed, as set forth below, that in exchange
for a cash payment, the transfer of RI's interest in a certain website, and the
release of any and all claims any of TCI, FHC and RI, asserts it has against
RTV, RTV will transfer its interest in RI to TCI, FHC, RTV will release any and
all claims RTV asserts it has against TCI, FHC and RI, and the parties hereto
will terminate certain agreements to which RTV is a party.
G. RTV and RI or TCI may be parties to other agreements not named in
these recitals. The parties intend by this Agreement to terminate only the
Services Agreement and the Adjustment Agreement, and to acknowledge the fact
that RTV will have no rights related to RI or RI's business upon the
consummation of the transactions described in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by each party, the parties herein agree as follows:
1. Conveyance of interest by RTV.
RTV hereby conveys its membership interest in RI and all of its rights,
titles and
<PAGE> 2
interests, of all types, in and to RI and RI's assets (collectively, the
"Interest") to TCI and to FHC in equal shares. The Interest is the same twenty
percent interest originally acquired by RTV under the Operating Agreement.
From and after the date hereof, RTV shall have no rights of any kind related to
RI or RI's business, subject to the performance by TCI and FHC of their
obligations under this Agreement. To the extent that this conveyance, or the
procedure for accomplishing this conveyance, is different from, inconsistent
with, or contrary to, any provision of the Operating Agreement, the parties
agree that the provisions of this Agreement supersede the Operating Agreement.
2. Termination of Agreements; Return of RTV Website to RTV.
2.1 The parties that the Adjustment Agreement and the Services Agreement
are hereby terminated, and shall have no further force or effect.
2.2 RI hereby conveys to RTV, without warranty except as otherwise set
forth in this Agreement, all of RI's right, title and interest in and to the
Internet website known as "www.recoverynetwork.com", and in and to the Uniform
Resource Locators "www.recoverynetwork.com" and "www.recoverynet.com. Each
party shall have the unrestricted right to engage in any business and to
compete against the other. RTV acknowledges and agrees that RI will continue to
use the URL "recovery1to1", and RTV agrees to remove all references to RTV from
the "recovery1to1" website as quickly as reasonably possible following the
execution of this Agreement.
3. Payment.
Within ten (10) business days following the execution and delivery of this
Agreement by all parties, TCI and FHC shall pay to RTV an aggregate sum of
Eight Hundred Fifty Thousand Dollars ($850,000.00) by federal funds wire
transfer to the account which RTV designates to TCI and FHC in writing upon the
execution of this Agreement. Such payment is, together with the provisions of
Article 2 and the release set forth in Article 6 of this Agreement, the entire
consideration due to RTV under this Agreement or otherwise. The parties
acknowledge and agree that said sum is fair and adequate consideration for the
settlement of the disputes between them and for all of the transactions
described in this Agreement.
4. Representations and Warranties of RTV.
4.1 RTV hereby makes the representations and warranties set forth in
Sections 4.2 and 4.5 below to each of the other parties to this Agreement. The
complete truth of all of such representations and warranties are conditions to
the obligation of the other parties to perform their obligations under this
Agreement, as well as covenants of RTV. All of such representations and
warranties shall survive the consummation of the transactions contemplated by
this Agreement.
2
<PAGE> 3
4.2 RTV has the full right, power and authority to enter into, and
perform its obligations under, this Agreement without the consent of, or payment
of any money or other consideration to, any person or entity. This Agreement
has been duly executed and delivered by RTV, and constitutes a legal, valid
and binding obligation on RTV. There is no legal basis known to RTV for any
person to object to the terms of this Agreement, and this Agreement is
enforceable against RTV in accordance with its terms, except as enforceability
may be limited or affected by applicable bankruptcy, insolvency, reorganization
or other laws of general application relating to or affecting the rights of
creditors. The execution, delivery and performance of this Agreement by RTV and
the consummation of the transactions contemplated hereby: (i) do not and will
not conflict with, or result in a breach, default, violation or loss of any
benefit under any agreement, mortgage, lease, license or other instrument or
obligation of RTV; (ii) do not require the consent or permission of any person
or governmental agency; and (iii) will not violate any law, rule or regulation
of any agency or governmental body to which RTV is subject. No registration,
declaration or filing with any governmental or administrative authority is
required on the part of RTV or any officer, director or shareholder of RTV in
connection with the execution, delivery and performance of this Agreement. RTV
has received independent legal advice from attorneys of its own choice with
respect to the advisability of entering into this Agreement. Prior to the
execution of this Agreement, RTV's attorneys reviewed this Agreement at length
and made all desired changes. TCI, FHC and RI and their attorneys have made
various statements and representations to the other parties and their attorneys
during negotiations leading to this Agreement. Nevertheless, RTV specifically
does not rely upon any statement, representation, legal opinion, or promise of
any other party or its counsel in executing this Agreement or in making the
settlement provided for herein, except as expressly stated in this Agreement.
RTV, together with its attorneys, has made such investigation of the facts and
the law pertaining to this settlement and this Agreement, and of all the
matters pertaining thereto, as it deems necessary. RTV forever waives all
rights to assert that this Agreement was the result of a mistake in law or in
fact. RTV is the sole and lawful owner of all right, title and interest in and
to every claim and other matter which it releases through this Agreement, and
that it has not assigned or transferred, or purported to assign or transfer to
any person or entity any claims or other matters released through this
Agreement. RTV has not filed against TCI, FHC and/or RI any complaints,
charges, demands, causes of action, or other claims in any jurisdiction or
before any dispute resolution entity.
4.3 RTV is the sole owner, beneficially and of record, of the entire
Interest. RTV has not entered into any agreement with any person regarding the
sale, transfer or other disposition of all or any part of the Interest.
