<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 June 30, 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
........................................... ..................................
(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 June 30, 1995, 44,044,657 shares of the Registrant's Common Stock were
outstanding.
<PAGE> 2
INDEX
Page
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1995 and December 30, 1994 3 - 4
Consolidated Statements of Operations -
Six Months ended June 30, 1995 and July 1, 1994 5
Consolidated Statements of Operations -
Three Months ended June 30, 1995 and July 1, 1994 6
Consolidated Statements of Cash Flows -
Six Months ended June 30, 1995 and July 1, 1994 7 - 8
Consolidated Statements of Cash Flows -
Three Months ended June 30, 1995 and July 1, 1994 9 - 10
Notes to Consolidated Financial Statements 11 - 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19 - 21
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security
Holders 22 - 23
Item 6. Exhibits and reports on Form 8-K 23
Signatures 23
2
<PAGE> 3
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 30,
1995 1994
(unaudited) (audited)
------------ ------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents $548,460 $329,007
Accounts receivable, less allowance
for doubtful accounts of
$151,989 and $154,330 1,461,362 862,868
Receivable from private placement 898,110 500,000
Inventories 311,738 337,564
Prepaid expenses and other current assets 526,343 43,780
------------ ------------
Total current assets 3,746,013 2,073,219
------------ ------------
Property and equipment:
Equipment, furniture and fixtures 2,273,615 1,975,857
Leasehold improvements 814,929 779,347
------------ ------------
3,088,544 2,755,204
Less accumulated depreciation
and amortization 1,918,278 1,779,850
------------ ------------
Net property and equipment 1,170,266 975,354
Other 401,576 456,394
------------ ------------
1,571,842 1,431,748
------------ ------------
$5,317,855 $3,504,967
============ ============
(Continued)
<FN>
See notes to consolidated financial statements
</TABLE>
3
<PAGE> 4
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 30,
1995 1994
(unaudited) (audited)
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Current portion of long-term debt $459,183 $479,123
Current portion of obligations
under capital leases 46,479 43,056
Short-term loan - principal shareholder 170,000 -
Accounts payable - trade 1,450,757 837,225
Accounts payable - major shareholder 31,381 834,683
Accrued expenses 489,743 502,332
------------ ------------
Total current liabilities 2,647,543 2,696,419
------------ ------------
Long-term debt, net of current portion - other 1,207,870 652,602
Long-term debt, net of current portion -
principal shareholder 1,675,000 1,675,000
Obligations under capital leases,
net of current portion 27,883 48,597
------------ ------------
Total long-term debt 2,910,753 2,376,199
------------ ------------
Other long-term liabilities 164,667 -
------------ ------------
(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, 10,000 shares; 10,000 10,000
1994, Convertible, 5,000 shares; 5,000 5,000
------------ ------------
102,058 97,352
<PAGE> 5
Common stock, $.10 par;
authorized 75,000,000 shares,
issued: 44,044,657 4,404,466 4,167,235
Additional paid-in capital 21,596,947 20,216,109
Accumulated deficit (26,488,331) (26,021,350)
Unamortized deferred compensation (20,248) (26,997)
------------ ------------
Total (capital deficit) stockholders' equity (405,108) (1,567,651)
------------ ------------
$5,317,855 $3,504,967
============ ============
<FN>
See notes to consolidated financial statements
</TABLE>
4
<PAGE> 6
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED UNE 30, 1995
AND JULY 1, 1994
<CAPTION>
1995 1994
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Net Sales $6,063,933 $2,237,277
Costs and expenses:
Cost of products sold 1,918,650 839,686
Personnel costs 2,701,075 1,438,629
Advertising, marketing, and selling 495,612 191,254
Occupancy & facility expense 943,138 567,360
Depreciation and amortization 149,207 65,274
General and administrative 251,217 180,692
Restructuring charges/(credits) - (50,000)
------------ ------------
Total costs and expenses 6,458,899 3,232,895
------------ ------------
Profit/(loss) from operations (394,966) (995,618)
------------ ------------
Other (charges) credits:
Interest income 2,561 2,791
Interest expense (88,890) (93,514)
Miscellaneous 14,314 (10,605)
------------ ------------
(72,015) (101,328)
------------ ------------
Net profit/(loss) ($466,981) ($1,096,946)
============ ============
Net profit/(loss) per Common Share ($0.01) ($0.03)
============ ============
Weighted average number
of shares of common
stock outstanding 41,277,010 32,185,323
============ ============
<FN>
See notes to consolidated financial statements
</TABLE>
5
<PAGE> 7
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995
AND JULY 1, 1994
<CAPTION>
1995 1994
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Net Sales $2,736,905 $999,815
------------ ------------
Costs and expenses:
Cost of products sold 857,011 392,882
Personnel costs 1,394,471 691,035
Advertising, marketing, and selling 214,582 69,863
Occupancy & facility expense 476,823 287,125
Depreciation and amortization 75,046 36,170
General and administrative 150,005 72,182
Restructuring charges/(credits) - (50,000)
------------ ------------
Total costs and expenses 3,167,938 1,499,257
------------ ------------
Profit/(loss) from operations (431,033) (499,442)
------------ ------------
Other (charges) credits:
Interest income 1,115 1,331
Interest expense (58,711) (59,809)
Miscellaneous (7,716) (18,682)
------------ ------------
(65,312) (77,160)
------------ ------------
Net profit/(loss) ($496,345) ($576,602)
