UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1995, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to ____________
Commission File No. 0-18695
WORK RECOVERY,INC.
(Exact name of registrant as specified in its charter)
Colorado 68-0165800
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
2341 South Friebus Avenue, Suite 14
Tucson, Arizona 85713
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(520) 322-6634
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.004 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 No X
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing:
Registrant's $.004 par value per share common stock is
its sole class of voting stock. As of April 1, 1996,
there were approximately 46,592,998 shares of common
stock outstanding, of which approximately
45,785,000 shares were held by non-affiliates of the
registrant. The closing trading price of the common
stock on that date was $.62 per share, as reported by
Bloomberg Business News. Based upon this price, the
market value of those shares of registrant's voting stock
held by non-affiliates was approximately $28,386,700 as
of April 1, 1996.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No Not Applicable X
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Registrant has only one class of common stock outstanding, of
which approximately 46,592,998 shares were outstanding as of April 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Business
Special Note
CHANGES IN CONTROL OF THE BOARD OF DIRECTORS OF WORK
RECOVERY, INC. AND CERTAIN CHANGES IN THE MANAGEMENT OF THE
COMPANY HAVE BEEN EFFECTED. THIS ITEM 1. SHOULD BE READ IN
CONJUNCTION WITH ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. THE COMPANY'S PRESENT
FINANCIAL CONDITION IS EXTREMELY SERIOUS AND ITS WORKING CAPITAL IS LIMITED.
AS A RESULT OF THE FOREGOING, THE COMPANY'S BOARD OF DIRECTORS
HAS AUTHORIZED MANAGEMENT TO FILE FOR PROTECTION PURSUANT TO
CHAPTER 11 OF THE U.S. BANKRUPTCY CODE, IF MANAGEMENT DEEMS
FILING NECESSARY.
Description of Business
Work Recovery, Inc.
Focus V, Inc. ("Focus") was incorporated under the laws of
the State of Colorado on August 9, 1988, and completed an initial
public offering on July 11, 1989. On December 18, 1989, Focus, a
non-operating public shell, entered into an exchange agreement with
the shareholders of Work Recovery Centers, Inc. ("WRCI") to acquire
100% control of WRCI. WRCI was acquired by Focus from its
shareholders, including Messrs. Thomas L. Brandon and Stephen E.
Bubala, in a tax-free common share exchange on December 18, 1989,
and was subsequently merged into Focus. On January 30, 1990, the
name of Focus was changed to Work Recovery, Inc. WRCI was
organized under the laws of the State of Arizona on June 21, 1986,
for the purpose of researching, developing, manufacturing and
distributing the ERGOS Work Simulator, a machine which addresses
certain needs of the injured workers' rehabilitation industry and
the vocational aptitude assessment industry, and which assists
employers in complying with the Americans with Disabilities Act
("ADA"). (See "Products of the Company - ERGOS Work Simulator" for
a more complete description of this machine.)
Work Recovery, Inc. ("the Company"), directly and through
its subsidiaries, is engaged in the research, manufacture,
distribution and sale of products, as well as the provision of
services, to the injured workers' rehabilitation industry, to the
vocational aptitude assessment industry and to the ADA compliance
industry. This business is pursued in five areas: (i) the
development, manufacture, distribution and sale of ERGOS directly by
the Company, (ii) the development, manufacture, distribution and
sale of Transition Work Stations ("TWS"), (iii) the operation of
evaluation and rehabilitation centers, (iv) consulting services, and
(v) the delivery of marketing and other services to ERGOS network
providers.
New Concepts Corporation
On January 2, 1991, the Company acquired New Concepts
Corporation ("NCC") from Messrs. Brandon and Bubala in a tax-free
common share exchange. Following the acquisition, NCC became and
remains a wholly-owned subsidiary of the Company. The business of
NCC was formerly operated under the name of "Career Systems" as a
division of Singer Corporation, which at the time of the sale to
NCC was a large multi-national conglomerate. These business
operations were acquired by NCC in 1985. NCC manufactures, markets
and distributes TWS, which address certain needs of the injured
workers' rehabilitation industry and the vocational aptitude
assessment industry. (See "Products of the Company - Transition
Work Stations" for a more complete description of these machines.)
Work Recovery Centers, Inc.
On February 3, 1992, the Company acquired approximately
80% of the outstanding voting common shares of RehabNet, Inc., a
Colorado corporation, from Messrs. Brandon and Bubala, both of whom
were then principals of the Company, and Mr. David L. Shorey,
president and a director of RehabNet, in exchange for 4,906,824
shares of Common Stock. The Company subsequently acquired, on
September 18, 1992, the assets and assumed the liabilities of this
corporation through the distribution, on a share-for-share basis, of
common and preferred shares of the Company to the holders of
RehabNet's common and preferred shares, other than Messrs. Brandon,
Bubala and Shorey. All of the assets and liabilities of RehabNet
upon acquisition were concurrently transferred by the Company to a
wholly-owned subsidiary, Work Recovery Centers, Inc. ("WRC"), a
Colorado corporation, and the common shares of RehabNet acquired by
the Company on February 3, 1992, were concurrently transferred back
to Messrs. Brandon, Bubala and Shorey. RehabNet was, and WRC
currently is, engaged in the development and operation of evaluation
and rehabilitation centers directly and by joint venture, primarily
using ERGOS and TWS to provide services to the injured workers' and
vocational assessment industries. WRC also assists employers in
complying with the ADA. (See "Services" for a more complete
description of the services offered by these centers.)
Work Recovery Europe, Ltd.
During fiscal 1993, the Company established Work Recovery
Europe, Ltd.("WRE"), a United Kingdom company, and opened an office
in London, England. WRE was established to manage the Company's
expansion of products sales and service delivery into the United
Kingdom and the European Community. In February 1996, New
Management closed the London office and is currently evaluating its
international business strategy.
Definitions of Certain Terms
The following terms are commonly used in the injured
workers' rehabilitation industry, in the vocational aptitude
assessment industry, and in the ADA compliance industry, and are
presented to assist the reader in understanding the business of the
Company.
Americans with Disabilities Act. The ADA was enacted by
Congress in July of 1990, and became effective in July of
1992. The general purpose of the ADA is to prevent
discrimination against persons with disabilities in many
areas of public life. The employment provisions of the
ADA affect the business of the Company, and prohibit
discrimination against persons with disabilities in all
aspects of the employment relationship. The ADA
requires reasonable accommodation be made for persons
with disabilities; thus, an employer must identify the
essential functions of the position for the purpose of
establishing the parameters of the tasks associated with
the position. Hiring for and maintaining a position
must be strictly based on the essential functions
required in fulfilling the tasks of the position. These
essential functions are defined by the employer to fit
each position within the employer's business. The ADA
currently applies to employers with 15 or more employees.
Functional Capacity Evaluation. This evaluation provides
an assessment of an individual's performance on specific
physical tasks, and is used to determine physical
deficiencies subsequent to an injury. The evaluation
assists in the establishment of a Work Therapy program
and in the identification of possible alternative
occupations in the event the physical deficiencies
caused by an injury cannot be overcome. Also, the
assessment is used to gauge the progress of a Work
Therapy program and to determine the injured worker's
ability to return to work.
Pre- and Post-Offer Testing. This test assesses an
individual's ability to perform the essential functions of
a specific job which has been or may be offered. The
initial parameters of the test are established based on
the physical functions essential to the specific job
being offered. The purpose of the test is to
appropriately place an individual in a job which matches
his/her functional abilities, with the ultimate goal of
providing objective criteria by which to establish
hiring and job maintenance criteria under the ADA, and
to reduce work injuries.
Vocational Assessment. These tests assess aptitude and
ability for certain occupations or vocations.
Work Therapy. Once deficiencies have been identified
after the performance of a Functional Capacity
Evaluation, a program is designed to rehabilitate the
injured worker. The program is generally designed and
implemented by a physical or occupational therapist.
Products of the Company
ERGOS Work Simulator
The ERGOS Work Simulator assists rehabilitation
facilities, physicians, hospitals and medical centers in performing
Functional Capacity Evaluations and contributes to the measurement
of the progress of Work Therapy programs. ERGOS also provides for
the measurement of the essential functions of a position, thereby
allowing employers to provide unbiased job descriptions and
assessment tests for purposes of Pre- and Post-Offer Testing.
ERGOS is composed of five work stations and is operated
by the individual being tested under the supervision of a trained
test administrator. ERGOS is controlled by a network of five
computers linked to an on-site master computer. The Company
provides a training course leading to certification in the use of
the machine.
The software used by ERGOS integrates those job
descriptions provided by the U.S. Department of Labor; thus, there
is no sex, race or disability bias.
ERGOS is used in the WRC centers and is sold outside of
the Company to rehabilitation centers, physician groups, hospitals
and medical centers. The base price for ERGOS is presently
approximately $125,000. The Company generally has not offered price
discounts.
Transition Work Stations
As a complementary product to ERGOS, the Company also
develops, manufactures and distributes TWS. This product line
consists of machines which principally provide exercise to an
injured worker as part of Work Therapy, and also tests aptitude for
certain aspects of various occupations.
TWS provide video instruction during operation for their
use; thus, supervision by the therapist is reduced. As few as
twelve work stations can provide over 40 hours of what management
considers highly interesting, motivational exercise, as well as
vocational aptitude testing.
NCC developed a new product line using TWS in response to
the award of a competitive bid let in fiscal 1992 by the Cleveland
City School District. This product line uses the TWS technology to
introduce middle and high school students to various career choices.
NCC is now marketing this product line to school districts and
educational and correctional facilities throughout the United States
and abroad.
TWS are used in WRC centers and are sold outside of the
Company to rehabilitation centers. The prices for TWS, of which
there are presently 34 separate models, range from $899 to $4,595
each.
Software Product
The Company has acquired the right to the ADAMS (Americans
with Disabilities Act Management System) software program which is
used to assist employers in establishing and maintaining compliance
with the ADA. This software also has the ability to assist in the
identification of functions which are essential to a particular
job, and is used to provide job descriptions under the ADA.
The ADAMS program has not contributed significantly to
the revenues of the Company in the past and is not expected to do so
in the future because it is merely complimentary to ERGOS and TWS.
However, it does allow the Company to provide a more complete line
of services to the injured workers' rehabilitation, vocational and
ADA compliance assessment markets.
Services
WRC, as of April 15, 1996, operates a network of
12 rehabilitation centers in the states of Arizona, California,
Colorado, Kentucky, South Carolina, Texas, and Wisconsin, and in
Ottawa, Ontario, Canada. Nine are wholly owned by WRC and three
are joint ventures with the previous owners of the center or with
new owners.
The centers principally offer ERGOS and TWS, Functional
Capacity Evaluations, Work Therapy, Vocational Assessment and Pre-
and Post-Offer ADA Testing and a variety of consulting services,
including job analysis, job site modifications, and safety
training. A typical center uses between 3,500 and 5,000 square
feet of space, employs approximately five people, including a
physical or occupational therapist, and serves 15 to 20 individuals
per day.
Business Strategy and Expansion Plans
North America
The Company estimates that the current demand in the
United States for objective Functional Capacity Evaluations is in
excess of five million evaluations annually or $2.5 billion, at
existing prices. The New Management of the Company is redirecting
the business strategy of the Company in North America to penetrate
this and other related markets. The Company will attempt to
increase demand for the ERGOS technology by marketing the cost
saving benefits from the use of ERGOS to employers, insurance
carriers, governments, managed care organizations, and third party
payors. In addition, the Company is actively working at the state
and federal levels to effect legislation which will provide for the
use of Functional Capacity Evaluations using standardized, objective
and non-discriminatory testing methods, such as the ERGOS
technology, in the area of benefit determination. There can be no
assurance, however, that the Company will be able to increase the
demand for ERGOS or that such legislation will be implemented at
either the state or federal level.
The Company plans to grow, subject to obtaining additional
capital, through establishing a national, regional and local
network of affiliated health care providers ("Affiliates Network")
that operate ERGOS equipment and provide high quality service. The
Affiliates Network will pay a royalty to the Company for access to
the ERGOS technology and marketing by the Company to major national
referral sources. The Company plans to sell ERGOS equipment to the
network service providers and charge a nominal fee per evaluation.
In addition, the Company may agree to place an ERGOS unit with
little up-front cost to the affiliate in exchange for a higher per
use fee than that charged to the affiliate who purchases the ERGOS
equipment. The Company's goal through the above actions is to
establish the ERGOS technology as the standard by which to measure
functional capacity. Realization of this goal is expected to
provide significantly greater demand for the ERGOS equipment.
There can be no assurance, however, that this goal will be realized
or that there will be any greater demand for the ERGOS equipment.
With the refocusing of the business strategy, the Company
does not intend to operate numerous clinical centers of its own.
Accordingly, the New Management of the Company has closed or sold a
total of approximately 22 centers. The remaining 12 centers will
continue to provide rehabilitation and assessment services and to
provide the Company with training, quality control, beta and
demonstration sites.
During the final quarter of fiscal 1993, the Company began
to redirect a portion of its business and expansion strategy in
North America to the grant of licenses allowing for the exclusive
use of ERGOS and TWS within a geographical area, excepting those
machines already in use in the area. The licenses generally
required the purchase of a specified number of ERGOS machines within
certain time periods and typically had a five year term, with an
option to extend for an additional five years in the event a certain
number of ERGOS machines were purchased. Certain of the licenses
set a fixed price for the purchase of ERGOS machines during the
initial term of the agreement equal to the price at the date of the
agreement. The Company granted licenses for the States of Georgia,
Wisconsin, Illinois, Minnesota, Missouri, South Dakota, North
Dakota, Nebraska, Hawaii, Kansas, and Iowa. The Company does not
believe these licenses are currently valid, except for the states of
Minnesota and Hawaii.
International
International sales are expected to decrease materially as
a result of concentrating the Company's efforts and resources on
achieving its North American business goals. At this time, the
Company can display only limited resources in the development and
support of its international market.
During fiscal 1993, the Company began to implement its
international business strategy, which called for the introduction
of the Company's products internationally through license
agreements, because prior management believed the focus in the
United States on health care reform would cause uncertainty and
confusion in the domestic markets. The Company diversified into
the global markets by offering exclusive licensing rights to in-
country license partners which had contractual responsibilities to
introduce the Company's products and services into their markets.
The agreements were developed to grant the licensee an
exclusive, personal, non-transferable right to the use of the
Company's products within a defined geographic area, generally an
entire country, for a defined period of time, and for a defined
license fee. License fees varied according to country size,
population density and industrial development. The license
agreements generally had a five year term, with an option to extend
for an additional five years without the payment of any additional
license fee, and required the licensee to meet certain performance
criteria, which included purchases of the Company's products during
the initial term of the agreement. If the license holder did not
meet the minimum performance criteria, the holder was in default
and subject to forfeiture of its licensing rights to the Company.
The following countries were licensed during the fiscal
year ended June 30, 1995: The countries comprising the Arab Gulf,
Austria, China, Denmark, Finland, France, Germany, Italy, Korea,
Norway, Portugal, Spain, Sweden, and Switzerland.
The Company is investigating the validity of existing
licensing agreements and does not intend to emphasize new licensing
agreements until the validity of existing licensing agreements is
clarified. As a result of seriously delinquent payments due under
the terms of the licensing agreements and New Management's
discussions with certain licensees, it appears unlikely that future
payments will be made to the Company by any of the Company's
present international licensees. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Adjustments Resulting from Audit Process - Licenses Receivable".
Research and Development
The Company has expended and will continue to expend a
portion of its efforts and resources on the development of
innovative products for use in the work rehabilitation and
assessment fields. New Management is nearing completion of a
research and development program which is expected to result in an
enhanced version of ERGOS technology by the end of fiscal 1996 and
has begun development of a further improved version of ERGOS which
it plans to be available in fiscal 1997, both of which will feature
significant software upgrades.
During the fiscal years ended June 30, 1995, 1994, and
1993, approximately $264,000, $277,000 and $200,000, respectively,
were expended on research and development. The Company also
develops, from time to time, customized products for various
employer and insurance industry customers, including customized
functional capacity reports, safety programs, and pre-employment
tests. The developments remain the property of the Company and its
subsidiaries. The amounts expended by the Company for these
developments are not capable of estimation and have not been
included in the above figures.
Marketing and Distribution
The principal focus of marketing the Company's equipment
product lines has been trade conferences and advertisements in
professional journals and the use of direct mail and video tapes.
The Company intends to hire a Director of Sales and Marketing to
oversee these functions and to increase the sale and placement of
ERGOS and other products of the Company.
The Company's centers employ marketing representatives,
either on a full-time, part-time, or contract basis, to market the
services provided at each center to employers, insurance carriers,
physicians and rehabilitation professionals in the center's
geographic area.
See Note 18 to Consolidated Financial Statements for sales
by geographical area for the years ended June 30, 1995, 1994 and
1993.
Proprietary Rights Protection
The Company and its subsidiaries claim certain copyright,
trademark, contractual, common law and other proprietary rights in
the ERGOS software and related products. As part of its efforts to
maintain its competitive position in the market, the Company has
entered into certain confidentiality agreements with its employees
and independent consultants, and a licensing agreement with the
third party developer of a portion of the ERGOS software. Despite
these precautions, unauthorized persons may attempt to copy aspects
of the Company's products or to obtain and use information the
Company regards as confidential or proprietary, and may be able to
develop products with features similar to or competitive with the
Company's products. In addition, some time ago the third party
developer of a portion of the ERGOS software made certain claims
asserting that he has rights to use or disclose the ERGOS software.
The Company disputed such claims. These circumstances led to the
signing of the licensing agreement with the third party developer.
There can be no assurance that the Company would be successful in
any litigation to enforce its rights under the licensing agreement
or to protect the technology involved in ERGOS or related products.
Any loss of the exclusive right to the use of its products could
result in increased competition to the Company and could have a
material adverse effect on the Company's business, operating
results and financial condition. The Company intends to maintain
its technological leadership through continued advances and
innovation.
The Company does not believe its products and trademarks
and other confidential or proprietary rights infringe upon the
proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims
against the Company in the future. A recent claim has been made
with respect to the words "work simulator". The successful
assertion of such claims could have a material adverse effect on
the Company's business, operating results and financial condition.
Competition
The Company and its subsidiaries face competition from
traditional medical equipment manufacturers and distributors and
from sports medicine equipment manufacturers and distributors. The
Company is a minor participant in these industries. A number of
entities have recently either increased their activities in or
entered these industries. There are numerous companies within both
of these areas which have far greater financial and other resources
and advertising budgets than the Company. Although the Company
believes that ERGOS and the TWS complement the equipment sold by
many of its competitors, the Company is at a competitive
disadvantage in these industries. There can be no assurance the
Company will be able to compete successfully in the future with
existing or new competitors.
Employees
The Company and its subsidiaries, at April 1, 1996,
employed 105 persons full time, including management, and 8
part-time employees. The Company had approximately 220 employees at
the end of fiscal 1995.
None of the directors or executive officers of the
Company has entered into an employment agreement with the Company or
with any of its subsidiaries, however, there can be no assurance
they will do so in the future.
The Company has entered into an Interim Management
Services Agreement ("IMSA") with the Team for New Management L.L.C.
("Team"). During the term of the IMSA, the Team will provide the
Company the executive management services that generally are
performed by a corporation's President, Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer. In
particular, the Team will employ Dorcas R. Hardy and make her
services available to the Company as Acting President and Acting
Chief Executive Officer (See Item 10. Directors and Executive
Officers of the Registrant). The original 90-day IMSA expired
April 17, 1996; it has been extended by the new Board of Directors
until July 18, 1996 under the same terms.
In addition, the Company has not obtained key man life
insurance on its executive officers. The loss of the services of
Ms. Hardy or any other executive officer could severely and
adversely affect the short-term operating results of the Company.
Miscellaneous
The Company does not rely heavily upon raw materials, and
the component parts of its manufactured products are readily
available from a multitude of suppliers at competitive costs.
Further, the Company and its subsidiaries do not rely upon any one
or a few major customers. The Company has historically shipped
orders for products either from existing inventory or within several
weeks of an order. Thus, the Company has not experienced a
significant backlog of orders.
The business of the Company and its subsidiaries has
historically experienced reduced sales of products and services
during the last quarter of each calendar year.
The Company, through WRC as an operator of rehabilitation
centers, is subject to extensive and changing state and local
regulations concerning workers' compensation and governing the
licensing, conduct of operations, purchasing and leasing of
facilities, capital expenditures, cost containment and
reimbursement for services rendered. All of these programs are
regulated and there is a general trend toward cost containment in
the industry. It is not possible to accurately predict the impact
on operations of future regulations or legislation affecting
workers' compensation or the rehabilitation industry in general.
Further the business operations of the Company and its subsidiaries
depend in large part upon the regulatory structure of the ADA.
Management believes that any changes in the regulatory framework
concerning workers' compensation and the ADA will work to the
advantage of the Company because the business of the Company, on a
consolidated basis with its subsidiaries, provides a low cost
solution to the problems associated with the industry. There can
be no assurance, however, that the ADA, workers' compensation laws
and regulations, or other laws and regulations will not change to
the detriment of the Company and its subsidiaries.
The Company and its subsidiaries believe they are in
compliance with federal, state and local laws regulating the
discharge of materials into the environment, or otherwise relating
to the protection of the environment, in the locations of their
operations. Such compliance does not have a material effect upon
the capital expenditures, earnings or competitive position of the
Company and its subsidiaries. The Company does not anticipate any
material capital expenditures for environmental control facilities
for the remainder of the fiscal year or the next fiscal year.
Item 2. Properties
The Company maintains its executive offices, as well as
the manufacturing facilities for the Company and NCC, at 2341 South
Friebus Avenue, Tucson, Arizona 85713. These facilities are owned
by the Company, subject to a deed of trust, and consist of
approximately 48,600 square feet, of which the Company uses a
significant portion for its operations. The remainder is rented.
The current space is adequate for present operations and the
leasing of the facility is such that expansion in the foreseeable
future will be provided by the facility.
The clinic operations conducted by various subsidiaries
and joint ventures of the Company rent space for their operations at
market rates from independent third-parties.
Item 3. Legal Proceedings
The Company, its former directors and certain of its
former officers were named as defendants in various shareholder
class action lawsuits filed in the United States District Court for
the District of Arizona and one shareholder derivative suit filed in
state court in Colorado subsequent to an August 9, 1995 Wall Street
Journal article about the Company. The Colorado state court lawsuit
names the Company as a nominal party and requests no relief against
the Company. The Arizona lawsuits have been consolidated into one
class action proceeding. Subsequent to consolidation, an amended
consolidated complaint added the Company's outside auditors, LaVoie,
Clark, Charvoz and May, P.C., as an additional defendant. The
lawsuits generally allege that the defendants have misstated or
omitted to state certain material facts in press releases, filings
with the Securities and Exchange Commission, and other statements by
the defendants. The consolidated class action suit additionally
alleges violations of generally accepted accounting principles and
alleges various "sham" transactions. The complaints generally
request compensatory damages, injunctive relief, interest, costs and
expenses, punitive damages, and such other relief as the court may
deem just and proper. Answers to the complaints have been filed
with the courts. New Management of the Company is attempting to
settle these lawsuits. There can be no assurance, however, that the
Company will be able to settle these lawsuits on terms favorable to
the Company or at all.
On January 5, 1996, Al Sabah Trading and Development
Company PLC, a licensee of the Company, filed a complaint against
the Company in the United States District Court for the District of
Arizona alleging breach of contract and negligent misrepresentation.
The complaint seeks damages in the amount of $1.5 million, the
amount paid on the license agreement subsequent to year end, plus
attorney's fees and costs. In addition, plaintiff has requested
prejudgment attachment and garnishment of the Company's assets and
bank account. An answer to the complaint and a counterclaim have
been filed with the court and a preliminary report has been
submitted to the court regarding an attempt to settle the suit.
There can be no assurance, however that the Company will be able to
settle this lawsuit on terms favorable to the Company or at all.
In December 1994, the Company entered into agreements
with Tradesman Industries, Inc. ("Tradesman") based upon
representations by principals on behalf of Tradesman. On December 5,
1994, the Company agreed to purchase ten percent of the total issued
capital of Tradesman in exchange for $2.5 million (1,162,791 shares
at $2.15 per share) of the Company's Common Stock. This transaction
was recorded in December 1994 with the exchange of shares in January
1995. Tradesman, a subsidiary of Wincanton Corporation, reportedly
a development stage company which represented its principal business
as the manufacturing, marketing and distribution of trucks,
mini-vans and trailers with cargo beds and tailgate systems that
lower to the ground. Principals of Tradesman demonstrated to the
Company working prototypes of what was represented as its patented
technology.
On December 5, 1994, the Company also entered into an
agreement with Tradesman for a master distribution license to sell
all Tradesman products in the United States. The initial term of
the agreement is fifteen years with two five year extensions. The
Company paid for the license and a $1.5 million purchase commitment
deposit through the issuance to Tradesman of $7.5 million
(3,488,372 shares at $2.15 per share) of the Company's Common
Stock. This purchase commitment under the Tradesman agreement was
for 1,000 vans per year for the initial 15-year term at the initial
minimum price of $30,000 per unit. While the Company believes such
commitment is not enforceable due to Tradesman's failure to produce
patents for the technology as represented, it is, in any event,
doubtful that the Company could honor these commitments even if
Tradesman were able to produce the units.
The Company believed then that the Tradesman technology
had wide applications in transportation of the disabled and the
elderly and the reduction of risk of injury in jobs requiring
materials handling, and could contribute to the Company's strategic
plan for growth in its governmental and employer based markets.
Projections made by Tradesman, as announced by the Company in its
February 16, 1995 press release, were based in part upon Tradesman
bringing its technology to market in 1995. The Company has learned
that the technology has been materially redesigned and that patents
do not exist. The Company has not been notified of a revised
timetable for delivery of vehicles to the Company.
Subsequent to entering into the share purchase agreement
and master distribution license, a lawsuit, Fairgill Investments v.
Tradesman, was filed in Delaware by an Australian company
challenging, in part, Tradesman's rights to this technology. The
patent infringement count has been dismissed with prejudice. An
additional lawsuit, Robert Page and McGee Settlement Trust v.
Walter Doyle, Wincanton Corporation, Tradesman Industries, Work
Recovery, Inc., et. al. was filed on November 22, 1995 in Delaware
alleging, in part, that the plaintiff was defrauded out of patented
technology. The Company has filed a motion to dismiss with the
court.
No assurance can be given that the Company will be able
to recover any or all of its investments. Accordingly, the Company
has provided a $10 million reserve for impairment and investment
losses of these assets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Adjustments
Resulting from Audit Process - Wincanton Corporation," and Notes 3
and 8 to the audited financial statements.
The Company expects to experience, in the short term,
ongoing disputes with certain lessors of its clinics, certain
third-party claims as to the validity of certain prior contracts and
license agreements and various other matters arising in the ordinary
course of business. Although the Company is contesting the
allegations of the above complaints and actively seeking to resolve
all disputes, it is impossible to predict the outcome of current
lawsuits or any other claims that may be filed in the future. If a
final judgment were rendered against the Company, the Company would
be materially and adversely affected. The Company does not believe
that current litigation will require an inordinate amount of the
time and attention of management if the cases can be settled.
However, if the Company is unable to settle these lawsuits
expeditiously, the cost of litigation, including the cost of
indemnifying certain of the Company's former directors and officers
(see "certain Relationships and Related Transactions"), could
materially and adversely affect the Company's business, operating
results and financial condition.
Investigations
On August 11, 1995 the Securities and Exchange Commission
entered an Order Directing Private Investigation in the Matter of
Work Recovery, Inc. The Commission has advised the Company that
the Order is non-public and that the existence of the Order should
not be construed as an indication by the Commission that any
violation has occurred. The FBI has also been investigating the
Company. The Company is cooperating fully with the Commission and
the FBI.
Item 4. Submission of Matters to a Vote of Security
Holders
No matter was submitted during the fourth quarter of the
fiscal year covered by this Report to a vote of security holders.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
The Common Stock of the Company was quoted on the Nasdaq
under the symbol "WORK" to November 8, 1995. The Common Stock is
presently traded in the over-the-counter market. The following
table sets forth the high and low bid quotations for the Common
Stock for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended Bid
High Low
<S> <C> <C>
September 30, 1993 $ 4.6250 $3.2500
December 31, 1993 3.9375 2.2500
March 31, 1994 3.0625 2.0000
June 30, 1994 2.3750 1.6875
September 30, 1994 3.0000 1.7187
December 31, 1994 2.5000 1.5313
March 31, 1995 2.4063 1.750
June 30, 1995 7.0625 1.9687
September 30, 1995 8.5625 2.2500
December 31, 1995 2.5625 .3750
March 31, 1996 $ 1.1250 $ .3750
</TABLE>
The closing price of the Common Stock on April 1, 1996 was
$.625 per share.
The above prices were obtained from the NASD through
November 8, 1995 and from the Bloomberg Business News after November
8, 1995 and represent inter-dealer quotations, without retail
mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
On November 8, 1995 The Nasdaq Stock Market, Inc.("Nasdaq")
notified the Company it was denying the Company's request for an
exception from Nasdaq's listing requirements and delisting the
Company's securities from The Nasdaq Stock Market effective with the
opening of business on November 9, 1995.
Nasdaq noted that its Listing Qualifications Committee (the
"Committee") "was of the opinion that the continued delinquency of
the [C]ompany's Form 10-K report for the year ended June 30, 1995
and the seriousness of the allegations of the SEC and FBI
investigations and the shareholder litigation are matters which the
[C]ompany will not be able to resolve in the near term. As a
result, the Committee, in accordance with The Nasdaq Stock Market's
obligation to all its listed companies and the respective current
and future shareholders, determined that an exception for listing on
either the Nasdaq National Market or The Nasdaq SmallCap Market is
not appropriate."
As a result of the Company's delisting from Nasdaq,
stockholders will find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's
securities.
Number of Shareholders
As of April 1, 1996, there were approximately 15,382
holders of the Company's Common Stock. There is a total of
approximately 82 holders of the Company's Preferred Stock.
Dividends
Neither the Company nor any of its subsidiaries has
declared or paid any cash or stock dividends on their common shares
during the last two fiscal years. Further, no dividends are
contemplated at any time in the foreseeable future.
As long as any Series A, B, C, or D convertible preferred
shares are outstanding, no dividend, other than dividends payable in
common shares, may be declared or paid upon the Common Stock, and no
shares of Common Stock may be redeemed by the Company unless the
Company is current in the payment of dividends accrued under the
outstanding preferred shares. Dividends are generally paid on
Preferred Stock at the time of conversion into Common Stock.
Cumulative dividends in arrears at June 30, 1995 and 1994 amounted
to $618,722 and $736,531, respectively.
<PAGE>
Item 6. Selected Financial Data
The following table summarizes selected financial data
which have been derived from the consolidated financial statements
of the Company. The selected financial data presented in the table
below are qualified by reference to and should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial
Statements of the Company and the related notes thereto, as well as
the remainder of this Report.
<TABLE>
Selected Financial Data
<CAPTION>
<S>
Restated Restated Restated
Restated
FISCAL YEARS June 30, June 30, June 30, June 30, June 30,
ENDED 1995 1994 1993 1992 1991
<C> <C> <C> <C> <C>
Net Sales $ 8,142,000 $19,976,000 16,000,000 $6,422,000 $4,890,000
Income (Loss) From
Continuing Operations (50,849,000) 1,970,000 872,000 (292,000) 404,000
Net Income (Loss) (50,849,000) 1,970,000 872,000 (292,000) 404,000
Income (Loss) per Common Share:
From Continuing
Operations (1.43) .08 .01 (.04) .07
Before Extraordinary
Benefit
.04 .01
Net Income (Loss) (1.43) .08 .05 (.04) .08
Total Assets 15,659,000 33,783,000 26,433,000 14,140,000 8,030,000
Long-Term Liabilities 2,255,000 2,585,000 3,352,000 1,989,000 1,610,000
Cash Dividends per
Common Share -- -- -- -- --
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion is qualified by reference to
and should be read in conjunction with the audited financial statements
and related notes thereto, as well as the remainder of this Report.
The Company's Ability to Continue As a Going Concern
The Opinion of Independent Certified Public Accountants
covering the Company's audited financial statement (the "Opinion")
and Note 29 to the audited financial statements note that: (1) the
Company has experienced substantial cash flow reductions and the
financial condition of the Company has substantially deteriorated
subsequent to year end; (2) certain former members of management
(which had exclusive relationships with many third party investors,
lessees, licensees and customers) have resigned; (3) customers,
lessees and licensees have suspended payments to the Company and the
continuing cooperation of this former management may be needed to
effect the collection of amounts due the Company; (4) the effect on
the Company's ability to collect the recorded amounts due the
Company is not determinable; (5) substantial adjustments and
reserves have been made as of June 30, 1995 giving effect to these
matters; and (6) it is unlikely that the Company will be able to
continue day to day operations without seeking protection from
creditors under the bankruptcy laws. The Opinion further notes that
there is substantial doubt about the Company's ability to continue
as a going concern absent the collection of these amounts due or the
injection of substantial additional capital. There can be no
assurance that the Company will be able to collect these amounts,
acquire substantial additional capital at all or on terms and
conditions favorable to the Company, or continue as a going concern.
Given the Company's serious financial condition, the filing under
the bankruptcy laws could happen at anytime.
Safe Harbor Statement Under the Private Securities Litigation Reform
Act of 1995; Risk Factors
The information contained in this Report which does not
constitute historical facts constitutes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and is subject to the safe harbors created thereby. Such
forward-looking statements involve important risks and
uncertainties, including but not limited to: the risk that the
Company may not be able to continue as a going concern; the risk
that the Company will be unable to obtain, at all or on terms and
conditions acceptable to the Company, the substantial additional
financing necessary to fund its negative cash flow from operations
and its business development plan; the risk that the Company may not
be able to establish the Affiliates Network; the risk that the
Company may not be able to increase the demand for ERGOS equipment;
the risk that the Company may not be able to effect legislation that
would provide for the use of Functional Capacity Evaluations; the
risk that the Company's existing licenses may be invalid or
uncollectible; the risk that the Company may lose its entire
investment ($10,000,000) in Tradesman; the risk that the Company may
not be able to develop and implement an enhanced version of ERGOS
technology or a new version of ERGOS; the risk that the Company may
not be able to protect the technology involved in ERGOS and that
competitors may be able to develop products with features similar to
or competitive with the Company's products; the risk that third
parties may assert proprietary rights infringement claims against
the Company in the future; the risk that the Company may not be able
to compete successfully in the future with existing or new
competitors; the risk that the Company may lose the services of
Dorcas Hardy or other executive officers; the risk that the ADA,
workers' compensation laws and regulations or other laws and
regulations may change to the detriment of the Company; the risk
that the Company will be unsuccessful in settling or defending
various legal proceedings and investigations involving the Company;
the risk that the Company will be unable to collect certain
receivables; fluctuations in operating results and the price of the
Company's Common Stock; and other risks detailed herein and in the
Company's other filings with the Securities and Exchange Commission.
See "Business - Business Strategy and Expansion Plans - North
America," "- International," "- Research and Development," "Business
- - Proprietary Rights Protection," "-Competition," "- Employees," "-
Miscellaneous," "Legal Proceedings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations - The
Company's Ability to Continue As a Going Concern; Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Adjustments Resulting from Audit Process -
Leases Receivable," "- Licenses Receivable," "- Trade Receivables,"
"- Subscription Receivables," "- Wincanton Corporation," "- Work
Recovery Pty. Ltd.," "- Goodwill," "- Other Assets," and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
There can be no assurance that the forward-looking
information in this Report will prove to be accurate. The risks and
uncertainties discussed above increase the uncertainty inherent in
such forward- looking information. Accordingly, there may be
differences between the actual results or plans and the predicted
results or plans, and actual results or plans may be materially
different than those indicated in the forward-looking information
contained in this Report. Further, the Company assumes no
obligation to update or otherwise publicly revise the
forward-looking information disclosed in this Report to reflect
circumstances existing after the date hereof.
Adjustments Resulting From Audit Process
Introductory Statement With Respect to Results of
Operations
Since its assumption of control of the Company in January
1996, New Management has determined that the Company must report a
net loss of $50,849,000 for the fiscal year ended June 30, 1995.
This net loss and the subsequent further financial deterioration of
the Company are significantly different from the trends previously
reported by the Company in its interim filings on Form 10-Q for the
first three quarters of fiscal 1995.
The magnitude of the current year's loss and the
restatement of prior years' financial statements was affected by
significant factors which were determined during the audit process.
Specifically, these factors resulted in recording additional bad
debt reserves, investment losses and impairment losses of
$13,360,000, $11,437,000 and $13,825,000, respectively.
Additionally, $22,600,000 of fiscal 1995 revenues have been
deferred. Future realization of these deferred revenues appears
unlikely.
The above factors have affected fiscal year 1995 income by
$61,222,000 or $1.72 per share. The Company is in the process of
revising its Form 10-Q's for fiscal 1995 and 1994 and its Form 10-K
for fiscal 1994, 1993 and 1992, as necessary, to reflect adjustments
associated with the above matters.
The following paragraphs and the notes to the financial
statements elaborate on these matters.
Leases Receivable
The Company has historically sold some of its products
under sales-type leases. Most of these leases require quarterly
lease payments.All lessees are currently delinquent in their payments.
In response to this condition, demand notices were sent to the lessees
by New Management. Based upon the lessees' responses to the demand
notices, some of the equipment may not have been received by the
lessees and the location of other equipment may not be determinable.
Further, liens were never filed by the Company on the leased
equipment. As a result, the Company now believes the collectibility
of the remaining lease balances is in question. Accordingly, the
Company increased the reserve for uncollectible leases at June 30,
1995 by approximately $2,761,000. Further, two of the leases, which
were subsequently refuted by the lessees, have been reversed and the
fiscal 1994 financial statements have been restated accordingly.
See Note 5 to audited financial statements.
Licenses Receivable
During fiscal 1993, the Company began to implement its
international business strategy, which then called for the
introduction of the Company's products through license agreements.
The Company continued to enter into international license agreements
through fiscal 1995. License revenues are generally recognized when
the agreements were executed. The license receivable typically was
structured for periodic payments over 12 to 18 months.
As a result of the seriously delinquent payments due under
the terms of the license agreements and New Management's discussions
with certain licensees, the Company believes it is doubtful
additional payments will be made by any of its international
licensees. Accordingly, the Company has reserved $7,738,000 for
previously recognized fees which now appear uncollectible. License
fees of $13,600,000, which have been earned in fiscal 1995 but for
which collectibility appears doubtful, have been deferred and have
been offset against the receivable. These deferred revenues will be
recognized if and when cash is collected.
Further, even if such license fees are collectible, it
should be noted that license fees are transactions resulting in
non-repetitive balloon credits to income. Accordingly, license
revenues should be disregarded in assessing the ongoing operating
revenues of the Company. This is particularly true given New
Management's view as to the questionable validity and collectibility
of its North America and international licenses. See "Business -
Business Strategy and Expansion Plans - North America" and "-
International."
Trade Receivables
The Company's trade and other receivables include sales of
products and services rendered to insurance carriers and others in
the Company's rehabilitation clinics. Based upon a detailed review
of outstanding trade receivables and aging analysis, the Company
increased the allowance for uncollectible trade and other
receivables at June 30, 1995 by approximately $980,000.
Subscription Receivables
During fiscal 1995 the Company issued its common stock to
non U.S. persons pursuant to Regulation S. As of June 30, 1995, the
Company was owed a total of approximately $1,582,000 from three
entities for unpaid stock. Each of these entities provided the
Company with notes guaranteed by the principals. However, the
Company believes collection of these receivables is uncertain and
accordingly, has provided a reserve at June 30, 1995 for the total
amount due.
Wincanton Corporation
On December 5, 1994 the Company entered into an agreement
with Tradesman Industries, Inc., a subsidiary of Wincanton
Corporation, for the master distribution license to sell all
Tradesman products in the United States. The Company paid for the
license and a $1.5 million purchase commitment deposit through the
issuance to Tradesman of $7.5 million (3,488,372 shares at $2.15 per
share) of the Company's Common Stock. Additionally, the Company
purchased ten percent of the total issued capital of Tradesman in
exchange for $2.5 million (1,162,791 shares at $2.15) of the
Company's Common Stock. The Company has determined that these
investments may not be realized or recovered and accordingly has
recorded a $10 million reserve for impairment and investment losses
on these assets.
The Company entered into a consulting agreement with
Wincanton as of July 1, 1994, whereby the Company would provide
certain consulting services to Wincanton relating to the marketing
of the Tradesman products. According to the agreement, which
totalled $9,600,000, the Company was to provide these services for
$800,000 per month for a one year period through June 30, 1995. As
of June 30, 1995, the Company has been paid $2,609,000 under the
Agreement of which $600,000 of revenue has been recognized and
$2,009,000 has been deferred. No additional amounts have been paid
on the agreement and the Company has been informed that Wincanton is
contemplating an attempt to recover the funds paid on this
agreement. Accordingly, no further revenue on this agreement will
be recognized until the Company and Wincanton resolve certain
matters pertaining to this agreement. The Company is unable to
estimate when or if these matters will be resolved, and there can be
no assurance that the Company will receive any further revenues from
Wincanton or is able to retain the revenues it has already received.