4.4 Upon the execution of this Agreement, FHC and TCI will
collectively hold good and valid title to the entire Interest free and clear of
all liens, claims, charges or other encumbrances of any nature whatsoever.
3
<PAGE> 4
5. Representations and Warranties of TCI, FHC and RI.
5.1 TCI, FHC and RI hereby represent and warrant to RTV as set forth
in Section 5.2 below. The complete truth of all such representations and
warranties are conditions to the obligations of RTV to perform its obligations
under this Agreement as well as covenants of FHC, TCI and RI. All of such
representations and warranties shall survive the consummation of the
transactions contemplated by this Agreement. Each of TCI, FHC, and RI is making
the representations solely as to itself and shall not be responsible for the
truth or untruth of any representation made by the others.
5.2 TCI, FHC and RI each has the full right, power and authority to
enter into, and perform its obligations under, this Agreement without the
consent of, or payment of any money or other consideration to, any person or
entity. This Agreement has been duly executed and delivered by RI, TCI and FHC,
and constitutes a legal, valid and binding obligation on each of TCI, FHC and
RI. There is no legal basis known to TCI, FHC or RI for any person to object to
the terms of this Agreement, and this Agreement is enforceable against each of
them in accordance with its terms, except as enforceability may be limited or
affected by applicable bankruptcy, insolvency, reorganization or other laws of
general application relating to or affecting the rights of creditors. The
execution, delivery and performance of this Agreement by TCI, FHC and RI, and
the consummation of the transactions contemplated hereby: (i) do not and will
not conflict with, or result in a breach, default, violation or loss of any
benefit under any agreement, mortgage, lease, license or other instrument or
obligation of TCI, FHC or RI; (ii) do not require the consent or permission of
any person or governmental agency; and (iii) will not violate any law, rule or
regulation of any agency or governmental body to which TCI, FHC or RI is
subject. No registration, declaration or filing with any governmental or
administrative authority is required on the part of RI, FHC or TCI in connection
with the execution, delivery and performance of this Agreement. TCI, FHC and RI
have received independent legal advice from attorneys of its own choice with
respect to the advisability of entering into this Agreement. Prior to the
execution of this Agreement, the attorneys for TCI, FHC and RI, respectively,
have reviewed this Agreement at length and made all desired changes. RTV and its
attorneys have made various statements and representations to the other parties
and their attorneys during negotiations leading to this Agreement. Nevertheless,
TCI, FHC and RI specifically do not rely upon any statement, representation,
legal opinion, or promise of any other party or its counsel in executing this
Agreement or in making the settlement provided for herein, except as expressly
stated in this Agreement. TCI, FHC and RI, together with their attorneys, have
made such investigation of the facts and the law pertaining to this settlement
and this Agreement, and of all the matters pertaining thereto, as it deems
necessary. TCI, FHC and RI forever waive all rights to assert that this
Agreement was the result of a mistake in law or in fact. THC, FHC and RI are the
sole and lawful owners of all right, title and interest in and to every claim
and other matter which each is releasing through this Agreement, and that they
have not assigned or transferred, or purported to assign or transfer to any
person or entity any claims or other matters released through this Agreement.
TCI, FHC and RI have not filed
4
<PAGE> 5
against RTV any complaints, charges, demands, causes of action, or other claims
in any jurisdiction or before any dispute resolution entity.
5.3 Although TCI, FHC and RI agree that the consideration being
given to RI under this Agreement is fair and adequate consideration for the
settlement of the disputes between them and for all of the transactions
described in this Agreement (which transactions include, but are not limited
to, the conveyance of the Interest as described herein); however, TCI, FHC and
RI make no representations to RTV concerning the value of the Interest. No sale
of any interest in RI to any third party following the date of this Agreement,
regardless of the sum paid by such third party for its interest, shall affect
the parties' agreement that the sum being paid to RTV under this Agreement is
fair and adequate consideration for the transactions described in this
Agreement.
5.4 RI makes no representation or warranty regarding the
recoverynetwork.com website (there being no website for recoverynet.com; such
Uniform Resource Locator being only a link to the recoverynetwork.com website)
except that RI made no changes to, and did not transfer to any person any
interest in, the recoverynetwork.com website following the date that RTV
originally conveyed said website to RI, other than changes made with the
knowledge and consent of RTV.
6. Releases by RTV.
Subject to the performance by RI, TCI and FHC of their obligations
under this Agreement, RTV, for itself and on behalf of its respective present
and former officers, directors, shareholders, employees, agents, attorneys,
representatives, successors, and assigns, hereby releases, waives and
discharges each of RI, TCI and FHC, and each of their respective parents,
subsidiaries, or otherwise affiliated corporations, partnerships or business
enterprises, and each of their respective present and former officers,
directors, shareholders, employees, agents, attorneys, representatives,
successors, and assigns, from any and all causes of action, claims, charges,
demands, losses, damages, compensation, costs, agreements, attorneys' fees and
liabilities of any kind that it or they may have or claim to have, whether
known or unknown, suspected or unsuspected, in any way relating to or arising
out of any act or omission from the beginning of time through the date of the
execution of this Agreement arising out of or concerning RI or RTV's
involvement with RI, including, without limitation, RTV's Claims.
7. Releases by RI, TCI and FHC.
Subject to the performance of RTV of its obligations under this
Agreement, each of RI, TCI and FHC, for itself and on behalf of its officers,
directors, shareholders, employees, agents, successors, and assigns, hereby
releases, waives and discharges RTV and its parents, subsidiaries, or otherwise
affiliated corporations, partnerships or business enterprises, and each of its
respective present and former officers, directors, shareholders, employees,
agents, attorneys, representatives, successors, and assigns, from any and all
causes of action, claims, charges, demands, losses, damages, compensation,
costs, agreements, attorneys' fees and
5
<PAGE> 6
liabilities of any kind that it or they have or claim to have, whether known or
unknown, suspected or unsuspected, in any way relating to or arising out of any
act or omission from the beginning of time through the date of the execution of
this Agreement arising out of or concerning RI or RTV's involvement with RI.
