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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 June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16453
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HEARx LTD
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Exact Name of Registrant as Specified in Its Charter
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
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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 July 21, 2000 12,363,413 shares of the Registrant's Common Stock were
outstanding.
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INDEX
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Page
<S> <C> <C>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
June 30 , 2000 and December 31, 1999
Consolidated Statements of Operations 4
Six months ended June 30, 2000 and July 2, 1999
Consolidated Statements of Operations 5
Three months ended June 30, 2000 and July 2, 1999
Consolidated Statements of Cash Flows 6
Six months ended June 30, 2000 and July 2,1999
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial Condition 9 - 12
and Results of Operations
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
</TABLE>
2
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HEARX LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
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<S> <C> <C>
CURRENT ASSETS: (unaudited) (audited)
Cash and cash equivalents $ 2,725,799 $ 2,857,187
Investment securities 4,418,721 900,000
Accounts and notes receivable, less allowance for
doubtful accounts of $ 307,376 and $535,609 6,299,949 7,027,536
Inventories 475,163 551,460
Prepaid expenses 539,695 531,169
Other Assets 1,952,595 349,391
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Total current assets 16,411,922 12,216,743
PROPERTY AND EQUIPMENT - NET 8,015,300 8,492,708
OTHER ASSETS 2,065,705 2,170,300
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$ 26,492,927 $ 22,879,751
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,720,205 $ 8,202,010
Restructure reserve 120,946 214,656
Accrued salaries and other compensation 760,321 1,562,510
Current maturities of long term debt 71,137 294,993
Dividends payable 914,207 1,003,759
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Total current liabilities 11,586,816 11,277,928
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LONG TERM DEBT, LESS CURRENT MATURITIES 268,576 322,332
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COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Non-redeemable preferred stock:
(Aggregate liquidation preference $ 13,229,207 and $9,318,757) $1 par,
2,000,000 shares authorized
2000 Convertible 500 & 0 shares outstanding 500 -
1998 Convertible 5,515 & 7,315 shares outstanding 5,515 7,315
1997 Convertible 0 & 1,000 shares outstanding - 1,000
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Total preferred stock 6,015 8,315
Common stock; $.10 par; 20,000,000 shares
authorized; 12,364,117 & 11,547,337 shares
issued 1,236,412 1,154,734
Additional paid-in capital 92,157,258 87,307,886
Accumulated deficit (76,499,644) (75,083,251)
Accumulated other comprehensive income 20,681 -
Unamortized deferred compensation (18,906) (37,813)
Treasury stock, at cost:430,560 & 388,760 common shares (2,264,281) (2,070,380)
------------------ ------------------
Total stockholders' equity 14,637,535 11,279,491
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$ 26,492,927 $ 22,879,751
================== ==================
</TABLE>
See accompanying notes to the consolidated financial statements
3
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HEARX LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
<TABLE>
<CAPTION>
2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C>
NET REVENUES $ 28,296,183 $ 22,459,755
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COSTS AND EXPENSES:
Cost of products sold 9,829,774 6,938,377
Center operating expenses 14,007,075 12,431,648
General and administrative expenses 4,270,382 3,769,413
Depreciation and amortization 1,286,293 1,185,328
Interest expense 16,281 12,772
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Total costs and expenses 29,409,805 24,337,538
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LOSS BEFORE MINORITY INTEREST (1,113,622) (1,877,783)
MINORITY INTEREST - 197,552
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NET LOSS (1,113,622) (1,680,231)
DIVIDENDS ON PREFERRED STOCK (302,771) (426,030)
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NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,416,393) $ (2,106,261)
=================== ===================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.12) $ (0.20)
=================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 11,782,598 10,574,252
=================== ===================
</TABLE>
See accompanying notes to the consolidated financial statements
4
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HEARX LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
<TABLE>
<CAPTION>
2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C>
NET REVENUES $ 15,174,416 $ 12,005,229
