Back to GetFilings.com
1
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)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
---------------------- ----------------------
Commission file number 0-16453
HEARx LTD.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Delaware 22-2748248
- ------------------------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
471 Spencer Drive, West Palm Beach, Florida 33409
- ------------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 478-8770
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------------ -----------------------------------------
Common Stock, par value $0.10 per
share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 [ ]
2
Indicate by check mark 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 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 December 29, 1995, the aggregate market value of the Registrant's
Common Stock held by non-affiliates (based upon the closing bid and asked
prices on the NASD OTC Bulletin Board) was approximately $63,696,000.
On December 29, 1995, 47,956,783 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's definitive Proxy Statement for the 1996 Annual
Meeting of the Registrant's Stockholders ("1996 Proxy Statement"), as filed
with the Securities and Exchange Commission, are incorporated by reference into
Part III.
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 focuses on contracting with
managed care and health insurance companies to provide to their members and
beneficiaries high quality hearing care utilizing state-of-the-art facilities
with a full range of diagnostic and rehabilitative services, qualified
professional staff and hearing education learning programs. The Company also
provides such quality hearing care to the general population at the Company's
centers. The Company believes it is well positioned to successfully address
the concerns of access, quality and cost of the managed care and insurance
companies, the 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 qualifications, testing formats, prices and ancillary
services) and a documented quality control program.
HEARx intends, as its ultimate goal, to establish a nationwide network of
hearing care centers, located in metropolitan areas or in regions with high
concentrations of elderly consumers who are more likely to need the Company's
products and services. At the present time, HEARx operates 44 centers in New
York, New Jersey and Florida. It also operates three company-owned centers
situated in AARP Pharmacies located in Florida, Virginia and Oregon. The HEARx
expansion strategy is controlled and deliberate, opening new centers to fulfill
the requirements of new or existing providers pursuant to negotiated contracts
between those providers and the Company.
During the fiscal year ended December 29, 1995, HEARx derived its revenues
from two primary sources: sales of hearing care products (approximately 87%,
89% and 94% of revenues for the fiscal years ended December 29, 1995,
December 30, 1994, and September 30, 1993, respectively), and the provision of
hearing care diagnostics related to diseases of the ear (approximately 13%, 11%
3
and 6% of revenues for the fiscal years ended December 29, 1995, December 30,
1994, and September 30, 1993, respectively).
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 centers are located in
conveniently accessible strip shopping centers and are typically 1,500 to 2,000
square feet in size. The Company's goal is to have all centers virtually
identical in interior space design, exterior markings and signage. This
uniform appearance helps reinforce the consistent service and quality the
Company provides to customers 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. Some of these services include auditory brainstem evoked
potentials, electronystagmography and immittance audiometry.
* An aural rehabilitation program available to all patients to help them
better understand their disability.
* A wide variety of hearing aid brands to meet the patient's needs.
* A standardized medical reporting system for feedback to the referring
physicians.
Products
Unlike the national franchise organizations (Miracle Ear and Beltone) which
sell only their own brand of hearing aid, HEARx has selected approximately six
of the major worldwide manufacturers' products (Siemens, Rexton, 3M, GN
Danavox, ReSound and Telex) to make available through the HEARx network in
order to provide the best possible hearing care for HEARx customers.
In addition, HEARx offers a large selection of other hearing enhancement
devices including telephone and television amplifiers, telecaptioners and
decoders, pocket talkers, and specially adapted telephones, alarm clocks,
doorbells and fire alarms. These products are sold in most of the centers and
through a direct mail catalog.
Customers and Marketing
Approximately 86% of HEARx's hearing aid sales in the fiscal year ended
December 29, 1995, came either as a result of physician referrals or through
contracts with various institutional buyers (such as health maintenance
organizations, insurance companies, unions or AARP Pharmacy Service). The
Company believes that its future growth depends on its ability to inform
hearing impaired consumers of the importance of professional hearing testing
4
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. All patients referred to HEARx
from a physician receive a special discount intended to cover the cost of their
medical visit. With this program, the Company believes it has established
strong relationships with area physicians which represent a significant source
of 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's 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 qualify of life for the hearing
impaired. 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.
Physician Marketing Program
In order to strengthen the relationship between referring physicians and
HEARx, the Company signed a contract with Tufts University School of Medicine
for the development of a program of Continuing Medical Education ("CME")
related to hearing care and specifically directed to primary care physicians.
It is anticipated that marketing of this program will begin during fiscal 1996.
Physicians will receive CME credits when purchasing this program from Tufts.
Tufts will receive compensation for each physician exam submitted for credit.
The profits derived from the sale of this program will accrue 60% to Tufts and
40% to HEARx.
Growth Strategy
Company-owned Centers
The Company currently operates 44 centers located in Florida, New York, and
New Jersey. It also operates three company-owned centers situated in AARP
Pharmacies located in Florida, Virginia and Oregon. This represents a net
increase over fiscal 1994 of twenty-two centers. Eleven of the new centers
were opened in early January 1996 to fulfill the Company's contractual
requirements with its new provider, Oxford Health Plans. The Company's current
contracts contemplate ten additional centers in the immediate future. Over the
next several years, HEARx's primary emphasis, depending on the availability of
capital (see "Management's Discussion of Results of Operations and Analysis of
Financial Condition -- Liquidity and Capital Resources"), will be opening
additional (or selectively acquiring) Company-owned centers in these states.
The Company's ultimate goal, where the population warrants, is to open
"clusters" of four to six centers within a city or county in order to take
advantage of certain operational and marketing efficiencies created by having
multiple locations within a particular region.
5
Managed Care and Institutional Contracts
Since the beginning of 1991, the Company has entered into arrangements with
institutional buyers relating to the provision of discounted hearing care
products and services. HEARx believes that to implement successfully 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 kept to a minimum, and relationships with local
area physicians are enhanced. Critical to providing care to the 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, standardized centers will be successful in meeting the needs of
the patients and their providers.
HEARx utilizes the concept of entering into provider agreements with health
insurance or managed care organizations for the furnishing of hearing aids on
three different bases: (a) Fee for service with a predetermined discount (all
paid for by the patient); (b) a per capita basis, which is a fixed fee per
patient per month, 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 (the balanced is paid by the individual member).
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 typical hearing aid dispensers. To that end, the Company has
established several unique programs which are highlighted below:
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 prestigious universities and institutions. 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.
6
The current members of the Scientific Advisory Board and the area of
Company operations with respect to which each consults are listed below:
Hearing Diseases
Harold F. Schuknecht, M.D.
Walter Augustus Lecompte Professor of Otology and Laryngology
Harvard Medical School
Emeritus Chief of Otolaryngology
Massachusetts Eye and Ear Infirmary
Boston, Massachusetts
Hearing Testing
James Jerger, Ph.D.
Professor of Audiology
Baylor College of Medicine and The Methodist Hospital
Director, Department of Audiology and Speech Pathology
The Methodist Hospital
Houston, Texas
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
Product and Service Quality Assurance
Jerry L. Northern, Ph.D.
Professor of Otolaryngology
University of Colorado School of Medicine
Head, Audiology Division
University of Colorado School of Medicine
Denver, Colorado
Professional and Government Relations
Derald Brackmann, M.D.
Member
Otologic Medical Group, Inc.
