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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 2, 1999
----------------------
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
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HEARX LTD
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EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
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DELAWARE 22-2748248
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(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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 478-8770
----------------------------
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT
INDICATE BY CHECK X WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS YES X NO
----- -----
ON AUGUST 2, 1999 11,011,216 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
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INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
July 2, 1999 and December 25, 1998
Consolidated Statements of Operations 4
Six months ended July 2, 1999 and June 26, 1998
Consolidated Statements of Operations 5
Three months ended July 2, 1999 and June 26, 1998
Consolidated Statements of Cash Flows 6
Six months ended July 2, 1999 and June 26,1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9 - 12
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and reports on Form 8-K 14
Signatures 15
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2
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HEARX LTD.
CONSOLIDATED BALANCE SHEETS
ASSETS
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July 2, December 25,
1999 1998
-------------- --------------
(unaudited) (audited)
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CURRENT ASSETS:
Cash and cash equivalents $ 3,799,814 $ 2,650,111
Investment securities 948,138 7,170,780
Accounts and notes receivable, less allowance for
doubtful accounts of $ 495,479 and $588,509 6,351,905 4,087,912
Inventories 564,707 529,427
Prepaid expenses 391,573 338,868
Other assets 490,391 500,888
-------------- --------------
Total current assets 12,546,528 15,277,986
PROPERTY AND EQUIPMENT - NET 8,821,330 7,100,530
INVESTMENT AND ADVANCES IN HEARX WEST LLC - 1,406,900
OTHER 1,406,208 1,422,901
-------------- --------------
$ 22,774,066 $ 25,208,317
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,246,152 $ 4,877,649
Restructure reserve 472,589 1,450,739
Accrued salaries and other compensation 584,042 695,892
Current maturities of long term debt 292,746 639,664
-------------- --------------
Total current liabilities 8,595,529 7,663,944
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LONG TERM DEBT, LESS CURRENT MATURITIES 117,316 123,316
-------------- --------------
MINORITY INTEREST (290,652) -
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Non-redeemable preferred stock:
(Aggregate liquidation preference $ 11,531,687 and
$13,460,270) $1 par, 2,000,000 shares authorized; issued
and outstanding:
1998 Convertible 7,500 shares outstanding 7,500 7,500
1997 Convertible 3,098 & 5,209 shares outstanding 3,098 5,209
-------------- --------------
Total preferred stock 10,598 12,709
Common stock; $.10 par; 20,000,000 shares authorized;
10,878,260 & 104,023,643 shares issued 1,087,826 10,402,364
Additional paid-in capital 87,081,433 77,531,270
Accumulated deficit (72,364,229) (70,257,968)
Accumulated other comprehensive income 43,644 58,263
Unamortized deferred compensation (56,719) (75,625)
Treasury stock, at cost - 247,790 and 40,531
common shares (1,450,680) (249,956)
-------------- --------------
Total stockholders' equity 14,351,873 17,421,057
-------------- --------------
$ 22,774,066 $ 25,208,317
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements
3
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HEARX LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JULY 2, 1999 AND JUNE 26, 1998
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1999 1998
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(Unaudited) (Unaudited)
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NET REVENUES $ 22,459,755 $ 13,910,905
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COSTS AND EXPENSES:
Cost of products sold 6,938,377 3,993,738
Center operating expenses 12,431,648 9,534,405
General and administrative expenses 3,769,413 3,383,739
Depreciation and amortization 1,185,328 1,122,374
Interest expense 12,772 36,716
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Total costs and expenses 24,337,538 18,070,972
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LOSS BEFORE MINORITY INTEREST (1,877,783) (4,160,067)
MINORITY INTEREST 197,552 -
-------------- --------------
NET LOSS (1,680,231) (4,160,067)
DIVIDENDS ON PREFERRED STOCK (426,030) (202,653)
-------------- --------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,106,261) $ (4,362,720)
============== ==============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.20) $ (0.43)
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 10,574,252 10,057,940
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements
4
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HEARX LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JULY 2, 1999 AND JUNE 26, 1998
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1999 1998
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(Unaudited) (Unaudited)
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NET REVENUES $ 12,005,229 $ 6,816,576
----------------- -----------------
COSTS AND EXPENSES:
Cost of products sold 3,724,846 1,913,691
Center operating expenses 6,350,218 4,869,950
General and administrative expenses 1,911,004 1,667,671
Depreciation and amortization 599,277 567,319
Interest expense 5,517 17,210
----------------- -----------------
Total costs and expenses 12,590,862 9,035,841
----------------- -----------------
LOSS BEFORE MINORITY INTEREST (585,633) (2,219,265)
MINORITY INTEREST (71,969) -
----------------- -----------------
NET LOSS (657,602) (2,219,265)
DIVIDENDS ON PREFERRED STOCK (199,369) (98,618)
----------------- -----------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (856,971) $ (2,317,883)
================= =================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.08) $ (0.23)
================= =================
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 10,626,327 10,080,681
================ =================
</TABLE>
See accompanying notes to the consolidated financial statements
5
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HEARX LTD.