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COSTS AND EXPENSES:
Cost of products sold 5,532,724 3,724,846
Center operating expenses 7,263,467 6,350,218
General and administrative expenses 2,158,383 1,911,004
Depreciation and amortization 641,928 599,277
Interest expense 8,077 5,517
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Total costs and expenses 15,604,579 12,590,862
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LOSS BEFORE MINORITY INTEREST (430,163) (585,633)
MINORITY INTEREST - (71,969)
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NET LOSS (430,163) (657,602)
DIVIDENDS ON PREFERRED STOCK (166,735) (199,369)
------------------- ------------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (596,898) $ (856,971)
=================== ==================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.05) $ (0.08)
=================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 11,934,768 10,626,327
=================== ==================
</TABLE>
See accompanying notes to the consolidated financial statements
5
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HEARX LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
<TABLE>
<CAPTION>
2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,113,622) $ (1,680,231)
Adjustments to reconcile net loss to net cash
Provided(used) by operating activities:
Depreciation and amortization 1,286,293 1,185,328
Provision(recoveries) for doubtful accounts (190,834) 256,000
Loss on disposition of property 28,508 1,474
Minority interest - (197,552)
(Increase) decrease in:
Accounts and notes receivable 918,421 (3,032,126)
Inventories 76,298 (34,511)
Prepaid expenses (8,526) 6,629
Other current assets and charges (1,594,973) 20,571
Increase (decrease) in:
Accounts payable 1,518,197 1,113,180
Accrued expenses (895,901) (1,111,022)
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Net cash provided/(used) in operating activities 23,861 (3,472,260)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (724,711) (678,600)
Proceeds from sale of property and equipment 2,587 -
Purchase of investments (3,498,039) (1,500,000)
Proceeds from maturities of investments - 7,708,023
Net cash from consolidating HEARx West - 656,223
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Net cash (used)/provided by investing activities (4,220,163) 6,185,646
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principle payments:
Short-term debt (277,612) (352,918)
Acquisition of treasury stock (193,901) (1,200,724)
Proceeds from the issuance of stock, net of expenses 4,536,427 (10,040)
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Net cash provided(used) by financing activities 4,064,914 (1,563,682)
------------------ -----------------
Net (decrease) increase in cash and cash equivalents (131,388) 1,149,704
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Cash and cash equivalents at beginning of period 2,857,187 2,650,110
------------------ -----------------
Cash and cash equivalents at end of period $ 2,725,799 $ 3,799,814
================== =================
</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 have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30,
2000 are not necessarily indicative of the results that may be expected
for the year ending December 29, 2000. For further information, refer to
the audited consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1999.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain amounts in the 1999 consolidated financial statements have been
reclassified in order to conform to the 2000 presentation.
Segments
The Company's operations are organized by centers into three geographic regions,
the Northeast, Florida, and California. These regions comprise one operating
segment. Net sales from the Northeast, Florida and California were approximately
$6.9 million, $12.6 million and $8.7 million, respectively, for the six months
ended June 30, 2000 as compared to $4.9 million, $12.6 million and $4.8 million,
respectively for the comparable period of 1999. Operating profits at the center
level for the six months ended June 30, 2000, were approximately $500,000,
$2,600,000 and $1,200,000 for the Northeast, Florida and California,
respectively, as compared to an operating loss of approximately $400,000 for the
Northeast, and operating profit of approximately $2,700,000 and $800,000, for
Florida and California respectively, for the comparable period of 1999.
Operating profits at the center level are computed before corporate general and
administrative expenses, depreciation/amortization and preferred dividends.
2. STOCKHOLDERS' EQUITY
Series I Convertible Preferred Stock
On May 9, 2000, the Company closed a private placement of its equity
securities with the sale of 500 shares of a newly designated series of
convertible preferred stock with a 7% dividend rate and warrants to
purchase up to 203,390 shares of common stock, for an aggregate purchase
price of $5 million. Dividends are payable upon conversion of the
preferred stock in cash or common stock at the election of the Company.
The preferred stock is not convertible until after August 6, 2000 and
then at a fixed conversion price of $4.46 per share until January 2001.
