SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A2
(Amendment No. 2 to Form 10-K)
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission file number 0-16453
HEARx LTD.
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(Exact Name of Registrant as specified in its charter)
Delaware
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(State or 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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 478-8770
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $0.10 American Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 29, 1995, the aggregate market value of the Registrant's
Common Stock held by non-affiliates (based upon the closing bid and asked prices
on the NASD OTC Bulletin Board) was approximately $63,696,000.
On December 29, 1995, 47,956,783 shares of the registrant's common stock
were outstanding.
AMENDMENT NO. 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its annual report on Form 10-K, as
amended on Form 10-K/A on April 26, 1996, by restating such portions in their
entirety as set forth in the pages attached hereto:
1. Item 1, Business;
2. Item 7, Management's Discussion of Results of Operations and Analysis of
Financial Condition;
3. Item 11, Executive Compensation; and
4. Item 13, Certain Relationships and Related Transactions.
Item 1. Business
HEARx Ltd. ("HEARx" or the "Company") operates a network of hearing care
centers which provide a full range of audiological products and services for the
hearing impaired. The Company's strategy focuses on contracting with managed
care and health insurance companies to provide to their members and
beneficiaries high quality hearing care utilizing state-of-the-art facilities
with a full range of diagnostic and rehabilitative services, qualified
professional staff and hearing education learning programs. The Company also
provides such quality hearing care to the general population at the Company's
centers. The Company believes it is well positioned to successfully address the
concerns of access, quality and cost of the managed care and insurance
companies, the diagnostic needs of referring physicians and, ultimately, the
hearing health needs of consumers. HEARx believes that such success requires the
Company to offer convenient distribution points, uniform centers (meaning
standardized personnel qualifications, testing formats, prices and ancillary
services) and a documented quality control program.
HEARx intends, as its ultimate goal, to establish a nationwide network of
hearing care centers, located in metropolitan areas or in regions with high
concentrations of elderly consumers who are more likely to need the Company's
products and services. At the present time, HEARx operates 44 centers in New
York, New Jersey and Florida. It also operates three company-owned centers
situated in AARP Pharmacies located in Florida, Virginia and Oregon. The HEARx
expansion strategy is controlled and deliberate, opening new centers to fulfill
the requirements of new or existing providers pursuant to negotiated contracts
between those providers and the Company.
During the fiscal year ended December 29, 1995, HEARx derived its revenues
from two primary sources: sales of hearing care products (approximately 87%, 89%
and 94% of revenues for the fiscal years ended December 29, 1995, December 30,
1994, and September 30, 1993, respectively), and the provision of hearing care
diagnostics related to diseases of the ear (approximately 13%, 11% and 6% of
revenues for the fiscal years ended December 29, 1995, December 30, 1994, and
September 30, 1993, respectively).
HEARx was incorporated in Delaware on April 11, 1986.
Facilities and Services
Each HEARx center is staffed or supervised by a minimum of one
professionally trained, licensed and certified audiologist and at least one
patient care coordinator. The majority of the Company centers are located in
conveniently accessible strip shopping centers and are typically 1,500 to 2,000
square feet in size. The Company's goal is to have all centers virtually
identical in interior space design, exterior markings and signage. This uniform
appearance helps reinforce the consistent service and quality the Company
provides to customers at all locations. Each center provides comprehensive
hearing services that include:
* A facility equipped with soundproof testing booths and
state-of-the-art testing equipment that meets or exceeds all state
standards.
* A full range of diagnostic and auditory-vestibular tests that assist
the physician in the treatment of patients with hearing and balance
disorders. Some of these services include auditory brainstem evoked
potentials, electronystagmography and immittance audiometry.
* An aural rehabilitation program available to all patients to help
them better understand their disability.
* A wide variety of hearing aid brands to meet the patient's needs.
* A standardized medical reporting system for feedback to the
referring physicians.
Products
Unlike the national franchise organizations (Miracle Ear and Beltone) which
sell only their own brand of hearing aid, HEARx has selected approximately six
of the major worldwide manufacturers' products (Siemens, Rexton, 3M, GN Danavox,
ReSound and Telex) to make available through the HEARx network in order to
provide the best possible hearing care for HEARx customers.
In addition, HEARx offers a large selection of other hearing enhancement
devices including telephone and television amplifiers, telecaptioners and
decoders, pocket talkers, and specially adapted telephones, alarm clocks,
doorbells and fire alarms. These products are sold in most of the centers and
through a direct mail catalog.
Customers and Marketing
Approximately 86% of HEARx's hearing aid sales in the fiscal year ended
December 29, 1995, came either as a result of physician referrals or through
contracts with various institutional buyers (such as health maintenance
organizations, insurance companies, unions or AARP Pharmacy Service). The
Company believes that its future growth depends on its ability to inform hearing
impaired consumers of the importance of professional hearing testing and the
availability of quality hearing devices. The Company expects to continue to
establish relationships with health organizations and physicians that promote
HEARx to the hearing impaired.
