<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1995
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 0-16453
HEARx LTD.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2748248
- --------------------------------------- -------------------------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
471 Spencer Drive, West Palm Beach, Florida 33409
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (407) 478-8770
- -------------------------------------------------------------------------------
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 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 [ ]
On September 29, 1995, 46,463,520 shares of the Registrant's Common Stock
were outstanding.
<PAGE> 2
INDEX
Page
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 29,1995 and December 30, 1994 3 - 5
Consolidated Statements of Operations -
Nine Months ended September 29, 1995 and September 30, 1994 6
Consolidated Statements of Operations -
Three Months ended September 29, 1995 and September 30, 1994 7
Consolidated Statements of Cash Flows -
Nine Months ended September 29, 1995 and September 30, 1994 8 - 9
Consolidated Statements of Cash Flows -
Three Months ended September 29, 1995 and September 30, 1994 10 - 11
Notes to Consolidated Financial Statements 12 - 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19 - 21
PART II. OTHER INFORMATION:
Item 6. Exhibits and reports on Form 8-K 22
Signatures 22
<PAGE> 3
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 29, December 30,
1995 1994
------------- -------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents $ 247,225 $ 329,007
Accounts receivable, less allowance for
doubtful accounts of $54,776 and $154,330 1,674,893 862,868
Receivable from private placement 1,156,250 500,000
Inventories 289,657 337,564
Prepaid expenses and other current assets 504,615 43,780
------------- -------------
Total current assets 3,872,640 2,073,219
------------- -------------
Property and equipment:
Equipment, furniture and fixtures 2,466,301 1,975,857
Leasehold improvements 802,049 779,347
------------- -------------
3,268,350 2,755,204
Less accumulated depreciation and amortization 1,920,185 1,779,850
------------- -------------
Net property and equipment 1,348,165 975,354
Other 480,090 456,394
------------- -------------
1,828,255 1,431,748
------------- -------------
$5,700,895 $3,504,967
============= =============
(Continued)
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE> 4
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 29, December 30,
1995 1994
------------- -------------
(unaudited) (audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Current portion of long-term debt $ 558,395 $ 479,123
Current portion of obligations under capital
leases 62,882 43,056
Short-term loan - principal shareholder 170,000 -
Accounts payable - trade 1,295,878 1,671,908
Accrued expenses 563,696 502,332
------------- -------------
Total current liabilities 2,650,851 2,696,419
------------- -------------
Long-term debt, net of current portion - other 1,137,282 652,602
Long-term debt, net of current portion -
principal shareholder 1,675,000 1,675,000
Obligations under capital leases, net of current
portion 22,084 48,597
------------- -------------
Total long-term debt 2,834,366 2,376,199
------------- -------------
Other long-term liabilities 82,333 -
------------- -------------
(Capital Deficit) Stockholders' Equity
Non-Redeemable Preferred Stock:
$1 par; authorized 2,000,000 shares, issued
and outstanding
1992, Senior A, 30,000 shares; 30,000 30,000
1992, Senior B, 22,500 shares; 22,500 22,500
1993, Senior D, 14,926 shares; 14,926 14,926
1993, Senior G, 14,926 shares; 14,926 14,926
1995, Senior E, 4,706 shares; 4,706 -
(Total aggregate amount of liquidation
preference for the above - $5,400,000)
------------- -------------
87,058 82,352
Series C, 1992, Convertible, 10,000 shares; 10,000 10,000
1994, Convertible, 5,000 shares; 5,000 5,000
------------- -------------
102,058 97,352
(Continued)
<PAGE> 5
<CAPTION>
September 29, December 30,
1995 1994
------------- -------------
(unaudited) (audited)
<S> <C> <C>
Common stock, $.10 par;
authorized 75,000,000 shares,
issued: 46,463,520 4,646,352 4,167,235
Additional paid-in capital 22,487,059 20,216,109
Accumulated deficit (27,085,251) (26,021,350)
Unamortized deferred compensation (16,873) (26,997)
------------- -------------
Total (capital deficit) stockholders' equity 133,345 (1,567,651)
------------- -------------
$ 5,700,895 $ 3,504,967
============= =============
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE> 6
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 29, 1995
AND SEPTEMBER 30, 1994
<CAPTION>
1995 1994
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Net Sales $ 8,557,616 $ 3,135,311
------------- -------------
Costs and expenses:
Cost of products sold 2,733,452 1,191,506
Personnel costs 4,033,064 2,103,271
Advertising, marketing, and selling 717,326 254,444
