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, 1996, 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
or organization) Identification Number)
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 October 1, 1996, there were 45,918,623 shares of
common stock outstanding, of which approximately 45,111,000 shares were
held by non-affiliates of the registrant. The closing trading price of the
common stock on that date was $.125 per share, as reported by National
Quotation Bureau. Based upon this price, the market value of those
shares of registrant's voting stock held by non-affiliates was
approximately $5,639,000 as of October 1, 1996; although such stock is
thinly traded and there can be no assurance that the trading price
accurately reflects the value thereof.
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 45,918,623 shares were outstanding as of October 1,
1996.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Business
Overview
DURING THE FISCAL YEAR ENDED JUNE 30, 1996, THE ENTIRE MEMBERSHIP OF THE
BOARD OF DIRECTORS OF WORK RECOVERY, INC. WAS REPLACED AND SIGNIFICANT
CHANGES IN THE COMPANY'S MANAGEMENT OCCURRED.
ON MAY 29, 1996, THE COMPANY FILED A VOLUNTARY PETITION FOR REORGANIZATION
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ARIZONA.
THIS ITEM SHOULD BE READ IN CONJUNCTION WITH ITEM 7, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Bankruptcy and Reorganization Events
On May 29, 1996, Work Recovery, Inc., a Colorado corporation and its
wholly-owned subsidiary Work Recovery Centers, Inc., an Arizona corporation
(collectively "Work Recovery", the "Company" or the "Registrant")filed
voluntary petitions in the United States Bankruptcy Court for the District of
Arizona (the "Bankruptcy Court") for protection from creditors ("Bankruptcy
Filing") to reorganize under Chapter 11 of Title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). The Company is currently operating
as a debtor in possession under the supervision of the Bankruptcy Court and
is authorized to operate its business as such.
Subject to certain exceptions under the Bankruptcy Code, the Bankruptcy
Filing automatically enjoined the continuation of any judicial or administrative
proceedings against the Company. All creditor actions to obtain possession
of property from the Company or to create, perfect or enforce any lien against
the property of the Company are also enjoined. As a result, the creditors of
the Company are precluded from collecting pre-petition debts or pursuing
pre-petition claims without the approval of the Bankruptcy Court.
The Company anticipates that the reorganization process will result in the
restructuring, cancellation and/or replacement of the interests of its existing
common and preferred stockholders and holders of options, warrants or other
rights to acquire common or preferred stock ("Equity Interests"). Because of
the "absolute priority rule" of Section 1129 of the Bankruptcy Code, which
requires that the Company's creditors be paid in full (or otherwise consent)
before equity holders can receive any value under a plan of reorganization, it
is uncertain what the status of the holders of Equity Interests will be
following the bankruptcy.
On August 5, 1996, the Company filed a Joint Plan of Reorganization with
the Bankruptcy Court and an Amended Joint Plan of Reorganization in October
1996 (the "Reorganization Plan"). The Reorganization Plan sets forth a
proposal for the reorganization and continuation of the Company's business
through the restructuring of the Company's pre-Bankruptcy Filing unsecured debt
and restructures and substantially dilutes the Equity Interests of the
Company's shareholders.
A plan of reorganization effects a complete restructuring of the debt
and Equity Interests of a debtor. Once a plan has been confirmed by the
Bankruptcy Court, and the plan becomes effective by satisfying whatever
conditions are described in the plan, the plan becomes binding upon the
debtor and all creditors and Equity Interest holders dealt with in the plan.
The obligations of the debtor that existed prior to plan confirmation are
discharged and the obligations under the plan are substituted for those
obligations. The Equity Interests that existed prior to the plan are
cancelled and only Equity Interests granted or retained under the plan exist
after the effective date of the plan.
A confirmed and completed plan is binding upon all persons having claims
against or interests in the debtor if those claims or interests are dealt with
in the plan. The plan is binding upon those who voted against the plan, those
who do not vote at all and those who did not participate in the plan process.
The Reorganization Plan was filed with a Disclosure Statement describing
the Reorganization Plan ("Disclosure Statement") and describing procedures
necessary for its confirmation.
The Bankruptcy Court scheduled a hearing for October 7, 1996, to consider
the adequacy of the Disclosure Statement. Once the Court determines that the
Disclosure Statement is adequate to inform creditors, shareholders and other
interested parties, the Court will require the Company to distribute the
Disclosure Statement, or a summary thereof, to all creditors, shareholders
and other interested parties, and will also schedule a date for balloting
on the Reorganization Plan. The Company anticipates that the Court will
schedule a hearing to consider approval of the Reorganization Plan sometime
in November 1996.
The Reorganization Plan filed by the Company proposes various treatments
for the claims of creditors and the Equity Interests in the Company. Pursuant to
the terms of the Reorganization Plan, the Company would change its corporate
domicile from Colorado to Delaware, and cancel all existing capital stock.
Upon the Effective Date of the Reorganization Plan, the reorganized Company
would assume certain specified obligations to existing creditors and
undertake to issue common stock ("New Common Stock") to creditors, shareholders
and others.
In summary, the Plan provides for (1) the sale of the Company's real
property in Louisiana and the payment of the debt secured by such property
from the proceeds of the sale; (2) the Company's retention of its real property
in Tucson, Arizona and the payment of the debt secured by such property in
accordance with the original terms of such debt; (3) the payment of eighty
percent (80%) of the amount of most general, unsecured claims in installments
over six months; (4) the issuance of 1,500,000 shares of New Common Stock to
shareholders who have claims arising from alleged securities laws violations
by the Company; (5) the payment of up to $300,000 plus the issuance of up to
1,500,000 shares of New Common Stock to holders of allowed claims arising from
certain Unresolved Claims; and (6) the issuance of approximately 5,150,000
shares of New Common Stock to existing Common and Preferred shareholders and
option and warrant holders of the Company. The Reorganization Plan also
provides for the issuance of New Common Stock to providers of pre- and
post-petition financing, (approximately 3,900,000 shares); the Team for New
Management (as defined below) (approximately 1,800,000 shares) and current
directors (200,000 shares) and key employees (500,000 shares) of the Company.
The Bankruptcy Court scheduled October 1, 1996, as the last date for filing
claims against the Company for consideration in the Bankruptcy proceedings.
The Company is aware that a substantial number of claims have been filed
against the Company, but has not been able to review all such claims or compare
the claims against the Company's books and records. As a result, the Company
is currently unable to estimate with any accuracy the total amount of claims
asserted, their classification under the Reorganization Plan, or what claims
would likely be allowed as claims in the bankruptcy proceedings. However, the
claims that have been filed against the Company as of September 30, 1996 are
in excess of $43,994,000. Such aggregate amount includes claims of all
character, including, but not limited to, unsecured claims, secured claims,
claims that have been scheduled but not filed, tax claims, claims for leases
that were assumed, and claims which the Company believes to be without merit;
however, claims filed for which an amount was not stated are not reflected in
such amount. The Company is unable to estimate the potential amount of such
unstated claims; however, the amount of such claims could be material.
<PAGE>
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, 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, 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" for a more complete description of this machine.)
Work Recovery, Inc. ("the Company"), directly and through its subsidiaries,
is engaged in the development, 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 three areas: (i) the
development, manufacture, distribution and sale of ERGOS directly by the
Company, (ii) consulting services, and (iii) 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")
in a tax-free common share exchange. Following the acquisition, NCC became
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 Transition Work Stations, which address certain needs
of the injured workers' rehabilitation industry and the vocational aptitude
assessment industry. Subsequent to the end of fiscal year 1996, the Company
entered into a Business Purchase Agreement pursuant to which the Company's NCC
assets and liabilities were sold to a former employee of the Company. The
Company does not believe that any material gain or loss will result from this
transaction. This transaction is subject to the approval by the Bankruptcy
Court.
Work Recovery Centers, Inc.
In 1992, the Company acquired a Colorado corporation named Rehab Net, Inc.,
whose assets and liabilities, upon acquisition, were concurrently transferred
by the Company to a wholly owned subsidiary, Work Recovery Centers, Inc.
("WRC"), a Colorado corporation. The purpose of WRC was to engage in the
development and operation of evaluation and rehabilitation centers directly
and in joint ventures with others. At the beginning of fiscal year 1996, there
were 40 such centers in operation. The current Board of Directors and
management ("New Management") determined that such centers could not be operated
profitably and that existing operations should be greatly reduced.
Consequently, at the end of fiscal year 1996, only three such centers remained.
As of October 1, 1996, only one Company owned center and one joint venture owned
Center were in operation. The centers principally offer ERGOS functional
capacity evaluations, work therapy, vocational assessment and pre- and
post-offer ADA testing and a variety of consultant services, including job
analysis, job site modifications, and safety training.
<PAGE>
Work Recovery Europe, Ltd.
During fiscal year 1993, the Company established Work Recovery Europe, Ltd.
("WRE"), a United Kingdom company, and opened an office in Milton Keynes,
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 Milton Keynes office and is
currently evaluating its international business strategy, and has undertaken
substantial reforms in its operations by redirecting its marketing efforts to
focus on domestic, rather than international, sales. The Company has also
redirected its marketing approach towards sales and placement of equipment
rather than large area, exclusive licensing agreements.
Possible Change of Domicile
As discussed above, the Reorganization Plan provides for a change of the
Company's state of incorporation from Colorado to Delaware.
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.
<PAGE>
PRODUCTS OF THE COMPANY
ERGOS
The ERGOS 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 currently 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.
To the Company's knowledge, there are currently 120 ERGOS in use in North
America. In addition, ERGOS is used in the Company's sole WRC center and in
the remaining joint venture. It is marketed by the Company directly to health
care providers, insurers and large employers, at a price of approximately
$125,000.
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 complementary to ERGOS. It does, however, allow the Company to provide
a more complete line of services to the injured workers' rehabilitation,
vocational and ADA compliance assessment markets.
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. New Management 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 has begun to establish "ERGOS Network Affiliates" ("ENA")
intended to become a national, regional and local network of affiliated users
of ERGOS equipment. The participants in ENA receive access to the ERGOS
technology and the benefits of the marketing efforts of the Company to major
national referral sources. When the Company subcontracts with an ENA affiliate,
it will receive a per-use fee. The Company plans to sell upgrades to ERGOS to
affiliates of ENA at a discounted price. In addition, the Company may agree to
place an ERGOS unit with little up-front cost to an 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 objectively measure functional
capacity and to provide 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. Moreover, the Company's ability to
successfully establish and expand ENA will depend, in part, upon its access to
additional capital for marketing and development.
With the refocusing of the business strategy, the Company does not intend
to operate numerous clinical centers of its own. Accordingly, new management
has closed or sold a total of 38 rehabilitation centers. The remaining two
centers (one owned, one in joint venture), 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
granting of licenses allowing for the exclusive use of ERGOS 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 license
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, and has moved the
Bankruptcy Court to reject all of the foregoing licenses, except for the States
of Minnesota and Hawaii.
International
International sales are expected to decrease as a result of concentrating
the Company's efforts and resources on achieving its North American business
goals.
During fiscal 1993, the Company began to implement an 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.
Prior to fiscal year 1996, a number of licenses had been granted for
foreign countries and regions including, the Arab Gulf region, Canada, United
Kingdom, South Africa, Germany, Austria, China, Denmark, Finland, France, Italy,
Korea, Norway, Portugal, Spain, Sweden, Switzerland, Japan, the Netherlands,
Belgium, Luxembourg, Australia, New Zealand and Malaysia. However, all of
such licenses except for the Arab Gulf and Germany, have either been rejected
by the Company and a motion has been filed in the Bankruptcy Court to approve
such rejection or the Company has reached agreement cancelling the licenses not
rejected with the licensee thereof; which is subject to Bankruptcy Court
approval.
<PAGE>
The Company 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.
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 1997 and has begun
development of a further improved version of ERGOS which it plans to have
available in fiscal 1998, both of which will feature significant software
upgrades.
During the fiscal years ended June 30, 1996, 1995, and 1994, approximately
$311,000, $264,000, and $277,000, 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.
Subject to the availability of capital, the Company plans on developing
additional products in related industries and to continue to update the ERGOS
equipment.
Marketing and Distribution
Formerly, the principal focus of marketing the Company's equipment product
lines was trade conferences and advertisements in professional journals and the
use of direct mail and video tapes. Recently, the Company has hired 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.
See Note 23 to Consolidated Financial Statements for revenues by
geographical area for the years ended June 30, 1996, 1995 and 1994.
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,
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. The Company believes that
it holds the exclusive rights to the ERGOS software. There can be no
assurance, however, 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.
<PAGE>
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. The successful
assertion of any 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 complements 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
At October 1, 1996, the Company and its subsidiaries, employed 44 persons
full time, including management.
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 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 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 its manufacturing
facilities 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 or available for rent.
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 Company also owns a 17,000 square foot facility in Metarie, Louisiana
which was the location of a rehabilitation center ("Louisiana Facility") which
is no longer in operation. The Company has entered into an agreement to sell
the Louisiana Facility which sale has been approved by the Bankruptcy Court.
The proceeds of sale will be used to satisfy the underlying indebtedness and
the balance will be available for Company operations.
Item 3. Legal Proceedings
On May 29, 1996, the Company filed a voluntary petition in the United
States Bankruptcy Court for the District of Arizona to reorganize under Chapter
11 of Title 11 of the United States Bankruptcy Court. Subject to certain
exceptions under the Bankruptcy Code, the Company's filing for reorganization
automatically enjoined the continuation of any judicial or administrative
proceedings against the Company. All creditor actions to obtain possession of
property from the Company or to create, perfect or enforce any lien against the
property of the Company are also enjoined. As a result, the creditors of the
Company are precluded from collecting pre-petition debts without the approval
of the Bankruptcy Court. Since the bankruptcy filing, numerous claims have been
filed with the Bankruptcy Court seeking payment or compensation.
The reorganization process is expected to result in the cancellation and/or
restructuring of substantial obligations of the Company. Under the Bankruptcy
Code, the Company's pre-petition liabilities are subject to settlement under
a plan of reorganization. The Bankruptcy Code also requires that all
administrative claims be paid on the effective date of a plan of reorganization
unless the respective claimants agree to different treatment. There are
differences between the amounts at which claims liabilities are recorded in the
financial statements and the amounts claimed by the Company's creditors and such
differences are material. Significant litigation may be required in the
Bankruptcy Court to resolve any disputes.
Claims by the Company against third parties are also subject to
adjudication by the Bankruptcy Court. The Bankruptcy Court also has
jurisdiction to cancel or modify executory agreements such as leases, licenses,
etc. Substantial claims existed at the time of the Bankruptcy Filing or have
been made since that time.
See Note 27 to Consolidated Financial Statements for a description of
significant claims and legal contingencies involving the Company. It is
anticipated that such claims and contingencies will be resolved in the
Bankruptcy Court.
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. 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. The Reorganization Plan provides for the
issuance of 1,500,000 shares of New Common Stock in settlement of the these
lawsuits (as they relate to the Company).
Investigations
On August 11, 1995 the Securities and Exchange Commission ("Commission")
entered an Order Directing Private Investigation ("Order") in the Matter of
Work Recovery, Inc. for actions and conduct occurring prior to the initiation
of the investigation. 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 Stock 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>
Bid
Quarter Ended High Low
<S> <C> <C>
September 30, 1994 $3.00 $1.7187
December 31, 1994 2.50 1.5313
March 31, 1995 2.4063 1.7500
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
June 30, 1996 .625 .125
</TABLE>
The closing price of the Common Stock on October 4, 1996 was $.125 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 Company'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 Company 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.
<PAGE>
Number of Shareholders
As of October 1, 1996, there were approximately 14,200 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 or C 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, 1996 and 1995 amounted to $676,000
and $618,722, respectively. Under the Reorganization Plan, all Preferred Stock
will be cancelled and exchanged for New Common Stock plus payment of 20% of the
accumulated dividends.
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>
<CAPTION>
FISCAL YEARS June 30, June 30, June 30, June 30, June 30,
ENDED 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Revenues $ 5,341,000 $8,142,000 $19,976,000 $16,000,000 $6,422,000
Income (Loss) From
Operations before
income taxes and
before reorganization
items (14,821,000) (51,181,000) 2,302,000 872,000 (292,000)
Net Income (Loss) (15,523,000) (50,849,000) 1,970,000 872,000 (292,000)
Income (Loss) per Common
Share:
From Operations (.34) (1.43) .08 .01 (.04)
Before Extraordinary Benefit .04
Net Income (Loss) (.35) (1.43) .08 .05 (.04)
Total Assets 5,549,000 15,659,000 33,783,000 26,433,000 14,140,000
Long-Term Liabilities 11,081,000 2,255,000 2,585,000 3,352,000 1,989,000
Cash Dividends Per Common
Share -- -- -- --
</TABLE>
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.
<PAGE>
Overview
On May 29, 1996, the Company filed a voluntary petition in the United States
Bankruptcy Court for the District of Arizona (the "Bankruptcy Court") to
reorganize under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). The Company is currently operating as a debtor-in-
possession under the supervision of the BankruptcyCourt and is authorized to
operate its business as such.
The accompanying financial statements have been prepared on a going concern
basis which assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As a result
of the reorganization proceedings as well as other factors discussed
throughout this Report, there are uncertainties relating to the ability of the
Company to continue as a going concern. The financial statements do not include
any adjustments that might be necessary as a result of the outcome of the
uncertainties discussed herein including the effects of any plan of
reorganization. The appropriateness of using the going concern basis is
dependent upon, among other things, confirmation of a reorganization plan,
success of future operations and the ability to generate sufficient cash from
operations and financing sources to meet obligations.
In the event the Reorganization Plan is approved by the Bankruptcy Court,
continuation of the business of the Company after reorganization is dependent
upon the implementation of the Reorganization Plan, the success of future
operations and the Company's ability to meet its future obligations as they
become due.
Due to unusual transactions and activities and significant accounting
adjustments that have been made in connection with revenues, accounts
receivable, reserves and assets, an accurate measure of comparability can not
be drawn from past results in order to measure those that may occur in the
future. See Notes 29 and 30 to Consolidated Financial Statements.
The Company's Ability to Continue As a Going Concern
The Report of Independent Accountants covering the Company's audited
financial statements (the "Opinion") notes that the Company has suffered from
recurring losses from operations and has a net capital deficiency. The Opinion
further notes that the Company has filed a petition in Bankruptcy Court and
there is substantial doubt about the Company's ability to continue as a going
concern. In order for the Company to continue as a going concern substantial
additional capital will be needed and an acceptable plan of reorganization
will have to be confirmed. There can be no assurance that the Company will be
able to acquire substantial additional capital at all or on terms and conditions
favorable to the Company, or continue as a going concern.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995; Risk Factors
The information contained in this Form 10-K 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 ENA; 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 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; fluctuations in
operating results 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,
" and "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources." The foregoing factors should
be considered in conjunction with any discussion of operations or results by the
Company or its representatives, including any forward-looking discussion, as
well as comments contained in press releases, presentations to securities
analysts or investors, or other communications by the Company.
There can be no assurance that the forward-looking information in this Form
10-K 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 Form 10-K. Further, the Company assumes no obligation to
update or otherwise publicly revise the forward-looking information disclosed
in this Form 10-K to reflect circumstances existing after the date hereof.
Results of Operations
Fiscal 1996 as Compared to Fiscal 1995
Net revenues for fiscal 1996 decreased by approximately 34.4% to
approximately $5,341,000 from approximately $8,142,000 for fiscal 1995. This
decrease is attributed to an approximately 21.8% decrease in sales and related
services and a 28.0% decrease in clinic services. Equipment sales and clinic
services decreased as a result of the adverse publicity and uncertainty
concerning the continuing operations of the Company. The decrease of equipment
sales in the first half of the year was partially offset by increased sales
by new management during the second half of fiscal 1996. In addition, clinic
services decreased due to selling or closing of most of the Company's centers
during the last half of fiscal 1996. There were no significant increases in
prices for the products or services of the Company during fiscal 1996.
Gross loss for fiscal 1996, as compared to fiscal 1995, increased by
approximately 7.1%. This increase is directly attributable to combined losses
sustained by the clinical service centers, including closing costs.
