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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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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 (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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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE .10 PER SHARE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS YES X NO
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INDICATE BY CHECK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF
REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO THE BEST OF
THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
AS OF MARCH 21, 2000, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON
STOCK HELD BY NON-AFFILIATES (BASED UPON THE CLOSING PRICE OF THE COMMON STOCK
ON THE AMERICAN STOCK EXCHANGE) WAS APPROXIMATELY $55,197,132.
ON MARCH 21, 2000, 11,934,515 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 2000 ANNUAL
MEETING OF THE REGISTRANT'S STOCKHOLDERS ("2000 PROXY STATEMENT"), TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, ARE INCORPORATED BY REFERENCE IN
PART III HEREOF
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PART I
ITEM 1. BUSINESS
HEARx Ltd. ("HEARx" or the "Company") operates a network of hearing care
centers which provide a full range of audiological products and services for the
hearing impaired. The Company's strategy for continuing and accelerating centers
sales growth and market penetration includes 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. The Company
believes it is well positioned to successfully address the concerns of access,
quality and cost of the managed care and health insurance companies, diagnostic
needs of referring physicians and, ultimately, the hearing health needs of
consumers. HEARx believes that such success requires the Company to offer
convenient distribution points, uniform centers (meaning standardized personnel
qualification, testing, formats, products, prices and ancillary services) and a
documented quality control program.
HEARx and its subsidiary, HEARx West, currently receive a
per-member-per-month fee for more than 1.3 million managed care members. In
total, HEARx has over 170 contracts for hearing care with various healthcare
providers. 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. In addition, 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.
HEARx was incorporated in Delaware on April 11, 1986.
FACILITIES AND SERVICES
Each HEARx center is staffed or supervised by a minimum of one
professionally trained, licensed and certified audiologist and at least one
patient care coordinator. The majority of the Company's centers are located in
conveniently accessible strip shopping centers and are typically 1,500 to 2,500
square feet in size. The Company's goal is to have all centers virtually
identical in interior space design, exterior marking and signage. This uniform
appearance helps reinforce the consistent service and quality the Company
strives to provide to patients at all locations. Each center provides
comprehensive hearing services that include:
- A facility equipped with soundproof testing booths and state-of-the-art
testing equipment that meets or exceeds all state standards.
- A full range of diagnostic and auditory-vestibular tests that assist
the physician in the treatment of patients with hearing and balance
disorders is provided in the centers. Some of these services include
auditory brainstem evoked potentials, electronystagmography and
immittance audiometry.
- A family hearing counseling program available to all patients to help
them better understand the use of their hearing products and their
disability.
- A wide variety of hearing aid brands to meet the patient needs.
- A standardized medical reporting system for feedback to the referring
physicians.
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PRODUCTS
Unlike other national organizations (Miracle Ear and Beltone) which sell
only their brand of hearing aid, HEARx has selected an assortment of major
worldwide manufacturers' products to make available through the HEARx network in
order to provide the best possible hearing care for HEARx patients, including
the latest digital technology.
In addition, all HEARx centers offer a large selection of other hearing
enhancement devices including telephone and television amplifiers,
telecaptioners and decoders, pocket talkers, specially adapted telephones, alarm
clocks, doorbells and fire alarms.
CUSTOMERS AND MARKETING
The majority of HEARx hearing aid sales in the fiscal year ended December
31, 1999 resulted from physician referrals and through contracts with
institutional buyers (health maintenance organizations, insurance companies, or
unions). The Company believes that its future growth depends in part on its
ability to inform hearing impaired consumers of the importance of professional
hearing testing and the availability of quality hearing devices. The Company
expects to continue to establish relationships with health organizations and
physicians that promote HEARx to the hearing impaired.
Because HEARx believes that hearing loss is a medical problem and not
simply a retail opportunity the Company encourages all patients to see a
physician prior to purchasing a hearing aid. The Company believes it has
established strong relationships with area physicians, which represent a
significant source of continuing patient referrals. HEARx further maintains
these relationships using its computerized medical reporting system to provide
each referring physician a full report on each of their patient visits to HEARx.
HEARx's marketing plan focuses on educating both physicians and patients
on the need for regular hearing testing and the importance of hearing aids and
other assistive listening devices in improving the quality of life for hearing
impaired individuals. The Company works to further its image as a provider of
highly professional services, quality products, and comprehensive post-sale
consumer education. In connection with its marketing program, HEARx has
developed a direct consumer marketing campaign, which utilizes television,
radio, newspaper and magazine advertisements, direct mailings, and
company-operated free seminars on hearing and hearing loss. Additionally, during
January 2000, the Company formed a strategic marketing partnership with TIME
Magazine ("TIME"). As part of this program, HEARx patients visiting HEARx
centers will be able to subscribe to TIME Regular or the TIME Large print
edition. In addition, HEARx will be offering previous patients an opportunity to
receive as a gift a TIME watch and two free months of either TIME Magazine.
TIME, as part of the agreement, will include a HEARx offer to TIME subscribers
and prospective subscribers residing in 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 year's subscription of either edition of TIME.
In an effort to supplement its base of sales to and through the
healthcare provider contracts which continue to account for the majority of the
Company's sales, the Company has, since late 1997, developed and refined its
marketing programs oriented toward the non-insured "self pay" patient. In 1999,
the programs have generated self-pay sales approximating 33% of total revenues.
During 1999, the Company did not have sales totaling 10% or more of total
net sales to a single customer. In each of 1998 and 1997, the Company had sales
of 10% or more of total net sales to single customers as follows: approximately
$3.3 million, or 12.7%, to Health Options and $2.7 million, or 11.1%, Oxford
Health.
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OPERATIONS
Company-owned Centers
At the end of 1999, the Company operated a total of 79 centers located in
Florida, New York, New Jersey and in California through HEARx West. In January
of 1999, HEARx closed twelve of its centers in the northeast in response to the
withdrawal of some managed care companies from that region. During 1999, the
Company opened 18 centers in California as part of HEARx West, its joint venture
with the Permanente Federation. The Company's long term goal, where the
population warrants, is to open "clusters" of four to six Company-owned centers
within a city or county in the Company's primary markets in order to take
advantage of certain operational and marketing efficiencies created by having
multiple locations within a particular region. These efficiencies relate
principally to advertising and marketing of the centers as well as to personnel
recruiting and supervision for the centers.
Joint Venture
During August 1998, HEARx formed a joint venture, HEARx West LLC, with
the Permanente Federation LLC to create and operate a network of retail centers
to serve the needs of the hearing impaired principally in California. The joint
venture agreement provides for a 50/50 ownership by HEARx and the Permanente
Federation, with the centers bearing the HEARx name. HEARx is responsible for
the daily operation of the centers, however all clinical and quality issues are
the responsibility of a joint committee comprised of HEARx and Permanente
clinicians.
During 1999, HEARx West centers concentrated on providing hearing aids
and diagnostic audiology testing to Kaiser Permanente's members and self pay
patients in the state of California. During 2000, HEARx West will also seek
contracts to provide services to members of other managed care organizations and
self pay patients. At the end of 1999, HEARx operated 18 HEARx West centers in
southern California. HEARx West has the first right of refusal for any
geographic expansion opportunities for new HEARx centers, excluding expansion in
the states of Florida, New Jersey and Pennsylvania, which shall remain
exclusively with HEARx Ltd.
Managed Care and Institutional Contracts
Since the beginning of 1991, the Company has entered into arrangements
with institutional buyers relating to the provision of hearing care products and
services. HEARx believes that to successfully implement its growth strategy,
contractual relationships with institutional buyers of hearing aids are
essential. These institutions include managed care companies, health maintenance
organizations, insurance companies, senior citizen buying groups and unions. By
developing contractual arrangements for the referral of patients, marketing
costs are reduced, and relationships with local area physicians are enhanced.
Critical to providing care to members of these groups is the availability of
distribution sites, quality control and the standardization of products and
services. The Company believes its system of high quality, uniform centers meets
the needs of the patients and their providers.
HEARx enters into provider agreements with health insurance or managed
care organizations for the furnishing of hearing care on three different bases:
(a) fee for service basis based on a contractual rate offered by HEARx to
provider's members (all paid for by the patient); (b) a per capita basis, which
is a fixed payment per patient per month from the provider to HEARx, determined
by the number of patients to be served and the amount to be paid by the
insurance or managed care organization (the balance is paid by the individual
member); or (c) an encounter basis where the Company is paid a fixed fee by the
insurance or managed care organization for each hearing aid sold (with the
balance paid to HEARx by the individual member).
