SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 27, 1996
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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Delaware
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
22-2748248
- --------------------------------------------------------------------------------
(.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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------------- ---------------------------------------
Common Stock, par value $0.10 per share American Stock Exchange
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 [ ]
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF
FINANCIAL CONDITION
GENERAL
Management believes the shift of patients from the Medicare population
to managed care, which has occurred in recent years, will continue and 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.
To support the requirements of the Company's current and future
participation in such contracts, the Company made a strategic decision to enter
the northeast U.S. market in 1996. To fulfill its contractual requirements
during 1996, sixteen centers were opened in New York, fourteen in New Jersey,
and four in Connecticut for a total of thirty-four centers in the northeast
market. Additionally, five centers were opened in Florida, and two centers
closed for a net increase of three centers in the Company's Florida region.
In 1996, fourteen new contracts were signed with managed care and
insurance companies in the northeast U.S. market to support the new centers.
These contracts call for the managed care or insurance companies to reimburse
the Company for all, or a portion, of the costs incurred by their members for
hearing care services provided by the Company. The balance of the cost is borne
by the member. The Company is reimbursed by the insurer on either a "fee for
service" basis, or through a "capitated" plan. Capitation contracts are those
contracts which provide for payments to the Company on a per member per month
basis. Under those contracts, a member is entitled to testing services and a
product credit with respect to 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 those contracts, the member can receive
this credit once every three years. The price of the services and products
provided on the first visit, above the group discount, as well as any additional
services or products purchased, are the obligation of the member.
The Company believes that the loss of any single managed care contract
would not have a material adverse effect on its financial condition or results
of operation. Each of the existing insurance contracts are achieving expected
gross profit margins and contributing positively to the Company's results of
operations.
In 1996, the Company substantially completed its planned corporate
expansion to support the center network expansion and new contract signings.
This included the development, installation and implementation of new computer
information systems; the establishment and staffing of three new departments
(Professional Services, Information Technology and Contract Management); the
upgrade and expansion of existing departments and the relocation to a new
corporate facility.
2
<PAGE>
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net sales increased $7,320,493, or 65.5%, to $18,490,561 in 1996 from
$11,170,068 in 1995. Net sales in those regions in operation in both 1996 and
1995 increased $2,005,641, or 17.9%, to $13,175,709 in 1996 from $11,170,068 in
1995; and those regions were profitable at center level. The balance of the
increase in net sales, $4,799,348, resulted from those centers opened in the
northeast U.S. market in 1996.
Cost of products sold increased $3,007,000, or 84.2%, to $6,578,725 in
1996 from $3,571,725 in 1995. The increase in cost of products sold was
primarily the result of increased sales volume in 1996 over 1995. Cost of
products sold, as a percentage of net sales, was higher in 1996 than in 1995
because of a reduction in the Company's retail hearing aid prices; the inclusion
of one year's free batteries with each hearing aid purchased; and a shift toward
lower margin programmable hearing devices. Although there can be no assurance
that the Company will reach its 1997 sales targets, the volume discounts
negotiated with its primary vendors, should it achieve those sales targets, will
bring the cost of products, as a percentage of net sales, to the lower 1995
levels.
Center operating expenses increased $5,682,471, or 84.4%, to
$12,418,005 in 1996 from $6,735,534 in 1995. This increase is primarily due to
an increase of 132% in the number of centers operating in 1996 (65) compared to
1995 (28).
General and administrative expenses increased $3,445,359, or 139%, to
$5,917,360 in 1996 from $2,472,001 in 1995. $640,000, or 19% of the increase in
1996 over 1995, was the result of the write off of certain system development
costs, and an increase in the allowance for doubtful accounts. Substantially all
of the remaining increase was attributable to the increase in wages and fringe
benefits associated with the expansion of the corporate administrative
functions.
Depreciation and amortization expense increased $903,918, or 258%, to
$1,254,055 in 1996 from $350,137 in 1995. The increase was attributable to the
depreciation and amortization of the leasehold improvements, medical and
computer equipment, and furniture associated with the thirty-nine new centers
opened in 1996; the installation of computer systems in existing centers in the
base regions and the corporate office computer systems installed in 1996.
1995 COMPARED TO 1994
Net sales increased $6,838,920, or 158%, to $11,170,068 in 1995 from
$4,331,148 in 1994. The 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.
3
<PAGE>
Cost of products sold increased $1,980,549, or 124%, to $3,571,725 in
1995 from $1,591,176 in 1994. The increase resulted from the increased sales
volume from the eighteen centers, plus sales generated from the seven new
managed care contracts. Cost of products sold, as a percentage of net sales, was
lower in 1995 mainly due to agreements with vendors in 1995 to reduce costs
based on planned increases in future purchases.
Center operating expenses increased from $2,736,084, in 1994, to
$6,735,534 in 1995. General and administrative expenses increased from
$1,681,383, in 1994, to $2,472,001 in 1995. Depreciation and amortization
increased from $204,981, in 1994, to $350,137 in 1995. All of these increases
were due primarily to the acquisition of HHS mentioned above.
FOURTH QUARTER ADJUSTMENTS
There were no significant fourth quarter adjustments in 1996 or 1994.
Fourth quarter adjustments for 1995 consisted of an increase in the
allowance for doubtful accounts of $178,101 and the recording of additional
public relations expenses of $284,201.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $13,773,570 to $12,456,391 as of December
27,1996 from a working capital deficit of $1,317,179 as of December 29, 1995.
During 1996, the Company completed two private placements (see Note 6E,
Stockholders' Equity) providing the Company net proceeds of $27,842,590. The
Company also received net proceeds of $2,277,450 from the exercise of warrants
during the year. During 1996, the Company purchased $6,824,065 in property and
equipment and retired long term debt of $4,439,686. The sale of the Company's
securities in 1996 did not individually, or in the aggregate, cause a "change in
control" which would result in an annual limitation of the Company's net
operating loss carry-forward under Section 382 of the Internal Revenue Code of
1986, as amended.
In the first quarter of 1997, the Company completed a private placement
(see Note 3) and received net proceeds of approximately $9,300,000. The Company
believes that its current working capital and revenues from operations are
sufficient to support the Company's foreseeable capital requirements and
operating needs through 1997 in accordance with its strategic plan, although
there can be no assurance that other cash needs will not arise.
Net cash used by operating activities increased from $1,486,465, in
1995, to $6,431,112 in 1996. The increase in cash used by operating activities
was primarily the result of operating losses resulting from the Company's
decision to expand its operations to accommodate the new contract signings and
the accompanying expansion into the northeast U.S. market as discussed above.
Net cash used in investing activities increased from $1,689,455, in
1995, to $18,727,969 in 1996. This increase resulted from the use of cash of
$6,824,065 to fund the construction of leasehold improvements and the related
4
<PAGE>
purchase of property and equipment to equip the new and existing centers so as
to accommodate the expected increase in revenue. Excess cash of $11,903,904,
remaining from the 1996 equity placements, has been invested in marketable
securities until needed.
The capital costs associated with the start up of 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.
New center property and equipment costs include leasehold build out costs,
furniture and costs of equipment, including diagnostic and computer equipment.
Pre-opening costs, such as training wages, recruiting, advertising, travel, etc.
are expensed as incurred. The Company believes it has the funds to support the
planned expansion of the Company's network of centers through 1997.
Cash from financing activities increased from $3,780,452, in 1995, to
$26,036,979 in 1996. This increase was primarily of the result of equity
offerings and warrant exercises during 1996 in the amount of $29,558,328, net of
expenses. Long-term debt in the amount of $4,439,686 was retired during the
year.
During 1995, cash flows from financing activities consisted of a
$1,500,000 private placement; a loan from two investors for $1,100,000; and a
loan from the principal shareholder. These funds were used to pay for the
construction of fifteen new centers in New York and New Jersey and the purchase
and development of new point-of-sale and accounting systems.
The working capital deficiency increased from $623,200 at December 30,
1994 to $1,317,179 at December 29, 1995. The increase in the deficiency was due
primarily to the loans from the two investors discussed above.
Net cash used in operating activities was $1,486,465, for 1995, as
compared to $1,936,270 for 1994. The decrease in the net cash used in operating
activities was primarily due to the fact that there was no accrual for
restructuring costs in 1995, as compared with the accrual for restructuring
costs of $1,092,205 in 1994.
Net cash used by investing activities was $1,689,455 for 1995 as
compared to cash provided of $175,206 for 1994, a net decrease of $1,864,661.
