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, 1997
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. 01-18695
WORK RECOVERY, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0848910
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.
2341 South Friebus Avenue, Suite 14, Tucson, Arizona 85713
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (520) 322-6634
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 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 X No
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 $.01 par value per share common stock is its sole class of voting
stock. As of September 25, 1997, there were 14,722,830 shares of common stock
outstanding, of which approximately 11,243,455 shares were held by non-
affiliates of the registrant. The closing trading price of the common stock
on that date was $.26 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 $2,923,000 as of September 25,
1997, 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 X No Not Applicable
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 14,722,830 shares were outstanding as of September 25, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Form 10-Q for the quarter ended March 31, 1997; and December 31, 1996, as
amended.
Form 8-K dated January 30, 1997; and July 25, 1997.
<PAGE>1
PART I
Item 1. Business
THIS ITEM SHOULD BE READ IN CONJUNCTION WITH ITEM 7, MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE COMPANY'S
PRESENT FINANCIAL CONDITION IS EXTREMELY SERIOUS AND ITS CASH RESOURCES ARE
LIMITED. AS A RESULT OF LIMITED CASH RESOURCES, THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1997 HAVE NOT BEEN AUDITED AT THIS TIME.
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 ("Old WRI")
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 creditors and equity holders
subsequently approved Old WRI's Plan of Reorganization ("the Plan") and on
December 4, 1996 the Bankruptcy Court issued its order confirming the Plan.
On February 1, 1997 (the "Effective Date"), all of the assets of Old WRI were
transferred to Work Recovery, Inc., a Delaware corporation, ("Work Recovery",
"WRI" the "Company" or the "Registrant") and the Company assumed all liabilities
of Old WRI as such liabilities were modified pursuant to the terms of the Plan.
The Company's Certificate of Incorporation authorizes 48,000,000 shares of
common stock ("New Common Stock") of which 14,388,429 shares were issued
under the Plan as follows:
* Holders of Old WRI Common Stock ("Old Common Stock") received approximately
4.6 million shares of New Common Stock at the exchange rate of one share of
New Common Stock for every 10 shares of Old Common Stock. In addition, the
holders of Old Common Stock received warrants ("the Warrants") for the purchase
of New Common Stock at a share price of $2.50. One Warrant was issued for
every ten shares of Old Common Stock held by the shareholder. The unexercised
Warrants expired 180 days after the Effective Date. The number of Warrants
exercised totaled 334,401.
* Allsup Inc. received a total of 2.6 million shares of New Common Stock, 1.3
million upon converting its prepetition and postpetition loans to equity
($1,000,000 in total) and 1.3 million upon payment to the Company of $1,000,000
in cash.
* The Team for New Management, Board of Directors, and key employees received
2.5 million shares of New Common Stock.
* Recovery Lender, LLC received 1.3 million shares of New Common Stock after
electing to convert its various loans with the Company to equity.
* Holders of Series B and Series C preferred stock ("Preferred Stock") received
0.1 million shares of New Common Stock at the exchange rate of one share of New
Common Stock for every 10 shares of Old Common Stock to which their Preferred
Stock could have been converted. The holders of Preferred Stock also received
cash equal to 20% of accrued dividends. The Company is still in the process of
completing all of the Preferred Stock exchanges and dividend payments.
* A reserve of 1.5 million shares of New Common Stock was made for the filers
of securities fraud claims. The Company has not yet issued any shares from
this reserve.
<PAGE>2
* Approximately 1.8 million in remaining shares of New Common Stock were issued
in settlement of various claims against the Company. The Company is still in
the process of issuing new shares in settlement of these claims.
The Plan also provided for the holders of old employee stock options to receive
one new option for each 10 options previously held. New options issued to
existing holders plus new options issued to all employees on the Effective
Date totaled 236,805 shares. The new options were issued in four categories,
non-qualified options, qualified options-reissued, qualified standard options,
and qualified performance options. The exercise price of the 103,480 non-
qualified options is $3.15 (140% of $2.25). The exercise price of the 17,325
qualified options-reissued is $2.25. The exercise price of the 17,000
qualified standard options is $2.25, and the exercise price for the 102,000
qualified performance options is $2.70 (120% of $2.25). All options are
scheduled to vest in equal amounts over a three year period with the first
one-third vesting February 1, 1998.
Reference is made to the Company's Form 8-K dated January 30, 1997 and its Form
10-Q for the quarter ended December 31, 1996 for more detailed information
concerning the Plan and the consequences and provisions of the Company's
Disclosure Statement and Amended Joint Plan of Reorganization dated October 4,
1996, and the modification of the Plan dated November 25, 1996.
<PAGE>3
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. As part of the Plan, the Company's corporate
domicile was moved on February 1, 1997 from Colorado to Delaware. 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
(r) System, 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(r) System") for a more
complete description of this machine.)
Work Recovery is engaged in the development, manufacture, distribution and sale
of the ERGOS(r) System which measures the functional capacity of workers and
addresses the needs of the injured workers' rehabilitation industry. This
business is pursued in three areas: (i) the development, manufacture,
distribution and sale of ERGOS(r) Systems directly by the Company, (ii)
consulting services, and (iii) the delivery of marketing and other services to
ERGOS(r) 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. In September 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. No material gain or loss
resulted from this sale.
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 1997,
there remained only three such centers in operation. Management determined
that these centers could not be operated profitably and that existing operations
should be sold or closed. Consequently, at the end of fiscal year 1997, only
one joint venture owned Center was in operation. In August 1997, the Company
sold its equity interest in this operation to its joint venture partner for
$80,000, subject to certain adjustments.
<PAGE>4
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 to 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 10 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 related 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>5
PRODUCTS OF THE COMPANY
ERGOS(r) System
The ERGOS(r) System is used by rehabilitation facilities, physicians, hospitals
and medical centers to perform Functional Capacity Evaluations and contributes
to the measurement of the progress of Work Therapy programs. The ERGOS(r)
System also contributes to 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.
The ERGOS(r) System is composed of five work stations and is operated by the
individual being tested under the supervision of a trained test administrator.
The ERGOS(r) System 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 the ERGOS(r) System 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 approximately 130 ERGOS(r) Systems in
use in North America. It is marketed by the Company directly to health care
providers, insurers and large employers, at a current price of approximately
$99,500.
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 the ERGOS(r) System. 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.
<PAGE>6
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. Management is
directing 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(r) technology by marketing the cost saving benefits from the
use of ERGOS(r) Systems 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(r) 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(r) Systems or that such legislation will be implemented at either
the state or federal level. The Company has been unsuccessful, to date, in
its efforts to increase sales of the ERGOS(r) System or penetrate the
potential market.
International
As a result of the Company's limited resources, management is concentrating
its sales and marketing efforts in North America.
Prior to fiscal year 1996, the Company had granted a number of foreign license
agreements which provided for 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.
However, all such licenses have either been rejected by the Company and approved
by the Bankruptcy Court or the Company has reached agreement with the licensee
to cancel the license.
In July 1997, the Company entered into a Sole Sale Contract ("Contract") with
Work Recovery Europa BV ("WRE"), a unaffiliated Dutch company. The Contract
grants to WRE a nontransferable, exclusive (within the specified territory),
terminable license to sublicense and distribute the ERGOS(r) System within
Europe. The Contract is for a term of ten years with buyout rights by the
Company within the first three years and minimum purchase requirements by
WRE during the first six years of the Contract.
Research and Development
The Company has expended a portion of its efforts and resources on the
development of innovative products for use in the work rehabilitation and
assessment fields; however, at the end of fiscal 1997, the Company discontinued
its research and development program until adequate capital can be obtained to
fund such activities. There can be no assurance, however, that the Company
will be able to obtain adequate capital to resume funding such activities.
During the fiscal years ended June 30, 1997, 1996, and 1995, approximately
$455,000, $311,000, and $264,000, respectively, were expended on research
and development. The Company also has developed, 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. It is not
possible for the Company to estimate the amounts expended for these developments
and as a result, they 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(r) System.
<PAGE>7
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. The Company employs three full-time
sales representatives located throughout the country. Recently, the Company
has engaged Functional Capacity Evaluation Technologies, Inc. ("FCET"), an
unaffiliated company, to generate additional sales and enhance Work Recovery's
knowledge of its current market. The Company has engaged FCET for an initial
period of 90 days commencing July 21, 1997. Principals of FCET specialize in
the development of new health care product businesses and improvement of
existing medical equipment businesses, and have recently expanded into the
functional capacity assessment field. During this period, FCET will have
responsibilities for managing the Company's sales and marketing activities.
FCET will provide consultation with respect to the Company's operations,
including technical support, manufacturing and research and development.
FCET, however, will have no decision making authority regarding the
operation of Work Recovery. The cost of this agreement is $30,000 per month
plus travel and other expenses. FCET will also receive a commission of 2.5%
of any ERGOS(r) Systems sold to existing prospects and 5% of the sales price
for any systems sold to a lead generated by FCET.
On July 18, 1997 the Company entered into a ten year contract with WRE,
granting WRE the exclusive right to sell ERGOS(r) Systems and products in
Europe. WRE has developed a marketing and sales strategy for selling ERGOS(r)
Systems in Europe. The Company has granted WRE the exclusive right to sell
ERGOS(r) products in the following regions or countries in Europe: Benelux,
Austria, Switzerland, Scandinavia, Germany, France, United Kingdom (including
England and Ireland), Italy, Spain and Portugal. Either party may terminate
this agreement upon the third anniversary of the contract if WRE fails to
purchase 10 ERGOS(r) Systems, and on the sixth anniversary if WRE fails to
purchase 20 ERGOS(r) Systems by such date. The Company may terminate the
agreement for the entire Territory prior to the third anniversary for the
following sums:
Effective Date - July 31, 1998 $375,000
August 1, 1998 - July 31, 1999 $625,000
August 1, 1999 - July 31, 2000 $875,000
Reference is made to the Company's Form 8-K dated July 25, 1997 for a discussion
of terms of the Company's relationship with FCET and WRE.
See Note 23 to the Consolidated Financial Statements for revenues by
geographical area for the years ended June 30, 1997, 1996 and 1995.
Proprietary Rights Protection
The Company claims certain copyright, trademark, contractual, common law and
other proprietary rights in the ERGOS(r) software and related products
("Intellectual Property"). 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. 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, during fiscal 1997 the
Company purchased from a third party developer of a portion of the ERGOS(r)
software his rights to use or disclose the ERGOS(r) software. The Company
believes it holds the exclusive rights to the ERGOS(r) software. There can
be no assurance, however, that the Company would be successful in any
litigation to enforce its rights to protect the technology involved in the
ERGOS(r) System 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. Subject to available capital, the Company
intends to maintain its technological leadership through continued advances
and innovation.
<PAGE>8
The Company's Intellectual Property is pledged as security for a loan from
Allsup Inc. and Quest Trading, Inc. in the current principal amount of
$1,900,000. See Note 16 to the Consolidated Financial Statements.
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 faces 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 the ERGOS(r) System
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 September 15, 1997, the Company employed 21 persons full-time and 1 person
part-time, including management. At June 30, 1996 the Company had approximately
47 full-time employees. The reduction in the number of employees from the prior
fiscal year is a result of selling or closing rehabilitation centers,
discontinuing research and development, and other cost reduction measures.
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 does 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 has historically experienced reduced sales of
products and services during the last quarter of each calendar year.
The Company's sales efforts are subject to the effects of 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 depend in large part
upon the regulatory structure of the ADA. Management believes 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
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.
<PAGE>9
The Company believes 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. 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. Property
The Company maintains its executive offices and 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 Company has listed the above property for sale and is currently in default
under the terms of the deed of trust.
See Item 1 "Proprietary Rights Protection" for a discussion of the Company's
Intellectual Property.
Item 3. Legal Proceedings
On December 4, 1996, the United States Bankruptcy Court for the District of
Arizona entered its confirmation order confirming and approving Debtor's (the
Company's) Restated Amended Joint Plan of Reorganization dated October 4, 1996
and the modification of Plan dated November 25, 1996 (the "Plan") of the
Company. On February 1, 1997, the Amended Plan became effective. As a
result, all claims against the Company were extinguished and discharged
pursuant to the Amended Plan other than the Unresolved Claims. As of
September 1, 1997, the amount of Unresolved Claims being claimed by creditors
was approximately $113,000, in the aggregate. The Company does not believe it
will ultimately be obligated in this amount but is unable to predict with
accuracy its probable liability on the Unresolved Claims.
Approximately $2,000,000 in allowed claims and administrative expenses
authorized in the Plan remain unpaid and in default. Such claims and
expenses are subject to enforcement in the Bankruptcy Court or other
appropriate jurisdiction.
