<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1998
-------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------- ---------------
COMMISSION FILE NUMBER 0-16453
-------
HEARX LTD
- --------------------------------------------------------------------------------
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELAWARE 22-2748248
- --------------------------------------------------------------------------------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1250 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 478-8770
----------------------------
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT
INDICATE BY CHECK __ 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 OCTOBER 30, 1998, 102,819,003 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets 3
September 25, 1998 and December 26, 1997
Statements of Operations 4
Nine months ended September 25, 1998 and September 26, 1997
Statements of Operations 5
Three months ended September 25, 1998 and September 26, 1997
Statements of Cash Flows 6
Nine months ended September 25, 1998 and September 26, 1997
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 2. Recent Sales of Unregistered Securities 12
Item 5. Other Information 13
Item 6. Exhibits and reports on Form 8-K 14-15
Signatures 16
</TABLE>
2
<PAGE> 3
HEARx LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 25, December 26,
1998 1997
------------ ------------
(unaudited) (audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,463,663 $ 3,644,838
Investment securities 2,000,001 10,281,913
Accounts and notes receivable, less allowance for
doubtful accounts of $496,553 and $246,371 4,039,421 3,256,716
Inventories 513,662 523,356
Prepaid expenses 204,999 312,866
Other 629,539 143,371
------------ ------------
Total current assets 18,851,285 18,163,060
PROPERTY AND EQUIPMENT - NET 8,339,013 9,014,190
OTHER 1,703,477 1,182,297
------------ ------------
$ 28,893,775 $ 28,359,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,900,057 $ 3,062,062
Accrued salaries and other compensation 501,447 914,156
Current maturities of long term debt 795,321 1,050,695
------------ ------------
Total current liabilities 5,196,825 5,026,913
------------ ------------
LONG TERM DEBT, LESS CURRENT MATURITIES 168,897 177,897
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Non-redeemable preferred stock:
(Aggregate liquidation preference $13,803,921 and $7,447,163) $1 par;
2,000,000 shares authorized; issued and outstanding:
1997 Convertible - 6,250 and 7,115 shares 6,250 7,115
1998 Convertible - 7,500 shares 7,500 -
------------ ------------
Total preferred stock 13,750 7,115
Common stock; $.10 par; 130,000,000 shares authorized;
101,883,560 and 99,211,436 shares issued
and outstanding 10,188,356 9,921,144
Additional paid-in capital 77,667,504 70,646,172
Accumulated deficit (64,256,478) (57,326,412)
Unrealized gain on marketable securities - 20,156
Unamortized deferred compensation ( 85,079) (113,438)
------------ ------------
Total stockholders' equity 23,528,053 23,154,737
------------ ------------
$ 28,893,775 $ 28,359,547
============ ============
</TABLE>
See accompanying notes to the financial statements
3
<PAGE> 4
HEARx LTD.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET REVENUE $ 20,525,107 $ 17,347,775
------------ ------------
COSTS AND EXPENSES:
Cost of products sold 5,913,052 4,835,015
Center operating expenses 14,625,594 12,694,323
General and administrative expenses 4,814,406 4,558,854
Depreciation and amortization 1,698,427 1,464,986
Interest expense 51,332 -
------------ ------------
Total expenses 27,102,811 23,553,178
------------ ------------
LOSS BEFORE DIVIDENDS ON PREFERRED STOCK (6,577,704) (6,205,403)
DIVIDENDS ON PREFERRED STOCK:
Deemed dividends - (1,500,000)
Dividends (352,362) (385,026)
------------ ------------
Total dividends (352,362) (1,885,026)
------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (6,930,066) $ (8,090,429)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.07) $ (0.09)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 100,688,912 86,418,725
============ ============
</TABLE>
See accompanying notes to the financial statements
4
<PAGE> 5
HEARx LTD.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET REVENUE $ 6,614,203 $ 5,744,926
------------ ------------
COSTS AND EXPENSES:
Cost of products sold 1,919,315 1,555,132
Center operating expenses 5,091,189 4,634,194
General and administrative expenses 1,430,667 1,542,919
Depreciation and amortization 576,053 512,209
Interest expense 14,616 -
------------ ------------
Total expenses 9,031,840 8,244,454
------------ ------------
LOSS BEFORE DIVIDENDS ON PREFERRED STOCK (2,417,637) (2,499,528)
DIVIDENDS ON PREFERRED STOCK (149,709) (148,969)
------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,567,346) $ (2,648,497)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.03) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 100,906,864 90,782,693
============ ============
</TABLE>
See accompanying notes to the financial statements
5
<PAGE> 6
HEARx LTD.