Because HEARx believes that hearing loss is a medical problem and not
simply a "retail opportunity", the Company encourages all patients to see a
physician prior to purchasing a hearing aid. All patients referred to HEARx from
a physician receive a special discount intended to cover the cost of their
medical visit. With this program, the Company believes it has established strong
relationships with area physicians which represent a significant source of
patient referrals. HEARx further maintains these relationships using its
computerized medical reporting system to provide each referring physician a full
report on each of their patient's visits to HEARx.
HEARx's marketing plan focuses on educating both physicians and patients on
the need for regular hearing testing and the importance of hearing aids and
other assistive listening devices in improving qualify of life for the hearing
impaired. The Company works to further its image as a provider of highly
professional services, quality products, and comprehensive, post-sale consumer
education. In connection with its marketing program, HEARx has developed a
direct consumer marketing campaign which utilizes television, radio, newspaper
and magazine advertisements, direct mailings, and company-operated free seminars
on hearing and hearing loss.
Physician Marketing Program
In order to strengthen the relationship between referring physicians and
HEARx, the Company signed a contract with Tufts University School of Medicine
for the development of a program of Continuing Medical Education ("CME") related
to hearing care and specifically directed to primary care physicians. It is
anticipated that marketing of this program will begin during fiscal 1996.
Physicians will receive CME credits when purchasing this program from Tufts.
Tufts will receive compensation for each physician exam submitted for credit.
The profits derived from the sale of this program will accrue 60% to Tufts and
40% to HEARx.
Growth Strategy
Company-owned Centers
As of March 31, 1996, the Company was operating 46 centers located in
Florida, New York, and New Jersey and three company-owned centers situated in
AARP Pharmacies located in Florida, Virginia and Oregon. Thirteen new centers
were opened in the first quarter of 1996 to fulfill the Company's contractual
requirements with its new provider, Oxford Health Plans. The Company's current
contracts contemplate additional centers to be opened prior to the end of 1996.
Over the next several years, HEARx's primary emphasis, depending on the
availability of capital will be opening additional (or selectively acquiring)
Company-owned centers in these states and elsewhere to the extent necessary to
fulfill future managed care and institutional contracts. The Company intends to
fund such growth with earnings and, to the extent available on favorable terms
to the Company, with proceeds from the sale of its securities and commercial
lines of credit. See "Management's Discussion of Results of Operations and
Analysis of Financial Condition --Liquidity and Capital Resources," below. The
Company's ultimate goal, where the population warrants, is to open "clusters" of
four to six centers within a city or county in order to take advantage of
certain operational and marketing efficiencies created by having multiple
locations within a particular region. These efficiencies relate principally to
advertising and marketing of the centers as well as recruiting, training and
deploying personnel to staff the centers.
Managed Care and Institutional Contracts
Since the beginning of 1991, the Company has entered into arrangements
with institutional buyers relating to the provision of discounted hearing care
products and services. HEARx believes that to implement successfully its growth
strategy, contractual relationships with institutional buyers of hearing aids
are essential. These institutions include managed care companies, health
maintenance organizations, insurance companies, senior citizen buying groups and
unions. By developing contractual arrangements for the referral of patients,
marketing costs are kept to a minimum, and relationships with local area
physicians are enhanced. Critical to providing care to the members of these
groups is the availability of distribution sites, quality control and the
standardization of products and services. The Company believes its system of
high quality, standardized centers will be successful in meeting the needs of
the patients and their providers.
HEARx utilizes the concept of entering into provider agreements with
health insurance or managed care organizations for the furnishing of hearing
aids on three different bases: (a) Fee for service with a predetermined discount
(all paid for by the patient); (b) a per capita basis, which is a fixed fee per
patient per month, determined by the number of patients to be served and the
amount to be paid by the insurance or managed care organization (the balance is
paid by the individual member); or (c) an encounter basis where the Company is
paid a fixed fee by the insurance or managed care organization for each hearing
aid (the balanced is paid by the individual member).
Distinguishing Features
Integral to the success of HEARx's strategy is the strengthening of
consumer's confidence in the hearing care industry and the differentiation of
HEARx from typical hearing aid dispensers. To that end, the Company has
established several unique programs which are highlighted below:
Scientific Advisory Board
HEARx has formed a Scientific Advisory Board consisting of some the
leading experts in otolaryngology and audiology in an effort to instill consumer
confidence. Each of the five members of the Scientific Advisory Board is a
highly-trained professional with extensive experience in the hearing field and
is affiliated with prestigious universities and institutions. Company officials
consult with members of this Board to keep the Company abreast of developments
in otolaryngology and audiology and for advice as to the Company's overall
business strategy. Additionally, the Scientific Advisory Board meets annually to
review corporate planning and discuss improvements in any of the services or
products which the Company offers. The Scientific Advisory Board also advises
the Company with respect to the introduction of new or improved services or
products, assists the Company in developing and reviewing quality assurance
programs, and advises the Company as to the effect of any proposed or existing
regulatory activity upon customers of the Company.
