<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 April 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
-------
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
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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
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 May 5, 1999 106,328,156 shares of the Registrant's Common Stock were
outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
April 2, 1999 and December 25, 1998 3
Consolidated Statements of Operations
Three months ended April 2, 1999 and March 27, 1998 4
Consolidated Statements of Cash Flows
Three months ended April 2, 1999 and March 27,1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
2
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HEARX LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
April 2, December 25,
1999 1998
------------ ------------
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,253,231 $ 2,650,111
Investment securities 2,776,641 7,170,780
Accounts and notes receivable, less allowance for
doubtful accounts of $ 542,579 and $588,509 4,894,970 4,087,912
Inventories 498,763 529,427
Prepaid expenses 296,513 338,868
Other assets 391,736 500,888
------------ ------------
Total current assets 11,111,854 15,277,986
PROPERTY AND EQUIPMENT - NET 9,104,290 7,100,530
INVESTMENT AND ADVANCES IN HEARX WEST LLC - 1,406,900
OTHER 1,435,556 1,422,901
------------ ------------
$ 21,651,700 $ 25,208,317
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 4,819,699 $ 4,877,649
Restructure reserve 727,029 1,450,739
Accrued salaries and other compensation 445,852 695,892
Current maturities of long term debt 298,356 639,664
------------ ------------
Total current liabilities 6,290,936 7,663,944
------------ ------------
LONG TERM DEBT, LESS CURRENT MATURITIES 120,316 123,316
------------ ------------
MINORITY INTEREST (362,620) -
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Non-redeemable preferred stock:
(Aggregate liquidation preference $ 11,724,128 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 3,444 & 5,209 shares outstanding 3,444 5,209
------------ ------------
Total preferred stock 10,944 12,709
Common stock; $.10 par; 130,000,000 shares authorized;
107,818,396, & 104,023,643 shares issued 10,781,839 10,402,364
Additional paid-in capital 77,346,789 77,531,270
Accumulated deficit (71,507,258) (70,257,968)
Accumulated other comprehensive income 43,690 58,263
Unamortized deferred compensation (66,172) (75,625)
Treasury stock, at cost - 1,542,000 common shares (1,006,764) (249,956)
------------ ------------
Total stockholders' equity 15,603,068 17,421,057
------------ ------------
$ 21,651,700 $ 25,208,317
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
3
<PAGE> 4
HEARX LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED APRIL 2, 1999 AND MARCH 27, 1998
<TABLE>
<CAPTION>
April 2, March 27,
1999 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET REVENUES $ 10,454,525 $ 7,094,329
------------- -------------
COSTS AND EXPENSES:
Cost of products sold 3,213,531 2,080,047
Center operating expenses 6,081,430 4,664,455
General and administrative expenses 1,858,409 1,716,068
Depreciation and amortization 586,050 555,055
Interest expense 7,255 19,506
------------- -------------
Total costs and expenses 11,746,675 9,035,131
------------- -------------
LOSS BEFORE MINORITY INTEREST (1,292,150) (1,940,802)
MINORITY INTEREST 269,521 -
------------- -------------
NET LOSS (1,022,629) (1,940,802)
DIVIDENDS ON PREFERRED STOCK (226,661) (104,035)
------------- -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,249,290) $ (2,044,837)
============= =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.01) $ (0.02)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 105,258,978 100,353,997
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements
4
<PAGE> 5
HEARX LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASHFLOWS
THREE MONTHS ENDED APRIL 2, 1999 AND MARCH 27, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,022,629) $(1,940,802)
Adjustments to reconcile net loss to net cash
Used by operating activities:
Depreciation and amortization 586,051 555,055
Write down of property and equipment 19,765 -
Provision for doubtful accounts 151,000 (750)
Loss on disposition of property 132 13,852
(Increase) decrease in:
Accounts and notes receivable (958,058) (549,135)
Inventories 30,664 (3,590)
Prepaid expenses 42,355 90,232
Other current assets and deferred charges 1,503,450 (387,183)
Increase (decrease) in :
Accounts payable (134,975) 373,355
Accrued expenses (896,724) (636,578)
----------- -----------
Net cash used in operating activities (678,969) (2,485,544)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,577,988) (451,706)
Purchase of investments - (6,000,000)
Proceeds from the sale of mature investments 4,379,565 6,800,918
----------- -----------
Net cash provided (used) by investing activities $ 1,801,577 $ 349,212
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principle payments:
Short-term borrowings (332,243) -
Long-term debt (3,000) (43,360)
Forgiveness of long-term debt (9,065) -
Minority interest (384,940) -
Acquisition of treasury stock (756,809) -
Accrued dividends (226,661) (104,035)
Proceeds from the issuance of stock 193,230 147,093
----------- -----------
Net cash used by financing activities (1,519,488) (302)
----------- -----------
Net increase (decrease) in cash and cash equivalents (396,880) (2,136,634)
Cash and cash equivalents at beginning of period 2,650,111 3,644,838
----------- -----------
Cash and cash equivalents at end of period $ 2,253,231 $ 1,508,204
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE> 6
HEARX LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Conversion of 1997 Preferred Stock into shares of Common Stock
During the quarter ended April 2, 1999, 1,765 shares of the 1997
Convertible Preferred Stock were converted into 3,784,751 shares of
Common Stock.