Clinical Professor of Otolaryngology
University of Southern California
Los Angeles, California
7
Each member presently receives compensation of $5,000 annually, payable in
shares of Common Stock, as well as $1,000 in cash for attending each annual
Scientific Advisory Board meeting.
Medical Reporting and HEARx Data Link
A computerized medical reporting system gives referring physicians the
results of, and recommended action for, every patient examined at 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 qualified audiologists working for hospitals
or physicians, 2,000 of whom are licensed audiologists in private practice, and
the remaining 6,500 are hearing aid specialists (individuals who may not have
any formal training or qualifications). Industry surveys estimate that
approximately 5% of all outstanding hearing aids are sold in physicians'
offices, 40% are dispensed by qualified audiologists in private practice and
the remaining are sold by hearing aid specialists.
Most competitors are small retailers generally focusing on the sale of
hearing aids without providing comprehensive audiometric testing and other
professional services. Among the larger distributors of hearing aids are:
(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 600 franchised
dealers. A statistically meaningful number of these stores and dealers are
located in the areas the Company serves.
HEARx believes that these networks will not, as presently operated,
continue to be competitive with the Company's centers. These networks
primarily offer hearing aids only and do not provide the comprehensive
diagnostic services or 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 far
greater resources than HEARx, and there can be no assurance that one or more of
these competitors will not expand and 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.
8
Manufacturers
The hearing aid manufacturing industry is highly competitive with
approximately 40 manufacturers serving the worldwide market. Few manufacturers
offer dramatic product differentiation, which further compounds the industry's
competitive nature. The major hearing aid manufacturers include Bausch & Lomb,
Beltone, Philips Electronics, Siemens, Starkey, 3M, GN Danavox and ReSound.
Regulation
Federal
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 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. FDA hearings were held in
Washington, D.C. in the fall of 1993 regarding changes for regulations
affecting the hearing industry. New regulations were expected to be
promulgated in 1995, but never took place. Although 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 up to a
60-day return policy. The extension of HEARx's normal 30-day term is given to
patients provided that the purchaser participates in the HEARx Educational
Learning Program (H.E.L.P.).
State
Most states have established formal licensing boards that certify qualified
audiologists or dispensers before they may begin their practice, though some
states such as Massachusetts, New York and Colorado have no certification
requirements. Inspection of facilities, quality control and advertising are
largely unregulated at the State level.
The Company believes it is in material compliance with all applicable
federal and 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 have a material adverse effect upon 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.
9
Employees
At December 29, 1995, HEARx had approximately 134 full-time and 8 part-time
employees.
Item 2. Properties
HEARx's corporate offices are located in 7,752 square feet of space in West
Palm Beach, Florida. The lease covering such space provides for an annual rent
of $65,892 with annual escalations ($69,768 in 1995). The lease is renewable
yearly and expires in January 1999.
As of December 29, 1995, the Company operated twenty-eight centers in
Florida as well as one center in Virginia and another center in Oregon. All of
the locations are leased for one to six year terms pursuant to generally non-
cancelable leases (with renewal options in some cases). Each center consists
of between 900 and 3,200 square feet with annual base rents ranging from
approximately $8,000 to $98,000. In addition, HEARx manages one audiology
facility for a physician.
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.
10
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information as of the date hereof with
respect to the Company's executive officers. They have been appointed to terms
which will expire at the annual meeting of the Board of Directors held at the
time of the 1996 Annual Meeting of Stockholders, or at the time their
successors are duly elected and qualified:
Name and Position Age First Served as Officer
- ------------------------------------------------- --- -----------------------
Paul A. Brown, M.D 58 1986
Chairman of the Board, Chief Executive Officer
and Director
Stephen J. Hansbrough 49 1993
President and Chief Operating Officer
Tommy E. Kee 47 1993
Vice President and Chief Financial Officer
David W. Forman 54 1986
Vice President - Facilities Management
& Secretary
Donna L. Taylor 40 1993
Vice President - Operations
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 an 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. In 1984, after leaving MetPath, Dr. Brown and a
small group of investors founded SCI/MED Advances Corporation, a venture
capital, business development and management services company, but the company
was ultimately unsuccessful in raising the $80 million in a public offering
sought to commence this venture. Dr. Brown founded HEARx in 1986. Dr. Brown
is formerly Chairman of the Board of Overseers of Tufts University School of
Medicine as well as a member of the Board of Trustees, a member of the Visiting
Committee of the Boston University School of Medicine and a part-time lecturer
in pathology at Columbia University College of Physicians and Surgeons.
Stephen J. Hansbrough, President and Chief Operating Officer, 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 had been an independent consultant specializing
in turn-around and start-up operations primarily in the retail field.
Tommy E. Kee, Vice President and Chief Financial Officer, joined HEARx in
September 1993. He holds a B.S. degree in accounting from the University of
Tennessee and an M.B.A. from the University of Memphis. Prior to joining
HEARx, Mr. Kee owned an international consulting business and served as Chief
11
Financial Officer for United Studios of America, Inc. from 1991 through 1993.
From 1973 through 1991, he was Corporate Financial Director for the
International Division of Holiday Inns, Inc., whereas he founded the
International Finance and Accounting Department and directed the financial and
accounting activities for the worldwide operations.
David W. Forman holds a B.A. in Biology from the University of Ottawa.
Prior to joining the Company in 1986, Mr. Forman served as the Vice President
of Operations at SCI/MED where he directed product research, development and
production. From 1970 to 1985 he was employed by MetPath in various research,
development and production capacities including Director of Operations. Prior
to 1970, Mr. Forman served in the United States Navy as a Medical Laboratory
Technologist.
Donna L. Taylor, Vice President - Operations, holds an M.A. in Audiology
and joined HEARx in July 1987. Ms. Taylor has an extensive background in
establishing and developing Audiology and Hearing Aid Dispensing programs
including a private ENT practice, Washington University Medical School in St.
Louis from 1983 to 1985 and as an independent contractor.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company was traded in the over-the-counter market
during 1995; however, the stock is now trading on the American Stock Exchange,
effective March 15, 1996, under the symbol of "EAR". For 1995, the prices were
reported by the National Association of Securities Dealers, Inc., OTC Bulletin
Board Service ("NASDBB") and the Common Stock traded under the symbol "HRXL".
The following table sets forth the high and low bid prices of the Common
Stock in the over-the-counter market, as reported by NASDBB for the fiscal
quarters indicated. Such prices reflect interdealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions:
Fiscal Quarter Common Stock
-------------- --------------
High Low
------ ------
1994
----
First 23/32 1/4
Second 3/8 1/8
Third .56 1/8
Fourth .71 .15
1995
----
First 1.44 .50
Second 1.44 7/16
Third 1-5/32 5/16
Fourth 1-15/32 .82
As of December 29, 1995, there were 742 holders of record of Common Stock.
The Company estimates that included within the holders of record are
approximately 3,271 beneficial owners of Common Stock.
12
Dividend Policy
HEARx has never paid and does not intend to pay any dividends on the Common
Stock in the foreseeable future but instead intends to retain any earnings for
use in the Company's business operations.