CONSOLIDATED STATEMENT OF CASHFLOWS
SIX MONTHS ENDED JULY 2, 1999 AND JUNE 26, 1998
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1999 1998
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(Unaudited) (Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,680,231) $ (4,160,067)
Adjustments to reconcile net loss to net cash
Used by operating activities:
Depreciation and amortization 1,185,328 1,122,374
Write down of property and equipment 57,605 -
Provision for doubtful accounts 256,000 65,967
Loss on disposition of property 1,474 23,013
Fixed asset additions related to consolidation (2,165,551) -
Elimination of sub. Invest. related to consolidation 1,406,900
(Increase) decrease in:
Accounts and notes receivable (2,519,993) (642,650)
Inventories (35,280) (63,871)
Prepaid expenses (52,705) (27,496)
Other current assets and charges 4,966 (851,518)
Increase (decrease) in:
Accounts payable 1,292,715 1,093,665
Accrued expenses (14,213) (237,689)
------------- -------------
Net cash used in operating activities (2,262,985) (3,678,272)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (736,205) (854,703)
Purchase of investments (1,500,000) (10,300,000)
Proceeds from sale of mature investments 7,708,023 12,800,029
------------- -------------
Net cash provided by investing activities 5,471,818 1,645,326
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principle payments:
Short-term debt (332,243) (41,086)
Long-term debt (6,000) (6,000)
Forgiveness of long-term debt (14,675) (16,831)
Minority interest (312,971) -
Acquisition of treasury stock (1,200,724) -
Accrued dividends (426,030) (202,653)
Proceeds from the issuance stock 233,514 189,255
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Net cash used by financing activities (2,059,129) (77,315)
------------- -------------
Net increase (decrease) in cash and cash equivalents 1,149,704 (2,110,261)
------------- -------------
Cash and cash equivalents at beginning of period 2,650,110 3,644,838
------------- -------------
Cash and cash equivalents at end of period $ 3,799,814 $ 1,534,577
============= ===============
</TABLE>
See accompanying notes to the consolidated financial statements
6
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HEARX LTD.
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 25, 1998. 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 1998 consolidated financial statements have been
reclassified in order to conform to the 1999 presentation.
Principles of Consolidation:
The consolidated financial statements include the accounts of HEARx Ltd.
and HEARx West LLC, a joint venture between HEARx Ltd. and the Permanente
Federation. All intercompany transactions and accounts have been
eliminated in the consolidation. Minority Interest represents the
Permanente Federation's capital contribution less their share of the
cumulative losses since the formation of the joint venture.
2. STOCKHOLDERS' EQUITY
Reverse Stock Split:
On June 30, 1999 the Company effectuated a one for ten reverse common
stock split. The reverse stock split and a reduction in the authorized
shares of common stock to twenty million was approved at the June 7, 1999
Annual Meeting of Shareholders. Each shareholder of ten shares of common
stock on June 30, 1999 was entitled to one share of common stock in
connection with the reverse split. A cash payment was paid in lieu of
fractional shares issued.
In accordance with FASB 128, Earnings Per Share, the Company has
retroactively adjusted its earnings per share computation for all periods
presented to reflect the change in capital structure.
Conversion of 1997 Preferred Stock into shares of Common Stock:
During the six months ended July 2, 1999, 2,111 shares of the 1997
Convertible Preferred Stock were converted into 4,745,320 shares of
Common Stock.
Common Stock:
During the six months ended July 2, 1999, no warrants were exercised.
Employee stock options were exercised resulting in the issuance of 10,000
shares of common stock.
7
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HEARX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
("SFAS 133"). The Company is required to adopt SFAS 133 for the year
ending December 29, 2000. SFAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because the Company
currently holds no derivative financial instruments and does not
currently engage in hedging activities, adoption of SFAS 133 is expected
to have no material impact on the Company's financial condition or
results of operations.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
The Company's strategy for continuing and accelerating center sales
growth and market penetration includes both positioning the Company as
the leading provider of hearing care to the managed care marketplace, and
aggressively advertising to the non-insured self-pay market.