Notwithstanding the generality of the previous sentence, the release set forth
in this Article 7 is not intended to release, and does not release, any cause
of action, claim, charge, demand, loss, damage, compensation, costs,
agreements, defenses, counterclaims, setoffs, attorneys' fees and liabilities
against any person, who was, is, or hereafter may be, employed in any manner by
RI who at any time have been an employee, agent or representative of RTV who
asserts a claim against RI, TCI, FHC or any of their respective affiliates.
8. Waiver of "Section 1542" -- type statutes.
Not withstanding the fact that this Agreement is governed by Colorado law,
and not California law, the parties wish to emphasize their intent with respect
to unknown causes of action as follows: It is the intention of each party in
executing this Agreement that this Agreement shall be effective as a bar to each
and every claim, demand or cause of action described above to be so barred. In
furtherance of this intention, each party hereby expressly waives any and all
rights and benefits which might be conferred upon it by the provisions of
Section 1542 of the California Civil Code (if such law were applicable to this
Agreement), and any similar law in any state which might be found to be
applicable to this Agreement, notwithstanding the express choice of Colorado law
by the parties. Section 1542 of the California Civil Code provides:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known to him must have materially affected his
settlement with the debtor."
Each party providing a release under this Agreement hereby acknowledges the
foregoing waivers of the provisions of Section 1542 of the California Civil
Code, and similar provisions in the law of any state which might be found
applicable to this Agreement notwithstanding the express choice of Colorado law
by the parties, was separately bargained for.
9. Miscellaneous
9.1 This Agreement sets forth the entire agreement of the parties with
respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements, discussions, understandings, negotiations and
commitments of any kind between the parties. This Agreement may not be amended
or supplemented, nor may any rights hereunder be waived, except in a writing
signed by all of the parties hereto.
9.2 The section and paragraph headings in this Agreement are included for
6
<PAGE> 7
convenience only, are not a part of this Agreement and shall not be used in
construing it.
9.3 The parties intend that the provisions of this Agreement not be
severable.
9.4 The validity, interpretation, enforceability, and performance of this
Agreement shall be governed by and construed in accordance with the law of the
State of Colorado without regard to Colorado's conflicts of law principles. The
parties agree that any and claims concerning this Agreement must be brought in,
and the parties agree to submit to the jurisdiction of the United States
Federal District Court for the District of Colorado, unless that court cannot
exercise jurisdiction over such claim or claims, in which case the parties
agree that such claims must be brought in, and the parties agree to submit to
the jurisdiction of, the District Court for the City and County of Denver,
Colorado. The terms of this Agreement shall not be construed against any party
by reason of that party's having drafted, or having contributed language to the
drafting of, this Agreement.
9.5 This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
9.6 Each party will execute such other and further documents reasonably
requested by the other parties to carry out the purposes of this Agreement.
9.7 This Agreement effectuates the settlement of claims which are
contested. Nothing in this Agreement shall constitute or be construed as an
admission of liability or wrongdoing by any party.
9.8 The parties agree to keep confidential all of the terms of this
Agreement (other than the fact that RTV is no longer a member of RI and conveyed
its Interest to the other members), and shall not disclose the terms of this
Agreement to any person other than their
7
<PAGE> 8
respective legal and financial advisors, and except for disclosure of the
minimum information required under federal and state securities laws applicable
to RTV.
9.9 The parties shall, on the next business day following the
execution of this Agreement by all parties, release the press release attached
hereto as Exhibit "A".
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
TCI ONLINE RN HOLDINGS, INC. RECOVERY NETWORK, INC.
By: By:
-------------------------------- --------------------------------
Name: Name:
Title: Title:
FHC INTERNET SERVICES, LC LIFESCAPE 1 TO 1, LLC
By: By:
-------------------------------- --------------------------------
Name: Name:
Title: Title:
8
<PAGE> 9
EXHIBIT "A"
Text of Press Release
9
<PAGE> 1
EXHIBIT 10.17
SETTLEMENT AGREEMENT AND GENERAL RELEASE
In consideration of (i) the sum of $25,000.00 full and complete
receipt of which is hereby acknowledged, and (ii) the execution and delivery by
Recovery Network, Inc. of a Warrant Agreement in the form attached hereto as
Exhibit "A", the receipt of which is hereby acknowledged, MICHAEL LENNON
("Releasor") hereby releases and discharges RECOVERYNET INTERACTIVE, LLC ("RNI")
and RNI's members, directors, officers, employees, attorneys, designees,
successors and assigns (collectively, "Releasees") from any and all claims,
demands and causes of action of whatever kind or nature, whether known or
unknown, or suspected or unsuspected by Releasor which Releasor ever had, now
has, or hereafter may have, against Releasees arising out of or connected with
that certain Shadow Equity Agreement dated May 14, 1998 between Releasor and RNI
("Shadow Equity Agreement").
It is the intention of Releasor in executing this Release, that this
Release shall be effective as a bar to each and every claim, demand or cause of
action described above to be so barred. In furtherance of this intention,
Releasor hereby expressly waives any and all rights and benefits conferred upon
her by the provisions of Section 1542 of the California Civil Code, which are as
follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known to him must have materially affected his
settlement with the debtor."
Releasor hereby acknowledges the foregoing waiver of the provisions of Section
1542 of the California Civil Code was separately bargained for.