Item 6. Selected Financial Data
The following selected financial data of the Company should be read in
conjunction with the 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 financial statements of the Company:
OPERATING STATEMENT DATA
Year Year Three Months
Ended Ended Ended
December 29, December 30, December 31, Year ended September 30,
------------ ------------ ------------ ----------------------------------------
1995 1994 1993 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
Net Sales $11,170,068 $ 4,331,148 $ 1,042,576 $ 7,335,067 $ 5,300,114 $ 4,233,428
Total costs and expenses 13,100,786 6,201,287 1,568,825 12,669,759 7,724,750 7,724,903
Loss from Continuing
Operations (2,213,453) (2,105,635) (561,517) (5,579,446) (2,481,083) (3,892,483)
Loss from Discontinued
Operations -- -- -- (918,720) (202,851) (251,251)
Net loss (2,213,453) (2,105,635) (561,517) (6,498,166) (2,683,934) (4,143,734)
Loss per Common Share:
Continuing Operations (0.05) (0.06) (0.02) (0.18) (0.09) (0.19)
Discontinued Operations -- -- -- (0.03) (0.01) (0.01)
Net loss per Common Share (0.05) (0.06) (0.02) (0.21) (0.10) (0.20)
Weighted Average Number of
Shares of Common Stock
Outstanding 45,164,091 36,278,205 31,031,790 30,819,790 27,606,013 20,523,083
Cash Dividends per
Common Share None None None None None None
13
BALANCE SHEET DATA
December 29, December 30, December 31, September 30,
------------ ------------ ------------ ----------------------------------------
1995 1994 1993 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
Total Assets $ 6,450,628 $ 3,504,967 $ 2,659,794 $ 2,800,222 $ 3,288,771 $ 2,567,346
Working Capital
(Deficit) (1,317,179) (623,200) (2,560,618) (2,936,745) 266,276 (661,146)
Long-term obligations:
Long-term debt and
obligations under
capital leases, net
of current portion 2,316,300 2,376,199 1,175,372 607,097 213,868 570,344
Subordinated debenture -
Principal Stockholder -- -- -- -- -- 500,000
Mandatorily Redeemable
Preferred Stock -- -- -- -- -- 3,034,800
Book Value per Share -- (0.04) (0.08) (0.08) 0.04 (0.17)
Item 7. Management's Discussion of Results of Operations and Analysis of
Financial Condition
Effective December 31, 1993, the Company's fiscal year was changed from
September 30 to the Friday nearest to December 31. Therefore, results are
compared for the twelve months ended December 29, 1995, the twelve months ended
December 30, 1994 and the twelve months ended September 30, 1993. A discussion
of the results of operations and financial condition for the three months ended
December 31, 1993 would not be meaningful if compared to the other periods.
Accordingly, such discussion has not been included.
Year ended December 29, 1995 vs. Year ended December 30, 1994, and Year ended
December 30, 1994 vs. Year ended September 30, 1993
Results of Operations
For the year ended December 29, 1995, the Company's revenues were
$11,170,068, an increase of $6,838,920 or 158% from 1994. This increase
resulted from the first year of revenue from the 18 Florida retail hearing
aid centers acquired from Hearing Health Services, Inc. ("HHS"), plus revenues
recognized from seven contracts with managed care companies signed in late
1994. Included in sales for the year ended December 29, 1995, are capitation
revenues of $1,570,000 and approximately $2,330,000 for additional sales to
members of the managed care companies. The Company has capitation contracts
with certain managed care companies to provide hearing care services.
Generally, these contracts provide for a set dollar discount (from $200 to
$1,100) from published retail prices. As generally provided in these
14
contracts, the recipient can receive this discount once every three years.
During the three years, any additional services or products purchased and the
price of the services and products provided on the first visit over the group
discount are the obligation of the recipient. 1994 revenues were $4,331,148
which represented a decrease of $3,003,919 or 41% from 1993. This decrease was
primarily due to the restructuring and expense reduction program completed
during 1994 in which 14 unprofitable centers were closed.
Cost of products sold for the year ended December 29, 1995 was $3,571,725,
an increase of $1,980,549 or 124% from 1994. This increase was related to the
increased sales volume from the 18 centers purchased in late 1994 from HHS and
the increased volume generated from the seven managed care contracts. 1994
cost of products sold of $1,591,176 decreased by $1,261,189 or 44% from 1993
due to the 14 centers closed in 1994 as a result of the restructuring program.
Cost of products sold as a percentage of sales was lower in 1995 compared to
1994 and 1993 mainly due to agreements with vendors in 1995 to reduce costs
based on planned increases in future purchases.
Operating expenses are comprised primarily of salaries, advertising and
marketing expenses, real estate rents, and depreciation and amortization.
Operating expenses totaled $9,529,061 for 1995 as compared to $4,734,622 for
1994, an increase of $4,794,439 or 101%. This increase was caused by the
additional costs from the operation of the 18 centers that were purchased from
HHS in late 1994. 1994 operating expenses totaled $4,734,622 as compared to
$8,390,107 for 1993, a decrease of $3,655,485 or 44%. This decrease was
caused by the closing of 14 centers in 1994 as well as the implementation of an
expense reduction program which included the reduction of corporate overhead by
the elimination of three officers' positions and numerous corporate positions.
Fourth Quarter Adjustments - Years ended December 29, 1995 and December 30,
1994 and Year ended September 30, 1993
Fourth quarter adjustments for 1995 were an increase in the allowance for
doubtful accounts of $178,101 and the recording of additional public relations
expense of $284,201.
There were no significant fourth quarter adjustments for the year ended
December 30, 1994.
Other than the provision of $1,427,827 for the estimated costs of closing
of 14 centers and certain corporate restructuring expenses, losses in the
fourth quarter of the year ended September 30, 1993 increased by $1,406,000 as
a result of certain adjustments (some of which pertained to prior quarters)
primarily related to correcting an intercompany account, adjusting the sales
returns allowance account, adjusting various accruals and adjustments to
allowance for doubtful accounts. The total closing provision and the fourth
quarter adjustments contributed to an overall increase in the net loss of
$2,833,287, or $.09 per share. The Company believes that the restructuring
costs were necessary, in part, in response to the general downturn in the
market caused by adverse national publicity affecting the industry at that
time.
Discontinued Operations - Year ended September 30, 1993
During September 1993, management formulated a plan to dispose of its
Special Instrument Division so that it could concentrate its resources on its
15
main business. This Division had a loss of $316,507 in 1993 and had assets of
$498,713 at September 30, 1993. Although the Company received a note for
$450,000 upon the sale of the division in January, 1994, management felt the
full amount of $498,713 should be reserved. Additional costs associated with
closing this division were estimated to be $103,500, resulting in a net loss of
$918,720 for 1993.
Liquidity and Capital Resources
Historically, the Company's principal sources of funds have been borrowings
from and stock purchases by its stockholders, private and public offerings of
stock and warrants, and a commercial bank line of credit. During 1995, cash
flow from financing activities consisted of a $1,500,000 private placement from
individual investors, three institutional private placements for a total of
$1,600,600, plus a short term loan from two investors for $1,100,000 and a loan
of $270,000 from the principal shareholder. These funds were used to pay for
the construction of 15 new centers in New York and New Jersey plus the payment
of associated costs for the new point-of-sale and accounting computer systems.
On December 29, 1995, the Company had a working capital deficiency of
$1,317,179 as compared to a working capital deficiency of $623,200 on
December 30, 1994 of which $1,100,000 related to a short term loan from two
investors. On December 29, 1995, the Company was in compliance with all
covenants in its loan agreements.
Future sources of funds include funds generated from operations as well as
the offer and sale of the Company's securities. In January 1996, the Company
successfully completed a placement of 6,000 shares of 1996 Senior Preferred
Stock and Common Stock purchase warrants for a total purchase price of
$6,000,000, consisting of $4,900,000 in cash and the conversion of the
$1,100,000 short term loan.