The decrease was primarily related to the purchase of property and equipment and
computer and accounting systems.
Net cash provided by financing activities increased to $3,780,452, for
1995, from $1,778,313 for 1994. The increase was related to additional private
placements as well as additional loans of $1,370,000 and the conversion of
certain amounts due an accounts payable vendor into debt.
5
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants ..................... 7
Consolidated Balance Sheets at December 27, 1996 (Pro Forma and Actual)
and December 29, 1995 ........................................ 8-9
Consolidated Statements of Operations for the years ended
December 27, 1996, December 29, 1995, and December 30, 1994 ... 10
Consolidated Statements of Changes in Stockholders' Equity (Capital
Deficit) for the years ended December 27, 1996,
December 29, 1995, and December 30, 1994 ...................... 11-14
Consolidated Statements of Cash Flows for the years ended
December 27, 1996, December 29, 1995, and December 30, 1994 ... 15-17
Notes to Consolidated Financial Statements ............................. 18-23
FINANCIAL STATEMENT SCHEDULES:
For the years ended December 27, 1996, December 29, 1995 and
December 30, 1994
II Valuation Accounts ......................................... 34
6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
HEARx Ltd.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of HEARx Ltd. and
Subsidiaries as of December 27, 1996 and December 29, 1995 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 27, 1996. We have
also audited the schedule listed in the accompanying index. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HEARx Ltd. and
Subsidiaries at December 27, 1996 and December 29, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 1996 in conformity with generally accepted accounting
principles.
Also in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
West Palm Beach, Florida BDO Seidman, LLP
March 25, 1997
7
<PAGE>
<TABLE>
HEARX LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
Pro Forma
(Note 3) December 27, December 29,
1996 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 1,811,437 $ 1,811,437 $ 933,539
Marketable securities (Note 2) ................................................ 21,236,025 11,936,025 --
Accounts and notes receivable, less allowance
for doubtful accounts of $789,322, and $341,234 ............................. 3,021,992 3,021,992 1,227,993
Inventories ................................................................... 363,978 363,978 395,983
Prepaid expenses .............................................................. 245,000 245,000 529,418
--------------- --------------- ---------------
Total current assets ........................................................ 26,678,432 17,378,432 3,086,933
PROPERTY AND EQUIPMENT - NET (Note 5) ........................................... 8,068,700 8,068,700 2,523,882
OTHER ........................................................................... 1,180,352 1,180,352 839,813
--------------- --------------- ---------------
$ 35,927,484 $ 26,627,484 $ 6,450,628
=============== =============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
8
<PAGE>
<TABLE>
HEARX LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONCLUDED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Pro Forma
(Note 3) December 27, December 29,
1996 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable and other accrued expenses ................................... $ 3,357,422 $ 3,357,422 $ 2,000,090
Accrued salaries and other compensation ....................................... 812,946 812,946 217,042
Current maturities of long-term debt (Note 4) ................................. 751,673 751,673 2,186,980
=============== =============== ===============
Total current liabilities ................................................. 4,922,041 4,922,041 4,404,112
--------------- --------------- ---------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 4) ................................ 230,258 230,258 2,316,300
--------------- --------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 & 8)
STOCKHOLDERS' EQUITY:
Non-redeemable preferred stock:
(Aggregate liquidation preference $5,114,252)
$1 par; 2,000,000 shares, authorized, issued and outstanding: (Note 6)
1992 Senior A 30,000 shares .......................................... -- -- 30,000
1992 Senior B 22,500 shares .......................................... -- -- 22,500
1992 Convertible C 10,000 shares .......................................... -- -- 10,000
1993 Senior D 14,926 shares .......................................... -- -- 14,926
1993 Senior G 14,926 shares .......................................... -- -- 14,926
1994 Convertible 5,000 shares .......................................... -- -- 5,000
1995 Senior E 6,472 shares .......................................... -- -- 6,472
1996 Convertible B-1 3,500 shares .......................................... 3,500 3,500 --
1996 Convertible B-2 1,450 shares .......................................... 1,450 1,450 --
1997 Convertible 10,000 shares .......................................... 10,000 -- --
--------------- --------------- ---------------
Total preferred stock ..................................................... 14,950 4,950 103,824
Common stock, 130,000,000 shares authorized,
81,969,233 & 47,956,783 shares issued (Notes 4 & 6) ......................... 8,196,923 8,196,923 4,795,678
Additional paid-in capital .................................................... 69,286,480 59,996,480 23,079,016
Accumulated deficit ........................................................... (46,130,289) (46,130,289) (28,234,803)
Unrealized gain on marketable securities ...................................... 32,121 32,121 --
Unamortized deferred compensation ............................................. -- -- (13,499)
Treasury stock, at cost - 250,000 common shares ............................... (625,000) (625,000) --
--------------- --------------- ---------------
Total stockholders' equity ................................................ 30,775,185 21,475,185 (269,784)
--------------- --------------- ---------------
$ 35,927,484 $ 26,627,484 $ 6,450,628
=============== =============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
9
<PAGE>
<TABLE>
HEARX LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended Year Ended Year Ended
December 27, December 29, December 30,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
NET SALES .................................................................... $ 18,490,561 $ 11,170,068 $ 4,331,148
--------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of products sold ...................................................... 6,578,725 3,571,725 1,591,176
Center operating expenses .................................................. 12,418,005 6,735,534 2,736,084
General and administrative expenses ........................................ 5,917,360 2,472,001 1,681,383
Depreciation and amortization .............................................. 1,254,055 350,137 204,981
Interest expense ........................................................... 181,395 254,124 223,159
--------------- --------------- ---------------
Total expenses ........................................................... 26,349,540 13,383,521 6,436,783
--------------- --------------- ---------------
LOSS BEFORE DIVIDENDS ON PREFERRED STOCK ..................................... (7,858,979) (2,213,453) (2,105,635)
DIVIDENDS ON PREFERRED STOCK:
Deemed dividend (Note 6G) .................................................. (9,000,000) -- --
Dividends .................................................................. (1,036,507) -- --
--------------- --------------- ---------------
Total dividends .......................................................... (10,036,507) -- --
--------------- --------------- ---------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ................................... $ (17,895,486) $ (2,213,453) $ (2,105,635)
=============== =============== ===============
NET LOSS PER COMMON SHARE .................................................... $ (.25) $ (.05) $ (.06)
=============== =============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ................ 71,197,115 45,164,091 36,278,205
=============== =============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
10
<PAGE>
<TABLE>
HEARx Ltd. And Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
Non-Redeemable
Preferred Stocks Common Stock Additional Unamortized Total
---------------- ---------------------- Paid-In Accumulated Treasury Deferred Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Compensation Equity
------ -------- ---------- ---------- ----------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 ..... 92,352 $ 92,352 31,250,228 $3,125,023 $18,105,416 $(23,915,715) $ -- $ (30,541) $ (2,623,465)
Payments from 3M
to exercise Senior E
preferred stock
series ................ -- -- -- -- 75,000 -- -- -- 75,000
Conversion of debenture
($700,000) plus
accrued interest
payable ($27,682) to
common stock .......... -- -- 3,638,414 363,841 363,841 -- -- -- 727,682
1994 Private placements,
net of expenses of
$51,965, to common
stock ................. -- -- 6,500,000 650,000 598,035 -- -- -- 1,248,035
Issuance of common
stock-Advisory Board .. -- -- 40,985 4,098 20,902 -- -- -- 25,000
Executive stock
bonuses ............... -- -- 22,727 2,273 5,227 -- -- -- 7,500
Issuance of common stock
to officers ........... -- -- 70,000 7,000 30,188 -- -- (37,188) --
Issuance of common stock
to public relations
company ............... -- -- 150,000 15,000 22,500 -- -- -- 37,500
Issuance of private
placement convertible
preferred stock during
December, 1994 ........ 2,500 2,500 -- -- 497,500 -- -- -- 500,000
Issuance of convertible
preferred stock for
acquisition of centers
from Hearing Health
Services, Inc. ........ 2,500 2,500 -- -- 497,500 -- -- -- 500,000
Amortization of deferred
compensation .......... -- -- -- -- -- -- -- 40,732 40,732
Net loss for the year .. -- -- -- -- -- (2,105,635) -- -- (2,105,635)