Common Stock
During the quarter ended April 2, 1999, no warrants were exercised.
Employee stock options were exercised resulting in the issuance of 10,000
shares of Common Stock.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, "Reporting for the Costs of Start
- Up Activities," ("SOP 98-5"). The pronouncement requires all companies
to expense as incurred all start up costs related to new operations. It
further requires expensing of previously capitalized costs. Since the
Company adopted this accounting method in prior years there is no impact
on its financial position or results of operations.
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.
6
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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.
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 first quarter
of 1999, HEARx operated a total of 77 centers. Those include 34 centers
in Florida, 13 in New York, 15 in New Jersey and the 15 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.
Management continues to try to position the Company as the leading
provider of hearing care to the managed care marketplace. HEARx and HEARx
West combined currently receives a per-member-per-month fee for more than
1.2 million managed care members each month, with Medicare representing
more than 500,000, Medicaid approximately 180,000 and commercial in
excess of 500,000. 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.
In order to reduce losses in response to the withdrawal of certain
managed care companies from the Northeast region, the Company decided to
close 12 of its most severely impacted centers in this region. All of
these centers closed 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 $727,000 at April 2,
1999 is adequate to cover remaining costs. The Company has successfully
negotiated and completed lease buy-outs or exercised early termination
options on nine of the twelve properties.
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 were 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
7
<PAGE> 8
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 will be ongoing
through mid 1999. The Company believes any future costs associated with
Year 2000 compliance by the Company will be immaterial.
RESULTS OF OPERATIONS
For the three months ended April 2, 1999 Compared to the three months
ended March 27, 1998
Net revenues increased $3,360,197, or 47%, to $10,454,526 in the first
quarter of 1999 from $7,094,329 in the comparable quarter of 1998. The
increase in net revenues resulted from an increase in the Company's
non-insured "self-pay" business and the revenues from HEARx West. HEARx
Ltd.'s net revenues for the first quarter of 1999, before consolidation
with HEARx West, were the highest for a quarter in the Company's history.
HEARx Ltd. recorded net revenues of $8,749,070 from 62 centers for the
quarter, up 23%, from $7,094,329 from 75 centers for the comparable
quarter of 1998.
The loss before preferred dividends for the first quarter of 1999,
including losses from the joint venture HEARx West, decreased 47% from
$1,940,802 in the first quarter of 1998 to $1,022,629. The loss from
operations before consolidation and preferred stock dividends decreased
61% from $1,940,802 for the first quarter of 1998 to $753,109 for the
first quarter of 1999.
Cost of products sold increased $1,133,484, or 54%, to $3,213,531 in the
first quarter of 1999 from $2,080,047 in the comparable quarter of 1998.
Approximately 31% of the 54% 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 29% for the first
quarter of 1999 and 1998, fluctuates from period to period depending upon
the sales mix and sales promotions.
Center operating expenses increased $1,346,475, or 29%, to $6,010,930 in
the first quarter of 1999 from $4,664,455 in the comparable quarter of
1998. Approximately $1,056,949 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 quarter of 1999
to 58% from 66% in the first quarter of 1998.
HEARx Ltd.'s general and administrative expenses, before consolidation of
HEARx West, decreased $24,868, to $1,691,200 in the first quarter of 1999
from $1,716,068 in the comparable quarter of 1998. Consolidated general
and administrative expenses increased $47,876 to $1,763,944 in the first
quarter of 1999 from $1,716,068 in the comparable quarter of 1998.