Nothing herein is intended to, nor shall it be deemed to, cancel or
change in any way any party's obligations under (i) that certain Settlement
Agreement and Release dated May 14, 1998 between Releasor and RNI ("First 1998
Settlement Agreement") other than those relating to the Shadow Equity
Agreement, or (ii) that certain Non-Qualified Stock Option Agreement dated
March 21, 1996 between Releasor and Recovery Network, Inc. The Shadow Equity
Agreement is, by virtue of this Settlement Agreement and Release, terminated and
of no force or effect, ab initio. Releasor acknowledges and agrees that all sums
due to Releasor under the First 1998 Settlement Agreement to the date of this
Release have been paid in full.
This Release may be executed in two or more counterparts, each of
which shall be an original, but all of which shall constitute one and the same
instrument. This Release shall be binding upon and inure to the benefit of
Releasor, Releasees, and their respective heirs, representatives, successors
and assigns. This Release shall be governed by the law of the State of
California without regard to California's conflicts of law principles.
This Release shall be effective immediately upon the receipt by
Releasor of the payment set forth at the beginning of this Release.
IN WITNESS WHEREOF, Releasor has executed this General Release this
___ day of February, 1999.
---------------------------------
Name: Michael Lennon
<PAGE> 2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAW.
THE RECOVERY NETWORK, INC.
COMMON STOCK PURCHASE WARRANT
1. Issuance. For good and valuable consideration, the receipt of which
is hereby acknowledge by THE RECOVERY NETWORK, INC., a Colorado corporation (the
"Company"), MICHAEL LENNON ("Lennon") is hereby granted the right to purchase at
any time commencing two (2) days following the date hereof and until 5:00 P.M.,
New York City time, on May 15, 2003 (the "Expiration Date"), Thirty Five
Thousand (35,000) duly issued, fully-paid and nonassessable shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock"), free of
all taxes, liens and other encumbrances (other than whatever encumbrances
encumber the publicly traded shares of the Common Stock, if any), and without
issuance tax. The exercise price for such shares shall be $2.125 ("Exercise
Price"). The shares of the Company's Common Stock which are the subject of this
Warrant are hereinafter referred to as "the Shares". The Company shall register
the Shares (at the Company's cost) and shall use its best efforts to register
the Shares within ninety (90) days following the issuance of this Warrant. Upon
such registration, the Shares shall be publicly-tradeable by the holder of this
Warrant on the exchange where the Common Stock of the Company is normally
traded. Lennon shall be deemed a record holder of the Shares as to which he
exercises his right hereunder as of the date he exercises such rights and pays
for the Shares.
2. Exercise of Warrant. This Warrant is exercisable, in a maximum of
three exercises only, as to any or all of the Shares at the Exercise Price per
Share payable hereunder, payable only in cash or by certified or official bank
check or such other form of payment as may be acceptable to the Company, in its
sole discretion. Upon surrender of this Warrant Certificate with the annexed
Notice of Exercise Form duly executed, together with payment of the Exercise
Price for the Shares of Common Stock purchased, Lennon shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased.
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<PAGE> 3
3. Reservation of Shares. The Company hereby agrees that at all times
during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant. The Company shall use its
best efforts and all due diligence to increase the number of shares of Common
Stock so reserved to cure any deficiencies, and, if necessary, to obtain
approval of its stockholders therefor, including authorization of such
additional number of shares of Common Stock as may be required in excess of the
number so reserved.
4. Mutilation or Loss of Warrant. Upon receipt by the Company of a sworn
affidavit of Lennon of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) receipt of reasonably
satisfactory indemnification, and (in the case of mutilation) upon surrender
and cancellation of this Warrant the Company, at the Company's expense, will
execute and deliver a new Warrant of like tenor and date and any such lost,
stolen, destroyed or mutilated Warrant shall thereupon become void.
5. Rights of Lennon. Lennon shall not, by virtue hereof, be entitled to
any rights of a stockholder in the Company, either at law or equity, and the
rights of Lennon are limited to those expressed in this Warrant and are not
enforceable against the Company except to the extent set forth herein.
6. Adjustments of Exercise Price and Number of Shares.
6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is
required pursuant to this Section 6, Lennon shall be entitled to purchase such
number of shares of Common Stock as will cause (i) the total number of shares
of Common Stock Lennon is entitled to purchase pursuant to this Warrant (after
such adjustment) multiplied by the adjusted Exercise Price to equal (ii) the
total number of shares of Common Stock Lennon was entitled to purchase before
such adjustment multiplied by the Exercise Price before the adjustment.
6.2 Capital Adjustments. In case of any stock split or combination,
stock dividend, reclassification of the Common Stock, recapitalization, or
like capital adjustment affecting the Common Stock of the Company, the Exercise
Price shall be proportionately adjusted in a fair, equitable and reasonable
manner so as to give effect, as nearly as reasonably practicable to the
purposes hereof.
6.3 Merger, Sale of Assets, Etc. If at any time while this Warrant,
or any portion hereof, is outstanding and unexpired there shall be (i) a
reorganization (other than a stock split or combination, stock dividend,
reclassification, or like capital adjustment of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation or other entity including a merger or consolidation in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are
2
<PAGE> 4
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (iii) a sale or transfer of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then as a part of such reorganization, merger, consolidation, sale or transfer
lawful provision shall be made so that the holder of this Warrant shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and payment of the Exercise Price then in effect, the
number of shares of stock or other securities or property resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 6. The foregoing provisions of this Section 6 shall similarly
apply to successive reorganization, consolidations, mergers, sales and transfers
and to the stock or securities of any other corporation or other entity that are
at the time receivable upon the exercise of this Warrant. If the per-share
consideration payable for shares in connection with any such transactions is in
a form other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
Directors. In all events, appropriate adjustment (as determined in good faith by
the Company's Board of Directors) shall be made in the application of the
provisions of this Warrant with respect to the rights and interest of Lennon
after the transaction, to the end that the provisions of this Warrant shall be
applicable after that event, as near as reasonably practicable, in relation to
any shares or other property deliverable after that even upon exercise of this
Warrant.