STATEMENT OF CASHFLOWS
NINE MONTHS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before $ (6,577,704) $ (6,205,403)
Adjustments to reconcile net loss to net cash
Used by operating activities:
Depreciation and amortization 1,696,880 1,464,986
Provision for doubtful accounts 290,967 (101,275)
Loss on disposition of property 60,268 4,508
(Increase) decrease in:
Accounts and notes receivable (1,073,678) 306,470
Inventories 9,693 (55,766)
Prepaid expenses 107,867 84,834
Other current and non-current assets (1,063,821) (39,284)
Increase (decrease) in:
Accounts payable and accrued expenses 425,292 (1,292,895)
------------ ------------
Net cash used in operating activities (6,124,236) (5,833,825)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,045,448) (2,006,248)
Proceeds from the sale of property & equipment 48,310 -
Purchase/sale of investments 8,261,757 (2,359,633)
------------ ------------
Net cash provided (used) by investing activities 7,264,619 (4,365,881)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of:
Long-term debt - 171,560
Principle payments:
Short-term borrowings (218,220) (18,302)
Long-term debt (9,000) (47,259)
Forgiveness of long-term debt (37,155) (81,330)
Proceeds from the issuance of capital stock, net of
offering costs 6,942,817 10,965,880
------------ ------------
Net cash provided by financing activities 6,678,442 10,990,549
------------ ------------
Net increase in cash and cash equivalents 7,818,825 790,843
Cash and cash equivalents at beginning of period 3,644,838 1,811,437
------------ ------------
Cash and cash equivalents at end of period $ 11,463,663 $ 2,602,280
============ ============
See accompanying notes to the financial statements
</TABLE>
6
<PAGE> 7
HEARx LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended December
26, 1997. 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain amounts in the 1997 consolidated financial statements have been
reclassified in order to conform to the 1998 presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, which
establishes standards for reporting and presentation of comprehensive income and
its components. SFAS 130 is effective for periods beginning after December 15,
1997 and does not have a material impact on the Company's financial statements.
Additionally in June 1997, the FASB issued SFAS 131, Disclosure about Segments
of an Enterprise and Related Information. SFAS 131 establishes standards for the
way public enterprises are to report operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim reports. SFAS 131 is effective for periods beginning after
December 15, 1997 and does not have a material impact on the Company's financial
statements.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
HEARx intends, as its ultimate goal, to establish a nationwide network of
hearing care centers, located in the metropolitan areas or regions with
concentrations of elderly consumers who are more likely to need the Company's
products or services. At the end of the third quarter of 1998, HEARx continued
to operate 75 centers. Those include 35 centers in Florida, 16 in New York, 15
in New Jersey, 4 in Connecticut, and 5 in Pennsylvania. HEARx has distinguished
itself from other hearing care providers by being awarded a three year
accreditation, effective June 2, 1998, from the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO).
The Company is currently expanding its network of hearing care centers through
the recently announced joint venture with The Permanente Federation LLC. A
network of 15 centers servicing the Southern California Market is targeted to
open in early January 1999. In addition to being a 50% owner of the venture,
HEARx will manage the new company pursuant to a management agreement with the
joint venture. The Company will be reimbursed annually over $1.5 million for its
general and administrative costs associated with management of this venture.
Pursuant to an interest bearing loan agreement, HEARx will also provide a $5
million loan to the joint venture to be used to fund the construction and other
start-up costs of the new centers. Construction has commenced at a number of
sites and the first employee-training group starts early in November 1998.
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.
Management continues to try to position the Company as the leading provider of
hearing care to the managed care marketplace. HEARx currently receives a
per-member-per-month fee for more than 500,000 Medicare members each month. In
total, HEARx has over 170 contracts for hearing care with various healthcare
providers. Management continues to observe, however, that a number of managed
care organizations are experiencing significant difficulties arising from the
widespread growth and reach of available plans and benefits, as well as the
diverse nature of some of the defined participant populations. Many of these
organizations, including some of those with whom HEARx has contracts, have
focused substantial resources on correcting their own administrative, cost and
information systems instead of expanding their plan memberships. As a result,
HEARx has not experienced the growth it expected from this market. A number of
managed care organizations have announced that they are withdrawing from
selected geographic areas, some of which include HEARx markets. Where warranted,
HEARx will also make reductions in its center network to assure profitability.