The Company is indebted to MetLife Capital Corporation ("MetLife") in the
amount of $1,169,000 which indebtedness is secured by a deed of trust in the
Company's executive offices and manufacturing facilities located at 2341
South Friebus Ave., Tucson, Arizona. That indebtedness is in default and
MetLife has initiated legal proceedings to foreclose its deed of trust
interest in the property.
Numerous claims and lawsuits were resolved as part of the Plan. Reference is
made to Note 1 of the Consolidated Financial Statements for a description of
settlements made as part of the Plan.
Note 27 to the Consolidated Financial Statements contains a description of
other significant claims and legal contingencies involving the Company.
Investigations
On August 11, 1995 the Securities and Exchange Commission (the "Commission")
entered an Order Directing Private Investigation (the "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.
<PAGE>10
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>11
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The New Common Stock of the Company is presently traded in the over-the-counter
market under the symbol "WRKE". At the close of business on June 30, 1997,
there were 14,716,234 shares of New Common Stock, $.01 par value outstanding.
There were approximately 414 shareholders of record as of September 1, 1997.
The closing price of the New Common Stock on September 25, 1997 was $.26 per
share.
The quarterly market value of the Company's stock is discussed in Note 34 to
the Consolidated Financial Statements.
The Company's Old Common Stock was quoted on the Nasdaq Stock Market ("Nasdaq")
under the symbol "WORK" until November 8, 1995. On November 8, 1995, 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 Nasdaq'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
Small Cap Market is not appropriate."
See Note 1 to the Consolidated Financial Statements for detail regarding the
restructure of equity including Old Common Stock under the Company's Plan of
Reorganization ("the Plan").
Cumulative cash dividends in arrears at June 30, 1996 amounted to $676,000.
Under the Plan, all Preferred Stock was canceled and exchanged for New Common
Stock plus payment of 20% of the accumulated dividends. The Company is still
in the process of completing all of the Preferred Stock exchanges and dividend
payments. As of June 30, 1997, approximately $99,000 of the dividends had been
paid and $40,000 remained payable.
Item 6. Selected Financial Data
As discussed in Item 1, the Company emerged from its Chapter 11 proceedings
effective February 1, 1997 (the "Effective Date"). For financial reporting
purposes, the Company accounted for the consummation of the Plan effective
February 1, 1997. In accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting By
Entities in Reorganization Under The Bankruptcy Code", the Company has
applied Fresh-Start Reporting as of the Effective Date which has resulted in
significant changes to the valuation of certain of the Company's assets,
liabilities and stockholders' equity. In connection with the adoption of
Fresh-Start Reporting, a new entity has been deemed created for financial
reporting purposes. The periods prior to the Effective Date have been
designated "Predecessor Company" and the periods subsequent to the Effective
Date have been designated "Successor Company".
The following table summarizes selected financial data which have been derived
from the Consolidated Financial Statements of the Company. It should be noted
that the Consolidated Financial Statements have not been audited or reviewed by
the Company's independent public accountants. The selected financial
<PAGE>12
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. All dollars are in thousands except per share data.
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
---------- ---------------------------------------------------------
February 2, July 1, Year Year Year Year
1997 to 1996 to Ended Ended Ended Ended
June 30, February 1, June 30, June 30, June 30, June 30,
1997 1997 1996 1995 1994 1993
--------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 670 $ 1,328 $ 5,341 $ 8,142 $ 19,976 $ 16,000
Income (Loss) From
Operations before
Reorganization Items,
Income Taxes, and
Extraordinary Items (41,219) (7,857) (14,821) (51,181) 2,302 872
Net Income (Loss) (40,238) (13,965) (15,523) (50,849) 1,970 872
Loss per
Common Share:
From Operations [1] (2.81)
Net Income Loss (2.74)
Total Assets [2] 3,442 43,508 5,549 15,659 33,783 26,433
Long Term Liabilities - 1,190 11,081 2,255 2,585 3,352
Total Liabilities 6,180 6,742 11,789 10,948 5,737 7,814
</TABLE>
[1] Loss per share data is not meaningful for periods prior to the Effective
Date due to the significant changes in the capital structure of the Company.
[2] Total Assets for the period ended February 1, 1997 include an Intangible
Asset for the Excess Reorganization Value of 40,350,000. This excess
reorganization value was deemed to be impaired by management and was fully
reserved at June 30, 1997.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE COMPANY'S PRESENT FINANCIAL CONDITION IS EXTREMELY SERIOUS AND ITS CASH
RESOURCES ARE LIMITED. AS A RESULT, THE FINANCIAL STATEMENTS FOR THE YEAR
ENDED JUNE 30, 1997 HAVE NOT BEEN AUDITED OR REVIEWED BY THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS.
The following discussion is qualified by reference to and should be read in
conjunction with the consolidated financial statements and related notes t
hereto, as well as the remainder of this Report.
<PAGE>13
The Company's Ability to Continue As a Going Concern
The Company has suffered recurring losses from operations and there is
substantial doubt about its ability to continue as a going concern. The
Company continues to have substantial obligations to certain bankruptcy
creditors and continues to experience slow sales of ERGOS(r) Systems, its
only product. As a result, the Company will need additional capital to
continue as a going concern, the source of which is unknown at this time.
See Liquidity and Capital Resources.
Overview
As discussed in Item 1, the Company emerged from its Chapter 11 proceedings
effective February 1, 1997 (the "Effective Date"). For financial reporting
purposes, the Company accounted for the consummation of the Plan effective
February 1, 1997. In accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting By
Entities in Reorganization Under The Bankruptcy Code", the Company has
applied Fresh-Start Reporting as of the Effective Date which has resulted in
significant changes to the valuation of certain of the Company's assets,
liabilities and stockholders' equity. In connection with the adoption of
Fresh-Start Reporting, a new entity has been deemed created for financial
reporting purposes. The periods prior to the Effective Date have been
designated "Predecessor Company" and the periods subsequent to the Effective
Date have been designated "Successor Company". For purposes of the discussion
of Results of Operations for the year ended June 30, 1997, and Liquidity and
Capital Resources, the results of the Predecessor Company and Successor
Company have been combined.
Due to unusual transactions and activities and significant accounting
adjustments that have been made in prior years in connection with revenues,
accounts receivable, reserves and assets, an accurate measure of comparability
cannot be drawn from past results in order to measure those that may occur in
the future. See Notes 29 and 30 to the Consolidated Financial Statements.
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 capital necessary to
fund its negative cash flow from operations
* The risk that it will be unable to satisfy its obligations to Allsup Inc.
and Quest Trading, Inc and that the assets securing such obligations will be
lost to foreclosure
* The risk that the Company may not be able to increase the demand for ERGOS(r)
equipment
* The risk that the Company may not be able to effect legislation that would
provide for the increased demand for use of Functional Capacity Evaluations
* The risk that the Company may not be able to develop and implement an enhanced
version of ERGOS(r) technology or a new version of the ERGOS(r) System
* The risk that the Company may not be able to protect the technology involved
in ERGOS(r) 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 R. Hardy or other
executive officers
<PAGE>14
* The risk that the ADA, workers' compensation laws and regulations or other
laws and regulations may change to the detriment of the Company
* The risk that the Company will be unsuccessful in settling or defending
various legal proceedings and investigations involving the Company
* The risk of 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," 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 1997 as Compared to Fiscal 1996
Net revenues for fiscal 1997 decreased by approximately 63% to approximately
$1,998,000 from approximately $5,341,000 for fiscal 1996. This decrease is
attributed to an approximately 97% decrease in clinic services offset by a
15% increase in sales and related services . Clinic services decreased due
to the selling or closing all of the Company's centers except its 50% joint
venture in Lexington, Kentucky during fiscal 1997. The slight increase in
sales and related services was due to the efforts by management to sell new
and used ERGOS(r) Systems to a broadened customer base. There were no
significant increases in prices for the products or services of the Company
during fiscal 1997.
Gross profit for fiscal 1997, as compared to fiscal 1996, increased by
approximately 119%. This increase is directly attributable to the closing of
all but the Lexington, Kentucky clinical service centers.
Selling, general and administrative expenses ("SG&A') increased approximately
12% during fiscal 1997 to approximately $9,702,000 from approximately $8,537,000
for fiscal 1996. Increased SG&A consisted of a one-time charge of $5,138,000
in compensation for the issuance of New Common Stock to the Team for New
Management, the Board of Directors and key employees as approved by the
Bankruptcy Court, offset by a $4,020,000 reduction. Such stock was valued at
$2.50 per share which was the price set by the Bankruptcy Court, although the
stock traded at that price for only a short time after the Effective Date and
is now trading at $.26 per share. The $4,020,000 reduction in SG&A, net of
the one-time compensation charge, was due to significant reduction in staff
and operating costs as a result of cost saving efforts implemented by
management.
Reorganization items totaling $22,927,000 in fiscal 1997 and $702,000 in fiscal
1996 were recorded as a result of the Company's bankruptcy proceedings. See
Note 15 to the Consolidated Financial Statements.
<PAGE>15
Cash increased $271,000 from approximately $189,000 at June 30, 1996 to
approximately $460,000 at June 30, 1997. The principal sources of cash were
$1,814,000 received from issuances of common stock, $2,867,000 received in
proceeds from notes payable, and $1,304,000 received in proceeds from sales
of property, plant and equipment. The principal uses of cash for the year
were $4,358,000 for operating activities, and repayments of notes payable
and long-term debt of $1,195,000.
In fiscal 1997, net receivables decreased $52,000 (16%) from approximately
$318,000 at June 30, 1996 to approximately $266,000 at June 30, 1997. The
decrease in receivables resulted primarily from the selling and closing of
centers offset by a slight increase due to the successful collection efforts
for the centers closed during the fiscal year.
Property, plant and equipment decreased from approximately $3,738,000 at
June 30, 1996 to approximately $1,697,000 at June 30, 1997. The $2,041,000
decrease resulted principally from furniture and equipment included in the
sale of clinical centers totaling $1,304,000, the reclassification of fixed
assets to inventory of $310,000, the recording of depreciation of $274,000
and impairment losses totaling $133,000.
Intangible and other assets decreased approximately $16,000 (13%) during
fiscal 1997. Intangible assets increased by $40,350,000 as a result of
fresh-start accounting implemented on the Effective Date. This increase was
offset by an equal decrease when it was determined that the intangible excess
reorganization value of the Company was impaired due to the Company's severe
financial condition. See Note 2 to the Consolidated Financial Statements.
Total liabilities decreased $5,609,000 from approximately $11,789,000 at June
30, 1996 to approximately $6,180,000 at June 30, 1997. The decrease was due
primarily to a reclassification of $6,609,000 in liabilities subject to
compromise following the adoption of fresh-start accounting, and payment of
approximately $2,000,000 in bankruptcy debt during the fiscal year. The
decrease was offset by a $3,000,000 increase in notes payable of approximately
$1,910,000 and administrative claims of approximately $993,000.
The equity attributable to the Convertible Preferred Stock decreased
$1,318,000 (100%) from fiscal 1996 to fiscal year 1997 as a result of the
equity restructuring under the Plan. The $19,995,000 decreases in common
stock and additional paid in capital were the result of equity restructuring
under the Plan and the adoption of fresh-start accounting on the Effective
Date. See Note 2 to the Consolidated Financial Statements.
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% 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.
<PAGE>16
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 totaling $702,000 were recorded in fiscal 1996 which are
directly related to the Company's bankruptcy proceedings. See Note 15 to the
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 resulted principally from the recording of depreciation of
$1,252,000, impairment losses totaling $707,000 and equipment included in the
sale of clinical centers totaling $360,000. In addition, the Company had
purchases totaling $428,000.
In addition, investment losses totaling $926,000 and additional bad debt of
$1,031,000 were recorded during fiscal 1996. See Note 32 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) was retired as of July 1, 1995.
Liquidity and Capital Resources
The Company has continued to sustain significant losses and as of June 30, 1997
had a working capital deficit of approximately $4,663,000. The financial
condition of the Company is perilous.
The Company is in need of additional funds for ongoing operations and it will
need substantial additional funds in order to fulfill its remaining obligations
under the Plan.
<PAGE>17
Subsequent to emerging from bankruptcy, the Company received proceeds of
$1,000,000 from the sale of Common Stock to Allsup Inc. ("Allsup"), $819,000
from the exercise of new warrants and $1,810,000 from the draw down on a
$2,000,000 line of credit from Allsup Inc. and Quest Trading, Inc. See
Notes 16 and 21 to the Consolidated Financial Statements.
It is unlikely the Company will be able to borrow additional funds unless it
can demonstrate significant improvement in its ability to sell ERGOS(r)
Systems, its sole product. On July 21, 1997, the Company entered into a 90-
day contract with Functional Capacity Evaluation Technologies, Inc. ("FCET")
to manage its sales and marketing activities. The Company believes FCET will
be able to demonstrate that there is a valid market for the ERGOS(r) System.
