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 September 30, 1997
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)
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)
(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 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 __
<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 X 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. As of September
30, 1997, approximately 14,722,830 shares of common stock were issued or
reserved for issuance pursuant to the Amended Plan of Reorganization.
<PAGE>
FORM 10-Q
WORK RECOVERY, INC.
For the Quarter ended September 30, 1997
INDEX
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 1997 and June 30, 1997
Consolidated Statements of Operations for the three-months ended
September 30, 1997 (Successor Company) and the three-months ended
September 30, 1996 (Predecessor Company)
Consolidated Condensed Statements of Cash Flows for the three-months
ended September 30, 1997 (Successor Company) and the three-months
ended September 30, 1996 (Predecessor Company)
Notes to Consolidated Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WORK RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 118,000 $ 460,000
Receivables, including Related Party, net 230,000 266,000
Inventories 656,000 682,000
Prepaid Expenses and Other Assets 76,000 109,000
___________ __________
Total Current Assets 1,080,000 1,517,000
Property, Plant and Equipment, net 1,655,000 1,697,000
Intangible Assets 101,000 107,000
Other Assets 60,000 121,000
___________ ___________
Total Assets $ 2,896,000 $ 3,442,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 214,000 $ 236,000
Claims Payable 1,756,000 1,756,000
Accrued Expenses 1,029,000 1,032,000
Notes Payable, including Related Parties 1,907,000 1,887,000
Other Debt 1,257,000 1,269,000
___________ ___________
Total Liabilities 6,163,000 6,180,000
Commitments and Contingent Liabilities
Shareholders' Equity (Deficit):
Common Stock, $.01 par value:
Authorized 48,000,000 shares, issued and
outstanding 14,722,830 shares 147,000 147,000
Preferred Stock, $.01 par value, 2,000,000
shares authorized, no shares issued and
outstanding
Additional Paid-in Capital 37,454,000 37,353,000
Accumulated Deficit (40,868,000) (40,238,000)
___________ ___________
Total Shareholders' Deficit (3,267,000) (2,738,000)
___________ ___________
Total Liabilities and Shareholders'
Deficit $ 2,896,000 $ 3,442,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Information
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
Three-Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
<S> <C> <C>
Net Revenues:
Sales and Related Services $ 206,000 $ 215,000
Clinic Services 58,000
___________ ___________
Total Net Revenues 206,000 273,000
Cost of Sales 145,000 320,000
___________ ___________
Gross Profit (Loss) 61,000 (47,000)
Expenses:
Selling, General and Administrative 667,000 1,053,000
___________ ___________
Loss From Operations (606,000) (1,100,000)
Other Income (Expense):
Interest Expense (79,000) (89,000)
Investment Income 46,000
Interest Income 1,000
Miscellaneous Income 94,000 5,000
___________ ___________
Net Other Income (Expense) 61,000 (83,000)
Loss From Operations Before Income Taxes
and Reorganization Items (545,000) (1,183,000)
Income Taxes
Reorganization Items 430,000
___________ ___________
Net Loss $ (545,000) $(1,613,000)
=========== ===========
Loss per Common and Common Equivalent
Share $ (.04)
===========
Weighted Average Number of Common
Shares Outstanding 14,721,059
===========
</TABLE>
See Notes to Consolidated Financial Information
WORK RECOVERY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
Three-Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
<S> <C> <C>
Net Cash Used in Operating Activities $ (531,000) $ (507,000)
___________ ___________
Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment (6,000)
Sales of Property, Plant and Equipment 4,000
Sales of Clinical Centers 80,000 50,000
Sales of Investments 27,000
___________ ___________
Net Cash Provided by Investing Activities 111,000 44,000
___________ ___________
Cash Flows from Financing Activities:
Proceeds from Notes Payable 90,000 385,000
Repayment of Long-Term Debt and
Capital Leases (12,000) (71,000)
___________ ___________
Net Cash Provided by Financing Activities 78,000 314,000
___________ ___________
Net Decrease in Cash (342,000) (149,000)
Cash at Beginning of Year 460,000 189,000
___________ ___________
Cash at End of Period $ 118,000 $ 40,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Information
<PAGE>
1. Basis of Accounting
The accompanying unaudited financial statements of Work Recovery, Inc.
("WRI") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instruction to
Form 10-Q 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,
the consolidated financial statements include all adjustments which consist
only of normal recurring adjustments necessary for a fair presentation of
operating results for the interim period. Operating results for the three-
month period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1998.