At June 30, 1994, the Company held 200,000 shares of
Wincanton Corporation common stock received as payment on licensing
fees of Queensland Industries, a subsidiary of Wincanton. During
fiscal 1995, the Company received 600,000 shares of Wincanton common
stock valued at $5.00 per share in exchange for 1,500,000 shares of
the Company's Common Stock valued at $2.00 per share.
At June 30, 1995, Wincanton stock was being publicly
traded at approximately $10.00 per share. However, the consulting
agreement between Wincanton and the Company, as discussed above, had
not been publicly disclosed. The Wincanton stock has recently
traded at approximately $.33 per share. Additionally, the
certificate for the 600,000 shares was sent directly to a Company
brokerage account. Although the broker confirmed receipt of the
certificate, it was subsequently determined that the certificate is
registered in the name of an entity unrelated to the Company.
Although the Company is attempting to obtain clear title to the
certificate, it is uncertain at this time whether, and there can be
no assurance that, the Company will be able to transfer the shares
for the Company's benefit. Accordingly, the Company has only valued
the 200,000 shares at $.33 per share as of June 30, 1995 and has not
valued the 600,000 shares. The $3,934,000 reduction in value of the
Wincanton shares has been recorded as an investment loss during
fiscal 1995.
Work Recovery Pty. Ltd.
The Company owns a 31% equity interest in Work Recovery
Pty. Ltd., an Australian company. As of June 30, 1995, the Company
had invested approximately $5,003,000 in this entity consisting of
equity and loans. The Company has determined that these investments
may not be realized or recovered and has accordingly recorded a
reserve of $5,003,000 to reflect their impairment.
Goodwill
The Company has determined that because of the significant
deterioration of the Company's financial condition, the unamortized
balance of goodwill is impaired. Accordingly, $5,424,000 has been
recorded as an impairment to goodwill.
Other Assets
The Company is unable to locate certain equipment,
including ERGOS Work Simulators, previously classified as equipment
not in service. Accordingly, the Company has recorded a $901,000
impairment loss for this equipment and other assets.
Results of Operations
Fiscal 1995 as Compared to Fiscal 1994
Net sales for fiscal 1995 decreased by approximately 59.2%
to approximately $8,142,000 from approximately $19,976,000 for
fiscal 1994. This decrease was attributed to an approximately 97%
decrease in licensing fees, a 8.2% decrease in service fees and a
52.4% decrease in equipment sales. As discussed above, deferral of
licensing revenues decreased licensing revenues for fiscal 1995 by
$13.6 million. Equipment sales decreased as a result of the Company
relying on equipment sales to foreign licensees, which sales were
not completed during fiscal 1995. Consulting fees of $600,000 for
fiscal 1995 are from Wincanton Corporation as discussed above. Net
service revenues decreased in fiscal 1995 as a result of decreased
referrals at the Company's higher sales volume centers. There were
no increases in prices for the products or services of the Company
during fiscal 1995.
Gross profit for fiscal 1995, as compared to fiscal 1994,
decreased by approximately 138% to a loss of approximately
$2,973,000 from a profit of approximately $7,830,000. This decrease
was directly attributable to combined losses sustained by the
clinical service centers and materially reduced licensing fees. The
licensing fees have a significantly lower cost of sales than
clinical services and product sales.
Selling, general and administrative expenses increased
approximately 83.8% during fiscal 1995 to approximately $8,822,000
from approximately $4,801,000 for fiscal 1994. As a percentage of
sales, such expenses increased to 108.4% in fiscal 1995 from 24% in
fiscal 1994. The increase in such expenses was directly related to
increased bad debt expense, marketing, training, legal and investor
services costs, and particularly consulting incurred by the Company
and costs incurred by hiring additional administrative personnel.
The increase in such expenses as a percentage of sales was due to
the increase in such expenses and the decrease in net sales. During
fiscal 1995, the Company established a department to control the
quality of clinical reports and to disseminate internal and external
corporate communications, and a new position responsible for
marketing to national accounts. The New Management of the Company
has significantly reduced, and in some instances eliminated,
unnecessary departments and positions.
Interest expense increased 29.1% to approximately $439,000
in fiscal 1995 from approximately $340,000 in fiscal 1994, due to
the adjustment of interest on the conversion of a debenture and
additions to capitalized leases in connection with the acquisition
of equipment.
Cash increased $5,366,000 from approximately $1,188,000 at
June 30, 1994 to approximately $6,554,000 at June 30, 1995, with the
principal source being $14,821,000 received from issuances of Common
Stock and Preferred Stock of the Company. The principle uses of
cash for the year were loans to an Australian affiliate in the
amount of approximately $1,452,000, the purchase of treasury stock
of approximately $1,383,000, and the net negative cash flow from
operations.
In fiscal 1995, net trade receivables decreased $2,254,000
(64.2%) from approximately $3,509,000 at June 30, 1994 to
approximately $1,255,000 at June 30, 1995. The decrease in trade
receivables resulted primarily from decreased trade revenues and a
net increase of $967,000 in the allowance for uncollectible amounts.
Current and long-term licensing receivables decreased to zero at
June 30, 1995 from approximately $8,288,000 at June 30, 1994. The
decrease in licensing receivables resulted from a bad debt reserve
on unpaid prior year licensing fees and the deferral of fiscal 1995
unpaid licensing fees.
Net goodwill and other intangible assets decreased
$5,319,000 (99.4%) from approximately $5,352,000 to approximately
$33,000 at June 30, 1994 and 1995, respectively, due to the
impairment reserve discussed above. Income taxes payable decreased
from approximately $332,000 at June 30, 1994 to zero at June 30,
1995, due to the significant operating loss of the Company for
fiscal 1995.
The equity attributable to the Series A, B, C, and D
Convertible Preferred Stock decreased approximately $1,060,000
(38.6%) from fiscal 1994 to fiscal year 1995 due to conversion to
Common Stock by preferred stockholders, which accounted for a
portion of the increase in par value of the Common Stock and
additional paid in capital. Other increases in Common Stock and
additional paid in capital were the result of (i) the exercise of
Warrants (1,963,499 shares); (ii) shares issued in payment
of services to various legal and marketing consultants (1,061,344
shares); (iii) shares issued in investment acquisitions (4,750,000
shares); (iv) shares issued in the conversion of debt (308,189
shares); (v) shares issued under the Company's 1993 Incentive Stock
Option Plan (168,000 shares); and (vi) shares issued largely
pursuant to Regulation S (7,930,193 shares).
Fiscal 1994 as Compared to Fiscal 1993
Net sales for fiscal 1994 increased by approximately 24.9%
to approximately $19,976,000 from approximately $16,000,000 for
fiscal 1993. This increase was all attributable to a 183.7%
increase in licensing revenues. Equipment sales for fiscal 1994
decreased 34%. This decrease was a result of a larger volume of
equipment sales in fiscal 1993, which included a substantial
equipment sale to one vendor. Clinical service revenues during
fiscal 1994 decreased 4.4% as a result of decreased referrals. Bad
debt reserves totaling $10,815,000 were recorded in fiscal 1995 on
unpaid license and equipment lease sales reported in 1994 and prior.
There were no increases in prices for the products or services of
the Company during fiscal 1994.
Gross profit for fiscal 1994, as compared to fiscal 1993,
increased by approximately 12.7% to approximately $7,830,000 from
approximately $6,950,000. As a percentage of sales, gross profit
decreased to 39.2% for fiscal 1994 from 43.4% for fiscal 1993. The
decrease in gross profit as a percentage of sales was attributable
to higher clinic service costs.
Selling, general, and administrative expenses decreased
approximately 10.5% during fiscal 1994 to approximately $4,801,000
from approximately $5,363,000 for fiscal 1993. As a percentage of
sales, such expenses decreased to 24% in fiscal 1994 from 33.5% in
fiscal 1993. The decrease in such expenses was due to increased
operating efficiencies and reductions in staff generated from an
improved management information system and management structure
which were put into place during fiscal 1993. This continued the
trend which first became noticeable in fiscal 1993. The decrease in
selling, general and administrative expenses as a percentage of
sales was attributable to the higher percentage of revenues from
licensing agreements, which have a lower cost of sales than the
clinical services and product sales.
Interest expense decreased 49.4% to approximately $340,000
in fiscal 1994 from approximately $672,000 in fiscal 1993, due
primarily to the decreased borrowing by the rehabilitation centers.
Cash decreased $1,273,000 from approximately $2,461,000 at
June 30, 1993 to approximately $1,188,000 at June 30, 1994, the
principal uses being: (i) the reduction of notes payable from
approximately $2,009,000 to approximately $245,000, a decrease of
$1,764,000 (87.8%); (ii) investments in affiliates of approximately
$2,156,000; (iii) loans to an Australian affiliate in the amount of
approximately $2,481,000; and (iv) investments in buildings, office
furniture, leasehold improvements and machinery and equipment, which
together increased approximately $1,051,000 (16.8%). In addition,
cash was used to support the Company's expansion of sales and to
finance the receivables of the Company which resulted from the
increase in sales.
In fiscal 1994, the Company accepted marketable equity
securities in partial payment of license fees. Net trade receivables
decreased $1,473,000 (29.6%) from approximately $4,982,000 at June 30, 1993
to approximately $3,509,000 at June 30, 1994. The decrease in trade
receivables resulted primarily from improved collection efforts and
decreased clinical and other revenues. Licensing receivables
increased $4,539,000 (121.1%) from approximately $3,749,000 at June
30, 1993 to approximately $8,288,000 at June 30, 1994. The increase
in licensing receivables results from increased licensing sales and
installment payments of these fees. Also, cash was used to support
sales through financing. Net leases receivable increased $1,836,000
(165.7%) from approximately $1,108,000 to approximately $2,944,000
at June 30, 1994.
Net goodwill decreased $184,000 (3.3%) from approximately
$5,536,000 at June 30, 1993 to approximately $5,352,000 at June 30,
1994 due to the offsetting effect of the purchase of two centers by
WRC and the renegotiated lower purchase price of the Work Simulation
Centers ("WSCI"). Income taxes payable increased $163,000 (96.4%)
from $169,000 at June 30, 1993 to $332,000 at June 30, 1994 due to
the increase in income of the Company for fiscal 1994.
The equity attributable to the Series A, B, C, and D
Convertible Preferred Stock decreased approximately $2,305,000
(45.6%) from fiscal year end 1993 to fiscal year end 1994 due to
investors who converted to Common Stock, which accounted for part of
the increase in par value of the Common Stock and additional paid in
capital. The remaining change in Common Stock and additional paid
in capital is primarily a result of Common Stock issued to various
legal and marketing consultants and Common Stock issued to foreign
investors. Retained earnings increased from approximately $457,000
at June 30, 1993 to approximately $1,792,000 at June 30, 1994,
primarily due to the net income of the Company less dividends paid
to those investors who converted from preferred shares to common
shares.
Liquidity and Capital Resources
The Company has sustained a significant loss for the year
ended June 30, 1995 and has experienced further material financial
and liquidity deterioration since year end. The financial condition
of the Company is perilous. It is unlikely the Company will be able
to continue day to day operations without seeking protection from
creditors under the bankruptcy laws.
In January 1996, the New Management of the Company began
an immediate, aggressive cost reduction program, which includes the
selling or closing of unprofitable centers and the reduction of
corporate staff and other expenses, in an effort to provide for and
alleviate immediate and short-term cash requirements.
New Management is also investigating possible sources of
additional capital. In February 1996, the Company secured a
$500,000 loan at an interest rate of 10% per annum from a private
disability management company. This loan is convertible into Common
Stock of the Company and is secured by certain ERGOS equipment
pursuant to the loan agreement. See Exhibit 10.28 to this Report.
Management estimates the Company needs between $8-$12 million to
fund current negative cash flows from operations and to fund its
business development plan over the next 24 months. At the date of
this Report no commitments for such capital have been received. The
Company's financial condition, the legal actions against the Company
and contingencies, as discussed below, severely limit the Company's
ability to obtain additional financing outside of bankruptcy. There
can be no assurance that additional financing will be available and,
or if available, that the terms and conditions of any such financing
would be acceptable to the Company.
The Company during the fiscal years 1995 and 1994 provided
for its cash needs from issuances of its Common Stock. Common Stock
was issued as a result of the exercise of Warrants and employee
incentive stock options, sales under Regulation S, and the
consideration for business investments.
The holders of Warrants to purchase Common Stock of the
Company are currently unable to exercise their Warrants until the
Company files an amendment to its Registration Statement. As more
fully described in Note 16 to the Company's Consolidated Financial
Statements, the Company intends to file such an amendment. The
Company intends to use funds which may be obtained from the exercise
of Warrants, if any, to further its expansion strategy. There can be
no assurance, however, that the Company will receive any funds
through the exercise of Warrants. In addition, it should be noted
that warrants sold by the Company in a Regulation D private
placement in 1993 contain significant anti-dilution provisions to
protect the holders of such warrants from dilution through the sale
of "cheap stock". These provisions may prohibit the Company from
issuing stock or securities convertible into Common Stock at prices
less than the initial exercise prices without adjusting the exercise
prices and quantity of securities which such holders may purchase.
As a result of the foregoing, any issuances of securities which
occurred after the issuance of such warrants, and any further
issuance of securities which may be effected as a result of
financing, settlements, or other matters (the aggregate total of
such securities being impossible to predict at this time) could
result in substantial dilution to the Company's Common Stock and
have a serious negative impact on the capitalization of the Company.
Please refer to the specific text of the various warrant agreements
at Exhibit 4.1 of this Report.
New Management knows of four contingencies which may
require, during the next 24 to 36 months, the expenditure of a
material amount of the liquid assets of the Company. First are the
defense costs and resolution of the lawsuits against the Company.
One such lawsuit brought by Al Sabah Trading and Development
Company, PLC (See "- Legal Proceedings") involves the claim that the
license fees paid are refundable to the licensee if the Company
fails to perform on the license agreement. The Company has billed
but failed to complete and ship ERGOS units. This condition, if not
corrected by the Company, could constitute a default and require
refunding of license fees paid on the agreements. Additionally,
amounts previously collected on other license agreements in force,
totalling $5,738,000, may be refundable in the event of continuing
default by the Company on these respective agreements. Second are
the legal costs to restructure the operations of the Company,
including the sale or closing of service centers; to investigate and
resolve the status of licensing, equipment lease and other
contractual arrangements; and to resolve regulatory investigations
of the Company. Third are the Company's expansion plans, to which
the Company will not commit unless and until sufficient liquid
reserves are available. There can be no assurance that sufficient
liquid reserves will be available.
The fourth contingency is potential violations of
Regulation S promulgated pursuant to the Securities Act of 1933, as
amended (the "Securities Act"). Regulation S, as applied to the
Company, generally requires that securities sold pursuant to
Regulation S not be sold or transferred to a U.S resident prior to
the expiration of a 40-day restricted period following the closing
of the offering in which they were originally sold by the Company.
The following table provides certain information regarding three
issuances pursuant to Regulation S for which the Company instructed
its transfer agent to remove legends from the certificates
representing the securities prior to the end of the 40-day
restricted periods.
Date Subscription Dollar Amount of
Agreement Accepted Number of Shares Sales by Company
May 17, 1995 354,000 $ 425,000
June 16, 1995 479,166 $ 575,000
June 21, 1995 500,000 $1,000,000
In each of these cases, the Company has been informed that the
shares were placed in street name but held for the benefit of
non-U.S. persons prior to the end of the 40-day restricted periods.
The Company and its outside counsel are investigating to determine
whether a violation of Regulation S has occurred.
It should be noted that the Commission has become
increasingly concerned regarding immediate transfers following the
40-day period and that it has generally only issued no-action
letters where Regulation S equity securities are to be held offshore
for at least one year.
If a violation has occurred, the Commission could elect to
bring an administrative proceeding against the Company alleging
violations of the registration requirements of Section 5 of the
Securities Act in connection with these Regulation S transactions.
Further, if a violation has occurred, such transactions could lead
to civil litigation by private plaintiffs against the Company
alleging violations of Section 5. Any such administrative
proceeding by the Commission or civil litigation by private
plaintiffs could have a material adverse effect on the Company and
its liquidity.
Inflation
While inflation has not had a material impact on operating
results, there can be no assurance that the business of the Company,
on a consolidated basis, will not be affected by inflation in the
future.
Item 8. Financial Statements and Supplementary Data
The audited financial statements and supporting schedules
required under this item are listed in Item 14, below.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
During the fiscal years ended June 30, 1995 and June 30,
1994, there were no changes in or disagreements with the independent
accountants engaged to audit the Company's financial statements.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the names of all directors,
executive officers and significant employees of the Company, and of
its significant subsidiaries, as well as their ages and positions as
of the date of this Report:
Name Age Position with Company
Dorcas R. Hardy (1) 49 Chair of the Board of
Directors and Acting
President, Acting
Chief Executive Officer
and Acting Chief
Financial Officer
John E. Affeldt, MD (3) 77 Director
Julian De La Rosa (2) 56 Director
Renato DiPentima (1) 55 Director
William R. Sauey (2) 68 Director
Edward M. Young (1)(2) 49 Director
Hirsch Handmaker, M.D. 55 Acting Secretary
John J. Banks 50 Vice President of
Research and Development
Mark S. Dakos 41 Vice President of
Governmental Affairs
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Chairman of the Scientific Advisory Committee
Biographical Profiles
Following are biographical profiles of each individual
serving as a director, executive officer or significant employee of
the Company or its significant subsidiaries as of the date of this
Report.
Dorcas R. Hardy. Ms. Hardy has been the Acting President,
Acting Chief Executive Officer, Acting Chief Financial Officer and
a Director of the Company since January 18, 1996. From 1989 to the
present, Ms. Hardy has provided management consulting for government
and corporate entities regarding health care, strategic planning and
governmental relations. She is currently President of Dorcas R.
Hardy & Associates, a government relations and public policy
consulting firm. From January 1995 until early October 1995, Dorcas
R. Hardy & Associates provided consulting services to the Company.
From 1986 to 1989, Ms. Hardy served as U.S. Commissioner
of Social Security. Ms. Hardy oversaw a budget of nearly $350
billion, including administrative costs of more than $4 billion.
She was an international leader in promoting solutions for social
insurance systems around the world.
From 1981 to 1986, Ms. Hardy served as U.S. Assistant
Secretary of Health and Human Services where she was responsible for
more than $6 billion of social services programs. Previously she
was Assistant Secretary for Health in the State of California.
John E. Affeldt, M.D. Dr. Affeldt has been a Director of
the Company since January 22, 1996. Dr. Affeldt has served as
Medical Advisor for Beverly Enterprises from 1986 to present. From
1977 to 1986, Dr. Affeldt was the President of the Joint Commission
of Health Care Organizations, which accredits more than 6,000 acute
care hospitals, as well as outpatient health care facilities.
Julian W. De La Rosa. Mr. De La Rosa was appointed a
Director of the Company on January 18, 1996. From June 1993 to the
present, Mr. De La Rosa has been a consultant on major programs of
the U.S. Department of Labor including ERISA, Job Training, Workers'
Compensation, Pensions and Health Insurance. From 1990 to March
1993, Mr. De La Rosa was Inspector General of the U.S. Department of
Labor and during that time he served as Vice Chair of the
President's Council on Integrity and Efficiency, which coordinates
the activities of all Inspectors General, The Office of Government
Ethics, the Office of Special Counsel, and the Office of Management
and Budget.
Renato DiPentima, PhD. Dr. DiPentima was appointed a
Director of the Company on January 18, 1996. From July 1995 to the
present, Dr. DiPentima has been Vice President and Chief Information
Officer for SRA Corporation where he is responsible for information
systems and services, including software development, systems and
network integration and business reengineering. From June 1963 to
July 1995, Dr. DiPentima held various positions with the Social
Security Administration, serving as the Deputy Commissioner for
Systems from 1987 to 1995.
William R. Sauey. Mr. Sauey has been a Director of the
Company since January 22, 1996. Mr. Sauey has been Chairman of the
Nordic Group of Companies, Ltd., a privately held corporation
providing management services to manufacturing and service
businesses, for more than five years. Mr. Sauey is also a director
of the Advisory Board of Liberty Mutual Insurance Company and a
director of Suomi College in Michigan.
Edward M. Young. Mr. Young has been a Director of the
Company since January 18, 1996. From 1992 to the present, Mr. Young
has been Chairman, President and Chief Executive Officer of American
Cytogenetics, Inc., a publicly-held company which owns and manages
specialty clinical laboratories. Mr. Young was a health care
management consultant with Bedford International from 1990 to 1991.
Hirsch Handmaker, M.D. Dr. Handmaker has been Acting
Secretary of the Company since January 18, 1996. Dr. Handmaker is
the founder and owner and has served as President of Healthcare
Technology Group ("HTG") since 1988. HTG is a management and
consulting firm which specializes in providing technical, marketing
and business advice to hospitals, corporate entities, medical
practices, investors and to entities interested in the healthcare
and medical services business. Dr. Handmaker also serves as
Executive Director of the Arizona Institute of Nuclear Medicine and
is the Medical Director of Papago Imaging. He has been a practicing
radiologist and nuclear medicine physician for twenty- five years.
John J. Banks. Mr. Banks was appointed Vice President of
Research and Development in January 1996, having served as Vice
President of International Operations since May 1995 and Coordinator
of International Operations since February 1993. Prior to these
appointments, Mr. Banks served as the Company's Director of Research
and Development from July 1986. As Vice President of Research and
Development, Mr. Banks has responsibility for the research and
development for the ERGOS Work Simulator and its continuing
enhancements.
Mark S. Dakos. Mr. Dakos joined the Company in July 1994,
as Special Projects Director, and was promoted to Vice President of
Governmental Affairs in May 1995. In these positions, Mr. Dakos has
responsibility for the Company's work with governmental agencies as
well as the Company's efforts to effect state legislative reform in
the areas of workers' compensation and disability determination.
Mr. Dakos was the owner and manager of Work Recovery Center -
Hawaii, Inc., from January 1994 until June 1994, a rehabilitation
facility using ERGOS and related equipment of the Company. Mr.
Dakos operated Mark S. Dakos & Associates, a Sacramento,
California-based business specializing in vocational counseling and
rehabilitation, from December 1989 until December 1993.
<PAGE>
Item 11. Executive Compensation
Summary Compensation
The following table sets forth the compensation paid to
the Chief Executive Officer and the next four most highly
compensated executive officers whose total annual salary and bonus
exceeded $100,000 (the "Named Executive Officers") for services
rendered in all capacities to the Company and its subsidiaries
during the periods indicated.
<TABLE>
<CAPTION>
Summary Compensation Table
Other Number of
Annual Securities
Name and Year Ended Compen- Underlying
Principal Position June 30 Salary Bonus sation Options
<S> <C> <C> <C> <C> <C>
Thomas L. Brandon
Chairman, President
and Chief Executive
Officer <F1> 1995 $ 181,500 $171,891<F2> 6,200,000
Thomas L. Brandon
Chairman, President
and Chief Executive
Officer <F1> 1994 $ 109,500 $20,000
Thomas L. Brandon
Chairman, President
and Chief Executive
Officer <F1> 1993 $ 96,000
Robert B. Bunker
Chief Financial
Officer <F3> 1995 $ 120,000 $ 5,000 400,000
Linda J. Duncan
Chief Operating
Officer <F4> 1995 $ 92,000 $18,300 410,000
John J. Banks
Vice President of
International
Operations 1995 $ 58,000 $70,000 394,400
<FN>
<F1> Mr. Brandon served as Chief Executive Officer
from December 1989 until November 4, 1992 and
from March 24, 1994 to December 14, 1995 .
<F2> Includes reimbursement of personal expenses
and use of Company car.
<F3> Mr. Bunker served as Chief Financial Officer
from February 15, 1994 until January 18, 1996.
<F4> Ms. Duncan served as Chief Operating Officer
from March 24, 1994 until January 18, 1996.
</FN>
</TABLE>
Option Grants
The following table provides information with respect
to stock option grants made to each of the Named Executive Officers
during the fiscal year ended June 30, 1995. No stock appreciation
rights were granted to these individuals during such period.
<TABLE>
Option Grants in Last Fiscal Year
<CAPTION>
Percent of Potential Realizable
Total Value at
Number of Options Annual rates of
Securities Granted to Stock Price
Underlying Employees Exercise Appreciation for
Named Options on Fiscal Price per Expiration Option Term
Officers Granted Year Share Date 5% 10%
- ---------- ------------ ----------- ---------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas L.
Brandon 300,000 3.05% $ 2.01 8/31/99 $110,700 $291,871
150,000 1.52 2.50 8/31/99 - 72,435
150,000 1.52 3.00 8/31/99 - -
300,000 3.05 6.00 8/31/99 - -
300,000 3.05 7.00 8/31/99 - -
3,000,000 30.48 10.00 8/31/99 - -
2,000,000 20.32 15.00 8/31/99 - -
Robert 100,000 1.02 1.83 8/31/99 54,900 115,290
Bunker 50,000 .51 2.50 8/31/99 - 24,145
50,000 .51 3.00 8/31/99 - -
100,000 1.02 6.00 8/31/99 - -
100,000 1.02 7.00 8/31/99 - -
Linda J. 10,000 .10 1.58 7/20/95 790 1,580
Duncan 100,000 1.02 1.83 8/31/99 54,900 115,290
50,000 .51 2.50 8/31/99 - 24,145
50,000 .51 3.00 8/31/99 - -
100,000 1.02 6.00 8/31/99 - -
100,000 1.02 7.00 8/31/99 - -
John J. 44,400 .45 1.58 7/20/95 3,508 7,015
Banks 25,000 .25 1.83 8/31/99 13,725 28,823
250,000 2.25 1.25 5/03/00 168,750 354,375
12,500 .13 2.50 8/31/99 - 6,036
12,500 .13 3.00 8/31/99 - -
25,000 .25 6.00 8/31/99 - -
25,000 .25 7.00 8/31/99 - -
</TABLE>
<PAGE>
Aggregated Option Exercise and Fiscal Year-End Option Values
The following table sets forth information with respect
to the exercise of stock options by the Named Executive Officers
during the fiscal year ended June 30, 1995 and the number and value
of unexercised options held by the named executive officers at June
30, 1995.
<TABLE>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<CAPTION>
Number of Value of
Shares Value Unexercised Unexercised
Acquired Realized Options at In-the-Money
Upon Upon Fiscal Year Options at Fiscal
Named Officer Exercise Exercise End <F1> Year End <F1>
<S> <C> <C> <C> <C>
Thomas L. Brandon <F2> - - 6,200,000 $3,108,000
Robert B. Bunker <F3> - - 400,000 1,054,500
Linda J. Duncan <F3> 10,000 $ 2,500 400,000 1,054,500
John J. Banks 44,400 62,160 350,000 1,458,500
<FN>
<F1> All options were exercisable at the end of fiscal 1995.
<F2> All of Mr. Brandon's unexercised options terminate three months
after cessation of his employment with the Company. Mr. Brandon
resigned as an employee effective January 19, 1996.
<F3> The Company entered into a separate Severance Agreement and
Releases dated January 18, 1996 with each of Ms. Duncan and Mr.
Bunker. These agreements provide, in part, that the Company, at the
discretion of the Compensation Committee, shall replace the options
held by Ms. Duncan and Mr. Bunker to each purchase 400,000 shares
with options to each purchase 170,000 shares of the Company's Common
Stock at an exercise price of $1.50 per share for a period expiring
on the date two years following the date they cease to be employed
by the Company.
</FN>
</TABLE>
Executive Compensation Committee Interlocks and Insider
Participation
The Executive Compensation Committee, which until January
18, 1996, consisted of Ms. Patricia Golde and Dr. Charles Rastatter,
exercises all the powers of the Board in authorizing and approving
the compensation of senior executives of the Company and its
subsidiaries, and determines awards under various incentive plans,
including the Company's 1993 Incentive Stock Option Plan. The new
Board of Directors, at the date of this Report, has not yet
appointed members to the Compensation Committee.
Mr. Brandon, until December 14, 1995, was the President
and Chief Executive Officer of the Company and each of its
significant subsidiaries and was a member of the Compensation
Committee until his resignation from that committee in August 1994.
Compensation of Directors
Former Directors who were not employees of the Company
received $1,500 for each Board meeting attended and received no
additional compensation for attending committee meetings. Directors
were reimbursed for their reasonable out-of-pocket expenses incurred
in connection with attendance at Board and committee meetings.
New Directors of the Company who are not officers of the
Company receive (1) $1,500 per Board or committee meeting attended
plus expenses for meeting attendance; $500 for telephonic board
meetings; (2) 100,000 warrants for serving as a director, 25,000
warrants for each committee membership, and 25,000 warrants for each
committee chair; (3) indemnification agreements substantially in the
form previously granted to former directors and senior officers of
the Company; and (4) coverage under a directors' and officers'
insurance policy with maximum limits of not less than $5 million.
The warrants are for the purchase of the Common Stock of the Company
and are exercisable for five years at an exercise price equal to the
average closing bid price of the Company's stock for a twenty-day
trading period commencing with the date that is ten days prior to
the earlier of the date of the public announcement of such person
becoming a director or the date of the first meeting of the Board
of Directors after the appointment or election of such director.
The Company paid Lifestyle Enhancement Systems, Inc.
$76,274 during fiscal 1995 for consulting fees. Dr. Charles
Rastatter, a director of the Company until January 18, 1996, is an
officer and owner of that entity. Employment Contracts, Termination
and Change of Control
None of the Company's executive officers has an
employment contract with the Company, and their employment may be
terminated at any time at the discretion of the Board of Directors.
On January 18, 1996, the Board of Directors of the Company and the
Team for New Management LLC. ("Team") effected a change in control
through a voluntary, negotiated change in the composition of the
Board of Directors and management of the Company. The Team was
formed to help finance and conduct a proxy solicitation against the
former management and to provide management services to the Company
if a new Board were installed.
On January 18, 1996, the Company entered into an Interim
Management Services Agreement ("IMSA") with the Team. During the
term of the IMSA, the Team will provide the Company the executive
management services that generally are performed by a corporation's
President, Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer. In particular, the Team will employ Dorcas
R. Hardy and make her services available to the Company as Acting
President and Acting Chief Executive Officer. On January 18, 1996,
The Board of Directors of the Company appointed Ms. Hardy as Acting
Chair of the Board, Acting President, Acting Chief Executive Officer
and Acting Chief Financial Officer. The initial IMSA expired April
17, 1996. The agreement was extended by the Board of Directors to
July 18,1996. Under the IMSA, the Company will pay the Team $25,000
per week and will advance or reimburse the Team's out-of-pocket
expenses associated with services provided under the IMSA.
The former directors of the Company authorized, subject
to approval by the shareholders of the Company and negotiation with
the Team of a definitive Management Services Agreement to replace
the IMSA, the issuance of warrants to the Team exercisable for five
years to purchase (i) three million shares of the Common Stock of
the Company at an exercise price of $1.25 per share; (ii) three
million shares of the Common Stock of the Company at an exercise
price equal to the average closing bid price of the Common Stock for
the 20 day trading period beginning 10 days prior to January 18,
1996 ($.72); (iii) two million shares of Common Stock of the Company
at an exercise price of $3.00 per share; and (iv) two million shares
of Common Stock of the Company at an exercise price of $5.00 per
share. These warrants will be issued as restricted securities; will
carry unlimited piggyback registration rights on all underwritten
public offerings or registrations of outstanding shares by the
Company, subject to reasonable cutback pro rata with other secondary
sellers, as may be requested by the managing underwriter; will have
the rights to participate pari passu with demand registration rights
of other holders of shares of Common Stock, including shares
underlying any outstanding options or warrants; and will carry two
demand registration rights for which the Company will bear all
expenses.
The warrant or stock option incentives for Ms. Hardy as
an officer and director of the Company, but excluding cash bonuses
paid based upon stock price appreciation, along with similar stock
incentives that the Company is anticipated to offer for executive
officers to be hired will also come from, or cause a deduction from
the warrant package to be issued to, the Team.
On January 18, 1996, the Company also entered into a
Severance Agreement and Release (the "Severance Agreement") with
each of Robert B. Bunker, the Company's former Senior Vice President
and Chief Financial Officer, and Linda J. Duncan, the Company's
former Senior Vice President, Secretary and Chief Operating Officer.
Under the Severance Agreement with Mr. Bunker, the Company will pay
him severance equal to one year's salary paid out over a period of
thirty months upon termination from the Company, payable monthly in
arrears, at the per annum rate of $120,000, with any unpaid amounts
payable in full if and when the Company reimburses the Team for its
expenses through January 2, 1996. During a twelve month period, the
Company will provide Mr. Bunker with the health care and other
benefits provided to the Company's senior executives; provided,
however, that the aggregate amount of such other benefits (excluding
health care benefits) shall not exceed 5% of the per annum severance
pay. In addition, the Company, through its Compensation Committee
and subject to the discretion of the Compensation Committee, will
reprice and extend the exercise period in respect of the stock
options granted to Mr. Bunker such that he will have options to
purchase 170,000 shares of the Company's Common Stock at an exercise
price of $1.50 per share for a period expiring on the date two years
following the date on which Mr. Bunker ceases his full time
employment with the Company.
In exchange for the consideration described above, Mr.
Bunker will assist in the orderly transition of management control
and make himself available to provide all requested information
about the Company. Mr. Bunker, however, is not obligated to provide
any particular number of hours of assistance and is entitled to seek
and accept other employment. Mr. Bunker also has agreed not to
solicit any customer or licensee of the Company or its related
entities for purposes the effect of which would be to adversely
impact the volume of business of such customer or licensee with the
Company or its related entities. In addition, Mr. Bunker has agreed
not to compete with the Business of the Company (as defined) and
certain related entities in the Geographic Area (as defined) until
January 18, 1999. Further Mr. Bunker has released the Company and
its related entities and certain other parties from claims and
causes of action existing as of January 18, 1996. Likewise, the
Company has agreed not to assert against Mr. Bunker any claim
existing as of January 18, 1996, subject to certain exceptions.
Finally, Mr. Bunker has agreed to the establishment of a voting
trust into which all of his capital stock in the Company, whether
now owned or hereafter acquired, will be placed and has agreed that
the voting trustee shall be the President of the Company.
The Severance Agreement with Linda J. Duncan is
substantially similar to the Severance Agreement with Mr. Bunker
except that Ms. Duncan's severance pay is payable at the per annum
rate of $96,000.
Effective February 1, 1996, the Company also entered into
a Mutual Release and Settlement Agreement ("Settlement Agreement")
with Christopher Bingham, the former Chief Executive Officer of Work
Recovery Europe, Ltd. and a former Director of the Company. Under
the Settlement Agreement with Mr. Bingham, the Company will pay him
as severance pay $25,000 by August 1, 1996 ("Severance Pay"). The
Severance Pay is payable in full when the Company reimburses the
Team for its expenses through January 2, 1996. If the Team does not
receive reimbursement for its expenses by August 1, 1996, any unpaid
Severance Pay is then due in full. In addition, Mr. Bingham
received certain computer equipment valued at less than $10,000.
In exchange for the consideration described above, Mr.
Bingham will assist in the orderly transition of management control.
Mr. Bingham is not obligated to provide any particular number of
hours of assistance and is entitled to seek and accept other
employment. Mr. Bingham has released the Company from any claims
and causes of actions and likewise the Company has agreed not to
assert any claims against Mr. Bingham.
<PAGE>
EXECUTIVE COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The former members of the Executive Compensation
Committee of the Board of Directors resigned January 18, 1996. The
actions of the Committee, as reported below, were taken without the
benefit of subsequent financial and other disclosures which gave
rise to the substantial net loss of the Company for fiscal 1995.
This Executive Compensation Committee Report is made by the former
members of the Committee. As of the date of this Report, the Board
of Directors had not yet appointed any new members to the Committee
to replace the former members who resigned January 1996. This
Executive Compensation Committee Report is presented pursuant to
Item 402 of Regulation S-K. Notwithstanding anything to the
contrary set forth in any of the Company's previous filings under
the Securities Act of 1933 as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings,
including this Form 10-K, in whole or in part, this report and the
graph which follows this report shall not be incorporated by
reference into any such filings, and such information shall be
entitled to the benefits provided in Item 402(a)(9) of Regulation
S-K.
On March 24, 1994, the Company established an Executive
Compensation Committee, comprised of two independent members of the
Board, Ms. Patricia D. Golde and Dr. Charles J. Rastatter, and the
Chairman of the Board, Mr. Brandon. Prior to establishing the
Executive Compensation Committee, the entire Board held primary
responsibility for determining executive compensation. In August
1994, Mr. Brandon resigned from the Committee and Dr. Rastatter
assumed the role of Chairman of the Executive Compensation
Committee.
The Executive Compensation Committee exercises all of the
powers of the Board in the authorization and approval of the
compensation of executive officers of the Company and its
subsidiaries, including awards of stock options to all employees.
The goals of the Executive Compensation Committee are to provide
compensation packages to the officers of the Company which are
highly incentive based with a modest compensation base, compared to
industry standards, coupled with bonus and stock option incentive
awards based on corporate performance, business unit performance and
personal performance. The Executive Compensation Committee believes
this strategy will best align the interests of management with those
of the shareholders.
The Executive Compensation Committee, in furtherance of
this policy, during fiscal 1995 awarded stock options, including
certain options under the Company's 1993 Incentive Stock Option
Program, to many employees of the Company, including management,
based on years of service and individual contribution to the overall
goals of the Company and its shareholders.
In May 1995, the Executive Compensation Committee approved
base compensation packages for several newly-appointed Vice
Presidents.
The Executive Compensation Committee made no changes to
the base compensation packages for Mr. Bunker or Ms. Duncan in
fiscal 1995; however, an upward adjustment of approximately 66% was
made to Mr. Brandon's base compensation package for fiscal 1995.
The Committee determined that the following factors justified this
increase:
a) The Company's performance during fiscal 1994 as
compared to fiscal 1993. Prior to restatements fiscal 1994 sales
increased approximately 53% and net income increased
approximately 333% as compared to fiscal 1993.
b) Mr. Brandon's personal contribution to this
increased performance was determined to be substantial.
c) Mr. Brandon's base compensation remained low by
industry standards. A report on "Executive and Board Compensation
at Public Companies," published by a national accounting firm,
indicates that, for manufacturing companies with annual revenues
below $500 million, Chief Executive Officers earned an average
base compensation of approximately $300,000; for high-tech
companies this figure is approximately $225,000.
Respectfully submitted,
Former Executive Compensation Committee:
Patricia D. Golde
Charles J. Rastatter
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following tables set forth certain information
regarding the beneficial ownership of the Company's Common Stock as
of March 1, 1996 by (1) each person known to the Company to own
beneficially more than 5% of the outstanding Common Stock, (2) the
Named Executive Officers, (3) each of the Company's directors, and
(4) all directors and officers of the Company as a group. Except as
otherwise indicated below, to the knowledge of the Company, all
persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent that
authority is shared by spouses under applicable law. Table I
furnishes the information required by Item 403(b). Table II
provides the same information except that only current executive
officers are included rather than the Named Executive Officers as
defined by Item 402(a)(3) and the exclusion of Mr. Brandon who is
believed not to own beneficially more than 5% of the outstanding
Common Stock upon termination of his stock options. The purpose of
Table II is to illustrate the beneficial ownership of the Company's
management following the change in control.
<TABLE>
TABLE I
<CAPTION>
Number of Shares
Name and Address of of Beneficial Percent of
Title of Class Beneficial Owner <F1> Ownership <F2> Class <F3>
<S> <C> <C> <C>
Common Stock Dorcas R. Hardy 5,500 <F10>
Common Stock John E. Affeldt, MD 125,000 <F4> <F10>
Common Stock Julian De La Rosa 125,000 <F4> <F10>
Common Stock Renato DiPentima 125,000 <F4> <F10>
Common Stock William R. Sauey 135,000 <F4> <F10>
Common Stock Edward M. Young 150,000 <F5> <F10>
Common Stock John J. Banks 350,100 <F6> <F10>
Common Stock Thomas L. Brandon 7,739,280 <F7><F8> 14.85%
Common Stock Robert B. Bunker 171,000 <F9> <F10>
Common Stock Linda J. Duncan 180,800 <F9> <F10>
Directors and Executive
Officers as a Group 9,353,180 17.45%
<PAGE>
TABLE II
Number of Shares
Name and Address of of Beneficial Percent of
Title of Class Beneficial Owner <F1> Ownership <F2> Class <F3>
Common Stock Dorcas R. Hardy 5,500 <F10>
Common Stock John E. Affeldt, MD 125,000 <F4> <F10>
Common Stock Julian De La Rosa 125,000 <F4> <F10>
Common Stock Renato DiPentima 125,000 <F4> <F10>
Common Stock William R. Sauey 135,000 <F4> <F10>
Common Stock Edward M. Young 150,000 <F5> <F10>
Common Stock John J. Banks 350,100 <F6> <F10>
Directors and Executive
Officers as a Group 1,284,100 2.73%
<FN>
Notes to Table I and Table II:
<F1> The address of all beneficial owners is 2341 South
Friebus Avenue, Tucson, Arizona 85713, except for Mr. Brandon whose
address is 5555 E. 5th Street, Tucson, AZ 85711.