Selling, general and administrative expenses ("SG&A") decreased
approximately 3.2% during fiscal 1996 to approximately $8,537,000 from
approximately $8,822,000 for fiscal 1995. Decreased SG&A resulted from new
management's cost reduction program implemented during the last five months
of fiscal 1996. Decreased SG&A costs, however, were offset by increased legal
and other professional costs which are directly attributable to the
investigations during the first half of fiscal 1996 and resulting change in
management.
Reorganization items totalling $702,000 were recorded in fiscal 1996 which
are directly related to the Company's bankruptcy proceedings. See Note 15 to
Consolidated Financial Statements.
Cash decreased $6,365,000 from approximately $6,554,000 at June 30, 1995 to
approximately $189,000 at June 30, 1996. The principal uses of cash for the year
were $7,331,000 from operating activities, loans to officers and former officers
of $384,000, purchases of property, plant and equipment of $428,000, investment
in unconsolidated affiliates in the amount of approximately $567,000, and
repayments of notes payable, long-term debt and capital leases of $1,103,000.
The principal source of cash was $924,000 received from issuances of common
stock, $1,465,000 in proceeds from issuances of notes payable and $699,000
from long-term debt.
In fiscal 1996, receivables decreased $1,175,000 (78.7%) from approximately
$1,493,000 at June 30, 1995 to approximately $318,000 at June 30, 1996. The
decrease in receivables resulted primarily from decreased trade revenues due
to adverse publicity and the selling or closing of centers and a net increase
of $666,000 in the allowance for uncollectible amounts.
Property, plant and equipment decreased from approximately $5,649,000 at
June 30, 1995 to approximately $3,738,000 at June 30, 1996. The $1,911,000
decrease results principally from the recording of depreciation of $1,252,000,
impairment losses totalling $707,000 and equipment included in the sale of
clinical centers totalling $360,000. In addition, the Company had purchases
totalling $428,000.
In addition, investment losses totalling $926,000 and additional bad debt
of $1,031,000 were recorded during fiscal 1996. See Note 33 to Consolidated
Financial Statements.
Intangible and other assets decreased approximately $900,000 during fiscal
1996 as a result of the sale or closing of the Company's centers and investment
in unconsolidated affiliates, and an increase in impairment reserves.
Total liabilities increased $841,000 from approximately $10,948,000 at June
30, 1995 to approximately $11,789,000 at June 30, 1996. This increase was
directly attributable to increased long-term debt and reorganization costs.
The equity attributable to the Convertible Preferred Stock decreased
approximately $367,000 (21.8%) from fiscal 1995 to fiscal year 1996 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) shares issued in payment of services to a marketing
consultant (9,748 shares); (ii) shares issued in settlement of due related
party (1,651,163 shares); (iii) shares issued under the Company's 1993
Incentive Stock Option Plan (32,500 shares); and (iv) shares issued for cash
(500,000 shares). The previously outstanding treasury stock (674,375 common
shares) has been retired as of July 1, 1995.
Fiscal 1995 as Compared to Fiscal 1994
Net revenues 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.
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. See Note 12 to Consolidated Financial statements. 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.
<PAGE>
In addition, during fiscal 1995 the Company reported additional bad debt
and impairment losses totalling $13,360,000 and $13,825,000, respectively.
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 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, receivables decreased $2,254,000 (64.2%) from approximately
$3,509,000 at June 30, 1994 to approximately $1,495,000 at June 30, 1995.
The decrease in 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 as described in Note 11 to
Consolidated Financial Statements. 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).
Liquidity and Capital Resources
The Company has sustained a significant loss for the year ended June 30,
1996. At June 30, 1996, the Company had working capital of $795,000. The
financial condition of the Company is perilous.
In January 1996, the New Management of the Company began an immediate,
aggressive cost reduction program, which included the selling or closing of
centers and the reduction of corporate staff and other expenses, in an effort to
provide for and alleviate immediate and short-term cash requirements. That
effort has continued since the Bankruptcy Filing.
The Company is in need of additional funds for ongoing operations and it
will need substantial additional funds in order to fulfill its obligations under
the Reorganization Plan if and when it is confirmed.
Funds required for these purposes will be supplied from operations and the
sale of assets, from existing and prospective credit arrangements and from
additional financing that will become available if and when the Reorganization
Plan is confirmed.
Prior to the Bankruptcy Filing, the Company entered into a Loan Agreement
("Loan Agreement") with Recovery Lender, L.L.C., an Arizona limited liability
company ("Recovery Lender") pursuant to which Recovery Lender loaned the
principal sum of $400,000 to the Company. The Loan Agreement contemplates that
additional advances will be made by Recovery Lender not to exceed $5,000,000.
Amounts advanced by Recovery Lender are secured by a lien on the Company's
intellectual property, 14 ERGOS machines and the Company's receivables. The
Loan Agreement provides for interest on the principal amount outstanding from
time to time at the rate of twelve percent (12%) per annum. The Loan Agreement
provides that Recovery Lender may, at its option, convert the amount due
thereunder into equity of the Company following a reorganization at a
conversion ratio of 1% of the stock to be issued and outstanding on the
effective date of a plan of reorganization for every $100,000 of outstanding
principal and accrued interest. The Bankruptcy Court approved the terms of the
Recovery Lender Agreement on July 22, 1996.
Prior to the Bankruptcy Filing, Recovery Lender had advanced $400,000 to the
Company. Since then, it has advanced an additional $500,000. It is anticipated
that additional advances will be made pursuant to the Loan Agreement.
The Company has reached an agreement in principle with a third party
("Investor") to provide additional financing for operations and for funding
the Reorganization Plan. Such agreement is subject to Bankruptcy Court approval
and the execution of definitive documentation. It provides for Investor to
make a secured loan to the Company in the principal amount of $500,000, and,
upon confirmation of the Reorganization Plan, for the purchase of shares of New
Common Stock and warrants to purchase New Common Stock for $1,000,000. Such
loan will be convertible into New Common Stock on the same conversion terms as
Recovery Lender. The Investor is currently a secured creditor of the Company
("Old Loan") and has the option to convert the Old Loan into New Common Stock.
Upon the purchase of New Common Stock and the conversion of both loans, but
before the exercise of warrants, the Investor will own 17.5% of the number of
shares anticipated to be outstanding under the Reorganization Plan.
The Reorganization Plan also provides for the issuance of warrants to
purchase an aggregate of 2,700,000 shares of New Common Stock ("New Warrants")
to the existing holders of Common and Preferred Stock, pro-rata, based on the
ownership of Old Common Stock and Preferred Stock. Such New Warrants will
expire 120 days following the effective date of the confirmation of the
Reorganization Plan and their exercise price will be the value of the New
Common Stock (as determined by the Bankruptcy Court) on the effective date of
the Reorganization Plan.
The Company estimates that it will require cash totalling approximately
$3,000,000 to pay various administrative and unsecured creditors pursuant to
the Reorganization Plan which will be payable in varying amounts between the
date of confirmation and July 1, 1997. The Company believes that it will have
sufficient capital available to pay such claims without having to rely upon the
proceeds from the exercise of New Warrants.
There can be no assurance that the Reorganization Plan will be approved by
the Bankruptcy Court or that it will be accepted by a sufficient number of
creditors and other interested parties as required by the Bankruptcy laws.
The Company has entered into an agreement to sell its property located in
Metarie, Louisiana. After satisfying the underlying encumbrance, the Company
expects to net from $200,000 to $300,000 from this sale.
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 schedule 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, 1996 and June 30, 1995, there were no
disagreements with the independent accountants engaged to audit the Company's
financial statements. On April 29, 1996, the Company's former independent
accountants, LaVoie, Clark, Charvoz & May, P.C. declined to stand for
re-appointment. On the same date, the Company engaged Price Waterhouse LLP to
audit the Company's financial statements for the year ended June 30, 1996.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
On January 18, 1996, a complete change in the composition of the Company's
Board of Directors was effected pursuant to an agreement with the members of
the former Board of Directors ("Former Directors" or "Old Board") who resigned
on that date. A change in management also occurred on that date (See
"Employment Contracts, Termination and Change of Control").
The following table sets forth the names of all directors ("New 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:
<TABLE>
<CAPTION>
Name Age Position with Company
<S> <C> <C>
Dorcas R. Hardy (1) 50 Chair of the Board of
Directors and Acting
President and Acting Chief
Executive Officer
Robert D. Judson, Jr. 46 Acting Chief Financial
Officer
Julian De La Rosa (2) 57 Director
John E. Affeldt, MD 78 Director
Renato DiPentima (1) 55 Director
William R. Sauey (2) 69 Director
Edward M. Young (1)(2) 49 Director
Hirsch Handmaker, M.D. 56 Acting Secretary
John J. Banks 50 Vice President of Research
and Development
Mark S. Dakos 41 Vice President of
Governmental Affairs
James Maki 44 Director of Sales and
Marketing
(1) Member of the
Executive Committee
(2) Member of the Audit
Committee
</TABLE>
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.
Robert D. Judson, Jr. Mr. Judson joined the Company as part of the Team in
January, 1996 as Manager of Financial Operations. He became Acting Chief
Financial Officer on May 20, 1996. Mr. Judson has been the President and CEO
of Sierra Financial Group, Inc. or a predecessor ("Sierra") since 1988.
Sierra provides financial advisory and investment banking services with a
specialty in turn-around and crisis management. Mr. Judson's twenty-three year
career as a financial professional includes fifteen years as a commercial lender
and eight years counselling small and large businesses on a broad range of
financial matters.
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.
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.
James Maki. Mr. Maki joined the Company in July, 1996 as the Director of
Sales and Marketing. From 1994 until he joined the Company, Mr. Maki was
Vice President of Quadrant USA, Inc., a subsidiary of Quadrant Healthcare PLC,
Cambridge, England. From 1992 to 1993, he was Area General Manager for Amsco
Scientific. From 1987 to 1992 he was District Sales Manager, Midwest, for
Beckman Instruments.
Item 11. Executive Compensation
Summary Compensation
The following table sets forth the compensation paid to the acting Chief
Executive Officer, Dorcas R. Hardy, the former Chief Executive Officer Thomas L.
Brandon and the only executive officer to receive total annual compensation in
excess of $100,000 for services rendered in all capacities to the Company and
its subsidiaries during the year ended June 30, 1996 (together, the "Named
Executive Officers").
<TABLE>
Summary Compensation Table
<CAPTION>
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>
Dorcas R. Hardy
Acting Chair,
President and
Chief Executive
Officer (1) 1996 - 0 - - 0 - $ 63,750(2) - 0 -
Robert D. Judson, Jr.
Managing of Financial
Operations and Acting
Chief Financial Officer (3) 1996 - 0 - - 0 - 141,536 - 0 -
Thomas L. Brandon
Chairman, President
and Chief Executive
Officer (4) 1996 129,231 30,000 67,696 - 0 -
(1) Ms. Hardy became the acting President and acting Chief Executive
Officer of the Company on January 18, 1996 pursuant to an agreement
entered into that date between the Company and the Team for New
Management, LLC ("Team"). Pursuant to such agreement, the Team
provides certain management and consulting services to the Company
which include, in addition to Ms. Hardy's services, the services of
an acting Chief Financial Officer. See "Employment Contracts,
Termination and Change of Control".
(2) Does not include $89,000 owed to Ms. Hardy by the Team for services
rendered by her to the Company which will probably not be paid in
full or $45,000 paid to Ms. Hardy during fiscal year 1996 for
consulting services rendered prior to the Team's assumption of
control as management.
<PAGE>
(3) Mr. Judson became the Acting Chief Financial Officer on May 20, 1996.
Until that date, he served in a consulting capacity as Manager of
Financial Operations.
(4) Mr. Brandon served as the Chief Executive Officer of the Company from
December, 1989 until November 4, 1992 and from March 24, 1994 to
December 14, 1995.
</TABLE>
Option Grants
No stock option grants were made to any of the Named Executive Officers
during the fiscal year ended June 30, 1996. No stock appreciation rights were
granted to these individuals during such period.
All outstanding options or warrants to purchase Common or any Preferred
Stock of the Company are subject to elimination, modification or restructuring
pursuant to the plan of reorganization ultimately confirmed by the Bankruptcy
Court. The Reorganization Plan provides for the cancellation of all employee
and other options and warrants including those set forth in the table below.
Employee options to purchase New Common Stock are provided for in the
Reorganization Plan.
The options granted to Mr. Brandon terminated as a result of the termination
of his employment with the Company.
Aggregated Option Exercise and Fiscal Year-End Option Values
No stock options were exercised by any of the Named Executive Officers
during the fiscal year ended June 30, 1996 and no options were held by any of
them on that date.
All outstanding options or warrants to purchase Common or any Preferred
Stock of the Company are subject to elimination, modification or restructuring
pursuant to the plan of reorganization ultimately confirmed by the Bankruptcy
Court. The Reorganization Plan provides for the cancellation of all employee
and other options and warrants including those set forth in the table below.
Employee options to purchase New Common Stock are provided for in the
Reorganization Plan.
Mr. Brandon's unexercised options terminated three months after cessation of
his employment with the Company which became effective January 19, 1996.
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. On September 11, 1996, the New Board of Directors appointed Renato
DiPentima (Chairman), Dorcas R. Hardy and Edward M. Young to the Compensation
Committee.
Compensation of Directors
Until their resignation on January 18, 1996, 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. Former
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. At the time of their
appointment, each New Director received 100,000 warrants for serving as a
director, 25,000 warrants for each committee membership, and 25,000 warrants
for each committee chair ("Directors' Warrants"); (2) indemnification agreements
substantially in the form previously granted to former directors and senior
officers of the Company; and (3) coverage under a directors' and officers'
insurance policy with maximum limits of not less than $5 million. The
Directors' 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 Reorganization Plan provides for the cancellation of all Director's
Warrants and the issuance of New Common Stock to the non-employee members of
the New Board.
The Company paid Lifestyle Enhancement Systems, Inc. $30,000 during fiscal
1996 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
As of the date of this report, none of the Company's executive officers had
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 was 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 employs Dorcas
R. Hardy and makes 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 Chair of the Board, Acting President,
Acting Chief Executive Officer and, until May 20, 1996, Acting Chief Financial
Officer. Under the IMSA, the Company originally paid the Team $25,000 per week
and advanced or reimbursed the Team's out-of-pocket expenses associated with
services provided under the IMSA. The Team sub-contracted with Sierra Financial
Group, Inc. for certain financial and management services including the services
of Robert D. Judson, Jr. who initially served in a consulting capacity as
Manager of Financial Operations and has since been appointed as the Acting
Chief Financial Officer.
Since the Bankruptcy Filing, the Team has continued to manage the Company
pursuant to a Bankruptcy Court approved modification of the compensation
arrangements of the IMSA. As of the date of this Report, the Team receives
$12,500 per week (plus an estimated $1,000 for expenses) which is allocated:
$3,500 to Ms. Hardy, Acting Chief Executive Officer; $3,500 to Mr. Judson,
Acting Chief Financial Officer (through Sierra Financial Group, Inc.); $2,500
to Dr. Handmaker, Acting Secretary (through Healthcare
Technology Group) and the balance to other Team members who are not New
Directors or executive officers. A significant amount of the compensation
payable to the Team has been deferred in order to preserve working capital.
The sub-contract between Team and Sierra Financial Group provides for the
payment of a $125,000 cash bonus if the Company emerges from bankruptcy prior to
January 1, 1997 and $90,000 if it emerges after that date. Mr. Judson and his
wife are 50% owners of Sierra Financial Group and will receive such bonus if it
is paid.
The Old Board authorized the issuance of warrants to the Team
("Team Warrants") to purchase a total of ten million shares of Common Stock
having varying exercise prices. The Plan has never been submitted to
shareholders, and consequently, the warrants were never insured. The
Reorganization Plan provides for the cancellation of the Team Warrants and the
issuance of 1,800,000 shares of New Common Stock, in the aggregate, to the
members of the Team.
<PAGE>
Executive Compensation Committee Report
on Executive Compensation
The members of the Executive Compensation committee of the Old Board
resigned January 18, 1996. This Committee remained inactive until September
11, 1996 when the New Board appointed Renato DiPentima , PhD. (Chairman), Dorcas
R. Hardy and Edward M. Young as members (the "New Committee").
The 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 New Committee has held one meeting which dealt with organizational
matters.
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 September 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>
<CAPTION>
Number ofShares
Name and Address (1) ofBeneficial Percent of
Title of Class of Beneficial Owner Ownership(2) Class (3)
<S> <C> <C> <C>
Common Stock Dorcas R. Hardy 5,500 (5)(6)
Common Stock Robert D. Judson, Jr. 0 (5)(6)
Common Stock John E. Affeldt, M.D. 0 (4)
Common Stock Julian De La Rosa 0 (4)
Common Stock Renato DiPentima 0 (4)
Common Stock William R. Sauey 10,000 (4)
Common Stock Thomas Brandon 1,089,280 2.4%
Common Stock Edward M. Young 0 (4)
Directors and Executive
Officers as a Group
(9 persons) 134,000 (7) (4)(5)(6)
<PAGE>
Notes to Table:
(1) 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.
(2) The information shown is based upon information furnished by the
respective directors and executive officers.
(3) Percentages are based upon 45,918,623 shares outstanding on October
1, 1996, and assuming no conversion of preferred stock. As of October
1, 1996 there were also 113 shares of Series A Preferred Stock,
59,398 of Series B Preferred Stock, and 71,912 of Series C Preferred
Stock which had been issued and were outstanding, all of which are
immediately convertible into Common Stock. If converted on October
1, 1996, an additional 1,096,827 shares of Common Stock would have
been issued.
(4) Does not include options ("Directors Options") to purchase shares of
Old Common Stock held by the non-employee directors which are "out of
the money" and are expected to be cancelled if the Reorganization
Plan is confirmed. Shares of New Common Stock are expected to be
issued to the non-employee directors if the Reorganization Plan is
confirmed.
(5) Does not include any portion of the 10,000,000 warrants ("Team
Warrants") to purchase Old Common Stock granted to the Team; which
warrants have not been allocated to members of the Team; have
varying exercise prices all of which are "out of the money" and are
expected to be cancelled if the Reorganization Plan is confirmed.
The Reorganization Plan provides for the issuance of a total of
2,300,000 shares of New Common Stock to Team Members and key
employees.
(6) Represents less than 1% of the outstanding shares of Common Stock.
(7) Does not include Director Options, Team Warrants or any employee
stock options all of which are subject to cancellation or
modification in the Reorganization Agreement.
Item 13. Certain Relationships and Related Transactions
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 $49,000 for the fiscal year
ended June 30, 1996. The Company discontinued the services of this entity
effective January 18, 1996. The Company paid approximately $14,000 directly to
Mr. Brandon for advertising during the fiscal year ended June 30, 1996 for a
NASCAR racing team believed to be owned by Mr. Brandon. The Company paid
Lifestyle Enhancement Systems, Inc. approximately $30,000 for consulting
services rendered during the fiscal year ended June 30, 1996. 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. Subsequently, the former Board of Directors of the Company
appointed independent counsel to review the conduct of Mr. Brandon and determine
whether his individual conduct would preclude the Company from advancing
expenses on his 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. Neither Mr. Brandon nor
the law firm representing him have returned any of the amounts so advanced.
The members of the Team include Douglas Engmann who has been providing
consulting services to the Company without compensation. The amounts paid to
the Team pursuant to the IMSA, as modified by the Bankruptcy Court, flow
through to the persons (other than Mr. Engmann), actually providing services
to the Company including Ms. Hardy, Mr. Judson and Dr. Handmaker and certain
other full and part-time consultants. The Reorganization Plan provides for
the issuance of shares of New Common Stock to the Team which will be
distributed, in varying amounts, to the members of the Team, including Mr.
Engmann (or an affiliate). Mr. Engmann loaned $125,000 to the Company prior
to the Bankruptcy Filing which amount was subsequently reduced to $35,000. Such
loan is secured by certain accounts receivable and two ERGOS. The
Reorganization Plan provides that, at Mr. Engmann's option, such loan will be
converted into shares of New Common Stock or will be repaid in installments.
See Footnote 25 to Consolidated Financial Statements.