The current members of the Scientific Advisory Board and the area of
Company operations with respect to which each consults are listed below:
Hearing Diseases
Harold F. Schuknecht, M.D.
Walter Augustus Lecompte Professor of Otology and Laryngology
Harvard Medical School
Emeritus Chief of Otolaryngology
Massachusetts Eye and Ear Infirmary
Boston, Massachusetts
Hearing Testing
James Jerger, Ph.D.
Professor of Audiology
Baylor College of Medicine and The Methodist Hospital
Director, Department of Audiology and Speech Pathology
The Methodist Hospital
Houston, Texas
Hearing Aids and Devices
Charles I. Berlin, Ph.D.
Professor of Otorhinolaryngology & Biocommunications
Louisiana State University
Director, Kresge Hearing Research Laboratory of the South
New Orleans, Louisiana
Product and Service Quality Assurance
Jerry L. Northern, Ph.D.
Professor of Otolaryngology
University of Colorado School of Medicine
Head, Audiology Division
University of Colorado School of Medicine
Denver, Colorado
Professional and Government Relations
Derald Brackmann, M.D.
Member
Otologic Medical Group, Inc.
Clinical Professor of Otolaryngology
University of Southern California
Los Angeles, California
Each member presently receives compensation of $5,000 annually, payable in
shares of Common Stock, as well as $1,000 in cash for attending each annual
Scientific Advisory Board meeting.
Medical Reporting and HEARx Data Link
A computerized medical reporting system gives referring physicians the
results of, and recommended action for, every patient examined at HEARx. To the
Company's knowledge, no other dispenser or audiologist presently offers any
referring physician similar computerized documentation. The Company believes
that as hearing acuity and correction become an expected part of an individual's
health profile, accurate records of past audiological test results,
prescriptions and pathology should be available and accessible to those treating
the patient. To address this need, the Company has developed a centralized
computer data storage and retrieval system which provides information compiled
from each HEARx center visit.
Competition
The hearing care industry is highly fragmented with approximately 11,000
practitioners providing testing and dispensing products and services. Roughly
2,500 of these practitioners are qualified audiologists working for hospitals or
physicians, 2,000 are licensed audiologists in private practice, and the
remaining 6,500 are hearing aid specialists (individuals who may not have any
formal training or qualifications). Industry surveys estimate that approximately
5% of all outstanding hearing aids are sold in physicians' offices, 40% are
dispensed by qualified audiologists in private practice and the remaining are
sold by hearing aid specialists. Because there is no federal, state or local
regulatory or oversight agencies in the hearing care industry, it is not
possible to determine the precise number of "competitors" of the Company in the
various states in which the Company has operations or the percentage of market
share enjoyed by the Company. Based on industry-reported sales in 1995 in the
State of Florida, the Company's market share of hearing aid sales was
approximately 10%.
Most competitors are small retailers generally focusing on the sale of
hearing aids without providing comprehensive audiometric testing and other
professional services. Among the larger distributors of hearing aids are: (1)
Bausch & Lomb, a hearing aid manufacturer whose distribution system is through a
national network of over 1,000 franchised stores (Miracle Ear) including 400
located in Sears Roebuck & Co. stores; and (2) Beltone Electronics Corp., a
privately-owned hearing aid manufacturer that distributes its products primarily
through its network of approximately 600 franchised dealers. Many of these
stores and dealers are located in the areas the Company serves.
HEARx believes that these networks will not, as presently operated,
continue to be competitive with the Company's centers. These networks primarily
offer hearing aids only and do not provide the comprehensive diagnostic services
or ancillary products offered by the Company. More importantly, they do not use
the services of audiologists in the majority of their centers. However, these
networks are owned by companies having far greater resources than HEARx, and
there can be no assurance that one or more of these competitors will not expand
and change their operations to capture the market targeted by the Company. Nor
can there be any assurance that the largely fragmented hearing care market
cannot be successfully consolidated by the establishment of co-operatives,
alliances, confederations or the like.
Manufacturers
The hearing aid manufacturing industry is highly competitive with
approximately 40 manufacturers serving the worldwide market. Few manufacturers
offer dramatic product differentiation, which further compounds the industry's
competitive nature. The major hearing aid manufacturers include Bausch & Lomb,
Beltone, Philips Electronics, Siemens, Starkey, 3M, GN Danavox and ReSound.
