FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the quarter ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission file number 01-18695
WORK RECOVERY, INC
(Exact name of registrant as specified in its charter)
Colorado * 68-0165800 *
(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)
(520) 322-6634
Registrant's telephone number, including area code
Not applicable
(Former name, former address and former fiscal year, if changed since last
report.)
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 Act of
1934during 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
* Note: As part of the bankruptcy reorganization plan, the Registrant's
corporate domicile will move on February 1, 1997 from Colorado to Delaware.
The IRS Employer Identification Number will be 86-0848910.
<PAGE>
APPLICABLE ONLY TO ISSUERS 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 Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes___. No___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant has only one class of common stock outstanding, of which
approximately 45,918,623 shares were outstanding as of January 30, 1997.
The Company estimates that, on February 1, 1997, the Effective Date of the Plan
of Reorganization, there will be approximately 17,675,234 shares of New Common
Stock issued or reserved for issuance pursuant to the Amended Plan.
<PAGE>
FORM 10-Q
For The Quarter Ended December 31, 1996
INDEX
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets
at December 31, 1996 and June 30, 1996 1
Consolidated Statements of Operations
for the three-months and six-months ended
December 31, 1996 and 1995 2
Consolidated Condensed Statements of Cash Flows
for the six-months ended December 31, 1996 and 1995 3
Notes to Consolidated Financial Information 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II. Other Information:
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE> 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WORK RECOVERY, INC.
(Debtor-in-Possession as of May 29, 1996)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 107,000 $ 189,000
Receivables, including Related Party, net 461,000 318,000
Inventories 873,000 813,000
Prepaid Expenses and Other Assets 42,000 183,000
----------- ------------
Total Current Assets 1,483,000 1,503,000
Property, Plant and Equipment, net 2,115,000 3,738,000
Intangible Assets 67,000 123,000
Other Assets 321,000 185,000
----------- ------------
Total Assets $ 3,986,000 $ 5,549,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 1,134,000 $ 495,000
Accrued Expenses 438,000 98,000
Notes Payable, including Related Parties 1,071,000 115,000
---------- -----------
Total Current Liabilities 2,643,000 708,000
Liabilities Subject to Compromise 16,011,000 11,081,000
---------- -----------
Total Liabilities 18,654,000 11,789,000
Commitments and Contingent Liabilities
Shareholders' Equity (Deficit):
Preferred Stock, Cumulative Convertible 1,318,000 1,318,000
Common Stock, $.004 par value:
Authorized 100,000,000 shares, issued and
outstanding 45,918,623 shares at December
31,1996 and June 30,1996 184,000 184,000
Additional Paid-in Capital 57,311,000 57,311,000
Accumulated Deficit (73,481,000) (65,053,000)
---------- ----------
Total Shareholders' Deficit (14,668,000) (6,240,000)
---------- ----------
Total Liabilities and Shareholders'
Equity (Deficit) $ 3,986,000 $ 5,549,000
========== ==========
</TABLE>
See Notes to Consolidated Financial Information
<PAGE> 2
WORK RECOVERY, INC.