<F2> The information shown is based upon information
furnished by the respective directors and executive officers.
<F3> Percentages are based upon 46,592,998 shares
outstanding on April 1, 1996, excluding 674,375 shares held in
treasury and assuming no conversion of preferred stock. As of March
1, 1996 there were also 113 shares of Series A Preferred Stock,
58,662 of Series B Preferred Stock, 71,912 of Series C Preferred
Stock and 8,000 of Series D Preferred Stock which had been issued
and were outstanding, all of which are immediately convertible into
Common Stock. If converted on April 1, 1996, an additional
1,018,000 shares of Common Stock would have been issued.
<F4> Includes immediately exercisable warrants to
purchase 125,000 shares of the Common Stock of the Company.
<F5> Includes immediately exercisable warrants to
purchase 150,000 shares of the Common Stock of the Company.
<F6> Includes immediately exercisable stock options to
purchase 350,000 shares of the Common stock of the Company. Mr.
Banks disclaims beneficial ownership of 13,100 shares of Common
Stock held by his wife.
<F7> Includes 6,200,000 of immediately exercisable stock
options to purchase 6,200,000 shares of the Common Stock of the
Company. As of the date of this Report all of these stock options
have terminated. The number of shares held by Mr. Brandon was
obtained from the records of the Company's transfer agent.
<F8> Mr. Brandon disclaims beneficial ownership of
55,875 shares of Common Stock held by his wife and minor child.
<F9> Includes 170,000 shares of immediately exercisable
stock options and assumes Compensation Committee approval.
<F10> Represents less than 1% of the outstanding shares
of Common Stock.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions
The following describes matters which have been confirmed
by New Management of the Company as of the date of this Report:
The Company engaged, from time to time, a corporation
owned by the brother of Mr. Brandon to deliver ERGOS machines and to
perform certain other related services. The cost of these services
approximated $96,000 for the fiscal year ended June 30, 1995. The
Company discontinued the services of this entity effective January
18, 1996. The Company paid approximately $85,000 directly to Mr.
Brandon for advertising during the fiscal year ended June 30, 1995
for a NASCAR racing team believed to be owned by Mr. Brandon. The
Company paid Lifestyle Enhancement Systems, Inc. approximately
$76,000 for consulting services rendered during the fiscal year
ended June 30, 1995. Dr. Rastatter, a member of the Board of
Directors of the Company until January 18, 1996, is an officer and
an owner of that company. The Company purchased two rehabilitation
centers from Mark S. Dakos, an officer of the Company, for a net
purchase price of $85,000.
The Company's Articles of Incorporation contain
indemnification and exculpation provisions. In addition, the
Company has entered into indemnification agreements with each of its
former directors and with certain former officers.
On October 27, 1995, the Company advanced $100,000 in
payment of legal fees, subject to the terms of indemnification
agreements, to the law firm representing Mr. Brandon, Mr. Bunker and
Ms. Duncan. Subsequently, the former Board of Directors of the
Company appointed independent counsel to review the conduct of Mr.
Brandon, Mr. Bunker and Ms. Duncan and determine whether their
individual conduct would preclude the Company from advancing
expenses on their behalf in connection with certain legal
proceedings prior to the disposition of those proceedings.
Independent counsel has determined that Mr. Brandon's conduct does
not satisfy certain standards of conduct and that as a result the
Company is precluded from advancing expenses on behalf of Mr.
Brandon in connection with certain legal proceedings. Independent
counsel has determined that both Ms. Duncan and Mr. Bunker are not
precluded from indemnification and the advancement of legal
expenses. In January 1996, the Company advanced legal expenses for
Ms. Duncan and Mr. Bunker of $60,000 each.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a)(1) Financial Statements. The following financial
statements are included in this Form 10-K
Opinion of Independent Certified Public Accountants
Consolidated Balance Sheets as of June 30, 1995 and
1994
Consolidated Statements of Operations for the fiscal
years ended June 30, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for
the fiscal years ended June 30, 1995, 1994 and
1993
Consolidated Statements of Cash Flows for the fiscal
years ended June 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules. The following
financial statement schedule is included in this
Form 10-K and should be read in conjunction with
the financial statements:
VIII - Valuation and Qualifying Accounts for the
fiscal years ended June 30, 1995, 1994 and 1993
(a)(3) Exhibits
3.1* Certificate of Incorporation, Certificate of
Amendment dated February 12, 1990
(changing name and reverse splitting
capital shares), Certificate of Amendment
dated July 20, 1990 (establishing a Series
A Preferred Stock), Certificate of
Amendment dated October 31, 1990
(amending Series A Preferred Stock
provisions), Certificate of Amendment
dated October 31, 1990 (amending Series
Preferred Stock provisions), Certificate
of Amendment dated March 18, 1993
(establishing a Series C Preferred Stock),
Certificate of Amendment dated May 19, 1993
increasing authorized capital shares), and
Certificate of Amendment dated June 1,
1993 (establishing a Series D Preferred
Stock).
3.2* Bylaws
4.1* Warrant Agreement dated May 5, 1993,
Registration Rights Agreement dated May 5,
1993, Warrant Agreement dated June 7,
1993, Registration Rights Agreement dated
June 7, 1993, Dealer Warrant Agreement
dated June 7, 1993, Dealer Registration
Rights Agreement dated May 5, 1993, Dealer
Warrant Agreement dated June 7, 1993, Dealer
Registration Rights Agreement dated June
7, 1993, and Stock Sale Agreement and
Debenture Purchase and Registration Rights
Agreement dated April 1, 1993.
10.1 Form of the Company's 1993 Incentive Stock
Option Plan is hereby incorporated by
reference from the Registrant's
Registration Statement on Form S-8 dated
November 18, 1993.
10.2* License Agreement, dated November 14, 1992,
between the Company and Capital Vocational
Specialists, Inc.
10.3* License Agreement, dated November 16, 1992,
between the Company and Stichting
Werkenrode
10.4* Master License Agreement, dated May 4, 1993,
between the Company and Work Recovery
Pty., Ltd.
10.5* License Agreement, dated June 1, 1993,
between the Company and Zhuhai Trading
Systems
10.6* License Agreement, dated March 30, 1993,
between the Company and Mike C. Abraham
10.7* License Agreement, dated April 28, 1993,
between the Company and Midwestern
Diagnostic Assessment Services, Inc.
10.8* License Agreement, dated June 4, 1993,
between the Company and Douglas A. Larson
10.9* License Agreement, dated September 29, 1993,
between the Company and World Co. Ltd.
10.10* License Agreement, dated December 28, 1993,
between the Company and Queensland
Industries, Inc.
10.11* License Agreement, dated March 25, 1994,
between the Company and INC/Eurocontrols
Corp.
10.12* License Agreement, dated March 25, 1994,
between the Company and Alliance Medical
10.13 License Agreement, dated June 29, 1994,
between the Company and Manados
Investments, Ltd.
10.14 Consulting Agreement, dated July 1, 1994,
between the Company and Wincanton
Corporation
10.15 License Agreement, dated September 10, 1994,
between the Company and Al-Sabah Trading
and Development Company PLC
10.16 Master License Distributor Agreement, dated
December 5, 1994, between the Company and
Tradesman Industries, Inc.
10.17 Employment Agreement, dated March 1, 1995,
between the Company and Bobby S. Roberts.
10.18 License Agreement, dated March 9, 1995,
between the Company and Work Recovery Far
East
10.19 License Agreement, dated March 13, 1995,
between the Company and Neval Ltd.
10.20 License Agreement, dated May 24, 1995,
between the Company and Al-Sabah Trading
and Development Company PLC
10.21 License Agreement, dated June 19, 1995,
between the Company and Work Recovery Far
East
10.22 Guarantee and Security agreement, dated July
20, 1995,between the Company and Yorkton
Securities,Inc.
10.23 License Agreement, dated September 11, 1995
between the Company and Intermedia Com.
10.24 Agreement, dated January 18, 1996, between
the Company and Team for New Management,
L.L.C. is hereby incorporated by reference
from the Registrant's Form 8-K dated
January 18, 1996.
10.25 Interim Management Services Agreement, dated
January 18, 1996, between the Company and
Team for New Management, L.L.C. is hereby
incorporated by reference from the
Registrant's Form 8-K dated January 18,
1996.
10.26 Severance Agreement and Release, dated
January 18, 1996, between the Company and
Robert B. Bunker is hereby incorporated by
reference from the Registrant's Form 8-K
dated January 18, 1996.
10.27 Severance Agreement and Release, dated
January 18, 1996, between the Company and
Linda J. Duncan is hereby incorporated by
reference from the Registrant's Form 8-K
dated January 18, 1996.
10.28 Loan Agreement, dated February 26, 1996,
between the Company and Allsup Inc.
10.29 Severance Agreement and Release, dated March
4, 1996, between the Company and
Christopher H. Bingham a former officer and
a former Director of the Company.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth
quarter of the fiscal year ended June 30, 1995.
A Report on Form 8-K, dated November 8, 1995, was
filed by the Registrant, which reported under Item
5 the delisting of the Registrant's securities from
Nasdaq effective November 9, 1995.
A Report on Form 8-K, dated January 3, 1996, was
filed by the Registrant which reported under Item 5
that the Registrant and Team for New Management,
L.L.C entered into a letter of intent that
contemplates a change in control of the Board of
Directors and management of the Registrant.
A Report on Form 8-K, dated January 18, 1996, was
filed by the Registrant which reported under Items 1
and 5 the resignation of members of the Board of
Directors of the Registrant; the appointment of new
members to the Board; the appointment of Dorcas R.
Hardy as Acting Chair of the Board, Acting Chief
Executive Officer, Acting President and Acting Chief
Financial Officer; the Company and Team for New
Management, L.L.C. entering into an Interim
Management Services Agreement; and the Company
entering into a separate Severance Agreement and
Release with the previous Chief Operating Officer and
the Chief Financial Officer of the Company.
* Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (No. 33-67210) or amendments thereto.
All other exhibits are omitted as the information required is
inapplicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
WORK RECOVERY, INC.
(Registrant)
By: /s/ Dorcas R. Hardy
Dorcas R. Hardy Acting Chief Executive Officer (Principal Executive
Officer)
Date: April 24, 1996
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Dorcas R. Hardy
Dorcas R. Hardy, Acting Chief Executive Officer
(Principal Executive Officer) and Director
Date: April 24, 1996
/s/ Dorcas R. Hardy
Dorcas R. Hardy, Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
and Director
Date: April 24, 1996
/s/ John E. Affeldt, M.D.
John E. Affeldt, M.D.,Director
Date: April 24, 1996
/s/ Julian W. De La Rosa
Julian W. De La Rosa, Director
Date: April 24, 1996
/s/ Renato DiPentima
Renato DiPentima, Director
Date: April 24, 1996
/s/ William R. Sauey
William R. Sauey, Director
Date: April 24, 1996
/s/ Edward M. Young
Edward M. Young, Director
Date: April 24, 1996
<PAGE>
Opinion of Independent Certified Public Accountants
Board of Directors and Shareholders
Work Recovery, Inc.
2341 South Friebus Avenue
Tucson, Arizona 85713
We have audited the consolidated balance sheets of Work
Recovery,Inc. and its subsidiaries as of June 30, 1995 and 1994 and
the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the
three year period ended June 30, 1995. 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 did not audit the financial
statements of Work Recovery Pty, Ltd, an Australian affiliate owned
31% by the Company whose investment is being accounted for on the
equity method. Those statements were audited by other auditors,
whose report thereon has been furnished to us and our opinion,
insofar as it relates to the amounts included for Work Recovery Pty,
Ltd, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and
the report of the other auditors provide a reasonable basis for our
opinion.
Generally accepted auditing standards regarding the auditors
responsibility in detecting errors, irregularities and illegal acts
are promulgated by the American Institute of Certified Public
Accountants in Statement on Auditing Standards No's 53 and 54.
"Because of the characteristics of irregularities, particularly
those involving forgery and collusion, a properly designed and
executed audit may not detect a material irregularity. For example,
generally accepted auditing standards do not require that an auditor
authenticate documents, nor is the auditor trained to do so. Also
audit procedures that are effective for detecting a misstatement
that is unintentional may be ineffective for a misstatement that is
intentional and is concealed through collusion between client
personnel and third parties or among management or employees of the
client". Additionally, "...the subsequent discovery that a material
misstatement exists in the financial statements does not, in and of
itself, evidence inadequate planning, performance, or judgment on
the part of the auditor."
As disclosed in Note 25 to the financial statements certain
irregularities and possible illegal acts may have been committed by
certain former members of management and other third parties. The
financial statements have been adjusted to reflect the restatement
of related identified transactions. There may also be unidentified
transactions which may have been entered into by certain former
members of management and third parties in a collusive manner. The
financial statements for the year ended June 30, 1994 have been
restated to correct suspected irregularities, identified subsequent
to the release of our previous report dated September 30, 1994.
Further revision to the financial statements may be required if
additional irregularities or illegal acts are identified.
The audit process is inherently dependent on the integrity of
management and is particularly susceptible to concealment. The
representation letter, signed by management at the conclusion of the
audit, asserts that there is nothing of a material nature, known to
management, which if known to the auditors, would require disclosure
or adjustment to the financial statements. As disclosed in Note
25(h), certain former officers owned 75% of a partnership which
owned and leased real estate to an unconsolidated affiliate.
Additionally, the Company was pledged as guarantor of the mortgage
which was substantially in excess of the market value of the real
estate. The Company's 30% ownership in the unconsolidated
affiliate, the officers' ownership in the real estate, and the
mortgage guarantee, had all been concealed from us in previous
audits. Amounts advanced to this affiliate, used primarily for
carrying costs of the real estate, were previously represented as a
receivable from this entity. This previously unconsolidated
affiliate and the real estate were acquired by the Company in 1995.
Accordingly, prior period financial statements have been restated to
reflect the impairment of this asset to the extent of amounts
previously advanced.
As disclosed in Note 22 to the financial statements, class action
suits have been filed subsequent to June 30, 1995 against the
Company, certain former officers and directors, and its independent
auditors. As further disclosed in Note 22 to the financial
statements, a licensee has also filed suit against the Company for
refund of substantial amounts paid the Company related to license
fees. Other licensees may follow suit to recover amounts previously
paid. Company counsel is unable to predict the ultimate resolution
of this litigation or other related potential claims or their
effect on the financial statements.
As also disclosed in Note 22, certain stock was transferred to
street name within the forty day waiting period required or the
Regulation S exemption under the Securities Act of 1933. This
condition may expose the Company to claims for rescission by
purchasers of these securities under applicable securities laws. If
such claims are asserted, they may result in an obligation by the
Company to refund amounts paid in the market to purchase these
shares, creating a very substantial contingent liability to the
Company. The Company does not have the financial resources to
refund these amounts.
As further disclosed in Note 22, substantial amounts of common
stock have been sold pursuant to the provisions of Regulation S of
the Securities Act of 1933 at substantial discounts to market.
The purpose or nature of the discounts which exceed a normal
discount have not been determined. Accordingly, the accounting
effect of recording these discounts, if their nature and purpose
were determinable, has not been reflected in these financial
statements.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 29 to the financial statements, the Company has experienced a
substantial deterioration of liquidity subsequent to year end.
Additionally, certain former members of management (which had
exclusive relationships with many third party investors, lessees,
licensees and customers) have resigned. The continuing cooperation
of this former management may be needed to affect the collection of
amounts due the Company. The effect on the Company's ability to
collect the recorded amounts due the Company is not determinable.
Substantial adjustments and reserves have been made as of June 30,
1995 giving effect to these matters. Substantial doubt exists about
the Company continuing as a going concern absent the collection of
these amounts due or the infusion of substantial additional capital.
In our opinion, based on our audit and the report of the
other auditors and except for the effects if any of the
items discussed above, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Work Recovery, Inc. and its subsidiaries
as of June 30, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three year
period ended June 30, 1995 in conformity with generally
accepted accounting principles.
In connection with our audits of the financial statements
referred to above, we audited the financial statement
schedules listed under item 14 for the years ended June 30,
1995, 1994 and 1993. In our opinion, these financial
statement schedules present fairly, in all material respects,
the information stated therein, when considered in relation to
the financial statements taken as a whole.
/s/ La Voie, Clark, Charvoz & May, P.C.
Tucson, Arizona
October 20, 1995, except for Notes 22, 25, 28 and 29
for which the date is February 28, 1996<PAGE>
<PAGE>
<TABLE>
WORK RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
Restated
June 30, 1995 June 30, 1994
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 6,554,000 $ 1,188,000
Receivables, including related party, net <F4> 1,493,000 11,684,000
Inventories, net <F6> 356,000 438,000
Marketable Securities, net <F3> 66,000 1,000,000
Prepaid Expenses and Other Assets 333,000 168,000
----------- -----------
Total Current Assets 8,802,000 14,478,000
Property, Plant and Equipment, net <F7> 5,649,000 4,399,000
Intangible Assets:
Goodwill and Other, net <F8> 33,000 5,352,000
Master Distribution License, net <F8> 0 0
Other Assets, including related party, net <F9) 1,175,000 9,554,000
----------- -----------
Total Assets $ 15,659,000 $ 33,783,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,168,000 $ 976,000
Accrued Expenses <F10> 345,000 851,000
Due Related Party <F20> 3,550,000
Deferred Income Taxes <F21> 0 332,000
Notes Payable <F11> 126,000 245,000
Current Portion of Long-Term Debt <F12> 441,000 434,000
Other Current Liabilities 88,000 148,000
Unallocated Credits <F26> 966,000 166,000
Deferred Consulting Revenue <F4> 2,009,000
----------- ----------
Total Current Liabilities 8,693,000 3,152,000
Long-Term Debt, net <F12> 2,255,000 2,585,000
Commitments and Contingencies <F13><F22>
Shareholders' Equity:
Preferred Stock, Cumulative Convertible <F14> 1,685,000 2,745,000
Common Stock: $.004 par value; authorized
100,000,000 Shares; issued and outstanding
44,132,172 shares (1995) and 27,060,983 shares (1994) 176,000 108,000
Additional Paid-in-Capital 53,648,000 24,262,000
Retained Earnings (Deficit) (49,414,000) 1,792,000
Subscription Notes Receivable, net <F15> 0 (860,000)
Treasury Stock, at cost (1,384,000) (1,000)
------------ -----------
Total Shareholders' Equity 4,711,000 28,046,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 15,659,000 $ 33,783,000
============ ===========
</TABLE>
<TABLE>
See Notes to Consolidated Financial Statements<PAGE>
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Restated Restated
Year Ended Year Ended Year Ended
June 30, 1995 June 30, 1994 June 30, 1993
<S> <C> <C> <C>
Net Revenues:
Sales and Related Services $ 2,061,000 $ 4,333,000 $ 6,570,000
Clinic Services 5,181,000 5,643,000 5,905,000
Licensing 300,000 10,000,000 3,525,000
Consulting (Related Party) <F4> 600,000
---------- ---------- -----------
Total Net Sales 8,142,000 19,976,000 16,000,000
Cost of Sales 11,115,000 12,146,000 9,050,000
---------- ---------- ----------
Gross Profit (Loss) ( 2,973,000) 7,830,000 6,950,000
Expenses:
Selling, General and Administrative 8,822,000 4,801,000 5,363,000
Theft loss <F25C> 493,000
Additional bad debts <F26> 13,360,000
Impairment losses <F26> 13,825,000
----------- --------- ---------
Income (Loss) From Operations (39,473,000) 3,029,000 1,587,000
Other Income (Expense):
Interest Expense (439,000) (340,000) (672,000)
Investment losses <F26> (11,437,000)
Interest Income 351,000 170,000 40,000
Miscellaneous Income (Expense) (183,000) (557,000) (83,000)
------------ ----------- ----------
Net Other Income (Expense) (11,708,000) (727,000) (715,000)
Income (Loss) From Continuing
Operations Before Income Taxes (51,181,000) 2,302,000 872,000
Income Taxes (Benefits) (332,000) 332,000 684,000
Income Before Extraordinary Benefit (50,849,000) 1,970,000 188,000
Extraordinary Benefit from Utilization
of Net Operating Loss Carryforwards 684,000
------------- ---------- -----------
Net Income (Loss) $(50,849,000) $1,970,000 $ 872,000
============= =========== ===========
Earnings (Loss) per Common and
Common Equivalent Share:
Primary and Fully Diluted <F19>:
Income (Loss) Before
Extraordinary Benefit $(1.43) $.08 $.01
Extraordinary Benefit .04
-------- ----- -----
Net Income (Loss) $(1.43) $.08 $.05
======== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<CAPTION>
Preferred
Series A Series B Series C Series D
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1992 10,737 $107,370 115,431 $1,154,272 473,461 $4,734,609
Correction of previously reported earnings
Preferred shares converted to common shares (7,123) (70,947) (23,360) (233,665) (110,239) (1,102,391)
Preferred shares canceled (750) (7,500)
Preferred shares issued for Dividends 994 9,965 4,591 45,956 16,828 168,278
Preferred shares issued for cash 24,440 244,400
Restricted common shares issued
Unrestricted common shares issued
Shares issued for acquisition of equipment
Common shares canceled
Net income as restated
Balance, June 30, 1993 4,608 46,388 120,352 1,203,463 380,050 3,800,496
Preferred shares converted to common shares (538) (5,377) (25,198) (224,699) (279,007) (2,790,233)
Preferred shares issued for dividends 101 1,015 6,516 65,267 56,889 569,076
Preferred shares issued 8,000 $80,000
Common shares issued for services
Common shares issued
Shares recovered (previously canceled)
Common shares issued for debt
Net income as restated
Balance, June 30, 1994 4,171 42,026 101,670 1,044,031 157,932 1,579,339 8,000 80,000
Preferred shares converted to common shares (4,211) (42,124) (44,887) (448,922) (96,818) (968,230)
Preferred shares issued for dividends 1,285 12,860 10,126 101,312 24,287 242,920
Preferred shares issued for cash 4,200 42,000
Exercise of warrants to common shares
Common shares issued for services
Common shares issued in acquisition
Common shares issued for conversion of debt
Common shares issued under stock option plan
Common shares issued for cash
Issuance costs
Net loss
Balance, June 30, 1995 1,245 12,762 71,109 $738,421 85,401 $854,029 8,000 $80,000
</TABLE>
<PAGE>
<TABLE>
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<CAPTION>
Capital in Retained
Preferred Common Stock Excess of Earnings
Total Shares Amount Par Value (Deficit)
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1992 $5,996,251 12,375,784 $49,503 $ 2,629,127 $ (18,695)
Correction of previously reported earnings (172,000)
Preferred shares converted to common shares (1,407,003) 889,790 3,559 1,403,431
Preferred shares canceled (7,500)
Preferred shares issued for Dividends 224,199 (224,199)
Preferred shares issued for cash 244,400
Restricted common shares issued 5,161,052 20,642 6,989,039
Unrestricted common shares issued 1,400,000 5,600 1,365,069
Shares issued for acquisition of equipment 100,000 400 158,600
Common shares canceled (284,386) (1,135)
Net income as restated 872,000
Balance, June 30, 1993 5,050,347 19,642,240 78,569 12,545,266 457,106
Preferred shares converted to common shares (3,020,309) 1,722,020 6,888 3,013,421
Preferred shares issued for dividends 635,358 (635,358)
Preferred shares issued 80,000
Common shares issued for services 892,047 3,568 586,112
Common shares issued 4,564,310 18,257 7,837,794
Shares recovered (previously canceled) 165,500 662 (662)
Common shares issued for debt 74,866 300 279,700
Net income as restated 1,970,000
Balance, June 30, 1994 2,745,396 27,060,983 108,244 24,261,631 1,791,748
Preferred shares converted to common shares (1,459,276) 889,964 3,560 1,455,716
Preferred shares issued for dividends 357,092 (357,092)
Preferred shares issued for cash 42,000
Exercise of warrants to common shares 1,963,499 7,854 2,214,020
Common shares issued for services 860,694 3,442 2,207,233
Common shares issued in acquisition 4,750,000 19,000 9,931,000
Common shares issued for conversion of debt 308,189 1,233 846,287
Common shares issued under stock option plan 168,000 672 271,018
Common shares issued for cash 8,130,843 32,524 12,845,315
Issuance costs (383,838)
Net loss (50,849,000)
Balance, June 30, 1995 $1,685,212 44,132,172 176,529 $53,648,382 ($ 49,414,344)
</TABLE>
<TABLE>
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Restated Restated
Year Ended Year Ended Year Ended
June 30, 1995 June 30, 1994 June 30, 1993
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (Loss) $( 50,849,000) $1,970,000 $ 872,000
Adjustments to Reconcile Net Income to
Net Cash Used in Operating Activities:
Depreciation and Amortization 1,094,000 1,057,000 796,000
Provision for Taxes (332,000) 332,000 684,000
Utilization of Net Operating Loss (684,000)
Expenses Paid by Stock Issuance 2,201,000 590,000 353,000
Deferred Revenues 20,591,000
Impairment losses 13,825,000
Bad debts 13,360,000
Investment losses 11,437,000
Changes in Current Assets and Liabilities:
Accounts Receivable, Trade 1,342,000 1,505,000 (1,887,000)
Accounts Receivable, Licensing (13,150,000) (5,339,000) (3,949,000)
Accounts Receivable, Other 158,000 74,000 (428,000)
Accounts Receivable,Consulting (6,991,000)
Inventories 82,000 (98,000) (119,000)
Prepaid Expenses (165,000) 25,000 (103,000)
Leases Receivable 183,000 (1,836,000) (353,000)
Accounts Payable, Trade and Other 192,000 462,000 (274,000)
Accrued Expenses, Other Current (566,000) 3,000 (161,000)
Unallocated Credits 800,000 166,000
Deferred Licensing Revenue 2,009,000 (680,000) 750,000
----------- ---------- ----------
Net Cash Used in
Operating Activities (4,779,000) (1,769,000) (4,503,000)
<PAGE>
Cash Flows from Investing
Activities:
Investment in Notes Receivable (2,600,000) (53,000)
Investment in Deposits and Other Assets 13,000 (133,000)
Loans to Officers (200,000) (352,000)
Repayments from Officers 333,000 206,000
Investment in Unconsolidated Affiliates (1,345,000) (971,000)
Purchases of Property, Plant
and Equipment In--Service (554,000) (292,000) (294,000)
Other assets (631,000) (252,000) 40,000
------------ ----------- ----------
Net Cash Used in
Investing Activities (2,530,000) (3,969,000) (586,000)
Cash Flows from Financing
Activities:
Proceeds from Issuance of Stock 14,465,000 6,327,000 7,770,000
Loans from Officers 283,000
Repayments to Officers (144,000)
Net Repayments on Short Term Debt (112,000) (1,021,000) (372,000)
Proceeds from Issuance
of Long-Term Debt 2,000,000 580,000
Purchase of Treasury Stock (1,383,000)
Repayment of Long-Term Debt (2,295,000) (1,124,000) (492,000)
------------ ------------ ---------
Net Cash Provided by
Financing Activities 12,675,000 4,465,000 7,342,000
----------- ----------- ----------
Net Increase (Decrease) in Cash 5,366,000 (1,273,000) 2,253,000
Cash at Beginning of Period 1,188,000 2,461,000 208,000
----------- ---------- -----------
Cash at End of Period $ 6,554,000 $1,188,000 $2,461,000
=========== ========== ===========
See Notes to Consolidated Financial Statements, Specifically Note 23<PAGE>
WORK RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<FN>
<F1>
Description of Business and Summary of Significant
Accounting Policies:
Description of Business
Work Recovery, Inc. ("WRI" or the "Company") develops,
manufactures, sells and distributes equipment and supplies to
the rehabilitation health care industry, to assist rehabilitation
facilities, physician groups, hospitals and medical centers in
establishing functional capacity evaluations and work therapy
programs. In connection with these sales, WRI extends credit to
customers in the rehabilitation health-care industry.
New Concepts Corporation ("NCC"), a subsidiary of WRI,
manufactures equipment and supplies for the rehabilitation
health-care industry and educational products for schools,
universities and industrial training programs.
Work Recovery Centers, Inc. ("WRCI" - formerly known as
RehabNet, Inc.), a subsidiary of WRI, acquires, develops and
operates centers that specialize in providing therapy, and
recovery conditioning to industrially-injured workers. It also
provides consulting to employers.
Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts
of WRI and subsidiaries (the "Company") in which it owns
a controlling financial interest. The equity method of accounting
is used for investments in entities in which the Company holds
a controlling financial interest of 20% to 50%. All
intercompany accounts and transactions have been eliminated
in consolidation.
Revenue Recognition
The Company generally records revenue when services
are rendered and products are shipped.
In accordance with the structure of the license
agreements, revenues are ordinarily recognized when
licensing agreements are executed. Current year fees which
have been earned but for which collectibility appears doubtful
are deferred and have been offset to the receivable.
These deferred revenues are recognized if and when cash
is collected. Receivables previously recorded, which, based
on subsequent circumstances appear uncollectible, are reserved.
By their nature and the structure of the agreements,
license revenues are transactions resulting in non-repetitive
balloon credits to income and should accordingly be disregarded
in assessing the ongoing operating revenues of the Company.
Consulting revenues earned and collected under provisions of the
contract disclosed in Note 4 are reflected in income in
proportion to the estimated costs incurred. Deferred revenues on
the consulting contract have been offset to the receivable.
Cash and Cash Equivalents
The Company considers all highly liquid investments
maturing in three months or less as cash equivalents.
Foreign Currency Translation
Assets and liabilities of international subsidiaries
have been translated at year end rates of exchange, and
related revenues and expenses have been translated at average
rates of exchange in effect during the year. Translation
adjustments have been included in net income because the Company's
international subsidiaries are located in highly inflationary
economies.
Inventories
Inventories are stated at the lower of cost or market.
Costs of raw materials are determined by the first-in,
first-out method. Costs of work-in-progress and finished goods
are determined by the full absorption costing method which
includes actual material, labor costs and applied overhead.
Goodwill
Goodwill associated with acquisitions is being
amortized using the straight line method over a 40 year period.
Accumulated amortization is $426,000 and $295,000 at June 30,
1995 and 1994, respectively.
The significant financial deterioration of the Company
has caused management to believe the unamortized balance is fully
impaired.
Leases Receivable
The Company sells some of its products under long-term
lease arrangements. These arrangements have been recorded
as sales-type leases with terms consistent with its
major competitors. Leases which appear uncollectible are
reserved allowing for the residual value of the respective assets.
Property, Plant and Equipment
Property, plant and equipment are stated at cost.
Equipment under capital leases is recorded at the lower of
an amount equal to the present value of the minimum lease
payments or the fair market value at the inception of the lease.
Depreciation and amortization are provided for using
the straight-line method over the estimated useful lives of
the assets, which range from five to forty years.
Marketable Equity Securities
The Company has adopted Statement of Financial
Accounting Standards No 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115") effective July 1, 1994.
FAS 115 requires that securities be classified as
trading, held-to-maturity or available-for-sale.
Trading securities are to be carried at market value with
realized and unrealized gains and losses included in earnings.
Securities available-for-sale are to be carried at fair value,
with unrealized gains and losses, net of income taxes, reported
as a separate component of stockholders' equity, net of tax.
See Notes 3 and 9.
Research and Development Costs
Research and development costs are charged to operations as
incurred.
Income Taxes
The Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income
Taxes" effective July 1, 1993. Deferred taxes are provided
for temporary differences between book and taxable income.
The Standard requires an asset and liability approach to
recording deferred taxes. Deferred income taxes result
primarily from the use of the installment method of
recognizing income on sales-type leases and license fees, the
cost versus equity method in accounting for investments, and
the use of the accelerated cost recovery system on
depreciable assets for income tax purposes.
The effect of changing to Statement of Financial
Accounting Standards No. 109 resulted in no change to net income.
Income Per Common Share
Primary earnings per share is computed using weighted
average common stock and common stock equivalents outstanding.
Common stock equivalents include shares issuable under stock
options, warrants, and preferred stock, including preferred
stock dividend requirements, and are determined under the
treasury stock method.
Fully diluted earnings per share is computed as above
and assumes the Company's common stock equivalents were exercised
at the year end market price.
Reclassifications
Certain prior year amounts have been reclassified to conform
to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
<F2>
Acquisitions
No individually significant business combinations
were transacted during fiscal 1995 or 1994.
Business acquisitions made during fiscal 1993,
totaling $1,680,000, were transacted through a combination of
cash ($135,000), notes and debentures payable ($1,100,000),
74,866 shares of "restricted" common stock ($280,000) and
16,500 shares of convertible preferred stock ($165,000).
<F3>
Marketable Equity Securities
Under Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and
Equity Securities", net unrealized gains and losses on trading
securities are reported at fair value, with unrealized gains
and losses included in earnings.
At June 30, 1995, the Company held 800,000 shares
of Wincanton Corporation common stock. During fiscal 1995,
600,000 shares of Wincanton common stock (valued at $5 per
share) were received in exchange for 1,500,000 shares of WRI
common stock (valued at $2 per share). The other 200,000
shares are described below. At June 30, 1995 Wincanton stock
was being publicly traded at approximately $10 per share.
The consulting agreement with Work Recovery, further discussed
in Note 4, had not been disclosed to the public at that
time however. Subsequent to public disclosure of the
agreement, the Wincanton stock has traded at approximately $.33
per share. Additionally, it has been determined that the
600,000 shares received during fiscal 1995 cannot be sold at
the present time because the certificate is not registered in
the name of the Company. It is uncertain whether the Company
will be able to transfer the shares for the Company's benefit.
Accordingly, only the 200,000 shares have been valued at $.33
per share as of June 30, 1995. The $3,934,000 reduction in
value has been recorded as a loss during fiscal 1995.
At June 30, 1994, the Company held 200,000 shares
of Wincanton Corporation common stock received as payment
on account from Queensland Industries, a subsidiary of Wincanton.
At June 30, 1994 the value of the stock at date of
receipt ($1,100,000) exceeded market value by $100,000.
A valuation allowance in that amount was established with
a corresponding charge to earnings at that date.
<F4>
</TABLE>
<TABLE>
Receivables - Current
<CAPTION>
Restated
Descriptions of Current Receivables June 30, 1995 June 30, 1994
<S> <C> <C>
Trade, net of allowance for uncollectible amounts
of $1,760,000 (1995) and $793,000 (1994) $ 1,255,000 $ 3,509,000
Consulting (Related Party), net of 1995
deferred revenues of $6,991,000 0
Licensing, net of allowance for 1995 uncollectible
amounts of $7,738,000 and 1995 deferred revenues
of $8,000,000 0 7,336,000
Leases Receivable - Current, net of 1995 allowance
for uncollectible amounts of $808,000 100,000 543,000
Other 138,000 296,000
----------- ------------
Total $ 1,493,000 $ 11,684,000
=========== ============
</TABLE>
At June 30, 1995, consulting receivables include $6,991,000
due from Wincanton Corporation for consulting services. At June
30, 1995 and 1994 licensing receivables include $1.5 million
due from Queensland Industries, a subsidiary of Wincanton
Corporation.
The Company entered into a consulting agreement
with Wincanton Corporation as of July 1, 1994 whereby WRI
would provide certain consulting services to Wincanton related
to marketing the Tradesman Industries products. According to
the agreement, which totalled $9,600,000, WRI was to provide
these services for $800,000 per month for a one year period
through June 30, 1995. Payments totalling approximately
$2,609,000 were received from Wincanton as of June 30, 1995
with the remaining balance payable within one year of the
original billing date. The agreement was not previously
disclosed by either Wincanton or WRI in their respective
public filings. The terms of the agreement and remaining
unpaid balance were however confirmed by Wincanton to the
Company's outside auditors.
$600,000 of revenue has been recognized in proportion
to identified costs incurred and approximately $2,009,000 of
the approximate $2,609,000 paid under the agreement has
been deferred. No additional amounts have been paid on
the agreement and the Company has been informed that Wincanton
is contemplating an attempt to recover the funds paid on
this agreement. Accordingly, further recognition of revenue
on this agreement has been suspended pending resolution of
this matter. There is no assurance WRI will receive
further payment from Wincanton or will be able to retain
the amounts it has already received.
<F5>
Investments as Lessor (Leases Receivable)
The Company has leased to approved customers its
various ERGOS Work Simulator models and Transition Work
Stations ("TWS"). Lease agreements are sales-type leases.
Additionally, substantially all leases are for 60 months,
provide for no minimum or contingent rentals, contain a
bargain purchase option, and require the lessee to pay executory
costs.
Minimum future lease payments to be received for the years
ending June 30:
Financing Operating
1996 $ 1,250,000 $ 0
1997 867,000
1998 867,000
1999 498,000
2000 148,000
----------- ----------
Totals $3,630,000 $ 0
=========== ===========
<TABLE>
Net investment in sales-type leases:
<CAPTION>
Restated
June 30, 1995 June 30, 1994
<S> <C> <C>
Minimum Lease Payments Receivable $3,630,000 $3,700,000
Allowance for Uncollectible Payments (2,893,000) (100,000)
Unearned Amount Representing Interest (637,000) (656,000)
----------- -----------
Net Investment 100,000 2,944,000
Current Portion Included in Receivables 100,000 543,000
------------ ------------
Net Investment in Sales-Type Leases 0 2,401,000
============ ============
Contingent Rental Income 0 0
Executory Costs Lessee Lessee
</TABLE>
Equipment leases have been reserved in their entirety as of
June 30, 1995 giving consideration to cash subsequently collected.
This decision was based on the considerable subsequent delinquency
of lease payments and lessee responses to demand notices filed by
the Company. Management has determined that, based on these
responses, WRI had not filed equipment liens, some of the
equipment may not have been received by lessees, and the location
of other equipment may not be determinable. Accordingly, the
residual value of the equipment was ignored in establishing this
provision. Two of the leases, discussed below, which were
subsequently repudiated by the lessees, have been reversed and the
fiscal 1994 financial statements have been restated accordingly.
Two leases entered into in fiscal 1994 have subsequently
been repudiated by the lessees. One agreement was with
Lifestyle Enhancement Systems (Dr. Donald Ross). The
Lifestyle lease, affecting fiscal 1994 net income by
approximately $228,000, had payments applied
totalling approximately $46,000. The other lease was
with Queensland Industries, a subsidiary of Wincanton Corporation.
The Queensland lease, affecting fiscal 1994 net income by
approximately $1,048,000, had payments applied totalling $220,000.
These sales have accordingly been reversed and the
payments recorded as unallocated credits.
Dr. Ross and Mr. Walter Doyle of Queensland/Wincanton
had previously signed independent audit confirmations, which
were provided to the outside auditors, in connection with
the fiscal 1994 audit.
<F6>
<TABLE>
Inventories
<CAPTION>
Description of Inventory Components June 30, 1995 June 30, 1994
<S> <C> <C>
Raw materials $336,000 $337,000
Finished goods 66,000 66,000
Work in progress 81,000
Reserve for obsolete inventory (46,000) (46,000)
--------- --------
Total $356,000 $438,000
========= ========
</TABLE>
<F7>
<TABLE>
Property, Plant and Equipment
<CAPTION>
Description of Categories, at Cost June 30, 1995 June 30, 1994
<S> <C> <C>
Land $ 800,000 $ 300,000
Buildings 1,992,000 1,515,000
Office Furniture 1,380,000 838,000
Machinery and Equipment 4,517,000 4,372,000
Vehicles 133,000 194,000
Leasehold Improvements 450,000 98,000
---------- ----------
Total, at cost 9,272,000 7,317,000
Less Accumulated Depreciation
and Amortization (3,623,000) (2,918,000)
----------- -----------
Total, net $ 5,649,000 $ 4,399,000
=========== ============
</TABLE>
<F8>
Intangible Assets
On December 5, 1994 the Company entered into an agreement
with Tradesman Industries, Inc. (Tradesman) for the master
distribution license to sell all Tradesman products in the United
States in exchange for $6 million (2,790,698 shares at $2.15
per share) of the Company's common stock. The initial term of
the agreement is fifteen years with two five year extensions.
Tradesman, a subsidiary of Wincanton Corporation, asserts that
it is a development stage company whose principal business is to
be the manufacturing, marketing and distribution of
trucks, mini-vans and trailers with cargo beds and tailgate
systems that lower to the ground. Amortization of the agreement
cost will be recognized using the straight-line method over
the initial term of the license and will begin when the
products are available for sale to customers. Tradesman has
not yet notified WRI of its revised product delivery
schedule, originally scheduled to start July 1995.