HEARx believes that competition among the managed care organizations for members
will intensify in the core markets now serviced by HEARx. To the extent HEARx is
successful in obtaining contracts with those organizations and the members in
those organizations expand sufficiently, HEARx will open new centers as needed.
It is the Company's belief that restrictions on, or elimination of, "open-ended"
benefits such as pharmacy or dental care may mean the enhancement of "limited
risk" benefits such as hearing care in order to attract new members, although
there can be no assurance that hearing care will be among those "limited risk"
benefits offered.
There can be no assurance that all of the Company's provider contracts will
produce the revenues anticipated. 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
8
<PAGE> 9
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 or insurance
contract would not have a material adverse effect on its financial condition or
results of operations. Each of the existing managed care and insurance contracts
are achieving expected gross profit margins and contributing positively to the
Company's results of operations.
In an effort to supplement its base of sales to and through the healthcare
provider contracts which continue to account for the majority of the Company's
sales, the Company has, since late 1997, developed and refined its marketing
programs oriented toward the non-insured "self pay" patient. The programs have
been generating "self pay" sales approximating 30% of total revenues.
At the center level, HEARx is profitable in Florida where sales for the nine
months ended September 1998 are up approximately 40% over the comparable period
in 1997. In the Northeast market, however, centers have yet to generate enough
revenue to reach profitability, primarily as a result of the difficulties
several of the Company's contract providers have been having (as discussed
above). HEARx expects to close on several new contracts in the Northeast soon
and that, combined with the initiation of the several previously announced
contracts in that market, should increase revenues and decrease center losses.
The Company has conducted a comprehensive review of its computer systems to
identify any system that could be affected by the "Year 2000" issue. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than 2000. This could result in a system malfunction or
miscalculation. Management believes the Year 2000 problem will not pose
significant operational problems for the Company. The Company's computer
operational programs have been written within the past three years and use four
digits to define the applicable year. The Company has sent confirmations to
outside vendors and principal customers to ensure their programs are Year 2000
compatible. A majority of the confirmations have been received and favorably
evaluated as to Year 2000 issues. A plan has been formulated to address these
issues and testing will be ongoing through mid 1999. The Company believes any
future costs associated with Year 2000 compliance will be immaterial.
RESULTS OF OPERATIONS
For the three months ended September 25, 1998 Compared to September 26, 1997
Net revenue increased $869,277, or 15.1%, to $6,614,203 in the third quarter of
1998 from $5,744,926 in the same period of 1997. The increase in net revenue
primarily resulted from the increase in the Company's non-insured "self-pay"
business and the effect of new contracts signed with major managed care
companies during the period ended September 25, 1998.
Cost of products sold increased $364,183, or 23.4%, to $1,919,315 in the third
quarter of 1998 from $1,555,132 in the same period of 1997. The increase in the
cost of products sold is primarily attributable to the increase in net sales
through new and existing centers. Cost of products sold as a percent of net
revenue, which has remained in a range of between 28%-31% over the last four
quarters, fluctuates from period to period depending upon product sale mix and
sales promotions.
Center operating expenses increased $456,995, or 9.9%, to $5,091,189 in the
third quarter of 1998 from $4,634,194 in the same period of 1997. The Company
relocated and remodeled certain centers in southeast Florida during the quarter.
The increase in center operating
9
<PAGE> 10
expenses from quarter to quarter is attributable to an increase in the number of
centers operating in the third quarter of 1998 (75) compared to the third
quarter of 1997 (73); one time charges for relocation of three centers in
southeast Florida to larger facilities; and an increase in center wages in the
southeast Florida region to manage increased sales levels generated there.
General and administrative expenses decreased by $112,252, or 7.3%, to
$1,430,667 in the third quarter of 1998 from $1,542,919 in the same period of
1997. General and administrative expenses have been declining each quarter since
the fourth quarter of 1997.
Depreciation and amortization expense increased $63,844, or 12.5%, to $576,053
in the third quarter of 1998 from $512,209 in the same period of 1997. The
increase was attributable to the depreciation and amortization of the leasehold
improvements, medical and computer equipment, and furniture associated with the
centers opened, acquired, relocated and remodeled in southeast Florida during
1998.
RESULTS OF OPERATIONS
For the nine months ended September 25, 1998 Compared to September 26, 1997
Net revenue increased $3,177,332, or 18.3%, to $20,525,107 for the nine months
ended September 1998 from $17,347,775 for the same period of 1997. The increase
in net sales primarily resulted from the increase in the Company's non-insured
"self-pay" business and the effect of new contracts signed with major managed
care companies.
