SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-16453
HEARx LTD.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State of Other Jurisdiction of Incorporation or Organization)
22-2748248
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(I.R.S. Employer Identification No.)
1250 Northpoint Parkway, West Palm Beach, Florida 33407
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (561) 478-8770
471 Spencer Drive, West Palm Beach, Florida 33409
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check x/ 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 28, 1996, 67,231,208 shares of the Registrant's Common Stock were
outstanding.
1
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INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 28,1996 and December 29, 1995 3 - 4
Consolidated Statements of Operations -
Six Months ended June 28, 1996 and
June 30, 1995 5
Consolidated Statements of Operations -
Three Months ended June 28, 1996 and
June 30, 1995 6
Consolidated Statements of Cash Flows -
Six Months ended June 28, 1996 and
June 30, 1995 7 - 8
Consolidated Statements of Cash Flows -
Three Months ended June 28, 1996 and
June 30, 1995 9 - 10
Notes to Consolidated Financial Statements 11 - 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18 - 21
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and reports on Form 8-K 23
Signatures 24
2
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 28, December 29,
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents ..................................... ................................. $ 10,648,036 $ 933,539
Accounts and notes receivable, less allowance for doubtful accounts of $364,385 and $341,234 .... 1,867,293 1,227,993
Receivable from private placements .............................................................. 12,450,000 --
Inventories ..................................................................................... 224,458 395,983
Prepaid expenses and other current assets ....................................................... 1,287,095 529,418
--------------- ---------------
Total current assets ............................................................................. 26,476,882 3,086,933
--------------- ---------------
Property and equipment:
Equipment, furniture and fixtures ............................................................... 4,231,406 2,357,101
Leasehold improvements .......................................................................... 2,564,150 729,144
Construction-in-progress ........................................................................ 1,077,843 1,309,127
--------------- ---------------
7,873,399 4,395,372
Less accumulated depreciation and amortization .................................................. 2,178,654 1,871,490
--------------- ---------------
Net property and equipment ....................................................................... 5,694,745 2,523,882
Other ............................................................................................ 1,516,927 839,813
--------------- ---------------
7,211,672 3,363,695
--------------- ---------------
$ 33,688,554 $ 6,450,628
=============== ===============
(Continued)
See notes to consolidated financial statements
</TABLE>
3
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 28, December 29,
1996 1995
--------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Current portion of long-term debt ........................................................... $ 669,785 $ 2,030,774
Current portion of obligations
under capital leases ....................................................................... 6,783 56,206
Current portion of principal shareholder debt ............................................... 1,675,000 100,000
Accounts payable - trade .................................................................... 2,172,639 1,597,714
Accrued expenses ............................................................................ 1,071,044 619,418
Accrued finders fee for private placements .................................................. 747,000 --
--------------- ---------------
Total current liabilities .................................................................... 6,342,251 4,404,112
--------------- ---------------
Long-term debt, net of current portion - other ............................................... 232,012 460,194
Long-term debt, net of current portion -
principal shareholder ...................................................................... 447,673 1,845,000
Obligations under capital leases,
net of current portion ..................................................................... 1,701 11,106
--------------- ---------------
Total long-term debt ......................................................................... 681,386 2,316,300
--------------- ---------------
(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
1992, Senior B, 22,500 shares; ............................................................. -- 22,500
1993, Senior D, 14,926 shares; ............................................................. -- 14,926
1993, Senior G, 14,926 shares; ............................................................. -- 14,926
1995, Senior E, 6,472 shares; .............................................................. -- 6,472
(Total aggregate amount of liquidation
preference for the above - $5,400,000)
--------------- ---------------
-- 88,824
Series C, 1992, Convertible, 10,000 shares; ............................................... -- 10,000
1994, Convertible, 5,000 shares; ........................................................... -- 5,000
1996, Series A, 5,100 shares; .............................................................. 5,100 --
1996, Series B-1, 7,500 shares; ............................................................ 7,500 --
1996, Series B-2, 4,950 shares; ............................................................ 4,950 --
--------------- ---------------
17,550 103,824
Common stock, $.10 par;
authorized 130,000,000 shares,
issued: 66,981,208; outstanding: 67,231,208 ................................................. 6,723,121 4,795,678
Treasury Stock ............................................................................... (625,000) --
Additional paid-in capital ................................................................... 60,434,922 23,079,016
Accumulated deficit .......................................................................... (39,878,927) (28,234,803)
Unamortized deferred compensation ............................................................ (6,749) (13,499)
--------------- ---------------
Total (capital deficit) stockholders' equity ................................................. 26,664,917 (269,784)
--------------- ---------------
$ 33,688,554 $ 6,450,628
=============== ===============
See notes to consolidated financial statements
</TABLE>
4
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 1996
AND JUNE 30, 1995
<CAPTION>
1996 1995
--------------- ----------------
<S> <C> <C>
Net Sales .................................................................................. $ 8,962,983 $ 6,063,933