Occupancy & facility expense 1,464,559 812,725
Depreciation and amortization 223,806 95,985
General and administrative 309,144 231,834
Restructuring charges/(credits) - (70,000)
------------- -------------
Total costs and expenses 9,481,351 4,619,765
------------- -------------
Profit/(loss) from operations (923,735) (1,484,454)
------------- -------------
Other (charges) credits:
Interest income 2,650 4,340
Interest expense (149,732) (163,358)
Miscellaneous 6,916 (14,743)
------------- -------------
(140,166) (173,761)
------------- -------------
Net profit/(loss) ($1,063,901) ($1,658,215)
============= =============
Net profit/(loss) per Common Share ($0.02) ($0.05)
============= =============
Weighted average number of shares of common
stock outstanding 43,592,983 33,672,673
============= =============
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE> 7
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 29, 1995
AND SEPTEMBER 30, 1994
<CAPTION>
1995 1994
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Net Sales $ 2,493,683 $ 898,034
------------- -------------
Costs and expenses:
Cost of products sold 814,802 351,820
Personnel costs 1,331,989 664,642
Advertising, marketing, and selling 221,714 63,190
Occupancy & facility expense 521,421 245,365
Depreciation and amortization 74,599 30,711
General and administrative 57,927 51,142
Restructuring charges/(credits) - (20,000)
------------- -------------
Total costs and expenses 3,022,452 1,386,870
------------- -------------
Profit/(loss) from operations (528,769) (488,836)
------------- -------------
Other (charges) credits:
Interest income 89 1,549
Interest expense (60,842) (69,844)
Miscellaneous (7,398) (4,138)
------------- -------------
(68,151) (72,433)
------------- -------------
Net profit/(loss) ($596,920) ($561,269)
============= =============
Net profit/(loss) per Common Share ($0.01) ($0.02)
============= =============
Weighted average number of shares of common
stock outstanding 45,254,089 36,074,626
============= =============
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE> 8
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 29, 1995 AND SEPTEMBER 30, 1994
Increase (decrease) in cash and cash equivalents
<CAPTION>
1995 1994
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net profit/(loss) ($1,063,901) ($1,658,215)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 223,806 95,985
Non-cash expense to advisors/consultants 39,500 25,000
Non-cash expense for computerized systems 164,666 -
Non-cash expense for executive stock
bonuses/deferred compensation stock plans 127,076 37,188
(Increase) decrease in (net of discontinued
operations):
Accounts and notes receivable (812,025) 35,652
Receivable from private placement (656,250) -
Inventories 47,907 122,232
Prepaid expenses and other current assets (460,835) (22,696)
Deferred charges and other (13,572) (32,637)
Write off of customer list - 125,099
Increase (decrease) in:
Accounts payable (376,030) 94,724
Accrued expenses 61,364 (104,053)
Accrued costs for restructuring and
discontinued operations - (929,010)
Other long-term liabilities 82,333 -
------------- -------------
Net cash used in operating activities (2,635,961) (2,210,731)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (614,261) (35,819)
Proceeds from sale of property and equipment 17,644 181,010
Discontinued operations - 23,672
------------- -------------
Net cash provided (used) by investing activities (596,617) 168,863
------------- -------------
(Continued)
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE> 9
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 29, 1995 AND SEPTEMBER 30, 1994
Increase (decrease) in cash and cash equivalents
<CAPTION>
1995 1994
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of:
Short-term debt-principal stockholder 170,000 500,000
Convertible subordinated debentures - other - 150,000
Long-term debt - other 98,680 65,421
Long-term debt - major supplier - 656,410
Long-term debt - major shareholder 808,000 -
Capital leases 31,209 -
Principal payments:
Long-term debt (95,178) (75,266)
Forgiveness of long-term debt (247,550) -
Capital lease obligations (37,896) (105,384)
Canceled debt for long-term consultant contract - (100,000)
Conversion of debenture debt and accrued interest
payable into capital stock, net of financing costs - 28,287
Proceeds from issuance of capital stock,
net of offering costs 2,423,531 470,949
------------- -------------
Net cash provided by financing activities 3,150,796 1,590,417
------------- -------------
Net increase (decrease) in cash and cash
equivalents (81,782) (451,451)
Cash and cash equivalents at beginning of period 329,007 552,305
------------- -------------
Cash and cash equivalents at end of period $ 247,225 $ 100,854
============= =============
<FN>
Supplemental cash flow information:
Cash equivalents include temporary cash investments which have an original
maturity of ninety days or less.