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 the continuing shift of
Medicare patients to managed care. HEARx and HEARx West combined
currently receives a per-member-per-month fee for more than 1.3 million
managed care 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, and HEARx has not experienced the
growth it expected from this market. In part as a result of this, the
Company has increased its attention to the self-pay market, focusing an
aggressive advertising and marketing program on the uninsured patient.
The Company intends to increase its sales to these patients, while
creating greater awareness of the Company by the managed care patients
covered by contracts with HEARx. A number of managed care organizations
have announced that they are withdrawing from selected geographic areas,
some of which include HEARx markets. In order to reduce losses in
response to the withdrawal of certain managed care companies from the
Northeast region, the Company closed 12 of its most severely impacted
centers in this region in January 1999. A restructure reserve of
$1,450,739 was established at the end of fiscal 1998 to cover the costs
of closing the centers, including lease termination, employee severance
and other costs. The Company believes the remaining reserve of $472,589
at July 2, 1999 is adequate to cover remaining costs.
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. The Company is currently expanding its
hearing care center network through a joint venture ("HEARx West") with
the Permanente Federation LLC. The joint venture agreement provides for
a 50/50 ownership by the Company and members of the Permanente
Federation, with the centers bearing the HEARx name. At the end of the
second quarter of 1999, HEARx operated a total of 77 centers. Those
include 33 centers in Florida, 13 in New York, 15 in New Jersey and the
16 HEARx West centers in California. HEARx West is expected to open two
more centers in California by the end of the third quarter of 1999.
RESULTS OF OPERATIONS
For the three months ended July 2, 1999 Compared to the three months
ended June 26, 1998
Net revenues increased $5,188,653, or 76%, to $12,005,229 in the second
quarter of 1999 from $6,816,576 in the comparable quarter of 1998. The
increase in net revenues resulted from an increase in the Company's
non-insured "self-pay" and managed care business arising from the
Company's aggressive advertising campaign and the revenues from HEARx
West. HEARx Ltd. recorded net revenues of $8,967,719 from 61 centers for
the quarter, up 32%, from $6,816,576 from 75 centers for the comparable
quarter of 1998.
The net loss before minority interest was $585,633 for the second quarter
of 1999 from $2,219,265 in the comparable quarter of 1998. The HEARx West
joint venture generated net income of $143,938 for the second quarter of
1999, its first full quarter of operations, resulting in minority
interest for HEARx Ltd. of $71,969.
9
<PAGE> 10
The consolidated loss before preferred dividends for the second quarter
of 1999, including earnings from the joint venture HEARx West, decreased
70% from $2,219,265 in the second quarter of 1998 to $657,602 in this
quarter. The loss of HEARx Ltd. from operations before consolidation and
preferred stock dividends decreased 67% from $2,219,265 for the second
quarter of 1998 to $729,571 for the second quarter of 1999.
Cost of products sold increased $1,811,155, or 95%, to $3,724,846 in the
second quarter of 1999 from $1,913,691 in the comparable quarter of 1998.
Approximately $1.2 million of the increase is a direct result of the
inclusion of cost of products sold for HEARx West. The remainder of
the increase is attributable to the increase in sales from existing
centers. The cost of products sold as a percent of net revenues, which
was 31% and 28 % for the second quarter of 1999 and 1998, respectively,
fluctuates from period to period depending upon the sales mix and sales
promotions. The results of the second quarter were consistent with
management's expectations.
Center operating expenses increased $1,480,268, or 30%, to $6,350,218 in
the second quarter of 1999 from $4,869,950 in the comparable quarter of
1998. Approximately $1.2 million of the increase is attributable to the
center operating expenses of HEARx West. During the quarter the Company
intensified its aggressive marketing program increasing advertising
expense to $1,376,878 up from $900,093 for the comparable quarter of
1998. Consolidated center operating expenses as a percent of revenue
decreased in the second quarter of 1999 to 53% from 71% in the second
quarter of 1998, which is attributable to higher sales.
Consolidated general and administrative expenses increased $243,333 to
$1,911,004 in the second quarter of 1999 from $1,667,671 in the
comparable quarter of 1998. This increase is primarily the result of the
inclusion of HEARx West general and administrative expenses. Consolidated
general and administrative expenses as a percent of net revenue decreased
to 16% in 1999 from 24% in the comparable period of 1998.
