SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1997
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
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Exact Name of Registrant as Specified in Its Charter
Delaware
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(State of Other Jurisdiction of Incorporation or Organization)
22-2748248
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(I.R.S. Employer Identification No.)
1250 Northpoint Parkway, West Palm Beach, Florida 33407
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (561) 478-8770
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
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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 [ ]
On March 28,1997, 84,459,283 shares of the Registrant's Common Stock were
outstanding.
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PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
HEARX LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 28, December 27,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents ............................ $ 9,897,002 $ 1,811,437
Marketable securities ................................ 10,940,337 11,936,025
Accounts and notes receivable ........................ 4,303,501 3,811,314
Allowance for doubtful accounts ...................... (819,322) (789,322)
Inventories .......................................... 364,829 363,978
Prepaid expenses ..................................... 189,518 245,000
------------ ------------
Total current assets ............................. 24,875,865 17,378,432
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PROPERTY AND EQUIPMENT
Equipment, furniture and fixtures .................... 7,463,734 6,914,732
Leasehold improvements ............................... 4,320,506 3,823,205
Construction-in-progress ............................. 196,045 114,382
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11,980,285 10,852,319
Less accumulated depreciation and amortization ......... 3,160,833 2,783,619
------------ ------------
Net property and equipment ............................. 8,819,452 8,068,700
OTHER ASSETS ........................................... 1,188,314 1,180,352
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$ 34,883,631 $ 26,627,484
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion - long-term debt ..................... 731,363 751,673
Accounts payable and accrued expenses ................ 4,179,913 3,357,422
Accrued salaries and other compensation .............. 345,663 812,946
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Total current liabilities ......................... 5,256,939 4,922,041
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LONG-TERM DEBT-NET OF CURRENT PORTION .................. 188,999 230,258
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COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Non-redeemable preferred stock:
(Aggregate liquidation preference $11,866,722)
$1 par; 2,000,000 shares authorized, issued
and outstanding:
1996 Convertible B-1 ............................... 750 3,500
1996 Convertible B-2 ............................... 1,000 1,450
1997 Convertible ................................... 10,000 --
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Total preferred stock ............................ 11,750 4,950
Common stock, $.10 par; 130,000,000 shares authorized,
84,459,283 and 81,969,233 shares issued ............. 8,445,928 8,196,923
Additional paid-in capital ........................... 69,791,649 59,996,480
Accumulated deficit .................................. (48,076,958) (46,130,289)
Unrealized gain on marketable securities ............. 32,121 32,121
Unamortized deferred compensation .................... (141,797) --
Treasury stock, at cost - 250,000 common shares ...... (625,000) (625,000)
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Total stockholders' equity ....................... 29,437,693 21,475,185
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$ 34,883,631 $ 26,627,484
============ ============
See notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
HEARX LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 28, 1997 AND MARCH 29, 1996
<CAPTION>
1997 1996
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(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES ............................................ $ 5,748,257 $ 4,718,192
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COSTS AND EXPENSES:
Cost of products sold .............................. 1,811,763 1,391,646
Center operating expenses .......................... 4,002,188 2,236,956
General and administrative expenses ................ 1,421,079 787,557
Depreciation and amortization ...................... 404,710 145,347
Interest expense ................................... -- 57,509
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Total expenses .................................. 7,639,740 4,619,015
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INCOME (LOSS) BEFORE DIVIDENDS ON PREFERRED STOCK .... (1,891,483) 99,177
DIVIDENDS ON PREFERRED STOCK ......................... 55,186 --
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS .. $ (1,946,669) $ 99,177
============ ============
NET INCOME (LOSS) PER COMMON SHARE ................... $ (0.02) $ 0.00
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING ........................... 82,964,258 51,093,536
============ ============
See notes to Consolidated Financial Statements
</TABLE>
4
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<TABLE>
HEARX LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
THREE MONTHS ENDED MARCH 28, 1997 AND MARCH 29, 1996
<CAPTION>
1997 1996
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ (1,946,669) $ 99,177
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization .......................................... 377,214 145,347
Allowance for doubtful accounts ........................................ 30,000 (12,600)
Unamortized deferred compensation ...................................... (141,797) --
Non-cash expense for consulting services ............................... 38,250
Non-cash expense for customer list ..................................... -- 239,070
Non-cash expense for executive stock bonuses ........................... 3,375
Changes in operating assets and liabilities:
Accounts and notes receivable .......................................... (492,187) (825,650)
Inventories ............................................................ (850) 78,436
Prepaid expenses and other current assets .............................. 55,482 (591,784)
Deferred charges and other ............................................. (7,963) (881,360)
Accounts payable and accrued expenses ................................. 355,208 302,803
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Net cash used by operating activities .......................................... (1,771,562) (1,404,936)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................................... (1,127,966) (1,463,886)
Proceeds from sale of property and equipment .......................... -- 4,856
Sale of investments ................................................... 995,688 --
------------ ------------
Net cash used by investing activities .......................................... (132,278) (1,459,030)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of:
Long-term debt-principal shareholder ................................ -- 277,673
Long-term debt-other ................................................ 73,471 213,515
Principal payments on borrowings:
Short-term debt ..................................................... (8,004) (13,671)
Long-term debt ...................................................... (46,445) (1,515,863)
Forgiveness of long-term debt ....................................... (80,591) (99,000)
Proceeds from issuance of capital stock, net of offering costs ...... 10,050,974 6,471,921
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Net cash provided by financing activities ...................................... 9,989,405 5,334,575
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Net increase in cash and cash equivalents ...................................... 8,085,565 2,470,609
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................... 1,811,437 933,539
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 9,897,002 $ 3,404,148
============ ============
See notes to Consolidated Financial Statements
</TABLE>
5
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HEARX LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended December 27, 1996. 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.