For further information, refer to the unaudited financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended June 30, 1997.
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.
2. 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 for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Arizona (the "Bankruptcy Court"). The creditor 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.
For more detailed information concerning the Plan, refer to the Company's
Form 8-K dated January 30, 1997 and its Form 10-Q for the quarter ended
December 31, 1996.
3. Fresh-Start Reporting
As of the Effective Date, the Company adopted fresh-start reporting in
accordance with AICPA Statement of Position 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 the financial reporting purposes. The
periods presented prior to the Effective Date have been designated
"Predecessor Company" and the periods subsequent to the Effective Date have
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.
4. Inventories
Inventories consist of the following: September 30, 1997 June 30, 1997
Raw Material $ 420,000 $ 446,000
Finished Goods 288,000 288,000
Work-in-Progress 119,000 118,000
Reserve for Excess and Obsolete Inventory (171,000) (170,000)
__________ __________
$ 656,000 $ 682,000
========== ==========
5. Loan Agreements
In January 1997 WRI entered into a Loan Agreement with Allsup Inc. and Quest
Trading, Inc. (collectively, "the Lenders") pursuant to which the Lenders
agreed to loan WRI 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. At September 30, 1997, WRI had borrowed $1,9000,000. The Loan
will revolve and, provided applicable conditions are satisfied, repaid
principal may be re-borrowed until the extended maturity date of the Loan,
February 15, 1998. The Loan is being used to support the working capital
needs of the Company and to make payments due under the Bankruptcy 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
options to purchase 100,00 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 options to purchase 225,000 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.
6. Sale of Joint Venture in Lexington, Kentucky
Effective August 1, 1997 Work Recovery, Inc. sold its 50% equity interest in
Return to Work Center, Lexington, Kentucky to American Rehabilitation Group,
P.S.C. for $80,000 subject to certain adjustments.
7. Earning per Share
Earnings per share for the three months ended September 30, 1997 have been
calculated on the basis of 14,721,059 shares outstanding. Common stock
equivalents, including stock options, are excluded from the computation
because their inclusion would be anti-dilutive. Loss per common and common
equivalent share data is not meaningful for periods prior to February 1,
1997 due to the significant change in the capital structure of the Company.
8. Other
The Company is currently exploring opportunities to outsource its
manufacturing function.
9. Subsequent Events
On November 4, 1997, the Company signed a three year sales and marketing
consulting agreement with Functional Capacity Evaluation Technologies, Inc.
("FCET"). Pursuant to the agreement, FCET will provide worldwide sales and
marketing, service support, and engineering management services to Work
Recovery (see attached Exhibit).
<PAGE>
Item 2. 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 SEVERELY LIMITED. AS A RESULT, THE FINANCIAL STATEMENTS FOR
THE YEAR ENDED JUNE 30, 1997 WERE NOT AUDITED OR REVIEWED BY THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS.
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( 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.
Results of Operations:
The following discussion of the results of operations for the three-months
ended September 30, 1997, as compared to the three-months ended September 30,
1996, and financial condition of the Company as of September 30, 1997, as
compared to the fiscal year ended June 30, 1997, should be read in
conjunction with the financial statements and related notes appearing under
Part I. - Item 1.
Net Revenues decreased by 24.5% from approximately $273,000 for the quarter
ended September 30, 1996 to approximately $206,000 for the quarter ended
September 30, 1997. This decrease is attributed to a 4% decrease in sales
and related services and a 100% decrease in clinic services. Clinic services
decreased due to the selling of the Company's one remaining clinic services
center in Lexington, Kentucky.
Gross profit for the quarter ended September 30, 1997 increased 230% from a
gross loss of $47,000 for the quarter ended September 30, 1996 to a gross
profit of $61,000 for the quarter ended September 30, 1997. The increase is
due, in part, to the sale of the Company's center in Kentucky and also due
to decreases in the manufacturing and centers' staff over the past year.
Selling, general and administrative expenses ("SG&A") during the quarter
ended September 30, 1997 decreased approximately 37% from the comparable
period of the preceding fiscal year. Decreased SG&A costs resulted from
continued cost reduction efforts implemented by management including staff
and cost reductions in the Research and Development department, reductions
in administrative staff, and reductions in legal and consulting fees.
