SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16453
HEARx LTD.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(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 (407) 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 March 29, 1996, 65,909,183 shares of the Registrant's Common Stock were
outstanding.
INDEX
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 29,1996 and December 29, 1995 3 - 4
Consolidated Statements of Operations -
Three Months ended March 29, 1996 and
March 31, 1995 5
Consolidated Statements of Cash Flows -
Three Months ended March 29, 1996 and
March 31, 1995 6 - 7
Notes to Consolidated Financial Statements 8 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15 - 18
PART II. OTHER INFORMATION:
Item 6. Exhibits and reports on Form 8-K 18
Signatures 19
2
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 29, 1996
-------------------------------------------
Pro Forma December 29,
(Note 11) Actual 1995
---------------- ---------------- ----------------
(unaudited) (unaudited) (audited)
<S> <C> <C> <C>
ASSETS
Current:
Cash and cash equivalents $25,549,598 $3,404,148 $933,539
Accounts and notes receivable, less allowance
for doubtful accounts of
$353,834 and $341,234 2,066,243 2,066,243 1,227,993
Inventories 317,547 317,547 395,983
Prepaid expenses and other current assets 1,121,202 1,121,202 529,418
---------------- ---------------- ----------------
Total current assets 29,054,590 6,909,140 3,086,933
---------------- ---------------- ----------------
Property and equipment:
Equipment, furniture and fixtures 2,122,472 2,122,472 2,357,101
Leasehold improvements 760,997 760,997 729,144
Construction-in-progress 2,965,719 2,965,719 1,309,127
---------------- ---------------- ----------------
5,849,188 5,849,188 4,395,372
Less accumulated depreciation
and amortization 1,967,240 1,967,240 1,871,490
---------------- ---------------- ----------------
Net property and equipment 3,881,948 3,881,948 2,523,882
Other 1,676,790 1,676,790 839,813
---------------- ---------------- ----------------
5,558,738 5,558,738 3,363,695
---------------- ---------------- ----------------
$34,613,328 $12,467,878 $6,450,628
================ ================ ================
(Continued)
See notes to consolidated financial statements
</TABLE>
3
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 29, 1996
-------------------------------------------
Pro Forma December 29,
(Note 11) Actual 1995
---------------- ---------------- ----------------
(unaudited) (unaudited) (audited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Current portion of long-term debt $969,582 $969,582 $2,030,774
Current portion of obligations
under capital leases 49,781 49,781 56,206
Short-term loan - principal shareholder - - 100,000
Accounts payable - trade 1,841,397 1,841,397 1,597,714
Accrued expenses 678,538 678,538 619,418
---------------- ---------------- ----------------
Total current liabilities 3,539,298 3,539,298 4,404,112
---------------- ---------------- ----------------
Long-term debt, net of current portion - other 220,038 220,038 460,194
Long-term debt, net of current portion -
principal shareholder 2,122,673 2,122,673 1,845,000
Obligations under capital leases,
net of current portion 3,860 3,860 11,106
---------------- ---------------- ----------------
Total long-term debt 2,346,571 2,346,571 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, Senior, 6,000 shares; - 6,000 -
1996, Series A, 5,100 shares; 5,100 - -
1996, Series B-1, 15,000 shares; 15,000 - -
1996, Series B-2, 9,900 shares; 9,900 - -
---------------- ---------------- ----------------
30,000 6,000 103,824
Common stock, $.10 par;
authorized 100,000,000 shares,
issued: 65,909,183 6,590,918 6,590,918 4,795,678
Treasury Stock (625,000) (625,000) -
Additional paid-in capital 50,877,291 28,755,841 23,079,016
Accumulated deficit (28,135,626) (28,135,626) (28,234,803)
Unamortized deferred compensation (10,124) (10,124) (13,499)
---------------- ---------------- ----------------
Total (capital deficit) stockholders' equity 28,727,459 6,582,009 (269,784)
---------------- ---------------- ----------------
