SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
DRAFT
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 27, 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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
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 September 27, 1996, 69,678,837 shares of the Registrant's Common Stock
were outstanding.
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 27, 1996 and December 29, 1995 3 - 4
Consolidated Statements of Operations -
Nine Months ended September 27, 1996 and
September 29, 1995 5
Consolidated Statements of Operations -
Three Months ended September 27, 1996 and
September 29, 1995 6
Consolidated Statements of Cash Flows -
Nine Months ended September 27, 1996 and
September 29, 1995 7 - 8
Consolidated Statements of Cash Flows -
Three Months ended September 27, 1996 and
September 29, 1995 9 - 10
Notes to Consolidated Financial Statements 11 - 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 19 - 23
PART II. OTHER INFORMATION:
Item 6. Exhibits and reports on Form 8-K 24
Signatures 24
2
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 27, December 29,
1996 1995
--------------- ---------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents ....................................................................... $ 17,214,594 $ 933,539
Accounts and notes receivable, less allowance or doubtful accounts of $392,385 and $341,234 ..... 2,451,766 1,227,993
Inventories ..................................................................................... 293,211 395,983
Prepaid expenses and other current assets ....................................................... 1,290,378 529,418
--------------- ---------------
Total current assets ............................................................................. 21,249,949 3,086,933
--------------- ---------------
Property and equipment:
Equipment, furniture and fixtures ............................................................... 4,820,449 2,357,101
Leasehold improvements .......................................................................... 2,709,798 729,144
Construction-in-progress ........................................................................ 1,781,840 1,309,127
--------------- ---------------
9,312,087 4,395,372
Less accumulated depreciation and amortization .................................................. 2,475,274 1,871,490
--------------- ---------------
Net property and equipment ....................................................................... 6,836,813 2,523,882
Other ............................................................................................ 1,531,057 839,813
--------------- ---------------
8,367,870 3,363,695
--------------- ---------------
$ 29,617,819 $ 6,450,628
=============== ===============
(Continued)
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 27, December 29,
1996 1995
--------------- ---------------
(unaudited) (audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Current portion of long-term debt ..................................................... $ 641,037 $ 2,030,774
Current portion of obligations
under capital leases ................................................................. 4,942 56,206
Current portion of principal shareholder debt ......................................... -- 100,000
Accounts payable - trade .............................................................. 2,106,195 1,597,714
Accrued expenses ...................................................................... 2,087,390 619,418
--------------- ---------------
Total current liabilities .............................................................. 4,839,564 4,404,112
--------------- ---------------
Long-term debt, net of current portion - other ......................................... 233,258 460,194
Long-term debt, net of current portion - principal shareholder ......................... -- 1,845,000
Obligations under capital leases, net of current portion ............................... 811 11,106
--------------- ---------------
Total long-term debt ................................................................... 234,069 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, 1,700 shares; ........................................................ 1,700 --
1996, Series B-1, 15,000 shares; ..................................................... 15,000 --
1996, Series B-2, 6,942 shares; ...................................................... 6,942 --
--------------- ---------------
23,642 103,824
Common stock, $.10 par;
authorized 130,000,000 shares, issued: 69,428,837; outstanding: 69,678,837 ............ 6,967,884 4,795,678
Treasury Stock ......................................................................... (625,000) --
Additional paid-in capital ............................................................. 60,497,022 23,079,016
Accumulated deficit .................................................................... (42,315,987) (28,234,803)
Unamortized deferred compensation ...................................................... (3,375) (13,499)
--------------- ---------------
Total (capital deficit) stockholders' equity ........................................... 24,544,186 (269,784)
--------------- ---------------
$ 29,617,819 $ 6,450,628
=============== ===============
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1996
AND SEPTEMBER 29, 1995
<CAPTION>
1996 1995
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Net Sales ...................................................................................... $ 13,564,269 $ 8,557,616
--------------- ---------------
Costs and expenses:
Cost of products sold ......................................................................... 4,829,417 2,733,452
Center operating expenses ..................................................................... 8,442,034 5,145,011
General and administrative expenses ........................................................... 3,766,987 1,337,654
Depreciation and amortization ................................................................. 821,010 255,668
Interest expense .............................................................................. 159,957 149,732
--------------- ---------------
Total expenses ................................................................................. 18,019,405 9,621,517
--------------- ---------------
Income/(loss) before income taxes .............................................................. (4,455,136) (1,063,901)
Provision for income taxes ..................................................................... -- --
--------------- ---------------
Net income/(loss) before dividends on Convertible Preferred Stock .............................. (4,455,136) (1,063,901)
Deemed dividend on Convertible Preferred Stock ................................................. (9,000,000) --