There can be no assurance at this time, however, that the Company will be
successful in accomplishing the objectives or goals mentioned herein. Even
if FCET is highly successful in its marketing and sales efforts, it is highly
unlikely that sufficient sales revenues can be generated in order to provide
the Company with adequate funds to meet its operating expenses, to satisfy its
obligations under the Plan, or to meet its obligations to Allsup Inc. and
Quest Trading, Inc. The Company's strategy is to demonstrate that there is a
valid market for the ERGOS(r) System that will enable the Company to raise
additional capital.
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 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
The audit for the fiscal year ended June 30, 1997 has not been completed due
to the severely limited cash of the Company at the present time. As a result,
the financial statements presented for the year ended June 30, 1997 are
unaudited and no Report of Independent Accountants has been included.
During the fiscal year ended June 30, 1996, 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>18
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the names of all directors, executive officers
and significant employees of the Company, as well as their ages and positions
as of the date of this Report:
<TABLE>
<CAPTION>
<S>
Name Age Position with Company
<C> <C>
Dorcas R. Hardy (1) 51 Chairman of the Board of Directors and Chief
Executive Officer
Vernon S. Schweigert 58 President and Chief Operating Officer
Julian De La Rosa (2)(3) 58 Director
John E. Affeldt, MD 79 Director
Renato DiPentima (1)(3) 56 Director
William R. Sauey (2) 70 Director
Edward M. Young (1)(2) 50 Director
John J. Banks 51 Vice President of Research and Development
Mark S. Dakos 42 Vice President of Governmental Affairs
</TABLE>
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Biographical Profiles
Following are biographical profiles of each individual serving as a director,
executive officer or significant employee of the Company as of the date of this
Report.
Dorcas R. Hardy. Ms. Hardy has been the Chief Executive Officer and a Director
of the Company since January 18, 1996, and has served as the Chief Financial
Officer from January 18, 1996 to May 20, 1996 and Principal Financial and
Accounting Officer from August 12, 1997 to present. Ms. Hardy also served
as the President of the Company from January 18, 1996 until August 20, 1997.
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.
<PAGE>19
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.
Vernon S. Schweigert. Mr. Schweigert has been the President and Chief
Operating Officer of the Company since August 20, 1997. For at least the
past five years, Mr. Schweigert has been the President of Biltmore Associates,
Inc., a business consulting firm.
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 Chairman 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 May 1997 to present, Dr. DiPentima has been
President of SRA Federal Systems and from July 1995 to May 1997, Dr.
DiPentima was Vice President and Chief Information Officer for SRA
Corporation where he was 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 and from April 3, 1997 to August 12, 1997 served as the Chief Operating
Officer and the Chief Financial Officer of the Company. From 1992 to 1997,
Mr. Young was the Chairman, President and Chief Executive Officer of American
Cytogenetics, Inc., a publicly-held company which owned and managed specialty
clinical laboratories. Mr. Young was a health care management consultant with
Bedford International from 1990 to 1991.
John J. Banks. Mr. Banks was appointed Vice President of Research and
Development in January 1996, having served as Vice President of International
Operations since May 1995 and Coordinator of International Operations since
February 1993. Prior to these appointments, Mr. Banks served as the Company's
Director of Research and Development from July 1986. As Vice President of
Research and Development, Mr. Banks has responsibility for the research and
development of the Company's products.
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 an ERGOS(r) System and related equipment of the Company. Mr. Dakos
operated Mark S. Dakos & Associates, a Sacramento, California-based business
specializing in vocational counseling and rehabilitation, from December 1989
until December 1993.
<PAGE>20
Item 11. Executive Compensation
Summary Compensation
The following table sets forth the compensation paid to the Chief Executive
Officer and the next four most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000 (the "Named Executive
Officers") for services rendered in all capacities to the Company and
subsidiaries during the periods indicated.
<TABLE>
<CAPTION>
Summary Compensation Table
Other Number of
<S> Annual Securities
Name and Year Ended Compen- Underlying
Principal Position June 30 Salary Bonus sation Options
- ------------------ ---------- ------- ------- --------- ----------
<C> <C> <C> <C> <C>
Dorcas R. Hardy
Chairman, and
Chief Executive 1997 $ 73,250 $334,550(2)(9) $1,330,530(3)(9) -0-
Officer (1) 1996 -0- -0- 63,750(4) -0-
Robert D. Judson, Jr.
Manager of Financial
Operations and Acting 1997 -0- 295,000(5)(9) 908,435(6)(9) -0-
Chief Financial Officer 1996 -0- -0- 141,536 -0-
John J. Banks
Vice President
Research & Development 1997 81,000 65,000(7)(9) -0- 22,131
Mark S. Dakos
Vice President
Governmental Affairs 1997 82,500 127,500(8)(9) -0- 14,944
Thomas L. Brandon
Chairman, President
and Chief Executive
Officer (10) 1996 129,231 30,000 67,696 -0-
</TABLE>
(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 (the "Team"). Pursuant
to such agreement, the Team provided certain management and consulting services
to the Company until February 1, 1997 which included, in addition to Ms. Hardy's
services, the services of an acting Chief Financial Officer. See "Employment
Contracts, Termination and Change of Control"
(2) Represents 133,820 shares of New Common Stock valued at the reorganization
value of $2.50 per share, which may or may not reflect fair market value at the
time it was paid.
<PAGE>21
(3) Includes $1,237,500, representing the reorganization value of $2.50 per
share, which may or may not reflect fair market value at the time it was paid,
of 495,000 shares of Common Stock received from the Team pursuant to the Plan
and $93,030 of consulting fees received from the Team for services rendered to
the Company. Does not include $52,500 owed to Ms Hardy by the Team for services
rendered by her to the Company which will probably not be paid in full.
(4) Consulting fees received from the Team for services rendered to the
Company. 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.
(5) Includes $187,500, representing the reorganization value of $2.50 per
share, which may or may not reflect fair market value at the time it was paid,
of 75,000 shares of Common Stock received from the Company, and $107,500 cash.
Does not include $17,500 owed to Mr. Judson by the Company.
(6) Includes $712,500, representing the reorganization value of $2.50 per
share, which may or may not reflect fair market value at the time it was paid,
of 285,000 shares of Common Stock received by Mr. Judson from the Team pursuant
to the Plan of Reorganization, $118,167 of consulting fees received from the
Team for services rendered to the Company, and $77,768 of consulting fees
received from the Company. Does not include $11,738 owed to Mr. Judson by
the Team for services rendered by him to the Company which will probably not
be paid in full.
(7) Represents 26,000 shares of New Common Stock valued at the reorganization
value of $2.50 per share, which may or may not reflect fair market value at the
time it was paid.
(8) Represents 51,000 shares of New Common Stock valued at the reorganization
value of $2.50 per share, which may or may not reflect fair market value at the
time it was paid.
(9) The shares of New Common Stock issued are valued at the reorganization
value of $2.50 per share for purposes of compensation disclosure in the above
table, which may or may not reflect fair market value at the time it was paid.
Although the stock traded at this price for a short time following the Effective
Date, it is currently trading at approximately $.26 per share. Shares of New
Common Stock issued are subject to varying lock-up terms and restrictions.
(10) 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.
<PAGE>22
Option Grants
Pursuant to the Plan, all employee and other options and warrants to purchase
Old Common Stock were revised to reflect the one for ten stock adjustment.
The following table provides information with respect to stock option grants
made to each of the Named Executive Officers during the fiscal year ended
June 30, 1997 to purchase New Common Stock. The reorganization value of the
Company's Common Stock was $2.50 per share, which may or may not reflect fair
market value, at the date of grant. The exercise prices of the options are
equal to or greater than the average price of the Company's Common Stock for
the thirty-day period following the date of grant. No stock appreciation
rights were granted to these individuals during such period.
<TABLE>
Option Grants in Last Fiscal Year
<CAPTION>
Percent of Potential Realizable
Total Value at
Number of Options Annual Rates of
Securities Granted to Stock Price
<S> Underlying Employee Exercise Appreciation for
Named Options In Fiscal Price per Expiration Option Term
Officer Granted Year Share Date 5% 10%
- ------------- ---------- ---------- --------- ---------- --------------------
<C> <C> <C> <C> <C> <C>
John J. Banks 33,369 32.25% $3.15 1/31/07 - -
2,131 6.21% 2.25 1/31/07 - -
20,000 19.61% 2.70 1/31/07 - -
Mark S. Dakos 11,111 10.74% 3.15 1/31/07 - -
4,944 14.4% 2.25 1/31/07 - -
10,000 9.80% 2.70 1/31/07 - -
</TABLE>
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, 1997.
No stock options held by any of the Named Executive Officers were in-the-money
at June 30, 1997.
Compensation of Directors
Directors of the Company who are not officers of the Company are entitled to
receive (1) $1,500 per Board or committee meeting attended plus expenses for
meeting attendance; $500 for telephonic board meetings; however, no Board fees
have been paid to the Directors subsequent to the Effective Date due to limited
cash resources. At the time of their appointment, each 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.
<PAGE>23
Pursuant to the Reorganization Plan, the Directors' Warrants were canceled and
non-employee Directors were issued New Common Stock as follows:
<TABLE>
<CAPTION>
Number of Reorganization
Director Shares Issued Value of Shares
- ------------------- --------------- ------------------
<S> <C> <C>
John Affeldt, MD 36,000 $90,000
Julian De La Rosa 36,000 90,000
Renato DiPentima 46,000 115,000
William Sauey 36,000 90,000
Edward Young 51,000 127,500
</TABLE>
The total number of shares issued to each Director was determined based upon
the Director's committee assignments. The reorganization value of the New
Common Stock issued was $2.50 per share, which may or may not reflect fair
market value at the date of grant. Shares issued bear a restrictive legend
and are subject to lock-up agreements that restrict the ability to sell.
Employment Contracts, Termination and Change of Control
As of the date of this report, John J. Banks is the only employee of the
Company who has an employment contract. Under the terms of this contract,
Mr. Banks receives an annual gross salary of seventy-five thousand dollars
plus certain additional fringe benefits for successive one year periods
beginning May 1, 1996. This contract is terminable by either party at the
end of the yearly term. The other Named Executive Officers' 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
provided 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
employed Dorcas R. Hardy and made 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 was subsequently appointed as the Acting Chief Financial Officer.
The Team continued to manage the Company until February 1, 1997, when the
Company emerged from bankruptcy. Pursuant to a Bankruptcy Court approved
modification of the compensation arrangements of the IMSA, the Team received
$12,500 per week (plus an estimated $1,000 for expenses) which was 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. As of the date of this report, the Company owes the Team $67,500
in unpaid fees. In addition, the Company paid Sierra Financial Group a
$107,500 bonus. The Company still owes $17,500 to Sierra Financial Group.
Mr. Judson and his wife are 50% owners of Sierra Financial Group.
<PAGE>24
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 was never submitted to shareholders, and
consequently, the warrants were never issued. Pursuant to the
Reorganization Plan, Team Warrants were canceled and in February 1997,
1,800,000 shares of New Common Stock, in the aggregate, were issued to the
members of the Team.
Executive Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee 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. In
January 1997, Ms. Hardy became an ex-officio member of the Committee and in
April 1997 Mr. Young resigned upon being appointed Chief Operating Officer
of the Company. Julian De La Rosa was appointed to the Compensation Committee
in April, 1997.
Performance Graph
A performance graph has not been included in this Report because such is not
meaningful due to the Company's bankruptcy and re-capitalization
during fiscal 1997.
<PAGE>25
Compensation Committee Report on Executive Compensation
The Compensation Committee membership changed in 1997 when Dorcas R. Hardy
became an ex-officio member (1/97) and when Edward Young resigned to become
Chief Operating Officer (4/97). The Compensation Committee consists of
Directors Dr. DiPentima (Chairman) and Julian De La Rosa.
The Compensation Committee develops and maintains compensation policies and
guidelines for the senior executives of the Corporation, reviews the
performance of the Corporation's senior executives against annual objectives
and determines annual salary increase adjustments or incentive rewards, and
formulates comprehensive compensation programs for the senior executives and
senior management of the Corporation for recommendation to and action by the
Board of Directors. The goals of the Compensation Committee are to provide
compensation packages to the officers of the Company which are highly
incentive-based with a compensation base, generally in accordance with
industry standards, coupled with bonus and stock option incentive awards
based on corporate performance, business unit performance and personal
performance. The Compensation Committee believes this strategy will best
align the interests of management with those of the shareholders.
The Committee held one meeting to review Officer contracts, reaffirm severance
and indemnification agreements entered into prior to Chapter 11, and review
management's recommendations for distribution of stock options and bonus shares.