Regulation
Federal
The United States Food and Drug Administration ("FDA") is responsible for
monitoring the hearing care industry. Currently there are only two regulations
affecting the sale of hearing aids: 1) a physician's review and 2) a return
policy. The FDA requires first time hearing aid purchasers to receive medical
clearance from a physician prior to purchase; however, patients may sign a
waiver in lieu of a physician's examination. In 1993, the State of Vermont
petitioned the FDA to drop the waiver provision and mandate a physician visit. A
final decision has never been generated. FDA hearings were held in Washington,
D.C. in the fall of 1993 regarding changes for regulations affecting the hearing
industry. New regulations were expected to be promulgated in 1995, but never
took place. Approximately 85% of the patients in HEARx centers are members of
the managed care or institutional providers with whom HEARx has contracts to
provide hearing care. These organizations require a physician referral.
Consequently, a new federal or state physician referral mandate should not have
an adverse impact on the Company's operations. Although the FDA has mandated
that states adopt a return policy for consumers offering them the right to
return their products, generally within 3-30 days, HEARx offers its customers up
to a 60-day return policy. The extension of HEARx's normal 30-day term is given
to patients provided that the purchaser participates in the HEARx Educational
Learning Program (H.E.L.P.).
In addition, because the Company centers accept Medicare and Medicaid
patients, the centers must maintain their eligibility as Medicare/Medicaid
providers and must comply with related federal anti-fraud, anti-kickback and
other applicable regulations. Federal laws prohibit the payment of remuneration
("kickbacks") in return for a physician referring a Medicare or Medicaid
patient, and those laws limit physicians from referring patients to providers in
which they have a financial interest. The Company believes that none of its
managed-care or other provider contracts are violative of the anti-kickback
statute.
The Company cannot predict the effect of future changes in federal or
state laws, including changes which may result from proposals for comprehensive
federal health care reform legislation now being considered by the U.S.
Congress, or the impact that changes in existing federal or state laws or in the
interpretation of those laws might have on the Company. The Company believes it
is in material compliance with all existing federal regulatory requirements.
State
Most states have established formal licensing boards that certify
qualified audiologists or dispensers before they may begin their practice,
though some states such as Massachusetts, New York and Colorado have no
certification requirements. Inspection of facilities, quality control and
advertising are largely unregulated at the State level.
The Company believes it is in material compliance with all applicable
state regulatory requirements.
Product and Professional Liability
In the ordinary course of its business, HEARx may be subject to product
and professional liability claims alleging the failure of, or adverse effects
claimed to have been caused by, products sold or services provided by the
Company. The Company maintains insurance at a level which the Company believes
to be adequate. A successful claim in excess of the policy limits of the
Company's liability insurance could have a material adverse effect upon the
Company. As the distributor of products manufactured by others, the Company
believes it would properly have recourse against the manufacturer in the event
of a product liability claim; however, there can be no assurance that recourse
against a manufacturer by the Company would be successful.
Employees
At December 29, 1995, HEARx had approximately 134 full-time and 8
part-time employees.
Item 7. Management's Discussion of Results of Operations and Analysis of
Financial Condition
Effective December 31, 1993, the Company's fiscal year was changed from
September 30 to the Friday nearest to December 31. Therefore, results are
compared for the twelve months ended December 29, 1995, the twelve months ended
December 30, 1994 and the twelve months ended September 30, 1993. A discussion
of the results of operations and financial condition for the three months ended
December 31, 1993 would not be meaningful if compared to the other periods.
Accordingly, such discussion has not been included.
Year ended December 29, 1995 vs. Year ended December 30, 1994, and Year ended
December 30, 1994 vs. Year ended September 30, 1993
Results of Operations
For the year ended December 29, 1995, the Company's revenues were
$11,170,068, an increase of $6,838,920 or 158% from 1994. This increase resulted
from the first year of revenue from the 18 Florida retail hearing aid centers
acquired from Hearing Health Services, Inc. ("HHS"), plus revenues recognized
from seven contracts with managed care companies signed in late 1994. Included
in sales for the year ended December 29, 1995, are revenues from "capitation
contracts" of $1,570,000 and approximately $2,330,000 for additional sales to
members of the managed care companies. The Company has "capitation contracts"
with certain managed care companies to provide hearing care services.
"Capitation contracts" are those contracts which provide for payments to the
Company on a per member per month basis. Under these contracts, a member patient
is entitled to testing services and a product credit in respect of a hearing aid
purchase. These credits (discounted from published retail prices) are then
applied to the member's purchase of hearing aids. As generally provided in these
contracts, the recipient can receive this credit once every three years. Any
additional services or products purchased and the price of the services and
products provided on the first visit over the group discount are the obligation
of the recipient. 1994 revenues were $4,331,148 which represented a decrease of
$3,003,919 or 41% from 1993. This decrease was primarily due to the
restructuring and expense reduction program completed during 1994 in which 14
unprofitable centers were closed.