------ -------- ---------- ---------- ----------- ------------ -------- ------------ ------------
Balance at
December 30, 1994 ..... 97,352 $ 97,352 41,672,354 $4,167,235 $20,216,109 $(26,021,350) $ -- $ (26,997) $ (1,567,651)
------ -------- ---------- ---------- ----------- ------------ -------- ------------ ------------
See accompanying notes to consolidated financial statements
</TABLE>
11
<PAGE>
<TABLE>
HEARx Ltd. And Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Continued)
Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
Non-Redeemable
Preferred Stocks Common Stock Additional Unamortized Total
----------------- ---------------------- Paid-In Accumulated Treasury Deferred Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Compensation Equity
------- -------- ---------- ---------- ----------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 30, 1994 ..... 97,352 $ 97,352 41,672,354 $4,167,235 $20,216,109 $(26,021,350) $ -- $ (26,997) $ (1,567,651)
1995 Individual private
placements, net of
expenses of $63,192 ... -- -- 2,427,184 242,718 1,194,090 -- -- -- 1,436,808
1995 Institutional
private placements,
net of expenses of
$297,315 .............. -- -- 2,602,572 260,257 1,172,336 -- -- -- 1,432,593
Issuance of common stock
- Advisory Board ...... -- -- 87,419 8,742 26,258 -- -- -- 35,000
Executive stock
bonuses ............... -- -- 115,138 11,514 115,562 -- -- -- 127,076
Exercise of employee
stock options ......... -- -- 278,650 27,865 60,233 -- -- -- 88,098
Issuance of common stock
to consultants ........ -- -- 373,466 37,347 240,900 -- -- -- 278,247
Stock option exercise by
consultants ........... -- -- 400,000 40,000 60,000 -- -- -- 100,000
Issuance of Senior E
preferred stock
series ................ 6,472 6,472 -- -- (6,472) -- -- -- --
Amortization of deferred
compensation .......... -- -- -- -- -- -- -- 13,498 13,498
Net loss for the year .. -- -- -- -- -- (2,213,453) -- -- (2,213,453)
------- -------- ---------- ---------- ----------- ------------ -------- ------------ ------------
Balance at
December 29, 1995 ..... 103,824 $103,824 47,956,783 $4,795,678 $23,079,016 $(28,234,803) $ -- $ (13,499) $ (269,784)
------- -------- ---------- ---------- ----------- ------------ -------- ------------ ------------
See accompanying notes to consolidated financial statements
</TABLE>
12
<PAGE>
<TABLE>
HEARx Ltd. And Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Continued)
Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
Non-Redeemable
Preferred Stocks Common Stock Additional
--------------------------- --------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 29, 1995 ............................ 103,824 $ 103,824 47,956,783 $ 4,795,678 $ 23,079,016
Exercise of employee stock options ...................... -- -- 419,900 41,990 167,861
Exercise of warrants, net of expenses of $134,814 ....... -- -- 4,059,650 405,965 1,871,485
Treasury stock received from cashless exercise of
warrants ............................................... -- -- 250,000 25,000 --
Conversions of preferred stock Senior A,B,D,G, and E .... (88,824) (88,824) 8,882,400 888,240 (799,416)
Series C, Convertible 1992 ............................. (10,000) 1,040,000 104,000 (94,000) --
1994, Convertible .................................... (5,000) (5,000) 5,000,000 500,000 (495,000)
Preferred dividends paid to principal stockholder ....... -- -- -- -- (214,666)
Purchase and retirement of common stock from
former officer ......................................... -- -- (120,000) (12,000) (33,000)
Issuance of common stock - Advisory Board ............... -- -- 28,900 2,890 22,110
Issuance of private placement 1996 Sr convertible
preferred stock, net of expenses of $338,345 ........... 6,000 6,000 -- -- 5,655,655
Redemption of 1996 Sr. convertible preferred stock ...... (6,000) (6,000) -- -- (5,994,000)
Common stock issued for customer list ................... -- -- 150,000 15,000 224,070
Issuance of private placement 1996 Series A convertible
preferred stock, net of expenses of $306,000 ........... 5,100 5,100 -- -- 4,788,900
Conversions of 1996 Series A preferred stock ............ (5,100) (5,100) 1,955,888 195,589 (54,153)
Issuance of private placement 1996 Series B-1 and B-2
convertible preferred stock, net of expenses
of $1,851,410 .......................................... 24,900 24,900 -- -- 23,023,690
Conversions of 1996 Series B-1 and B-2 preferred stock .. (19,950) (19,950) 12,020,712 1,202,071 (446,203)
Stock option exercise by consultants .................... -- -- 325,000 32,500 252,428
------------ ------------ ------------ ------------ ------------
Subtotal ................................................ 4,950 $ 4,950 81,969,233 $ 8,196,923 $ 50,954,777
------------ ------------ ------------ ------------ ------------
<CAPTION>
Unamortized Unrealized Total
Accumulated Treasury Deferred Gain on Market Stockholders'
Deficit Stock Compensation Securities Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 29, 1995 ............................. $(28,234,803) $ -- $ (13,499) $ -- $ (269,784)
Exercise of employee stock options ....................... -- -- -- -- 209,851
Exercise of warrants, net of expenses of $134,814 ........ -- -- -- -- 2,277,450
Treasury stock received from cashless exercise of
warrants ................................................ -- (625,000) -- -- (600,000)
Conversions of preferred stock Senior A,B,D,G, and E ..... -- -- -- -- --
Series C, Convertible 1992 .............................. -- -- -- --
1994, Convertible ..................................... -- -- -- -- --
Preferred dividends paid to principal stockholder ........ -- -- -- -- (214,666)
Purchase and retirement of common stock from former
officer ................................................. -- -- -- -- (45,000)
Issuance of common stock - Advisory Board ................ -- -- -- -- 25,000
Issuance of private placement 1996 Sr convertible
preferred stock, net of expenses of $338,345 ............ -- -- -- -- 5,661,655
Redemption of 1996 Sr. convertible preferred stock ....... -- -- -- -- (6,000,000)
Common stock issued for customer list .................... -- -- -- -- 239,070
Issuance of private placement 1996 Series A convertible
preferred stock, net of expenses of $306,000 ............ -- -- -- -- 4,794,000
Conversions of 1996 Series A preferred stock ............. (136,336) -- -- -- --
Issuance of private placement 1996 Series B-1 and B-2
convertible preferred stock, net of expenses of
$1,851,410 .............................................. -- -- -- -- 23,048,590
Conversions of 1996 Series B-1 and B-2 preferred stock ... (900,171) -- -- -- (164,253)
Stock option exercise by consultants ..................... -- -- -- -- 284,928
------------ ------------ ------------ ------------ ------------
Subtotal ................................................. $(29,271,310) $ (625,000) $ (13,499) $ -- $ 29,246,841
------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements
</TABLE>
13
<PAGE>
<TABLE>
HEARx Ltd. And Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Concluded)
Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
<CAPTION>
Non-Redeemable
Preferred Stocks Common Stock Additional
--------------------------- --------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance carried forward ................................. 4,950 $ 4,950 81,969,233 $ 8,196,923 $ 50,954,777
Deemed dividend on 1996 Series A, B-1 and
B-2 private placements ................................ -- -- -- -- 9,000,000
Vesting of restricted stock - Officers .................. -- -- -- -- 2,800
Amortization of deferred compensation ................... -- -- -- -- --
Unrealized gain on marketable securities net of taxes ... -- -- -- -- --
Non-employee stock option compensation .................. -- -- -- -- 38,903
Net loss for the year ................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 27, 1996 ............................ 4,950 $ 4,950 81,969,233 $ 8,196,923 $ 59,996,480
------------ ------------ ------------ ------------ ------------
<CAPTION>
Unamortized Unrealized Total
Accumulated Treasury Deferred Gain on Market Stockholders'
Deficit Stock Compensation Securities Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance carried forward ................................. $(29,271,310) $ (625,000) $ (13,499) $ -- $ 29,246,841
Deemed dividend on 1996 Series A, B-1 and
B-2 private placements ................................ (9,000,000) -- -- -- --
Vesting of restricted stock - Officers .................. -- -- -- -- 2,800
Amortization of deferred compensation ................... -- -- 13,499 -- 13,499
Unrealized gain on marketable securities net of taxes ... -- -- 32,121 32,121
Non-employee stock option compensation .................. -- -- -- -- 38,903
Net loss for the year ................................... (7,858,979) -- -- -- (7,858,979)
------------ ------------ ------------ ------------ ------------
Balance at December 27, 1996 ............................ $(46,130,289) $ (625,000) $ -- $ 32,121 $ 21,475,185
------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements
</TABLE>
14
<PAGE>
<TABLE>
HEARx Ltd. And Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended Year Ended Year Ended
December 27, December 29, December 30,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before dividends ................................................ $ (7,858,979) $ (2,213,453) $ (2,105,635)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................................ 1,254,055 350,137 204,981
Provision for losses on accounts receivable .......................... 448,088 198,298 51,247
Loss on disposition of property ...................................... 280,187 -- --
Non-cash expense for consulting services ............................. -- 222,530 62,500
Non-cash expense for executive stock bonuses ......................... -- 127,076 7,500
(Increase) decrease in:
Accounts and notes receivable .......................................... (2,242,087) (63,423) (105,612)
Inventories ............................................................ 32,005 (58,419) 134,818
Prepaid expenses ....................................................... 284,418 (485,638) 99,184