From January 2001 until May 2001, the holders may request redemption of
the shares of preferred stock at 110% of the stated value plus accrued
dividends. If the Company elects not to redeem the shares, the
conversion price converts to the lesser of $4.46 or the market price
(defined as the average of the 5 lowest closing prices for 30 days
preceding the conversion date) at the time of conversion. The preferred
stock automatically converts to common stock in three years. The Company
received proceeds of $4,585,000, net of cash commissions and certain
expenses. The Company has registered for resale the common stock
underlying the preferred stock and warrants.
Conversion of Preferred Stock into shares of Common Stock
7
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HEARX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the six months ended June 30, 2000, 1,000 shares of the 1997
Convertible Preferred Stock and 1,800 shares of the 1998 Convertible
Preferred Stock were converted into 299,214 and 517,988 shares of Common
Stock, respectively.
Common Stock
During the six months ended June 30, 2000, no warrants were exercised.
Employee stock options were exercised resulting in the issuance of 1,580
shares of Common Stock.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133"). As amended by SFAS No.
137, the Company is required to adopt SFAS 133 for the year ending
December 28, 2001. 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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HEARX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 aggressively advertising to
the non-insured self-pay or retail market and positioning the Company as
the leading provider of hearing care to the benefited populations
covered by managed care contracts.
HEARx intends, as its long term 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 and services. The Company is currently expanding its
hearing care center network through HEARx West LLC in California. The
joint venture agreement provides for a 50/50 ownership by the Company
and the Permanente Federation and its affiliate Kaiser Foundation Health
Plan, with the centers bearing the HEARx name. For the six months ended
June 30, 2000, the Company operated 18 of these centers in California.
On July 17, 2000, the Company opened another center in California
bringing the total of HEARx West centers in operation to 19.
During the six months ended June 30, 2000, the Company formed two
strategic marketing partnerships, one with TIME Magazine ("TIME") and
one with Reader's Digest. As part of each program, patients visiting
HEARx centers will be offered an opportunity to take advantage of a
special promotion of either magazine's large print edition.
TIME, as part of its agreement with HEARx, will include a HEARx offer to TIME
subscribers and prospective subscribers residing within zip codes serviced by
HEARx. Both of these groups will receive a discount at HEARx when purchasing a
hearing aid in addition to a free one year subscription of either TIME regular
or Time large print edition.
HEARx will be promoting Reader's Digest Large Print Edition in the HEARx
network of hearing care centers and in its patient mailings. Reader's
Digest Large Print will be including a special offer from HEARx to
current subscribers of Reader's Digest Large Print Edition. HEARx will
also receive a special credit for use in advertising in Reader's Digest
Large Print Edition. Reader's Digest Large Print currently reaches over
500,000 people each month with more than 35 percent residing in areas
currently serviced by HEARx.
Effective January 1, 2000, several insurance companies with which the
Company has contracts significantly changed their contract benefits or
service areas. While some insurance companies increased their Medicare
benefits, others either limited or discontinued hearing benefits for
Medicare patients. The Company believes these changes will not have a
long term material adverse effect on the Company's financial condition
or results of operations. The Company also believes that the loss of any
single managed care contract will not have a long term material adverse
effect on its financial condition or results of operations.
9
<PAGE> 10
RESULTS OF OPERATIONS
For the three months ended June 30, 2000 compared to the three months
ended July 2,1999
Net revenues increased $3,169,187, or 26%, to $15,174,416 in the second
quarter of 2000 from $12,005,229 in the comparable quarter of 1999. The
increase in net revenues resulted from the increase of revenues from
HEARx West and the Northeast and an increase in the retail business
arising from the Company's aggressive advertising campaign. HEARx West
recorded net revenues of $4,779,898 from 18 centers for the quarter, up
54%, from $3,093,845 from 15 centers for the comparable quarter of 1999.
Cost of products sold increased $1,807,878, or 49%, to $5,532,724 in the
second quarter of 2000 from $3,724,846 in the comparable quarter of
1999. The increase in the cost of products sold is a direct result of
the increase in net revenues. The cost of products sold as a percent of
net revenues, which was 36% and 31% for the second quarter of 2000 and
1999, respectively, fluctuates from period to period due to retail
pricing and changing marketing strategies.