Messrs. Judson and Engmann (or an affiliate) and Ms. Hardy are each members
of Recovery Lenders which has provided pre- and post-Bankruptcy Filing
financing to the Company. Mr. Engmann is the managing member of Recovery
Lender. See "Management's Discussion and Analysis - Liquidity and Capital
Resources".
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:
Reports of Independent Accountants
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Operations for the fiscal years ended June
30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the fiscal years
ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1996, 1995 and 1994
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:
II - Valuation and Qualifying Accounts for the fiscal years ended June 30,
1996, 1995 and 1994
(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 B 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
<PAGE>
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.
10.30 Business Purchase Agreement dated September 9, 1996 between the
Company and R.J. Enterprises (Sale of New Concepts Corporation).
10.31 Security Agreement dated April 30, 1996 between the Company and
Douglas J. Engmann
10.32 Loan Agreement dated May 17, 1996 between the Company and
Recovery Lender, L.L.C.
* Incorporated by reference from the Registrant's Registration
Statement on Form S-1 (No. 33-67210) or amendments thereto.
** Incorporated by reference from the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995.
<PAGE>
(b) Reports on Form 8-K
A Report on Form 8-K, dated April 29, 1996, was filed by the Registrant,
which reported under Item 4 the declination of the Company's former
independent accountants to stand for re-appointment and the appointment of
new independent accountants.
A Report on Form 8-K, dated May 29, 1996, was filed by the Registrant
which reported under Item 3 the initiation of the Bankruptcy Proceedings.
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: October 8 , 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: October 8, 1996
/S/ ROBERT D. JUDSON, JR.
Robert D. Judson, Jr., Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: October 8 , 1996
/S/ JOHN E. AFFELDT
John E. Affeldt M.D., Director
Date: October 8, 1996
/S/ JULIAN W. De La ROSA
Julian W. De La Rosa, Director
Date: October 8, 1996
/S/ RENATO DiPENTIMA
Renato DiPentima, Director
Date: October 8, 1996
/S/ WILLIAM R. SAUEY
William R. Sauey, Director
Date: October 8, 1996
/S/ EDWARD M. YOUNG
Edward M. Young, Director
Date: October 8, 1996
<PAGE>
<AUDIT-REPORT>
Report of Independent Accountants
To the Board of Directors and Shareholders' of
Work Recovery, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 25 present fairly,
in all material respects, the financial position of Work Recovery, Inc.
and its subsidiaries at June 30, 1996 and the results of their operations
and their cash flows for the year ended June 30, 1996, in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. However, the Company has
suffered recurring losses from operations and has a net capital deficiency.
As discussed in Note 1 to the financial statements, the Company filed a
petition with the United States Bankruptcy Court for reorganization under
Chapter 11 of the Bankruptcy Code on May 29, 1996. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are discussed in
Note 1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Price Waterhouse LLP
Phoenix, Arizona
September 30, 1996
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 sheet of Work Recovery, Inc. and
its subsidiaries as of June 30, 1995 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows
for each of the years in the two 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 related 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.
As disclosed in Note 29 to the financial statements, certain concealments,
irregularities and possible illegal acts may have been committed by certain
former members of management and other third parties. Prior financial
statements have been previously 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. Further revision to
the financial statements may be required if additional irregularities or
illegal acts are identified.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, the Company has
experienced a substantial deterioration of liquidity subsequent to June
30, 1995. 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. Accordingly, 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 the results of its operations and its
cash flows for each of the years in the two 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 and 1994. 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
Tucson, Arizona
October 20, 1995, except for Note 29
for which the date is February 28, 1996
</AUDIT-REPORT>
<PAGE>
WORK RECOVERY, INC.
(Debtor-in-Possession as of May 29, 1996)
CONSOLIDATED BALANCE SHEETS
</TABLE>
<TABLE>
<CAPTION>
ASSETS
June 30 June 30
1996 1995
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 189,000 $ 6,554,000
Receivables, including Related Party, net (Note 8) 318,000 1,493,000
Inventories (Note 7) 813,000 356,000
Marketable Securities (Note 6) 66,000
Prepaid Expenses and Other Assets 183,000 333,000
---------- ----------
Total Current Assets 1,503,000 8,802,000
Property, Plant and Equipment, net (Note 10) 3,738,000 5,649,000
Intangible Assets (Note 11) 123,000 465,000
Other Assets (Note 12) 185,000 743,000
--------- ----------
Total Assets $ 5,549,000 $15,659,000
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 495,000 $ 1,168,000
Accrued Expenses (Note 13) 98,000 345,000
Notes Payable, including Related Parties
(Note 16) 115,000 3,676,000
Current Portion of Long-Term Debt (Note 17) 441,000
Other Current Liabilities 88,000
Unallocated Credits (Note 30) 966,000
Deferred Consulting Revenue (Note 8) 2,009,000
---------- -----------
Total Current Liabilities 708,000 8,693,000
Liabilities Subject to Compromise (Note 14) 11,081,000
Long-Term Debt (Note 17) 2,255,000
---------- -----------
Total Liabilities 11,789,000 10,948,000
Commitments and Contingent Liabilities
(Notes 18 and 27)
Shareholders' Equity (Deficit):
Preferred Stock, Cumulative Convertible (Note 19) 1,318,000 1,685,000
Common Stock, $.004 par value:
Authorized 100,000,000 shares, issued and
outstanding 45,918,623 shares (1996) and
44,132,172 shares (1995) 184,000 176,000
Additional Paid-in Capital 57,311,000 53,648,000
Accumulated Deficit (65,053,000) (49,414,000)
Treasury Stock, at cost (1,384,000)
----------- -----------
Total Shareholders' Equity (Deficit) (6,240,000) 4,711,000
----------- -----------
Total Liabilities and Shareholders'
Equity (Deficit) $ 5,549,000 $ 15,659,000
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
WORK RECOVERY, INC.
(Debtor-in-Possession as of May 29, 1996)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1994
<S> <C> <C> <C>
Net Revenues:
Sales and Related Services $ 1,611,000 $ 2,061,000 $ 4,333,000
Clinic Services 3,730,000 5,181,000 5,643,000
Licensing 300,000 10,000,000
Consulting (Related Party)(Note 8) 600,000
---------- --------- ----------
Total Net Revenues 5,341,000 8,142,000 19,976,000
Cost of Sales 8,525,000 11,115,000 12,146,000
---------- ---------- ----------
Gross Profit (Loss) (3,184,000) (2,973,000) 7,830,000
Expenses:
Selling, General and
Administrative 8,537,000 8,822,000 4,801,000
Settlement with Investors (Note 32) 185,000
Loss from Unusual Transactions
and Activities (Notes 29 and 31) 128,000 493,000
Additional Bad Debts 1,031,000 13,360,000
Impairment Losses (Note 10) 707,000 13,825,000
---------- ---------- ----------
Income (Loss) From Operations (13,772,000) (39,473,000) 3,029,000
---------- ---------- ----------
Other Income (Expense):
Interest Expense (416,000) (439,000) (340,000)
Investment Losses (Note 33) (926,000) (11,437,000)
Interest Income 267,000 351,000 170,000
Miscellaneous Income (Expense) 26,000 (183,000) (557,000)
---------- ---------- -----------
Net Other Expense (1,049,000) (11,708,000) (727,000)
Income (Loss) From Operations
Before Income Taxes and
Reorganization Items (14,821,000) (51,181,000) 2,302,000
Reorganization Items (Note 15) 702,000
Income Taxes (Benefits) (332,000) 332,000
---------- ---------- ---------
Net Income (Loss) $ (15,523,000) $(50,849,000) $ 1,970,000
========== ========== =========
Earnings (Loss) per Common and
Common Equivalent Share $ (.34) $ (1.43) $ .08
Weighted Average Number of Common
Shares Outstanding 45,817,199 35,492,074 25,844,223
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
WORK RECOVERY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------
Series A Series B Series C Preferred
Shares Amount Shares Amount Shares Amount Share Amount Total
------- ------- ------ --------- ------- ---------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 4,608 $46,000 120,352 $1,204,000 380,050 $3,800,000 - $ - $5,050,000
Preferred Shares Converted
to Common Shares (538) (5,000) (25,198) (225,000) (279,007)(2,790,000) (3,020,000)
Preferred Shares Issued for
Dividends 101 1,000 6,516 65,000 56,889 569,000 635,000
Preferred Shares Issued 8,000 80,000 80,000
Common Shares Issued for Services
Common Shares Recovered
(Previously Cancelled)
Common Shares Issued for
Conversion of Debt
Net Income
------ ------- ------- --------- --------- -------- ------ -------- ---------
Balance, June 30, 1994 4,171 42,000 101,670 1,044,000 157,932 1,579,000 8,000 80,000 2,745,000
Preferred Shares Converted to
Common Shares (4,211) (42,000) (44,887) (449,000) (96,818) (968,000) (1,459,000)
Preferred Shares Issued for
Dividends 1,285 13,000 10,126 101,000 24,287 243,000 357,000
Preferred Shares Issued for Cash 4,200 42,000 42,000
Exercise of Warrants to Common
Shares
Common Shares Issued for Services
Common Shares Issued for License
and Investments (Notes 5, 10
and 11)
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 13,000 71,109 738,000 85,401 854,000 8,000 80,000 1,685,000
Preferred Shares Converted to
Common Shares (1,677) (18,000) (15,597) (179,000) (17,325) (173,000)(10,664) (113,000) (483,000)
Preferred Shares Issued for
Dividends 545 6,000 3,886 39,000 3,836 38,000 2,664 33,000 116,000
Common Shares Issued for Services
Common Shares Issued in
Settlement Due Related Party
Common Shares Issued Under Stock
Option Plan
Common Shares Issued for Cash
Issuance Costs
Retirement of Treasury Stock
Net Loss
------- -------- ------- -------- ------ -------- ------ -------- ----------
Balance, June 30, 1996 113 $1,000 59,398 $598,000 71,912 $719,000 - $ - $1,318,000
======= ======== ======= ======== ====== ======== ====== ======== ==========
</TABLE>
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1996, 1995, AND 1994 (continued)
<TABLE>
Capital in Retained Earnings
Common Stock Excess of (Accumulated
Shares Amount Par Value Deficit)
--------- ------- ----------- -----------------
<S> <C> <C> <C> <C>
Balance, June 30, 1993 19,642,240 $ 79,000 $12,545,000 $ 457,000
Preferred Shares Converted to Common Shares 1,722,020 7,000 3,014,000
Preferred Shares Issued for Dividends (635,000)
Preferred Shares Issued
Common Shares Issued for Services 892,047 3,000 586,000
Common Shares Issued for Cash 4,564,310 18,000 7,838,000
Common Shares Recovered (Previously Cancelled) 165,500 1,000 (1,000)
Common Shares Issued for Conversion of Debt 74,866 280,000
Net Income 1,970,000
--------- -------- ---------- -------------
Balance, June 30, 1994 27,060,983 108,000 24,262,000 1,792,000
Preferred Shares Converted to Common Shares 889,964 3,000 1,456,000
Preferred Shares Issued for Dividends (357,000)
Preferred Shares Issued for Cash
Exercise of Warrants to Common Shares 1,963,499 8,000 2,214,000
Common Shares Issued for Services 860,694 3,000 2,207,000
Common Shares Issued for License and Investments
Notes 5, 10, and 11) 4,750,000 19,000 9,931,000
Common Shares Issued for Conversion of Debt 308,189 1,000 846,000
Common Shares Issued Under Stock Option Plan 168,000 1,000 271,000
Common Shares Issued for Cash 8,130,843 33,000 12,845,000
Issuance Costs (384,000)
Net Loss (50,849,000)
--------- ------- ----------- ------------
Balance, June 30, 1995 44,132,172 176,000 53,648,000 (49,414,000)
Preferred Shares Converted to Common Shares
Preferred Shares Issued for Dividends 267,415 1,000 482,000
Common Shares Issued for Services 9,748 30,000
Common Shares Issued in Settlement Due Related
Party 1,651,163 7,000 3,543,000
Common Shares Issued Under Stock Option Plan 32,500 69,000
Common Shares Issued for Cash 500,000 2,000 998,000
Issuance Costs (77,000)
Retirement of Treasury Stock (674,375) (2,000) (1,382,000)
Net loss (15,523,000)
---------- ------- ---------- -------------
Balance, June 30, 1996 45,918,623 $184,000 $57,311,000 $(65,053,000)
========== ======== =========== =============
</TABLE>
WORK RECOVERY, INC.
(Debtor-in-Possession as of May 29, 1996)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $(15,523,000) $(50,849,000) $1,970,000
Adjustments to Reconcile
Net Income (Loss) to Net Cash
Used in Operating Activities:
Depreciation and Amortization 1,878,000 1,094,000 1,057,000
Provision for Taxes (332,000) 332,000
Expenses Paid by Stock Issuance 30,000 2,201,000 590,000
Deferred Revenues 20,591,000
Impairment Losses 707,000 13,825,000
Reorganization Items 702,000
Bad Debts 1,031,000 13,360,000
Investment Losses 926,000 11,437,000
Changes in Assets and Liabilities:
Receivables, including Related Party 509,000 (18,641,000) (3,760,000)
Inventories (457,000) 82,000 (98,000)
Prepaids and Other Current Assets 150,000 (165,000) 25,000
Leases Receivable 183,000 (1,836,000)
Intangibles and Other Assets 20,000
Accounts Payable 1,231,000 192,000 462,000
Accrued Expenses and Other Current
Liabilities (83,000) (566,000) 3,000
Unallocated Credits 48,000 800,000 166,000
Deferred Licensing Revenue 1,500,000 2,009,000 (680,000)
--------- --------- ---------
Net Cash Used in
Operating Activities (7,331,000) (4,779,000) (1,769,000)
Cash Flows from Investing Activities:
Investment in Notes Receivable (2,600,000)
Investment in Deposits
and Other Assets 13,000
Loans to Officers and Former
Officers (384,000) (200,000)
Repayments from Officers 333,000
Investment in Unconsolidated
Affiliates (567,000) (1,345,000) (971,000)
Purchases of Property, Plant
and Equipment (428,000) (554,000) (292,000)
Sales of Clinical Centers 360,000
Other Assets (631,000) (252,000)
---------- --------- ----------
Net Cash Used in
Investing Activities (1,019,000) (2,530,000) (3,969,000)
Cash Flows from Financing Activities:
Proceeds from Issuance of Common
Shares 924,000 14,465,000 6,327,000
Loans from Officers 283,000
Net Repayments on Notes Payable (367,000) (112,000) (1,021,000)
Proceeds from Notes Payable 1,465,000 2,000,000
Purchase of Treasury Stock (1,383,000)
Repayment of Long-Term Debt and
Capital Leases (736,000) (2,295,000) (1,124,000)
Proceeds from Long-Term Debt 699,000
--------- --------- ---------
Net Cash Provided by
Financing Activities 1,985,000 12,675,000 4,465,000
--------- ---------- ---------
Net Increase (Decrease) in Cash (6,365,000) 5,366,000 (1,273,000)
Cash at Beginning of Year 6,554,000 1,188,000 2,461,000
---------- --------- ---------
Cash at End of Year $ 189,000 $ 6,554,000 $ 1,188,000
========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
1. Chapter 11 Bankruptcy Filings and Reorganization
On May 29, 1996, Work Recovery, Inc. ("WRI") and its wholly-owned
subsidiary Work Recovery Centers, Inc. ("WRCI") (collectively, the "Company")
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Arizona (the "Bankruptcy Court") and are currently
operating as Debtor-in-Possession subject to the limitations and requirements of
the Bankruptcy Code.
As of the petition date, actions to collect prepetition indebtedness are
stayed and other contractual obligations may not be enforced against the
Company. Substantially all liabilities as of the petition date are subject to
compromise under a plan of reorganization to be voted upon by creditors and
equity security holders and approved by the Bankruptcy Court. The ultimate
settlement terms with respect to such liabilities are subject to an approved and
confirmed plan and, accordingly, are not determinable as of this date. These
claims are reflected in the June 30, 1996 balance sheet as "Liabilities Subject
to Compromise." For financial statement presentation, secured debt is also
accounted for as liabilities subject to compromise. Liabilities subject to
compromise under the reorganization proceedings are recorded at $11,081,000 as
of June 30, 1996. The Company is in default on substantially all of its
outstanding debt and loan agreements and consequently, such debt is classified
as liabilities subject to compromise as of June 30, 1996.
Under the provisions of the Bankruptcy Code, the Company's creditors are
required to file their claims with the Bankruptcy Court by October 1, 1996.
In addition to confirming debts and payables already recorded, this process
normally gives rise to the receipt of numerous claims for disputed and
previously unrecognized amounts. Claims totaling approximately $43,994,000 have
been received as of September 30, 1996, however, the Bankruptcy Court is
currently several days behind in processing creditors' claims and consequently,
the ultimate amount of the claims may materially exceed this amount. The
Company has begun the lengthy process of reviewing and reconciling these claims,
and, while it believes its records accurately reflect all prepetition
liabilities, it is possible the review and reconciliation process will result in
adjustments, in amounts that could be material, to the recorded liabilities.
Under the Bankruptcy Code the Company may reject executory contracts, including
lease obligations. Since the petition date, the Company has filed motions to
reject leases and executory contracts. For rejected leases, the Company ceased
paying rent on such leases and tendered possession of the leased premises to the
landlords. As of June 30, 1996, the Company has accrued $530,000 as a reserve
for estimated damages for the rejection of leases and executory contracts which
amount is reported in liabilities subject to compromise in the accompanying
balance sheet and as reorganization items in the accompanying statement of
operations. This amount may be subject to adjustment as the Company completes
its assessment of its leases and other executory contracts and as proofs of
claim resulting from rejected leases and contracts are reconciled. Parties
affected by these rejections may file claims with the Bankruptcy Court in
accordance with the reorganization process.
On August 5, 1996, the Company filed its initial Joint Plan of
Reorganization (the "Plan") and Joint Disclosure Statement with the Bankruptcy
Court. The Plan provides for the reorganization and continuation of the
Company through the restructuring of the majority of the Company's prepetition
unsecured debt. In addition, the Plan contemplates substantial dilution of the
interests of current equity holders. There is no assurance that the Plan will
receive the requisite approval of the creditors or, ultimately, of the
Bankruptcy Court. The Company has until the start of the confirmation hearing,
currently scheduled to commence on November 17, 1996, to obtain acceptance of
the Plan. Should the Company fail to obtain acceptance of its plan and the
exclusivity period to obtain such acceptance not be extended by the Bankruptcy
Court, any creditor or equity holder will be free to file a plan of
reorganization with the Court and solicit acceptances.
In the event a plan of reorganization is approved by the Bankruptcy Court,
continuation of the business after reorganization is dependent upon the
implementation of the Plan, the success of future operations and the Company's
ability to meet its future obligations as they become due. The accompanying
financial statements have been prepared on a going concern basis. The
appropriateness of using the going concern basis is dependent upon, among other
things, confirmation of a plan, success of future operations and the ability to
generate sufficient cash from operations and financing sources to meet
obligations.
As a result of the reorganization proceedings, the Company may have to sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the financial statements. Further, the approved
Plan could materially change the amounts currently recorded in the financial
statements. The financial statements do not give effect to all adjustments to
the carrying value of assets, or amounts and classifications of liabilities that
may be necessary as a consequence of these bankruptcy proceedings.
2. 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 Board of Directors has voted to
continue the IMSA, as modified, through the administration of the Chapter 11
proceedings.
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. The plan has never been submitted
to shareholders, and consequently, the warrants were never issued.
The Joint Plan of Reorganization contemplates the issuance of 2.5 million
shares of new common stock to the Team and to existing members of the Company's
Board of Directors in full satisfaction of their existing claims for warrants
and in partial payment for services rendered during the administration of the
bankruptcy proceedings. As the Plan has not been formally approved by the
Bankruptcy Court as of September 30, 1996, 1996, the required accounting entries
associated with this transaction have not been reflected in the accompanying
financial statements.
On January 18, 1996, the Company also entered into Severance Agreements and
Releases ("Severance Agreements") with two former officers, Mr. Bunker and Ms.