--------------- ---------------
Costs and expenses:
Cost of products sold ..................................................................... 2,861,513 1,918,650
Center operating expenses ................................................................. 5,476,022 3,493,358
General and administrative expenses ....................................................... 2,443,357 859,957
Depreciation and amortization ............................................................. 500,180 170,059
Interest expense .......................................................................... 125,330 88,890
--------------- ---------------
Total expenses ............................................................................. 11,406,402 6,530,914
--------------- ---------------
Income/(loss) before income taxes .......................................................... (2,443,419) (466,981)
Provision for income taxes ................................................................. -- --
--------------- ---------------
Net income/(loss) before dividends on Convertible Preferred Stock .......................... (2,443,419) (466,981)
Deemed dividend on Convertible Preferred Stock ............................................. (9,000,000) --
Dividends on Convertible Preferred Stock ................................................... (200,705) --
--------------- ---------------
Net income/(loss) applicable to common stockholders ........................................ ($ 11,644,124) ($ 466,981)
=============== ===============
Net income/(loss) per Common Share ......................................................... ($ 0.20) ($ 0.01)
=============== ===============
Weighted average number
of shares of common
stock outstanding ......................................................................... 56,890,174 41,277,010
=============== ===============
See notes to consolidated financial statements
</TABLE>
5
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 28, 1996
AND JUNE 30, 1995
<CAPTION>
1996 1995
--------------- ----------------
<S> <C> <C>
Net Sales .................................................................................. $ 4,244,791 $ 2,736,905
--------------- ---------------
Costs and expenses:
Cost of products sold ..................................................................... 1,469,867 857,011
Center operating expenses ................................................................. 3,239,066 1,738,698
General and administrative expenses ....................................................... 1,655,800 493,017
Depreciation and amortization ............................................................. 354,833 85,813
Interest expense .......................................................................... 67,821 58,711
--------------- ---------------
Total expenses ............................................................................. 6,787,387 3,233,250
--------------- ---------------
Income/(loss) before income taxes .......................................................... (2,542,596) (496,345)
Provision for income taxes ................................................................. -- --
--------------- ---------------
Net income/(loss) before dividends on Convertible Preferred Stock .......................... (2,542,596) (496,345)
Deemed dividend on Convertible Preferred Stock ............................................. (9,000,000) --
Dividends on Convertible Preferred Stock ................................................... (200,705) --
--------------- ---------------
Net income/(loss) applicable to common stockholders ........................................ ($ 11,743,301) ($ 496,345)
=============== ===============
Net income/(loss) per Common Share ......................................................... ($ 0.18) ($ 0.01)
=============== ===============
Weighted average number
of shares of common
stock outstanding ......................................................................... 66,570,196 43,118,030
=============== ===============
See notes to consolidated financial statements
</TABLE>
6
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 28, 1996 AND JUNE 30, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................................ ($ 11,644,124) ($ 466,981)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................................... 500,180 170,059
Non-cash expense for dividends on Convertible
Preferred Stock ....................................................................... 9,200,705 --
Non-cash expense to advisors/consultants ............................................... 101,500 98,125
Non-cash expense for customer list ..................................................... 239,070 --
Non-cash expense for computerized systems .............................................. -- 82,333
Non-cash expense for executive stock
bonuses/deferred compensation stock plans ............................................. 6,750 127,076
(Increase) decrease in:
Accounts and notes receivable .......................................................... (639,300) (598,494)
Receivable from private placement ...................................................... (12,450,000) (398,110)
Inventories ............................................................................ 171,525 25,826
Prepaid expenses and other current assets .............................................. (757,677) (482,563)
Deferred charges and other ............................................................. (916,184) 40,715
Increase (decrease) in:
Accounts payable ....................................................................... 574,925 (189,770)
Accrued expenses ....................................................................... 1,198,626 (12,589)
Other long-term liabilities ............................................................ -- 164,667
--------------- ---------------
Net cash used in operating activities .................................................... (14,414,004) (1,439,706)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment ..................................................... (3,487,518) (350,151)
Proceeds from sale of
property and equipment ................................................................ 4,856 6,032
--------------- ---------------
Net cash used by investing activities .................................................... (3,482,662) (344,119)
--------------- ---------------
(Continued)
See notes to consolidated financial statements
</TABLE>
7
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 28, 1996 AND JUNE 30, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of:
Customer list purchase ................................................................... 213,515 --
Short-term debt - principal shareholder .................................................. -- 170,000
Conversion of accrued interest - principal shareholder ................................... 63,000 --
Conversion of cumulative dividends - principal shareholder ............................... 214,666 --
Long-term debt - major shareholder ....................................................... -- 808,000
