e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-11655
HearUSA, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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22-2748248 |
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(State of Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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1250 Northpoint Parkway, West Palm Beach, Florida
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33407 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants
Telephone Number, Including Area Code (561) 478-8770
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate
by check þ 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 þ No o
Indicate
by check þ whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No o
On October 28, 2005, 31,218,851 shares of the Registrants Common Stock and 841,051 exchangeable
shares of HEARx Canada, Inc. were outstanding.
INDEX
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Page |
PART I. |
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FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements: |
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Consolidated Balance Sheets |
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October 1, 2005 and December 25, 2004 |
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3 |
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Consolidated Statements of Operations |
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Nine months ended October 1, 2005 and September 25, 2004 |
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4 |
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Consolidated Statements of Operations |
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Three months ended October 1, 2005 and September 25, 2004 |
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5 |
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Consolidated Statements of Cash Flows |
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Nine months ended October 1, 2005 and September 25, 2004 |
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6 |
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Notes to Consolidated Financial Statements |
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8 |
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Item 2. |
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Managements Discussion and Analysis of Financial Condition
and Results of Operations |
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16 |
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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24 |
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Item 4. |
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Controls and Procedures |
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24 |
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PART II. |
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OTHER INFORMATION |
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Item 6. |
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Exhibits |
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25 |
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Signatures |
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26 |
2
Part
I Financial Information
Item 1. Financial Statements
HearUSA, Inc.
Consolidated Balance Sheets
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October 1, |
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December 25, |
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2005 |
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2004 |
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(unaudited) |
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(audited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
3,152,769 |
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$ |
2,615,379 |
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Restricted cash and investment securities |
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431,000 |
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435,000 |
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Accounts and notes receivable, less allowance for
doubtful accounts of $381,528 and $373,583 |
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6,620,397 |
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5,876,699 |
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Inventories |
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904,785 |
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801,234 |
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Prepaid expenses and other |
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1,409,031 |
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557,435 |
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Current
assets held for sale (Note 2) |
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77,458 |
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Total current assets |
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12,517,982 |
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10,363,205 |
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Property and equipment, net |
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3,312,972 |
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3,346,788 |
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Goodwill
(Note 3) |
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36,282,984 |
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33,210,380 |
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Intangible assets, net |
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11,492,728 |
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11,094,169 |
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Deposits and other |
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617,389 |
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551,148 |
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Long-term
assets held for sale (Note 2) |
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736,125 |
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$ |
64,224,055 |
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$ |
59,301,815 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
7,546,049 |
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$ |
6,644,600 |
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Accrued expenses |
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2,129,025 |
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2,303,601 |
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Accrued salaries and other compensation |
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2,189,945 |
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1,982,559 |
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Current maturities of long-term debt |
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4,664,454 |
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4,152,908 |
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Dividends payable |
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34,561 |
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177,996 |
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Current maturities of subordinated notes |
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1,760,000 |
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Current maturities of convertible subordinated notes |
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1,875,000 |
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Total current liabilities |
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20,199,034 |
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15,261,664 |
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Long-term debt |
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16,335,592 |
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17,296,125 |
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Subordinated
notes, net of debt discount of $1,662,799 (Note 7) |
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2,077,201 |
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Warrant
liability (Note 7) |
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1,794,702 |
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Convertible subordinated notes, net of debt discount of $3,919,759
and $5,443,879 (Note 5) |
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1,705,241 |
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2,056,121 |
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Total long-term debt, subordinated notes, warrant liability and
convertible subordinated notes |
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21,912,736 |
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19,352,246 |
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Commitments and contingencies |
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Mandatorily
redeemable convertible preferred stock (Series E) (Note 6) |
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4,709,921 |
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Stockholders equity |
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Preferred stock (Aggregate liquidation preference $2,330,000; $1 par,
7,500,000 shares authorized) |
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Series H Junior Participating (none outstanding) |
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Series J (233 shares outstanding) |
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233 |
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233 |
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Total preferred stock |
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233 |
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233 |
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Common stock: $.10 par; 75,000,000 shares authorized
31,742,510 and 30,060,690 shares issued |
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3,174,251 |
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3,006,069 |
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Stock subscription |
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(412,500 |
) |
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(412,500 |
) |
Additional paid-in capital |
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121,908,793 |
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120,197,937 |
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Accumulated deficit |
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(102,344,377 |
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(101,968,452 |
) |
Accumulated other comprehensive income |
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2,271,026 |
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1,639,838 |
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Treasury stock, at cost: 523,662 and 523,662 common shares |
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(2,485,141 |
) |
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(2,485,141 |
) |
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Total stockholders equity |
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22,112,285 |
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19,977,984 |
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$ |
64,224,055 |
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$ |
59,301,815 |
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See accompanying notes to the consolidated financial statements
3
HearUSA, Inc.
Consolidated Statements of Operations
Nine Months Ended October 1, 2005 and September 25, 2004
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October 1, |
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September 25, |
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2005 |
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2004 |
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(unaudited) |
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(unaudited) |
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Net revenues |
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Hearing aids and other products |
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$ |
53,706,549 |
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$ |
46,617,220 |
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Services |
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3,995,852 |
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4,157,405 |
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Total net revenues |
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57,702,401 |
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50,774,625 |
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Operating costs and expenses |
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Hearing aids and other products |
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15,692,130 |
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12,835,926 |
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Services |
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1,342,226 |
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1,305,112 |
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Total cost of products sold and services |
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17,034,356 |
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14,141,038 |
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Clinic operating expenses |
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26,929,214 |
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26,005,198 |
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General and administrative expenses |
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8,848,091 |
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7,534,233 |
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Depreciation and amortization |
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1,446,203 |
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1,578,190 |
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Total operating costs and expenses |
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54,257,864 |
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49,258,659 |
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Income from operations |
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3,444,537 |
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1,515,966 |
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Non-operating income (expense): |
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Gain from insurance proceeds |
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430,122 |
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Interest income |
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52,180 |
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11,045 |
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Interest expense (including approximately $1,759,000 and $1,595,000
of non-cash debt discount amortization) (Notes 5 and 7) |
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(3,595,147 |
) |
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(3,467,304 |
) |
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Income (loss) from continuing operations |
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331,692 |
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(1,940,293 |
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Discontinued operations (Note 2): |
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Gain on disposition of assets |
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365,158 |
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Loss from discontinued operations |
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(406,662 |
) |
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(326,169 |
) |
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Net loss from discontinued operations |
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(41,504 |
) |
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(326,169 |
) |
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Net income (loss) |
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|
290,188 |
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(2,266,462 |
) |
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Dividends on preferred stock (Note 6) |
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(666,113 |