Subsequent to entering into the master distribution
license and the share purchase agreement, a lawsuit was
filed challenging, in part, Tradesman's rights to
certain technology. The patent infringement count has
been dismissed with prejudice. An additional lawsuit alleges,
in part, that the plaintiff was defrauded out of
patented technology. Because the technology has been
materially redesigned and patents do not exist, the Company
has placed an impairment reserve for the full amount of
the investment in this license. Also see Note 9. Although it is
the intent of current management to sell the master
distribution license, there can be no assurance that they will
be able to recover any of WRI's investment in this license.
<F9>
<TABLE>
Other Assets
<CAPTION>
Restated
Components of Other Assets June 30, 1995 June 30, 1994
<S> <C> <C>
Related Party:
Investment in unconsolidated affiliates
(primarily Australia), net of 1995
valuation reserve of $840,000 $ 352,000 $2,237,000
Investment in Tradesman stock, net of
1995 valuation reserve of $2,500,000 0
Tradesman unit deposit, net of 1995
impairment reserve of $1,500,000 0
Advances to related party (primarily
Australia), net of 1995 valuation
reserve of $4,163,000 0 2,481,000
Leases Receivable, net of 1995 allowance for
uncollectible amounts of $1,953,000 0 2,401,000
Licenses Receivable, net of
deferred revenues of $5,600,000 0 952,000
Other, net of 1995 impairment
reserve of $844,000 and bad debt
allowance of $299,000 823,000 1,483,000
----------- -----------
Total Other Assets $1,175,000 $9,554,000
=========== ===========
</TABLE>
On December 5, 1994 the Company agreed to purchase ten percent of
the total issued common stock of Tradesman Industries in exchange
for $2.5 million (1,162,791 shares at $2.15) of the Company's
common stock. This transaction was recorded in December 1994 with
the exchange of shares in January 1995. Additionally,
in accordance with the terms of the Tradesman agreement,
the Company has made a deposit of $1,500,000 for purchase of
the first 1,000 unit order under the agreement. The Company
has determined that these investments may not be realized
or recovered and has accordingly placed a full reserve
against these assets to reflect their impairment.
As further discussed in Note 20, $840,000 of the above
investment in unconsolidated affiliates relates to a 31%
equity interest in Work Recovery, Pty Ltd, an Australian company.
Additionally, $4,163,000 of cash, equipment and stock have
been advanced to this entity. It is unlikely these funds will
be recovered and management has decided to fully reserve these
assets to reflect this impairment. The primary factors in
this determination were the non-controlling minority interest,
the cash flow deficiencies of the entity and the
unlikely collection of a very substantial receivable
(approximately $3,190,000 US) from Zhuhai Trading, an
entity related to Work Recovery, Pty Ltd. The Company is
pursuing recovery of these assets but their recovery is unlikely.
<F10>
<TABLE>
Accrued Expenses
<CAPTION>
Components of Accrued Expenses June 30, 1995 June 30, 1994
<S> <C> <C>
Payroll and Related Taxes $97,000 $577,000
Other 248,000 274,000
-------- --------
Total Accrued Expenses $345,000 $851,000
======== ========
</TABLE>
<F11>
<TABLE>
Notes Payable
<CAPTION>
Components of Notes Payable June 30, 1995 June 30, 1994
<S> <C> <C>
Short-term bank note with an interest rate of 5%, due
on demand, collateralized by assets of the respective
borrowing entity. $ 5,000
Notes payable to individuals resulting from business
acquisitions. Principal and interest of 6% and 8% per
annum are due on demand. $ 116,000 190,000
Other short-term notes to individuals are unsecured
loans due on demand with interest rates ranging from
8% to 11%. 10,000 50,000
---------- ----------
Total Notes Payable $ 126,000 $ 245,000
========== ==========
</TABLE>
<F12>
<TABLE>
Long-Term Debt
<CAPTION>
Components of Long-Term Debt June 30, 1995 June 30, 1994
<S> <C> <C>
Trust Deed: payable in monthly installments of
$11,461,including interest at 9.7% per annum
through June 30, 2005. The remaining unpaid
principal and interest are then due. This loan
is collateralized by real property and other
assets. Replaced former mortgage payable. $ 1,213,000 $ 1,202,000
Mortgage: payable in monthly installments of
$7,444,including interest at 9.7% per annum
through June 30, 2005. The remaining unpaid
principal and interest are then due. This loan
is collateralized by real property and other
assets. 787,000
Bank: payable in monthly installments of $4,500,
including interest at 9.5%, with the final payment
due in July 1996. This note is collateralized by
the assets of Work Recovery Center of Eau
Claire, Inc. 54,000 100,000
Capital Leases: payable to various entities and
individuals with imputed interest rates ranging
from 9.5% to 29.86% and total monthly obligations
of $25,854. These leases are collateralized by
certain equipment. 383,000 658,000
Debenture Payable to Corporation: A five year, 6%
convertible debenture issued in the acquisition
of Work Simulation Centers, Inc., payable on
April 1, 1998. The debenture is convertible into
common stock of WRI at $2.75 per share. Debenture
was decreased during fiscal 1994 in exchange for a
reduced conversion rate. 750,000
Notes to Individuals: payable in monthly installments
totalling $8,958, including interest at 9%, with
final payments due July 1996 and January 1998. 259,000 309,000
----------- ----------
Total Long-Term Debt 2,696,000 3,019,000
Less Current Portion 441,000 434,000
----------- ----------
Net Long-Term Debt $ 2,255,000 $ 2,585,000
=========== ==========
</TABLE>
<TABLE>
Maturities of long-term debt for the years ending June 30
are as follows:
<CAPTION>
<S> <C>
1996 $ 441,000
1997 232,000
1998 128,000
1999 55,000
2000 50,000
Thereafter 1,790,000
----------
Total $ 2,696,000
===========
</TABLE>
<F13>
<TABLE>
Commitments
The Company leases office space, vehicles and equipment
under noncancellable capital and operating leases expiring through
2000. The following are the approximate annual commitments to
these leases for the years ending June 30 and the approximate
future minimum lease payments under lease obligations:
<CAPTION>
Fiscal Years Capital Operating
<S> <C> <C>
1996 $ 231,000 $ 898,000
1997 172,000 627,000
1998 84,000 440,000
1999 11,000 320,000
2000 215,000
Thereafter 13,000
---------- ---------
Total minimum lease payments 498,000 $ 2,513,000
Amounts representing interest 115,000 ==========
----------
Present value of net minimum lease payments,
included in Note 12, Long-Term Debt 383,000
Less: current maturities 170,000
----------
Long-term maturities $ 213,000
==========
</TABLE>
Rents
Rent expense for the years ended June 30, 1995, 1994 and
1993 totalled $1,473,000, $1,275,000 and $913,000, respectively.
Dividend Restrictions
Cash dividends on common stock may not be declared or
paid while the Company has preferred stock outstanding.
The Company can declare and issue a stock dividend to common
shareholders.
Consulting Agreements
As of June 30, 1993, the Company had entered into various
one year consulting agreements, principally expiring on January
14, 1994, related to the acquisition of subsidiaries,
financing, capital, licensing, sales, public/investor relations
and marketing whereby various consultants may ultimately
be remunerated for services rendered with common stock of
the Company. At June 30, 1993 the maximum number of common
shares potentially issuable on these agreements was
approximately 679,000 shares based on the current market price
at June 30, 1993. The value of these shares, when
subsequently vested, were principally allocated to investing
and financing activities with nominal effects on operations.
The subsequent vesting of these agreements did not
occur until Company management determined that the objectives
of the contracted services were successfully accomplished.
Additionally, the vesting did not occur until Company
management assessed the subsequent achievement of the financing
and operating goals of the Company, including a determination
of the dilutive effect of the issuance on earnings per share
as compared to prior periods. Since the achievability of
the objectives and the vesting decision was uncertain, such
amounts were not accrued as of June 30, 1993. Additionally, due
to the uncertainty, such shares were excluded from common
stock equivalents in the fiscal 1993 primary earnings per
share calculation but were included in the determination of
fully diluted earnings per share with no change resulting in
either calculation.
During fiscal 1995 and 1994, the Company issued a total
of 860,694 and 892,047 shares respectively of its common stock
for services rendered under the above and other agreements.
Shares issued under these agreements are issued as
free trading shares to be registered with the SEC on Form S-8.
Substantial shares issued under these agreements were issued to
persons otherwise employed by or transacting business with
the Company. It has not been determined whether there is
any correlation between these shares issued and other
reciprocal transaction, if any, between the Company and
these persons or their affiliates.
Other Commitments
The Company entered into future purchase commitments
under the Tradesman agreement for 1000 vans per year for
the initial 15 year term at the initial minimum price of
$30,000 per unit. It is doubtful that the Company could
honor these commitments even if Tradesman were able to produce the
units.
<F14>
<TABLE>
Preferred Stock
<CAPTION>
Components of Preferred Stock June 30, 1995 June 30, 1994
<S> <C> <C>
11% Redeemable Cumulative Convertible,
$10 Redemption Value:
Series A: Authorized 70,000 Shares;
Issued and Outstanding 1,245 Shares
(1995) and 4,171 (1994) $ 13,000 $ 42,000
Series B: Authorized 200,000 Shares;
Issued and Outstanding 71,109 Shares
(1995) and 101,670 Shares (1994) 738,000 1,044,000
Series C: Authorized 500,000 Shares;
Issued and Outstanding 85,401 Shares
(1995) and 157,932 Shares (1994) 854,000 1,579,000
13.75% Redeemable Cumulative Convertible,
$12.50 Redemption Value:
Series D: Authorized 12,000 Shares
Issued and Outstanding 8,000 Shares 80,000 80,000
----------- -----------
Total Preferred Outstanding $ 1,685,000 $ 2,745,000
=========== ===========
</TABLE>
The Company has 10,000,000 shares of preferred
stock authorized. The Board of Directors is authorized to
issue the preferred shares in series. As of June 30, 1995,
the Company had authorized and issued Series A, B, C and D.
The preferred stock is redeemable solely at the
Company's option, at any time. The redemption value will equal
the original amount paid for the stock plus any accrued but unpaid
or roll-over dividends.
The preferred stock is convertible into common shares
at rates ranging from $.72 to $5.00 in capital amounts per
common share. The Company has reserved 1,120,396 shares of common
stock for issuance upon conversions.
The stock has an annual cumulative dividend rate of 11%
on Series A, B and C and 13.75% for Series D.
Cumulative dividends in arrears at June 30, 1995 and 1994
amounted to $619,000 and $737,000, respectively.
<F15>
Common Stock Transactions
On September 1, 1994, the Company entered into a
subscription agreement with an international funding group to
sell up to $30 million of redeemable preferred stock of
the Company. The proceeds of the offering were to be used for
the repurchase of the outstanding common shares of the Company
in the open market. The funding group did not purchase
the preferred stock within the term of the agreement and
the Company subsequently withdrew the subscription agreement.
At various times during fiscal 1995, the Company purchased
a total of 499,775 shares of the Company's common stock on the
open market at an average purchase price of $2.77 per share.
During fiscal 1994, the Company recovered 165,500 shares
of the previously canceled shares which were issued in
the transaction discussed in Note 22. Further, the Company issued
274,285 shares of common stock each to Thomas L. Brandon
and Stephen Bubala to replace shares they provided as
collateral for a working capital loan for the Company. See Note
22.
As further disclosed in Note 25(b), common stock was sold
on subscription notes with remaining balances totalling
$1,342,000 at June 30, 1995. Additionally, 200,000 shares of
common stock were issued on a $240,000 subscription note
to Garstang Holdings (a Walter Doyle entity). While
management intends to pursue collection of these
personally collateralized notes, their collection cannot be
assured and they have accordingly been fully reserved.
As further disclosed in Note 22, common stock was
sold pursuant to the provisions of Regulation S of the
Securities Act of 1933. This stock was sold at
substantial discounts to market. Such stock is often issued at
a discount to give consideration to risks associated with
the transaction and the holding period. During fiscal
1995, 7,291,205 shares were sold for an aggregate consideration
of $12,285,000 with an average discount to market of 44%.
The purpose or nature of the discounts and whether they exceed
a reasonable discount, has not been determined. Furthermore,
it has not been determined whether there is any correlation
between the excess discounts, if any, and other reciprocal
transactions between the Company and these purchasing entities
or their affiliates.
<F16>
Warrants
There are 6,001 A Warrants, 1,562,500 B Warrants, and
164,000 Dealer Warrants outstanding as of June 30, 1995.
These warrants were issued on May 5 and June 7, 1993 in
connection with a private placement of the Company's common stock.
The stock underlying these warrants was registered by the
Company from July 1, 1994 until March 30, 1995, during which
time the warrants were exercisable. Under the terms of
the Registration Rights Agreement, the Company is required to
use its best efforts to keep the Registration Statement effective.
The Company intends to file an amendment to the
Registration Statement to update the financial and
other information contained in the Registration Statement.
However, because the Company was unable to keep the
Registration Statement effective for more than an aggregate
period of 180 days during the remaining term of the warrants,
the exercise price of each A and B warrant, pursuant to the
terms of the Registration Rights Agreement, will be reduced by
$.10 each month from approximately November 26, 1995 until
the Registration Statement is effective. In no event,
however, will these reductions to the exercise price be to
an amount which is below $.75 with respect to the A Warrant
or $1.00 with respect to the B Warrant. The reduction in
exercise price provisions relating to the Dealer, C and D
Warrants are substantially similar to those of the A and B
Warrants, except that the reduction in exercise price of the
Dealer Warrants is $.20 per month and the minimum to which
the exercise price may be adjusted is $2.50; $.75 for the
C Warrants and $1.00 for the D Warrants.
The A Warrants, upon exercise, allowed the holder to
acquire one share of Common Stock at a price of $1.05. They
were exercisable for a two year period which began June 7, 1993.
The B Warrants, upon exercise, allow the holder to
acquire one share of Common Stock at a pre-adjusted price of
$1.80. They may be exercised for a four year period which began
June 7, 1993.
Each Dealer Warrant, upon exercise, allows the holder
to acquire two shares of Common Stock, one C Warrant and one
D Warrant for $3.30. Each C and D Warrant allows the holder
to purchase an additional share of Common Stock at
pre-adjusted prices of $1.05 and $1.80, respectively, per share.
The Dealer Warrants may be exercised at any time from June 7,
1994 to June 7, 1998. The C and D Warrants are exercisable for
two and four year periods which begin upon exercise of the
Dealer Warrants, but are subject to a maximum exercise period
of five years ending June 7, 1998.
The Company may reduce the respective exercise prices of
the Warrants at any time, in any amount. It may also extend
the exercise period at any time, by any length.
<F17>
<TABLE>
Stock Options
The Company's 1993 Incentive Stock Option Plan provides for
the granting of options to purchase up to 2.6 million shares
of common stock to employees at an amount equal to fair
market value at the date of grant. However, if an optionee
owns more than 10% of the outstanding stock of the Company,
the option price-per-share shall be no less than 110% of the
market value at the date of grant. Options may be exercised
over the period prescribed at the time of grant, not to exceed
five years from the date of grant. Canceled or forfeited
options are available for grant. A summary of the qualified
1993 Incentive Stock Option Plan activity is as follows:
<CAPTION>
Number of Shares Option Price Total
(in thousands)
<S> <C> <C> <C>
Outstanding at June 30, 1994 -- -- --
Granted: 236,300 $1.58 $ 373
371,256 1.83 679
49,751 2.01 100
584,458 2.25 1,315
12,500 2.50 31
12,500 3.00 38
Exercised (256,700) $1.58 - $1.83 (412)
Canceled (54,645) $ 1.83 (100)
----------- -------
Outstanding at June 30, 1995 955,420 $1.58 -$3.00 $ 2,024
=========== ========
</TABLE>
<TABLE>
During fiscal 1995 the Board of Directors of the Company
approved the grant of non-qualified stock options to certain
officers, key employees and consultants to the Company. Options
were granted at not less than fair market value at the date of
grant and are exercisable as of the date of grant. Options may
be exercised over the period prescribed at the time of grant,
not to exceed five years from the date of grant. A summary
of non-qualified option activity is as follows:
<CAPTION>
Number of Shares Option Price Total
(in thousands)
<S> <C> <C> <C>
Outstanding at June 30, 1994 -- -- --
Granted 173,744 $1.83 $ 318
250,249 2.01 503
1,078,042 2.25 2,426
350,000 2.50 875
350,000 3.00 1,050
725,000 6.00 4,350
725,000 7.00 5,075
3,000,000 10.00 30,000
2,000,000 15.00 30,000
Exercised -- -- --
Canceled (245,355) $1.83-$7.00 $ (1,219)
----------- ---------
Outstanding at June 30, 1995 8,406,680 $1.83-$15.00 $ 73,378
=========== ===========
</TABLE>
Certain of the above options, 687,566 of the incentive
stock options and 7,717,434 of the non-qualified stock
options, have subsequently expired, were forfeited or will shortly
terminate as a result of the resignations and terminations
of employees as a result of the change in management.
<F18>
<TABLE>
Sales by Geographic Area / Major Customer
Sales by geographic area for the years ended June 30 are as
follows:
<CAPTION>
1995 Restated 1994 1993
<S> <C> <C> <C>
United States $ 7,214,000 $ 9,859,000 $ 12,281,000
Europe 446,000 4,438,000 859,000
Canada 182,000 2,731,000 956,000
Far East, Including Australia 2,948,000 1,904,000
Middle East 300,000
---------- ----------- ----------
Total Net Sales $ 8,142,000 $ 19,976,000 $ 16,000,000
=========== =========== ==========
</TABLE>
In fiscal 1994, the Company recorded revenues from entities
which exceeded 10% of total revenues. Four licenses, each
for $2,500,000, were included in the revenue line item
caption "license revenues". The licensees are Carat,
Inc., Queensland Industries, Inc/Eurocontrols and Manados
Investments Inc. Certain of these are further discussed in Note
25. As disclosed in "Significant Accounting Policies -Revenue
Recognition" the amounts were recognized as revenue upon execution
of the contracts in accordance with the contract terms and
generally accepted accounting principles. Since the license fees
by their nature represent non-repetitive balloon credits to
income, the Company believes that inclusion of these amounts in
this caption conformed with the intent to provide the reader with
the ability to assess the effect of such transactions on the
ongoing operations of the Company.
Other fiscal 1995 license transactions would, if recognized,
exceed 10% of total revenues. Included in deferred revenue are
$7,600,000 from Al-Sabah Trading and Development and $6,000,000
from Work Recovery Far East/MEI Japan. Additionally, the Company
entered into a consulting agreement with Wincanton Corporation for
$9,600,000, $9,000,000 of which has also been deferred.
<F19>
<TABLE>
Earnings Per Common and Common Equivalent Share
Per share information is computed by dividing net income
by the weighted average number of common and common equivalent
shares outstanding during each year. See Summary of Significant
Accounting Policies - Income per Common and Common Equivalent
Share.
<CAPTION>
June 30, 1995 June 30,1994 June 30, 1993
<S> <C> <C> <C>
Primary:
Weighted Average Common
Shares Outstanding 33,497,660 22,266,260 15,843,040
Weighted Average Common Share
Equivalents 1,994,414 3,577,963 1,653,958
------------ ----------- -----------
Total Weighted Average Common
and Common Equivalent Shares 35,492,074 25,844,223 17,496,998
============ =========== ===========
Fully Diluted:
Weighted Average Common
Shares Outstanding 33,497,660 22,266,260 15,843,040
Weighted Average Common
Share Equivalents 4,345,185 3,577,963 1,653,958
----------- ---------- -----------
Total Weighted Average Common
and Common Equivalent Shares 37,842,845 25,844,223 17,496,998
========== ========== ==========
</TABLE>
Due to the net loss for fiscal 1995, primary weighted
average common and common equivalent shares were used to
calculate fully diluted loss per share due to the anti-dilutive
effect of using fully diluted shares in a net loss calculation.
<F20>
<TABLE>
Related Party Transactions
The Company entered into transactions with various
affiliated entities. The following table describes these
transactions.
<CAPTION>
June 30, 1995 June 30,1994 June 30, 1993
<S> <C> <C> <C>
The Company sold goods and
services to affiliates $ 685,000 $ 750,000
The above sales effect on net
income 259,000 750,000
The Company engaged an entity
owned by a brother of an officer
of the Company for equipment
delivery and installation $ 96,000 78,000 52,000
The Company advertised with a
NASCAR racing team sponsored,
in part, by an officer of the
Company 85,000
The Company received consulting
services from a company in which
a member of the Board of
Directors of the Company is an
officer and owner 76,000
Balance of Indebtedness of Officers
and former affiliates 563,000
Balance of Indebtedness to Officers
and former affiliates 77,000
Balance of Indebtedness of Work
Recovery Pty. Ltd. 4,163,000 2,481,000
Investment in unconsolidated
affiliates:
Work Recovery Pty. Ltd. 840,000 1,071,000
Other 352,000 1,166,000 412,000
Total investment in unconsolidated
affiliates, before reserves 1,192,000 2,237,000 412,000
</TABLE>
The company owns a 31% equity interest in Work Recovery
Pty., Ltd. (an Australian corporation) which is accounted for on
the equity method. During the year ended June 30, 1993, but
before the Company acquired its equity interest, it entered into
a licensing agreement totalling $750,000 with the entity.
During the year ended June 30, 1994, the Company invested
cash ($1,418,000) and sold equipment ($685,000) to the entity.
Consistent with the equity method of accounting, the gross
profit on the sales was reduced $110,000, which is proportionate
to the equity interest in the entity. The proportionate share
of the entity loss for the year, as adjusted to give effect
to conversion to United States generally accepted accounting
principles and currency translation, amounting to
approximately $235,000, is included in the "Losses
of Unconsolidated Affiliates." Additionally, funds were
advanced to the entity through the sale of Company common
stock, the net proceeds ($2,481,000) being retained by the entity.
The retained proceeds were in turn loaned to an affiliate of
Work Recovery Pty Ltd and are carried as a receivable on
their books. (Note 9).
The total equity in losses of unconsolidated
affiliates included in miscellaneous income/expense was
$300,000 and $335,000 for the years ended June 30, 1995 and
1994, respectively.
During the year ended June 30, 1994, the Company wrote
off approximately $300,000 of loans to officers, and included
these amounts in compensation expense for the year.
At June 30, 1995, the Company owned an approximate 9%
equity interest in Wincanton Corporation. Queensland Industries
is a wholly owned subsidiary of Wincanton and holds an
exclusive license from the Company for the right to use ERGOS
in Canada. During fiscal 1995, the Company acquired a 10%
equity interest in Tradesman Industries, a Wincanton subsidiary, a
master distribution license and agreed to pay a
performance deposit. See Notes 8 and 9.
At June 30, 1995, a balance of $3,550,000 was payable on the
$10,000,000 transaction with Tradesman for the license,
equity investment and unit deposit. On July 12, 1995 this balance
was paid in full through issuance of 1,651,163 shares of
Work Recovery common stock at $2.15 per share.
<F21>
<TABLE>
Deferred Income Taxes
The components of income tax expense for the years ended
June 30 are comprised of the following amounts:
<CAPTION>
1995 Restated 1994 Restated 1993
<S> <C> <C> <C>
Current Provision
Deferred Provision:
Federal $ (264,000) $ 264,000 $ 525,000
State (68,000) 68,000 159,000
---------- --------- ---------
Total $ (332,000) $ 332,000 $ 684,000
========== ======== =========
Total Provision:
Federal $ (264,000) $ 264,000 $ 525,000
State (68,000) 68,000 159,000
----------- --------- ----------
Total $ (332,000) $ 332,000 $ 684,000
============ ========== ==========
</TABLE>
<TABLE>
The reconciliation of the expected federal provision to the
actual provision for the years ended June 30 is as follows:
<CAPTION>
1995 Restated 1994 Restated 1993
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Income tax (benefit) at
federal statutory rate $ (17,402,000) (34.0) $ 783,000 34.0 $296,000 34.0
State income taxes net of
federal tax benefit 45,000 2.0 159,000 18.2
Temporary differences
providing no current
tax benefit 17,019,000 33.3
Benefit of a SRLY NOL
carryforward utilized (394,000) (17.1)
Benefit of temporary
differences utilized (172,000) (7.5)
Non-deductible losses of
unconsolidated entities 170,000 19.5
Non-deductible expenses 51,000 .1 39,000 1.7 47,000 5.4
Other-Net 31,000 1.3 12,000 1.3
----------- ------------ ---------
$ (332,000) (.6) $ 332,000 14.4 $684,000 78.4
============ ============= ==========
</TABLE>
<TABLE>
Under Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes," net operating loss carrybacks
or carryforwards are recorded as reductions in current income tax
expense (subject to realization considerations). The Company
has net operating losses arising from years prior to
acquisition subject to separate return limitations (SRLY).
These net operating losses can only be used as deductions
against the respective entities' taxable income. As a
result, management has elected to provide a valuation allowance
for 100% of these net operating loss carryforwards. The
amounts and utilization of these net operating losses for the
years ended June 30 is as follows:
<CAPTION>
1995 Restated 1994 Restated 1993
NCC WRCI NCC WRCI NCC WRCI
<S> <C> <C> <C> <C> <C> <C>
SRLY Limitation
Carryforward $ 1,720,000 $ 937,000 $1,720,000 $ 1,237,000 $ 1,720,000
Utilized in Current
Year (937,000) (300,000)
--------- ------------ ---------- ------------ ------------ -----------
Ending Balance $1,720,000 $1,720,000 $ 937,000 $ 1,720,000
========= =========== ========== ========== =========== ==========
Benefit to Current Income
Tax Expense $ 394,000
==========
</TABLE>
In addition to the net operating losses above, subject
to SRLY limitations, the Company has additional net
operating losses totalling approximately $18,000,000 that
begin expiring in 2007 and later. Because it is unlikely these
net operating losses will be realized, the tax benefit has
been reduced fully by a valuation allowance. Also, there
are substantial temporary differences which have not provided
any current tax benefit. At June 30, 1995, more than
$33,000,000 of temporary differences exist. Because it is
unlikely these temporary differences will be realized, the
tax benefit has been reduced fully by a valuation allowance.
<F22>
Legal Contingencies:
Shareholder Lawsuits - Subsequent to an August 9, 1995
Wall Street Journal article about the Company, the Company,
its former directors and certain of its former officers were
named as defendants in various shareholder class action
lawsuits filed in the United States District Court for the
District of Arizona and one shareholder derivative suit filed
in state court in Colorado. The lawsuits generally allege that
the defendants have misstated or omitted to state certain
material facts in press releases, filings with the Securities
and Exchange Commission, and other statements by the defendants.
The complaints generally request compensatory damages,
interest, costs and expenses, punitive damages, and such
other relief as the court may deem just and proper. The
Arizona lawsuits have been consolidated into one class
action proceeding and additionally allege violations of
generally accepted accounting principles and allege various
"sham" transactions. An amended complaint was subsequently
filed adding the Company's outside auditors as a defendant.
Although the Company is contesting the allegations of
the complaints, it is impossible to predict the outcome of
these lawsuits or any other related claims that may be filed in
the future. New management is attempting to settle
this litigation. There can be no assurance, however, that
the Company will be able to settle these lawsuits with
terms favorable to the Company. If the settlement attempts
fail and a final judgment is rendered against the Company,
the Company would be materially and adversely affected.
Officer Indemnifications - The Company has entered
into indemnification agreements with each of its former
directors and with certain former officers. On October 27,
1995, the Company advanced $100,000 in payment of legal
fees, subject to the terms of the agreements, to the law
firm representing Mr. Brandon, Mr. Bunker and Ms. Duncan.
Subsequently, the former Board of Directors of the Company
appointed independent counsel to review the conduct of these
former officers and determine whether their individual
conduct would preclude the Company from advancing expenses on
their behalf in connection with certain legal proceedings prior
to the disposition of those proceedings. Independent counsel
has determined that Mr. Brandon's conduct does not satisfy
certain standards of conduct and that as a result the Company
is precluded from advancing expenses on behalf of Mr. Brandon
in connection with certain legal proceedings. Independent
counsel has determined that both Ms. Duncan and Mr. Bunker are
not precluded from indemnification and the advancement of
legal expenses. In January 1996, the Company advanced
legal expenses for Ms. Duncan and Mr. Bunker of $60,000 each.
Regulation S - Another contingency is potential violations
of Regulation S promulgated pursuant to the Securities Act of
1933, as amended (the "Securities Act"). Federal securities
laws, as applied to the Company, generally prohibit securities
sold abroad to a non-U.S. person pursuant to Regulation S
from being resold to a U.S. person prior to the expiration of
at least a 40-day restricted period following the original
offshore sale by the Company. The Company instructed its
transfer agent to remove legends from the certificates
representing 1,333,166 shares prior to the end of the
40-day restricted periods for several issuances pursuant
to Regulation S. These transactions with Intavest Pty Ltd.
are more thoroughly disclosed in Note 25. In each of
these transactions, the Company has been informed that the
shares were placed in street name but held for the benefit
of non-U.S. persons prior to the end of the 40-day
restricted periods. The Company is investigating whether
a violation of Regulation S has occurred.
If a violation has occurred, the Commission could elect
to bring an administrative proceeding against the Company,
alleging violations of the registration requirements set forth
in Section 5 of the Securities Act. Further, if a violation
has occurred, such transactions could lead to civil litigation by
private plaintiffs against the Company alleging violations
of Section 5. Any such administrative proceeding by the
Commission or civil litigation by private plaintiffs could have
a material adverse effect on the Company and its liquidity.
Licensee Lawsuit - Al Sabah Trading and Development
Company PLC, a licensee of the Company who had also entered
into transactions to purchase 37 Ergos units (more
thoroughly described in Note 25), has filed a complaint against
the Company alleging breach of contract and
negligent misrepresentation. The complaint seeks damages in
the amount of $1,500,000 (the amount paid on the license agreement
subsequent to year end) plus attorney's fees and costs.
The Company is seeking to settle this claim. There can be
no assurance, however, that the Company will be able to settle
this lawsuit with terms favorable to the Company. If
the settlement attempts fail and a final judgment is
rendered against the Company, the Company would be materially
and adversely affected.
The default provisions of the license agreements provide
that the license fees paid are refundable to the licensee if
the Company fails to perform on the license agreement. The
Company has billed but failed to complete and ship the Ergos
units discussed above. This condition, if not corrected by
the Company, could constitute a default and require refunding
of license fees paid on the agreements. Additionally,
amounts previously collected on other license agreements,
totalling $5,738,000, may be refundable in the event of
continuing default by the Company.
Other Legal Claims - An entity affiliated with Mr.
Brandon, Forestry International, Inc., has threatened litigation
to force payment of 200,000 shares of Work Recovery common stock
in satisfaction of a guarantee made by Mr. Brandon of an
obligation between Wincanton Corporation and
Forestry International. The guarantee was not disclosed to
or approved by the Board of Directors of Work Recovery and
the nature of this agreement has not been disclosed to the
Company.
Other Matters - In 1991, Messrs. Brandon and Bubala
collateralized 548,570 shares of personally held stock in the
Company against a working capital loan for the benefit of
the Company. These shares and other shares of the Company
were fraudulently misappropriated by certain foreign persons
and their agents through several illegal schemes. With the
full cooperation of the Company and its management, the Securities
and Exchange Commission obtained various injunctions against
these individuals and their agents.
The Company and Messrs. Brandon and Bubala have
obtained Federal District court judgments against certain of
the individuals and their agents under federal and state
racketeering statutes which provide for damages and treble
damages. Other individuals or their assets have not been located.
Accordingly, collection efforts resulting from the judgments have
been suspended until these individuals and assets can be located.
There can be no assurance that any amounts will be recovered other
than the return of $120,000 proceeds from share sales held in
escrow, which amount was returned to the Company in fiscal 1995.
During fiscal 1994 the Company replaced the shares that Messrs.
Brandon and Bubala had lost.
<F23>
<TABLE>
Statement of Cash Flows
Supplemental Disclosures of Cash Flow Information:
<CAPTION>
June 30, 1995 June 30,1994 June 30, 1993
<S> <C> <C> <C>
Cash paid for interest $425,000 $368,000 $417,000
Cash paid for income taxes 0 0 0
Noncash Investing Activities:
Wincanton common stock 3,000,000 1,100,000
Tradesman Industries common
stock, license and deposit 10,000,000
Net assets acquired 1,312,000 100,000 2,066,000
Receivables from acquisitions 514,000
Noncash Financing Activities:
Due Wincanton on Tradesman
investments 3,550,000
Debt issued or assumed in
business acquisitions 812,000 1,350,000
Equipment acquired under
Capital Lease 269,000
Debenture decrease for
reduced conversion rate 250,000
Preferred Stock Issued:
For business acquisitions 165,000
For dividends 357,000 635,000 224,000
Common Stock Issued:
For Wincanton common stock 3,000,000
For Tradesman investment 6,450,000
For business acquisitions 500,000 100,000 280,000
In payment of debt 848,000 280,000 274,000
For services rendered 2,201,000 590,000 499,000
Other (158,000) 271,000
Converted from preferred stock 1,459,000 3,020,000 1,409,000
</TABLE>
<F24>
International Operations
During fiscal 1995, the Company entered into licensing
agreements, with third parties, which grant to the licensees the
exclusive right to establish sub-licenses for the purpose of using
the products of the Company in Germany, China, Korea, Arab Gulf,
Sweden, Norway, Finland, Denmark, France, Switzerland, Austria,
Italy, Spain and Portugal. The agreements require a specified
number of product purchases over the term of the agreement and
most agreements require royalty fees to the Company based upon
gross revenues of the sub-licensees.
During fiscal 1994, the Company entered into similar
licensing agreements, as described above, for the countries of
Japan, Canada, the United Kingdom and South Africa.
During fiscal 1993, the Company entered into
similar licensing agreements, as described above, for the
countries of Australia, New Zealand and the Benelux
Region (Belgium, Netherlands and Luxembourg). The Company has
a 31% equity interest in Work Recovery Pty, Ltd., the licensee
for Australia and New Zealand.
<F25a>
Subsequent Events
Wall Street Journal
On August 9, 1995 an article in the Wall Street
Journal alleged financial irregularities related to sales
and licensing transactions of the Company. Reacting to
the article, the market price of the Company's common stock
dropped dramatically.
Class Action law suit
Subsequent to the publication of the Wall Street Journal
article numerous investor lawsuits were filed. These lawsuits
were subsequently consolidated into one class action suit.
The amended complaint alleges numerous financial
irregularities during the period from March 30, 1993 through
August 9, 1995.
SEC/FBI Investigations
On August 11, 1995 the SEC initiated a formal order
of private investigation into the Company's financial dealings
and reporting. The FBI also has been investigating the
allegations.
Audit Delays, Delinquent Filing of Form 10-K
The Company's annual report and Form 10-K were due on
the extended date of October 13, 1995. The filing was delayed
due to the lateness of presenting certain requested audit
evidence to the outside auditors.
Notification of Audit Committee, Internal Investigation
Upon examination of the information presented, the
auditors determined that certain irregularities and illegal
acts may have occurred and, in accordance with generally
accepted auditing standards, reported their concerns to the
Audit Committee of the Board of Directors on October 20, 1995.
Accordingly, the Board authorized the outside auditors and
counsel to determine the facts surrounding the alleged
irregularities and illegal acts and the resultant accounting and
reporting implications.
Nasdaq Investigation and Delisting
As a result of not filing the Form 10-K, a hearing
was conducted on October 30, 1995 by Nasdaq to determine
whether the stock of the Company should continue to be listed
on the Nasdaq Stock Market. After the hearing and
related investigation the stock was delisted effective with
the opening of business on November 9, 1995.
Resignation of Mr. Brandon - the President, CEO and Chairman
When it was determined by the outside auditors and
counsel that Mr. Brandon had knowledge of the improprieties,
they informed the Audit Committee that it must take
appropriate remedial action regarding the implicated management.
The Audit Committee reported the findings and recommendations
to the full Board of Directors which requested and received
Mr. Brandon's resignation as President, CEO and Chairman.
Audit Delays
The outside auditors have experienced substantial delays
in obtaining documentation. The delays have occurred in
obtaining documentation and information which are
obtainable through Mr. Brandon and other third parties.
Audit issues related to cash balances (Note 25(b)), theft
loss (Note 25(c)), stock issues (Note 25(d)), revenue
recognition (Note 25(f), and other substantive audit issues
were delayed due to lack of documentation. Documentation
was obtained through alternative means to reach audit conclusions.
Additionally, certain parties to the above transactions have
not cooperated with the auditors upon advice of their counsel.
Audit adjustments have accordingly been made reversing
transactions or providing impairment losses.
The delay in completing the audit was related to
resolution of these matters and the change in management of
the Company as discussed below.
<F25b>
Yorkton Securities, Inc. - Intavest Pty Ltd.
The Company reported receiving $6,250,000 as collection
on accounts receivable as a subsequent event in its 10-Q for
the quarter ended March 31, 1995.
The outside auditors and counsel have determined that
the $6,250,000, represented by Mr. Brandon as being received as
of June 30, 1995 and as being collections on various
accounts receivable, were in fact not received in an account
at Yorkton Securities, Inc. ("Yorkton") until August 3, 1995.
Additionally, the amount was not collection of accounts
receivable but loan proceeds from a loan by Yorkton to Intavest
Pty Ltd. ("Intavest") which were transferred into an account only
bearing the name of Work Recovery.
At Mr. Brandon's direction, the $6,250,000 had been posted
as of June 30, 1995 to the following account balances:
Carat International license receivable balance of $2,100,000,
Carat International Ergos receivable balance of $2,307,000,
A-1 Financial Planning stock subscription receivable balance
of $690,000, Victoria Overseas Fund, Inc. stock subscription
receivable balance of $651,750 and Midwestern Diagnostic
Assessment Services, Inc. (Midwestern Diagnostic) license
receivable balance of $501,250. The management of Carat
International independently confirmed their license and Ergos
account receivable balances net of the above amounts as they
had been actually paid. The other accounts were netted to zero
by the above allocations. The postings have been reversed as
audit adjustments. The participation of management of
these entities in this transaction has not been determined.
The auditors and counsel have also determined that
Mr. Brandon signed a loan guarantee and security agreement
on behalf of Work Recovery without knowledge of the Board
of Directors, guaranteeing a maximum of $5,748,750 of the
account balance against the Yorkton-Intavest loan. Per
the agreement, the funds were not accessible by the Company.
The auditors and counsel have also determined that based
on Mr. Brandon's August 30, 1995 authorization sent to
Yorkton releasing the collateral, Yorkton withdrew the
entire $6,250,000 from the "WRI" account. The location of
the $501,250 difference between the $6,250,000 account balance
and the loan guarantee of $5,748,750 has not been determined.
Additionally, the relationship of this $501,250 amount to the
above balance of Midwestern Diagnostic has not been determined.
<F25c>
World Wide Purchasing
The outside auditors and counsel have determined that in
June 1995 a corporation known as World Wide Purchasing, Inc.
was created with the known cooperation or knowledge of
Martha Greenlee (manufacturing director and sister of Mr.
Brandon), and an outside party. Documents evidencing purchase
and receipt of inventory from World Wide were fabricated.
These documents, totalling $352,829 were submitted and paid by
the Company in June 1995. Additional amounts totalling
approximately $277,000 were paid to or on behalf of World
Wide subsequent to year end.
With the cooperation of the third party, the records of
World Wide have been entrusted to the outside auditors.
The records have revealed that $100,000 of the initial funds
paid to World Wide were diverted via Martha Greenlee to an
entity known as Southwestern Diagnostic Services, Inc. and
endorsed by Mr. Brandon, $150,000 was diverted to
Midwestern Diagnostic; and $60,000 diverted to the third party.
The $100,000 and $60,000 amounts were subsequently repaid to
World Wide and used to purchase Ergos components for Work
Recovery. Midwestern Diagnostic subsequently paid $100,000
against its various Ergos leases with Work Recovery.
The relationship between the amount received by Midwestern
Diagnostic from World Wide Purchasing, and the amount paid to
Work Recovery against its lease balances has not been determined.
The entire $352,829 amount has been included in theft loss
to the extent that total funds paid by Work Recovery to or
on behalf of World Wide exceed inventory subsequently recovered.
The Company is attempting to recover the funds and inventories
and failing those attempts to ascertain available insurance
coverage.
<F25d>
Al Sabah Trading and Development Company, PLC/ Carat
International
The Company has reported Ergos sales to certain
foreign entities in the 10-Q's for the first three quarters
of fiscal 1995.