Duncan, whereby they would continue to assist in the orderly transition of
management control and provide requested information at per annum rates
approximating their prior compensation as officers. The Company has agreed not
to assert any claims against them existing as of January 18, 1996 subject to
certain exceptions.
3. Description of Business and Summary of Significant Accounting Policies
Description of Business:
WRI develops, manufacturers, sells and distributes equipment and supplies
to the rehabilitation health care industry, to assist rehabilitation facilities,
physician groups, and hospitals in establishing functional capacity
evaluations and work therapy programs. The primary product of the Company is
the ERGOS . The ERGOS is a machine that uses a proprietary, integrated system
of test protocols that assesses virtually all of the physical demand elements
used by the U.S. Department of Labor to define work. In addition, the Company
has granted license agreements which grant to 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. See Note 23 for an analysis of revenues by
geographical area.
WRCI, (formerly known as RehabNet, Inc.) a wholly owned subsidiary of WRI,
acquired, developed and operated centers that specialized in providing therapy,
evaluation, and recovery conditioning to industrially-injured workers and in
providing consulting services to employers. During fiscal 1996, WRI sold or
closed most of its center operations and intends only to continue to operate a
limited number of clinical centers.
New Concepts Corporation ("NCC"), a division of WRI, manufactures equipment
and supplies for the rehabilitation health-care industry and educational
products for schools, universities and industrial training programs.
Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of WRI and
subsidiaries 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 records revenue when services are rendered and when products
are shipped.
The Company's licensing activities ceased in fiscal 1995. With respect to
those licensing agreements in prior years, in accordance with the structure of
the licensing agreements, revenues were ordinarily recognized when licensing
agreements were executed. Receivables previously recorded, which, based on
subsequent circumstances appear uncollectible, have been reserved.
Consulting revenues ceased in fiscal 1995. During fiscal 1995, consulting
revenues earned and collected under provisions of the contract disclosed in
Note 8 were reflected in operating results in proportion to the estimated costs
incurred. Deferred revenues on the consulting contract were offset to the
receivable in the prior fiscal year.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be 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 (loss) 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 include actual direct material and labor
costs.
Goodwill
Goodwill associated with acquisitions was being amortized using the
straight line method over a 40 year period. Due to the significant financial
deterioration of the Company, goodwill has been fully amortized. Accumulated
amortization totalled $1,152,000 and $5,329,000 as of June 30, 1996 and 1995,
respectively.
Leases Receivable
The Company has sold some of its products under long-term lease
arrangements under terms consistent with its major competitors. These
arrangements have been recorded as sales-type leases. Leases which appear
uncollectible are recorded at the estimated 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 6 and 12.
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" ("FAS 109") 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.
There was no cumulative effect on the results of operations from the adoption of
FAS 109.
Liabilities Subject to Compromise
Liabilities subject to compromise include obligations which were
outstanding on the bankruptcy filing date and are subject to compromise under
the terms of the Plan. See Note 14.
Reorganization Items
Reorganization items consist of income, expenses and other costs directly
related to the reorganization of the Company pursuant to the Bankruptcy Code.
See Note 15.
Earnings (Loss) Per Common Share
Earnings (loss) per share is computed by dividing the net earnings (loss)
for the period (after deduction of preferred stock dividend requirements) by the
weighted average number of common stock and common stock equivalents outstanding
during the period. Common stock equivalents include shares issuable under
stock options, warrants, and redeemable convertible preferred stock, and are
determined under the treasury stock method. Common stock equivalents are
excluded from the computation if their effect is anti-dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121") issued in March 1995, and effective for fiscal years beginning after
December 15, 1995, requires the recognition of impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for recognition of impairment losses on long-lived assets and
certain intangible assets to be disposed of in accordance with FAS 121. During
fiscal 1996, impairment losses totalled $707,000 and such amounts have been
recognized in the accompanying financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), issued in October 1995, and effective for
fiscal years beginning after December 15, 1995, encourages, but does not
require, a fair value based method of accounting for employee stock options or
similar equity instruments. It also allows an entity to elect to continue to
measure compensation cost using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees", but requires pro forma disclosures of net income
and earnings per share as if the fair value based method of accounting had been
applied. While the Company is still evaluating FAS 123, it currently expects to
elect to continue to measure compensation cost under APB 25 and comply with the
pro forma disclosure requirements in fiscal 1997. If the Company makes this
election, this statement will have no impact on the Company's results of
operations or financial position.
4. Acquisitions
No individually significant business combinations were transacted during
fiscal 1996, 1995 or 1994.
5. Financial Instruments
The estimated fair value of financial instruments including cash and cash
equivalents, accounts receivable and current liabilities approximate their
carrying amounts because of the relatively short maturity of these instruments.
The carrying values of long-term debt, including the current portion,
approximate the related fair values. The estimated fair value of other
financial instruments at June 30, 1996 cannot be determined because the Company
is a debtor-in-possession under the Bankruptcy Code and such liabilities are
subject to compromise in the bankruptcy process.
6. Marketable Equity Securities
Under FAS 115, net unrealized gains and losses on trading securities are
reported at fair value, with unrealized gains and losses included in earnings.
The Company has determined that its marketable securities held during fiscal
1996 and 1995 are appropriately classified as trading securities under the
provisions of FAS 115.
At June 30, 1996 and 1995, the Company held 800,000 shares of Wincanton
Corporation ("Wincanton") 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 remaining
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
WRI, further discussed in Note 8, had not been disclosed to the public at that
time however. Subsequent to public disclosure of the agreement, the Wincanton
stock has significantly declined in value and as of September 30, 1996 traded at
approximately $.03 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.
At June 30, 1994, the Company held 200,000 shares of Wincanton 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 totaled
$1,100,000 which exceeded market value by $100,000. A valuation allowance in
that amount was established with a corresponding charge to earnings at that
date.
As a result of the above, no value has been placed on the 800,000 shares as
of June 30, 1996. A reduction in value of $66,000 and $3,934,000 has been
recorded as a loss during fiscal 1996 and 1995, respectively .
7. Inventories
<TABLE>
Inventories consist of the following:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Raw Materials $ 631,000 $ 336,000
Finished Goods 121,000 66,000
Work in Progress 197,000 -
Reserve for Excess and Obsolete Inventory (136,000) (46,000)
-------- --------
$ 813,000 $ 356,000
======== ========
</TABLE>
8. Receivables
<TABLE>
Receivables consist of the following:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Trade, net of allowance for uncollectible amounts
of $2,426,000 and $1,760,000 in 1996 and 1995,
respectively $ 273,000 $ 1,255,000
Related Party Consulting, net of deferred
revenues of $6,991,000 in 1995 - -
Leases Receivable - Current, net of allowance
for uncollectible amounts of $808,000 in 1995 - 100,000
Licenses Receivable - Current, net of allowance for
uncollectible amounts of $7,738,000 and deferred
revenues of $8,000,000 in 1995 - -
Other 45,000 138,000
--------- ----------
$ 318,000 $ 1,493,000
========= ==========
</TABLE>
At June 30, 1995, consulting receivables include $6,991,000 due from
Wincanton for consulting services. At June 30, 1995 licensing receivables
include $1,500,000 due from Queensland Industries. Both receivable balances
have been fully reserved for as of June 30, 1996 and 1995. As management does
not anticipate collection of these receivable balances within the next fiscal
year the amounts have been classified as non- current and included in other
assets as of June 30, 1996. See Note 12.
The Company entered into a consulting agreement with Wincanton as of
July 1, 1994 whereby WRI would provide certain consulting services to Wincanton
related to marketing of Tradesman Industries, Inc. products. Tradesman
Industries, Inc. ("Tradesman") is a subsidiary of Wincanton. 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
totaling 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.
Revenue of $600,000 was previously recognized in proportion to identified
costs incurred and approximately $2,009,000 of the approximate $2,609,000 paid
under the agreement was deferred as of June 30, 1995. No additional amounts
have subsequently 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. Consequently, the deferred revenue balance
totaling $2,009,000 has been included in liabilities subject to compromise as of
June 30, 1996.
9. Investments as Lessor
The Company has leased to approved customers its ERGOS and Transition Work
Stations ("TWS"). Lease agreements are accounted for as 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
are as follows:
1997 $ 1,619,000
1998 867,000
1999 498,000
2000 148,000
Totals $ 3,132,000
<TABLE>
Net investment in sales-type leases:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Minimum Lease Payments Receivable $ 3,132,000 $ 3,630,000
Allowance for Uncollectible Payments (2,495,000) (2,893,000)
Unearned Amount Representing Interest (637,000) (637,000)
---------- ----------
Net Investment $ - $ 100,000
---------- ----------
Current Portion Included in Receivables $ - $ 100,000
Net Investment in Sales-Type Leases $ - $ -
Contingent Rental Income $ - $ -
Executory Costs Lessee Lessee
</TABLE>
Equipment leases have been fully reserved as of June 30, 1996. This
decision was based on the 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, no residual value of the equipment was provided
in establishing this provision. Two of the leases, discussed below, which were
subsequently repudiated by the lessees, were reversed during fiscal 1995
resulting in a restatement of the fiscal 1994 financial statements.
Two leases entered into during fiscal 1994 have subsequently been
repudiated by the lessees. One agreement was with Lifestyle Enhancement Systems
("Lifestyle"). The Lifestyle lease contributed approximately $228,000 to fiscal
1994 income, and had payments applied totaling approximately $46,000. The other
lease was with Queensland Industries, a subsidiary of Wincanton. The Queensland
lease contributed approximately $1,048,000 to fiscal 1994 net income, and had
payments applied totaling $220,000. These sales were reversed in fiscal 1995
and the payments were recorded as unallocated credits; such payments are
included in liabilities subject to compromise as of June 30, 1996.
10. Property, Plant and Equipment
<TABLE>
Property, plant and equipment consist of the following:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Land $ 800,000 $ 800,000
Buildings 2,084,000 1,992,000
Furniture & Equipment 4,195,000 5,897,000
Vehicles 70,000 133,000
Leasehold Improvements 179,000 450,000
---------- ---------
Total, at cost 7,328,000 9,272,000
Less Accumulated Depreciation
and Amortization (3,590,000) (3,623,000)
---------- ---------
$ 3,738,000 $ 5,649,000
========== =========
</TABLE>
Furniture and equipment as of June 30, 1996 includes assets held for sale
totaling $70,000, net of accumulated depreciation of $671,000 and an impairment
loss of $535,000 recorded in fiscal 1996. These assets include primarily
surplus office furniture returned from the Company's closed clinical centers
during fiscal 1996. The carrying value of such assets reflects estimated net
realizable value based on independent appraisals and these assets are expected
to be disposed of within the next fiscal year. In addition to the above,
impairment losses were recognized during fiscal 1996 totaling $172,000, for the
write down of building improvements at the Company's Metairie, Louisiana
facility. In June 1996, the Company accepted an offer to sell the Metairie,
Louisiana facility for $1,200,000. If completed, the sale will result in the
payment of approximately $805,000 in debt which is fully secured by this real
property and other assets.
Included in furniture and equipment is $890,000 in 1996 and $884,000 in
1995 of equipment accounted for as capitalized leases. Accumulated depreciation
and amortization includes accumulated amortization of equipment under capital
leases of $604,000 and $456,000 as of June 30, 1996 and 1995, respectively.
11. Intangible Assets
On December 5, 1994 the Company entered into an agreement with Tradesman
for the master distribution license to sell all Tradesman products in the United
States in exchange for $6,000,000 (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 asserts it is a development stage company
whose principal business is to be the manufacturing, marketing and distribution
of trucks, minivans and trailers with cargo beds and tailgate systems that lower
to the ground. 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. The Company does not anticipate any
revenue from this asset, accordingly, it fully reserved the asset in fiscal
1995. Also see Note 12. It is the intent of WRI to sell the master
distribution license; however, there can be no assurance they will be able to
recover any of WRI's investment in this license.
12. Other Assets
<TABLE>
Other assets consist of the following:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Related Parties:
Investment in unconsolidated affiliates,
net of 1996 and 1995 valuation reserve
of $840,000 $ - $ 352,000
Investment in Tradesman stock, net of
1996 and 1995 valuation reserve of $2,500,000 - -
Tradesman unit deposit, net of 1996 and 1995
impairment reserve of $1,500,000 - -
Consulting, net of deferred revenues of $6,991,000
in 1996 - -
Advances to related party (primarily
Australia), valuation reserve of $4,730,000 (1996)
and $4,163,000 (1995) - -
Leases Receivable, net of allowance for
uncollectible amounts of $2,495,000 (1996) and
$1,953,000 (1995) - -
Licenses Receivable, net of allowance of uncollectible
amounts of $7,481,000 in 1996 and deferred revenues
of $13,600,000 and $ 5,600,000 for 1996 and 1995,
respectively - -
Other, net of impairment reserve of $680,000 in 1996
and $844,000 in 1995 and bad debt allowance of
$336,000 in 1996 and $299,000 in 1995 $ 185,000 391,000
------- ---------
$ 185,000 $ 743,000
======= ========
</TABLE>
On December 5, 1994 WRI agreed to purchase ten percent of the total issued
common stock of Tradesman in exchange for $2,500,000 (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 occurring in January 1995. Additionally, in
accordance with the terms of the Tradesman agreement, WRI made a deposit of
$1,500,000 (697,674 shares at $2.15) for purchase of the first 1,000 unit order.
During fiscal 1995, 3,000,000 shares of the Company's common stock were issued
in partial payment of this transaction in addition to the master distribution
license agreement with Tradesman (see Note 11). The remaining 1,651,163 shares
were issued during fiscal 1996. 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 of June 30, 1995.
As further discussed in Note 25, $840,000 of the above investment in
unconsolidated affiliates relates to a 31% equity interest in Work Recovery, Pty
Ltd ("WR Pty"), an Australian company. As of June 30, 1995 $4,163,000 of cash
and equipment had been advanced to this entity and during fiscal 1996, an
additional $567,000 has been advanced. It is unlikely these funds will be
recovered and, as a result, management has fully reserved these assets during
the corresponding periods in fiscal 1996 and 1995. 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) from Zhuhai Trading, an entity related
to WR Pty.
13. Accrued Expenses
<TABLE>
Accrued expenses consist of the following:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Payroll and Related Taxes $ 95,000 $ 97,000
Other 3,000 248,000
-------- -------
$ 98,000 $ 345,000
======== =======
</TABLE>
14. Liabilities Subject to Compromise and Contingencies Resulting From the
Bankruptcy Proceedings
The principal categories of claims reclassified in the consolidated balance
sheet as of June 30, 1996 and included in liabilities subject to compromise are
as follows:
Unearned Revenue and Unallocated Credits $ 4,523,000
Long-Term Debt 2,659,000
Notes Payable 1,109,000
Accounts Payable and Other Accrued Expenses 2,260,000
Liabilities for Lease Rejections 530,000
----------
$ 11,081,000
==========
15. Reorganization Items
Certain items of income and expense during the year ended June 30, 1996
which were directly related to the Company's reorganization proceedings have
been reflected in the consolidated statements of operation as reorganization
items and include the following items:
Loss on settlement of leases $ 530,000
Professional fees 168,000
Other expenditures directly related to
the Chapter 11 proceedings 4,000
-------
$ 702,000
=======
16. Notes Payable, including Due Related Parties
Notes payable, including due related parties that existed as of the date
of filing for protection under the bankruptcy laws have been reclassified as
liabilities subject to compromise as of June 30, 1996. See Note 14.
<TABLE>
Notes payable, including due related parties consist of the following:
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Note payable to related party, interest at 12.0%
per annum. Note is secured by certain assets of the
Company and is convertible, at the option of lender
and subject to Bankruptcy Court approval, into common
stock of the reorganized Company at 1.0% of the
reorganized company's outstanding stock (on a fully
diluted basis) for each $100,000 of indebtedness.
Principal and interest are due, unless converted, the
earlier of either December 31, 1996 or confirmation
of the Company's Plan or upon filing of a competing plan $ 515,000 $ -
Note payable to related party, secured by certain assets of
the Company. Principal and interest of 15.0% per annum
are due on demand 35,000 -
Note payable to a corporation, secured by two ERGOS
machines and convertible at the option of the lender and
subjectto Bankruptcy Court approval into common stock of
the Company at 1.0% of the reorganized company's outstanding
stock (on a fully diluted basis) for each $100,000 of
indebtedness. Principal and interest at the rate of 10.0% per
annum are due, unless converted, the earlier of either
December 31, 1996 or confirmation of the Company's Plan or
upon filing of a competing plan 500,000 -
Premium finance agreement for directors' and officers'
liability insurance, 6.9% interest, payable in monthly
installment of $27,947 164,000 -
Due related party, balance of payment for license, equity
investment and unit deposit. See Note 20 - 3,550,000
Notes payable to individuals resulting from business
acquisitions. Principal and interest of 6.0% and 8.0% per
annum are due on demand - 116,000
Other short-term notes to individuals are unsecured
loans due on demand with interest rates ranging from
8.0% to 11.0% 10,000 10,000
--------- ----------
Total Notes Payable 1,224,000 3,676,000
Less Liabilities Subject to Compromise 1,109,000 -
--------- ----------
$ 115,000 $ 3,676,000
========= ==========
</TABLE>
17. Long-Term Debt
All long-term debt has been reclassified as liabilities subject to
compromise as of June 30, 1996. See Note 14. Due to the uncertain duration of
the Chapter 11 proceedings, no current maturities have been reflected for 1996
on these loans. As a result of the Company's filing for protection under the
Bankruptcy Code, the Company is in default on substantially all of its
outstanding debt and loan agreements and no debt service payments are being
made.
<TABLE>
Long-term debt consists of the following:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
Trust Deed: Payable in monthly installments of $11,461,
including interest at 9.7% per annum through June 30,
2005, increasing to 15.0% upon default. The remaining
unpaid principal and interest are then due. This loan is
collateralized by real property and other assets $1,232,000 $ 1,213,000
Mortgage: Payable in monthly installments of $7,444,
including interest at 9.7% per annum through June 30,
2005, increasing to 15.0% upon default. The remaining
unpaid principal and interest are then due. This loan is
collateralized by real property and other assets 805,000 787,000
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. 8,000 54,000
Capital Leases: Payable to various entities and
individuals with imputed interest rates ranging from
8.1% to 21.8% and total monthly obligations of
$24,684. These leases are collateralized by
certain equipment 566,000 383,000
Notes to Individuals: Payable in monthly installments
totaling $8,958, including interest at 9%, with final
payments due July 1996 and January 1998 48,000 259,000
--------- ---------
2,659,000 2,696,000
Less Current Portion - 441,000
--------- ---------
Long-Term Debt $ 2,659,000 $ 2,255,000
========= =========
</TABLE>
18. Commitments
The Company leases office space, vehicles and equipment under
noncancellable capital and operating leases expiring through 1999. Although
they may be compromised through the bankruptcy process, the following are the
approximate annual commitments relating to the leases the Company intends to
assume for the years ending June 30 and the approximate future minimum lease
payments under those lease obligations:
<TABLE>
Capital Operating
Leases Leases
<S> <C> <C>
1997 $120,000 $17,000
1998 58,000
1999 5,000
-------
Total minimum lease payments 183,000
Amounts representing interest 22,000
-------
Present value of net minimum lease payments of
proposed leases to be assumed 161,000
Present value of net minimum lease payment of
proposed rejected leases in the Chapter 11
proceedings 405,000
-------
$566,000
=======
Rents
Rent expense for the years ended June 30, 1996, 1995 and 1994 totalled
$1,114,000, $1,473,000 and $1,275,000, 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. During
fiscal 1996 and 1995 the Company issued a total of 9,748 and 860,694 shares,
respectively, of its common stock for services rendered under the above and
other agreements.
Shares issued under these agreements were issued as free trading shares
registered with the Securities and Exchange Commission ("SEC") on Form S-8.
Substantial shares issued under these agreements were issued to persons
otherwise employed by or transacting business with the Company. Present
management can not determine whether there is any correlation between these
shares issued and other reciprocal transactions, 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 1,000 vehicles 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.