During fiscal years 1995, 1994 and 1993, the Company has sustained losses.
In January 1996, the Company took steps to correct its working capital deficit
by completing a private placement with a total purchase price of $6,000,000
(see Footnote 3a). The Company believes it has the ability to raise additional
funds, if needed, through the sales of its securities.
Management believes that the impact of the positive working capital from
this transaction coupled with the estimated revenues to be generated from the
new Northeast centers (see Footnote 3b) will be sufficient to cover any
foreseeable 1996 operating deficit. To further positively impact cash flow,
the Company entered into a trade financing agreement to provide its diagnostic
equipment needs (see Footnote 3c).
Net cash used in operating activities was $1,486,465 for the year ended
December 29, 1995, as compared to $1,936,270 and $2,917,881 for the years
ended December 30, 1994 and September 30, 1993. The decrease in the net cash
used in operating activities for 1994 compared to 1993 was primarily due to a
decrease in net loss of $4,392,531 offset by the decrease in the accrual for
restructuring cost of $2,622,991.
Net cash used by investing activities was $1,689,455 for the year ended
December 29, 1995 as compared to cash provided of $175,206 for the year ended
December 30, 1994, a net decrease of $1,864,661 between the two years. The
decrease was primarily related to the purchase of property and equipment in
1995 due to the expansion of new centers in the Northeast ($610,188) and the
16
implementation of new computer and accounting systems ($872,454) for the
Company. Net cash provided by investing activities was $175,206 for the year
ended December 30, 1994, as compared to cash used of $1,492,840 during the year
ended September 30, 1993, a net increase in cash of $1,668,046 between the two
years. This increase was due primarily to fewer purchases of property and
equipment in 1994 compared to 1993 and the loss from discontinued operations in
1993.
Net cash provided by financing activities was $3,780,452 for the year ended
December 29, 1995, as compared to $1,778,313 for the year ended December 30,
1994 and $4,207,283 for the year ended September 30, 1993. The increase in
1995 was related to additional private placements as well as additional loans
of $1,370,000 plus the conversion of a vendor's accounts payable into debt.
Net cash provided by financing activities in 1994 was $2,428,970 less than 1993
primarily due to a decrease of $731,391 in net proceeds from borrowings, and
decrease in net proceeds from issuance of capital stock of $1,772,579.
During 1993, cash flow from financing activities was the result of 3M's
exercise of its right to purchase the Senior Preferred Stock Series D and G for
a total of $2,000,000, net proceeds from a private warrant offering of
$748,526, and the completion in October 1992 of a public warrant offering for
$256,747. The funds were used principally to acquire the new centers in 1993
and for working capital.
Item 8. Financial Statements and Supplementary Data
Page
Index to Financial Statements
Financial Statements:
Report of Independent Certified Public Accountants....................... 17
Consolidated Balance Sheets at December 29, 1995 (Pro Forma and Actual)
and December 30, 1994................................................ 18
Consolidated Statements of Operations for the years ended December 29,
1995, December 30, 1994, and September 30, 1993, and three months
ended December 31, 1993.............................................. 20
Consolidated Statements of Changes in Stockholders' Equity
(Capital Deficit) for the years ended December 29, 1995,
December 30, 1994, and September 30, 1993, and three months ended
December 31, 1993.................................................... 21
Consolidated Statements of Cash Flows for the years ended
December 29, 1995, December 30, 1994, and September 30, 1993,
and three months ended December 31, 1993............................. 28
Notes to Consolidated Financial Statements............................... 32
Financial Statement Schedules:
For the years ended December 29, 1995 and December 30, 1994,
three months ended December 31, 1993, and the year ended
September 30, 1993................................................. 51
II Valuation Accounts............................................. 51
17
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. and
Subsidiaries as of December 29, 1995 and December 30, 1994, and the related
consolidated statements of operations, changes in stockholders' equity,
(capital deficit) and cash flows for the years ended December 29, 1995,
December 30, 1994 and September 30, 1993, and the three months ended
December 31, 1993. We have also audited the schedule listed in the
accompanying index. 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 financial statement presentation. 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. and
Subsidiaries at December 29, 1995, December 30, 1994, and the results of their
operations and their cash flows for the periods mentioned above, 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
April 5, 1996
18
HEARx Ltd.
Consolidated Balance Sheets
Pro Forma December 29, 1995, December 29, 1995
and December 30, 1994
- ------------------------------------------------------------------------------------------------------------
Pro Forma
(Note 3 (a)) 1995 1994
------------ ------------ ------------
Assets
Current:
Cash and cash equivalents $ 5,425,539 $ 933,539 $ 329,007
Accounts and notes receivable, less allowance for doubtful
accounts of $341,234, and $154,330 1,227,993 1,227,993 862,868
Receivable from private placement -- -- 500,000
Inventories 395,983 395,983 337,564
Prepaid expenses 529,418 529,418 43,780
------------ ------------ ------------
Total current assets 7,578,933 3,086,933 2,073,219
Net property and equipment (Notes 4 and 5) 2,523,882 2,523,882 975,354
Other 839,813 839,813 456,394
------------ ------------ ------------
$10,942,628 $ 6,450,628 $ 3,504,967
============ ============ ============
See accompanying notes to consolidated financial statements.
19
HEARx Ltd.
Consolidated Balance Sheets
(Concluded)
Pro Forma December 29, 1995, December 29, 1995
and December 30, 1994
- ------------------------------------------------------------------------------------------------------------
Pro Forma
(Note 3(a)) 1995 1994
------------ ------------ ------------
Liabilities and Stockholders' Equity (Capital Deficit):
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 2,217,132 $ 2,217,132 $ 2,174,240
Current maturities of long-term debt (Notes 4 and 5) 678,980 2,186,980 522,179
------------ ------------ ------------
Total current liabilities 2,896,112 4,404,112 2,696,419
------------ ------------ ------------
Long-term debt, less current maturities (Notes 4 and 5) 2,316,300 2,316,300 2,376,199
------------ ------------ ------------
Commitments and contingencies (Notes 4, 5, 8 and 11)
Stockholders' Equity (Capital Deficit):
Non-Redeemable Preferred Stock: (Note 6 A)
(Aggregate liquidation preference $5,400,000)
$1 par; authorized 2,000,000 shares, issued and outstanding
1992, Senior A, 30,000 shares; 30,000 30,000 30,000
1992, Senior B, 22,500 shares; 22,500 22,500 22,500
1993, Senior D, 14,926 shares; 14,926 14,926 14,926
1993, Senior G, 14,926 shares; 14,926 14,926 14,926
1995, Senior E, 6,472 shares; 6,472 6,472 --
------------ ------------ ------------
88,824 88,824 82,352
Series C, Convertible 1992, 10,000 shares; (Note 6B) 10,000 10,000 10,000
1994, Convertible, 5,000 shares; (Note 6D) 5,000 5,000 5,000
1996, Senior, 6,000 shares (Note 3(a)) 6,000 -- --
------------ ------------ ------------
109,824 103,824 97,352
Common stock, (Notes 4 and 6) $.10 par; authorized 100,000,000
shares, issued: 47,956,783, and 41,672,354 outstanding 4,795,678 4,795,678 4,167,235
Additional paid-in capital 29,073,016 23,079,016 20,216,109
Accumulated deficit (28,234,803) (28,234,803) (26,021,350)
Unamortized deferred compensation (13,499) (13,499) (26,997)
------------ ------------ ------------
Total stockholders' equity, (capital deficit) 5,730,216 (269,784) (1,567,651)
------------ ------------ ------------
$10,942,628 $ 6,450,628 $ 3,504,967
============ ============ ============
See accompanying notes to consolidated financial statements.