At the center level, the Company continues to be profitable in Florida and
is profitable in California at the HEARx West centers. Florida sales for
the quarter ended July 2, 1999 were up approximately 34% from the
comparable quarter in 1998. In the Northeast market, centers have yet to
generate enough revenue to reach profitability, although revenues were up
24% over the comparable quarter of 1998 with 12 fewer centers.
Depreciation and amortization expense increased $31,958, or 6%, to
$599,277 in the second quarter of 1999 from $567,319 in the comparable
quarter of 1998. Depreciation and amortization for HEARx Ltd., before
consolidation, decreased thirteen percent, or $75,689. This decrease is
due primarily to the closing of twelve centers in the Northeast.
For the six months ended July 2, 1999 Compared to June 26, 1998
Net revenues increased $8,548,850, or 61%, to $22,459,755 in the first six
months of 1999, from $13,910,905 in the comparable period of 1998. The
increase in net revenues resulted from an increase in the Company's
non-insured "self-pay" and managed care business arising from the
Company's aggressive advertising campaign and the revenues from HEARx
West. HEARx Ltd. recorded net revenues of $17,716,789 from 61 centers for
the first six months of 1999, up 27%, from $13,910,905 from 75 centers for
the comparable period of 1998.
The net loss before minority interest was $1,877,783 for the first six
months of 1999, down from $4,160,067 for the comparable period of 1998.
The HEARx West joint venture generated net losses of $395,104 for the
first six months of 1999, resulting in minority interest losses of
$197,552.
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<PAGE> 11
The consolidated loss before preferred dividends for the first six months
of 1999, including losses from the joint venture HEARx West, decreased
60% from $4,160,067 in the first six months of 1998 to $1,680,231 for the
1999 period. The loss of HEARx Ltd. from operations before consolidation
and preferred stock dividends decreased 64% from $4,160,067 for the first
six months of 1998 to $1,482,680 for the first six months of 1999.
Cost of products sold increased $2,944,639, or 74%, to $6,938,377 in the
first six months of 1999 from $3,993,738 in the comparable period of 1998.
Approximately $1.8 million of the increase is a direct result of the
inclusion of cost of products sold for HEARx West. The remainder of the
increase is attributable to the increase in sales from existing centers.
The cost of products sold as a percent of net revenues, which was 31% and
29% for the first six months of 1999 and 1998, fluctuates from period to
period depending upon the sales mix and sales promotions. The results of
the first six months of 1999 were consistent with management's
expectations.
Center operating expenses increased $2,897,243, or 30%, to $12,431,648 in
the first six months of 1999 from $9,534,405 in the comparable period of
1998. Approximately $2.2 million of the increase is attributable to the
center operating expenses of HEARx West. Consolidated center operating
expenses as a percent of revenue decreased in the first six months of
1999 to 55% from 68% in the comparable period of 1998, which is
attributable to higher sales.
Consolidated general and administrative expenses increased $385,674 to
$3,769,413 in the first six months of 1999 from $3,383,739 in the
comparable period of 1998. This increase is primarily the result of the
inclusion of HEARx West general and administrative expenses. Consolidated
general and administrative expenses as a percent of net revenue decreased
to 16% in 1999 from 24% in the comparable period of 1998.
Depreciation and amortization expense increased $62,954, or 6%, to
$1,185,328 in the first six months of 1999 from $1,122,374 in the
comparable period of 1998. Depreciation and amortization for HEARx Ltd.,
before consolidation, decreased twelve percent, or $132,587. This decrease
is due primarily to the closing of twelve centers in the Northeast.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $3,663,043 to $3,950,999 as of July 2, 1999
from $7,614,042 as of December 25, 1998. This decrease is primarily the
result of operating losses and the purchase of treasury stock. 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 into 2000 in accordance with its
strategic plan, although there can be no assurance that other cash needs
will not arise. The Company's strategic plan includes a commitment to
loan up to $5 million to HEARx West. As of July 2, 1999, the Company had
provided $3.8 million in loans and advances to HEARx West under this
agreement. During the remainder of 1999, the Company may lend or
advance additional funds to the joint venture under the agreement. During
the remainder of 1999 the Company expects to receive approximately $1
million in cash from the joint venture for quarterly management fees and
interest payments.
Net cash used by operating activities decreased from $3,678,272 for the
first six months of 1998, to $2,262,985 for the first six months of 1999.