) |
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(530,828 |
) |
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Net loss applicable to common stockholders |
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$ |
(375,925 |
) |
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$ |
(2,797,290 |
) |
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Net loss from continuing operations, including dividends on preferred
stock, per common share basic and diluted |
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$ |
(0.01 |
) |
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$ |
(0.08 |
) |
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Net loss applicable to common stockholders per common share basic
and diluted |
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$ |
(0.01 |
) |
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$ |
(0.09 |
) |
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Weighted average number of shares of common stock outstanding basic
and diluted |
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31,452,690 |
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|
30,425,804 |
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See accompanying notes to the consolidated financial statements
4
HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended October 1, 2005 and September 25, 2004
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October 1, |
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September 25, |
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2005 |
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2004 |
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|
(unaudited) |
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|
(unaudited) |
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Net revenues |
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|
|
|
|
|
|
|
Hearing aids and other products |
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$ |
18,362,752 |
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$ |
15,911,778 |
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Services |
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|
1,252,803 |
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|
1,623,617 |
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Total net revenues |
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|
19,615,555 |
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|
|
17,535,395 |
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Operating costs and expenses |
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|
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Hearing aids and other products |
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5,624,739 |
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4,345,713 |
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Services |
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|
507,152 |
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|
420,804 |
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Total cost of products sold and services |
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|
6,131,891 |
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|
4,766,517 |
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Clinic
operating expenses |
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|
8,868,510 |
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8,460,660 |
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General and administrative expenses |
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|
2,882,357 |
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|
2,585,408 |
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Depreciation and amortization |
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471,116 |
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|
504,396 |
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Total operating costs and expenses |
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18,353,874 |
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16,316,981 |
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Income from operations |
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1,261,681 |
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|
1,218,414 |
|
Non-operating income (expense): |
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|
|
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Gain from insurance proceeds |
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|
300,527 |
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|
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Interest income |
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|
22,582 |
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|
|
3,601 |
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Interest expense (including approximately
$663,000 and $532,000 of non-cash debt
discount amortization) (Notes 5 and 7) |
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(1,234,171 |
) |
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|
(1,138,273 |
) |
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|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
350,619 |
|
|
|
83,742 |
|
|
|
|
Discontinued operations (Note 2): |
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Net loss from discontinued operations |
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(140,155 |
) |
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|
(139,824 |
) |
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|
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|
|
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|
Net income (loss) |
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|
210,464 |
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(56,082 |
) |
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|
|
|
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|
Dividends on preferred stock (Note 6) |
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(299,035 |
) |
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|
(177,331 |
) |
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|
|
|
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|
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|
Net loss applicable to common stockholders |
|
$ |
(88,571 |
) |
|
$ |
(233,413 |
) |
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|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations, including dividends on
preferred stock, per common share basic |
|
$ |
0.00 |
|
|
$ |
(0.00 |
) |
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|
|
|
|
|
|
|
|
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|
|
Net income (loss) from continuing
operations, including dividends on
preferred stock, per common share
diluted |
|
$ |
0.00 |
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|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
stockholders per common share basic |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common
stockholders per common share diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of
common stock outstanding basic |
|
|
32,033,447 |
|
|
|
30,429,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of
common stock outstanding diluted |
|
|
39,155,406 |
|
|
|
30,429,902 |
|
|
|
|
See accompanying notes to the consolidated financial statements
5
HearUSA, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended October 1, 2005 and September 25, 2004
|
|
|
|
|
|
|
|
|
|
|
October 1, |
|
|
September 25, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
290,188 |
|
|
$ |
(2,266,462 |
) |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) gain to net cash (used in)
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,446,203 |
|
|
|
1,578,190 |
|
Provision for doubtful accounts |
|
|
266,554 |
|
|
|
313,443 |
|
Loss from discontinued operations |
|
|
41,504 |
|
|
|
326,169 |
|
Debt discount amortization |
|
|
1,758,771 |
|
|
|
1,595,300 |
|
Principal payments on long-term debt made through
preferred pricing reductions |
|
|
(2,192,336 |
) |
|
|
(2,190,603 |
) |
Interest on Siemens Tranche D |
|
|
632,533 |
|
|
|
480,215 |
|
Other |
|
|
(30,551 |
) |
|
|
26,631 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts and notes receivable (net of business acquisitions) |
|
|
(904,202 |
) |
|
|
(1,202,220 |
) |
Inventories (net of business acquisitions) |
|
|
(186,834 |
) |
|
|
54,144 |
|
Prepaid expenses and other (net of business acquisitions) |
|
|
(490,066 |
) |
|
|
760,468 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses (net of business
acquisitions) |
|
|
574,679 |
|
|
|
(146,816 |
) |
Accrued salaries and other compensation (net of business
acquisitions) |
|
|
196,070 |
|
|
|
248,304 |
|
|
|
|
Net cash provided by (used) in continuing operations |
|
|
1,402,513 |
|
|
|
(423,237 |
) |
Net cash used in discontinued operations |
|
|
(301,244 |
) |
|
|
(149,758 |
) |
|
|
|
Net cash provided by (used in) operating activities |
|
|
1,101,269 |
|
|
|
(572,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of property and equipment-continuing operations |
|
|
(781,117 |
) |
|
|
(308,935 |
) |
Purchase of property and equipment- discontinued operations |
|
|
(13,332 |
) |
|
|
(26,521 |
) |
Proceeds from sales of discontinued operations |
|
|
1,101,385 |
|
|
|
102,539 |
|
Business acquisitions |
|
|
(1,282,303 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(975,367 |
) |
|
|
(232,917 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net proceeds from issuance of subordinated and convertible
subordinated notes |
|
|
5,170,000 |
|
|
|
500,000 |
|
Principal payments on long-term debt |
|
|
(1,072,857 |
) |
|
|
(2,894,616 |
) |
Proceeds from the exercise of warrants |
|
|
1,725,000 |
|
|
|
|
|
Cost of exchange and redemption of capital stock |
|
|
(4,928,041 |
) |
|
|
(102,382 |
) |
Proceeds from exercise of employee stock options |
|
|
68,004 |
|
|
|
4,189 |
|
Dividends on preferred stock |
|
|
(591,428 |
) |
|
|
(923,196 |
) |
|
|
|
Net cash provided by (used in) financing activities |
|
|
370,678 |
|
|
|
(3,416,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash |
|
|
40,810 |
|
|
|
5,283 |
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
537,390 |
|
|
|
(4,216,634 |
) |
Cash and cash equivalents at beginning of period |
|
|
2,615,379 |
|
|
|
6,714,881 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,152,769 |
|
|
$ |
2,498,247 |
|
|
|
|
See accompanying notes to consolidated financial statements
6
HearUSA, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended October 1, 2005 and September 25, 2004
|
|
|
|
|
|
|
|
|
|
|
October 1, |
|
|
September 25, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Supplemental disclosure of cash flows information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,022,993 |
|
|
$ |
934,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and
financing activities: |
|
|
|
|
|
|
|
|
Principal payments on long-term debt through
preferred pricing reductions |
|
$ |
2,192,336 |
|
|
$ |
2,190,603 |
|
|
|
|
Purchase of equipment with volume discount credit |
|
$ |
|
|
|
$ |
158,800 |
|
|
|
|
Capital lease of property and equipment |
|
$ |
41,501 |
|
|
$ |
|
|
|
|
|
See accompanying notes to consolidated financial statements
7
HearUSA, Inc
Notes to Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included. Operating results for
the nine month period ended October 1, 2005 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2005. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in
the Companys report on Form 8-K filed on
October 26, 2005.
1. Description of the Company and Summary of Significant Accounting Policies
The Company
HearUSA, Inc. (HearUSA or the Company), a Delaware corporation, was organized for the purpose
of creating a nationwide chain of clinics to serve the needs of the hearing impaired. As of
October 1, 2005, the Company has a network of 138 company-owned
hearing care clinics in 8 states
and the Province of Ontario, Canada. The Company also sponsors a network of approximately 1,400
credentialed audiology providers that participate in selected hearing benefit programs contracted
by the Company with employer groups, health insurers and benefit sponsors in 49 states. The
clinics and the network providers provide audiological products and services for the hearing
impaired.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned and
majority controlled subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal year
The Companys fiscal year ends on the last Saturday in December and customarily consists of four
13-week quarters for a total of 52 weeks. Every sixth year includes 53 weeks. The current year
includes 53 weeks with the additional week included in the first quarter of 2005. The next year
with 53 weeks will be 2011.
Net income (loss) applicable to common stockholders per common share
Net income(loss) from continuing operations, including dividends on preferred stock, and net income
(loss) applicable to common stockholders 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 income (loss) from continuing
operations, including dividends on preferred stock, and net income (loss) applicable to common
stockholders per common share basic are based on the weighted average number of common shares
outstanding during the period. Net income (loss) from continuing operations, including dividends
on preferred stock, and net income applicable to common stockholders per common share diluted is
based on the weighted average number of common shares and dilutive potential common shares
outstanding during the period.
Due to the Companys net loss from continuing operations, including dividends on preferred stock,
applicable to common stockholders in the first nine months of 2005 and 2004, the
common stock equivalents for convertible subordinated notes, mandatorily redeemable convertible
preferred stock, convertible preferred stock, outstanding options and warrants of 9,635,337 in 2005
and 9,505,864 in 2004 were excluded from the computations of net loss from continuing operations,
including dividends on preferred stock, and net loss applicable to common stockholders per common
share diluted for these periods because they were anti-dilutive.
8
HearUSA, Inc
Notes to Consolidated Financial Statements
Due to the Companys net loss from continuing operations, including dividends on preferred
stock, applicable to common stockholders in the third quarter of 2004 the common stock equivalents for
convertible preferred subordinated notes, mandatorily redeemable convertible preferred stock,
convertible preferred stock, outstanding options and warrants of 6,400,864 in 2005 and 10,008,826
in 2004, were excluded from the computation of net loss from continuing operations, including
dividends on preferred stock, and net loss applicable to common
stockholders per common share
diluted for these periods because they were anti-dilutive.
For purposes of computing net income(loss) from continuing operations, including dividends on
preferred stock and net loss, applicable to common stockholders per common share basic and
diluted, for the nine and three months ended October 1, 2005 and September 25, 2004, the weighted
average number of shares of common stock outstanding includes the effect of the 815,041 and
913,419, respectively, exchangeable shares of HEARx Canada, Inc., as if they were outstanding
common stock of the Company.
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. The Companys other comprehensive income
represents foreign
currency translation adjustments.
The components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Three Months Ended |
|
|
October 1, |
|
September 25, |
|
October 1, |
|
September 25, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
Net income (loss) for the period |
|
$ |
290,188 |
|
|
$ |
(2,266,462 |
) |
|
$ |
210,464 |
|
|
$ |
(56,082 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
631,188 |
|
|
|
183,709 |
|
|
|
724,825 |
|
|
|
486,339 |
|
|
|
|
Comprehensive income (loss) for
the period |
|
$ |
921,376 |
|
|
$ |
(2,082,753 |
) |
|
$ |
935,289 |
|
|
$ |
430,257 |
|
|
|
|
Stock-based compensation
The Company has granted stock options to employees and directors under stock option plans. The
Company accounts for those plans using the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation
cost has been reflected in net income (loss), as all options granted under those plans had an
exercise price greater than or equal to the market value of the underlying common stock on the date
of the grant.