(Debtor-in-Possession as of May 29, 1996)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three-Months Ended Six-Months Ended
December 31, December 31,
------------------------ -------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net Revenues:
Sales and Related Services $ 1,010,000 $ 321,000 $ 1,225,000 $ 1,074,000
Clinic Services 15,000 916,000 73,000 1,986,000
---------- ---------- ---------- ----------
Total Net Revenues 1,025,000 1,237,000 1,298,000 3,060,000
---------- ---------- ---------- ----------
Cost of Sales 441,000 2,478,000 761,000 5,116,000
Gross Profit (Loss) 584,000 (1,241,000) 537,000 (2,056,000)
Expenses:
Selling, General and
Administrative 875,000 1,911,000 1,928,000 4,327,000
Settlement with Investors 185,000
Loss from Unusual Transactions
and Activities 128,000
Additional Bad Debts 30,000 1,014,000
---------- ---------- --------- ----------
Loss from Operations (291,000) (3,182,000) (1,391,000) (7,710,000)
---------- ---------- --------- ----------
Other Income (Expense):
Interest Expense (Contractual
Interest of $110,000 and
$210,000, respectively, for
the Three-Months and Six-
Months ended
December 31, 1996) (81,000) (83,000) (170,000) (177,000)
Investment Losses (149,000) (922,000)
Interest Income 2,000 128,000 3,000 263,000
Miscellaneous Income (Expense) (82,000) 8,000 (77,000) 14,000
----------- --------- ---------- ---------
Net Other Expense (161,000) (96,000) (244,000) (822,000)
Loss From Operations
Before Income Taxes and
Reorganization Items (452,000) (3,278,000) (1,635,000) (8,532,000)
Reorganization Items 6,363,000 6,793,000
Income Taxes
---------- ---------- ---------- ---------
Net Loss $ (6,815,000) $(3,278,000) $(8,428,000) $(8,532,000)
========== ========= ========= =========
Loss Per Common and Common
Equivalent Share $(.15) $(.07) $(.18) $(.19)
Weighted Average Number of
Common Shares Outstanding 45,918,623 45,537,178 45,918,623 45,697,626
</TABLE>
See Notes to Consolidated Financial Information
<PAGE> 3
WORK RECOVERY, INC.
(Debtor-in-Possession as of May 29, 1996)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six-Months Ended
December 31,
----------------------------
1996 1995
------------- ------------
<S> <C> <C>
Net Cash Used in Operating Activities $ (1,238,000) $ (4,756,000)
----------- -----------
Cash Flows from Investing Activities:
Investment in Unconsolidated Affiliates (567,000)
Purchases of Property, Plant and
Equipment In-Service (50,000) (342,000)
Loans to Officers and Former Officers (264,000)
Sales of Clinical Centers and Real Property 1,203,000
---------- -----------
Net Cash Provided by (Used in) Investing
Activities 1,153,000 (1,173,000)
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock 924,000
Proceeds from Notes Payable 971,000
Proceeds from Issuance of Long-Term Debt 175,000
Net Repayments on Notes Payable (24,000)
Repayment of Long-Term Debt and Capital
Leases (968,000) (441,000)
--------- ----------
Net Cash Provided by Financing
Activities 3,000 634,000
--------- ----------
Net Decrease in Cash (82,000) (5,295,000)
Cash at Beginning of Year 189,000 6,554,000
--------- ----------
$ 107,000 $ 1,259,000
========= ==========
</TABLE>
See Notes to Consolidated Financial Information
<PAGE> 4
1. Chapter 11 Bankruptcy Filings and Reorganization
On May 29, 1996, Work Recovery, Inc. ("WRI") and its wholly-owned subsidiary
Work Recovery Centers, Inc. ("WRCI") (collectively, the "Company") filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Arizona (the "Bankruptcy Court") and is currently operating
as Debtor-in-Possession subject to the limitations and requirements of the
Bankruptcy Code.
As of the petition date, actions to collect prepetition indebtedness are stayed
and other contractual obligations may not be enforced against the Company.
Substantially all liabilities as of the petition date are subject to compromise
under a plan of reorganization. These liabilities are reflected in the
accompanying balance sheet as "Liabilities Subject to Compromise." For
financial statement presentation, secured debt is also accounted for as
liabilities subject to compromise. The Company is in default on substantially
all of its outstanding debt and loan agreements and consequently, such debt is
classified as liabilities subject to compromise.
Under the provisions of the Bankruptcy Code, the Company's creditors were
required to file their claims with the Bankruptcy Court by October 1, 1996.
In addition to confirming debts and payables already recorded, this process
normally gives rise to the receipt of numerous disputed claims and/or duplicate
claims and claims for previously unrecognized amounts. Claims totaling
approximately $55,891,000 have been received as of January 22, 1997. The
Company has begun the lengthy process of reviewing and reconciling these
claims, and, while it believes its records accurately reflect all prepetition
liabilities, it is possible the review and reconciliation process will result
in adjustments, in amounts that could be material, to the recorded liabilities.