Other assets .......................................................... (582,035) (414,465) (141,091)
Increase (decrease) in:
Accounts payable ....................................................... (427,008) 733,806 696,541
Accrued expenses ....................................................... 2,380,244 117,086 251,502
Accrued costs for restructuring and
discontinued operations .............................................. -- -- (1,092,205)
--------------- --------------- ---------------
Net cash used in operating activities ............................... (6,431,112) (1,486,465) (1,936,270)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ..................................... (6,824,065) (1,711,203) (40,110)
Proceeds from sale of property and equipment ........................... -- 21,748 132,568
Purchase of marketable securities ...................................... (11,903,904) -- --
Discontinued operations ................................................ -- -- 82,748
--------------- --------------- ---------------
Net cash (used) provided by investing activities .................... $ (18,727,969) $ (1,689,455) $ 175,206
--------------- --------------- ---------------
See accompanying notes to consolidated financial statements
</TABLE>
15
<PAGE>
<TABLE>
HEARx Ltd. And Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
<CAPTION>
Year Ended Year Ended Year Ended
December 27, December 29, December 30,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings .................................................... $ -- $ 1,370,000 $ --
Proceeds from issuance of:
Long-term debt - principal stockholder ................................. -- -- 500,000
Long-term debt - other ................................................. 1,261,977 -- --
Convertible subordinated debentures .................................... -- -- 138,750
Exercise of stock option ............................................... -- -- 75,000
Principal payments:
Long-term debt ....................................................... (4,439,686) (279,255) (130,972)
Forgiveness of long-term debt ........................................ (343,640) (293,843) (52,500)
Proceeds from issuance of capital stock ................................ 29,558,328 2,983,550 1,248,035
--------------- --------------- ---------------
Net cash provided by financing activities ............................ 26,036,979 3,780,452 1,778,313
--------------- --------------- ---------------
Net increase in cash and cash equivalents .................................... 877,898 604,532 17,249
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................... 933,539 329,007 311,758
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................................... $ 1,811,437 $ 933,539 $ 329,007
=============== =============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
16
<PAGE>
<TABLE>
HEARx Ltd. And Subsidiaries
Consolidated Statements of Cash Flows
(Concluded)
<CAPTION>
Year Ended Year Ended Year Ended
December 27, December 29, December 30,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ......................................................... $ 249,097 $ 253,479 $ 211,490
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Deemed dividends on 1996 Series A, B-1,
B-2 private placements ................................................... 9,000,000 -- --
Preferred stock dividend paid upon conversion
in kind by issuance of additional common stock ........................... 1,036,507 -- --
Forgiveness of note payable by minimum required
purchases ................................................................ 343,640 293,843 --
Issuance of common stock for services ...................................... 309,925 222,530 62,500
Issuance of common stock to employees ...................................... 209,851 127,076 44,688
Issuance of common stock for customer list ................................. 239,070 -- --
Conversion of accounts payable into notes payable .......................... -- 808,000 721,832
Issuance of common stock for offering costs and software ................... -- 299,186
In connection with a business acquisition:
Convertible preferred stock issued ..................................... -- -- 500,000
Acquisition costs ...................................................... -- -- 61,569
Fair value of assets acquired .......................................... -- -- (492,224)
Costs in excess of fair value
of net assets acquired ................................................ -- 55,117 69,345
Repayment of bank line of credit by principal
stockholder/officer for a note payable ................................. -- -- 1,000,000
Convertible debentures and accrued interest
payable exchanged for common stock ....................................... -- -- 727,682
See accompanying notes to consolidated financial statements
</TABLE>
17
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
HEARx Ltd. ("HEARx" or "the Company"), a Delaware corporation, was organized for
the purpose of creating a nationwide chain of retail centers ("HEARx Centers")
to serve the needs of the hearing impaired. The company operates HEARx Centers
in Florida, New York, New Jersey, Connecticut, Virginia, Oregon and
Pennsylvania.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
MARKETABLE SECURITIES
Marketable securities are classified available for sale and are carried at
estimated market value. Unrealized holding gains and losses, net of tax, are
reported as a net amount in a separate component of stockholders' equity until
realized. Gains and losses realized from the sales are computed by the
specific-identification method.
INVENTORIES
Inventories, which consist of hearing aids, batteries, special hearing devices
and related items, are priced at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the depreciable asset.
Leasehold improvements are amortized over the shorter of the term of the lease
or the useful life of the asset.
INTANGIBLE ASSETS
Intangible assets, included in other assets, primarily represent customer lists
acquired from acquisitions of hearing businesses. These customer lists are being
amortized on a straight-line basis over periods not exceeding fifteen years.
Intangible assets also include the excess purchase price of acquisitions over
the fair value of assets acquired. Such excess costs are being amortized over
fifteen years. Accumulated amortization at December 27, 1996 and December 29,
1995 was $67,305 and $36,342, respectively.
PRE-OPENING COSTS
The costs associated with the opening of new centers are expensed as incurred.
SALES RETURN POLICY
Patients purchasing hearing aids are given a specific return period, usually 30
days, if dissatisfied with the product. The Company provides an allowance in
accrued expenses for returns. The return period can be extended to 60 days if
the customer attends the Company's H.E.L.P. program.
18
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED COMPENSATION
The value in excess of the selling price of shares of common stock issued to
officers has been amortized over the vesting period of such shares.
WARRANTIES
Hearing aids sold by the Company are covered by manufacturers' warranties.
CAPITATION REVENUE
The Company has capitation contracts with certain health care organizations
under which the Company is paid an amount, per enrollee of the health
maintenance organization, to provide a once every three years discount on
certain hearing products and services. The amount paid to the Company by the
health-care organization is calculated on a per-capita basis and is referred to
as capitation revenue.
Revenue under capitation contracts is recorded based on actual utilization by
the member populations of the health care organizations with whom the Company
has contracted to provide hearing-care services.
INCOME TAXES
Deferred taxes are provided for temporary differences arising from the
differences between financial statement and income tax bases of assets and
liabilities.
NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock is computed using the weighted average number
of shares outstanding during the year. Convertible preferred stock, convertible
subordinated debentures, stock options and stock warrants are excluded from the
computation of net loss per share because the effect of their inclusion would be
anti-dilutive.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purposes of the Statement of Cash Flows, temporary cash investments
which have a maturity of ninety days or less are considered cash equivalents.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been reclassified
in order to conform to the 1996 presentation.
ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
19
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MARKETABLE SECURITIES
Marketable securities at December 27, 1996 consist of U.S. Treasury Notes with
an amortized cost of $11,903,904, estimated fair value of $11,936,025 and
estimated unrealized gains of $32,121. Securities with an amortized cost of
$5,916,151 and estimated fair value of $5,932,795 have contractual maturities
within one year. Securities with an amortized cost of $5,987,753 and estimated
fair value of $6,003,230 have contractual maturities of two years through five
years.
3. SUBSEQUENT EVENT AND PRO-FORMA ADJUSTMENT
On March 17, 1997, the Company completed a private placement of 10,000 shares,
$1 par, of the 1997 Convertible Preferred Stock. Net proceeds to the Company
after payment of placement fees, legal and accounting expenses is estimated to
be $9,270,000. The pro forma effect of this transaction is presented as a
separate column in the consolidated balance sheet. The additional capital was
raised to enable HEARx to expand its network. The 1997 Convertible Preferred
Stock is convertible into Common Stock at various rates depending upon the date
of conversion and the market price at date of conversion. Management has
estimated that a deemed preferred stock dividend of approximately $1,500,000
will be recognized over the period from the date of issuance to August 15, 1997,
the first date on which the preferred stock may be converted for the discounted
conversion price.