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RENEWAL OF AGREEMENTS WITH HEALTH INSURANCE AND MANAGED CARE ORGANIZATIONS
The terms of most of these agreements are to be renegotiated annually,
and most of these agreements may be terminated by either party on 90-days notice
at any time. The early termination of or failure to renew the agreements could
adversely affect the operation of the hearing care centers located in the
related market area. In addition, the early termination of or failure to renew
the agreements which provide for payment to the Company on a per capita basis
would cause the Company to lower its estimates of revenues to be received over
the life of the agreements and could have an adverse effect on the Company's
results of operations. The Company is not aware of any likely contract
terminations at this time.
DISTINGUISHING FEATURES
Integral to the success of HEARx's strategy is the strengthening of consumer's
confidence in the hearing care industry and the differentiation of HEARx from
its competitors. To that end, the Company has accomplished several unique
objectives, which are highlighted below.
Joint Commission on Accreditation of Healthcare Organizations (JCAHO)
During 1998, the Company distinguished itself from other hearing care
providers by being awarded a three year accreditation, effective June 2, 1998,
from the Joint Commission on Accreditation of Healthcare Organizations (JCAHO).
To achieve accreditation, the Company was required to meet national standards
addressing the rights and responsibilities of persons enrolled in the network;
organizational ethics; providing a continuum of care; educating and
communicating with enrollees; leadership; management of information; and
improving network performance.
Scientific Advisory Board
HEARx has formed a Scientific Advisory Board consisting of some of the
leading experts in otolaryngology and audiology in an effort to instill consumer
confidence. Each of the five members of the Scientific Advisory Board is a
highly trained professional with extensive experience in the hearing field and
is affiliated with a prestigious university and/or institution. Company
officials consult with members of this Board to keep the Company abreast of
developments in otolaryngology and audiology and for advice as to the Company's
overall business strategy. Additionally, the Scientific Advisory Board meets
annually to review corporate planning and discuss improvements in any of the
services or products which the Company offers. The Scientific Advisory Board
also advises the Company with respect to the introduction of new or improved
services or products, assists the Company in developing and reviewing quality
assurance programs, and advises the Company as to the effect of any proposed or
existing regulatory activity upon customers of the Company.
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The current members of the Scientific Advisory Board and field with
respect to which each consults with the Company are listed below:
Hearing Testing
James Jerger, Ph.D.
Professor of Audiology
University of Texas at Dallas
Dallas, TX
Patient Satisfaction and Outcomes
Lucille Beck, Ph.D.
Director of Audiology and Speech Pathology Services
VA Medical Center
Washington, D.C.
Medical Relations
Bruce J. Gantz, M.D.
Department Chairman of Otolaryngology
University of Iowa Hospitals and Clinics
Iowa City, IA
Hearing Aids and Devices
Charles I. Berlin, Ph.D.
Professor of Otorhinolaryngology & Biocommunications
Louisiana State University
Director, Kresge Hearing Research Laboratory of the South
New Orleans, Louisiana
Professional and Government Relations
Derald Brackmann, M.D.
House Ear Clinic, Inc.
Clinical Professor of Otolaryngology
University of Southern California
Los Angeles, California
Medical Reporting and HEARx Data Link
A computerized medical reporting system gives referring physicians the
results of, and recommended action for, every patient examined by HEARx. To the
Company's knowledge, no other dispenser or audiologist presently offers any
referring physician similar computerized documentation. The Company believes
that as hearing acuity and correction become an expected part of an individual's
health profile, accurate records of past audiological test results,
prescriptions and pathology should be available and accessible to those treating
the patient. To address this need, the Company has developed a centralized
computer data storage and retrieval system which provides information compiled
from each HEARx center visit.
COMPETITION
The hearing care industry is highly fragmented with approximately 11,000
practitioners providing testing and dispensing products and services. Roughly
2,500 of these practitioners are audiologists working for hospitals or
physicians, 2,500 of the practitioners are licensed audiologists in private
practice, and the remaining 6,000 are hearing aid specialists . Industry surveys
estimate that approximately 5% of all hearing aids are sold in physicians'
offices, 60% are
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dispensed by qualified audiologists in private practice, and the remaining 35%
are sold by hearing aid specialists.
Because there are no federal, state or local regulatory or oversight
agencies in the hearing care industry, it is not possible to determine the
precise number of competitors of the Company in every market where the Company
has operations, or the percentage of market share enjoyed by the Company. Based
on 1999 industry-reported sales in the State of Florida, the Company's market
share of hearing aid sales in Florida was approximately 22%.
Most competitors are small retailers generally focusing on the sale of
hearing aids without providing comprehensive audiometric testing and other
professional services. Some competitors are significantly larger distributors,
including: (1) Bausch & Lomb, a hearing aid manufacturer whose distribution
system is through a national network of over 1,000 franchised stores (Miracle
Ear) including 400 located in Sears Roebuck & Co. stores; and (2) Beltone
Electronics Corp., a privately-owned hearing aid manufacturer that distributes
its products primarily through its network of approximately 1000 "authorized"
distributors. A number of these franchises and distributors are located in the
areas the Company serves.
These networks primarily offer hearing aids only and do not provide the
comprehensive diagnostic services, use of audiologist services or other
ancillary products offered by the Company. More importantly, they do not use the
services of audiologists in the majority of their centers. However, these
networks are owned by companies having greater resources than the Company, and
there can be no assurance that one or more of these competitors will not expand
and/or change their operations to capture the market targeted by the Company.
Nor can there be any assurance that the largely fragmented hearing care market
cannot be successfully consolidated by the establishment of co-operatives,
alliances, confederations or the like which would then compete more directly
with HEARx in its marketing strategy.
RELIANCE ON MANUFACTURERS AND QUALIFIED HEARING PROFESSIONALS
Through its hearing care centers, HEARx makes hearing aids available to
patients which are supplied by approximately five major manufacturers, as well
as hearing enhancement devices manufactured by other companies. The Company
relies on these manufacturers to supply such products, and a significant
disruption in supply from any or all of these manufacturers could adversely
affect the Company's business. In the event of a disruption of supply from one
or more of the Company's current suppliers, the Company could obtain comparable
products from other manufacturers. Few manufacturers offer dramatic product
differentiation. The Company has not experienced any significant disruptions in
supply in the past.
The Company currently employs 150 licensed hearing professionals, of
which 120 are audiologists. The inability of the Company to attract and retain
qualified licensed hearing professionals would reduce the Company's ability to
distinguish itself from competing networks of hearing aid retailers and thus
adversely affect its business. Management believes that it will be able to
attract and retain qualified licensed hearing professionals sufficient to staff
its centers for the foreseeable future.
REGULATION
Federal
The practice of audiology and the dispensing of hearing aids are not
presently regulated on the Federal level. The United States Food and Drug
Administration ("FDA") is responsible for monitoring the hearing care industry.
Currently there are only two regulations affecting the sale of hearing aids: 1)
a physician's review and 2) a return policy. The FDA requires first time hearing
aid purchasers to receive medical clearance from a physician prior to purchase;
however, patients
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may sign a waiver in lieu of a physician's examination. In 1993, the State of
Vermont petitioned the FDA to drop the waiver provision and mandate a physician
visit. A final decision has never been generated. A majority of the patients in
HEARx centers are members of the managed care or institutional providers with
whom HEARx has contracts to provide hearing care. Some of these organizations
require a physician referral. Consequently, a new federal or state physician
referral mandate should not have an adverse impact on the Company's operations.
The FDA has mandated that states adopt a return policy for consumers offering
them the right to return their products, generally within 3-30 days, HEARx
offers its customers a full 30-day period and up to a 60-day period for patients
who participate in the free HEARx Educational Listening Program (H.E.L.P.)
family hearing counseling program.
In addition, because the Company's centers accept Medicare and Medicaid
patients, the centers must maintain their eligibility as Medicare/Medicaid
providers and must comply with related federal anti-fraud, anti-kickback and
other applicable regulations. Federal laws prohibit the payment of remuneration
("kickbacks") in return for a physician referring a Medicare or Medicaid
patient, and those laws limit physicians from referring patients to providers in
which they have a financial interest. The Company believes that none of its
managed care or other provider contracts or its relationships with referring
physicians are violative of the anti-kickback statute.