20
HEARx Ltd.
Consolidated Statements of Operations
Years ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Three Months
Ended
December 29, December 30, September 30, December 31,
1995 1994 1993 1993
------------ ------------ ------------ ------------
Net Sales $11,170,068 $ 4,331,148 $ 1,042,576 $ 7,335,067
Costs and expenses:
Cost of products sold 3,571,725 1,591,176 354,324 2,852,365
Personnel costs 5,338,531 2,766,572 685,579 4,664,425
Advertising, marketing, and selling 1,113,692 397,926 63,506 864,815
Occupancy (Note 5) 1,994,174 1,096,382 298,893 1,717,849
Depreciation and amortization 305,593 126,735 50,471 314,520
General and administrative 777,071 347,007 116,052 828,498
Restructuring charges/(credits) (Note 9) -- (124,511) -- 1,427,287
------------ ------------ ------------ ------------
Total costs and expenses 13,100,786 6,201,287 1,568,825 12,669,759
------------ ------------ ------------ ------------
Loss from operations (1,930,718) (1,870,139) (526,249) (5,334,692)
------------ ------------ ------------ ------------
Other (expense) income:
Interest income 4,630 4,473 327 8,006
Interest expense (Note 11) (254,124) (223,159) (29,939) (234,007)
Miscellaneous (33,241) (16,810) (5,656) (18,753)
------------ ------------ ------------ ------------
(282,735) (235,496) (35,268) (244,754)
------------ ------------ ------------ ------------
Loss from continuing operations (2,213,453) (2,105,635) (561,517) (5,579,446)
Loss from discontinued operations (Note 10) -- -- -- (918,720)
------------ ------------ ------------ ------------
Net loss $(2,213,453) $(2,105,635) $(561,517) $(6,498,166)
============ ============ ============ ============
Loss per Common Share:
Continuing operations $(.05) $(.06) $(.02) $(.18)
Discontinued operations -- -- -- $(.03)
------------ ------------ ------------ ------------
Net loss per common share $(.05) $(.06) $(.02) $(.21)
============ ============ ============ ============
Weighted average number of shares of common
stock outstanding 45,164,091 36,278,205 31,031,790 30,819,790
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
21
HEARx Ltd.
Consolidated Statements of Changes in Stockholder's Equity (Capital Deficit)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Non-Redeemable
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance at September 30, 1992 62,500 $62,500 29,974,306 $2,997,431
Continued exercise of warrant offering from
September, 1992, net of associated expenses of
$85,593 (Note 6 F) -- -- 427,925 42,792
Return of Common Stock due to termination of employee -- -- (90,000) (9,000)
Exercise of employee stock options -- -- 2,750 275
Executive stock bonuses -- -- 42,877 4,288
Cancellation of treasury shares -- -- (77,000) (7,700)
Issuance of Common Stock-consultants -- -- 2,110 211
Issuance of Common Stock- Advisory Board -- -- 29,760 2,976
Private warrant offering, net of associated expenses
of $1,474 (Note 6 F) -- -- 937,500 93,750
Amortization of deferred compensation -- -- -- --
Stock option exercised by 3-M for Senior Preferred
Stock Series D (Note 6 A (iii)) 14,926 14,926 -- --
Stock option exercised by 3-M for Senior Preferred
Stock Series G (Note 6 A (iii)) 14,926 14,926 -- --
Net loss for the year -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 1993 92,352 $92,352 31,250,228 $3,125,023
------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
22
HEARx Ltd.
Consolidated Statements of Changes in Stockholder's Equity (Capital Deficit)
(Continued)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Additional Unamortized Total
Paid In Accumulated Treasury Deferred Stockholders'
Capital Deficit Stock Compensation Equity
------------ ------------- ------------ ------------ -------------
Balance at September 30, 1992 $14,880,638 $(16,856,032) $(1,400) $(57,025) $1,026,112
Continued exercise of warrant
offering from September, 1992,
net of associated expenses of
$85,593 (Note 6 F) 213,955 -- -- -- 256,747
Return of Common Stock due to
termination of employee (900) -- -- 9,457 (443)
Exercise of employee stock options 1,024 -- -- -- 1,299
Executive stock bonuses 30,890 -- -- -- 35,178
Cancellation of treasury shares 6,300 -- 1,400 -- --
Issuance of Common Stock-consultants 1,561 -- -- -- 1,772
Issuance of Common Stock-
Advisory Board 22,024 -- -- -- 25,000
Private warrant offering, net of
associated expenses of $1,474
(Note 6 F) 654,776 -- -- -- 748,526
Amortization of deferred compensation -- -- -- 14,485 14,485
Stock option exercised by 3-M for
Senior Preferred Stock Series D
(Note 6 A (iii)) 985,074 -- -- -- 1,000,000
Stock option exercised by 3-M for
Senior Preferred Stock Series G
(Note 6 A (iii)) 985,074 -- -- -- 1,000,000
Net loss for the year -- (6,498,166) -- -- (6,498,166)
------------ ------------- ------------ ------------ ------------
Balance at September 30, 1993 $17,780,416 $(23,354,198) $ -- $(33,083) $(2,389,490)
============ ============= ============ ============ ============
See accompanying notes to consolidated financial statements.
23
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficit)
(Continued)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Non-Redeemable
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance at September 30, 1993 92,352 $92,352 31,250,228 $3,125,023
Payments from 3M towards exercise of Senior E
Preferred Stock series (Note 6 A (iv)) -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss for the period -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1993 92,352 $92,352 31,250,228 $3,125,023
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Additional Unamortized Total
Paid In Accumulated Treasury Deferred Stockholders'
Capital Deficit Stock Compensation Equity
------------ ------------- ------------ ------------ -------------
Balance at September 30, 1993 $17,780,416 $(23,354,198) $ -- $(33,083) $(2,389,490)
Payments from 3M towards exercise
of Senior E Preferred Stock series
(Note 6 A (iv)) 325,000 -- -- -- 325,000
Amortization of deferred
compensation -- -- -- 2,542 2,542
Net loss for the period -- (561,517) -- -- (561,517)
------------ ------------- ------------ ------------ -------------
Balance at December 31, 1993 $18,105,416 $(23,915,715) $ -- $(30,541) $(2,623,465)
============ ============= ============ ============ =============
See accompanying notes to consolidated financial statements.