Center operating expenses increased $913,249, or 14%, to $7,263,467 in
the second quarter of 2000 from $6,350,218 in the comparable quarter of
1999. The increase is partially because there were only 15 HEARx West
centers in the second quarter of 1999, many of which were not then fully
operational, compared to 18 HEARx West centers in full operation during
the comparable quarter of 2000. In addition, the Company continued to
intensify its aggressive marketing program increasing advertising
expense to $1,813,117 up from $1,376,879 for the comparable quarter of
1999. Center operating expenses as a percent of revenue decreased to 48%
in the second quarter of 2000, from 53% in the second quarter of 1999.
The percentage decrease is due to the increase in revenues.
General and administrative expenses increased $247,379 to $2,158,383 in
the second quarter of 2000 from $1,911,004 in the comparable quarter of
1999. This increase is partially due to the increase in wages and fringe
benefits associated with the expansion of corporate administrative
functions. In addition corporate marketing expense increased $48,234, to
$136,412 in the second quarter of 2000 from $88,178 in the comparable
quarter of 1999.
At the center level, all three geographic areas serviced by HEARx,
Florida, the Northeast and California (operating under HEARx West) were
profitable. In Florida, the Northeast and California, sales were up
approximately 5%, 43% and 54%, respectively over the comparable quarter
of 1999.
Depreciation and amortization expense increased $42,651, or 7%, to
$641,928 in the second quarter of 2000 from $599,277 in the comparable
quarter of 1999. This increase is attributable to the increase of
depreciable assets due to the opening of 18 HEARx West centers in
California during 1999 and the relocation of certain centers within
Florida during the second quarter of 2000.
For the six months ended June 30, 2000 compared to July 2, 1999
Net revenues increased $5,836,428, or 26%, to $28,296,183 in the first
six months of 2000 from $22,459,755 in the comparable period of 1999.
The increase in net revenues resulted from the increase of revenues from
HEARx West and the Northeast and an increase in the Company's retail
business arising from the Company's aggressive advertising campaign.
HEARx West recorded net revenues of $8,683,373 from 18 centers for the
six months ended, up 78%, from $4,854,851 from 15 centers for the
comparable six months of 1999.
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The net loss before preferred dividends for the first six months of 2000
decreased 34% from $1,680,232 in the first six months of 1999 to
$1,113,622. This decrease is primarily due to the increase in revenues.
Cost of products sold increased $2,891,397, or 42%, to $9,829,774 in the
first six months of 2000 from $6,938,377 in the comparable period of
1999. Approximately 55% of the 42% increase represents the increase
attributable to HEARx West increased product sales. The remainder of the
increase is attributable to the increase in product sales from other
centers. The cost of products sold as a percent of net revenues, which
was 35% and 31% for the first six months of 2000 and 1999 respectively,
fluctuates from period to period due to retail pricing and changing
marketing strategies.
Center operating expenses increased $1,575,427, or 13%, to $14,007,075
in the first six months of 2000 from $12,431,648 in the comparable
period of 1999. The increase is partially because there were only 15
HEARx West centers in the first six months of 1999, many of which were
not then fully operational, compared to 18 HEARx West centers in full
operation during the comparable period of 2000. In addition, the Company
continued to intensify its aggressive marketing program increasing
advertising expense to $3,497,218 up from $2,358,190 for the comparable
period of 1999. These increases were offset by the recovery of bad debts
totaling $190,834. Center operating expenses as a percent of revenue
decreased in the first six months of 2000 to 50% from 55% in the first
six months of 1999. The percentage decrease is due to the increase in
revenues.
General and administrative expenses increased $500,969, or 13% to
$4,270,382 in the first six months of 2000 from $3,769,413 in the
comparable period of 1999. This increase is partially due to the
increase in wages and fringe benefits associated with the expansion of
corporate administrative functions. Travel costs also increased to
$147,638 for the six months ended June 30, 2000 from $89,321 in the
comparable quarter of 1999 due to increased travel for HEARx West
business. In addition, corporate marketing expense increased $109,568,
to $279,038 in the first six months of 2000 from $169,470 in the
comparable period of 1999.