See notes to consolidated financial statements
</TABLE>
<PAGE> 10
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 29, 1995 AND SEPTEMBER 30, 1994
Increase (decrease) in cash and cash equivalents
<CAPTION>
1995 1994
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net profit/(loss) ($596,920) ($561,269)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 74,599 30,711
Non-cash expense to advisors/consultants (58,625) -
Non-cash expense for computerized systems 82,333 -
Non-cash expense for executive stock
bonuses/deferred compensation stock plans - 26,563
(Increase) decrease in (net of discontinued
operations):
Accounts and notes receivable (213,531) 39,377
Receivable from private placement (258,140) -
Inventories 22,081 10,427
Prepaid expenses and other current assets 21,728 84,264
Deferred charges and other (75,139) 13,569
Increase (decrease) in:
Accounts payable (186,260) 57,317
Accrued expenses 73,953 30,971
Accrued costs for restructuring and
discontinued operations - (169,260)
Other long-term liabilities (82,334) -
------------- -------------
Net cash used in operating activities (1,196,255) (437,330)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (264,110) (10,165)
Proceeds from sale of property and equipment 11,612 58,536
Discontinued operations - (18,930)
------------- -------------
Net cash provided (used) by investing activities (252,498) 29,441
------------- -------------
(Continued)
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE> 11
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 29, 1995 AND SEPTEMBER 30, 1994
Increase (decrease) in cash and cash equivalents
<CAPTION>
1995 1994
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of:
Long-term debt - other 98,680 -
Capital leases 31,209 -
Principal payments:
Long-term debt (10,056) (9,561)
Forgiveness of long-term debt (60,000) -
Capital lease obligations (20,605) (10,358)
Proceeds from issuance of capital stock,
net of offering costs 1,108,290 470,949
------------- -------------
Net cash provided by financing activities 1,147,518 451,030
------------- -------------
Net increase (decrease) in cash and cash
equivalents (301,235) 43,141
Cash and cash equivalents at beginning of period 548,460 57,713
------------- -------------
Cash and cash equivalents at end of period $ 247,225 $ 100,854
============= =============
<FN>
Supplemental cash flow information:
Cash equivalents include temporary cash investments which have an original
maturity of ninety days or less.
See notes to consolidated financial statements
</TABLE>
<PAGE> 12
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
The accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1994. All adjustments, consisting of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of results for interim periods have been made.
Note 1. The Company:
Hearx, Ltd. ("HEARx" or "the Company"), a Delaware corporation, was organized
in April 1986 for the purpose of creating a nationwide chain of retail centers
(HEARx Centers) to serve the needs of the hearing impaired.
Note 2. Acquisition:
On December 30, 1994, the Company entered into a purchase agreement to acquire
certain assets and assume certain liabilities of eighteen (18) Florida retail
hearing aid centers from Hearing Health Services, Inc. ("HHS"). The purchase
price consisted of 2,500 HEARx 1994 Convertible Preferred Shares (conversion
ratio of 1 preferred share to 1,000 Common) valued at $200 per share ($500,000)
plus $85,585 of acquisition costs. The estimated fair value of the net assets
acquired was $492,224, resulting in cost in excess of fair value of net assets
acquired of $93,361 ($69,345 for 1994 and $24,016 for 1995), which will be
amortized over fifteen (15) years using the straight-line method. The
acquisition was accounted for under the purchase method of accounting. Since
the purchase occurred on December 30, 1994, the results of operations of the
acquired centers are included in the Company's financial results for 1995 but
are not included in the Company's operations for 1994.
Note 3. Expanded Managed Care Program:
During the latter part of 1994, the Company signed seven (7) contracts with
managed care organizations in its expanded market areas. HEARx is the only
Florida company that has agreements with virtually all of the managed care
companies in the state. Most of these new programs commenced in early 1995 as
the Company reflected incremental revenues for the start-up of these new
contracts. Several of these contracts are unique in that HEARx receives a
fixed fee per member per month, regardless of the number of hearing aids sold
(a capitated program). At the end of each calendar year based on documented
utilization, an adjustment is made in the per capita payment automatically for
the next calendar year. During 1995, the Company signed two (2) other
contracts with managed care organizations. HEARx now has contracts to supply
hearing care for nine (9) of the ten (10) managed care companies that operate
in the Florida hearing aid market (includes one new managed care company just
recently approved by the State of Florida to provide services).
On August, 1995, the Company announced its first major expansion outside of the
Florida area by signing a contract with Oxford Health Plans of New York to
provide hearing care benefits to Oxford's medicare members beginning January 1,
1996. The Company is currently working on the development of fifteen (15) to
<PAGE> 13
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
twenty (20) centers in the New York, New Jersey and eventually Connecticut
areas with the intent of opening the majority of these centers on January 2,
1996.
Note 4. Private Placements:
On December 30, 1994, the Company and three limited partnerships affiliated
with Hearing Health Services, Inc. (collectively the "Investors") entered into
a stock purchase agreement pursuant to which the Investors purchased 2,500
shares of 1994 Convertible Preferred Stock, par value $1.00 per share at a
total cash purchase price of $500,000 ($200 per share), to be payable on
January 4, 1995. This amount was recorded as a separate receivable on the
December 30, 1994 balance sheet and has since been collected. These shares
have the same rights, privileges, and conversion features as the above
mentioned shares (see Note 2) of 1994 Convertible Preferred Stock.
