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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-16453
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HEARx LTD.
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EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELAWARE 22-2748248
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(STATE OF OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1250 NORTHPOINT PARKWAY, WEST PALM BEACH, FLORIDA 33407
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 478-8770
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE .10 PER SHARE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS YES X NO
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INDICATE BY CHECK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF
REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO THE BEST OF
THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
AS OF MARCH 21, 2000, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON
STOCK HELD BY NON-AFFILIATES (BASED UPON THE CLOSING PRICE OF THE COMMON STOCK
ON THE AMERICAN STOCK EXCHANGE) WAS APPROXIMATELY $55,197,132.
ON MARCH 21, 2000, 11,934,515 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 2000 ANNUAL
MEETING OF THE REGISTRANT'S STOCKHOLDERS ("2000 PROXY STATEMENT"), TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, ARE INCORPORATED BY REFERENCE IN
PART III HEREOF
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PART I
ITEM 1. BUSINESS
HEARx Ltd. ("HEARx" or the "Company") operates a network of hearing care
centers which provide a full range of audiological products and services for the
hearing impaired. The Company's strategy for continuing and accelerating centers
sales growth and market penetration includes positioning the Company as the
leading provider of hearing care to the managed care marketplace, and
aggressively advertising to the non-insured self-pay market. The Company
believes it is well positioned to successfully address the concerns of access,
quality and cost of the managed care and health insurance companies, diagnostic
needs of referring physicians and, ultimately, the hearing health needs of
consumers. HEARx believes that such success requires the Company to offer
convenient distribution points, uniform centers (meaning standardized personnel
qualification, testing, formats, products, prices and ancillary services) and a
documented quality control program.
HEARx and its subsidiary, HEARx West, currently receive a
per-member-per-month fee for more than 1.3 million managed care members. In
total, HEARx has over 170 contracts for hearing care with various healthcare
providers. To the extent the Company is successful in contracting with the
providers of Medicare managed care for the provision of hearing care goods and
services, the Company can enjoy the benefits of the continuing shift of Medicare
patients to managed care. In addition, the Company has increased its attention
to the self-pay market, focusing an aggressive advertising and marketing program
on the uninsured patient. The Company intends to increase its sales to these
patients, while creating greater awareness of the Company by the managed care
patients covered by contracts with HEARx.
HEARx was incorporated in Delaware on April 11, 1986.
FACILITIES AND SERVICES
Each HEARx center is staffed or supervised by a minimum of one
professionally trained, licensed and certified audiologist and at least one
patient care coordinator. The majority of the Company's centers are located in
conveniently accessible strip shopping centers and are typically 1,500 to 2,500
square feet in size. The Company's goal is to have all centers virtually
identical in interior space design, exterior marking and signage. This uniform
appearance helps reinforce the consistent service and quality the Company
strives to provide to patients at all locations. Each center provides
comprehensive hearing services that include:
- A facility equipped with soundproof testing booths and state-of-the-art
testing equipment that meets or exceeds all state standards.
- A full range of diagnostic and auditory-vestibular tests that assist
the physician in the treatment of patients with hearing and balance
disorders is provided in the centers. Some of these services include
auditory brainstem evoked potentials, electronystagmography and
immittance audiometry.
- A family hearing counseling program available to all patients to help
them better understand the use of their hearing products and their
disability.
- A wide variety of hearing aid brands to meet the patient needs.
- A standardized medical reporting system for feedback to the referring
physicians.
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PRODUCTS
Unlike other national organizations (Miracle Ear and Beltone) which sell
only their brand of hearing aid, HEARx has selected an assortment of major
worldwide manufacturers' products to make available through the HEARx network in
order to provide the best possible hearing care for HEARx patients, including
the latest digital technology.
In addition, all HEARx centers offer a large selection of other hearing
enhancement devices including telephone and television amplifiers,
telecaptioners and decoders, pocket talkers, specially adapted telephones, alarm
clocks, doorbells and fire alarms.
CUSTOMERS AND MARKETING
The majority of HEARx hearing aid sales in the fiscal year ended December
31, 1999 resulted from physician referrals and through contracts with
institutional buyers (health maintenance organizations, insurance companies, or
unions). The Company believes that its future growth depends in part on its
ability to inform hearing impaired consumers of the importance of professional
hearing testing and the availability of quality hearing devices. The Company
expects to continue to establish relationships with health organizations and
physicians that promote HEARx to the hearing impaired.
Because HEARx believes that hearing loss is a medical problem and not
simply a retail opportunity the Company encourages all patients to see a
physician prior to purchasing a hearing aid. The Company believes it has
established strong relationships with area physicians, which represent a
significant source of continuing patient referrals. HEARx further maintains
these relationships using its computerized medical reporting system to provide
each referring physician a full report on each of their patient visits to HEARx.
HEARx's marketing plan focuses on educating both physicians and patients
on the need for regular hearing testing and the importance of hearing aids and
other assistive listening devices in improving the quality of life for hearing
impaired individuals. The Company works to further its image as a provider of
highly professional services, quality products, and comprehensive post-sale
consumer education. In connection with its marketing program, HEARx has
developed a direct consumer marketing campaign, which utilizes television,
radio, newspaper and magazine advertisements, direct mailings, and
company-operated free seminars on hearing and hearing loss. Additionally, during
January 2000, the Company formed a strategic marketing partnership with TIME
Magazine ("TIME"). As part of this program, HEARx patients visiting HEARx
centers will be able to subscribe to TIME Regular or the TIME Large print
edition. In addition, HEARx will be offering previous patients an opportunity to
receive as a gift a TIME watch and two free months of either TIME Magazine.
TIME, as part of the agreement, will include a HEARx offer to TIME subscribers
and prospective subscribers residing in zip codes serviced by HEARx. Both of
these groups will receive a discount at HEARx when purchasing a hearing aid in
addition to a free year's subscription of either edition of TIME.
In an effort to supplement its base of sales to and through the
healthcare provider contracts which continue to account for the majority of the
Company's sales, the Company has, since late 1997, developed and refined its
marketing programs oriented toward the non-insured "self pay" patient. In 1999,
the programs have generated self-pay sales approximating 33% of total revenues.
During 1999, the Company did not have sales totaling 10% or more of total
net sales to a single customer. In each of 1998 and 1997, the Company had sales
of 10% or more of total net sales to single customers as follows: approximately
$3.3 million, or 12.7%, to Health Options and $2.7 million, or 11.1%, Oxford
Health.
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OPERATIONS
Company-owned Centers
At the end of 1999, the Company operated a total of 79 centers located in
Florida, New York, New Jersey and in California through HEARx West. In January
of 1999, HEARx closed twelve of its centers in the northeast in response to the
withdrawal of some managed care companies from that region. During 1999, the
Company opened 18 centers in California as part of HEARx West, its joint venture
with the Permanente Federation. The Company's long term goal, where the
population warrants, is to open "clusters" of four to six Company-owned centers
within a city or county in the Company's primary markets in order to take
advantage of certain operational and marketing efficiencies created by having
multiple locations within a particular region. These efficiencies relate
principally to advertising and marketing of the centers as well as to personnel
recruiting and supervision for the centers.
Joint Venture
During August 1998, HEARx formed a joint venture, HEARx West LLC, with
the Permanente Federation LLC to create and operate a network of retail centers
to serve the needs of the hearing impaired principally in California. The joint
venture agreement provides for a 50/50 ownership by HEARx and the Permanente
Federation, with the centers bearing the HEARx name. HEARx is responsible for
the daily operation of the centers, however all clinical and quality issues are
the responsibility of a joint committee comprised of HEARx and Permanente
clinicians.
During 1999, HEARx West centers concentrated on providing hearing aids
and diagnostic audiology testing to Kaiser Permanente's members and self pay
patients in the state of California. During 2000, HEARx West will also seek
contracts to provide services to members of other managed care organizations and
self pay patients. At the end of 1999, HEARx operated 18 HEARx West centers in
southern California. HEARx West has the first right of refusal for any
geographic expansion opportunities for new HEARx centers, excluding expansion in
the states of Florida, New Jersey and Pennsylvania, which shall remain
exclusively with HEARx Ltd.
Managed Care and Institutional Contracts
Since the beginning of 1991, the Company has entered into arrangements
with institutional buyers relating to the provision of hearing care products and
services. HEARx believes that to successfully implement its growth strategy,
contractual relationships with institutional buyers of hearing aids are
essential. These institutions include managed care companies, health maintenance
organizations, insurance companies, senior citizen buying groups and unions. By
developing contractual arrangements for the referral of patients, marketing
costs are reduced, and relationships with local area physicians are enhanced.
Critical to providing care to members of these groups is the availability of
distribution sites, quality control and the standardization of products and
services. The Company believes its system of high quality, uniform centers meets
the needs of the patients and their providers.
HEARx enters into provider agreements with health insurance or managed
care organizations for the furnishing of hearing care on three different bases:
(a) fee for service basis based on a contractual rate offered by HEARx to
provider's members (all paid for by the patient); (b) a per capita basis, which
is a fixed payment per patient per month from the provider to HEARx, determined
by the number of patients to be served and the amount to be paid by the
insurance or managed care organization (the balance is paid by the individual
member); or (c) an encounter basis where the Company is paid a fixed fee by the
insurance or managed care organization for each hearing aid sold (with the
balance paid to HEARx by the individual member).
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RENEWAL OF AGREEMENTS WITH HEALTH INSURANCE AND MANAGED CARE ORGANIZATIONS
The terms of most of these agreements are to be renegotiated annually,
and most of these agreements may be terminated by either party on 90-days notice
at any time. The early termination of or failure to renew the agreements could
adversely affect the operation of the hearing care centers located in the
related market area. In addition, the early termination of or failure to renew
the agreements which provide for payment to the Company on a per capita basis
would cause the Company to lower its estimates of revenues to be received over
the life of the agreements and could have an adverse effect on the Company's
results of operations. The Company is not aware of any likely contract
terminations at this time.
DISTINGUISHING FEATURES
Integral to the success of HEARx's strategy is the strengthening of consumer's
confidence in the hearing care industry and the differentiation of HEARx from
its competitors. To that end, the Company has accomplished several unique
objectives, which are highlighted below.
Joint Commission on Accreditation of Healthcare Organizations (JCAHO)
During 1998, the Company distinguished itself from other hearing care
providers by being awarded a three year accreditation, effective June 2, 1998,
from the Joint Commission on Accreditation of Healthcare Organizations (JCAHO).
To achieve accreditation, the Company was required to meet national standards
addressing the rights and responsibilities of persons enrolled in the network;
organizational ethics; providing a continuum of care; educating and
communicating with enrollees; leadership; management of information; and
improving network performance.
Scientific Advisory Board
HEARx has formed a Scientific Advisory Board consisting of some of the
leading experts in otolaryngology and audiology in an effort to instill consumer
confidence. Each of the five members of the Scientific Advisory Board is a
highly trained professional with extensive experience in the hearing field and
is affiliated with a prestigious university and/or institution. Company
officials consult with members of this Board to keep the Company abreast of
developments in otolaryngology and audiology and for advice as to the Company's
overall business strategy. Additionally, the Scientific Advisory Board meets
annually to review corporate planning and discuss improvements in any of the
services or products which the Company offers. The Scientific Advisory Board
also advises the Company with respect to the introduction of new or improved
services or products, assists the Company in developing and reviewing quality
assurance programs, and advises the Company as to the effect of any proposed or
existing regulatory activity upon customers of the Company.
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The current members of the Scientific Advisory Board and field with
respect to which each consults with the Company are listed below:
Hearing Testing
James Jerger, Ph.D.
Professor of Audiology
University of Texas at Dallas
Dallas, TX
Patient Satisfaction and Outcomes
Lucille Beck, Ph.D.
Director of Audiology and Speech Pathology Services
VA Medical Center
Washington, D.C.
Medical Relations
Bruce J. Gantz, M.D.
Department Chairman of Otolaryngology
University of Iowa Hospitals and Clinics
Iowa City, IA
Hearing Aids and Devices
Charles I. Berlin, Ph.D.
Professor of Otorhinolaryngology & Biocommunications
Louisiana State University
Director, Kresge Hearing Research Laboratory of the South
New Orleans, Louisiana
Professional and Government Relations
Derald Brackmann, M.D.
House Ear Clinic, Inc.
Clinical Professor of Otolaryngology
University of Southern California
Los Angeles, California
Medical Reporting and HEARx Data Link
A computerized medical reporting system gives referring physicians the
results of, and recommended action for, every patient examined by HEARx. To the
Company's knowledge, no other dispenser or audiologist presently offers any
referring physician similar computerized documentation. The Company believes
that as hearing acuity and correction become an expected part of an individual's
health profile, accurate records of past audiological test results,
prescriptions and pathology should be available and accessible to those treating
the patient. To address this need, the Company has developed a centralized
computer data storage and retrieval system which provides information compiled
from each HEARx center visit.
COMPETITION
The hearing care industry is highly fragmented with approximately 11,000
practitioners providing testing and dispensing products and services. Roughly
2,500 of these practitioners are audiologists working for hospitals or
physicians, 2,500 of the practitioners are licensed audiologists in private
practice, and the remaining 6,000 are hearing aid specialists . Industry surveys
estimate that approximately 5% of all hearing aids are sold in physicians'
offices, 60% are
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dispensed by qualified audiologists in private practice, and the remaining 35%
are sold by hearing aid specialists.
Because there are no federal, state or local regulatory or oversight
agencies in the hearing care industry, it is not possible to determine the
precise number of competitors of the Company in every market where the Company
has operations, or the percentage of market share enjoyed by the Company. Based
on 1999 industry-reported sales in the State of Florida, the Company's market
share of hearing aid sales in Florida was approximately 22%.
Most competitors are small retailers generally focusing on the sale of
hearing aids without providing comprehensive audiometric testing and other
professional services. Some competitors are significantly larger distributors,
including: (1) Bausch & Lomb, a hearing aid manufacturer whose distribution
system is through a national network of over 1,000 franchised stores (Miracle
Ear) including 400 located in Sears Roebuck & Co. stores; and (2) Beltone
Electronics Corp., a privately-owned hearing aid manufacturer that distributes
its products primarily through its network of approximately 1000 "authorized"
distributors. A number of these franchises and distributors are located in the
areas the Company serves.
These networks primarily offer hearing aids only and do not provide the
comprehensive diagnostic services, use of audiologist services or other
ancillary products offered by the Company. More importantly, they do not use the
services of audiologists in the majority of their centers. However, these
networks are owned by companies having greater resources than the Company, and
there can be no assurance that one or more of these competitors will not expand
and/or change their operations to capture the market targeted by the Company.
Nor can there be any assurance that the largely fragmented hearing care market
cannot be successfully consolidated by the establishment of co-operatives,
alliances, confederations or the like which would then compete more directly
with HEARx in its marketing strategy.
RELIANCE ON MANUFACTURERS AND QUALIFIED HEARING PROFESSIONALS
Through its hearing care centers, HEARx makes hearing aids available to
patients which are supplied by approximately five major manufacturers, as well
as hearing enhancement devices manufactured by other companies. The Company
relies on these manufacturers to supply such products, and a significant
disruption in supply from any or all of these manufacturers could adversely
affect the Company's business. In the event of a disruption of supply from one
or more of the Company's current suppliers, the Company could obtain comparable
products from other manufacturers. Few manufacturers offer dramatic product
differentiation. The Company has not experienced any significant disruptions in
supply in the past.
The Company currently employs 150 licensed hearing professionals, of
which 120 are audiologists. The inability of the Company to attract and retain
qualified licensed hearing professionals would reduce the Company's ability to
distinguish itself from competing networks of hearing aid retailers and thus
adversely affect its business. Management believes that it will be able to
attract and retain qualified licensed hearing professionals sufficient to staff
its centers for the foreseeable future.
REGULATION
Federal
The practice of audiology and the dispensing of hearing aids are not
presently regulated on the Federal level. The United States Food and Drug
Administration ("FDA") is responsible for monitoring the hearing care industry.
Currently there are only two regulations affecting the sale of hearing aids: 1)
a physician's review and 2) a return policy. The FDA requires first time hearing
aid purchasers to receive medical clearance from a physician prior to purchase;
however, patients
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may sign a waiver in lieu of a physician's examination. In 1993, the State of
Vermont petitioned the FDA to drop the waiver provision and mandate a physician
visit. A final decision has never been generated. A majority of the patients in
HEARx centers are members of the managed care or institutional providers with
whom HEARx has contracts to provide hearing care. Some of these organizations
require a physician referral. Consequently, a new federal or state physician
referral mandate should not have an adverse impact on the Company's operations.
The FDA has mandated that states adopt a return policy for consumers offering
them the right to return their products, generally within 3-30 days, HEARx
offers its customers a full 30-day period and up to a 60-day period for patients
who participate in the free HEARx Educational Listening Program (H.E.L.P.)
family hearing counseling program.
In addition, because the Company's centers accept Medicare and Medicaid
patients, the centers must maintain their eligibility as Medicare/Medicaid
providers and must comply with related federal anti-fraud, anti-kickback and
other applicable regulations. Federal laws prohibit the payment of remuneration
("kickbacks") in return for a physician referring a Medicare or Medicaid
patient, and those laws limit physicians from referring patients to providers in
which they have a financial interest. The Company believes that none of its
managed care or other provider contracts or its relationships with referring
physicians are violative of the anti-kickback statute.
The Company cannot predict the effect of future changes in federal laws,
including changes which may result from proposals for federal health care reform
legislation being considered by the U.S. Congress, or the impact that changes in
existing federal laws or in the interpretation of those laws might have on the
Company. The Company believes it is in material compliance with all existing
federal regulatory requirements.
State
Generally, state regulations, where they exist, are concerned primarily
with the formal licensure of audiologists and of those who dispense hearing aids
and with practices and procedures involving the fitting and dispensing of
hearing aids. There can be no assurance that regulations do not exist in
jurisdictions in which the Company plans to open centers or will not be
promulgated in states in which the Company currently operates centers which may
have a material adverse effect upon the Company. Such regulations might include
stricter licensure requirements for dispensers of hearing aids, inspections of
centers for the dispensing of hearing aids and the regulation of advertising by
dispensers of hearing aids. The Company knows of no current or proposed state
regulations with which it, as currently operated, could not comply.
The Company believes it is in material compliance with all applicable
state regulatory requirements.
PRODUCT AND PROFESSIONAL LIABILITY
In the ordinary course of its business, HEARx may be subject to product
and professional liability claims alleging the failure of, or adverse effects
claimed to have been caused by, products sold or services provided by the
Company. The Company maintains insurance at a level which the Company believes
to be adequate. A successful claim in excess of the policy limits of the
Company's liability insurance could adversely affect the Company. As the
distributor of products manufactured by others, the Company believes it would
properly have recourse against the manufacturer in the event of a product
liability claim; however, there can be no assurance that recourse against a
manufacturer by the Company would be successful or that any manufacturer will
maintain adequate insurance or otherwise be able to pay such liability.
SEASONALITY
The Company is not generally affected by seasonality.
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EMPLOYEES
At December 31, 1999, HEARx Ltd. had approximately 360 full-time
employees, of which 60 were employed by HEARx West.
The operations of the Company are dependent in large part upon the
efforts of Paul A. Brown, M.D., Chairman of the Board and Chief Executive
Officer, and Stephen J. Hansbrough, President, Chief Operating Officer and
Director. The loss of the services of Dr. Brown or Mr. Hansbrough could
adversely affect the conduct and operation of the Company's business. The
Company purchased a "key man" insurance policy on Dr. Brown's life in the amount
of $3,000,000 for the benefit of the Company.
ITEM 2. PROPERTIES
HEARx's corporate offices are located in 13,000 square feet of space in
West Palm Beach, Florida. The lease is for five years and expires May 2001.
As of December 31, 1999, the Company operated 33 centers in Florida, 15
in New Jersey and 13 in New York and 18 HEARx West centers in California. All of
the locations are leased for one to ten year terms pursuant to generally
non-cancelable leases (with renewal options in some cases). Each center consists
of between 700 and 3,000 square feet with annual base rents ranging from
approximately $8,700 to $76,000. In January 1999, the Company closed twelve
centers in the northeast. The Company has successfully negotiated and completed
lease buy-outs, exercised early termination options or subleases on ten of the
twelve properties.
The Company believes its facilities are adequate and suitable for its
current operations.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information as of the date hereof with
respect to the Company's executive officers. Each of Dr. Brown and Mr.
Hansbrough are serving pursuant to employment agreements with 5 year terms. Mr.
Peklenk has been appointed to a term which will expire at the annual meeting of
Board of Directors held at the time of the 2000 Annual Meeting of Stockholders,
or at the time his successor is duly elected and qualified:
NAME AND POSITION AGE FIRST SERVED AS OFFICER
----------------- --- -----------------------
Paul A. Brown, M.D. 61 1986
Chairman of the Board
Chief Executive Officer
Stephen J. Hansbrough 52 1993
President, Chief Operating
Officer and Director
James W. Peklenk 54 1996
Vice President - Finance
and Chief Financial Officer
There are no family relationships among any of the executive officers and
directors of the Company.
Paul A. Brown, M.D., holds an A.B. from Harvard College and a M.D. from
Tufts University School of Medicine. From 1970 to 1984, Dr. Brown was Chairman
of the Board and Chief Executive Officer of MetPath Inc. ("MetPath"), a New
Jersey-based corporation offering a full range of clinical laboratory services
to physicians and hospitals, which he founded in 1967 while a resident in
pathology at Columbia Presbyterian Medical Center in New York City. MetPath
developed into the largest clinical laboratory in the world with over 3,000
employees and was listed on the American Stock Exchange prior to being sold to
Corning Glass Works in 1982. Dr. Brown founded HEARx in 1986. Dr. Brown is
formerly Chairman of the Board of Overseers of Tufts University School of
Medicine, an Emeritus member of the Board of Trustees of Tufts University, a
member of the Visiting Committee of Boston University School of Medicine and
part-time lecturer in pathology at Columbia University College of Physicians and
Surgeons.
Stephen J. Hansbrough, President, Chief Operating Officer and Director,
joined HEARx in December 1993. Mr. Hansbrough has an extensive background in the
retail arena. He served as Chairman and Chief Executive Officer of Dart Drug
Stores until 1988. Subsequently, he was an independent consultant specializing
in turn-around and start-up operations, primarily in the retail field, until
joining HEARx in 1993.
James W. Peklenk, Vice President - Finance and Chief Financial Officer,
joined the Company in November 1995 as Controller and became Vice President
Finance and Chief Financial Officer in June 1996. He has a B.S. in Accounting
from the University of Louisville. From 1991 until joining HEARx, Mr. Peklenk
was Vice President, Finance/CFO, for Shooters International, Inc., an
international restaurant operator and franchiser of Shooters Waterfront Cafes.
Prior thereto , Mr. Peklenk was Director of Internal Audit for Chi-Chi's Mexican
Restaurants, and before that an Audit Partner with the international accounting
firm of Grant Thornton.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the
Common Stock as reported by the American Stock Exchange (AMEX), ticker symbol
EAR, for the fiscal quarters indicated. On June 30, 1999 the Company effectuated
a one for ten reverse common stock split. The reverse stock split and a
reduction in the authorized shares of common stock to twenty million was
approved at the June 7, 1999 Annual Meeting of Stockholders. Each stockholder of
ten shares of common stock on June 30, 1999 was entitled to one share of common
stock in connection with the reverse split. A cash payment was paid in lieu of
fractional shares. Accordingly, the Company has restated all share and per share
data for all periods presented to reflect the change in capital structure.
<TABLE>
<CAPTION>
Fiscal Quarter Common Stock
-------------- ------------
High Low
---- ---
<S> <C> <C>
1998
----
First $ 15 5/8 $15
Second 15 5/8 14 7/16
Third 8 3/4 8 1/8
Fourth 6 1/4 5 5/8
1999
----
First $ 7 1/2 $ 5
Second 5 5/8 4 3/8
Third 5 3/8 4 3/8
Fourth 4 7/8 3 9/16
</TABLE>
As of March 21, 2000, there were 1,927 holders of record of the Common
Stock. The Company estimates that included within the holders of record are
approximately 17,300 beneficial owners of the Common Stock.
Dividend Policy
HEARx has never paid and does not anticipate paying any dividends on the
Common Stock in the foreseeable future but intends to retain any earnings for
use in the Company's business operations.
Unregistered Sale of Securities
During 1999, 4,209 shares of the Company's 1997 Preferred Stock were
converted into 1,098,906 shares of the Company's Common Stock. The Preferred
Stock was initially issued to certain "accredited investors" pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act of
1933 and Rule 506 of Regulation D. The shares issued upon the conversion were
also issued pursuant to Section 4(2) of the securities Act of 1933.
During 1999, 185 shares of the Company's 1998 Preferred Stock were
converted into 44,712 shares of the Company's Common Stock. The Preferred Stock
was initially issued to certain "accredited investors" pursuant to the exemption
from registration contained in Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D. The shares issued upon conversion were also issued
pursuant to Section 4(2) of the securities Act of 1933.
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SHAREHOLDER RIGHTS PLAN
On December 14, 1999, the Board of Directors approved the adoption of a
Shareholder Rights Plan, in which a dividend of one preferred share purchase
right ( a "Right") for each outstanding share of Common Stock was declared,
payable to the stockholders of record on December 31, 1999. The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
Common Stock or announces a tender offer which would result in ownership of 15%
or more of the Common Stock. The Rights entitle the holder to purchase one
one-hundredth of a share of Series H Junior Participating Preferred Stock at an
exercise price of $28.00 and will expire on December 31, 2009.
Following the acquisition of 15% or more of the Company's Common Stock by
a person or group without the prior approval of the Board of Directors, the
holders of the Rights (other than the acquiring person) will be entitled to
purchase shares of Common Stock (or Common Stock equivalents) at one-half the
then current market price of the Common Stock, or at the election of the Board
of Directors, to exchange each Right for one share of the Company's Common Stock
(or Common Stock equivalent). In the event of a merger or other acquisition of
the Company without the prior approval of the Board of Directors, each Right
will entitle the holder (other than the acquiring person), to buy shares of
common stock of the acquiring entity at one-half of the market price of those
shares. The Company will be able to redeem the Rights at $0.01 per Right at any
time until a person or group acquires 15% or more of the Company's Common Stock.
