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FILED PURSUANT TO RULE 424(B)(3) RELATED TO
REGISTRATION STATEMENT NO. 333-64571
PROSPECTUS
13,134,750 SHARES
HEARX LTD.
COMMON STOCK
This Prospectus relates to the resale of 13,134,750 shares (the "Shares")
of common stock, par value $.10 per share (the "Common Stock"), of HEARx LTD.,
a Delaware corporation (the "Company"). All of the Shares offered hereby are
being sold by the Selling Shareholders. Of the total Shares, 11,850,000 Shares
are issuable by the Company upon the conversion of 7,500 shares of the
Company's 1998 Convertible Preferred Stock, par value $1.00 per share (the
"Preferred Stock"), the exercise of warrants issued to the purchasers of the
Preferred Stock (the "Investor Warrants"), and the exercise of certain warrants
(the "Finder Warrants"). The remaining 1,284,750 Shares are issuable by the
Company upon the exercise of certain warrants issued to replace outstanding
warrants previously issued in connection with the private placement of the
Company's 1997 Convertible Preferred Stock and upon conversion of the Company's
Series B-1 Preferred Stock (collectively, the "Replacement Warrants" and
together with the Investor Warrants and the Finder Warrants, the "Warrants").
The Company issued the Preferred Stock and the Investor Warrants in a private
placement transaction. The Finder Warrants were issued by the Company as
compensation in connection with the private placement transaction. The Company
issued the Replacement Warrants also in private placements in exchange for the
cancellation of certain outstanding warrants issued in connection with the
private placement of the Company's 1997 Convertible Preferred Stock and upon
conversion of the Company's Series B-1 Preferred Stock. See "Selling
Shareholders." Additional Shares that may become issuable as a result of the
anti-dilution provisions of the Preferred Stock and the Warrants are offered
for resale hereby pursuant to Rule 416 under the Securities Act of 1933, as
amended (the "Securities Act").
The Company will not receive any proceeds from the sale of Shares by the
Selling Shareholders, but will receive the exercise price payable upon the
exercise of the Warrants if those Warrants are exercised for cash. There can
be no assurance that all or any part of the Warrants will be exercised or that
they will be exercised for cash. All expenses incurred in connection with this
offering are being borne by the Company, other than any commissions or
discounts paid or allowed by the Selling Shareholders to underwriters, dealers,
brokers or agents and legal fees of counsel to the Selling Shareholders. There
can be no assurance that the Selling Shareholders will sell any or all of the
Shares offered hereby.
The Selling Shareholders have not advised the Company of any specific plans
for the distribution of the Shares, but it is anticipated that the Shares may
be sold from time to time in transactions (which may include block
transactions) on the American Stock Exchange (the "AMEX") at the market prices
then prevailing. Sales of the Shares may also be made through negotiated
transactions or otherwise. The Selling Shareholders and the brokers and
dealers through which the sales of the Shares may be made may be deemed to be
"underwriters" within the meaning set forth in the Securities Act of 1933, as
amended (the "Securities Act"), and their commissions and discounts and other
compensation may be regarded as underwriters' compensation. See "Plan of
Distribution."
The Shares have not been registered under the blue sky or securities laws
of any jurisdiction, and any broker or dealer should assure the existence of an
exemption from registration or effectuate such registration in connection with
the offer and sale of the Shares.
The Common Stock is traded on the AMEX under the symbol "EAR." The closing
price of the Common Stock as reported on the AMEX on December 21, 1998 was
$0.563 per share.
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE DISCUSSION UNDER "RISK
FACTORS" BEGINNING ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is January 5, 1999.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Electronic filings of
such documents are publicly available on the Commission's Web Site at
http://www.sec.gov. Copies of such materials can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Information on the operation of the public
reference facilities maintained by the Commission may be obtained by calling
the Commission at 1-800-SEC-0330. In addition, the Common Stock is traded on
the American Stock Exchange under the symbol "EAR" and copies are available for
inspection at the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement or the exhibits
thereto. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained or incorporated by reference in
the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document filed or incorporated by reference
as an exhibit to the Registration Statement are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed or incorporated by reference as an exhibit to the Registration
Statement. For further information, reference is hereby made to the
Registration Statement and exhibits thereto, copies of which may be inspected
at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 or obtained from the Commission at the same address at prescribed rates.
INCORPORATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated herein by reference:
(1) Annual Report on Form 10-K for the fiscal year ended December 26,
1997, filed on March 17, 1998;
(2) Quarterly Report on Form 10-Q for the fiscal quarter ended March
27, 1998, filed on May 11, 1998;
(3) Quarterly Report on Form 10-Q for the fiscal quarter ended June
26, 1998, filed on July 10, 1998;
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(4) Quarterly Report on Form 10-Q for the fiscal quarter ended
September 25, 1998, filed on November 9, 1998;
(5) Current Report on Form 8-K dated August 27, 1998, filed on
September 3, 1998; and
(6) Description of Common Stock contained in the Registration
Statement on Form S-18, filed on September 4, 1987.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof
shall hereby be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of filing of such documents. See "Available
Information." Any statement contained in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document incorporated or
deemed to be incorporated herein by reference modifies or supersedes such
statement. Any statement contained herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained in any subsequently filed document incorporated or deemed to be
incorporated herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS (EXCLUDING EXHIBITS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE
INFORMATION INCORPORATED HEREIN) WILL BE PROVIDED BY FIRST CLASS MAIL WITHOUT
CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR
ORAL REQUEST BY SUCH PERSON TO HEARx LTD., 1250 NORTHPOINT PARKWAY, WEST PALM
BEACH, FLORIDA 33407, ATTENTION CORPORATE SECRETARY (TELEPHONE: (561)
478-8770).
No person has been authorized in connection with this offering to give any
information or to make any representation not contained or incorporated by
reference in this Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Company, the Selling Shareholders or any other person. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to purchase, any
securities other than those to which it relates, nor does it constitute an
offer to sell or a solicitation of an offer to purchase by any person in any
jurisdiction in which it is unlawful for such person to make such an offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Prospectus, as well as information incorporated by reference herein,
contains certain "forward looking" statements. Such forward-looking statements
include, without limitation, statements about the Company's future growth and
expansion, the manner in which such expansion will be funded and demands on
Company resources relating to the expansion (see "Risk Factors -- Recent and
Future Expansion; Management of Growth"); the Company's ability to obtain
comparable products from other manufacturers in the event of disruption of
supply from one or more of the Company's current suppliers (see "Risk Factors
- -- Reliance on Manufacturers and Qualified Audiologists"); the adequacy of the
Company's insurance and the ability to have recourse against a manufacturer in
the event of a product liability claim (see "Risk Factors -- Product and
Professional Liability"); the Company's ability to continue to establish
relationships with health organizations and physicians that promote the Company
to the hearing impaired (see "Business - Products and -- Customers and
Marketing" in the Company's annual report on Form 10-K for the fiscal year
ended December 26, 1997 (the "Form 10-K")); the number of centers expected to
open in Southern California (see "Risk Factors -- Recent and Future Expansion;
New Venture, Management of Growth"); the continued competitiveness with the
Company's centers of certain networks of hearing aid stores or distributors
(see "Business -- Competition" in the Form 10-K); the effect of a new federal
or state physician referral mandate on the Company (see "Business -- Regulation
- -- Federal" in the Form 10-K); and the effect on the Company of the loss of any
single managed care contract (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" in the Form 10-K).
Actual events or results may differ materially from those discussed in the
forward looking statements as a result of various factors, including those
discussed in "Risk Factors," below and generally in the Form 10-K and other
documents incorporated by reference herein.
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RISK FACTORS
The following factors should be carefully considered in evaluating the
Company and its business before purchasing any of the Shares offered hereby.
RECENT AND FUTURE EXPANSION; NEW VENTURE; MANAGEMENT OF GROWTH
The Company has expanded its network of hearing care centers recently and
plans to continue such expansion, currently through the recently announced
joint venture with The Permanente Federation. The Company is a 50% owner of
the joint venture. Initially the joint venture will open 15 centers in Southern
California. After an initial equity investment, the Company will provide the
venture with a $5 million interest-bearing loan to fund the establishment of
those centers. The Company intends to fund this and other expansion with
existing capital, the proceeds from the offering of the Preferred Stock,
earnings and, to the extent necessary and available on favorable terms to the
Company (of which there can be no assurance), commercial lines of credit. The
Company's operating results will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
resulting from this expansion. In addition, this expansion will increase the
demands on the Company's management, technical, financial and other resources.