24
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficit)
(Continued)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Non-Redeemable
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance at December 31, 1993 92,352 $92,352 31,250,228 $3,125,023
Payments from 3M towards exercise of Senior E
Preferred Stock series (Note 6 A (iv)) -- -- -- --
Conversion of debenture debt ($700,000) plus
accrued interest payable ($27,682) to
Common Stock (Notes 4 and 6 D) -- -- 3,638,414 363,841
1994 Private placements, net of associated
expenses of $51,965, to Common Stock (Note 6 D) -- -- 6,500,000 650,000
Issuance of Common Stock-Advisory Board -- -- 40,985 4,098
Executive stock bonuses -- -- 22,727 2,273
Issuance of Common Stock to officers -- -- 70,000 7,000
Issuance of Common Stock to public relations
company -- -- 150,000 15,000
Issuance of Private Placement Convertible Preferred
Stock during December 1994 (Note 6 E) 2,500 2,500 -- --
Issuance of Convertible Preferred Stock for
acquisition of centers from Hearing Health
Services, Inc. (Note 6 E) 2,500 2,500 -- --
Amortization of deferred compensation -- -- -- --
Net loss for the year -- -- -- --
------------ ------------ ------------ ------------
Balance at December 30, 1994 97,352 $97,352 41,672,354 $4,167,235
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
25
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficit)
(Continued)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Additional Unamortized Total
Paid In Accumulated Treasury Deferred Stockholders'
Capital Deficit Stock Compensation Equity
------------ ------------- ------------ ------------ -------------
Balance at December 31, 1993 $18,105,416 $(23,915,715) $ -- $(30,541) $(2,623,465)
Payments from 3M towards exercise
of Senior E Preferred Stock series
(Note 6 A (iv)) 75,000 -- -- -- 75,000
Conversion of debenture debt
($700,000) plus accrued interest
payable ($27,682) to Common Stock
(Notes 4 and 6 D) 363,841 -- -- -- 727,682
1994 Private placements, net of
associated expenses of $51,965, to
Common Stock (Note 6 D) 598,035 -- -- -- 1,248,035
Issuance of Common Stock-
Advisory Board 20,902 -- -- -- 25,000
Executive stock bonuses 5,227 -- -- -- 7,500
Issuance of Common Stock to officers 30,188 -- -- (37,188) --
Issuance of Common Stock to public
relations company 22,500 -- -- -- 37,500
Issuance of Private Placement
Convertible Preferred
Stock during December 1994 (Note 6 E) 497,500 -- -- -- 500,000
Issuance of Convertible Preferred Stock
for acquisition of centers from
Hearing Health Services, Inc.
(Note 6 E) 497,500 -- -- -- 500,000
Amortization of deferred compensation -- -- -- 40,732 40,732
Net loss for the year -- (2,105,635) -- -- (2,105,635)
------------ ------------- ------------ ------------ -------------
Balance at December 30, 1994 $20,216,109 $(26,021,350) $ -- $(26,997) $(1,567,651)
============ ============= ============ ============ =============
See accompanying notes to consolidated financial statements.
26
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficit)
(Concluded)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Non-Redeemable
Preferred Stock Common Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance at December 30, 1994 97,352 $97,352 41,672,354 $4,167,235
1995 Individual private placements, net of
associated expenses of $63,192 (Note 6C) -- -- 2,427,184 242,718
1995 institutional private placements, net of
associated expenses of $297,315 (Note 6C) -- -- 2,602,572 260,257
Issuance of Common Stock - Advisory Board -- -- 87,419 8,742
Executive stock bonuses (Note 8C) -- -- 115,138 11,514
Exercise of employee stock options (Note 8A(iii)) -- -- 278,650 27,865
Issuance of Common Stock to consultants -- -- 373,466 37,347
Stock option exercise by Consultants (Note 8D) -- -- 400,000 40,000
Issuance of Senior E Preferred Stock series
(Note 6A(iv)) 6,472 6,472 -- --
Amortization of deferred compensation -- -- -- --
Net loss for the year -- -- -- --
------------ ------------ ------------ ------------
Balance at December 29, 1995 103,824 $103,824 47,956,783 $4,795,678
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
27
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity (Capital Deficit)
(Concluded)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Additional Unamortized Total
Paid In Accumulated Treasury Deferred Stockholders'
Capital Deficit Stock Compensation Equity
------------ ------------- ------------ ------------ -------------
Balance at December 30, 1994 $20,216,109 $(26,021,350) $ -- $(26,997) $(1,567,651)
1995 Individual private placements,
net of associated expenses
of $63,192 (Note 6C) 1,194,090 -- -- -- 1,436,808
1995 institutional private placements,
net of associated expenses
of $297,315 (Note 6C) 1,172,336 -- -- -- 1,432,593
Issuance of Common Stock -
Advisory Board 26,258 -- -- -- 35,000
Executive stock bonuses (Note 8C) 115,562 -- -- -- 127,076
Exercise of employee stock options
(Note 8A(iii)) 60,233 -- -- -- 88,098
Issuance of Common Stock to
consultants 240,900 -- -- -- 278,247
Stock option exercise by Consultants
(Note 8D) 60,000 -- -- -- 100,000
Issuance of Senior E Preferred
Stock series (Note 6A(iv)) (6,472) -- -- -- --
Amortization of deferred compensation -- -- -- 13,498 13,498
Net loss for the year -- (2,213,453) -- -- (2,213,453)
------------ ------------- ------------ ------------ -------------
Balance at December 29, 1995 $23,079,016 $(28,234,803) $ -- $(13,499) $(269,784)
============ ============= ============ ============ =============
See accompanying notes to consolidated financial statements.
28
HEARx Ltd.
Consolidated Statements of Cash Flows
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Three Months
Ended
December 29, December 30, September 30, December 31,
1995 1994 1993 1993
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(2,213,453) $(2,105,635) $(561,517) $(6,498,166)
Adjustments to reconcile net loss to net cash
used in operating activities:
Discontinued operations -- -- -- 918,720
Depreciation and amortization 305,593 126,735 50,471 314,520
Provision for losses on accounts receivable 198,298 51,247 -- 293,508
Non-cash expense to advisors/consultants/
public relations 222,530 62,500 -- 26,772
Non-cash expense for executive stock bonuses 127,076 7,500 -- 35,178
(Increase) decrease in (net of discontinued
operations):
Accounts and notes receivable (63,423) (105,612) (314) (71,768)
Inventories (58,419) 134,818 41,198 214,538
Prepaid expenses and other current assets (485,638) 99,184 (8,387) 29,481
Deferred charges and other (369,921) (62,845) (17,661) 78,952
Increase (decrease) in:
Accounts payable 733,806 696,541 207,347 187,745
Accrued expenses 117,086 251,502 (285,304) 21,853
Accrued costs for restructuring and discontinued
operations -- (1,092,205) (438,581) 1,530,786
------------ ------------ ------------ ------------
Net cash used in operating activities (1,486,465) (1,936,270) (1,012,748) (2,917,881)
------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
29
HEARx Ltd.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Three Months
Ended
December 29, December 30, September 30, December 31,
1995 1994 1993 1993
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,711,203) (40,110) (11,042) (482,647)
Proceeds from sale of property and equipment 21,748 132,568 -- 1,515
Discontinued operations -- 82,748 22,601 (852,708)
Purchase of customer list -- -- -- (159,000)
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities (1,689,455) 175,206 11,559 (1,492,840)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Short-term borrowings 1,370,000 -- -- 1,150,000
Proceeds from issuance of:
Long-term debt-principal stockholder -- 500,000 175,000 --
Long-term debt-other -- -- -- 515,259
Convertible subordinated debentures - other -- 138,750 450,375 88,375
Deposits on exercise of stock option -- 75,000 325,000 --
Principal payments:
Short-term borrowings -- -- -- (439,958)
Long-term debt (279,255) (130,972) (15,290) (127,007)
Forgiveness of long-term debt (293,843) (52,500) -- --
Proceeds from issuance of capital stock,
net of offering costs 2,983,550 1,248,035 -- 3,020,614
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,780,452 1,778,313 935,085 4,207,283
------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
30
HEARx Ltd.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and Three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Three Months
Ended
December 29, December 30, September 30, December 31,
1995 1994 1993 1993
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents $604,532 17,249 (66,104) (203,438)
Cash and cash equivalents at beginning of period 329,007 311,758 377,862 581,300
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $933,539 $329,007 $311,758 $377,862
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
31
HEARx Ltd.