Long-term debt - major supplier .......................................................... 482,328 --
Principal payments:
Long-term debt ........................................................................... (2,203,298) (85,122)
Forgiveness of long-term debt ............................................................ (181,709) (187,550)
Capital lease obligations ................................................................ (58,828) (17,291)
Proceeds from issuance of capital stock,
net of offering costs ................................................................... 29,081,489 1,315,241
--------------- ---------------
Net cash provided by financing activities .................................................. 27,611,163 2,003,278
--------------- ---------------
Net increase (decrease) in
cash and cash equivalents ................................................................. 9,714,497 219,453
Cash and cash equivalents
at beginning of period .................................................................... 933,539 329,007
--------------- ---------------
Cash and cash equivalents
at end of period .......................................................................... $ 10,648,036 $ 548,460
=============== ===============
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>
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 28, 1996 AND JUNE 30, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................................................. ($ 11,743,301) ($ 496,345)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ........................................................ 354,833 85,813
Non-cash expense for dividends on Convertible
Preferred Stock ..................................................................... 9,200,705 --
Non-cash expense to
advisors/consultants ................................................................ 63,250 55,074
Non-cash expense for executive stock
bonuses/deferred compensation stock plans .......................................... 3,375 8,000
(Increase) decrease in (net of
discontinued operations):
Accounts and notes receivable ........................................................ 198,950 (367,720)
Receivable from private placement .................................................... (12,450,000) (398,110)
Inventories .......................................................................... 93,089 (10,135)
Prepaid expenses and
other current assets ................................................................ (165,893) (214,811)
Deferred charges and other ........................................................... (34,824) 63,649
Increase (decrease) in:
Accounts payable ..................................................................... 331,242 (466,800)
Accrued expenses ..................................................................... 1,139,506 204,260
--------------- ---------------
Net cash used in operating activities .................................................. (13,009,068) (1,537,125)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment ................................................... (2,023,632) (54,168)
Proceeds from sale of
property and equipment .............................................................. -- 324
--------------- ---------------
Net cash used by investing activities .................................................. (2,023,632) (53,844)
--------------- ---------------
(Continued)
See notes to consolidated financial statements
</TABLE>
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<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 28, 1996 AND JUNE 30, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of:
Short-term debt - principal shareholder .............................................. -- 170,000
Long-term debt - major supplier ...................................................... 482,328 --
Long-term debt - major shareholder ................................................... -- 808,000
Principal payments:
Long-term debt ....................................................................... (687,442) (35,292)
Forgiveness of long-term debt ........................................................ (82,709) (70,000)
Capital lease obligations ............................................................ (45,157) (14,714)
Proceeds from issuance of capital stock,
net of offering costs ............................................................... 22,609,568 975,241
--------------- ---------------
Net cash provided by financing activities .............................................. 22,276,588 1,833,235
--------------- ---------------
Net increase (decrease) in
cash and cash equivalents ............................................................. 7,243,888 242,266
Cash and cash equivalents
at beginning of period ................................................................ 3,404,148 306,194
--------------- ---------------
Cash and cash equivalents
at end of period ...................................................................... $ 10,648,036 $ 548,460
=============== ===============
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
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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 29, 1995. 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. Reclassifications:
Certain amounts in the 1995 financial statements have been reclassified in order
to conform to the 1996 presentation.
Note 3. New Listing:
On March 15, 1996, the Company's Common Stock was listed on the American Stock
Exchange under the symbol of "EAR".
Note 4. Private Placements:
On January 29, 1996, the Company completed a private placement of 6,000 shares,
$1 par, of the 1996 Senior Preferred Stock and 10,909,090 Common Stock purchase
warrants in consideration for $4.9 million of cash and the conversion of a $1.1
million note payable. The warrants are exercisable over five years at a price of
$.55 per share. The 1996 Senior Preferred Stock was redeemable by the Company
for $6 million at any time. The Company redeemed all 6,000 shares of the 1996
Senior Preferred Stock and certain related warrants for a total of $6,040,000,
plus $14,550 related legal fees during May, 1996 with certain proceeds from the
May, 1996 financing (described below) plus some of the Company's then existing
funds. See also note 8. Under the terms of the 1996 Senior Preferred Stock, the
investors generally had the right to approve future debt or equity offerings by
the Company. The stock purchase agreement pursuant to which the 1996 Senior
Preferred Stock was sold also provided for the Company to effect a 15 for 1
reverse stock split. Now that the shares of 1996 Senior Preferred Stock have
been redeemed, the former holders have no approval rights with respect to
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financings by the Company and the Company is no longer obligated to effect the
reverse stock split. In connection with the private placement of the 1996 Senior
Preferred, the Company also issued warrants to purchase 2,250,000 shares of
Common Stock at a price of $.63 per share to an investment banker as a placement
fee.