The Series H Junior Participating Preferred Stock is subject to the
rights of the holders of any shares of any series of preferred stock of the
Company ranking prior and superior to the Series H Junior Participating
Preferred Stock with respect to dividends. The holders of shares of Series H
Junior Participating Preferred in preference to the holders of shares of Common
Stock, and any other junior stock, shall be entitled to receive dividends, when,
as and if declared by the Board of Directors out of funds legally available
therefore.
14
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the consolidated financial statements and notes thereto and the
following Management's Discussion and Analysis of Financial Condition and
Results of Operations. The financial data set forth on the next two pages have
been derived from the audited consolidated financial statements of the Company:
15
<PAGE> 15
OPERATING STATEMENT DATA:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
December 31 December 25 December 26
1999(1) 1998 1997
------- ---- ----
<S> <C> <C> <C>
Net Revenues $ 47,686,868 $ 27,493,849 $ 24,213,879
Total costs and expenses 52,038,441 39,222,091(2) 33,417,880
------------ ------------ -------------
Loss before equity in loss of joint venture 4,351,573) (11,728,242) (9,204,001)
Minority Interest/Equity in loss of joint venture 347,677 (615,420) -
Dividends on preferred stock (821,387) (587,893) (1,992,123)
------------ ------------ -------------
Net loss applicable to common stockholders $ (4,825,283) $(12,931,555) $(11,196,124)
============= ============= =============
Loss per common share:
Basic and diluted, including dividends on
preferred stock $ (0.45) $ (1.28) $ (1.25)
============= ============ =============
Weighted average
number of common shares
outstanding 10,775,006 10,126,979 8,960,503
============= ============ =============
Cash dividends per common
Share None None None
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
December 27 December 29
1996 1995
---- ----
<S> <C> <C>
Net Revenues $ 18,490,561 $11,170,068
Total costs and expenses 26,349,540 13,383,521
------------- -------------
Loss before equity in loss of joint venture (7,858,979) (2,213,453)
Minority Interest/Equity in loss of joint venture - -
Dividends on preferred stock (10,036,507) -
------------- -------------
Net loss applicable to common stockholders $(17,895,486) $(2,213,453)
============= ============
Loss per common share:
Basic and diluted, including dividends on
preferred stock $ (2.51) $ (0.49)
============= ============
Weighted average
number of common shares
outstanding 7,119,712 4,516,409
============ ==========
Cash dividends per common
Share None None
==== ====
</TABLE>
(1) As discussed in Note 1 to the Consolidated Financial Statements, during 1999
the Company's Consolidated Financial Statements include the accounts of
HEARx West, its 50% subsidiary.
(2) During December 1998, the Company recorded a restructure charge of
$2,233,800 in connection with the closing of 12 centers in the northeast in
January 1999.
16
<PAGE> 16
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
As of
December 31 December 25 December 26 December 27 December 29
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $22,879,751 $25,208,317 $28,359,547 $26,627,484 $6,450,628
Working capital (deficit) 938,815 7,614,042 13,136,147 12,456,391 (1,317,179)
Long-term debt, net of
current portion 322,332 123,316 177,897 230,258 2,316,300
Book value per share (1) 0 .18 0 .39 1.60 2.30 (1.20)
</TABLE>
(1) represents total stockholders' equity less aggregate liquidation preferences
on preferred stock, divided by shares of common stock outstanding at year
end.
17
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
AND ANALYSIS OF FINANCIAL CONDITION
GENERAL
The Company's strategy for continuing and accelerating center sales growth and
market penetration includes both positioning the Company as the leading provider
of hearing care to the managed care marketplace, and aggressively advertising to
the non-insured self-pay market.
HEARx intends, as its long term goal, to establish a nationwide network of
hearing care centers, located in the metropolitan areas or regions with
concentrations of elderly consumers who are more likely to need the Company's
products or services. The Company is currently expanding its hearing care center
network through HEARx West LLC. The joint venture agreement provides for a 50/50
ownership by the Company and the Permanente Federation of HEARx West, with the
centers bearing the HEARx name. The initial opening of 15 HEARx West centers in
Southern California was completed by January 6, 1999.
At the center level, HEARx is profitable in Florida where sales for the year
ended December 31, 1999 were up approximately 31% over the comparable period in
1998. Also during 1999, the California centers, operating under HEARx West were
profitable at the center level. In the Northeast market, however, centers have
yet to generate enough revenue to reach profitability. In order to reduce losses
in response to the withdrawal of certain managed care companies from the
Northeast region, the Company closed 12 of its most severely impacted centers in
this region during January 1999. A restructure reserve of $1,450,739 was
established at the end of fiscal 1998 to cover the costs of closing the centers,
including lease termination, employee severance and other costs. The Company
believes the remaining reserve of $214,656 at December 31, 1999 is adequate to
cover remaining costs.
Effective January 1, 2000, Florida Health Choice of southeast Florida and United
Healthcare of New Jersey discontinued providing hearing care benefits to
Medicare participants. Total revenue generated from these plans in 1999 was
approximately $692,000. In addition, several other insurance companies, which
the Company has contracts with, significantly changed their contract benefits or
service areas. The Company believes these changes will not have a material
effect on the Company's financial condition or results of operations. The
Company also believes that the loss of any single managed care contract will not
have a long term material adverse affect on its financial condition or results
of operations.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Prior to March 1999, HEARx Ltd. accounted for its investment in HEARx West using
the equity method because HEARx did not control HEARx West due to certain
provisions in the joint venture agreement. During 1999, as a result of
amendments to the agreement, HEARx obtained control of HEARx West. Accordingly,
during 1999, HEARx has included the financial position and results of operations
of HEARx West in its consolidated financial statements.
Net revenues increased $20,193,019, or 73%, to $47,686,868 in 1999 from
$27,493,849 in 1998. The consolidation of HEARx West revenues contributed
approximately $12,446,000 to the increase. The Company's aggressive advertising
campaign during 1999 yielded revenues from self-pay patients of approximately
$16,457,000, which was partially offset by the closing of the 12 northeast
centers in January 1999, which accounted for $1,228,000 of 1998 revenues.
18
<PAGE> 18
Cost of products sold increased $6,418,226, or 78%, to $14,611,284 in 1999 from
$8,193,058 in 1998. Approximately $4,452,000 of the increase is a result of the
consolidation of HEARx West. The remainder of the increase is attributable to
the increase in sales from existing centers. The cost of products sold as a
percent of net revenues, which was 31% and 30 % for 1999 and 1998, respectively,
fluctuates from period to period depending generally upon the sales mix and
sales promotions. However, HEARx West provided a higher cost of sales percentage
at 36%, because a fixed discount has been granted to Kaiser Plan members.
Center operating expenses increased $6,406,335, or 32%, to $26,376,830 in 1999
from $19,970,495 in 1998. Approximately $6.3 million of the increase is
attributable to the now consolidated center operating expenses of HEARx West.
Consolidated center operating expenses as a percent of revenue decreased in 1999
to 55% from 73% in 1998, which is generally attributable to the increase in
sales. Increased advertising accounted for approximately $1,428,000, or 22% of
the increase, offset by a decrease in rent expense of approximately $619,000 or
10% of the increase resulting from the closing of the 12 northeast centers in
January 1999.
Consolidated general and administrative expenses increased 33% or $2,118,002 to
$8,601,723 in 1999 from $6,483,721 in 1998, primarily as the result of the
consolidation of HEARx West expenses of approximately $1.7 million. Consolidated
general and administrative expenses as a percent of net revenue decreased to 18%
in 1999 from 24% in 1998.
Depreciation and amortization expense increased $142,423, or 6%, to $2,420,891
in 1999 from $2,278,468 in 1998. An increase of $451,032 provided by HEARx West
was offset by a reduction of $308,609 primarily attributable to the closing of
twelve centers in the Northeast in January 1999.
The net loss before dividends on preferred stock was $4,003,896, representing a
decrease in loss of $8,339,766 or 68% from 1998 net losses before dividends on
preferred stock. The net loss for HEARx West was $695,354 in 1999.
1998 COMPARED TO 1997
Net revenues increased $3,279,970, or 14%, to $27,493,849 in 1998 from
$24,213,879 in 1997. The increase in net revenues primarily results from the
increase in the Company's non-insured "self-pay" business and the effect of new
contracts signed with major health insurers.
Cost of products sold increased $1,229,276, or 18%, to $8,193,058 in 1998 from
$6,963,782 in 1997. The increase in the cost of products sold is primarily
attributable to the increase in net sales from new and existing centers. The
cost of products sold as a percent of net revenues fluctuates from period to
period depending upon the sales mix and sales promotions.
Center operating expenses increased $2,196,556, or 12-%, to $19,970,495 in 1998
from $17,773,939 in 1997. This increase is partially due to an increase in
advertising expense of $316,411, over the comparable period of 1997. The
remaining increase of $1,880,145, or 11%, is attributable to the increase in the
number of centers operating during 1998 (75) compared to 1997 (73); one time
charges for the relocation of three southeast Florida centers to larger
facilities during 1998; and an increase in center wages in the southeast Florida
region to manage increased sales levels.
General and administrative expenses decreased $145,242, or 2%, to $6,483,721 in
1998 from $6,628,963 in 1997.
19
<PAGE> 19
Depreciation and amortization expense increased $285,716, or 14.3%, to
$2,278,468 in 1998 from $1,992,752 in 1997. The increase was attributable to the
depreciation and amortization of leasehold improvements, medical and computer
equipment, and furniture associated with the centers opened, acquired, relocated
and remodeled in southeast Florida in 1998.
Equity in loss of joint venture increased by $615,420 representing the Company's
share of the loss of HEARx West for the period from inception on August 10, 1998
to the end of the fiscal year on December 25, 1998. HEARx West's net loss
included a management fee to HEARx Ltd. of $466,000, as well as non-recurring
pre-operating costs expensed as incurred. These costs include recruiting, new
employee training, market research, licensing and organizational fees. The
initial opening of 15 HEARx West centers in Southern California was completed by
January 6, 1999.
FOURTH QUARTER ADJUSTMENTS - 1998
In order to reduce losses in the northeast region, and in response to the
withdrawal of certain managed care companies from the northeast region, the
Company closed 12 of its most severely impacted centers in January 1999. Those
centers had a combined loss for the year ended December 25, 1998 of
approximately $1.9 million. A restructure charge of $2,233,800 was recorded in
the fourth quarter of 1998 to reflect the costs of closing the centers as
detailed below.
<TABLE>
<CAPTION>
<S> <C>
Lease termination costs $1,304,400
Employee severance 81,800
Write down of Fixed Assets to net realizable value 783,100
Other 64,500
-----------
Total Restructure Charge $2,233,800
===========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $6,675,227 to $938,815 as of December 31, 1999 from
$7,614,042 as of December 25, 1998. This decrease is primarily the result of net
cash used by operating activities including a net loss from operations of
approximately $4.0 million and a net increase of approximately $4.0 million in
accounts and notes receivable, offset by an increase of approximately $2.5
million in accounts payable and accrued expenses related to the growth in
operations of existing centers and the 18 new centers of HEARx West. The Company
believes that its current working capital and revenues from operations are
sufficient to support the Company's foreseeable capital requirements and
operating needs through 2000 in accordance with its strategic plan, although
there can be no assurance that other cash needs will not arise.
Net cash used by operating activities decreased from $9,119,910 in 1998, to
$2,876,171 in 1999. The decrease in cash used by operating activities was
primarily the result of the reduction of operating losses of approximately $8.3
million.
Net cash provided by investing activities increased from $2,056,732 in 1998, to
$5,418,632 in 1999. Net funds from the purchase and sale or maturity of
investments increased to $6,212,156 in 1999 from $3,149,240 in 1998, offset by
an increase in purchases of property and equipment of $309,193 from 1998 to
1999.
Net cash from financing activities decreased from cash provided by financing
activities of $6,068,451 in 1998 to cash used of $2,335,385 in 1999. This
decrease was primarily the result of funds in the amount of $6,784,019 from a
preferred stock offering in 1998. In addition, during 1999 funds in the amount
of $1,820,424 were used to repurchase 348,229 shares of the Company's Common
Stock.
20
<PAGE> 20
The Company has historically been successful in raising capital when needed
(most recently in 1998), and continues to have contact with investment bankers
and lending institutions who are desirous of providing capital and financing to
the Company if needed. There can be no assurance, however, that such capital
will be available on favorable terms or at all when the Company's needs arise.
Except for historical information provided in this discussion and analysis, the
discussion includes forward looking statements, including those concerning the
shift of patients from Medicare to managed care and the effect thereof on the
Company; the intentions of the Company concerning the uninsured, "self-pay"
patient; the Company's goals of establishing a nationwide center network; the
adequacy of remaining reserves for the center closings; current working capital
and revenues from operations being sufficient to support the Company's capital
needs; and the year 2000 problem. Such statements involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include
industry and market conditions, especially those affecting managed health care;
the accuracy of the Company's assumptions concerning reserves; unforeseen
capital requirements; trends in market sales, and the success of the joint
venture with The Permanente Federation, as well as those risks associated with
the Company's business described in the Company's filings with the Securities
and Exchange Commission, including the Form S-3 resale registration statement
dated September 29, 1998.
21
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
22
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Financial Statements
Financial Statements:
Report of Independent Certified Public Accountants 24
Consolidated Balance Sheets at December 31, 1999 and December 25, 1998 25
Consolidated Statements of Operations for the years ended December 31, 1999,
December 25, 1998, and December 26, 1997 26
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, December 25, 1998 and
December 26, 1997 27-28
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
December 25, 1998, and December 26, 1997 29-30
Notes to Consolidated Financial Statements 31-45
Financial Statement Schedule:
For the years ended December 31, 1999, December 25, 1998 and
December 26, 1997
II Valuation and Qualifying Accounts 46
</TABLE>
23
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
HEARx Ltd.
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of HEARx Ltd. as of
December 31, 1999 and December 25, 1998, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. We have also audited the
accompanying schedule. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HEARx Ltd. at
December 31, 1999 and December 25, 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with generally accepted accounting principles.
Also in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.
West Palm Beach, Florida BDO Seidman, LLP
March 8, 2000
24
<PAGE> 24
HEARx Ltd.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
December 31, December 25,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,857,187 $ 2,650,111
Investment securities (Note 2) 900,000 7,170,780
Accounts and notes receivable, less allowance for
doubtful accounts of $ 535,609 and $588,509 (Note 8) 7,027,536 4,087,912
Inventories 551,460 529,427
Prepaid expenses 531,169 338,868
Other Assets 349,391 500,888
------------ ------------
Total current assets 12,216,743 15,277,986
PROPERTY AND EQUIPMENT - NET (Notes 3, 4 & 10) 8,492,708 7,100,530
INVESTMENT AND ADVANCES IN HEARX WEST LLC (Note 8) - 1,406,900
DEPOSITS AND OTHER 2,170,300 1,422,901
------------ ------------
$ 22,879,751 $ 25,208,317
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,202,010 $ 4,126,379
Restructure reserve (Note 10) 214,656 1,450,739
Accrued salaries and other compensation 1,562,510 695,892
Current maturities of long term debt (Note 3) 294,993 639,664
Dividends payable (Notes 5B and 5C) 1,003,759 751,270
------------ ------------
Total current liabilities 11,277,928 7,663,944
------------ ------------
LONG TERM DEBT, LESS CURRENT MATURITIES (Note 3) 322,332 123,316
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4,6,8,10 & 11)
STOCKHOLDERS' EQUITY: - -
Non-redeemable preferred stock:
(Aggregate liquidation preference $ 9,318,757 and
$13,460,270) $1 par, 2,000,000 shares authorized (Note 5)
1998 Convertible 7,315 & 7,500 shares outstanding 7,315 7,500
1997 Convertible 1,000 & 5,209 shares outstanding 1,000 5,209
------------ ------------
Total preferred stock 8,315 12,709
Common stock; $.10 par; 20,000,000 and 130,000,000
shares authorized; 11,547,337 & 104,023,643 shares
issued (Notes 5 & 6) 1,154,734 10,402,364
Additional paid-in capital 87,307,886 77,531,270
Accumulated deficit (75,083,251) (70,257,968)
Accumulated other comprehensive income - 58,263
Unamortized deferred compensation (37,813) (75,625)
Treasury stock, at cost:388,760 & 405,311 common shares (2,070,380) (249,956)
------------ ------------
Total stockholders' equity 11,279,491 17,421,057
------------ ------------
$ 22,879,751 $ 25,208,317
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
25
<PAGE> 25
HEARx Ltd.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
NET REVENUE $ 47,686,868 $ 27,493,849 $ 24,213,879
COSTS AND EXPENSES:
Cost of products sold 14,611,284 8,193,058 6,963,782
Center operating expenses 26,376,830 19,970,495 17,773,939
General and administrative expenses 8,601,723 6,483,721 6,628,963
Depreciation and amortization 2,420,891 2,278,468 1,992,752
Interest expense (Note 8) 27,713 62,492 58,444
Restructure charge (Note 10) - 2,233,857 -
------------- ------------- -------------
Total costs and expenses 52,038,441 39,222,091 33,417,880
------------- ------------- -------------
LOSS BEFORE EQUITY IN LOSS OF JOINT VENTURE (4,351,573) (11,728,242) (9,204,001)
MINORITY INTEREST 347,677 - -
EQUITY IN LOSS OF JOINT VENTURE - (615,420) -
------------- ------------- -------------
NET LOSS (4,003,896) (12,343,662) (9,204,001)
DIVIDENDS ON PREFERRED STOCK:
Deemed dividends (Notes 5B and 5C) - - (1,500,000)
Dividends (821,387) (587,893) (492,123)
------------- ------------- -------------
Total dividends on preferred stock (821,387) (587,893) (1,992,123)
------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDER $ (4,825,283) $(12,931,555) $(11,196,124)
============= ============= =============
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED (NOTE 1) $ (.45) $ (1.28) $ (1.25)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (NOTE 1) 10,775,006 10,126,979 8,960,503
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE> 26
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 25, 1998
----------------- -----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
PREFERRED STOCK:
Balance, beginning of year 12,709 $ 12,709 7,115 $ 7,115
Issuance of preferred stock - - 7,500 7,500
Conversion of preferred stock (4,394) (4,394) (1,906) (1,906)
------------ -------------- ------------ ------------
Balance, end of year 8,315 $ 8,315 12,709 $ 12,709
============ ============= ============ =============
COMMON STOCK:
Balance, beginning of year 104,023,643 $ 10,402,364 99,211,436 $ 9,921,144
Exercise of warrants - - 1,316,848 131,684
Conversion of preferred stock 5,414,400 541,440 3,265,384 326,538
Exercise of employee stock options 13,600 1,360 104,975 10,498
Exercise of stock options by consultants - - 50,000 5,000
Exercise of stock options by Board of Directors - - 75,000 7,500
Issuance of restricted stock to officers - - - -
Retirement of treasury stock - - - -
Settlement of litigation - - - -
Reverse stock split (97,904,306) (9,790,430) - -
------------ ------------- ------------ ------------
Balance, end of year 11,547,337 $ 1,154,734 104,023,643 $10,402,364
============ ============= ============ =============
TREASURY STOCK:
Balance, beginning of year (405,311) $ (249,956) - $ -
Purchase of treasury stock (1,921,239) (1,820,424) (405,311) (249,956)
Reverse Stock Split 1,937,790 - - -
Retirement of treasury stock - - - -
------------ ------------- ------------ ------------
Balance, end of year (388,760) $ (2,070,380) (405,311) $ (249,956)
============ ============= ============ =============
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 77,531,270 $70,646,172
Issuance of preferred stock - 6,936,472
Deemed dividend on preferred stock issuance - -
Conversion of preferred stock 31,852 (155,845)
Exercise of warrants - (24,805)
Exercise of employee stock options 1,500 43,620
Exercise of stock options by consultants - 45,000
Exercise of stock options by board of directors - 40,256
Reverse stock split 9,743,264 -
Retirement of treasury stock - -
Vesting of restricted stock - 400
Settlement of litigation - -
------------- ------------
Balance, end of year $ 87,307,886 $77,531,270
============= ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 26, 1997
-----------------
SHARES AMOUNT
------ ------
<S> <C> <C>
PREFERRED STOCK:
Balance, beginning of year 4,950 $ 4,950
Issuance of preferred stock 10,000 10,000
Conversion of preferred stock (7,835) (7,835)
------------- -------------
Balance, end of year 7,115 $ 7,115
============ ============
COMMON STOCK:
Balance, beginning of year 81,969,233 $ 8,196,923
Exercise of warrants 11,460,233 1,146,023
Conversion of preferred stock 5,817,586 581,759
Exercise of employee stock options 205,250 20,525
Exercise of stock options by consultants 25,000 2,500
Exercise of stock options by Board of Directors - -
Issuance of restricted stock to officers 50,000 5,000
Retirement of treasury stock (250,000) (25,000)
Settlement of litigation (65,866) (6,586)
Reverse stock split - -
------------ ------------
Balance, end of year 99,211,436 $ 9,921,144
============ ============
TREASURY STOCK:
Balance, beginning of year (250,000) $ (625,000)
Purchase of treasury stock - -
Reverse Stock Split - -
Retirement of treasury stock 250,000 625,000
------------ ------------
Balance, end of year - $ -
============ ============
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 59,996,480
Issuance of preferred stock 9,695,519
Deemed dividend on preferred stock issuance 1,500,000
Conversion of preferred stock (950,732)
Exercise of warrants 752,129
Exercise of employee stock options 76,639
Exercise of stock options by consultants 22,500
Exercise of stock options by board of directors -
Reverse stock split -
Retirement of treasury stock (600,000)
Vesting of restricted stock 147,050
Settlement of litigation 6,587
-------------
Balance, end of year $ 70,646,172
=============
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE> 27
HEARx Ltd.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1999 December 25, 1998 December 26, 1997
----------------- ----------------- -----------------
Amount Amount Amount
------ ------ ------
<S> <C> <C> <C>
ACCUMULATED DEFICIT:
Balance, beginning of year $(70,257,968) $(57,326,413) $ (46,130,289)
Net loss for the year (4,003,896) (12,343,662) (9,204,001)
Deemed dividends on - - (1,500,000)
Preferred stock issuance
Preferred stock dividends (821,387) (587,893) (492,123)
--------------- -------------- ---------------
Balance, end of year $ (75,083,251) $ (70,257,968) $ (57,326,413)
=============== ============== ===============
UNAMORTIZED DEFERRED COMPENSATION:
Balance, beginning of year $ (75,625) $ (113,438) $ -
Issuance of restricted stock to officer - - (147,050)
Amortization 37,812 37,813 33,612
--------------- -------------- ---------------
Balance, end of year $ (37,813) $ (75,625) $ (113,438)
=============== ============== ===============
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year $ 58,263 $ 20,156 $ 32,121
Unrealized gains on securities net of
reclassification adjustment (see
disclosure) (58,263) 38,107 (11,965)
--------------- -------------- ---------------
Balance, end of year $ - $ 58,263 $ 20,156
=============== ============== ===============
COMPREHENSIVE INCOME (LOSS):
Net loss for the year $(4,003,896) $(12,343,662) $(9,204,001)
Other comprehensive income (Loss) 58,263) 38,107 (11,965)
--------------- -------------- ---------------
Comprehensive income(loss) $ (4,062,159) $ (12,305,555) $ (9,215,966)
=============== ============== ===============
Disclosure of reclassification amount:
Unrealized holding gains (losses) arising
during period $ (84,022) $ 50,763 $ (11,965)
Less: reclassification adjustment for
gains (losses) included in net loss 25,759 (12,656) -
--------------- -------------- ---------------
Net unrealized gains (losses) on securities $(58,263) $ 38,107 $ (11,965)
=============== ============== ===============
</TABLE>
See notes to accompanying consolidated financial statements
28
<PAGE> 28
HEARx Ltd.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
------------ -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,003,896) $(12,343,662) $ (9,204,001)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,420,891 2,278,468 1,992,752
Write down of property and equipment - 783,118 -
Provision for loss on accounts receivable 568,135 553,467 243,178
Loss on disposition of equipment 40,325 60,238 30,378
Minority interest (347,677) - -
Changes in assets and liabilities, net of
effect of consolidating HEARx West in 1999
(Increase) decrease in:
Accounts and notes receivable (4,049,849) (1,384,669) (477,896)
Inventories (21,265) (6,072) (159,377)
Prepaid expenses (132,967) (26,002) (67,866)
Other assets 165,372 (2,082,863) (593,967)
Increase (decrease) in:
Accounts payable 2,875,246 991,620 (673,257)
Accrued expenses (390,486) 2,056,447 855,584
------------ -------------- --------------
Net cash used in operating activities (2,876,171) (9,119,910) (8,054,472)
------------ -------------- --------------
Cash flow from investing activities:
Purchase of property and equipment (1,450,107) (1,140,914) (2,858,741)
Proceeds from sale of equipment - 48,406 -
Purchase of investments (2,750,000) (24,287,452) (29,327,413)
Proceeds from maturities of investments 8,962,516 27,436,692 30,969,560
Net cash from consolidating HEARx West 656,223 - -
------------ -------------- --------------
Net cash provided (used) by investing
Activities 5,418,632 2,056,732 (1,216,594)
------------ -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of:
Long-term debt 35,250 - 406,907
Principal payments:
Long-term debt (505,905) (465,612) (160,246)
Acquisition of treasury stock (1,820,424) (249,956) -
Proceeds from issuance of capital stock,
net of offering costs (44,306) 6,784,019 10,857,806
------------ -------------- --------------
Net cash (used) provided by financing
activities (2,335,385) 6,068,451 11,104,467
------------ -------------- --------------
Net increase(decrease) in cash and cash
equivalents 207,076 (994,727) 1,833,401
Cash and cash equivalents at beginning of
year 2,650,111 3,644,838 1,811,437
------------ -------------- --------------
Cash and cash equivalents at end of year $ 2,857,187 $ 2,650,111 $ 3,644,838
============ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE> 29
HEARx LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------
December 31, December 25, December 26,
1999 1998 1997
-------------- --------------- -----------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 7,419 $ 8,836 $ 11,956
============== =============== =================
Supplemental schedule of non-cash investing and financing activities
Deemed dividends $ - $ - $ 1,500,000
Preferred stock dividend paid upon conversion in
kind by issuance of additional common stock 568,898 168,787 112,489
Issuance of note payable and assumption of
accounts payable in exchange for customer list
and equipment 482,496 - -
Issuance of Common Stock for services - - 17,000
Issuance of Common Stock to employees 2,860 54,118 97,164
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE> 30
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
HEARx Ltd. ("HEARx" or "the Company"), a Delaware corporation, was organized for
the purpose of creating a nationwide chain of retail centers ("HEARx Centers")
to serve the needs of the hearing impaired. At the end of 1999, the Company
operated a total of 79 centers. Those included 33 in Florida, 13 in New York, 15
in New Jersey and the 18 HEARx West centers in California.