Under the Bankruptcy Code, the Company may reject executory contracts, including
lease obligations. Since the petition date, the Company has filed motions to
reject leases and executory contracts. For rejected leases, the Company ceased
paying rent on such leases and tendered possession of the leased premises to the
landlords. As of December 31, 1996, the Company has a reserve of $442,000 for
estimated damages for the rejection of leases and executory contracts, which
amount is included in liabilities subject to compromise in the accompanying
balance sheet. This amount may be subject to adjustment as the Company
completes its assessment of its leases and other executory contracts and as
proofs of claim resulting from rejected leases and contracts are reconciled.
The creditors and equity holders approved the Company's Plan of Reorganization
("the Plan") and on December 4, 1996 the Bankruptcy Court issued its Order
confirming the Plan. The Effective Date of the Plan and the Company's
emergence from bankruptcy is scheduled for February 1, 1997. In part, the
Plan provides for the issuance of new shares of Common Stock ("New Common
Stock") in the reorganized Company in exchange for existing shares of Common
Stock ("Old Common Stock") at an 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 will receive Warrants for the purchase of New Common Stock
at a share price of $2.50. One
<PAGE> 5
Warrant will be issued for every ten shares
of Old Common Stock held by the shareholder. The Warrants will expire either
180 days after the Effective Date or the date upon which 2,700,000 shares of
New Common Stock have been purchased pursuant to the exercise of the Warrants.
The Plan provides that holders of general unsecured claims are to receive cash
equal to eighty percent of their allowed claims, in two equal installments, the
first such installment being payable within thirty days of the Effective Date,
and the final installment being payable within one hundred eighty days of the
Effective Date. Accounting for the distribution of New Common Stock and
treatment of allowed claims and interests will be recorded as of the Effective
Date. 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 complete details of the Plan.
Continuation of the business after reorganization is dependent upon the
implementation of the Plan, the success of future operations and the Company's
ability to meet its future obligations as they become due.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instruction to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended December 31, 1996 are not necessarily indicative of the results that may
be expected for the year ending June 30, 1997.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
June 30, 1996.
All inter-entity accounts and transactions have been eliminated in the
consolidated financial statements. The accompanying unaudited financial
statements have been prepared on a going concern basis which assumes
continuity of operations and realization of assets and liquidation of
liabilities in the ordinary course of business. The appropriateness of using
the going concern basis is dependent upon, among other things, success of
future operations and the ability to generate sufficient cash from operations
and financing sources to meet obligations.
As a result of the reorganization proceedings, the Company may have to sell
or otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the financial statements. The financial
statements do not give effect of all adjustments to the carrying value of
assets, or amounts and classifications of liabilities that may be necessary
as a consequence of the bankruptcy proceedings.
<PAGE> 6
3. Inventories
Inventories consist of the following: December 31, 1996 June 30, 1996
[S] [C] [C]
Raw Materials $ 637,000 $ 631,000
Finished Goods 152,000 121,000
Work-in-Progress 174,000 197,000
Reserve for Excess and Obsolete Inventory (90,000) (136,000)
-------- ---------
$ 873,000 $ 813,000
======== =========
4. Liabilities Subject to Compromise and Contingencies Resulting From the
Bankruptcy Proceedings
The principal categories of claims reclassified in the consolidated balance
sheets and included in liabilities subject to compromise are as follows:
December 31, 1996 June 30, 1996
[S] [C] [C]
Unearned Revenue and Unallocated Credits $ 4,523,000 $ 4,523,000
Long-Term Debt 1,673,000 2,659,000
Notes Payable 945,000 1,109,000
Accounts Payable and Other Accrued
Expenses 8,428,000 2,260,000
Liabilities for Lease Rejections 442,000 530,000
--------- ---------
$16,011,000 $11,081,000
========== ==========
5. Reorganization Items
Certain items of income and expense during the three-months and six-months
ended December 31, 1996 which were directly related to the Company's
reorganization proceedings have been reflected in the consolidated statements
of operations as reorganization items and include the following:
Three-Months Six-Months
Ended Ended
December 31, 1996 December 31, 1996
[S] [C] [C]
Professional Fees $ 282,000 $ 708,000
Settlements (See Note 6) 5,979,000 5,979,000
Other Expenditures Directly Related to the
Chapter 11 Bankruptcy Proceedings 102,000 106,000
---------- ---------
$ 6,363,000 $ 6,793,000
========== =========
<PAGE> 7
6. Settlement Agreements
During the quarter ended December 31, 1996 the Bankruptcy Court approved various
settlements between the Company and a number of claimants. The Company recorded
$5,979,000 as reorganization items during the quarter ended December 31, 1996 to
provide for settlements not previously recorded. The above amount includes
$3,750,000 for settlement of class action lawsuit (1,500,000 shares of New
Common Stock valued at $2.50 per share), $1,250,000 for settlement of B Warrant
and Dealer Warrant claims (500,000 shares of New Common Stock valued at $2.50
per share), $535,000 for settlement of Bobby S. Roberts claims (200,000 shares
of New Common Stock valued at $2.50 per share plus $35,000 cash. In addition,
the Company agreed to pay Mr. Roberts $4,500 a month for consulting services for
a period of 30 months), $300,000 for settlement of McGee Settlement Trust and
Robert Page claims (80,000 shares of New Common Stock valued at $2.50 per share
plus $100,000 cash) and miscellaneous other settlements totaling $144,000. For
further information regarding the nature of these claims, 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.