$34,613,328 $12,467,878 $6,450,628
================ ================ ================
See notes to consolidated financial statements
</TABLE>
4
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 29, 1996
AND MARCH 31, 1995
<CAPTION>
1996 1995
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Net Sales $4,718,192 $3,327,028
---------------- ----------------
Costs and expenses:
Cost of products sold 1,391,646 1,061,639
Center operating expenses 2,236,956 1,754,660
General and administrative expenses 787,557 366,940
Depreciation and amortization 145,347 84,246
Interest expense 57,509 30,179
---------------- ----------------
Total expenses 4,619,015 3,297,664
---------------- ----------------
Income before income taxes 99,177 29,364
Provision for income taxes - -
---------------- ----------------
Net Income 99,177 29,364
================ ================
Net Income per Common Share $0.00 $0.00
================ ================
Weighted average number of shares of common stock outstanding 51,093,536 39,003,252
================ ================
See notes to consolidated financial statements
</TABLE>
5
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 31, 1995
Increase (decrease) in cash and cash equivalents
<CAPTION>
1996 1995
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $99,177 $29,364
Adjustments to reconcile net income to net
cash provided (used) in operating activities:
Depreciation and amortization 145,347 84,246
Non-cash expense to advisors/consultants 38,250 43,051
Non-cash expense for customer list 239,070 82,333
Non-cash expense for executive stock
bonuses/deferred compensation stock plans 3,375 119,076
(Increase) decrease in:
Accounts and notes receivable (838,250) (230,774)
Inventories 78,436 35,961
Prepaid expenses and other current assets (591,784) (267,752)
Deferred charges and other (881,360) (22,934)
Increase (decrease) in:
Accounts payable 243,683 277,030
Accrued expenses 59,120 (216,849)
Other long-term liabilities - 164,667
---------------- ----------------
Net cash used in operating activities (1,404,936) 97,419
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (1,463,886) (295,983)
Proceeds from sale of
property and equipment 4,856 5,708
---------------- ----------------
Net cash provided used by investing activities (1,459,030) (290,275)
---------------- ----------------
(Continued)
See notes to consolidated financial statements
</TABLE>
6
<TABLE>
HEARx LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 31, 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 -
Conversion of accrued interest - principal shareholder 63,007 -
Conversion of cumulative dividends - principal shareholder 214,666 -
Principal payments:
Long-term debt (1,515,863) (49,830)
Forgiveness of long-term debt (99,000) (117,550)
Capital lease obligations (13,671) (2,577)
Proceeds from issuance of capital stock,
net of offering costs 6,471,921 340,000
---------------- ----------------
Net cash provided by financing activities 5,334,575 170,043
---------------- ----------------
Net increase (decrease) in
cash and cash equivalents 2,470,609 (22,813)
Cash and cash equivalents
at beginning of period 933,539 329,007
---------------- ----------------
Cash and cash equivalents
at end of period $3,404,148 $306,194
================ ================
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>
7
HEARx LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
The accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended December 29, 1995. All adjustments, consisting of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
statement of results for interim periods have been made.
Note 1. The Company:
Hearx, Ltd. ("HEARx" or "the Company"), a Delaware corporation, was organized
in April 1986 for the purpose of creating a nationwide chain of retail
centers (HEARx Centers) to serve the needs of the hearing impaired.
Note 2. Reclassifications:
Certain amounts in the 1995 financial statements have been reclassified in order
to conform to the 1996 presentation.
Note 3. New Listing:
On March 15, 1996, the Company's Common Stock was listed on the American Stock
Exchange under the symbol of "EAR".