The Company cannot predict the effect of future changes in federal laws,
including changes which may result from proposals for federal health care reform
legislation being considered by the U.S. Congress, or the impact that changes in
existing federal laws or in the interpretation of those laws might have on the
Company. The Company believes it is in material compliance with all existing
federal regulatory requirements.
State
Generally, state regulations, where they exist, are concerned primarily
with the formal licensure of audiologists and of those who dispense hearing aids
and with practices and procedures involving the fitting and dispensing of
hearing aids. There can be no assurance that regulations do not exist in
jurisdictions in which the Company plans to open centers or will not be
promulgated in states in which the Company currently operates centers which may
have a material adverse effect upon the Company. Such regulations might include
stricter licensure requirements for dispensers of hearing aids, inspections of
centers for the dispensing of hearing aids and the regulation of advertising by
dispensers of hearing aids. The Company knows of no current or proposed state
regulations with which it, as currently operated, could not comply.
The Company believes it is in material compliance with all applicable
state regulatory requirements.
PRODUCT AND PROFESSIONAL LIABILITY
In the ordinary course of its business, HEARx may be subject to product
and professional liability claims alleging the failure of, or adverse effects
claimed to have been caused by, products sold or services provided by the
Company. The Company maintains insurance at a level which the Company believes
to be adequate. A successful claim in excess of the policy limits of the
Company's liability insurance could adversely affect the Company. As the
distributor of products manufactured by others, the Company believes it would
properly have recourse against the manufacturer in the event of a product
liability claim; however, there can be no assurance that recourse against a
manufacturer by the Company would be successful or that any manufacturer will
maintain adequate insurance or otherwise be able to pay such liability.
SEASONALITY
The Company is not generally affected by seasonality.
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EMPLOYEES
At December 31, 1999, HEARx Ltd. had approximately 360 full-time
employees, of which 60 were employed by HEARx West.
The operations of the Company are dependent in large part upon the
efforts of Paul A. Brown, M.D., Chairman of the Board and Chief Executive
Officer, and Stephen J. Hansbrough, President, Chief Operating Officer and
Director. The loss of the services of Dr. Brown or Mr. Hansbrough could
adversely affect the conduct and operation of the Company's business. The
Company purchased a "key man" insurance policy on Dr. Brown's life in the amount
of $3,000,000 for the benefit of the Company.
ITEM 2. PROPERTIES
HEARx's corporate offices are located in 13,000 square feet of space in
West Palm Beach, Florida. The lease is for five years and expires May 2001.
As of December 31, 1999, the Company operated 33 centers in Florida, 15
in New Jersey and 13 in New York and 18 HEARx West centers in California. All of
the locations are leased for one to ten year terms pursuant to generally
non-cancelable leases (with renewal options in some cases). Each center consists
of between 700 and 3,000 square feet with annual base rents ranging from
approximately $8,700 to $76,000. In January 1999, the Company closed twelve
centers in the northeast. The Company has successfully negotiated and completed
lease buy-outs, exercised early termination options or subleases on ten of the
twelve properties.
The Company believes its facilities are adequate and suitable for its
current operations.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information as of the date hereof with
respect to the Company's executive officers. Each of Dr. Brown and Mr.
Hansbrough are serving pursuant to employment agreements with 5 year terms. Mr.
Peklenk has been appointed to a term which will expire at the annual meeting of
Board of Directors held at the time of the 2000 Annual Meeting of Stockholders,
or at the time his successor is duly elected and qualified:
NAME AND POSITION AGE FIRST SERVED AS OFFICER
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Paul A. Brown, M.D. 61 1986
Chairman of the Board
Chief Executive Officer
Stephen J. Hansbrough 52 1993
President, Chief Operating
Officer and Director
James W. Peklenk 54 1996
Vice President - Finance
and Chief Financial Officer
There are no family relationships among any of the executive officers and
directors of the Company.
Paul A. Brown, M.D., holds an A.B. from Harvard College and a M.D. from
Tufts University School of Medicine. From 1970 to 1984, Dr. Brown was Chairman
of the Board and Chief Executive Officer of MetPath Inc. ("MetPath"), a New
Jersey-based corporation offering a full range of clinical laboratory services
to physicians and hospitals, which he founded in 1967 while a resident in
pathology at Columbia Presbyterian Medical Center in New York City. MetPath
developed into the largest clinical laboratory in the world with over 3,000
employees and was listed on the American Stock Exchange prior to being sold to
Corning Glass Works in 1982. Dr. Brown founded HEARx in 1986. Dr. Brown is
formerly Chairman of the Board of Overseers of Tufts University School of
Medicine, an Emeritus member of the Board of Trustees of Tufts University, a
member of the Visiting Committee of Boston University School of Medicine and
part-time lecturer in pathology at Columbia University College of Physicians and
Surgeons.
Stephen J. Hansbrough, President, Chief Operating Officer and Director,
joined HEARx in December 1993. Mr. Hansbrough has an extensive background in the
retail arena. He served as Chairman and Chief Executive Officer of Dart Drug
Stores until 1988. Subsequently, he was an independent consultant specializing
in turn-around and start-up operations, primarily in the retail field, until
joining HEARx in 1993.
James W. Peklenk, Vice President - Finance and Chief Financial Officer,
joined the Company in November 1995 as Controller and became Vice President
Finance and Chief Financial Officer in June 1996. He has a B.S. in Accounting
from the University of Louisville. From 1991 until joining HEARx, Mr. Peklenk
was Vice President, Finance/CFO, for Shooters International, Inc., an
international restaurant operator and franchiser of Shooters Waterfront Cafes.
Prior thereto , Mr. Peklenk was Director of Internal Audit for Chi-Chi's Mexican
Restaurants, and before that an Audit Partner with the international accounting
firm of Grant Thornton.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the
Common Stock as reported by the American Stock Exchange (AMEX), ticker symbol
EAR, for the fiscal quarters indicated. 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 Stockholders. Each stockholder 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. Accordingly, the Company has restated all share and per share
data for all periods presented to reflect the change in capital structure.
Fiscal Quarter Common Stock
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High Low
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1998
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First $ 15 5/8 $15
Second 15 5/8 14 7/16
Third 8 3/4 8 1/8
Fourth 6 1/4 5 5/8
1999
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First $ 7 1/2 $ 5
Second 5 5/8 4 3/8
Third 5 3/8 4 3/8
Fourth 4 7/8 3 9/16
As of March 21, 2000, there were 1,927 holders of record of the Common
Stock. The Company estimates that included within the holders of record are
approximately 17,300 beneficial owners of the Common Stock.
Dividend Policy
HEARx has never paid and does not anticipate paying any dividends on the
Common Stock in the foreseeable future but intends to retain any earnings for
use in the Company's business operations.
Unregistered Sale of Securities
During 1999, 4,209 shares of the Company's 1997 Preferred Stock were
converted into 1,098,906 shares of the Company's Common Stock. The 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.
During 1999, 185 shares of the Company's 1998 Preferred Stock were
converted into 44,712 shares of the Company's Common Stock. The 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 conversion were also issued
pursuant to Section 4(2) of the securities Act of 1933.
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SHAREHOLDER RIGHTS PLAN
On December 14, 1999, the Board of Directors approved the adoption of a
Shareholder Rights Plan, in which a dividend of one preferred share purchase
right ( a "Right") for each outstanding share of Common Stock was declared,
payable to the stockholders of record on December 31, 1999. The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
Common Stock or announces a tender offer which would result in ownership of 15%
or more of the Common Stock. The Rights entitle the holder to purchase one
one-hundredth of a share of Series H Junior Participating Preferred Stock at an
exercise price of $28.00 and will expire on December 31, 2009.
Following the acquisition of 15% or more of the Company's Common Stock by
a person or group without the prior approval of the Board of Directors, the
holders of the Rights (other than the acquiring person) will be entitled to
purchase shares of Common Stock (or Common Stock equivalents) at one-half the
then current market price of the Common Stock, or at the election of the Board
of Directors, to exchange each Right for one share of the Company's Common Stock
(or Common Stock equivalent). In the event of a merger or other acquisition of
the Company without the prior approval of the Board of Directors, each Right
will entitle the holder (other than the acquiring person), to buy shares of
common stock of the acquiring entity at one-half of the market price of those
shares. The Company will be able to redeem the Rights at $0.01 per Right at any
time until a person or group acquires 15% or more of the Company's Common Stock.