During prior years, former management of the Company entered into various
agreements with Mr. Peter Voss and affiliated parties regarding the exclusive
licenses for Australia, New Zealand and Malaysia. Mr. Voss also contended
that WRI entered into an agreement to provide all necessary funding for the
operations of Work Recovery Pty. Ltd. ("WR Pty"), in which WRI owns a 31%
equity interest, and to purchase 100% of the equity in WR Pty for $3,000,000.
The Company contested any liability to Mr. Voss, WR Pty, or any related parties
and filed an adversary proceeding to collect amounts due WRI by WR Pty.
In September 1996, the Company reached an agreement with Mr. Voss and his
affiliated companies that provides for (i) a termination of the Malaysia
license agreement, (ii) the termination of the Australia and New Zealand
license agreements, (iii) the joint marketing of an acceptable exclusive
license arrangement for Australia with an acceptable third party and the
sharing of any license fee payable under such an agreement if consummated
within a prescribed period of time, and (iv) the mutual release of claims
and the termination of all contracts. The Company obtained Bankruptcy Court
approval of this agreement on November 7, 1996. Subsequently, the joint
marketing of the license arrangement for Australia terminated by the terms of
the agreement.
7. Sale of Centers
Effective August 12, 1996, the Company sold the business operations including
certain assets of its clinical center operations in El Paso, Texas for $80,000.
The Bankruptcy Court approved the sale in October 1996, at which time the
transaction was recorded. Additionally, on August 15, 1996, the Bankruptcy
Court approved and the Company sold its 51% interest in the equity of Work
<PAGE> 8
Recovery Centers of Eau Claire, Inc. for $50,000. Both sales were made to
unrelated parties. No material gain or loss resulted from the sale of these
two centers.
8. Sale of New Concepts Corporation
In November 1996 the Company sold all of the assets and liabilities of New
Concepts Corporation to a former employee of the Company for $50,000. No
material gain or loss resulted from this transaction.
9. Sale of Metairie Real Property
On November 12, 1996, the Company sold real property located in Metairie,
Louisiana for $1,200,000. Approximately $177,000 of the sales proceeds was
placed with an escrow agent pending resolution of certain disputes between the
Company and the mortgage lender. In January 1997 the Company received
approximately $103,000 from the escrow agent in payment of the negotiated
settlement with the lender. No material gain or loss resulted from this sale.
10. Funding Agreements
In July 1996 the Bankruptcy Court issued an order authorizing a loan
agreement the Company entered into in May 1996 with Recovery Lender, L.L.C.,
an Arizona limited liability company ("Recovery Lender"), for funding up to
$5,000,000, $900,000 of which had been funded as of December 31, 1996. See
Liquidity and Capital Resources.