============ ============
Net profit/(loss) per Common Share ($0.01) ($0.02)
============ ============
Weighted average number
of shares of common
stock outstanding 43,118,030 33,120,419
============ ============
<FN>
See notes to consolidated financial statements
</TABLE>
6
<PAGE> 8
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND JULY 1, 1994
Increase (decrease) in cash and cash equivalents
<CAPTION>
1995 1994
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net profit/(loss) ($466,981) ($1,096,946)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 149,207 65,274
Non-cash expense to
advisors/consultants/public relations 98,125 25,000
Non-cash expense for computerized
systems 82,333 -
Non-cash expense for executive stock
bonuses/deferred compensation stock plans 127,076 10,625
(Increase) decrease in (net of
discontinued operations):
Accounts and notes receivable (598,494) (3,725)
Receivable from private placement (398,110) -
Inventories 25,826 111,805
Prepaid expenses and
other current assets (482,563) (106,960)
Deferred charges and other 61,567 (46,206)
Write off of customer list - 125,099
Increase (decrease) in:
Accounts payable (189,770) 37,407
Accrued expenses (12,589) (135,024)
Accrued costs for restructuring and
discontinued operations - (759,750)
Other long-term liabilities 164,667 -
------------ ------------
Net cash used in operating activities (1,439,706) (1,773,401)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (350,151) (25,654)
Proceeds from sale of
property and equipment 6,032 122,474
Discontinued operations - 42,602
------------ ------------
Net cash provided (used) by investing activities (344,119) 139,422
------------ ------------
(Continued)
<FN>
See notes to consolidated financial statements
</TABLE>
7
<PAGE> 9
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND JULY 1, 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 - 65,421
Long-term debt - major supplier - 656,410
Long-term debt - major shareholder 808,000 -
Principal payments:
Long-term debt (85,122) (65,705)
Forgiveness of long-term debt (187,550) -
Capital lease obligations (17,291) (95,026)
Canceled debt for long-term
consultant contract - (100,000)
Conversion of debenture debt and accrued interest
payable into capital stock, net of financin - 28,287
Proceeds from issuance of capital stock,
net of offering costs 1,315,241 -
------------ ------------
Net cash provided by financing activities 2,003,278 1,139,387
------------ ------------
Net increase (decrease) in
cash and cash equivalents 219,453 (494,592)
Cash and cash equivalents
at beginning of period 329,007 552,305
------------ ------------
Cash and cash equivalents
at end of period $548,460 $57,713
============ ============
<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>
8
<PAGE> 10
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1995 AND JULY 1, 1994
Increase (decrease) in cash and cash equivalents
<CAPTION>
1995 1994
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net profit/(loss) ($496,345) ($576,602)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 75,046 36,170
Non-cash expense to
advisors/consultants/public relations 55,074 -
Non-cash expense for executive stock
bonuses/deferred compensation stock plans 8,000 10,625
(Increase) decrease in (net of
discontinued operations):
Accounts and notes receivable (367,720) 262,966
Receivable from private placement (398,110) -
Inventories (10,135) 74,330
Prepaid expenses and
other current assets (214,811) (89,887)
Deferred charges and other 74,416 36,195
Increase (decrease) in:
Accounts payable (466,800) (211,859)
Accrued expenses 204,260 (10,484)
Accrued costs for restructuring and
discontinued operations - (358,323)
------------ ------------
Net cash used in operating activities (1,537,125) (826,869)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (54,168) (12,470)
Proceeds from sale of
property and equipment 324 12,734
Discontinued operations - 25,878
------------ ------------
Net cash provided (used) by investing activities (53,844) 26,142
------------ ------------
(Continued)
<FN>
See notes to consolidated financial statements
</TABLE>
9
<PAGE> 11
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1995 AND JULY 1, 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 -
Long-term debt - other - 65,421
Long-term debt - major supplier - 656,410
Long-term debt - major shareholder 808,000
Principal payments:
Long-term debt (35,292) (58,875)
Forgiveness of long-term debt (70,000) -
Capital lease obligations (14,714) (77,662)
Conversion of debenture debt and accrued interest
payable into capital stock, net of financin - 28,287
Proceeds from issuance of capital stock,
net of offering costs 975,241 -
------------ ------------
Net cash provided by financing activities 1,833,235 613,581
------------ ------------
Net increase (decrease) in
cash and cash equivalents 242,266 (187,146)
Cash and cash equivalents
at beginning of period 306,194 244,859
------------ ------------
Cash and cash equivalents
at end of period $548,460 $57,713
============ ============
<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>
10
<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 $75,662 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 $83,438 ($69,345 for 1994 and $14,093 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
11
<PAGE> 13
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------------
based on documented utilization, an adjustment is made in the per capita
payment automatically for the next calendar year. During 1995, the Company
signed another contract with a managed care organization. HEARx now has
contracts to supply hearing care for eight (8) of the nine (9) managed care
companies that operate in the Florida hearing aid market.