During May, 1996, the Company completed the first two closings in a side-by-side
offering pursuant to Regulation D and Regulation S, each promulgated under the
Securities Act of 1993, as amended. In the Regulation D offering, the Company
entered into a Securities Purchase Agreement with certain purchasers for the
sale of a total of 15,000 shares of a convertible preferred stock (the "Series
B-1 Preferred Stock") and 9,900 shares of another convertible preferred stock
(the "Series B-2 Preferred Stock"), for a total purchase price of $24,900,000.
The first closing of the offering of the Series B-1 and B-2 Preferred Stock
occurred on May 7, 1996, and the Company received gross proceeds of $12,450,000.
The second closing of this offering and the receipt by the Company of the
remaining gross proceeds of $12,450,000 will occur upon the effectiveness of a
registration statement on Form S-3 for the Common Stock underlying the Series
B-1 and B-2 Preferred Stock and related Warrants. This registration statement
was declared effective by the Securities and Exchange Commission on August 8,
1996. Accordingly, a receivable in the amount of $12,450,000 has been recorded
to reflect the gross proceeds that are expected to be received in August, 1996
at this second closing. An accrued payable in the amount of $747,000 also has
been recorded to recognize the finders fee associated with this financing. This
payable will be paid upon receipt of the gross proceeds. In the related
Regulation S offering, the Company sold 5,100 shares of a convertible preferred
stock (the "Series A Preferred Stock") for a total purchase price of $5,100,000.
The balance of the net proceeds to the Company from the May 1996 financing and
the proceeds from the third closing upon the effectiveness of the registration
statement will be used by the Company to fund its expansion program and for
general corporate purposes.
In connection with these placements, the Company must report a one- time,
noncash charge against earnings (loss) available to common stockholders of
approximately $9,000,000 in 1996. See note 11.
Note 5. Other Financing:
On March 5, 1996, the Company completed a $2.5 million trade financing agreement
with a vendor pursuant to which the vendor will provide financing for the
purchase of diagnostic equipment to be utilized by the Company's distribution
network. A percentage of all hearing aid purchases by the Company from this
vendor will be applied to repayment of financed amounts under the financing
agreement.
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Note 6. Acquisition, Expansion and Changes in Contracts:
In January, 1996, the Company acquired the customer list and selected assets of
Suffolk County Hearing Aid Center, Inc. in New York for $150,000, 150,000 shares
of Common Stock, and a five year note in the amount of $250,000 including
interest. The note payable includes interest at 5 1/2 percent and is payable in
five annual installments of $50,000 beginning January 22, 1997.
During the first half of 1996, the Company opened 23 in a projected series of 35
new HEARx Centers in the New York, New Jersey and Connecticut areas to provide
hearing care to members of Oxford Health Plans, Select Providers, Inc., Cigna
Health Plans, Prudential, US Group Coverages, Inc., The New York Hospital
Community Health Plan and NYH Health Plan, Inc. Management estimates these
contracts will generate $4.25 million in annual revenues in each of the next
three years; however, they can be cancelled with ninety days notice by either
party at any time.
Effective May 31, 1996, Humana Health Care Plans of Florida ("Humana") declined
to renew its contract with the Company to provide coverage to Humana Medicare
members on the east coast of Florida (the contract to service Humana Medicare
members living on the west coast of Florida was unaffected). Total revenues from
Humana east costs members were approximately $2 million in 1995, or 18% of the
Company's total revenues. The Company is confident that new contracts with other
providers obtained by the Company in 1996 will replace those lost revenues.
Nevertheless, there can be no assurance that other contracts will not be the
subject of a non- renewal or early termination. The Company is aware of no other
potential contract terminations at this time.
Note 7. Long-term Debt:
During December, 1995, two individuals loaned the Company $1,000,000 and
$100,000 represented by short term notes payable. During January, 1996, these
notes payable were converted into part of the 1996 Senior Preferred Stock (see
note 4).
During May, 1995, the Company reached an agreement with Minnesota Mining and
Manufacturing Company ("3M") to convert $808,000 of accounts payable into
long-term debt. The Company paid $308,000 of this debt in January, 1996 and the
remaining $500,000 in May, 1996 with some of the proceeds from the May, 1996
financing.
In January, 1996, a payment of $100,000 was made to the principal
stockholder/officer on the total $270,000 advanced by him to the Company during
1995. The remaining $170,000 of the advance plus 63,000 of accrued interest were
converted into a three-year note payable bearing interest at prime plus 3%.
Likewise in January, 1996, cumulative dividends of $214,666 associated with the
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conversion of the Series C Preferred Stock were converted into a promissory note
payable to the principal stockholder/officer. In addition, the principal
stockholder/officer has a promissory note of the Company for $1,675,000 which is
subordinated to all other indebtedness of the Company and is due in April 1997.
The interest rate is prime plus 3%. The combined total of the above notes
payable is $2,122,666.