Cost of products sold increased $1,078,037, or 22.3%, to $5,913,052 for the nine
months ended September 1998 from $4,835,015 for the same period of 1997. The
increase in the cost of products sold is primarily attributable to the increase
in net sales from new and existing centers. As indicated above, cost of products
sold as a percent of net revenue fluctuates somewhat from period to period
depending upon product sale mix and sales promotions.
Center operating expenses increased $1,931,271, or 15.2%, to $14,625,594 for the
nine months ended September 1998 from $12,694,323 for the same period of 1997.
This increase is partially due to an increase in advertising expense of
$412,988, a 17.7% increase over the comparable period of 1997. The remaining
increase of $1,518,283, or 12%, is attributable to the increase in the number of
centers operating during the nine months ended September 1998 (75) compared to
the fiscal year end 1997 (73); one time charges for relocation of three centers
in southeast Florida to larger facilities during the third quarter; and an
increase in center wages in the southeast Florida region to manage increased
sales levels.
General and administrative expenses increased $255,552, or 5.6%, to $4,814,406
for the nine months ended September 1998 from $4,558,854 for the same period of
1997. The increase, which primarily occurred in the first quarter of 1998, was
attributable to the expansion of staff functions in the marketing and insurance
claims processing departments as well as non recurring increases in outside
consulting fees in the areas of public relations, quality assurance and center
office management, each of which was implemented or increased in order to
accomplish the Company's objectives for 1998. General and administrative
expenses have been declining each quarter since the fourth quarter of 1997.
Depreciation and amortization expense increased $233,441, or 15.9%, to
$1,698,427 for the nine months ended September 1998 from $1,464,986 for the same
period of 1997. The increase was attributable to the depreciation and
amortization of the leasehold improvements, medical and computer equipment, and
furniture associated with the centers opened, acquired, relocated and remodeled
in southeast Florida in the first three quarters of 1998.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $518,313 to $13,654,460 as of September 25, 1998 from
$13,136,147 as of December 26, 1997. During the third quarter of 1998, the
Company completed a private placement providing the Company net proceeds of
$6,975,000. The Company believes that its current working capital and revenues
from operations are sufficient to support the Company's current foreseeable
capital requirements and current operating needs through 1998 in accordance with
its strategic plan, although there can be no assurance that other cash needs
will not arise. In the event such needs arise, the Company would obtain such
cash from the sale of its securities or, if available on acceptable terms, a
commercial or private line of credit.
Net cash used by operating activities increased from $5,833,825 in the first
nine months of 1997, to $6,124,236 in the first nine months of 1998. The cash
used by operating activities in 1998 and 1997 was primarily the result of
operating losses in the northeast U.S. market due to provider contracts not
starting timely or not producing the anticipated revenue levels. Other current
and non-current assets increased from $39,284 in the first nine months of 1997
to $1,063,821 in the first nine months of 1998. This increase is primarily due
to the acquisition of an audiology practice and investments in HEARx West LLC,
the joint venture with The Permanente Federation.
Net cash provided by investing activities increased from cash being used by
investing activities of $4,365,881, in the first nine months of 1997 to cash
being provided by investing activities of $7,264,619 in 1998. This increase
resulted from a $960,800 reduction of cash ($ 2,006,248 in 1997 to $1,045,448 in
1998) used in the construction of leasehold improvements and related purchase of
property and equipment for new, relocated or remodeled centers. In addition,
funds from the sale of investments increased to $8,261,757 in the third quarter
of 1998 from $2,359,633 of purchases in investments in the same period of 1997.
The proceeds from the sale of investments were used to fund the operations of
the Company.
Cash from financing activities decreased from $10,990,549 in the first nine
months of 1997, to $6,678,442 in the first nine months of 1998. This decrease
was primarily the result of funds in the amount of $9,909,177, from a preferred
stock offering being included in the first nine months of 1997 versus funds in
the amount of $7,492,500 from a preferred stock offering being included in the
first nine months of 1998.
The Company has approved a stock repurchase program of up to 20 million shares
over the next 12 to 18 months. The Company intends that the repurchases will be
open market purchases and will be made depending on the then prevailing price of
common stock. Funding for such purchases, if and when made, will come from the
Company's available cash, profits from operations and, if available on favorable
terms, a line of credit to be established for this purpose.