A new private placement for the sale of 1,000,000 shares of Common Stock at
$.85 per share (total of $850,000) was established during 1995, and during the
third quarter of 1995 was increased to a total of up to $1,500,000. A total of
$1,062,710 of the private placement has been paid and/or subscribed. A
subscription receivable was recorded in September, 1995 for $156,250. All but
$50,000 of this receivable was collected in October, 1995.
A second private placement was authorized by the Board of Directors in 1995 for
the sale of a maximum of 3,000,000 shares of Common Stock. A subscription for
780,000 shares ($600,600) at $.77 per share was recorded as a receivable on the
June 1995 balance sheet. Payment of this receivable was received in early July
1995. Associated costs for this placement amounted to $96,096 to be paid 50%
in shares of Common Stock (62,400 shares) and 50% in cash ($48,048). In
addition to the 62,400 shares, an additional 12,600 shares (total of 75,000
shares) of Common Stock were issued to the company that raised the private
placement funds in connection with post-closing adjustments.
In connection with the above second private placement, three additional
subscriptions were received in September, 1995 at $.618 per share, one for
809,061 shares ($500,000), the second for 404,531 shares ($250,000), and a
third for 404,531 shares ($250,000) for a combined total of $1,000,000. This
total of $1,000,000 was recorded as a receivable on the September, 1995 balance
sheet. Total payments of $750,000 have been received during October for these
subscription receivables and the remainder of $250,000 is expected to be
received in November 1995. Applicable finders fees for the $500,000
subscription were a total of $100,000 with $60,000 to be paid in cash and the
remainder to be paid in 64,725 shares of Common Stock (equivalent to $40,000).
The associated costs for the two $250,000 subscriptions collectively were
$100,000 with $60,000 to be paid in cash and the other amount to be paid in
64,725 shares of Common Stock (equivalent to $40,000). Associated costs
($90,000) payable for the $500,000 subscription and the first $250,000
subscription were paid in October, 1995.
<PAGE> 14
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
Note 5. Property and Equipment:
During March 1995, the Company entered into an agreement for the development of
a computerized system for the Company's network of hearing centers at a price
of $247,000. This amount was capitalized and recorded into the Property and
Equipment assets and will be depreciated once all other associated fixed assets
and the system have been installed and become operational (estimated to be
January 1, 1996).
Note 6. Long-term Debt:
The principal stockholder/officer has a loan with the Company for $1,675,000.
This loan is subordinated to all other indebtedness of the Company. The
interest rate is prime plus 3% (currently 12%).
The principal stockholder/officer also made two short-term loans of $85,000
each for a total of $170,000 during the second quarter of 1995. The Company
anticipates the payment of these loans during the fourth quarter of 1995.
As a result of the Company selling a certain number of hearing aids during the
first three quarters of 1995, the manufacturer of these products forgave
certain of the long-term debt attributable to prior product purchases from that
manufacturer. Under an arrangement established with this manufacturer on
January 1, 1995, the Company has been able to reduce its long-term debt to the
manufacturer by a total of $190,000. The term of this arrangement is four (4)
years, over which time the Company expects to further reduce its long-term debt
to the manufacturer upon achieving certain product sales goals.
The Company has reached a similar agreement with another of its manufacturers.
Under this agreement, a total of $808,000 was reclassified from accounts
payable into long-term debt during the second quarter of 1995. The agreement
provides for conversion of a substantial portion of this long-term debt into
equity upon the Company reaching certain product sales goals.
Note 7. (Capital Deficit) Stockholders' Equity:
Senior Preferred Stock - The shares of Senior Preferred Stock have 100 votes
per share and, unless otherwise required by Delaware law, vote with the holders
of other shares of Capital Stock as one class. The shares of Senior Preferred
Stock have no right to dividends except pari passu with the Common Stock based
on the number of shares of Common Stock into which they are then convertible
when, as and if a dividend is declared by the Board of Directors. The Senior
Preferred Stock is senior to all other shares of capital stock of the Company
in the event of the liquidation, dissolution, or winding up of the Company.