Note 8. Stockholders' Equity:
Conversions of Senior Preferred, Series C Preferred, and 1994 Convertible
Preferred Stock into shares of Common Stock:
- -------------------------------------------------------------------------
Senior Preferred Stock - Each share of Senior Preferred Stock, Series A, B, D, E
and G, is convertible at the option of the holder (3M) into 100 shares of Common
Stock and is automatically converted into 100 shares of Common Stock upon the
listing of the Common Stock on the American or New York Stock Exchanges. As the
Company's Common Stock was listed on the American Stock Exchange on March 15,
1996, all shares of the Senior Preferred Stock (Series A, B, D, E and G) were
automatically converted into 8,882,400 shares of Common Stock.
Series C Preferred Stock - During January, 1996, the Series C Preferred Stock
was converted by the principal shareholder/officer into 1,040,000 shares of
Common Stock, and the cumulative dividends of $214,666 were converted into a
promissory note ( see note 7).
1994 Convertible Preferred Stock - Each share of 1994 Convertible Preferred
Stock is convertible into 1,000 shares of Common Stock. On March 8, 1996, the
holders (Hearing Health Services, Inc. nd three limited partnerships affiliated
with Hearing Health Services, Inc.) converted all of the 1994 Convertible
Preferred Stock into 5,000,000 shares of Common Stock. Hearing Health Services,
Inc. also exercised warrants to purchase 2,500,000 shares of Common Stock at a
price of $.25 per share on January 29, 1996, in a cashless exercise resulting in
the issuance to Hearing Health Services, Inc. of 2,250,000 shares of Common
Stock.
1996 Senior Preferred Stock
- ---------------------------
As described in note 4, the Company completed a private placement of 6,000
shares, $1 par, of the 1996 Senior Preferred Stock in consideration for $4.9
million of cash and the conversion of a $1.1 million note payable. Associated
warrants with this preferred stock are 11,070,480 at an exercise price of $.55
per share. The 1996 Senior Preferred Stock was redeemed by the Company during
May, 1996.
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1996 Series B-1, Series B-2 and Series A Preferred Stock
- --------------------------------------------------------
As described in note 4, the Company completed the first two closings in a
side-by-side offering pursuant to Regulation D and Regulation S. In the first of
two closings under the Regulation D offering, the Company sold 7,500 shares of a
convertible preferred stock (the "Series B-1 Preferred Stock") and 4,450 shares
of another convertible preferred stock (the "Series B-2 Preferred Stock"), for a
total purchase price of $12,450,000. The remaining gross proceeds of $12,450,000
will be received upon the second closing expected to occur on or about August
13, 1996, after the effectiveness of a registration statement on Form S-3 for
the resale of the Common Stock underlying the Series B-1 and B-2 Preferred Stock
and related Warrants. In the related Regulation S offering, the Company sold
5,100 shares of a convertible preferred stock (the "Series A Preferred Stock")
for a total purchase price of $5,100,000.
Common Stock
- ------------
As described in note 6, an additional 150,000 shares of Common Stock were issued
during January, 1996 for the purchase of the customer list and selected assets
of Suffolk County Hearing Aid Center, Inc.
During the first half of 1996, a total of 3,879,500 shares of Common Stock were
issued upon the exercise of warrants (includes the exercise of 2,500,000
warrants by Hearing Health Services, Inc.). Also during the first six months of
1996, employee options were exercised resulting in the issuance of 301,125
shares of Common Stock.
During April, 1996, 28,900 shares (5,780 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).
Note 9. Stock Plans:
Under the Company's 1987 stock option plan, as amended, the Company's Board of
Directors, or a committee thereof, is authorized to grant stock options to
purchase up to an aggregate of 2,500,000 shares of the Company's Common Stock.
Officers and other key employees of the Company, other than the principal
stockholder and individuals who hold ten percent or more of the Company's Common
Stock, 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.
15
<PAGE>
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 shares 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, 1996,
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.
Note 10. Income Taxes:
At June 28, 1996, the Company had net operating loss carryforwards of
approximately $37.3 million for both tax and financial reporting purposes. The
16
<PAGE>
losses are available for carryforward for a fifteen year period and will expire
beginning in 2002. Under Section 382 of the Internal Revenue Code, as amended
(the "Code"), any future significant change in the ownership (as that is defined
in Section 382) of the Company or its subsidiaries could result in a limitation
of the annual utilization of the tax net operating loss carryforwards.
Management has determined that no such change has occurred in connection with
any of the Company's stock offerings which occurred as of June 28, 1996. In
addition, the conversion and/or exercise of all convertible preferred stock,
warrants and options which the Company has issued or agreed to issue in
connection with the offerings described in Note 4 would not result in such a
change of control under Section 382.