Segments
The Company's operations are organized by centers in geographic regions of the
Northeast, the southeast and west coasts of Florida and California. These
regions comprise one operating segment. Net sales of operations amounted to
approximately $47,687,000, $27,494,000 and $24,214,000 in 1999, 1998 and 1997,
respectively. Operating profit and losses for center operations, before
allocation of general corporate expenses of approximately $8,602,000, $6,484,000
and $6,629,000 was approximately $5,087,000 of operating profit and, $4,536,000
and $1,913,000 of operating losses, respectively. Center operations'
depreciation amounted to $1,793,000, $1,632,000 and $1,389,000 in 1999, 1998,
and 1997 respectively. Center operations' capital expenditures amounted to
$1,450,000, $1,141,000 and $2,859,000 in 1999, 1998, and 1997, respectively.
Aggregate identifiable assets of center operations at December 31, 1999 and
December 25, 1998 were $7,666,000 and $6,090,000, respectively. Such amounts
exclude general corporate assets (primarily cash, fixed assets, notes and other
investments) of $13,135,000 and $14,882,000 and an investment in and advance in
HEARx West LLC of $1,407,000 at December 25, 1998.
Consolidation and change in reporting entity
On August 10, 1998, HEARx formed a joint venture, HEARx West LLC, with the
Permanente Federation LLC to create and operate a network of retail hearing care
centers ("HEARx West Centers"). The joint venture agreement provides for a 50/50
ownership by HEARx and the Permanente Federation, with centers bearing the HEARx
name. The agreement provides for net income and losses, tax credits and tax
preference items to be allocated according to the members' percentage interests.
Prior to March 1999, HEARx Ltd. accounted for its investment in HEARx West using
the equity method because HEARx did not control HEARx West due to certain
provisions in the joint venture agreement. In March 1999, as a result of
amendments to the agreement, HEARx obtained control of HEARx West. Accordingly,
at December 31, 1999, HEARx has included the financial position and results of
operations of HEARx West in the accompanying consolidated financial statements.
Fiscal year
The Company's fiscal year ends on the last Friday in December and customarily
consists of four 13-week quarters for a total of 52 weeks. Every sixth year
includes 53 weeks.
31
<PAGE> 31
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment securities
Marketable securities are classified available for sale and are carried at
estimated market value. Unrealized holding gains and losses, are reported as a
net amount in a separate component of stockholders' equity until realized. Gains
and losses realized from the sales are computed by the specific identification
method.
Inventories
Inventories, which consist of hearing aids, batteries, special hearing devices
and related items, are priced at the lower of cost (first-in, first-out) or
market.
Property and equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the depreciable asset.
Leasehold improvements are amortized over the shorter of the term of the lease
or the useful life of the asset.
Intangible assets
Intangible assets, included in other assets, primarily represent customer lists
acquired from acquisitions of hearing businesses. These customer lists are being
amortized on a straight-line basis over periods ranging from nine to fifteen
years. Intangible assets also include the excess purchase price of acquisitions
over the fair value of assets acquired. Such excess costs are being amortized
over fifteen years. Accumulated amortization at December 31, 1999 and December
25, 1998 was $350,608 and $253,657, respectively.
Pre-opening costs
The costs associated with the opening of new centers are expensed as incurred.
Long-lived assets - impairments and disposals
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. At December 31, 1999, no long-lived assets were held for disposal.
Advertising Costs
Costs for newspaper, television, and other media advertising are expensed as
incurred and were $5,470,000, $4,105,000 and $3,362,000 in 1999, 1998, and 1997,
respectively.
Sales return policy
Patients purchasing hearing aids are given a specific return period, usually 30
days, if dissatisfied with the product. The Company provides an allowance in
accrued expenses for returns. The return period can be extended to 60 days if
the customer attends the Company's H.E.L.P. program.
32
<PAGE> 32
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred compensation
The value in excess of the selling price of shares of common stock issued to
officers is amortized over the vesting period of such shares.
Warranties
Hearing aids sold by the Company are covered by manufacturers' warranties.
Capitation revenue
The Company has capitation contracts with certain health care organizations
under which the Company is paid an amount, per enrollee of the health
maintenance organization, to provide to the enrollee a once every three years
discount on certain hearing products and services. The amount paid to the
Company by the healthcare organization is calculated on a per-capita basis and
is referred to as capitation revenue. Revenue under capitation contracts is
recorded based on actual utilization by the member populations of the healthcare
organizations with whom the Company has contracted to provide hearing care
services.
Income taxes
Deferred taxes are provided for temporary differences arising from the
differences between financial statement and income tax bases of assets and
liabilities. A valuation allowance is provided for the amount of deferred tax
assets which are not considered more likely than not to be realized.
Net loss per common share
Net loss per common share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which
requires companies to present basic and diluted earnings per share. Net loss per
share - Basic is based on the weighted average number of common shares
outstanding during the year. Net loss per common share - Diluted is based on the
weighted average number of common shares and dilutive potential common shares
outstanding during the year. Convertible preferred stock, stock options and
stock warrants are excluded from the computations of net loss per share because
the effect of their inclusion would be anti-dilutive.
Excluded from the computation of net loss per common share - diluted at December
31, 1999, December 25, 1998 and December 26, 1997 were convertible preferred
stock, outstanding options and warrants to purchase 2,693,885, 1,773,928 and
998,658 shares, respectively, of the Company's Common Stock at exercise prices
less than average market price because to not do so would be anti-dilutive. In
addition, outstanding options and warrants to purchase 889,941, 394,268 and
699,900 shares of common stock were excluded because the options' and warrants'
exercise prices were greater than the average market price of the common shares.
Statements of Cash Flows
For the purposes of the Statements of Cash Flows, temporary cash investments
which have a maturity of ninety days or less are considered cash equivalents.
33
<PAGE> 33
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been reclassified
in order to conform to the 1999 presentation.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-based compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure only provisions of SFAS No. 123, ("SFAS 123") Accounting
for Stock-Based Compensation.
2. INVESTMENT SECURITIES
Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Market
Cost Gains/(Losses) Value
------------ ------------- -----------
<S> <C> <C> <C>
December 31, 1999
- -----------------
Municipal Bonds $ 750,000 $ - $ 750,000
Certificate of Deposit 150,000 - 150,000
------------ ------------- -----------
Total $ 900,000 $ - $ 900,000
============ ============= ============
December 25, 1998
- -----------------
U.S. Government and Agency Bonds $ 6,631,889 $ 60,381 $ 6,692,270
Corporate Bonds 280,690 (2,180) 278,510
Certificate OF Deposit 199,938 62 200,000
------------ ------------- -----------
Total $ 7,112,517 $ 58,263 $ 7,170,780
============ ============= ============
</TABLE>
At December 31, 1999, $150,000 and $750,000 of investment securities have
contractual maturities of one and twenty years, respectively.
34
<PAGE> 34
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 25,
1999 1998
------------ ------------
<S> <C> <C>
Note payable to supplier, collateralized by equipment,
due January 13, 2000, see (a) below $140,000 $585,083
Note payable collateralized by customer list, see (b)& (c) below 417,316 134,897
Other notes payable 60,009 43,000
-------- ---------
617,325 762,980
Less current maturities (294,993) (639,664)
-------- ---------
$322,332 $ 123,316
======== =========
</TABLE>
The approximate aggregate maturities on long term debt obligations in years
subsequent to 1999 are as follows: 2000 - $295,000; 2001 - $160,000; 2002 -
$121,000; and 2003 - $41,000.
(a) On March 5, 1996, the Company completed a $2.5 million trade agreement
with a vendor pursuant to which the vendor provides financing for the
purchase of diagnostic equipment to be utilized by the Company's
distribution network. The financing is collateralized by the equipment
financed. A percentage of all hearing aid purchases by the Company from
this vendor is applied to repayment of financed amounts under the
financing agreement. This note was repaid in January 2000.
(b) In January 1996, the Company acquired the customer list and selected
assets of Suffolk County Hearing Aid Center, Inc. in New York for $150,000
in cash, 150,000 shares of Common Stock, and a five year note in the
amount of $250,000 including interest. The note payable includes interest
at 5.5% and is payable in five annual installments of $50,000 including
interest beginning January 22, 1997.
(c) During July 1999, the Company issued a $325,000 promissory note payable
bearing 8.75% interest to an individual in connection with a purchase of
an audiological practice in California, (See Note 8). The note is payable
in four annual installments of $81,250 plus accrued interest, beginning
July 1, 2000 and is collateralized by the equipment and customer list
purchased.
4. PROPERTY AND EQUIPMENT AND LEASES
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Range of December 31, December 25,
Useful Lives 1999 1998
<S> <C> <C> <C>
Equipment, furniture and fixtures 5-10 YEARS $ 7,472,695 $ 6,439,418
Leasehold Improvements 5-10 YEARS 6,123,687 4,253,764
Computer systems 3 YEARS 3,055,847 2,802,181
Leasehold improvements in progress N/A 37,485 14,557
--------------- --------------
16,689,714 13,509,920
--------------- --------------
Less accumulated depreciation and amortization 8,197,006 6,409,390
--------------- --------------
$ 8,492,708 $ 7,100,530
=============== ==============
</TABLE>
35
<PAGE> 35
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approximate future minimum rental commitments under operating leases are as
follows: $3,730,000 in 2000; $3,101,000 in 2001; $2,707,000 in 2002; $2,593,000
in 2003; $1,651,000 in 2004 and $1,979,000 thereafter. These leases are
primarily for hearing centers and are located in retail shopping areas.
Equipment and building rent expense for the years ended December 31, 1999,
December 25, 1998 and December 26, 1997 was $3,039,000, $2,892,000 and
$2,599,000, respectively.
5. STOCKHOLDERS' EQUITY
A. REVERSE STOCK SPLIT
On June 30, 1999 the Company effectuated a one for ten reverse common stock
split. The reverse stock split and a reduction in the authorized shares of
common stock to twenty million was approved at the June 7, 1999 Annual Meeting
of Stockholders. Each stockholder of ten shares of common stock on June 30, 1999
was entitled to one share of common stock in connection with the reverse split.
A cash payment was paid in lieu of fractional shares issued. Accordingly, except
for the presentation in the accompanying consolidated balance sheets and
statements of changes in stockholders' equity, the Company has restated all
share and per share data for all periods presented to reflect the change in
capital structure.
B. 1998 CONVERTIBLE PREFERRED STOCK
On August 27, 1998, the Company completed a private placement of 7,500 units of
$1 par, 1998 Convertible Preferred Stock and warrants. Net proceeds to the
Company after the payment of placement fees, legal and accounting expenses was
$6,975,000. The additional capital was primarily raised to fund construction and
start-up costs of the HEARx West centers.
The 1998 Convertible Preferred Stock ranks prior to all of the Company's Common
Stock, prior to any class or series of capital stock of the Company thereafter
created specifically ranking by its terms junior to 1998 Convertible Preferred,
junior to with the Company's 1997 Convertible Preferred Stock, and after any
class or series of capital stock of the Company thereafter created and
specifically ranking by its terms senior to the 1998 Convertible Preferred. The
1998 Preferred Stock is convertible into Common Stock, par value $.10 per share,
of the Company. Upon the conversion, holders will be entitled to receive a
number of shares of Common Stock determined by dividing the sum of the stated
value of the 1998 Preferred Stock ($1,000 per share), plus a premium (unless the
Company elects to pay that premium in cash), by a conversion price equal to the
lesser of the average closing bid prices for the Common Stock during a five-day
period prior to conversion, and $18.00 ( the closing bid price at the date of
issuance, subject to adjustment upon occurrence of certain dilutive events). The
premium payable upon conversion will be equal to 8% of the stated value of 1998
Preferred Stock from the date of issuance until one year following such date,
and shall increase by 0.5% each year, commencing on the date which is one year
following the date of issuance. The 1998 Preferred Stock may not be converted
for the 180-day period after the closing (i.e. to February 23, 1999). The 1998
Preferred Stock may be converted by holders in accordance with these terms at
any time prior to August 27, 2003, and automatically converts on such date. In
the event of liquidation, dissolution or winding up of the Company prior to
conversion of the 1998 Preferred Stock, holders of 1998 Preferred Stock will be
entitled to share ratably in all assets available for distribution prior to
distributions to holders of Common Stock. In addition, no distributions may be
made to holders of Common Stock until holders of 1998 Preferred Stock shall have
received a liquidation preference equal to the sum of the stated value of the
1998 Preferred Stock ($1,000 per share) plus an amount equal to ten percent
(10%) per annum of such stated value for the period from the date of issuance
until the date of final
36
<PAGE> 36
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
distribution. During 1999, 185 shares of the 1998 Convertible Preferred Stock
plus accrued dividends of $16,156 were converted into 44,712 shares of the
Company's Common Stock.
For each unit of 1998 Convertible Preferred Stock purchased, each investor
received 7.5 warrants to acquire shares of Common Stock of the Company. Upon
exercise, holders will be entitled to receive shares of Common Stock for an
exercise price of $18.00 per share. The warrants will expire on August 27, 2003.
In connection with this transaction, the Company issued 56,250 warrants with an
exercise price of $18.00 to purchase shares of the Company's Common Stock. These
warrants were issued to certain individuals as finder's fees for the placement
of preferred shares with investors. All related warrants remain outstanding as
of December 31, 1999.
C. 1997 CONVERTIBLE PREFERRED STOCK
On March 17, 1997, the Company completed a private placement of 10,000 shares,
$1 par, of 1997 Convertible Preferred Stock. Net proceeds to the Company after
the payment of placement fees, legal and accounting expenses was $9,006,000. The
additional capital was raised to enable HEARx to expand its network of hearing
centers as may be required by current or potential managed-care contracts.
The 1997 Convertible Preferred Stock ranks prior to all of the Company's Common
Stock, prior to any class or series of capital stock of the Company thereafter
created specifically ranking by its terms junior to 1997 Convertible Preferred,
pari passu with the Company's 1996 Series B-1 Convertible Preferred Stock, 1996
Series B-2 Convertible Preferred Stock and after any class or series of capital
stock of the Company thereafter created and specifically ranking by its terms
senior to the 1997 Convertible Preferred. The 1997 Convertible Preferred Stock
bears dividends of 6%, payment in kind or cash upon conversion at the option of
the Company. Upon conversion of the Preferred Stock, holders will be entitled to
receive a number of shares of Common Stock determined by dividing the stated
value of the Preferred Stock ($1,000 per share), plus a premium in the amount of
6% per annum of the stated value from the date of issuance (unless the Company
chooses to redeem the shares otherwise issuable in respect of that premium) by a
conversion price equal to the lesser of (i) $50.00, or (ii) 85% of the average
of the closing bid prices for shares of Common Stock for the ten day trading
period immediately prior to conversion. The 1997 Convertible Preferred Stock may
be converted by holders beginning August 15, 1997 and at any time prior to March
17, 2000 and must be converted on that date. During 1999, 1998 and 1997, 4,209,
1,906 and 2,885 shares of the 1997 Convertible Preferred Stock plus accrued
dividends of $552,743, $168,787 and $78,426 were converted into 1,098,906,
326,538 and 234,238 shares of the Company's Common Stock, respectively.
In 1997, the Company recorded a deemed preferred stock dividend of $1,500,000
for the discounted conversion price representing a 15% discount upon conversion
of the $10,000,000 gross proceeds. In connection with this transaction, the
Company issued 85,000 warrants with an exercise price of $50.00 and 75,000
warrants with an exercise price of $20.00 to purchase shares of the Company's
Common Stock. These warrants were issued to certain individuals as finder's fees
for the placement of the preferred shares with investors. All related warrants
remain outstanding as of December 31, 1999.
D. 1996 SERIES A, B-1 AND B-2 CONVERTIBLE PREFERRED STOCK
During May and August 1996, the Company completed a side-by-side offering
pursuant to Regulation D and Regulation S of the Securities Act of 1933. In the
Regulation D offering, the Company sold 15,000 shares of a convertible preferred
stock (the "Series B-1 Preferred Stock") and 9,900 shares of another convertible
preferred stock (the "Series B-2 Preferred Stock"), for net
37
<PAGE> 37
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proceeds of $23,048,590. In the Regulation S offering, the Company sold 5,100
shares of a convertible preferred stock (the "Series A Preferred Stock") for net
proceeds of $4,794,000.
In connection with the Regulation D and Regulation S offerings, the Company
reported a one-time, non-cash charge against loss available to common
stockholders of $9,000,000. This charge related to the discounted conversion
price for the shares of Common Stock issuable on conversion of the Preferred
Stock. The amount of the charge was computed as the difference between the $5.00
conversion price (as defined) and the per share market price of the Common Stock
on the date of the first closing ($6.50) times the number of shares issuable.
As of December 26, 1997, all of the shares of the 1996 Series A, B-1, and B-2
Preferred Stock had been converted into shares of Common Stock. Upon conversion
of the Series B-1 Preferred Stock, holders were entitled to and were issued
375,000 warrants to acquire shares of Common Stock at $64.70 per share. On
August 27, 1998, the Company cancelled 426,413 warrants in exchange for 65,975
new warrants with an exercise price of $20.00. The new warrants are exercisable
any time prior to August 24, 2003.
E. 1996 SENIOR PREFERRED STOCK
During 1996 the Company completed a private placement of 6,000 shares, $1 par,
of 1996 Senior Preferred Stock in consideration for $4,900,000 and the
conversion of a $1,100,000 note payable. Investors also received warrants to
purchase 1,107,048 shares of common stock at an exercise price of $5.50 per
share. Additionally 228,327 warrants, to acquire shares of Common Stock at $
6.30 per share, were issued to an investment banker as a placement fee. The
Company redeemed the 1996 Senior Preferred Stock during May 1996. All but 9,226
of the related warrants had been exercised as of December 31, 1999.
F. SHAREHOLDER RIGHTS PLAN
On December 14, 1999, the Board of Directors approved the adoption of a
Shareholder Rights Plan, in which a dividend of one preferred share purchase
right ( a "Right") for each outstanding share of Common Stock was declared, and
payable to the stockholders of record on December 31, 1999. The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
Common Stock or announces a tender offer which would result in ownership of 15%
or more of the Common Stock. The Rights entitle the holder to purchase one
one-hundredth of a share of Series H Junior Participating Preferred Stock at an
exercise price of $28.00 and will expire on December 31, 2009.
Following the acquisition of 15% or more of the Company's Common Stock by a
person or group without the prior approval of the Board of Directors, the
holders of the Rights (other than the acquiring person) will be entitled to
purchase shares of Common Stock (or Common Stock equivalents) at one-half the
then current market price of the Common Stock, or at the election of the Board
of Directors, to exchange each Right for one share of the Company's Common Stock
(or Common Stock equivalent). In the event of a merger or other acquisition of
the Company without the prior approval of the Board of Directors, each Right
will entitle the holder (other than the acquiring person), to buy shares of
common stock of the acquiring entity at one-half of the market price of those
shares. The Company will be able to redeem the Rights at $0.01 per Right at any
time until a person or group acquires 15% or more of the Company's Common Stock.
The Series H Junior Participating Preferred Stock is subject to the rights of
the holders of any shares of any series of preferred stock of the Company
ranking prior and superior to the Series H Junior participating Preferred Stock
with respect to dividends. The holders of shares of Series H Junior
Participating Preferred; in preference to the holders of shares of Common Stock,
and any other junior stock, shall be entitled to receive dividends, when, as and
if declared by the Board of Directors out of funds legally available therefore.
38
<PAGE> 38
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. WARRANTS
No warrants were exercised in 1999.
On August 27, 1998, the Company issued warrants, with an exercise price of
$20.00, to purchase 65,975 shares of the Company's Common Stock. These warrants
were issued in exchange for the cancellation of outstanding warrants covering
426,413 shares of Common Stock exercisable at prices between $50.00 and $64.70
per share. The new warrants are exercisable any time prior to August 24, 2003.
The aggregate number of common shares reserved for issuance upon the exercise of
warrants is 426,413 as of December 31, 1999. The expiration date and exercise
prices of the outstanding warrants are as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXPIRATION EXERCISE
WARRANTS DATE PRICE
----------- ------------ ---------
<S> <C> <C>
59,500 2002 50.00
75,000 2001 20.00
57,712 2003 12.50
30,000 2001 6.30
9,225 2001 5.50
65,975 2003 20.00
112,501 2003 18.00
16,500 Various 6.30-40.00
</TABLE>
6. STOCK PLANS
The Company has the following stock plans:
A. EMPLOYEE STOCK OPTION PLANS
In 1987, the Company established the 1987 Stock Options Plan. It is administered
by the Company's Board of Directors. A maximum of 250,000 shares of Common Stock
were authorized for issuance under this plan. All employees of the Company,
other than the principal stockholder, were eligible to receive options under
this plan at the sole discretion of the Board of Directors. Both incentive and
non-incentive stock options could be granted. This plan expired June 2, 1997 and
no further option grants can be made under this plan. The expiration of the plan
did not affect the outstanding options which shall remain in full force as if
the plan had not expired.
In 1995, the Company established the 1995 Flexible Stock Plan. It is also
administered by the Company's Board of Directors. An original maximum of 250,000
shares of the Company's Common Stock may be issued under this plan. The plan
authorizes an annual increase in authorized shares equal to 10% of the number of
shares authorized as of the prior year. Currently an aggregate of 11,148 shares
may be issued under the plan. All employees of the Company are eligible to
receive stock options under this plan at the sole discretion of the Board of
Directors. Incentive stock options, non-qualified stock options, stock
appreciation rights, restricted shares, performance shares, and other
stock-based awards may be awarded under this plan.
39
<PAGE> 39
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 14, 1999 the Board of Directors approved the issuance of
non-qualified stock options to purchase 268,246 shares of the Company's Common
Stock for $3.88 per share to certain officers of the Company. These grants are
independent of the Company's 1987 and 1995 stock option plans and are to be
issued from shares of treasury stock.
As of December 31, 1999, 315 employees of the Company held options under the
Stock Option Plans permitting them to purchase 764,194 shares of Common Stock at
prices ranging from $2.00 to $18.75 per share. Options are exercisable for
periods ranging from four to nine years commencing one year following the date
of grant and are exercisable in cumulative annual installments of 25 percent per
year. During 1998, the Company cancelled 131,180 and 337,160 stock options held
by certain employees with exercise prices ranging from $18.75 to $28.75 and from
$8.75 to $18.75 and reissued those options with an exercise price of $15.00 and
$7.50,respectively.
40
<PAGE> 40
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the transactions of the Company's employee stock
option plans:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------------
December 31, 1999 December 25, 1998 December 26, 1997
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 464,718 $7.19 466,178 $15.80 428,165 $15.00
Granted 342,256 $4.17 528,080 $10.04 98,163 $20.05
Exercises 1,360 $2.10 10,498 $5.20 20,525 $4.70
Forfeited and cancelled 41,420 $8.45 519,042 $18.32 39,625 $23.30
---------- ---------- -------- ---------- ---------- ---------
Outstanding at end of year 764,194 $5.78 464,718 $6.74 466,178 $15.00
========== ========== ======== ========== ========== =========
Exercisable at end of year 345,921 272,230 195,321
========== ======== ==========
Weighted average fair market
Of options granted during year $ 2.96 $ 7.30 $ 7.60
========== ======== ==========
</TABLE>
The following table summarizes information about fixed employee stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Options Weighted
Remaining Average Exercisable Average
Options Contractual Exercise At December Exercise
Range of Exercise Price Outstanding Life Price 31, 1999 Price
- ------------------------ ------------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$2.00 50,035 4.5 $2.00 50,035 $2.00
$2.10 - $5.40 345,331 6.0 $4.11 47,595 $5.09
$5.41 - $8.75 344,468 6.9 $7.29 235,416 $7.51
$8.75 - $18.75 24,360 7.3 $15.92 12,875 $15.75
------------- -----------
764,194 345,921
============= ===========
THE STOCK OPTIONS ARE EXERCISABLE IN THE FOLLOWING YEARS:
2000 478,971
2001 106,601
2002 95,076
2003 83,546
----------
764,194
==========
</TABLE>
SFAS 123, Accounting for Stock-Based Compensation, requires the Company to
provide pro forma information regarding net loss and loss per share as if
compensation cost for the Company's employee stock option plans had been
determined in accordance with the fair value based method prescribed in SFAS
123. The Company estimates the fair value of each option at the grant date by
using the Black-Scholes option pricing model with the following weighted-
41
<PAGE> 41
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
average assumptions used for grants in 1999, 1998, and 1997, respectively, no
dividends, expected volatility ranging from 35% to 89%; risk-free interest rates
from 4.35% to 6.65% and expected lives ranging from 5 to 10 years.
Under accounting provisions of SFAS 123, the Company's net loss and loss per
share would have been increased to pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Net Loss applicable to Common Stockholders
As reported $ (4,825,283) $(12,931,555) $(11,196,124)
Pro forma $ (5,895,779) $(14,718,119) $(12,181,611)
Loss per share - basic and diluted
As reported $ (0.45) $ (1.28) $ (1.25)
Pro forma $ (0.55) $ (1.45) $ (1.36)
</TABLE>
B. NON-EMPLOYEE DIRECTOR PLAN
In April 1993, the stockholders of the Company approved the adoption of the
HEARx Ltd. Non-qualified Stock Option Plan for Non-Employee Directors
("Directors Plan"). The purpose of the Directors Plan is to increase the
proprietary interest of non-employee directors and promote long-term stockholder
value by granting stock options. Grants cannot exceed 50,000 shares of Common
Stock in the aggregate and may be granted until the Annual Meeting of
Stockholders in 2003. Under the plan, non-employee directors are granted 1,500
options each year. The option price is the fair market value of the Company's
shares at the date of grant.