The Committee proposed to engage Dorcas R. Hardy as an employee of the Company
effective February 1, 1997. The Committee recommended that the Board approve a
stock grant from the Employee bonus shares based upon her performance and
accomplishments upon taking over the Company's management and successful
completion of Chapter 11 proceedings. The agreed compensation level was
established at a rate similar to what she had received as a member of the
Team for New Management. A formal employment contract for Ms. Hardy, Chief
Executive Officer, is still under discussion and will be based upon
appropriate performance-based incentives and a base salary comparable to
similar technology and health-related companies.
The Committee also reviewed the contract of Vice President John Banks and
discussed development of a contract for Vice President Mark Dakos. Given the
current financial condition of the company, the Committee decided to postpone
development of any new employment contracts until the Company reached a more
stable financial condition.
Upon recommendation of the Compensation Committee, the Board of Directors
approved the issuance (post Effective Date of the Chapter 11 Bankruptcy Plan)
of 500,000 bonus shares to employees and stock options to employees (103,480
non-qualified options and 136,325 qualified options). The Committee reviewed
suggested expansion of the Company stock option plan as well as a new Non-
Employee Directors' Stock Option Plan but decided to postpone consideration
and presentation to shareholders until the next fiscal year.
Respectfully submitted,
Renato DiPentima, Ph.D., Chairman
Julian De La Rosa
<PAGE>26
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 1, 1997 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 of Shares
Name and Address (1) of Beneficial Percent of
Title of Class of Beneficial Owner Ownership (2) Class (3)
- -------------- ------------------- -------------- ----------
<S> <C> <C> <C>
Common Stock Dorcas R. Hardy 664,934 4.52% (4)
Common Stock John E. Affeldt, M.D. 36,000 (5)
Common Stock Julian De La Rosa 36,000 (5)
Common Stock Renato DiPentima 46,000 (5)
Common Stock William R. Sauey 37,000 (5)
Common Stock Edward M. Young 51,000 (5)
Common Stock John J. Banks 26,000 (5)(6)
Common Stock Mark S. Dakos 60,150 (5)
Common Stock Allsup Inc. 2,573,555 19.26% (7)
Directors and Executive
Officers as a Group
(8 persons) 955,984 6.50%
</TABLE>
Notes to Table:
(1) The address of all beneficial owners is 2341 South Friebus Avenue, Tucson,
Arizona 85713, except for Allsup Inc. whose address is 300 Allsup Place,
Belleville, IL 62223.
(2) The information shown is based upon information furnished by the respective
directors, executive officers and Allsup Inc.
(3) Percentages are based upon 14,722,830 shares outstanding on September 1,
1997.
(4) Ms. Hardy disclaims beneficial ownership of 300 shares of Common Stock of
the Company owned by her husband.
(5) Represents less than 1% of the outstanding shares of Common Stock.
(6) Mr. Banks disclaims beneficial ownership of 160 shares of Common Stock of
the Company owned by his wife.
<PAGE>27
(7) Includes options to purchase 100,000 and 225,000 shares of the Company's
Common Stock at $1.56 and $.42 per share, respectively. See Note 22 to
Consolidated Financial Statements.
Item 13. Certain Relationships and Related Transactions
The members of the Team included Douglas Engmann who provided consulting
services to the Company without cash compensation. The amounts paid to the
Team pursuant to the IMSA, as modified by the Bankruptcy Court, flowed 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 provided for the
issuance of shares of New Common Stock to the Team which were 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. Pursuant to the
Reorganization Plan, and at Mr. Engmann's option, such loan was converted
into shares of New Common Stock. See Note 25 to Consolidated Financial
Statements.
Messrs. Judson and Engmann (or an affiliate) and Ms. Hardy were each members of
Recovery Lender which 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".
See Note 25 to Consolidated Financial Statements for information on New Common
Stock issued to the Team, officers of the Company and a related shareholder.
<PAGE>28
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
Consolidated Balance Sheets as of June 30, 1997 (unaudited) and 1996
Consolidated Statements of Operations for the fiscal years ended June 30, 1997
(unaudited), 1996 and 1995
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1997
(unaudited), 1996 and 1995
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, 1997,
1996 and 1995.
(a)(3) Exhibits
1.1 Debtors' Restated Amended Joint Plan of Reorganization dated October 4,
1996, modified as of November 25, 1996 is hereby incorporated by reference
from the Registrant's Form 8-K dated January 30, 1997.
1.11 Order Confirming Plan of Reorganization is hereby incorporated by reference
from the Registrant's Form 10-K/A for the quarter ended December 31, 1996.
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).
3.11 Certificate of Incorporation of Work Recovery, Inc., as amended is hereby
incorporated by reference from the Registrant's Form 8-K dated January 30, 1997.
3.2* Bylaws
4.1* Warrant Agreement dated May 5, 1993, Registration Rights Agreement dated
May 5, 1993, Warrant Agreement dated June 7, 1993, Registration Rights Agreement
dated June 7, 1993, Dealer Warrant Agreement dated June 7, 1993, Dealer
Registration
<PAGE>29
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.
4.11 Warrant Agreement dated as of February 1, 1997 between Work Recovery,
Inc. , and Harris Trust and Bank is hereby incorporated by reference from the
Registrant's Form 8-K dated January 30, 1997.
4.2 Form of Warrant is hereby incorporated by reference from the Registrant's
Form 8-K dated January 30, 1997.
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.
<PAGE>30
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.
<PAGE>31
10.30 Business Purchase Agreement dated September 9, 1996 between the Company
and R.J. Enterprises (Sale of New Concepts Corporation) is hereby incorporated
by reference from the Registrant's Form 10-K for the year ended June 30, 1996.
10.31 Security Agreement dated April 30, 1996 between the Company and Douglas
J. Engmann is hereby incorporated by reference from the Registrant's Form 10-K
for the year ended June 30, 1996.
10.32 Loan Agreement dated May 17, 1996 between the Company and Recovery Lender,
L.L.C. is hereby incorporated by reference from the Registrant's Form 10-K for
the year ended June 30, 1996.
10.33 Investment Agreement dated October 11, 1996 between the company and Allsup
Inc. is hereby incorporated by reference from the Registrant's Form 10-Q for the
quarter ended September 30, 1996.
10.34 Loan Agreement dated January 30, 1997 between the Company, Allsup Inc.
and Quest Trading, Inc is hereby incorporated by reference from the Registrant's
Form 10-K/A for the quarter ended December 31, 1996.
10.35 Sole Sale Contract dated as of July 18, 1997 between Work Recovery, Inc.
and Work Recovery Europa BV is hereby incorporated by reference from the
Registrant's Form 8-K dated July 25, 1997.
10.36 Engagement Letter dated as of July 16, 1997 between Work Recovery, Inc.
and Functional Capacity Evaluation Technologies, Inc. is hereby incorporated
by reference from the Registrant's Form 8-K dated July 25, 1997.
99.1 Registrant's press release dated May 29, 1996 announcing Chapter 11 filing
is hereby incorporated by reference from the Registrant's Form 8-K dated May 29,
1996.
* 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.
(b) Reports on Form 8-K
No Reports on Form 8-K have been filed during the last quarter of fiscal 1997.
All other exhibits are omitted as the information required is inapplicable.
<PAGE>32
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, Chief Executive Officer (Principal Executive Officer and
Principal Financial and Accounting Officer)
Date: September 26, 1997
By: /s/ VERNON S. SCHWEIGERT
Vernon S. Schweigert, President and Chief Operating Officer
Date: September 26, 1997
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, Chief Executive Officer (Principal Executive Officer and
Principal Financial and Accounting Officer) and Director
Date: September 26, 1997
/s/ JOHN E. AFFELDT
John E. Affeldt, M.D., Director
Date: September 25, 1997
/s/ JULIAN DE LA ROSA
Julian W. De La Rosa, Director
Date: September 24, 1997
/s/ RENATO DIPENTIMA
Renato DiPentima, Director
Date: September 26, 1997
/s/ WILLIAM R. SAUEY
William R. Sauey, Director
Date: September 26, 1997
Edward M. Young, Director
Date:
<PAGE>33
PART IV.
Item 14. (a)(1)
<TABLE>
WORK RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
Successor Predecessor
Company Company
June 30, June 30,
1997 1996
----------- | -----------
(Unaudited) |
ASSETS |
<S> <C> | <C> |
Current Assets: |
Cash and Cash Equivalents $ 460 | $ 189
Receivables, including Related Party, |
net (Note 8) 266 | 318
Inventories (Note 7) 682 | 813
Prepaid Expenses (Note 12) 109 | 183
-------- | --------
Total Current Assets 1,517 | 1,503
|
Property, Plant and Equipment, net (Note 10) 1,697 | 3,738
Intangible Assets (Note 11) 107 | 123
Other Assets (Note 12) 121 | 185
-------- | --------
Total Assets $ 3,442 | $ 5,549
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)|
|
Liabilities: |
Accounts Payable $ 236 | $ 495
Claims Payable (Note 13) 1,756 |
Accrued Expenses (Note 13) 1,032 | 98
Notes Payable, including Related Parties |
(Note 16) 1,887 | 115
Other Debt (Note 17) 1,269 |
Liabilities Subject to Compromise (Note 14) | 11,081
-------- | --------
Total Liabilities 6,180 | 11,789
|
Commitments and Contingent Liabilities |
|
Shareholders' Equity (Deficit): |
New Common Stock, $.01 par value: |
Authorized 48,000,000 shares, issued and |
outstanding 14,716,234 shares 147 |
New Preferred Stock, $.01 par value, |
2,000,000 shares authorized, no shares |
issued and outstanding |
Old Common Stock | 184
Additional Paid-in Capital 37,353 | 57,311
Old Preferred Stock | 1,318
Accumulated Deficit (40,238) | (65,053)
--------- | --------
Total Shareholders' Equity (Deficit) (2,738) | (6,240)
Total Liabilities and Shareholders' --------- |
Equity (Deficit) $ 3,442 | $ 5,549
========= | =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>34
<TABLE>
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<CAPTION>
Successor Company Predecessor Company
----------------- | ---------------------------------------------------
February 2, 1997 | July 1, 1996
to | to Year Ended Year Ended
June 30, 1997 | February 1, 1997 June 30, 1996 June 30, 1995
--------------- | ------------------ --------------- --------------
(Unaudited) | (Unaudited)
<S> <C> | <C> <C> <C>
Net Revenues: |
Sales and Related Services $ 648 | $ 1,252 $ 1,611 $ 2,061
Clinic Services 22 | 76 3,730 5,181
Licensing and Consulting | 900
--------- | --------- --------- --------
Total Net Revenues 670 | 1,328 5,341 8,142
Cost of Sales 372 | 1,030 8,525 11,115
--------- | --------- --------- --------
Gross Profit (Loss) 298 | 298 (3,184) (2,973)
|
Expenses: |
Selling, General and Administrative 3,663 | 7,726 8,537 8,822
Settlement with Investors | 185
Loss from Unusual Activities |
(Note 29 and 31) | 128 493
Additional Bad Debts | 1,031 13,360
Impairment Losses 37,835 | 707 13,825
-------- | -------- --------- --------
Loss From Operations (41,200) | (7,428) (13,772) (39,473)
-------- | -------- --------- --------
Other Income (Expense): |
Interest Expense (105) | (196) (416) (439)
Investment Losses (Note 32) | (926) (11,437)
Interest Income 14 | 3 267 351
Miscellaneous Income (Expense) 72 | (236) 26 (183)
-------- | --------- ---------- --------
Net Other Expense (19) | (429) (1,049) (11,708)
-------- | --------- ---------- --------
|
Loss From Operations Before |
Reorganization Items, Income Taxes |
and Extraordinary Gain on Debt |
Discharge (41,219) | (7,857) (14,821) (51,181)
Reorganization Items (Note 15) | (22,927) (702)
Loss Before Income Taxes and --------- | -------- ---------- --------
Extraordinary Gain on Debt Discharge (41,219) | (30,784) (15,523) (51,181)
Income Taxes (Benefits) | (332)
Net Loss Before Extraordinary Gain --------- | -------- ---------- --------
on Debt Discharge (41,219) | (30,784) (15,523) (50,849)
Extraordinary Gain on Debt Discharge |
(Note 2) 981 | 16,819
--------- | -------- ---------- --------
Net Loss $ (40,238) | $ (13,965) $ (15,523) $ (50,849)
========= | ======== ========== =========
</TABLE>
Loss per Common Share $ (2.74)
=========
Weighted Average Number of Common
Shares Outstanding 14,663,442
See Notes to Consolidated Financial Statements
<PAGE>35
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- | -------------------------------------------------------
February 2, 1997 | July 1, 1996
to | to Year Ended Year Ended
June 30, 1997 | February 1, 1997 June 30, 1996 June 30, 1995
----------------- | ----------------- --------------- ---------------
(Unaudited) | (Unaudited)
<S> <C> | <C> <C> <C>
OPERATING ACTIVITIES: |
Net Loss $ (40,238) | $ (13,965) $ (15,523) $ (50,849)
Adjustments to Reconcile |
Net Loss to Net Cash |
Used in Operating Activities: |
Depreciation and Amortization 1,787 | 174 1,878 1,094
Provision for Taxes | (332)
Expenses Paid by Stock Issuance | 30 2,201
Deferred Revenues (59) | 8 20,591
Impairment Losses 38,835 | 21 707 13,825
Non-Cash Interest 77 |
Reorganization Items | 22,927 702
Extraordinary Gain on Debt |
Discharge (981) | (16,819)
Bad Debts (120) | 79 1,031 13,360
Investment (Gains) Losses (13) | 85 926 11,437
Changes in Assets and Liabilities: |
Receivables, Including Related Party 207 | 364 509 (18,641)
Inventories 20 | 126 (457) 82
Prepaids and Other Current Assets 80 | 154 150 (165)
Leases Receivable 72 | 183
Intangibles and Other Assets (101) | (170) 20
Accounts Payable, Trade and Other (797) | 471 1,231 192
Accrued Expenses, Other Current |
Liabilities (1,731) | 113 (83) (566)
Unallocated Credits | 48 800
Liabilities Subject to Compromise | 5,036
Deferred Licensing Revenue | 1,500 2,009
-------- | --------- -------- --------
Net Cash Used in Operating |
Activities (2,962) | (1,396) (7,331) (4,779)
-------- | --------- -------- --------
|
INVESTING ACTIVITIES: |
Loans to Officers and Former Officers | (384)
Repayment from Former Officer 30 |
Investment in Unconsolidated |
Affiliates | (567) (1,345)
Purchases of Property, Plant and |
Equipment (19) | (73) (428) (554)
Sales of Property Plant and Equipment 14 | 1,290 360
Other Assets | (631)
-------- | -------- -------- --------
Net Cash (Used in) Provided by |
Investing Activities 25 | 1,217 (1,019) (2,530)
-------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>36
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- | ---------------------------------------------------
February 2, 1997 | July 1, 1996
to | to Year Ended Year Ended
June 30, 1997 | February 1, 1997 June 30, 1996 June 30, 1995
----------------- | ---------------- ------------- ---------------
(Unaudited) | (Unaudited)
<S> <C> | <C> <C> <C>
FINANCING ACTIVITIES: |
Proceeds from Issuance of Common |
Shares 1,814 | 924 14,465
Repayments of Notes Payable |
and Long Term Debt (154) | (1,041) (1,103) (2,407)
Proceeds from Notes Payable |
and Long Term Debt 1,810 | 1,057 2,164 2,000
Purchase of Treasury Stock | (1,383)
Dividends Paid (85) | (14)
-------- | -------- ------- --------
Net Cash Provided by Financing |
Activities 3,385 | 2 1,985 12,675
------- | -------- ------- --------
Net Increase (Decrease) in Cash 448 | (177) (6,365) 5,366
Cash at Beginning of Year 12 | 189 6,554 1,188
-------- | -------- ------- --------
Cash at End of Year $ 460 | $ 12 $ 189 $ 6,554
======== | ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>37
THESE NOTES HAVE NOT BEEN REVIEWED BY THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS
1. Significant Accounting Policies and Business of the Company
Reorganization
On May 29, 1996 the predecessor to WRI ("Old WRI") and its wholly-owned
subsidiary, Work Recovery Centers, Inc. ("WRCI") 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").