Note 11: Deemed Preferred Stock Dividend
In connection with the Company's recently filed Form S-3 relating to the May,
1996 financings (Regulation S and D), the Company has recorded a deemed
preferred stock dividend which is shown as a reduction in earnings (loss)
available to common stockholders of $9,000,000. This one-time, noncash charge
was recorded during the second quarter of 1996. This charge relates to the
discounted conversion price for the shares of Common Stock issuable on
conversion of the Preferred Stock, and will only impact the calculation of
earnings per share related to the Common Stock. The amount of the charge was
computed by taking the difference between the $5.00 conversion price (as
defined) and the per share market price of the Common Stock on the date of each
of the first two closings ($6.50) multiplied by the number of shares issuable
upon conversion based on the $5.00 conversion price.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Six months ended June 28, 1996 versus six months ended June 30, 1995
- --------------------------------------------------------------------
For the six months ended June 28, 1996, net sales were $8,962,983, an increase
of $2,899,050 or 48% over the comparable six months ended June 30, 1995. The
main reason for this increase is the inclusion of revenues from the opening of
twenty-three (23) centers in New York, New Jersey and Connecticut.
Cost of products sold for the six months ended June 28, 1996 increased by
$942,863 or 49% over the six months ended June 30, 1995. This increase resulted
from the cost of products sold related to additional revenues from the twenty
three new centers that were opened in New York, New Jersey and Connecticut as
well as the new Florida centers; however, the percentage of cost of products
sold to net sales is about the same as in 1995 mainly because of stable costs of
products for the first two quarters of 1996.
Center operating and 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 1996 due to the write-off of certain 1996 developmental costs
associated with the Company's computer systems, new center pre-opening expenses
incurred in 1996, and other selected assets, in the aggregate approximate amount
of $1,000,000.
Net loss for the six months ended June 28, 1996 was $11,644,124 (includes a
deemed dividend of $9,000,000) as compared to a net loss of $466,981 for the
comparable six months ended June 30, 1995.
Three Months Ended June 28, 1996 versus three months ended June 30, 1995
- ------------------------------------------------------------------------
For the three months ended June 28, 1996, net sales were $4,244,791, an increase
of $1,507,886 or 55% over the comparable three months ended June 30, 1995. The
main reason for this increase is the inclusion of revenues from the opening of
ten (10) hearing centers in New York, New Jersey, Connecticut and Florida.
Cost of products sold for the three months ended June 28, 1996 increased by
$612,856 or 72% over the three months ended June 30, 1995. This increase
18
<PAGE>
resulted from the correlated effect of additional revenues from the ten new
centers mentioned above. Costs of products sold during the last two months of
the second quarter of 1996 reflected a higher increase over 1995 mainly due to
the sale of new hearing aid products with lower gross margins.
Center operating and 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 1996 due to the new centers that were opened as well as the decision
by the Company to write off certain developmental costs associated with the
recently installed computer systems, new center opening expenses and other
selected assets that would otherwise have been amortized over the life of the
assets.
Net loss for the three months ended June 28, 1996 was $11,743,301 (includes a
deemed dividend of $9,000,000) as compared to a net loss of $496,345 for the
comparable three months ended June 30, 1995.
The Company has incurred significant losses since its inception. Currently, two
main steps are being taken by the Company to address this. The first step is the
Company's expansion of its contractual relationships with health insurance and
managed care organizations, which is expected to result in revenue increases.
Management believes the shift of patients from the Medicare population to
managed care which has occurred in recent years will continue and, in fact,
increase in the future. To the extent the Company is successful in contracting
with the providers of managed care for the provision of these hearing care goods
and services, the Company can enjoy the benefits of this shift. To support the
requirements of the Company's current and future participation in such
contracts, the Company plans to expand its network of centers to approximately
250 over the next several years. The second step being taken by the Company is
cost savings expected to result from an increase in volume purchases from
vendors, and from efficiencies related to marketing and personnel costs expected
to result from the opening of "clusters" of centers during the center network
expansion. While the Company has already begun to expand its center network
using funds from offerings of Preferred Stock (see note 4) and has continued to
enter into new managed care contracts with health insurance and managed care
organizations, there can be no assurance that such steps will result in enough
increased revenue and cost savings to reverse the losses and achieve
profitability in the near or long term.
19
<PAGE>
Subsequent Events
Since the end of June, 1996, certain holders of the 1996 "Series A Preferred
Stock" from the Regulation S offering have converted 2,200 shares of the "Series
A Preferred Stock" out of a total number of 5,100 shares into 556,610 shares of
Common Stock at a range of conversion prices from $3.33 to $4.69.
The recently filed Form S-3 relating to the registration for resale of the
Common Stock underlying the Series B-1 and Series B-2 Convertible Preferred
Stock and related warrants was declared effective by the Securities Exchange
Commission on August 8, 1996.
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 securities
offerings, and cash generated from operations. During the six months ended
June 28, 1996, the net increase in cash and cash equivalents was $9,714,497,
resulting primarily from the proceeds from the sale of the Series B-1, B-2 and A
Preferred Stock.