Net Other Income for the quarter ended September 30, 1997 increased 173%
from a net expense of $83,000 for the quarter ended September 30, 1996 to a
net income of $61,000 for the quarter ended September 30, 1997. The increase
is due mostly to proceeds from the sale of the Company's center in Kentucky
and due partially to proceeds from the sale of common stock in Wincanton
Corporation.
Reorganization items totaling $430,000 were recorded in the quarter ended
September 30, 1996 as a result of the Company's Chapter 11 bankruptcy
proceedings. The Company emerged from bankruptcy on February 1, 1997 and,
accordingly, has no continuing reorganization costs.
Cash decreased from approximately $460,000 at June 30, 1997 to approximately
$118,000 at September 30, 1997. The principal use of cash for the quarter
was $520,000 for operating activities. The principal sources of cash were
$90,000 received in proceeds from notes payable and $80,000 received from
the sale of the Kentucky center.
The $33,000 decrease in net receivables from the end of fiscal 1997 was due
primarily to aggressive collection efforts for past due receivables.
Property, plant and equipment decreased by $42,000 from $1,697,000 at June
30, 1997 to approximately $1,655,000 at September 30, 1997. The decrease
was due primarily to the recording of $30,000 in depreciation and the sale
of the Kentucky center.
Other assets decreased by approximately $61,000 during the first quarter of
the fiscal year due to the sale of the Kentucky center.
Notes payable increased by $20,000 to approximately $1,907,000 at September
30, 1997 from approximately $1,887,000 at June 30, 1997. An increase of
$90,000 in notes payable due to Allsup Inc. and Quest Trading, Inc. was
offset by a $70,000 decrease in notes payable for Directors' and Officers'
insurance.
Additional paid-in capital decreased by $101,000 from approximately
$37,353,000 at June 30, 1997 to approximately $37,454,000 at September 30,
1997. The decrease resulted from an $85,000 reclassification of dividends
paid from the accumulated deficit at the fiscal year ended June 30, 1997 and
$16,000 in exercised warrants.
Liquidity and Capital Resources:
The Company has continued to sustain significant losses and as of September
30, 1997 had a working capital deficit of approximately $5,083,000. 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.
Subsequent to emerging from bankruptcy, the Company has received a total of
$1,900,000 from the draw down on a $2,000,000 line of credit from Allsup Inc.
and Quest Trading, Inc. (see Note 5 to Consolidated Financial Information).
On November 4, 1997, Allsup Inc. and Quest Trading, Inc. signed an agreement
with the Company to extend the loan maturity from December 31, 1997 to
February 15, 1998.
In addition, the Company is continuing in its attempts to obtain additional
investment capital. However, the Company cannot guarantee that such efforts
will be successful considering the tenuous financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) 10.37 Memorandum of Agreement dated November 4, 1997 between the
Company and Functional Capacity Technologies, Inc.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE>
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
CEO
Dated November 7, 1997
EXHIBIT 10.37
MEMORANDUM OF AGREEMENT
This Memorandum of Agreement ("Agreement") sets forth the agreements
reached between Functional Capacity Evaluation Technologies, Inc. ("FCET") and
Work Recovery, Inc. ("WRI") (together the "Parties"), which the Parties agree
shall constitute a legally binding agreement among the Parties until such
time as a more detailed agreement may be entered.
WHEREAS, WRI and FCET entered into an Initial Engagement which by its
terms has expired; and
WHEREAS, WRI wishes to enter into a long-term agreement with FCET to
provide certain management services to WRI; and
WHEREAS, FCET represents and the Parties agree that FCET possesses
managerial resources with the expertise to provide these certain management
services and is willing to provide these services to WRI.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained below and intending to be legally bound, the Parties hereto agree
as follows:
1. Subject to the terms and conditions of this Agreement, FCET agrees to
provide worldwide sales and marketing, service support and engineering
management services to WRI. It is understood by the Parties that the
individuals performing these services maintain other jobs for which they are
responsible and will continue to be responsible during the term of this
Agreement. WRI shall maintain the responsibility for providing those
services normally associated with the offices of the Chief Executive Officer,
President, Chief Operating Officer and Chief Financial Officer including all
investor relations, financing, accounting, debtor relations, SEC reporting
and compliance, accounts payable and receivable management, and the overall
general administration of WRI.