Note 4. Private Placements:
On January 29, 1996, the Company completed a private placement of 6,000 shares,
$1 par, of the 1996 Senior Preferred Stock and 10,909,090 Common Stock purchase
warrants in consideration for $4.9 million of cash and the conversion of a $1.1
million note payable. The warrants are exercisable over five years at a price of
$.55 per share. The 1996 Senior Preferred Stock may be redeemed by the Company
for $6 million at any time. See note 11. If not redeemed within four years, the
investors will be entitled to exercise, for a one year period, warrants to
purchase an additional 4,000,000 shares of Common Stock at an exercise price of
$.55 per share. Under the terms of the 1996 Senior Preferred Stock, the
investors generally have the right to approve future debt or equity offerings by
the Company. In connection with the private placement, the Company issued
warrants to purchase 2,250,000 shares of Common Stock at a price of $.63 per
share to an investment banker as a placement fee. Additionally, the agreement
8
provided for the Company to effect a 15 for 1 reverse stock split. The Board of
Directors has since decided that it is not in the best interest of the
shareholders or the Company to proceed with the above stock split at this time,
and it is not expected that a reverse stock split will be proposed in the
upcoming June 14, 1996 Annual Stockholders' Meeting. 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.
Note 6. Acquisition and Expansion:
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 quarter of 1996, the Company opened 13 in a projected series of
25-30 new HEARx Centers in the New York, New Jersey and soon to be Connecticut
areas to provide hearing care to members of Oxford Health Plans and Select
Providers, Inc. Management estimates these contracts will generate $4.25 million
in annual revenues in each of the next three years; however, they can be
cancelled with ninety days notice by either party at any time.
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).
9
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.
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 has a promissory note of the Company for $1,675,000 which is
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.
Note 8. Stockholders' Equity:
Conversions of Senior Preferred, Series C Preferred, and 1994 Convertible
Preferred Stock into shares of Common Stock:
Senior Preferred Stock - Each share of Senior Preferred Stock, Series A, B, D, E
and G is convertible at the option of the holder (3M) into 100 shares of Common
Stock and is automatically converted into 100 shares of Common Stock upon the
listing of the Common Stock on the American or New York Stock Exchanges. As the
Company's Common Stock was listed on the American Stock Exchange on March 15,
1996, all shares of the Senior Preferred Stock, Series A, B, D, E and G were
automatically converted into 8,882,400 shares of Common Stock.
Series C Preferred Stock - During January, 1996, the Series C Preferred Stock
was converted by the principal shareholder/officer into 1,040,000 shares of
Common Stock, and the cumulative dividends of $214,666 were converted into a
promissory note (see note 7).
1994 Convertible Preferred Stock - Each share of 1994 Convertible Preferred
Stock is convertible into 1,000 shares of Common Stock. On March 8, 1996, the
holders (Hearing Health Services, Inc. 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
10
price of $.25 per share on January 29, 1996, in a cashless exercise resulting in
the issuance to Hearing Health Services, Inc. of 2,250,000 shares of Common
Stock.
1996 Senior Preferred Stock
As 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 10,909,090 at an exercise price of $.55
per share. The 1996 Senior Preferred Stock may be redeemed by the Company for $6
million at any time. If not redeemed within four years, the investors will be
entitled to exercise, for a one year period, warrants to purchase an additional
4,000,000 shares of Common Stock at an exercise price of $.55 per share. See
note 11.
Common Stock
As already mentioned in note 6, an additional 150,000 shares of Common Stock
were issued during January, 1996 for the purchase of the customer list and
selected assets of Suffolk County Hearing Aid Center, Inc.
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
11
an automatic annual increase of 10% of the number of shares subject to the Plan
as of the prior year.
In April 1993, the stockholders of the Company approved the adoption of the
Hearx Ltd. Non- Qualified Stock Option Plan for Non-Employee Directors
("Directors Plan"). The purpose of the Directors Plan is to increase the
proprietary interest of non-employee directors in the Company by granting
non-qualified stock options that will promote long-term shareholder value.
Grants under the Directors Plan may not exceed 500,000 shares of Common Stock in
the aggregate and may be made until the Annual Meeting of Stockholders in 2003.