9
HearUSA, Inc
Notes to Consolidated Financial Statements
The following table illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of SFAS 123 Accounting for Stock-Based Compensation
to stock-based employee compensation (see Note 8 Recent Accounting Pronouncement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Three Months Ended |
|
|
October 1, |
|
September 25, |
|
October 1, |
|
September 25, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss applicable to
common stockholders as
reported |
|
$ |
(375,925 |
) |
|
$ |
(2,797,290 |
) |
|
$ |
(88,571 |
) |
|
$ |
(233,413 |
) |
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of tax
effects |
|
|
(1,137,000 |
) |
|
|
(536,000 |
) |
|
|
(390,000 |
) |
|
|
(350,000 |
) |
|
|
|
Pro forma, net loss |
|
$ |
(1,512,925 |
) |
|
$ |
(3,333,290 |
) |
|
$ |
(478,571 |
) |
|
$ |
(583,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basicas reported |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
Basicpro forma |
|
$ |
(0.05 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
Dilutedas reported |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
Dilutedpro forma |
|
$ |
(0.05 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
For purposes of the above disclosure, the determination of the fair value of stock options granted
in 2005 and 2004 was based on the following: (i) a risk free interest rate of 4.04% and 3.46%,
respectively; (ii) expected option lives ranging from 5 to 10 years; (iii) expected volatility in
the market price of the Companys common stock of 95% and 97%, respectively; and (iv) no dividends
on the underlying common stock.
Reclassifications
Certain amounts in the 2004 consolidated financial statements have been reclassified in order to
conform to the 2005 presentation.
2. Discontinued operations
In
June 2005, the Company sold the assets of a group of hearing
care clinics in Minnesota,
Washington and Wisconsin, including goodwill, customer lists and selected assets with a net book
value of approximately $739,000, for approximately $1.1 million in cash, resulting in a gain on
disposition of assets of approximately $365,000.
The assets sold and related operating results have been presented as discontinued operations and
the consolidated financial statements have been reclassified to segregate the assets and operating
results for all periods presented in accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, including $147, 000 of property and equipment, $442,000 of goodwill
and $150,000 of net intangibles as of December 25, 2004. The assets and operating expenses of
these hearing care clinics sold has been reported in the clinic segment. Net revenues of the
discontinued operations for the nine months ended October 1, 2005 and September 25, 2004 were
approximately $1.9 million and $2.7 million, respectively. Pre-tax net losses of the discontinued
operations were approximately $41,500 million and $326,000, respectively.
10
HearUSA, Inc
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Three Months Ended |
|
|
October 1, |
|
September 25, |
|
October 1, |
|
September 25, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
Net loss from
discontinued
operations
applicable to
common
stockholdersbasic |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from
discontinued
operations
applicable to
common
stockholdersdiluted |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
|
|
3. Business Acquisitions
In the second and third quarters of 2005, in three separate transactions, the Company acquired the
assets of four hearing care clinics in Michigan, New Jersey and New York having a fair value of
approximately $382,000. Consideration paid was cash of $900,000 and notes payable in the amount of
$750,000. The acquisitions resulted in additions to goodwill of approximately $1.3 million. The
notes bear interest at 5 percent and are payable in quarterly installments of $37,500 plus accrued
interest, through September 2009.
In May 2005, the Company also acquired the assets of a hearing care network in Florida, including
network contracts with fair values of approximately $410,000. Consideration paid was cash of
$350,000 and a three-year convertible note payable in the amount of $1,400,000, resulting in
goodwill of approximately $1,340,000. The note bears interest at 7 percent and is payable in 36
monthly installments of $38,889 plus interest, beginning on June 1, 2005. After September 30, 2005
the payee has the right to convert all or any portion of the unpaid principal, and accrued
interest, on the note into the number of shares of the Companys common stock as determined by
dividing such sum of unpaid principal and accrued interest to be converted by $1.74 (the market
price of the Companys common stock on the date of the acquisition).
4. Stockholders Equity
Common stock
During the nine months ended October 1, 2005, 265,000 employee stock options were issued at an
exercise price of $1.79, 1,500,000 warrants were exercised at an exercise price of $1.15 and
employee stock options for 130,000 shares of common stock were exercised at exercise prices ranging
from $0.35 to $0.81.
5. Convertible Subordinated Notes
In December 2003, the Company completed a private placement of $7.5 million five-year convertible
subordinated notes with warrants to purchase 2,642,750 shares of the Companys common stock. The
notes could not be converted and warrants to purchase 2,142,750 shares could not be exercised for a
two-year period. The remaining warrants to purchase 500,000 shares were exercisable after May 31,
2005 at $1.75 per share. Beginning December 2005 the notes may be converted at $1.75 per share
and the lender warrants may be exercised for up to 2,142,750 shares at $1.75 per share. The
quoted closing market price of the Companys common stock on the commitment date was $2.37 per
share. The notes bear interest at 11 percent annually for the first two years and then at 8
percent through the remainder of their term. The Company recorded a debt discount of approximately
$7,488,000 consisting of intrinsic value of the beneficial conversion of approximately $4,519,000
and the portion of the proceeds allocated to the warrants issued to the lenders of approximately
$2,969,000, using a Black-Scholes option pricing model, based on the relative fair values of the
lender warrants and the notes. The debt discount is being amortized as interest expense over the
five-year term of the note using the effective interest method.
11
HearUSA, Inc
Notes to Consolidated Financial Statements
In addition to the 2,642,750 lender warrants issued to the investors in the $7.5 million financing,
the Company also issued 117,143 common stock purchase warrants with the same terms as the lender
warrants and paid cash of approximately $206,000 to third parties as finder fees and financing
costs. These warrants were valued at approximately $220,000 using a Black-Scholes option pricing
model. The total of such costs of approximately $426,000 is being amortized as interest expense
using the effective interest method over the five year term of the notes.
For the first two years of the term beginning on March 25, 2004, the Company will make quarterly
payments of interest only. Beginning March 25, 2006, the Company will make twelve equal quarterly
payments of principal plus interest. Payments of principal and interest may be made, at the
Companys option, in cash or with the Companys common stock. If payments are made using the
Companys common stock, the shares to be issued would be computed at 90% of the average closing
price for the 20 day trading period immediately preceding the payment date. Approximate annual
aggregate amount of maturities of such notes maturing in future years is $2,500,000 in each of
2006, 2007 and 2008.
During the first nine months of 2005 and 2004, approximately $2,225,000 and $2,170,000,
respectively, of prepaid financing fees and debt discount was amortized as interest expense,
including a non-cash portion of approximately $1,624,000 and $1,595,000, respectively. The future
non-cash debt discount and prepaid finder fees to be amortized as interest expense over the next
five years are approximately $528,000 for the remainder of 2005, $1,763,000 in 2006, $1,145,000 in
2007 and $434,000 in 2008. In the event the investors convert or exercise the debt or warrants,
the Company will be required to accelerate the debt discount to the period in which the exercise or
conversion occurs.
6. Mandatorily Redeemable Convertible Preferred Stock
On August 27, 2003, the Company exchanged all 4,563 outstanding shares of its 1998 Convertible
Preferred Stock for 4,563 shares of E Series Convertible Preferred Stock (E Series Convertible
Preferred Stock). If the E Series Convertible Preferred Stock had not converted or redeemed by
December 18, 2006 it would have had to be redeemed by the Company on December 18, 2006 for a price
equal to 108% of its stated value plus accrued and unpaid premiums. The E Series Convertible
Preferred Stock was presented as Mandatorily Redeemable Convertible Preferred Stock, a category
between liabilities and equity in the accompanying consolidated balance sheet. The Company had the
right to redeem the newly designated preferred stock at its stated value plus accrued but unpaid
premiums for sixteen months and thereafter until the redemption date at 108% of its stated value
plus accrued but unpaid premiums.
As part of the transaction, the Company agreed that accrued but unpaid premiums on the 1998
Convertible Preferred Stock and the 10% premium on the E Series Convertible Preferred Stock would
be paid in cash each month beginning in November 2003 and continuing until December 2006. The
holders agreed that they would not convert the newly designated preferred stock into the Companys
common stock prior to November 1, 2005, except in the event of a default in payment of premiums or
unless on or after December 10, 2004 the price of the common stock reached a trading price at or
above $3.00 per share and the holders sell at or above $3.00 per share. In the event of default in
payment of premiums, the holder could sell any shares of the E Series Convertible Preferred Stock
or convert such shares under the same terms described below for the period after November 1, 2005.
If converted during the period from December 10, 2004 until November 1, 2005 based on the trading
price reaching $3.00 per share, the holders could convert only a number of shares of the newly
designated preferred stock that would yield upon conversion no more than 744,911 shares of HearUSA
common stock. Subsequent to November 1, 2005, upon conversion of the E Series Convertible
Preferred, holders would have been entitled to receive a number of shares of common stock
determined by dividing the sum of the stated value of the E Series Convertible Preferred ($1,000
per share) so converted plus any unpaid premium, by a conversion price equal to the lesser of the
average closing bid prices for the common stock five of twenty days prior to conversion, and $18.00
(the fixed conversion price). The premium payable upon conversion is equal to 10% of the stated
value of the Series E Convertible Preferred from the date of issuance until the conversion date.