Each share of Senior Preferred Stock is convertible at the option of the holder
into 100 shares of Common Stock, i.e., a total of 3,000,000 shares in the case
of Senior A, 2,250,000 shares in the case of Senior B, 1,100,000 shares in the
case of Senior C, 1,492,600 shares in the case of Senior D, 1,176,500 shares
in the case of Senior E, 800,000 shares in the case of Senior F, and 1,492,600
shares in the case of Senior G. The shares of Senior Preferred Stock will be
<PAGE> 15
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
automatically converted into shares of Common Stock upon the listing of the
shares of Common Stock on the American or New York Stock Exchange. The shares
of Senior Preferred Stock are not subject to either mandatory or optional
redemption by the Company. At September 29, 1995, 3M held options to purchase
7,059 shares of Senior E Preferred Stock (total of 11,765 less exercised 4,706
shares) at a price of $85 a share and 8,000 shares of Senior F Senior
Preferred Stock at a price of $125 a share. Additionally, 3M holds warrants
to acquire Senior C Preferred Stock at $1.10 per share. The aggregate amount
for the liquidation preference per share is as follows: Senior A Preferred -
$50 per share; Senior B, D and G - $67 per share; Senior E - $85 per share for
a total of $5,400,000.
Senior A - On October 31, 1991 pursuant to an agreement ("Stock Purchase
Agreement") with the Company, Minnesota Mining and Manufacturing Company ("3M")
purchased 30,000 shares of the Company's Senior Preferred Stock, Series A, par
value $1.00 per share ("Senior Preferred, Series A") for $1,370,000 in cash and
$130,000 in credits against outstanding receivables. Further, 3M received the
right to acquire 22,500 shares of Senior Preferred Stock, Series B, ("Senior B
Preferred"), for $1,500,000 on or before September 30, 1992.
Under the Stock Purchase Agreement, the Company has agreed not to seek capital
from any person, other than financial investors or through a public offering,
as opposed to persons having an interest in the hearing aid industry, without
3M's prior written approval. The principal stockholder/officer has agreed not
to sell for five years any shares of Common Stock beneficially owned by himself
or securities convertible into or exchangeable for Common Stock. He will
afford 3M (a) a right of first refusal to purchase all or any portion of such
shares or securities (b) the right to approve any potential purchaser, which
approval is not to be withheld unreasonably. The principal
stockholder/officer's agreement does not apply to the sale in the open market
or gift of up to 5% of his security holdings (on a fully converted basis).
Senior B - On May 15, 1992, 3M exercised its right to acquire 22,500 shares of
Senior B Preferred for $1,500,000 cash pursuant to the Stock Purchase
Agreement. As a result of this transaction, the 10,000 shares of Series B
Preferred Stock held by the principal stockholder/officer were converted into
2,250,000 share of Common Stock of the Company.
Senior C - During February 1991, the Company and 3M entered into an arrangement
pursuant to which, among other things, the Company marketed 3M's "Memory Mate"
brand hearing aids and certain other 3M hearing related products (on a non-
exclusive basis). 3M furnished one of these systems in each of the Company's
retail locations (valued at $50,000), and 3M paid the Company a test marketing
fee of $300,000. In connection with these transactions and at its sole option,
3M has been granted the right, in exchange for transfer of title to the fitting
systems and agreement to forego repayment of the funds advanced as a test
marketing fee, to acquire for a nominal consideration 11,000 shares of Senior
Preferred Stock, Series C.
Senior D and G - On June 28, 1993, 3M exercised its right to acquire 14,926
shares of Senior Preferred Stock, Series D, par value $1.00 per share ("Senior
D Preferred") for $1,000,000 and to acquire 14,926 shares of Senior Preferred
Stock, Series G, par value $1.00 per share ("Senior G Preferred") for
<PAGE> 16
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
$1,000,000 (total of $2,000,000). The Board of Directors modified the
conversion price of the Series G to $.67 (the same as the conversion price of
the Series D).
Senior E - During late 1993 and early 1994, 3M paid $400,000 as a partial
payment towards the exercise of Senior Preferred Stock, Series E, par value
$1.00 per share ("Senior E Preferred"). On May 1, 1995, the Company and 3M
agreed to apply the $400,000 to the purchase of Senior Preferred Stock, Series
E, of the Company, at $85.00 per share, for a total of 4,706 shares. The price
was modified from $67 per share to $85 per share, and the number of shares was
changed from 14,926 to 11,765. In addition, the Company and 3M agreed on July
24, 1995 to apply $600,000 of long-term debt which Hearx owes to 3M to the
purchase of the remaining 7,059 shares of Senior Preferred Stock, Series E of
the Company, at $85.00 per share. The application of the debt to the purchase
of the stock is conditional upon certain hearing aid purchases from 3M. As a
result of these new arrangements, the prior exclusive distributorship agreement
between 3M and the Company was terminated.