19. Preferred Stock
</TABLE>
<TABLE>
Preferred stock consists of:
<CAPTION>
June 30, 1996 June 30, 1995
<S> <C> <C>
11.0% Redeemable Cumulative Convertible,
$10 Redemption Value:
Series A: Authorized 70,000 Shares;
Issued and Outstanding 113 Shares
(1996) and 1,245 Shares (1995) $ 1,000 $ 13,000
Series B: Authorized 200,000 Shares;
Issued and Outstanding 59,398 Shares
(1996) and 71,109 Shares (1995) 598,000 738,000
Series C: Authorized 500,000 Shares;
Issued and Outstanding 71,912 Shares
(1996) and 85,401 Shares (1995) 719,000 854,000
13.75% Redeemable Cumulative Convertible,
$12.50 Redemption Value:
Series D: Authorized 12,000 Shares
Issued and Outstanding 8,000 Shares (1995) - 80,000
--------- ---------
$ 1,318,000 $ 1,685,000
========= =========
</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, 1996, the Company had authorized and issued redeemable cumulative
convertible Series A, B, C and D preferred stock.
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
$1.20 to $3.80 in capital amounts per common share. The Company has reserved
1,096,827 shares of common stock for issuance upon conversions.
Cumulative dividends in arrears at June 30, 1996 and 1995 amounted to
$676,000 and $619,000, respectively.
<TABLE>
Cumulative dividends in arrears at June 30, 1996 consist of the following:
<CAPTION>
Cumulative
Series Number of Shares Cumulative Dividends Dividends per Share
<C> <C> <C> <C>
A 113 $ 789 $ 6.98
B 59,398 289,251 4.87
C 71,912 386,324 5.37
------- ------- ----
131,423 $ 676,364 $ 5.15
======= ======= ====
</TABLE>
20. Common Stock Transactions
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. No such transactions occurred in fiscal
1996. This treasury stock was retired in fiscal 1996.
Common stock was sold on subscription notes with remaining balances
totaling $1,342,000 at June 30, 1995. Additionally, 200,000 shares of common
stock were issued on a $240,000 subscription note. While management intends
to pursue collection of these personally collateralized notes, their collection
cannot be assured. Consequently, these notes were fully reserved during fiscal
1995 and the subscription receivable balance was reversed with no impact on the
Company's statement of operations.
As further disclosed in Note 27, 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. During fiscal 1996, 500,000 shares of
common stock were sold for an aggregate consideration of $1,000,000 with an
average discount to market of 74.2%. 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.
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 the Company's common stock at $2.15 per share.
21. Warrants
There are 6,001 A Warrants, 1,562,500 B Warrants, 175,000 C Warrants,
175,000 D Warrants and 164,000 Dealer Warrants outstanding as of June 30, 1996.
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. 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. In addition, these Warrants are subject to anti-dilution
provisions that increase the number of shares covered by the warrants based
upon subsequent stock issuances, and decrease the price per share to be paid
under the Warrants based upon the price of subsequent stock sales. As a
result of these provisions, holders of such Warrants could assert a right to
purchase several million shares of stock in WRI at a price of $.004 per share.
The Plan contemplates that current Warrant holders will receive a pro rata
share of a specified number of shares of New Common Stock of WRI on account
of such claims and Warrants.
22. 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 or greater 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. All options granted are exercisable
as of the date of grant. A summary of the qualified 1993 Incentive Stock
Option Plan activity during fiscal 1996 is as follows:
<TABLE>
Total
Number of Shares Price Range (in Thousands)
---------------- --------------- -------------
<S> <C> <C> <C>
Outstanding at June 30, 1995 955,420 $1.58 - $3.00 $ 2,024
Exercised (32,500) 1.83 - 2.50 (68)
Canceled (714,666) 1.83 - 2.25 (1,485)
-------- ----------
Outstanding at June 30, 1996 208,254 1.83 - 3.00 $ 471
======== =========
</TABLE>
Available for grant at June 30, 1995 1,407,988
Available for grant at June 30, 1996 2,122,654
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 during fiscal 1996 is as follows:
<TABLE>
Total
Number of Shares Option Price (In Thousands)
---------------- ------------ -------------
<S> <C> <C> <C>
Outstanding at June 30, 1995 8,412,236 $ 1.83 - $ 15.00 $ 73,390
Canceled (7,717,434) 1.83 - 15.00 (71,393)
--------- --------
Outstanding at June 30, 1996 694,802 1.83 - 7.00 $ 1,997
========= ========
</TABLE>
23. Revenues by Geographic Area / Major Customer
<TABLE>
Revenues by geographic area for the years ended June 30 are as follows:
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
United States $ 4,717,000 $ 7,214,000 $ 9,859,000
Europe 552,000 446,000 4,438,000
Canada 72,000 182,000 2,731,000
Far East, Including Australia - - 2,948,000
Middle East - 300,000 -
--------- ---------- ----------
Total Net Revenues $ 5,341,000 $ 8,142,000 $ 19,976,000
========= ========= ==========
</TABLE>
In fiscal 1994, the Company recorded revenues from individual entities
which exceeded 10% of total revenues. Four licenses, each for $2,500,000,
were included in the revenue line item caption "licensing". The licenses
were granted to Carat, Inc., Queensland Industries, Inc/Eurocontrols and
Manados Investments Inc. Certain of these are further discussed in Note 29.
As disclosed in "Description of Business and Summary of Significant Accounting
Policies -Revenue Recognition" the amounts were recognized as revenue upon
execution of the contracts in accordance with the contract terms. Since the
license fees by their nature represent non-repetitive 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, as disclosed in Note 8, during fiscal 1995 the Company entered
into a consulting agreement with Wincanton for $9,600,000, of which $600,000
was recognized as revenue and $6,991,000 was recorded as a contra to accounts
receivable in fiscal 1995 and $2,009,000 has been recorded as unearned revenue
and included in liabilities subject to compromise as of June 30, 1996.
During fiscal 1995, the Company entered into various licensing agreements
with third parties, for the countries of Germany, China, Korea, Arab Gulf
region, 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.
The Company believes substantially all of its foreign licenses are terminated
by their terms and has filed a motion in the Bankruptcy Court to approve
rejection of those licenses.
The Company has a 31% equity interest in WR Pty, the licensee for Australia
and New Zealand. This investment has been fully reserved as of June 30, 1996.
See Note 12.
24. Earnings (Loss) Per Common and Common Stock Equivalents
Per share information is computed by dividing net income (loss) for the
period (after deduction of preferred stock dividend requirements) by the
weighted average number of common and dilutive common stock equivalents
outstanding during each year. See "Description of Business and Summary of
Significant Accounting Policies - Earnings (Loss) per Common Share."
<TABLE>
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Primary:
Weighted Average Common
Shares Outstanding 45,817,199 33,497,660 22,266,260
Weighted Average Common Share
Equivalents - 1,994,414 3,577,963
----------- ---------- ----------
Total Weighted Average Common
and Common Equivalent Shares 45,817,199 35,492,074 25,844,223
=========== ========== ==========
Fully Diluted:
Weighted Average Common
Shares Outstanding 45,817,199 33,497,660 22,266,260
Weighted Average Common
Share Equivalents - 4,345,185 3,577,963
----------- ---------- ----------
Total Weighted Average Common
and Common Equivalent Shares 45,817,199 37,842,845 25,844,223
=========== ========== ==========
</TABLE>
Due to the net loss for fiscal 1996, primary weighted average common 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.
25. Related Party Transactions
<TABLE>
The Company entered into transactions with various affiliated entities. The following table describes these
transactions.
<CAPTION>
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
The Company sold goods and
services to affiliates $ - $ - $ 685,000
The above sales effect on net income - - 259,000
The Company engaged an entity owned by a
brother of a former officer of the Company for
equipment delivery and installation 49,000 96,000 78,000
The Company advertised with a
NASCAR racing team sponsored,in part, by
a former officer of the Company 14,000 85,000 -
The Company received consulting services
from a company in which a former member of the
Board of Directors of the Company is an
officer and owner 30,000 76,000 -
The Company received consulting services from
the current Chief Executive Officer before
appointment of the Team For New Management 45,000 - -
Balance of Indebtedness due from Work
Recovery Pty. Ltd., an equity investment 4,730,000 4,163,000 2,481,000
The Company purchased two centers from an
officer of the Company, net. See Note 29 85,000 - -
The Company made loans to two of the Company's
officers 164,000 - -
The Company advanced payments of legal fees to
former officers under indemnification agreements 220,000 - -
The Company received a loan from a member of
The Team for New Management, of which
$35,000 is subject to compromise 125,000 - -
The Company received a loan from an entity that
received funds from certain officers of the
Company, of which $400,000 is subject to
compromise 515,000 - -
Management fee paid/payable to Team for New
Management 537,000 - -
The Company issued common shares for a license,
equity investment and unit deposit to Tradesman
See Note 20 3,550,000 6,450,000 -
The Company leased space for a WRC center from
the former Chief Executive Officer 22,000 - -
Investment in unconsolidated affiliates:
WR Pty 840,000 840,000 1,071,000
Other - 352,000 1,166,000
Total investment in unconsolidated
affiliates, before reserves 840,000 1,192,000 2,237,000
</TABLE>
The Company owns a 31% equity interest in WR Pty, which is accounted for on
the equity method of accounting for investments in common stock. During the
year ended June 30, 1994, the Company invested $1,418,000 in cash and sold
equipment totaling $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. Additionally, funds were
advanced to the entity through the sale of Company common stock, the net
proceeds of $2,481,000 being retained by the entity. See Note 12.
The total equity in losses of unconsolidated affiliates included in
miscellaneous income (expense) was $567,000, $300,000 and $335,000 for the years
ended June 30, 1996, 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. No amounts were written off in relation to officers loans
during fiscal 1996 and 1995.
At June 30, 1996 and 1995, the Company owned an approximate 9% equity
interest in Wincanton. 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, a master distribution license and agreed to pay a
performance deposit. See Notes 11 and 12.
26. Deferred Income Taxes
<TABLE>
The components of income tax expense for the years ended June 30 are comprised
of the following amounts:
<CAPTION>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Deferred
Federal $ - $ (264,000) $ 264,000
State - (68,000) 68,000
--------- --------- ----------
Total $ - $ (332,000) $ 332,000
========= ========= ==========
Total Provision:
Federal $ - $ (264,000) $ 264,000
State - (68,000) 68,000
--------- --------- ---------
Total $ - $ (332,000) $ 332,000
========= ========= =========
</TABLE>
In accordance with FAS 109 the following table illustrates the composition
of the Company's deferred tax assets (liabilities) as of June 30, 1996 and 1995
were as follows:
<TABLE>
1996 1995
----------- -----------
<S> <C> <C>
Gross Deferred Tax Liabilities:
Revenue Recognition Differences $ 3,150,000 $ 3,708,000
========= =========
Gross Deferred Tax Assets:
Net Operating Loss Carryforwards $ 10,610,000 $ 6,712,000
Impairment Losses 10,390,000 9,680,000
Accounting Reserves 2,250,000 1,798,000
Investment in Unconsolidated Subsidiary 840,000 840,000
Other 80,000 70,000
----------- -----------
24,170,000 19,100,000
Deferred Tax Assets Valuation Allowance (24,170,000) (19,100,000)
------------ ------------
Total Net Deferred Tax Asset $ - $ -
============ ============
</TABLE>
The reconciliation of the expected federal provision to the actual provision
for the years ended June 30 is as follows:
<TABLE>
1996 1995 1994
--------------------- -------------------- ---------------
<S> <C> <C> <C>
Income tax (benefit) at
federal statutory rate $(5,278,000) (34.0%) $(17,402,000) (34.0%) $ 783,000 34.0%
State income taxes net of
federal tax benefit (332,000) (2.1) - - 45,000 2.0
Temporary differences
providing no current
tax benefit 5,493,000 35.4 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 expenses 117,000 0.7 51,000 .1 39,000 1.7
Other-Net - - - - 31,000 1.3
---------- ---- ----------- ---- --------- -----
$ - - % $ (332,000) (.6)% $ 332,000 14.4%
========== ==== ============ ==== ======== =====
</TABLE>
Under FAS 109 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:
<TABLE>
1996 1995 1994
---------------------- ------------------- ----------------------
NCC WRCI NCC WRCI NCC WRCI
-------- ------------- ------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
SRLY Limitation Carryforward $ - $1,720,000 $ - $1,720,000 $937,000 $1,720,000
Utilized in Current Year - - - - (937,000) -
------- --------- ------ --------- -------- ----------
Ending Balance $ - $1,720,000 $ - $1,720,000 $ - $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 totaling approximately
$29,000,000 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. In the event of a change of more than 50% in ownership
of the Company, either through the Plan of Reorganization ultimately adopted or
otherwise, the net operating loss carryforwards may be reduced or become subject
to annual limitations on their use. It is presently uncertain as to what
provisions will be included in the Plan of Reorganization ultimately adopted.
27. Legal Contingencies:
Subject to approval of the Company's Plan of Reorganization by the
Bankruptcy Court, the following matters would be treated and discharged during
the bankruptcy process.
Shareholder and Class Action 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 SEC, 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.
Although the Company is contesting the allegations of the complaints, it is
impossible to predict the ultimate outcome of these lawsuits or any other
related claims that may be filed in connection with the Chapter 11 proceedings.
There can be no assurance 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
During fiscal 1996 the Company 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. Ms.
Duncan and Mr. Bunker each engaged separate counsel and, in January 1996, the
Company advanced legal expenses for Ms. Duncan and Mr. Bunker of $60,000 each.
Regulation S
Another contingency relates to 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. During fiscal 1995
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 are more thoroughly disclosed in Note 29. 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 still investigating whether a
violation of Regulation S has occurred.
If a violation has occurred, the SEC 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 of the
Securities Act. The Company's liquidity would be materially and adversely
affected by any such administrative proceeding by the SEC or civil litigation by
private plaintiffs. No such transactions occurred during fiscal 1996.
Licensee Lawsuit
Al Sabah Trading and Development Company PLC, a licensee of the Company
who, during fiscal 1995, had also entered into transactions to purchase 37 ERGOS
units (more thoroughly described in Note 29), 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, which represents the amount
paid on the license agreement during fiscal 1996, plus attorney's fees and
costs. The Company disputes this claim and is pursuing its defenses in the
Bankruptcy Court. 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 againstthe Company,
the Company would be materially and adversely affected. In relation to this
matter, $1,500,000 has been included in unearned revenues and unallocated
credits in liabilities subject to compromise as of June 30, 1996.
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 license agreements with
other entities, totaling $5,738,000, may be refundable in the event of
continuing default by the Company.
Other Legal Claims
Forestry International, Inc., an entity affiliated with Mr. Brandon, has
made a demand on the Company for payment of 200,000 shares of WRI common stock
in satisfaction of a guarantee made by Mr. Brandon of an obligation between
Wincanton and Forestry International. The guarantee was not disclosed to or
approved by the Board of Directors of WRI and the nature of this agreement has
not been disclosed to the Company. No amount has been accrued relating to
this matter as of June 30, 1996.
Former management of the Company entered into a series of agreements with
Mr. Bobby Roberts pertaining to proposed operations of a center in Louisiana.
Work Recovery Centers, Inc. ("WRC"), a Louisiana corporation, filed a complaint
in the United States District Court in the Eastern District of Louisiana against
the Company and certain of its officers contending that WRI breached a February
17, 1995 agreement between the Company and Mr. Roberts, which agreement is
alleged to be for the benefit of WRC. The Company thereafter filed a
counterclaim against WRC and Mr. Roberts alleging breach of the February 17
agreement. The Company intends to defend vigorously the allegations asserted
by WRC and to pursue its counterclaim against WRC and Mr. Roberts. No amount
has been accrued relating to this matter as of June 30, 1996. See Note 29.
Mr.Robert Page has filed a complaint in the United States District Court in
Delaware against Wincanton, its principals and the Company. Mr. Page alleges
he sold a patent to Wincanton in exchange for shares in Wincanton and that
Wincanton failed to deliver freely tradeable shares. Mr. Page further alleges
that Wincanton, its principals and WRI manipulated the value of Wincanton stock.
The Company disputes these claims insofar as they relate to WRI. No amount has
been accrued relating to this matter as of June 30, 1996.
Other Matters
In 1991, Mr. Brandon and Mr. Stephen Bubala (a former officer of WRI)
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 appropriated by certain foreign persons and their
agents through several activities. With the full cooperation of the Company
and its management, the SEC obtained various injunctions against these
individuals and their agents. During fiscal 1994 the Company replaced the above
shares to Messrs. Brandon and Bubala.
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.
SEC and FBI Investigation
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. No additional information is available
through September 30, 1996.
Nasdaq Investigation and Delisting
As a result of not filing Form 10-K for the year ended June 30, 1995, 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 and continues to be delisted
through September 30, 1996.
28. Statement of Cash Flows
<TABLE>
Supplemental disclosures of cash flow information:
<CAPTION>
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid for interest $ 410,000 $ 425,000 $ 368,000
Cash paid for income taxes 10,000 - -
Noncash Investing Activities:
Wincanton common stock 66,000 3,000,000 1,100,000
Tradesman common
stock, license and deposit - 10,000,000 -
Net assets acquired - 1,312,000 100,000
Noncash Financing Activities:
Due Wincanton on Tradesman
investments - 3,550,000 -
Debt issued or assumed in
business acquisitions - 812,000 -
Equipment acquired under
Capital Lease - - 269,000
Debenture decrease for
reduced conversion rate - - 250,000
Preferred Shares Issued for
dividends 116,000 357,000 635,000
Common Shares Issued:
For Wincanton common stock - 3,000,000 -
For Tradesman investment 3,550,000 6,450,000 -
For business acquisitions - 500,000 100,000
In payment of debt - 848,000 280,000
For services rendered 30,000 2,201,000 590,000
Under stock option plan 69,000 272,000 -
Other - (158,000) -
Converted from preferred stock 483,000 1,459,000 3,020,000
Retired treasury stock 1,384,000 - -
</TABLE>
29. Other Unusual Transactions and Activities
Yorkton Securities, Inc. - Intavest Pty, Ltd.
The Company reported receiving $6,250,000 as collection on accounts
receivable as a subsequent event in its Form 10-Q for the quarter ended March
31, 1995.
The Company has 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 WRI.
At Mr. Brandon's direction, the $6,250,000 was credited as of June 30, 1995
to the following account receivable 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. These entries
were reversed during fiscal 1995 and the $6,250,000 was credited to cash. The
accounts receivable balances were fully reserved in fiscal 1995. The
participation of management of these entities in this transaction has still not
been determined.
The Company also determined that Mr. Brandon signed a loan guarantee and
security agreement on behalf of WRI without knowledge of the Company's 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 Company understands 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 was never determined. Additionally, the
relationship of this $501,250 amount to the above balance of Midwestern
Diagnostic has still not been determined to date.
World Wide Purchasing, Inc.
In June 1995 a corporation known as World Wide Purchasing, Inc. ("World
Wide") was created with the known cooperation or knowledge of Martha Greenlee
(former WRI manufacturing director and sister of Mr. Brandon), and an outside
party. Documents evidencing purchase and receipt of inventory from World Wide
appear to have been fabricated. These documents, totaling $352,829 were
submitted and paid by the Company in June 1995.
With the cooperation of the third party, the records of World Wide were
entrusted to La Voie, Clark, Charvoz & May, LLC ("LCCM"), the Company's
independent accountants at the time. These records 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 in fiscal 1996 and used to purchase ERGOS components for
WRI. Midwestern Diagnostic subsequently paid $100,000 against its various
ERGOS leases with WRI. The relationship between the amount received by
Midwestern Diagnostic from World Wide and the amount paid to WRI against its
lease balances has not been determined.
The entire $352,829 amount was included in Loss From Unusual Transactions
and Activities for fiscal 1995 to the extent that total funds paid by WRI to
or on behalf of World Wide exceed inventory subsequently recovered. The Company
is attempting to recover the funds and inventory as a part of the Chapter 11
proceedings.
Al Sabah Trading and Development Company PLC/ Carat International
The Company reported ERGOS sales to certain foreign entities in its Form
10-Q's for the first three quarters of fiscal 1995.
The Company determined that the earnings process was not complete for ERGOS
sales totaling $7,499,000 during fiscal 1995.