1. PRIVATE PLACEMENT
On March 17, 1997, the Company completed a private placement of 10,000 shares of
a newly designated preferred stock, the 1997 Convertible Preferred Stock, par
value $1.00 per share, pursuant to Regulation D under the Securities Act of
1933, as amended. Net proceeds to the Company after payment of placement fees
and legal and accounting expenses were $9,270,000. The additional capital was
raised to enable HEARx to expand its network of hearing centers, if required by
current or potential managed-care contracts. The 1997 Convertible Preferred
Stock is convertible into Common Stock at various rates depending upon the date
of conversion and the market price at the 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 issuance date to August 15, 1997,
the first date on which the preferred stock may be converted for the discounted
conversion price.
2. STOCKHOLDERS' EQUITY
CONVERSION OF SERIES B-1 AND B-2 PREFERRED STOCK INTO SHARES OF COMMON STOCK
During May and August 1996, the Company completed an offering pursuant to
Regulation D, 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 (the "Series B-2 Preferred Stock"), for net proceeds of $23,048,590.
During the quarter ended March 28, 1997, 2,750 shares of the Series B-1
Preferred Stock were converted into 1,550,399 shares of Common Stock and 450
shares of the Series B-2 Preferred Stock were converted into 253,717 shares of
Common Stock.
COMMON STOCK
During the quarter ended March 28, 1997, warrants were exercised resulting in
the issuance of 528,634 shares of Common Stock and employee stock options were
exercised resulting in the issuance of 107,500 shares of Common Stock.
During the quarter ended March 28, 1997, 50,000 shares of Common Stock were
issued to one of the Company's officers pursuant to a deferred compensation
stock plan.
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Standard Number 128,
Earnings Per Share. As required the Company will adopt this standard at the end
of its current fiscal year. The adoption of this standard is not expected to
have a material impact on the Company's reported earnings per share.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 in this
region, 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 the first
quarter of 1997, the Company continued its thrust into the northeast U.S. market
with the opening of four new centers in the Philadelphia region, and increased
its presence in the Florida region with the addition of three new centers in
central Florida to serve the Orlando market. The seven new centers opened in the
first quarter of 1997 brought the total Company owned centers to seventy-two
(72).
The Company signed new or expanded contracts with four managed care companies in
the first quarter of 1997 adding to the fourteen new contracts signed in 1996 in
the northeast U.S. market in support of the new and existing 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.
7
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 1997 COMPARED TO 1996
Net sales increased $1,030,065, or 21.8%, to $5,748,257 in 1997 from $4,718,192
in 1996. Net sales in those regions in operation in both 1997 and 1996 increased
$730,070, or 15.6%, to $5,421,744 in 1997 from $4,691,674 in 1996, and in the
first quarter of 1997 centers from those regions had a combined operating profit
before depreciation and corporate overhead. The balance of the increase in net
sales, $149,024, resulted from those centers opened in the northeast U.S. market
in 1997.
Cost of products sold increased $420,117, or 30.2%, to $1,811,763 in 1997 from
$1,391,646 in 1996. The increase in cost of products sold was primarily the
result of increased sales volume in 1997 over 1996. Cost of products sold, as a
percentage of net sales, was higher in 1997 than in 1996 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.
Center operating expenses increased $1,765,232, or 78.9%, to $4,002,188 in 1997
from $2,236,956 in 1996. This increase is partially due to an increase in
advertising expense of $388,891, a 125% increase over 1996. The remaining
increase of $1,376,341, or 61.5% is attributable to the 60% increase in the
number of centers operating in the first quarter of 1997 (72) compared to the
first quarter of 1996 (45).
General and administrative expenses increased $633,522, or 80.4%, to $1,421,079
in 1997 from $787,557 in 1996. Substantially all of the 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 $259,363, or 178%, to $404,710
in 1997 from $145,347 in 1996. The increase was attributable to the depreciation
and amortization of the leasehold improvements, medical and computer equipment,
and furniture associated with the forty-four new centers opened in 1996 and
1997, the installation of computer systems in existing centers in the base
regions and the corporate office computer systems installed in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $7,162,535 to $19,618,926 as of March 28, 1997 from
$12,456,391 as of December 27, 1996. During the first quarter of 1997, the
Company completed a private placement (see Note 1. Private Placement) providing
the Company net proceeds of $9,270,000. The Company also received net proceeds
of $780,974 from the exercise of warrants and stock options during the quarter.
The Company purchased $1,127,966 in property and equipment in the first quarter.
The sale of the Company's securities in 1997 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.
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 $1,404,936, in the first
quarter of 1996, to $1,771,562 in 1997. 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
8
<PAGE>
the new contract signings and the accompanying expansion into the northeast U.S.
market as discussed above, in advance of patient usage.
Net cash used in investing activities decreased from $1,459,030, in the first
quarter of 1996, to $132,278 in 1997. This decrease resulted from a $335,920
reduction of cash ($1,463,886 in 1996 to $1,127,966 in 1997) used to fund the
construction of leasehold improvements and the related purchase of property and
equipment to equip the new and existing centers so as to accommodate the
expected increase in revenue, in addition to the sale of investments amounting
to $995,688.
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 $5,334,575, in the first quarter
of 1996, to $9,989,405 in 1997. This increase was the result of an equity
offering and the exercise of warrants and stock options during the first quarter
of 1997 in the amount of $10,050,974, net of expenses.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEARx Ltd.
(Registrant)
Date: June 17, 1997 By: /s/ Stephen J. Hansbrough
------------------------------------
Stephen J. Hansbrough
President and
Chief Operating Officer
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