If the Company is unable to manage growth effectively, or to integrate fully
its infrastructure systems throughout its network of hearing care centers, its
operating results may be adversely affected. In addition, there can be no
assurance that the Company will be successful in its efforts on behalf of the
joint venture with The Permanente Federation, that the centers will be open by
the targeted deadline of January 1999 or that, once open, the centers will
generate sufficient revenues to support continued operations.
HISTORY OF OPERATING LOSSES
The Company has incurred losses in each year since its organization. There
can be no assurance that the Company will achieve profitability in the near or
long term.
USE OF PROCEEDS
The Company will not receive any proceeds from the offer or sale of the
Shares by the Selling Shareholders, but will receive the exercise price,
payable upon exercise of the Warrants, if the Warrants are exercised for cash.
The Company intends to use the proceeds, if any, from the exercise of the
Warrants to fund the operations of the Company. There can be no assurance that
any of the Warrants will be exercised or that they will be exercised for cash.
NO DIVIDENDS
The Company has not paid any cash dividends on its Common Stock and does
not anticipate paying any such dividends in the foreseeable future.
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RELIANCE ON SENIOR MANAGEMENT
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 and Chief Operating Officer. 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 has purchased a "key man"
insurance policy on Dr. Brown's life in the amount of $3,000,000 for the
benefit of the Company.
COMPETITION
The hearing care industry is highly fragmented with approximately 11,000
practitioners providing testing and dispensing products and services. Most
competitors are small retailers generally focusing on the sale of hearing aids
without providing comprehensive audiometric testing and other professional
services. Among the Company's larger competitors are: (i) Bausch & Lomb Inc.,
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 (ii) Beltone Electronics Corp., a
privately-owned hearing aid manufacturer that distributes its products
primarily through its network of approximately 1,000 "authorized" distributors.
A number of these franchises and distributors are located in the areas the
Company serves. Although the Company believes it offers more comprehensive
services and products, there can be no assurance that these large, established
companies, which have far greater resources than the Company, will not expand
and change their operations to capture the market targeted by the Company. Nor
can there be any assurance that the hearing care market can be consolidated
successfully by the Company or its competitors, or that associations of
independent audiologists will not form and compete successfully for the
Company's targeted market.
RENEWAL OF AGREEMENTS WITH HEALTH INSURANCE AND MANAGED CARE ORGANIZATIONS
Since 1991, the Company has entered into agreements with certain health
insurance and managed care organizations to provide hearing care products and
services, and has established hearing care centers in the related market areas.
The terms of a number 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 or failure to renew the agreements could
materially adversely affect the operation of the hearing care centers located
in the related market areas. In addition, the early termination 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 a material adverse effect on the
Company's results of operations. The Company is not aware of any potential
contract terminations at this time.
RELIANCE ON EFFORTS AND SUCCESS OF MANAGED CARE COMPANIES
A number of managed care organizations, including some of those with whom
HEARx has contracts, are experiencing significant difficulties arising from the
widespread growth and reach of available plans and benefits. Some of these
organizations have focused substantial resources on correcting their own
administrative, cost and information systems instead of expanding their plan
memberships. As a result, HEARx has not experienced the growth it expected
from this market.
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In fact, primarily as a result of these problems of the managed care
organizations, HEARx centers in the northeast market have yet to generate
sufficient revenues to be profitable. There can be no assurance that these
centers will be profitable. A number of managed care organizations have
announced their withdrawal from certain geographical areas, some of which
include HEARx markets. There can be no assurance that HEARx can maintain all
of its centers in those markets. HEARx will close centers where warranted.