The costs associated to start up a new center vary depending on the size of the
center and its location. Typically, new centers are leased under operating
leases and range from 1,500 to 2,000 square feet in size. Center start up costs
include leasehold build out costs and costs of equipment including diagnostic,
computer, and testing equipment. The Company believes that with the proceeds
from the recent offerings (see note 4), it will have sufficient funds to support
the planned expansion to approximately 250 centers in the Company's network.
There can be no assurance, however, that such expansion can be made fully with
such funds or that all such funds will be received by the Company.
The Company receives revenues from the sale of hearing care products.
Approximately 85% of the Company's revenues is generated from sales derived
directly (payments received from the managed care or insurance company) or
indirectly (sales of goods and services to the insured or managed care
beneficiary which are not covered by the policy or the managed care program)
from the Company's contracts with insurance and managed care companies. The
remaining 15% of sales is generated from private pay customers as a result of
direct marketing efforts of the Company. The Company has not experienced delays
in payment of revenue from capitation contracts (those which provide for
payments to the Company on a per member per month basis); however, delays in
payment have been experienced from health insurance organizations and Medicare
and Medicaid insurance. Agings of accounts receivable from the payment sources
20
<PAGE>
other than capitation contract revenues vary based on the payors' payment
cycles. In the past the financing of these receivables has been from stockholder
loans, vendor loans or from operations. The infusion of approximately $22.1
million net proceeds from the sale of preferred stock (see note 4) will provide
any necessary financing of growth in accounts receivable for the ensuing year.
On June 28, 1996, the Company had working capital of $20,134,631 (working
capital ratio of 4.17) as compared to a working capital deficit of $1,317,179
for December 29, 1995.
Net cash used in operating activities was $14,414,004 for the six months ended
June 28, 1996, as compared to cash used of $1,439,706 for the six months ended
June 30, 1995. The primary reason for the difference was the increase in the
private placement receivable of $12,450,000.
Net cash used in investing activities was $3,482,662 for the six months ended
June 28, 1996, as compared to net cash used of $344,119 for the six months ended
June 30, 1995. The difference was primarily due to the increased development in
opening new centers in 1996 as well as the development and implementation of new
computer systems.
Net cash provided by financing activities was $27,611,163 for the six months
ended June 28, 1996, as compared to $2,003,278 for the six months ended June 30,
1995. The increase was from the sale of the Company's 1996 Series A, Series B-1,
and Series B-2 Convertible Preferred Stock, amounting to gross proceeds of
approximately $30,000,000.
With all proceeds from the recent private placements, the Company expects to
meet its cash needs for its existing operations as well as for the planned
expansion to approximately 250 centers. HEARx believes that with the continued
implementation of its cost control programs and the further development and
execution of anticipated managed care contracts, the Company should not have a
need to seek other financing in the near future except for additional expansion
requirements which may be necessitated by new contracts; however, there can be
no assurance that other unforeseeable events will not occur which will require
additional financing.
21
<PAGE>
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 14, 1996. 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 130,000,000 the number of shares of Common Stock
which the Company may issue;
3. The ratification of the selection of BDO Seidman as the Company's
independent public accountants for its fiscal year ending December 27,
1996;
The voting of the shareholders on the above issues was as follows:
1. Election of directors:
Paul A. Brown, M.D.: 54,489,255 "For";
116,291 "Against"/"Withheld"; 0 broker non-votes; and
12,084,437 abstentions.
Thomas W. Archibald: 54,489,255 "For";
116,291 "Against"/"Withheld"; 0 broker non-votes; and
12,084,437 abstentions.
Fred N. Gerard, Esq.: 54,489,255 "For";
116,291 "Against"/"Withheld"; 0 broker non-votes; and
12,084,437 abstentions.
David J. McLachlan: 54,489,255 "For";
116,291 "Against"/"Withheld"; 0 broker non-votes; and
12,084,437 abstentions.
2. Proposal to amend the Restated Certificate of Incorporation of the
Company to increase to 130,000,000 the number of shares of Common Stock
which the Company may issue: 53,638,658 "For"; 839,169 "Against"; 0
broker non-votes; and 12,212,156 abstentions.
3. The ratification of the selection of BDO Seidman as the Company's
independent public accountants for its fiscal year ending December 27,
1996: 54,311,717 "For"; 203,355 "Against"; 0 broker non-votes; and
12,174,911 abstentions.
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Restated Certificate of Incorporation of the Company, including
certificates of designations, preferences and rights of the
preferred stock of the Company (filed as exhibit 3 to the
Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission on May 17, 1996, incorporated herein by
reference).
3.1A Amendment to Restated Certificate of Incorporation (increasing
the number of shares of authorized Common Stock).