2. In addition to these services, and until adequate capital or cash flow
from operations is generated, FCET agrees to organize field sale
representation through the sales team(s) of one or more companies with which
FCET executives are familiar, in order to provide broader market coverage
than WRI alone can provide. It is understood that these sales
representatives have primary responsibility to the company where they are
currently employed, but that to the degree that there is an overlap in the
market they service, they will also provide sales representation for the
ERGOS system of WRI. FCET retains all rights and control over the allocation
of time spent by these individuals selling the ERGOS system. It being
further understood by the Parties that this is a short-term accommodation
and a less than optimal approach and that at some point in the future,
predicated on available financing at any time, a sales force will be hired
directly into WRI, at which time FCET may, at its option and in its sole
discretion, discontinue the relationships with these companies.
3. This Agreement shall remain in full force and effect for a period of
three years commencing on October 22, 1997, cancelable at anytime by FCET
upon (a) six months prior written notice to WRI; (b) 30-day written notice
upon failure of WRI, upon a vacancy in the office of the President of WRI, to
hire a replacement acceptable to FCET within 30 days of the date of such
vacancy or failure of WRI to comply with Section 12, 14, 15 or 17 of this
Agreement; or (c) 10-day written notice to WRI for failure of WRI to make
payment of amounts owed to FCET pursuant to Section 4, 7, 8 and 9 of this
Agreement. WRI may immediately cancel this Agreement for cause, which shall
be defined as gross malfeasance in the performance of FCET of its obligations
under this Agreement. Upon termination by the lapsing of time, the
Agreement may be renewed by mutual consent of the Parties. Upon termination
for whatever reason, WRI shall pay to FCET all amounts earned by FCET up and
until the date of termination, in accordance with the terms and conditions of
this Agreement. Upon termination of this Agreement by FCET in accordance
with Section 3(a) or by WRI for cause (as defined above) and payment by WRI
of all amounts earned by FCET up and until the date of termination, FCET
shall return to WRI all prospect lists, customer lists and any sales and
marketing literature used by it in carrying out its activities under this
Agreement.
4. For good and valuable consideration for the services rendered by FCET
under this Agreement, WRI agrees to compensate FCET as follows:
(a) WRI will pay to FCET a monthly fee of $30,000 per month, payable in
advance of each month, plus $10,000 per month beginning January 1, 1998
for manufacturing management services if the assembly of the ERGOS system
has not been subcontracted to an outside third party by such time.
(b) WRI will pay to FCET 10% of its book revenues generated from the
sale of its products and services subsequent to the commencement date
hereof, not including recovery from bankruptcy claims or collection of
prior accounts receivable previously written off the books of WRI and
excepting the revenues from sales made to those prospects on the attached
list prior to January 21, 1998 on which FCET will be paid 2.5% of the
sale price. Amounts payable to FCET under this paragraph (b) will be
payable as collected from the account debtor with respect to sales
revenues and with respect to other revenues shall be due within five days
of each month-end.
(c) WRI will pay to FCET a $1 million cash bonus if, during the term of
this Agreement, WRI generates a cumulative total of $5 million in earnings
calculated before interest, taxes, depreciation and amortization and all
restructuring costs. It is agreed that the fees paid to FCET in (a) and
(b) above are expenses in compiling the earnings of WRI. Should the
bonus be earned, FCET and WRI shall agree to negotiate, in good faith,
reasonable payment terms at the time this target is achieved.
(d) Commencing upon termination of this Agreement due to the lapse of
time or cancellation by FCET for failure of WRI to comply with Sections
3(b) or 3(c) of this Agreement, WRI will pay to FCET a royalty of 3% of
book revenues generated during the immediately succeeding year after the
effective date of termination, 2% of book revenues generated during the
next two succeeding years after the effective date of termination and 1%
of the book revenues generated during the next succeeding year after the
effective date of termination, calculated based on the proportion of
revenues generated during each fiscal year ending June 30, and payable
within 90 days after each fiscal year end or upon completion of the annual
audit, whichever comes first.