As of December 31, 1999, three directors hold options as follows: 3,000 shares
at $ 3.40, 4,500 shares at $5.00, 4,500 shares at $ 6.875, 16,500 at $7.50, and
4,500 shares at prices ranging from $12.50 to $58.75 per share.
C. STOCK BONUS PLAN
The Board of Directors adopted a Stock Bonus Plan ("Bonus Plan"). The number of
shares of Common Stock which can be issued under the Bonus Plan cannot exceed
50,000. It is administered by the Board of Directors. The purpose of the Bonus
Plan is to provide an incentive to senior management to achieve the Company's
strategic objectives. At present there are nine senior management personnel
eligible to participate. No shares were issued in 1999, 1998 or 1997.
D. OTHER
In 1995, the Company granted options, which expire ten years from the date of
grant, to consultants to purchase 70,000 shares of Common Stock at $10.00 per
share. The options vested during the year subsequent to the grant. Options to
purchase 2,500 shares and 20,000 shares were exercised in 1997 and 1996,
respectively.
42
<PAGE> 42
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also in 1995, the Company granted options to another consultant, in exchange for
consulting services, to purchase 14,400 shares of Common Stock at $10.00 per
share. Options were granted to this same consultant in 1997, also for consulting
services, to purchase additional 2,500 shares at $10.00 per share and 4,800
shares at $20.00 per share. These options have a three-year vesting period.
7. MAJOR CUSTOMERS
During 1999, the Company did not have sales totaling 10% or more of the total
net sales to a single customer. In each of 1998 and 1997, the Company had sales
totaling $3.3 million, or 12.7% and $2.7 million, or 11.1%, respectively, of net
sales to single customers.
8. RELATED PARTY TRANSACTIONS
On August 10, 1998, the Company and HEARx West LLC entered into a Management and
Services Agreement. The term of this agreement runs concurrently with the
limited liability company agreement, which shall continue indefinitely. For
services provided, HEARx West LLC pays a quarterly management fee based on the
Company's corporate overhead, as defined. The agreement allocates the corporate
overhead based on the ratio of the number of HEARx West centers to the total
number of centers operated by the Company (including the HEARx West centers). As
described previously, the joint venture agreement was amended in March 1999,
providing the Company with control of HEARx West. For 1998, total management
fees under this agreement were approximately $466,000. At December 25, 1998,
approximately $570,000, was due from HEARx West to the Company, which is
included in accounts and notes receivable in the accompanying balance sheet.
HEARx West LLC has a $5,000,000 line of credit with the Company, bearing 9.5%
interest at December 31, 1999, which represents one percentage point above the
prime rate charged by Citibank, N.A.. The proceeds are to be used solely for the
purpose of establishing, operating or acquiring retail hearing centers. The line
of credit expires on November 5, 2008 and is collateralized by substantially all
of HEARx West LLC's assets. During the first five years, payments of interest
only are due quarterly. Beginning in the sixth year, equal monthly installments
of principal and interest are due. At December 25, 1998 $1,500,000 was
outstanding under the line of credit, and included in investment in and advances
to HEARx West LLC in the accompanying balance sheet.
On January 6, 1999 HEARx West entered into a capitation contract (the "Kaiser
Plan") with an affiliate of its minority owner the Permanente Federation LLC.
Under the terms of the contract, HEARx West is paid an amount per enrollee of
the Kaiser Plan, to provide a once every three years benefit on certain hearing
products and services. During 1999 approximately $4,308,000 of capitation
revenue from this contract is included in the net revenue in the accompanying
consolidated statement of operations.
On July 31, 1999, the Company entered into an asset purchase agreement with an
individual who is employed as the Company's California Division Manager. Under
the terms of this agreement, the Company purchased equipment for consideration
of approximately $100,000 and a customer list for consideration of approximately
$382,000. Consideration included cash of $75,000, a $325,000 promissory note
payable to the individual, and assumed trade payables of approximately $82,000.
43
<PAGE> 43
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
The Company has accounted for certain items (principally depreciation, allowance
for doubtful accounts, and the restructure charge) for financial reporting
purposes in periods different from those for tax reporting purposes.
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December
----------------------------------------
1999 1998
-------------------- --------------
<S> <C> <C>
Depreciation $ 91,000 $ 190,000
Allowance for doubtful accounts 120,000 223,000
Restructure reserve 81,000 849,000
Other 166,000 -
Net operating loss carryforward 23,354,000 22,604,000
------------------ ------------
23,812,000 23,866,000
Less valuation allowance (23,812,000) (23,866,000)
================== ============
Net deferred tax asset $ - $ -
================== ============
</TABLE>
At December 31, 1999 the Company had net operating loss carryforwards of
approximately $62,000,000 for both tax and financial reporting purposes. The
losses are available for carryforward for fifteen and twenty year periods and
will expire beginning in 2002. Any future significant changes in ownership of
the Company may limit the annual utilization of the tax net operating loss
carryforwards.
10. RESTRUCTURE CHARGE
In order to reduce losses in the northeast region, on December 14, 1998, the
Company approved a plan to close 12 of its centers, located in the northeast
region. The plan consisted of closing the centers, terminating the employees,
transferring the equipment and negotiating the lease terminations. These centers
closed in January 1999. As of December 31, 1999 all phases have been completed
except for two lease terminations, which are included in the restructure reserve
of $214,656.
These centers had a combined loss for the year ended December 25, 1998 of
approximately $1.9 million. A restructure charge of $2,233,800 was recorded in
the fourth quarter of 1998 to reflect the costs of closing the centers as
detailed below.
<TABLE>
<CAPTION>
<S> <C>
Lease termination costs $ 1,304,400
Employee severance 81,800
Write down of Fixed Assets to net realizable value 783,100
Other 64,500
------------
Total Restructure Charge $ 2,233,800
============
</TABLE>
44
<PAGE> 44
HEARx LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
The Company established the HEARx Ltd. 401(k) plan in October 1998. All
employees who have attained age 21 with at least three months of service are
eligible to participate in the plan. The Company's contribution to the plan is
determined from year to year by the Board of Directors. The Company's
contributions to the plan were approximately $42,400 and $8,400 for the years
ended December 31, 1999 and December 25, 1998, respectively.
Effective December 14, 1999 the Company entered into five year employment
agreements with certain of its executive officers that provide for annual
salaries, severance payments, and accelerated vesting of stock options upon
termination of employment under certain circumstances or a change in control, as
defined.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107 requires the disclosure of fair value of financial instruments. The
estimated fair value amounts have been determined by the Company's management
using available market information and other valuation methods. However,
considerable judgment is required to interpret market data in developing the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methods may have a material effect on the estimated fair value amounts.
Furthermore, the Company does not intend to dispose of a significant portion of
its financial instruments and thus, any aggregate unrealized gains or losses
should not be interpreted as a forecast of future earnings and cash flows. SFAS
107 excludes certain financial instruments from its disclosure requirements,
such as leases. In addition, disclosure of fair value estimates are not required
for nonfinancial assets and liabilities, such as fixed assets, intangibles and
anticipated future business. As a result, the following fair values are not
comprehensive and therefore do not reflect the underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosure for financial instruments:
Cash and Cash Equivalents - the carrying amounts reported in the consolidated
balance sheets approximate those assets' fair value.
Investment Securities - the carrying amounts reported in the consolidated
balance sheets approximate those assets' fair value (Note 2).
Accounts Receivable - the carrying amounts reported in the consolidated balance
sheets approximate those assets' fair value.
Accounts Payable, Accrued Expenses and Long Term Debt - the carrying amounts
reported in the consolidated balance sheets approximate those liabilities' fair
value.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133"). As amended by SFAS No. 137,
the Company is required to adopt SFAS 133 for the year ending December 28, 2001.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is expected to have no material impact on the Company's financial
condition or results of operations.
45
<PAGE> 45
HEARx LTD.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Balance at Balance at
Beginning End
Of Period Additions Deductions Of Period
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
Allowance for doubtful accounts $ 588,509 $ 568,135 $ (621,035) (1) $ 535,609
=====================================================================================================================
December 25, 1998
Allowance for doubtful accounts $ 246,371 $ 553,467 $ (211,329) (1) $ 588,509
=====================================================================================================================
December 26, 1997
Allowance for doubtful accounts $ 789,322 $ 243,178 $ (786,129) (1) $ 246,371
=====================================================================================================================
</TABLE>
(1) Write-offs to reserve
46
<PAGE> 46
Item 9. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure
None.
47
<PAGE> 47
PART III
Item 10. Directors and Executive Officers
The information required by this Item for directors is set forth in the
Company's 2000 Proxy Statement under the heading "Election of Directors" and is
incorporated herein by this reference as if set forth in full.
The information required by this Item for executive officers is set forth
in Part I of this report under the heading "Executive Officers of the Company."
Item 11. Executive Compensation
The information required by this Item is set forth in the Company's 2000
Proxy Statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in the Company's 2000
Proxy Statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth in the Company's 2000
Proxy Statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.
48
<PAGE> 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Report on Form 8-K
(a) (1) The following financial statements are filed as part of this report:
(i) Consolidated Balance Sheets as of December 31, 1999 and December
25, 1998.
(ii) Consolidated Statements of Operations for the years ended
December 31, 1999, December 25, 1998 and December 26, 1997.
(iii) Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, December 25, 1998 and
December 26, 1997.
(iv) Consolidated Statements of Cash Flows for the years ended
December 31, 1999, December 25, 1998 and December 26, 1997.
(v) Notes to Consolidated Financial Statements
(2) The following financial statement schedules are filed as part of this
report and are contained on page 46.
<TABLE>
<CAPTION>
Schedule II Valuation Accounts
----------- ------------------
<S> <C>
(3) Exhibits:
3.1(1) Restated Certificate of Incorporation of HEARx
Ltd., including certain certificates of designations,
preference and rights of certain preferred
stock of the Company. [3]
3.2(2) Amendment to Restated Certificate of Incorporation [3.1A]
3.3(3) Certificate of Designations, Preference and Rights of the
Company's 1997 Convertible Preferred Stock [3]
3.4 Amended and Restated By-Laws of HEARx, Ltd.
3.5(6) Certificate of Designations, Preferences and Rights of the
Company's 1998 Convertible Preferred Stock. [3]
3.6(8) Amendment to Restate Certificate of Incorporation including
one for ten reverse stock split and reduction of authorized shares.
3.7(9) Certificate of Designations, Preferences and Rights of the
Company's 1999 Series H Junior Participating Preferred Stock[4]
4.1(1) Securities Purchase Agreement, dated March 17, 1997, between HEARx
Ltd. and each of the purchasers set forth on the signature pages
thereto. [4.1]
</TABLE>
49
<PAGE> 49
<TABLE>
<S> <C>
4.2(3) Registration Rights Agreement, dated March 17, 1997, between HEARx Ltd.
and each of the purchasers set forth on the signature pages thereto.
[4.2]
4.3(3) Form of Placement Agent Warrant (to purchase up to 850,000 shares of Common
Stock at an exercise price equal to $5.00 per share). [4.3]
4.5(4) Specimen of Certificate representing Common Stock. [4.1]
4.1(6) Securities Purchase Agreement, dated August 27, 1998, between HEARx Ltd. and each of the
purchasers set forth on the signature pages thereto. [4.1]
4.2(6) Registration Rights Agreement, dated August 27, 1998, between HEARx Ltd. and each purchaser set
forth on the signature pages thereto. [4.2]
4.3(6) Form of Placement Agent Warrant (to purchase up to 1,125,000 shares of
Common Stock at an exercise price equal to $1.80 per share). [4.3]
4.4(9) Form of Rights Agreement, dated December 14, 1999, between HEARx and the
Rights Agent, which includes the Certificate of Designations,
Preferences and Rights of the Company's 1999 Series H Junior Participating
Preferred Stock [4]
10.1(4) Form of Consulting Agreement, dated January 1, 1987, as of June 1, 1986,
by and between HEARx Ltd. and each of the members of the Company's
Scientific Advisory Board. [10.1]
10.2(4) HEARx Ltd. 1987 Stock Option Plan. [10.11]#
10.3(5) (a) HEARx Ltd. Stock Option Plan for Non-Employee Directors and (b) Form
of Option Agreement. [10.35] [10.48]#
10.9(7) 1995 Flexible Employee Stock Plan [4]#
10.10 Executive Employment Agreement, dated December 14, 1999, with Dr. Paul A
Brown #
10.11 Executive Employment Agreement, dated December 14, 1999, with Stephen J.
Hansbrough #
23 Consent of Independent Certified Public Accountants.
</TABLE>
50
<PAGE> 50
<TABLE>
<S> <C>
27 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only).
- -------------------------------------------------------------------------------------------------------------
1 Filed as an exhibit to the Company's Current Report on Form 8-K, filed
May 17, 1996,as the exhibit number indicated in brackets, and incorporated
herein by reference.
2 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 28, 1996, as the exhibit number indicated in brackets, and
incorporated herein by reference.
3 Filed as an exhibit to the Company's Current Report on Form 8-K, filed on
March 26, 1997, as the exhibit number indicated in brackets, and incorporated
herein by reference.
4 Filed as an exhibit to the Company's Registration Statement on Form S-18
(Registration No. 33-17041-NY) as the exhibit number indicated in brackets,
and incorporated by reference herein.
5 Filed as an exhibit to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-18, as the exhibit number indicated in
brackets, and incorporated by reference herein.
6 Filed as an exhibit to the Company's Current Report on Form 8-K, filed
August 27, 1998, as the exhibit number indicated in brackets, and
incorporated herein by reference.
7 Filed as an exhibit to the Company's 1995 Proxy Statement, as the exhibit
number indicated in brackets, and incorporated by reference herein.
8 Filed as an exhibit to the Company's Quarterly Report on Form 10Q for the
period ending July 2, 1999, as the exhibit number indicated in brackets,
and incorporated herein by reference.
9 Filed as an exhibit to the Company's Current Report on Form 8-K, December
17,1999, as the exhibit number indicated in brackets, and incorporated
herein by reference.
# Denotes compensatory plan or arrangement for Company Officer or Director.
(b) Reports on Form 8-K :
A current report on Form 8-K, dated December 14, 1999, was filed with the
Securities and Exchange Commission on December 17, 1999, in which the
Company reported a declaration of a dividend of one preferred share
purchase right for each outstanding share of Common Stock, par value
$0.10 per share, of the Company. The dividend distribution is payable on
December 31, 1999 (record date) to the stockholders of record on that
date.
</TABLE>
51
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEARx Ltd.
(Registrant)
Date: March 24, 2000 By: s/Paul A. Brown, M.D.
---------------------
Paul A. Brown, M.D.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
s/Paul A. Brown, M.D. Chairman of the Board March 24, 2000
- --------------------- Chief Executive Officer
Paul A. Brown, M.D. And Director
s/Stephen J. Hansbrough President, Chief March 24, 2000
- ----------------------- Operating Officer and
Stephen J. Hansbrough Director
s/James W. Peklenk Vice President - Finance March 24, 2000
- ----------------------- and Chief Financial Officer
James W. Peklenk
s/David J. McLachlan Director March 24, 2000
- -----------------------
David J. McLachlan
s/Thomas W. Archibald Director March 24, 2000
- -----------------------
Thomas W. Archibald
s/Joseph L. Gitterman III Director March 24, 2000
- -----------------------
Joseph L. Gitterman III
</TABLE>
52
<PAGE> 52
HEARx, LTD.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------
<S> <C>
3.4 Amended and Restated Bylaws of HEARx, Ltd.
10.10 Executive Employment Agreement, dated December 14, 1999,
with Dr. Paul A. Brown
10.11 Executive Employment Agreement, dated December 14, 1999,
with Stephen J. Hansbrough
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BY-LAWS OF HEARX LTD.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The Corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such time and place, either within or without the
State of Delaware, as shall be designated from time to time by the Board of
Directors as stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year
1987, shall be held on the 15th day of April, if not a legal holiday, and if a
legal holiday, then on the next business day following, at 2:00 P.M., or at such
other date and time as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting, at which they shall elect by
a plurality vote a Board of Directors, and transact such other business as may
properly be brought before the meeting.
<PAGE> 2
Section 3. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 4. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Chairman of the Board
of Directors, shall be called by the Chairman of the Board of Directors or
Secretary at the request in writing of a majority of the Board of Directors.
Such request shall state the purpose or purposes of the proposed meeting.
Section 5. Whenever stockholders are required or permitted to take any
action at a meeting, annual or special, a written notice of the meeting shall be
given to such stockholder or stockholders which shall state the place, date and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. Unless otherwise provided by law, the
written notice of any meeting shall be given not less than ten (10) nor more
than sixty (60) days before the date of the meeting to each stockholder entitled
to vote at such meeting.
Section 6. At any meeting of stockholders, annual or special, only such
business shall be conducted, and only such proposals shall be acted upon, as
shall have been properly brought before the meeting as hereinafter provided. For
a proposal to be properly brought before a meeting, each item of business must
either (a) be specified in the notice of meeting (or any
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supplement thereto) given by or at the direction of the Board of Directors
or the persons calling the meeting as herein provided, (b) be otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or
(c) be otherwise properly brought before the meeting by a stockholder as
hereinafter provided. For a proposal to be properly brought before a meeting by
a stockholder, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation, in the case of an annual meeting, not less
than ninety (90) days nor more than one hundred and twenty (120) days prior to
anniversary of the last annual meeting of stockholders and, in the case of a
special meeting, not less than ten (10) days immediately following the giving of
notice of such special meeting; provided, however, that in the event that the
annual meeting date is changed by more than thirty (30) days from the
anniversary of the last annual meeting and less than one hundred (100) days
notice or prior public disclosure of the date of the annual meeting of
stockholders is given or made to the stockholders, to be timely, notice of a
proposal delivered by the stockholder must be received by the Secretary not
later than the close of business on the tenth day following the day on which
notice of the date of the annual meeting of stockholders was mailed or such
public disclosure was made to the stockholders. The provisions of this Section
shall also govern what constitutes timely notice for purposes of Rule 14a-4(c)
under the Securities Exchange Act of 1934, as amended. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the meeting (a) a brief description of the proposal desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (b) the name and address of record of the stockholder proposing the
business and any other stockholders known by such stockholder to be supporting
the proposal, (c) the class or classes of stock and number of shares of such
class or classes of stock which are beneficially owned by the proposing
stockholder or stockholders on the date of the stockholder notice, and (d) any
material interest of the proposing stockholder or stockholders in the proposal.
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Section 7. Notwithstanding anything in these By-Laws to the contrary, no
business shall be conducted at a meeting of stockholders except in accordance
with the procedures set forth in this Article II. The Board of Directors may
reject any stockholder proposal submitted for consideration at a meeting of
stockholders which is not made in accordance with the terms of this Article II
or which is not a proper subject for stockholder action in accordance with
provisions of applicable law. Alternatively, if the Board of Directors fails to
consider the validity of any such stockholder proposal, the presiding officer of
the meeting of stockholders may, if the facts warrant, determine and declare to
the persons attending the meeting that the business was not properly brought
before the meeting in accordance with the provisions of Section 6 of this
Article II, and he or she shall further declare that any such business not
properly brought before such meeting shall not be transacted. The Board of
Directors or, as the case may be, the presiding officer of the meeting shall
have absolute authority to decide questions of compliance with the foregoing
procedures and the Board of Directors' or, as the case may be, the presiding
officer's ruling thereon shall be final and conclusive. This provision shall not
prevent the consideration and approval or disapproval at the annual meeting of
stockholders of reports of officers, directors and committees of the Board of
Directors, but, in connection with such reports, no new business shall be acted
upon at such meeting unless stated, filed and received as herein provided.
Section 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may
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be transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the Delaware
General Corporation Law or of the Certificate of Incorporation a different vote
is required, in which case such express provision shall govern and control the
decision of such question.
Section 10. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the Certificate of
Incorporation, any action required to be taken at any annual or special meeting
of stockholders of the Corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
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ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be not less than one nor more than ten. The first board shall
consist of one director. Thereafter, within the limits above specified, the
number of directors shall be determined by resolution of the Board of Directors.
The directors shall be elected at the annual meeting of the stockholders, except
as provided in Section 4 of this Article, and each director elected shall hold
office until his successor is elected and qualified, or as otherwise provided by
statute or by these By-Laws. Directors need not be stockholders.
Section 2. To be qualified for election as a director, persons must be
nominated in accordance with the procedures set forth in this Section 2. All
nominations of directors, except those made by or at the direction of the Board
of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered to or mailed and received by the Secretary not less than ninety (90)
days nor more than one hundred and twenty (120) days prior to the anniversary of
the last annual meeting of stockholders; provided, however, that in the event
that the annual meeting date is changed by more than thirty (30) days from the
anniversary of the last annual meeting and less than one hundred (100) days'
notice or prior public disclosure of the date of the meeting of stockholders is
given or made to stockholders, to be timely, notice of a nomination delivered by
such stockholder must be received by the Secretary not later than the close of
business on the tenth day following the day on which notice of the date of the
meeting of stockholders was mailed or such public disclosure was made to the
stockholders. Such stockholder's notice shall set forth (a) the name, age,
business address and residence address, and the principal occupation or
employment of any nominee proposed in such notice, (b) the name and address of
the stockholder or stockholders giving the notice as the same appears in the
Corporation's stock ledger, (c) the number of shares of capital stock of the
Corporation which are beneficially owned
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by any such nominee and by such nominating stockholder or stockholders, and (d)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of Directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, (including without limitation such person's written consent to
being named in the proxy statement as a nominee and to serving as a Director if
elected), and (e) if the stockholder(s) making the nomination is an Interested
Person, details of any relationship, agreement or understanding between the
stockholder(s) and the nominee.
Section 3. At the request of the Board of Directors, any person
nominated for election as a director shall furnish to the Secretary the
information required by Section 2 of this Article to be set forth in a
stockholder's notice of nomination which pertains to the nominee. The Chairman
of a meeting of stockholders shall, if the facts warrant, determine and declare
at such meeting of stockholders that such nomination was not made in accordance
with the procedures prescribed by Section 2 of this Article, and he or she shall
further declare that the defective nomination shall be disregarded. The Chairman
of a meeting of stockholders shall have absolute authority to decide questions
of compliance with the foregoing procedures and his or her ruling thereon shall
be final and conclusive.
Section 4. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, or as
otherwise provided by statute or by these By-Laws. If there are no directors in
office, then an election of directors may be held in the manner provided by the
Delaware General Corporation Law. If, at the time of filling any vacancy or any
newly created directorship, the directors then in office shall constitute less
than a majority of the whole board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
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stockholders holding at least ten percent of the total number of the shares at
the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorship, or to replace the directors chosen by the directors then in
office.
Section 5. The business of the corporation shall be managed by or under
the direction of its Board of Directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by the
Delaware General Corporation Law or by the Certificate of Incorporation or by
these By-Laws directed or required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 6. The Board of Directors of the Corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 7. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 8. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board.
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Section 9. Special meetings of the Board may be called by the Chairman
of the Board on one day's notice to each director, either personally or by mail
or by telegram; special meetings shall be called by the Chairman of the Board or
Secretary in like manner and on like notice on the written request of two
directors unless the Board consists of only one director, in which case, special
meetings shall be called by the Chairman of the Board or Secretary in like
manner and on like notice on the written request of the sole director.
Section 10. At all meetings of the Board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by the Delaware General Corporation Law or by the
Certificate of Incorporation. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 11. Any action required or permitted to be taken at any meeting
of the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
Section 12. Members of the Board of Directors or any committee
designated by the Board of Directors, may participate in a meeting of the Board
of Directors or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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COMMITTEES OF DIRECTORS
Section 13. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the Delaware General Corporation Law, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation; and, unless the resolution or the
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Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock or to adopt a certificate of ownership and merger. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the board of directors.
Section 14. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 15. The Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of committees may be allowed like compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 16. Except as otherwise provided in the Certificate of
Incorporation, any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of shares then entitled to
vote at an election of directors.
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ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the Delaware General
Corporation Law or of the Certificate of Incorporation or of these by-laws,
notice is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by telegram.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation shall be chosen by the Board
of Directors and shall be a Chairman of the Board, a President, one or more Vice
Presidents, a Secretary and a Treasurer. The Board Of Directors may also choose
additional Vice Presidents, and one or more Assistant Secretaries and Assistant
Treasurers. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these By-Laws otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a Chairman of the Board, a President, one
or more Vice Presidents, a Secretary and a Treasurer.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
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Section 4. The salaries of all officers of the Corporation shall be
fixed by the Chairman of the Board or the Board of Directors.
Section 5. The officers of the Corporation shall hold office until their
successors are elected and qualified. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD OF DIRECTORS
Section 6. The Chairman of the Board of Directors shall be the Chief
Executive Officer of the Corporation, shall preside at all meetings of the
stockholders and the Board of Directors, shall have general management of the
business of the Corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect.
THE PRESIDENT
Section 7. The President of the Corporation shall be the Chief Operating
Officer of the Corporation, shall have active management of the business and
operations of the Corporation and shall have such duties and responsibilities,
incident to the office of President, as may be assigned to him from time to time
by the Chairman of the Board of Directors or the Board of Directors. In the
absence of the Chairman of the Board of Directors or in the event of his
inability or refusal to act, the President shall perform the duties of the
Chairman of the Board of Directors, and when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the Chairman of the
Board of Directors.
THE VICE PRESIDENTS
Section 8. In the absence of the President or in the event of his
inability or refusal to act, the Vice President (or in the event there be more
than one Vice President, the Vice Presidents in
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the order designated by the directors, or in the absence of any designation,
then in the order of their election) shall perform the duties of the President,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the president. One Vice President shall be designated as Vice
President-Finance of the Corporation, who shall be the Chief Financial Officer
of the Corporation. The Vice Presidents shall perform such other duties and have
such other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 9. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all proceedings of the
meetings of the Corporation and of the Board of Directors in a minute book to be
kept for that purpose and shall perform like duties for the committees when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or the
Chairman of the Board of Directors, under whose supervision he shall be. The
Secretary shall have custody of the seal of the corporation and he, or an
Assistant Secretary, shall have authority to affix the same to any instrument
and when so affixed, it may be attested by his signature or by the signature of
such Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.