If the closing price of the Companys common stock on the date prior to any conversion date is less
than $10.00, the Company at its option may redeem the E Series Convertible Preferred at a
price equal to 108% of its stated value plus any accrued and unpaid premium, in lieu of converting
such E Series Convertible Preferred to common stock.
12
HearUSA, Inc
Notes to Consolidated Financial Statements
In
September 2005 the Company used the proceeds from an
August 2005 private placement (see Note 7
Subordinated Notes and Warrant Liability) to redeem all of the Companys outstanding mandatorily
redeemable convertible preferred stock for approximately $4.9 million, which included approximately
$125,000 of accrued and unpaid premium.
7. Subordinated Notes and Warrant Liability
On August 22, 2005, the Company completed a private placement of $5.5 million three-year
subordinated notes (Subordinated Notes) with warrants (Note Warrants) to purchase 1,499,960
shares of the Companys common stock expiring on November 22, 2008. If they are paid in full on or
before December 31, 2005 the investors will forfeit 25% of the 1,499,960 Note Warrants. The
warrants to purchase 1,124,970 shares (75 percent) are exercisable subsequent to August 22, 2005 at
$2.00 per share and the remaining warrants to purchase 374,990 shares (25 percent), if not
forfeited, are exercisable after January 1, 2006 at $2.00 per share. The quoted closing market
price of the Companys common stock on the commitment date was $1.63 per share. The notes bear
interest at 7 percent annually. Proceeds from this financing were used to redeem all of the
Companys 1998-E Series Convertible Preferred Stock (see Note 6 Mandatorily Redeemable
Convertible Preferred Stock). The Company has agreed to register the common shares underlying the
warrant shares and to maintain such registration so that the warrant
holders may sell their shares if the warrants are exercised. The liability created by the
Companys agreement to register and keep the underlying shares registered has been recorded as a warrant liability of approximately $1.7 million based on the fair value of the warrants, using a
Black-Scholes option pricing model. Any gains or losses resulting from the changes in fair value
from period to period will be included in income. As the holders exercise their warrants the
liability will be reclassified to additional paid in capital.
The
Company recorded a debt discount of approximately $1.7 million based on the portion of the
proceeds allocated to the fair value of the Note Warrants. The debt discount is being amortized as interest expense over the three-year term of the
notes using the effective interest method.
In addition to the warrants issued to the purchasers of the Subordinated Notes, the Company
also issued 55,000 common stock purchase warrants with the same terms as the lender warrants and
paid cash of approximately $330,000 to third parties as finder fees and financing costs. These
warrants were valued at approximately $66,000 using a Black-Scholes option pricing model. The
total of such costs of approximately $396,000 is being amortized as interest expense using the
effective interest method over the three year term of the notes.
On the date of issuance of the Subordinated Notes the Company prepaid interest for the first four
months of the note. Beginning December 22, 2005, the Company will make twelve quarterly payments
of principal corresponding to 8 percent of the original principal amount plus interest and a
premium of 2 percent of the principal payment made. Approximate annual aggregate amount of
maturities of such notes maturing in future years is $1,760,000 in 2006, $1,760,000 in 2007 and
$1,540,000 in 2008.
During the first nine months of 2005 approximately $186,000 of prepaid financing fees and debt
discount was amortized as interest expense, including a non-cash portion of approximately $135,000.
The future non-cash debt discount and prepaid finder fees to be amortized as interest expense over
the next three years are approximately $292,000 for the remainder of 2005, $932,000 in 2006,
$546,000 in 2007 and $109,000 in 2008. In the event the Company retires the Subordinated Notes,
the Company will be required to accelerate the debt discount to the period in which the payoff
occurs.
13
HearUSA, Inc
Notes to Consolidated Financial Statements
8. Segments
The Company operates in three business segments, which include the operation and management of
clinics, the establishment, maintenance and support of an affiliated network and the operation of
an e-commerce business. The Companys business units are located in the United States and Canada.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinics |
|
|
E-commerce |
|
|
Network |
|
|
Corporate |
|
|
Total |
|
Hearing aids and other
products revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months ended 10/1/05 |
|
$ |
53,642,000 |
|
|
$ |
65,000 |
|
|
|
|
|
|
|
|
|
|
$ |
53,707,000 |
|
9 months ended 9/25/04 |
|
|
46,571,000 |
|
|
|
46,000 |
|
|
|
|
|
|
|
|
|
|
|
46,617,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months ended 10/1/05 |
|
|
2,864,000 |
|
|
|
|
|
|
|
1,132,000 |
|
|
|
|
|
|
|
3,996,000 |
|
9 months ended 9/25/04 |
|
|
3,374,000 |
|
|
|
|
|
|
|
783,000 |
|
|
|
|
|
|
|
4,157,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months ended 10/1/05 |
|
|
11,883,000 |
|
|
|
(51,000 |
) |
|
|
613,000 |
|
|
|
(9,000,000 |
) |
|
|
3,445,000 |
|
9 months ended 9/25/04 |
|
|
8,961,000 |
|
|
|
(12,000 |
) |
|
|
312,000 |
|
|
|
(7,745,000 |
) |
|
|
1,516,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months ended 10/1/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
1,290,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
152,000 |
|
|
|
1,446,000 |
|
Total assets |
|
|
49,932,000 |
|
|
|
|
|
|
|
1,273,000 |
|
|
|
13,019,000 |
|
|
|
64,224,000 |
|
Capital expenditures |
|
|
659,000 |
|
|
|
|
|
|
|
|
|
|
|
135,000 |
|
|
|
794,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 months ended 9/25/04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
1,363,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
211,000 |
|
|
|
1,578,000 |
|
Total assets |
|
|
47,324,000 |
|
|
|
|
|
|
|
1,481,000 |
|
|
|
11,444,000 |
|
|
|
60,249,000 |
|
Capital expenditures |
|
|
307,000 |
|
|
|
|
|
|
|
2,000 |
|
|
|
26,000 |
|
|
|
335,000 |
|
In 2005 and 2004, 95.5% and 94.5%, respectively, of hearing aids and other products revenues
consisted of hearing aid revenues and 4.5% and 5.5%, respectively, were other products revenues.
In 2005 and 2004, 52.5% and 50.4%, respectively, of services revenues consisted of hearing aid
repairs and 47.5% and 49.6%, respectively, consisted of testing and other income.
Income (loss) from operations at the segment level is computed before general administrative
expense ($8,848,000 in 2005 and $7,534,000 in 2004) and corporate depreciation and amortization
expense ($152,000 in 2005 and $211,000 in 2004), the sum of which is included in the column
Corporate as loss from operations ($9,000,000 in 2005 and $7,745,000 in 2004).
14
HearUSA, Inc
Notes to Consolidated Financial Statements
Information concerning geographic areas as of and for the nine months ended October 1, 2005 and
September 25, 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 1, 2005 |
|
|
As of September 25, 2004 |
|
|
|
United States |
|
|
Canada |
|
|
United States |
|
|
Canada |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Hearing aid and
other product
revenues |
|
$ |
47,835,000 |
|
|
$ |
5,872,000 |
|
|
$ |
41,908,000 |
|
|
$ |
4,709,000 |
|
Service revenues |
|
|
3,693,000 |
|
|
|
303,000 |
|
|
|
3,931,000 |
|
|
|
226,000 |
|
Long-lived assets |
|
|
41,406,000 |
|
|
|
10,300,000 |
|
|
|
39,179,000 |
|
|
|
9,432,000 |
|
Total assets |
|
|
51,371,000 |
|
|
|
12,853,000 |
|
|
|
49,034,000 |
|
|
|
11,215,000 |
|
Net revenues by geographic area are allocated based on the location of the subsidiary
operations.
9. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R (revised 2004),
Share-Based Payment. The Statement requires companies to expense the estimated fair value of
stock options and similar equity instruments issued to employees. Currently, companies are
required to calculate the estimated fair value of these share-based payments and can elect to
either include the estimated cost in earnings or disclose the pro-forma effect in the footnotes to
their financial statements. We have chosen to disclose the pro-forma effect. The fair value
concepts were not changed significantly in SFAS 123(R); however, in adopting this Standard,
companies must choose among alternative valuation models and amortization assumptions. The
valuation model and amortization assumption we have used (a Black Scholes model) continue to be
available and we elected to use this model for the future. On April 14, 2005 the U. S. Securities
and Exchange Commission (the SEC) announced a deferral of the effective date of SFAS 123(R) for
calendar year companies until the beginning of 2006. Based on the outstanding number of employees
stock options and excluding the impact of any future grants, at October 1, 2005, the total stock
based compensation expense determined under the fair value method that would be reflected in the
financial statements is approximately $875,000 in 2006 and $425,000 in 2007 (see Note 1
Description of the Company and Summary of Significant Accounting Policies Stock-Based
Compensation).
10. Liquidity
The working capital deficit increased $2.8 million to $7.7 million as of October 1, 2005 from $4.9
million as of December 25, 2004. The working capital deficit of $7.7 million includes
approximately $2.5 million representing the current portion of the long-term debt to Siemens for
Tranches A, B and C, which may be repaid through preferred pricing reductions and approximately
$1.9 million of current portion of convertible subordinated notes that can be repaid with common
stock, at the option of the Company. Cash and cash equivalents as of October 1, 2005 was
approximately $3.2 million.