<TABLE>
The outside auditors and corporate counsel have
determined that the earnings process was not complete for
the following previously recorded Ergos sales of the Company:
<CAPTION>
Date Amount
<S> <C> <C>
Customer
Al Sabah Trading and Development 09/11/94 $ 538,000
Carat International 12/14/94 3,750,000
----------
Through 12/31/94 4,288,000
Al Sabah Trading and Development 03/12/95 1,525,000
----------
Through 03/31/95 5,813,000
Al Sabah Trading and Development 04/17/95 1,686,485
----------
Through 06/30/95 $ 7,499,485
==========
</TABLE>
The above transactions and related account balances have
been independently confirmed by management of the above entities
inferring they had received the Ergos units. Management of these
entities also signed authorizations for custodial shipments to
World Wide Purchasing as warehousing agent. Additionally,
certain former management of WRI presented shipping and
custodial receipt documents to the auditors "evidencing"
shipments to World Wide Purchasing as warehousing agent.
However, upon auditor and counsel inspection of the
components representing the above units it was determined that the
manufacturing and shipping processes related to the above
recorded sales were not completed. Additionally, it was
determined that the World Wide Purchasing warehouse, where
these shipments were purportedly held as of the above dates,
was not opened until July 1995, evidencing that certain of
these documents were falsified or fabricated. Accordingly,
the above sales have been reversed.
The collaboration of the above entities in these
transactions has not been determined.
Prior to his resignation as an officer on December 14,
Mr. Brandon issued a rescission to Al Sabah. This rescission
was not approved by the Board of Directors and counsel notified
Al Sabah that the rescission was invalid. Al Sabah
subsequently filed suit for return of the $1,500,000 paid
against the license and Ergos receivables. See Note 22.
<F25e>
Regulation S Transaction - Intavest
As discussed in Note 22, Regulation S promulgated by
the Securities and Exchange Commission under the Securities
and Exchange Act of 1933, exempts the sale of securities to
foreign investors from registration requirements of the Act.
The shares cannot enter the U.S. market for at least forty days.
In June 1995, the Company sold and issued 1,333,166 shares
of common stock to Intavest Pty. Ltd. for $2,000,000 cash at
a substantial discount to market. The shares were placed in
street name of Yorkton Securities before expiration of the 40-day
period.
Intavest and Yorkton have not provided requested
documentation as to the disposition of these shares. If the
shares had been sold, the market value of these shares could
have generated approximately $8,000,000 or a $6,000,000 net
profit. Alternatively, the share value may have been sufficient
to collateralize a substantial loan. It has not been determined
if there an association between the issuance of these shares
and the loan from Yorkton to Intavest described in Note 25(b).
<F25f>
Wincanton/Tradesman
As disclosed in Notes 4, 8 and 9, the Company has
entered into various licensing, purchase, sales, consulting
and investing transactions with Wincanton and its
subsidiaries Queensland Industries and Tradesman. It has
been alleged in the class action Complaint that these
transactions have been entered into for the mutual and
offsetting benefit of the parties involved. Absent an admission
by the parties involved, the Company has not been able
to conclusively determine such intent based on the facts
and circumstances.
The Company has issued substantial blocks of stock
to Wincanton, Tradesman and Garstang Holdings (Walter
Doyle entities) in payment of the obligations for the
Tradesman license, the advance deposit on the Tradesman
mini-van units, and the Tradesman and Wincanton common
stock purchases. Since some cash has been received by
Work Recovery subsequent to these transactions, there may be a
circumstantial correlation between the related sales of
Work Recovery stock received by these parties and cash
payments received by the Company on the various accounts.
<F25g>
Inc/Eurocontrols (Peter Tucker) / Neval Ltd (Dominique
Lang) / Intermedia Com (Roger Serrero)
The following comments are based on prima facia appearance
of certain documents and signatures and not as a result
of validation by a hand writing or documentary expert.
During fiscal 1994, the Company reported entering into
a license agreement with Inc/Eurocontrols for $2,500,000.
Mr. Peter Tucker signed the independent confirmation to the
outside auditors acknowledging the license agreement and
the $2,500,000 balance owed. On the same day, Mr. Tucker
also signed a stock subscription agreement to purchase
common shares from the Company.
Prior to completion of the 1994 audit field work on
September 30, 1994, $200,000 was applied by the Company
against this receivable. Subsequently an additional $500,000
was applied by the Company against this receivable. These
amounts were received from Discom Ltd (a Walter Doyle entity)
and A-1 Financial Planning (a Peter Voss entity). The balance
of $1,800,000 was subsequently reported by the Company to have
been assumed by Neval, Ltd. During fiscal 1995 the Company
also reported entering into an additional $7,500,000 in
license agreements with Neval.
No payments were made by Neval against the agreement.
Subsequent to June 30, 1995, the $9,300,000 balance on
these agreements was assumed by Intermedia Com. The
$9,300,000 balance and license agreements were independently
confirmed to the auditors by Mr. Roger Serrero of Intermedia Com.
Mr. Brandon has represented that subsequent to year end,
a$1,500,000 wire transfer for payment on the Intermedia license
was in process but was stopped. The location or disposition
of these funds has not been determined.
Even though the balance was confirmed by Intermedia Com,
the auditors attempted to confirm the agreement transfers
with Peter Tucker and Dominique Lang. Mr. Tucker was
provided signature pages from the three documents signed in
the name of Peter Tucker; the license agreement, the
audit confirmation and the stock subscription agreement.
His written response stated that he did not sign the
license agreement. He verbally denied any knowledge of
the agreement. He did not deny signing the audit confirmation
and the subscription agreement. He deferred all
future communication on the issue to Mr. Brandon.
Based on Mr. Tucker's verbal assertion, his refusal
to communicate further on the matter and Mr. Brandon's lack
of cooperation on the matter, the Company reversed this
transaction which had been previously recorded in the fiscal
year ended June 30, 1994.
Additionally, due to the absence of any confirming
communication from Dominique Lang and Mr. Brandon's lack
of cooperation with obtaining such confirmation, the Company
has also reversed the expanded $7,500,000 ($2,500,000 as of
March 31, 1995) in related license revenues recorded in the
fiscal year ended June 30, 1995.
<F25h>
Work Recovery Centers, Inc. - Louisiana (WRCLA)
Since 1992 the Company has advanced funds to an entity
(WRCLA) located in Metarie, Louisiana. The amounts were
previously represented by former management as being
advances toward the purchase of the operation and that all
amounts advanced would be capitalizable as purchase costs when
the transaction was completed. No disclosure of ownership by
the Company or its officers in this entity had been made to
the outside auditors. When the 1995 transaction was reviewed
by the auditors, it was determined that the purchase price
was substantially in excess of the value of assets purchased.
The following previously undisclosed facts were also determined.
During fiscal 1992, former management of the Company
entered into an agreement to purchase a clinic in Metarie,
Louisiana. A memo outlining the points of how the purchase would
be structured revealed that the Company would be an 80% owner in
the operating entity. Additionally, three then officers of the
Company; Mr. Brandon, Mr. Shorey and Mr. Bubala; acquired a 75%
interest in a partnership which purchased the related real estate
leased by the entity. The real estate was purchased for
$1,500,000, approximately $800,000 greater than its then appraised
value. (The 1995 appraised value of this real estate was
$1,050,000.) The Company guaranteed the real estate mortgage and
advanced funds to this entity from fiscal 1992 through 1995
primarily to pay the carrying costs of the real estate.
During fiscal 1993 the Company received 3,000 shares in
WRCLA out of a total of 10,000 shares issued, with the intent
to issue a total of 20,000 shares. Based on shares
actually issued, the Company's ownership was 30%. During
fiscal 1995, the Company recorded the purchase of the
clinic operations and related equipment and real estate, through
a consulting agreement with Mr. Roberts, the majority owner.
The Company's ownership was increased to 80% of WRCLA. Mr.
Roberts has asserted that WRCLA has filed separate income
tax returns for all years.
The Company's actual and intended ownership of the clinic
was not disclosed to the auditors. Additionally, the
officers' ownership of the underlying real estate and guarantee
was not disclosed to the auditors. Mr. Bunker, Company
CFO beginning in fiscal 1994, has asserted that he had no
knowledge of this ownership as well. Additionally, no
explanation has been provided for the substantial premium paid on
the property.
Due to the underlying impairment of this investment,
the financial statements of the Company have been restated
to expense the advances made to or on behalf of WRCLA.
<F25i>
Southwestern Diagnostic Service, Inc.
On August 1, 1995 the Company paid $385,000 to an
entity known as Southwestern Diagnostic Service, Inc.
("SDS"), purportedly to complete the purchase of its New
Mexico, Arizona and Hawaii operations. Some lesser
amounts totalling $65,000 had previously been advanced.
As disclosed in Note 25(c), SDS also received an advance from
World Wide Purchasing.
Documentation provided by the former owner of SDS
evidences that Mr. Brandon was actively involved with the
formation of this entity in 1994. Although Mr.
Brandon subsequently changed his investment in this company
from common stock to a loan, he continued to serve as an
officer, director and signatory on the checking account.
On August 22, 1995 the checking account of Southwestern
Diagnostic was closed through the issuance of three cashier's
checks: $85,000 to the 100% shareholder of SDS, approximately
$104,000 to World Wide Purchasing and $300,000 to the Company. As
disclosed previously, the $104,000 was repayment of the circuitous
advance from World Wide. The $300,000 payment to Work Recovery,
originally applied to unrelated Ergos leases and
receivable balances, has been reclassified to
"Unallocated Credits". The affected lease and receivable have
been fully reserved.
The stock purchase agreements for the Arizona and
Hawaii entities totalled $450,000, which was payable not later
than September 1, 1995. The Company did not purchase the
New Mexico entity. The former owner of Southwestern Diagnostic
has asserted that Mr. Brandon increased the purchase price of the
entities for the $300,000 circuitously applied to the
Ergos purchases. The Company accordingly intends to reduce
the subsequently recorded purchase price of these entities.
<F25j>
Mr. Brandon's Stock
The auditors have also determined that Mr. Brandon has
entered into numerous transfers of his personal stock in the
Company to related persons who are also employees of the Company,
unrelated employees of the Company, and other business associates
of the Company. Mr. Brandon's counsel has advised him not to
respond to the auditors' request to explain the substance of these
transactions. Accordingly, no determination has been made as to
the effect, if any, on the financial statements of the Company.
<F26>
<TABLE>
Bad Debt Reserves, Impairment Losses, Investment Losses and
Deferred Revenues
As disclosed in various previous notes, additional bad debt
reserves, impairment reserves, deferred revenues, and unallocated
credits have been recorded. The following table discloses the
effects of these adjustments. The year of origin of the revenue
or cost is likewise disclosed. All adjustments have been
recorded to fiscal 1995. To the extent the origin was from
prior periods, these adjustments result from a change in
accounting estimates by management and do not qualify as
prior period adjustments or require restatements of prior periods.
<CAPTION>
June 30, 1995 June 30, 1994 Prior
Additional Bad Debt Reserves:
<S> <C> <C> <C>
Licensing receivables $ 7,453,000 $ 285,000
Ergos lease receivables 2,761,000
Ergos receivables 316,000
New Concepts receivables 202,000
Clinic receivables $ 462,000
Subscription notes receivable 1,582,000
Other receivables 299,000
------------ ------------ -----------
Total additional bad debts 2,044,000 10,732,000 584,000
------------- ------------ -----------
Impairment losses:
Other assets, equipment
not in service 844,000
Tradesman license and
unit advance 7,500,000
Investment in affiliate 57,000
Goodwill related to acquisitions 5,424,000
------------ ---------- -----------
Total impairment losses 7,557,000 6,268,000
------------- ---------- -----------
Investment losses:
Tradesman Industries
common stock 2,500,000
Wincanton Corporation
common stock 3,000,000 934,000
Work Recovery Pty, Ltd
common stock/advances 766,000 4,237,000
------------- ----------- -------------
Total investment losses 6,266,000 5,171,000
------------- ------------ -------------
Deferred revenues:
Wincanton consulting revenues 9,000,000
Licensing revenues 13,600,000
-------------- ------------ ------------
Total deferred revenues 22,600,000
-------------- ------------ -----------
Total effect of the
above adjustments $ 38,467,000 $ 15,903,000 $6,852,000
=============== ============
============
</TABLE>
These adjustments have affected fiscal 1995 income by
$61,222,000 or $1.72 per share.
Certain adjustments have resulted in unallocated credits
which resulted from payments which had previously been applied
to repudiated transactions which were previously recorded.
$700,000 results from repudiated licenses and $266,000
from repudiated leases. These amounts, grouped with liabilities,
will ultimately be classified as liabilities, equity or
revenues when determined by the Company.
<F27>
<TABLE>
Adjustments to Prior Periods
Certain adjustments have resulted in restatement of prior
period financial statements. These adjustments and periods
affected are as follows:
<CAPTION>
June 30, 1994 June 30,1993 June 30, 1992
<S> <C> <C> <C>
Net Income (Loss) as previously reported $4,607,000 $1,064,000 $(120,000)
Adjustment to rescind
repudiated license (Note 25(g)) (2,500,000)
Adjustments to rescind
repudiated leases (Note 5) (2,127,000)
Adjustment to record undisclosed
impairment of investment (Note 25(h)) (238,000) (217,000) (260,000)
Adjustment to provision for income taxes 2,396,000 105,000 88,000
Adjustment to cumulative effect of
change in accounting principle (168,000)
Adjustment to extraordinary benefit from
utilization of NOL carryforwards (80,000)
----------- ---------- ----------
Net Income (Loss) as restated $ 1,970,000 $872,000 $(292,000)
=========== ========== =========
Earnings (Loss) per share,
as previously reported $ .18 $.06 $(.02)
Effect of adjustments on
Earnings per share (.10) (.01) (.02)
------- ------- ---------
Earnings (Loss) per share,
as restated $ .08 $.05 $(.04)
======= ======== ========
<FN>
<F28>
The TEAM for New Management, LLC
On January 18, 1996 the Board of Directors of the Company
and the Team for New Management LLC (the "Team") effected a change
in control of the Company through a voluntary, negotiated change
in the composition of the Board of Directors and management of
the Company. The Team was formed by certain stockholders who
had lost confidence in the Company's former management. The
Team was formed to help finance and conduct a proxy
solicitation against the former management and to provide
management services to the Company if a new Board were installed.
On January 18, 1996 the Company entered into an Interim
Management Services Agreement ("IMSA") with the Team to
provide executive management services generally performed by
a President, Chief Executive Officer, Chief Operating Officer
and Chief Financial Officer. The IMSA expires April 17, 1996,
unless extended or terminated pursuant to its terms. Under
the IMSA, the Company will pay the Team $25,000 per week and
will advance or reimburse the Team's related out-of-pocket
expenses.
The former directors also authorized, subject to approval
of the shareholders of the Company, the issuance of warrants to
the Team which are exercisable for five years to purchase
common stock of the Company: (i) three million shares at $1.25
per share; (ii) three million shares at the average closing
bid price for the 20 trading day period beginning January 4,
1996; (iii) two million shares at $3.00 per share; and (iv)
two million shares at $5.00 per share. The warrants will be
issued as restricted securities and subject to certain rights
and restrictions.
On January 18, 1996, the Company also entered into Severance
Agreements and Releases ("Severance Agreements") with Mr. Bunker and
Ms. Duncan whereby they would continue to assist the orderly transition
of management control and provide requested information at per annum rates
approximating their prior compensation as officers. The Company has agreed
to not assert any claims against them existing as of January 18, 1996
subject to certain exceptions.
<F29>
Ability of the Company to Continue as a Going Concern
The Company has sustained a significant loss for the year
ended June 30, 1995 and has experienced further material financial
and liquidity deterioration since year end. It is unlikely the Company will
be able to continue day to day operations without seeking protection from
creditors under the bankruptcy laws.
In January 1996, the new management began an immediate,
aggressive cost reduction program, which includes the selling
or closing of unprofitable centers and the reduction of
corporate staff and other expenses, in an effort to provide for
and alleviate immediate and short-term cash requirements.
The Company plans to retain or relocate ten centers, sell
thirteen centers and close five centers. Subsequent to year
end but before the TEAM assumed management, six other centers
had already been closed. These centers, which were
operating during fiscal 1995, affected fiscal 1995 revenues,
net loss and earnings per share by $2,759,000, $(2,130,000)
and $(.06), respectively. Management estimates that due to
the substantial accumulated depreciation, the net unrecovered
costs from these dispositions will not be material and
accordingly has not further recorded impairment to Property,
Plant and Equipment.
New management is also investigating possible sources
of additional capital. In February 1996, the Company secured a
$500,000 loan from a private company. This loan is convertible into common
stock and is secured by certain equipment. Management estimates the Company
needs between $8-$12 million to fund current negative cash flows from
operations and to fund its business development plan over the next 24 months.
No commitments for such capital have yet been received. The legal actions
against the Company and contingencies, as discussed above, severely limit the
Company's ability to obtain additional financing outside of bankruptcy.
There can be no assurance that additional financing will be available and,
if available, that the terms and conditions would be acceptable to the
Company.
</FN>
</TABLE>
<PAGE>
<TABLE>
SCHEDULE VIII
WORK RECOVERY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1995
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Description
Allowance for Bad Debts,
Trade Receivables $ 1,066,000 $ 980,000 $(286,000) $1,760,000
Allowance for Obsolescence 46,000 46,000
Marketable Securities
Valuation Allowance 3,934,000 3,944,000
Deferred Revenues,
Consulting (AR) $ 6,991,000 6,991,000
Deferred Revenues,
Consulting (Cash) 2,009,000 2,009,000
Allowance for Bad Debts,
Licenses 7,738,000 7,738,000
Deferred Revenues,
Licenses (AR) 13,600,000 13,600,000
Allowance for Bad Debts,
Leases 2,761,000 2,761,000
Impairment Reserve,
Goodwill and Other 5,424,000 5,424,000
Impairment Reserve,
Tradesman 7,500,000 7,500,000
Valuation Reserve,
Investments in and
Advances to Affiliates 11,437,000 11,437,000
Impairment Reserve,
Other Assets 901,000 901,000
Unallocated Credits 966,000 966,000
Allowance for Bad Debts,
Subscription Notes 1,582,000 1,582,000
FOR THE YEAR ENDED
JUNE 30, 1994
Allowance for Bad Debts $545,000 $734,000 $(214,000) $1,066,000
Allowance for Obsolescence 46,000 46,000
FOR THE YEAR ENDED
JUNE 30, 1993
Allowance for Bad Debts $106,000 $202,166 $*262,000 $(25,000) $ 545,000
Allowance for Obsolescence 34,000 12,000 46,000
* Valuation accounts acquired with Work Simulation
Centers, Inc.
acquisition and Sim Center acquisition
<FN>
(AR) - Reserve was offset to the related receivable rather than
reflected as a liability for the sake of accounting conservatism in
light of the circumstances encountered on the audit.
</FN>
</TABLE>
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into this 29th day of
June , 1994, by and between Work Recovery, Inc., a Colorado
corporation ("WRI") and Manados Investments, Inc. , a Channel
Islands company having a registered and records office at Hirzel
House, Smith Street, St. Peter Port, Guernsey, Channel Islands GY1
2NG ("Licensee").
WITNESSETH:
WHEREAS, WRI owns all right, title and interest in and to
that certain product known and otherwise referred to as "ERGOS"
and the educational products manufactured by its wholly-owned
subsidiary, New Concepts Corporation ("NCC Products"), as more
completely described in Exhibit A, attached hereto; and
WHEREAS, Licensee desires to acquire from WRI the right to
establish itself as the holder of the Master License Agreement as
the sole and exclusive Licensee of WRI for the use of ERGOS and
NCC Products within the country of South Africa.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms, conditions, representations, warranties and
covenants set forth herein and such other and further
consideration, the receipt and sufficiency of which is hereby
acknowledged, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
GRANT OF LIMITED LICENSE TO PRODUCTS
Section 1.1. Grant of License. WRI hereby grants to
Licensee during the term of this agreement a personal, non-
transferable, master license for the use of ERGOS and NCC Products
for its own purposes and, by mutual agreement between WRI and
Licensee, for further license to others in South Africa. Licensee
acknowledges and agrees that ERGOS and NCC Products are
proprietary to WRI and embody valuable trademarks, copyrights and
trade secrets of WRI. Licensee shall make no additional copies of
the computer programs within ERGOS and shall not attempt to
reverse engineer such programs. Licensee shall protect ERGOS and
NCC Products using all due care from unauthorized copying,
dissemination, disclosure or decompilation or other unauthorized
use. Title and full ownership rights to the name ERGOS shall
remain with WRI.
Section 1.2. Representations and Warranties. Licensee
has and shall exercise no authority to make statements or
representations concerning ERGOS and NCC Products that exceed or
are inconsistent with the marketing materials and technical
specifications provided by WRI, which shall provide Licensee with
updates of ERGOS and NCC Products free of charge; however, this
agreement shall not in any way be construed to be a service
agreement by WRI in respect of ERGOS and NCC Products. WRI shall
provide maintenance services to Licensee in respect of ERGOS and
NCC Products at rates not to exceed the lowest rate charged to any
other third party if such maintenance services are not otherwise
covered by a WRI warranty. WRI agrees to enter into a one-year
limited warranty and to further enter into an extended warranty
agreement with Licensee upon the sale of any ERGOS and NCC
Products equipment, on such terms and conditions more fully set
forth in Exhibit B. Licensee expressly acknowledges and agrees
that this agreement is being made without any representation or
warranty of any kind whatsoever (express or implied), other than
as specifically set forth herein (see Exhibit B). WRI has no
obligation whatsoever to market or sell ERGOS and NCC Products.
Section 1.3. Assignment. This agreement is personal in
nature to Licensee and is not assignable (voluntarily,
involuntarily, by operation of law or otherwise) by it without the
mutual agreement of WRI. Any attempt to assign, transfer, or
subcontract any of the rights, duties, or obligations set forth
hereunder shall render this agreement void and unenforceable.
Notwithstanding the foregoing or any other provision of this
agreement to the contrary, Licensee may, with the consent of WRI
which shall not be unreasonably withheld, sublicense its rights
under this agreement to any other third party.
Section 1.4. Trademark. Except for use for the
purposes of identification of ERGOS and NCC Products, no right,
title, interest or license in or to any trademark or service mark
of WRI is granted to Licensee under this agreement.
SECTION 2
PAYMENTS BY LICENSEE
Section 2.1. Royalty. Licensee shall pay a fee to WRI
in the amount of Two Million Five Hundred Thousand Dollars
($2,500,000) in U.S. Dollars, with payments due on the following
schedule:
August 15, 1994: $ 250,000 (U.S.)
November 15, 1994: $ 450,000 (U.S.)
February 15, 1995: $ 450,000 (U.S.)
May 15, 1995: $ 450,000 (U.S.)
August 15, 1995: $ 450,000 (U.S.)
November 15, 1994: $ 450,000 (U.S.)
Payment of the licensing fee shall be secured by stock in
African Exploration Company Limited, Box 32018, Braamfontein 2017,
South Africa (Cyril Heever, President).
Section 2.2 Pricing. Licensee shall, during the term of
this Agreement, establish a minimum of 15 franchise or co-venture
Work Recovery Centers within the Country of South Africa. All
equipment will be sold to Licensee or Sub-Licensee(s) at the
standard retail price at the time of sale.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations, Warranties and Covenants
of WRI. WRI represents and warrants to and covenants with
Licensee as follows:
(a) It is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Colorado and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which
the conduct of its business or the ownership of its
properties requires such qualification, except where the
failure to qualify will not have a material adverse effect
on the business of WRI.
(b) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of WRI enforceable in accordance with
its terms.
(c) WRI subsequently shall not, using all due care,
sell (or grant any licenses to the use of) ERGOS and NCC
Products for ultimate use nor will WRI permit such use
within the country of South Africa during the term hereof.
In the event that any ERGOS or NCC Products, other than that
covered by this agreement, are utilized in the country of
South Africa during the term of this agreement, WRI will
take all immediate steps to cause the use of such equipment
to be removed therefrom.
(d) WRI has good and marketable title to all ERGOS
machines and NCC Products to be sold to Licensee hereunder.
WRI warrants that the ERGOS machines and NCC Products all
component parts thereof and their use by Licensee pursuant
to this agreement do not and will not violate the copyright,
patent, trade secret or other proprietary rights of any
third party and that there is currently no actual or
threatened suit by any third party based on an alleged
violation of any such rights by WRI. WRI shall indemnify
and save Licensee harmless from and against all costs,
losses, damages and liabilities, including, without
limitation, attorneys' fees which may be incurred on account
of the breach of any representation, warranty, and covenant
set forth in this Section 3.1(d) and WRI, upon demand by
Licensee and at its own expense, shall defend all such
claims, suits or actions against Licensee, provided WRI is
notified thereof.
(e) WRI warrants that any services performed by an
employee or contractor of WRI under this agreement will be
performed in a timely and professional manner by qualified
personnel and will conform to the standards generally
observed in the industry for similar services.
(f) WRI hereby agrees to sell and make available to
the Licensee, at the prices set forth in Section 2.2, ERGOS
machines and NCC Products during the term of this agreement,
as and when requested by Licensee. WRI also agrees to
provide, at no additional cost to Licensee, all literature
and software updates relating to ERGOS and NCC Products that
are produced by WRI and WRI also agrees to provide to
Licensee, at the lowest price offered to any third party,
any upgrades of ERGOS or NCC Products.
Section 3.2. Representations, Warranties and Covenants
of Licensee. Licensee represents and warrants to and covenants
with WRI as follows:
(a) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of Licensee enforceable in accordance
with its terms.
(b) Licensee has not previously and shall not,
except as provided herein, grant subsequently any sublicense
of ERGOS and NCC Products.
(c) Licensee has or can acquire all technical know-
how and skill and all personnel, facilities, equipment and
materials required for the performance of its obligations
hereunder.
(d) Licensee shall establish a minimum of fifteen
(15) franchise or co-venture Work Recovery Centers during
the five years following the date first set forth above.
SECTION 4
TERM AND TERMINATION
Section 4.1. Term. The term of this agreement shall
begin on the date first above set forth and shall end on the fifth
yearly anniversary date thereof, unless earlier terminated
pursuant to the provisions hereof. The term shall be extended for
an additional five years in the event Licensee complies with the
covenant set forth in paragraph 3.2(d) hereof.
Section 4.2. Termination. WRI may terminate this
agreement upon the occurrence of an Event of Default as set forth
under Section 5 hereof.
SECTION 5
DEFAULT
WRI shall have the right to terminate this agreement in the
event that Licensee fails to purchase the ERGOS machines as set
forth in Section 3.2(d), provided that, prior to such termination,
WRI shall provide at least 30 days written notice of such
termination to Licensee and, if, during such notice period,
Licensee places orders with WRI to purchase the ERGOS machine(s)
required under Section 3.2(d), then the Licensee shall be deemed
to have satisfied the requirements of Section 3.2(d).
SECTION 6
INDEMNITIES
Licensee does hereby agree to indemnify WRI for and against
any and all claims, demands and actions arising out of its
activities or performances under this agreement or any breach of
its obligations hereunder. WRI does hereby agree to indemnify
Licensee for and against any and all claims, demands and actions
arising out of its activities or performances under this agreement
or any breach of its obligations hereunder.
SECTION 7
EXPENSES
Licensee hereby acknowledges and agrees that it shall be
solely responsible for its own expenses and costs under this
agreement, and that WRI shall have no obligation to reimburse
Licensee for any expenses or costs incurred by Licensee hereunder.
SECTION 8
GENERAL PROVISIONS
Section 8.1. Waiver. Any failure on the part of any
party hereunder to comply with any of their obligations,
agreements or conditions hereunder may be waived in writing by the
party to whom such compliance is owed; however, waiver on one
occasion does not operate to effectuate a waiver on any other
occasion.
Section 8.2. Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
to have been given if delivered in person or sent by prepaid,
first class, registered or certified mail, return receipt
requested, as follows: WRI at 2341 S. Friebus, Ste. 14, Tucson,
Arizona 85713; and to Licensee at Hirzel House, Smith Street, St.
Peter Port, Guernsey, Channel Islands GY1 2NG . Either party may
change their notice address by written notice to the other as
provided in this paragraph.
Section 8.3. Governing Law. This agreement shall be
governed by and construed and enforced in accordance with the laws
of the State of Arizona. Further, all parties agree that said
state shall be the appropriate and agreed upon jurisdiction for
the resolution of any and all disputes which may arise hereunder.
Section 8.4. No Oral Modification. This agreement may
be amended solely in writing, and only after the mutual agreement
of the parties affected thereby.
Section 8.5. Survival of Representations, Warranties
and Covenants. The representations, warranties, covenants and
agreements contained herein shall survive the execution and
delivery of this agreement.
Section 8.6. Parties Independent. In making and
performing this agreement, the parties set and shall set at all
times as independent entities and nothing contained in this
agreement shall be construed or implied to create an agency,
partnership, joint venture or employer and employee relationship
between the parties. At no time shall either party make
commitments or incur any charges or expenses for or in the name of
the other party. Licensee shall be solely responsible for wages,
hours and conditions of employment of his personnel. Nothing
herein shall be construed as implying that employees of Licensee
are employees of WRI.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed effective the date and year first above
written.
[Corporate Seal] Work Recovery, Inc.
Attest: /s/ Linda J. Duncan By: /s/ Thomas L. Brandon
Secretary President
Manados
Attest: /s/ (Illegible) By: /s/ Michael W. Macey, M.D.
CONSULTING AGREEMENT
This Agreement is effective as of the 1st day of July,
1994, by and between WINCANTON CORPORATION, a Nevada
Corporation (the"Company"), and WORK RECOVERY, INC., a
Colorado Corporation (the"Consultant").
The Company desires to retain the Consultant to provide
advice and assistance in the development of Company's
product lines currently in development by its subsidiary,
Tradesman Industries ("Tradesman"), on both a domestic
and international level.
1. DUTIES AND INVOLVEMENT
a) Conduct marketing activities, both domestically and
internationally, relating to the various potential
market segments which might utilize the product
line currently under development by Tradesman (for
which the Consultant holds master distribution
rights within the United States), which product
line incorporates a technology to lower the beds of
trailers, pickup trucks, and mini-vans to ground
level. These marketing activities are expected to
include, but not be limited to, holding "focus"
groups with representatives of potential user
groups, including employers, workers, disabled
persons, aged populations, and organizations or
associations which serve these populations;
utilizing Consultant's existing network of sales
representatives (in its Work Recovery Centers) to
conduct local market analyses, market the vehicles
with existing accounts, display and demonstrate the
vehicles (when available); and provide graphic,
video, and printed media consultation on the
development of marketing materials.
b) Advise Tradesman on the development of additional
products which will have application to
Consultant's existing and future clients, including
employers, insurance carriers, medical and
rehabilitation providers, governmental agencies,
and private not-for-profit organizations.
c) Consultation on the development of a relationship
Tradesman desires to cultivate which will put in
place a leasing mechanism for its vehicles, thereby
expanding the market for such vehicles. The
Company recognizes that Consultant is currently
exploring similar possibilities for its own product
lines, and Company and Consultant recognize the
potential for joint efforts on such negotiations.
d) Provide introductions to Consultant's existing and
future international license holders, and general
consultation and assistance to Tradesman in the
development of international distribution license
agreements for its products.
e) Provide a full-time equivalent National Director of
Marketing for Tradesman products, who will have
responsibility to train Consultant's marketing
personnel in Tradesman's products and the
integration of the product line into Consultant's
existing "technological package" of products
available to employer-based accounts.
f) To provide a proportion of time of Consultant's
existing staff in the Work Recovery Centers to
Tradesman-related activities, as follows:
i) Center directors: a minimum of 10% full-time
equivalent
ii) Regional directors: a minimum or 10% full-time
equivalent
iii) Sales representatives: a minimum of 40% full-
time equivalent
g) Provide introductions directly to Chrysler
Corporation and its subsidiary manufacturers, to
assist in presentation to key personnel within
Chrysler Corporation regarding development of joint
manufacturing agreements for Tradesman vehicles.
h) Incorporate Tradesman marketing materials, product
literature, and other promotional items into
Consultant's national and international trade shows
and conventions.
i) Jointly develop an international strategy for
introduction of Tradesman's product line for the
purpose of establishing international manufacturing
and distribution strategies for Tradesman products.
j) Provide consultation services designed to meet the
Company's mission statement with respect to mining
and forestry. Consultant will assist the Company,
through the introduction of influential people in
each of the countries where Consultant currently
holds master license programs for distribution of
its products and services (see Exhibit A).
Consultant will further provide introductions to
governmental agencies within these countries and
will direct appropriate Company personnel to
individuals who have as their primary
responsibility decisions related to environmental
reforestation and reclamation of land during and
after mining operations.
k) Introduction of the Company's key management
personnel to Fortune 500 companies whose primary
focus is reforestation, harvesting, and other
timber-related sales and services.
l) Introduction of the Company's key management
personnel to potential financial strategic
partners.
m) Assist in the presentation of programs designed to
create joint ventures between the Company and
others for land acquisition and reforestation
programs in international jurisdictions.
Consultant acknowledges that it is not an officer,
director, or agent of the Company, that it is not and
will not be responsible for any management decisions on
behalf of the Company and that it may not commit the
Company to any action. Any and all arrangements or
agreements that Consultant may negotiate for the Company
will be subject to acceptance by the Company, to be
evidenced by execution by an authorized officer of the
Company. Consultant represents that it does not have,
through stock ownership or otherwise, the power to
control the Company nor to exercise any dominating
influence over its management.
2. TERM
This agreement shall continue for a term of one year
from the effective date hereof. Consultant's engagement
hereunder may be terminated during the term of this
Agreement under the following circumstances:
a. Disability. If, as a result of Consultant's
incapacity due to physical or mental illness, Consultant
shall have been unable to perform its duties hereunder on
a full time basis for one full month, and within 10 days
after written notice of termination is given shall not
have returned to the performance of its duties hereunder,
the Company may terminate Consultant's engagement
hereunder.
b. Termination with Notice. After an initial non-
cancellation period of 30 days from the date of this
Agreement, the Company or the Consultant may terminate
this agreement at any time upon 30 days notice.
3. COMPENSATION
a. As full compensation for all services
hereunder, the Company shall grant to the Consultant a
payment of $800,000 per month, for a total over the term
of the contract of $9,600,000, for services rendered.
b. The Company agrees to pay invoices in full by
not later than one calendar year from the date of the
invoices.
4. TAXES AND OTHER LIABILITIES
Consultant acknowledges and agrees that it is an
independent contractor and not an employee of the
company. As such, Consultant acknowledges that it is
responsible for all employment and other taxes payable to
any federal, state or local authority and any other
obligations or liabilities arising from its engagement
and compensation hereunder.
5. GENERAL
The Consultant shall devote such of its time and
effort to the duties hereunder and shall use its best
efforts to fulfill obligations hereunder; however, the
Company acknowledges that the Consultant is engaged in
other business activities and that such activities will
continue during the term of this agreement.
By: WINCANTON CORPORATION Date: July 1, 1994
/s/ Walter Doyle Director
By: WORK RECOVERY, INC. Date: July 1, 1994
/s/ Thomas L. Brandon President
<PAGE>
EXHIBIT A
WORK RECOVERY, INC.'S CURRENT
LICENSING AGREEMENTS
Australia Malaysia
Belgium The Netherlands
Canada New Zealand
Japan South Africa
Luxembourg United Kingdom
ADDITIONAL LICENSING AGREEMENTS
CURRENTLY UNDER NEGOTIATION
Austria Norway
Bahrain Oman
Brunei Pakistan
China Portugal
Denmark Saudi Arabia
Finland Singapore
France Spain
Germany Sweden
Hong Kong Switzerland
India Taiwan
Indonesia Thailand
Italy United Arab Emirates
Korea Yemen
Kuwait
<PAGE>
EXHIBIT B
WORK RECOVERY, INC.'S EXISTING CUSTOMERS
(EMPLOYERS AND INSURANCE CARRIERS)
3M Corporation Johnson Controls
Aetna Insurance Liberty Mutual Insurance
ARCO Products North American Van Lines
BMW Manufacturing Oscar Meyer
CIGNA Insurance Pillsbury
CNA Insurance Sedgwick James Insurance
Fireman's Funds Southern California Edison
Company
Ford Motor Company Toyota Motor Manu, USA
Fortis Benefits The Traveler's Insurance
GAB Business Services Wausau Insurance
General Motors Wrangler
Goodyear
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into this 10th day of
September , 1994, by and between Work Recovery, Inc., a Colorado
corporation ("WRI") and Al Sabah Trading Co., PLC , having a
registered address of c/o Philip R. Gustlin, Gustlin, Golob &
Bragin, 11755 Wilshire Boulevard, Suite 1400, Los Angeles,
California 90025 ("Licensee").
WITNESSETH:
WHEREAS, WRI owns all right, title and interest in and to
that certain product known and otherwise referred to as "ERGOS",
more completely described in Exhibit A, attached hereto; and
WHEREAS, Licensee desires to acquire from WRI the right to
establish itself as the holder of the Master License Agreement as
the sole and exclusive Licensee of WRI for the use of ERGOS within
the Country of Germany.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms, conditions, representations, warranties and
covenants set forth herein and such other and further
consideration, the receipt and sufficiency of which is hereby
acknowledged, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
GRANT OF LIMITED LICENSE TO PRODUCTS
Section 1.1. Grant of License. WRI hereby grants to
Licensee during the term of this agreement a personal, non-
transferable, master license for the use of ERGOS for its own
purposes and, by mutual agreement between WRI and Licensee, for
further license to others in the Country of Germany. Licensee
acknowledges and agrees that ERGOS is proprietary to WRI and
embodies valuable trademarks, copyrights and trade secrets of WRI.
Licensee shall make no additional copies of the computer programs
within ERGOS and shall not attempt to reverse engineer such
programs. Licensee shall protect ERGOS using all due care from
unauthorized copying, dissemination, disclosure or decompilation
or other unauthorized use. Title and full ownership rights to the
name ERGOS shall remain with WRI.
Section 1.2. Representations and Warranties. Licensee
has and shall exercise no authority to make statements or
representations concerning ERGOS that exceed or are inconsistent
with the marketing materials and technical specifications provided
by WRI, which shall provide Licensee with updates of ERGOS free of
charge; however, this agreement shall not in any way be construed
to be a service agreement by WRI in respect of ERGOS. WRI shall
provide maintenance services to Licensee in respect of ERGOS at
rates not to exceed the lowest rate charged to any other third
party if such maintenance services are not otherwise covered by a
WRI warranty. WRI agrees to enter into a one-year limited
warranty and to further enter into an extended warranty agreement
with Licensee upon the sale of any ERGOS equipment, on such terms
and conditions more fully set forth in Exhibit B. Licensee
expressly acknowledges and agrees that this agreement is being
made without any representation or warranty of any kind whatsoever
(express or implied), other than as specifically set forth herein
(see Exhibit B). WRI has no obligation whatsoever to market or
sell ERGOS.
Section 1.3. Assignment. This agreement is personal in
nature to Licensee and is not assignable (voluntarily,
involuntarily, by operation of law or otherwise) by it without the
mutual agreement of WRI. Any attempt to assign, transfer, or
subcontract any of the rights, duties, or obligations set forth
hereunder shall render this agreement void and unenforceable.
Notwithstanding the foregoing or any other provision of this
agreement to the contrary, Licensee may, with the consent of WRI
which shall not be unreasonably withheld, sublicense its rights
under this agreement to any other third party.
Section 1.4. Trademark. Except for use for the
purposes of identification of ERGOS, no right, title, interest or
license in or to any trademark or service mark of WRI is granted
to Licensee under this agreement.
SECTION 2
PAYMENTS BY LICENSEE
Section 2.1. Royalty. Licensee shall pay a fee to WRI
in the amount of Two Million Nine Hundred Thousand Dollars
($2,900,000) in U.S. Dollars, with payments due on the following
schedule:
August 1, 1995: $500,000 (U.S.)
November 1, 1995: $500,000 (U.S.)
February 1, 1996: $500,000 (U.S.)
May 1, 1996: $500,000 (U.S.)
August 1, 1996: $500,000 (U.S.)
November 1, 1996: $400,000 (U.S.)
Section 2.2 Pricing. Licensee shall, during the term of
this Agreement, establish a minimum of 10 Work Recovery Centers
within the Country of Germany. All equipment will be sold to
Licensee or Sub-Licensee(s) at the standard retail price at the
time of sale.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations, Warranties and Covenants
of WRI. WRI represents and warrants to and covenants with
Licensee as follows:
(a) It is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Colorado and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which
the conduct of its business or the ownership of its
properties requires such qualification, except where the
failure to qualify will not have a material adverse effect
on the business of WRI.
(b) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of WRI enforceable in accordance with
its terms.
(c) WRI subsequently shall not, using all due care,
sell (or grant any licenses to the use of) ERGOS for
ultimate use nor will WRI permit such use within the Country
of Germany during the term hereof. In the event that any
ERGOS machine or equipment, other than that covered by this
agreement, is utilized in the Country of Germany during the
term of this agreement, WRI will take all immediate steps to
cause the use of such machine to be removed therefrom.