The creditors and equity holders approved Old WRI's Plan of Reorganization
("the Plan") and on December 4, 1996 the Bankruptcy Court issued its order
confirming the Plan. On February 1, 1997 (the "Effective Date"), Work
Recovery, Inc. ("WRI" or the "Company") acquired the assets and assumed the
liabilities of Old WRI in accordance with the Plan. A total of 14,388,429
shares of New Common Stock were issued under the Plan as follows:
*Holders of shares of Common Stock in Old WRI ("Old Common Stock") received
approximately 4.6 million shares of New Common Stock at the exchange rate of
one share of New Common Stock for every 10 shares of Old Common Stock. In
addition, the holders of Old Common Stock received warrants ("the Warrants")
for the purchase of New Common Stock at a share price of $2.50. One Warrant
was issued for every ten shares of Old Common Stock held by the shareholder.
The Warrants expired 180 days after the Effective Date. As of June 30, 1997
the number of Warrants exercised totaled 327,805. At July 31, 1997, the date
of expiration of the Warrants, a total of 334,401 had been exercised.
*Allsup Inc. received a total of 2.6 million shares of New Common Stock, 1.3
million upon converting its prepetition and postpetition loans to equity
($1,000,000 in total) and 1.3 million upon payment to the Company of $1,000,000
in cash.
*The Team for New Management (see Note 3), the Board of Directors, and key
employees received 2.5 million shares of New Common Stock.
*Recovery Lender LLC received 1.3 million in shares of New Common Stock after
electing to convert its various loans with the Company to equity.
*Holders of Series B and Series C preferred stock ("Preferred Stock") received
0.1 million shares of New Common Stock at the exchange rate of one share of New
Common Stock for every 10 shares of Old Common Stock to which their Preferred
Stock could have been converted. The holders of Preferred Stock also received
cash equal to 20% of accrued dividends. The Company is still in the process of
completing all of the Preferred Stock exchanges and dividend payments.
*A reserve of 1.5 million shares of New Common Stock was made for the filers
of securities fraud claims. The Company has not yet issued any shares from
this reserve.
*Approximately 1.8 million in remaining shares of New Common Stock were issued
in settlement of various claims against the Company. The Company is still in
the process of issuing new shares in settlement of these claims.
The Plan also provided for the holders of old employee stock options to receive
one new option for each 10 options previously held. New options issued to
existing holders plus new options issued to all employees on the Effective
Date totaled 236,805 shares. The new options were issued in four categories,
non-qualified options, qualified options - reissued, qualified standard options,
and qualified performance options. The exercise price of the 103,480
non-qualified options is $3.15 (140% of $2.25). The exercise price of the
17,325 qualified options - reissued is $2.25. The exercise price for the
17,000 qualified standard options is $2.25, and the exercise price for the
102,000 qualified performance options is $2.70 (120% of $2.25). All options
are scheduled to vest in equal amounts over a three year period with the
first one-third vesting February 1, 1998.
<PAGE>38
The administrative claims submitted to the Court were proven by the Court to
be valid and were approved. All claims, including administrative claims,
have been accounted for in the accompanying financial statements.
See the Company's Disclosure Statement and Amended Joint Plan of Reorganization
dated October 4, 1996, and the modification of the Plan dated November 25, 1996
for more detailed information of the Plan which are attached to and discussed
in the Company's Form 10-Q for the quarter ended December, 31, 1996 and its
Form 8-K dated January 30, 1997 which is incorporated herein by reference.
Business
WRI develops, manufactures, 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(r)
System. The ERGOS(r) System is a computer-based system 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 and fiscal
1997, WRI sold or closed all of its center operations except for its Lexington,
Kentucky center, a 50% joint venture, which was sold in August, 1997.
New Concepts Corporation ("NCC"), a division of WRI, manufactured equipment
and supplies for the rehabilitation health-care industry and educational
products for schools, universities and industrial training programs. WRI
sold NCC during fiscal 1997.
Consolidation
The consolidated financial statements include the accounts of Work Recovery,
Inc. ("WRI" or the "Company") and subsidiaries in which it owns a controlling
financial interest (collectively, the "Company"). 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.
<PAGE>39
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.
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 significant financial deterioration
of the Company, goodwill has been fully amortized.
Lease 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 Note 6.
Research and Development Costs
Research and development costs are charged to operations as incurred.
<PAGE>40
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 prior to emergence from Chapter 11
bankruptcy included obligations which were outstanding on the bankruptcy
filing date and were subject to compromise under the terms of the Plan.
See Note 14. At June 30, 1997, all claims related to the bankruptcy had
been settled or reserved and reclassified to accrued expenses.
Reorganization Items
Reorganization items consisted of income, expenses and other costs directly
related to the reorganization of the Company pursuant to the Bankruptcy Code.
See Note 15. No items were recorded as reorganization items following the
Company's emergence from bankruptcy on February 1, 1997.
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 1997, impairment losses totaled $39,522,000 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
<PAGE>41
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 has elected to continue to measure compensation cost under APB 25.
2. Fresh-Start Reporting
As of the Effective Date, the Company adopted fresh-start reporting in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting By Entities in Reorganization Under The Bankruptcy Code"
("Fresh-Start Reporting"). In connection with the adoption of Fresh-Start
Reporting, a new entity has been deemed created for financial reporting
purposes. The periods presented prior to the Effective Date have been
designated "Predecessor Company" and the period subsequent to the Effective
Date has been designated "Successor Company". For financial reporting
purposes, the Company accounted for the consummation of the Plan effective
February 1, 1997.
In accordance with Fresh-Start Reporting, the Company valued its assets and
liabilities at fair values and eliminated its accumulated deficit at the
Effective Date. The reorganization value of the Company was determined on
the basis of pro forma discounted cash flows of the new entity for a period
of ten years. The total reorganization value as of the Effective Date was
$36,766,000 which was approximately $40,336,000 in excess of the aggregate
fair value of the Company's tangible and identified intangible assets. Such
excess, and other eliminations related to the plan, was included in Intangible
Assets as of the Effective Date and was to be amortized over a period of ten
years. It has since been determined that the asset is impaired. The
financial condition of the Company is perilous and it is very doubtful it
will achieve the ten year cash flow projections reviewed and agreed upon by
the Company's creditors and the Bankruptcy Court. At June 30, 1997, the
unamortized excess was reclassified to Impairment Losses and is included in
the accompanying consolidated statement of operations under Operating Expenses.
<PAGE>42
The effect of the Plan on the Company's Consolidated Balance Sheet as of the
Effective Date, is as follows:
<TABLE>
<CAPTION>
Pre-Fresh Fresh
Start Debt Start
Balance Discharge Balance
Sheet and Fresh Sheet
February Start Value February
(Amounts in Thousands) 1, 1997 Adjustments 1, 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 12 $ 12
Receivables, net 107 107
Inventories 662 662
Prepaid Expenses and Other Assets 29 29
Property, Plant and Equipment, net 1,933 1,933
Intangible Assets [1] 62 $ 40,336 40,398
Other Assets 367 367
--------- --------- --------
Total Assets $ 3,172 $ 40,336 $ 43,508
========= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts Payable $ 965 $ 965
Claims Payable $ 1,802 1,802
Accrued Expenses, Team and
Key Employees [2] 5,138 (5,138)
Accrued Expenses, Other 1,408 1,377 2,785
Liabilities Subject to Compromise 15,867 (15,867)
Long-Term Debt 1,190 1,190
-------- -------- --------
Total Liabilities 23,378 (16,636) 6,742
Stockholders' Equity:
Preferred Stock 1,318 (1,318)
Common Stock 184 (37) 147
Additional Paid-in Capital 57,310 (20,691) 36,619
Accumulated Deficit (79,018) 79,018
--------- -------- --------
Total Stockholders' Equity (20,206) 56,972 36,766
Total Liabilities and
Stockholders' Equity $ 3,172 $ 40,336 $ 43,508
======== ======= =======
</TABLE>
[1] The Intangible Asset adjustment for fresh-start reporting includes an excess
reorganization value as detailed below:
Fresh-Start Reporting:
<TABLE>
<CAPTION>
<S> <C>
Establish Reorganization Value (new Common Stock) $36,766
Eliminate Old Common Stock (57,494)
Eliminate Accumulated Deficit 79,018
Debt Converted to Common Stock (2,053)
Preferred Stock converted to Common Stock (1,318)
Claims Settled with Issuance of Common Stock (9,445)
Common Stock Issued to management and key employees (5,138)
Excess Reorganization Value (determined to be impaired at -------
June 30, 1997) $40,336
=======
</TABLE>
<PAGE>43
Reorganization Items directly related to bankruptcy proceedings:
<TABLE>
<S> <C>
Allowed Claims $22,061
Legal Fees 616
Other Professional Fees 209
Other 41
-------
Total Reorganization Items $22,927
=======
Gain recognized on debt discharge:
Elimination of Bankruptcy Claims and Related Claims $37,937
Issuance of New Common Stock (16,748)
Re-classification of Current Liabilities (3,180)
Re-classification of Long Term Debt (1,190)
--------
Gain on Debt Discharge $16,819
========
</TABLE>
[2] Accrued Expenses, Team and Key Employees were eliminated on the Effective
Date due to the issuance of 2,500,000 in shares of New Common Stock under the
Plan.