Depreciation and amortization expense increased $100,965, or 9%, to
$1,286,293 in the first six months of 2000 from $1,185,328 in the
comparable period of 1999. This increase is attributable to the
additional depreciation related to the opening of 18 HEARx West centers
in California during 1999 and the relocation of certain centers within
Florida during the first six months of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $3,886,291 to $4,825,106 as of June 30, 2000
from $938,815 as of December 31, 1999. On May 9, 2000 the Company
completed a private placement providing the Company with proceeds of
$4,585,000 after payment of the placement fee. Although there can be no
assurance, the Company believes that its current cash and revenues from
operations are sufficient to support the Company's capital needs through
2000.
Net cash provided by operating activities increased from a net use of
cash of $3,472,260 in the second quarter of 1999, to net cash provided
by operating activities of $23,861 in the second quarter of 2000. The
increase in cash being provided by operating activities was primarily
the result of the reduction of operating losses of approximately
$570,000, the reduction in current assets, including accounts and notes
receivable, of approximately $ 2.4 million, and the increase in accounts
payable and accrued expenses of approximately $620,000.
Net cash provided by investing activities decreased from $6,185,646 in
the second quarter of 1999, to cash being used for investing activities
of $4,220,163 in the second quarter of 2000. There were no funds from
the maturity of investments in the second quarter of 2000,
11
<PAGE> 12
however there were purchases of investments of $3,498,039 and property and
equipment of $724,711.
Cash from financing activities increased from cash being used for financing
activities of $1,563,682 in the second quarter of 1999 to cash being provided
from financing activities of $4,064,914 in the second quarter of 2000. This
change was primarily the result of net proceeds of $4,585,000, from a preferred
stock offering included in the second quarter of 2000.
Except for historical information provided in this discussion and analysis, the
discussion includes forward looking statements, including those concerning the
expected effect of SFAS 133 on the Company; the Company's goal of establishing
a nationwide center network; plans for the TIME and Reader's Digest Large
Print Edition promotionals; current working capital and revenues from
operations being sufficient to support the Company's capital; the Company's
belief concerning the effect on its financial condition or operations of
changes in benefits announced by some insurance companies and the loss of any
single contract. 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;
unforeseen capital requirements; trends in market sales, and the success of the
joint venture with The Permanente Federation and of the strategic marketing
partnership programs with TIME and Reader's Digest, as well as those risks
associated with the Company's business described in the Company's annual report
on Form 10-K for the fiscal year ended 12/31/99 filed with the Securities and
Exchange Commission
12
<PAGE> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS
On May 9, 2000, the Company entered into a Convertible Preferred Stock Purchase
Agreement with Advantage Fund II Ltd., pursuant to which the Company sold a
total of 500 shares of the Company's 7% Series I Convertible Preferred Stock,
par value $1.00 per share (the "Series I Preferred Stock") and warrants to
acquire 203,390 shares of the Company's common stock, par value $.10 per share
(the "Common Stock") (the "Warrants") for an aggregate purchase price of $5.0
million. The offers and sales were made only to persons who qualified as
"accredited investors" as defined by 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 Series I Preferred Stock is convertible into Common Stock after August 6,
2000.. Upon 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 Series
I Preferred Stock ($10,000 per share), plus accrued and unpaid dividends (unless
the Company elects to pay dividends in cash) by $4.46 (subject to adjustments
upon occurrence of certain dilutive events). The dividends payable upon
conversion will be equal to 7% of the stated value of the Series I Preferred
Stock per annum in cash or by accrual to the Stated Value, at the Company's
discretion subject to limited exceptions. The Series I Preferred Stock may not
be converted until after August 6, 2000 and then at the fixed conversion price
of $4.46 per share until January 2001. From January 2001 until May 2001, the
holders may request redemption of the shares of preferred stock at 110% of the
stated value plus accrued dividends. If the Company elects not to redeem the
shares, the conversion price converts to the lesser of $4.46 or the market price
(defined as the average of the 5 lowest closing prices for the 30 days preceding
the conversion date) at the time of conversion. The Series I Preferred Stock may
be converted by holders in accordance with these terms any time prior to May 9,
2003, and will automatically convert on such date. In the event of liquidation,
dissolution or winding up of the Company prior to the conversion of the Series I
Preferred Stock, holders of the Series I Preferred Stock will be entitled to
receive an amount equal to the stated value per share before any distribution
shall be made to the holders of any junior securities but after any distribution
made to holders of senior securities.