Section 10. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
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THE TREASURER AND ASSISTANT TREASURERS
Section 11. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 12. The Treasurer shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chairman of the Board of Directors and
the Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his transactions as Treasurer and of the
financial condition of the Corporation.
Section 13. If required by the Board of Directors, the Treasurer shall
give the Corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation.
Section 14. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the Treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
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ARTICLE V
CERTIFICATES FOR SHARES
Section 1. The shares of the Corporation shall be represented by
certificates. Certificates shall be signed by, or in the name of the Corporation
by, the Chairman of the Board of Directors, the President or a Vice President
and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary of the Corporation.
Upon the face or back of each stock certificate issued to represent any
partly paid shares, the total amount of the consideration to be paid therefor
and the amount paid thereon shall be stated.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in fall or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the Delaware General Corporation Law, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the Corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any or all of the signatures on a certificate may be
facsimiles. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
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LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issuance of a new certificate or certificates, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the Corporation may determine the stockholders
entitled to notice of, or to vote at, any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such Meeting, nor more than sixty days prior to any other action. A
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determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the Delaware
General Corporation Law.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the Corporation, subject
to the provisions of the Certificate of Incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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ANNUAL STATEMENT
Section 3. The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its organization and these words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 7.
(a) The Corporation shall indemnify its officers, directors, employees
and agents to the fullest extent permitted by the Delaware General Corporation
Law as it exists on the date hereof, or as it may hereafter be amended.
(b) The right of indemnification created by the Section shall be a
contract right enforceable against the Corporation by those indemnities to whom
this section is applicable, and it shall not be exclusive of any other rights to
which such indemnities may otherwise be entitled.
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The provisions of this Section shall be applicable to any action, suit or
proceeding described herein commenced or continuing after the adoption of this
Section, whether arising from acts or omissions occurring before or after such
adoption. No amendment, alteration, change, addition or repeal of or to these
By-Laws shall deprive any indemnitee to whom this Section is applicable of any
rights under this Section with respect to any act or omission of such indemnitee
occurring prior to such amendment, alteration, change, addition or repeal.
ARTICLE VIII
AMENDMENTS
Section 1. These By-Laws may be altered, amended or repealed or new
By-Laws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the Certificate of
Incorporation, at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
By-Laws be contained in the notice of such meeting. If the power to adopt, amend
or repeal By-Laws is conferred upon the Board of Directors by the Certificate of
Incorporation it shall not divest or limit the power of the stockholders to
adopt, amend or repeal By-Laws.
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EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of December
14, 1999 (the "Effective Date"), by and between HEARx Ltd., a Delaware
corporation ("HEARx"), and Paul A. Brown, M.D. ("Executive").
RECITALS
1. HEARx operates a network of hearing care centers which provide
a full range of audiological products and services for the hearing impaired (the
"Business");
2. Executive is recognized as having experience in the management
and operation of companies that are in the Business;
3. HEARx's Board of Directors (the "Board") has determined that it
is in the best interests of HEARx and its stockholders to assure that HEARx will
have the continued dedication of Executive, notwithstanding the possibility,
threat or occurrence of a Change in Control (as defined in Section 4.7);
4. The Board believes it is imperative (a) to diminish the
inevitable and significant distractions of Executive and dilution of the time of
Executive, by virtue of the personal uncertainties and risks created by a
pending or threatened Change in Control, (b) to encourage Executive's full
attention and dedication to HEARx currently and in the event of any threatened
or pending Change in Control and (c) to provide Executive with compensation
arrangements in the event of a Change in Control which provide Executive with
financial security, which are competitive with those of other companies, and
which ensure that Executive receives the compensation and benefits intended to
be provided to Executive by HEARx through this Agreement and HEARx's various
employee benefit and compensation plans and arrangements without regard to any
Excise Tax (as defined in Section 4.11(a)); and
5. To accomplish the objectives described in the two immediately
preceding recitals, the Board desires to cause HEARx to enter into this
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements contained in this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged by the
parties, HEARx and Executive agree as follows:
ARTICLE I
EMPLOYMENT, REPORTING AND DUTIES
1.1 EMPLOYMENT. On the terms and subject to the conditions of this
Agreement, HEARx hereby employs and engages the services of Executive to serve
as, and Executive agrees to serve as and perform the functions of, Chairman of
the Board and Chief Executive Officer (collectively, the "Office") of HEARx for
the Term (as defined in Section 4.1) and for the compensation and benefits
stated herein.
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1.2 MAJOR RESPONSIBILITIES; AUTHORITY. Executive shall have the
authorities, duties, responsibilities and status (including offices, titles and
reporting requirements) usually associated with the Office of companies having
operations and assets similar in nature and value to the operations and assets
of HEARx and at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the 90-day
period immediately preceding the Effective Date, and such other duties as the
Board shall determine and Executive shall accept from time to time.
1.3 EXTENT OF SERVICE. During the Term, and excluding any periods of
vacation and sick leave to which Executive is entitled, Executive agrees to
devote reasonable time and energies to the Business consistent with past
practice and shall not, during the Term, be engaged in any business activity
which would interfere or prevent Executive from carrying out his duties under
this Agreement; provided, however, that this Section 1.3 shall not be construed
as preventing Executive from investing his assets in such form or manner as will
not require services on the part of Executive in the operation of the affairs of
any company in which such investments are made.
1.4 LOCATION. Executive shall not be required to move from
Executive's home in Palm Beach County, Florida in the performance of his duties,
responsibilities and obligations hereunder.
ARTICLE II
COMPENSATION AND RELATED ITEMS
2.1 COMPENSATION.
(a) BASE SALARY. Until a Change in Control occurs, as
compensation and in consideration for the services to be rendered by Executive
under this Agreement and for the performance by Executive of the usual
obligations of such employment, HEARx agrees to pay Executive, and Executive
agrees to accept, a base salary (the "Base Salary") effective January 1, 2000 of
at least $300,000 per annum which shall be paid in accordance with HEARx's
standard payroll practice. Executive's Base Salary shall be subject to review
annually by the Board in accordance with HEARx's review policies and practices
for executives as in effect at the time of any such review. If a Change in
Control occurs, Executive's Base Salary for the next calendar year and each
subsequent calender year during the Term must increase by at least 20% over his
Base Salary during the previous calendar year.
(b) BONUS. At the end of each calendar year during the Term,
the Executive shall be eligible to receive an annual bonus (the "Annual Bonus"),
based upon a performance evaluation criteria which shall be consistent with the
criteria used by the Board for its current evaluation of Executive; provided
that, if, in any calender year during the Term, HEARx achieves the net income
target approved by the Board for such calendar year (the "Net Income Target")
the Executive must receive an Annual Bonus equal to at least 50% of Executive's
Base Salary for the previous calender year. For the purposes of this Agreement,
net income must be determined in accordance with generally accepted accounting
principles, consistently applied.
(c) PERCENTAGE OF NET INCOME. If, in any calender year
during the Term, HEARx achieves the Net Income Target approved by the Board for
such calendar year, no more than 100
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days after the end of such calender year, HEARx must pay to Executive an amount
equal to 1% of HEARx's net income for such calender year.
(d) 1999 BONUS. Notwithstanding the foregoing, for the
calendar year ended December 31, 1999, the Executive's Annual Bonus must not be
less than $125,000.
(e) ADDITIONAL COMPENSATION. In addition to the Base Salary
provided for in Section 2.1(a), Executive or Executive's family, as the case may
be, shall be entitled to:
(i) participate in, and shall receive all benefits
under:
(A) any and all welfare benefit and similar
employee benefit plans, programs, arrangements or
policies that are generally made available by HEARx and
its affiliates (as defined in Section 4.11(l)) now or at
any time in the future to other key employees or retired
key employees, including any hospitalization, medical,
prescription, dental, disability, salary continuance,
individual life insurance, executive life insurance,
group life insurance, accidental death insurance and
travel accident insurance plans, programs, arrangements
and policies; and
(B) in addition to the incentive
compensation provided for in Section 2.1(b), Executive
will be entitled to any and all incentive, savings,
retirement, profit sharing, pension, stock option,
restricted stock, employee stock ownership, supplemental
executive retirement and other employee benefit plans,
programs, arrangements and policies that are generally
made available by HEARx and its affiliates now or at any
time in the future to officers and other key employees;
additionally, pension benefits from HEARx when Executive
is eligible for and elects retirement shall be
calculated so as to provide a benefit based on actual
credited years and months of service with HEARx plus a
benefit calculated equivalent to an added ten years of
credited service;
(ii) annual vacations and sick leave in accordance
with the vacation and sick leave policies of HEARx and its affiliates
that are now or at any time in the future in effect with respect to
officers and other key employees, during which time Executive's
compensation shall be paid in full; and
(iii) fringe benefits in accordance with the fringe
benefit policies of HEARx and its affiliates that are now or at any time
in the future in effect with respect to officers and other key
employees.
2.2 EXPENSES. HEARx agrees that, during the Term, Executive shall be
allowed reasonable and necessary business expenses in connection with the
performance of his duties hereunder within guidelines established by the Board
as in effect at any time with respect to key employees ("Business Expenses"),
including reasonable and necessary expenses for food, travel, lodging,
entertainment and other items in the promotion of the Business within such
guidelines. HEARx shall promptly reimburse Executive for all Business Expenses
incurred by Executive upon Executive's presentation to HEARx of an itemized
account thereof, together with receipts, vouchers
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or other supporting documentation. After termination or expiration of the Term,
however such termination or expiration may come about, Executive shall have
ninety (90) days after the date of such termination or expiration to submit
Business Expenses incurred during the Term to HEARx for reimbursement.
ARTICLE III
EXCULPATION
HEARx agrees that Executive will not be liable for any losses, expenses,
costs or damages caused by or resulting from the recommendations, suggestions,
actions, errors, omissions or mistakes of Executive undertaken or proposed by
Executive if Executive acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of HEARx. Executive's
rights under this Article III shall not be deemed exclusive of, but shall be
cumulative with, any and all other rights (including rights of indemnification
and advancement of expenses) to which Executive may now or at any time in the
future be entitled under applicable law, HEARx's certificate of incorporation,
HEARx's bylaws, any agreement (including this Agreement), any vote of
stockholders, any resolution of directors, or otherwise. Nothing contained in
this Article III will prevent the termination of Executive's employment in
accordance with the provisions of this Agreement.
ARTICLE IV
TERM AND TERMINATION
4.1 TERM. Subject to Section 4.2, the term of this Agreement shall
be for five (5) years commencing on the Effective Date ("Term"); provided,
however, that if a Change in Control occurs prior to the second anniversary of
the Effective Date, the Term shall be extended to end on the fifth anniversary
of such Change in Control.
4.2 TERMINATION OF TERM. Except as may otherwise be provided herein,
the Term shall terminate:
(a) Thirty (30) days after written notice of termination is
given by either party to the other; or
(b) On Executive's death or, at HEARx's option, upon
Executive's becoming Disabled (as defined in Section 4.9).
Any notice of termination given by HEARx to Executive under Section 4.2(a) above
shall specify whether such termination is with or without Cause (as defined in
Section 4.4). Any notice of termination given by Executive to HEARx under
Section 4.2(a) above shall specify whether such termination is made with or
without Good Reason (as defined in Section 4.5) or Good Reason-Change in Control
(as defined in Section 4.6).
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4.3 OBLIGATIONS OF HEARX UPON TERMINATION.
(a) CAUSE; WITHOUT GOOD REASON; AND WITHOUT GOOD REASON-CHANGE IN
CONTROL. If HEARx terminates the Term with Cause pursuant to Section 4.2(a), or
if Executive terminates the Term without Good Reason or without Good
Reason-Change in Control pursuant to Section 4.2(a), the Term shall terminate
without further obligations to Executive, other than those obligations owing or
accrued to, vested in, or earned by Executive through the date of termination,
including:
(i) Executive's Base Salary in effect at the time of
such termination through the date of termination to the extent it
remains unpaid; and
(ii) all compensation previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx, and any
accrued vacation pay not yet paid by HEARx; and
(iii) all other amounts or benefits owing or accrued
to, vested in or earned by Executive through the date of termination
under the then existing or applicable plans, programs, arrangements and
policies of HEARx and its affiliates, including any such plans,
programs, arrangements or policies described in Section 2.1(b).
The obligations owing or accrued to, vested in, or earned by Executive through
the date of termination, including such amounts and benefits specified in
clauses (i), (ii) and (iii) of this Section 4.3(a), are collectively referred to
as the "Accrued Obligations." The aggregate amount of such obligations owing or
accrued to, vested in, or earned by Executive through the date of termination,
including the Accrued Obligations, shall be paid by HEARx to Executive in
accordance with the plans, programs or agreements under which the Accrued
Obligations were earned.
(b) GOOD REASON. If Executive terminates the Term with Good
Reason pursuant to Section 4.2(a):
(1) HEARx shall pay the aggregate of the following
amounts to Executive in one lump sum within thirty (30) days after the
date of such termination or in a manner and at such later time as
specified by Executive, provided that all such payments must be made no
later than the end of the Term as in effect immediately before the date
of such termination:
(i) to the extent not theretofore paid,
Executive's Base Salary in effect at the time of such
termination (but prior to giving effect to any reduction of
Executive's Base Salary which may have precipitated such
termination) for the duration of the Term as in effect
immediately before the date of such termination; and
(ii) if more than three years of the Term
have elapsed on the date of such termination, an amount equal to
one (1) times Executive's Base Salary in
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effect at the time of such termination (but prior to giving
effect to any reduction of Executive's Base Salary which may
have precipitated such termination); and
(iii) an amount equal to (A) one (1) times the
average of all bonus, profit sharing and other incentive
payments made by HEARx to Executive in respect of the two (2)
calendar years immediately preceding such termination, and (B)
the pro-rata share of Executive's target bonus, profit sharing
and other incentive payments for the calendar year in which such
termination occurred based upon the proportion that the number
of days that have elapsed in such calendar year up to and
including the date of termination bears to 365; and
(iv) in the case of compensation previously
deferred by Executive, all amounts previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx,
and any accrued vacation pay not yet paid by HEARx; and
(v) all other amounts or benefits owing or
accrued to, vested in, or earned by Executive through the date
of termination under the then existing or applicable plans,
programs, arrangements and policies of HEARx and its affiliates,
including any such plans, programs, arrangements or policies
described in Section 2.1(b); and
(vi) any and all other Accrued Obligations
not otherwise described in clauses (i), (ii), (iii) or (iv) of
this Section 4.3(b)(1); and
(2) Executive shall receive the following additional
benefits:
(i) for a 548-day period commencing on the
date of termination of the Term (the "Good Reason Benefits
Period"), Executive shall continue to be covered under each of
the medical, dental, life insurance, accident benefit and other
welfare benefit (exclusive of short- and long-term disability
benefit) programs of HEARx in effect and applicable to Executive
immediately prior to such termination, and HEARx shall pay the
costs therefor except to the extent that Executive already pays
all or any portion thereof; provided, however, that if Executive
obtains any of the welfare benefits provided for under this
sentence from a new employer, HEARx's obligation to provide such
welfare benefits should be secondary to that of such new
employer. Executive's coverage under HEARx's medical and dental
programs for the Good Reason Benefits Period shall be included
in the calculation of the "Period of Coverage" to be provided to
Executive pursuant to Section 4980B(f)(2)(B) of the Internal
Revenue Code of 1986, as amended (the "Code"), and Executive's
right to "Continuation Coverage" under Section 4980B(f)(2) of
the Code. The amount of the "Applicable Premium" to be charged
Executive under Section 4980B(f)(4) for Continuation Coverage
shall never be greater than the monthly amount charged Executive
for medical and dental coverage prior to the termination of the
Term; and
(ii) shall be fully vested in any and all
options, restricted stock, stock appreciation rights, cash
equivalent stock appreciation rights or any other
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similar rights based on the fair market value of or otherwise
relating to HEARx's common stock (collectively, "Stock Incentive
Rights") which are outstanding immediately prior to the
termination of the Term, and Executive may exercise any such
vested Stock Incentive Rights during the two year period
commencing on the date of termination of the Term,
notwithstanding any provision otherwise in any plan or agreement
awarding or granting any Stock Incentive Right to Executive; and
(iii) shall be fully vested in any and all
benefits accrued under any "employee pension benefit plan," as
defined in Section 3(2)(A) of the Employee Retirement Income
Security Act of 1947, as amended ("ERISA"), of HEARx
("Retirement Plan"); and
(iv) shall receive credit in the calculation
of the accrued benefit under HEARx's Pension Plan ("Pension
Plan") for (A) the compensation to be paid to Executive pursuant
to Section 4.3(b)(1)(ii) and (B) one (1) year of service in
addition to the service accrued by Executive through the date
that the Term is terminated. If the benefits set forth in this
clause would cause the Pension Plan to lose its qualification
under Section 401(a) of the Code, then the benefits accrued
hereunder shall accrue to Executive under HEARx's Supplemental
Executive Retirement Plan ("SERP").
(c) WITHOUT CAUSE BEFORE A CHANGE IN CONTROL. If HEARx
terminates the Term without Cause before the occurrence of a Change in Control
pursuant to Section 4.2(a):
(1) HEARx shall pay the aggregate of the following
amounts to Executive in one lump sum within thirty (30) days after the
date of such termination or in a manner and at such later time as
specified by Executive, provided that all such payments must be made no
later than the end of the Term as in effect immediately before the date
of such termination:
(i) to the extent not theretofore paid,
Executive's Base Salary in effect at the time of such
termination for the duration of the Term as in effect
immediately before the date of such termination; and
(ii) if more than three years of the Term
have elapsed on the date of such termination, an amount equal to
one (1) times Executive's Base Salary in effect at the time of
such termination; and
(iii) an amount equal to the sum of (A) one
(1) times the average of all bonus, profit sharing and other
incentive payments made by HEARx to Executive in respect of the
two calendar years immediately preceding such termination, and
(B) the pro-rata share of Executive's target bonus, profit
sharing and other incentive payments for the calendar year in
which such termination occurred based upon the proportion that
the number of days that have elapsed in such calendar year up to
and including the date of termination bears to 365; and
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(iv) in the case of compensation previously
deferred by Executive, all amounts previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx,
and any accrued vacation pay not yet paid by HEARx; and
(v) all other amounts or benefits owing or
accrued to, vested in, or earned by Executive through the date
of termination under the then existing or applicable plans,
programs, arrangements and policies of HEARx and its affiliates,
including any such plans, programs, arrangements or policies
described in Section 2.1(b); and
(vi) any and all other Accrued Obligations
not otherwise described in clauses (i), (ii), (iii) or (iv) of
this Section 4.3(b)(1); and
(2) Executive shall receive the following additional
benefits:
(i) for a 548-day period commencing on the
date of termination of the Term (the "Without Cause Benefits
Period"), Executive shall continue to be covered under each of
the medical, dental, life insurance, accident benefit and other
welfare benefit (exclusive of short- and long-term disability
benefit) programs of HEARx in effect and applicable to Executive
immediately prior to such termination, and HEARx shall pay the
costs therefor except to the extent that Executive already pays
all or any portion thereof; provided, however, that if Executive
obtains any of the welfare benefits provided for under this
sentence from a new employer, HEARx's obligation to provide such
welfare benefits will thereupon cease. Executive's coverage
under HEARx's medical and dental programs for the Without Cause
Benefits Period shall be included in the calculation of the
"Period of Coverage" to be provided to Executive pursuant to
Section 4980B(f)(2)(B) of the Code, and Executive's right to
"Continuation Coverage" under Section 4980B(f)(2) of the Code.
The amount of the "Applicable Premium" to be charged Executive
under Section 4980B(f)(4) for Continuation Coverage shall never
be greater than the monthly amount charged Executive for medical
and dental coverage prior to the termination of the Term; and
(ii) shall be fully vested in any and all
Stock Incentive Rights which are outstanding immediately prior
to the termination of the Term, and Executive may exercise any
such vested Stock Incentive Rights during the two year period
commencing on the date of termination of the Term,
notwithstanding any provision otherwise in any plan or agreement
awarding or granting any Stock Incentive Right to Executive; and
(iii) shall be fully vested in any and all
benefits accrued under any Retirement Plan; and
(iv) shall receive credit in the calculation
of the accrued benefit under HEARx's Pension Plan for (A) the
compensation to be paid to Executive pursuant to Section
4.3(c)(1)(ii) and (B) one (1) year of service in addition to the
service accrued by Executive through the date that the Term is
terminated. If the
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benefits set forth in this clause would cause the Pension Plan
to lose its qualification under Section 401(a) of the Code, then
the benefits accrued hereunder shall accrue to Executive under
HEARx's SERP.
(d) GOOD REASON-CHANGE IN CONTROL; WITHOUT CAUSE ON OR
AFTER A CHANGE IN CONTROL. If Executive terminates the Term with Good
Reason-Change in Control pursuant to Section 4.2(a), or if HEARx terminates the
Term without Cause on or after the occurrence of a Change in Control pursuant to
Section 4.2(a):
(1) HEARx shall pay the aggregate of the following
amounts to Executive in one lump sum within thirty (30) days after the
date of such termination or in a manner and at such later time as
specified by Executive, provided that all such payments must be made no
later than the end of the Term as in effect immediately before the date
of such termination:
(i) to the extent not theretofore paid,
Executive's Base Salary in effect at the time of such
termination (but prior to giving effect to any reduction of
Executive's Base Salary which may have precipitated such
termination) for the duration of the Term as in effect
immediately before the date of such termination; and
(ii) an amount equal to the sum of (A) the
greater of (a) Executive's Base Salary times the number of years
remaining in the original five-year term of this Agreement or
(b) three (3) times Executive's Base Salary in effect at the
time of such termination (but prior to giving effect to any
reduction therein which may have precipitated such termination),
(B) three (3) times the average of all bonus, profit sharing and
other incentive payments made by HEARx to Executive in respect
of the two (2) calendar years immediately preceding such
termination and (C) the pro-rata share of Executive's target
bonus, profit sharing and other incentive payments for the
calendar year in which such termination occurred based upon the
proportion that the number of days that have elapsed in such
calendar year up to and including the date of termination bears
to 365; and
(iii) in the case of compensation previously
deferred by Executive, all amounts previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx,
and any accrued vacation pay not yet paid by HEARx; and
(iv) all other amounts or benefits owing or
accrued to, vested in, or earned by Executive through the date
of termination under the then existing or applicable plans,
programs, arrangements and policies of HEARx and its affiliates,
including any such plans, programs, arrangements or policies
described in Section 2.1(b); and
(v) any and all other Accrued Obligations
not otherwise described in clauses (i), (ii), (iii) or (iv) of
this Section 4.3(d)(1); and
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(2) Executive shall receive the following additional
benefits:
(i) for the three year period commencing on
the date of termination of the Term (the "Three Year Period"),
Executive shall continue to be covered under each of the
medical, dental, life insurance, accident benefit and other
welfare benefit (exclusive of short- and long-term disability
benefit) programs of HEARx in effect and applicable to Executive
immediately prior to the time of such termination, and HEARx
shall pay the costs therefor except to the extent that Executive
already pays all or any portion thereof; provided, however, that
if Executive obtains any of the welfare benefits provided for
under this sentence from a new employer, HEARx's obligation to
provide such welfare benefits shall be secondary to that of such
new employer. Executive's coverage under HEARx's medical and
dental programs for the Three Year Period shall not be included
in the calculation of the "Period of Coverage" to be provided to
Executive pursuant to Section 4980B(f)(2)(B) of the Code, and
Executive's right to "Continuation Coverage" under Section
4980B(f)(2) of the Code for medical and dental benefits under
HEARx's medical and dental programs shall commence on the first
day following the end of the Three Year Period. The amount of
the "Applicable Premium" to be charged Executive under Section
4980B(f)(4) for Continuation Coverage shall never be greater
than the monthly amount charged Executive for medical and dental
coverage during the Three Year Period; and
(ii) shall be fully vested in any and all
Stock Incentive Rights which are outstanding immediately prior
to the termination of the Term, and Executive may exercise any
such vested Stock Incentive Rights during the Three Year Period,
notwithstanding any provision otherwise in any plan or agreement
awarding or granting any Stock Incentive Right to Executive; and
(iii) shall be fully vested in any and all
benefits accrued under any Retirement Plan; and
(iv) shall receive credit in the calculation
of the accrued benefit under the Pension Plan for (A) the
compensation to be paid to Executive pursuant to Section
4.3(d)(1)(ii) and (B) three (3) years of service in addition to
the service accrued by Executive through the date that the Term
is terminated. If the benefits set forth in this clause would
cause the Pension Plan to lose its qualification under Section
401(a) of the Code, then the benefits accrued hereunder shall
accrue to Executive under the SERP, and if the Executive is not
a participant in the SERP, the actual lump sum equivalent of the
benefit described in this clause shall be paid in accordance
with Section 4.3(d)(1).
(e) DEATH. If Executive's employment is terminated under
Section 4.2(b) by reason of Executive's death, HEARx shall pay to Executive's
legal representatives the full amount of the obligations owing or accrued to,
vested in or earned by Executive through the date of Executive's death,
including the Accrued Obligations in accordance with the plans, programs or
agreements under which the Accrued Obligations were earned. Notwithstanding the
provisions of
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any agreement pursuant to which Stock Incentive Rights were granted, any granted
but unvested Stock Incentive Rights will automatically vest on the date of
Executive's death. Executive's legal representative may exercise any Stock
Incentive Rights which vest pursuant to this Section 4.3(e) during a one year
period following Executive's death. Anything in this Agreement to the contrary
notwithstanding, Executive's family shall be entitled to receive benefits
provided by HEARx and any of its affiliates to surviving families under the then
existing or applicable plans, programs or arrangements and policies of HEARx and
its affiliates.
(f) DISABILITY. If Executive's employment is terminated
under Section 4.2(b) by reason of Executive's becoming Disabled, HEARx shall pay
to Executive or Executive's legal representative the full amount of the
obligations owing or accrued to, vested in or earned by Executive through the
date of termination, including the Accrued Obligations in accordance with the
plans, programs or agreements under which the Accrued Obligations were earned.
Notwithstanding the provisions of any agreement pursuant to which Stock
Incentive Rights were granted, any granted but unvested Stock Incentive Rights
will automatically vest on the date of Executive's termination by reason of his
becoming Disabled. Executive or Executive's legal representative may exercise
any Stock Incentive Rights which vest pursuant to this Section 4.3(f) during a
one year period following Executive's termination by reason of his becoming
Disabled.