3. 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 voted to continue
the IMSA, as modified, through the administration of the Chapter 11 proceedings.
Under the Plan 2.5 million shares of New Common Stock were issued to the Team,
key employees, 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.
It was determined that some of these shares, issued in blocks on the Effective
Date, were subject to the Securities and Exchange Commission Rule 144. A
discount was calculated on those shares and an expense totaling $5,138,000
was recorded as of the Effective Date.
The Company has not utilized the services of the Team subsequent to its
emergence from bankruptcy.
4. Acquisitions
No individually significant business combinations were transacted during fiscal
1997, 1996, or 1995.
<PAGE>44
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 approximate the related fair values.
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
1997 and 1996 are appropriately classified as trading securities under the
provisions of FAS 115.
At June 30, 1996, the Company held 800,000 shares of Wincanton Corporation
("Wincanton") common stock. A total of 200,000 shares of Wincanton common
stock were received during fiscal 1994 from Queensland Industries, a
subsidiary of Wincanton, as payment on account. During fiscal 1995,
an additional 600,000 shares (valued at $5 per share) were received in
exchange for 1,500,000 shares of Work Recovery common stock (valued at
$2 per share). At June 30, 1995, Wincanton stock was being publicly traded
at approximately $10 per share. The consulting agreement with Work Recovery,
further discussed in Note 8, had not been disclosed to the public at that time
however. Subsequent to public disclosure of the agreement, the Wincanton stock
significantly declined in value and as of September 19, 1997 traded at
approximately $.34 per share. Additionally, it was determined that the
600,000 shares received during fiscal 1995 could not be sold because the
certificate was 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.
During June, 1997, the Company sold 15,000 of the 200,000 shares received
during fiscal 1994. The shares were sold at an average price of $.31 per
share. The Company has sold an additional 120,000 shares since June 30,
1997. However, at June 30, 1997, no value was placed on the remaining
185,000 shares. The value of the 600,000 shares received during fiscal
1995 were recorded as a loss during fiscal 1995.
7. Inventories
Inventories consist of the following;
June 30, 1997 June 30, 1996
------------- -------------
<TABLE>
<S> <C> <C>
Raw Materials $ 446,000 $ 631,000
Finished Goods 288,000 121,000
Work in Progress 118,000 197,000
Reserve for Excess and Obsolete Inventory (170,000) (136,000)
--------- ---------
$ 682,000 $ 813,000
========= =========
</TABLE>
8. Receivables
Trade receivables totaled $251,000 at June 30, 1997 and $273,000 at June 30,
1996 net of allowance for uncollectible amounts of $245,000 and $2,426,000 in
1997 and 1996.
<PAGE>45
At June 30, 1995, consulting receivables included $6,991,000 due from Wincanton
for consulting services. At June 30, 1996, this amount was fully reserved and
classified as noncurrent as management did not anticipate collection within the
next fiscal year. Subsequent to the approval of the Plan, both the non-current
receivable and the reserve were eliminated.
The Company entered into a consulting agreement with Wincanton as of July 1,
1994 whereby the Company would provide certain consulting services to Wincanton
related to marketing of Tradesman Industries, Inc. products for a total
$9,600,000. Payments of 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. Revenue of $600,000 was previously
recognized in proportion to identified costs incurred and the remaining
$2,009,000 was reclassified as deferred revenue. Because there was no
assurance that the Company would receive further payment from Wincanton or
be able to retain funds paid, the entire $2,009,000 deferred revenue balance
was included in liabilities subject to compromise as of June 30, 1996.
As of June 30, 1997 the Wincanton claim had been discharged and is no longer a
part of the outstanding bankruptcy claims.
9. Investments As Lessor
Net investment in sales-type leases:
June 30, 1997 June 30, 1996
<TABLE>
<S> <C> <C>
Minimum Lease Payments Receivable $ - $ 3,132,000
Allowance for Uncollectible Payments - ( 2,495,000)
Unearned Amount Representing Interest - (637,000)
---------- ------------
Net Investment $ - $ -
========== ============
</TABLE>
Equipment leases were 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 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.
10. Property, Plant and Equipment
Property, plant and equipment decreased approximately $2,041,000 from the June
30, 1996 balance of $3,738,000 to $1,697,000 at June 30, 1997, primarily due to
the sale of property and facilities.
<TABLE>
June 30, 1997 June 30, 1996
<S> <C> <C>
Land $ 300,000 $ 800,000
Furniture and Equipment 1,122,000 4,195,000
Leasehold Improvements 18,000 179,000
Vehicles 70,000 70,000
Buildings 1,608,000 2,084,000
----------- ------------
Total, at cost 3,118,000 7,328,000
Less Accumulated Depreciation
and Amortization (1,421,000) (3,590,000)
------------ -----------
$ 1,697,000 $ 3,738,000
============ ===========
</TABLE>
Impairment losses of $133,000 were recognized during fiscal 1997 for Property,
Plant and Equipment.
<PAGE>46
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. It is the intent of the Company to sell the master distribution
license; however, there can be no assurance they will be able to recover any
of the Company's investment in this license.
During fiscal 1997 the Company purchased for $115,000 the rights, title and
interest in ERGOS( computer software programs developed specifically for the
Company. This asset is being amortized over sixty months.
In accordance with Fresh-Start Reporting, the Company valued its assets and
liabilities at fair values and eliminated its accumulated deficit at the
Effective Date. The reorganization value of the Company was determined on
the basis of pro forma discounted cash flows of the new entity for a period
of ten years. The total reorganization value as of the Effective Date was
$36,766,000 which was approximately $40,336,000 in excess of the aggregate
fair value of the Company's tangible and identified intangible assets. Such
excess, and other eliminations related to the plan, was included in Intangible
Assets as of the Effective Date and was to be amortized over a period of ten
years. It has since been determined that the asset is impaired. The
financial condition of the Company is perilous and it is very doubtful it
will achieve the ten year cash flow projections reviewed and agreed upon by
the Company's creditors and the Bankruptcy Court. At June 30, 1997, the
unamortized excess was reclassified to Impairment Losses and is included in
the accompanying consolidated statement of operations under Operating Expenses.
12. Prepaid Expenses and Other Assets
<TABLE>
June 30, 1997 June 30, 1996
------------ -------------
Prepaid expenses consist of the following:
<S> <C> <C>
Prepaid Directors' & Officers' insurance $ 103,000 $ 177,000
Miscellaneous prepaid insurance 6,000 6,000
-------- --------
Total Prepaid expenses $ 109,000 $ 183,000
======== ========
</TABLE>
<PAGE>47
13. Accrued Expenses and Claims Payable
<TABLE>
June 30, 1997 June 30, 1996
------------- -------------
Accrued expenses consist of the following
categories:
<S> <C> <C>
Payroll, employee benefits and related taxes $ 150,000 $ 95,000
Severance pay 120,000
Professional fees 496,000
Provision for unsettled claims 113,000
Other 153,000 3,000
--------- ----------
Total Accrued expenses $ 1,032,000 $ 98,000
========== ==========
Claims payable consist of the following
categories:
Legal Fees $ 588,000 $
Other Administrative Claims 149,000
Lease Claims 608,000
Other Bankruptcy Claims 411,000
--------- ---------
Total Claims payable $ 1,756,000 $ -
========= ==========
</TABLE>
14. Liabilities Subject to Compromise and Contingencies Resulting From
Bankruptcy Proceedings
At June 30, 1997 all claims related to bankruptcy have been settled or reserved
and reclassified to accrued expenses and claims payable. 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:
<TABLE>
June 30, 1997 June 30, 1996
-------------- --------------
<S> <C> <C>
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
=========== ============
</TABLE>
15. Reorganization Items
Certain items of income and expense 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:
<TABLE>
<CAPTION>
July 1, 1996
to Year Ended
February 1, 1997 June 30, 1996
---------------- -------------
<S> <C> <C>
Loss on Settlement of Leases $ 6,866,000 $ 530,000
Securities Fraud Claim 13,250,000
Legal and Other Professional Fees 825,000 168,000
Warrants 1,320,000
Claims Trust Fund 625,000
Other expenditures directly related to the
Chapter 11 proceedings 41,000 4,000
----------- -----------
$ 22,927,000 $ 702,000
=========== ===========
</TABLE>
<PAGE>48
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 were reclassified as
liabilities subject to compromise as of June 30, 1996. See Note 14.
Notes payable, including due related parties consist of the following:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Allsup Inc. and Quest Trading, Inc. Loan Agreement $ 1,810,000
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(r) Systems and convertible at the option of
the lender and subject to 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: 1997 policy, 8.16%
interest payable in ten monthly installment of
$ 17,990; 1996 policy, 6.9% interest, payable in
monthly installments or $27,947. 71,000 164,000
Other short-term notes to individuals are
unsecured loans due on demand with interest rates
ranging from 8.0% to 11.0% 6,000 10,000
--------- ---------
Total Notes Payable 1,887,000 1,224,000
Less Liabilities Subject to Compromise 1,109,000
--------- ---------
$ 1,887,000 $ 115,000
========== ==========
</TABLE>
In January, 1997, the Company entered into a Loan Agreement with Allsup Inc.
and Quest Trading, Inc. (collectively, "the Lenders") pursuant to which the
Lenders have agreed to loan the Company up to $2,000,000 in one or more advances
(the "Loan"), subject to the satisfaction of certain conditions set forth in
the Loan Agreement. On June 30, 1997, the Company had borrowed $1,810,000.
The Loan will revolve and, provided applicable conditions are satisfied,
repaid principal may be re-borrowed until the maturity of the Loan, December
31, 1997. The Loan is being used to support the working capital needs of the
Company and to make payments due
<PAGE>49
under the Plan. The Loan is secured by a security interest in all of the
Company's personal property including its intellectual property.
On February 3, 1997, pursuant to the Loan Agreement the Lenders were granted
100,000 options to purchase shares of New Common Stock of the Company at an
exercise price of $1.56 per share. On April 30, 1997, pursuant to the Loan
Agreement, the Lenders were granted 225,000 options to purchase shares of
New Common Stock of the Company at an exercise price of $0.42 per share.
The options will expire twelve months from date of delivery to the Lenders.
17. Long-Term Debt
Subsequent to adoption of the Chapter 11 Reorganization Plan, the Company's
long term debt at June 30, 1997 consists of a trust deed and an individual
note. Due to slow sales and reduced cash flow, no debt service payments were
made on the Trust Deed after June 30, 1997 and the property is listed for sale.
In addition, the lender has initiated foreclosure proceedings against the
Company. Therefore, all long-term debt has been reclassified as current in
the accompanying consolidated financial statements.
As of June 30, 1996 all long-term debt totaling $2,659,000 was reclassified
as liabilities subject to compromise. See Note 14.
<TABLE>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Trust Deed, payable in monthly installments
of $11,461, interest of 9.7% per annum
through June 30, 2005, increasing to 15.0%
upon default. This loan is collateralized
by real property and other assets. $ 1,169,000 $ 1,232,000
Mortgage, payable in monthly installments of
$7,444, interest at 9.7% per annum through
June 30, 2005, increasing to 15.0% upon
default. This loan was collateralized by
real property and other assets. 805,000
Bank Note, payable in monthly installments
of $4,500, interest at 9.7%, with final
payment due in July 1996. This note is
collateralized by the assets of Work
Recovery Center of Eau Claire, Inc. 8,000
Capital Lease, 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
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
Note to Individual, payable in monthly
installments of $2,114, interest at 8%
per annum through February 1, 2002. 100,000
----------- ----------
$ 1,269,000 $ 2,659,000
=========== ===========
</TABLE>
<PAGE>50
18. Commitments
The Company leases equipment under noncancelable capital and operating leases.
As of June 30, 1997 the Company has only operating leases for equipment. The
approximate annual commitments relating to these leases for the years ending
June 30 are as follows:
<TABLE>
<CAPTION>
Operating Leases
<S> <C>
1998 $ 23,000
1999 23,000
2000 23,000
--------
$ 69,000
=========
</TABLE>
The Company has a sublease on an ERGOS(r) System with a company in Texas. At
June 30, 1997 approximately 14 months, or $33,909, remained payable on the
lease.
Dividend Restrictions
Cash dividends on common stock may not be declared or paid while the Company
has preferred stock outstanding. In accordance with the Plan, all preferred
stock has been canceled and the Company is in the process of distributing to
all previous holders of Preferred Stock cash equal to 20% of accrued dividends.
Consulting Agreements
During Fiscal 1997, as provided by the Plan, the Company issued 2,500,000 shares
of New Common Stock to the Team for New Management, Board of Directors and key
employees as partial payment for services rendered during the administration of
the Bankruptcy.
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 the agreement described in the previous paragraph 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 cannot 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, which management believes is highly unlikely.