RELIANCE ON MANUFACTURERS AND QUALIFIED AUDIOLOGISTS
Through its hearing care centers, the Company makes available to customers
hearing aids supplied by approximately six 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 materially
adversely affect the Company's business. There are currently approximately 40
manufacturers of hearing aids and related hearing enhancement devices worldwide
however, so that in the event of disruption of supply from one or more of the
Company's current suppliers, the Company believes it could obtain comparable
products from other manufacturers. There can be no assurance, however, that
such products could be obtained at prices favorable to the Company or on a
timely basis. The Company has not experienced any significant disruptions in
supply in the past. In addition, the Company's centers employ audiologists,
and the Company believes that it distinguishes itself in the industry by having
qualified audiologists available to supervise or manage all of the Company's
centers. The inability of the Company to attract and retain qualified
audiologists may 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 audiologists sufficient to staff its centers for the foreseeable
future.
PRODUCT AND PROFESSIONAL LIABILITY
In the ordinary course of its business, the Company may be subject to
product and professional liability claims alleging the failure of or adverse
effect 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 materially 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.
REGULATION
The practice of audiology and the dispensing of hearing aids are not
presently regulated on the Federal level. The sale of hearing aids, however,
is subject to certain limited regulations promulgated by the United States Food
and Drug Administration. 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
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currently operates centers or at the Federal level. Such regulations may have
a material adverse effect upon the Company. Such regulations might include
stricter licensure requirements for dispensers of hearing aids, inspection 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
regulations in the jurisdictions in which it operates with which it, as
currently operated, could not comply.
POSSIBLE VOLATILITY OF PRICES
The market price of the Common Stock has changed significantly over the
past two years. Since the stock began trading on the AMEX on March 15, 1996,
and through November 30, 1998, the stock has traded as high as $7.375 and as
low as $0.563 per share. Future changes in the market price of the Common Stock
may bear no relation to the Company's results of operations. Quarterly
operating results, changes in the condition of the economy generally or in the
healthcare industry, or developments affecting the Company or its competitors
could cause the market price of the Common Stock to fluctuate substantially.
POTENTIAL DILUTION; SHARES ELIGIBLE FOR FUTURE SALES; POSSIBLE EFFECT ON
ADDITIONAL EQUITY FINANCING
A substantial number of shares of Common Stock are or will be issuable by
the Company upon the conversion of convertible preferred stock and the exercise
of warrants and options which the Company has issued, which would result in
substantial dilution to a shareholder's percentage ownership interest in the
Company and could adversely affect the market price of the Common Stock. Under
the applicable conversion formulas of the Preferred Stock, the number of shares
of Common Stock issuable upon conversion is inversely proportional to the
market price of the Common Stock at the time of conversion (i.e., the number of
shares increases as the market price of the Common Stock decreases); and except
with respect to certain redemption rights of the Company for the Preferred
Stock, there is no cap on the number of shares of Common Stock which may be
issuable. In addition, the number of shares issuable upon the conversion of
the Preferred Stock and the exercise of warrants and options is subject to
adjustment upon the occurrence of certain dilutive events.
On November 30, 1998, there were issued and outstanding a total of
102,597,803 shares of Common Stock. If all convertible preferred stock,
warrants and options which the Company has issued were deemed converted and
exercised, as the case may be, as of November 30, 1998, there would be issuable
approximately 34,144,166 shares of Common Stock. Upon such conversion and
exercise, there would be outstanding approximately 136,741,969 shares of Common
Stock. See "--Limitation on Available Shares." Of these, the Company
currently has registered for resale approximately 25,971,749 shares (including
the Shares offered hereby) and has granted registration rights in respect of
approximately 202,250 additional shares. The sale or availability for sale of a
significant number of shares of Common Stock in the public market could
adversely affect the market price of the Common Stock. In addition, certain
holders of outstanding securities of the Company have rights to approve and/or
participate in certain types of future equity financing by the Company. The
availability to the Company of additional equity financing, and the terms of
any such financing, may be adversely affected by the foregoing.