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. A total of
$828,960 of the private placement has been paid and/or subscribed. A
subscription receivable was recorded in June, 1995 for $297,510. All payments
were received in July, 1995 except for $90,000.
A second private placement has been authorized by the Board in 1995 for the
sale of a maximum of 3,000,000 shares of Common Stock. A subscription for
780,000 shares ($600,600) 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).
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
12
<PAGE> 14
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------------
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 latter half of 1995.
As a result of the Company selling a certain number of hearing aids during this
quarter, the manufacturer of these products forgave $70,000 of the long-term
debt attributable to prior product purchases from that manufacturer. Under an
arrangement established with this manufacturer January 1, 1995, the Company has
been able to reduce its long-term debt to the manufacturer by a total of
$130,000. 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 suppliers.
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.
13
<PAGE> 15
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------------
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
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 June 30, 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).
14
<PAGE> 16
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------------
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
$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.
15
<PAGE> 17
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------------
Series C Preferred Stock - The Series C 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 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 Preferred Stock may be redeemed at
the sole option of the Company at a redemption price of $70 per share. 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 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
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 first half of 1995, the Company issued 1,649,364 shares of Common
Stock in connection with the two private placements
16
<PAGE> 18
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------------
implemented in 1995. As part of the costs of this financing, an additional
62,400 shares of Common Stock (equivalent of $48,048) were issued as payment of
a portion of the finders' fees.
During the six months ended June 30, 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 a total of $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 first half of 1995, employee options were exercised resulting in the
issuance of 112,500 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.
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 of Common Stock. 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
17
<PAGE> 19
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------------
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.
18
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Results of Operations
---------------------
Six months ended June 30, 1995 vs. six months ended July 1, 1994
----------------------------------------------------------------
For the six months ended June 30, 1995, net sales were $6,063,933, an
increase of $3,826,656 or 171% over the comparable six months ended July 1,
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 six months ended June 30, 1995 increased by
$1,078,964 or 128% over the six months ended July 1, 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 six months ended June 30, 1995 was $466,981 or $.01 loss
per share as compared to a net loss of $1,096,946 or $.03 loss per share for
the comparable six months ended July 1, 1994.
Three months ended June 30, 1995 vs. three months ended July 1, 1994
--------------------------------------------------------------------
For the three months ended June 30, 1995, net sales were $2,736,905, an
increase of $1,737,090 or 174% over the comparable three months ended July 1,
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 June 30, 1995 increased by
$464,129 or 118% over the three months ended July 1, 1994. This increase
resulted from the correlated effect of
19
<PAGE> 21
additional revenues from the eighteen new centers. The overall cost of products
sold percentage of net sales is lower in 1995 (31%) as compared to 1994 (39%)
mainly due to the Company's ongoing expense control programs and lower product
costs from 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 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 June 30, 1995 was $496,345 or $.01 per share
as compared to a net loss of $576,602 or $.02 per share for the quarter ended
July 1, 1994.
Subsequent Event
----------------
During early August, 1995, the Company announced that it had signed a
contract with Oxford Health Plans to provide hearing care benefits to their
"Medicare" members beginning January 1, 1996. Under the terms of this
contract, the Company will establish a network of 15 to 20 centers in the
Northeast, primarily in New York, New Jersey, and Connecticut.