The Series H Junior Participating Preferred Stock is subject to the
rights of the holders of any shares of any series of preferred stock of the
Company ranking prior and superior to the Series H Junior Participating
Preferred Stock with respect to dividends. The holders of shares of Series H
Junior Participating Preferred in preference to the holders of shares of Common
Stock, and any other junior stock, shall be entitled to receive dividends, when,
as and if declared by the Board of Directors out of funds legally available
therefore.
14
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the consolidated financial statements and notes thereto and the
following Management's Discussion and Analysis of Financial Condition and
Results of Operations. The financial data set forth on the next two pages have
been derived from the audited consolidated financial statements of the Company:
15
15
OPERATING STATEMENT DATA:
Year Ended
----------------------------------------------------------
December 31 December 25 December 26
1999(1) 1998 1997
------- ---- ----
Net Revenues $ 47,686,868 $ 27,493,849 $ 24,213,879
Total costs and expenses 52,038,441 39,222,091(2) 33,417,880
------------ ------------ -------------
Loss before equity in loss of joint venture 4,351,573) (11,728,242) (9,204,001)
Minority Interest/Equity in loss of joint venture 347,677 (615,420) -
Dividends on preferred stock (821,387) (587,893) (1,992,123)
------------ ------------ -------------
Net loss applicable to common stockholders $ (4,825,283) $(12,931,555) $(11,196,124)
============= ============= =============
Loss per common share:
Basic and diluted, including dividends on
preferred stock $ (0.45) $ (1.28) $ (1.25)
============= ============ =============
Weighted average
number of common shares
outstanding 10,775,006 10,126,979 8,960,503
============= ============ =============
Cash dividends per common
Share None None None
==== ==== ====
Year Ended
---------------------------------------
December 27 December 29
1996 1995
---- ----
Net Revenues $ 18,490,561 $11,170,068
Total costs and expenses 26,349,540 13,383,521
------------- -------------
Loss before equity in loss of joint venture (7,858,979) (2,213,453)
Minority Interest/Equity in loss of joint venture - -
Dividends on preferred stock (10,036,507) -
------------- -------------
Net loss applicable to common stockholders $(17,895,486) $(2,213,453)
============= ============
Loss per common share:
Basic and diluted, including dividends on
preferred stock $ (2.51) $ (0.49)
============= ============
Weighted average
number of common shares
outstanding 7,119,712 4,516,409
============ ==========
Cash dividends per common
Share None None
==== ====
(1) As discussed in Note 1 to the Consolidated Financial Statements, during 1999
the Company's Consolidated Financial Statements include the accounts of
HEARx West, its 50% subsidiary.
(2) During December 1998, the Company recorded a restructure charge of
$2,233,800 in connection with the closing of 12 centers in the northeast in
January 1999.
16
16
BALANCE SHEET DATA:
As of
December 31 December 25 December 26 December 27 December 29
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total assets $22,879,751 $25,208,317 $28,359,547 $26,627,484 $6,450,628
Working capital (deficit) 938,815 7,614,042 13,136,147 12,456,391 (1,317,179)
Long-term debt, net of
current portion 322,332 123,316 177,897 230,258 2,316,300
Book value per share (1) 0 .18 0 .39 1.60 2.30 (1.20)
(1) represents total stockholders' equity less aggregate liquidation preferences
on preferred stock, divided by shares of common stock outstanding at year
end.
17
17
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
AND ANALYSIS OF FINANCIAL CONDITION
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.
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 or services. The Company is currently expanding its hearing care center
network through HEARx West LLC. The joint venture agreement provides for a 50/50
ownership by the Company and the Permanente Federation of HEARx West, with the
centers bearing the HEARx name. The initial opening of 15 HEARx West centers in
Southern California was completed by January 6, 1999.
At the center level, HEARx is profitable in Florida where sales for the year
ended December 31, 1999 were up approximately 31% over the comparable period in
1998. Also during 1999, the California centers, operating under HEARx West were
profitable at the center level. In the Northeast market, however, centers have
yet to generate enough revenue to reach profitability. 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 during 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 $214,656 at December 31, 1999 is adequate to
cover remaining costs.
Effective January 1, 2000, Florida Health Choice of southeast Florida and United
Healthcare of New Jersey discontinued providing hearing care benefits to
Medicare participants. Total revenue generated from these plans in 1999 was
approximately $692,000. In addition, several other insurance companies, which
the Company has contracts with, significantly changed their contract benefits or
service areas. The Company believes these changes will not have a material
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 affect on its financial condition or results
of operations.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Prior to March 1999, HEARx Ltd. accounted for its investment in HEARx West using
the equity method because HEARx did not control HEARx West due to certain
provisions in the joint venture agreement. During 1999, as a result of
amendments to the agreement, HEARx obtained control of HEARx West. Accordingly,
during 1999, HEARx has included the financial position and results of operations
of HEARx West in its consolidated financial statements.
Net revenues increased $20,193,019, or 73%, to $47,686,868 in 1999 from
$27,493,849 in 1998. The consolidation of HEARx West revenues contributed
approximately $12,446,000 to the increase. The Company's aggressive advertising
campaign during 1999 yielded revenues from self-pay patients of approximately
$16,457,000, which was partially offset by the closing of the 12 northeast
centers in January 1999, which accounted for $1,228,000 of 1998 revenues.
18
18
Cost of products sold increased $6,418,226, or 78%, to $14,611,284 in 1999 from
$8,193,058 in 1998. Approximately $4,452,000 of the increase is a result of the
consolidation of 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 30 % for 1999 and 1998, respectively,
fluctuates from period to period depending generally upon the sales mix and
sales promotions. However, HEARx West provided a higher cost of sales percentage
at 36%, because a fixed discount has been granted to Kaiser Plan members.
Center operating expenses increased $6,406,335, or 32%, to $26,376,830 in 1999
from $19,970,495 in 1998. Approximately $6.3 million of the increase is
attributable to the now consolidated center operating expenses of HEARx West.
Consolidated center operating expenses as a percent of revenue decreased in 1999
to 55% from 73% in 1998, which is generally attributable to the increase in
sales. Increased advertising accounted for approximately $1,428,000, or 22% of
the increase, offset by a decrease in rent expense of approximately $619,000 or
10% of the increase resulting from the closing of the 12 northeast centers in
January 1999.
Consolidated general and administrative expenses increased 33% or $2,118,002 to
$8,601,723 in 1999 from $6,483,721 in 1998, primarily as the result of the
consolidation of HEARx West expenses of approximately $1.7 million. Consolidated
general and administrative expenses as a percent of net revenue decreased to 18%
in 1999 from 24% in 1998.
Depreciation and amortization expense increased $142,423, or 6%, to $2,420,891
in 1999 from $2,278,468 in 1998. An increase of $451,032 provided by HEARx West
was offset by a reduction of $308,609 primarily attributable to the closing of
twelve centers in the Northeast in January 1999.
The net loss before dividends on preferred stock was $4,003,896, representing a
decrease in loss of $8,339,766 or 68% from 1998 net losses before dividends on
preferred stock. The net loss for HEARx West was $695,354 in 1999.
1998 COMPARED TO 1997
Net revenues increased $3,279,970, or 14%, to $27,493,849 in 1998 from
$24,213,879 in 1997. The increase in net revenues primarily results from the
increase in the Company's non-insured "self-pay" business and the effect of new
contracts signed with major health insurers.
Cost of products sold increased $1,229,276, or 18%, to $8,193,058 in 1998 from
$6,963,782 in 1997. The increase in the cost of products sold is primarily
attributable to the increase in net sales from new and existing centers. The
cost of products sold as a percent of net revenues fluctuates from period to
period depending upon the sales mix and sales promotions.
Center operating expenses increased $2,196,556, or 12-%, to $19,970,495 in 1998
from $17,773,939 in 1997. This increase is partially due to an increase in
advertising expense of $316,411, over the comparable period of 1997. The
remaining increase of $1,880,145, or 11%, is attributable to the increase in the
number of centers operating during 1998 (75) compared to 1997 (73); one time
charges for the relocation of three southeast Florida centers to larger
facilities during 1998; and an increase in center wages in the southeast Florida
region to manage increased sales levels.
General and administrative expenses decreased $145,242, or 2%, to $6,483,721 in
1998 from $6,628,963 in 1997.