(d) WRI has good and marketable title to all ERGOS
machines and New Concepts' work stations to be sold to
Licensee hereunder. WRI warrants that the ERGOS machines
and New Concepts' work stations, all component parts thereof
and their use by Licensee pursuant to this agreement do not
and will not violate the copyright, patent, trade secret or
other proprietary rights of any third party and that there
is currently no actual or threatened suit by any third party
based on an alleged violation of any such rights by WRI.
WRI shall indemnify and save Licensee harmless from and
against all costs, losses, damages and liabilities,
including, without limitation, attorneys' fees which may be
incurred on account of the breach of any representation,
warranty, and covenant set forth in this Section 3.1(d) and
WRI, upon demand by Licensee and at its own expense, shall
defend all such claims, suits or actions against Licensee,
provided WRI is notified thereof.
(e) WRI warrants that any services performed by an
employee or contractor of WRI under this agreement will be
performed in a timely and professional manner by qualified
personnel and will conform to the standards generally
observed in the industry for similar services.
(f) WRI hereby agrees to sell and make available to
the Licensee, at the prices set forth in Section 2.2, ERGOS
machines and New Concepts' work stations during the term of
this agreement, as and when requested by Licensee. WRI also
agrees to provide, at no additional cost to Licensee, all
literature and software updates relating to ERGOS and New
Concepts' work stations that are produced by WRI and WRI
also agrees to provide to Licensee, at the lowest price
offered to any third party, any upgrades of ERGOS or New
Concepts' equipment.
Section 3.2. Representations, Warranties and Covenants
of Licensee. Licensee represents and warrants to and covenants
with WRI as follows:
(a) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of Licensee enforceable in accordance
with its terms.
(b) Licensee has not previously and shall not,
except as provided herein, grant subsequently any sublicense
of ERGOS.
(c) Licensee has or can acquire all technical know-
how and skill and all personnel, facilities, equipment and
materials required for the performance of its obligations
hereunder.
(d) Licensee shall establish a minimum of ten (10)
Work Recovery Centers during the five years following the
date first set forth above.
SECTION 4
TERM AND TERMINATION
Section 4.1. Term. The term of this agreement shall
begin on the date first above set forth and shall end on the fifth
yearly anniversary date thereof, unless earlier terminated
pursuant to the provisions hereof. The term shall be extended for
an additional five years in the event Licensee complies with the
covenant set forth in paragraph 3.2(d) hereof.
Section 4.2. Termination. WRI may terminate this
agreement upon the occurrence of an Event of Default as set forth
under Section 5 hereof.
SECTION 5
DEFAULT
WRI shall have the right to terminate this agreement in the
event that Licensee fails to purchase the ERGOS machines as set
forth in Section 3.2(d), provided that, prior to such termination,
WRI shall provide at least 30 days written notice of such
termination to Licensee and, if, during such notice period,
Licensee places orders with WRI to purchase the ERGOS machine(s)
required under Section 3.2(d), then the Licensee shall be deemed
to have satisfied the requirements of Section 3.2(d).
SECTION 6
INDEMNITIES
Licensee does hereby agree to indemnify WRI for and against
any and all claims, demands and actions arising out of its
activities or performances under this agreement or any breach of
its obligations hereunder. WRI does hereby agree to indemnify
Licensee for and against any and all claims, demands and actions
arising out of its activities or performances under this agreement
or any breach of its obligations hereunder.
SECTION 7
EXPENSES
Licensee hereby acknowledges and agrees that it shall be
solely responsible for its own expenses and costs under this
agreement, and that WRI shall have no obligation to reimburse
Licensee for any expenses or costs incurred by Licensee hereunder.
SECTION 8
GENERAL PROVISIONS
Section 8.1. Waiver. Any failure on the part of any
party hereunder to comply with any of their obligations,
agreements or conditions hereunder may be waived in writing by the
party to whom such compliance is owed; however, waiver on one
occasion does not operate to effectuate a waiver on any other
occasion.
Section 8.2. Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
to have been given if delivered in person or sent by prepaid,
first class, registered or certified mail, return receipt
requested, as follows: WRI at 2341 S. Friebus, Ste. 14, Tucson,
Arizona 85713; and to Licensee at c/o Philip R. Gustlin, Gustlin,
Golob & Gragin, 11755 Wilshire Boulevard, Suite 1400, Los Angeles,
California 90025 . Either party may change their notice address
by written notice to the other as provided in this paragraph.
Section 8.3. Governing Law. This agreement shall be
governed by and construed and enforced in accordance with the laws
of the State of Arizona. Further, all parties agree that said
state shall be the appropriate and agreed upon jurisdiction for
the resolution of any and all disputes which may arise hereunder.
Section 8.4. No Oral Modification. This agreement may
be amended solely in writing, and only after the mutual agreement
of the parties affected thereby.
Section 8.5. Survival of Representations, Warranties
and Covenants. The representations, warranties, covenants and
agreements contained herein shall survive the execution and
delivery of this agreement.
Section 8.6. Parties Independent. In making and
performing this agreement, the parties set and shall set at all
times as independent entities and nothing contained in this
agreement shall be construed or implied to create an agency,
partnership, joint venture or employer and employee relationship
between the parties. At no time shall either party make
commitments or incur any charges or expenses for or in the name of
the other party. Licensee shall be solely responsible for wages,
hours and conditions of employment of his personnel. Nothing
herein shall be construed as implying that employees of Licensee
are employees of WRI.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed effective the date and year first above
written.
[Corporate Seal] Work Recovery, Inc.
Attest: /s/ Linda J. Duncan By: /s/ Thomas L. Brandon
Secretary Thomas L. Brandon, President
Al-Sabah Trading and Development Company
Attest: /s/ (ILLEGIBLE) By: /s/ (Illegible)
Director
MASTER LICENSE DISTRIBUTOR AGREEMENT
THIS MASTER LICENSE AGREEMENT is made and entered into
this 5th day of December 1994, by and between TRADESMAN
Industries, Inc. a Delaware corporation, having a place
of business at 11588 Sorrento Valley Road, Suite 22, San
Diego, California 92121, ("TRADESMAN") and Work Recovery,
Inc. having a place of business at 2341 South Friebus,
Suite 14, Tucson, AZ 85713 ("Master Distributor").
1. Term of Agreement
This Agreement shall be effective as of the date
first set forth above and unless otherwise
terminated in accordance with the provisions
herein, shall remain in effect for an initial term
of fifteen (15) years. Thereafter, this Master
Distributor Agreement shall be renewable for two
(2) additional five (5) year periods in accordance
with paragraph 4 thereof.
2. Appointment of Master Distributor and Market Area
A. Appointment
TRADESMAN agrees to sell to Master Distributor
and Master Distributor agrees to purchase from
TRADESMAN, under the terms and conditions
contained herein, TRADESMAN products including
trucks, trailers, equipment, accessories and
parts with a patented rear-end hydraulic
technology as set forth on Exhibit A attached
hereto ("Vehicles"). TRADESMAN reserves the
right to add or delete any or all items of
Vehicles from Exhibit A upon ninety (90) days
prior written notice to Master Distributor.
Master Distributor shall not acquire the right
to purchase other TRADESMAN products not set
forth on Exhibit A unless or until a written
amendment to Exhibit A is executed by both
TRADESMAN and Master Distributor.
B. Designated Territory
TRADESMAN hereby grants to Master Distributor
the right to sell, lease, service and/or
otherwise market Vehicles within Master
Distributor's Designated Territory which shall
consist of the United States.
Subject to the exceptions set forth below,
TRADESMAN agrees that so long as Master
Distributor is not in default of the terms and
conditions of this Agreement and continues to
meet all Performance Criteria, as set forth in
paragraph 3, below, within the specified time
frames, TRADESMAN will not appoint another
Master Distributor for Vehicles within the
Designated Territory.
C. Appointment of Dealers
Master Distributor shall be entitles to
appoint dealers of Vehicles within the
Designated Territory and TRADESMAN agrees that
so long as Master Distributor is not in
default hereunder, only those dealers
appointed by Master Distributor within the
Designated Territory shall be entitled to
designate themselves as an "Authorized Dealer
of TRADESMAN Industries, Inc." ("Authorized
Dealer")
Dealer Criteria: Each new Authorized Dealer
appointed by Master Distributor shall meet the
following criteria:
i) Be an existing business in automobiles,
trucks, trailers or a related automotive field
for at least five (5) years or be a start-up
business whose participants each have
sufficient years automotive or related sales
experience; and
ii) Agree to maintain a suitable location for
the sale of products and display at least one
(1) Vehicle to be sold, leased, or otherwise
distributed at each of its locations for
demonstration purposes; and
iii) Agree to use its best efforts to promote
marketing, sales, lease or other distribution
of Vehicles.
Master Distributor shall notify TRADESMAN, in
writing of each new proposed dealer to be
appointed by it and provide TRADESMAN with all
information requested by TRADESMAN concerning
that proposed dealer. TRADESMAN shall have
the right to reject the appointment of any
proposed dealer not meeting the above
criteria. So long as Master Distributor is
not in default, TRADESMAN also agrees, at its
discretion, to refer prospective dealer leads
within the Designated Territory to Master
Distributor.
D. TRADESMAN/ Master Distributor Relationship
Master Distributor agrees and acknowledges
that it is an independent contractor and, as
such, shall not be nor hold itself out as a
partner or agent of TRADESMAN. Master
Distributor further agrees and acknowledges
that it has no authority to act for or in the
name of TRADESMAN or to bind or commit
TRADESMAN in any manner. Master Distributor
shall operate its business as an independent
business with full responsibility for payment
of all related expenses.
3. Consideration
Master Distributor shall pay to TRADESMAN in
consideration of the execution of this Agreement by
TRADESMAN, a license fee of Six Million (U.S.
$6,000,000) Dollars.
4. Minimum Performance Criteria
A. Appointment of Dealers
Master Distributor agrees to appoint in the
Designated Territory at least the following
minimum number of Authorized Dealers at the
following intervals:
A total of twenty (20) Authorized Dealers by
one year after the effective date of this
agreement;
A total of thirty (30) Authorized Dealers by
two (2) years after the effective date of this
Agreement;
B. Annual and Quarterly Purchase Commitment
During the initial term of this Agreement,
Master Distributor agrees to purchase at the
price shown in Exhibit A at least 1,000 Van
Vehicles ("Annual Purchase Commitment") for
sale in the Designated Territory to its
Authorized Dealers or its end user customers
in accordance with the quarterly purchase
schedule set forth below:
Quarterly Purchase Schedule
Percentage of
Annual Purchase Unit
Commitment Volume
1st Quarter 25% 250
2nd Quarter 25% 250
3rd Quarter 25% 250
4th Quarter 25% 250
Total...... 100% (Annual
Purchase
Commitment)
The first quarter shall commence on April 1,
1995.
C. Annual Purchase Commitment Deposit.
Master Distributor shall pay to TRADESMAN an
Annual Purchase Commitment deposit of One
Million Five Hundred Thousand (U.S.
$1,500,000) Dollars.
D. Default/Notice of Deficiency
In the event Master Distributor fails to
achieve either the performance criteria for
appointment of Authorized Dealers or for
purchase of either the quarterly or Annual
Purchase Commitment in any of the time periods
specified, TRADESMAN may issue to Master
Distributor a notice of deficiency within
thirty (30) days after the conclusion of the
relevant periods.
In the event Master Distributor, after receipt
of such notice of deficiency, fails to
achieve, the aggregate minimum performance
criteria for both appointment of Authorized
Dealers and for purchase of either the
aggregate quarterly or Annual Purchase
Commitment, TRADESMAN may, at its sole option,
cancel this agreement upon thirty (30) days
prior written notice and/or appoint additional
dealers and/or distributors in the Designated
Territory. The appointment by TRADESMAN of
additional dealers and/or distributors in the
Designated Territory as authorized by the
previous sentence shall not preclude
subsequent cancellation of this Agreement by
TRADESMAN in the event aggregate minimum
performance criteria are not satisfied by
Master Distributor in subsequent time
intervals.
5. Renewal/Minimum Performance Criteria
No later than one hundred and eighty (180) days
prior to the expiration of the initial term of this
Agreement and expiration of each successive renewal
term, TRADESMAN and Master Distributor shall
negotiate in good faith to establish minimum
performance criteria for the next period. The
minimum performance criteria to be agreed upon
shall take into account reasonable market growth
and penetration with due regard to demonstrated
performance by other Master Distributors and
economic conditions in the Designated Territory.
In the event TRADESMAN and Master Distributor are
unable to agree, in writing, on minimum performance
criteria for the next period within sixty (60) days
prior to commencement thereof; (i) the minimum
performance criteria for such period shall be
conclusively established to be twenty percent (20%)
greater than the minimum performance criteria for
the previous period for both operating Authorized
Dealers and for the Annual Purchase Commitment and
(ii) TRADESMAN may, at its sole option, appoint
additional dealers and/or distributors in the
Designated Territory.
6. Orders and Delivery
A. Each Vehicle order shall be in writing and
shall be subject to written acceptance and
confirmation of delivery schedule by TRADESMAN
within thirty (30) days from receipt of same,
subject to reasonable availability of
Vehicles.
B. TRADESMAN Vehicles shall be sold and shipped
FOB TRADESMAN's factory. All freight,
insurance, duty, sales, use and excise taxes
applicable to or levied on the sales of
Vehicles shall be paid by Master Distributor,
in addition to the currently listed prices for
such vehicles. TRADESMAN agrees to drop ship
to Master Distributor's dealer or end user
within the Designated Territory upon forty-
five (45) days written notice prior to the
scheduled delivery date.
C. This Agreement is intended to cover all
transactions related hereto. Unless otherwise
expressly agreed to in writing, no written or
printed terms and conditions in any purchase
order inconsistent with anything herein shall
have any effect. All transactions, orders
and/or deliveries between Master Distributor
and TRADESMAN subsequent to the expiration
and/or cancellation of this Agreement shall
not serve as an extension and/or renewal of
the Agreement, but shall be deemed to be
governed by the terms hereof.
D. TRADESMAN shall use reasonable efforts to ship
Vehicles ordered by Master Distributor to meet
Master Distributor's requested delivery dates.
TRADESMAN may, in its sole discretion,
allocate distribution since Master Distributor
agrees and acknowledges that TRADESMAN will be
subject, from time to time, to manufacturer
production and/or shipping delays. In no
event shall TRADESMAN be liable to Master
Distributor for any loss or damage resulting
from failure to fill Master Distributor's
orders or delay in delivery. Master
Distributor shall inspect all products upon
receipt. Acceptance shall be conclusively
presumed unless TRADESMAN receives written
notice of rejection within ten (10) days of
receipt by Master Distributor.
E. Upon execution of this Agreement, Master
Distributor shall give to TRADESMAN a firm,
non-cancelable purchase order covering
Vehicles to be delivered within the first six
(6) months after execution of this Agreement.
In addition, Master Distributor shall give
TRADESMAN its estimated requirements for the
subsequent six (6) month period. Quarterly,
thereafter, Master Distributor shall update
both the firm order and forecast.
7. Prices/Terms
A. Prices to Master Distributor for Vehicles and
applicable taxes and duties are FOB
TRADESMAN's factory, and are those set forth
in Exhibit A attached hereto (as it may be
amended by TRADESMAN from time to time). For
purposes of computing achievement of minimum
performance criteria, Master Distributor shall
be entitled to include only those purchases of
Vehicles for sale to Authorized Dealers or end
users within the Designated Territory.
B. TRADESMAN reserves the right to increase
prices effective upon ninety (90) days prior
written notice. Price decreases will be
effective immediately without notice. New
pricing will apply to all shipments made after
the effective date of the price change.
C. Prices to Master Distributor for training,
sales literature, publications and product
support shall be TRADESMAN's then current
rates.
D. Payments called for under this Agreement shall
be due from Master Distributor on terms as set
forth on the appropriate invoice. TRADESMAN
reserves the right to alter or rescind such
terms in the event Master Distributor is in
default of payments.
E. TRADESMAN retains a security interest in all
Vehicles sold to Master Distributor hereunder
until TRADESMAN receives payment in full
therefore from Master Distributor. Master
Distributor agrees to execute any instrument
or statement required by law or otherwise in
order to perfect, continue, or terminate
TRADESMAN's security in all Vehicles sold
hereunder.
8. Spare Parts/Modifications
A. Spare Parts
For a period of five (5) years following last
delivery to Master Distributor of a particular
model of Vehicle, TRADESMAN agrees to make
spare parts available to Master Distributor
for that Model.
Spare part prices shall be established by
TRADESMAN and may be amended from time to
time. Prices for said spare parts shall be
those in effect at the time of the delivery
except that TRADESMAN will honor all orders
received and accepted prior to the effective
date of any change and scheduled for delivery
not more than sixty (60) days after the date
of any price change.
B. Modifications
Master Distributor agrees that it will not
sell parts, supplies or Vehicles bearing
TRADESMAN's name or trademark which have been
modified or altered or which were not
originally manufactured or supplied by
TRADESMAN.
9. Installation, Service and Maintenance
Master Distributor shall perform or provide for
installation and adequate ongoing support and
maintenance of Vehicles sold and parts supplied by
Master Distributor and/or Authorized Dealers.
Master Distributor and/or Authorized Dealers will
employ a sufficient number of qualified personnel
to enable it to provide necessary warranty and out
of warranty installation and maintenance service at
reasonable rates, for all TRADESMAN Vehicles in the
Designated Territory, without regard to whether
said Vehicle was sold by Master Distributor to its
Authorized Dealers. The maintenance service to be
provided by Master Distributor and/or Authorized
Dealers shall meet all reasonable standards
established by TRADESMAN. A failure by Master
Distributor to comply with any of the provisions of
this paragraph shall be deemed to be a material
breach of this Agreement and TRADESMAN shall have
the right to immediately terminate this Agreement
unless Master Distributor cures such breach within
five (5) days after receiving notice of the breach
from TRADESMAN.
10. Duties of Master Distributor
A. Master Distributor shall use its best efforts
to actively promote the marketing, sale and
distribution of Vehicles within Master
Distributor's Designated Territory. Without
in any way limiting the generality of the
foregoing, Master Distributor shall:
1. Purchase and stock the minimum necessary
quantities of spare parts to adequately
support Vehicles and equipment.
2. Provide TRADESMAN with a copy of Master
Distributor's published dealer list
prices and suggested retail list prices
for Vehicles and parts to be used in the
Designated Territory. On a quarterly
basis, Master Distributor will furnish
TRADESMAN with information summarizing
significant marketing activities, trends
and conditions, as well as an updated six
(6) month forecast of Vehicle
requirements and prospective dealers and
on a monthly basis, furnish the name and
address of each end user for Vehicles
that have been sold during that month.
3. Develop and market parts and accessories
for use with Vehicles.
4. Maintain an adequate, trained sales and
support force, employed by Master
Distributor, to promote the sale and
support of Vehicles and support of Master
Distributor's dealer network.
5. Endeavor to protect patents, copyrights,
trade secret and proprietary rights of
TRADESMAN. Master Distributor shall
promptly report any infringements of
which Master Distributor becomes aware
and shall cooperate with TRADESMAN in its
efforts to protect patents, trademarks,
and copyrights.
6. Provide all necessary marketing, service
and maintenance support to Master
Distributor's Authorized Dealers
including distribution of advertising
literature, maintenance manuals and other
sales materials.
b. No compensation or other expenses shall be paid to
Master Distributor for the performance of the
duties set forth in this Agreement. Master
Distributor's principal compensation will arise
from the resale of Vehicles purchased.
11. Duties of TRADESMAN
A. TRADESMAN will make available scheduled
classes subject to space availability in
California, or at other locations TRADESMAN
might designate, and, from time to time,
training courses for Vehicles operations,
maintenance and repair. All salary, travel
and living expenses of Master Distributor's
and its dealers' personnel will be borne by
Master Distributor and/or Authorized Dealer.
Training manuals and training courses will be
provided at TRADESMAN's standard prices in
effect at the time of the order for said
training.
B. TRADESMAN will make available to Master
Distributor those pamphlets, advertising
literature, maintenance manuals, aids,
promotional materials and sales materials
regarding Vehicles as it may have available.
Prices for such publications will be
TRADESMAN's standard prices in effect at the
time of order for said materials.
C. During the term of this Agreement, TRADESMAN
shall provide Master Distributor with Vehicle
support consisting of, but not necessarily
limited to:
1) Vehicle mechanical and technical
consultation.
2) Maintenance and revision of TRADESMAN-
furnished publications.
3) Troubleshooting assistance at TRADESMAN's
standard prices then in effect.
4) TRADESMAN designated mandatory Field
Change Order kits.
12. Warranty
TRADESMAN warrants to Master Distributor alone that
TRADESMAN manufactured Vehicles will be free from
defects in material and workmanship. TRADESMAN
warrants to Master Distributor alone that Vehicles
such as trucks, vans and trailers not manufactured
by TRADESMAN, but sold by TRADESMAN, as well as all
spare parts will be free from defects in material
and workmanship.
TRADESMAN's obligation under these warranties is
limited to replacing or repairing parts and
equipment provided that each item found to be
defective is within the warranty period.
This warranty shall immediately be null and void
if, in TRADESMAN's sole judgment, the Vehicles,
parts or equipment have been subject to
unauthorized modification, misuse, abuse, neglect,
accident, improper installation or application,
alteration or neglect in use, storage,
transportation or handling, or if the serial number
and/or other Product markings have been removed,
defaced or altered.
THE ABOVE WARRANTIES ARE NOT IN LIEU OF ALL OTHER
MANUFACTURER WARRANTIES, EXPRESSED, IMPLIED OR
STATUTORY OR ARISING BY CUSTOM OR TRADE USAGE,
INCLUDING ANY WARRANTY OF MERCHANTABILITY OR
FITNESS.
13. Limitation of Claims
THE COMMENCEMENT OF ANY ACTION OR PROCEEDING ON ANY
CLAIM RELATING TO THIS AGREEMENT ON THE WARRANTIES
HEREUNDER OR ON ANY MATTER RELATING TO THE SALE TO
MASTER DISTRIBUTOR OF VEHICLES, EQUIPMENT OR SPARE
PARTS MUST BE BROUGHT WITHIN ONE (1) YEAR FROM THE
DATE OF DELIVERY OF THE VEHICLE OR CLAIMED BREACH
OF THIS AGREEMENT OR ANY WARRANTY. IN NO EVENT
SHALL TRADESMAN'S LIABILITY TO MASTER DISTRIBUTOR
(WHETHER SUCH LIABILITY ARISES FROM A CLAIM BASED
ON CONTRACT, WARRANTY, TORT OR OTHERWISE) THE PRICE
PAID FOR THE SPECIFIC VEHICLE AND IN NO EVENT SHALL
TRADESMAN BE LIABLE FOR ANY COMPENSATION TO MASTER
DISTRIBUTOR FOR THE VALUE OF ITS PAST, PRESENT, OR
FUTURE BUSINESS, ESTABLISHMENT OF THE TRADESMAN
NAME AND REPUTATION IN THE DESIGNATED TERRITORY,
GOODWILL OR OTHER SUCH DAMAGES.
14. Patents, Trademarks and Copyrights
All patents, trademarks, trade names, and
copyrights granted or applied for in connection
with the vehicles now and in the future are and
shall remain the sole property of TRADESMAN and may
be used by Master Distributor only in accordance
with TRADESMAN's written instructions governing
their use.
15. Patent Indemnity
A. TRADESMAN shall, at its expense, defend any
patent infringement proceeding instituted
against Master Distributor in which it is
asserted that any Vehicle or any part thereof
sold by TRADESMAN hereunder infringes on any
Patent, United States or International, and
shall hold Master Distributor harmless against
damages and costs awarded by final judgment in
such proceeding to the extent directly
attributable to such infringement. TRADESMAN
shall have full control of the defense and
shall be free to negotiate and conclude any
settlement or compromise.
B. If permanent injunction shall prohibit use of
Vehicle or any part thereof, or if TRADESMAN
shall reasonably believe that such an
injunction may issue, TRADESMAN shall, at its
option and expense, either:
1. Procure for Master Distributor the right
to continue use of Vehicle or part
thereof; or
2. Replace and modify the Vehicle so that it
becomes non-infringing or
3. Require the return to TRADESMAN of such
Vehicle or part thereof and refund the
purchase price, less a reasonable amount
for use, damage or obsolescence.
C. TRADESMAN's sole liability shall be as stated
herein and TRADESMAN shall have no liability
whatever to Master Distributor for any actual
or claimed patent infringement arising out of
(i) compliance with Regulatory Agency
requirements and (ii) modification or
alteration of Vehicles not made by TRADESMAN
or use of Vehicle in combination with non-
TRADESMAN furnished equipment or parts.
Master Distributor undertakes to provide
similar limitation of liability for patent
infringement in Master Distributor's
agreements with its dealers and other
customers.
16. Indemnity
MASTER DISTRIBUTOR SHALL DEFEND AND HOLD TRADESMAN
HARMLESS FROM ALL CLAIMS, LAWSUITS AND AWARDS,
JUDGMENTS AND/OR LIABILITY ARISING IN CONNECTION
WITH MASTER DISTRIBUTOR'S MARKETING, SALE, LEASE OR
OTHER DISTRIBUTION OF VEHICLES PURSUANT TO THIS
AGREEMENT.
THIS INDEMNITY SHALL INCLUDE ALL ATTORNEY'S FEES
AND COSTS REASONABLY INCURRED BY TRADESMAN IN
DEFENSE OF ANY CLAIM OR LAWSUIT SUBJECT TO THIS
PARAGRAPH.
17. Termination/Expiration
A. In addition to the specific provisions
concerning failure to meet minimum
performance criteria as set forth in paragraph
3 and other specific provisions regarding
termination or expiration contained in this
Agreement, this Agreement may be terminated by
either party by reason of the other party's
default in any of the provisions of this
Agreement or any other agreement between the
parties if the defaulting party fails to cure
said default within ten (10) days of written
notice by the non-defaulting party. This
Agreement may also be terminated immediately
upon receipt of written notice if either party
becomes insolvent, files or is the subject of
a bankruptcy action, has a receiver appointed,
or makes an assignment for the benefit of
creditors.
B. Upon termination/expiration of this Agreement
for reasons other than non-payment, howsoever
same shall occur, TRADESMAN will fill such
orders as have been accepted by TRADESMAN and
the Master Distributor shall accept the
Vehicles subject thereto and pay the purchase
price therefore in accordance with the
provisions of this Agreement. All sales of
Vehicles to Master Distributor after
termination/expiration of this Agreement shall
be pursuant to the terms and conditions as set
forth in this Agreement except that no such
sale shall be interpreted or construed to
effect a renewal or extension of this
Agreement.
C. Termination/expiration of this Agreement shall
not relieve Master Distributor of any
obligations incurred while this Agreement is
in effect, nor shall Master Distributor be
relieved of its obligations to provide service
on products sold during or after the term of
this Agreement.
D. Upon termination/expiration of this Agreement,
Master Distributor shall immediately cease to
hold itself out as an "Authorized Master
Distributor of Products of TRADESMAN
Industries, Inc." and shall cease to exercise
any rights granted pursuant to this Agreement,
and remove all signs, advertisements,
telephone directory listings, logotypes,
names, insignia and/or all other promotional
materials identifying it in any way as an
authorized TRADESMAN Master Distributor.
Master Distributor shall return to TRADESMAN
all copies of TRADESMAN furnished proprietary
manuals, and/or confidential data except data
specifically required to service and maintain
sold Vehicles.
E. Notwithstanding termination/expiration of this
Agreement, Master Distributor shall continue
to be liable to TRADESMAN for any and all
amounts due TRADESMAN pursuant to this
Agreement. Master Distributor shall pay any
and all reasonable attorneys' fees and other
costs incurred by TRADESMAN in seeking
collection of any amounts due TRADESMAN by
Master Distributor.
F. Upon termination/expiration, no indemnity,
severance, damages or compensation shall be
deemed earned or payable to Master Distributor
because of Master Distributor's activities
done or performed while this Agreement is in
effect, or because of expenditures,
investments, leases, agreements, or
commitments given or made in connection with
the creation, development, maintenance,
growth, expansion and financing of such
distributorship, or because of the creation of
existence of dealership goodwill.
18. Force Majeure
In the event of fire, explosion, strikes, war, act
of any government agency, material or labor
shortage, transportation contingency, act of God or
any other causes beyond the control of TRADESMAN,
or Force Majeure, TRADESMAN shall not be liable for
any delay in shipment or non-delivery of the
Vehicles covered by this Agreement arising
therefrom, and Master Distributor is bound to
accept the delayed shipment or delivery made within
a reasonable time. The same causes or other
defaults unavoidable to Master Distributor shall be
sufficient excuse for the failure of Master
Distributor to take and pay for Vehicles ordered
under this Agreement, beyond such as are in
transit, until such contingencies are removed. In
the event such conditions cannot be corrected by
the party affected within six (6) months from the
date of the occurrence of the condition, then the
other party has the option to terminate this
Agreement.
19. Other Terms
A. Remedies
All remedies provided pursuant to this
Agreement are cumulative and are in addition
to any and all legal rights of the parties.
B. Assignment
Master Distributor may not assign to this
Agreement in whole or in part without the
prior written consent of TRADESMAN. TRADESMAN
reserves the right to assign this Agreement to
a wholly-owned subsidiary or to any party
acquiring a majority of the assets of
TRADESMAN. Subject to the above, this
Agreement shall be binding upon and inure to
the benefit of the successors and assigns of
the parties.
C. Waiver of Rights
The failure of either party to enforce any of
the provisions of this Agreement at any time
shall not be construed to be a waiver of the
right to enforce the provision or a waiver of
the provision itself.
D. Validity
In the event that any provision or any portion
of any provision of this Agreement shall be
held invalid, illegal or unenforceable, the
remainder of this Agreement shall remain
valid, enforceable, and in effect.
E. Governing Law
This Agreement shall be governed and construed
pursuant to the laws of the State of
California.
F. Notice
Any and all notice of delivery required
pursuant to this Agreement shall be given in
writing with delivery by certified or
registered mail, return receipt requested, or
by personal delivery as follows:
If to TRADESMAN: TRADESMAN Industries,
Inc.
11588 Sorrento Valley
Road, Suite 22
San Diego, CA 92121
Atten: President
or
if to Master Distributor:Work Recovery, Inc.
2341 South Freibus,
Suite 14
Tucson, AZ 85713
or to the most current known address of the
party as may be specified in any written
notice subsequent hereto.
20. Entire Agreement
This Agreement and any addenda attached hereto
contain the entire understanding between TRADESMAN
and Master Distributor regarding the subject matter
of this Agreement. This Agreement supersedes any
and all prior contracts, discussions, and or
correspondence regarding the subject matter of this
Agreement. Any and all modifications to this
Agreement must be written and signed by authorized
representatives of TRADESMAN and Master
Distributor.
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement on the Date(s) indicated
below:
MASTER DISTRIBUTOR TRADESMAN Industries, Inc.
By:Thomas L. Brandon By: Carl J. Kosner
Title: President and CEO Title: President and CEO
Date: December 5, 1994 Date: December 5, 1994
EMPLOYMENT AGREEMENT
THIS AGREEMENT has been made and entered into this 1st day
of March, 1995, by and between Work Recovery, Inc., a corporation
organized and operated under the laws of the State of Colorado
(the "Company"), with its corporate offices located at 2341 S.
Friebus, Tucson, Arizona 85713, and Bobby S. Roberts (the
"Employee").
RECITALS
WHEREAS, the Company and its affiliates are engaged in the
business of providing services to the rehabilitation industry;
WHEREAS, the Employee desires to be employed by the Company
and to act as instructed by the Company, including, but not
limited to, functioning within the position of Director of
Louisiana Operations for Work Recovery Centers, Inc.; and
WHEREAS, the parties desire to enter into a written
agreement providing for the employment by the Company of the
Employee.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms and conditions set forth subsequently herein,
and such other, further and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, THE PARTIES AGREE
AS FOLLOWS:
1. Employment. The Company hereby employs, engages, and
hires the Employee, and the Employee hereby accepts and agrees to
such hiring, engagement, and employment, subject to the general
supervision and pursuant to the orders, advice and direction of
the Company. The Employee agrees to devote all time necessary to
his employment with the Company as the Company shall direct.
Employment shall be on a full-time basis and the Employee shall
not engage in any other type of employment for any other type of
employer or for himself during the term of this agreement.
2. Term. The term of this agreement shall be for three
(3) years commencing March 1, 1995. This agreement is terminable
for any reason or no reason whatsoever at the end of any yearly
period if the party terminating the agreement delivers to the
other party written notice of such at least 30 days prior to the
end of any yearly anniversary. This agreement is cancelable as
set forth in paragraph 11 at any time during its term.
Cancellation of this agreement will not, under any circumstances,
apply to the compensation to be paid to Employee, which shall
continue without interruption to Employee or his heirs throughout
the term of the agreement.
3. Duties. The parties hereby agree that the duties to
be performed by the Employee for the Company shall initially be
that of Director of Louisiana Operations for Work Recovery
Centers, Inc.
The Employee further agrees that he will perform such
further acts and duties as the Company may subsequently and
reasonably assign to him, in the Company's discretion;' provided,
however, that in no event will the Employee be required to perform
any duties which are unlawful or illegal.
4. Best Efforts of Employee. The Employee agrees that he
will at all times faithfully and industriously and to the best of
his ability, experience, and talents perform any and all of the
duties which may be required of and from him pursuant to the
express and implicit terms hereof.
5. Compensation of Employee. The Company shall pay the
Employee for the performance of services hereunder a gross base
salary of Two Hundred Thousand and No One-Hundredths Dollars
($200,000) on an annual basis during the term hereof at such times
and from time to time as is currently the normal practice for the
Company generally with its employees. The foregoing salary
represents gross wages, and the Employee recognizes and agrees
that the Company shall deduct federal and state income taxes,
F.I.C.A. and all other normal, necessary and required amounts
therefrom.
At the one year anniversary date of the opening of the
Metairie Work Recovery Center, the Company agrees to issue to
Employee 200,000 restricted shares of Work Recovery, Inc.,
providing that the Metairie Work Recovery Center has achieved a
"break-even" status for the first year of operations. "Break-
even" will be defined as follows: Net revenues at least equal to
actual cash expenses plus 20% Work Recovery, Inc.
administrative/overhead fees. Employee's salary and the cost of
completing building renovations will not be defined as cash
expenses for the Metairie Work Recovery Center.
At the one-year anniversary date of the opening of the
Metairie Work Recovery Center, the Company agrees to issue to
Employee, under the Company's existing Incentive Stock Option
Program (ISOP), at an exercise price equal to the average of the
bid and ask prices at close of market on the anniversary date,
less a 15% discount, the following options: For each dollar of
"profit" earned by the Metairie Work Recovery Center for the first
year of operations, one option. Profit will be defined as excess
above break-even, as defined in the preceding paragraph. The
exercise period for these options will be one year, beginning upon
granting the options.
6. Vacations. The Company hereby agrees that the
Employee shall be entitled to two (2) weeks vacation after the
first full year of this agreement, and two (2) weeks after each
succeeding full year, if any. The time that such vacation may be
taken by the Employee shall be determined by mutual agreement
between the parties, but shall be taken in the year succeeding the
year of accrual.
7. Devotion of Time. The Employee shall devote such of
his time, attention, knowledge and skills as are required of him
by this agreement.
8. Disclosure of Information. Employee shall not, during
the term of the agreement or thereafter at any time, impart any
information relative to the business or affairs of the Company or
its affiliates to anyone except those employees of the Company or
its affiliates who are entitled to receive such information.
9. Covenant Not to Compete. Employee hereby agrees and
covenants with the Company and its affiliates that for a period of
two (2) years from the termination of his employment with the
Company for any reason whatsoever, whether with or without cause,
he will not, for any reason or cause whatsoever, either directly
or indirectly, own, manage, operate, lend money to, join, control,
assist, be employed by, or participate in the ownership,
management, operation, or control of, or be connected in any
manner with, including, but not limited to, the positions of
shareholder, director, officer, consultant, independent
contractor, agent, employee, partner, creditor or investor, any
organization which is of a type or character which conducts the
same or a business similar to the business engaged in by the
Company or its affiliates at the time of the termination of this
agreement within a distance of ten (10) miles of any facility then
owned or operated by the Company or its affiliates, nor will the
Employee divert or attempt to divert from the Company or its
affiliates any business whatsoever by influencing or attempting to
influence any clients, employees or agents of the Company or its
affiliates. This Agreement is intended to provide protection for
the trade secrets of the Company and its affiliates by eliminating
the possibility of an intentional or inadvertent use of disclosure
of any trade secret information during the term of the covenant
set forth herein.
10. Reimbursement of Expenses. In the event that Employee
incurs any expenses in the performance of the duties contained in
this agreement, the incurrence of which was authorized by the
Company, the Company shall reimburse the Employee for said
expenses within thirty (30) days after the Employee has furnished
the Company with a Expense Report on Form AF125, completed in
accordance with Accounting and Finance Policy No. AF 5.0, a copy
of which is attached. In the event that any agent of the Internal
Revenue Service or any court of law denies the deduction to the
Company for the reimbursement of any such expenditures on the
basis of the personal nature of such expenditure or on the basis
of improper or insufficient documentation, the Employee shall,
within ten (10) days' written notice from the Company, reimburse
the Company for all such expenditures for which a deduction is not
allowed.
11. Termination. In the event during the term hereof any
of the following events occur: (1) the death or "total and
permanent incapacity" (as defined below) of Employee; (2) the
substantial failure or inability of Employee to perform his duties
hereunder; or (3) the "serious misconduct" (as defined below) of
Employee, the board of the Company may elect to terminate the
rights and obligations under this agreement by written notice to
Employee. In the event the board of the Company exercises its
right to terminate this agreement under this paragraph, the
Employee will be relieved of all duties for and on behalf of the
Company; however, the compensation due to the Employee shall
continue without interruption for the entire term of the
agreement. In the event Employee is not able to personally accept
the agreed-upon compensation (e.g., in the event of his death),
the agreed-upon compensation shall be paid to his heir(s) for the
entire term of this Agreement.
Total and permanent incapacity shall mean any physical or
mental condition, including, without limitation, habitual
alcoholism or drug abuse of Employee, expected to continue for
more than six months which renders Employee incapable of
effectively performing the services contemplated hereunder.
Serious misconduct shall mean embezzlement or misappropriation of
funds, as well as any other acts of dishonesty, significant
activities harmful to the reputation of the Company, willful
refusal to perform or substantial disregard of those duties
properly assigned hereunder or the violation of any contractual
obligation set forth in this agreement.
12. Waiver and Severability. No waiver or any breach or
violation hereof shall be implied from forbearance or failure by
the Company to take action thereon. It is the desire and intent
of the parties that the provisions of this agreement be enforced
to the fullest extent permissible under the laws and the
applicable public policies of the State of Arizona. Accordingly,
the terms of the agreement are determined to be severable, and if
any particular portion is adjudicated or determined to be invalid
or unenforceable, such determination shall only apply to that
portion of this agreement and the balance of this agreement shall
nevertheless be enforceable to the fullest extent permissible
under the laws and public policies applying thereto.
13. Modification of Contract. No waiver or modification
of this Agreement or of any covenant, condition, or limitation
herein contained shall be valid unless in writing and duly
executed by the party to be charged therewith. No evidence of any
waiver or modification shall be offered or received in evidence of
any proceeding, arbitration or litigation between the parties
hereto arising out of or affecting this agreement, or the rights
or obligations of the parties hereunder, unless such waiver or
modification is in writing and duly executed. The parties further
agree that the provisions of this section may not be waived.
14. Complete Agreement. This agreement contains the
complete agreement concerning the employment arrangement between
the parties and shall, as of the date hereof, supersede all other
agreements between the parties relating thereto. The parties
stipulate that neither of them has made any representation with
respect to the subject matter of this agreement or any
representations including the execution and delivery hereof,
except such representations as are specifically set forth herein,
and each of the parties hereto acknowledges that he or it has
relied on his or its own judgment in entering into this agreement.
The parties further acknowledge that any payment or
representations that may have heretofore been made by either of
them to the other are of no effect and that neither of them has
relied thereon in connection with his or its dealings with the
other.
15. Choice of Law. It is the intention of the parties
hereto that this agreement and the performance hereunder and all
suits and special proceedings hereunder shall be construed in
accordance with and under and pursuant to the laws of the State of
Arizona. Further, the parties hereby agree that the venue for any
action brought by either party against the other shall be in the
District Court, City of Tucson, County of Pima, and any other
venue is hereby waived.
16. Notice. If any notice is required hereunder, it shall
be sufficient if in writing sent by registered or certified mail
or facsimile to the Company at 2341 S. Friebus, Tucson, AZ 85713,
(602) 325-5227, and if to the Employee at 2629 N Causeway,
Metairie, Louisiana, (504) 831-9951 or such other address as each
party shall designate in writing to the other in accordance with
the above.