4. DEBT
Long-term debt as of December 27, 1996 and December 29, 1995 consists of the
following:
1996 1995
---------- ----------
Note payable to supplier, collateralized by equipment,
due December 31, 1997, see (a) below ................ $ 683,114 $ --
Note payable collateralized by customer list, see (b)
below ............................................... 213,515 --
Note payable to principal stockholder,
paid during 1996 (see note 9) ........................ -- 1,675,000
7% notes payable, to investors, due December 11, 1996
converted to common stock (see note 6D) .............. -- 1,100,000
Note payable to supplier, due January 31, 1999,
paid in 1996 ......................................... -- 808,000
Short term advances from principal stockholder paid in
1996 (see note 9) .................................... -- 270,000
Other notes payable .................................... 85,302 650,280
---------- ----------
981,931 4,503,280
Less current maturities ................................ 751,673 2,186,980
---------- ----------
$ 230,258 $2,316,300
========== ==========
The approximate aggregate maturities on long-term debt obligations in years
subsequent to 1996 are as follows: 1997, $752,000; 1998, $72,000; 1999, $72,000;
2000, $72,000; and $14,000 thereafter.
20
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) 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. The financing is collateralized by the equipment financed.
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.
(b) In January, 1996, the Company acquired the customer list and selected assets
of Suffolk County Hearing Aid Center, Inc. in New York for $150,000, 150,000
shares of Common Stock, and a five year note in the amount of $250,000 including
interest. The note payable includes interest at 5.5% and is payable in five
annual installments of $50,000 including interest beginning January 22, 1997.
5. PROPERTY AND EQUIPMENT AND LEASES
Property and equipment consist of the following:
December 27, December 29,
1996 1995
------------ ------------
Equipment, furniture and fixtures .................. $ 4,840,652 $ 2,357,101
Leasehold improvements ............................. 3,823,205 729,144
Computer systems ................................... 2,127,770 872,454
Leasehold improvements in progress ................. 60,692 436,673
------------ ------------
10,852,319 4,395,372
Less accumulated depreciation and amortization ..... 2,783,619 1,871,490
------------ ------------
$ 8,068,700 $ 2,523,882
============ ============
Remaining commitments under contracts in progress related to the northeast
expansion necessary to fulfill the Company's contractual commitments to certain
managed care companies total $295,687 at December 27, 1996.
Approximate future minimum rental commitments under operating leases are as
follows: $2,183,000 in 1997; $2,080,000 in 1998; $1,955,000 in 1999; $1,797,000
in 2000; $1,422,000 in 2001 and $5,624,000 thereafter. These leases are
primarily for hearing centers and are located in retail shopping areas. The
Company believes that it would be able to sublease the space should it have to
close a center due to losing a large contract with a managed care insurance
company.
Equipment and building rent expense for the years ended December 27, 1996,
December 29, 1995 and December 30, 1994 was $1,916,000, $1,267,000 and $930,000,
respectively.
21
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCKHOLDERS' EQUITY
A. SENIOR PREFERRED STOCK, SERIES A, B, C, D, G AND E
These shares of Senior Preferred Stock had 100 votes per share and, unless
otherwise required by Delaware law, voted with the holders of other shares of
Common Stock as one class. The shares of Senior Preferred Stock Series A, B,
C, D, G and E had no right to dividends except pari passu with the Common
Stock based on the number of shares of Common Stock into which they were then
convertible when, as and if a dividend was declared by the Board of
Directors. The Senior Preferred Stock Series A, B, C, D, G and E were senior
to the Common Stock and the Series C Preferred Stock and were pari passu with
the 1994 Convertible Preferred Stock and the 1996 Senior Preferred Stock
(discussed below). Upon the listing of the Company's Common Stock on the
American Stock Exchange on March 15, 1996, all of the Senior Preferred Stock
Series A, B, D, G, and E were automatically converted to common stock.
(i) SENIOR SERIES A AND SENIOR SERIES B
Pursuant to an October 31, 1991 agreement with 3M, the Company agreed
not to seek capital from any person, other than financial investors or
through a public offering, as opposed to persons having an interest in
the hearing aid industry, without 3M's prior written approval. The
principal stockholder/officer agreed not to sell for five years any
shares of Common Stock beneficially owned by himself or securities
convertible into or exchangeable for Common Stock. He agreed to give
3M (a) a right of first refusal to purchase all or any portion of such
shares or securities and (b) the right to approve any potential
purchaser, which approval is not to be withheld unreasonably. The
principal stockholder/officer's agreement does not apply to sales in
the open market or gifts of up to five percent of his security
holdings (on a fully converted basis).
(ii) SENIOR SERIES C:
In February, 1991, the Company and 3M entered into an arrangement
pursuant to which, among other things, the Company marketed 3M's
"Memory Mate"tm brand hearing aids and certain other 3M hearing
related products (on a non-exclusive basis). 3M furnished one of its
"Master-Fit"[Trademark] hearing aid fitting systems in each of the
Company's retail locations (valued at $50,000), and 3M paid the
Company a test marketing fee of $300,000. In connection with these
transactions, 3M was granted the right, in exchange for transfer of
title to the fitting systems and agreement to forego repayment of the
funds advanced as a test marketing fee, to acquire for a nominal
consideration, 11,000 shares of Senior Series C. This right has been
converted into the rights to acquire up to 1,100,000 shares of common
stock and has not been exercised by 3M.
(iii) SENIOR SERIES D AND G:
On June 28, 1993, 3M exercised its right to acquire 14,926 shares of
Senior Preferred Stock, Series D, par value $1.00 per share ("Senior
Series D") for $1,000,000 and to acquire 14,926 shares of Senior
Preferred Stock, Series G, par value $1.00 per share ("Senior Series
G") for $1,000,000.
(iv) SENIOR SERIES E:
During 1993 and 1994, 3M paid $400,000 as a partial payment towards
the exercise of Senior Preferred Stock, Series E, par value $1.00 per
share ("Senior Series E"). On May 1, 1995, the Company and 3M agreed
22
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to and the Company did issue 6,472 shares of Senior Series E Stock in
consideration for the $400,000.
B. SERIES C PREFERRED STOCK
During January, 1996, all of the outstanding shares of the Series C Preferred
Stock were converted into 1,040,000 shares of Common Stock, and the
cumulative dividends of $214,666 were converted into a promissory note, which
the Company paid in August, 1996. The Series C Preferred Stock provided for
cumulative dividends at the rate of $5.60 per share per annum, payable
quarterly, commencing June 30 1992, and was junior to the Senior Series
Preferred Stock discussed above and the 1994 Convertible Preferred stock
discussed below; it was senior to the Common Stock in the event of the
liquidation, dissolution or winding up of the Company. The Series C Preferred
Stock had 104 votes per share (1,040,000 votes total) and, except as
otherwise required by Delaware law, voted with the holders of shares of
Common Stock as one class. The Series C Preferred Stock was redeemable at the
sole option of the Company at a redemption price of $70 per share.
C. 1994 CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of certain assets from Hearing Health
Services, Inc. ("HHS"), the Company issued to HHS 2,500 shares of the
Company's 1994 Convertible Preferred Stock, par value $1.00 per share. All
shares were converted to Common Stock by HHS on March 9, 1996. The 1994
Convertible Preferred Stock had 1,000 votes per share (2,500,000 votes total)
and voting rights and powers equal to the voting rights and powers of the
Common Stock. Each share was convertible at any time at the option of the
holder. In connection with the acquisition, HHS also received warrants to
purchase 2,500,000 shares of Common Stock at a price of $.25 per share with
standard anti-dilution rights. These warrants were exercised on January 29,
1996, in a cashless exercise resulting in the issuance to HHS of 2,250,000
shares of Common Stock. The Company received 250,000 shares for the cashless
exercise, which was recorded as treasury stock.
On December 30, 1994, the Company and three limited partnerships affiliated
with HHS (collectively the "Investors") entered into a stock purchase
agreement pursuant to which the Investors purchased 2,500 shares of 1994
Convertible Preferred Stock, par value $1.00 per share at a total cash
purchase price of $500,000 ($200 per share), paid on January 4, 1995. These
shares had the same rights, privileges, and conversion features as the shares
of 1994 Convertible Preferred Stock issued to HHS. On March 8, 1996, the
Investors converted all their 1994 Convertible Preferred stock into 2,500,000
shares of Common Stock.
D. 1996 SENIOR PREFERRED STOCK
During 1996 the Company completed a private placement of 6,000 shares, $1
par, of 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 cover an aggregate of 11,070,480 shares of common stock
at an exercise price of $.55 per share. The 1996 Senior Preferred Stock was
redeemed by the Company during May, 1996. The warrants remain outstanding.