Although there can be no assurance that the Company can maintain compliance with Siemens loan
covenants, that net revenue levels will remain at or higher than current levels or that unexpected
cash needs will not arise for which cash and cash equivalents and cash flow from operating
activities will be sufficient, the Company believes that current cash, cash equivalents and cash
flow from operating activities, at current net revenue levels, will be sufficient to support the
Companys operational needs through the remainder of the year. For the next three months, the
Company expects approximately the same level of cash flow from operating activities as achieved in
the first three quarters of 2005. In the event of a shortfall in cash, the Company might consider
short-term debt, or additional equity or debt offerings. There can be no assurance however, that
such financing will be available to the Company on favorable terms or at all. The Company is also
continuing its aggressive cost controls and sales and gross margin improvements.
15
Forward Looking Statements
This form 10-Q and in particular, this Managements Discussion and analysis contain or incorporate
a number of forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Act of 1934. Any statements that are not statements of
historical fact should be considered forward-looking statements and should be read in conjunction
with our consolidated financial statements and notes to the consolidated financial statements
included in this report. These forward-looking statements are based on current expectations,
estimates, forecasts and projections about the industry and markets in which we operate and
managements beliefs and assumptions. The statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to predict. We do not
intend to update publicly any forward-looking statements whether as a result of new information,
future events or otherwise.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
During the third quarter of 2005, the Company continued to improve its profitability through
increased revenues and cost controls. The Companys strategic acquisition program initiated in
the second quarter of 2005 resulted in acquisitions during the second and third quarters of 2005
(see Note 3 Business Acquisitions) in order to increase its market share and take advantage of
economies of scale. Future strategic acquisitions are expected to be made using the cash on hand
at the end of the quarter, the Siemens acquisition line of credit, issuance of common stock and
promissory notes to the sellers.
The Company expects to continue improving the year-over-year profitability. We plan to reduce
losses for the remainder of the year through increases in net revenues from additional or enhanced
managed care contracts, improvement in employee performance and strategic acquisitions in selected
markets. In addition, we intend to keep costs under control as revenues grow. Profitability
could, however, be affected for a short term period in the event the holders of the $7.5
convertible subordinated notes convert their notes and/or exercise their warrants and/or the
holders of the $5.5 million subordinated notes exercise their warrants, or the Company repays the
notes before their term. In such cases, the remaining discount would be expensed resulting in an
increase in the interest expense. A significant change in the value of the warrant liability could
also affect profitability in the quarter the change occurs.
In
October 2005, certain clinics located in Florida sustained minor damages and were out of power
due to Hurricane Wilma. As a result, these clinics were closed for a period of 3 to 12 days. As
of issuing this report, all the clinics were operational. Although the impact of these closings
has not been established as of yet, the Company does not expect it to significantly effect the
overall performance of its operations. The Company intends to file a claim for business
interruption with its insurance company. There is no assurance that the Company will recover on
such claim.
RESULTS OF OPERATIONS
For the three months ended October 1, 2005 compared to the three months ended and September 25,
2004
Total net revenues in the third quarter of 2005 increased approximately $2.1 million, or 11.9%,
compared to the third quarter of 2004. This increase is primarily attributable to an increase in
hearing aids revenues resulting from an increase in average selling price of 14.4% in the third
quarter of 2005 compared to 2004. Such increases occurred as patients selected a higher percentage
of more advanced technology hearing aids with higher sales prices. This increase was somewhat
offset by a reduction in other products revenues and services due to lower revenues from the
Department of Veteran Affairs. Approximately $172,000 of the overall increase in total net
revenues relates to a favorable change in the average Canadian exchange rate from 2004 to 2005.
During the fourth quarter of 2005, the Company expects to continue its total net revenue
improvement over the preceding year, principally as a result of increases in
average selling price due to more advanced technology hearing aids being sold, and increases in the
number of hearing aids sold, mainly attributable to acquisitions made in the second and third
quarters of 2005.
16
Total cost of products sold and services in the third quarter of 2005 increased approximately $1.4
million, or 28.6%, compared to the third quarter of 2004. This increase is primarily attributable
to the increase in hearing aids revenues and in the cost of hearing aids due to increased sales of
more advanced technology hearing aids. Included in the cost of hearing aids and other products sold
are Siemens preferred pricing reductions of approximately $816,000 in the third quarter of 2005 and
$901,000 for the third quarter 2004. Such pricing reductions from Siemens are accounted for as
reductions of cost of hearing aids and other products sold for financial reporting purposes and
applied, pursuant to the Siemens credit agreement, to reduce the principal ($730,000 in 2005 and
$730,000 in 2004) and interest payments ($86,000 in 2005 and $172,000 in 2004) due on Tranches A, B
and C of the Siemens loan. Cost of services remained flat from 2004 to 2005. The total cost of
products sold and services as a percent of total net revenues was, 31.3% and 27.2% for the third
quarter of 2005 and 2004, respectively. This increase in cost as a percentage of total net
revenues is mostly due to the increase in sales of more advanced technology hearing aids, which
bear a higher cost as a percent of sales, and special promotional pricing on the introduction of a
new Siemens product. Also, 2004 benefited from higher revenues from the Department of Veteran
Affairs which has no cost of products. The Company expects its total cost of products sold and
services as a percent of total net revenues, to improve in the fourth quarter of 2005 as compared
to the third quarter of 2005, resulting from the end of the promotional pricing on the new Siemens
product. However, a portion of the Siemens pricing reduction will be eliminated at the end of June
2006 (approximately $575,000 of principal per quarter) and the remaining portion at the end of June
2007 ($155,000 of principal per quarter) according to the credit facility agreement with Siemens.
The Company has identified different opportunities in order to offset the loss of the rebates, but
no decisions have been made or negotiations have been finalized.
Clinic operating expenses increased approximately $408,000, or 4.8%, in the third quarter of 2005
compared to the third quarter of 2004. The increase is mainly attributable to an increase of
approximately $317,000 in clinic wages as a result of normal merit increases, additional new
employees at the clinic level and increases in incentive compensation in relation to higher hearing aids
revenues. It is expected that clinic operating expenses in the fourth quarter of 2005 will
increase due to expenses associated with the business acquisitions made in the second and third
quarters of 2005 as well as any operating expenses of any future business acquisitions. These
increases are expected to be proportional to the corresponding increases in revenues.
General and administrative expenses in the third quarter of 2005 increased approximately $297,000,
or 11.5%, compared to the third quarter of 2004. The increase is primarily attributable to an
increase in wages and fringe benefits of approximately $181,000 principally due to normal annual
increases and the creation of a new sales training department in January of 2005, coupled with an
increase in professional fees due to additional consulting fees for Sarbanes-Oxley compliance
(Section 404) and other projects in 2005 compared to 2004. The Company expects general and
administrative expenses to remain consistent with the third quarter for the remainder of the year.
Depreciation and amortization expense decreased approximately $33,000, or 6.5%, in 2005. This
decrease is due to certain property and equipment being fully depreciated. The Company expects
these expenses to remain comparable for the remainder of the year.
The gain on insurance proceeds of approximately $301,000 in the third quarter of 2005 is
attributable to insurance proceeds resulting from 2004 hurricane damage and business interruption
claims sustained in Florida hearing care clinics. This gain resulted from the final payment on the
2004 claims. Gain of future claims will be recorded when payments, if any, are received.
17
Interest expense in the third quarter of 2005 increased approximately $96,000, or 8.4%, compared to
the third quarter of 2004. The non-cash charge of $663,000 included in the interest expense is
$528,000 of amortization of the debt discount related to $7.5 million convertible subordinate debt
(see Note 5 Convertible Subordinated Notes) and $135,000 in amortization of the debt discount related to $5.5
million subordinated note (see Note 7 Subordinated Notes and Warrant Liability). This
non-cash charge does not have an impact on the liquidity and working capital of the Company. The
Company expects interest expense in the next three months to increase. This increase would reflect
interest on the $5.5 million subordinated notes for a full quarter as compared to 40 days in the
third quarter of 2005 and any interest expense on new promissory notes that might be issued for
business acquisitions. These increases will however be partially offset by reduction of interest
expense due to lower interest on lower balances for other debts.
Dividends on preferred stock increased approximately $122,000 in the third quarter of 2005 as
compared to the third quarter of 2004 due to the premium on the mandatorily redeemable convertible
preferred stock resulting from redeeming such preferred stock before expiration of its term. Due
to the retirement of the preferred stock, the dividend expense from these preferred shares will be
eliminated in the fourth quarter of 2005 and in future quarters. Thereafter the dividend expense
will be approximately $35,000 per quarter, until the remainder of the preferred stock (Series J) is
repaid.
In the third quarter of 2005, the Company incurred a net loss applicable to common stockholders of
approximately $89,000, compared to $233,000 in the same period of 2004. This improvement is mainly
due to the increase in net revenues and gains on insurance proceeds. However, these events were
partially offset by a reduction in gross margin (due to the increase in the percent of cost of
products sold and services) and increases in clinic operating and general and administrative
expenses. The net loss applicable to common stockholders for the third quarters of 2005 and 2004
includes a non-cash interest expense of approximately $663,000 and $532,000, respectively,
representing the amortization of the debt discount related to the $7.5 million convertible
subordinated notes and the $5.5 million subordinated notes.