These transactions and related account balances were 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 as warehousing agent. Additionally, certain
former members of WRI presented shipping and custodial receipt documents to
LCCM "evidencing" shipments to World Wide as warehousing agent. However, upon
LCCM and counsel inspection of the components representing the above sales 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 warehouse, where these shipments were purportedly held, was not
opened until July 1995, evidencing that certain of these documents were
falsified or fabricated. Accordingly, the above sales were reversed as of
June 30, 1995.
Prior to his resignation as an officer on December 14, 1995, Mr. Brandon
issued a rescission to Al Sabah Trading and Development Company PLC ("Al
Sabah"). This rescission was not approved by the Company's Board of Directors
and counsel notified Al Sabah that the rescission was invalid. During fiscal
1996, Al Sabah paid $1,500,000 against licenses and ERGOS receivables and
subsequently has filed suit for the return of this amount. See Note 27.
Regulation S Transaction - Intavest
As discussed in Note 27 Regulation S promulgated by the SEC under the
Securities Act of 1933, exempts the sale of securities to foreign investors
from registration requirements of the Securities Act. The shares cannot
re-enter the U.S. market for at least forty days following the original
offshore sale.
During fiscal 1995, the Company sold and issued 1,333,166 shares of common
stock to Intavest for $2,000,000 cash at a substantial discount to market. The
shares were placed in street name of Yorkton before expiration of the 40-day
period.
Intavest and Yorkton have still not provided the Company with the 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 still not
been determined if there an association between the issuance of these shares
and the loan from Yorkton to Intavest described above.
Wincanton/Tradesman
As disclosed in Notes 8, 11 and 12, the Company had previously 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 lawsuit that these transactions were entered
into for the mutual and offsetting benefit of the parties involved. Absent
an admission by the parties involved, the Company has still not been able to
conclusively determine such intent based on the facts and circumstances.
The Company has also previously issued substantial blocks of stock to
Wincanton, Tradesman and Garstang Holdings 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 was
received by WRI subsequent to these transactions, there may be a circumstantial
correlation between the related sales of WRI common stock received by these
parties and cash payments received by the Company on the various accounts.
Inc/Eurocontrols (Peter Tucker) / Neval Ltd (Dominique Lang) / Intermedia Com
(Roger Serrero)
The following comments are based on the 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 LCCM 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 LCCM 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 and A-1 Financial Planning. 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 through June 30, 1996.
Subsequent to fiscal 1995, the $9,300,000 balance on these agreements was
assumed by Intermedia Com. The $9,300,000 balance and license agreements were
confirmed to LCCM by Mr. Roger Serrero of Intermedia Com. Mr. Brandon has
represented that subsequent to fiscal 1995, 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 still not been determined.
Even though the balance was confirmed by Intermedia Com, LCCM 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 during fiscal
1995, 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 during fiscal 1995, the Company has also reversed the $7,500,000
in related license revenues recorded in the fiscal year ended June 30, 1995.
Work Recovery Centers, Inc. - Louisiana ("WRCLA")
Since 1992 the Company has advanced funds to WRCLA which is located in
Metairie, 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 previously made to LCCM. When the 1995 transaction was
reviewed by LCCM 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 Metairie, Louisiana. A memorandum 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. An amount totaling
$172,000 was recognized as impairment loss during fiscal 1996. See Note 10.
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 in addition to
the officers' ownership of the underlying real estate and guarantee was not
previously disclosed to LCCM. Additionally, no explanation has been provided
for the substantial premium paid on the property.
Due to the underlying impairment of this investment, during fiscal 1995 the
financial statements were restated to expense the advances made to or on behalf
of WRCLA. No such transactions have occurred during fiscal 1996.
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
totaling $65,000 had previously been advanced. As disclosed above, SDS also
received an advance from World Wide.
Documentation provided by the former owner of SDS to LCCM 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 SDS was closed through the
issuance of three cashier's checks: $85,000 to the 100% shareholder of SDS,
approximately $104,000 to World Wide and $300,000 to the Company. As disclosed
previously, the $104,000 represented repayment of the circuitous advance from
World Wide. The $300,000 payment to WRI originally applied to unrelated ERGOS
leases and receivable balances, has been reclassified to reduce the purchase
of the investment. The affected lease and receivable were fully reserved as of
June 30, 1995.
The stock purchase agreements for the Arizona and Hawaii entities totalled
$450,000, which was payable no later than September 1, 1995. The Company did
not purchase the New Mexico entity. The former owner of SDS asserted to LCCM
that Mr. Brandon increased the purchase price of the entities for the $300,000
circuitously applied to the ERGOS purchases. The Company accordingly reduced
the subsequently recorded purchase price of these entities during fiscal 1996.
Mr. Brandon's Stock
The Company has determined that Mr. Brandon 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 advised him not to respond to
the Company's 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 as of June 30, 1996 and 1995.
30. Unallocated Credits
During fiscal 1995 certain adjustments were made relating to payments which
have previously been applied to repudiated transactions. These adjustments,
included in unallocated credits in fiscal 1995, totalled $966,000 as of June
30, 1995 and represented $700,000 relating from repudiated licenses and $266,000
from repudiated leases receivable. As of June 30, 1996, these amounts, in
addition to a further $48,000 resulting from miscellaneous other items, have
been included in liabilities subject to compromise.
31. Loss From Unusual Transactions and Activities
During fiscal 1995 the Company opened a bank account in Japan for the
purpose of paying marketing and operating expenses incurred by WRI in Japan.
The former Chief Executive Officer of WRI and a principal of Carat
International, a licensee at that time, were the only authorized signators on
that account. The Company has been unable to determine the amount of funds,
if any, in that account as of June 30, 1996. Consequently, the Company has
recorded a loss of $128,000 during fiscal 1996 for the amount transferred to
that bank account.
See Note 29 (World Wide Purchasing, Inc.) for discussion of the fiscal 1995
loss from unusual transactions and activities.
32. Settlement with Investors
In September 1995, the Company entered into a settlement agreement with
three individuals who had previously invested in preferred stock of WRI. In
addition to the preferred stock, the investors received the right to become
owners and managers of a Work Recovery center; however, the investors were not
subsequently provided ownership of a center as agreed to by the Company. The
Company paid $185,000 to the investors in consideration of a mutual release
and termination of the investment agreement.
33. Investment Losses
<TABLE>
Investment losses consist of the following:
<CAPTION>
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
WR Pty advances and other $ 567,000 $ 5,003,000 $ -
Investment in unconsolidated affiliates 293,000 - -
Wincanton stock 66,000 3,934,000 -
Tradesman stock - 2,500,000 -
---------- ---------- -----------
$ 926,000 $ 11,437,000 $ -
========== ========== ===========
</TABLE>
34. Subsequent Events
Settlement Agreement with Peter Voss and Affiliated Parties
During prior years former management of the Company entered into various
agreements with Mr. Peter Voss and affiliated parties regarding the exclusive
licenses for Australia, New Zealand and Malaysia. Mr. Voss also contends that
WRI entered into an agreement to provide all necessary funding for the
operations of WR Pty in which WRI own a 31% equity interest, and to purchase
100% of the equity in WR Pty for $3,000,000. The Company contests any
liability to Mr. Voss, WR Pty, or any related parties and has filed an adversary
proceeding to collect amounts due WRI by WR Pty.
In September 1996, the Company reached an agreement with Mr. Voss and his
affiliated companies, subject to Bankruptcy Court approval, that provides for
(i) a termination of the Malaysia license agreement, (ii) the termination of
the Australia and New Zealand license agreements, (iii) the joint marketing of
an acceptable exclusive license arrangement for Australia with an acceptable
third party and the sharing of any license fee payable under such an agreement,
and (iv) the mutual release of claims and the termination of all contracts.
The Company has filed a motion seeking Bankruptcy Court approval of this
agreement.
Sale of Centers
Effective August 12, 1996, the Company sold the business operations
including certain assets of its clinical center operations in El Paso, Texas
for $80,000. Additionally, on August 15, 1996, the Company sold its 51%
interest in the equity of Work Recovery Centers of Eau Claire, Inc. for $50,000.
Both sales were made to two unrelated parties. No material gain or loss
resulted from the sale of these two centers.
Pending Sale of New Concepts Corporation
On September 9, 1996, the Company entered into a business purchase
agreement with a former employee of WRI for the sale of all the assets and
liabilities of NCC for $50,000, subject to Bankruptcy Court approval. The
Company believes no material gain or loss will result from this transaction.
Funding Agreements
In July 1996 the Bankruptcy Court issued an order authorizing a loan
agreement the Company entered into in May 1996 with a related party for funding
up to $5,000,000, $515,000 of which had been funded as of June 30, 1996. See
Note 16.
During September 1996, the Company reached an agreement in principle with
a third party to provide additional financing for operations and for funding
of the Plan. Pursuant to this agreement, and subject to Bankruptcy Court
approval, the third party will advance $500,000 to the Company as a loan on
terms similar to the terms of the $515,000 note payable to related party as
outlined in Note 16. Assuming execution of a definative agreement and
confirmation of the Plan, the third party would acquire New Common Stock for an
additional $1,000,000, and would elect to convert both its prepetition and
postpetition advances to New Common Stock, subject to certain contingencies.
October 10, 1996
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549
Ladies and Gentlemen:
Enclosed for filing via the EDGAR System is Form 10-K of Work
Recovery, Inc. for the year ended June 30, 1996.
Sincerely,
/S/ DORCAS R. HARDY
Dorcas R. Hardy
Chief Executive Officer, Acting
BUSINESS PURCHASE AGREEMENT EX-10.30
This BUSINESS PURCHASE AGREEMENT ("Agreement") is made and entered into as
of September 9, 1996 (the Effective Date ) by and between WORK RECOVERY, INC.,
a Colorado corporation ("WRI" or Seller ) and R.J. ENTERPRISES, an Arizona
Company whose sole shareholder (owner) is Ray Jennings (the Purchaser ).
RECITALS
A. WRI presently owns One Hundred Percent (100%) of the stock (the
Stock ) of New Concepts Corporation, an Illinois Corporation (the
"Corporation"), and the Corporation operates a business located at 2301 South
Friebus, Tucson, Arizona (the "Premises ), at which it manufactures vocational
aptitude assessment and vocational training equipment and associated software.
B. WRI desires to sell to the Purchaser, and Purchaser desires to
purchase from WRI, all assets and liabilities of the Corporation, both known and
unknown and expressly including trade payables and commissions payables, as of
the Effective Date, including the following: physical inventory including parts,
supplies, completed units and partially completed units; manufacturing materials
and supplies; manufacturing/assembly tools and equipment; research and
development materials including partially completed projects/products; marketing
materials and supplies including one commercial table top display unit; office
furniture, equipment and supplies; current accounts payable liability; current
accounts receivable; the goodwill associated with the Business (including such
items as existing advertisements,telephone numbers, customer lists, trade
secrets, and, if applicable, any trademarks and copyrightsassociated with the
product); any existing contract rights; and the name New Concepts Corporation
(all items set forth in this Recital being collectively referred to as the
"Business"). Purchaser acknowledgesthat Seller has attempted to locate the
Corporation s corporate documents, but has been unable to do so. The Business
expressly excludes video tape duplicating equipment. In the event Purchaser
desires to purchase such video tape duplicating equipment, the price and payment
for same shall be described in a separate letter agreement to be negotiated and,
if terms agreed to, formally documented subsequent to the Effective Date.
C. As of the Effective Date, Purchaser will expressly assume all assets
and liabilities of the Corporation and the Business, including, but not limited
to, complete responsibility for any and all obligations of every nature and kind
in connection with future employees (as there are no current employees of the
Corporation), such as payroll, payroll deductions, accrued vacation and sick
leave, and the like. Notwithstanding the foregoing, Purchaser agrees that it
will pay to Seller, on a monthly basis for a six month period commencing upon
the Closing Date (as hereinafter defined), an amount equal to one-half (1/2) of
the gross monthly salary and benefits currently payable to Ms. Sandy Mackenroth,
whom Seller agrees to permit to continue to perform those functions she is
currently performing on behalf of the Corporation for this six-month period; and
D. The Purchaser has personally managed and operated the Business, and
has personally performed such due diligence with respect to the purchase of the
Business, is familiar with the assets, liabilities and the specialized nature of
the Business and has been represented by counsel in connection herewith or has
consciously elected not to seek such counsel.
<PAGE>
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Recitals
The foregoing recitals are hereby incorporated herein by this
reference and made a part hereof as though set forth in full at this
point.
2. Bankruptcy Court Approval
THE PARTIES HERETO EXPRESSLY ACKNOWLEDGE AND AGREE THAT THE
FINAL CONSUMMATION OF THE TRANSACTION CONTEMPLATED HEREBY IS SUBJECT TO
THE APPROVAL OF THE BANKRUPTCY COURT IN CASE NO. B-96-01640 TUC-JMM IN THE
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ARIZONA. THIS AGREE-
MENT SHALL BE OF NO FORCE OR EFFECT UNLESS AND UNTIL SUCH APPROVAL IS
GRANTED BY ORDER OF SAID COURT. The parties hereto agree to execute this
Agreement, and Purchaser will pay the Purchase Price to WRI on or before the
Closing Date, subject only to the Court s approval hereof.
3. Purchase and Sale of Business; Surrender of Seller s Stock
3.1 Purchase and Sale; Payment. Subject to the terms, conditions and
covenants set forth herein, within five (5) business days of the Closing (as
defined below) WRI shall sell, assign, transfer and convey to Purchaser and
Purchaser shall purchase and accept from WRI all of WRI's right, title and
interest to the Business for a price of Fifty Thousand Dollars ($50,000) (the
"Purchase Price"). The Purchase Price shall be paid to WRI in full, in cash,
at Closing, by wire transfer, into WRI s bankruptcy counsel s trust account, to
be held therein pending approval of the Bankruptcy Court, directed as follows:
-Norwest Bank Minnesota, N.A., ABA# 091000019
-For credit to Beneficial Bank: Norwest Bank Phoenix, Arizona
-Further credit to FBO Work Recovery, Inc., Osborn Maledon PA
#XXXXXXXXXX
-Please note on wiring instructions: Upon receipt notify Jack
Jensen at 602-248-1235
The Parties acknowledge and agree that, unless otherwise stated herein, the
Business, and every item of the Business, is sold AS IS, WHERE IS.
Notwithstanding that the parties hereto acknowledge and agree that the sale
contemplated hereby is a sale of assets, at Closing, as defined at Section 3.5
hereinbelow, Seller shall transfer, surrender and deliver either (i) its stock
certificate(s) evidencing its 100% ownership of the Corporation to Purchaser.
(The Seller has been able to confirm the Illinois identification numberfor
the corporation (D53978196), that it was incorporated on September 17, 1985, and
that the corporation was involuntarily dissolved on February 1, 1994.); or,
alternatively, (ii) in lieu of (i), a certificate signed by the Acting President
of Seller, confirming that the corporate records for the Corporation have not
been located, but that the Seller certifies that it has conducted such search,
has been unable to locate such documents, but is nevertheless transferring all
of its right, title and interest in and to the Corporation s stock in accordance
with the terms of this Agreement. One of the above-referenced documents will be
delivered via overnight courier to C. Taylor Ashworth, Esq., Osborn Maledon PA,
The Phoenix Plaza, 2929 North Central Avenue, Phoenix, Arizona 85012-2794, with
directions to hold it pending (i) the receipt of the Purchase Price; and (ii)
the approval of the Bankruptcy Court, whereupon it shall be delivered to Seller.
3.2 Taxes. The Purchaser agrees to pay any Federal, state or local
sale or transfer taxes, or the like, arising from the sale of the Business to
the Purchaser.
3.3 Bulk Sale Compliance. If applicable, the Purchaser agrees to be
responsible and liable for compliance with any applicable bulk sales
requirements in connection with the purchase of the Business.
3.4 Office Space for the Business. The Corporation currently rents
space from the Seller and operates the Business at the Premises. Upon the
Closing (as defined in section 3.5 hereinbelow), Seller agrees to rent to
Purchaser the office space at 2341 South Friebus, Suites 18 and 19, in
accordance with the following schedule, for a term of six (6) months (the
Term ): for the first three (3) months of the Term, Purchaser, as tenant, shall
pay the amount of One Hundred Dollars ($100.00) per month, payable $50.00 on the
1st and 15th of each month to Seller, as Landlord; for the second three
(3) months of the Term, Purchaser shall pay to Seller the amount of $450.00 per
month, payable in full onthe 1st of each month. Any extension of the Term must
be agreed to in writing and signed by the Seller (as Landlord) and the Purchaser
(as Tenant).
3.5 Closing Date. The closing of the transactions contemplated
hereby (the "Closing") shall be held at 2341 South Friebus, Suite 14, Tucson,
Arizona at 10:00 a.m. on September _____, 1996, or at such other time and place
as Seller and Purchaser may agree in writing (the "Closing or the Closing
Date").
4. Disclaimer.
SELLER IS SELLING THE BUSINESS, AND EACH AND EVERY COMPONENT THEREOF, AS IS
AND WHERE IS, AND MAKES NO WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING
BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. IN NO EVENT SHALL SELLER BE LIABLE FOR LOSS OF PROFITS,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE BREACH OR
ALLEGED BREACH OF ANY PROVISION OF THIS AGREEMENT.
5. Transfer and Assumption at Closing
The Purchaser shall assume responsibility and liability for, among other
things, all trade payables, lease payments and all other liabilities and
obligations of the business, whether arising before or after the Effective Date
and shall be entitled to all trade receivables arising from Purchaser's
operation of the Business, whether arising before or after the Effective Date.
Except as provided in Recital C hereinabove with respect to Sandy Mackenroth
(which obligation of Seller shall automatically cease and terminate following
Seller's final (6th) payment as described therein), Purchaser s assumptions
described herein expressly include any and all of the Business's employee
payroll costs and expenses and overhead associated therewith. Notwithstanding
the foregoing, in the event that the Bankruptcy Court declines to approve the
transaction contemplated hereby, the parties agree to do an accounting of the
Business s operations fromthe Effective Date to the date that the parties
receive notice that the Court has declined to approve this transaction, and
payables and receivables will be apportioned, and the parties will reconcile,
accordingly.
6. Payments to Seller in Addition to Purchase Price
In addition to the Purchase Price, and as further consideration to Seller
for the sale of the Business as described in this Agreement, Purchaser will pay
to Seller the following:
6.1 an amount equal to ten percent (10%) of the gross sales amount
generated from the following three (3) current sales projects to the extent that
any or all of them are actually received, or should actually be received, within
eighteen (18) months following the Closing Date: (i) the sale of software,
equipment and materials to the Chicago, Illinois Career One Stop directors for
use in middle schools and high schools in the metropolitan Chicago area; (ii)
the sale of software, equipment and materials for a pilot program sponsored by
the San Diego Job Corp.; and (iii) the sale of software, equipment and materials
for a Career One Stop program in West Virginia. Payments due to Seller
pursuant to this Section 6.1 shall be due and payable to Seller no later than
ten (10) days following receiptof any proceeds described in this Section 6.2,
whether received in one lump sum or in payments over time.
6.2 an amount equal to fifty percent (50%) of the gross amount of
collections on trade receivables which exceeds the total amount of trade
payables and commissions payables at the Effective Date of this Agreement. When
collections have exceeded this amount, these payments will be due and payable to
Seller no later than ten (10) days following receipt of and proceeds described
in this Section 6.2, whether received in one lump sum or in payments over time.
7. Purchaser s Indemnification
The Purchaser unconditionally agrees to indemnify, defend and hold
harmless Seller and Seller s officers, directors, employees, agents, successors
and assigns from and against any and all losses, liabilities, damages and
claims, and all related costs and expenses including reasonable attorneys' fees
and any and all costs of investigation, litigation, settlement, judgment,
appeal, interest and penalties (collectively, "Losses") arising from or in
connection with: (i) the death or bodily injury of any agent, employee,
customer, business invitee or business visitor of the Purchaser, (ii) the
Purchaser s operation of the Corporation, or (iii) the breach by the Purchaser
of any of its obligations arising hereunder. The employees or agents and
representatives of Seller shall, when at the Corporation, be deemed the
Purchaser s business invitee or business visitor.