<PAGE>51
19. Preferred Stock
Pursuant to the Plan, holders of Series B and C Preferred Stock in the Company
are entitled to receive cash equal to 20% of all accrued dividends and 100,000
shares of New Common Stock at the exchange rate of one share of New Common Stock
for every 10 shares of Old Common Stock to which their Preferred Stock could
have been converted.
Series A Preferred Stock, was redeemed in accordance with its terms and the
funds required to redeem the stock were contributed as additional capital and
without compensation, exchange or reimbursement by a member of the Team.
The Company has 2,000,000 shares of New Preferred Stock authorized , no shares
have been issued as of June 30, 1997.
Preferred stock for the Predecessor and Successor Company consists of:
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
June 30, 1997 February 1, 1997
-------------- | ----------------
<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
|
Series B: Authorized 200,000 Shares: |
Issued and Outstanding 59,398 Shares (1996) |
and 71,109 Shares (1995) | 598,000
|
Series C: Authorized 500,000 Shares: |
Issued and Outstanding 71,912 Shares (1996) |
and 85,401 Shares (1995) | 719,000
|
New Preferred Stock: Authorized 2,000,000 |
Shares: No shares issued and Outstanding |
---------- | -----------
$ - | $ 1,318,000
========== ===========
</TABLE>
20. Common Stock Transactions
On the Effective Date, approximately 4,600,000 shares of New Common Stock were
issued to holders of Old Common Stock at the exchange rate of one share of New
Common Stock for every ten shares of Old Common Stock. In addition, holders of
Old Common stock received one Warrant for the purchase of New Common Stock at a
share price of $2.50 for every ten shares of Old Common Stock held by
shareholders. As of June 30, 1997 approximately 328,000 warrants have been
exercised.
At June 30, 1997, the Company has approximately 5,800,000 shares of common
stock reserved but not issued. Of this balance, 1,500,000 shares are reserved
for securities fraud claims and the remaining balance for other claimants and
warrant holders, if any.
As further disclosed in Note 27, prior management sold common stock 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
<PAGE>52
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.
21. Warrants
As of June 30, 1996, there were 6,001 A Warrants, 1,562,500 B Warrants, 175,000
C Warrants, 175,000 D Warrants and 164,000 Dealer Warrants outstanding. 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 Plan, each holder of B Warrants received its pro rata
share of 150,000 shares of New Common Stock and each holder of Dealer Warrants
received its pro rata share of 350,000 shares of New Common Stock. No
provision was made for the holders of A Warrants, C Warrants and D Warrants
and were canceled as of the Effective Date. The Company is still in the
process of issuing New Common Stock to B Warrant holders and Dealer Warrant
holders.
On the Effective Date, new warrants ("New Warrants") were issued for the
purchase of New Common Stock. The New Warrants gave each shareholder of
record at January 31, 1997 the right to purchase, at $2.50 each, one share
of New Common Stock in the Company for every ten shares of Old Common Stock.
The New Warrants were scheduled to expire on the earlier of 180 days after the
Effective Date, or the date upon which 2,700,000 shares of New Common Stock had
been purchased pursuant to the exercise of New Warrants. As of June 30, 1997,
327,805 had been exercised and as of July 31, 1997, the expiration date, 334,401
had been exercised.
In addition to the New Warrants, the Company issued warrants to Allsup Inc.
(the "Allsup Warrants") to purchase additional shares of New Common Stock.
The Allsup Warrants were non-transferable and gave Allsup the right to purchase
up to 300,000 shares at a price of $2.50 per share. The Allsup Warrants expired
August 20, 200 days after the Effective Date, with none exercised.
22. Stock Options
Employee Stock Option Plan
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 total of 239,805 new options to purchase shares were issued to existing
holders and to all employees on the Effective Date. The new options were
issued in four categories, non-qualified options, qualified options -
reissued, qualified standard options, and qualified performance options.
The exercise price of the 103,480 non-qualified options is $3.15 (140% of
$2.25). The exercise price of the 17,325 qualified options - reissued is
$2.25. The exercise price for the 17,000 qualified standard options is
$2.25, and the exercise price for the 102,000 qualified performance options
is $2.70 (120% of $2.25). All options are scheduled to vest in equal amounts
over a three
<PAGE>53
year period with the first one-third vesting February 1, 1998. A summary of
the qualified 1993 Incentive Stock Option Plan activity during fiscal 1997 is
as follows:
<TABLE>
<S> <C>
Available for grant at June 30, 1996 2,122,654
Ten to one reverse split at Effective Date (February 1, 1997) (1,910,389)
Available for grant at February 1, 1997 212,265
New qualified options issued on Effective Date (119,000)
----------
Available for grant at June 30, 1997 93,265
==========
</TABLE>
Allsup Inc. Options
Pursuant to the loan agreement dated January 30, 1997 between Allsup Inc.,
Quest Trading, Inc. (the "Lenders") and the Company, stock options to purchase
100,000 shares of the Company's New Common were issued to the Lenders at $1.56
per share as a commitment fee for the $2,000,000 line of credit. On March 25,
1997, the Company borrowed $1,800,000 from the line and issued 225,000
additional options to purchase shares of New Common Stock at $.42 per share.
23. Revenues by Geographic Area / Major Customer
Revenues by geographic area for the years ended June 30 are as follows:
<TABLE>
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
United States $ 1,996,000 $ 4,717,000 $ 7,214,000
Europe 552,000 446,000
Canada 2,000 72,000 182,000
Middle East 300,000
---------- ---------- ---------
Total Net Revenues $ 1,998,000 $ 5,341,000 $ 8,142,000
========== ========== =========
</TABLE>
Included in deferred revenue in 1995 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 was 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 of other countries. 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.
These transactions, would, if recognized exceed 10% of total revenues. Due
to the questionable ability of the licensee to perform, these receivables were
reserved or reclassified as deferred or unearned revenue. The Company
rejected or negotiated terms for all of its foreign licenses in the Bankruptcy
Court.
The Company had a 31% equity interest in WR Pty, the licensee for Australia
and New Zealand. This investment was fully reserved as of June 30, 1996 and
was eliminated in Fresh-Start accounting on the Effective Date.
<PAGE> 54
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, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Primary:
Weighted Average Common
Shares Outstanding 14,663,442 45,817,199 33,497,660
Weighted Average Common Share
Equivalents 1,994,414
Total Weighted Average Common ---------- ----------- ----------
and Common Equivalent Shares 14,663,442 45,817,199 35,492,074
========== =========== ==========
Fully Diluted:
Weighted Average Common
Shares Outstanding 14,663,442 45,817,199 33,497,660
Weighted Average Common
Share Equivalents 4,345,185
Total Weighted Average Common ---------- ---------- ----------
and Common Equivalent Shares 14,663,442 45,817,199 37,842,845
========== ========== ==========
</TABLE>
Due to the net loss for fiscal 1997, 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
The Company entered into transactions with various affiliated entities. The
following table describes these transactions.
<TABLE>
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
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
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
</TABLE>
<PAGE>55
<TABLE>
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
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 $ 423,900 537,000
Travel expenses paid/payable by Member of
the Team for New Management 61,000
New Common Stock issued to Team for New
Management 3,817,500
Additional New Common Stock issued to
2 Members of the Team for New
Management 2,683,247
New Common Stock issued to 18% shareholder 1,000,000
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
Other 352,000
Total investment in unconsolidated
affiliates, before reserves 840,000 1,192,000
Loan from 18% shareholder converted to equity 1,000,000
</TABLE>
The total equity in losses of unconsolidated affiliates included in
miscellaneous income (expense) was $ 0, $567,000 and $300,000 for the years
ended June 30, 1997, 1996 and 1995, respectively.
At June 30, 1997, 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(r) Systems 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.
<PAGE>56
26. Deferred Income Taxes
The components of income tax expense for the years ended June 30 are comprised
of the following amounts:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Deferred
Federal $ - $ - $ (254,000)
State - - (68,000)
--------- --------- ----------
Total $ - $ - $ (332,000)
========= ========= ===========
Total Provision:
Federal $ - $ - $ (264,000)
State - - (68,000)
---------- --------- ----------
Total $ - $ - $ (332,000)
========== ========= ==========
</TABLE>
As a result of the Company's bankruptcy and subsequent plan of reorganization
which was confirmed by the Bankruptcy Court effective February 1, 1997, the
Company has no deferred Federal or State income taxes for the years ended
June 30, 1997, 1996, or 1995. In addition, due to continued operating losses
since the Plan was confirmed, the Company has no income taxes deferred, due or
payable for the period from confirmation (February 1, 1997) through June 30,
1997 or for the fiscal years ended June 30, 1997, 1996, or 1995.
The Company has net operating losses available to offset future taxable income
of approximately $42,000,000 that begin expiring in the year 2007 and later.
In addition, the Company has approximately $1,700,000 of operating losses
subject to SRLY loss limitation rules. Because it is unlikely that these
operating losses will be realized, the tax benefit has been fully reserved.
27. Legal Contingencies
Under the Plan confirmed by the Bankruptcy Court, the following matters were
treated and/or discharged as described below:
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 alleged that the
defendants misstated or omitted to state certain material facts in press
releases, filings with the SEC, and other statements by the defendants. The
complaints generally requested compensatory damages, interest, costs and
expenses, punitive damages, and such other relief as the court might deem
just and proper. The Arizona lawsuits were consolidated into one class
action proceeding and additionally alleged violations of generally accepted
accounting principles and alleged various "sham" transactions.
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
<PAGE>57
those proceedings. Independent counsel determined that Mr. Brandon's conduct
did not satisfy certain standards of conduct and that, as a result, the Company
was precluded from advancing expenses on behalf of Mr. Brandon in connection
with certain legal proceedings. Independent counsel determined that both Ms.
Duncan and Mr. Bunker were 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. In June 1997, the Company
advanced an additional $5,000 in legal expenses for Ms. Duncan.
Regulation S
Another contingency related 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 or
fiscal 1997.
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(r)
Systems (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 disputed this claim and is pursued its defenses in the
Bankruptcy Court. In relation to this matter, $1,500,000 was included in
unearned revenues and unallocated credits in liabilities subject to compromise
as of June 30, 1996.
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, 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
had not been disclosed to the Company.
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
<PAGE>58
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.
Mr. Robert Page filed a complaint in the United States District Court in
Delaware against Wincanton, its principals and the Company. Mr. Page alleged
he sold a patent to Wincanton in exchange for shares in Wincanton and that
Wincanton failed to deliver freely tradable shares. Mr. Page further alleged
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 was 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 1, 1997.
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.
<PAGE>59
28. Statement of Cash Flows
Supplemental disclosures of cash flow information:
<TABLE>
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid for interest $ 14,000 $ 410,000 $ 425,000
Cash paid for income taxes 10,000
Noncash Investing Activities:
Wincanton common stock 66,000 3,000,000
Tradesman common
stock, license and deposit 10,000,000
Net assets acquired 1,312,000
Noncash Financing Activities:
Due Wincanton on Tradesman
investments 3,550,000
Debt issued or assumed in
business acquisitions 812,000
Preferred Shares Issued for
dividends 116,000 357,000
Common Shares Issued:
For Wincanton common stock 3,000,000
For Tradesman investment 3,550,000 6,450,000
For business acquisitions 500,000
In payment of debt 848,000
In payment of debt under the
Plan 9,445,000
For services rendered 67,200 30,000 2,201,000
Under stock option plan 69,000 272,000
Other (158,000)
Converted from preferred stock 483,000 1,459,000
Retired treasury stock 1,384,000
</TABLE>
29. Other Unusual Transactions and Activities
Yorkton Securities, Inc. - Intavest Pty, Ltd.
In its Form 10-Q for the quarter ended March 31, 1995, the Company reported
receiving $6,250,000 as collection on accounts receivable as a subsequent event.
As of June 30, 1995, the Company has determined that the $6,250,000, represented
by Mr. Brandon as being received 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.
However, as of June 30, 1995, at Mr. Brandon's direction, the $6,250,000 was
credited to the following account receivable balances: Carat International
license receivable balance of $2,100,000, Carat International ERGOS(r)
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
<PAGE>60
of Carat International independently confirmed their license and ERGOS(r)
Systems 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(r) components for WRI.
Midwestern Diagnostic subsequently paid $100,000 against its various ERGOS(r)
Systems 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.
For fiscal 1995, the entire $352,829 amount was included in Loss From Unusual
Transactions and Activities 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
For the first three quarters of fiscal 1995, the Company reported ERGOS(r)
Systems sales to certain foreign entities in its Form 10-Q's.
During fiscal 1995, the Company determined that the earnings process was not
complete for ERGOS(r) Systems sales totaling $7,499,000.