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LIMITATION ON AVAILABLE SHARES
The number of shares of Common Stock issuable upon conversion of the
Preferred Stock and the Company's 1997 Convertible Preferred Stock (the "1997
Preferred Stock"), and upon exercise of the Warrants and the Company's
previously issued options and warrants, could exceed the 130,000,000 shares of
Common Stock the Company is currently authorized to issue under its Restated
Certificate of Incorporation. See "-- Potential Dilution; Shares Eligible for
Future Sales; Possible Effect on Additional Equity Financing." If all of the
outstanding Preferred Stock and 1997 Preferred Stock were converted at December
20, 1998, approximately 13,651,465 and 11,870,720, respectively, shares of
Common Stock would be issuable to the holders of such preferred stock. If a
holder of the Preferred Stock elects to convert at a time when the Company does
not have sufficient authorized but unissued shares of Common Stock to effect
the conversion, the Corporation is obligated to use its best efforts to obtain
shareholder approval to increase the authorized number of shares of Common
Stock and to pay to the holder conversion default payments. However, under the
terms of the Preferred Stock, if a holder elects to convert at a time when the
market price of the Common Stock is less than $1.00, the Company has a right to
redeem such Preferred Stock at a price equal to 108% of its stated value plus
applicable premium. Under the terms of the 1997 Preferred Stock, if a holder
elects to convert at a time when the market price of the Common Stock is less
than $1.50, the Company has a right to redeem such 1997 Preferred Stock at a
price equal to 115% of its stated value plus applicable premium. The Company
intends to exercise these rights of redemption if necessary to prevent the
Company's outstanding Common Stock from exceeding 130,000,000 shares.
Furthermore, the Company has commenced a stock repurchase program pursuant to
which it may further reduce the number of outstanding shares of Common Stock.
CONTINUED AMEX LISTING
The Common Stock was listed and began trading on the AMEX on March 15,
1996. The AMEX will consider delisting a company's securities if, among other
things, the company fails to maintain stockholder's equity of at least
$2,000,000 if the company has sustained losses from continuing operations or
net losses in two of its three most recent fiscal years; the company fails to
maintain stockholder's equity of $4,000,000 if the company has sustained losses
from continuing operations or net losses in three of its four most recent
fiscal years; or the company has sustained losses from continuing operations or
net losses in its five most recent fiscal years. In the event the Company's
Common Stock was delisted from the AMEX, trading, if any, in the Common Stock
would be conducted in the over-the-counter market, and the ability of holders
to sell or otherwise dispose of such shares could be adversely affected. In
addition, if such delisting were to occur, transactions in shares of the Common
Stock could become subject to the Commission's "penny stock" regulations. The
Company is unaware of any intention on the part of the AMEX to delist its
Common Stock.
"PENNY STOCK" REGULATIONS
The Commission has adopted regulations that define a "penny stock" to
include any over-the-counter equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. The regulations require
the delivery, prior to any transaction in a penny stock, of a disclosure
schedule prescribed by the Commission relating to the penny stock market,
subject to certain exemptions. A broker-dealer effecting transactions in penny
stocks must disclose the commissions payable to both the broker-dealer and any
registered representative, current quotations
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for the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent to the customer
disclosing the recent price information for the penny stock held in the account
and information on the limited market in penny stocks. If the penny stock
regulations were to become applicable to transactions in shares of the Common
Stock, they could adversely affect the ability of holders to sell or otherwise
dispose of such shares.
POTENTIAL CHANGE IN VOTING CONTROL OF THE COMPANY
As of November 30, 1998, the directors and executive officers of the
Company beneficially owned, as a group, approximately 14% of the 102,597,803
shares of outstanding Common Stock. If all convertible preferred stock,
warrants and options which the Company has issued or agreed to issue were
deemed converted and/or exercised on November 30, 1998, the directors and
executive officers would beneficially own approximately 11% of the then
outstanding Common Stock. See "-- Potential Dilution; Shares Eligible for
Future Sales; Possible Effect on Additional Equity Financing." In the event of
a change in voting control of the Company, the current directors and officers
of the Company could be replaced.
YEAR 2000
Many computer systems experience problems handling data beyond year 1999.