8. Release by Purchaser
Purchaser and its sole owner, Ray Jennings, hereby agree to
unconditionally waive, release and forever discharge Seller and Seller s
officers, directors, shareholders, affiliates, subsidiaries, representatives,
agents and attorneys, and each of their respective heirs, successors and assigns
(the Released Parties ) from and against any and all claims, disputes, demands,
liabilities, controversies, actions, obligations, debts, losses, rights,
promises, liens, causes of action, damages, costs, expenses and attorneys fees
of any kind or nature, whether legal or equitable, in tort or in contract,
actual or contingent, latent or patent, known or unknown, that Purchaser and Ray
Jennings, or either of them, ever had, now have or may have in the future
(collectively, the Claims ) which, in any way, arise out of or relate, directly
or indirectly, in any manner, to any of the Released Parties and Purchaser or
Mr. Ray Jennings,or either of their, past, present or future relationships with
any of the Released Parties. Purchaser and Ray Jennings expressly agree that
the Release provisions set forth in this Section 8 are intended to, andwill,
fully, finally and forever discharge all Claims, whether now asserted or
unasserted, known or unknown, and shall remain in effect as a full and complete
release, notwithstanding the discovery or existence of additional claims or
facts related thereto which may not be known as of the Effective Date of this
Agreement.
<PAGE>
9. Miscellaneous Provisions
9.1 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Arizona as applicable to
contracts executed and performed entirely within and by residents of such state.
Each party hereto hereby submits to the exclusive jurisdiction and venue of the
Superior court of the State of Arizona for the County of Pima or the Federal
District Court for the District of Arizona for purposes of any legal or
equitable action or proceeding arising out of this Agreement. Each party agrees
that service upon such party in any such action or proceeding may be made by
first class mail, certified or registered, return receipt requested, as provided
by the giving of notices in Section 9.4 below.
9.2 No Other Agreements. This Agreement embodies all agreements
between the parties hereto with respect to the subject matter hereof and
supersedes any and all prior or contemporaneous agreements or representations of
any kind, written or oral, between the parties.
9.3 Disputes and Attorneys' Fees. In the event any action or
proceeding is filed to enforce or interpret this Agreement, the prevailing party
in such action or proceeding will be entitled to recover its reasonable
attorneys' fees in addition to any other award of the court or tribunal, as the
case may be.
9.4 Notice. Any communication among the parties hereto, and any
notices or communications herein provided to be made, shall be given or made by
personal delivery, telecopy, facsimile or overnight courier, or by mailing the
same by first class mail, postage prepaid, to the parties at the address
indicated below, or to such other address(es) as either party may in writing
hereafter provide in accordance with this section 9.4. Notices will be deemed
to be received when personally delivered or transmitted by telecopy or
facsimile, one (1) day after the date of forwarding by overnight courier, or
three (3) business days after posting in the U.S. Mails, as the case may be.
9.5 Savings Clause. In the event that any provision, or provisions,
of this Agreement should be declared invalid or unenforceable by any court of
law, the remaining terms and conditions set forth herein shall remain in full
force and effect.
(INTENTIONALLY LEFT BLANK)<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
SELLER: PURCHASER:
WORK RECOVERY, INC RJ ENTERPRISES
By____________________________ By ____________________________
Robert D. Judson Ray Jennings, sole owner
Its Acting Chief Financial Officer
Address: Address:
2341 South Friebus, Suite 14
Tucson, Arizona 85713
October 9, 1996
SECURITY AGREEMENT EX-10.31
SECURITY AGREEMENT dated April 30, 1996, made by Work RECOVERY, INC., a
Colorado corporation (the "Grantor"), and DOUGLAS J. ENGMANN ("Secured Party").
RECITALS:
Secured Party and Grantor have entered into a loan agreement of even date
pursuant to which Secured Party has agreed to loan Grantor up to $125,000.00,
and the indebtedness to be incurred by Grantor is evidenced by a Promissory
Note (the "Note") of even date herewith.
NOW THEREFORE, in consideration of the premises and in order to induce
Secured Party to enter into and perform under the loan agreement and the Note,
the Grantor hereby agrees with Secured Party as follows:
SECTION 1. Grant of Security. The Grantor hereby assigns and pledges to
Secured Party, and hereby grants to Secured Party a security interest in and to
(a) all claims, liabilities, accounts receivables and notes owed to
Grantor by Toyota ____________ (the Receivable );
(b) those certain ERGOS WorkStations identified as follows: (i) the
R&D WorkStation; Serial Number EWS-9206123-E11-11111; and (ii) the Suite 8
WorkStation, Serial Number EWS-9412262-EA1-AAAAA (the Equipment ).
(c) All accounts receivable, contract rights, chattel paper, instruments,
general intangibles, instruments, notes, drafts, acceptances, cash, bank
balances and other obligations of any kind now or hereafter existing, and all
rights now or hereafter existing in and to all security agreements, leases, and
other contracts securing or otherwise relating to the Receivable or the
Equipment (any and all such accounts, contract rights, chattel paper,
instruments, general intangibles and obligations being also included within the
term the "Receivables" and any and all such leases, security agreements and
other contracts relating thereto being the "Related Contracts");
(d) All proceeds of any and all of the foregoing Collateral and, to the
extent not otherwise included, all payments under insurance (whether or not
Secured Party is the loan payee thereof), or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect to
any of the foregoing; and
(e) The products and proceeds of all of the foregoing. It is the intent
and understanding of the parties hereto that the coverage of the security
interest granted hereby be broadly and liberally construed to include all
personal property of any nature arising out of or relating to the specifically
described collateral.
SECTION 2. Security for Obligations. This Agreement secures the payments
of all obligations of the Grantor now or hereafter existing under the loan
agreement and the Note, whether for principal, interest, fees, expenses or
otherwise, and all obligations of the Grantor now or hereafter existing under
this Agreement (all such obligations being the "Obligations").
SECTION 3. Grantor Remains Liable. Anything herein to the contrary
notwithstanding,
(a) the Grantor shall remain liable under the contracts and agreements
included in the Collateral to the extent set forth therein to perform all of
its duties and obligations thereunder to the same extent as if this Agreement
had not been executed;
(b) the exercise by Secured Party of any of the rights hereunder shall
not release the Grantor from any of its duties or obligations under the
contracts and agreements included in the Collateral; and
(c) Secured Party shall have no obligations or liability under the
contracts and agreements included in the Collateral by reason of this
Agreement, nor shall Secured Party be obligated to perform any of the
obligations or duties of the Grantor thereunder or to take any action to
collect or enforce any claim for payment assigned hereunder.
SECTION 4. Representations and Warranties. The Grantor represents and
warrants as follows:
(a) The chief place of business and chief executive office of the Grantor
and the office where the Grantor keeps its records concerning the Collateral
are located in Tucson, Arizona. All of the tangible personal property covered
hereby is located in Tucson, Arizona. The Grantor shall cause any tangible
personal property covered hereby and not located in Tucson, Arizona on the
date hereof to be moved thereto within 30 days after the date hereof.
(b) This Agreement creates a valid first priority security interest in
the Collateral, securing the payment of the Obligations, and all filing and
other actions necessary or desirable to perfect and protect such security
interest have been duly taken.
(c) The Grantor owns the Collateral free and clear of any lien, security
interest, charge or encumbrance except for the security interest created by
this Agreement and Equipment Financings. No effective financing statement or
other similar instrument is on file in any recording office covering the
Collateral, except such as may have been filed in favor of Secured Party
relating to this Agreement or with respect to Equipment Financings.
(d) No authorization, approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body not already
undertaken is required either (i) for the grant by the Grantor of the security
interest granted hereby or for the execution, delivery or performance of this
Agreement by the Grantor or (ii) for the perfection of or the exercise by
Secured Party of his rights and remedies hereunder.
SECTION 5. Further Assurances.
(a) The Grantor agrees that from time to time, at the expense of the
Grantor, the Grantor will promptly execute and deliver all further instruments
and documents, and take all further action, that may be necessary or that
Secured Party may reasonably request, in order to perfect and protect any
security interest granted or purported to be granted hereby or to enable
Secured Party to exercise and enforce his rights and remedies hereunder with
respect to any Collateral. Without limiting the generality of the foregoing,
the Grantor will executeand file such financing or continuation statements, or
amendments thereto and such other instruments or notices,or take such further
action, as may be necessary or as Secured Party may reasonably request, in
order to perfectand preserve the security interests granted or purported to
be granted hereby.
(b) The Grantor hereby authorizes Secured Party to file one or more
financing or continuation statements, and amendments thereto, relative to all
or part of the Collateral without the signature of the Grantor where permitted
by law.
(c) The Grantor will furnish to Secured Party from time to time
statements and schedules further identifying and describing the Collateral and
such other reports in connection with the Collateral as Secured Party may
reasonably request, all in reasonable detail.
SECTION 6. As to Equipment. The Grantor shall:
(a) Other than in the ordinary course of business, keep the Equipment at
the place therefor specified in Section 4(a) or, upon 30 days' prior written
notice to Secured Party, at such other places in jurisdictions where all action
required by Section 5 shall have been taken with respect to the Equipment.
(b) Pay promptly when due all property and other taxes, assessments and
governmental charges or levies imposed upon, and all claims (including claims
for labor, materials and supplies) against, the Equipment, except to the extent
the validity thereof is being contested in good faith.
SECTION 7. Insurance.
(a) The Grantor shall, at its own expense, maintain a complete insurance
package in such amounts, against such risks, in such form and with such
insurers, as shall reasonably be required from time to time by the Secured
Party. Each policy for liability insurance shall provide for all losses to be
paid on behalf of Secured Party and the Grantor as their respective interests
may appear, and shall provide that at least 10 days' prior written noticeof
cancellation, amendment, change of beneficiary or lapse shall be given to
Secured Party by the insurer. TheGrantor shall, if so requested by Secured
Party, deliver to Secured Party original or duplicate policies of such
insurance.
(b) Reimbursement under any liability insurance maintained by the Grantor
pursuant to this Section 7 may be paid directly to the person who shall have
incurred liability covered by such insurance.
SECTION 8. As to Receivables.
(a) The Grantor shall keep its chief place of business and chief
executive office at the office where the Grantor keeps its records concerning
the Receivable at the location therefor specified in Section 4(a) or, upon 30
days' prior written notice to Secured Party, at such other locations in a
jurisdiction where all action required by Section 5 shall have been taken with
respect to the Receivables. The Grantor will hold and preserve such recordson
chattel paper and will permit representatives of Secured Party at any time
during normal business hours to inspect and make abstracts from such records
and chattel paper.
(b) Except as otherwise provided in this subsection (b), the Grantor
shall continue to collect, at its own expense, all amounts due or to become due
the Grantor under the Receivables. In connection with such collections, the
Grantor may take (and, at Secured Party's direction, if an Event of Default
shall occur, shall take) such actionas the Grantor or Secured Party may deem
necessary or advisable to enforce collection of the Receivables; provided,
however, that upon the occurrence of an event of default (hereunder or under
the Note), Secured Party shall have the right to notify the account debtors or
obligors under the Receivable of the assignment of such Receivable toSecured
Party and to direct such account debtors or obligors to make payment of all
amounts due or to become dueto the Grantor thereunder directly to Secured Party
and, upon such notification and at the expense of the Grantor,to enforce
collection of any such Receivable and to adjust, settle or compromise the
amount or payment thereof,in the same manner and to the same extent as the
Grantor might have done. After receipt by the Grantor of the notice from
Secured Party referred to in the proviso to the preceding sentence,
(i) all amounts and proceeds (including instruments) received by the
Grantor in respect of the Receivable shall be received in trust for the
benefit of Secured Party hereunder, shall be segregated from other funds of
the Grantor and shall be forthwith paid over to Secured Party in the same
form as so received (with any necessary endorsement) to be applied as
provided by Section 13(b); and
(ii) the Grantor shall not adjust, settle or compromise the amount or
payment of any receivable, or release wholly or partly an account debtor
or obligor thereof, or allow any credit or discount thereon.
SECTION 9. Transfers and Other Liens. The Grantor shall not:
(a) Sell, assign (by operation of law or otherwise) or otherwise dispose
of any of the Collateral, except in the ordinary course of business in which
case such Collateral shall be free and clear of the security interest created
hereby.
(b) Create or suffer to exist any lien, security interest or other charge
or encumbrance upon or with respect to any of the Collateral to secure debt of
any person or entity, except for the security interest created by this
Agreement.
SECTION 10. Secured Party Appointed Attorney-in-Fact. The Grantor hereby
irrevocably appoints Secured Party as the Grantor's attorney-in-fact, with full
authority in the place and stead of the Grantor and in the name of the Grantor
or otherwise, from time to time in Secured Party's discretion, upon the
occurrence of an event of default under the Loan Agreement or Note, to
accomplish the purposes of this Agreement (subject to the rights of the Grantor
under Section 8), including without limitation:
(i) to obtain and adjust insurance required to be paid to Secured
Party pursuant to Section 7;
(ii) to ask, demand, collect, sue for, recover, compound, receive and
give acquittance and receipts for monies due and to become due under or in
respect of any of the Collateral;
(iii) to receive, enforce, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (i) or
(ii) above; and
(iv) to file any claims or take any action or institute any
proceedings which Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights
of Secured Party with respect to any of the Collateral.
SECTION 11. Secured Party May Perform. If the Grantor fails to perform
any agreement contained herein, upon the occurrence of an event of default
under the Loan Agreement or Note, Secured Party may cure such event of default,
and the expenses of Secured Party incurred in connection therewith shall be
payable by the Grantor under Section 14(b).
SECTION 12. Secured Party's Duties. The powers conferred on Secured
Party hereunder are solely to protect its interest in the Collateral and shall
not impose any duty upon it to exercise any such powers. Except for the safe
custody of any Collateral in its possession and the accounting for monies
actually received by it hereunder, Secured Party shall have no duty as to any
Collateral or as to the taking of any necessary steps to preserve rights against
prior parties or any other rights pertaining to any Collateral.
SECTION 13. Remedies. If any event of default under the Note or Loan
Agreement shall have occurred and be continuing:
(a) Secured Party may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to it,
all the rights and remedies of a secured party on default under the Uniform
Commercial Code (the "Code") (whether or not the Code applies to the affected
Collateral) and also may
(i) require the Grantor to, and the Grantor hereby agrees that it
will at its expense and upon request of Secured Party forthwith, assemble
all or part of the Collateral as directed by Secured Party and make it
available to Secured Party at a place in Tucson, Arizona, to be designated
by Secured Party which is reasonably convenient to both parties; and
(ii) without notice except as specified below, sell the Collateral or
any part thereof in one or more parcels at public or private sale in
Tucson, Arizona, for cash, on credit or for future delivery, and at such
price or prices and upon such other terms as Secured Party may deem
commercially reasonable.
The Grantor agrees that, to the extent notice of sale shall be required by
law, at least 10 days' notice to the Grantor of the time and place of any public
sale or the time after which any private sale is to be made shall constitute
reasonable notification. Secured Party shall not be obligated to make any sale
of Collateral regardless of notice of sale having been given. Secured Party
may adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.
(b) All cash proceeds received by Secured Party in respect of any sale of,
collection from, or other realization upon all or any part of the Collateral
may, in the discretion of Secured Party, be held by Secured Party as collateral
for, and/or then or at any time thereafter applied (after payment of any amounts
payable to Secured Party pursuant to Section 14) in whole or in part by Secured
Party against all or any part of the Obligations. All Collateral that is cash
or cash proceeds held by Secured Party and remaining after payment in full of
all the Obligations shall be paid over to the Grantor or to whomsoever may be
lawfully entitled to receive such surplus.
SECTION 14. Indemnity and Expenses.
(a) The Grantor agrees to indemnify Secured Party for, from and against
all claims, losses and liabilities growing out of or resulting from this
Agreement (including, without limitation, enforcement of this Agreement), except
claims, losses or liabilities resulting from Secured Party's gross negligence
or willful misconduct.
(b) The Grantor will upon demand pay to Secured Party the amount of any
and all reasonable expenses, including the reasonable fees and disbursements of
its counsel and of any experts and agents, which Secured Party may incur in
connection with
(i) the custody, preservation, use or operation of, or the sale of,
collection from, or other realization upon, any of the Collateral;
(ii) the exercise or enforcement of any of the rights of Secured
Party hereunder; or
(iii) the failure by the Grantor to perform or observe any of the
provisions hereof.
SECTION 15. Security Interest Absolute. All rights of Secured Party and
security interests hereunder, and all Obligations of the Grantor hereunder,
shall be absolute and unconditional, irrespective of:
(i) any lack of validity or enforceability of the Loan Agreement,
the Note or any other agreement or instrument relating thereto;
(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations or any other amendment or
waiver of or any consent to any departure from the Loan Agreement or the
Note;
(iii) any exchange, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to
departure from any guaranty, for all or any of the Obligations; or
(iv) any other circumstances which might otherwise constitute a
defense available to, or a discharge of, Grantor in respect of the
Obligations of the Grantor in respect of this Agreement.
SECTION 16. Amendments; Etc. No amendment or waiver of any provision of
this Agreement nor consent to any departure by the Grantor herefrom, shall in
any event be effective unless the same shall be in writing and signed by
Secured Party, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
SECTION 17. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telegraphic
communications) and,
if to the Secured Party, mailed or telegraphed or delivered to it,
addressed to it at:
Douglas J. Engmann
Sage Clearing, L.P.
220 Bush Street, Suite 600
San Francisco, CA 94104
if to Grantor, mailed or delivered to it, addressed to Grantor at:
Work Recovery, Inc.
2341 S. Friebus, Suite 14
Tucson, AZ 85713
or as to either party at such other address as shall be designated by such
party in a written notice to each other party complying as to delivery with the
terms of this Section. All such notices and other communications shall, when
mailed or telegraphed, respectively, be effective on the third day after deposit
in the mails or on the day delivered to the telegraph company, respectively
addressed as aforesaid.
SECTION 18. Continuing Security Interest; Transfer of Notes. This
Agreement shall create a continuing security interest in the Collateral and
shall (i) remain in full force and effect until payment in full of the
Obligations, (ii) be binding upon the Grantor, its successors and assigns and
(iii) inure to the benefit of Secured Party and its respective successors,
transferees and assigns. Without limiting the generality of the foregoing
clause (iii), SecuredParty may assign or otherwise transfer the Note (or any
interest thereunder) to any other person or entity, and suchother persons or
entity shall thereupon become vested with all the benefits in respect thereof
granted to Secured Party herein or otherwise. Upon the payment in full of the
Obligations, the security interest granted hereby shall terminate and all rights
to the Collateral shall revert to the Grantor. Upon any such termination,
Secured Party will, at the Grantor's expense, execute and deliver to the Grantor
such documents as the Grantor shall reasonably request to evidence such
termination.
SECTION 19. Governing Law; Terms. This Agreement shall be governed by
and construed in accordance with the laws of the State of Arizona. Unless
otherwise defined herein or in the Loan Agreement, terms used in Article 9 of
the Uniform Commercial Code in the State of Arizona are used herein as therein
defined. All terms defined in the Loan Agreement and not otherwise defined
herein shall have the same meaning herein as therein.
IN WITNESS WHEREOF, the Grantor has caused this Agreement to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
WORK RECOVERY, INC.,
a Colorado corporation
By___________________________________________________
Its authorized officer
"Grantor"
_____________________________________________________
Douglas J. Engmann
"Secured Party"
<PAGE>
DEMAND PROMISSORY NOTE
$125,000.00 April 30, 1996
Tucson, Arizona
FOR VALUE RECEIVED, WORK RECOVERY, INC. (the Maker), a Colorado
corporation, promises to pay to the order of DOUGLAS J. ENGMANN (the Holder,
which term shall also include subsequent holders and other assignees of this
Note) at Tucson, Arizona, or at such other place as Holder may from time to
time designate in writing, the principal sum of One Hundred Twenty-Five Thousand
and No/100 Dollars ($125,000.00) in immediately available funds, together with
interest in arrears as hereinafter provided on the unpaid principal balance,
from the date of this Note until such principal balance is paid in full.
The principal amount of this Note shall bear interest at ten percent (10%)
per annum. Interest as herein provided shall be computed on a daily basis and
calculated on the basis of a 365-day year for the actual number of days elapsed.