For the nine months ended October 1, 2005 compared to the nine months ended September 25,
2004
Total net revenues in the first nine months of 2005 increased approximately $6.9 million, or 13.6%,
compared to the first nine months of 2004. This increase is primarily attributable to an increase
in hearing aids revenues mainly due to an increase in the average selling price of 15.4% in the
first nine months of 2005 compared to 2004, as patients selected a higher percentage of more
advanced technology hearing aids, and from the additional week in the first quarter of 2005, offset
by a reduction in other products revenues and services due to lower revenues from the contract with
the Department of Veteran Affairs. Approximately $482,000 of the overall increase in net revenues
relates to a favorable change in the average Canadian exchange rate from 2004 to 2005.
Total cost of products sold in the first nine months of 2005 increased approximately $2.9 million,
or 20.5%, compared to the first nine months of 2004. This increase is primarily attributable to
the increase in hearing aids revenues and in the cost of hearing aids due to increased sales of
more advanced technology hearing aids. Included in the cost of products sold are Siemens preferred
pricing reductions of approximately $2,514,000 in the first nine months of 2005 and $2,759,000 for
the first nine months of 2004. Such pricing reductions from Siemens are accounted for as reductions
of cost of hearing aids and other products sold for financial reporting purposes and applied,
pursuant to the Siemens credit agreement, against the principal ($2,192,000 in 2005 and $2,190,000
in 2004) and interest payments ($322,000 and $569,000) due on Tranches A, B and C of the Siemens
loan. Cost of services remained stable and in correlation with services revenues. The total cost
of products sold and services as a percent of total net revenues was 29.5% and 27.9% for the first
nine months of 2005 and the first nine months of 2004, respectively. This increase in cost as a
percent of total net revenues is due to increase in sales of more advanced technology hearing aids,
which bear a higher cost as a percent of sales, and special promotional pricing on the introduction
of a new Siemens product. Also, 2004 benefited from higher revenues from the Department of
Veteran Affairs which bear no cost of products.
18
Clinic operating expenses increased approximately $924,000, or 3.6%, in the first nine months of
2005 compared to the first nine months of 2004. This increase is mainly attributable to the
additional week in the 2005 period, increased wages due to new employees from acquisitions, normal
merit increases and an increase in incentive compensation related to the increase in net revenues. These
increases were offset in part by reductions due to the
reclassification of the salaries of certain employees from clinic
operating expenses to general and administrative expenses as a result of changes in
responsibilities and changes in certain employees compensation programs from fixed salary to base
salary plus commission.
General and administrative expenses in the first nine months of 2005 increased approximately $1.3
million, or 17.4%, compared to the first nine months of 2004. $211,000 of this increase is due to
the additional week in the first quarter of 2005. The remaining increase is primarily attributable
to an increase in wages and fringe benefits of approximately $486,000 mainly due to normal annual
increases and the transfer of certain employees from clinic operating expenses to general and
administrative expenses as a result of changes in responsibilities and the creation of a new sales
training department in January 2005, coupled with an increase in professional fees due to
additional consulting fees for Sarbanes-Oxley compliance (Section 404) and other projects in 2005
compared to 2004.
Depreciation and amortization expense decreased approximately $132,000 or 8.4% in 2005. This
decrease is due to certain property and equipment being fully depreciated.
The gain on insurance proceeds of approximately $430,000 in the third quarter of 2005 is
attributable to insurance proceeds resulting from 2004 hurricane damage and business interruption
claims sustained in Florida hearing care clinics. This gain resulted from the final payment on the
2004 claims.
Interest expense in the first nine months of 2005 increased approximately $128,000, or 3.6%,
compared to the first nine months of 2004. The non-cash charge of $1,759,000 included in the
interest expense is $1,623,000 in amortization of the debt discount related to $7.5 million
convertible subordinate debt (see Note 5 Convertible Subordinated Notes) and $135,000 in
amortization of the debt discount related to $5.5 million subordinate debt (see Note 7
Subordinated Notes and Warranty Liability). This non-cash charge does not have an impact on the
liquidity and working capital of the Company.
Dividends on preferred stock increased approximately $135,000 due to the premium on the mandatorily
redeemable convertible preferred stock that resulted from redeeming such preferred stock before the
expiration of its term.
The Company has net loss carryfowards of approximately $76 million for U.S. Federal tax purposes
and approximately $3.3 million of operating loss carryforwards in Canada. The Company does not
expect to pay income tax in the near future.
In the first nine months of 2005, the Company incurred a net loss applicable to common stockholders
of approximately $376,000, compared to a net loss of approximately $2.8 million in the same period
in 2004. This improvement is attributable to an increase in net revenues, impacted by the
additional week in the 2005 period and gains on disposal of assets and insurance proceeds.
However, these events were generally offset by increases in clinic operating expenses and general
and administrative expenses also partially the result of the additional week in the reporting
period. The net loss applicable to common stockholders for the first nine months of 2005 and 2004
includes non-cash interest expense of approximately $1,759,000 and $1,595,000, respectively,
representing the amortization of the debt discount related to the $7.5 million convertible
subordinated notes and the $5.5 million subordinated notes.
During the first nine months of 2005, HEARx West generated net income of approximately $1,809,000.
The HEARx West deficit decreased from approximately $3,206,000 at the end of 2004 to approximately
$1,397,000 at October 1, 2005. In accordance with the joint venture agreement with the Permanente
Federation, the Company included in its statement of operations 100% of the losses incurred by the
venture since its inception and will receive 100% of the net income of the venture until the
members deficit is eliminated. At such time as the members deficit is eliminated and if the
venture continues to be profitable, the Company will begin recording a minority interest,
corresponding to 50% of the ventures net income as an expense in the Companys consolidated
statement of operations and as a liability on the consolidated balance sheets. The deficit is
expected to be eliminated during the second quarter of 2006.
19
LIQUIDITY AND CAPITAL RESOURCES
On December 7, 2001, the Company obtained a secured credit facility from Siemens comprised of (a)
a $10,875,000 secured five-year term loan credit facility (the Tranche A Loan); (b) a $25,000,000
secured five-year revolving loan credit facility (the Tranche B Loan); (c) a $3,000,000 secured
five-year term loan facility (the Tranche C Loan); (d) a $13,000,000 five-year secured term loan
credit facility (the Tranche D Loan). On March 14, 2003, the Company obtained an additional
$3,500,000 secured five-year term loan from Siemens bearing interest at a rate of 10% annually (the
Tranche E Loan). The Tranche E loan was obtained pursuant to an amendment to the Companys credit
agreement with Siemens and is otherwise subject to the terms and conditions of the credit agreement
and related security agreement. At October 1, 2005, $1,874,985, $45,067, $1,050,000, $14,045,187
and $1,730,726, representing principal on the Tranche A, Tranche B, Tranche C, Tranche D, and
Tranche E Loans, respectively, were outstanding. As of July 2, 2005, approximately $24.9 million
is available to the Company for acquisitions under Tranche B of the credit facility.
The Tranche A, B and C Loans are payable quarterly over five years with the outstanding principal
and interest at 10%, due and payable on the final maturity date. Principal and interest, at the
prime rate (as defined) plus 1%, on the Tranche D Loan is payable on the final maturity date. The
Company is required to make monthly payments of interest only on the Tranche E Loan in the first
year. In years two through five, the Company must make monthly principal and interest payments.
Quarterly principal and interest payments on the Tranche A, B and C Loans may be paid through
preferred pricing reductions received from Siemens by HearUSA as long as the Company purchases
certain minimum percentages of its hearing aids requirements from Siemens. During the first nine
months of 2005 and 2004, approximately $2,514,000 and $2,759,000 of earned preferred pricing
reductions were recorded as a reduction of cost hearing aids and other products sold. In the first
nine months of 2005 and 2004, $322,000 and $569,000 of interest payable, and $2,192,000 and
$2,190,000 of principal, respectively, has been paid through such preferred pricing reductions.
The Company is also required to make additional payments on the Tranche D Loan under the following
conditions: The Company must make a payment equal to 25% of net proceeds it receives from the
issuance of stock or stock equivalents. In addition, within 120 days of any fiscal year, the
Company must make a payment equal to 20% of Excess Cash Flow (as defined in the credit agreement)
for such fiscal year end. The total payment of approximately $178,000 was made in the second
quarter of 2005 based on 2004 Excess Cash Flow.
The Siemens credit facility imposes certain financial and other covenants on the Company, which
are customary for loans of this size and nature, including restrictions on the conduct of the
Companys business, the incurrence of indebtedness, merger or sale of assets, the modification of
material agreements, changes in capital structure, making certain payments and paying dividends.