Additionally 2,283,278 warrants were issued to an investment banker as a
placement fee.
E. 1996 SERIES A, B-1 AND B-2 CONVERTIBLE PREFERRED STOCK
During May and August, 1996, the Company completed a side-by-side offering
pursuant to Regulation D and Regulation S, each promulgated under the
Securities Act of 1933, as amended. 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
23
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(the "Series B-2 Preferred Stock"), for net proceeds of $23,048,590. In the
Regulation S offering, the Company sold 5,100 shares of a convertible
preferred stock (the "Series A Preferred Stock") for net proceeds of
$4,794,000. In connection with the Regulation D and Regulation S offerings,
the Company was required to report a one-time, non-cash charge against loss
available to common stockholders of $9,000,000 (see Note 6G).
(i) 1996 SERIES A CONVERTIBLE PREFERRED STOCK
As of December 27, 1996, all of the 5,100 shares of the 1996 Series A
Convertible Preferred Stock plus accrued dividends in the amount of
$136,336 had been converted into 1,955,888 shares of the Company's
Common Stock. The 1996 Series A Convertible Preferred Stock ranked
prior to all of the Company's Common Stock, prior to any class or
series of capital stock of the Company thereafter created specifically
ranking by its terms junior to 1996 Series A Convertible Preferred,
and after any class or series of capital stock of the Company
thereafter created and specifically ranking by its terms senior to the
1996 Series A Convertible Preferred. The 1996 Series A Convertible
Preferred Stock bore dividends of 8%, payable in kind or cash upon
conversion at the option of the Company. The holders of this stock
were entitled to convert up to 100 percent of the number of shares
beginning 60 days following the date of the last closing (May, 1996).
(ii) 1996 SERIES B-1 CONVERTIBLE PREFERRED STOCK
The 1996 Series B-1 Convertible Preferred Stock ranks prior to all of
the Company's Common Stock, prior to any class or series of capital
stock of the Company thereafter created specifically ranking by its
terms junior to any 1996 Series B-1 Convertible Preferred, pari passau
with the Company's 1996 Series B-2 Convertible Preferred Stock, 1997
Convertible Preferred Stock and after any class or series of capital
stock of the Company thereafter created and specifically ranking by
its terms senior to the 1996 Series B-1 Convertible Preferred. The
1996 Series B-1 Convertible Preferred Stock bears dividends of 8%,
payment in kind or cash upon conversion at the option of the Company.
Upon conversion of the Preferred Stock, holders will be entitled to
receive a number of shares of Common Stock determined by dividing the
stated value of the Preferred Stock ($1,000 per share), plus a premium
in the amount of 8% per annum of the stated value from the date of
issuance (unless the Company chooses to redeem the shares otherwise
issuable in respect of that premium) by a conversion price equal to
the lesser of (i) $5.00, and (ii) a percentage (ranging from 100% on
or before July 7, 1996, to 75% after May 7, 1997) of the average of
the closing bid prices for shares of Common Stock for the ten
24
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
trading day period immediately prior to conversion, subject to
adjustment upon the occurrence of certain dilutive events. The Series
B-1 Preferred Stock may be converted by holders at any time prior to
May 7, 1999 and must be converted on that date. Upon conversion of the
Series B-1 Preferred Stock, holders will also be entitled to receive
up to a maximum of 3,750,000 Warrants to acquire shares of Common
Stock at $6.47. For the year ended December 27, 1996, 11,500 shares of
the total 15,000 shares of the 1996 Series B-1 Convertible Preferred
Stock plus accrued dividends of $491,397 were converted into 7,523,849
shares of the Company's Common Stock, and all 3,750,000 warrants have
been issued to holders on conversion.
(iii) 1996 SERIES B-2 CONVERTIBLE PREFERRED STOCK
The 1996 Series B-2 Convertible Preferred Stock ranks prior to all of
the Company's Common Stock, prior to any class or series of capital
stock of the Company thereafter created specifically ranking by its
terms junior to any 1996 Series B-2 Convertible Preferred, pari passau
with the Company's 1996 Series B-1 Convertible Preferred Stock, 1997
Convertible Preferred Stock and after any class or series of capital
stock of the Company, thereafter created and specifically ranking by
its terms senior to the 1996 Series B-2 Convertible Preferred. The
1996 Series B-2 Convertible Preferred Stock bears dividends of 8%,
payment in kind or cash upon conversion at the option of the Company.
Upon conversion of the Preferred Stock, holders will be entitled to
receive a number of shares of Common Stock determined by dividing the
stated value of the Preferred Stock ($1,000 per share), plus a premium
in the amount of 8% per annum of the stated value from the date of
issuance (unless the Company chooses to redeem the shares otherwise
issuable in respect of that premium) by a conversion price equal to
the lesser of (i) $5.00, and (ii) a percentage (ranging from 100% on
or before July 7, 1996, to 75% after May 7, 1997) of the average of
the closing bid prices for shares of Common Stock for the ten trading
day period immediately prior to conversion, subject to adjustment upon
the occurrence of certain dilutive events. The Series B-2 Preferred
Stock may be converted by holders at any time prior to May 7, 1999 and
must be converted on that date. For the year ended December 27, 1996,
8,450 shares of the total 9,900 shares of the 1996 Series B-2
Convertible Preferred Stock plus accrued dividends of $244,522 were
converted into 4,496,863 shares of the Company's Common Stock.
F. 1995 PLACEMENTS
During 1995, the Company completed a private placement of Common Stock for
$1,500,000 with individual investors for a total of 2,427,184 shares of
Common Stock net of associated costs of $63,192.
The Company completed three Regulation S offerings in 1995 totaling
$1,600,600. Costs related to the offerings were $297,315. A total of
2,602,572 shares of Common Stock were issued in the transactions. The
25
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock purchase agreement provided that the investors' warrants were
exercisable monthly through October, 1996. The warrants gave the investors
the right to purchase additional shares (based on a pre-set formula) at $.10
per share should the market price fall below $.85 per share. None of the
warrants were exercised.
G. DEEMED PREFERRED STOCK DIVIDEND
In connection with the May, 1996 financings (Regulation S and D), the Company
recorded a deemed preferred stock dividend which is shown as an increase in
loss available to common stockholders of $9,000,000. This 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 only impacted the calculation of earnings per share
related to the Common Stock. The amount of the charge was computed as the
difference between the $5.00 conversion price (as defined) and the per share
market price of the Common Stock on the date of the first closing ($6.50)
times the number of shares issuable.
H. WARRANTS
As discussed in Note 6E, the Company issued warrants to purchase 3,750,000
shares of the Company's Common Stock at an exercise price of $6.47 per share
in connection with the conversion of the Series B-1 Convertible Preferred
Stock. These warrants expire in 2001. None of these warrants were exercised
during 1996.
As disclosed in Note 6C above, during 1996 HHS converted 2,500,000 warrants
via a cashless exercise and received 2,250,000 shares of the Company's Common
Stock.
Other warrants were exercised in 1996 to receive 1,809,650 shares of the
Company's Common Stock for proceeds of $1,812,264.
As disclosed in Note 6D, the Company issued 11,070,480 warrants at $.55 per
share to purchase shares of Common Stock in connection with the January, 1996
private placement of 6,000 shares of the 1996 Senior Preferred Stock. In
connection with this private placement, the Company also issued 2,283,278
warrants at $.63 per share to an investment banker as a placement fee. None
of these warrants were exercised during 1996. These warrants will expire on
January 26, 2001.
26
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate number of shares reserved for issuance upon the exercise of
warrants is 21,095,358 as of December 27, 1996. Exercise prices range from $.01
to $6.47 and are exercisable as follows:
Number of Expiration
Warrants Outstanding Date Price
-------------------- -------------- -----
1,100,000 February,1998 $ .01
5,000 December, 1998 .50
1,500 December,1998 .67
12,500 December,1998 .75
58,750 December,1998 2.00
5,000 November,1999 1.50
11,070,480 January, 2001 .55
2,283,278 January, 2001 .63
75,000 August, 2001 4.00
35,000 September, 2001 4.00
3,750,000 December, 2001 6.47
642,125 February, 2003 1.25
2,056,725 January, 2004 1.00
--------------------
21,095,358
====================
7. BUSINESS ACQUISITION 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 % and is payable in five
annual installments of $50,000 beginning January 22, 1997.
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.