Series C Convertible Preferred Stock - The Series C Convertible Preferred Stock
has 104 votes per share (1,040,000 votes total) and, except as otherwise
required by Delaware law, votes with the holders of shares of Senior Preferred
Stock and Common Stock as one class. The Series C Convertible Preferred Stock
is junior to the Senior Preferred Stock and senior to the Common Stock in the
event of liquidation, dissolution or winding up of the Company. The Series C
Convertible Preferred Stock may be redeemed at the sole option of the Company
at a redemption price of $70 per share. Each share of Series C Convertible
Preferred is convertible at any time at the option of the holder into 104 fully
paid and non-assessable shares of Common Stock. During April 1992, the
principal stockholder and officer canceled a 10% Subordinated Debenture in the
amount of $500,000, a loan in the principal amount of $100,000, and $100,000 of
accrued interest. In return, the Company issued to the principal stockholder
10,000 shares of Series C Convertible Preferred Stock, par value $1.00 per
share.
1994 Convertible Preferred Stock - In connection with the acquisition described
in Note 2, HHS was issued 2,500 shares of the Company's 1994 Convertible
Preferred Stock, par value $1.00 per share. The 1994 Convertible Preferred
Stock has 1,000 votes per share (2,500,000 votes total) and also has voting
rights and powers equal to the voting rights and powers of the Common Stock.
Each share is convertible at any time at the option of the holder. In
connection with this transaction, HHS also received 2,500,000 ten year Common
Stock purchase warrants with an exercise price of $.25 per share with standard
anti-dilution rights. As also mentioned in Note 2 for Acquisitions, three
limited partnerships affiliated with HHS purchased another 2,500 shares of 1994
Convertible Preferred Stock, par value $1.00 per share at a total purchase
price of $500,000 ($200 per share). These shares have the same rights,
privileges, and conversion features as the above 2,500 shares.
As mentioned in Note 5, the Company entered into an agreement for the
development of a computerized system for the Company's network of hearing
centers at a price of $247,000. During March, 1995, the Company issued 131,733
shares of Common Stock (equivalent of $82,333 or 1/3 of the total purchase
price) to Alpha Bytes Computer Corporation of Toronto, Canada in partial
<PAGE> 17
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
payment for the system. During July, 1995, the second payment of 131,733 shares
of Common Stock ($82,333) was sent to Alpha Bytes Computer Corporation. The
Company has the option to pay the remaining balance either in cash, Common
Stock, or a combination of cash and Common Stock.
During the nine months ended September 29, 1995, the Company issued 3,460,833
shares of Common Stock in connection with the two private placements
implemented in 1995. As part of the costs of this financing, an additional
204,449 shares of Common Stock (equivalent of $126,350) were issued as payment
of a portion of the finders' fees.
During the nine months ended September 29, 1995, 115,138 shares of Common Stock
(equivalent to $127,076) were issued to certain of the Company's officers and
executives as bonuses.
During February, 1995, 73,530 shares (14,706 shares per group member) of Common
Stock were issued to the five members of the Advisory Group for their annual
services to the Company (equivalent to $25,000). In addition, the Company
issued 13,889 shares of Common Stock to one of the members of the Advisory
Group for additional services.
During the nine months ended September 29, 1995, employee options were
exercised resulting in the issuance of 263,650 shares of Common Stock.
During July, 1994, the Company granted an option to a public relations firm to
purchase 600,000 shares at $.25 a share. During June, 1995, this firm
exercised 200,000 of its options leaving 250,000 shares to be exercised by
July 1, 1997. In addition, the Company retained the services of this public
relations firm to which 75,000 shares of Common Stock would be issued over a
twelve month period at the rate of 6,250 shares per month. This firm was
issued 18,750 shares of Common Stock for the second quarter of 1995. During
July, 1995, the contract was revised to provide for one year (July, 1995
through June, 1996), the public relations firm would receive 150,000 shares of
Common Stock. As a result, 37,500 shares have been issued for these services
from July through September, 1995. The same firm also received ten year options
to purchase 700,000 shares of Common Stock at a price of $1.00 per share and
these options shall vest at the rate of 58,333 shares per month beginning in
July, 1995. None of these options have been exercised.
On July 11, 1995, the Company granted an option to purchase 144,000 shares of
Common Stock to an individual for consulting services to be rendered over
a period of three years, beginning July 11, 1995. The option price is $1.00
for each optioned share, and the optioned shares shall vest at the rate of
4,000 optioned shares per month on the first day of each month, beginning
August 1, 1995. No options have been exercised.
During September, 1995, 10,000 shares ($5,280) of restricted stock were issued
to a financial public relations firm for fund raising activities.
<PAGE> 18
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- -------------------------------------------------------------------------------
Note 8. Stock Plans:
Under the 1987 plan, as amended in April 1992, the Company's Board of
Directors, or a committee thereof, is authorized to grant stock options to
purchase an aggregate of 2,500,000 shares. Subject to the Plan, officers and
other key employees of the Company are eligible to receive either incentive or
non-incentive stock options. The option price for non-incentive stock options
may be any price determined by the Board of Directors or the Committee. The
option price for incentive stock options may not be less than the fair market
value of the shares at the time the option is granted.