Interest shall be simple, and not compounded, throughout the term of this Note.
The entire indebtedness (principal and interest) evidenced by this Note,
if not sooner paid, shall be due and payable in full on demand, and, if no
demand is made, on May 31, 1996.
Maker shall have the right to prepay the principal balance of this Note in
full or in part at any time without penalty or premium.
If any of the following events takes place (each, an Event of Default ),
Holder at its option may declare all principal and interest then remaining
unpaid and all other amounts payable under this Note immediately due and
payable:
(i) Maker fails to pay principal of or interest on this Note when such
payment is due; or
(ii) A receiver, liquidator or trustee of Maker or any substantial part of
Maker s assets or properties is appointed by a court order and such
appointment remains in effect for sixty (60) days; or
(iii)A default occurs under the Security Agreement; or
(iv) Any of Maker's property is sequestered by or in consequence of a
court order and such order remains in effect for more than sixty (60)
days; or
(v) Maker files a petition in voluntary bankruptcy or requests
reorganization under any provision of any bankruptcy, reorganization
or insolvency law or consents to the filing of any petition against
him under any such law; or,
(vi) Maker makes a formal or informal general assignment for the benefit of
its creditors, or admits in writing its inability to pay debts
generally when they become due, or consents to the appointment of a
receiver or liquidator of Maker or of all or any part of his property.
Upon the occurrence of an Event of Default, interest on the outstanding
principal balance of the Note shall accrue at fifteen percent (15%) per annum.
If an Event of Default occurs and is continuing and Holder incurs costs or
expenses in connection with its collection of the principal of or interest on
this Note, such reasonable costs and expenses shall be paid by Maker and
constitute part of the indebtedness evidenced by this Note.
Payment of this Note is secured by a security agreement (the Security
Agreement ) of even date herewith, covering (i) certain account receivables
and (ii) certain equipment.
Presentment, demand, notice of dishonor, and protest are waived by Maker.
No delay by Holder in exercising any of the rights it may have hereunder shall
operate as a waiver of any of the rights Holder may have, and any waiver
granted for one occasion shall not operate as a waiver of any subsequent
default.
All rights and remedies existing under this Note are cumulative and in
addition to, and not exclusive of, any rights or remedies otherwise available.
This Note shall be governed by and construed in accordance with the laws
of the United States and the State of Arizona, without regard to such of those
laws as govern the choice of law or mandate reliance upon laws foreign to such
State.
This Note shall be binding upon and enforceable against Maker s personal
representatives and assigns, and shall inure to the benefit of and be
enforceable by Holder s heirs, personal representatives, successors and
assigns.
WORK RECOVERY, INC.
By_________________________________________________
Its President
Maker
LOAN AGREEMENT EX-10.32
This Loan Agreement (this "Agreement"), is dated as of May 17, 1996,
between WORK RECOVERY, INC., a Colorado corporation (the "Borrower"), and
RECOVERY LENDER, L.L.C., an Arizona limited liability company (the Lender").
WHEREAS, the Borrower anticipates filing for relief pursuant to Chapter 11
of Title 11 of the United States Code in the near future (the Filing );
WHEREAS, the Borrower is in immediate need of a loan for working capital
purposes, and will require financing during the anticipated Chapter 11 for
working capital purposes; and
WHEREAS, the Lender has agreed to provide financing in an amount not to
exceed $5,000,000 on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, the mutual covenants of
the parties hereinafter set forth and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereby agree as follows:
1. LOANS; BORROWING PROCEDURES
1.1. Loans. Subject to the terms and conditions of this Agreement, the
Lender agrees to make such loans to the Borrower as the Borrower may from time
to time request up to, but not including, the earlier of (i) December 31, 1996,
and (ii) thirty (30) days after entry of an order in the Borrower s anticipated
Chapter 11 confirming a plan of reorganization, which order shall be final and
nonappealable (the Maturity Date ).
1.2. Maximum Amount of Loans. The aggregate principal amount of all loans
hereunder shall not exceed $5,000,000. Notwithstanding the foregoing, the
aggregate principal amount of all loans hereunder which are made prior to the
Filing shall not exceed $450,000, unless Lender in its sole and absolute
discretion consents to make additional loans hereunder prior to the Filing.
1.3. Loan Borrowing Procedures. The Borrower shall give the Lender irre-
vocable telephonic notice of each borrowing of a loan hereunder no later than
11:00 a.m., Arizona time, on the same business day as the proposed date of
borrowing. Each such notice shall be effective upon receipt by the Lender and
shall specify the date and the amount of the borrowing, and, subject to the
terms and conditions hereof, the Lender shall make a loan to the Borrower in
such amount on the date specified in such notice. The Borrower agrees that the
Lender may rely on any notice referred to in this Section that the Lender
reasonably believes to be made by a person authorized to request a loan, without
the necessity of independent investigation. The Borrower shall confirm in
writing any telephonic notice of borrowing. Each request for a loan shall
automatically constitute a representation and warranty by the Borrower that, as
of the date of such requested loan, all conditions precedent to the making of
such loan set forth herein shall be satisfied. Each borrowing of a loan shall
be on a business day. Communications with the Lender with respect to matters
described in this Section 1.3 shall be made to:
Recovery Lender, L.L.C.
Attention: Douglas Engmann
c/o Sage Clearing, L.P.
220 Bush Street, Suite 660
San Francisco, CA 94104
Telephone: (415) 781-7430
Facsimile: (415) 781-4641
2. NOTE; INTEREST; PAYMENTS
2.1. Note; Loan Balances. All loans pursuant to this Agreement shall be
evidenced by one Promissory Note in the form attached hereto as Exhibit A (the
Note ). The date and amount of each individual loan hereunder and of each
repayment of principal shall be recorded by the Lender in its records. The
outstanding principal balances of the loans reflected in the Lender's records
from time to time shall be rebuttable presumptive evidence of such outstanding
principal balances as of such time. The failure so to record such amount or any
error in so recording any such amount shall not limit or otherwise affect the
Borrower s obligations hereunder or under the Note to repay the principal amount
of all loans made pursuant to this Agreement, together with all interest
accruing thereon.
2.2. Interest Rate on Loans. Interest shall accrue on the principal
amount of loans outstanding from time to time pursuant hereto from the date of
advance until repaid or converted (pursuant to Section 2.8 below) at a rate
equal to twelve percent (12%) per annum.
2.3. Computation of Interest. Interest on each loan shall be computed for
the actual number of days elapsed on the basis of a 365 or 366-day year, as the
case may be.
2.4. Maturity. The loans, together with all accrued interest thereon,
unless converted pursuant to Section 2.8 below, shall be due and payable in
full on the Maturity Date.
2.5. Prepayments. The Borrower may from time to time prepay the loans in
whole or in part without notice and without penalty.
2.6. Interest on Principal Prepaid. Any prepayment of a loan shall include
accrued and unpaid interest to the date of prepayment on the principal amount
being prepaid.
2.7. Making of Payments. All payments of principal or interest on the Note
shall be made to the Lender at the address set forth in Section 1.3 above or
such other address as Lender shall designate in writing.
2.8. Conversion Option. The indebtedness evidenced by the Note
(outstanding principal and interest) shall, at Lender s option, be convertible
into common stock of the reorganized Borrower (the Reorganized Borrower )
pursuant to an Approved Plan (as defined in Section 4.2(b) below) confirmed
in the Borrower s anticipated Chapter 11 (the Plan ) at one percent (1.0%) of
the Reorganized Borrower s issued and outstanding stock (on a fully diluted
basis, giving effect to all stock issuances pursuant to the Plan) for each One
Hundred Thousand Dollars ($100,000) of such indebtedness.
3. CONDITIONS PRECEDENT TO PRE-FILING LOANS
The disbursement of one pre-Filing loan hereunder in the amount of up to
$450,000 shall be subject to the satisfaction or waiver by the Lender of the
follow conditions precedent:
3.1. The Note. The Lender shall have received the Note, executed and
delivered by the Borrower.
3.2. The Security Agreement. The Lender shall have received the Security
Agreement in the form attached hereto as Exhibit B (the Security Agreement ),
executed and delivered by Borrower.
3.3. Perfection of Security Interests. The Lender shall have received
originals, each duly executed by the Borrower, of all financing statements under
the Uniform Commercial Code reasonably required by Lender to be filed in
connection with the Security Agreement.
3.4. Board Approval. The Borrower s Board of Directors shall have
authorized the execution, delivery and performance of this Agreement, the Note
and the Security Agreement.
In addition to the foregoing conditions precedent, if Lender in its sole and
absolute discretion consents to make loans hereunder prior to the Filing in
excess of $450,000, then disbursement of such additional loans shall be subject
to such additional conditions precedent as Lender in its sole and absolute
discretion shall require.
4. CONDITIONS PRECEDENT TO POST-FILING LOANS
Anything herein to the contrary notwithstanding, each and every post-Filing
loan hereunder shall be subject to Lender s agreement, in its sole and absolute
discretion, to make such loan; provided, however, that if Lender has not loaned
Borrower at least $2,500,000 pursuant to this Agreement on or before the
sixtieth (60th) day of the Chapter 11 proceedings, then the security interest
granted by the Security Agreement in the ERGOS Technology (as defined in the
Security Agreement) and the products and proceeds thereof shall terminate and
all rights to the ERGOS Technology and the products and proceeds thereof shall
revert to the Borrower. As set forth in the Security Agreement, upon any such
termination, Lender will, at the Borrower s expense, execute and deliver to the
Borrower such documents as the Borrower shall reasonably request to evidence
such termination.
4.1. Initial Post-Filing Advances. The Lender may make one or more loans
after the Filing in an aggregate amount not to exceed $600,000 (the Initial
Post-Filing Advances ), subject to the satisfaction or waiver by Lender of the
following conditions precedent:
(a) The Filing shall have occurred.
(b) The Borrower shall have obtained emergency or interim Bankruptcy
Court approval for (i) the Initial Post-Filing Advances, (ii) the granting
to Lender of a continuing security interest in all of the Collateral (as
defined in the Security Agreement) to secure all amounts outstanding under
the Note (including the Initial Post-Filing Advances) senior to all liens
(except as permitted by the Security Agreement), pursuant to Section 364(d)
of the Bankruptcy Code, and (iii) the granting of a priority to the Initial
Post-Filing Advances pursuant to Section 364(c)(1) of the Bankruptcy Code.
4.2. Secondary Post-Filing Advances. The Lender may make one or more
additional loans after the Filing in an aggregate amount not to exceed $600,000
(the Secondary Post-Filing Advances ) (so that the total of all advances under
the Note could aggregate $1,650,000 plus the amount of any pre-Filing advances
in excess of $450,000), subject to the satisfaction or waiver by Lender of the
following conditions precedent:
(a) The Borrower shall have obtained final Bankruptcy Court approval
for
(i) all post-Filing loans theretofore made or which might be made pursuant
to this Agreement, (ii) the granting to Lender of a continuing security
interest in all of the Collateral to secure all amounts outstanding from
time to time under the Note (including such additional loans), senior to
all liens (except as permitted by the Security Agreement), pursuant to
Section 364(d) of the Bankruptcy Code, and (iii) the granting of a priority
to all post-Filing loans made pursuant to this Agreement pursuant to
Section 364(c)(1) of the Bankruptcy Code.
(b) The Borrower shall have filed in its bankruptcy case a plan of
reorganization satisfactory to Lender containing at least the following
provisions (an Approved Plan ): (i) that Lender, at its option, may
convert the indebtedness evidenced by the Note into common stock of the
Reorganized Borrower consistent with Section 2.8 above; (ii) that the TEAM
for New Management, L.L.C. (the TEAM ) shall continue as manager of the
Reorganized Borrower on terms and conditions acceptable to the TEAM and
Lender; and (iii) that existing shareholders of the Borrower may convert
their existing stock into common stock in the Reorganized Borrower equal to
at least twenty percent (20%) of the Reorganized Borrower s issued and
outstanding stock (on a fully diluted basis, giving effect to all stock
issuances pursuant to the Plan).
4.3. Tertiary Post-Filing Advances. The Lender may make one or more
additional loans after the Filing in an aggregate amount not to exceed
$3,550,000 minus the amount of any pre-Filing advances in excess of $450,000
(so that the total of all advances under the Note could aggregate $5,000,000),
subject to the satisfaction or waiver by Lender of the following conditions
precedent:
(a) The Bankruptcy Court shall have approved a Disclosure Statement
relating to an Approved Plan.
(b) The Borrower shall have satisfied such further conditions
precedent, including, without limitation, obtaining further Bankrutpcy
Court approvals and causing Borrower s subsidiaries to grant Lender a first
lien security interest in any property owned by such subsidiaries, as the
Lender shall require in its sole and absolute discretion.
5. REPRESENTATIONS AND WARRANTIES OF THE BORROWER
As a material inducement to the Lender to enter into this Agreement, the
Borrower hereby represents and warrants that as of the date of this Agreement:
5.1. Organization, Corporate Powers, Etc. The Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Colorado, is duly qualified to transact business in all places where
such qualification is necessary (excluding places where the failure to so
qualify would not materially adversely affect the business of the Borrower) and
has all requisite authority and legal right to incur the obligations provided
for under, to execute and deliver, and to perform and observe and provisions of,
this Agreement and the Note.
5.2. Authorization. The making and performance by the Borrower of this
Agreement, the Note and the Security Agreement have been duly authorized by all
necessary corporate action.
5.3. Enforceability. This Agreement, the Note and the Security Agreement
constitute the legal and binding obligations of Borrower, enforceable against
Borrower in accordance with their terms.
5.4. Subsidiaries. None of the Borrower s subsidiaries own property of any
significant value; provided, that if it is determined that a subsidiary of the
Borrower does own property of significant value, the foregoing representation
and warranty shall not give rise to an Event of Default hereunder if Borrower
shall cause such subsidiary to grant Lender a first lien security interest in
any such property of significant value to further secure the Note.
6. COVENANTS
So long as all or any portion of the Note remains outstanding, the Borrower
hereby agrees as follows:
6.1. Compliance With Laws. The Borrower shall comply in all material
respects with all applicable laws, rules, regulations and orders of, and
restrictions imposed by, governmental authorities, the violation of which could
reasonably be expected to material adverse effect upon the financial condition,
results, assets or operations of the Borrower.
6.2. Inspection. The Borrower shall allow representatives of the Lender,
upon reasonable prior notice to the Borrower, to inspect, copy and make extracts
of all applicable records, and all properties, of the Borrower at any reasonable
time for any reasonable purpose.
6.3. Litigation. The Borrower shall promptly notify the Lender of any
litigation instituted, or to the Borrower s knowledge, threatened against the
Borrower.
7. EVENTS OF DEFAULT; REMEDIES
7.1. Event of Default. An Event of Default shall be deemed to have
occurred upon the occurrence and during the continuance of any of the following
events:
(a) Payment. Any amount payable on any loan shall not be paid when
due; or
(b) Covenants. A breach or failure of performance by Borrower of any
covenant, condition or agreement on its part to be observed or performed
contained in this Agreement, the Note or the Security Agreement which shall
not have been cured within thirty (30) days after receipt by the Borrower
of notice thereof given by the Lender; or
(c) Misrepresentation. Any material representation or warranty made
by the Borrower herein or in the Security Agreement shall prove to have
been false or breached in any material respect on and as of the date on
which made; or
(d) Conversion, Appointment of Trustee, Dismissal. The Borrower s
bankruptcy case shall be converted to a proceeding under Chapter 7 of the
Bankruptcy Code, a trustee shall be appointed in the Borrower s bankruptcy
case, or the Borrower s bankruptcy case shall be dismissed; or
(e) Deadlines. Unless Lender in its sole and absolute discretion
elects to extend any of the following deadlines, (i) the final Bankruptcy
Court approval referred to in Section 4.2(a) above shall not be obtained
on or before June 30, 1996, (ii) an Approved Plan shall not be filed on or
before July 15, 1996, (iii) a Disclosure Statement relating to an Approved
Plan shall not be approved on or before September 30, 1996, or (iv) an
Approved Plan shall not be confirmed by November 30, 1996.
7.2. Consequences of an Event of Default.
(a) Acceleration. If an Event of Default shall have occurred and be
continuing, the Lender may (by written notice delivered to the Borrower)
declare all or any portion of the loans immediately due and payable.
(b) Other Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default:
(i) The Lender s commitment to make further loans shall, at
Lender s option, terminate, and the Lender shall have no further
obligation to make loans hereunder;
(ii) The Lender shall also be entitled to exercise all its rights
and remedies as may exist at law or as set forth in the Security
Agreement or the Note.
8. MISCELLANEOUS
8.1. Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of either party shall bind and inure to the benefit of
their respective successors and assigns, including any subsequent holder of the
Note.
8.2. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under applicable law, then such
invalidity, illegality or unenforceability shall not affect the other provisions
of this Agreement.
8.3. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original hereof, and all of
which taken together shall constitute one and the same agreement.
8.4. Descriptive Headings; Interpretation. Descriptive headings in this
Agreement are inserted for convenience of reference only and are not intended to
be part of or affect the meaning or interpretation of this Agreement.
8.5 Governing Law. THIS AGREEMENT SHALL BE ENFORCED IN
ACCORDANCE WITH, AND ALL QUESTIONS REGARDING THE CONSTRUCTION, VALIDITY,
INTERPRETATION AND PURPOSE OF THIS AGREEMENT SHALL BE GOVERNED BY, THE INTERNAL
LAWS OF THE STATE OF ARIZONA, WITHOUT GIVING EFFECT TO PROVISIONS THEREOF
REGARDING CONFLICT OF LAWS.
8.6. Notices. Any notice provided for in this Agreement must be in writing
and must be either (a) hand delivered, (b) mailed by registered or certified
first class mail, postage prepaid with return receipt requested, (c) sent by
reputable overnight courier service for next business morning delivery, or (d)
sent by telecopy to the recipient at the address/telecopy number below
indicated:
If to the Lender:
Recovery Lender, L.L.C.
Attention: Douglas Engmann
c/o Sage Clearing, L.P.
220 Bush St., Suite 660
San Francisco, CA 94104
Telephone: (415) 781-7430
Facsimile: (415) 781-4641
If to the Borrower:
Work Recovery, Inc.
2341 S. Friebus, Suite 14
Tucson, AZ 85713
Telephone: (520) 322-6634
Facsimile: (520) 321-9481
or such other address/telecopy number or to the attention of such other person
as the recipient party shall have specified by prior written notice to the
sending party. Any notice under this Agreement shall be deemed to have been
given (i) on the date such notice is hand delivered, (ii) three (3) days after
the date of mailing if mailed by certified or registered mail, (iii) on the
business day next following the day notice is sent via overnight courier
service, or (iv) as of the beginning of the next day if such notice is sent by
telecopy.
8.7. Entire Agreement. This Agreement, the Note and the Security Agreement
embody the complete agreement and understanding among the parties with respect
to the subject matter hereof and thereof and supersede and preempt any prior
understandings, agreements and/or representations by or among the parties,
written or oral, related to the subject matter hereof in any way.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WORK RECOVERY, INC.
By__________________________________________
Authorized Officer
RECOVERY LENDER, L.L.C.
By__________________________________________
Member
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 189,000
<SECURITIES> 0
<RECEIVABLES> 2,744,000
<ALLOWANCES> 2,426,000
<INVENTORY> 813,000
<CURRENT-ASSETS> 1,503,000
<PP&E> 7,328,000
<DEPRECIATION> 3,590,000
<TOTAL-ASSETS> 5,549,000
<CURRENT-LIABILITIES> 708,000
<BONDS> 0
0
1,318,000
<COMMON> 184,000
<OTHER-SE> (7,742,000)
<TOTAL-LIABILITY-AND-EQUITY> 5,549,000
<SALES> 1,611,000
<TOTAL-REVENUES> 5,341,000
<CGS> 482,000
<TOTAL-COSTS> 8,525,000
<OTHER-EXPENSES> 10,892,000
<LOSS-PROVISION> 1,031,000
<INTEREST-EXPENSE> 416,000
<INCOME-PRETAX> (15,523,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,523,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,523,000)
<EPS-PRIMARY> (.35)
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