Except for historical information provided in this discussion and analysis, the
discussion includes forward looking statements, including those concerning the
shift of patients from Medicare to managed care and the effect thereof on the
Company; the Company's goals of establishing a nationwide center network; the
loss of any existing contracts; and the year 2000 problem. Such statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Potential risks
and uncertainties include industry and market conditions, unforeseen capital
requirements, and the success of the joint venture with The Permanente
Federation, as well as those risks associated with the Company's business
described in the Company's filings with the Securities and Exchange Commission,
including the Form 10K for the fiscal year ended December 26, 1997 and the Form
S-3 resale registration statement dated June 25, 1997.
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 2. Recent Sales of Unregistered Securities
On August 27, 1998, the Company entered into a Securities Purchase Agreement
with Zanett Lombardier Ltd., Goldman Sachs Performance Partners L.P. and Goldman
Sachs Performance Partners (Offshore) L.P. , in which the Company sold a total
of 7,500 units, each unit consisting of: (i) one share of the Company's 1998
Convertible Preferred Stock, par value $1.00 per share (the "1998 Preferred
Stock"), and (ii) a warrant to acquire 75 shares of the Company's common stock,
par value $.10 per share (the "Common Stock") (the "Warrants") for an aggregate
purchase price of $7.5 million. The offers and sales were made only to persons
who are qualified as "accredited investors" as defined in Rule 501(a) of
Regulation D and the Company relied on Regulation D and Section 4(2) of the
Securities Act of 1933 as amended, to issue the securities without registration.
The 1998 Preferred Stock is convertible into Common Stock, par value $.10 per
share, of the Company. Upon the conversion, holders will be entitled to receive
a number of shares of Common Stock determined by dividing the sum of the stated
value of the 1998 Preferred Stock ($1,000 per share), plus a premium (unless the
Company elects to pay that premium in cash), by a conversion price equal to the
lesser of the average closing bid prices for the Common Stock during a five-day
period prior to conversion, and $1.80 (subject to adjustment upon occurrence of
certain dilutive events). The premium payable upon conversion will be equal to
8% of the stated value of 1998 Preferred Stock from the date of issuance until
one year following such date, and shall increase by 0.5% each year, commencing
on the date which is one year following the date of issuance. The 1998 Preferred
Stock may not be converted for the 180-day period after the closing (i.e. to
February 23, 1999). The 1998 Preferred Stock may be converted by holders in
accordance with these terms at any time prior to August 27, 2003, and
automatically converts on such date. In the event of liquidation, dissolution
or winding up of the Company prior to conversion of the 1998 Preferred
Stock, holders of 1998 Preferred Stock will be entitled to share ratably in all
assets available for distribution prior to distributions to holders of Common
Stock. In addition, no distributions may be made to holders of Common Stock
until holders of 1998 Preferred Stock shall have received a liquidation
preference equal to the sum of the stated value of the 1998 Preferred Stock
($1,000 per share) plus an amount equal to ten percent (10%) per annum of such
stated value for the period from the date of issuance until the date of final
distribution.
The Warrants are exercisable for shares of Common Stock of the Company. Upon
exercise, holders will be entitled to receive shares of Common Stock for an
exercise price of $1.80 per share. The Warrants may not be exercised for the
60-day period after the closing and will expire on August 27, 2003.
In connection with this transaction, the Company also entered into a
Registration Rights Agreement with the purchasers under which the Company was
required to file a registration statement on Form S-3, covering the resale of
shares of Common Stock underlying all the 1998 Preferred Stocks and the
Warrants. The S-3 registration statement was filed on September 29, 1998. Under
the Registration Rights Agreement, the Company may be required to make certain
payments to holders of the 1998 Preferred Stock as partial damages if , among
other things, the registration statement has not been declared effective by the
Securities and Exchange Commission on or before December 25, 1998.
The net proceeds to the Company after payment of closing fees was $6,975,000.
The Company paid Zanett Securities (the "Placement Agent") a fee in the amount
of $525,000 and issued to the Placement Agent and its assignees warrants to be
purchase an aggregate of 1,125,000 shares of Common Stock at an exercise price
equal to $1.80 per share. All of the shares underlying the placement agent
warrants were included in the resale registration statement on Form S-3 filed by
the Company.