In June 1995, the Company's stockholders approved the adoption of the HEARx
Ltd. 1995 Flexible Stock Plan ("Flexible Stock Plan"), pursuant to which a
committee of the Board of Directors (whose members shall not receive awards
under the 1995 Flexible Stock Plan or any other discretionary grant plans of
the Company) may make awards to eligible participants in the form of stock
options, stock appreciation rights, restricted stock, performance shares and
other stock-based awards. The number of shares of Common Stock which may be
issued in connection with awards under the 1995 Flexible Stock
Plan will not exceed 2,500,000, plus an automatic annual increase of 10% of the
number of shares subject to the Plan as of the prior year.
In April 1993, the stockholders of the Company approved the adoption of the
Hearx Ltd. Non-Qualified Stock Option Plan for Non-Employee Directors
("Directors Plan"). The purpose of the Directors Plan is to increase the
proprietary interest of non-employee directors in the Company by granting non-
qualified stock options that will promote long-term shareholder value. Grants
under the Directors Plan may not exceed 500,000 share of Common
Stock in the aggregate and may be made until the Annual Meeting of Stockholders
in 2003. Each year, upon election to the Board, each non-employee director
shall be granted a 10-year non-qualified stock option ("Option") to acquire
15,000 shares of Common Stock. The exercise price shall be one hundred percent
(100%) of the fair market value of the shares as of the close of business on
the business day immediately prior to the date on which the Option is granted.
During June, 1995, stock options to acquire 15,000 shares of Common Stock were
given to each Director (total of 45,000 options).
The Board of Directors has adopted a Stock Bonus Plan ("Bonus Plan"). It is
the purpose of the Bonus Plan to create an incentive for senior management
personnel to work to the very best of their abilities for the achievement of
the Company's strategic objectives. To accomplish this purpose, the Board of
Directors intends to award shares of Common Stock to eligible employees. The
Bonus Plan will be administered by the Board of Directors. Participants in the
Bonus Plan must be key executives of the Company or its subsidiaries who are
determined by the Board of Directors to be important to the future success of
the Company. Members of the Board of Directors are not eligible to participate
so long as the Board is administering the Bonus Plan. The plan calls for the
Common Stock to be issued at the market price at date of grant, and the
aggregate number of shares of Common Stock which may be issued under the Bonus
Plan may not exceed 500,000.
<PAGE> 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Operations
---------------------
Nine months ended September 29, 1995 vs. nine months ended September 30, 1994
- -----------------------------------------------------------------------------
For the nine months ended September 29, 1995, net sales were $8,557,616, an
increase of $5,422,305 or 173% over the comparable nine months ended September
30, 1994. The main reasons for this increase are (i) the inclusion of revenues
from the eighteen (18) hearing centers acquired from Hearing Health Services,
Inc. on December 30, 1994; and (ii) the incremental revenue from the new and
expanded managed care contracts the Company has obtained. The effectiveness of
new advertising programs contributed to the increase in net sales in 1995 as
compared to 1994.
Cost of products sold for the nine months ended September 29, 1995
increased by $1,541,946 or 129% over the nine months ended September 30, 1994.
This increase resulted from the correlated effect of additional revenues from
the eighteen new centers; however, the percentage of cost of products sold to
net sales is lower in 1995 (32%) than in 1994 (38%) due to the Company's
ongoing expense control programs and better terms with the various
manufacturers.
Selling, general and administrative expenses are comprised of personnel
costs, advertising and marketing expenses, property and equipment rents, and
depreciation and amortization. The total of all of these expenses was higher
in 1995 due to the eighteen new centers.
Net loss for the nine months ended September 29, 1995 was $1,063,901 or
$.02 loss per share as compared to a net loss of $1,658,215 or $.05 loss per
share for the comparable nine months ended September 30, 1994.
Three months ended September 29, 1995 vs. three months ended September 30, 1994
- -------------------------------------------------------------------------------
For the three months ended September 29, 1995, net sales were $2,493,683,
an increase of $1,595,649 or 178% over the comparable three months ended
September 30, 1994. The primary reasons for this increase are (i) the
inclusion of revenues from the eighteen new hearing centers, and (ii) the
incremental revenue from the new and expanded managed care contracts the
Company has obtained. In addition, new advertising programs contributed to the
increase in net sales.
Cost of products sold for the three months ended September 29, 1995
increased by $462,982 or 132% over the three months ended September 30, 1994.
This increase resulted from the correlated effect of additional revenues from
the eighteen new centers. The overall cost of products sold percentage of net
sales is lower in 1995 (33%) as compared to 1994 (39%) mainly due to the
Company's ongoing expense control programs and lower product costs from the
various manufacturers.