6.4 Merger with End of Company's Existence. In case of any
consolidation or merger to which the Company is a party other than a merger or
consolidation in which the Company is continuing corporation, or in case of any
sale or conveyance to another entity of the property of the Company as an
entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another entity (including any exchange effectuated
in connection with a merger of any other corporation with the Company other than
a merger in which the Company is the continuing corporation) Lennon shall have
the right thereafter to exercise such Warrant for the kind and amount of
securities, cash or other property which he would have owned or have been
entitled to receive immediately after such consolidation, merger, statutory
exchange, sale or conveyance had this Warrant been exercised immediately prior
to the effective date of such consolidation, merger, statutory exchange, sale or
conveyance and in any case, if necessary, appropriate adjustment shall be made
in the application of the provisions set forth in this Section 6 with respect
tot the rights and interests thereafter of Lennon to the end that the provisions
set forth in this Section 6 shall thereafter correspondingly be made applicable,
as nearly as may reasonably be, in relation to any shares of stock or other
securities or property thereafter deliverable on the exercise of this Warrant.
The above provisions of this Subsection 6.4 shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances of property
as an entirety or substantially as an entirety. Notice or any
3
<PAGE> 5
such consolidation, merger, statutory exchange, sale or conveyance, and of said
provisions so proposed to be made, shall be mailed to Lennon not less than 20
days proper to such event. A sale of all or substantially all of the assets of
the Company for a consideration consisting primarily of securities shall be
deemed a consolidation or merger for the foregoing purposes.
6.5 DeMinimus Adjustment. No adjustment in the Exercise Price
shall be required unless such adjustment would require an increase or decrease
of at least $0.05 per share of Common Stock, provided, however, that any
adjustments which by reason of this Subsection 6.5 are not required to be made
shall be carried forward and taken into account in any subsequent adjustments
and provided further, however, that adjustments shall be required and made in
accordance with the provisions of this Section 6 (other than this Subsection
6.5) not later than such time as may be required in order to preserve the
tax-free nature of a distribution to Lennon of Common Stock. All calculations
under this Section 6 shall be made to the nearest cent or the nearest 1/100th
of a share, as the case may be. Anything in this Section 6 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
per share Exercise Price, in addition to those required by this Section 6, as it
in its discretion shall deem to be advisable in order that any stock dividend,
subdivision of shares or distribution of rights to purchase stock or securities
convertible or exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
6.6 Notice. Whenever the Exercise Price is adjusted as provided
in this Section 6 and upon any modification of the rights of Lennon in
accordance with this Section 6, the Company shall, at its own expense, within
ten (10) days of such adjustment or modification, deliver to the holder of this
Warrant a certificate of the Principal Financial Officer of the Company setting
forth the unaudited Exercise Price and the number of Warrant Shares after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same.
If the Board of Directors of the Company shall declare any dividend or other
distribution in cash with respect to the Common Stock, other than out of earned
surplus, the Company shall mail notice thereof of Lennon not less than 10 days
prior to the record date fixed for determining shareholders entitled to
participate in such dividend or other distribution.
6.7 Payment Deferment. In the event of the exercise of all or
part of this Warrant after the record date for any event described in
Subsection 6.2 or 6.3 but prior to the effective date therefor, the Company may
defer until the effective or payment date issuing (and, in case of any stock
combination or reclassification that would result in Lennon being entitled to
fewer shares of Common Stock, the Company need not issue) to Lennon any shares
or property in addition to (or in excess of) that which Lennon would be
entitled to own prior to such payment or effective date had Lennon exercised
this Warrant (or portion thereof exercised) immediately prior to such record
date.
4
<PAGE> 6
6.8 Form of Consideration. If the consideration received or to
be received by the Company with respect to any Common Stock, rights, options,
warrants or securities convertible into Common Stock (including any future
consideration which may be received): (i) is cash, the amount thereof shall be
the amount of cash to be received and/or (ii) is a consideration other than
cash, the amount of such other consideration shall be deemed to be the fair
market value of such consideration as determined by the Board of Directors of
the Company, in the case of (i) and/or (ii) without deduction therefrom of any
expenses incurred or any underwriting commissions, discounts or concessions paid
or allowed by the Company.
7. Transfer to Comply with the Securities Act. This Warrant has not
been registered under the Securities Act and has been issued to Lennon for
investment purposes and not with a view to the distribution of either the
Warrant or the Shares. Neither this Warrant nor any of the Shares or any other
security issued or issuable upon exercise of this Warrant may be sold,
transferred, pledged or hypothecated in the absence of an effective registration
statement under the Securities Act relating to such security or an opinion of
counsel reasonably satisfactory to the Company that registration is not required
under the Securities Act. Each certificate for the Warrant, the Shares and any
other security issued or issuable upon exercise of this Warrant shall contain a
legend on the fact thereof, in form and substance satisfactory to counsel for
the Company, setting forth the restrictions on transfer contained in this
Section.
8. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given upon confirmed delivery by a standard
overnight carrier or when delivered by hand, addressed at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to the Company, to:
The Recovery Network, Inc.
1411 5th Street, Suite 200
Santa Monica, California 90401
Attention: Mr. William D. Moses
With a copy to:
Richard Posell, Esq.
Greenberg, Glusker, Fields, Claman & Machtinger, LLP
1900 Avenue of the Stars
Los Angeles, California 90067
(b) if to Lennon, to:
Michael Lennon
5
<PAGE> 7
13940 Esworthy Road
Darnestown, Maryland 20874
with a copy to:
Floria Lasky, Esq.