17. Inurement. This agreement shall inure to the benefit
of and be binding upon the Company, its successors and assigns.
The rights and benefits of the Employee under this agreement shall
also inure to the benefits of his successors and assigns.
IN WITNESS WHEREOF, the parties have hereunto affixed their
hands this 1st day of March, 1995.
WORK RECOVERY, INC.
By: /s/ Thomas L. Brandon
Thomas L. Brandon, President and CEO
ATTEST: /s/ Linda J. Duncan
Linda J. Duncan, Secretary
EMPLOYEE
/s/ Bobby S. Roberts
Bobby S. Roberts
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into this 9th day of
March , 1995, by and between Work Recovery, Inc., a Colorado
corporation ("WRI") and Work Recovery Far East , a Japanese
company having a registered address of 2-9-17-203, Moto-Azabu,
Minato-Ku, Tokyo, Japan ("Licensee").
WITNESSETH:
WHEREAS, WRI owns all right, title and interest in and to
that certain product known and otherwise referred to as "ERGOS",
more completely described in Exhibit A, attached hereto; and
WHEREAS, Licensee desires to acquire from WRI the right to
establish itself as the holder of the Master License Agreement as
the sole and exclusive Licensee of WRI for the use of ERGOS within
the Country of China.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms, conditions, representations, warranties and
covenants set forth herein and such other and further
consideration, the receipt and sufficiency of which is hereby
acknowledged, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
GRANT OF LIMITED LICENSE TO PRODUCTS
Section 1.1. Grant of License. WRI hereby grants to
Licensee during the term of this agreement a personal, non-
transferable, master license for the use of ERGOS for its own
purposes and, by mutual agreement between WRI and Licensee, for
further license to others in China. Licensee acknowledges and
agrees that ERGOS is proprietary to WRI and embodies valuable
trademarks, copyrights and trade secrets of WRI. Licensee shall
make no additional copies of the computer programs within ERGOS
and shall not attempt to reverse engineer such programs. Licensee
shall protect ERGOS using all due care from unauthorized copying,
dissemination, disclosure or decompilation or other unauthorized
use. Title and full ownership rights to the name ERGOS shall
remain with WRI.
Section 1.2. Representations and Warranties. Licensee
has and shall exercise no authority to make statements or
representations concerning ERGOS that exceed or are inconsistent
with the marketing materials and technical specifications provided
by WRI, which shall provide Licensee with updates of ERGOS free of
charge; however, this agreement shall not in any way be construed
to be a service agreement by WRI in respect of ERGOS. WRI shall
provide maintenance services to Licensee in respect of ERGOS at
rates not to exceed the lowest rate charged to any other third
party if such maintenance services are not otherwise covered by a
WRI warranty. WRI agrees to enter into a one-year limited
warranty and to further enter into an extended warranty agreement
with Licensee upon the sale of any ERGOS equipment, on such terms
and conditions more fully set forth in Exhibit B. Licensee
expressly acknowledges and agrees that this agreement is being
made without any representation or warranty of any kind whatsoever
(express or implied), other than as specifically set forth herein
(see Exhibit B). WRI has no obligation whatsoever to market or
sell ERGOS.
Section 1.3. Assignment. This agreement is personal in
nature to Licensee and is not assignable (voluntarily,
involuntarily, by operation of law or otherwise) by it without the
mutual agreement of WRI. Any attempt to assign, transfer, or
subcontract any of the rights, duties, or obligations set forth
hereunder shall render this agreement void and unenforceable.
Notwithstanding the foregoing or any other provision of this
agreement to the contrary, Licensee may, with the consent of WRI
which shall not be unreasonably withheld, sublicense its rights
under this agreement to any other third party.
Section 1.4. Trademark. Except for use for the
purposes of identification of ERGOS, no right, title, interest or
license in or to any trademark or service mark of WRI is granted
to Licensee under this agreement.
SECTION 2
PAYMENTS BY LICENSEE
Section 2.1. Royalty. Licensee shall pay a fee to WRI
in the amount of Three Million Dollars ($3,000,000) in U.S.
Dollars, with payments due on the following schedule:
September 15, 1995: $ 500,000 (U.S.)
January 15, 1996: $ 500,000 (U.S.)
April 15, 1996: $ 500,000 (U.S.)
July 15, 1996: $1,500,000 (U.S.)
Section 2.2 Pricing. Licensee shall, during the term of
this Agreement, establish a minimum of 25 co-venture Work Recovery
Centers within China. All equipment will be sold to Licensee or
Sub-Licensee(s) at the standard retail price at the time of sale.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations, Warranties and Covenants
of WRI. WRI represents and warrants to and covenants with
Licensee as follows:
(a) It is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Colorado and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which
the conduct of its business or the ownership of its
properties requires such qualification, except where the
failure to qualify will not have a material adverse effect
on the business of WRI.
(b) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of WRI enforceable in accordance with
its terms.
(c) WRI subsequently shall not, using all due care,
sell (or grant any licenses to the use of) ERGOS for
ultimate use nor will WRI permit such use within China
during the term hereof. In the event that any ERGOS machine
or equipment, other than that covered by this agreement, is
utilized in China during the term of this agreement, WRI
will take all immediate steps to cause the use of such
machine to be removed therefrom.
(d) WRI has good and marketable title to all ERGOS
machines and New Concepts' work stations to be sold to
Licensee hereunder. WRI warrants that the ERGOS machines
and New Concepts' work stations, all component parts thereof
and their use by Licensee pursuant to this agreement do not
and will not violate the copyright, patent, trade secret or
other proprietary rights of any third party and that there
is currently no actual or threatened suit by any third party
based on an alleged violation of any such rights by WRI.
WRI shall indemnify and save Licensee harmless from and
against all costs, losses, damages and liabilities,
including, without limitation, attorneys' fees which may be
incurred on account of the breach of any representation,
warranty, and covenant set forth in this Section 3.1(d) and
WRI, upon demand by Licensee and at its own expense, shall
defend all such claims, suits or actions against Licensee,
provided WRI is notified thereof.
(e) WRI warrants that any services performed by an
employee or contractor of WRI under this agreement will be
performed in a timely and professional manner by qualified
personnel and will conform to the standards generally
observed in the industry for similar services.
(f) WRI hereby agrees to sell and make available to
the Licensee, at the prices set forth in Section 2.2,
ERGOS machines and New Concepts' work stations during
the term of this agreement, as and when requested by
Licensee. WRI also agrees to provide, at no
additional cost to Licensee, all literature and
software updates relating to ERGOS and New Concepts'
work stations that are produced by WRI and WRI also
agrees to provide to Licensee, at the lowest price
offered to any third party, any upgrades of ERGOS or
New Concepts' equipment.
Section 3.2. Representations, Warranties and Covenants
of Licensee. Licensee represents and warrants to and covenants
with WRI as follows:
(a) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of Licensee enforceable in accordance
with its terms.
(b) Licensee has not previously and shall not,
except as provided herein, grant subsequently any sublicense
of ERGOS.
(c) Licensee has or can acquire all technical know-
how and skill and all personnel, facilities, equipment and
materials required for the performance of its obligations
hereunder.
(d) Licensee shall establish a minimum of twenty-
five (25) co-venture Work Recovery Centers during the five
years following the date first set forth above.
SECTION 4
TERM AND TERMINATION
Section 4.1. Term. The term of this agreement shall
begin on the date first above set forth and shall end on the fifth
yearly anniversary date thereof, unless earlier terminated
pursuant to the provisions hereof. The term shall be extended for
an additional five years in the event Licensee complies with the
covenant set forth in paragraph 3.2(d) hereof.
Section 4.2. Termination. WRI may terminate this
agreement upon the occurrence of an Event of Default as set forth
under Section 5 hereof.
SECTION 5
DEFAULT
WRI shall have the right to terminate this agreement in the
event that Licensee fails to purchase the ERGOS machines as set
forth in Section 3.2(d), provided that, prior to such termination,
WRI shall provide at least 30 days written notice of such
termination to Licensee and, if, during such notice period,
Licensee places orders with WRI to purchase the ERGOS machine(s)
required under Section 3.2(d), then the Licensee shall be deemed
to have satisfied the requirements of Section 3.2(d).
SECTION 6
INDEMNITIES
Licensee does hereby agree to indemnify WRI for and against
any and all claims, demands and actions arising out of its
activities or performances under this agreement or any breach of
its obligations hereunder. WRI does hereby agree to indemnify
Licensee for and against any and all claims, demands and actions
arising out of its activities or performances under this agreement
or any breach of its obligations hereunder.
SECTION 7
EXPENSES
Licensee hereby acknowledges and agrees that it shall be
solely responsible for its own expenses and costs under this
agreement, and that WRI shall have no obligation to reimburse
Licensee for any expenses or costs incurred by Licensee hereunder.
SECTION 8
GENERAL PROVISIONS
Section 8.1. Waiver. Any failure on the part of any
party hereunder to comply with any of their obligations,
agreements or conditions hereunder may be waived in writing by the
party to whom such compliance is owed; however, waiver on one
occasion does not operate to effectuate a waiver on any other
occasion.
Section 8.2. Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
to have been given if delivered in person or sent by prepaid,
first class, registered or certified mail, return receipt
requested, as follows: WRI at 2341 S. Friebus, Ste. 14, Tucson,
Arizona 85713; and to Licensee at 2-9-17-203, Moto-Azabu, Minato-
Ku, Tokyo, Japan . Either party may change their notice address
by written notice to the other as provided in this paragraph.
Section 8.3. Governing Law. This agreement shall be
governed by and construed and enforced in accordance with the laws
of the State of Arizona. Further, all parties agree that said
state shall be the appropriate and agreed upon jurisdiction for
the resolution of any and all disputes which may arise hereunder.
Section 8.4. No Oral Modification. This agreement may
be amended solely in writing, and only after the mutual agreement
of the parties affected thereby.
Section 8.5. Survival of Representations, Warranties
and Covenants. The representations, warranties, covenants and
agreements contained herein shall survive the execution and
delivery of this agreement.
Section 8.6. Parties Independent. In making and
performing this agreement, the parties set and shall set at all
times as independent entities and nothing contained in this
agreement shall be construed or implied to create an agency,
partnership, joint venture or employer and employee relationship
between the parties. At no time shall either party make
commitments or incur any charges or expenses for or in the name of
the other party. Licensee shall be solely responsible for wages,
hours and conditions of employment of his personnel. Nothing
herein shall be construed as implying that employees of Licensee
are employees of WRI.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed effective the date and year first above
written.
[Corporate Seal] WORK RECOVERY, INC.
Attest: /s/ Linda J. Duncan By: /s/ Thomas L. Brandon
Secretary Thomas L. Brandon, President
WORK RECOVERY FAR EAST
Attest: /s/ Peter Voss By: /s/ Hiroo Maeda
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into this 13th day of
March , 1995 by and between Work Recovery, Inc., a Colorado
corporation ("WRI") and Neval Ltd., having a registered address
of c/o Alfred Wiederkher, 44 Banhofstrasse, Zurich, Switzerland
("Licensee").
WITNESSETH:
WHEREAS, WRI owns all right, title and interest in and to
that certain product known and otherwise referred to as "ERGOS",
more completely described in Exhibit A, attached hereto; and
WHEREAS, Licensee desires to acquire from WRI the right to
establish itself as the holder of the Master License Agreement as
the sole and exclusive Licensee of WRI for the use of ERGOS within
the Country of Sweden.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms, conditions, representations, warranties and
covenants set forth herein and such other and further
consideration, the receipt and sufficiency of which is hereby
acknowledged, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
GRANT OF LIMITED LICENSE TO PRODUCTS
Section 1.1. Grant of License. WRI hereby grants to
Licensee during the term of this agreement a personal, non-
transferable, master license for the use of ERGOS for its own
purposes and, by mutual agreement between WRI and Licensee, for
further license to others within the Country of Sweden. Licensee
acknowledges and agrees that ERGOS is proprietary to WRI and
embodies valuable trademarks, copyrights and trade secrets of WRI.
Licensee shall make no additional copies of the computer programs
within ERGOS and shall not attempt to reverse engineer such
programs. Licensee shall protect ERGOS using all due care from
unauthorized copying, dissemination, disclosure or decompilation
or other unauthorized use. Title and full ownership rights to the
name ERGOS shall remain with WRI.
Section 1.2. Representations and Warranties. Licensee
has and shall exercise no authority to make statements or
representations concerning ERGOS that exceed or are inconsistent
with the marketing materials and technical specifications provided
by WRI, which shall provide Licensee with updates of ERGOS free of
charge; however, this agreement shall not in any way be construed
to be a service agreement by WRI in respect of ERGOS. WRI shall
provide maintenance services to Licensee in respect of ERGOS at
rates not to exceed the lowest rate charged to any other third
party if such maintenance services are not otherwise covered by a
WRI warranty. WRI agrees to enter into a one-year limited
warranty and to further enter into an extended warranty agreement
with Licensee upon the sale of any ERGOS equipment, on such terms
and conditions more fully set forth in Exhibit B. Licensee
expressly acknowledges and agrees that this agreement is being
made without any representation or warranty of any kind whatsoever
(express or implied), other than as specifically set forth herein
(see Exhibit B). WRI has no obligation whatsoever to market or
sell ERGOS.
Section 1.3. Assignment. This agreement is personal in
nature to Licensee and is not assignable (voluntarily,
involuntarily, by operation of law or otherwise) by it without the
mutual agreement of WRI. Any attempt to assign, transfer, or
subcontract any of the rights, duties, or obligations set forth
hereunder shall render this agreement void and unenforceable.
Notwithstanding the foregoing or any other provision of this
agreement to the contrary, Licensee may, with the consent of WRI
which shall not be unreasonably withheld, sublicense its rights
under this agreement to any other third party.
Section 1.4. Trademark. Except for use for the
purposes of identification of ERGOS, no right, title, interest or
license in or to any trademark or service mark of WRI is granted
to Licensee under this agreement.
SECTION 2
PAYMENTS BY LICENSEE
Section 2.1. Royalty. Licensee shall pay a fee to WRI
in the amount of Two Million Five Hundred Thousand Dollars
($2,500,000) in U.S. Dollars, with payments due on the following
schedule:
October 1, 1995: $500,000 (U.S.)
January 1, 1995: $500,000 (U.S.)
April 1, 1996: $500,000 (U.S.)
July 1, 1996: $500,000 (U.S.)
October 1, 1996: $500,000 (U.S.)
Section 2.2 Pricing. Licensee shall, during the term of
this Agreement, establish a minimum of 10 Work Recovery Centers
within Sweden. All equipment will be sold to Licensee or Sub-
Licensee(s) at the standard retail price at the time of sale.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations, Warranties and Covenants
of WRI. WRI represents and warrants to and covenants with
Licensee as follows:
(a) It is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Colorado and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which
the conduct of its business or the ownership of its
properties requires such qualification, except where the
failure to qualify will not have a material adverse effect
on the business of WRI.
(b) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of WRI enforceable in accordance with
its terms.
(c) WRI subsequently shall not, using all due care,
sell (or grant any licenses to the use of) ERGOS for
ultimate use nor will WRI permit such use within the Country
of Sweden during the term hereof. In the event that any
ERGOS machine or equipment, other than that covered by this
agreement, is utilized in Sweden during the term of this
agreement, WRI will take all immediate steps to cause the
use of such machine to be removed therefrom.
(d) WRI has good and marketable title to all ERGOS
machines and New Concepts' work stations to be sold to
Licensee hereunder. WRI warrants that the ERGOS machines
and New Concepts' work stations, all component parts thereof
and their use by Licensee pursuant to this agreement do not
and will not violate the copyright, patent, trade secret or
other proprietary rights of any third party and that there
is currently no actual or threatened suit by any third party
based on an alleged violation of any such rights by WRI.
WRI shall indemnify and save Licensee harmless from and
against all costs, losses, damages and liabilities,
including, without limitation, attorneys' fees which may be
incurred on account of the breach of any representation,
warranty, and covenant set forth in this Section 3.1(d) and
WRI, upon demand by Licensee and at its own expense, shall
defend all such claims, suits or actions against Licensee,
provided WRI is notified thereof.
(e) WRI warrants that any services performed by an
employee or contractor of WRI under this agreement will be
performed in a timely and professional manner by qualified
personnel and will conform to the standards generally
observed in the industry for similar services.
(f) WRI hereby agrees to sell and make available to
the Licensee, at the prices set forth in Section 2.2, ERGOS
machines and New Concepts' work stations during the term of
this agreement, as and when requested by Licensee. WRI also
agrees to provide, at no additional cost to Licensee, all
literature and software updates relating to ERGOS and New
Concepts' work stations that are produced by WRI and WRI
also agrees to provide to Licensee, at the lowest price
offered to any third party, any upgrades of ERGOS or New
Concepts' equipment.
Section 3.2. Representations, Warranties and Covenants
of Licensee. Licensee represents and warrants to and covenants
with WRI as follows:
(a) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of Licensee enforceable in accordance
with its terms.
(b) Licensee has not previously and shall not,
except as provided herein, grant subsequently any sublicense
of ERGOS.
(c) Licensee has or can acquire all technical know-
how and skill and all personnel, facilities, equipment and
materials required for the performance of its obligations
hereunder.
(d) Licensee shall establish a minimum of ten (10)
Work Recovery Centers during the five years following the
date first set forth above.
SECTION 4
TERM AND TERMINATION
Section 4.1. Term. The term of this agreement shall
begin on the date first above set forth and shall end on the fifth
yearly anniversary date thereof, unless earlier terminated
pursuant to the provisions hereof. The term shall be extended for
an additional five years in the event Licensee complies with the
covenant set forth in paragraph 3.2(d) hereof.
Section 4.2. Termination. WRI may terminate this
agreement upon the occurrence of an Event of Default as set forth
under Section 5 hereof.
SECTION 5
DEFAULT
WRI shall have the right to terminate this agreement in the
event that Licensee fails to purchase the ERGOS machines as set
forth in Section 3.2(d), provided that, prior to such termination,
WRI shall provide at least 30 days written notice of such
termination to Licensee and, if, during such notice period,
Licensee places orders with WRI to purchase the ERGOS machine(s)
required under Section 3.2(d), then the Licensee shall be deemed
to have satisfied the requirements of Section 3.2(d).
SECTION 6
INDEMNITIES
Licensee does hereby agree to indemnify WRI for and against
any and all claims, demands and actions arising out of its
activities or performances under this agreement or any breach of
its obligations hereunder. WRI does hereby agree to indemnify
Licensee for and against any and all claims, demands and actions
arising out of its activities or performances under this agreement
or any breach of its obligations hereunder.
SECTION 7
EXPENSES
Licensee hereby acknowledges and agrees that it shall be
solely responsible for its own expenses and costs under this
agreement, and that WRI shall have no obligation to reimburse
Licensee for any expenses or costs incurred by Licensee hereunder.
SECTION 8
GENERAL PROVISIONS
Section 8.1. Waiver. Any failure on the part of any
party hereunder to comply with any of their obligations,
agreements or conditions hereunder may be waived in writing by the
party to whom such compliance is owed; however, waiver on one
occasion does not operate to effectuate a waiver on any other
occasion.
Section 8.2. Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
to have been given if delivered in person or sent by prepaid,
first class, registered or certified mail, return receipt
requested, as follows: WRI at 2341 S. Friebus, Ste. 14, Tucson,
Arizona 85713; and to Licensee at c/o Alfred Wiederkher, 44
Banhofstrasse, Zurich, Switzerland. Either party may change their
notice address by written notice to the other as provided in this
paragraph.
Section 8.3. Governing Law. This agreement shall be
governed by and construed and enforced in accordance with the laws
of the State of Arizona. Further, all parties agree that said
state shall be the appropriate and agreed upon jurisdiction for
the resolution of any and all disputes which may arise hereunder.
Section 8.4. No Oral Modification. This agreement may
be amended solely in writing, and only after the mutual agreement
of the parties affected thereby.
Section 8.5. Survival of Representations, Warranties
and Covenants. The representations, warranties, covenants and
agreements contained herein shall survive the execution and
delivery of this agreement.
Section 8.6. Parties Independent. In making and
performing this agreement, the parties set and shall set at all
times as independent entities and nothing contained in this
agreement shall be construed or implied to create an agency,
partnership, joint venture or employer and employee relationship
between the parties. At no time shall either party make
commitments or incur any charges or expenses for or in the name of
the other party. Licensee shall be solely responsible for wages,
hours and conditions of employment of his personnel. Nothing
herein shall be construed as implying that employees of Licensee
are employees of WRI.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed effective the date and year first above
written.
[Corporate Seal] Work Recovery, Inc.
Attest: /s/ Linda J. Duncan By: /s/Thomas L. Brandon
Secretary Thomas L. Brandon, President
Neval, LTD.
By: /s/ Dominique Lang
Its: President
THIS AGREEMENT SUPERSEDES THE GERMAN LICENSE AGREEMENT
DATED SEPTEMBER 10, 1994
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into this 24 day of May
, 1995, by and between Work Recovery, Inc., a Colorado corporation
("WRI") and Al Sabah Trading Co., PLC ("Licensee").
WITNESSETH:
WHEREAS, WRI owns all right, title and interest in and to
that certain product known and otherwise referred to as "ERGOS",
more completely described in Exhibit "A", attached hereto; and
WHEREAS, Licensee desires to acquire from WRI the right to
establish itself as the holder of the Master License Agreement for
the sole and exclusive Licensee of WRI for the use of ERGOS within
the Arabian Gulf region and the Country of Germany, additionally
giving rights to the use of New Concepts products in the United
Kingdom for appropriate screening of workers out of the Arabian
Gulf region.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms, conditions, representations, warranties and
covenants set forth herein and such other and further
consideration, the receipt and sufficiency of which is hereby
acknowledged, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
GRANT OF LIMITED LICENSE TO PRODUCTS
Section 1.1. Grant of License. WRI hereby grants to
Licensee during the term of this agreement a personal, non-
transferable, master license to the use of ERGOS for its own
purposes and, by mutual agreement between WRI and Licensee, for
further license to others in the Arabian Gulf region and the
Country of Germany. Licensee acknowledges and agrees that ERGOS
is proprietary to WRI and embodies valuable trademarks, copyrights
and trade secrets of WRI. Licensee shall make no additional
copies of the computer programs within ERGOS and shall not attempt
to reverse engineer such programs. Licensee shall protect ERGOS
using all due care from unauthorized copying, dissemination,
disclosure or decompilation or other unauthorized use. Title and
full ownership rights to the name ERGOS shall remain with WRI.
Section 1.2. Representations and Warranties. Licensee
has and shall exercise no authority to make statements or
representations concerning ERGOS that exceed or are inconsistent
with the marketing materials and technical specifications provided
by WRI, which shall provide Licensee with updates of ERGOS free of
charge; however, this agreement shall not in any way be construed
to be a service agreement by WRI in respect of ERGOS. WRI shall
provide maintenance services to Licensee in respect of ERGOS at
rates not to exceed the lowest rate charged to any other third
party if such maintenance services are not otherwise covered by a
WRI warranty. WRI agrees to enter into a one-year limited
warranty and to further enter into an extended warranty agreement
with Licensee upon the sale of any ERGOS equipment, on such terms
and conditions more fully set forth in Exhibit "B". Licensee
expressly acknowledges and agrees that this agreement is being
made without any representation or warranty of any kind whatsoever
(express or implied), other than as specifically set forth herein
(see Exhibit "B"). WRI has no obligation whatsoever to market or
sell ERGOS.
Section 1.3. Assignment. This agreement is personal in
nature to Licensee and is not assignable (voluntarily,
involuntarily, by operation of law or otherwise) by it without the
mutual agreement of WRI. Any attempt to assign, transfer, or
subcontract any of the rights, duties, or obligations set forth
hereunder shall render this agreement void and unenforceable.
Notwithstanding the foregoing or any other provision of this
agreement to the contrary, Licensee may, with the consent of WRI
which shall not be unreasonably withheld, sublicense its rights
under this agreement to any other third party.
Section 1.4. Trademark. Except for use for the
purposes of identification of ERGOS, no right, title, interest or
license in or to any trademark or service mark of WRI is granted
to Licensee under this agreement.
SECTION 2
PAYMENTS BY LICENSEE
Section 2.1. Royalty. Licensee shall pay a fee to WRI
in the amount of Seven Million Nine Hundred Thousand Dollars
($7,900,000) in U.S. Dollars; $300,000 of which has already been
paid for a total outstanding balance of $7.6 million with payments
due on the following schedule. Licensee must make a deposit of
$1.5 million due on or before August 25, 1995 ($1.0 million to be
applied to the License and $500,000 to outstanding ERGOS
invoices).
October 1, 1995: $1,300,000 (U.S.)
January 1, 1996: $1,300,000 (U.S.)
April 1, 1996: $1,400,000 (U.S.)
July 1, 1996: $1,000,000 (U.S.)
September 1, 1996: $1,000,000 (U.S.)
December 1, 1996: $ 600,000 (U.S.)
Section 2.2 Pricing. Licensee shall, during the term of
this Agreement, purchase a minimum of 25 ERGOS units. All
equipment will be sold to Licensee or Sub-Licensee(s) at the
standard off-shore retail price at the time of sale.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations, Warranties and Covenants
of WRI. WRI represents and warrants to and covenants with
Licensee as follows:
(a) It is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Colorado and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which
the conduct of its business or the ownership of its
properties requires such qualification, except where the
failure to qualify will not have a material adverse effect
on the business of WRI.
(b) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of WRI enforceable in accordance with
its terms.
(c) WRI subsequently shall not, using all due care,
sell (or grant any licenses to the use of) ERGOS for
ultimate use nor will WRI permit such use within the Arabian
Gulf region during the term hereof. In the event that any
ERGOS machine or equipment, other than that covered by this
agreement, is utilized in the Arabian Gulf region during the
term of this agreement, WRI will take all immediate steps to
cause the use of such machine to be removed therefrom.
(d) WRI has good and marketable title to all ERGOS
machines to be sold to Licensee hereunder. WRI warrants
that the ERGOS machines, all component parts thereof and
their use by Licensee pursuant to this agreement do not and
will not violate the copyright, patent, trade secret or
other proprietary rights of any third party and that there
is currently no actual or threatened suit by any third party
based on an alleged violation of any such rights by WRI.
WRI shall indemnify and save Licensee harmless from and
against all costs, losses, damages and liabilities,
including, without limitation, attorneys' fees which may be
incurred on account of the breach of any representation,
warranty, and covenant set forth in this Section 3.1(d) and
WRI, upon demand by Licensee and at its own expense, shall
defend all such claims, suits or actions against Licensee,
provided WRI is notified thereof.
(e) WRI warrants that any services performed by an
employee or contractor of WRI under this agreement will be
performed in a timely and professional manner by qualified
personnel and will conform to the standards generally
observed in the industry for similar services.
(f) WRI hereby agrees to sell and make available to
the Licensee, at the prices set forth in Section 2.2, ERGOS
machines during the term of this agreement, as and when
requested by Licensee. WRI also agrees to provide, at no
additional cost to Licensee, all literature and software
updates relating to ERGOS machines that are produced by WRI
and WRI also agrees to provide to Licensee, at the lowest
price offered to any third party, any upgrades of ERGOS.
Section 3.2. Representations, Warranties and Covenants
of Licensee. Licensee represents and warrants to and covenants
with WRI as follows:
(a) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of Licensee enforceable in accordance
with its terms.
(b) Licensee has not previously and shall not,
except as provided herein, grant subsequently any sublicense
of ERGOS.
(c) Licensee has or can acquire all technical know-
how and skill and all personnel, facilities, equipment and
materials required for the performance of its obligations
hereunder.
(d) Licensee shall purchase a minimum of twenty-five
(25) ERGOS units.
SECTION 4
TERM AND TERMINATION
Section 4.1. Term. The term of this agreement shall
begin on the date first above set forth and shall end on the
twentieth yearly anniversary date thereof, unless earlier
terminated pursuant to the provisions hereof.
Section 4.2. Termination. WRI may terminate this
agreement upon the occurrence of an Event of Default as set forth
under Section 5 hereof.
SECTION 5
DEFAULT
WRI shall have the right to terminate this agreement in the
event that Licensee fails to purchase the ERGOS machines as set
forth in Section 3.2(d), provided that, prior to such termination,
WRI shall provide at least 30 days written notice of such
termination to Licensee and, if, during such notice period,
Licensee places orders with WRI to purchase the ERGOS machine(s)
required under Section 3.2(d), then the Licensee shall be deemed
to have satisfied the requirements of Section 3.2(d). This
License Agreement is irrevocable except on default of Licensee.
SECTION 6
INDEMNITIES
Licensee does hereby agree to indemnify WRI for and against
any and all claims, demands and actions arising out of its
activities or performances under this agreement or any breach of
its obligations hereunder. WRI does hereby agree to indemnify
Licensee for and against any and all claims, demands and actions
arising out of its activities or performances under this agreement
or any breach of its obligations hereunder.
SECTION 7
EXPENSES
Licensee hereby acknowledges and agrees that it shall be
solely responsible for its own expenses and costs under this
agreement, and that WRI shall have no obligation to reimburse
Licensee for any expenses or costs incurred by Licensee
hereunder. SECTION 8
GENERAL PROVISIONS
Section 8.1. Waiver. Any failure on the part of any
party hereunder to comply with any of their obligations,
agreements or conditions hereunder may be waived in writing by the
party to whom such compliance is owed; however, waiver on one
occasion does not operate to effectuate a waiver on any other
occasion.
Section 8.2. Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
to have been given if delivered in person or sent by prepaid,
first class, registered or certified mail, return receipt
requested, as follows: WRI at 2341 South Friebus Avenue, Suite
14, Tucson, Arizona 85713; and to Licensee at Al Sabah Trading
Co., PLC, c/o Philip R. Gustlin, Gustlin, Golob & Bragin, 11755
Wilshire Boulevard, Suite 1400, Los Angeles, California 90025.
Either party may change their notice address by written notice to
the other as provided in this paragraph.
Section 8.3. Governing Law. This agreement shall be
governed by and construed and enforced in accordance with the laws
of the State of Arizona. Further, all parties agree that said
state shall be the appropriate and agreed upon jurisdiction for
the resolution of any and all disputes which may arise hereunder.
Section 8.4. No Oral Modification. This agreement may
be amended solely in writing, and only after the mutual agreement
of the parties affected thereby.
Section 8.5. Survival of Representations, Warranties
and Covenants. The representations, warranties, covenants and
agreements contained herein shall survive the execution and
delivery of this agreement.
Section 8.6. Parties Independent. In making and
performing this agreement, the parties set and shall set at all
times as independent entities and nothing contained in this
agreement shall be construed or implied to create an agency,
partnership, joint venture or employer and employee relationship
between the parties. At no time shall either party make
commitments or incur any charges or expenses for or in the name of
the other party. Licensee shall be solely responsible for wages,
hours and conditions of employment of his personnel. Nothing
herein shall be construed as implying that employees of Licensee
are employees of WRI.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed effective the date and year first above
written.
WORK RECOVERY, INC.
Attest: /s/ Linda J. Duncan By: /s/ Thomas L. Brandon
Secretary Thomas L. Brandon, President
AL SABAH TRADING CO. PLC
Attest: /s/ (Illegible) By: /s/ (Illegible)
Its:
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into this 19th day of
June , 1995, by and between Work Recovery, Inc., a Colorado
corporation ("WRI") and Work Recovery Far East , a Japanese
company having a registered address of 2-9-17-203, Moto-Azabu,
Minato-Ku, Tokyo, Japan ("Licensee").
WITNESSETH:
WHEREAS, WRI owns all right, title and interest in and to
that certain product known and otherwise referred to as "ERGOS",
more completely described in Exhibit A, attached hereto; and
WHEREAS, Licensee desires to acquire from WRI the right to
establish itself as the holder of the Master License Agreement as
the sole and exclusive Licensee of WRI for the use of ERGOS within
the Country of Korea.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms, conditions, representations, warranties and
covenants set forth herein and such other and further
consideration, the receipt and sufficiency of which is hereby
acknowledged, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
GRANT OF LIMITED LICENSE TO PRODUCTS
Section 1.1. Grant of License. WRI hereby grants to
Licensee during the term of this agreement a personal, non-
transferable, master license for the use of ERGOS for its own
purposes and, by mutual agreement between WRI and Licensee, for
further license to others in Korea. Licensee acknowledges and
agrees that ERGOS is proprietary to WRI and embodies valuable
trademarks, copyrights and trade secrets of WRI. Licensee shall
make no additional copies of the computer programs within ERGOS
and shall not attempt to reverse engineer such programs. Licensee
shall protect ERGOS using all due care from unauthorized copying,
dissemination, disclosure or decompilation or other unauthorized
use. Title and full ownership rights to the name ERGOS shall
remain with WRI.
Section 1.2. Representations and Warranties. Licensee
has and shall exercise no authority to make statements or
representations concerning ERGOS that exceed or are inconsistent
with the marketing materials and technical specifications provided
by WRI, which shall provide Licensee with updates of ERGOS free of
charge; however, this agreement shall not in any way be construed
to be a service agreement by WRI in respect of ERGOS. WRI shall
provide maintenance services to Licensee in respect of ERGOS at
rates not to exceed the lowest rate charged to any other third
party if such maintenance services are not otherwise covered by a
WRI warranty. WRI agrees to enter into a one-year limited
warranty and to further enter into an extended warranty agreement
with Licensee upon the sale of any ERGOS equipment, on such terms
and conditions more fully set forth in Exhibit B. Licensee
expressly acknowledges and agrees that this agreement is being
made without any representation or warranty of any kind whatsoever
(express or implied), other than as specifically set forth herein
(see Exhibit B). WRI has no obligation whatsoever to market or
sell ERGOS.
Section 1.3. Assignment. This agreement is personal in
nature to Licensee and is not assignable (voluntarily,
involuntarily, by operation of law or otherwise) by it without the
mutual agreement of WRI. Any attempt to assign, transfer, or
subcontract any of the rights, duties, or obligations set forth
hereunder shall render this agreement void and unenforceable.
Notwithstanding the foregoing or any other provision of this
agreement to the contrary, Licensee may, with the consent of WRI
which shall not be unreasonably withheld, sublicense its rights
under this agreement to any other third party.
Section 1.4. Trademark. Except for use for the
purposes of identification of ERGOS, no right, title, interest or
license in or to any trademark or service mark of WRI is granted
to Licensee under this agreement.
SECTION 2
PAYMENTS BY LICENSEE
Section 2.1. Royalty. Licensee shall pay a fee to WRI
in the amount of Three Million Dollars ($3,000,000) in U.S.
Dollars, with payments due on the following schedule:
October 15, 1995: $500,000 (U.S.)
January 15, 1996: $500,000 (U.S.)
April 15, 1996: $500,000 (U.S.)
July 15, 1996: $500,000 (U.S.)
October 15, 1996: $500,000 (U.S.)
January 15, 1997: $500,000 (U.S.)
Section 2.2 Pricing. Licensee shall, during the term of
this Agreement, establish a minimum of 25 co-venture Work Recovery
Centers within Korea. All equipment will be sold to Licensee or
Sub-Licensee(s) at the standard retail price at the time of sale.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations, Warranties and Covenants
of WRI. WRI represents and warrants to and covenants with
Licensee as follows:
(a) It is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Colorado and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which
the conduct of its business or the ownership of its
properties requires such qualification, except where the
failure to qualify will not have a material adverse effect
on the business of WRI.
(b) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of WRI enforceable in accordance with
its terms.
(c) WRI subsequently shall not, using all due care,
sell (or grant any licenses to the use of) ERGOS for
ultimate use nor will WRI permit such use within Korea
during the term hereof. In the event that any ERGOS machine
or equipment, other than that covered by this agreement, is
utilized in Korea during the term of this agreement, WRI
will take all immediate steps to cause the use of such
machine to be removed therefrom.
(d) WRI has good and marketable title to all ERGOS
machines and New Concepts' work stations to be sold to
Licensee hereunder. WRI warrants that the ERGOS machines
and New Concepts' work stations, all component parts thereof
and their use by Licensee pursuant to this agreement do not
and will not violate the copyright, patent, trade secret or
other proprietary rights of any third party and that there
is currently no actual or threatened suit by any third party
based on an alleged violation of any such rights by WRI.
WRI shall indemnify and save Licensee harmless from and
against all costs, losses, damages and liabilities,
including, without limitation, attorneys' fees which may be
incurred on account of the breach of any representation,
warranty, and covenant set forth in this Section 3.1(d) and
WRI, upon demand by Licensee and at its own expense, shall
defend all such claims, suits or actions against Licensee,
provided WRI is notified thereof.
(e) WRI warrants that any services performed by an
employee or contractor of WRI under this agreement will be
performed in a timely and professional manner by qualified
personnel and will conform to the standards generally
observed in the industry for similar services.
(f) WRI hereby agrees to sell and make available to
the Licensee, at the prices set forth in Section 2.2, ERGOS
machines and New Concepts' work stations during the term of
this agreement, as and when requested by Licensee. WRI also
agrees to provide, at no additional cost to Licensee, all
literature and software updates relating to ERGOS and New
Concepts' work stations that are produced by WRI and WRI
also agrees to provide to Licensee, at the lowest price
offered to any third party, any upgrades of ERGOS or New
Concepts' equipment.
Section 3.2. Representations, Warranties and Covenants
of Licensee. Licensee represents and warrants to and covenants
with WRI as follows:
(a) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of Licensee enforceable in accordance
with its terms.
(b) Licensee has not previously and shall not,
except as provided herein, grant subsequently any sublicense
of ERGOS.
(c) Licensee has or can acquire all technical know-
how and skill and all personnel, facilities, equipment and
materials required for the performance of its obligations
hereunder.
(d) Licensee shall establish a minimum of twenty-
five (25) co-venture Work Recovery Centers during the five
years following the date first set forth above.
SECTION 4
TERM AND TERMINATION
Section 4.1. Term. The term of this agreement shall
begin on the date first above set forth and shall end on the fifth
yearly anniversary date thereof, unless earlier terminated
pursuant to the provisions hereof. The term shall be extended for
an additional five years in the event Licensee complies with the
covenant set forth in paragraph 3.2(d) hereof.
Section 4.2. Termination. WRI may terminate this
agreement upon the occurrence of an Event of Default as set forth
under Section 5 hereof.
SECTION 5
DEFAULT
WRI shall have the right to terminate this agreement in the
event that Licensee fails to purchase the ERGOS machines as set
forth in Section 3.2(d), provided that, prior to such termination,
WRI shall provide at least 30 days written notice of such
termination to Licensee and, if, during such notice period,
Licensee places orders with WRI to purchase the ERGOS machine(s)
required under Section 3.2(d), then the Licensee shall be deemed
to have satisfied the requirements of Section 3.2(d).
SECTION 6
INDEMNITIES
Licensee does hereby agree to indemnify WRI for and against
any and all claims, demands and actions arising out of its
activities or performances under this agreement or any breach of
its obligations hereunder. WRI does hereby agree to indemnify
Licensee for and against any and all claims, demands and actions
arising out of its activities or performances under this agreement
or any breach of its obligations hereunder.
SECTION 7
EXPENSES
Licensee hereby acknowledges and agrees that it shall be
solely responsible for its own expenses and costs under this
agreement, and that WRI shall have no obligation to reimburse
Licensee for any expenses or costs incurred by Licensee hereunder.
SECTION 8
GENERAL PROVISIONS
Section 8.1. Waiver. Any failure on the part of any
party hereunder to comply with any of their obligations,
agreements or conditions hereunder may be waived in writing by the
party to whom such compliance is owed; however, waiver on one
occasion does not operate to effectuate a waiver on any other
occasion.
Section 8.2. Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
to have been given if delivered in person or sent by prepaid,
first class, registered or certified mail, return receipt
requested, as follows: WRI at 2341 S. Friebus, Ste. 14, Tucson,
Arizona 85713; and to Licensee at 2-9-17-203, Moto-Azabu, Minato-
Ku, Tokyo, Japan . Either party may change their notice address
by written notice to the other as provided in this paragraph.
Section 8.3. Governing Law. This agreement shall be
governed by and construed and enforced in accordance with the laws
of the State of Arizona. Further, all parties agree that said
state shall be the appropriate and agreed upon jurisdiction for
the resolution of any and all disputes which may arise hereunder.
Section 8.4. No Oral Modification. This agreement may
be amended solely in writing, and only after the mutual agreement
of the parties affected thereby.
Section 8.5. Survival of Representations, Warranties
and Covenants. The representations, warranties, covenants and
agreements contained herein shall survive the execution and
delivery of this agreement.
Section 8.6. Parties Independent. In making and
performing this agreement, the parties set and shall set at all
times as independent entities and nothing contained in this
agreement shall be construed or implied to create an agency,
partnership, joint venture or employer and employee relationship
between the parties. At no time shall either party make
commitments or incur any charges or expenses for or in the name of
the other party. Licensee shall be solely responsible for wages,
hours and conditions of employment of his personnel. Nothing
herein shall be construed as implying that employees of Licensee
are employees of WRI.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed effective the date and year first above
written.