Consolidated Statements of Cash Flows
(Concluded)
Years Ended December 29, 1995, December 30, 1994 and
September 30, 1993 and three Months Ended December 31, 1993
- ------------------------------------------------------------------------------------------------------------
Three Months
Ended
December 29, December 30, September 30, December 31,
1995 1994 1993 1993
------------ ------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $253,479 $211,490 $26,352 $173,167
============ ============ ============ ============
Supplemental schedule of non-cash investing and
financing activities:
Convertible debentures and accrued interest payable
exchanged for Common Stock $ -- $727,682 $ -- $ --
Issuance of Common Stock for professional services 187,530 37,500 -- 1,772
Issuance of Common Stock to Advisory Board for
services 35,000 25,000 -- 25,000
Issuance of Common Stock to employees 127,076 44,688 -- 35,178
In connection with a business acquisition:
Convertible Preferred Stock issued -- 500,000 -- --
Acquisition costs -- 61,569 -- --
Fair value of assets acquired -- (492,224) -- --
Costs in excess of fair value of net assets
acquired 55,117 69,345 -- --
Conversion of accounts payable into notes payable 808,000 721,832 -- --
Repayment of bank line of credit by principal
shareholder/officer for a note payable -- 1,000,000 -- --
Forgiveness of note payable by minimum required
purchases 293,843 -- -- --
Issuance of Common Stock for offering costs and
software 299,186 -- -- --
See accompanying notes to consolidated financial statements.
32
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1. The Company
HEARx Ltd. ("HEARx" or "the Company"), a Delaware corporation, was
organized in April 1986 for the purpose of creating a nationwide chain of
retail centers (HEARX Centers) to serve the needs of the hearing impaired.
Change in fiscal year-end
Effective December 31, 1993, the Company changed its fiscal year-end from
September 30 to the Friday nearest December 31.
2. Summary of Significant Accounting Policies
Principles of consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Inventories
Inventories, which consist of hearing aids, 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 are carried at cost. Depreciation of property and
equipment are recorded on a straight-line basis over the estimated useful
lives of the related property. Leasehold improvements are amortized over
the shorter of the term of the lease or the useful life of the asset.
Sales return policy
Customers purchasing hearing aids are given a specific return period,
usually 30 days, if dissatisfied with the product. The Company provides an
allowance in accrued liabilities for returns based on prior experience.
The return period can be extended to 60 days if the customer attends the
Company's H.E.L.P. program.
Deferred compensation
The value in excess of the selling price of shares of common stock granted
to officers is being amortized over the vesting period of such shares.
33
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Warranties
Hearing aids sold by the Company generally 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 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 estimates of
utilization adjusted for actual utilization by the member populations of
the health care 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.
Net loss per share of common stock
Net loss per share of common stock was computed using the weighted average
number of shares outstanding during the year.
Convertible preferred stock, convertible subordinated debentures, stock
options and stock warrants are excluded from the computation of earnings
per share because the effect of their inclusion would be antidilutive.
Consolidated statements of cash flows
For purposes of the Statement of Cash Flows, temporary cash investments
which have a maturity of ninety days or less are considered cash
equivalents.
Reclassifications
Certain amounts in the 1994 financial statements have been reclassified in
order to conform to the 1995 presentation.
34
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Estimates
The preparation of the consolidated 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.
3. Liquidity, Subsequent Events and Pro Forma Adjustment
The Company has sustained losses of $2,213,453, $2,105,635 and $6,498,166
for the years ended December 29, 1995, December 30, 1994 and September 30,
1993. At December 29, 1995 the Company has a working capital deficit of
$1,317,179. In order to enable the Company to continue operations
Management has taken certain actions including the raising of additional
capital (see (a)) the signing of a contract with a health care provider in
the Northeast (see (b)), and as more fully described in (c) the Company
obtained financing from a vendor for the diagnostic equipment in the new
centers. Management believes that the actions taken as outlined in 3(a),
3(b) and 3(c) will be sufficient to fund any foreseeable 1996 operating
deficit.
(a) On January 29, 1996, the Company completed a private placement of 6,000
shares, $1 par, of the 1996 Senior Preferred Stock and 10,909,090 Common
Stock purchase warrants in consideration for $4.9 million of cash and the
conversion of a $1.1 million note payable. The warrants are exercisable
over five years at a price of $.55 per share. The 1996 Senior Preferred
Stock may be redeemed by the Company for $6 million at any time. If not
redeemed within four years, the investors will be entitled to exercise, for
a one year period, warrants to purchase an additional 4,000,000 shares of
Common Stock at an exercise price of $.55 per share. Under the terms of
the 1996 Senior Preferred Stock, the investors generally have the right to
approve future debt or equity offerings by the Company. In connection with
the private placement, the Company issued warrants to purchase 2,250,000
shares of Common Stock at a price of $.63 per share to an investment banker
as a placement fee. Additionally, the agreement provides that the Company
will effect a 15 for 1 reverse stock split. Such stock split would require
approval of the Board of Directors and the stockholders.
35
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
The pro forma adjustments, to give effect to the issuance of the 6,000
shares of 1996 Senior Preferred Stock for consideration of the $4.9 million
and the conversion of the $1.1 million note payable, as if it had occurred
on December 29, 1995 are as follows:
---------------------------------------------------------------------------
Assets
Net increase in cash $ 4,492,000
---------------------------------------------------------------------------
Liabilities
Decrease in current maturities of long-term debt:
Investors note payable 1,100,000
Note payable to principal stockholder/officer 100,000
Note payable to vendor 308,000
---------------------------------------------------------------------------
1,508,000
---------------------------------------------------------------------------
Stockholders' Equity
Increase in 1996 Senior Preferred Stock (6,000)
Increase in additional paid-in-capital (5,994,000)
---------------------------------------------------------------------------
(6,000,000)
---------------------------------------------------------------------------
$ --
===========================================================================
(b) During January and February, 1996, the Company opened 13 in a
projected series of 25-30 new HEARx Centers in the New York and New Jersey
area to provide hearing care to members of Oxford Health Plans and Select
Providers, Inc. Management estimates this contract will generate $4.25
million in annual revenues in each of the next three years; however, it can
be cancelled with ninety days notice by either party at any time.
(c) On March 5, 1996, the Company completed a $2.5 million trade financing
agreement with a vendor whereby the vendor will provide financing for the
purchase of diagnostic equipment to be utilized by the Company's
distribution network. A percentage of all hearing aid purchases by the
Company from the supplier will be applied to repayment of financed amounts
under the financing agreement.