Cost of products sold for the year ended December 29, 1995 was $3,571,725,
an increase of $1,980,549 or 124% from 1994. This increase was related to the
increased sales volume from the 18 centers purchased in late 1994 from HHS and
the increased volume generated from the seven managed care contracts. 1994 cost
of products sold of $1,591,176 decreased by $1,261,189 or 44% from 1993 due to
the 14 centers closed in 1994 as a result of the restructuring program. Cost of
products sold as a percentage of sales was lower in 1995 (31.98%) compared to
1994 (36.74%) and 1993 (38.89%) mainly due to understandings with vendors in
1995 to reduce costs in light of planned increases in future purchases.
Operating expenses are comprised primarily of salaries, advertising and
marketing expenses, real estate rents, and depreciation and amortization.
Operating expenses totaled $9,529,061 for 1995 as compared to $4,734,622 for
1994, an increase of $4,794,439 or 101%. This increase was caused by the
additional costs from the operation of the 18 centers that were purchased from
HHS in late 1994. 1994 operating expenses totaled $4,734,622 as compared to
$8,390,107 for 1993, a decrease of $3,655,485 or 44%. This decrease was caused
by the closing of 14 centers in 1994 as well as the implementation of an expense
reduction program which included the reduction of corporate overhead by the
elimination of three officers' positions and numerous corporate positions.
The Company has incurred significant losses during each year 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 Medicare managed care for the
provision of hearing care goods and services, the Company can enjoy the benefits
of this shift. See "Business - Growth Strategy - Company-owned Centers." 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 centers 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. See "Business - Growth Strategy -
Company-owned Centers." While the Company has already begun to expand its center
network using funds from the January 1996 private placement of Senior Preferred
Stock, 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.
The Company's net sales and revenues and net losses from continuing
operations have not been materially affected by inflation and changing prices
during 1995, 1994 and 1993.
Fourth Quarter Adjustments - Years ended December 29, 1995 and December 30, 1994
and Year ended September 30, 1993
Fourth quarter adjustments for 1995 were an increase in the allowance for
doubtful accounts of $178,101 and the recording of additional public relations
expense of $284,201.
There were no significant fourth quarter adjustments for the year ended
December 30, 1994.
Other than the provision of $1,427,827 for the estimated costs of closing
of 14 centers (including four centers in Georgia and seven centers on the west
coast of Florida), and certain corporate restructuring expenses, losses in the
fourth quarter of the year ended September 30, 1993 increased by $1,406,230 as a
result of certain adjustments (some of which pertained to prior quarters)
primarily related to correcting an intercompany account, adjusting the sales
returns allowance account, adjusting various accruals and adjustments to
allowance for doubtful accounts. The 14 centers were closed as part of an
overall restructuring effort in 1993 at a point in time at which the Company
needed to respond to a general downturn in the industry by cutting costs and
redeploying its resources. The centers slated for closing were chosen mainly
because of their lack of profitability and their undesirable locations The total
restructuring provision and the fourth quarter adjustments contributed to an
overall increase in the net loss of $2,833,287, or $.09 per share. The Company
believes that the restructuring was necessary in response to the general
downturn in the market caused by adverse national publicity affecting the
industry at that time. The sources of the adverse publicity included television
news segments carried on NBC Dateline and CBS 60 Minutes, certain FDA-imposed
manufacturer fines, FTC-imposed distributor fines and federal legislative
inquiries into issues facing the aging American population. The Company was
never a target of the adverse press or the enforcement actions taken by the FDA
or the FTC. Since that time, many providers in the hearing care industry have
endeavored to improve the industry and an industry trade association, the
Hearing Industry Association, has been active in consumer education programs.
Management believes that the industry now has a much improved public image and
that the potential for the hearing care market is now significantly better than
in 1993. The Company has therefore undertaken the controlled expansion program,
growing centers in response to signed contracts with insurance and managed care
companies.
Discontinued Operations - Year ended September 30, 1993
During September 1993, management formulated a plan to dispose of its
Special Instrument Division so that it could concentrate its resources on its
main business. This Division had a loss of $316,507 in 1993 and had assets
valued at $498,713 at September 30, 1993. Additional costs associated with
closing this Division were estimated to be $103,500, resulting in a net loss of
$918,720 for 1993. Although a note receivable for $450,000 was received from a
group of former employees of the Division as consideration for the sale of the
Division in January 1994, management felt the full amount of $498,713 should be
reserved. Since the Division had not been profitable during the time it was
being managed by the group of former employees of the Company, and the value of
the former Division's assets collateralizing the note was not significant,
management determined that a 100% reserve was necessary. The note matures
January 1999, bears interest at 6% per annum, and is secured by furniture,
fixtures and other assets. Through March 1996, the Company has been paid
$227,325 on the note.
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
offerings of stock and warrants, and a commercial bank line of credit. During
1995, cash flow from financing activities consisted of a $1,500,000 private
placement from individual investors, a total of $1,600,600 from three
institutional private placements, plus a short term loan of $1,100,000 from two
investors and a loan of $270,000 from the principal shareholder. These funds
were used to pay for the construction of 15 new centers in New York and New
Jersey plus the payment of associated costs for the new point-of-sale and
accounting computer systems.