In October 1996 the Company entered into an investment agreement with Allsup,
Inc. an Illinois company ("Allsup"), to provide additional financing for
operations and for funding of the Plan. Pursuant to this agreement, which
was approved by the Bankruptcy Court in November 1996, the Company and Allsup
executed a loan agreement pursuant to which Allsup advanced $500,000 to the
Company as a loan on terms similar to that of Recovery Lender. Allsup can
acquire New Common Stock for a purchase price of $1,000,000 and is expected
to elect to convert both its prepetition and postpetition advances (totaling
$500,000 and $500,000, respectively) to New Common Stock, subject to certain
contingencies. Assuming Allsup converts both its prepetition and postpetition
loans to New Common Stock and acquires additional New Common Stock for
$1,000,000, Allsup will own 17.5% of the New Common Stock of the Company.
See Liquidity and Capital Resources.
11. Loan Agreements
In January 1997 the Company entered into a Loan Agreement with Allsup 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. The Loan will revolve and, provided applicable conditions
are satisfied, repaid principal may be reborrowed until the maturity of the
Loan.
<PAGE> 9
The Loan will be available to support the working capital needs of the
Company and to make payments due under the Plan. The Loan Agreement also
provides that the Lenders will be granted options to purchase shares of New
Common Stock of the Company and have certain conversion rights. See Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for details of the Loan Agreement.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's Ability to Continue as a Going Concern
The Company has suffered recurring losses from operations. In order for the
Company to continue as a going concern, additional capital will be needed.
As discussed in the Company's Form 8-K dated January 30, 1997, the Company
will emerge from bankruptcy on February 1, 1997 (the "Effective Date")
pursuant to the Debtors' Restated Amended Joint Plan of Reorganization dated
November 25, 1996 (the "Bankruptcy Plan"). On the Effective Date, the Company
will have substantial obligations to certain bankruptcy creditors and others.
The funds needed to pay such obligations as well as to operate the Company's
business will be obtained through operations, from the sale of assets, from
the purchase of shares of the Company's Common Stock ("Common Stock") by
Allsup, Inc. ("Allsup") for $1,000,000 and from the loan described below.
In addition, the Company has entered into a Loan Agreement with Allsup 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. The Loan will revolve and, provided
applicable conditions are satisfied, repaid principal may be reborrowed
until the maturity of the Loan. The Loan will be available to support the
working capital needs of the Company and to make payments due under the
Bankruptcy Plan. Outstanding principal on the Loan will bear interest at
the rate of 10% per annum, and principal and interest shall be due and
payable in full on December 31, 1997. In addition, principal repayments
will be made on a monthly basis in an amount equal to 50% of the proceeds
from the exercise of warrants, if any, issued to holders of common stock in
the Company's predecessor as part of the Bankruptcy Plan during the preceding
month. The Loan will be secured by the granting of a security interest in all
of the assets of the Company, which security interest will be effective at all
times that the balance of the Loan exceeds $500,000.
Upon execution of the Loan Agreement, the Lenders will be granted options
(the "Initial Options"), as additional compensation for providing the Loan,
to purchase 100,000 shares of Common Stock, in the aggregate, at a price equal
to 60% of the average daily closing prices of the Common Stock for the first
five business days beginning February 3, 1997. The Lenders will be issued
additional options (the "Additional Options") to acquire 75,000 shares of
Common Stock, in the aggregate, the first time that the average outstanding
principal balance of the Loan equals or exceeds $500,000, $1,000,000,
$1,500,000 and $2,000,000 during any calendar month (as a result, the
maximum number of shares of Common Stock subject to the Additional Options is
300,000). The exercise price of the Additional Options will be equal to 60% of
the closing price on the last trading day of the calendar month in which the
average outstanding principal balance of the Loan equals or exceeds $500,000,
$1,000,000, $1,500,000, or $2,000,000, as the case may be.
The Lenders will also have the right to convert the Loan in Common Stock
within thirty days after the maturity date of the Loan. The number of shares
that the Lender can acquire will be determined by applying the outstanding
Loan balance at the maturity date of the Loan, plus any unpaid interest and
attorney's fees incurred in connection with the Loan, to a conversion rate
that will be the lesser
<PAGE> 11
of (a) the average of the daily closing prices of
the Common Stock for the five business days prior to each advance on the
Loan or (b) the average of the daily closing prices of the Common Stock for
the five business days after the maturity date of the Loan.