Fitelson, Lasky & Aslin
551 Fifth Avenue, Suite 614
New York, New York 10176
7. Supplements and Amendments; Whole Agreement. This Warrant may
be amended or supplemented only by an instrument in writing signed by the
Company and Lennon. This Warrant contains the full understanding of the parties
hereto with respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings other than expressly
contained herein and therein.
8. Governing Law. This Warrant shall be governed by, and in
construed in accordance with, the laws of the State of Colorado without regard
to principles of conflicts or choice of law (or any other law that would make
any substantive laws of any state other than the State of Colorado applicable
hereto).
9. Descriptive Headings. Descriptive headings of the several
Sections of this Warrant are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, THE RECOVERY NETWORK, IN. has caused this Warrant
to be signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary as of the _____ day of January, 1999.
THE RECOVERY NETWORK, INC.
By: /s/ GARY HOROWITZ
-------------------------------------
Name: Gary Horowitz
Title: President &
Chief Executive Officer
Attest: /s/ [Signature Illegible]
---------------------------
6
<PAGE> 1
EXHIBIT 10.18
SETTLEMENT AGREEMENT AND GENERAL RELEASE
In consideration of (i) the sum of One Hundred Thousand Dollars
($100,000.00), full and complete receipt of which is hereby acknowledged, (ii)
the issuance of Twenty Five Thousand (25,000) fully paid and non assessable
shares of the common stock of Recovery Network, Inc. (without cost to Releasor),
full and complete receipt of which is hereby acknowledged, and (iii) the
execution and delivery by Recovery Network, Inc. of a Warrant Agreement in the
form attached hereto as Exhibit "A", the receipt of which is hereby
acknowledged, GEORGE HENRY ("Releasor") hereby releases and discharges
RECOVERYNET INTERACTIVE, LLC ("RNI") and RNI's members, directors, officers,
employees, attorneys, designees, successors and assigns (collectively,
"Releasees") from any and all claims, demands and causes of action of whatever
kind or nature, whether known or unknown, or suspected or unsuspected by
Releasor which Releasor ever had, now has, or hereafter may have, against
Releasees arising out of or connected with that certain Shadow Equity Agreement
dated November __, 1997 between Releasor and RNI ("Shadow Equity Agreement").
Releasor acknowledges that the shares which are referred to in clause (ii)
above, and the shares which are described in the Warrant Agreement referred to
in clause (iii) above, are not now registered, cannot be traded until they are
registered, and that Company shall use its best efforts to register all such
shares (at Company's cost) within ninety (90) days following the date of this
Release. Upon registration, such shares will be publicly-tradeable on the
exchange where the shares of Recovery Network, Inc. are normally traded.
It is the intention of Releasor in executing this Release, that this
Release shall be effective as a bar to each and every claim, demand or cause of
action described above to be so barred. In furtherance of this intention,
Releasor hereby expressly waives any and all rights and benefits conferred upon
her by the provisions of Section 1542 of the California Civil Code, which are as
follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known to him must have materially
affected his settlement with the debtor."
Releasor hereby acknowledges the foregoing waiver of the provisions of Section
1542 of the California Civil Code was separately bargained for.
This Release may be executed in two or more counterparts, each of which
shall be an original, but all of which shall constitute one and the same
instrument. This Release shall be binding upon and inure to the benefit of
Releasor, Releasees, and their respective heirs, representatives, successors and
assigns. This Release shall be governed by the law of the State of California
without regard to California's conflicts of law principles.
This Release shall be effective immediately upon the receipt by Releasor of
the payment set forth at the beginning of this Release.
IN WITNESS WHEREOF, Releasor has executed this General Release this 26
day of October, 1998.
/s/ GEORGE HENRY
-------------------
NAME: George Henry
1
<PAGE> 2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.
THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR
SALE, SOLE, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAW.
THE RECOVERY NETWORK, INC.
COMMON STOCK PURCHASE WARRANT
TRNW-1001
1. Issuance. For good and valuable consideration, the receipt of which
is hereby acknowledged by THE RECOVERY NETWORK, INC., a Colorado corporation
(the "Company"), GEORGE HENRY ("Henry") is hereby granted the right to purchase
at any time commencing two (2) days following the date hereof and until 5:00
P.M., New York City time, on May 15, 2003 (the "Expiration Date"), One Hundred
Thousand (100,000) fully-paid and nonassessable shares of the Company's
publicly tradable Common Stock, par value $.01 per share (the "Common Stock").
The exercise price for such shares shall be $2.125 ("Exercise Price"). The
shares of the Company's Common Stock which are the subject of this Warrant are
hereinafter referred to as "the Shares". The Company shall register the Shares
(at the Company's cost) and shall use its best efforts to register the Shares
within ninety (90) days following the issuance of this Warrant. Upon such
registration, the Shares shall be publicly-tradeable by the holder of this
Warrant on the exchange where the Common Stock of the Company is normally
traded.
2. Exercise of Warrant. This Warrant is exercisable, in a maximum of
three exercises only, as to any or all of the Shares at the Exercise Price per
Share payable hereunder, payable only in cash or by certified or official bank
check or such other form of payment as may be acceptable to the Company, in its
sole discretion. Upon surrender of this Warrant Certificate with the annexed
Notice of Exercise Form duly executed, together with payment of the Exercise
Price for the Shares of Common Stock purchased, Henry shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased.
3. Reservation of Shares. The Company hereby agrees that at all times
during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant. The Company shall use its
best efforts and all
1
<PAGE> 3
due diligence to increase the number of shares of Common Stock so reserved to
cure any deficiencies, and, if necessary, to obtain approval of its stockholders
therefor, including authorization of such additional number of shares of Common
Stock as may be required in excess of the number so reserved.