The decrease in cash used by operating activities was primarily the
result of eliminating intercompany transactions between HEARx Ltd. and
HEARx West.
Net cash provided by investing activities increased from $1,645,326 for
the first six months of 1998, to $5,471,818 for the first six months of
1999. Funds from the sales of investments decreased $5,092,006, from
$12,800,029 for the first six months of 1998 to $7,708,023 for the
11
<PAGE> 12
first six months of 1999. In the first six months of 1998, $10,300,000
was reinvested in securities and $1,500,000 reinvested in the first six
months of 1999.
Cash from financing activities increased from cash being used from
financing activities of $77,315 in the first six months of 1998 to
$2,059,129 in the first six months of 1999. This increase was primarily
the result of funds in the amount of $1,200,724 used to repurchase the
Company's common stock and the repayment of short term borrowings in the
amount of $332,243.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems
to identify any system that could be affected by the "Year 2000" issue.
This review was completed by the Company's Information Technology
department. The costs associated with this process relate primarily to
salaries and are being expensed as incurred. 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
requests for 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. However, there can be no guarantee that the systems of other
companies will be converted timely, or that a supplier will convert. If
these entities are not timely with their conversions, the results could
have a material adverse effect on the Company. A plan has been formulated
to address these issues and testing should be completed by the end of the
third quarter of 1999. The Company believes any future costs associated
with Year 2000 compliance by the Company will be immaterial. The
Company's worst case scenario would be that some of our suppliers would
be unable to supply products timely and the Company would have to use
alternate vendors.
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 intentions of the Company
concerning the uninsured, "self-pay" patient; the Company's goals of
establishing a nationwide center network; the adequacy of remaining
reserves for the center closings; current working capital and revenues
from operations being sufficient to support the Company's capital needs;
loans and advances to and receipts from the HEARx West joint venture in
1999; 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, especially those
affecting managed health care; the accuracy of the Company's assumptions
concerning reserves; unforeseen capital requirements; trends in market
sales; 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 S-3 resale registration statement dated
September 29, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
At the June 7, 1999, Annual Meeting of Shareholders, the stockholders approved
a one for ten reverse stock split and a reduction in the authorized shares of
common stock to twenty million. The reverse split was effectuated June 30,
1999. Each shareholder of ten shares of common stock on June 30, 1999 was
entitled to one share of common stock in connection with the reverse split. No
fractional shares were issued. Instead, holders who would otherwise be
entitled to receive fractional shares received a cash payment equal to the
fraction times $0.4875, the average closing price for the common stock on
American Stock Exchange on each of the five trading days preceding June 30,
1999. Trading of the post-split stock on the American Stock Exchange began on
July 1, 1999.
During the six months ended July 2, 1999, 2,111 shares of the 1997
Convertible Preferred Stock plus accrued dividends of $243,553 were converted
into 4,745,320 shares of the Company's Common Stock. The 1997 Convertible
Preferred Stock was issued to certain "accredited investors" pursuant to Rule
506 of Regulation D, and the shares issued upon conversion thereof were also
issued pursuant to Rule 506 Regulation D.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 7, 1999. At that
meeting, the stockholders were asked to consider and act on the following
matters:
1. The election of five directors;
2. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation authorizing a 1 for 10 reverse split of
the Company's Common Stock, par value $.10 per share; and
3. To approve a related amendment to the Company's Amended and
Restated Certificate of Incorporation authorizing a reduction in the
authorized Common Stock from 130,000,000 shares to 20,000,000 shares.
The voting of the shareholders on the above issues was as follows:
For the election of directors:
<TABLE>
<CAPTION>
Against/ Broker/
Nominee For Withheld Non-votes Abstentions
<S> <C> <C> <C> <C>
Paul A. Brown, M.D. 98,011,453 2,746,776 0 5,581,772
Stephen J. Hansbrough 98,042,175 2,716,057 0 5,581,772
Thomas W. Archibald 98,247,020 2,511,209 0 5,581,772
Joseph L. Gitterman III 98,246,995 2,511,234 0 5,581,772
David J. McLachlan 98,249,420 2,508,809 0 5,581,772
</TABLE>
The proposal to approve an amendment to the Company's Amended and
Restated Certificate of Incorporation authorizing a 1 for 10 reverse
split of the Company's Common Stock, par value $.10 per share:
91,947,301 "For"; 8,333,871 "Against"; 0 broker non-votes and 477,057
abstentions.