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 $4.46 per share. The Warrants will expire on May 9, 2005.
In connection with this transaction, the Company also entered into a
Registration Rights Agreement with the purchaser under which the Company was
required to file a registration statement on Form S-3 by June 8, 2000, covering
the resale of the shares of Common Stock underlying all of the Series I
Preferred Stock and Warrants. The registration statement was timely filed and
was declared effective by the Securities and Exchange Commission on June 19,
2000.
The net proceeds to the Company after payment of finders fees was $4,585,000. In
connection with the placement of the Series I Preferred Stock, the Company also
issued finders warrants to purchase an aggregate of 131,695 shares of Common
Stock at an exercise price equal to $4.46. All of the shares underlying the
finder warrants were included in the registration statement on Form S-3 filed by
the Company.
During the six months ended June 30, 2000, 1,000 shares of the 1997 Convertible
Preferred Stock and 1,800 shares of the 1998 Convertible Preferred Stock plus
accrued dividends of
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<PAGE> 14
$175,397 and $216,926 were converted into 299,214 and 517,988 shares of the
Company's Common Stock, respectively. The 1997 and 1998 Convertible Preferred
Stock was initially issued to certain "accredited investors" pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act of
1933 and Rule 506 of Regulation D. The shares issued upon the conversion were
also issued pursuant to Section 4(2) of the securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on June 6, 2000. At that
meeting, the stockholders were asked to consider and act on three separate
matters. These matters and the final vote of the stockholders on them are as
follows:
1. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to provide for a classified board of
directors:
5,204,858 "For"; 897,676 "Against"; 5,406,423 broker non-votes and
77,527 abstentions. The proposal was not approved.
2. The election of five directors for a one-year term:
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. 11,255,246 316,172 0 537,943
Stephen J. Hansbrough 11,259,279 312,139 0 537,943
Thomas W. Archibald 11,261,574 309,844 0 537,943
Joseph L. Gitterman III 11,258,899 312,519 0 537,943
David J. McLachlan 11,261,419 309,999 0 537,943
</TABLE>
3. To approve an amendment to the HEARx 1995 Flexible Stock Plan to
increase the number of shares of common stock available under the
Plan:
10,511,729 "For"; 1,026,360 "Against"; 0 broker non-votes and 48,395
abstentions. The proposal was approved.
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
14
<PAGE> 15
March 26, 1997, as the exhibit number indicated in brackets,
and incorporated herein by reference.
3.4 Certificate of Designations, Preferences and Rights of the
Company's 1998 Convertible Preferred Stock. [3] 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.
3.5 Certificate of Designations, Preferences and Rights of the
Company's 7% Series I Convertible Preferred Stock. [3] Filed
as an exhibit to the Company's Current Report on Form 8-K,
filed May 9, 2000, as the exhibit number indicated in
brackets, and incorporated herein by reference.
3.6 By-Laws of HEARx Ltd. [3.4]. Filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
12/31/99 as the exhibit number indicated in brackets, and
incorporated herein by reference.
4.1 Form of Rights Agreement, dated December 14, 1999, between
HEARx and the Rights Agent, which includes the Certificate of
Designations, Preferences and Rights of the Company's 1999
Series H Junior Participating Preferred Stock. [4] Filed as an
exhibit to the Company's Current Report on Form 8-K, dated
December 17, 1999, 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:
A current report on Form 8-K, dated May 9, 2000, was filed with the
Securities and Exchange Commission on May 22, 2000, in which the
Company reported the offer and sale of the Series I Preferred Stock
pursuant to Regulation D for an aggregate gross sale price of $5.0
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: August 7, 2000 By: s/Stephen J. Hansbrough
-----------------------
Stephen J. Hansbrough
President and
Chief Operating Officer
Date: August 7, 2000 By: s/James W. Peklenk
------------------
James W. Peklenk
Vice President and
Chief Financial Officer
16