Many existing computer programs only use two digits to identify a year in the
date field. Such systems and programs must be modified or replaced prior to
January 1, 2000 in order to remain functional. The Company has undertaken a
company-wide review of its Year 2000 exposure. The Company has identified its
key manufacturers and suppliers and intends to send written requests for
information on their Year 2000 compliance status. As required to address
potential failures of these parties to be Year 2000 ready, the Company will
send additional requests and develop contingency plans.
Failure by the Company and/or the third parties with whom it does business
to be prepared for and properly address the Year 2000 issue could have a
material adverse effect on the Company and its ability to conduct business.
The Company expects to implement successfully the systems and programming
changes necessary to address the Year 2000 issue and does not believe the cost
of such actions will have a material adverse effect on the Company, its results
of operations or financial condition.
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THE COMPANY
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
currently operates 75 centers primarily located in Connecticut, Florida, New
York, New Jersey, and Pennsylvania.
The Company recently completed the formation of HEARx West LLC, a joint
venture with The Permanente Federation LLC. The Permanente Federation is the
national association of Permanente Medical Groups, one of the three health
delivery systems of Kaiser Permanente, America's largest not-for-profit health
maintenance organization. The joint venture will concentrate initially on
providing hearing aids and diagnostic audiology testing through HEARx centers
located in the State of California. The parties intend that the centers will
serve the needs of Kaiser Permanente's membership, members of other managed
care organizations and the "self-pay" patients in the geographic region. The
venture is owned 50/50 by HEARx and The Permanente Federation. HEARx will be
responsible for day-to-day operations management of the centers. The first
centers are expected to open in January 1999.
The Company's principal executive offices are located at 1250 Northpoint
Parkway, West Palm Beach, Florida 33407, and its telephone number is (561)
478-8770.
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SELLING SHAREHOLDERS
None of the Selling Shareholders is an affiliate of the Company or has had
any position, office or other material relationship with the Company within the
past three years except as a shareholder of the Company or as noted below. The
following table sets forth information with respect to the Selling
Shareholders, based upon information provided to the Company by them.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Being Shares Beneficially Owned
Name of Selling Shareholder Prior to Offering (1) Offered After Offering (1)(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zanett Lombardier, Ltd. 13,159,994 (3) (4) (5) 8,104,000 (6) 5,055,994
Goldman Sachs Performance 1,989,955 (3) (4) 1,580,250 (7) 409,705
Partners, L.P.
Goldman Sachs Performance 1,610,916 (3) (4) 1,279,250 (8) 331,666
Partners (Offshore), L.P.
Kuhn, Loeb & Co. 546,058 (3) (4) 429,000 (9) 117,058
Capital Ventures International 3,880,765 (11) 254,750 (12) 3,626,015
Claudio Guazzoni 210,938 (10) 210,938 0
David McCarthy 210,937 (10) 210,937 0
Tony Milbank 140,625 (10) 140,625 0
NP Partners 2,724,861 (11) 87,500 (12) 2,637,361
Olympus Securities, Ltd. 2,898,794 (11) 62,500 (12) 2,836,294
Bruno Guazzoni 774,000 (12) 774,000 0
The Zanett Securities 1,000 (12) 1,000 0
Corporation
- -------------------------------------------------------------------------------------------------------------
Total 28,148,843 13,134,750 15,014,093
====================== =============== ==========
</TABLE>
(1) Assumes that all of the Preferred Stock and the Company's 1997 Convertible
Preferred Stock (the "1997 Preferred Stock") held by the Selling
Shareholders is converted at a conversion price of $0.563, including
shares issuable in respect of any premium. Pursuant to the terms of the
Preferred Stock, the 1997 Preferred Stock, the Warrants and certain other
Warrants held by the Selling Shareholders, such securities are
convertible and exerciseable by the holders thereof only to the extent
that the number of shares of Common Stock thereby issuable, together with
the number of shares of Common Stock then held by such holder and its
affiliates (not including shares underlying unconverted shares of
Preferred Stock and unexercised warrants) would not exceed 4.9% of the
then outstanding Common Stock as determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended. Accordingly,
the number of shares of Common Stock set forth for each Selling
Shareholder may exceed the actual number of shares of Common Stock
that such Selling Shareholder could acquire at any given time through its
conversion of the Preferred Stock and the 1997 Preferred Stock and the
exercise of the Warrants in light of such limitation.