The Company also receives revenue 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 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
Company marketing efforts. The Company has not experienced delays in payment of
revenue from capitation contracts; however, delays in payment have been
experienced from health insurance organizations and Medicare and Medicaid
insurance providers. Agings of accounts receivable from the payment sources
other than capitation contract revenue vary based on the payors' payment cycles.
During fiscal years 1995, 1994 and 1993, the Company has sustained losses.
On December 29, 1995, the Company had a working capital deficiency of $1,317,179
as compared to a working capital deficiency of $623,200 on December 30, 1994 of
which $1,100,000 related to a short term loan from two investors. On December
29, 1995, the Company was in compliance with all covenants in its loan
agreements.
Future sources of funds include funds generated from operations as well as
the offer and sale of the Company's securities. In January 1996, the Company
took steps to correct its working capital deficit by successfully completing a
private placement of 6,000 shares of 1996 Senior Preferred Stock and Common
Stock purchase warrants for a total purchase price of $6,000,000, consisting of
$4,900,000 in cash and the conversion of the $1,100,000 short term loan.
Management believes that the impact of the positive working capital from this
transaction coupled with the estimated revenues to be generated from the new
northeast centers (see Footnote 3b) will be sufficient to cover any foreseeable
1996 operating deficit. To further positively impact cash flow, the Company
entered into a trade financing agreement to provide its diagnostic equipment
needs (see Footnote 3c). The sale of the 1996 Senior Preferred Stock in January
1996 did not cause a "change in control" which would result in an annual
limitation of the Company's net operating loss carryforward under Section 382 of
the Internal Revenue Code of 1986, as amended.
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. Funds to support the
planned expansion of the Company's network of centers is expected to come from
additional sales of the Company's securities, although there can be no assurance
that funds will be available on terms favorable to or otherwise acceptable to
the Company.
Net cash used in operating activities was $1,486,465 for the year ended
December 29, 1995, as compared to $1,936,270 and $2,917,881 for the years ended
December 30, 1994 and September 30, 1993. The decrease in the net cash used in
operating activities for 1994 compared to 1993 was primarily due to a decrease
in net loss of $4,392,531 offset by the decrease in the accrual for
restructuring cost of $2,622,991.
Net cash used by investing activities was $1,689,455 for the year ended
December 29, 1995 as compared to cash provided of $175,206 for the year ended
December 30, 1994, a net decrease of $1,864,661 between the two years. The
decrease was primarily related to the purchase of property and equipment in 1995
due to the expansion of new centers in the Northeast ($610,188) and the
implementation of new computer and accounting systems ($872,454) for the
Company. Net cash provided by investing activities was $175,206 for the year
ended December 30, 1994, as compared to cash used of $1,492,840 during the year
ended September 30, 1993, a net increase in cash of $1,668,046 between the two
years. This increase was due primarily to fewer purchases of property and
equipment in 1994 compared to 1993 and the loss from discontinued operations in
1993.
Net cash provided by financing activities was $3,780,452 for the year
ended December 29, 1995, as compared to $1,778,313 for the year ended December
30, 1994 and $4,207,283 for the year ended September 30, 1993. The increase in
1995 was related to additional private placements as well as additional loans of
$1,370,000 plus the conversion of a vendor's accounts payable into debt. Net
cash provided by financing activities in 1994 was $2,428,970 less than 1993
primarily due to a decrease of $731,391 in net proceeds from borrowings, and
decrease in net proceeds from issuance of capital stock of $1,772,579.
During 1993, cash flow from financing activities was the result of 3M's
exercise of its right to purchase the Senior Preferred Stock Series D and G for
a total of $2,000,000, net proceeds from a private warrant offering of $748,526,
and the completion in October 1992 of a public warrant offering for $256,747.
The funds were used principally to acquire the new centers in 1993 and for
working capital. While the Company is no longer the sole distributor of 3M
hearing products in Florida, the availability of other sources of quality
hearing products is such that the Company does not believe any negative impact
on the Company's future operations will occur.