Each year, upon election to the Board, each non-employee director shall be
granted a 10-year non-qualified stock option ("Option") to acquire 15,000 shares
of Common Stock. The exercise price shall be one hundred percent (100%) of the
fair market value of the shares as of the close of business on the business day
immediately prior to the date on which the Option is granted. 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 March 29, 1996, the Company had net operating loss carryforwards of
approximately $25.7 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 March
29, 1996. In addition, the conversion and/or exercise of all convertible
preferred stock, warrants and options which the Company has issued or agreed to
12
issue in connection with the offerings described in Note 11 below would not
result in such a change in control under Section 382.
Note 11. Subsequent Events and Pro Forma Adjustments:
On May 10, 1996, the Company closed the second of two offerings of its
securities in a side-by-side offering pursuant to Regulation D and Regulation S,
each promulgated under the Securities Act of 1993, as amended. In the
Regulation D offering, the Company entered into a Securities Purchase Agreement
with certain purchasers for the sale of a total of 15,000 shares of a
convertible preferred stock (the "Series B-1 Preferred Stock") and 9,900 shares
of another convertible preferred stock (the "Series B-2 Preferred Stock"), for a
total purchase price of $24,900,000. The first closing of the offering of the
Series B-1 and B-2 Preferred Stock occurred on May 7, 1996, and the Company
received gross proceeds of $12,450,000. The second closing of this offering and
the receipt by the Company of the remaining gross proceeds of $12,450,000, will
occur upon the effectiveness of a registration statement on Form S-3 for the
Common Stock underlying the Series B-1 and B-2 Preferred Stock and related
Warrants. 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.
Certain of the proceeds from the May, 1996 financing, plus some of the Company's
then existing funds, were used to redeem all of the shares of the 1996 Senior
Preferred Stock and certain related warrants (a total redemption price to the
Company of $6,040,000). As a result of the redemption of the 1996 Senior
Preferred Stock, the Company is no longer obligated to effect the reverse stock
split (see Note 4 above).
The balance of the net proceeds to the Company from the May, 1996 financing, and
the proceeds from the third closing upon the effectiveness of the registration
statement will be used by the Company to fund its expansion program and for
general corporate purposes.
The pro forma adjustments, to give effect to: 1) the first closing on May 7,
1996 of the offering of 7,500 shares of Series B-1 Preferred Stock and 4,950
shares of B-2 Preferred Stock for consideration of $11,703,000 (gross proceeds
of $12,450,000 less finders' fees of $747,000), and the redemption of the 6,000
shares of 1996 Senior Preferred Stock and certain related warrants for a total
of $6,054,550 ($6,040,000 redemption price plus $14,550 related legal fees) and
5,100 shares of Series A Convertible Preferred Stock for consideration of
$4,794,000 (gross proceeds of $5,100,000 less finders' fees of $306,000), and 2)
the second closing on May 10, 1996 of the offering of 7,500 shares of B-1
Preferred Stock and 4,950 shares of B-2 Preferred Stock for consideration of
13
11,703,000 (gross proceeds of $12,450,000 less finders' fees of $747,000) to be
received upon the effectiveness of the registration statement on Form S-3, as if
it had occurred on March 29, 1996 are as follows:
Assets $ 22,145,450
------------
Net increase in cash
Stockholders' Equity
Decrease in 1996 Senior Preferred Stock 6,000
Increase in 1996 Series A Convertible Preferred Stock (5,100)
Increase in 1996 Series B-1 Preferred Stock (15,000)
Increase in 1996 Series B-2 Preferred Stock (9,900)
Increase in Additional Paid-In Capital (22,121,450)
$ -
=============
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three months ended March 29, 1996 vs. three months ended March 31, 1995
For the three months ended March 29, 1996, net sales were $4,718,192, an
increase of $1,391,164 or 42% over the comparable three months ended March 31,
1995. The main reasons for this increase are the inclusion of revenues from the
opening of thirteen (13) hearing centers in New York and New Jersey as well as
the opening of three of five proposed new centers in Florida.