19
19
Depreciation and amortization expense increased $285,716, or 14.3%, to
$2,278,468 in 1998 from $1,992,752 in 1997. The increase was attributable to the
depreciation and amortization of leasehold improvements, medical and computer
equipment, and furniture associated with the centers opened, acquired, relocated
and remodeled in southeast Florida in 1998.
Equity in loss of joint venture increased by $615,420 representing the Company's
share of the loss of HEARx West for the period from inception on August 10, 1998
to the end of the fiscal year on December 25, 1998. HEARx West's net loss
included a management fee to HEARx Ltd. of $466,000, as well as non-recurring
pre-operating costs expensed as incurred. These costs include recruiting, new
employee training, market research, licensing and organizational fees. The
initial opening of 15 HEARx West centers in Southern California was completed by
January 6, 1999.
FOURTH QUARTER ADJUSTMENTS - 1998
In order to reduce losses in the northeast region, and 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 January 1999. Those
centers had a combined loss for the year ended December 25, 1998 of
approximately $1.9 million. A restructure charge of $2,233,800 was recorded in
the fourth quarter of 1998 to reflect the costs of closing the centers as
detailed below.
Lease termination costs $1,304,400
Employee severance 81,800
Write down of Fixed Assets to net realizable value 783,100
Other 64,500
-----------
Total Restructure Charge $2,233,800
===========
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $6,675,227 to $938,815 as of December 31, 1999 from
$7,614,042 as of December 25, 1998. This decrease is primarily the result of net
cash used by operating activities including a net loss from operations of
approximately $4.0 million and a net increase of approximately $4.0 million in
accounts and notes receivable, offset by an increase of approximately $2.5
million in accounts payable and accrued expenses related to the growth in
operations of existing centers and the 18 new centers of HEARx West. 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 2000 in accordance with its strategic plan, although
there can be no assurance that other cash needs will not arise.
Net cash used by operating activities decreased from $9,119,910 in 1998, to
$2,876,171 in 1999. The decrease in cash used by operating activities was
primarily the result of the reduction of operating losses of approximately $8.3
million.
Net cash provided by investing activities increased from $2,056,732 in 1998, to
$5,418,632 in 1999. Net funds from the purchase and sale or maturity of
investments increased to $6,212,156 in 1999 from $3,149,240 in 1998, offset by
an increase in purchases of property and equipment of $309,193 from 1998 to
1999.
Net cash from financing activities decreased from cash provided by financing
activities of $6,068,451 in 1998 to cash used of $2,335,385 in 1999. This
decrease was primarily the result of funds in the amount of $6,784,019 from a
preferred stock offering in 1998. In addition, during 1999 funds in the amount
of $1,820,424 were used to repurchase 348,229 shares of the Company's Common
Stock.
20
20
The Company has historically been successful in raising capital when needed
(most recently in 1998), and continues to have contact with investment bankers
and lending institutions who are desirous of providing capital and financing to
the Company if needed. There can be no assurance, however, that such capital
will be available on favorable terms or at all when the Company's needs arise.
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; 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.
21
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
22
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Index to Financial Statements
Financial Statements:
Report of Independent Certified Public Accountants 24
Consolidated Balance Sheets at December 31, 1999 and December 25, 1998 25
Consolidated Statements of Operations for the years ended December 31, 1999,
December 25, 1998, and December 26, 1997 26
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, December 25, 1998 and
December 26, 1997 27-28
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
December 25, 1998, and December 26, 1997 29-30
Notes to Consolidated Financial Statements 31-45
Financial Statement Schedule:
For the years ended December 31, 1999, December 25, 1998 and
December 26, 1997
II Valuation and Qualifying Accounts 46
23
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
HEARx Ltd.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of HEARx Ltd. as of
December 31, 1999 and December 25, 1998, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. We have also audited the
accompanying schedule. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HEARx Ltd. at
December 31, 1999 and December 25, 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with generally accepted accounting principles.
Also in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
West Palm Beach, Florida BDO Seidman, LLP
March 8, 2000
24
24
HEARx Ltd.
Consolidated Balance Sheets
ASSETS
December 31, December 25,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,857,187 $ 2,650,111
Investment securities (Note 2) 900,000 7,170,780
Accounts and notes receivable, less allowance for
doubtful accounts of $ 535,609 and $588,509 (Note 8) 7,027,536 4,087,912
Inventories 551,460 529,427
Prepaid expenses 531,169 338,868
Other Assets 349,391 500,888
------------ ------------
Total current assets 12,216,743 15,277,986
PROPERTY AND EQUIPMENT - NET (Notes 3, 4 & 10) 8,492,708 7,100,530
INVESTMENT AND ADVANCES IN HEARX WEST LLC (Note 8) - 1,406,900
DEPOSITS AND OTHER 2,170,300 1,422,901
------------ ------------
$ 22,879,751 $ 25,208,317
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,202,010 $ 4,126,379
Restructure reserve (Note 10) 214,656 1,450,739
Accrued salaries and other compensation 1,562,510 695,892
Current maturities of long term debt (Note 3) 294,993 639,664
Dividends payable (Notes 5B and 5C) 1,003,759 751,270
------------ ------------
Total current liabilities 11,277,928 7,663,944
------------ ------------
LONG TERM DEBT, LESS CURRENT MATURITIES (Note 3) 322,332 123,316
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4,6,8,10 & 11)
STOCKHOLDERS' EQUITY: - -
Non-redeemable preferred stock:
(Aggregate liquidation preference $ 9,318,757 and
$13,460,270) $1 par, 2,000,000 shares authorized (Note 5)
1998 Convertible 7,315 & 7,500 shares outstanding 7,315 7,500
1997 Convertible 1,000 & 5,209 shares outstanding 1,000 5,209
------------ ------------
Total preferred stock 8,315 12,709
Common stock; $.10 par; 20,000,000 and 130,000,000
shares authorized; 11,547,337 & 104,023,643 shares
issued (Notes 5 & 6) 1,154,734 10,402,364
Additional paid-in capital 87,307,886 77,531,270
Accumulated deficit (75,083,251) (70,257,968)
Accumulated other comprehensive income - 58,263
Unamortized deferred compensation (37,813) (75,625)
Treasury stock, at cost:388,760 & 405,311 common shares (2,070,380) (249,956)
------------ ------------
Total stockholders' equity 11,279,491 17,421,057
------------ ------------
$ 22,879,751 $ 25,208,317
============ ============
See accompanying notes to consolidated financial statements
25
25
HEARx Ltd.