Dividends on Convertible Preferred Stock ....................................................... (626,048) --
--------------- ---------------
Net income/(loss) applicable to common stockholders ............................................ ($ 14,081,184) ($ 1,063,901)
=============== ===============
Net income/(loss) per Common Share ............................................................. ($ 0.22) ($ 0.02)
=============== ===============
Weighted average number of shares of common stock outstanding .................................. 62,694,003 43,592,983
=============== ===============
See notes to consolidated financial statements
</TABLE>
5
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 1996
AND SEPTEMBER 29, 1995
<CAPTION>
1996 1995
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Net Sales ...................................................................................... $ 4,601,286 $ 2,493,683
--------------- ---------------
Costs and expenses:
Cost of products sold ......................................................................... 1,967,904 814,802
Center operating expenses ..................................................................... 2,966,012 1,651,653
General and administrative expenses ........................................................... 1,323,630 477,697
Depreciation and amortization ................................................................. 320,830 85,609
Interest expense .............................................................................. 34,626 60,842
--------------- ---------------
Total expenses ................................................................................. 6,613,002 3,090,603
--------------- ---------------
Income/(loss) before income taxes .............................................................. (2,011,716) (596,920)
Provision for income taxes ..................................................................... -- --
--------------- ---------------
Net income/(loss) before dividends on Convertible Preferred Stock .............................. (2,011,716) (596,920)
Dividends on Convertible Preferred Stock ....................................................... (425,343) --
--------------- ---------------
Net income/(loss) applicable to common stockholders ............................................ ($ 2,437,059) ($ 596,920)
=============== ===============
Net income/(loss) per Common Share ............................................................. ($ 0.04) ($ 0.01)
=============== ===============
Weighted average number of shares of common stock outstanding .................................. 68,455,023 45,254,089
=============== ===============
See notes to consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net profit .................................................................................... ($ 14,081,184) ($ 1,063,901)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................................ 821,010 255,668
Non-cash expense for dividends on Convertible Preferred Stock ................................ 9,626,048 --
Non-cash expense to advisors/consultants ..................................................... 101,500 39,500
Non-cash expense for customer list ........................................................... 239,070 --
Non-cash expense for computerized systems .................................................... -- 164,666
Non-cash expense for executive stock bonuses/deferred compensation stock plans ............... 10,124 127,076
(Increase) decrease in:
Accounts and notes receivable ................................................................ (1,223,773) (812,025)
Receivable from private placement ............................................................ -- (656,250)
Inventories .................................................................................. 102,772 47,907
Prepaid expenses and other current assets .................................................... (760,960) (460,835)
Deferred charges and other ................................................................... (1,143,829) (45,434)
Increase (decrease) in:
Accounts payable ............................................................................. 508,481 (376,030)
Accrued expenses ............................................................................. 1,467,972 61,364
Other long-term liabilities .................................................................. -- 82,333
--------------- ---------------
Net cash used in operating activities .......................................................... (4,332,769) (2,635,961)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment ........................................................... (4,923,053) (614,261)
Proceeds from sale of property and equipment ................................................. 4,856 17,644
--------------- ---------------
Net cash used by investing activities .......................................................... (4,918,197) (596,617)
--------------- ---------------
(Continued)
See notes to consolidated financial statements
</TABLE>
7
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
--------------- ---------------
(unaudited) (unaudited)
<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 --
Long-term debt - other ....................................................................... -- 98,680
Capital leases ............................................................................... -- 31,209
Principal payments:
Long-term debt ............................................................................... (1,962,717) (95,178)
Principal shareholder ........................................................................ (2,222,666) --
Forgiveness of long-term debt ................................................................ (349,800) (247,550)
Capital lease obligations .................................................................... (61,558) (37,896)
Proceeds from issuance of capital stock,
net of offering costs ....................................................................... 29,155,253 2,423,531
--------------- ---------------
Net cash provided by financing activities ...................................................... 25,532,021 3,150,796
--------------- ---------------
Net increase (decrease) in cash and cash equivalents ........................................... 16,281,055 (81,782)
Cash and cash equivalents at beginning of period ............................................... 933,539 329,007
--------------- ---------------
Cash and cash equivalents at end of period ..................................................... $ 17,214,594 $ 247,225
=============== ===============
Supplemental cash flow information:
Cash equivalents include temporary cash investments which have an original maturity of ninety days or less.