4.4 CAUSE. As used in this Agreement, the term "Cause" means (a)
willful misconduct by Executive or gross neglect by Executive of his duties as
an employee, officer or director of HEARx which continues for more than thirty
(30) days after Executive's receipt of written notice from the Board to
Executive specifically identifying the willful misconduct or gross negligence of
Executive and directing Executive to discontinue the same, (b) the commission by
Executive of a crime constituting a felony or (c) the commission by Executive of
an act, other than an act taken in good faith within the course and scope of
Executive's employment, which is directly detrimental to HEARx and exposes HEARx
to material liability.
4.5 GOOD REASON. As used in this Agreement, the term "Good Reason"
means the breach of any material provision of this Agreement by HEARx (including
any removal of Executive, without Cause, from the position of the Office during
the Term) which is not cured within thirty (30) days after written notice from
Executive to HEARx specifically identifying such breach; provided, however, that
the term "Good Reason" shall not include any breach of any provision of this
Agreement that occurs after the occurrence of a Change in Control.
4.6 GOOD REASON-CHANGE IN CONTROL.
(a) Except as provided in Section 4.6(b), as used in this
Agreement, the term "Good Reason-Change in Control" means after the occurrence
of a Change in Control, a determination by Executive that any one or more of the
following events has occurred:
(i) a material change in the nature of Executive's
Office, including his authorities, duties, responsibilities or status
(including offices, titles or reporting requirements), from those in
effect immediately prior to the Change in Control; or
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(ii) the relocation of Executive's place of
employment to a location in excess of fifty (50) miles from the place of
Executive's employment immediately prior to the Change in Control,
except for required travel on HEARx business to an extent substantially
equivalent to Executive's business travel obligations immediately prior
to the Change in Control; or
(iii) any reduction by HEARx of Executive's Base
Salary, or a material reduction in his bonus, profit sharing or other
incentive benefits, from those in effect immediately prior to the Change
in Control; or
(iv) the failure by HEARx to increase Executive's
Base Salary in a manner consistent (both as to frequency and percentage
increase) with (A) HEARx's practices in effect immediately prior to the
Change in Control with respect to similarly positioned employees or (B)
HEARx's practices implemented subsequent to the Change in Control with
respect to similarly positioned employees, whichever is more favorable
to Executive; or
(v) the failure of HEARx to continue in effect
Executive's participation in (A) HEARx's employee benefit plans,
programs, arrangements and policies, at a level substantially equivalent
in value to and on a basis consistent with the relative levels of
participation of other similarly positioned employees, as in effect
immediately prior to the Change in Control or (B) HEARx's employee
benefit plans, programs, arrangements and policies implemented
subsequent to the Change in Control with respect to similarly positioned
employees, whichever is more favorable to Executive; or
(vi) the failure of HEARx to obtain from a successor
(including a successor to a material portion of the business or assets
of HEARx) a satisfactory assumption in writing of HEARx's obligations
under this Agreement; or
(vii) the failure of HEARx to continue to provide
Executive with office space, related facilities and support personnel
(including administrative and secretarial assistance) that are both
commensurate with the Office and Executive's responsibilities to and
position with HEARx immediately prior to the Change in Control and not
materially dissimilar to the office space, related facilities and
support personnel provided to other key executive officers of HEARx; or
(viii) HEARx notifies Executive of HEARx's intention
not to observe or perform one or more of the obligations of HEARx under
this Agreement; or
(ix) HEARx breaches any provision of this Agreement
and such breach is not cured within thirty (30) days after HEARx's
receipt of notice thereof from Executive.
(b) If, after the occurrence of a Change in Control,
Executive receives a written description from HEARx of the nature of Executive's
Office thereafter, stating Executive's authorities, duties, responsibilities,
status, salary, bonus and other employee benefits, or job location, and
Executive accepts such new authorities, duties, responsibilities, status,
salary, bonus and other employee benefits, or job location ("New Office") with
HEARx without determining that
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the New Office causes a Good Reason-Change in Control as set forth in Section
4.6(a), then for the remaining Term the New Office shall be the authorities,
duties, responsibilities, status, salary, bonus and other employee benefits, or
job location to be used by Executive in determining whether a Good Reason-Change
in Control occurs thereafter pursuant to Section 4.6(a).
4.7 CHANGE IN CONTROL. As used herein, the term "Change in Control"
shall mean the occurrence with respect to HEARx of any of the following events:
(a) a report on Schedule 13D is filed with the Securities
and Exchange Commission (the "SEC") pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any
person, entity or group (within the meaning of Section 13(d) or 14(d) of the
Exchange Act), other than HEARx (or one of its subsidiaries) or any employee
benefit plan sponsored by HEARx (or one of its subsidiaries), is the beneficial
owner (as such term is defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of 30% or more of the outstanding common stock of
HEARx or the combined voting power of the then outstanding securities of HEARx;
(b) a report is filed by HEARx disclosing a response to
either Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act, Item 1 of Form 8-K promulgated under the Exchange Act, or any
similar reporting requirement hereafter promulgated by the SEC;
(c) any person, entity or group (within the meaning of
Section 13(d) or Section 14(d) of the Exchange Act), other than HEARx (or one of
its subsidiaries) or any employee benefit plan sponsored by HEARx (or one of its
subsidiaries), shall purchase securities pursuant to a tender offer or exchange
offer to acquire any common stock of HEARx (or securities convertible into
common stock) for cash, securities or any other consideration, provided that
after consummation of the offer, the person, entity or group in question is the
beneficial owner (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of 30% or more of the combined voting
power of the then outstanding securities of HEARx (as determined under paragraph
(d) of Rule 13d-3 promulgated under the Exchange Act, in the case of rights to
acquire common stock);
(d) the stockholders of HEARx shall approve:
(i) any merger, consolidation or reorganization of
HEARx:
(A) in which HEARx is not the continuing or
surviving corporation,
(B) pursuant to which common stock of HEARx
would be converted into cash, securities or other property,
(C) with an entity which, prior to such
merger, consolidation or reorganization, owned 20% or more of
the combined voting power of the then outstanding securities of
HEARx, or
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(D) in which HEARx will not survive as an
independent, publicly owned corporation;
(ii) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or
substantially all the assets of HEARx, or
(iii) any liquidation or dissolution of HEARx;
(e) the stockholders of HEARx shall approve a merger,
consolidation, reorganization, recapitalization, exchange offer, purchase of
assets or other transaction after the consummation of which any person, entity
or group (within the meaning of Section 13(d) or Section 14(d) of the Exchange
Act) would own beneficially in excess of 30% of the outstanding common stock of
HEARx or in excess of 30% of the combined voting power of the then outstanding
securities of HEARx;
(f) HEARx's common stock is listed on none of the American
Stock Exchange, New York Stock Exchange and NASDAQ National Market System as a
result of a going-private transaction; or
(g) during any period of two consecutive years, the
individuals who at the beginning of such period constituted the Board cease for
any reason to constitute a majority of the Board, unless the election or
nomination for election by HEARx's stockholders of each new director during any
such two-year period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such two-year
period.
4.8 DISABLED. As used herein, "Disabled" or "Disability" shall mean
a mental or physical impairment which, in the reasonable opinion of a qualified
doctor selected by HEARx, renders Executive unable to perform with reasonable
diligence the ordinary functions and duties of Executive on a full-time basis in
accordance with the terms of this Agreement, which inability continues for a
period of not fewer than 180 consecutive days.
4.9 RETURN OF MATERIALS; CONFIDENTIAL INFORMATION. In the event of
any termination of the Term, Executive shall promptly deliver to HEARx all
lists, books, records, literature, products and any other materials owned or
provided by HEARx in connection with Executive's employment hereunder. Executive
shall not at any time during or after the Term hereof use for himself or others,
or divulge to others, any secret or confidential information, knowledge or data
of HEARx obtained by Executive as a result of his employment unless authorized
by the Board.
4.10 CERTAIN ADDITIONAL PAYMENTS BY HEARX.
(a) Anything in this Agreement to the contrary
notwithstanding, if it shall be determined that any payment or distribution by
HEARx or any of its affiliates to or for the benefit of Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (any such payments or distributions being individually
referred to herein as a "Payment," and any two or more of such payments or
distributions being referred to herein as
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"Payments"), would be subject to the excise tax imposed by Section 4999 of the
Code (such excise tax, together with any interest thereon, any penalties,
additions to tax, or additional amounts with respect to such excise tax, and any
interest in respect of such penalties, additions to tax or additional amounts,
being collectively referred herein to as the "Excise Tax"), then Executive shall
be entitled to receive and HEARx shall make an additional payment or payments
(individually referred to herein as a "Gross-Up Payment," and any two or more of
such additional payments being referred to herein as "Gross-Up Payments") in an
amount such that after payment by Executive of all taxes (as defined in Section
4.10(k)) imposed upon the Gross-Up Payment, Executive retains an amount of such
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 4.10(c) through
(i), any determination (individually, a "Determination") required to be made
under this Section 4.10(b), including whether a Gross-Up Payment is required and
the amount of such Gross-Up Payment, shall initially be made, at HEARx's
expense, by nationally recognized tax counsel mutually acceptable to HEARx and
Executive ("Tax Counsel"). Tax Counsel shall provide detailed supporting legal
authorities, calculations and documentation both to HEARx and Executive within
15 business days of the termination of Executive's employment, if applicable, or
such other time or times as is reasonably requested by HEARx or Executive. If
Tax Counsel makes the initial Determination that no Excise Tax is payable by
Executive with respect to a Payment or Payments, it shall furnish Executive with
an opinion reasonably acceptable to Executive that no Excise Tax will be imposed
with respect to any such Payment or Payments. Executive shall have the right to
dispute any Determination (a "Dispute") within 15 business days after delivery
of Tax Counsel's opinion with respect to such Determination. The Gross-Up
Payment, if any, as determined pursuant to such Determination shall, at HEARx's
expense, be paid by HEARx to Executive within five business days of Executive's
receipt of such Determination. The existence of a Dispute shall not in any way
affect Executive's right to receive the Gross-Up Payment in accordance with such
Determination. If there is no Dispute, such Determination shall be binding,
final and conclusive upon HEARx and Executive, subject in all respects, however,
to the provisions of Section 4.10(c) through (i) below. As a result of the
uncertainty in the application of Sections 4999 and 280G of the Code, it is
possible that Gross-Up Payments (or portions thereof) which will not have been
made by HEARx should have been made ("Underpayments"), and if upon any
reasonable written request from Executive or HEARx to Tax Counsel, or upon Tax
Counsel's own initiative, Tax Counsel, at HEARx's expense, thereafter determines
that Executive is required to make a payment of any Excise Tax or any additional
Excise Tax, as the case may be, Tax Counsel shall, at HEARx's expense, determine
the amount of the Underpayment that has occurred, and any such Underpayment
shall be promptly paid by HEARx to Executive.
(c) HEARx shall defend, hold harmless and indemnify
Executive on a fully grossed-up after tax basis from and against any and all
claims, losses, liabilities, obligations, damages, impositions, assessments,
demands, judgements, settlements, costs and expenses (including reasonable
attorneys', accountants', and experts' fees and expenses) with respect to any
tax liability of Executive resulting from any Final Determination (as defined in
Section 4.10(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral
communication with respect to any question, adjustment, assessment or pending or
threatened audit, examination, investigation or
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administrative, court or other proceeding which, if pursued successfully, could
result in or give rise to a claim by Executive against HEARx under this Section
4.10(d) ("Claim"), including a claim for indemnification of Executive by HEARx
under Section 4.10(c), then such party shall promptly notify the other party
hereto in writing of such Claim ("Tax Claim Notice").
(e) If a Claim is asserted against Executive ("Executive
Claim"), Executive shall take or cause to be taken such action in connection
with contesting such Executive Claim as HEARx shall reasonably request in
writing from time to time, including the retention of counsel and experts as are
reasonably designated by HEARx (it being understood and agreed by the parties
hereto that the terms of any such retention shall expressly provide that HEARx
shall be solely responsible for the payment of any and all fees and
disbursements of such counsel and any experts) and the execution of powers of
attorney, provided that:
(i) within 30 calendar days after HEARx receives or
delivers, as the case may be, the Tax Claim Notice relating to such
Executive Claim (or such earlier date that any payment of the taxes
claimed is due from Executive, but in no event sooner than five calendar
days after HEARx receives or delivers such Tax Claim Notice), HEARx
shall have notified Executive in writing ("Election Notice") that HEARx
does not dispute its obligations (including its indemnity obligations)
under this Agreement and that HEARx elects to contest, and to control
the defense or prosecution of, such Executive Claim at HEARx's sole risk
and sole cost and expense; and
(ii) HEARx shall have advanced to Executive on an
interest-free basis, the total amount of the tax claimed for Executive,
at HEARx's request, to pay or cause to be paid the tax claimed, file a
claim for refund of such tax and, subject to the provisions of the last
sentence of Section 4.10(g), sue for a refund of such tax if such claim
for refund is disallowed by the appropriate taxing authority (it being
understood and agreed by the parties hereto that HEARx shall only be
entitled to sue for a refund and HEARx shall not be entitled to initiate
any proceeding in, for example, United States Tax Court) and shall
indemnify and hold Executive harmless, on a fully grossed-up after tax
basis, from any tax imposed with respect to such advance or with respect
to any imputed income with respect to such advance; and
(iii) HEARx shall reimburse Executive for any and all
costs and expenses resulting from any such request by HEARx and shall
indemnify and hold Executive harmless, on fully grossed-up after-tax
basis, from any tax imposed as a result of such reimbursement.
(f) Subject to the provisions of Section 4.10(e), HEARx
shall have the right to defend or prosecute, at the sole cost, expense and risk
of HEARx, such Executive Claim by all appropriate proceedings, which proceedings
shall be defended or prosecuted diligently by HEARx to a Final Determination;
provided, however, that (i) HEARx shall not, without Executive's prior written
consent, enter into any compromise or settlement of such Executive Claim that
would adversely affect Executive, (ii) any request from HEARx to Executive
regarding any extension of the statute of limitations relating to assessment,
payment or collection of taxes for the taxable year of Executive with respect to
which the contested issues involved in, and amount of, the Executive
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Claim relate is limited solely to such contested issues with respect to the
Executive Claim and Executive shall be entitled to settle or contest, in his
sole and absolute discretion, any other issue raised by the Internal Revenue
Service or any other taxing authority. So long as HEARx is diligently defending
or prosecuting such Executive Claim, Executive shall provide or cause to be
provided to HEARx any information reasonably requested by HEARx that relates to
such Executive Claim, and shall otherwise cooperate with HEARx and its
representatives in good faith to contest effectively such Executive Claim. HEARx
shall keep Executive informed of all developments and events relating to any
such Executive Claim (including providing to Executive copies of all written
materials pertaining to any such Executive Claim), and Executive or his
authorized representatives shall be entitled, at Executive's expense, to
participate in all conferences, meetings and proceedings relating to any such
Executive Claim.
(g) If, after actual receipt by Executive of an amount of a
tax claimed (pursuant to an Executive Claim) that has been advanced by HEARx
pursuant to Section 4.10(e)(ii), the extent of the liability of HEARx hereunder
with respect to such tax claimed has been established by a Final Determination,
Executive shall promptly pay or cause to be paid to HEARx any refund actually
received by, or actually credited to, Executive with respect to such tax
(together with any interest paid or credited thereon by the taxing authority and
any recovery of legal fees from such taxing authority related thereto), except
to the extent that any amounts are then due and payable buy HEARx to Executive,
whether under the provisions of this Agreement or otherwise. If, after the
receipt by Executive of an amount advanced by HEARx pursuant to Section
4.10(e)(ii), a determination is made by the Internal Revenue Service or other
appropriate taxing authority that Executive shall not be entitled to any refund
with respect to such tax claimed and HEARx does not notify Executive in writing
of its intent to contest such denial of refund prior to the expiration of thirty
days after such determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of any Gross-Up Payments and other payments required
to be paid hereunder.
(h) With respect to any Executive Claim, if HEARx fails to
deliver an Election Notice to Executive within the period provided in Section
4.10(e)(i) or, after delivery of such Election Notice, HEARx fails to comply
with the provisions of Section 4.10(e)(ii) and (iii) and Section 4.10(f), then
Executive shall at any time thereafter have the right (but not the obligation),
at his election and in his sole and absolute discretion, to defend or prosecute,
at the sole cost, expense and risk of HEARx, such Executive Claim. Executive
shall have full control of such defense or prosecution and such proceedings,
including any settlement or compromise thereof. If requested by Executive, HEARx
shall cooperate, and shall cause its affiliates to cooperate, in good faith with
Executive and his authorized representatives in order to contest effectively
such Executive Claim. HEARx may attend, but not participate in or control, any
defense, prosecution, settlement or compromise of any Executive Claim controlled
by Executive pursuant to this Section4.10(h) and shall bear its own costs and
expenses with respect thereto. In the case of any Executive Claim that is
defended or prosecuted by Executive, Executive shall, from time to time, be
entitled to current payment, on a fully grossed-up after tax basis, from HEARx
with respect to costs and expenses incurred by Executive in connection with such
defense or prosecution.
(i) In the case of any Executive Claim that is defended or
prosecuted to a Final Determination pursuant to the terms of this Section
4.10(i), HEARx shall pay, on a fully grossed-up
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after tax basis, to Executive in immediately available funds the full amount of
any taxes arising or resulting from or incurred in connection with such
Executive Claim that have not theretofore been paid by HEARx to Executive,
together with the costs and expenses, on a fully grossed-up after tax basis,
incurred in connection therewith that have not theretofore been paid by HEARx to
Executive, within ten calendar days after such Final Determination. In the case
of any Executive Claim not covered by the preceding sentence, HEARx shall pay,
on a fully grossed-up after tax basis, to Executive in immediately available
funds the full amount of any taxes arising or resulting from or incurred in
connection with such Executive Claim at least ten calendar days before the date
payment of such taxes is due from Executive, except where payment of such taxes
is sooner required under the provisions of this Section 4.10(i), in which case
payment of such taxes (and payment, on a fully grossed-up after tax basis, of
any costs and expenses required to be paid under this Section 4.10(i)) shall be
made within the time and in the manner otherwise provided in this Section
4.10(i).
(j) For purposes of this Agreement, the term "Final
Determination" shall mean (A) a decision, judgment, decree or other order by a
court or other tribunal with appropriate jurisdiction, which has become final
and non-appealable; (B) a final and binding settlement or compromise with an
administrative agency with appropriate jurisdiction, including, but not limited
to, a closing agreement under Section 7121 of the Code; (C) any disallowance of
a claim for refund or credit with respect to an overpayment of tax unless a suit
is filed on a timely basis; or (D) any final disposition by reason of the
expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms "tax" and
"taxes" mean any and all taxes of any kind whatsoever (including any and all
Excise Taxes, income taxes, and employment taxes), together with any interest
thereon, any penalties, additions to tax or additional amounts with respect to
such taxes and any interest in respect of such penalties, additions to tax or
additional amounts.
(l) For purposes of this Agreement, the terms "affiliate"
and "affiliates" mean, when used with respect to any entity, individual or other
person, any other entity, individual or other person which, directly or
indirectly, through one or more intermediaries controls, or is controlled by, or
is under common control with, such entity, individual or person. The term
"control" and deviations thereof when used in the immediately preceding sentence
means the ownership, directly or indirectly, of 50% of more of the voting
securities of an entity or other person or possessing the power to direct or
cause the direction of the management and policies of such entity or other
person, whether through the ownership of voting securities, by contract or
otherwise.
4.11 LEGAL FEES AND EXPENSES. HEARx shall defend, hold harmless and
indemnify Executive on a fully grossed-up after tax basis from and against any
and all costs and expenses (including reasonable attorneys', accountants' and
experts' fees and expenses) incurred by Executive acting reasonably from time to
time as a result of any contest (regardless of the outcome) by HEARx or others
contesting the validity or enforcement of, or liability under, any term or
provision of this Agreement, plus in each case interest at the applicable
federal rate provided for in Section 7872(f)(2)(B) of the Code.
4.12 NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit Executive's continuing or future participation in any benefit,
bonus, incentive or other plan,
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program, arrangement or policy provided by HEARx or any of its affiliates
(including any plan, program, arrangement or policy described in Section 2.1(e))
and for which Executive and/or Executive's family may qualify, nor shall
anything herein limit or otherwise affect such rights as Executive and/or
Executive's family may have under any other agreements with HEARx or any of its
affiliates. Amounts which are vested benefits or which Executive and/or
Executive's family is otherwise entitled to receive under any plan, program,
arrangement or policy described in Section 2.1(e)) at or subsequent to the date
of termination of the Term shall be payable in accordance with such plan,
program, arrangement or policy.
4.13 FULL SETTLEMENT. HEARx's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which HEARx may have against Executive
or others. In no event shall Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to Executive
under any of the provisions of this Agreement.
ARTICLE V
SHARE OPTIONS
5.1 SHARE OPTIONS. Concurrent with the execution hereof, HEARx is
granting to Executive, nonqualified, five-year options to purchase 100,000
shares of HEARx's common stock, $0.10 par value per share (the "Common Stock"),
at an option price per share equal to the closing price of the Common Stock as
reported on the American Stock Exchange of the shares on the effective date of
this Agreement, subject to adjustment as provided in the Option Agreement dated
as of the date hereof (the "Options"). Such Options shall vest in and become
exercisable by Executive for all purposes as follows: 25% of such Options as of
each of the first four anniversary dates of the Effective Date, so that all of
such Options shall be fully vested in and exercisable by Executive as of the
fourth anniversary of the Effective Date. Also, if an Acceleration Event occurs,
all outstanding options to purchase HEARx's common stock, including those
options currently held by Executive, those Options granted hereunder and all
additional share options granted to Executive by HEARx after the Effective Date,
shall vest in and be exercisable by Executive (or, as the case may be, his
estate or representative) as of the Acceleration Event. "Acceleration Event"
shall mean for all purposes hereof any of the following events: (a) the Term is
terminated by Executive with Good Reason pursuant to Section 4.2(a) or by HEARx
without Cause, (b) Executive dies or (c) Executive becomes Disabled. The Option
Agreement shall provide that the shares of Common Stock issuable on exercise of
the options shall be treasury shares.
ARTICLE VI
GENERAL PROVISIONS
6.1 ARBITRATION OF DISPUTES.
(a) SCOPE OF AGREEMENT. HEARx and Executive agree to take
all reasonable steps to resolve any employment-related legal and/or judicial
disputes between them quickly and fairly. Should such matters remain unresolved,
HEARx and Executive agree that final and binding arbitration shall be the
exclusive remedy for any dispute between them relating to all common law,
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statutory, legal or judicial claims, including any claims for breach of contract
and for violation of laws forbidding discrimination on the basis of race, color,
religion, gender, age, national origin, disability, or any other legally
protected status.
(b) PROCEDURE. Arbitration shall be before a single
arbitrator in Miami, Florida, unless the parties mutually agree to hold the
arbitration in a different location. The arbitration will be administered in
accordance with the employment dispute rules of the American Arbitration
Association (AAA), and its procedures then in effect. If the parties cannot
agree on an arbitrator, then the AAA rules will govern selection. HEARx will pay
the fees of the AAA and the arbitrator. However, if Executive submits a matter
to arbitration, he shall be responsible for contributing to such fees an amount
equivalent to the amount required to file a complaint of the same type in the
state court which is geographically closest to the site of the arbitration if he
does not prevail in the arbitration.
The arbitrator's award is to be in writing, with reasons given and
evidence cited for the award. The arbitrator shall have the discretion to award
fees (including administrative charges, costs and/or reasonable attorney's fees
actually expended) to the prevailing party, in accordance with controlling law.
Any court of competent jurisdiction may enter judgment upon the award, either
by: (1) confirming the award, or (2) vacating, modifying or correcting the
award: (a) on any ground referred to in the U.S. Arbitration Act, (b) where the
findings of fact are not supported by substantial evidence, or (c) where the
conclusions of law are erroneous.
6.2 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the law of the State of Delaware.
6.3 ASSIGNABILITY. This Agreement is personal to Executive and
without the prior written consent of HEARx shall not be assignable by Executive
other than by will or the laws of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by Executive's legal representatives
and heirs. This Agreement shall inure to the benefit of and be binding upon
HEARx and its successors and assigns. HEARx shall require any corporation,
entity, individual or other person who is the successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business and/or assets of HEARx to expressly
assume and agree to perform, by a written agreement in form and substance
satisfactory to Executive, all of the obligations of HEARx under this Agreement.
As used in this Agreement, the term "HEARx" shall mean HEARx as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, written
agreement or otherwise.
6.4 WITHHOLDING. HEARx may withhold from any amounts payable under
this Agreement such federal, state or local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
6.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the
entire agreement and understanding between Executive and HEARx and supersedes
any prior agreements or understandings, whether written or oral, with respect to
the subject matter hereof. Except as may be
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otherwise provided herein, this Agreement may not be amended or modified, except
by subsequent written agreement executed by both parties hereto.
6.6 MULTIPLE COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which shall constitute an original, but all of
which together shall constitute one Agreement.
6.7 NOTICES. Any notice provided for in this Agreement shall be
deemed delivered upon deposit in the United States mails, registered or
certified mail, addressed to the party to whom directed at the addresses set
forth below or at such other addresses as may be substituted therefor by notice
given hereunder. Notice given by any other means must be in writing and shall be
deemed delivered only upon actual receipt.
If to HEARx:
1250 Northpoint Parkway
West Palm Beach, FL 33407
Attn: President
If to Executive:
1744 South Ocean Boulevard
Palm Beach, FL 33480
Attn: Paul A. Brown, M.D.
6.8 WAIVER. The waiver of any breach of any term or condition of
this Agreement shall not be deemed to constitute the waiver of any breach of the
same or by any other term or condition of this Agreement.
6.9 SEVERABILITY. In the event any provision of this Agreement is
found to be unenforceable or invalid, such provision shall be severable from
this Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
HEARx LTD.
By: /s/ Stephen J. Hansbrough
------------------------------
Name: Stephen J. Hansbrough
------------------------------
Title: President and COO
------------------------------
/s/ Paul A. Brown, M.D.