(e) Concurrent with the execution of this Agreement, WRI shall grant to
FCET, or its designees as FCET may elect, immediately exercisable stock
options for 20% of the outstanding stock of WRI (calculated on a fully
diluted basis and after giving effect to any equity interest provided to
Allsup and/or Quest with respect to the debt of WRI presently held by
them) at an exercise price equal to the lower of the share price as of the
close of business on October 21, 1997 ($.16 per share) or the closing
price as of the signing of a more detailed agreement with respect to the
matters described in this Agreement. The stock options shall have
protection against percentage dilution up to an additional $5 million in
new equity capital and WRI shall provide FCET 30 days prior written notice
of the filing of any registrations with the SEC. Prior to their
exercise, the options shall be subject to cancellation by WRI if (i) this
Agreement is canceled by WRI for gross malfeasance in the performance of
FCET under the terms of this Agreement; or (ii) the failure of Allsup or
WRI to raise the necessary funds, obtain financing from other sources or
generate adequate cash from operations to enable WRI to successfully
reorganize and remain outside of Bankruptcy (which, for purposes of this
Agreement, is defined as a voluntary or involuntary or uncontested
involuntary filing for liquidation under Chapter 7 of the U.S. Federal
Bankruptcy Statutes as amended.)
5. FCET shall report to WRI's President and shall have no obligation to
interact with any other officer, director or creditor of WRI or with
investors, news or media representatives.
6. FCET shall be solely responsible for the worldwide sales and marketing
activities of WRI and, except as requested by FCET, no WRI employee shall
have any interaction with potential prospects or customers during the term of
this Agreement. Should any WRI employee engage in any unauthorized
interaction with potential prospects or customers, their names shall be
brought to the attention of the Board of Directors for a determination of
their disposition.
7. WRI shall reimburse FCET for reasonable travel and living expenses
incurred by FCET personnel or personnel from other companies that FCET
utilizes to promote the ERGOS product in the marketing of the ERGOS system,
including prospect travel to and from demonstration sites, as approved by the
President of WRI. WRI shall reimburse FCET for these expenses five business
days after their submission.
8. WRI shall reimburse FCET for all reasonable out-of-pocket expenses
incurred by any individuals acting on behalf of WRI, or for reasonable
consulting fees paid to outside third parties, both as approved by the
President. It is acknowledged and agreed that FCET has entered into a
renewal of a consulting agreement with John Connelly commencing October 22,
1997 for an additional three months of service at a rate of $3,333.33 per
month, payable in advance of each month, which amount WRI agrees to reimburse
to FCET. Should FCET or Mr. Connelly terminate their consulting agreement
during a month or should Mr. Connelly fail to fulfill the responsibilities of
his consulting agreement, FCET agrees to reimburse to WRI any amounts paid to
Mr. Connelly in advance of services rendered during that particular month.
9. WRI shall be responsible for the cost of all new hires and any
additional expenses incurred to support the operating plans of WRI, as
approved by the President. This includes the services of John Connelly
should he become a WRI employee. Should Mr. Connelly become an employee of
FCET, the monthly fee paid to FCET shall be increased by his cost to FCET
including his salary, benefits and travel and living expenses as agreed to
by the President of WRI.
10. It is understood by the Parties that FCET is acting solely in a
consulting capacity, that it does not have any decision making authority
with respect to the operations of WRI and that all matters pertaining to the
operation of WRI are the responsibility of the officers and directors of WRI
including, but not limited to all financing decisions, product pricing
decisions, hiring and firing of all employees and entrance into and
termination of material contracts.
11. During the term of this Agreement, FCET may have access to proprietary
and/or confidential information with respect to WRI's products, promotional
materials, current and prospective clients, and business and financial
strategies existing prior to July 21, 1997. WRI shall identify to FCET in
writing any such material that it considers of a confidential or proprietary
nature which shall include WRI's patents, copyrights and any other rights
and information relating to the ERGOS technology ("Proprietary Information").
FCET agrees that, during the term of this Agreement, such information is
proprietary and confidential and further agrees not to use such information
for any purposes other than promoting the sale of WRI products. Upon
termination of this Agreement, FCET shall return to WRI any unused materials
that it receives from WRI in connection with carrying out its activities and
all copies of any Proprietary Information.
(a) At all times during and for two years following the termination of
this Agreement, FCET covenants and agrees to hold in strictest confidence,
not disclose to any third party or use any Proprietary Information without
the express written consent of WRI or the lawful owner of the ERGOS
technology. This covenant and agreement shall survive this Agreement and
continue to be binding upon FCET after the expiration or termination
hereof, whether by passage of time or otherwise so long as the Proprietary
information shall remain Proprietary Information. Notwithstanding the
foregoing, the foregoing covenant and agreement shall run with the ERGOS
technology and any person who becomes the lawful owner of the ERGOS
technology shall have the right to waive all or any portion of FCET's
obligations hereunder.