Item 11. Executive Compensation
The following table sets forth the annual and long-term compensation for
services rendered in all capacities to HEARx and its subsidiaries during the
1995, 1994 and 1993 fiscal years, of those persons who were at fiscal year-end
1995 (i) the chief executive officer and (ii) other compensated executive
officers whose salary and bonus exceeded $100,000 (all persons are hereafter
referred to as the "Named Executive Officers"):
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
All Other
Name & Principal Position Year Salary ($) Bonus ($) Options/SARs (#) Compensation
- ------------------------------------------- ---- -------------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Paul A. Brown, M.D. 1995 -0- -0- -0- -0-
Chairman, Chief Executive Officer <F1> 1994 -0- -0- -0- -0-
1993 -0- -0- 100,000 -0-
Stephen J. Hansbrough 1995 $124,000 62,000 1,100,000 -0-
President, Chief Operating Officer 1994 $100,000 -0- 700,000 -0-
1993 Not applicable 250,000 -0-
Tommy E. Kee 1995 $ 70,000 31,000 50,000 -0-
Vice President, Chief Financial Officer 1994 $ 70,000 10,000 25,000 -0-
1993 Not applicable 100,000 -0-
- ---------------
<FN>
<F1> Dr. Brown is currently entitled to receive compensation at the rate of
$100,000 per annum, but he has waived payment of such compensation until
the Company has had two successive fiscal quarters of profitability.
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information with respect to the grants of
options to the named Executive Officers to purchase Common Stock:
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realizable Value
at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants For Option Term
- ----------------------------------------------------------------------------- --------------------------
Percent
of Total
Options
Granted to
Options/SARs Employees
Granted (#) in Fiscal Exercise Expiration
Name <F1> Year <F1> Price Date 5% 10%
- --------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Paul A. Brown, M.D. None None None None None None
Stephen J. Hansbrough 100,000 79% $0.865 09/29/05 $ 90,825 $ 95,150
1,000,000 $1.21 12/13/05 $1,270,500 $1,331,000
------------ ------------ ------------
1,100,00 $1,361,325 $1,426,150
============ ============ ============
Tommy E. Kee 50,000 4% $0.865 09/29/05 $ 45,413 $ 47,575
============ ============ ============
- ---------------
<FN>
<F1> HEARx did not award any SAR's during the fiscal year ended December 29,
1995.
</TABLE>
Option Exercises and Fiscal Year-End Values
The following table sets forth information with respect to the unexercised
options to purchase Common Stock held by the Named Executive Officers at fiscal
year-end 1995:
<TABLE>
OPTION EXERCISE AND AGGREGATED FISCAL YEAR-END OPTION VALUE
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options at Options at
Fiscal Year-End Fiscal Year-End
(#) ($)
--------------------------- ---------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ------------ ---------- ------------ ------------- ------------ -------------
<C> <C> <C> <C> <C> <C> <C>
Paul A. Brown, M.D.
Chairman, Chief
Executive Officer -0- -0- 100,000 -0- -0- -0-
Stephen J. Hansbrough
President, Chief
Operating Officer 237,500 $181,140 62,500 1,750,000 $49,809 $840,975
Tommy E. Kee
Vice President,
Chief Financial
Officer -0- -0- 56,250 118,750 $46,899 $84,161
</TABLE>
Report of the Board of Directors on Compensation
Compensation decisions are made by the full Board of Directors. In
addition to base salary, compensation for the Company's executive officers may
include bonuses, stock options pursuant to the Company's stock option plan and
otherwise and stock grants pursuant to the Company's stock bonus plan. It is the
intention of the Board of Directors to use salary and bonuses as compensation
for current and past performance, while using stock options and restricted stock
grants to provide incentives for superior long-term performance.
The Board of Directors does not use any formulas or other objective
criteria to establish compensation for its executive officers. Instead, the
decisions are based on subjective performance evaluations and, with respect to
executive officers other than Dr. Brown, the Company's Chief Executive Officer,
the salary and bonus recommendations of Dr. Brown. In light of the Company's
financial position and overall corporate performance, the Board of Directors
determined to keep the salaries of its two executive officers at a modest level
relative to the Board's understanding of the salary levels of executives with
comparable experience and skills at other public companies. The subjective
evaluations of the Company's executive officers by Dr. Brown and the Board are
based on assessments of the overall performance of the executive officer in his
position, including the time and effort expended in the discharge of his duties,
his ability to address and resolve the challenges faced by the Company and the
contributions made by the officer in the successes experienced by the Company
(including internal corporate management matters as well as marketing and
customer relations). As for Dr. Brown, because of the Company's financial
condition, Dr. Brown determined to waive payment of any cash compensation to him
until the Company can achieve two successive quarters of profitability. Based on
advice from the Company's former independent auditors to remedy an unintended
adverse financial consequence to the Company of Dr. Brown's salary waiver, the
Company granted Dr. Brown an option in fiscal 1993 to purchase 100,000 shares of
the Company's Common Stock at a purchase price of $2.00 per share. No options
were granted to Dr. Brown in fiscal 1995 and 1994.
BOARD OF DIRECTORS
Paul A. Brown, M.D., Chairman
Thomas W. Archibald
Fred N. Gerard, Esq.
David J. McLachlan
Compensation Committee Interlocks and Insider Participation
Dr. Brown is the Chairman of the Board of Directors and the Company's
Chief Executive Officer. The other members of the Board of Directors are not
employees or former employees of the Company.