(2) Assumes all shares offered hereby are sold to persons who are not
affiliates of the Selling Shareholders. The Selling Shareholders may, but
are not required to, sell all shares offered hereby.
(3) Includes shares issuable upon conversion of the Preferred Stock.
(4) Includes shares issuable upon the exercise of the Investor Warrants.
(5) Includes shares issuable upon the exercise of Replacement Warrants.
(6) Includes 7,579,000 shares issuable upon conversion of Preferred Stock,
420,000 shares issuable upon exercise of Investor Warrants and 105,000
shares issuable upon exercise of Replacement Warrants.
(7) Includes 1,501,500 shares issuable upon conversion of Preferred Stock and
78,750 shares issuable upon exercise of
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<PAGE> 13
Investor Warrants.
(8) Includes 1,215,500 shares issuable upon conversion of Preferred Stock and
63,750 shares issuable upon exercise of Investor Warrants.
(9) Includes 429,000 shares issuable upon conversion of Preferred Stock.
(10) Includes shares issuable upon the exercise of the Finder Warrants.
Claudio Guazzoni and David McCarthry are officers, and Tony Milbank is an
employee, of The Zanett Securities Corporation.
(11) Includes shares issuable upon the exercise of Replacement Warrants.
(12) Represents shares issuable upon the exercise of Replacement Warrants.
10,725,000 of the Shares offered hereby are issuable upon the
conversion of 7,500 shares of the Preferred Stock, and 2,409,750 of the Shares
offered hereby are issuable upon the exercise of the Warrants. Upon conversion
of a share of Preferred Stock, holders will be entitled to receive a number of
shares of Common Stock determined by dividing the sum of the stated value of
the 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 on five days selected by
the holder during the twenty trading-day period prior to conversion, and $1.80
(subject to adjustment upon the occurrence of certain dilutive events). The
premium payable upon conversion will be equal to 8% of the stated value of the
Preferred Stock ($1,000 per share) 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 Preferred Stock may
not be converted for the 180-day period after the closing (i.e. to February 23,
1999). Thereafter, up to one third of a holder's Preferred Stock may be
converted until the period ending 270 days after the closing (i.e. to May 24,
1999), up to two third's may be converted after day 270 and up to the period
ending 360 days after the closing (i.e. to August 12, 1999), after which time
all of the Preferred Stock may be converted. If the Preferred Stock is not
converted by holders in accordance with these terms prior to August 27, 2003,
on such date it will automatically convert to Common Stock.
If a holder of the Preferred Stock elects to convert at a time when the
Company does not have sufficient authorized but unissued shares of Common Stock
to effect the conversion, the Corporation is obligated to use its best efforts
to obtain shareholder approval to increase the authorized number of shares of
Common Stock and to pay to the holder conversion default payments. The Company
has the right upon receipt of notice of conversion of any shares of the
Preferred Stock to redeem shares of the Preferred Stock tendered for conversion
in lieu of conversion at a price equal to 108% of its stated value plus the
premium, if the closing price of the Common Stock as reported on AMEX for the
date immediately prior to the conversion date is equal to or less than $1.00
per share. The holders of the Preferred Stock have no voting power except with
respect to certain actions by the Company that might adversely affect the
rights of such holders and as otherwise provided by Delaware General
Corporation Law.
1,125,000 Shares offered hereby are issuable upon the exercise of the Finder
Warrants and the Investor Warrants. Upon exercise, holders will be entitled to
receive shares of Common Stock for an exercise price of $1.80 per share. The
Finder Warrants and the Investor Warrants may be exercised any time prior to
August 27, 2003.
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<PAGE> 14
1,284,750 Shares offered hereby are issuable upon the exercise of the
Replacement Warrants. Upon exercise, holders will be entitled to receive
shares of Common Stock for an exercise price of $2.00 per share. Of the
Replacement Warrants, 404,750 may be exercised any time prior to August 24,
2003 and 880,000 may be exercised any time prior to December 23, 2003. The
Replacement Warrants were issued by the Company in exchange for cancellation of
certain warrants previously issued in connection with the private placement of
the Company's 1997 Convertible Preferred Stock and upon the exercise of the
Company's Series B-1 Preferred Stock. The Company issued Replacement Warrants
covering 1,284,750 shares exercisable at a price of $2.00 per share in exchange
for the cancellation of outstanding warrants covering 4,927,500 shares
exercisable at prices of $6.47, $5.00 and $2.00 per share.