4. Mutilation or Loss of Warrant. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of Henry. Henry shall not, by virtue hereof, be entitled
to any rights of a stockholder in the Company, either at law or equity, and the
rights of Henry are limited to those expressed in this Warrant and are not
enforceable against the Company except to the extent set forth herein.
6. Adjustments of Exercise Price and Number of Shares.
6.1 Adjustment Mechanism. If an adjustment of the Exercise Price
is required pursuant to this Section 6, Henry shall be entitled to purchase such
number of shares of Common Stock as will cause (i) the total number of shares of
Common Stock Henry is entitled to purchase pursuant to this Warrant (after such
adjustment) multiplied by the adjusted Exercise Price to equal (ii) the total
number of shares of Common Stock Henry was entitled to purchase before such
adjustment multiplied by the Exercise Price before the adjustment.
6.2 Capital Adjustments. In case of any stock split or
combination, stock dividend, reclassification of the Common Stock,
recapitalization, or like capital adjustment affecting the Common Stock of the
Company, the Exercise Price shall be proportionately adjusted in a fair,
equitable and reasonable manner so as to give effect, as nearly as reasonably
practicable to the purposes hereof.
6.3 Merger, Sale of Assets, Etc. If at any time while this
Warrant, or any portion hereof, is outstanding and unexpired there shall be (i)
a reorganization (other than a stock split or combination, stock dividend,
reclassification, or like capital adjustment of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation or other entity including a merger or consolidation in which the
Company is the surviving entirety but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then as a part of such
reorganization, merger, consolidation, sale or transfer lawful provision shall
be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of
2
<PAGE> 4
this Warrant, during the period specified herein and payment of the Exercise
Price then in effect, the number of shares of stock or other securities or
property resulting from such reorganization, merger, consolidation, sale or
transfer that a holder of the shares deliverable upon exercise of this Warrant
would have been entitled to receive in such reorganization, consolidation,
merger, sale or transfer if this Warrant had been exercised immediately before
such reorganization, merger, consolidation, sale or transfer, all subject to
further adjustment as provided in this Section 6. The foregoing provisions of
this Section 6 shall similarly apply to successive reorganization,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation or other entity that are at the time receivable upon the
exercise of this Warrant. If the per-share consideration payable for shares in
connection with any such transactions is in a form other than cash or marketable
securities, then the value of such consideration shall be determined in good
faith by the Company's Board of Directors. In all events, appropriate adjustment
(as determined in good faith by the Company's Board of Directors) shall be made
in the application of the provisions of this Warrant with respect to the rights
and interests of Henry after the transaction, to the end that the provisions of
this Warrant shall be applicable after that event, as near as reasonably
practicable, in relation to any shares or other property deliverable after that
event upon exercise of this Warrant.
6.4 Merger with End of Company's Existence. In case of any consolidation
or merger to which the Company is a party other than a merger or consolidation
in which the Company is the continuing corporation, or in case of any sale or
conveyance to another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory exchange of
securities with another entity (including any exchange effectuated in connection
with a merger of any other corporation with the Company other than a merger in
which the Company is the continuing corporation) Henry shall have the right
thereafter to exercise such Warrant for the kind and amount of securities, cash
or other property which he would have owned or have been entitled to receive
immediately after such consolidation, merger, statutory exchange, sale or
conveyance had this Warrant been exercised immediately prior to the effective
date of such consolidation, merger, statutory exchange, sale or conveyance and
in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 6 with respect to the
rights and interests thereafter of Henry to the end that the provisions set
forth in this Section 6 shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock or other
securities or property thereafter deliverable on the exercise of this Warrant.
The above provisions of this Subsection 6.4 shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances of property
as an entirety or substantially as an entirety. Notice or any such
consolidation, merger, statutory exchange, sale or conveyance, and of said
provisions so proposed to be made, shall be mailed to Henry not less than 20
days prior to such event. A sale of all or substantially all of the assets of
the Company for a consideration consisting primarily of securities shall be
deemed a consolidation or merger for the foregoing purposes.
3
<PAGE> 5
6.5 DeMinimus Adjustment. No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or decrease of at
least $0.05 per share of Common Stock, provided, however, that any adjustments
which by reason of this Subsection 6.5 are not required to be made shall be
carried forward and taken into account in any subsequent adjustments and
provided further, however, that adjustments shall be required and made in
accordance with the provisions of this Section 6 (other than this Subsection
6.5) not later than such time as may be required in order to preserve the
tax-free nature of a distribution to Henry of Common Stock. All calculations
under this Section 6 shall be made to the nearest cent or the nearest 1/100th
of a share, as the case may be. Anything in this Section 6 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
per share Exercise Price, in addition to those required by this Section 6, as
it in its distribution of rights to purchase stock or securities convertible or
exchangeable for stock hereafter made by the Company to its shareholders shall
not be taxable.
6.6 Notice. Whenever the Exercise Price is adjusted as provided in this
Section 6 and upon any modification of the rights of Henry in accordance with
this Section 6, the Company shall, at its own expense, within ten (10) days of
such adjustment or modification, deliver to the holder of this Warrant a
certificate of the Principal Financial Officer of the Company setting forth the
unaudited Exercise Price and the number of Warrant Shares after such adjustment
or the effect of such modification, a brief statement of the facts requiring
such adjustment or modification and the manner of computing the same. If the
Board of Directors of the Company shall declare any dividend or other
distribution in cash with respect to the Common Stock, other than out of earned
surplus, the Company shall mail notice thereof of Henry not less than 10 days
prior to the record date fixed for determining shareholders entitled to
participate in such dividend or other distribution.