Consolidated Statements of Operations
Year Ended
------------------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------- ------------- -------------
NET REVENUE $ 47,686,868 $ 27,493,849 $ 24,213,879
COSTS AND EXPENSES:
Cost of products sold 14,611,284 8,193,058 6,963,782
Center operating expenses 26,376,830 19,970,495 17,773,939
General and administrative expenses 8,601,723 6,483,721 6,628,963
Depreciation and amortization 2,420,891 2,278,468 1,992,752
Interest expense (Note 8) 27,713 62,492 58,444
Restructure charge (Note 10) - 2,233,857 -
------------- ------------- -------------
Total costs and expenses 52,038,441 39,222,091 33,417,880
------------- ------------- -------------
LOSS BEFORE EQUITY IN LOSS OF JOINT VENTURE (4,351,573) (11,728,242) (9,204,001)
MINORITY INTEREST 347,677 - -
EQUITY IN LOSS OF JOINT VENTURE - (615,420) -
------------- ------------- -------------
NET LOSS (4,003,896) (12,343,662) (9,204,001)
DIVIDENDS ON PREFERRED STOCK:
Deemed dividends (Notes 5B and 5C) - - (1,500,000)
Dividends (821,387) (587,893) (492,123)
------------- ------------- -------------
Total dividends on preferred stock (821,387) (587,893) (1,992,123)
------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDER $ (4,825,283) $(12,931,555) $(11,196,124)
============= ============= =============
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED (NOTE 1) $ (.45) $ (1.28) $ (1.25)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (NOTE 1) 10,775,006 10,126,979 8,960,503
============= ============= =============
See accompanying notes to consolidated financial statements
26
26
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 25, 1998
----------------- -----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
PREFERRED STOCK:
Balance, beginning of year 12,709 $ 12,709 7,115 $ 7,115
Issuance of preferred stock - - 7,500 7,500
Conversion of preferred stock (4,394) (4,394) (1,906) (1,906)
------------ -------------- ------------ ------------
Balance, end of year 8,315 $ 8,315 12,709 $ 12,709
============ ============= ============ =============
COMMON STOCK:
Balance, beginning of year 104,023,643 $ 10,402,364 99,211,436 $ 9,921,144
Exercise of warrants - - 1,316,848 131,684
Conversion of preferred stock 5,414,400 541,440 3,265,384 326,538
Exercise of employee stock options 13,600 1,360 104,975 10,498
Exercise of stock options by consultants - - 50,000 5,000
Exercise of stock options by Board of Directors - - 75,000 7,500
Issuance of restricted stock to officers - - - -
Retirement of treasury stock - - - -
Settlement of litigation - - - -
Reverse stock split (97,904,306) (9,790,430) - -
------------ ------------- ------------ ------------
Balance, end of year 11,547,337 $ 1,154,734 104,023,643 $10,402,364
============ ============= ============ =============
TREASURY STOCK:
Balance, beginning of year (405,311) $ (249,956) - $ -
Purchase of treasury stock (1,921,239) (1,820,424) (405,311) (249,956)
Reverse Stock Split 1,937,790 - - -
Retirement of treasury stock - - - -
------------ ------------- ------------ ------------
Balance, end of year (388,760) $ (2,070,380) (405,311) $ (249,956)
============ ============= ============ =============
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 77,531,270 $70,646,172
Issuance of preferred stock - 6,936,472
Deemed dividend on preferred stock issuance - -
Conversion of preferred stock 31,852 (155,845)
Exercise of warrants - (24,805)
Exercise of employee stock options 1,500 43,620
Exercise of stock options by consultants - 45,000
Exercise of stock options by board of directors - 40,256
Reverse stock split 9,743,264 -
Retirement of treasury stock - -
Vesting of restricted stock - 400
Settlement of litigation - -
------------- ------------
Balance, end of year $ 87,307,886 $77,531,270
============= ============
YEAR ENDED
DECEMBER 26, 1997
-----------------
SHARES AMOUNT
------ ------
PREFERRED STOCK:
Balance, beginning of year 4,950 $ 4,950
Issuance of preferred stock 10,000 10,000
Conversion of preferred stock (7,835) (7,835)
------------- -------------
Balance, end of year 7,115 $ 7,115
============ ============
COMMON STOCK:
Balance, beginning of year 81,969,233 $ 8,196,923
Exercise of warrants 11,460,233 1,146,023
Conversion of preferred stock 5,817,586 581,759
Exercise of employee stock options 205,250 20,525
Exercise of stock options by consultants 25,000 2,500
Exercise of stock options by Board of Directors - -
Issuance of restricted stock to officers 50,000 5,000
Retirement of treasury stock (250,000) (25,000)
Settlement of litigation (65,866) (6,586)
Reverse stock split - -
------------ ------------
Balance, end of year 99,211,436 $ 9,921,144
============ ============
TREASURY STOCK:
Balance, beginning of year (250,000) $ (625,000)
Purchase of treasury stock - -
Reverse Stock Split - -
Retirement of treasury stock 250,000 625,000
------------ ------------
Balance, end of year - $ -
============ ============
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 59,996,480
Issuance of preferred stock 9,695,519
Deemed dividend on preferred stock issuance 1,500,000
Conversion of preferred stock (950,732)
Exercise of warrants 752,129
Exercise of employee stock options 76,639
Exercise of stock options by consultants 22,500
Exercise of stock options by board of directors -
Reverse stock split -
Retirement of treasury stock (600,000)
Vesting of restricted stock 147,050
Settlement of litigation 6,587
-------------
Balance, end of year $ 70,646,172
=============
See accompanying notes to consolidated financial statements
27
27
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity
Year Ended Year Ended Year Ended
December 31, 1999 December 25, 1998 December 26, 1997
----------------- ----------------- -----------------
Amount Amount Amount
------ ------ ------
ACCUMULATED DEFICIT:
Balance, beginning of year $(70,257,968) $(57,326,413) $ (46,130,289)
Net loss for the year (4,003,896) (12,343,662) (9,204,001)
Deemed dividends on - - (1,500,000)
Preferred stock issuance
Preferred stock dividends (821,387) (587,893) (492,123)
--------------- -------------- ---------------
Balance, end of year $ (75,083,251) $ (70,257,968) $ (57,326,413)
=============== ============== ===============
UNAMORTIZED DEFERRED COMPENSATION:
Balance, beginning of year $ (75,625) $ (113,438) $ -
Issuance of restricted stock to officer - - (147,050)
Amortization 37,812 37,813 33,612
--------------- -------------- ---------------
Balance, end of year $ (37,813) $ (75,625) $ (113,438)
=============== ============== ===============
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year $ 58,263 $ 20,156 $ 32,121
Unrealized gains on securities net of
reclassification adjustment (see
disclosure) (58,263) 38,107 (11,965)
--------------- -------------- ---------------
Balance, end of year $ - $ 58,263 $ 20,156
=============== ============== ===============
COMPREHENSIVE INCOME (LOSS):
Net loss for the year $(4,003,896) $(12,343,662) $(9,204,001)
Other comprehensive income (Loss) 58,263) 38,107 (11,965)
--------------- -------------- ---------------
Comprehensive income(loss) $ (4,062,159) $ (12,305,555) $ (9,215,966)
=============== ============== ===============
Disclosure of reclassification amount:
Unrealized holding gains (losses) arising
during period $ (84,022) $ 50,763 $ (11,965)
Less: reclassification adjustment for
gains (losses) included in net loss 25,759 (12,656) -
--------------- -------------- ---------------
Net unrealized gains (losses) on securities $(58,263) $ 38,107 $ (11,965)
=============== ============== ===============
See notes to accompanying consolidated financial statements
28
28
HEARx Ltd.
Consolidated Statements of Cash Flows
Year Ended
-------------------------------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------ -------------- --------------
Cash flows from operating activities:
Net loss $(4,003,896) $(12,343,662) $ (9,204,001)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,420,891 2,278,468 1,992,752
Write down of property and equipment - 783,118 -
Provision for loss on accounts receivable 568,135 553,467 243,178
Loss on disposition of equipment 40,325 60,238 30,378
Minority interest (347,677) - -
Changes in assets and liabilities, net of
effect of consolidating HEARx West in 1999
(Increase) decrease in:
Accounts and notes receivable (4,049,849) (1,384,669) (477,896)
Inventories (21,265) (6,072) (159,377)
Prepaid expenses (132,967) (26,002) (67,866)
Other assets 165,372 (2,082,863) (593,967)
Increase (decrease) in:
Accounts payable 2,875,246 991,620 (673,257)
Accrued expenses (390,486) 2,056,447 855,584
------------ -------------- --------------
Net cash used in operating activities (2,876,171) (9,119,910) (8,054,472)
------------ -------------- --------------
Cash flow from investing activities:
Purchase of property and equipment (1,450,107) (1,140,914) (2,858,741)
Proceeds from sale of equipment - 48,406 -
Purchase of investments (2,750,000) (24,287,452) (29,327,413)
Proceeds from maturities of investments 8,962,516 27,436,692 30,969,560
Net cash from consolidating HEARx West 656,223 - -
------------ -------------- --------------
Net cash provided (used) by investing
Activities 5,418,632 2,056,732 (1,216,594)
------------ -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of:
Long-term debt 35,250 - 406,907
Principal payments:
Long-term debt (505,905) (465,612) (160,246)
Acquisition of treasury stock (1,820,424) (249,956) -
Proceeds from issuance of capital stock,
net of offering costs (44,306) 6,784,019 10,857,806
------------ -------------- --------------
Net cash (used) provided by financing
activities (2,335,385) 6,068,451 11,104,467
------------ -------------- --------------
Net increase(decrease) in cash and cash
equivalents 207,076 (994,727) 1,833,401
Cash and cash equivalents at beginning of
year 2,650,111 3,644,838 1,811,437
------------ -------------- --------------
Cash and cash equivalents at end of year $ 2,857,187 $ 2,650,111 $ 3,644,838
============ ============== ==============
See accompanying notes to consolidated financial statements
29
29
HEARx LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
----------------------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
-------------- --------------- -----------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,419 $ 8,836 $ 11,956
============== =============== =================
Supplemental schedule of non-cash investing and financing activities
Deemed dividends $ - $ - $ 1,500,000
Preferred stock dividend paid upon conversion in
kind by issuance of additional common stock 568,898 168,787 112,489
Issuance of note payable and assumption of
accounts payable in exchange for customer list
and equipment 482,496 - -
Issuance of Common Stock for services - - 17,000
Issuance of Common Stock to employees 2,860 54,118 97,164
See accompanying notes to consolidated financial statements
30
30
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
HEARx Ltd. ("HEARx" or "the Company"), a Delaware corporation, was organized for
the purpose of creating a nationwide chain of retail centers ("HEARx Centers")
to serve the needs of the hearing impaired. At the end of 1999, the Company
operated a total of 79 centers. Those included 33 in Florida, 13 in New York, 15
in New Jersey and the 18 HEARx West centers in California.