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 six months ended
June 30, 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 June 30, 1995, the Company had working capital of $1,098,470 (working
capital ratio of 1.41) as compared to a working capital deficit of $623,200 for
December 30, 1994.
Net cash used in operating activities was $1,439,706 for the six months
ended June 30, 1995, as compared to cash used of $1,773,401 for the six months
ended July 1, 1994. The primary reason for the difference was the recording of
the provision for accrued costs for restructuring and discontinued operations
in 1994.
20
<PAGE> 22
Net cash used in investing activities was $344,119 for the six months ended
June 30, 1995, as compared to net cash provided of $139,422 for the six months
ended July 1, 1994. The difference was primarily due to the 1995 purchase of a
computerized system from Alpha Bytes Computer Corporation, Inc. for $247,000.
Net cash provided by financing activities was $2,003,278 for the six months
ended June 30, 1995, as compared to $1,139,387 for the comparable six months
ended July 1, 1994. The difference was from the 1995 private placements
whereas net proceeds of $1,315,241 were raised.
The Company expects to meet its 1995 cash needs with the sale of additional
units in the 1995 Private Placements, short-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 January 1996. There can be no assurance, however, that
anticipated improvements in operations can be achieved or that the
aforementioned funding can be obtained.
21
<PAGE> 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its annual meeting of stockholders on June 16, 1995. At
that meeting, the stockholders were asked to consider and act on the following
matters:
1. The election of four directors;
2. A proposal to amend the Restated Certificate of Incorporation of the
Company to increase to 100,000,000 the number of shares of Common
Stock which the Company may issue;
3. The adoption of the HEARx Ltd. 1995 Flexible Stock Plan;
and
4. The ratification of the selection of BDO Seidman as the Company's
independent public accountants for its fiscal year ending December 30,
1995.
The voting of the shareholders on the above issues was as follows:
1. Election of directors:
Paul A. Brown, M.D.: 47,374,207 "For";
42,200 "Against"/"Withheld"; 0 broker non-votes;
and 9,075,687 abstentions.
Thomas W. Archibald: 47,374,207 "For";
42,200 "Against"/"Withheld"; 0 broker non-votes;
and 9,075,687 abstentions.
Fred N. Gerard, Esq.: 47,374,207 "For";
42,200 "Against"/"Withheld"; 0 broker non-votes;
and 9,075,687 abstentions.
David J. McLachlan: 47,374,207 "For";
42,200 "Against"/"Withheld"; 0 broker non-votes;
and 9,075,687 abstentions.
2. Proposal to amend the Restated Certificate of Incorporation of the
Company to increase to 100,000,000 the number of shares of Common
Stock which the Company may issue: 46,467,851 "For"; 472,985
"Against"; 0 broker non-votes; and 9,551,258 abstentions.
3. The adoption of the HEARx Ltd. 1995 Flexible Stock Plan: 39,882,401
"For"; 379,449 "Against"; 0 broker non-votes; and 16,230,244
abstentions.
22
<PAGE> 24
4. The ratification of the selection of BDO Seidman as the Company's
independent public accountants for its fiscal year ending December 29,
1995: 47,339,388 "For"; 46,014 "Against"; 0 broker non-votes; and
9,106,692 abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None
(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: August 14, 1995 By: /s/Stephen J. Hansbrough
--------------------------------------------------
Stephen J. Hansbrough
President
Chief Operating Officer
Date: August 14, 1995 By: /s/Tommy E. Kee
--------------------------------------------------
Tommy E. Kee
Vice President, Controller and
Chief Accounting Officer
23
<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> 6-MOS
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-START> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 548,460
<SECURITIES> 0
<RECEIVABLES> 2,511,461
<ALLOWANCES> (151,989)
<INVENTORY> 311,738
<CURRENT-ASSETS> 3,746,013
<PP&E> 3,088,544
<DEPRECIATION> (1,918,278)
<TOTAL-ASSETS> 5,317,855
<CURRENT-LIABILITIES> 2,647,543
<BONDS> 2,910,753
<COMMON> 4,404,466
0
102,058
<OTHER-SE> (4,911,632)
<TOTAL-LIABILITY-AND-EQUITY> 5,317,855
<SALES> 5,688,426
<TOTAL-REVENUES> 6,063,933
<CGS> 1,918,650
<TOTAL-COSTS> 6,458,889
<OTHER-EXPENSES> (16,875)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,890
<INCOME-PRETAX> (466,981)
<INCOME-TAX> 0
<INCOME-CONTINUING> (466,981)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (466,981)
<EPS-PRIMARY> ($.01)
<EPS-DILUTED> ($.01)
</TABLE>