Results of Operations
The following discussion of the results of operations for the three-months
and six-months ended December 31, 1996, as compared to the three-months and
six-months ended December 31, 1995 and financial condition of the Company as
of December 31, 1996, as compared to the fiscal year ended June 30, 1996,
should be read in conjunction with the financial statements and related notes
appearing under Part I. - Item 1.
Net revenues for the three-months and six-months ended December 31, 1996
decreased, by 17.1% and 57.6%, respectively, as compared to the corresponding
periods of fiscal 1996. Clinic services for the three-month and six-month
periods ended December 31, 1996 as compared to the comparable periods of the
prior fiscal year decreased approximately 98.4% and 96.3%, respectively,
due to the sale or closure of all but one of the Company's centers. The
decrease in clinic revenues was partially offset by an increase in sales and
related service revenues, consisting primarily of the sale of ERGOS(r) systems,
of 214.6% and 14.1% for the three-months and six-months ended December 31, 1996,
respectively.
Cost of sales decreased for the three-month and six-month periods ended
December 31, 1996 from the comparable periods of the prior fiscal year
primarily due to the closure and sale of the Company's centers during the
second half of fiscal 1996.
Selling, general and administrative expenses ("SG&A") decreased approximately
54.2% and 55.4% during the three-month and six-month periods ended December 31,
1996 compared to the comparable periods of fiscal 1996. Decreased SG&A costs
resulted from a cost reduction program implemented during the last five months
of fiscal 1996. Decreased SG&A costs were primarily salaries, legal, consulting
and professional fees.
The nature of settlement with investors of $185,000, loss from unusual
transactions and activities of $128,000, additional bad debts of $1,014,000
and investment losses of $922,000 for the six-months ended December 31, 1995
are discussed in the Company's Form 10-K and accompanying consolidated
financial statements for the year ended June 30, 1996.
Reorganization items are directly related to the Company's bankruptcy
proceedings.
Cash decreased $82,000 from approximately $189,000 at June 30, 1996 to
approximately $107,000 at December 31, 1996. Net cash used during the
six-month period included approximately $1,238,000 in operating activities,
$968,000 for repayment of debt and $50,000 for the purchase of property,
plant and equipment. The principal source of cash was additional borrowings
of $971,000 and the sale of centers and real property totaling approximately
$1,203,000.
<PAGE> 12
Net property, plant and equipment decreased approximately $1,623,000 from
June 30, 1996 to $2,115,000 at December 31, 1996 primarily due to the sale of
property.
Accounts payable and accrued expenses increased approximately $979,000 from
June 30, 1996 to $1,572,000 at December 31, 1996 primarily as a result of
unpaid fees to professionals in connection with the bankruptcy proceedings
and unpaid fees to the TEAM for New Management.
Notes payable increased from $115,000 at June 30, 1996 to $1,071,000 at
December 31, 1996 as a result of additional borrowings from Recovery Lender
($400,000), Allsup ($500,000) and from TEAM for New Management ($71,000).
Liquidity and Capital Resources
The Company has continued to sustain losses and as of December 31, 1996, had
a working capital deficit of approximately $1,160,000. As discussed in more
detail in the Company's Form 8-K dated January 30, 1997, the Company will
have substantial current and future obligations under the Bankruptcy Plan.
Moreover, the Company does not believe that it will be able to generate
sufficient revenues from operations to meet its working capital needs.
As discussed above, in order to meet its obligations under the Bankruptcy
Plan and to fund working capital needs, the Company has entered into the
Loan Agreement. Additional funds may become available to the Company from
the exercise of warrants issued to the holders of common stock in the Company's
predecessor. The Bankruptcy Plan provides that a maximum of 2,700,000 of such
warrants may be exercised at an exercise price of $2.50 per share. There can
be no assurance, however, that any of such warrants will be exercised. The
Company believes that it will be able to meet its obligations under the
Bankruptcy Plan and working capital needs during the fiscal quarter ended
June 30, 1997 even if none of such warrants are exercised.
Factors That May Affect Future Results
Management's Discussion and Analysis of Results of Operations and Financial
Condition contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve a number of
risks and uncertainties. While the company believes that such forward
looking statements are accurate as of the date hereof, the actual results
and conditions could differ materially from the statements contained herein.