These transactions and related account balances were independently confirmed
by management of the above entities inferring they had received the ERGOS(r)
Systems. 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
<PAGE>61
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 purported rescission was invalid. During fiscal
1996, Al Sabah paid $1,500,000 against licenses and ERGOS(r) Systems 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 the LCCM 1994 audit field work on September 30, 1994,
$200,000 was applied by the
<PAGE>62
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-1Financial 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.
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(r) 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 totaled
$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(r) purchases. The Company
accordingly reduced the subsequently recorded purchase price of these
entities during fiscal 1996.
<PAGE>63
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, totaled $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, were 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 signers on that account.
The Company has been unable to determine the amount of funds, if any, in
that account as of June 30, 1997. Consequently, the Company 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. Investment Losses
There were no investment losses recorded for Fiscal 1997. Investment losses for
fiscal 1996 and 1995 are as follows:
<TABLE>
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- --------------
<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>
33. Subsequent Events
Unaudited Statements
The fiscal 1997 financial statements and accompanying notes are unaudited.
Due to the Company's severely restricted cash, the Board of Directors
believes it is not fiscally possible at this time to engage a public
accounting firm to audit the fiscal 1997 records.
<PAGE>64
Functional Capacity Evaluation Technologies, Inc. ("FCET") Agreement
In order to generate additional sales and enhance Work Recovery's knowledge of
its current market, the Company has engaged FCET for a period of 90 days
commencing July 21, 1997. Principals of FCET specialize in the development
of new health care product businesses and improvement of existing medical
equipment businesses, and have recently expanded into the functional capacity
assessment field. During this period, FCET will have responsibilities for
managing the Company's sales and marketing activities. FCET will provide
consultation with respect to the Company's operations, including technical
support, manufacturing and research and development. FCET, however, will
have no decision making authority regarding the operation of Work Recovery.
The cost of this agreement is $30,000 per month plus travel and other expenses.
FCET will also receive a commission of 2.5% of any ERGOS(r) Systems sold to
existing prospects and 5% of the sales price for any systems sold to a lead
generated by FCET.
Sole Sale Contract with Work Recovery Europa BV, a Dutch Corporation ("WRE")
On July 18, 1997 the Company entered into a ten year contract with WRE, granting
WRE the exclusive right to sell ERGOS(r) Systems and products in Europe. WRE
has developed a marketing and sales strategy for selling ERGOS(r) Systems in
Europe. The Company has granted WRE the exclusive right to sell ERGOS(r)
products in thefollowing regions/countries in Europe: Benelux, Austria,
Switzerland, Scandinavia, Germany, France, United Kingdom (including England
and Ireland), Italy, Spain and Portugal. Either party may terminate this
agreement upon the third anniversary of the contract if WRE fails to purchase
10 ERGOS(r) Systems, and on the sixth anniversary if WRE fails to purchase 20
ERGOS(r) Systems by such date. The Company may terminate the agreement for the
entire Territory prior tothe third anniversary for the following sums:
<TABLE>
<CAPTION>
<S> <C>
Effective Date - July 31, 1998 $375,000
August 1, 1998 - July 31, 1999 $625,000
August 1, 1999 - July 31, 2000 $875,000
</TABLE>
Sale of Joint Venture in Lexington, Kentucky
As of June 30, 1997, American Rehabilitation Group, P.S.C. ("ARG") and Work
Recovery jointly owned certain assets and operated a business as Return to
Work Center, Lexington, Kentucky. Effective August 1, 1997 ARG purchased
the Company's 50% interest for $80,000 subject to certain adjustments.
Foreclosure Proceedings
On August 13, 1997, the Company was served with a Notice of Foreclosure for
the facility located at 2341 S. Friebus Avenue, Tucson, Arizona. The
Company is contesting the foreclosure action and a foreclosure date has not
been determined.
<PAGE>65
34. Quarterly Financial Information (Unaudited) (In Thousands, except Loss
Per Share and Market Price)
<TABLE>
<CAPTION>
Predecessor Company Successor Company
--------------------------------- -----------------------
Fiscal 1997 9/30/96 12/31/96 1/31/97 3/31/97 6/30/97
- ------------
<S> <C> <C> <C> <C> <C>
Sales $ 273 $ 1,025 $ 30 $ 103 $ 567
Gross Profit (47) 584 (239) (30) 328
Income (Loss) From Operations
before Reorganization
Items, Income Taxes and
Extraordinary Items (1,183) (452) ( 6,222) (1,441) (39,778)
Net Income (Loss) (1,613) (6,815) ( 5,537) (1,441) (38,797)
Net Loss Per Share [1] (.10) (2.74)
Market Price Range - High 3.00 1.09
Market Price Range - Low .94 .35
</TABLE>
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------
Fiscal 1996 9/30/95 12/30/95 3/31/96 6/30/96
- ------------
<S> <C> <C> <C> <C>
Sales $ 1,823 $ 1,237 $ 1,548 $ 733
Gross Profit (880) (1,241) (441) (622)
Income (Loss) from Operations
before Reorganization
Items, Income Taxes and
Extraordinary Items (5,300) (3,278) (2,786) (3,457)
Net Income (Loss) (5,300) (3,278) (2,786) (4,159)
</TABLE>
[1] Loss per common share data and market high and low data are not meaningful
for the periods prior to the Effective Date due to the significant change in the
capital structure of the Company.
<PAGE>66
35. Stockholders' Equity (Deficit) Old Common Stock and Preferred Stock
Changes in Stock holders' Equity (Deficit) and Old Common Stock were as follows
(in thousands):
<TABLE>
<CAPTION>
New Old Capital in
Common Old Preferred Common Excess of Equity
Stock Stock Stock Par Value (Deficit)
------- ------------- ------- ----------- ----------
Predecessor Company
- -------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ $ 2,745 $ 108 $ 24,262 $ 1,792
Net loss (50,849)
Preferred shares converted to
common stock of Predecessor
Company (1,459) 3 1,456
Preferred shares issued for
dividends 357 (357)
Preferred shares issued for cash 42
Warrants exercised for common
stock of Predecessor Company 8 2,214
Common shares of Predecessor
Company issued for services 3 2,207
Common shares of Predecessor
Company issued for license
and investments (Note 5,10,11) 19 9,931
Common shares of Predecessor
Company issued for conversion
of debt 1 846
Common shares issued under Stock
Option Plan 1 271
Common shares of Predecessor
Company issued for cash 33 12,461
------- ------ ------- -------- ----------
Balance at June 30, 1995 - 1,685 176 53,648 (49,414)
------- ------- ------- -------- ----------
Net loss (15,523)
Preferred shares converted to
common shares of Predecessor
Company (483) 1 482
Preferred shares issued for
dividends 116 (116)
Common shares issued for services 30
Common shares issued in
settlement due Related Party 7 3,543
Common shares issued under
Stock Option Plan 69
Retirement of Treasury Stock (2) (1,382)
Common shares of Predecessor
Company issued for cash 2 921
-------- -------- ------- -------- ----------
Balance at June 30, 1996 - 1,318 184 57,311 (65,053)
-------- ------- ------- -------- ----------
Net Loss (13,965)
Extinguishment of Stockholders'
equity in reorganization as
of February 1, 1997 (1,318) (184) (57,311) 79,018
Balance at February 1, 1997 $ - $ - $ - $ - $ -
======= ======= ======= ======= ==========
Successor Company
Balance at February 1, 1997 $ - $ - $ - $ - $ -
Issuance of New Common Stock
under Fresh-Start 144 - - 36,622 -
Cash Dividends (85)
Warrants exercised for New
Common Stock 3 816
Net loss for the 21 weeks ended (40,238)
June 30, 1997 ------- -------- ------- ------- ----------
Balance at June 30, 1997 $ 147 $ - $ - $37,353 $ (40,238)
======== ======== ======= ======== ==========
</TABLE>
<PAGE>67
The Company's Certificate of Incorporation was restated as of the Effective
Date. The New Certificate authorizes 50,000,000 shares of new stock of which
48,000,000 shares will be reserved for issuance of New Common Stock and
2,000,000 will be reserved for issuance of New Preferred Stock. Under the
Plan, 14,388,429 shares of New Common Stock were issued. For a more detailed
breakdown of the distribution of the New Common Stock see Note 1.
SCHEDULE II
WORK RECOVERY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Balance at Charge to Costs Charged to Balance at End
Description Beginning of Period and Expenses Other Accounts [1] Deductions of Period
- ---------------------------- -------------------- ----------------- ------------------ ---------- -----------
For the Year Ended June 30, 1997:
<S> <C> <C> <C> <C> <C>
Allowance for Bad Debts,
Trade Receivables $ 2,426,000 $ 179,000 $ (2,360,000) $ $ 245,000
Allowance for Obsolescence,
Inventory 136,000 81,000 (46,000) 171,000
Marketable Securities
Valuation Allowance 4,000,000 (4,000,000)
Deferred Revenues
Consulting, (A/R) 6,991,000 (6,991,000)
Deferred Revenues
Consulting, Liabilities
Subject to Compromise 2,009,000 (2,009,000)
Allowance for Bad Debts,
Licenses 7,481,000 (7,481,000)
Deferred Revenues,
Licenses 13,600,000 (13,600,000)
Allowance for Bad Debts,
Leases 2,495,000 (2,495,000)
Impairment Reserve,
Goodwill and Other 1,430,000 58,000 (1,187,000) 301,000
Impairment Reserve,
Tradesman 10,000,000 (10,000,000)
Valuation Reserve, Investment
in and Advances to Affiliates 5,570,000 (5,570,000)
Impairment Reserve, Other Assets 1,016,000 (1,016,000)
Unallocated Credits 2,514,000 (1,164,000) (1,350,000)
Allowance for Bad Debts,
Subscriptions Notes 1,582,000 (1,582,000)
</TABLE>
[1] Includes Fresh-Start accounting adjustments.
SCHEDULE II
WORK RECOVERY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTIONS>
Balance at Charge to Costs Charged to Balance at End
Description Beginning of Period and Expenses Other Accounts Deductions of Period
- -------------------------------- ------------------- ---------------- -------------- ----------- --------------
For the Year Ended June 30, 1996:
<S> <C> <C> <C> <C> <C>
Allowance for Bad Debts,
Trade Receivables $ 1,7600,000 $ 666,000 $ $ $ 2,426,000
Allowance for Obsolescence,
Inventory 46,000 90,000 136,000
Marketable Securities
Valuation Allowance 3,934,000 66,000 4,000,000
Deferred Revenues
Consulting, (A/R) 6,991,000 6,991,000
Deferred Revenues
Consulting (Cash) 2,009,000 2,009,000
Allowance for Bad Debts,
Licenses 7,738,000 330,000 (587,000) 7,481,000
Deferred Revenues,
Licenses 13,600,000 13,600,000
Allowance for Bad Debts,
Leases 2,761,000 132,000 (398,000) 2,495,000
Impairment Reserve,
Goodwill and Other 5,424,000 606,000 (4,600,000) 1,430,000
Impairment Reserve.
Tradesman 7,500,000 2,500,000 10,000,000
Valuation Reserve, Investment
in and Advances to Affiliates 11,437,000 567,000 (5,374,000) (1,060,000) 5,570,000
Impairment Reserve, Other Assets 901,000 35,000 80,000 1,016,000
Unallocated Credits 966,000 1,548,000 2,514,000
Allowance for Bad Debts,
Subscriptions Notes 1,582,000 1,582,000
</TABLE>
SCHEDULE II
WORK RECOVERY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Balance at Charge to Costs Charged to Balance at End
Description Beginning of Period and Expenses Other Accounts Deductions of Period
- --------------------------------- -------------------- ---------------- -------------- ----------- --------------
For the Year Ended June 30, 1995:
<S> <C> <C> <C> <C>
Allowance for Bad Debts,
Trade Receivables $ 1,066,000 $ 980,000 $ $ (286,000) $ 1,760,000
Allowance for Obsolescence,
Inventory 46,000 46,000
Marketable Securities
Valuation Allowance 3,934,000 3,934,000
Deferred Revenues
Consulting, (A/R) 6,991,000 6,991,000
Deferred Revenues
Consulting (Cash) 2,009,000 2,009,000
Allowance for Bad Debts,
Licenses 7,738,000 7,738,000
Deferred Revenues,
Licenses 13,600,000 13,600,000
Allowance for Bad Debts,
Leases 2,761,000 2,761,000
Impairment Reserve,
Goodwill and Other 5,424,000 5,424,000
Impairment Reserve,
Tradesman 7,500,000 7,500,000
Valuation Reserve, Investment
in and Advances to Affiliates 11,437,000 11,437,000
mpairment Reserve, Other Assets 901,000 901,000
Unallocated Credits 966,000 966,000
Allowance for Bad Debts,
Subscriptions Notes 1,582,000 1,582,000
</TABLE>