8. STOCK OPTION PLANS
At December 27, 1996, the Company has three stock option plans, which are
described below. The Company applies APB Opinion 25, Accounting for Stock Issued
to Employees, and related Interpretations in accounting for the plans. Under APB
Opinion 25, because the exercise price of the
27
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation cost is recognized.
A. EMPLOYEE STOCK OPTION PLANS
(i) Under the Company's 1987 plan, the Company's Board of Directors, or a
committee thereof, is authorized to grant 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
stock options 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.
(ii) 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
may not exceed 2,500,000, plus an automatic annual increase of ten
percent of the number of shares subject to the Plan as of the prior
year.
As of December 27, 1996, 175 employees of the Company held options under the
Stock Option Plans permitting them to purchase 4,281,150 shares of Common
Stock at prices ranging from $.20 to $2.875 per share. Options are
exercisable for a period of nine years commencing one year following the
date of grant and are exercisable in cumulative annual installments of 25
percent per year.
28
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the option activity for the years ended
December 27, 1996, December 29, 1995 and December 30, 1994.
<TABLE>
<CAPTION>
December 27, 1996 December 29, 1995 December 30, 1994
-------------------------- -------------------------- --------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............. 3,252,950 $0.72 2,390,500 $0.41 1,791,800 $0.63
Granted ...................................... 1,746,800 $2.81 1,391,600 $1.12 1,619,850 $0.30
Exercised .................................... 423,400 $0.50 278,650 $0.32 none --
Forfeited .................................... 295,200 $0.52 250,500 $0.40 1,021,150 $0.65
Outstanding at end of year ................... 4,281,150 $1.50 3,252,950 $0.72 2,390,500 $0.41
Options Exerciable at year end ............... 1,200,900 572,211 337,625
Weighted avg. fair value of options granted
during the year ............................ $1.49 $0.00 $0.00
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 27, 1996.
<TABLE>
<CAPTION>
Weighted
Average Weighted Options Weighted
Range of exercise Options Remaining Average Exerciable at Average
Price Outstanding Contractual Life Exercise Price 12/27/1996 Exercise Price
----------------- ----------- ---------------- -------------- ------------- --------------
<C> <C> <C> <C> <C> <C>
$ .20 647,900 7.5 $0.20 323,950 $0.20
$ .34 - $ .75 681,150 6.8 $0.53 499,725 $0.54
$ .78 - $ .88 368,100 8.4 $0.85 118,425 $0.84
$1.21 - $1.49 1,108,200 8.9 $1.23 258,800 $1.21
$2.88 1,475,800 9.5 $2.88 0 $0.00
----------- -------------- -------------
4,281,150 8.6 $1.50 1,200,900 $0.62
========== ============== =============
</TABLE>
29
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation, requires the Company to provide pro forma
information regarding net loss and loss per share as if compensation cost for
the Company's employee stock option plans had been determined in accordance
with the fair value based method prescribed in SFAS 123. During the initial
phase-in period of SFAS 123, the effects on pro forma results are not likely
to be representative of the effects on pro forma results in future years
since the options vest over several years and additional awards could be made
each year. The Company estimates the fair value of each option at the grant
date by using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1995 and 1996 respectively,
expected volatility of 35%; risk-free interest rates of 5.79% and 6.59%; and
expected lives of 10 years.
Under accounting provisions of SFAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
1996 1995
------------- ------------
Net Loss applicable to common stockholder
As reported ....................... $(17,895,486) $(2,213,453)
------------- ------------
Pro forma ......................... $(18,047,159) $(2,213,453)
------------- ------------
Loss per share
As reported ....................... $ (0.25) $ (0.05)
------------- ------------
Pro forma ......................... $ (0.25) $ (0.05)
------------- ------------
B. NON-EMPLOYEE DIRECTOR PLAN
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 stockholder value.
Grants under the Directors Plan may not exceed 500,000 shares of Common Stock
in the aggregate and may be granted 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 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. As of December
27, 1996,
30
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
three non-employee directors hold options under the plan allowing them to
purchase the following shares: 90,000 at $.6875; 45,000 shares at $.78125;
45,000 shares at $.34; 45,000 shares at $1.25; and 45,000 shares at $5.875.
C. STOCK BONUS PLAN
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 is 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 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. There are approximately
nine persons eligible to participate in the Plan.
The aggregate number of shares of Common Stock which may be issued under the
Bonus Plan may not exceed 500,000. A total of 115,138 and 22,727 shares were
issued under this plan during the years ended December 29, 1995 and December
30, 1994, respectively. None were issued during the year ended December 27,
1996.
D. OTHER
On July 11, 1995, the Company granted options expiring ten years from date of
grant to a consultant to purchase 700,000 shares of Common Stock at $1.00 a
share. Options to purchase 58,333 shares vested immediately, with the
remaining options vesting at a rate of 58,333 shares per month beginning
August 1, 1995. A total of 200,000 shares related to the exercise of these
options were issued during the year ended December 27, 1996.
On July 1, 1994, the Company granted an option to the same consultant to
purchase 600,000 shares of Common Stock at $.25 a share. These options vest
at the rate of 50,000 shares per month beginning October 1, 1994. The
consultant exercised options to purchase 50,000 shares, 400,000 shares and
150,000 shares in 1996, 1995 and 1994 respectively. On July 11, 1995, the
Company granted an option to purchase 144,000 shares of Common Stock to an
individual in exchange for consulting services to be rendered over a period
of three years, beginning July 11, 1995. The option price is $1.00 per share,
and the options vest at the rate of 4,000 shares per month beginning August
1, 1995. None of these options have been exercised.
9. RELATED PARTY TRANSACTIONS
In addition to the related party transactions described in Note 6, the following
related party transactions occurred during 1996, 1995, and 1994:
In January, 1996, a payment of $100,000 was made to the principal
stockholder/officer on the $270,000 advanced by him to the Company during 1995.
The remaining $170,000 of the advance plus $63,000 of accrued interest were
converted into a three-year note payable bearing interest at prime plus 3%. 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 held a note payable of the Company in the amount of
$1,675,000 which was subordinated to all other indebtedness of the Company. The
interest rate was prime plus 3%. During August, 1996, each of the three notes
payable to the principal
31
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stockholder/officer was paid in full. At December 27, 1996 the Company had no
other amounts due to the principal stockholder/officer.
Working capital funds were provided during fiscal 1995, 1994 and 1993 through
periodic loans from the principal stockholder/officer. Interest expense on notes
and advances payable to the principal stockholder/officer was $144,773, $198,181
and $120,139 for 1996, 1995 and 1994, respectively.
10. INCOME TAXES
The Company and its subsidiaries file a consolidated income tax return. It has
accounted for certain items (principally depreciation and the allowance for
doubtful accounts) for financial reporting purposes in periods different from
those for tax reporting purposes.
Deferred tax assets are comprised of the following:
December 1996 1995
- ------------------------------------------ ------------ ------------
Depreciation ............................. $ 15,000 $ 54,000
Allowance for doubtful accounts .......... 297,000 163,000
Net operating loss carryforward .......... 12,521,000 9,658,000
------------ ------------
12,833,000 9,875,000
Less valuation allowance ................. (12,833,000) (9,875,000)
============ ============
Net deferred tax asset ................... $ -- $ --
============ ============
At December 27, 1996, the Company had net operating loss carryforwards of
approximately $33,274,000 for both tax and financial reporting purposes. The
losses are available for carryforward for a fifteen year period and will expire
beginning in 2002. Any future significant changes in the ownership of the
Company or its subsidiaries may limit the annual utilization of the tax net
operating loss carryforwards.
11. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
There were no significant fourth quarter adjustments for fiscal 1996.
Significant fourth quarter adjustments for 1995 included were an increase in the
allowance for doubtful accounts of $178,101 and the recording of additional
public relations expense of $284,201.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 107 which
requires the disclosure of fair value of financial instruments. The estimated
fair value amounts have been determined by the Company's management using
available market information and other valuation methods. However, considerable
judgment is required to interpret market data in developing the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation methods may
have a material effect on the estimated fair value amounts. Furthermore, the
Company does not intend to dispose of a significant portion of its financial
instruments and, thus, any aggregate unrealized gains or losses should not be
interpreted as a forecast of future earnings and cash flows.
32
<PAGE>
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 107 excludes certain financial instruments from its disclosure
requirements, such as leases. In addition, disclosure of fair value estimates
are not required for nonfinancial assets and liabilities, such as fixed assets,
intangibles and anticipated future business. As a result, the following fair
values are not comprehensive and therefore do not reflect the underlying value
of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Cash and Cash Equivalents - the carrying amounts reported in the balance sheet
approximate those assets' fair value.