12
<PAGE> 13
Unregistered Warrant Exchange
On August 27,1998, the Company issued warrants to purchase 404,750 shares of the
Company's Common Stock at an exercise price of $2.00 per share. These warrants
were issued to three persons in exchange for the cancellation of outstanding
warrants held by them covering 4,047,500 shares of Common Stock exercisable at
prices between $5.00 and $6.47 per share. The new warrants are exercisable at
any time prior to August 24, 2003. The Company completed this transaction
pursuant to Section 4(2) of the Securities Act of 1933 in a private placement
exempt from registration.
Item 5. Other Information
Any shareholder of the Company that wishes to submit a stockholder proposal
pursuant to SEC Rule 14a-8 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"), for presentation to the Company's 1999 Annual
Meeting of Stockholders must submit such proposal to the Company at its
principal office no later than December 7, 1998 for inclusion, if appropriate,
in the Company's proxy statement and form of proxy relating to such meeting. A
Company stockholder proposal submitted other than pursuant to Rule 14a-8 will be
timely for purposes of Rule 14a-4(c)(a) promulgated under the 1934 Act only if
submitted to the Company on or before February 20, 1999.
13
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Exhibits:
3.1(1) Restated Certificate of Incorporation of HEARx Ltd., including certain certificates of
designations, preferences and rights of certain preferred stock of the Company. [3]
3.2(2) Amendment to Restated Certificate of Incorporation. [3.1A]
3.3(3) Certificate of Designations, Preferences and Rights of the Company's 1997 Convertible Preferred
Stock. [3]
3.4(4) By-Laws of HEARx Ltd. [3.2]
3.5(5) Certificate of Designations, Preferences and Rights of the Company's 1998 Convertible Preferred
Stock. [3]
4.1(5) Securities Purchase Agreement, dated August 27, 1998, between HEARx Ltd. and each of the
purchasers set forth on the signature pages thereto. [4.1]
4.2(5) Registration Rights Agreement, dated August 27, 1998, between HEARx Ltd. and each purchaser set
forth on the signature pages thereto. [4.2]
4.3(5) Form of Placement Agent Warrant (to purchase up to 1,125,000 shares of Common Stock at an
exercise price equal to $1.80 per share). [4.3]
27 Financial Data Schedule (provided for the information of the Securities and Exchange Commission
only).
====================================================================================================================================
1 Filed as an exhibit to the Company's Current Report on Form 8-K, filed May 17, 1996, as the
exhibit number indicated in brackets, 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, as the exhibit number indicated in brackets, and incorporated herein by reference.
3 Filed as an exhibit to the Company's Current Report on Form 8-K, filed March 26, 1997, as the
exhibit number indicated in brackets, 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 herein by reference.
5 Filed as an exhibit to the Company's Current Report on Form 8-K, filed August 27, 1998, as the
exhibit number indicated in brackets, and incorporated herein by reference.
</TABLE>
14
<PAGE> 15
(b) Reports on Form 8-K:
A current report on Form 8-K, dated August 27, 1998, was filed
with the Securities and Exchange Commission on September 3,
1998, in which the Company reported the offer and sale of the
1998 Preferred Stock pursuant to Regulation D for an aggregate
purchase price of $7.5 million.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEARx Ltd.
(Registrant)
Date: November 9, 1998 By: s/Stephen J. Hansbrough
-----------------------
Stephen J. Hansbrough
President and
Chief Operating Officer
Date: November 9, 1998 By: s/James W. Peklenk
------------------
James W. Peklenk
Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-27-1997
<PERIOD-END> SEP-25-1998
<CASH> 11,463,663
<SECURITIES> 2,000,001
<RECEIVABLES> 4,535,974
<ALLOWANCES> (496,553)
<INVENTORY> 1,348,200
<CURRENT-ASSETS> 18,851,285
<PP&E> 14,453,509
<DEPRECIATION> (6,114,495)
<TOTAL-ASSETS> 28,893,775
<CURRENT-LIABILITIES> 5,196,825
<BONDS> 168,897
0
13,750
<COMMON> 10,188,356
<OTHER-SE> 13,325,947
<TOTAL-LIABILITY-AND-EQUITY> 28,893,775
<SALES> 20,525,107
<TOTAL-REVENUES> 20,525,107
<CGS> 5,913,052
<TOTAL-COSTS> 21,189,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,577,704)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,577,704)
<DISCONTINUED> 0
<EXTRAORDINARY> 352,362
<CHANGES> 0
<NET-INCOME> (6,930,066)
<EPS-PRIMARY> ($0.07)
<EPS-DILUTED> ($0.07)
</TABLE>