FCET shall have no obligations or restrictions with respect to any
Proprietary Information which:
(i) has come into the public domain prior to, or after the disclosure
thereof and in such case through no wrongful act of FCET; or
(ii) has been lawfully received from a third party without
restrictions or breach of this Agreement; or
(iii) is independently developed in good faith by employees of FCET
who did not have access to the Proprietary Information; or
(iv) is approved for release or use by written authorization of WRI;
or
(v) is not properly designated or confirmed in writing as proprietary.
12. The Parties to this Agreement and WRI's officers and directors agree
to keep confidential any information pertaining to FCET or its Agreements with
FCET or any of its affiliated companies without the prior written consent of
FCET, except as may be required under SEC reporting requirements, in which
case FCET shall have the right to review and reasonably modify the information
pertaining to FCET. Furthermore, the Parties agree that they shall not
interfere with, disrupt or disparage, either publicly or privately, the
efforts of FCET or WRI, its lenders, investors, consultants or others who are
supporting the entering into of this Agreement.
13. When asked, FCET will present itself to the marketplace as a consultant
to WRI and will answer questions from the customer in an honest and direct
manner consistent with its knowledge of the facts.
14. WRI shall retain full responsibility for ensuring that any products
sold are delivered in a timely manner, free of material defects, and for
providing the resources to install, train and provide technical support and
service to customers.
15. WRI agrees to hold FCET, its employees, officers, directors, investors
and related companies harmless for any loss or damage attributable to WRI or
its products and will indemnify same for any claims made by WRI's customers,
stockholders, officers, directors or creditors unless such claims are proven
to be solely the result of gross malfeasance in the performance of FCET under
the terms of this Agreement. WRI shall maintain general and product
liability insurance with a reputable carrier, in amounts and on the same
general terms and conditions as is currently maintained, and shall name FCET
a named insured and shall deliver to FCET evidence of coverage and renewal.
WRI shall maintain directors and officers insurance with a reputable carrier,
in amounts and on the same general terms and conditions as is currently
maintained, and shall name FCET, its officers, directors and employees as
named insureds and shall deliver to FCET evidence of coverage. In addition,
WRI shall reimburse FCET for annual renewal of a $3 million E&O insurance
policy in its name, the cost of which is currently $16,000 per year and
which coverage lapses on July 21, 1998.
16. FCET understands that WRI is attempting to raise additional investment
capital from one or more sources, and FCET agrees to reasonably assist WRI by
providing information generated from sales activities for the purpose of
developing marketing and/or business plans, allowing WRI to discuss the role
of FCET in the management of WRI (subject to the prior approval of FCET) and,
if necessary, meeting with prospective investors. However, FCET shall not
be obligated to be a solicitor of funds from any source nor to write the
business plans required to raise such funds. WRI agrees to hold FCET harmless
from any claims arising from such financing activities.
17. WRI shall agree to relocate those operations for which FCET has
management responsibility to a location selected by FCET, with the mutual
consent of the President.
18. It is understood by the Parties to this Agreement that FCET makes no
representations, whether expressed or implied, as to its ability to guarantee
sufficient cash flow to support the operations of WRI.
The Parties agree that this Agreement shall be binding upon its execution
and in full force and effect until such time as a more detailed agreement
with respect to the matters described herein may be executed.
Agreed to this 4th day of November, 1997, by
FUNCTIONAL CAPACITY EVALUATION
WORK RECOVERY, INC. TECHNOLOGIES, INC.
/s/DORCAS R. HARDY /s/DONALD G. BROOMFIELD
CEO TREASURER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE STATEMENT OF OPERATIONS
FOR THE PERIOD SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 118,000
<SECURITIES> 0
<RECEIVABLES> 392,000
<ALLOWANCES> (230,000)
<INVENTORY> 656,000
<CURRENT-ASSETS> 1,080,000
<PP&E> 3,084,000
<DEPRECIATION> (30,000)
<TOTAL-ASSETS> 2,896,000
<CURRENT-LIABILITIES> 4,907,000
<BONDS> 0
0
0
<COMMON> 145,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,896,000
<SALES> 120,000
<TOTAL-REVENUES> 206,000
<CGS> 93,000
<TOTAL-COSTS> 145,000
<OTHER-EXPENSES> 667,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,000
<INCOME-PRETAX> (545,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (545,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (545,000)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