Consolidated general and administrative expenses as a percent of net
revenue decreased to 18% 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 April 2, 1999 were up approximately 31%, from the
comparable quarter in 1998. In the Northeast market, centers have yet to
generate enough revenue to reach profitability, although revenues were up
modestly over the comparable quarter of 1998 with 12 fewer centers.
8
<PAGE> 9
Depreciation and amortization expense increased $30,996, or 6%, to
$586,051 in the first quarter of 1999 from $555,055 in the comparable
quarter of 1998. Depreciation and amortization for HEARx Ltd., before
consolidation, decreased ten percent, or $56,898. This decrease is due
primarily to the closing of twelve centers in the Northeast.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $2,793,124 to $4,820,918 as of April 2, 1999
from $7,614,042 as of December 25, 1998. 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 1999 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 April 2, 1999, the Company had provided $2.5 million to HEARx
West under this agreement. During 1999, the Company expects to lend
additional funds to the joint venture under the agreement. During 1999
the Company expects to receive approximately $1.4 million in cash from
the joint venture for quarterly management fees and interest payments.
Net cash used by operating activities decreased from $2,485,544 in the
first quarter of 1998, to $678,971 in the first quarter 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 $349,212 in the
first quarter of 1998, to $1,801,577 in the first quarter of 1999. Funds
from the sales of investments decreased $2,241,383 from $6,800,918 in the
first quarter of 1998, to $4,379,565 in the first quarter of 1999. In the
first quarter of 1998, $6,000,000 was reinvested in securities and there
were no funds reinvested in the first quarter of 1999. In addition, there
was a $2,126,282 reduction in cash ($451,706 in 1998 to $2,577,988 in
1999) primarily used in the construction of leasehold improvements and
related purchase of property and equipment for the 15 HEARx West centers.
Cash from financing activities increased from cash being used from
financing activities of $302 in the first quarter of 1998 to $1,519,488
in the first quarter of 1999. This increase was primarily the result of
funds in the amount of $1,006,765 used to repurchase the Company's common
stock and the repayment of short term borrowings in the amount of
$332,243.
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; the year
2000 problem; the effect of closing the 12 northeast centers; and the
expected revenues from HEARx West. 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 S-3 resale registration statement dated
September 29, 1998.
9
<PAGE> 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended April 2, 1999, 1,765 shares of the 1997
Convertible Preferred Stock plus accrued dividends of $197,801 were
converted into 3,784,751 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Certificate of Incorporation of
HEARx Ltd., including certain certificates
of designations, preferences and rights of
certain preferred stock of the Company. [3]
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.
3.2 Amendment to Restated Certificate of
Incorporation. [3.1A]. 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.
3.3 Certificate of Designations, Preferences and
Rights of the Company's 1997 Convertible
Preferred Stock. [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.
3.4 By-Laws of HEARx Ltd. [3.2]. 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.
27 Financial Data Schedule (provided for the
information of the Securities and Exchange
Commission only).
(b) Reports on Form 8-K:
None
10
<PAGE> 11
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: May 17, 1999 By: s/Stephen J. Hansbrough
-----------------------
Stephen J. Hansbrough
President and
Chief Operating Officer
Date: May 17, 1999 By: s/James W. Peklenk
------------------
James W. Peklenk
Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR HEARx LTD CONTAINED IN THE COMPANY'S REPORT ON FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000821536
<NAME> HEARX LTD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> APR-02-1999
<CASH> 2,253,231
<SECURITIES> 2,776,641
<RECEIVABLES> 5,437,549
<ALLOWANCES> (542,579)
<INVENTORY> 1,187,012
<CURRENT-ASSETS> 11,111,854
<PP&E> 13,483,837
<DEPRECIATION> (6,858,665)
<TOTAL-ASSETS> 21,070,007
<CURRENT-LIABILITIES> 5,346,623
<BONDS> 120,316
0
10,944
<COMMON> 10,781,839
<OTHER-SE> 4,821,228
<TOTAL-LIABILITY-AND-EQUITY> 21,070,007
<SALES> 10,454,525
<TOTAL-REVENUES> 10,454,525
<CGS> 3,213,531
<TOTAL-COSTS> 8,533,144
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,022,629)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,022,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 226,661
<CHANGES> 0
<NET-INCOME> (1,249,290)
<EPS-PRIMARY> ($0.01)
<EPS-DILUTED> ($0.01)
</TABLE>