See notes to consolidated financial statements
</TABLE>
8
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net profit .................................................................................... ($ 2,437,059) ($ 596,920)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................................ 320,830 85,609
Non-cash expense for dividends on Convertible Preferred Stock ................................ 425,343 --
Non-cash expense to advisor/consultants ...................................................... -- (58,625)
Non-cash expense for computerized systems .................................................... -- 82,333
Non-cash expense for executive stock bonuses/deferred compensation stock plans ............... 3,374 3,374
(Increase) decrease in (net of discontinued operations):
Accounts and notes receivable ................................................................ (584,473) (213,531)
Receivable from private placement ............................................................ 12,450,000 (258,140)
Inventories .................................................................................. (68,753) 22,081
Prepaid expenses and other current assets .................................................... (3,283) 21,728
Deferred charges and other ................................................................... (227,645) (89,523)
Increase (decrease) in:
Accounts payable ............................................................................. (66,444) (186,260)
Accrued expenses ............................................................................. 269,346 73,953
Other long-term liabilities .................................................................. -- (82,334)
--------------- ---------------
Net cash provided/(used) in operating activities ............................................... 10,081,236 (1,196,255)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment ........................................................... (1,435,535) (264,110)
Proceeds from sale of property and equipment ................................................. -- 11,612
--------------- ---------------
Net cash used by investing activities .......................................................... (1,435,535) (252,498)
--------------- ---------------
(Continued)
See notes to consolidated financial statements
</TABLE>
9
<PAGE>
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of:
Long-term debt - other ....................................................................... -- 98,680
Capital leases ............................................................................... -- 31,209
Principal payments:
Long-term debt ............................................................................... (11,911) (10,056)
Principal shareholder ........................................................................ (2,122,666) --
Forgiveness of long-term debt ................................................................ (15,600) (60,000)
Capital lease obligations .................................................................... (2,730) (20,605)
Proceeds from issuance of capital stock, net of offering costs ................................ 73,764 1,108,290
--------------- ---------------
Net cash provided/(used) by financing activities ............................................... (2,079,143) 1,147,518
--------------- ---------------
Net increase (decrease) in ..................................................................... 6,566,558 (301,235)
Cash and cash equivalents at beginning of period ............................................... 10,648,036 548,460
--------------- ---------------
Cash and cash equivalents at end of period ..................................................... $ 17,214,594 $ 247,225
=============== ===============
Supplemental cash flow information:
Cash equivalents include temporary cash investments which have an original maturity of ninety days or less.
See notes to consolidated financial statements
</TABLE>
10
<PAGE>
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, as amended. 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. 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 11,070,480 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. In connection with the private placement, the Company issued
warrants to purchase 2,383,278 shares of Common Stock at a price of $.63 per
share to an investment banker as a placement fee. The 1996 Senior Preferred
Stock and certain related warrants were redeemed by the Company for a total of
$6,054,550 ($6,040,000 redemption price plus $14,550 related legal fees) during
May, 1996 with certain proceeds from the May, 1996 financing (see below) plus
some of the Company's then existing funds. See note 8.
11
<PAGE>
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
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 occurred in August, 1996 when a
registration statement on Form S-3 was approved and became effective for resales
of the Common Stock underlying the Series B-1 and B-2 Preferred Stock and
related Warrants. Total finders' fees associated with the $24,900,000 amounted
to $1,494,000 and have been paid by the Company. In the related Regulation S
offering in May, 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. All
of the net proceeds from these offerings will be used by the Company to fund its
expansion program and for general corporate purposes.
In connection with these placements, the Company was required to report a
one-time, noncash charge against earnings (loss) available to common
stockholders of $9,000,000. 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.
12
<PAGE>
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
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 bears interest at 5 1/2 percent and is payable in
five annual installments of $50,000 beginning January 22, 1997.
During the first nine months of 1996, the Company opened 25 in a projected
series of 34 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, NYH Health Plan, Inc., Chubb Health Plans, Inc.,
Mission Health Plans, Inc., First Option Plan of New Jersey, Inc., Fidelis
Healthcare Plan and MultiPlan Inc. Management estimates these contracts will
generate $10 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 coast of Florida members were approximately $2 million in 1995, or
18% of the Company's total revenues. Although 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 non-renewals or 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.
13
<PAGE>
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
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 note payable bearing interest at prime plus 3%. Likewise
in January, 1996, cumulative dividends of $214,666 associated with the
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 had a promissory note of the Company for $1,675,000 which
was subordinated to all other indebtedness of the Company. The interest rate is
prime plus 3%. The combined total of the above notes payable is $2,122,666.