6.7 Payment Deferment. In the event of the exercise of all or part of
this Warrant after the record date for any event described in Subsection 6.2 or
6.3 but prior to the effective date therefor, the Company may defer until the
effective or payment date issuing (and, in case of any stock combination or
reclassification that would result in Henry being entitled to fewer shares of
Common Stock, the Company need not issue) to Henry any shares or property in
addition to (or in excess of) that which Henry would be entitled to own prior
to such payment or effective date had Henry exercised this Warrant (or portion
thereof exercised) immediately prior to such record date.
6.8 Form of Consideration. If the consideration received or to be
received by the Company with respect to any Common Stock, rights, options,
warrants or securities convertible into Common Stock (including any future
consideration which may be received): (i) is cash, the amount thereof shall be
the amount of cash to be received and/or (ii) is a consideration other than
cash, the amount of such other consideration shall be deemed to be the fair
market value of such
4
<PAGE> 6
consideration as determined by the Board of Directors of the Company, in the
case of (i) and/or (ii) without deduction therefrom of any expenses incurred or
any underwriting commissions, discounts or concessions paid or allowed by the
Company.
7. Transfer to Comply with the Securities Act. This Warrant has not
been registered under the Securities Act and has been issued to Henry for
investment purposes and not with a view to the distribution of either the
Warrant or the Shares. Neither this Warrant nor any of the Shares or any other
security issued or issuable upon exercise of this Warrant may be sold,
transferred, pledged or hypothecated in the absence of an effective registration
statement under the Securities Act relating to such security or an opinion of
counsel reasonably satisfactory to the Company that registration is not required
under the Securities Act. Each certificate for the Warrant, the Shares and any
other security issued or issuable upon exercise of this Warrant shall contain a
legend on the fact thereof, in form and substance satisfactory to counsel for
the Company, setting forth the restrictions on transfer contained in this
Section.
8. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given upon (i) the transmitter's confirmation
of the receipt of a facsimile transmission or (ii) confirmed delivery by a
standard overnight carrier or when delivered by hand, addressed at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to the Company, to:
The Recovery Network, Inc.
1411 5th Street, Suite 200
Santa Monica, California 90401
Attention: Mr. William D. Moses
Telecopier: (310) 393-5749
With a copy to:
Richard Posell, Esq.
Greenberg, Glusker, Fields, Claman & Machtinger, LLP
1900 Avenue of the Stars
Los Angles, California 90067
Telecopier: (310) 553-0687
(b) if to Henry, to:
with a copy to:
5
<PAGE> 7
7. Supplements and Amendments: Whole Agreement. This Warrant may
be amended or supplemented only by an instrument in writing signed by the
Company and Henry. This Warrant contains the full understanding of the parties
hereto with respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understanding of the parties hereto
with respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings other than expressly
contained herein and therein.
8. Governing Law. This Warrant shall be governed by, and
construed in accordance with, the laws of the State of Colorado without regard
to principles of conflicts or choice of laws (or any other law that would make
any substantive laws of any state other than the State of Colorado applicable
hereto).
9. Descriptive Headings. Descriptive headings of the several
Sections of this Warrant are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, THE RECOVERY NETWORK, INC. has caused this
Warrant to be signed by its President and its corporate seal to be hereunto
affixed and attested by its Secretary as of the __ day of October, 1998.
THE RECOVERY NETWORK, INC.
By:
----------------------------------
Name:
Title:
Attest:
--------------------------
6
<PAGE> 8
EXHIBIT "A"
FORM OF NOTICE OF EXERCISE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of the attached Warrant ("Warrant")
irrevocably exercises this Warrant for the purchase of _________ shares of
Common Stock of Recovery Network, Inc. purchasable with this Warrant, and
herewith makes payment therefor, at the price and on the terms and conditions
specified in this Warrant.
DATED: ______________________
Signature of Registered Owner:__________________________________
Print Name:__________________________________
I
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Rnethealth.com, Inc.
We hereby consent to the incorporation by reference in the previously
filed Registration Statement on Form S-8 (File No. 333-80753) of our report
dated October 9, 1999, appearing in the Annual Report on Form 10-KSB of
Rnethealth.com, Inc. (formerly known as The Recovery Network, Inc.) for the
year ended June 30, 1999.
/s/ CORBIN & WERTZ
CORBIN & WERTZ
Irvine, California
October 12, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated September 23, 1998 for the year ended June 30,
1998 (which includes an explanatory paragraph that describes the Company's
ability to continue as a going concern as discussed in Note 1 to the
consolidated financial statements) included in this Form 10-KSB, into the
Company's previously filed Form S-8 registration statement File No. 333-80753.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
October 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND CASH
FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS CONTAINED WITHIN THE COMPANY'S FORM 10-KSB AS OF JUNE 30,
1999.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 136,058
<SECURITIES> 0
<RECEIVABLES> 288,499
<ALLOWANCES> (32,000)
<INVENTORY> 55,539
<CURRENT-ASSETS> 616,495
<PP&E> 433,257
<DEPRECIATION> (255,707)
<TOTAL-ASSETS> 1,268,379
<CURRENT-LIABILITIES> 1,880,396
<BONDS> 481,015
0
0
<COMMON> 154,945
<OTHER-SE> (766,962)
<TOTAL-LIABILITY-AND-EQUITY> 1,268,379
<SALES> 1,533,922
<TOTAL-REVENUES> 1,533,922
<CGS> 499,766
<TOTAL-COSTS> 9,250,551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 489,552
<INCOME-PRETAX> (8,140,487)
<INCOME-TAX> 800
<INCOME-CONTINUING> (8,141,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,141,287)
<EPS-BASIC> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