Common Stock Performance
As part of the executive compensation information presented in this Form
10-K, the Securities and Exchange Commission requires a five-year comparison of
stock performance for the Company with stock performance of other companies. The
closing price of the Common Stock at December 29, 1995, was $1.3282 per share.
During 1995, the Common Stock was traded on the over-the-counter market with
prices being reported by the National Association of Securities Dealers, Inc.,
OTC Bulletin Board Service ("NASDBB"). During the middle of March, 1996, the
Common Stock was traded on the American Stock Exchange. The following chart
depicts a comparison of five-year cumulative total returns for each of the
Company, the NASDAQ Stock Market - US and the NASDAQ Non-Financial Index.
COMPARISON OF 63 MONTH CUMULATIVE TOTAL RETURN*
AMONG HEARx LTD., THE NASDAQ STOCK MARKET - US INDEX
AND THE NASDAQ NON-FINANCIAL INDEX
[PERFORMANCE GRAPH]
Cumulative Total Return
-------------------------------------------------
9/90 9/91 9/92 9/93 12/93 12/94 2/95
------ ------ ------ ------ ------ ------- ------
HEARx Ltd. 100 200 260 190 200 220 409
Nasdaq Stock Market - US 100 157 176 231 236 230 325
Nasdaq Non-Financial 100 157 166 216 222 213 293
- ---------------
* $100 invested on 09/30/90 in stock or index, including reinvestment of
dividends, fiscal year ending December 31.
Director Compensation
The Board of Directors received no cash compensation during the fiscal year
ended December 29, 1995, and it is not anticipated that the Board will receive
cash compensation during the current fiscal year. The Company does reimburse
out-of-pocket expenses for attendance at meetings.
Non-management directors (i.e., Messrs. Archibald, Gerard and McLachlan) each
received pursuant to the Company's shareholder approved Non-Qualified Stock
Option Plan for Non-Employee Directors an option to acquire 15,000 shares of
Common Stock at a price of $1.25 per share. These options are for a period of
ten years and vested immediately.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of
the Common Stock to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than
ten-percent shareholders are required by Securities and Exchange Commission
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 29, 1995, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with; except that one
report, relating to the sale of 76,000 shares was filed late by Paul A. Brown; a
report, relating to the sale of 60,000 shares, was filed late by Stephen J.
Hansbrough; and another report, relating to the acquisition of 24,242 shares,
was filed late by Tommy E. Kee.
Item 13. Certain Relationships and Related Transactions
a. Relationship with Minnesota Mining and Manufacturing Company
Pursuant to a series of agreements, the first of which was executed in
October 1991, between the Company and Minnesota Mining and Manufacturing Company
("3M"), 3M acquired from the Company or obtained options to acquire from the
Company shares of up to seven different series of senior preferred stock at
varying purchase prices. The Company also entered into a number of different
arrangements with 3M pursuant to which the Company became an authorized
distributor of hearing aids manufactured by 3M. 3M has exercised all but two of
its options to purchase senior preferred stock. Under certain of the options and
stock purchase agreements, the Company granted to 3M the right to participate in
future financings by the Company. Specifically, the Company granted to 3M the
right to elect to purchase a pro-rata portion of new equity offerings by the
Company in order to maintain its overall ownership interest in the Company. 3M
has never elected to make any such purchases in the past. In addition, Paul A.
Brown, M.D., the Chairman of the Board and Chief Executive Officer of the
Company, agreed with 3M that he would not sell for five years any shares of
Common Stock or securities convertible into or exchangeable for Common Stock; he
further agreed to afford 3M the right of first refusal to purchase all or any
portion of such shares and the right to approve any potential purchaser. Dr.
Brown's agreements with 3M do not apply to the sale in the open market or the
transfer by gift of up to 5% of Dr. Brown's security holdings (on a fully
converted basis). Dr. Brown's five-year agreement with 3M terminated in February
of 1996.
On May 1, 1995, the Company reached an agreement with 3M to convert $808,000
of accounts payable into long-term debt. This agreement provides for conversion
of a portion of this long-term debt into equity upon the Company reaching
certain product sales goals.
b. Transactions with Paul A. Brown, M.D.
At the end of 1994, Paul A. Brown, M.D., the Chairman of the Board and the
principal shareholder of the Company, had loaned a total of $1,675,000 to the
Company, which is evidenced by a note due on April 1, 1996, bearing interest at
a rate of prime plus three percent. This note was amended and restated in early
1996 to provide that the Company will make no payments under the note until such
time as the 1996 Senior Preferred Stock has been redeemed by the Company. During
1995, Dr. Brown loaned the Company an additional $270,000, on a demand loan
basis, which loan bears interest at the rate of prime plus three percent. In
early 1996, $100,000 of that amount was repaid to Dr.
Brown.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: July 23, 1996
By: /s/ Paul A. Brown
--------------------------------------
Paul A. Brown, M.D.
Chairman of the Board