-------------------------------------
Paul A. Brown, M.D.
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EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of December
14, 1999 (the "Effective Date"), by and between HEARx Ltd., a Delaware
corporation ("HEARx"), and Stephen J. Hansbrough ("Executive").
RECITALS
1. HEARx operates a network of hearing care centers which provide a
full range of audiological products and services for the hearing impaired (the
"Business");
2. Executive is recognized as having experience in the management
and operation of companies that are in the Business;
3. HEARx's Board of Directors (the "Board") has determined that it
is in the best interests of HEARx and its stockholders to assure that HEARx will
have the continued dedication of Executive, notwithstanding the possibility,
threat or occurrence of a Change in Control (as defined in Section 4.7);
4. The Board believes it is imperative (a) to diminish the
inevitable and significant distractions of Executive and dilution of the time of
Executive, by virtue of the personal uncertainties and risks created by a
pending or threatened Change in Control, (b) to encourage Executive's full
attention and dedication to HEARx currently and in the event of any threatened
or pending Change in Control and (c) to provide Executive with compensation
arrangements in the event of a Change in Control which provide Executive with
financial security, which are competitive with those of other companies, and
which ensure that Executive receives the compensation and benefits intended to
be provided to Executive by HEARx through this Agreement and HEARx's various
employee benefit and compensation plans and arrangements without regard to any
Excise Tax (as defined in Section 4.11(a)); and
5. To accomplish the objectives described in the two immediately
preceding recitals, the Board desires to cause HEARx to enter into this
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements contained in this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged by the
parties, HEARx and Executive agree as follows:
ARTICLE I
EMPLOYMENT, REPORTING AND DUTIES
1.1 EMPLOYMENT. On the terms and subject to the conditions of this
Agreement, HEARx hereby employs and engages the services of Executive to serve
as, and Executive agrees to serve as and perform the functions of, President and
Chief Operating Officer (collectively, the "Office") of HEARx for the Term (as
defined in Section 4.1) and for the compensation and benefits stated herein.
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1.2 MAJOR RESPONSIBILITIES; AUTHORITY. Executive shall have the
authorities, duties, responsibilities and status (including offices, titles and
reporting requirements) usually associated with the Office of companies having
operations and assets similar in nature and value to the operations and assets
of HEARx and at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the 90-day
period immediately preceding the Effective Date, and such other duties as the
Board shall determine and Executive shall accept from time to time.
1.3 EXTENT OF SERVICE. During the Term, and excluding any periods of
vacation and sick leave to which Executive is entitled, Executive agrees to
devote reasonable time and energies to the Business consistent with past
practice and shall not, during the Term, be engaged in any business activity
which would interfere or prevent Executive from carrying out his duties under
this Agreement; provided, however, that this Section 1.3 shall not be construed
as preventing Executive from investing his assets in such form or manner as will
not require services on the part of Executive in the operation of the affairs of
any company in which such investments are made.
1.4 LOCATION. Executive shall not be required to move from
Executive's home in Palm Beach County, Florida in the performance of his duties,
responsibilities and obligations hereunder.
ARTICLE II
COMPENSATION AND RELATED ITEMS
2.1 COMPENSATION.
(a) BASE SALARY. Until a Change in Control occurs, as
compensation and in consideration for the services to be rendered by Executive
under this Agreement and for the performance by Executive of the usual
obligations of such employment, HEARx agrees to pay Executive, and Executive
agrees to accept, a base salary (the "Base Salary") effective January 1, 2000 of
at least $275,000 per annum which shall be paid in accordance with HEARx's
standard payroll practice. Executive's Base Salary shall be subject to review
annually by the Board in accordance with HEARx's review policies and practices
for executives as in effect at the time of any such review. If a Change in
Control occurs, Executive's Base Salary for the next calendar year and each
subsequent calender year during the Term must increase by at least 20% over his
Base Salary during the previous calendar year.
(b) BONUS. At the end of each calendar year during the Term,
the Executive shall be eligible to receive an annual bonus (the "Annual Bonus"),
based upon a performance evaluation criteria which shall be consistent with the
criteria used by the Board for its current evaluation of Executive; provided
that, if, in any calender year during the Term, HEARx achieves the net income
target approved by the Board for such calendar year (the "Net Income Target")
the Executive must receive an Annual Bonus equal to at least 50% of Executive's
Base Salary for the previous calender year. For the purposes of this Agreement,
net income must be determined in accordance with generally accepted accounting
principles, consistently applied.
(c) PERCENTAGE OF NET INCOME. If, in any calender year
during the Term, HEARx achieves the Net Income Target approved by the Board for
such calendar year, no more than 100
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days after the end of such calender year, HEARx must pay to Executive an amount
equal to 1% of HEARx's net income for such calender year.
(d) 1999 BONUS. Notwithstanding the foregoing, for the
calendar year ended December 31, 1999, the Executive's Annual Bonus must not be
less than $112,500.
(e) ADDITIONAL COMPENSATION. In addition to the Base Salary
provided for in Section 2.1(a), Executive or Executive's family, as the case may
be, shall be entitled to:
(i) participate in, and shall receive all benefits
under:
(A) any and all welfare benefit and similar
employee benefit plans, programs, arrangements or policies that
are generally made available by HEARx and its affiliates (as
defined in Section 4.11(l)) now or at any time in the future to
other key employees or retired key employees, including any
hospitalization, medical, prescription, dental, disability,
salary continuance, individual life insurance, executive life
insurance, group life insurance, accidental death insurance and
travel accident insurance plans, programs, arrangements and
policies; and
(B) in addition to the incentive
compensation provided for in Section 2.1(b), Executive will be
entitled to any and all incentive, savings, retirement, profit
sharing, pension, stock option, restricted stock, employee stock
ownership, supplemental executive retirement and other employee
benefit plans, programs, arrangements and policies that are
generally made available by HEARx and its affiliates now or at
any time in the future to officers and other key employees;
additionally, pension benefits from HEARx when Executive is
eligible for and elects retirement shall be calculated so as to
provide a benefit based on actual credited years and months of
service with HEARx plus a benefit calculated equivalent to an
added ten years of credited service;
(ii) annual vacations and sick leave in accordance
with the vacation and sick leave policies of HEARx and its affiliates
that are now or at any time in the future in effect with respect to
officers and other key employees, during which time Executive's
compensation shall be paid in full; and
(iii) fringe benefits in accordance with the fringe
benefit policies of HEARx and its affiliates that are now or at any time
in the future in effect with respect to officers and other key
employees.
2.2 EXPENSES. HEARx agrees that, during the Term, Executive shall be
allowed reasonable and necessary business expenses in connection with the
performance of his duties hereunder within guidelines established by the Board
as in effect at any time with respect to key employees ("Business Expenses"),
including reasonable and necessary expenses for food, travel, lodging,
entertainment and other items in the promotion of the Business within such
guidelines. HEARx shall promptly reimburse Executive for all Business Expenses
incurred by Executive upon Executive's presentation to HEARx of an itemized
account thereof, together with receipts, vouchers
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or other supporting documentation. After termination or expiration of the Term,
however such termination or expiration may come about, Executive shall have
ninety (90) days after the date of such termination or expiration to submit
Business Expenses incurred during the Term to HEARx for reimbursement.
ARTICLE III
EXCULPATION
HEARx agrees that Executive will not be liable for any losses, expenses,
costs or damages caused by or resulting from the recommendations, suggestions,
actions, errors, omissions or mistakes of Executive undertaken or proposed by
Executive if Executive acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of HEARx. Executive's
rights under this Article III shall not be deemed exclusive of, but shall be
cumulative with, any and all other rights (including rights of indemnification
and advancement of expenses) to which Executive may now or at any time in the
future be entitled under applicable law, HEARx's certificate of incorporation,
HEARx's bylaws, any agreement (including this Agreement), any vote of
stockholders, any resolution of directors, or otherwise. Nothing contained in
this Article III will prevent the termination of Executive's employment in
accordance with the provisions of this Agreement.
ARTICLE IV
TERM AND TERMINATION
4.1 TERM. Subject to Section 4.2, the term of this Agreement shall
be for five (5) years commencing on the Effective Date ("Term"); provided,
however, that if a Change in Control occurs prior to the second anniversary of
the Effective Date, the Term shall be extended to end on the fifth anniversary
of such Change in Control.
4.2 TERMINATION OF TERM. Except as may otherwise be provided herein,
the Term shall terminate:
(a) Thirty (30) days after written notice of termination is
given by either party to the other; or
(b) On Executive's death or, at HEARx's option, upon
Executive's becoming Disabled (as defined in Section 4.9).
Any notice of termination given by HEARx to Executive under Section 4.2(a) above
shall specify whether such termination is with or without Cause (as defined in
Section 4.4). Any notice of termination given by Executive to HEARx under
Section 4.2(a) above shall specify whether such termination is made with or
without Good Reason (as defined in Section 4.5) or Good Reason-Change in Control
(as defined in Section 4.6).
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4.3 OBLIGATIONS OF HEARX UPON TERMINATION.
(a) CAUSE; WITHOUT GOOD REASON; AND WITHOUT GOOD
REASON-CHANGE IN CONTROL. If HEARx terminates the Term with Cause pursuant to
Section 4.2(a), or if Executive terminates the Term without Good Reason or
without Good Reason-Change in Control pursuant to Section 4.2(a), the Term shall
terminate without further obligations to Executive, other than those obligations
owing or accrued to, vested in, or earned by Executive through the date of
termination, including:
(i) Executive's Base Salary in effect at the time of
such termination through the date of termination to the extent it
remains unpaid; and
(ii) all compensation previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx, and any
accrued vacation pay not yet paid by HEARx; and
(iii) all other amounts or benefits owing or accrued
to, vested in or earned by Executive through the date of termination
under the then existing or applicable plans, programs, arrangements and
policies of HEARx and its affiliates, including any such plans,
programs, arrangements or policies described in Section 2.1(b).
The obligations owing or accrued to, vested in, or earned by Executive through
the date of termination, including such amounts and benefits specified in
clauses (i), (ii) and (iii) of this Section 4.3(a), are collectively referred to
as the "Accrued Obligations." The aggregate amount of such obligations owing or
accrued to, vested in, or earned by Executive through the date of termination,
including the Accrued Obligations, shall be paid by HEARx to Executive in
accordance with the plans, programs or agreements under which the Accrued
Obligations were earned.
(b) GOOD REASON. If Executive terminates the Term with Good
Reason pursuant to Section 4.2(a):
(1) HEARx shall pay the aggregate of the following
amounts to Executive in one lump sum within thirty (30) days after the
date of such termination or in a manner and at such later time as
specified by Executive, provided that all such payments must be made no
later than the end of the Term as in effect immediately before the date
of such termination:
(i) to the extent not theretofore paid,
Executive's Base Salary in effect at the time of such
termination (but prior to giving effect to any reduction of
Executive's Base Salary which may have precipitated such
termination) for the duration of the Term as in effect
immediately before the date of such termination; and
(ii) if more than three years of the Term
have elapsed on the date of such termination, an amount equal to
one (1) times Executive's Base Salary in
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effect at the time of such termination (but prior to giving
effect to any reduction of Executive's Base Salary which may
have precipitated such termination); and
(iii) an amount equal to (A) one (1) times the
average of all bonus, profit sharing and other incentive
payments made by HEARx to Executive in respect of the two (2)
calendar years immediately preceding such termination, and (B)
the pro-rata share of Executive's target bonus, profit sharing
and other incentive payments for the calendar year in which such
termination occurred based upon the proportion that the number
of days that have elapsed in such calendar year up to and
including the date of termination bears to 365; and
(iv) in the case of compensation previously
deferred by Executive, all amounts previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx,
and any accrued vacation pay not yet paid by HEARx; and
(v) all other amounts or benefits owing or
accrued to, vested in, or earned by Executive through the date
of termination under the then existing or applicable plans,
programs, arrangements and policies of HEARx and its affiliates,
including any such plans, programs, arrangements or policies
described in Section 2.1(b); and
(vi) any and all other Accrued Obligations
not otherwise described in clauses (i), (ii), (iii) or (iv) of
this Section 4.3(b)(1); and
(2) Executive shall receive the following additional
benefits:
(i) for a 548-day period commencing on the
date of termination of the Term (the "Good Reason Benefits
Period"), Executive shall continue to be covered under each of
the medical, dental, life insurance, accident benefit and other
welfare benefit (exclusive of short- and long-term disability
benefit) programs of HEARx in effect and applicable to Executive
immediately prior to such termination, and HEARx shall pay the
costs therefor except to the extent that Executive already pays
all or any portion thereof; provided, however, that if Executive
obtains any of the welfare benefits provided for under this
sentence from a new employer, HEARx's obligation to provide such
welfare benefits should be secondary to that of such new
employer. Executive's coverage under HEARx's medical and dental
programs for the Good Reason Benefits Period shall be included
in the calculation of the "Period of Coverage" to be provided to
Executive pursuant to Section 4980B(f)(2)(B) of the Internal
Revenue Code of 1986, as amended (the "Code"), and Executive's
right to "Continuation Coverage" under Section 4980B(f)(2) of
the Code. The amount of the "Applicable Premium" to be charged
Executive under Section 4980B(f)(4) for Continuation Coverage
shall never be greater than the monthly amount charged Executive
for medical and dental coverage prior to the termination of the
Term; and
(ii) shall be fully vested in any and all
options, restricted stock, stock appreciation rights, cash
equivalent stock appreciation rights or any other
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similar rights based on the fair market value of or otherwise
relating to HEARx's common stock (collectively, "Stock Incentive
Rights") which are outstanding immediately prior to the
termination of the Term, and Executive may exercise any such
vested Stock Incentive Rights during the two year period
commencing on the date of termination of the Term,
notwithstanding any provision otherwise in any plan or agreement
awarding or granting any Stock Incentive Right to Executive; and
(iii) shall be fully vested in any and all
benefits accrued under any "employee pension benefit plan," as
defined in Section 3(2)(A) of the Employee Retirement Income
Security Act of 1947, as amended ("ERISA"), of HEARx
("Retirement Plan");
(iv) shall receive credit in the calculation
of the accrued benefit under HEARx's Pension Plan ("Pension
Plan") for (A) the compensation to be paid to Executive pursuant
to Section 4.3(b)(1)(ii) and (B) one (1) year of service in
addition to the service accrued by Executive through the date
that the Term is terminated. If the benefits set forth in this
clause would cause the Pension Plan to lose its qualification
under Section 401(a) of the Code, then the benefits accrued
hereunder shall accrue to Executive under HEARx's Supplemental
Executive Retirement Plan ("SERP"); and
(v) shall receive such individual
outplacement service as is appropriate for Executive's position
for the Good Reason Benefits Period.
(c) WITHOUT CAUSE BEFORE A CHANGE IN CONTROL. If HEARx
terminates the Term without Cause before the occurrence of a Change in Control
pursuant to Section 4.2(a):
(1) HEARx shall pay the aggregate of the following
amounts to Executive in one lump sum within thirty (30) days after the
date of such termination or in a manner and at such later time as
specified by Executive, provided that all such payments must be made no
later than the end of the Term as in effect immediately before the date
of such termination:
(i) to the extent not theretofore paid,
Executive's Base Salary in effect at the time of such
termination for the duration of the Term as in effect
immediately before the date of such termination; and
(ii) if more than three years of the Term
have elapsed on the date of such termination, an amount equal to
one (1) times Executive's Base Salary in effect at the time of
such termination; and
(iii) an amount equal to the sum of (A) one
(1) times the average of all bonus, profit sharing and other
incentive payments made by HEARx to Executive in respect of the
two calendar years immediately preceding such termination, and
(B) the pro-rata share of Executive's target bonus, profit
sharing and other incentive payments for the calendar year in
which such termination occurred
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based upon the proportion that the number of days that have
elapsed in such calendar year up to and including the date of
termination bears to 365; and
(iv) in the case of compensation previously
deferred by Executive, all amounts previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx,
and any accrued vacation pay not yet paid by HEARx; and
(v) all other amounts or benefits owing or
accrued to, vested in, or earned by Executive through the date
of termination under the then existing or applicable plans,
programs, arrangements and policies of HEARx and its affiliates,
including any such plans, programs, arrangements or policies
described in Section 2.1(b); and
(vi) any and all other Accrued Obligations
not otherwise described in clauses (i), (ii), (iii) or (iv) of
this Section 4.3(b)(1); and
(2) Executive shall receive the following additional
benefits:
(i) for a 548-day period commencing on the
date of termination of the Term (the "Without Cause Benefits
Period"), Executive shall continue to be covered under each of
the medical, dental, life insurance, accident benefit and other
welfare benefit (exclusive of short- and long-term disability
benefit) programs of HEARx in effect and applicable to
Executive immediately prior to such termination, and HEARx
shall pay the costs therefor except to the extent that
Executive already pays all or any portion thereof; provided,
however, that if Executive obtains any of the welfare benefits
provided for under this sentence from a new employer, HEARx's
obligation to provide such welfare benefits will thereupon
cease. Executive's coverage under HEARx's medical and dental
programs for the Without Cause Benefits Period shall be
included in the calculation of the "Period of Coverage" to be
provided to Executive pursuant to Section 4980B(f)(2)(B) of the
Code, and Executive's right to "Continuation Coverage" under
Section 4980B(f)(2) of the Code. The amount of the "Applicable
Premium" to be charged Executive under Section 4980B(f)(4) for
Continuation Coverage shall never be greater than the monthly
amount charged Executive for medical and dental coverage prior
to the termination of the Term; and
(ii) shall be fully vested in any and all
Stock Incentive Rights which are outstanding immediately prior
to the termination of the Term, and Executive may exercise any
such vested Stock Incentive Rights during the two year period
commencing on the date of termination of the Term,
notwithstanding any provision otherwise in any plan or
agreement awarding or granting any Stock Incentive Right to
Executive; and
(iii) shall be fully vested in any and all
benefits accrued under any Retirement Plan;
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(iv) shall receive credit in the calculation of the
accrued benefit under HEARx's Pension Plan for (A) the
compensation to be paid to Executive pursuant to Section
4.3(c)(1)(ii) and (B) one (1) year of service in addition to the
service accrued by Executive through the date that the Term is
terminated. If the benefits set forth in this clause would cause
the Pension Plan to lose its qualification under Section 401(a)
of the Code, then the benefits accrued hereunder shall accrue to
Executive under HEARx's SERP; and
(v) shall receive such individual outplacement
service as is appropriate for Executive's position for the
Without Cause Benefits Period.
(d) GOOD REASON-CHANGE IN CONTROL; WITHOUT CAUSE ON OR AFTER
A CHANGE IN CONTROL. If Executive terminates the Term with Good Reason-Change in
Control pursuant to Section 4.2(a), or if HEARx terminates the Term without
Cause on or after the occurrence of a Change in Control pursuant to Section
4.2(a):
(1) HEARx shall pay the aggregate of the following
amounts to Executive in one lump sum within thirty (30) days after the
date of such termination or in a manner and at such later time as
specified by Executive, provided that all such payments must be made no
later than the end of the Term as in effect immediately before the date
of such termination:
(i) to the extent not theretofore paid,
Executive's Base Salary in effect at the time of such
termination (but prior to giving effect to any reduction of
Executive's Base Salary which may have precipitated such
termination) for the duration of the Term as in effect
immediately before the date of such termination; and
(ii) an amount equal to the sum of (A) the
greater of (a) Executive's Base Salary times the number of years
remaining in the original five-year term of this Agreement or
(b) three (3) times Executive's Base Salary in effect at the
time of such termination (but prior to giving effect to any
reduction therein which may have precipitated such termination),
(B) three (3) times the average of all bonus, profit sharing and
other incentive payments made by HEARx to Executive in respect
of the two (2) calendar years immediately preceding such
termination and (C) the pro-rata share of Executive's target
bonus, profit sharing and other incentive payments for the
calendar year in which such termination occurred based upon the
proportion that the number of days that have elapsed in such
calendar year up to and including the date of termination bears
to 365; and
(iii) in the case of compensation previously
deferred by Executive, all amounts previously deferred (together
with any accrued interest thereon) and not yet paid by HEARx,
and any accrued vacation pay not yet paid by HEARx; and
(iv) all other amounts or benefits owing or
accrued to, vested in, or earned by Executive through the date
of termination under the then existing or
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applicable plans, programs, arrangements and policies of HEARx
and its affiliates, including any such plans, programs,
arrangements or policies described in Section 2.1(b); and
(v) any and all other Accrued Obligations
not otherwise described in clauses (i), (ii), (iii) or (iv) of
this Section 4.3(d)(1); and
(2) Executive shall receive the following additional
benefits:
(i) for the three year period commencing on
the date of termination of the Term (the "Three Year Period"),
Executive shall continue to be covered under each of the
medical, dental, life insurance, accident benefit and other
welfare benefit (exclusive of short- and long-term disability
benefit) programs of HEARx in effect and applicable to Executive
immediately prior to the time of such termination, and HEARx
shall pay the costs therefor except to the extent that Executive
already pays all or any portion thereof; provided, however, that
if Executive obtains any of the welfare benefits provided for
under this sentence from a new employer, HEARx's obligation to
provide such welfare benefits shall be secondary to that of such
new employer. Executive's coverage under HEARx's medical and
dental programs for the Three Year Period shall not be included
in the calculation of the "Period of Coverage" to be provided to
Executive pursuant to Section 4980B(f)(2)(B) of the Code, and
Executive's right to "Continuation Coverage" under Section
4980B(f)(2) of the Code for medical and dental benefits under
HEARx's medical and dental programs shall commence on the first
day following the end of the Three Year Period. The amount of
the "Applicable Premium" to be charged Executive under Section
4980B(f)(4) for Continuation Coverage shall never be greater
than the monthly amount charged Executive for medical and dental
coverage during the Three Year Period; and
(ii) shall be fully vested in any and all
Stock Incentive Rights which are outstanding immediately prior
to the termination of the Term, and Executive may exercise any
such vested Stock Incentive Rights during the Three Year Period,
notwithstanding any provision otherwise in any plan or agreement
awarding or granting any Stock Incentive Right to Executive; and
(iii) shall be fully vested in any and all
benefits accrued under any Retirement Plan;
(iv) shall receive credit in the calculation
of the accrued benefit under the Pension Plan for (A) the
compensation to be paid to Executive pursuant to Section
4.3(d)(1)(ii) and (B) three (3) years of service in addition to
the service accrued by Executive through the date that the Term
is terminated. If the benefits set forth in this clause would
cause the Pension Plan to lose its qualification under Section
401(a) of the Code, then the benefits accrued hereunder shall
accrue to Executive under the SERP, and if the Executive is not
a participant in the SERP, the
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actual lump sum equivalent of the benefit described in this
clause shall be paid in accordance with Section 4.3(d)(1); and
(v) shall receive such individual
outplacement service as is appropriate for Executive's position
for the Three Year Period.
(e) DEATH. If Executive's employment is terminated under
Section 4.2(b) by reason of Executive's death, HEARx shall pay to Executive's
legal representatives the full amount of the obligations owing or accrued to,
vested in or earned by Executive through the date of Executive's death,
including the Accrued Obligations in accordance with the plans, programs or
agreements under which the Accrued Obligations were earned. Notwithstanding the
provisions of any agreement pursuant to which Stock Incentive Rights were
granted, any granted but unvested Stock Incentive Rights will automatically vest
on the date of Executive's death. Executive's legal representative may exercise
any Stock Incentive Rights which vest pursuant to this Section 4.3(e) during a
one year period following Executive's death. Anything in this Agreement to the
contrary notwithstanding, Executive's family shall be entitled to receive
benefits provided by HEARx and any of its affiliates to surviving families under
the then existing or applicable plans, programs or arrangements and policies of
HEARx and its affiliates.
(f) DISABILITY. If Executive's employment is terminated
under Section 4.2(b) by reason of Executive's becoming Disabled, HEARx shall pay
to Executive or Executive's legal representative the full amount of the
obligations owing or accrued to, vested in or earned by Executive through the
date of termination, including the Accrued Obligations in accordance with the
plans, programs or agreements under which the Accrued Obligations were earned.
Notwithstanding the provisions of any agreement pursuant to which Stock
Incentive Rights were granted, any granted but unvested Stock Incentive Rights
will automatically vest on the date of Executive's termination by reason of
becoming Disabled. Executive or Executive's legal representative may exercise
any Stock Incentive Rights which vest pursuant to this Section 4.3(f) during a
one year period following Executive's termination by reason of becoming
Disabled.
4.4 CAUSE. As used in this Agreement, the term "Cause" means (a)
willful misconduct by Executive or gross neglect by Executive of his duties as
an employee, officer or director of HEARx which continues for more than thirty
(30) days after Executive's receipt of written notice from the Board to
Executive specifically identifying the willful misconduct or gross negligence of
Executive and directing Executive to discontinue the same, (b) the commission by
Executive of a crime constituting a felony or (c) the commission by Executive of
an act, other than an act taken in good faith within the course and scope of
Executive's employment, which is directly detrimental to HEARx and exposes HEARx
to material liability.
4.5 GOOD REASON. As used in this Agreement, the term "Good Reason"
means the breach of any material provision of this Agreement by HEARx (including
any removal of Executive, without Cause, from the position of the Office during
the Term) which is not cured within thirty (30) days after written notice from
Executive to HEARx specifically identifying such breach; provided, however, that
the term "Good Reason" shall not include any breach of any provision of this
Agreement that occurs after the occurrence of a Change in Control.
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4.6 GOOD REASON-CHANGE IN CONTROL.