Segments
The Company's operations are organized by centers in geographic regions of the
Northeast, the southeast and west coasts of Florida and California. These
regions comprise one operating segment. Net sales of operations amounted to
approximately $47,687,000, $27,494,000 and $24,214,000 in 1999, 1998 and 1997,
respectively. Operating profit and losses for center operations, before
allocation of general corporate expenses of approximately $8,602,000, $6,484,000
and $6,629,000 was approximately $5,087,000 of operating profit and, $4,536,000
and $1,913,000 of operating losses, respectively. Center operations'
depreciation amounted to $1,793,000, $1,632,000 and $1,389,000 in 1999, 1998,
and 1997 respectively. Center operations' capital expenditures amounted to
$1,450,000, $1,141,000 and $2,859,000 in 1999, 1998, and 1997, respectively.
Aggregate identifiable assets of center operations at December 31, 1999 and
December 25, 1998 were $7,666,000 and $6,090,000, respectively. Such amounts
exclude general corporate assets (primarily cash, fixed assets, notes and other
investments) of $13,135,000 and $14,882,000 and an investment in and advance in
HEARx West LLC of $1,407,000 at December 25, 1998.
Consolidation and change in reporting entity
On August 10, 1998, HEARx formed a joint venture, HEARx West LLC, with the
Permanente Federation LLC to create and operate a network of retail hearing care
centers ("HEARx West Centers"). The joint venture agreement provides for a 50/50
ownership by HEARx and the Permanente Federation, with centers bearing the HEARx
name. The agreement provides for net income and losses, tax credits and tax
preference items to be allocated according to the members' percentage interests.
Prior to March 1999, HEARx Ltd. accounted for its investment in HEARx West using
the equity method because HEARx did not control HEARx West due to certain
provisions in the joint venture agreement. In March 1999, as a result of
amendments to the agreement, HEARx obtained control of HEARx West. Accordingly,
at December 31, 1999, HEARx has included the financial position and results of
operations of HEARx West in the accompanying consolidated financial statements.
Fiscal year
The Company's fiscal year ends on the last Friday in December and customarily
consists of four 13-week quarters for a total of 52 weeks. Every sixth year
includes 53 weeks.
31
31
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment securities
Marketable securities are classified available for sale and are carried at
estimated market value. Unrealized holding gains and losses, are reported as a
net amount in a separate component of stockholders' equity until realized. Gains
and losses realized from the sales are computed by the specific identification
method.
Inventories
Inventories, which consist of hearing aids, batteries, special hearing devices
and related items, are priced at the lower of cost (first-in, first-out) or
market.
Property and equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the depreciable asset.
Leasehold improvements are amortized over the shorter of the term of the lease
or the useful life of the asset.
Intangible assets
Intangible assets, included in other assets, primarily represent customer lists
acquired from acquisitions of hearing businesses. These customer lists are being
amortized on a straight-line basis over periods ranging from nine to fifteen
years. Intangible assets also include the excess purchase price of acquisitions
over the fair value of assets acquired. Such excess costs are being amortized
over fifteen years. Accumulated amortization at December 31, 1999 and December
25, 1998 was $350,608 and $253,657, respectively.
Pre-opening costs
The costs associated with the opening of new centers are expensed as incurred.
Long-lived assets - impairments and disposals
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. At December 31, 1999, no long-lived assets were held for disposal.
Advertising Costs
Costs for newspaper, television, and other media advertising are expensed as
incurred and were $5,470,000, $4,105,000 and $3,362,000 in 1999, 1998, and 1997,
respectively.
Sales return policy
Patients purchasing hearing aids are given a specific return period, usually 30
days, if dissatisfied with the product. The Company provides an allowance in
accrued expenses for returns. The return period can be extended to 60 days if
the customer attends the Company's H.E.L.P. program.
32
32
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred compensation
The value in excess of the selling price of shares of common stock issued to
officers is amortized over the vesting period of such shares.
Warranties
Hearing aids sold by the Company are covered by manufacturers' warranties.
Capitation revenue
The Company has capitation contracts with certain health care organizations
under which the Company is paid an amount, per enrollee of the health
maintenance organization, to provide to the enrollee a once every three years
discount on certain hearing products and services. The amount paid to the
Company by the healthcare organization is calculated on a per-capita basis and
is referred to as capitation revenue. Revenue under capitation contracts is
recorded based on actual utilization by the member populations of the healthcare
organizations with whom the Company has contracted to provide hearing care
services.
Income taxes
Deferred taxes are provided for temporary differences arising from the
differences between financial statement and income tax bases of assets and
liabilities. A valuation allowance is provided for the amount of deferred tax
assets which are not considered more likely than not to be realized.
Net loss per common share
Net loss per common share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which
requires companies to present basic and diluted earnings per share. Net loss per
share - Basic is based on the weighted average number of common shares
outstanding during the year. Net loss per common share - Diluted is based on the
weighted average number of common shares and dilutive potential common shares
outstanding during the year. Convertible preferred stock, stock options and
stock warrants are excluded from the computations of net loss per share because
the effect of their inclusion would be anti-dilutive.
Excluded from the computation of net loss per common share - diluted at December
31, 1999, December 25, 1998 and December 26, 1997 were convertible preferred
stock, outstanding options and warrants to purchase 2,693,885, 1,773,928 and
998,658 shares, respectively, of the Company's Common Stock at exercise prices
less than average market price because to not do so would be anti-dilutive. In
addition, outstanding options and warrants to purchase 889,941, 394,268 and
699,900 shares of common stock were excluded because the options' and warrants'
exercise prices were greater than the average market price of the common shares.
Statements of Cash Flows
For the purposes of the Statements of Cash Flows, temporary cash investments
which have a maturity of ninety days or less are considered cash equivalents.
33
33
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been reclassified
in order to conform to the 1999 presentation.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-based compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure only provisions of SFAS No. 123, ("SFAS 123") Accounting
for Stock-Based Compensation.
2. INVESTMENT SECURITIES
Investment securities available for sale consist of the following:
Gross Estimated
Amortized Unrealized Market
Cost Gains/(Losses) Value
------------ ------------- -----------
December 31, 1999
- -----------------
Municipal Bonds $ 750,000 $ - $ 750,000
Certificate of Deposit 150,000 - 150,000
------------ ------------- -----------
Total $ 900,000 $ - $ 900,000
============ ============= ============
December 25, 1998
- -----------------
U.S. Government and Agency Bonds $ 6,631,889 $ 60,381 $ 6,692,270
Corporate Bonds 280,690 (2,180) 278,510
Certificate OF Deposit 199,938 62 200,000
------------ ------------- -----------
Total $ 7,112,517 $ 58,263 $ 7,170,780
============ ============= ============
At December 31, 1999, $150,000 and $750,000 of investment securities have
contractual maturities of one and twenty years, respectively.
34
34
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT
Long term debt consists of the following:
December 31, December 25,
1999 1998
------------ ------------
Note payable to supplier, collateralized by equipment,
due January 13, 2000, see (a) below $140,000 $585,083
Note payable collateralized by customer list, see (b)& (c) below 417,316 134,897
Other notes payable 60,009 43,000
-------- ---------
617,325 762,980
Less current maturities (294,993) (639,664)
-------- ---------
$322,332 $ 123,316
======== =========
The approximate aggregate maturities on long term debt obligations in years
subsequent to 1999 are as follows: 2000 - $295,000; 2001 - $160,000; 2002 -
$121,000; and 2003 - $41,000.