If the Company cannot maintain compliance with these covenants, Siemens may terminate future
funding under the credit facility and declare all then outstanding amounts under the facility
immediately due and payable. Also, the Companys supply agreement with Siemens requires full
payment for hearing aids purchased from Siemens within 60 days from statement date. As of October
1, 2005, the Company was in compliance with those payment provisions. Upon noncompliance, Siemens
may declare the Company to be in default of the supply agreement by written notification, which, if
not cured within 60 days of the date of written notification, would be an event of default under
the Companys credit facility with Siemens and Siemens would have the right to declare all amounts
outstanding under the credit facility immediately due and payable. Any non-compliance with the
supply agreement could have a material adverse effect on the Companys financial condition and
continued operations.
The working capital deficit increased $2.8 million to $7.7 million as of October 1, 2005 from $4.9
million as of December 25, 2004. The working capital deficit of $7.7 million includes
approximately $2.5 million representing the current portion of the long-term debt to Siemens for
Tranches A, B and C, which may be repaid through preferred pricing reductions and approximately
$1.9 million of current portion of convertible subordinated notes that can be repaid with common
stock, at the option of the Company. Cash and cash equivalents as of October 1, 2005 was
approximately $3.2 million.
20
Although there can be no assurance that the Company can maintain compliance with Siemens loan
covenants, that net revenue levels will remain at or higher than current levels or that unexpected
cash needs will not arise for which cash and cash equivalents and cash flow from operating activities
will be sufficient, the Company believes that current cash, cash equivalents and cash flow from
operating activities, at current net revenue levels, will be sufficient to support the Companys
operational needs through the remainder of the year. Future strategic acquisitions are expected to
be made using the cash on hand at September 30, 2005, the Siemens acquisition line of credit,
issuance of common stock and promissory notes to the sellers. For the next three months, the
Company expects approximately the same level of cash flow from operating activities as achieved in
the first three quarters of 2005. In the event of a shortfall in cash, the Company might consider
short-term debt, or additional equity or debt offerings. There can be no assurance however, that
such financing will be available to the Company on favorable terms or at all. The Company is also
continuing its aggressive cost controls and sales and gross margin improvements.
Below is a chart setting forth the Companys contractual cash payment obligations which have been
aggregated to facilitate a basic understanding of the Companys liquidity as of October 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
than 1 |
|
|
1 3 |
|
|
4 5 |
|
|
than 5 |
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
|
|
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1) |
|
$ |
21,061,000 |
|
|
$ |
3,669,000 |
|
|
$ |
16,764,000 |
|
|
$ |
628,000 |
|
|
$ |
|
|
Interest to be paid on long-term debt (2) |
|
|
657,000 |
|
|
|
160,000 |
|
|
|
479,000 |
|
|
|
18,000 |
|
|
|
|
|
Operating leases |
|
|
16,897,000 |
|
|
|
5,039,000 |
|
|
|
9,147,000 |
|
|
|
1,909,000 |
|
|
|
802,000 |
|
Convertible subordinated notes (3) |
|
|
7,500,000 |
|
|
|
1,875,000 |
|
|
|
5,000,000 |
|
|
|
625,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes |
|
|
5,500,000 |
|
|
|
1,760,000 |
|
|
|
3,740,000 |
|
|
|
|
|
|
|
|
|
Interest to be paid on convertible
subordinated notes |
|
|
1,124,000 |
|
|
|
599,000 |
|
|
|
517,000 |
|
|
|
8,000 |
|
|
|
|
|
Interest to be paid on subordinated notes |
|
|
613,000 |
|
|
|
331,000 |
|
|
|
282,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements |
|
|
4,186,000 |
|
|
|
1,135,000 |
|
|
|
2,016,000 |
|
|
|
1,035,000 |
|
|
|
|
|
Purchase obligations |
|
|
1,270,000 |
|
|
|
595,000 |
|
|
|
675,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
58,808,000 |
|
|
$ |
15,163,000 |
|
|
$ |
38,620,000 |
|
|
$ |
4,223,000 |
|
|
$ |
802,000 |
|
|
|
|
|
|
|
(1) |
|
Approximately $3.0 million (Tranches A, B and C) can be repaid through preferred pricing
reductions from Siemens, including $2.5 million in less than 1 year and, $500,000 in years
1-3. |
|
(2) |
|
Interest on long-term debt excludes $1,045,000 of accrued but unpaid interest on Tranche D
presented with long-term debt in (1) above. In addition, approximately $211,000 of interest
on Tranches A, B, and C can be repaid through preferred pricing reductions. |
|
(3) |
|
When due these notes and corresponding interest can be repaid at the option of the Company in
common stock. |
Net cash from operating activities improved from $573,000 used in the first nine months of 2004 to
approximately $1.1 million provided in the first nine months of 2005. The improvement was
primarily the result of an improvement in profitability going from a net loss of $2.3 million to a
net income of $290,000.
21
The first nine months of 2005 net increase of $1.6 million in accounts receivable, inventories and
prepaid expenses is mainly attributable to an increase of accounts receivable of approximately $904,000 due
to the increase in net revenues and the timing on receiving a capitation monthly payment on our
contract with Kaiser Permanente of approximately $580,000, and an increase in prepaid expenses of
approximately $490,000 due to the timing of our accounting period end and the payment of our rents
which occurred before the end of the quarter for the following month as opposed to after year end
in 2004. The net increase in accounts payable, accrued expenses and accrued compensation in the
first nine months of 2005 is also due to an increase in expenses as a result of an increase in
revenues and the timing of our accounting period end.
Net cash used in investing activities increased from approximately $233,000 in the first nine
months of 2004 to approximately $975,000 in the first nine months of 2005. This increase is mainly
due to an increase in cash used in the purchase of equipment of
$459,000 resulting from clinic relocations, new clinic openings and equipment upgrades and cash used for business
acquisitions of $1.3 million in the first nine months of 2005. These uses of cash were offset by
approximately $1.1 million received from the disposition of assets of hearing clinics located in
the states of Minnesota, Washington and Wisconsin (see Note 2 Discontinued Operations).
Net cash from financing activities increased from approximately $3.4 million used in the first nine
months of 2004 to approximately $371,000 provided in the first nine months of 2005. This increase
is mainly related to the payment of $1.8 million made to Siemens in January of 2004 on Tranches D
and E following the $7.5 million convertible subordinated notes financing (see Note 5 Convertible
Subordinated Notes) and the proceeds of $1.7 million received in March 2005 for the exercise of
warrants issued in the March 29, 2002 private placement (see Note 4 Stockholders Equity).
CRITICAL ACCOUNTING POLICIES
Management believes the following critical accounting policies affect the significant judgments and
estimates used in the preparation of the financial statements:
Goodwill
Annually, the Company is required to assess whether its goodwill is impaired. The Company elected
to perform this analysis on the first day of its fourth quarter of each year. In order to do this,
management applied judgment in determining its reporting units, which represent distinct parts of
the Companys business. The reporting units determined by
management are the clinics, the network
and e-commerce. The definition of the reporting units affects the Companys goodwill impairment
assessments. The annual goodwill impairment assessment involves estimating the fair value of a
reporting unit and comparing it with its carrying amount. If the carrying value of the reporting
unit exceeds its fair value, additional steps are required to calculate a potential impairment
charge. Calculating the fair value of the reporting units requires significant estimates and
long-term assumptions. Each year the Company utilized an independent appraisal firm to test
goodwill for impairment as of the first day of the Companys fourth quarter. In 2003 and 2004
these tests indicated no impairment. The Company estimates the fair value of its reporting units
by applying a weighted average of three methods: quoted market price, external transactions, and
discounted cash flow. Significant changes in key assumptions about the business and its prospects,
or changes in market conditions, stock price, interest rates or other externalities, could result
in an impairment charge.
Revenue recognition
Revenues from the sale of hearing aids and other products are recognized at the time of delivery to
the patient. Revenues from hearing care services, such as testing and
repairs at the clinic level
administration and other fees under the affiliated network agreements are recognized at the time
those services are performed.
22
The Company has capitation contracts with certain health care organizations under which the Company
is paid an amount for each enrollee of the health maintenance organization to provide to the enrollee
a 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. Capitation revenue is earned as a result of agreeing to provide services to members
without regard to the actual amount of service provided. Revenue is recorded in the period that the
Company has agreed to provide health care services to enrollees.
Allowance for doubtful accounts
Certain of the accounts receivable of the Company are from health insurance and managed care
organizations and government agencies. These organizations could take up to nine months before
paying a claim made by the Company and also impose a limit on the time the claim can be billed.
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible
amounts. That estimate is based on historical collection experience, current economic and market
conditions, and a review of the current status of each organizations trade accounts receivable.
In order to calculate that allowance, the Company first identifies any known uncollectible amounts
in its accounts receivable listing and charges them against the existing allowance for doubtful
accounts. Then a specific percent per plan and per aging categories is applied against the
remaining receivables to estimate the new allowance. Any changes in the percent assumptions per
plan and aging categories could result in a change in the allowance for doubtful accounts. For
example, an increase of 10% in the percent used would increase the allowance for doubtful accounts
by approximately $6,000.