(a) Except as provided in Section 4.6(b), as used in this
Agreement, the term "Good Reason-Change in Control" means after the occurrence
of a Change in Control, a determination by Executive that any one or more of the
following events has occurred:
(i) a material change in the nature of Executive's
Office, including his authorities, duties, responsibilities or status
(including offices, titles or reporting requirements), from those in
effect immediately prior to the Change in Control; or
(ii) the relocation of Executive's place of
employment to a location in excess of fifty (50) miles from the place of
Executive's employment immediately prior to the Change in Control,
except for required travel on HEARx business to an extent substantially
equivalent to Executive's business travel obligations immediately prior
to the Change in Control; or
(iii) any reduction by HEARx of Executive's Base
Salary, or a material reduction in his bonus, profit sharing or other
incentive benefits, from those in effect immediately prior to the Change
in Control; or
(iv) the failure by HEARx to increase Executive's
Base Salary in a manner consistent (both as to frequency and percentage
increase) with (A) HEARx's practices in effect immediately prior to the
Change in Control with respect to similarly positioned employees or (B)
HEARx's practices implemented subsequent to the Change in Control with
respect to similarly positioned employees, whichever is more favorable
to Executive; or
(v) the failure of HEARx to continue in effect
Executive's participation in (A) HEARx's employee benefit plans,
programs, arrangements and policies, at a level substantially equivalent
in value to and on a basis consistent with the relative levels of
participation of other similarly positioned employees, as in effect
immediately prior to the Change in Control or (B) HEARx's employee
benefit plans, programs, arrangements and policies implemented
subsequent to the Change in Control with respect to similarly positioned
employees, whichever is more favorable to Executive; or
(vi) the failure of HEARx to obtain from a successor
(including a successor to a material portion of the business or assets
of HEARx) a satisfactory assumption in writing of HEARx's obligations
under this Agreement; or
(vii) the failure of HEARx to continue to provide
Executive with office space, related facilities and support personnel
(including administrative and secretarial assistance) that are both
commensurate with the Office and Executive's responsibilities to and
position with HEARx immediately prior to the Change in Control and not
materially dissimilar to the office space, related facilities and
support personnel provided to other key executive officers of HEARx; or
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<PAGE> 13
(viii) HEARx notifies Executive of HEARx's intention
not to observe or perform one or more of the obligations of HEARx under
this Agreement; or
(ix) HEARx breaches any provision of this Agreement
and such breach is not cured within thirty (30) days after HEARx's
receipt of notice thereof from Executive.
(b) If, after the occurrence of a Change in Control,
Executive receives a written description from HEARx of the nature of Executive's
Office thereafter, stating Executive's authorities, duties, responsibilities,
status, salary, bonus and other employee benefits, or job location, and
Executive accepts such new authorities, duties, responsibilities, status,
salary, bonus and other employee benefits, or job location ("New Office") with
HEARx without determining that the New Office causes a Good Reason-Change in
Control as set forth in Section 4.6(a), then for the remaining Term the New
Office shall be the authorities, duties, responsibilities, status, salary, bonus
and other employee benefits, or job location to be used by Executive in
determining whether a Good Reason-Change in Control occurs thereafter pursuant
to Section 4.6(a).
4.7 CHANGE IN CONTROL. As used herein, the term "Change in Control"
shall mean the occurrence with respect to HEARx of any of the following events:
(a) a report on Schedule 13D is filed with the Securities
and Exchange Commission (the "SEC") pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any
person, entity or group (within the meaning of Section 13(d) or 14(d) of the
Exchange Act), other than HEARx (or one of its subsidiaries) or any employee
benefit plan sponsored by HEARx (or one of its subsidiaries), is the beneficial
owner (as such term is defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of 30% or more of the outstanding common stock of
HEARx or the combined voting power of the then outstanding securities of HEARx;
(b) a report is filed by HEARx disclosing a response to
either Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act, Item 1 of Form 8-K promulgated under the Exchange Act, or any
similar reporting requirement hereafter promulgated by the SEC;
(c) any person, entity or group (within the meaning of
Section 13(d) or Section 14(d) of the Exchange Act), other than HEARx (or one of
its subsidiaries) or any employee benefit plan sponsored by HEARx (or one of its
subsidiaries), shall purchase securities pursuant to a tender offer or exchange
offer to acquire any common stock of HEARx (or securities convertible into
common stock) for cash, securities or any other consideration, provided that
after consummation of the offer, the person, entity or group in question is the
beneficial owner (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of 30% or more of the combined voting
power of the then outstanding securities of HEARx (as determined under paragraph
(d) of Rule 13d-3 promulgated under the Exchange Act, in the case of rights to
acquire common stock);
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<PAGE> 14
(d) the stockholders of HEARx shall approve:
(i) any merger, consolidation or reorganization of
HEARx:
(A) in which HEARx is not the continuing or
surviving corporation,
(B) pursuant to which common stock of HEARx
would be converted into cash, securities or other property,
(C) with an entity which, prior to such
merger, consolidation or reorganization, owned 20% or more of
the combined voting power of the then outstanding securities of
HEARx, or
(D) in which HEARx will not survive as an
independent, publicly owned corporation;
(ii) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or
substantially all the assets of HEARx, or
(iii) any liquidation or dissolution of HEARx;
(e) the stockholders of HEARx shall approve a merger,
consolidation, reorganization, recapitalization, exchange offer, purchase of
assets or other transaction after the consummation of which any person, entity
or group (within the meaning of Section 13(d) or Section 14(d) of the Exchange
Act) would own beneficially in excess of 30% of the outstanding common stock of
HEARx or in excess of 30% of the combined voting power of the then outstanding
securities of HEARx;
(f) HEARx's common stock is listed on none of the American
Stock Exchange, New York Stock Exchange and NASDAQ National Market System as a
result of a going-private transaction; or
(g) during any period of two consecutive years, the
individuals who at the beginning of such period constituted the Board cease for
any reason to constitute a majority of the Board, unless the election or
nomination for election by HEARx's stockholders of each new director during any
such two-year period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such two-year
period.
4.8 DISABLED. As used herein, "Disabled" or "Disability" shall mean
a mental or physical impairment which, in the reasonable opinion of a qualified
doctor selected by HEARx, renders Executive unable to perform with reasonable
diligence the ordinary functions and duties of Executive on a full-time basis in
accordance with the terms of this Agreement, which inability continues for a
period of not fewer than 180 consecutive days.
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<PAGE> 15
4.9 RETURN OF MATERIALS; CONFIDENTIAL INFORMATION. In the event of
any termination of the Term, Executive shall promptly deliver to HEARx all
lists, books, records, literature, products and any other materials owned or
provided by HEARx in connection with Executive's employment hereunder. Executive
shall not at any time during or after the Term hereof use for himself or others,
or divulge to others, any secret or confidential information, knowledge or data
of HEARx obtained by Executive as a result of his employment unless authorized
by the Board.
4.10 CERTAIN ADDITIONAL PAYMENTS BY HEARX.
(a) Anything in this Agreement to the contrary
notwithstanding, if it shall be determined that any payment or distribution by
HEARx or any of its affiliates to or for the benefit of Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (any such payments or distributions being individually
referred to herein as a "Payment," and any two or more of such payments or
distributions being referred to herein as "Payments"), would be subject to the
excise tax imposed by Section 4999 of the Code (such excise tax, together with
any interest thereon, any penalties, additions to tax, or additional amounts
with respect to such excise tax, and any interest in respect of such penalties,
additions to tax or additional amounts, being collectively referred herein to as
the "Excise Tax"), then Executive shall be entitled to receive and HEARx shall
make an additional payment or payments (individually referred to herein as a
"Gross-Up Payment," and any two or more of such additional payments being
referred to herein as "Gross-Up Payments") in an amount such that after payment
by Executive of all taxes (as defined in Section 4.10(k)) imposed upon the
Gross-Up Payment, Executive retains an amount of such Gross-Up Payment equal to
the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 4.10(c) through
(i), any determination (individually, a "Determination") required to be made
under this Section 4.10(b), including whether a Gross-Up Payment is required and
the amount of such Gross-Up Payment, shall initially be made, at HEARx's
expense, by nationally recognized tax counsel mutually acceptable to HEARx and
Executive ("Tax Counsel"). Tax Counsel shall provide detailed supporting legal
authorities, calculations and documentation both to HEARx and Executive within
15 business days of the termination of Executive's employment, if applicable, or
such other time or times as is reasonably requested by HEARx or Executive. If
Tax Counsel makes the initial Determination that no Excise Tax is payable by
Executive with respect to a Payment or Payments, it shall furnish Executive with
an opinion reasonably acceptable to Executive that no Excise Tax will be imposed
with respect to any such Payment or Payments. Executive shall have the right to
dispute any Determination (a "Dispute") within 15 business days after delivery
of Tax Counsel's opinion with respect to such Determination. The Gross-Up
Payment, if any, as determined pursuant to such Determination shall, at HEARx's
expense, be paid by HEARx to Executive within five business days of Executive's
receipt of such Determination. The existence of a Dispute shall not in any way
affect Executive's right to receive the Gross-Up Payment in accordance with such
Determination. If there is no Dispute, such Determination shall be binding,
final and conclusive upon HEARx and Executive, subject in all respects, however,
to the provisions of Section 4.10(c) through (i) below. As a result of the
uncertainty in the application of Sections 4999 and 280G of the Code, it is
possible that Gross-Up Payments (or portions thereof) which will not have been
made by HEARx should have been made ("Underpayments"), and if upon any
reasonable written request from Executive or HEARx to Tax Counsel, or upon Tax
Counsel's own initiative, Tax Counsel, at HEARx's expense,
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<PAGE> 16
thereafter determines that Executive is required to make a payment of any Excise
Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at
HEARx's expense, determine the amount of the Underpayment that has occurred, and
any such Underpayment shall be promptly paid by HEARx to Executive.
(c) HEARx shall defend, hold harmless and indemnify
Executive on a fully grossed-up after tax basis from and against any and all
claims, losses, liabilities, obligations, damages, impositions, assessments,
demands, judgements, settlements, costs and expenses (including reasonable
attorneys', accountants', and experts' fees and expenses) with respect to any
tax liability of Executive resulting from any Final Determination (as defined in
Section 4.10(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral
communication with respect to any question, adjustment, assessment or pending or
threatened audit, examination, investigation or administrative, court or other
proceeding which, if pursued successfully, could result in or give rise to a
claim by Executive against HEARx under this Section 4.10(d) ("Claim"), including
a claim for indemnification of Executive by HEARx under Section 4.10(c), then
such party shall promptly notify the other party hereto in writing of such Claim
("Tax Claim Notice").
(e) If a Claim is asserted against Executive ("Executive
Claim"), Executive shall take or cause to be taken such action in connection
with contesting such Executive Claim as HEARx shall reasonably request in
writing from time to time, including the retention of counsel and experts as are
reasonably designated by HEARx (it being understood and agreed by the parties
hereto that the terms of any such retention shall expressly provide that HEARx
shall be solely responsible for the payment of any and all fees and
disbursements of such counsel and any experts) and the execution of powers of
attorney, provided that:
(i) within 30 calendar days after HEARx receives or
delivers, as the case may be, the Tax Claim Notice relating to such
Executive Claim (or such earlier date that any payment of the taxes
claimed is due from Executive, but in no event sooner than five calendar
days after HEARx receives or delivers such Tax Claim Notice), HEARx
shall have notified Executive in writing ("Election Notice") that HEARx
does not dispute its obligations (including its indemnity obligations)
under this Agreement and that HEARx elects to contest, and to control
the defense or prosecution of, such Executive Claim at HEARx's sole risk
and sole cost and expense; and
(ii) HEARx shall have advanced to Executive on an
interest-free basis, the total amount of the tax claimed for Executive,
at HEARx's request, to pay or cause to be paid the tax claimed, file a
claim for refund of such tax and, subject to the provisions of the last
sentence of Section 4.10(g), sue for a refund of such tax if such claim
for refund is disallowed by the appropriate taxing authority (it being
understood and agreed by the parties hereto that HEARx shall only be
entitled to sue for a refund and HEARx shall not be entitled to initiate
any proceeding in, for example, United States Tax Court) and shall
indemnify and hold Executive harmless, on a fully grossed-up after tax
basis, from any tax imposed with respect to such advance or with respect
to any imputed income with respect to such advance; and
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<PAGE> 17
(iii) HEARx shall reimburse Executive for any and all
costs and expenses resulting from any such request by HEARx and shall
indemnify and hold Executive harmless, on fully grossed-up after-tax
basis, from any tax imposed as a result of such reimbursement.
(f) Subject to the provisions of Section 4.10(e), HEARx
shall have the right to defend or prosecute, at the sole cost, expense and risk
of HEARx, such Executive Claim by all appropriate proceedings, which proceedings
shall be defended or prosecuted diligently by HEARx to a Final Determination;
provided, however, that (i) HEARx shall not, without Executive's prior written
consent, enter into any compromise or settlement of such Executive Claim that
would adversely affect Executive, (ii) any request from HEARx to Executive
regarding any extension of the statute of limitations relating to assessment,
payment or collection of taxes for the taxable year of Executive with respect to
which the contested issues involved in, and amount of, the Executive Claim
relate is limited solely to such contested issues with respect to the Executive
Claim and Executive shall be entitled to settle or contest, in his sole and
absolute discretion, any other issue raised by the Internal Revenue Service or
any other taxing authority. So long as HEARx is diligently defending or
prosecuting such Executive Claim, Executive shall provide or cause to be
provided to HEARx any information reasonably requested by HEARx that relates to
such Executive Claim, and shall otherwise cooperate with HEARx and its
representatives in good faith to contest effectively such Executive Claim. HEARx
shall keep Executive informed of all developments and events relating to any
such Executive Claim (including providing to Executive copies of all written
materials pertaining to any such Executive Claim), and Executive or his
authorized representatives shall be entitled, at Executive's expense, to
participate in all conferences, meetings and proceedings relating to any such
Executive Claim.
(g) If, after actual receipt by Executive of an amount of a
tax claimed (pursuant to an Executive Claim) that has been advanced by HEARx
pursuant to Section 4.10(e)(ii), the extent of the liability of HEARx hereunder
with respect to such tax claimed has been established by a Final Determination,
Executive shall promptly pay or cause to be paid to HEARx any refund actually
received by, or actually credited to, Executive with respect to such tax
(together with any interest paid or credited thereon by the taxing authority and
any recovery of legal fees from such taxing authority related thereto), except
to the extent that any amounts are then due and payable buy HEARx to Executive,
whether under the provisions of this Agreement or otherwise. If, after the
receipt by Executive of an amount advanced by HEARx pursuant to Section
4.10(e)(ii), a determination is made by the Internal Revenue Service or other
appropriate taxing authority that Executive shall not be entitled to any refund
with respect to such tax claimed and HEARx does not notify Executive in writing
of its intent to contest such denial of refund prior to the expiration of thirty
days after such determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of any Gross-Up Payments and other payments required
to be paid hereunder.
(h) With respect to any Executive Claim, if HEARx fails to
deliver an Election Notice to Executive within the period provided in Section
4.10(e)(i) or, after delivery of such Election Notice, HEARx fails to comply
with the provisions of Section 4.10(e)(ii) and (iii) and Section 4.10(f), then
Executive shall at any time thereafter have the right (but not the obligation),
at
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his election and in his sole and absolute discretion, to defend or prosecute, at
the sole cost, expense and risk of HEARx, such Executive Claim. Executive shall
have full control of such defense or prosecution and such proceedings, including
any settlement or compromise thereof. If requested by Executive, HEARx shall
cooperate, and shall cause its affiliates to cooperate, in good faith with
Executive and his authorized representatives in order to contest effectively
such Executive Claim. HEARx may attend, but not participate in or control, any
defense, prosecution, settlement or compromise of any Executive Claim controlled
by Executive pursuant to this Section4.10(h) and shall bear its own costs and
expenses with respect thereto. In the case of any Executive Claim that is
defended or prosecuted by Executive, Executive shall, from time to time, be
entitled to current payment, on a fully grossed-up after tax basis, from HEARx
with respect to costs and expenses incurred by Executive in connection with such
defense or prosecution.
(i) In the case of any Executive Claim that is defended or
prosecuted to a Final Determination pursuant to the terms of this Section
4.10(i), HEARx shall pay, on a fully grossed-up after tax basis, to Executive in
immediately available funds the full amount of any taxes arising or resulting
from or incurred in connection with such Executive Claim that have not
theretofore been paid by HEARx to Executive, together with the costs and
expenses, on a fully grossed-up after tax basis, incurred in connection
therewith that have not theretofore been paid by HEARx to Executive, within ten
calendar days after such Final Determination. In the case of any Executive Claim
not covered by the preceding sentence, HEARx shall pay, on a fully grossed-up
after tax basis, to Executive in immediately available funds the full amount of
any taxes arising or resulting from or incurred in connection with such
Executive Claim at least ten calendar days before the date payment of such taxes
is due from Executive, except where payment of such taxes is sooner required
under the provisions of this Section 4.10(i), in which case payment of such
taxes (and payment, on a fully grossed-up after tax basis, of any costs and
expenses required to be paid under this Section 4.10(i)) shall be made within
the time and in the manner otherwise provided in this Section 4.10(i).
(j) For purposes of this Agreement, the term "Final
Determination" shall mean (A) a decision, judgment, decree or other order by a
court or other tribunal with appropriate jurisdiction, which has become final
and non-appealable; (B) a final and binding settlement or compromise with an
administrative agency with appropriate jurisdiction, including, but not limited
to, a closing agreement under Section 7121 of the Code; (C) any disallowance of
a claim for refund or credit with respect to an overpayment of tax unless a suit
is filed on a timely basis; or (D) any final disposition by reason of the
expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms "tax" and
"taxes" mean any and all taxes of any kind whatsoever (including any and all
Excise Taxes, income taxes, and employment taxes), together with any interest
thereon, any penalties, additions to tax or additional amounts with respect to
such taxes and any interest in respect of such penalties, additions to tax or
additional amounts.
(l) For purposes of this Agreement, the terms "affiliate"
and "affiliates" mean, when used with respect to any entity, individual or other
person, any other entity, individual or other person which, directly or
indirectly, through one or more intermediaries controls, or is controlled by, or
is under common control with, such entity, individual or person. The term
"control" and deviations thereof when used in the immediately preceding sentence
means the
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ownership, directly or indirectly, of 50% of more of the voting securities of an
entity or other person or possessing the power to direct or cause the direction
of the management and policies of such entity or other person, whether through
the ownership of voting securities, by contract or otherwise.
4.11 LEGAL FEES AND EXPENSES. HEARx shall defend, hold harmless and
indemnify Executive on a fully grossed-up after tax basis from and against any
and all costs and expenses (including reasonable attorneys', accountants' and
experts' fees and expenses) incurred by Executive acting reasonably from time to
time as a result of any contest (regardless of the outcome) by HEARx or others
contesting the validity or enforcement of, or liability under, any term or
provision of this Agreement, plus in each case interest at the applicable
federal rate provided for in Section 7872(f)(2)(B) of the Code.
4.12 NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit Executive's continuing or future participation in any benefit,
bonus, incentive or other plan, program, arrangement or policy provided by HEARx
or any of its affiliates (including any plan, program, arrangement or policy
described in Section 2.1(e)) and for which Executive and/or Executive's family
may qualify, nor shall anything herein limit or otherwise affect such rights as
Executive and/or Executive's family may have under any other agreements with
HEARx or any of its affiliates. Amounts which are vested benefits or which
Executive and/or Executive's family is otherwise entitled to receive under any
plan, program, arrangement or policy described in Section 2.1(e)) at or
subsequent to the date of termination of the Term shall be payable in accordance
with such plan, program, arrangement or policy.
4.13 FULL SETTLEMENT. HEARx's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which HEARx may have against Executive
or others. In no event shall Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to Executive
under any of the provisions of this Agreement.
ARTICLE V
SHARE OPTIONS
5.1 SHARE OPTIONS. Concurrent with the execution hereof, HEARx is
granting to Executive, nonqualified, five-year options to purchase 113,246
shares of HEARx's common stock, $0.10 par value per share (the "Common Stock"),
at an option price per share equal to the closing price of the Common Stock as
reported on the American Stock Exchange of the shares on the effective date of
this Agreement, subject to adjustment as provided in the Option Agreement dated
as of the date hereof (the "Options"). Such Options shall vest in and become
exercisable by Executive for all purposes as follows: 25% of such Options as of
each of the first four anniversary dates of the Effective Date, so that all of
such Options shall be fully vested in and exercisable by Executive as of the
fourth anniversary of the Effective Date. Also, if an Acceleration Event occurs,
all outstanding options to purchase HEARx's common stock, including those
options currently held by Executive, those Options granted hereunder and all
additional share options granted to Executive by HEARx after the Effective Date,
shall vest in and be exercisable by Executive (or, as the case may be, his
estate or representative) as of the Acceleration Event. "Acceleration Event"
shall mean
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for all purposes hereof any of the following events: (a) the Term is terminated
by Executive with Good Reason pursuant to Section 4.2(a) or by HEARx without
Cause, (b) Executive dies or (c) Executive becomes Disabled. The Option
Agreement shall provide that the shares of Common Stock issuable on exercise of
the options shall be treasury shares.
ARTICLE VI
GENERAL PROVISIONS
6.1 ARBITRATION OF DISPUTES.
(a) SCOPE OF AGREEMENT. HEARx and Executive agree to take
all reasonable steps to resolve any employment-related legal and/or judicial
disputes between them quickly and fairly. Should such matters remain unresolved,
HEARx and Executive agree that final and binding arbitration shall be the
exclusive remedy for any dispute between them relating to all common law,
statutory, legal or judicial claims, including any claims for breach of contract
and for violation of laws forbidding discrimination on the basis of race, color,
religion, gender, age, national origin, disability, or any other legally
protected status.
(b) PROCEDURE. Arbitration shall be before a single
arbitrator in Miami, Florida, unless the parties mutually agree to hold the
arbitration in a different location. The arbitration will be administered in
accordance with the employment dispute rules of the American Arbitration
Association (AAA), and its procedures then in effect. If the parties cannot
agree on an arbitrator, then the AAA rules will govern selection. HEARx will pay
the fees of the AAA and the arbitrator. However, if Executive submits a matter
to arbitration, he shall be responsible for contributing to such fees an amount
equivalent to the amount required to file a complaint of the same type in the
state court which is geographically closest to the site of the arbitration if he
does not prevail in the arbitration.
The arbitrator's award is to be in writing, with reasons given and
evidence cited for the award. The arbitrator shall have the discretion to award
fees (including administrative charges, costs and/or reasonable attorney's fees
actually expended) to the prevailing party, in accordance with controlling law.
Any court of competent jurisdiction may enter judgment upon the award, either
by: (1) confirming the award, or (2) vacating, modifying or correcting the
award: (a) on any ground referred to in the U.S. Arbitration Act, (b) where the
findings of fact are not supported by substantial evidence, or (c) where the
conclusions of law are erroneous.
6.2 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the law of the State of Delaware.
6.3 ASSIGNABILITY. This Agreement is personal to Executive and
without the prior written consent of HEARx shall not be assignable by Executive
other than by will or the laws of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by Executive's legal representatives
and heirs. This Agreement shall inure to the benefit of and be binding upon
HEARx and its successors and assigns. HEARx shall require any corporation,
entity, individual or other person who is the successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business and/or assets of HEARx to
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<PAGE> 21
expressly assume and agree to perform, by a written agreement in form and
substance satisfactory to Executive, all of the obligations of HEARx under this
Agreement. As used in this Agreement, the term "HEARx" shall mean HEARx as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, written agreement or otherwise.
6.4 WITHHOLDING. HEARx may withhold from any amounts payable under
this Agreement such federal, state or local taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
6.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the
entire agreement and understanding between Executive and HEARx and supersedes
any prior agreements or understandings, whether written or oral, with respect to
the subject matter hereof. Except as may be otherwise provided herein, this
Agreement may not be amended or modified, except by subsequent written agreement
executed by both parties hereto.
6.6 MULTIPLE COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which shall constitute an original, but all of
which together shall constitute one Agreement.
6.7 NOTICES. Any notice provided for in this Agreement shall be
deemed delivered upon deposit in the United States mails, registered or
certified mail, addressed to the party to whom directed at the addresses set
forth below or at such other addresses as may be substituted therefor by notice
given hereunder. Notice given by any other means must be in writing and shall be
deemed delivered only upon actual receipt.
If to HEARx:
1250 Northpoint Parkway
West Palm Beach, FL 33407
Attn: President
If to Executive:
14245 Caloosa Boulevard
Palm Beach Gardens, FL 33418
Attn: Stephen J. Hansbrough
6.8 WAIVER. The waiver of any breach of any term or condition of
this Agreement shall not be deemed to constitute the waiver of any breach of the
same or by any other term or condition of this Agreement.
6.9 SEVERABILITY. In the event any provision of this Agreement is
found to be unenforceable or invalid, such provision shall be severable from
this Agreement and shall not affect the enforceability or validity of any other
provision of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
HEARx LTD.
By: /s/ Paul A. Brown
------------------------------
Name: Paul A. Brown, M.D.
------------------------------
Title: CEO and Chairman
------------------------------
/s/ Stephen J. Hansbrough
-------------------------------------
Stephen J. Hansbrough
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<PAGE> 1
EXHIBIT 23
CONSENT OF THE INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements of HEARx Ltd. on Form S-8 (filed September 13, 1994), Form S-8 (filed
July 19, 1996), Form S-3 (File No. 333-4303), Form S-3 (File No. 333-4639), Form
S-3 (File No. 333-11429) , Form S-3 (File No. 333-18753), Form S-3 (File No.
333-24357), Form S-3 (File No. 333-25169) and Form S-3 (File No. 333-6457) of
our report dated March 8, 2000, relating to the consolidated financial
statements and financial statement schedule of the Registrant for the year ended
December 31, 1999, included in the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1999.
West Palm Beach, Florida BDO Seidman, LLP
March 24, 2000
53
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the financial
statements of HEARx Ltd. and is qualified in its entirety by references to such
financial statements.
</LEGEND>
<CIK> 0000821536
<NAME> HEARX LTD.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 2,857,186
<SECURITIES> 900,000
<RECEIVABLES> 7,563,145
<ALLOWANCES> (535,609)
<INVENTORY> 551,460
<CURRENT-ASSETS> 12,216,743
<PP&E> 16,689,715
<DEPRECIATION> (8,197,007)
<TOTAL-ASSETS> 22,879,751
<CURRENT-LIABILITIES> 11,277,928
<BONDS> 322,332
8,315
0
<COMMON> 1,154,734
<OTHER-SE> 10,116,442
<TOTAL-LIABILITY-AND-EQUITY> 22,879,751
<SALES> 47,686,868
<TOTAL-REVENUES> 47,686,868
<CGS> 14,611,284
<TOTAL-COSTS> 52,038,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,825,283)
<INCOME-TAX> (4,825,283)
<INCOME-CONTINUING> (4,825,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,825,283)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