[Corporate Seal] WORK RECOVERY, INC.
Attest: /s/ Linda J. Duncan By: /s/ Thomas L. Brandon
Secretary Thomas L. Brandon, President
WORK RECOVERY FAR EAST
Attest: /s/ Peter Voss By: /s/ Hiroo Maeda
GUARANTEE AND SECURITY AGREEMENT
THIS AGREEMENT made this 20th day of July, 1995.
BETWEEN:
WORK RECOVERY, INC.
Suite 14, 2341 South Friebus
Tucson, Arizona, U.S.A. 85713
(hereinafter referred to as the "Guarantor")
OF THE FIRST PART
AND:
YORKTON SECURITIES, INC.
Suite 1000, 1055 Dunsmuir Street
Vancouver, British Columbia, Canada, V7X 1L4
(hereinafter referred to as the "Creditor")
OF THE SECOND PART
WHEREAS:
A. Pursuant to a loan agreement (the "Loss Agreement"),
a copy of which is attached hereto as Schedule "A", among
Peter Voss, Intavest Pty. Ltd. (collectively the
"Debtors") and the Creditor, the Creditor has agreed to
advance (U.S.) $6,250,000 to the Debtors (the "Loan").
B. As a condition to the Creditor advancing the Loan to
the Debtors, the Guarantor has agreed to guarantee the
repayment to the Creditor of a portion of the Loan and to
provide cash security to the Creditor for such guarantee.
IN CONSIDERATION of the sum of $10.00 and other good and
valuable consideration, the receipt and sufficiency of
which are acknowledged, the Guarantor agrees with the
Creditor as follows:
1. GUARANTEED OBLIGATIONS
The guarantor irrevocably and unconditionally
guarantees the due and punctual payment and
performance of (U.S.) $5,748,750 (plus accrued
interest) of any and all debts, liabilities
and obligations (collectively, the "Guaranteed
Obligations") of the Debtors to the Creditor
pursuant to the Loan Agreement (including without
limitation, any debit balances in account #8H-8691-
3 of Intavest Pty. Ltd. with the Creditor),
whenever, however or wherever incurred, subject to
the terms of this Agreement.
2. RIGHT TO IMMEDIATE PAYMENT
The Creditor shall not be bound to seek or exhaust
its resources against the Debtors or any other
persons or to realize on any other security it may
hold in respect to the Guaranteed Obligations
before being entitled to payment from the Guarantor
under this agreement and the guarantor renounces
all benefits of discussion and division.
3. STATEMENT OF ACCOUNTS
Any account settled or stated by or between the
Creditor and the Debtors, or if any such account
has not been so stated or settled prior to any
demand for payment, any account stated by the
Creditor shall, in the absence of manifest error,
be accepted by the Guarantor as conclusive evidence
that the amount of the Guaranteed Obligations so
settled or stated is due and payable by the Debtors
to the Creditor.
4. LIABILITY ABSOLUTE
The liability of the Guarantor shall be absolute
and unconditional irrespective of:
(a) the invalidity, unenforceability or
illegality, in whole or in part, of any
agreements, instruments or other documents
held by the Creditor to create, represent or
evidence any Guaranteed Obligations;
(b) any defence or counterclaim available to the
Debtors;
(c) any change in the name, objects, capital,
constating documents of by-laws of the Debtor
or the Guarantor;
(d) any amalgamation, merger or re-organization of
the Debtors or the Guarantor;
(e) any other circumstances which might otherwise
constitute, in whole or in part, a defence to
the Guarantor, the Debtors or any other
persons, firms or corporations in respect to
the Guaranteed Obligations or the liability of
the Guarantor.
5. SECURITY DEPOSIT
The Guarantor will deliver, concurrent with the
signing of this Agreement the sum of (U.S.)
$5,748,750 (the "Security Deposit") to be deposited
in account #8W-7833-6 with the Creditor (the
"Guaranty Account") in the name of the Guarantor.
The Creditor is authorized to hold the Security
Deposit and any interest earned thereon as
continuing collateral security for the payment of
all Guaranteed Obligations of the Guarantor
pursuant to this Agreement and the Loan Agreement.
6. INTEREST ON SECURITY DEPOSIT
Interest on the Security Deposit in the Guaranty
Account shall accrue at the regular rate specified
for cash deposits with the Creditor, and all
interest accruing on the Security Deposit in the
Guaranty Account shall accrue for the benefit of
the Guarantor and will form a part of the
collateral under this Agreement.
7. TERM OF DEPOSIT
The Security Deposit shall remain in the Guaranty
Account for as long as this Agreement shall remain
in effect. During the term of this Agreement, the
Guarantor shall have no right whatsoever to access
the Guaranty Account, save and except with the
express written consent of the Creditor.
8. LIMITATION AS TO AMOUNT
The liability of the Guarantor shall be limited to
the sum of (U.S.) $5,748,750 plus accrued interest
on the Guaranty Account ( the "Maximum Amount").
9. DEALINGS BY CREDITOR
The Creditor may, without giving notice to or
obtaining the consent of the Guarantor, grant
extensions of time and other indulgences, take and
give up securities, accept compositions, grant
releases and discharges, whether full, partial,
conditional or otherwise, perfect or fail to
perfect any security interest, release any
undertaking, property or assets charged by any
security to third parties and otherwise deal or
fail to deal with the Debtors and others
(including, without limitation, any other
guarantors) and any security interest, hold any
moneys received from the Debtors and others or from
any security unappropriated, apply such whole or in
part from time to time, all as the Creditor may see
fit, without prejudice to or in any way discharging
or diminishing the liability of the Guarantor and
no loss in respect of any security received by the
Creditor from the Debtors or any other person,
whether occasioned through the fault of the
Creditor or otherwise, shall in any way discharge
or diminish the liability of the Guarantor.
10. LIABILITY AS PRINCIPAL DEBTORS
All debts, liabilities and obligations purporting
to be incurred by the Debtors and owing to the
Creditor pursuant to the Loan Agreement shall form
part of the Guaranteed Obligations despite any
incapacity, disability, or lack or limitation of
status or power of the Debtors or any of their
directors, officers or agents or that the Debtors
may not be a legal entity or any irregularity or
defect or informality in the incurring of such
debts, liabilities or obligations and any such
debts, liabilities and obligations which may not be
recoverable from the Guarantor as guarantor shall
be recoverable from the Guarantor as principal
debtor upon demand and with interest, calculated
and payable as provided in this agreement.
11. REPRESENTATIONS OF GUARANTOR
The Guarantor represents and warrants that:
(a) to its knowledge, the Debtors collectively own
less than 5% of the outstanding voting
securities of the Guarantor;
(b) Peter Voss is not a director or officer of the
Guarantor and does not otherwise have the
ability to influence the policy making
decisions of management of the Guarantor; and
(c) the Guarantor has received all necessary
approvals of its board for the execution and
delivery of this Agreement.
12. PAYMENT ON DEMAND
The liability of the Guarantor shall be payable
immediately upon written demand (the "Demand Notice") and
such demand shall be conclusively deemed to have been
effectually made and given when such demand, addressed to
the Guarantor, is delivered by courier or sent by
telecopier, to the attention of the Guarantor at the
address shown on the cover page of this Agreement, or
at such other address as the Guarantor may from time to
time designate to the Creditor in writing.
13. ACCESS TO GUARANTY ACCOUNT
Where a Demand Notice is issued as contemplated in
paragraph 12 herein, the Creditor shall have the
right to access the Guaranty Account without
further notice to the Guarantor and apply the funds
contained therein against payment of the Guaranteed
Obligations up to the Maximum Amount.
14. CONTINUING NATURE AND REINSTATEMENT
This Agreement is a continuing guarantee and shall
apply to and secure payment of all Guaranteed
Obligations and any ultimate unpaid balance thereof.
This Agreement shall be reinstated if at any time
any payment of any Guaranteed Obligation is
rescinded or must otherwise by returned by the
Creditor upon the insolvency, bankruptcy or
reorganization of the Debtors or for any other
reason whatsoever, all as though such payment had
not been made.
15. LIQUIDATION, BANKRUPTCY, ETC.
In the event of any liquidation, winding up or
bankruptcy of either of the Debtors (whether
voluntary or compulsory) or in the event that
either of the Debtors shall make a bulk sale of any
of their respective assets within the bulk transfer
provisions of any applicable legislation or enter
into any composition with creditors or scheme of
arrangement, the Creditor shall have the right to
tank in priority to the Guarantor for its claim in
respect of the Guaranteed Obligations and to
receive all dividends or other payment sin respect
thereof until its claim has been paid in full, all
without prejudice to its claim against the
Guarantor who shall continue to be liable for any
remaining unpaid balance of the Guaranteed
Obligations.
16. WAIVER OF SUBROGATION RIGHTS
In the event that the Creditor receives any
payments on account of the liability of the
Guarantor, the Guarantor shall not have and waives
to the extent required, all rights to claim
repayment from or against the Debtors and any other
guarantors and all rights to be subrogated to any
rights of the Creditor, until the obligations of
the Debtors under the Loan Agreement have been paid
in full.
17. POSTPONEMENT AND ADJUSTMENT OF CLAIMS
All present and future debts, liabilities and
obligations (collectively the "Assigned
Obligations") of the Debtors to the Guarantor are
postponed to the payment of the Guaranteed
Obligations and are assigned by the Guarantor to
the Creditor as continuing security for the payment
of the liability of the Guarantor. Any moneys or
other property received by the Guarantor in
respect of any Assigned Obligations shall be
received in trust for, and immediately paid over
to, the Creditor with all necessary endorsements and
assignments and pending such payment shall be held
separate and a-part from all other property held
by the Guarantor. Any moneys received by the
Creditor pursuant to this section, including moneys
derived from instruments and any other property,
may be applied against any Guaranteed Obligations
or held by the Creditor as continuing security for
the liability of the Guarantor or released to the
Guarantor, all as the Creditor may see fir and
without prejudicing or in any way discharging or
diminishing the liability of the Guarantor. In the
event that the further liability of the Guarantor
is terminated, the provisions of this Agreement
relating to the postponement and assignment of the
Assigned Obligations shall continue in full force
and effect until the Guaranteed Obligations have
been paid in full and the Creditor is under no
obligation to make further advances or extend any
other financial accommodation to or for the benefit
of the Debtors.
18. TERM OF AGREEMENT
This Agreement shall remain in full force and
effect unless and until the Debtor have repaid all
indebtedness to the Lender in accordance with the
terms of the Loan Agreement.
19. COPY OF AGREEMENT AND FINANCING STATEMENT
The Guarantor hereby acknowledges receiving a copy
of this Agreement and waives all rights to receive
from the Creditor, a copy of any financing
statement, financing change statement, or
verification statement field from time to time to
register the security interest created hereunder.
20. NO RIGHT OF SET-OFF
All amounts payable by the Guarantor shall be paid
without set-off counterclaim and without any
deduction of withholding whatsoever unless and to
the extent that the Guarantor shall be prohibited
by law from doing so, in which case the Guarantor
shall pay to the Creditor such additional amount as
shall be necessary to ensure that the Creditor
receives the full amount it would have received if
no such deduction or withholding had been made.
21. ENTIRE AGREEMENT
There are no representatives, conditions.,
agreements or understandings with respect to the
Agreement or affecting the liability of the
Guarantor other than as set forth or referred to in
this Agreement.
22. ADDITIONAL SECURITY
This agreement is in addition and without prejudice
to any security with respect to the agreement or
affecting the liability of the Guarantor.
23. FURTHER ASSURANCES
The Guarantor shall from time to time upon the
request of the Creditor, execute and deliver under
seal or otherwise, all such further agreement,
instruments and documents and do all such further
acts and things as the Creditor may require to give
effect to the transactions contemplated by this
Agreement.
24. SUCCESSORS AND ASSIGNS
This Agreement shall enure to the benefit of and be
binding upon the respective heirs, legal
representatives, successors and assigns of the
Guarantor and the Creditor.
25. GOVERNING LAW
This Agreement shall be governed by and construed
in accordance with the laws of the State of
Victoria, Australia, without regard to principals
of conflicts of law.
26. JURISDICTION
The Guarantor agrees that any legal action or
proceeding with respect to this Agreement, any loan
document or any other agreement, document or
instrument executed in connection herewith or
therewith, or any action or proceeding to execute
or to otherwise enforce any judgment obtained
against the Debtor or the Guarantor or any of its
or their respective properties, may be brought in
the courts of the State of Victoria, Australia or
the Providence of British Columbia, Canada as the
Creditor may elect; provided always that suit may
also be brought in the courts of any country or
place where the Debtors or the Guarantor or their
respective assets may be found; and, by execution
and delivery of this Agreement, the Guarantor
irrevocably submits to each jurisdiction, the
Guarantor waives any objection which it may now or
hereafter have to the venue of any suit, action or
proceeding arising out of or relating to this
Agreement, any loss document or any other
agreement, document or instrument executed in
connection herewith brought in the courts of the
State of victoria, Australia, or the Providence of
British Columbia, Canada, and hereby further
irrevocably waives any claim that any such suit,
action or proceeding brought in any such court, has
been brought in an inconvenient form.
27. COUNTERPART
This Agreement may be executed in any number of
counterparts, each of which, when so executed and
delivered, shall be decreed to be an original and
all of which taken together shall constitute but
one in the same agreement, document or instrument,
respectively. This Agreement will deemed to have
been duly and properly executed and delivered when
executed and delivered by telecopier.
WORK RECOVERY, INC.
Per:
/s/ Thomas L. Brandon
Authorized Signatory
/s/ Linda J. Duncan*
Authorized Signatory
* Signature disavowed by Ms. Duncan
YORKTON SECURITIES, INC.
Per:
/s/ John McCoach
Authorized Signatory
/s/ Not legible
Authorized Signatory
THIS AGREEMENT SUPERSEDES THE SWEDEN LICENSE AGREEMENT
DATED MARCH 13, 1995
LICENSE AGREEMENT
THIS AGREEMENT, made and entered into this 11TH day of
September, 1995, by and between Work Recovery, Inc., a Colorado
corporation ("WRI") and Intermedia Com., having a registered
address of c/o Roger Serrero, President, Rue du Volais #7-CH1202,
Geneva, Switzerland ("Licensee").
WITNESSETH:
WHEREAS, WRI owns all right, title and interest in and to
that certain product known and otherwise referred to as "ERGOS",
more completely described in Exhibit A, attached hereto; and
WHEREAS, Neval Ltd., the previous Licensee for the herein-
described License area, desires to transfer its rights and
obligations under the License Agreement between Neval Ltd. and
WRI, and has provided to WRI its written assurance of its
willingness to transfer these rights and responsibilities to
Intermedia Com.
WHEREAS, Licensee desires to acquire from WRI the right to
establish itself as the holder of the Master License Agreement as
the sole and exclusive Licensee of WRI for the use of ERGOS within
the European Common Market (United Kingdom, Norway, Sweden,
Finland, Denmark, France, Switzerland, Austria, Italy, Spain, and
Portugal) and specifically excludes Germany, The Netherlands,
Belgium and Luxembourg.
NOW, THEREFORE, in consideration of the above and foregoing
premises, the terms, conditions, representations, warranties and
covenants set forth herein and such other and further
consideration, the receipt and sufficiency of which is hereby
acknowledged, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
GRANT OF LIMITED LICENSE TO PRODUCTS
Section 1.1. Grant of License. WRI hereby grants to
Licensee during the term of this agreement a personal, non-
transferable, master license for the use of ERGOS for its own
purposes and, by mutual agreement between WRI and Licensee, for
further license to others in within the European Common Market
(United Kingdom, Norway, Sweden, Finland, Denmark, France,
Switzerland, Austria, Italy, Spain, and Portugal) and specifically
excludes Germany, The Netherlands, Belgium and Luxembourg.
Licensee acknowledges and agrees that ERGOS is proprietary to WRI
and embodies valuable trademarks, copyrights and trade secrets of
WRI. Licensee shall make no additional copies of the computer
programs within ERGOS and shall not attempt to reverse engineer
such programs. Licensee shall protect ERGOS using all due care
from unauthorized copying, dissemination, disclosure or
decompilation or other unauthorized use. Title and full ownership
rights to the name ERGOS shall remain with WRI.
Section 1.2. Representations and Warranties. Licensee
has and shall exercise no authority to make statements or
representations concerning ERGOS that exceed or are inconsistent
with the marketing materials and technical specifications provided
by WRI, which shall provide Licensee with updates of ERGOS free of
charge; however, this agreement shall not in any way be construed
to be a service agreement by WRI in respect of ERGOS. WRI shall
provide maintenance services to Licensee in respect of ERGOS at
rates not to exceed the lowest rate charged to any other third
party if such maintenance services are not otherwise covered by a
WRI warranty. WRI agrees to enter into a one-year limited
warranty and to further enter into an extended warranty agreement
with Licensee upon the sale of any ERGOS equipment, on such terms
and conditions more fully set forth in Exhibit B. Licensee
expressly acknowledges and agrees that this agreement is being
made without any representation or warranty of any kind whatsoever
(express or implied), other than as
specifically set forth herein (see Exhibit B). WRI has no
obligation whatsoever to market or sell ERGOS.
Section 1.3. Assignment. This agreement is personal in
nature to Licensee and is not assignable (voluntarily,
involuntarily, by operation of law or otherwise) by it without the
mutual agreement of WRI. Any attempt to assign, transfer, or
subcontract any of the rights, duties, or obligations set forth
hereunder shall render this agreement void and unenforceable.
Notwithstanding the foregoing or any other provision of this
agreement to the contrary, Licensee may, with the consent of WRI
which shall not be unreasonably withheld, sublicense its rights
under this agreement to any other third party.
Section 1.4. Trademark. Except for use for the
purposes of identification of ERGOS, no right, title, interest or
license in or to any trademark or service mark of WRI is granted
to Licensee under this agreement.
SECTION 2
PAYMENTS BY LICENSEE
Section 2.1. Royalty. Licensee shall pay a fee to WRI
in the amount of Nine Million Three Hundred Thousand Dollars
($9,300,000) in U.S. Dollars, with payments due on the following
schedule:
October 1, 1995: $1,500,000 (U.S.)
January 1, 1996: $1,500,000 (U.S.)
April 1, 1996: $1,500,000 (U.S.)
July 1, 1996: $1,100,000 (U.S.)
October 1, 1996: $1,000,000 (U.S.)
December 1, 1996: $1,000,000 (U.S)
Section 2.2 Pricing. Licensee shall, during the term of
this Agreement, establish a minimum of 25 Work Recovery Centers
within the member countries of the European Common Market, with
the exception of The Netherlands, Belgium, Luxembourg and Germany.
All equipment will be sold to Licensee or Sub-Licensee(s) at the
standard retail price at the time of sale.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations, Warranties and Covenants
of WRI. WRI represents and warrants to and covenants with
Licensee as follows:
(a) It is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Colorado and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which
the conduct of its business or the ownership of its
properties requires such qualification, except where the
failure to qualify will not have a material adverse effect
on the business of WRI.
(b) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of WRI enforceable in accordance with
its terms.
(c) WRI subsequently shall not, using all due care,
sell (or grant any licenses to the use of) ERGOS for
ultimate use nor will WRI permit such use within the United
Kingdom, Norway, Sweden, Finland, Denmark, France,
Switzerland, Austria, Italy, Spain, or Portugal during the
term hereof. In the event that any ERGOS machine or
equipment, other than that covered by this agreement, is
utilized in the United Kingdom (with the exception of those
ERGOS machines already in place at the date of this
Agreement), Norway, Sweden, Finland, Denmark, France,
Switzerland, Austria, Italy, Spain or Portugal during the
term of this agreement, WRI will take all immediate steps to
cause the use of such machine to be removed therefrom.
(d) WRI has good and marketable title to all ERGOS
machines and New Concepts' work stations to be sold to
Licensee hereunder. WRI warrants that the ERGOS machines
and New Concepts' work stations, all component parts thereof
and their use by Licensee pursuant to this agreement do not
and will not violate the copyright, patent, trade secret or
other proprietary rights of any third party and that there
is currently no actual or threatened suit by any third party
based on an alleged violation of any such rights by WRI.
WRI shall indemnify and save Licensee harmless from and
against all costs, losses, damages and liabilities,
including, without limitation, attorneys' fees which may be
incurred on account of the breach of any representation,
warranty, and covenant set forth in this Section 3.1(d) and
WRI, upon demand by Licensee and at its own expense, shall
defend all such claims, suits or actions against Licensee,
provided WRI is notified thereof.
(e) WRI warrants that any services performed by an
employee or contractor of WRI under this agreement will be
performed in a timely and professional manner by qualified
personnel and will conform to the standards generally
observed in the industry for similar services.
(f) WRI hereby agrees to sell and make available to
the Licensee, at the prices set forth in Section 2.2, ERGOS
machines and New Concepts' work stations during the term of
this agreement, as and when requested by Licensee. WRI also
agrees to provide, at no additional cost to Licensee, all
literature and software updates relating to ERGOS and New
Concepts' work stations that are produced by WRI and WRI
also agrees to provide to Licensee, at the lowest price
offered to any third party, any upgrades of ERGOS or New
Concepts' equipment.
Section 3.2. Representations, Warranties and Covenants
of Licensee. Licensee represents and warrants to and covenants
with WRI as follows:
(a) The execution and delivery of this agreement
have been duly and validly authorized, and all necessary
action has been taken to make this agreement a legal, valid
and binding obligation of Licensee enforceable in accordance
with its terms.
(b) Licensee has not previously and shall not,
except as provided herein, grant subsequently any sublicense
of ERGOS.
(c) Licensee has or can acquire all technical know-
how and skill and all personnel, facilities, equipment and
materials required for the performance of its obligations
hereunder.
(d) Licensee shall establish a minimum of twenty-
five (25) Work Recovery Centers during the five years
following the date first set forth above.
SECTION 4
TERM AND TERMINATION
Section 4.1. Term. The term of this agreement shall
begin on the date first above set forth and shall end on the fifth
yearly anniversary date thereof, unless earlier terminated
pursuant to the provisions hereof. The term shall be extended for
an additional five years in the event Licensee complies with the
covenant set forth in paragraph 3.2(d) hereof.
Section 4.2. Termination. WRI may terminate this
agreement upon the occurrence of an Event of Default as set forth
under Section 5 hereof.
SECTION 5
DEFAULT
WRI shall have the right to terminate this agreement in the
event that Licensee fails to purchase the ERGOS machines as set
forth in Section 3.2(d), provided that, prior to such termination,
WRI shall provide at least 30 days written notice of such
termination to Licensee and, if, during such notice period,
Licensee places orders with WRI to purchase the ERGOS machine(s)
required under Section 3.2(d), then the Licensee shall be deemed
to have satisfied the requirements of Section 3.2(d).
SECTION 6
INDEMNITIES
Licensee does hereby agree to indemnify WRI for and against
any and all claims, demands and actions arising out of its
activities or performances under this agreement or any breach of
its obligations hereunder. WRI does hereby agree to indemnify
Licensee for and against any and all claims, demands and actions
arising out of its activities or performances under this agreement
or any breach of its obligations hereunder.
SECTION 7
EXPENSES
Licensee hereby acknowledges and agrees that it shall be
solely responsible for its own expenses and costs under this
agreement, and that WRI shall have no obligation to reimburse
Licensee for any expenses or costs incurred by Licensee hereunder.
SECTION 8
GENERAL PROVISIONS
Section 8.1. Waiver. Any failure on the part of any
party hereunder to comply with any of their obligations,
agreements or conditions hereunder may be waived in writing by the
party to whom such compliance is owed; however, waiver on one
occasion does not operate to effectuate a waiver on any other
occasion.
Section 8.2. Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
to have been given if delivered in person or sent by prepaid,
first class, registered or certified mail, return receipt
requested, as follows: WRI at 2341 S. Friebus, Ste. 14, Tucson,
Arizona 85713; and to Licensee at c/o Roger Serrero, President,
Rue du Volais #7-CH1202, Geneva Switzerland. Either party may
change their notice address by written notice to the other as
provided in this paragraph.
Section 8.3. Governing Law. This agreement shall be
governed by and construed and enforced in accordance with the laws
of the State of Arizona. Further, all parties agree that said
state shall be the appropriate and agreed upon jurisdiction for
the resolution of any and all disputes which may arise hereunder.
Section 8.4. No Oral Modification. This agreement may
be amended solely in writing, and only after the mutual agreement
of the parties affected thereby.
Section 8.5. Survival of Representations, Warranties
and Covenants. The representations, warranties, covenants and
agreements contained herein shall survive the execution and
delivery of this agreement.
Section 8.6. Parties Independent. In making and
performing this agreement, the parties set and shall set at all
times as independent entities and nothing contained in this
agreement shall be construed or implied to create an agency,
partnership, joint venture or employer and employee relationship
between the parties. At no time shall either party make
commitments or incur any charges or expenses for or in the name of
the other party. Licensee shall be solely responsible for wages,
hours and conditions of employment of his personnel. Nothing
herein shall be construed as implying that employees of Licensee
are employees of WRI.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed effective the date and year first above
written.
[Corporate Seal] WORK RECOVERY, INC.
Attest: /s/ Linda J. Duncan By: /s/ Thomas L. Brandon
Secretary Thomas L. Brandon, President
INTERMEDIA COM.
By: /s/ Roger Serrero
Its: President
LOAN AGREEMENT
THIS LOAN AGREEMENT is entered into as of the 26th day of
February, 1996, by and between Work Recovery, Inc., a Colorado corporation
("Borrower") and Allsup, Inc., an Illinois corporation ("Lender").
RECITALS
A. Borrower wishes to secure interim financing to finance its
operations prior to consummation of a debt or equity financing expected to be in
place in March, 1996.
B. Lender is willing to make financing available to Borrower
on the terms set forth herein.
NOW, THEREFORE, IT IS AGREED:
1. Loan Commitment. Subject to and upon the terms and
conditions set forth herein, Lender agrees, at any time and from time to time
prior to December 31, 1996, to make loans (any loan made by Lender hereunder
a "Loan")to the Borrower, which Loans may be prepaid and reborrowed in
accordance with the provisions hereof; provided, however, that the aggregate
principal amount of Loans outstanding shall at no time exceed $500,000. The
principal amount of each Loan hereunder shall be in an integral multiple of
$50,000, and shall bear interest from the date such Loan is made until repaid at
the rate of 10% per annum.
2. Notice of Borrowing. Whenever the Borrower desires to
receive a Loan hereunder, it shall give the Lender at least one business day's
prior notice (the "Notice of Borrowing"), provided that any such notice shall be
deemed given on a certain day only if given before 12:00 noon (Central Time)
on such day. Each such notice shall specify the principal amount (in an
integral multiple of $50,000) of the desired new Loan and the date on which
Borrower desires to receive the principal amount of such Loan.
3. Disbursement of Funds. Not later than 1:00 p.m. (Central
time) on the date specified in the Notice of Borrowing for such Loan, Lender
shall deliver funds to Borrower by wire transfer or such other manner as the
Borrower shall agree in advance, to the account specified in Section 10 hereof,
in the amount specified in such Notice of Borrowing.
4. Promissory Note. Borrower's obligation to pay the
principal of, and interest on, all Loans shall be evidenced by a promissory note
duly executed and delivered by the Borrower substantially in the form of Exhibit
A hereto (the "Note"). The note shall be in the principal amount of $500.00,
shall be dated of even date herewith and shall be entitled to the benefits of
this Loan Agreement. Lender shall note on its internal records and on the
Note in the table provided therefor the date and amount of each Loan and each
payment in respect thereof. Failure to make any such notation shall not affect
Borrower's obligations in respect of such Loans.
5. Prepayment. The Borrower shall have the right to prepay
the Loans, without premium or penalty, in whole or in part from time to time;
provided, however, that each prepayment shall be in a principal amount that is
an integral multiple of $50,000.
6. Conversion Rights. all or any portion of the aggregate
principal amount outstanding under the Loans together with any accrued but
unpaid interest (the "Outstanding Debt"), is convertible as follows:
a. Upon the consummation of any equity, debt or unit
financing or series of related financing on or before December 31, 1996 (the
"Financing") resulting in the sale of Borrower's securities with gross proceeds
to Borrower of at least Five Million Dollars ($5,000,000), the Outstanding
Debt shall automatically be converted into such number of securities sold in
the Financing as is obtained by dividing the Outstanding Debt by the lowest
price per security paid by any investor in the Financing.
b. If the Financing has not occurred by December 31,
1996, the Lender shall have the right at any time and from time to time after
such date to convert the Outstanding Debt at such date into that number of
shares of Borrower's common stock as is determined by multiplying the
aggregate principal amount outstanding under the Loans to be converted
by two.
c. If, before the Loans are converted pursuant to
subsection a or b above, Borrower files a voluntary petition under the United
States Bankruptcy Code, 11 U.S.C. 101 et seq. (the "Bankruptcy Code"), or
an involuntary petition is filed under the Bankruptcy Code and is not dismissed
within 90 days of such filing, or Borrower's bank accounts are attached by any
of its creditors other than Lender, Lender shall have the option, at any time
and from time to time, to convert the outstanding Debt into that number of
shares of Borrower's convertible preferred stock, if any such class of stock
then exists, or common stock if no such convertible preferred stock exists, as
determined by multiplying the aggregate principal amount outstanding under the
Loans on such date by two.
7. Loan of ERGOS Machines. As partial consideration for
Lender's agreement to make the Loans, Borrower hereby agrees to deliver and
install two ERGOS machines (the "Machines") to Lender's place of business in
Belleville, Illinois not later than March 4, 1996. The Machines may be used for
demonstration and training purposes only, shall be operated only by personnel
certified by Borrower, and shall bear such marks, signs or notices as Borrower
shall affix to give notice of Borrower's continued ownership of such machines.
Lender hereby covenants not to delete, deface or remove, or allow any other
person to delete, deface or remove, any such marks, signs or notices, and shall
use its best efforts to ensure that all marks, signs or notices affixed to the
Machines by Borrower are readily visible and are maintained so as to accomplish
Borrower's intention of giving notice of Borrower's ownership. Borrower and
Lender each agree to execute any and all documents reasonably requested by the
other to secure their respective interests in the Machines, including but not
limited to filings under the Uniform Commercial Code as adopted by the various
states, in connection with giving notice to creditors of either party of the
other's interest in the Machines. Lender shall pay for staffing and the
premises on which the Machines will be kept, and Borrower shall pay and be
responsible for installation and maintenance of the Machines. Borrower shall
also install routine software upgrades for the Machines as soon as practicable
after such upgrades are made available on other ERGOS machines. Lender shall
not make use of the Machines for purposes of revenue generation unless and
until lender and Borrower shall agree upon the terms on which any revenue so
generated shall be divided between them.
8. Grant of Security Interest. As security for Borrower's
obligations to Lender under this Loan Agreement and the Note, the Borrower
hereby grants to Lender a security interest in the Machines. The security
interest granted pursuant to this Section 8 shall terminate upon the
conversion of the Outstanding Debt pursuant to Section 6 of this Loan
Agreement. Upon such termination, Lender agrees to take such actions as may
be necessary or appropriate to terminate the security interest granted pursuant
to this Section 8, including but not limited to the execution and filing of
termination statements under the Uniform Commercial code as adopted by the
various states.
9. Severability. Should any one or more of the provisions
hereunder be determined to be illegal or unenforceable, all other provisions
hereof shall be given effect separately therefrom and shall not be affected
thereby.
10. Notices and Bank Accounts. Any notice or other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been given upon delivery if personally delivered or when sent if
sent by facsimile or two days after mailing by certified mail, postage prepaid,
and addressed as follows, and any disbursement or payment in connection with
a Loan shall be deemed delivered upon deposit of immediately available funds
to the accounts indicated below:
If to Lender: Allsup, Inc.
300 Allsup Place
Belleville, IL 62223-9626
Fax: (618) 236-5778
Acct: ABA 081004106
Acct. No: 4713006244
If to Borrower: Work Recovery, Inc.
2341 S. Friebus, Suite 14
Tucson, AZ 85713
Fax: (520) 325-5277
Acct:
Each of the above addressees may change its address or bank
account information for purposes of this paragraph by providing notice of the
new address or bank account in the manner herein provided.
11. Choice of Law. It is the intention of the parties that the
internal laws of the State of Arizona (and not the laws of conflict) shall
govern the validity of this Loan Agreement, the construction of its terms,
and the interpretation of the rights and duties of the parties.
12. Counterparts. This Loan Agreement may be signed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this
Loan Agreement as of the date and year first written above.
WORK RECOVERY, INC.
By: /s/ Dorcas R. Hardy
Title: President and CEO, Acting
ALLSUP, INC.
By: /s/ James R. Allsup
Title: President and CEO
MUTUAL RELEASE AND SETTLEMENT AGREEMENT
This MUTUAL RELEASE AND SETTLEMENT AGREEMENT
("Agreement") is made and entered into as of March 4, 1996 by and between
CHRISTOPHER BINGHAM, an individual ("Bingham"), WORK
RECOVERY, EUROPE, LTD. ("WRE"), and WORK RECOVERY, INC. a
Colorado (U.S.A.) corporation ("WORK").
RECITALS
WHEREAS, on or about January 18, 1996, WRE's parent company,
WORK, had a change in control whereby WORK's prior Board of Directors
was replaced by a new Board of Directors and a new acting President and
Chief Executive Officer was installed; and
WHEREAS, as a result of the facts and circumstances which gave rise
for the need for the aforesaid change in control ("Change in Control"), drastic
measures were taken to dramatically reduce WORK's expenses of operation
domestically and abroad; and
WHEREAS, in connection with said reduction, it was determined that
WRE's Milton Keynes facility in the United Kingdom would have to be
closed and that Bingham would have to be relieved of his duties thereat on
account of the mandated reduction in expenses and corresponding reduction
in personnel.
AGREEMENT
NOW, THEREFORE, Bingham and WRE and WORK hereby agree,
in consideration for the mutual covenants and conditions herein contained, the
receipt and sufficiency of which are hereby acknowledged, as follows.
1 The foregoing recitals are hereby incorporated herein by this
reference as though set forth in full at this point.
2. WORK agrees to pay to Bingham, as severance pay, the sum
of Twenty-Five Thousand Dollars U.S. (U.S. $25,000) on or before August 1,
1996 ("Severance Pay"). The Severance Pay will be due when the TEAM
For New Management, L.L.C., a management consultant under contract with
WORK, receives payment in the amount of $150,000. If said amount is not
received by the TEAM by August 1, 1996, Bingham shall nevertheless
receive the Severance Pay.
3. It is agreed that you may remove the computer equipment
specified in your February 1, 1996 memorandum, specifically: (i) one TAG
Pentium computer; (ii) one Mustek scanner; (iii) one EPSON color printer;
(iv) one HP4 Plus laser printer; and (v) associated cabling, and the following
additional items from Linford Forum:
a. your personal records of salaries and taxes paid
by Work Recovery, Europe ("WRE") to you;
b. bank records, all official corporate records and
ledgers and inventory of Sterling Canon Grant Limited, an entity wholly
unrelated to WRE in which you are the major shareholder. The inventory to
be removed consists of insulin injectors, two Omni Flexor hand therapy
devices and associated videos and cleaning items, and two Pronex devices
each in their own carry bags.
c. records of the Batavia Fund, an entity wholly
unrelated to WRE. These records are held in a banker's box, labeled
accordingly, and in a file cabinet.
d. computer software belonging to you, consisting
of a desktop publishing program, Lotus Organizer, Flight Simulator and
Bizplan, with associated manuals.
e. miscellaneous personal items, such as pictures,
magazines, framed cartoon panels and the like.
4. In further consideration of the Severance Pay, Bingham agrees
to spend approximately one day in the Linford Forum office in order to: (i)
prepare the necessary information for WRE's accountants in order that they
may prepare the V.A.T. return due by the end of February, 1996; and (ii)
prepare the payroll tax return for submission to the Inland Revenue. When
the amount for (ii) is ascertained, Bingham agrees that he will contact Mr.
Robert Bunker an WORK and provide Mr. Bunker with the sum of money to
pay the payroll taxes, whereupon Mr. Bunker will authorize, or cause to
authorize, subject to any applicable laws of the United Kingdom, Lloyd's
Bank or the Bank of Scotland to honor a Bank GIRO Credit Slip in the like
amount to be presented to such Bank by Bingham, whereupon Inland
Revenue shall be paid forthwith.
5. Bingham further agrees to provide to WRE and/or WORK all
necessary paperwork, official forms, records, and the like in order to
facilitate a smooth transition to either new management at the Milton Keynes
site or to another site that may be selected in the future.
6. Subject to the terms and conditions contained in this
Agreement, Bingham, WRE, and WORK, each for themselves and their
respective heirs, successors and assigns:
(a) unconditionally agrees to forever release and discharge the
other from, and each relinquishes, extinguishes and waives, any and all
claims, disputes, demands, liabilities, controversies, actions, obligations,
debts, losses, rights, promises, occurrences, liens, causes of action, damages,
costs, expenses, and attorney's fees of any kind or nature, whether legal or
equitable, in tort or in contract, actual or contingent, latent or patent, known
or unknown, asserted or unasserted, that either Bingham on the one hand and
WRE and WORK on the other hand, had, has, or may have against the
other(s) which in any way arose, arises or could arise out of, or relates to,
directly or indirectly, any and all issues which were or could have been raised
in connection with the transactions, facts and circumstances, and each and all
of them, including but not necessarily limited to, the Recitals set forth at the
beginning of this Agreement, giving rise to the need for this Agreement;
(b) acknowledge that Bingham on the one hand and WRE and
WORK on the other hand, may have claims, including claims for damages,
that are presently unknown and that the releases contained in this Agreement
are intended to and will fully, finally and forever discharge all claims,
whether now asserted or unasserted, known or unknown, arising out of the facts,
circumstances and transactions surrounding and giving rise to the need for
this Agreement. In furtherance of the intent expressed above, each party
agrees that the releases and agreements given herein shall remain in effect as
full and complete releases of such matters notwithstanding the discovery or
existence of additional claims or facts related thereto, without regard as to
when such discovery may occur. Without in any manner diminishing the
generality of the foregoing provisions of this Paragraph 6., WORK agrees
that it has an obligation to indemnify Bingham in accordance with, and
subject to, the terms of the defense and indemnity provisions contained in the
Articles and Bylaws of WORK in connection with a consolidated
shareholders action on file in the Federal District Court in Arizona. Defense
in the Arizona shareholders' action will be provided by Mr. John Everroad,
Esq. with the Phoenix, Arizona law firm of Fennemore Craig, .subject to the
possibility that the Board of Directors of WORK must yet ratify WORK's
obligations in this regard, and further subject to WORK's unconditional right
expressly reserved hereby to withdraw or otherwise terminate any such
defense or indemnity obligation in the event that Bingham is alleged (and it
should be subsequently proven) to have engaged in any unlawful act or ac-
tivity in any manner in connection with, or arising from, Bingham's
employment with WRE or as a member of the Board of Directors of WRE
and/or WORK. Bingham understands and agrees that in the event that he
should desire to retain counsel other than Mr. John Everroad, all expenses
and liabilities incurred in connection therewith and that may result therefrom
shall be Bingham's sole responsibility.
7. To the extent permitted by international law and the laws of the
United Kingdom, this Agreement shall be governed by the laws of the State
of Arizona, United States of America, and the parties hereto agree that any
action or proceeding to enforce or interpret the terms and conditions
contained in this Agreement shall be filed in the courts in the State of
Arizona and the parties hereto agree to subject themselves to the jurisdiction
of the Arizona (state or federal) courts and to be unconditionally bound by
any judgments rendered therein. Any judgment so rendered shall be
enforceable either in the United Kingdom or the United States of America, as
necessary. This Agreement may be signed in counterparts, including pages
transmitted by facsimile, all of which will be considered one and the same
instrument.
8. Bingham has represented to WORK that he holds options to
purchase stock of WORK. To the extent that such options are, in fact, held
and owned by Bingham, WORK agrees that the date by which said options
must be exercised will be extended from what would otherwise is believed to
have been on or about May 1, 1996, to July 1, 1996, expressly subject,
however, to the authority of WORK to grant such an extension and further
subject to approval therefore by the Board of Directors of WORK.
IN WITNESS WHEREOF, Bingham, WRE and WORK have executed
this Agreement at, and upon the date, indicated on the following page.
CHRISTOPHER BINGHAM
/s/ Christopher Bingham At: Milton Keynes, England
this 4th day of March, 1996.
WORK RECOVERY, EUROPE, LTD.
by: /s/ Dorcas R. Hardy At: Tucson, Arizona
this 4th day of March, 1996.
WORK RECOVERY, INC.
by: /s/ Dorcas R. Hardy At: Tucson, Arizona
this 4th day of March, 1996.