(d) On January 29, 1996, the principal stockholder/officer converted his
Series C Preferred Stock to 1,040,000 shares of Common Stock. In exchange
for his waiver to receive payment of cumulative dividends due for the
Series C Preferred Stock, the Company issued a promissory note in the
amount of $214,666. For so long as shares of 1996 Senior Preferred Stock
of the Company are outstanding, without the approval of the holders of a
majority of the outstanding shares of 1996 Senior Preferred Stock, the
principal of this promissory note shall not be payable. An additional
promissory note was issued to the principal stockholder/officer for
$233,000 during January, 1996, representing $170,000 from 1995 short term
advances plus accrued interest payable from previous years of $63,007. The
36
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
note payable is due in three years and bears interest at 3 percent above
prime.
(e) On March 15, 1996, the Company's Common Stock was listed on the
American Stock Exchange under the symbol of "EAR".
(f) In January, 1996, the Company entered into an agreement to acquire the
customer list and selected assets of Suffolk County Hearing Aid Center,
Inc. for $150,000, 150,000 shares of Common Stock, and a five year note in
the amount of $250,000 including interest. The note payable bears interest
at 5-1/2 percent and is payable in five annual installments of $50,000
beginning January 22, 1997.
(g) For additional subsequent events see notes 4, 6A and 6E.
4. Debt
Long-term debt consists of the following:
---------------------------------------------------------------------------
December 29, December 30,
1995 1994
------------ ------------
Note payable to principal stockholder,
due April 1, 1997 bearing interest at
prime plus 3% (11.75% at December 29,
1995) $1,675,000 $1,675,000
7% notes payable, to investors, due
December 11, 1996 (see below) 1,100,000 --
Note payable to supplier, due
January 31, 1999, interest at 12%,
beginning 1996 (see below) 808,000 --
Note payable to supplier, collateralized
by equipment, due December 31, 1996.
No interest rate requirements provided
purchase requirements are met. (Interest
imputed at 6%). 460,517 903,910
Short term advances from principal stockholder
(see below) 270,000 --
Other notes payable 146,313 248,074
Note payable, collateralized by certain
equipment, due February 1, 1997.
Interest rate of 7.25% at December 29, 1995. 43,450 71,394
------------ ------------
4,503,280 2,898,378
Less current portion 2,186,980 522,179
------------ ------------
$2,316,300 $2,376,199
============ ============
---------------------------------------------------------------------------
37
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
The approximate annual maturities of long-term debt for the years after
December 29, 1995 are as follows:
1996 $2,187,000
1997 1,831,000
1998 302,000
1999 152,000
Thereafter 31,000
During December, 1995, two individuals loaned the Company $1,000,000 and
$100,000 represented by short term notes payable. These notes payable were
converted to preferred stock during January, 1996, in connection with the
Company's private placement of $6 million of 1996 Senior Preferred Stock
(see note 3 (a)).
On May 1, 1995, the Company reached an agreement with Minnesota Mining and
Manufacturing Company ("3M") to convert $808,000 of accounts payable into
long-term debt. This agreement provides for conversion of a portion of
this long-term debt into equity upon the Company reaching certain product
sales goals. The Company paid $308,000 in January 1996.
During 1995, the principal stockholder/officer advanced $270,000 to the
Company. In January, 1996, $100,000 was repaid, and $170,000 of the
advances were converted into a note payable bearing interest at prime plus
3%.
During 1994, Convertible Subordinated Debentures ("Debentures") of
$700,000, (including $538,750 outstanding at December 31, 1993, and an
additional $161,250 issued during 1994, plus accrued interest payable of
$27,682) were converted into 3,638,414 shares of Common Stock and warrants
for the purchase of 1,050,000 shares of Common Stock at $1.00 per share
until January 1, 2000 and $2.00 per share until January 1, 2004.
During 1994, the principal stockholder loaned the Company $1.5 million and
converted two other loans ($125,000 and $50,000) into a $1,675,000 note
payable. $1.0 million of the proceeds were used to pay a bank line of
credit. The remaining $500,000 was used for working capital purposes.
38
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
5. Property and Equipment and Leases
Property and equipment consist of the following:
December 29, December 30,
1995 1994
------------ ------------
Equipment, furniture and fixtures $2,357,101 $1,975,857
Leasehold improvements 729,144 779,347
Computer systems 872,454 --
Leasehold improvements in progress 436,673 --
------------ ------------
4,395,372 2,755,204
Less accumulated depreciation 1,871,490 1,779,850
------------ ------------
Net property and equipment $2,523,882 $ 975,354
============ ============
Remaining commitments under contracts in progress related to the northeast
expansion (see Note 3(b)) totals $803,000.
Approximate future minimum rental commitments under operating leases are as
follows:
Years following December 29, 1995
---------------------------------------------------------------------------
1996 $1,314,000
1997 941,000
1998 801,000
1999 651,000
2000 605,000
Thereafter 2,016,000
------------
Total minimum lease payments $6,328,000
============
Equipment and building rent expense for the years ended December 29, 1995,
December 30, 1994 and September 30, 1993 and three months ended
December 31, 1993 was approximately:
December September
---------------------------------------- ------------
1995 1994 1993 1993
------------ ------------ ------------ ------------
$1,267,000 $ 930,000 $ 296,000 $1,151,000
============ ============ ============ ============
39
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
6. Capital Deficit
A. Senior Preferred Stock
The shares of Senior Preferred Stock have 100 votes per share and,
unless otherwise required by Delaware law, vote with the holders of
other shares of Common Stock as one class. The shares of Senior
Preferred Stock have no right to dividends except pari passu with the
Common Stock based on the number of shares of Common Stock into which
they are then convertible when, as and if a dividend is declared by
the Board of Directors. The Senior Preferred Stock is senior to the
Common Stock and the Series C Preferred Stock and is pari passu with
the 1994 Convertible Preferred Stock and the 1996 Senior Preferred
Stock (discussed below).
Each share of Senior Preferred Stock is convertible at the option of
the holder into 100 shares of Common Stock. The shares of Senior
Preferred Stock are automatically converted into shares of Common
Stock upon the listing of the shares of Common Stock on the American
or New York Stock Exchange. Upon the Company's listing on the
American Stock Exchange on March 15, 1996, all shares of the Senior
Preferred Stock automatically converted into shares of Common Stock,
(see Note 3(e)).
(i) Senior Series A and Senior Series B
Pursuant to an October 31, 1991 agreement with 3M, the Company
agreed not to seek capital from any person, other than
financial investors or through a public offering, as opposed
to persons having an interest in the hearing aid industry,
without 3M's prior written approval. The principal
stockholder/officer has agreed not to sell for five years any
shares of Common Stock beneficially owned by himself or
securities convertible into or exchangeable for Common Stock.
He agreed to give 3M (a) a right of first refusal to purchase
all or any portion of such shares or securities and (b) the
right to approve any potential purchaser, which approval is
not to be withheld unreasonably. The principal
stockholder/officer's agreement does not apply to the sale in
the open market or gift of up to five percent of his security
holdings (on a fully converted basis).
Simultaneously with the execution of the Stock Purchase Agree-
ment, 3M and the Company entered into a new arrangement in
which 3M appointed the Company as 3M's exclusive distributor
(with the exception of existing distributorships) for
programmable hearing aids for a five year period ending
December 31, 1997 with an option for 3M to renew for an
additional five years. During 1995, this arrangement was
modified in that the Company will no longer be the exclusive
distributor of 3M products.
40
HEARx Ltd.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(ii) Transactions as to the Senior Series C are as follows:
In February 1991, the Company and 3M entered into an arrange-
ment pursuant to which, among other things, the Company
marketed 3M's "Memory Mate"[Trademark] brand hearing aids