There can be no assurance that the Company will be able to generate sufficient
sales of its products to meet its working capital needs in the future or to
repay the Loan when it matures on December 31, 1997. The failure to repay
the Loan could result in the foreclosure of the Lender's security interest
in all of the assets of the Company.
The Company is emerging from bankruptcy and will have to overcome the stigma
of having been through reorganization as well as the potential lingering
negative impact of the controversies created by the mismanagement and
misfeasance of certain members of prior senior management.
The Company will also be subject to risks and uncertainties resulting from
changes in technology, competition, and increased regulation of the health
care industry.
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 29, 1996, the Company filed a voluntary petition in the United States
Bankruptcy Court for the District of Arizona to reorganize under Chapter 11
of Title 11 of the United States Bankruptcy Code. Subject to certain
exceptions under the Bankruptcy Code, the Company's filing for reorganization
automatically enjoined the continuation of any judicial or administrative
proceedings against the Company. All creditor actions to obtain possession
of property from the Company or to create, perfect or enforce any lien against
the property of the Company are also enjoined. As a result, the creditors of
the Company are precluded from collecting prepetition debts without the
approval of the Bankruptcy Court. Since the bankruptcy filing, numerous
claims have been filed with the Bankruptcy Court seeking payment or
compensation.
The reorganization process is expected to result in the cancellation and/or
restructuring of substantial obligations of the Company. Under the
Bankruptcy Code, the Company's prepetition liabilities are subject to
settlement under a plan of reorganization. The Bankruptcy Code also
requires that all administrative claims be paid on the effective date of a
plan of reorganization unless the respective claimants agree to different
treatment. There are differences between the amounts at which claims
liabilities are recorded in the financial statements and the amounts
claimed by the Company's creditors and such differences are material.
Significant litigation may be required in the Bankruptcy Court to resolve any
disputes.
Claims by the Company against third parties are also subject to adjudication
by the Bankruptcy Court. The Bankruptcy Court also has jurisdiction to cancel
or modify executory agreements such as leases, licenses, etc. Substantial
claims existed at the time of the bankruptcy filing or have been made since
that time.
See Note 27 to Consolidated Financial Statements for the year ended June 30,
1996 for a description of significant claims and legal contingencies involving
the Company. It is anticipated that such claims and contingencies will be
resolved by the Bankruptcy Court.
The Company, its former directors and certain of its former officers were named
as defendants in various shareholder class action lawsuits filed in the United
States District Court for the District of Arizona and one shareholder derivative
suit filed in state court in Colorado subsequent to an August 9, 1995 Wall
Street Journal article about the Company. The Colorado state court lawsuit
names the Company as a nominal party and requests no relief against the
Company. The Arizona lawsuits have been consolidated into one class action
proceeding. The lawsuits generally allege that the defendants have misstated
or omitted to state certain material facts in press releases, filings with the
Securities and Exchange Commission, and other statements by the defendants.
The consolidated class action suit additionally alleges violations of generally
accepted accounting principles and alleges various "sham" transactions. The
complaints generally request compensatory damages, injunctive relief,
interest, costs and expenses, punitive damages, and such other relief as the
court may deem just and proper. Answers to the complaints have been filed
with the courts. The Plan provides
<PAGE> 14
for the issuance of 1,500,000 shares of
New Common Stock in settlement of these lawsuits (as they relate to the
Company).
Investigations
On August 11, 1995 the Securities and Exchange Commission ("Commission") entered
an Order Directing Private Investigation ("Order") in the Matter of Work
Recovery, Inc. for actions and conduct occurring prior to the initiation of
the investigation. The Commission has advised the Company that the Order is
non-public and that the existence of the Order should not be construed as an
indication by the Commission that any violation has occurred. The FBI has
also been investigating the Company. The Company is cooperating fully with
the Commission and the FBI.
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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)
/s/ Dorcas R. Hardy
Dorcas R. Hardy, Acting Chief Executive Officer (Principal Executive Officer)
Date: January 31, 1997
/s/ Robert D. Judson, Jr.
Robert D. Judson, Jr., Acting Chief Financial Officer (Principal Financial and
Accounting Officer)
Date: January 31, 1997