Under the applicable conversion formula, the number of shares of Common Stock
issuable upon conversion of the Preferred Stock will be higher if the market
price of the Common Stock at the time of conversion is lower, and there is no
cap on the number of shares of Common Stock that may be issuable in respect of
the Preferred Stock. In addition, the number of shares issuable upon
conversion of the Preferred Stock and the exercise of the Warrants is subject
to adjustment upon the occurrence of certain dilutive events. The 13,134,750
shares offered hereby represent the number of shares that would be issuable if
the Preferred Stock were converted at a conversion price of $1.00 per share,
the premium is paid in cash, the Warrants were exercised and no limitation or
adjustments were applicable, plus an additional 4,350,000 shares. (Additional
shares that may become issuable as a result of the anti-dilution provisions of
the Preferred Stock and Warrants are also offered hereby pursuant to Rule 416
under the Securities Act.)
The foregoing summary is qualified in its entirety by the terms of the
Preferred Stock and the Warrants.
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<PAGE> 15
PLAN OF DISTRIBUTION
The Company is registering the Shares on behalf of the Selling
Shareholders. As used herein, "Selling Shareholders" includes donees and
pledgees selling shares received from a named Selling Shareholder after the
date of this prospectus. All costs, expenses and fees in connection with the
registration of the Shares offered hereby will be borne by the Company.
Brokerage commissions and similar selling expenses, if any, attributable to the
sale of Shares will be borne by the Selling Shareholders. Sales of Shares may
be effected by Selling Shareholders from time to time in one or more types of
transactions (which may include block transactions) on the AMEX, in the
over-the-counter market, in negotiated transactions, through put or call
options transactions relating to the Shares, through short sales of Shares, or
a combination of such methods of sale, at market prices prevailing at the time
of sale, or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The Selling Shareholders have advised the Company that
they have not entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their securities, nor
is there an underwriter or coordinating broker acting in connection with the
proposed sale of Shares by the Selling Shareholders.
The Selling Shareholders may effect such transactions by selling Shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Shareholders and/or the
purchasers of Shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The Selling Shareholders and any broker-dealers that act in connection with
the sale of Shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the Shares sold by them while
acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. The Company has agreed to indemnify each
Selling Shareholder against certain liabilities, including liabilities arising
under the Securities Act. The Selling Shareholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving
sales of the Shares against certain liabilities, including liabilities arising
under the Securities Act.
Because Selling Shareholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Shareholders will
be subject to the prospectus delivery requirements of the Securities Act, which
may include delivery through the facilities of the AMEX pursuant to Rule 153
under the Securities Act. The Company has informed the Selling Shareholders
that the anti-manipulative provisions of Regulation M promulgated under the
Exchange Act may apply to their sales in the market.
Selling Shareholders also may resell all or a portion of the Shares in open
market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
Upon the Company being notified by a Selling Shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of Shares
through a block trade, special offering,
15
<PAGE> 16
exchange distribution or secondary distribution or a purchase by a broker or
dealer, a supplement to this prospectus will be filed, if required, pursuant to
Rule 424(b) under the Act, disclosing (i) the name of each such selling
shareholder and of the participating broker-dealer(s), (ii) the number of
shares involved, (iii) the price at which such shares were sold, (iv) the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus and (vi) other facts material to the transaction. In addition,
upon the company being notified by a Selling Shareholder that a donee or
pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby has been passed
upon for the Company by Bryan Cave LLP, Washington, D.C.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 26, 1997 and December 27, 1996, and for the years ended December 26,
1997, December 27, 1996 and December 29, 1995, have been audited by BDO
Seidman, LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 26, 1997, and are incorporated
herein by reference, in reliance upon the authority of such firm as experts in
accounting and auditing in giving said reports.
16