(a) On March 5, 1996, the Company completed a $2.5 million trade agreement
with a vendor pursuant to which the vendor provides financing for the
purchase of diagnostic equipment to be utilized by the Company's
distribution network. The financing is collateralized by the equipment
financed. A percentage of all hearing aid purchases by the Company from
this vendor is applied to repayment of financed amounts under the
financing agreement. This note was repaid in January 2000.
(b) In January 1996, the Company acquired the customer list and selected
assets of Suffolk County Hearing Aid Center, Inc. in New York for $150,000
in cash, 150,000 shares of Common Stock, and a five year note in the
amount of $250,000 including interest. The note payable includes interest
at 5.5% and is payable in five annual installments of $50,000 including
interest beginning January 22, 1997.
(c) During July 1999, the Company issued a $325,000 promissory note payable
bearing 8.75% interest to an individual in connection with a purchase of
an audiological practice in California, (See Note 8). The note is payable
in four annual installments of $81,250 plus accrued interest, beginning
July 1, 2000 and is collateralized by the equipment and customer list
purchased.
4. PROPERTY AND EQUIPMENT AND LEASES
Property and equipment consists of the following:
Range of December 31, December 25,
Useful Lives 1999 1998
Equipment, furniture and fixtures 5-10 YEARS $ 7,472,695 $ 6,439,418
Leasehold Improvements 5-10 YEARS 6,123,687 4,253,764
Computer systems 3 YEARS 3,055,847 2,802,181
Leasehold improvements in progress N/A 37,485 14,557
--------------- --------------
16,689,714 13,509,920
--------------- --------------
Less accumulated depreciation and amortization 8,197,006 6,409,390
--------------- --------------
$ 8,492,708 $ 7,100,530
=============== ==============
35
35
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approximate future minimum rental commitments under operating leases are as
follows: $3,730,000 in 2000; $3,101,000 in 2001; $2,707,000 in 2002; $2,593,000
in 2003; $1,651,000 in 2004 and $1,979,000 thereafter. These leases are
primarily for hearing centers and are located in retail shopping areas.
Equipment and building rent expense for the years ended December 31, 1999,
December 25, 1998 and December 26, 1997 was $3,039,000, $2,892,000 and
$2,599,000, respectively.
5. STOCKHOLDERS' EQUITY
A. 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 Stockholders. Each stockholder 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. Accordingly, except
for the presentation in the accompanying consolidated balance sheets and
statements of changes in stockholders' equity, the Company has restated all
share and per share data for all periods presented to reflect the change in
capital structure.
B. 1998 CONVERTIBLE PREFERRED STOCK
On August 27, 1998, the Company completed a private placement of 7,500 units of
$1 par, 1998 Convertible Preferred Stock and warrants. Net proceeds to the
Company after the payment of placement fees, legal and accounting expenses was
$6,975,000. The additional capital was primarily raised to fund construction and
start-up costs of the HEARx West centers.
The 1998 Convertible Preferred Stock ranks prior to all of the Company's Common
Stock, prior to any class or series of capital stock of the Company thereafter
created specifically ranking by its terms junior to 1998 Convertible Preferred,
junior to with the Company's 1997 Convertible Preferred Stock, and after any
class or series of capital stock of the Company thereafter created and
specifically ranking by its terms senior to the 1998 Convertible Preferred. The
1998 Preferred Stock is convertible into Common Stock, par value $.10 per share,
of the Company. Upon the conversion, holders will be entitled to receive a
number of shares of Common Stock determined by dividing the sum of the stated
value of the 1998 Preferred Stock ($1,000 per share), plus a premium (unless the
Company elects to pay that premium in cash), by a conversion price equal to the
lesser of the average closing bid prices for the Common Stock during a five-day
period prior to conversion, and $18.00 ( the closing bid price at the date of
issuance, subject to adjustment upon occurrence of certain dilutive events). The
premium payable upon conversion will be equal to 8% of the stated value of 1998
Preferred Stock from the date of issuance until one year following such date,
and shall increase by 0.5% each year, commencing on the date which is one year
following the date of issuance. The 1998 Preferred Stock may not be converted
for the 180-day period after the closing (i.e. to February 23, 1999). The 1998
Preferred Stock may be converted by holders in accordance with these terms at
any time prior to August 27, 2003, and automatically converts on such date. In
the event of liquidation, dissolution or winding up of the Company prior to
conversion of the 1998 Preferred Stock, holders of 1998 Preferred Stock will be
entitled to share ratably in all assets available for distribution prior to
distributions to holders of Common Stock. In addition, no distributions may be
made to holders of Common Stock until holders of 1998 Preferred Stock shall have
received a liquidation preference equal to the sum of the stated value of the
1998 Preferred Stock ($1,000 per share) plus an amount equal to ten percent
(10%) per annum of such stated value for the period from the date of issuance
until the date of final
36
36
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
distribution. During 1999, 185 shares of the 1998 Convertible Preferred Stock
plus accrued dividends of $16,156 were converted into 44,712 shares of the
Company's Common Stock.
For each unit of 1998 Convertible Preferred Stock purchased, each investor
received 7.5 warrants to acquire shares of Common Stock of the Company. Upon
exercise, holders will be entitled to receive shares of Common Stock for an
exercise price of $18.00 per share. The warrants will expire on August 27, 2003.
In connection with this transaction, the Company issued 56,250 warrants with an
exercise price of $18.00 to purchase shares of the Company's Common Stock. These
warrants were issued to certain individuals as finder's fees for the placement
of preferred shares with investors. All related warrants remain outstanding as
of December 31, 1999.
C. 1997 CONVERTIBLE PREFERRED STOCK
On March 17, 1997, the Company completed a private placement of 10,000 shares,
$1 par, of 1997 Convertible Preferred Stock. Net proceeds to the Company after
the payment of placement fees, legal and accounting expenses was $9,006,000. The
additional capital was raised to enable HEARx to expand its network of hearing
centers as may be required by current or potential managed-care contracts.
The 1997 Convertible Preferred Stock ranks prior to all of the Company's Common
Stock, prior to any class or series of capital stock of the Company thereafter
created specifically ranking by its terms junior to 1997 Convertible Preferred,
pari passu with the Company's 1996 Series B-1 Convertible Preferred Stock, 1996
Series B-2 Convertible Preferred Stock and after any class or series of capital
stock of the Company thereafter created and specifically ranking by its terms
senior to the 1997 Convertible Preferred. The 1997 Convertible Preferred Stock
bears dividends of 6%, payment in kind or cash upon conversion at the option of
the Company. Upon conversion of the Preferred Stock, holders will be entitled to
receive a number of shares of Common Stock determined by dividing the stated
value of the Preferred Stock ($1,000 per share), plus a premium in the amount of
6% per annum of the stated value from the date of issuance (unless the Company
chooses to redeem the shares otherwise issuable in respect of that premium) by a
conversion price equal to the lesser of (i) $50.00, or (ii) 85% of the average
of the closing bid prices for shares of Common Stock for the ten day trading
period immediately prior to conversion. The 1997 Convertible Preferred Stock may
be converted by holders beginning August 15, 1997 and at any time prior to March
17, 2000 and must be converted on that date. During 1999, 1998 and 1997, 4,209,
1,906 and 2,885 shares of the 1997 Convertible Preferred Stock plus accrued
dividends of $552,743, $168,787 and $78,426 were converted into 1,098,906,
326,538 and 234,238 shares of the Company's Common Stock, respectively.
In 1997, the Company recorded a deemed preferred stock dividend of $1,500,000
for the discounted conversion price representing a 15% discount upon conversion
of the $10,000,000 gross proceeds. In connection with this transaction, the
Company issued 85,000 warrants with an exercise price of $50.00 and 75,000
warrants with an exercise price of $20.00 to purchase shares of the Company's
Common Stock. These warrants were issued to certain individuals as finder's fees
for the placement of the preferred shares with investors. All related warrants
remain outstanding as of December 31, 1999.
D. 1996 SERIES A, B-1 AND B-2 CONVERTIBLE PREFERRED STOCK
During May and August 1996, the Company completed a side-by-side offering
pursuant to Regulation D and Regulation S of the Securities Act of 1933. In the
Regulation D offering, the Company sold 15,000 shares of a convertible preferred
stock (the "Series B-1 Preferred Stock") and 9,900 shares of another convertible
preferred stock (the "Series B-2 Preferred Stock"), for net
37
37
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proceeds of $23,048,590. In the Regulation S offering, the