<PAGE> 20
Selling, general and administrative expenses are comprised of personnel
costs, advertising and marketing expenses, property and equipment rents, and
depreciation and amortization. The total of these expenses was higher than
last year due to the newly acquired centers from Hearing Health Services,
Inc. in December, 1994.
Net loss for the quarter ended September 29, 1995 was $596,920 or $.01 loss
per share as compared to a net loss of $561,269 or $.02 loss per share for the
quarter ended September 30, 1994.
Subsequent Event
----------------
During late October, 1995, the Company announced that a major manufacturer
of hearing aids and diagnostic equipment had entered into a letter of intent
with the Company to make available to the Company $2.5 million of financing.
Under the proposed terms of the agreement, the manufacturer will make available
to HEARx up to $1 million, based on the Company's net worth, in the form of a
term loan and $1.5 million under a trade financing agreement. This debt will
be reduced over a three-year period based on future HEARx purchases of products
from this manufacturer. Any unliquidated debt at the end of three years will
carry interest at a six percent (6%) annual rate. The parties are currently
negotiating definitive agreements to effectuate these transactions.
Liquidity and Capital Resources
-------------------------------
Historically, the Company's principal sources of funds have been borrowings
from and stock purchases by its stockholders, private and public warrant
offerings, and cash generated from operations. During the nine months ended
September 29, 1995, cash flow from operating activities was the result of the
collection of the $500,000 payment for the private placement to the investor
partnerships affiliated with Hearing Health Services, Inc. Cash from financing
activities was mainly from the two new 1995 private placements as well as
$185,000 loaned from the principal shareholder/officer.
On September 29, 1995, the Company had working capital of $1,221,789
(working capital ratio of 1.46) as compared to a working capital deficit of
$623,200 for December 30, 1994.
Net cash used in operating activities was $2,635,961 for the nine months
ended September 29, 1995, as compared to cash used of $2,210,731 for the nine
months ended September 30, 1994. The primary reason for the difference was the
increased payments of accounts payable in 1995.
Net cash used in investing activities was $596,617 for the nine months
ended September 29, 1995, as compared to net cash provided of $168,863 for the
nine months ended September 30, 1994. The difference was primarily due to the
1995 purchase of a computerized system from Alpha Bytes Computer Corporation,
Inc. for $247,000 as well as expenditures for new computer hardware and
capitalized costs for the development of accounting and other computerized
systems.
Net cash provided by financing activities was $3,150,796 for the nine
months ended September 29, 1995, as compared to $1,590,417 for the comparable
<PAGE> 21
nine months ended September 30, 1994. The difference was from the 1995 private
placements.
The Company expects to meet its cash needs with the sale of additional
units in the 1995 Private Placements, short-term and long-term borrowings, and
potential other sales of its securities. HEARx believes that with the
continued implementation of its cost control programs, the further development
of its franchise and institutional sales bases and continued investor
participation, the Company can fund its operating deficit, at its current
level, until approximately June 1996. There can be no assurance, however,
that anticipated improvements in operations can be achieved or that the
aforementioned funding can be obtained.
<PAGE> 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27 -- Financial Data Schedule (provided for the
information of the Securities and Exchange
Commission only)
(b) Reports on Form 8-K - None
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.
HEARx Ltd.
(Registrant)
Date: November 13, 1995 By: /s/ Stephen J. Hansbrough
---------------------------------
Stephen J. Hansbrough
President
Chief Operating Officer
Date: November 13, 1995 By: /s/ Tommy E. Kee
---------------------------------
Tommy E. Kee
Vice President, Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR HEARX LTD. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000821536
<NAME> HEARX LTD.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-START> DEC-31-1994
<PERIOD-END> SEP-29-1995
<CASH> 247,225
<SECURITIES> 0
<RECEIVABLES> 2,885,919
<ALLOWANCES> (54,776)
<INVENTORY> 289,657
<CURRENT-ASSETS> 3,872,640
<PP&E> 3,268,350
<DEPRECIATION> (1,920,185)
<TOTAL-ASSETS> 5,700,895
<CURRENT-LIABILITIES> 2,650,851
<BONDS> 2,916,699
<COMMON> 4,646,352
0
102,658
<OTHER-SE> (4,615,065)
<TOTAL-LIABILITY-AND-EQUITY> 5,700,895
<SALES> 7,402,671
<TOTAL-REVENUES> 8,557,616
<CGS> 2,733,452
<TOTAL-COSTS> 9,481,351
<OTHER-EXPENSES> (9,566)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149,732
<INCOME-PRETAX> (1,063,901)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,063,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,063,901)
<EPS-PRIMARY> $.02
<EPS-DILUTED> $.02
</TABLE>