Cost of products sold for the three months ended March 29, 1996 increased
by $330,007 or 31% over the three months ended March 31, 1995. This increase
resulted from the correlated effect of additional revenues from the thirteen new
centers that were opened in New York and New Jersey as well as the new Florida
centers; however, the percentage of cost of products sold to net sales is lower
in 1996 (29.5%) than in 1995 (31.9%) due primarily to the Company's ongoing
expense control programs and understandings with vendors beginning in 1995 to
reduce costs in light of planned increases in future purchases.
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.
Net profit for the three months ended March 29, 1996 was $99,177 as
compared to a net profit of $29,364 for the comparable three months ended March
31, 1995, a percentage increase of 238%.
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 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
15
note 4 and note 11), 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.
Subsequent Events
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 members were approximately $2 million in 1995,
or 18% of the Company's total revenues. The Company is confident that new
contracts with other providers obtained by the Company in 1996 will replace
those lost revenues.
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 three months
ended March 29, 1996, cash flow from operating activities was the result of the
payment of $4,900,000 from the January 29, 1996 private placement (total of
$6,000,000 less $1,100,000 received in 1995).
Same center sales for the three months ended March 29, 1996 were
approximately $3,784,000 compared to approximately $2,544,000 for the three
months ended March 31, 1995. The increase of $1,240,000 (49%) was due primarily
to the increase in revenues resulting from the new managed care contracts which
were signed in late 1994 and throughout 1995.
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 11), it will have sufficient funds
to support the planned expansion to approximately 250 centers in the Company's
network. There can be no assurance, however, that such expansion can be made
fully with such funds or that all such funds will be received by the Company.
The Company receives revenues from the sale of hearing care products.
Approximately 85% of the Company's revenues is generated from sales derived
directly (payments received from the managed care or insurance company) or
indirectly (sales of goods and services to the insured or managed-care
beneficiary which are not covered by the policy or the managed care program)
from the Company's contracts with insurance and managed care companies. The
remaining 15% of sales is generated from private pay customers as a result of
direct marketing efforts of the Company. The Company has not experienced delays
in payment of revenue from capitation contracts (those which provide for
16
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 have been from
stockholder loans, vendor loans or from operations. The infusion of
approximately $22.1 million net proceeds from the sales of preferred stock (see
note 11) will provide 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 March 29, 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 11 would not result in such a change in ownership
under Section 382.
While the Company is no longer the sole distributor of 3M hearing products
in Florida (and, in fact, 3M is no longer in the hearing care business), 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.
On March 29, 1996, the Company had working capital of $3,369,842 (working
capital ratio of 1.95) as compared to a working capital deficit of $1,317,179
for December 29, 1995.
Net cash used in operating activities was $1,404,936 for the three months
ended March 29, 1996, as compared to cash provided of $97,419 for the three
months ended March 31, 1995. The primary reason for the difference was the
increase in receivables and deferred charges (customer list acquisition).
Net cash used in investing activities was $1,459,030 for the three months
ended March 29, 1996, as compared to net cash used of $290,275 for the three
months ended March 31, 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 $5,334,575 for the three
months ended March 29, 1996, as compared to $170,043 for the comparable three
months ended March 31, 1995. The difference was from the 1996 private placement
of 6,000 shares of 1996 Senior Preferred Stock.
With 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
17
execution of anticipated managed care contracts, the Company should not have a
need to seek other financing in the near future except for additional expansion
requirements which may be necessitated by new contracts; however, there can be
no assurance that other unforeseeable events will not occur which will require
additional financing.
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.
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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: July 25, 1996 By: /s/Stephen J. Hansbrough
---------------------------------------
Stephen J. Hansbrough
President and
Chief Operating Officer
Date: July 25, 1996 By: /s/Tommy E. Kee
---------------------------------------
Tommy E. Kee
Vice President and
Secretary and Treasurer
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INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- --------------------------------------------------------------
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).
3.2 By-Laws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-18 (Registration
No. 33-17041-NY)).
27 Financial Data Schedule (provided for the information of
the U.S. Securities and Exchange Commission only)*
- ----------
*Previously filed.
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