During August, 1996, the entire amount of $2,122,666 was paid to the principal
stockholder/officer. The Company has no other debt obligations to the principal
stockholder/officer.
Note 8. Stockholders' Equity:
Conversions of Senior Preferred, Series C Preferred, 1994 Convertible Preferred
Stock, 1996 Senior Preferred, and 1996 Series A and B-2 Preferred Stock into
shares of Common Stock:
- --------------------------------------------------------------------------------
Senior Preferred Stock - Each share of Senior Preferred Stock, Series A, B, D, E
and G, was convertible at the option of the holder (3M) into 100 shares of
Common Stock and was automatically converted into 100 shares of Common Stock
upon the listing of the Common Stock on the American Stock Exchange on March 15,
1996 (a total of 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 was convertible into 1,000 shares of Common Stock. On March 8, 1996, the
holders (Hearing Health Services, Inc. and 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
14
<PAGE>
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
in the issuance to Hearing Health Services, Inc. of 2,250,000 shares of Common
Stock.
1996 Senior Preferred Stock - As mentioned 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.
1996 Series A, B-1 and B-2 Preferred Stock - As described in note 4, the Company
closed the side-by-side offering pursuant to Regulation D and Regulation S in
May and August 1996. In the Regulation D offering, the Company sold 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. 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. During the
quarter ended September 27, 1996, 2,958 shares of the Series B-2 Preferred Stock
were converted into 957,898 shares of the Company's Common Stock. In addition,
3,400 shares of the Series A Preferred Stock were converted into 948,106 shares
of Common Stock. No shares of Series B-1 Preferred Stock were converted during
the quarter.
Common Stock
- ------------
As mentioned in note 6, 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 nine months of 1996, warrants were exercised resulting in the
issuance of 4,209,650 shares of Common Stock (includes the exercise of
15
<PAGE>
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
2,500,000 warrants by Hearing Health Services, Inc.). Also during the first nine
months of 1996, employee options were exercised resulting in the issuance of
387,600 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.
During August, 1996, one of two public relations consultants exercised
75,000 options out of a total 700,000 options at $1.00 per share.
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.
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
16
<PAGE>
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
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 September 27, 1996, the Company had net operating loss carryforwards of
approximately $39.7 million for both tax and financial reporting purposes. The
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 changes 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
September 27, 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
17
<PAGE>
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
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 Form S-3 registration statement 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 for $9,000,000. This one-time, noncash charge
was recorded during the second quarter of 1996. This charge related 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) times the number of shares issuable based on
the $5.00 conversion price.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
---------------------
Nine months ended September 27, 1996 versus nine months ended September 29, 1995
- --------------------------------------------------------------------------------
For the nine months ended September 27, 1996, net sales were $13,564,269, an
increase of $5,006,653 or 59% over the comparable nine months ended September
29, 1995. The main reasons for this increase are the inclusion of revenues from
the twenty-five (25) new hearing centers in New York, New Jersey and
Connecticut, as well as the five new centers in Florida.
Cost of products sold for the nine months ended September 27, 1996 increased by
$2,095,965 or 77% over the nine months ended September 29, 1995. This increase
resulted from the correlated effect of additional revenues from the twenty five
new centers that were opened in New York, New Jersey and Connecticut as well as
the new Florida centers. Costs of products sold during 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 in the Northeast and Florida 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 nine months ended September 27, 1996 was $14,081,184 (includes
a deemed preferred stock dividend of $9,000,000) as compared to a net loss of
$1,063,901 for the comparable nine months ended September 29, 1995.
Three Months Ended September 27, 1996 versus three months ended
September 29, 1995
- ---------------------------------------------------------------
For the three months ended September 27, 1996, net sales were $4,601,286, an
increase of $2,107,603 or 85% over the comparable three months ended
September 29, 1995. The main reason for this increase is the inclusion of
revenues from the twelve (12) new hearing centers in New York, New Jersey,
Connecticut and Florida.
Cost of products sold for the three months ended September 27, 1996 increased by
$1,153,102 or 142% over the three months ended September 29, 1995.
19
<PAGE>
This increase resulted from the correlated effect of additional revenues from
the twelve new centers mentioned above. Costs of products sold in the third
quarter of 1996 reflected an increase over the same quarter in 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 write offs
of 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 September 27, 1996 was $2,437,059 (includes
dividends on convertible preferred stock for $425,343) as compared to a net loss
of $596,920 for the comparable three months ended September 29, 1995.
The Company has incurred significant losses during the years since its
inception. Currently, two main steps are being taken by the Company to reverse
the trend of losses. The first step is the Company's planned entrance into
additional contracts with health insurance and managed care organizations, which
are anticipated to result in continued 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 trend of losses and achieve profitability in the near or
long term.