Marketable Securities - the carrying amounts reported in the balance sheet
approximate those assets' fair value.
Accounts Receivable - the carrying amounts reported in the balance sheet
approximate those assets' fair value.
Accounts Payable, Accrued Expenses and Notes Payable - the carrying amounts
reported in the balance sheet approximate those liabilities' fair value.
13. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" on January 1, 1996. SFAS No. 121
provides guidance on how and when impairment losses are recognized on long-lived
assets. Adoption of SFAS No. 121 did not have a material impact on the Company's
operations.
14. MAJOR CUSTOMER
During 1996, the Company had sales totaling approximately 15.7% of net sales to
a single customer. In management's opinion the loss of this customer would not
adversely effect future operations of the Company.
33
<PAGE>
<TABLE>
HEARX LTD.
VALUATION ACCOUNTS
SCHEDULE II
<CAPTION>
Balance at Balance at
Beginning End
of Period Additions Deductions of Period
--------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
December 27, 1996:
Allowance for doubtful accounts $ 341,234 $492,774 $ (44,686) $ 789,322
--------- ----------- ------------- ----------
December 29, 1995:
Allowance for doubtful accounts $ 154,330 $436,971(1) $(250,067)(3) $ 341,234
--------- ----------- ------------- ----------
December 30, 1994:
Allowance for doubtful accounts $ 255,755 $180,071(2) $(281,496)(3) $ 154,330
--------- ----------- ------------- ----------
- ---------------
<FN>
(1) Charged to costs and expense $198,298, transfer from long term notes
receivable allowance $238,673
(2) Charged to costs and expense $51,247, transfer from long term note
receivable allowance for $128,824
(3) Write-off to reserves
</TABLE>
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
(a) (1) The following financial statements are filed as part of this
report:
(i) Consolidated Balance Sheets as of December 27, 1996 and
December 29, 1995.
(ii) Consolidated Statements of Operations for the years ended
December 27, 1996, December 29, 1995 and December 30, 1994.
(iii) Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 27, 1996, December 29, 1995 and
December 30, 1994.
(iv) Consolidated Statements of Cash Flows for the years ended
December 27, 1996, December 29, 1995 and December 30, 1994.
(v) Notes to Consolidated Financial Statements.
(2) The following financial statement schedules are filed as part of this
report and are contained on page 49.
Schedule II Valuation Accounts
(3) Exhibits:
3.1(a)[1] Restated Certificate of Incorporation of HEARx
Ltd., including certain certificates of
designations, preferential and rights of certain
preferred stock of the Company. [3]
3.1A-1[2] Amendment to Restated Certificate of Incorporation
[3.1A]
3.1A-2[3] Certificate of Designations, Preference and Rights
of the Company's 1997 Convertible Preferred Stock.
[3.1A-2]
3.2[4] By-Laws of HEARx, Ltd. [3.2]
4.1[4] Specimen of Certificate representing Common Stock.
[4.1]
35
<PAGE>
4.2[1] Securities Purchase Agreement, dated May 3, 1996,
among the Company and each of the purchasers set
forth on the signature pages thereto, including
Exhibit A thereto (form of warrant ). [4.1]
4.3[1] Registration Rights Agreement, dated May 3, 1996
among the Company and each of the purchasers set
forth on the signature pages thereto. [4.2]
4.4[1] Securities Subscription Agreement, dated as of the
closing thereunder of May 10, 1996, among the
Company and the purchasers set forth on the
signature pages thereto. [4.3]
4.5[1] Registration Rights Agreement, dated May 10,
1996, among the Company and the purchasers set
forth on the signature pages thereto. [4.4]
10.1[4] Form of Consulting Agreement, dated January 1,
1987, as of June 1, 1986, by and between HEARx
Ltd. and each of the members of the Company's
Scientific Advisory Board. [10.1]
# 10.2[4] Form of Directors' Restricted Stock Agreement,
dated July 1, 1987, by and between HEARx Ltd. and
each of Fred N. Gerard, David J. McLachlan and
Daniel J. Miller, M.D. [10.3]
# 10.3[4] HEARx Ltd. 1987 Stock Option Plan. [10.11]
# 10.4[4] Form of Restricted Stock Agreement. [10.28(a)*]
# 10.5[5] (a) HEARx Ltd. Stock Option Plan for
Non-Employee Directors and (b) Form of Option
Agreement. [10.35] [10.48]
10.6[6] Promissory Note dated January 4, 1994 by and
between HEARx Ltd. and Audiology Sales & Service,
Inc. [10.51]
10.7[6] Letter of Intent, dated November 14, 1994, between
HEARx Ltd. and Av-Med. [10.62]
36
<PAGE>
10.8[6] Agreement, dated January 4, 1995, between
CareFlorida HealthCare Plans and HEARx Ltd.
[10.65]
10.9[7] Consolidated and Amended Loan Agreement by and
among the Company, Siemens Hearing Instruments,
Inc., and Rexton, Inc., dated effective January 1,
1995. [10.17]
10.10[7] Care Florida Agreement [10.18]
# 10.11[8] 1995 Flexible Employee Stock Plan
10.12[7] Securities Purchase Agreement by and between the
Company and Kew Capital Corporation, Ltd., dated
as of June 29, 1995. [10.20]
10.13[7] Form of Offshore Securities Subscription Agreement
entered into by and between the Company and each
of Zanett Lombardier, Ltd., Harlow Enterprises,
Inc., and Bruno Guazzoni, dated September 29,
1995, and October 19, 1995. [10.21]
10.14[7] Promissory Note in favor of Bruce M. Langone in
the amount of $100,000 dated December 11, 1995.
[10.22]
10.15[7] Promissory Note in favor of Kenneth G. Langone in
the amount of $1,000,000 dated December 11, 1995.
[10.23]
10.16[7] Agreement between the Company and Oxford Health
Plans dated effective January 1, 1996, as amended
by letter agreements dated February 21, 1996, and
February 29, 1996. [10.24]
10.17[7] Stock Purchase Agreement and Registration Rights
Agreement, each dated January 26, 1996, by and
among the Company, Invemed Associates, Inc., and
certain Investors therein named. [10.25]
10.18[7] Amended and Restated Promissory Note in favor of
Paul A. Brown, M.D., in the amount of $1,675,000
dated January 26, 1996. [10.26]
37
<PAGE>
10.19[7] Promissory Note in favor of Paul A. Brown, M.D.,
in the amount of $214,666 dated January 29, 1996.
[10.27]
22 List of subsidiaries of HEARx Ltd.*
23(a) Consent of Independent Certified Public
Accountants.
- ---------------
[1] Filed as an exhibit to the Company's Current Report on Form 8-K, filed on
May 17, 1996, and incorporated herein by reference.
[2] Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 28, 1996, and incorporated herein by reference.
[3] Filed as an exhibit to the Company's Current Report on Form 8-K, filed on
March 26, 1997 and incorporated herein by reference.
[4] Filed as an exhibit to the Company's Registration Statement on Form S-18
(Registration No. 33-17041-NY) as the exhibit number indicated in brackets
and incorporated by reference herein.
[5] Filed as an exhibit to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-18 and incorporated by reference herein.
[6] Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 30, 1994, as the exhibit number indicated in brackets and
incorporated by reference herein.
[7] Filed as an exhibit to the Company's Form 10-K for the year ended December
27, 1995, and incorporated herein by reference. 8 Filed as an exhibit to the
Company's 1995 Proxy Statement, and incorporated by reference herein.
* Previously filed.
# Denotes plan or arrangement for Company officer or director.
(b) Reports on Form 8-K -- None
38
<PAGE>
SIGNATURES
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.
(Registrant)
Date: June 17, 1997 By: /s/ Paul A. Brown, M.D.
------------------------------------
Paul A. Brown, M.D.
Chairman of the Board
39
Exhibit 23 (a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements of HEARx Ltd. on Form S-8 (filed September 13, 1994), Form S-8 (filed
July 19, 1996), Form S-3 (File No. 333-4303), Form S-3 (File No. 333-4639), Form
S-3 (File No. 333-11429) and Form S-3 (File No. 333-18753) of our report dated
March 25, 1997, relating to the consolidated financial statements and financial
statement schedule of the Registrant and its subsidiaries for the year ended
December 27, 1996, included in the Registrant's Annual Report on Form 10-K, as
amended, for the fiscal year ended December 27, 1996.
West Palm Beach, Florida BDO Seidman, LLP
June 19, 1997