3.2 By-Laws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-18 (Registration
No. 33-17041-NY)).
27 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only).
(b) Reports on Form 8-K: A Form 8-K was filed with the Securities and
Exchange Commission (date of report: May 17, 1996) in which the Company
reported the side-by-side offerings pursuant to Regulation D and
Regulation S. The Company reported that it would sell up to 15,000
shares of the 1996 Series B-1 Preferred Stock and 9,900 shares of the
1996 Series B-2 Convertible Preferred Stock pursuant to Regulation D
for total gross proceeds of $24,900,000, and had sold 5,100 shares of
1996 Series A Convertible Preferred Stock pursuant to Regulation S for
total gross proceeds of $5,100,000.
23
<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.
HEARx Ltd.
(Registrant)
Date: August 12, 1996 By: /s/ Stephen J. Hansbrough
----------------------------------------
Stephen J. Hansbrough
President
Chief Operating Officer
Date: August 12, 1996 By: /s/ Tommy E. Kee
----------------------------------------
Tommy E. Kee
Vice President and
Secretary and Treasurer
24
EXHIBIT 3.1A
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
(Pursuant to Section 103(f) of the
General Corporation Law of the State of Delaware)
HEARx LTD., a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware (the "General Corporation
Law"), does hereby certify:
That paragraph First of the Certificate of Amendment of Restated
Certificate of Incorporation ("Certificate of Amendment"), filed with the
Delaware Secretary of State on June 20, 1996, incorrectly purported to amend
Article 4 "in its entirety" when the intent of the corporation was to amend only
the first two paragraphs of Article 4 of the Restated Certificate of
Incorporation without affecting the remainder of Article 4 or any certificates
of designations, preferences and rights filed pursuant thereto and pursuant to
Section 151 of the General Corporation Law. Thus, the second sentence of
paragraph First of the Certificate of Amendment in its corrected form should
read as follows:
"The resolution setting forth the proposed amendment is as follows:
RESOLVED: That the Board of Directors proposes and declares advisable
that Article 4 of the Restated Certificate of Incorporation of the
Corporation be amended as set forth below, and that such amendment be
submitted to the stockholders at the Annual Meeting to be held on June 14,
1996:
'The first two paragraphs of Article 4 are hereby amended to read as
follows:
"4. The total number of shares of stock which the Corporation
shall have authority to issue is one hundred thirty-two million
(132,000,000), consisting of two million (2,000,000) shares of
Preferred Stock of the par value of One Dollar ($1.00) per share and
one hundred thirty million (130,000,000) shares of Common Stock of the
par value of Ten Cents ($.10) per share. Authority is hereby expressly
vested in the Board of Directors to adopt from time to time
resolutions providing for the issuance of the authorized shares of
Preferred Stock, which resolutions shall provide for the division of
shares into classes and series and the designations thereof and shall
fix any or all voting powers, preferences and relative, participating,
optional or other rights, if any, or the qualifications, limitations
or restrictions thereof, including such provisions as may be desired
for the redemption of such shares and/or the conversion of such shares
into shares of any other class or series of stock. Such authority
shall be deemed to include the power to specify the number of shares
of any series and to increase or decrease the number of shares in a
class or series previously determined by the Board of Directors or to
change the designation of the shares of any class or series and to
change the preferences and rights of the shares of Preferred Stock or
any class or series thereof, providing that such increase, decrease or
change shall not affect issued shares."'" IN WITNESS WHEREOF, HEARx
LTD. has caused this Certificate of Correction to be executed by its
duly authorized officer this 9th day of August, 1996.
HEARx LTD.
By /s/ Paul A. Brown
--------------------------------------
Name: Paul A. Brown, M.D.
Title: Chairman and CEO
<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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> DEC-30-1995
<PERIOD-END> JUN-28-1996
<CASH> 10,648,036
<SECURITIES> 0
<RECEIVABLES> 14,681,678
<ALLOWANCES> (364,385)
<INVENTORY> 224,458
<CURRENT-ASSETS> 26,476,882
<PP&E> 7,873,399
<DEPRECIATION> (2,178,654)
<TOTAL-ASSETS> 33,668,554
<CURRENT-LIABILITIES> 6,342,251
<BONDS> 681,386
0
17,550
<COMMON> 6,723,121
<OTHER-SE> 19,924,246
<TOTAL-LIABILITY-AND-EQUITY> 33,688,554
<SALES> 8,827,705
<TOTAL-REVENUES> 8,962,983
<CGS> 2,861,513
<TOTAL-COSTS> 11,281,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,330
<INCOME-PRETAX> (2,443,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> 99,177
<DISCONTINUED> 0
<EXTRAORDINARY> (9,200,705)
<CHANGES> 0
<NET-INCOME> (11,644,124)
<EPS-PRIMARY> $0.20
<EPS-DILUTED> $0.20
</TABLE>