20
<PAGE>
Liquidity and Capital Resources
-------------------------------
Historically, the Company's principal sources of funds have been borrowings from
and stock purchases by its stockholders, private and public warrant offerings,
and cash generated from operations. During the nine months ended September 27,
1996, cash flow from operating activities was the result of the payment of
$30,000,000 gross 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.
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
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
21
<PAGE>
any necessary financing of growth in accounts receivable for the ensuing
year.
Management has determined that there has been no change in ownership, as defined
in Section 382 of the Code, in connection with any of the Company's stock
offerings which occurred as of September 27, 1996, which would result in an
annual limitation of the Company's net operating loss carryforward. 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 in ownership
under Section 382.
On September 27, 1996, the Company had working capital of $16,410,385 (working
capital ratio of 4.39) as compared to a working capital deficit of $1,317,179
for December 29, 1995.
Net cash used in operating activities was $4,332,769 for the nine months ended
September 27, 1996, as compared to cash used of $2,635,961 for the nine months
ended September 29, 1995. The primary reason for the difference was the increase
in receivables and deferred charges due to the effects of the new centers that
opened in 1996.
Net cash used in investing activities was $4,918,197 for the nine months ended
September 27, 1996, as compared to net cash used of $596,617 for the nine months
ended September 29, 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 $25,532,021 for the nine months
ended September 27, 1996, as compared to $3,150,796 for the comparable nine
months ended September 29, 1995. The difference was from the 1996 sale of the
Company's securities related to the 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
22
<PAGE>
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.
Forward Looking Information
---------------------------
Statements and financial discussion and analysis by management contained herein
which are not historical facts are forward looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward looking statements involve a number of risks and uncertainties.
The important factors that could cause actual results to differ materially from
the forward looking statements include, without limitation, the Company's
ability to manage its planned growth effectively and to integrate fully its
infrastructure systems throughout its network of centers; the continued
availability to the Company of senior management; consolidation of the hearing
care market; early termination of the Company's contracts with health insurance
and managed care organization; the ability of the Company to attract and retain
qualified audiologists to staff the Company's centers; product and professional
liability claims in excess of available insurance maintained by the Company;
changes in applicable statutes and government regulations or their
interpretation; and transactions in the Company's common stock which might
result in an ownership change triggering an annual limitation on the use of the
Company's net operating loss carryforwards under Section 382 of the Internal
Revenue Code of 1986, as amended. For further information regarding these
factors, see "Risk Factors" in the prospectus dated September 12, 1996, relating
to the resale of certain of the Company's Common Stock filed with the Securities
and Exchange Commission (File No. 333-11429).
23
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEARx Ltd.
(Registrant)
Date: November 11, 1996 By: /s/ Stephen J. Hansbrough
------------------------------------
Stephen J. Hansbrough
President
Chief Operating Officer
Date: November 11, 1996 By: /s/ Tommy E. Kee
------------------------------------
Tommy E. Kee
Vice President and
Secretary and Treasurer
24
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- ----------------------------------------------------------------
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).
3.1 A Amendment to Restated Certificate of Incorporated (increasing
the number of shares of authorized Common Stock) (filed as
exhibit 3.1 A to the Company's Quarterly Report on Form 10-Q,
filed with the Securities and Exchange Commission on August 12,
1996, incorporated herein by reference).
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-HY)).
27 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only).
25
<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> 9-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> DEC-30-1995
<PERIOD-END> SEP-27-1996
<CASH> 17,214,594
<SECURITIES> 0
<RECEIVABLES> 2,844,151
<ALLOWANCES> (392,385)
<INVENTORY> 293,211
<CURRENT-ASSETS> 21,249,949
<PP&E> 9,312,087
<DEPRECIATION> (2,475,274)
<TOTAL-ASSETS> 29,617,819
<CURRENT-LIABILITIES> 4,839,564
<BONDS> 234,069
0
23,642
<COMMON> 6,967,884
<OTHER-SE> 17,552,660
<TOTAL-LIABILITY-AND-EQUITY> 29,617,819
<SALES> 13,232,544
<TOTAL-REVENUES> 13,564,269
<CGS> 4,829,417
<TOTAL-COSTS> 17,859,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159,957
<INCOME-PRETAX> (4,455,136)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (9,626,048)
<CHANGES> 0
<NET-INCOME> (14,081,184)
<EPS-PRIMARY> ($0.22)
<EPS-DILUTED> ($0.13)
</TABLE>