Sales returns
The Company provides to all patients purchasing hearing aids a specific return period of at least
30 days if the patient is 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 patient attends
the Companys H.E.L.P. program. The Company calculates its allowance for returns using estimates
based upon actual historical returns. The cost of the hearing aid is reimbursed to the Company by
the manufacturer.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R (revised 2004),
Share-Based Payment. The Statement requires companies to expense the estimated fair value of
stock options and similar equity instruments issued to employees. Currently, companies are
required to calculate the estimated fair value of these share-based payments and can elect to
either include the estimated cost in earnings or disclose the pro forma effect in the footnotes to
their financial statements. We have chosen to disclose the pro-forma effect. The fair value
concepts were not changed significantly in SFAS 123(R); however, in adopting this Standard,
companies must choose among alternative valuation models and amortization assumptions. The
valuation model and amortization assumption we have used (a Black Scholes model) continue to be
available and we elected to use this model for the future. On April 14, 2005 the U. S. Securities
and Exchange Commission (the SEC) announced a deferral of the effective date of SFAS 123(R) for
calendar year companies until the beginning of 2006. Based on the outstanding number of employees
stock options and excluding the impact of any future grants, at October 1, 2005, the total stock
based compensation expense determined under the fair value method that would be reflected in the
financial statements is approximately $875,000 in 2006 and $425,000 in 2007 (see Note 1
Description of the Company and Summary of Significant Accounting Policies Stock-Based
Compensation).
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not engage in derivative transactions. The Company is exposed to Canadian currency
exchange rates and the Company is not hedging that exposure. Differences in the fair value of
investment securities are not material; therefore the related market risk is not significant. The
Companys exposure to market risk for changes in interest rates relates primarily to the Companys
long-term debt. The following table presents the Companys financial instruments for which fair
value is subject to changing market interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term, Convertible Subordinated Notes and Subordinated Notes (in thousands) |
|
|
|
Variable |
|
|
|
|
|
|
|
|
|
|
|
Rate |
|
|
|
Fixed Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr 1 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr 3 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime Rate |
|
|
|
7% |
|
|
8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
+ 1% note |
|
|
|
due |
|
|
due |
|
|
|
|
|
|
|
|
|
|
10 % note |
|
|
|
|
|
|
|
|
October |
|
due April |
|
|
|
August |
|
|
November |
|
|
10 % notes |
|
|
10 % notes |
|
|
due Dec 1, |
|
|
|
|
|
|
|
|
1, 2005: |
|
2007 |
|
|
|
2008 |
|
|
2008 |
|
|
due 2008 |
|
|
due 2007 |
|
|
2006 |
|
|
Other notes |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Estimated cash
inflow (outflow) by
fiscal year of
principal maturity |
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
(536 |
) |
|
|
|
(440 |
) |
|
|
|
|
|
|
(155 |
) |
|
|
(154 |
) |
|
|
(575 |
) |
|
|
(339 |
) |
|
|
|
(2,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
(1,760 |
) |
|
|
(2,500 |
) |
|
|
(657 |
) |
|
|
(621 |
) |
|
|
(1,300 |
) |
|
|
(834 |
) |
|
|
|
(7,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
(13,509 |
) |
|
|
|
(1,760 |
) |
|
|
(2,500 |
) |
|
|
(726 |
) |
|
|
(320 |
) |
|
|
|
|
|
|
(687 |
) |
|
|
|
(19,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
(1,540 |
) |
|
|
(2,500 |
) |
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
(306 |
) |
|
|
|
(4,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(14,045 |
) |
|
|
|
(5,500 |
) |
|
|
(7,500 |
) |
|
|
(1,731 |
) |
|
|
(1,095 |
) |
|
|
(1,875 |
) |
|
|
(2,250 |
) |
|
|
|
(33,996 |
) |
|
|
|
|
|
|
|
|
|
Estimated fair value |
|
|
(14,045 |
) |
|
|
|
(5,500 |
) |
|
|
(7,500 |
) |
|
|
(1,731 |
) |
|
|
(1,095 |
) |
|
|
(1,875 |
) |
|
|
(2,250 |
) |
|
|
|
(33,996 |
) |
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
(14,045 |
) |
|
|
|
(5,500 |
) |
|
|
(7,500 |
) |
|
|
(1,731 |
) |
|
|
(1,095 |
) |
|
|
(1,875 |
) |
|
|
(2,250 |
) |
|
|
|
(33,996 |
) |
|
|
|
|
|
|
|
|
|
Item 4. Controls and Procedures
The Companys management, with the participation of the Companys chief executive officer and chief
financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of October 1,
2005. Based on this evaluation, the Companys chief executive officer and chief financial officer
concluded that, as of October 1, 2005, the Companys disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to the Companys chief executive officer and chief financial officer by
others within those entities, particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable assurance that information required to
be disclosed by the Company in the reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms.
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 1, 2005 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
24
Part II Other Information
Item 6. Exhibits
|
|
|
2.1
|
|
Plan of Arrangement, including exchangeable share provisions (incorporated herein
by reference to Exhibit 2.3 to the Companys Joint Proxy Statement/Prospectus on
Form S-4 (Reg. No. 333-73022)). |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of HEARx Ltd., including certain certificates
of designations, preferences and rights of certain preferred stock of the Company
(incorporated herein by reference to Exhibit 3 to the Companys Current Report on
Form 8-K, filed May 17, 1996 (File No. 001-11655)). |
|
|
|
3.2
|
|
Amendment to the Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1A to the Companys Quarterly Report on Form 10-Q for the
period ended June 28, 1996 (File No. 001-11655)). |
|
|
|
3.3
|
|
Amendment to Restated Certificate of Incorporation including one for ten reverse
stock split and reduction of authorized shares (incorporated herein to Exhibit 3.5
to the Companys Quarterly Report on Form 10-Q for the period ending July 2, 1999
(File No. 001-11655)). |
|
|
|
3.4
|
|
Amendment to Restated Certificate of Incorporation including an increase in
authorized shares and change of name (incorporated herein by reference to Exhibit
3.1 to the Companys Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)). |
|
|
|
3.5
|
|
Certificate of Designations, Preferences and Rights of the Companys 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4
to the Companys Current Report on Form 8-K, filed December 17, 1999 (File No.
001-11655)). |
|
|
|
3.6
|
|
Certificate of Designations, Preferences and Rights of the Companys Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Companys
Current Report on Form 8-K, filed July 19, 2002 (File No. 001-11655)). |
|
|
|
3.7
|
|
Amendment to Certificate of Designations, Preferences and Rights of the Companys
1999 Series H Junior Participating Preferred Stock (incorporated herein by
reference to Exhibit 4 to the Companys Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)). |
|
|
|
3.8
|
|
Certificate of Designations, Preferences and Rights of the Companys 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed August 28, 2003 (File No. 001-11655)). |
|
|
|
3.9
|
|
Amendment of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Companys Quarterly Report
on Form 10-Q, filed August 8, 2004.) |
|
|
|
3.10
|
|
Amended and Restated By-Laws of HearUSA, Inc. (incorporated herein by reference to
Exhibit 3.9 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 27, 2003 (File No. 001-11655)). |
|
|
|
4.1
|
|
Amended and Restated Rights Agreement, dated July 11, 2002 between HEARx and the
Rights Agent, which includes an amendment to the Certificate of Designations,
Preferences and Rights of the Companys 1999 Series H Junior Participating
Preferred Stock (incorporated herein by reference as Exhibit 4.9.1 to the Companys
Joint Proxy/Prospectus on Form S-4 (Reg. No. 333-73022)). |
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4.2
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Form of Support Agreement among HEARx Ltd., HEARx Canada, Inc. and HEARx
Acquisition ULC (incorporated herein by reference as Exhibit 99.3 to the Companys
Joint Proxy Statement/Prospectus on Form S-4 (Reg No. 333-73022)). |
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4.3
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Form of 2003 Convertible Subordinated Note due November 30, 2008 (incorporated
herein by reference as Exhibit 4.1 to the Companys Current Report on Form 8-K,
filed December 31, 2003). |
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9.1
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Form of Voting and Exchange Trust Agreement among HearUSA, Inc., HEARx Canada, Inc
and HEARx Acquisition ULC and Computer Share Trust Company of Canada (incorporated
herein by reference as Exhibit 9.1 to the Companys Joint Proxy
Statement/Prospectus on Form S-4 (Reg. No. 333-73022)). |
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10.1*
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Employment Agreement between Dr. Paul A. Brown and HearUSA, Inc., dated August 31, 2005
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10.2*
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Employment Agreement between Stephen J. Hansbrough and HearUSA, Inc., dated August 31, 2005
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10.3*
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Employment Agreement between Gino Chouinard and HearUSA, Inc., dated August 31, 2005
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10.4*
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Employment Agreement between Ken Schofield and HearUSA, Inc., dated August 31, 2005
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10.5*
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Form of Change in Control Agreement
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31.1
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CEO Certification, pursuant to Section 302of the Sarbanes-Oxley Act of 2002 |
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31.2
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CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32
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CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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*
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Signifies management
compensatory plan, contract or arrangement.
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25
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.
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HearUSA Inc. |
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(Registrant) |
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November 9, 2005 |
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/s/ Stephen J. Hansbrough |
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Stephen J. Hansbrough |
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Chief Executive Officer |
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HearUSA, Inc. |
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/s/ Gino Chouinard |
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Gino Chouinard |
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Chief Financial Officer |
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HearUSA, Inc. |
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26