The proposal to approve a related amendment to the Company's
Amended and Restated Certificate of Incorporation authorizing a
reduction in the authorized Common Stock from 130,000,000 shares to
20,000,000 shares: 92,616,313 "For"; 7,588,520 "Against"; 0 broker
non-votes and 553,396 abstentions.
13
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<S> <C>
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(5) Certificate of Designations, Preferences and Rights of the
Company's 1998 Convertible Preferred Stock. [3]
3.5 Amendment to Restated Certificate of Incorporation including one
for ten reverse stock split and reduction of authorized shares.
3.6(4) By-Laws of HEARx Ltd. [3.2]
27 Financial Data Schedule (provided for 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>
(b) Reports on Form 8-K:
None
14
<PAGE> 15
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: August 12, 1999 By: s/Stephen J. Hansbrough
-----------------------
Stephen J. Hansbrough
President and
Chief Operating Officer
Date: August 12, 1999 By: s/James W. Peklenk
------------------
James W. Peklenk
Vice President and
Chief Financial Officer
15
<PAGE> 16
Exhibit Index
<TABLE>
<S> <C>
3.5 Amendment to Restated Certificate of Incorporation including one
for ten reverse stock split and reduction of authorized shares.
27 Financial Data Schedule (provided for information of the
Securities and Exchange Commission only.)
</TABLE>
<PAGE> 1
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
HEARX LTD.
HEARx Ltd. (the "Corporation"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY AS FOLLOWS:
FIRST: That the Restated Certificate of Incorporation of HEARx Ltd. is
hereby amended by deleting the first paragraph of Article 4 in its entirety
and substituting in lieu thereof a new first paragraph of Article 4 as
follows:
The total number of shares of stock which the Corporation shall have
authority to issue is twenty two million (22,000,000), consisting of two
million (2,000,000) shares of Preferred Stock of the par value of One
Dollar ($1.00) per share and twenty million (20,000,000) shares of Common
Stock of the par value of Ten Cents ($.10) per share.
SECOND: That the Restated Certificate of Incorporation of HEARx Ltd. is
hereby amended by adding the following paragraph after the first paragraph
of Article 4:
The Corporation hereby declares that each ten (10) of the outstanding
shares of the Corporation's Common Stock, par value $.10 per share, as of
the date of filing of this Certificate of Amendment to the Restated
Certificate of Incorporation, be converted and reconstituted into one share
of Common Stock, par value $.10 per share. No fractional shares shall be
issued upon such conversion and reconstitution, and the number of shares of
Common Stock to be issued shall be rounded down to the nearest whole share.
If a fractional interest in a share of Common Stock would, except for the
provisions of the preceding sentence, be deliverable upon such conversion
and reconstitution, the Corporation shall pay an amount in cash equal to
the fair market value of such fractional interest, as determined by the
Corporation's Board of Directors, to each holder of shares of Common Stock
to whom such fractional interest would have been deliverable.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE> 2
IN WITNESS WHEREOF, said HEARx Ltd. has caused its duly authorized
officer to execute this Certificate of Amendment of Restated Certificate of
Incorporation this 30th day of June, 1999.
HEARx Ltd.
By: /s/ Paul A. Brown, M.D.
-------------------------------------
Name: Paul A. Brown, M.D.
Title: Chairman and Chief Executive
Officer
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from financial statements
of HEARx Ltd. and is qualified in its entirety by references to such financial
statements.
</LEGEND>
<CIK> 0000821536
<NAME> HEARX LTD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> JUL-02-1999
<CASH> 3,799,814
<SECURITIES> 948,138
<RECEIVABLES> 6,351,905
<ALLOWANCES> (495,479)
<INVENTORY> 2,852,879
<CURRENT-ASSETS> 12,546,528
<PP&E> 16,312,328
<DEPRECIATION> (7,490,998)
<TOTAL-ASSETS> 22,774,066
<CURRENT-LIABILITIES> 8,595,529
<BONDS> 117,316
0
10,598
<COMMON> 1,087,826
<OTHER-SE> 13,253,449
<TOTAL-LIABILITY-AND-EQUITY> 22,774,066
<SALES> 22,459,755
<TOTAL-REVENUES> 22,459,755
<CGS> 6,938,377
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,386,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,772
<INCOME-PRETAX> (1,877,783)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,877,783)
<DISCONTINUED> 0
<EXTRAORDINARY> (228,478)
<CHANGES> 0
<NET-INCOME> (2,106,261)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
