HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
Net income (loss)
attributable to controlling interest per common share
Basic
earnings per share (“EPS”), is computed by dividing net income or loss
attributable to HearUSA, Inc. common stockholders by the weighted average of
common shares outstanding for the period. Basic EPS from continuing operations
is computed by dividing income (loss) from continuing operations attributable to
HearUSA, Inc.’s common stockholders, by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock (warrants to
purchase common stock, restricted stock units and options) were exercised or
converted into common stock. Potential common shares in the diluted EPS
computation are excluded where their effect would be antidilutive.
Common
stock equivalents for outstanding options and warrants to purchase common stock,
of approximately 1.6 million and 342,295, were excluded from the computation of
earnings per share – diluted for the quarters ended March 27, 2010 and March 28,
2009, respectively, because the loss from continuing operations attributable to
HearUSA, Inc. would make them anti-dilutive. For purposes of computing net
income/loss attributable to HearUSA, Inc. per common stockholder – basic and
diluted, for the quarter ended March 28, 2009, the weighted average number of
shares of common stock outstanding includes the effect of the 497,145
exchangeable shares of HEARx Canada, Inc., as if they were outstanding common
stock of the Company. These exchangeable shares were exchanged for common
stock of the Company in December 2009.
Comprehensive income
(loss)
Comprehensive
income (loss) is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. The Company's
other comprehensive income (loss) for the three months ended March
28, 2009 represents a foreign currency translation adjustment.
Components
of comprehensive income (loss) are as follows:
|
|
Three Months Ended
|
|
|
|
March
27,
|
|
|
March
28,
|
|
Dollars
in thousands |
|
2010
|
|
|
2009
|
|
Net
loss for the period
|
|
$ |
(2,545 |
) |
|
$ |
(370 |
) |
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
- |
|
|
|
(230 |
) |
Comprehensive
loss for the period
|
|
$ |
(2,545 |
) |
|
$ |
(600 |
) |
Comprehensive
income attributable to noncontrolling interest
|
|
|
(74 |
) |
|
|
(115 |
) |
Comprehensive
loss attributable to HearUSA, Inc
|
|
$ |
(2,619 |
) |
|
$ |
(715 |
) |
2.
Discontinued Operations
On
April 27, 2009, the Company sold the assets of Helix Hearing Care of
America Corp. (the “Seller”) and the stock of 3371727 Canada Inc. (“Canada”),
both indirect wholly owned subsidiaries of the Company, to an unrelated company,
for cash consideration of approximately $23.1 million U.S. dollars, which
resulted in a gain on sale of approximately $931,000, net of applicable tax, for
the year ended December 26, 2009. We incurred approximately $524,000 of legal
and financial advisory fees in connection with the sale, which are included in
the net gain on sale. The Company repaid approximately $8.1 million of
Siemens debt from the proceeds of this transaction during 2009, as required
under the agreement with Siemens.
In
connection with the sale, we agreed to provide certain transitional services to
the purchaser for eighteen months pursuant to a support agreement. We
believe the majority of services have already been provided. HearUSA agreed to
provide training, installation and support services for eighteen months in
exchange for monthly payments totaling approximately $1.2 million and
transition support services for up to nine months for quarterly payments
totaling approximately $331,000. Pursuant to a separate agreement between
HearUSA and a third party, HearUSA sold the right to the approximately
$1.2 million to be received over eighteen months under the support
agreement in exchange for a lump-sum payment of approximately $1.1 million
at the closing of the asset sale. The fees earned from these services are
accounted for as contract service revenues, as the services are provided.
Approximately $286,000 was recorded as contract service revenue in the first
quarter of 2010.
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
As a
result of the sale, the operations of the Canadian division have been
discontinued and, accordingly, these operating results are segregated and
reported as discontinued operations in the accompanying consolidated statements
of operations.
The
Canadian division’s results of operations for the quarter ended March 28, 2009
were as follows:
|
|
Three Months
Ended
|
|
|
|
March 28, 2009
|
|
(Dollars
in thousands)
|
|
|
|
Revenue
|
|
$ |
3,354 |
|
|
|
|
|
|
Cost
and expenses
|
|
|
2,628 |
|
|
|
|
|
|
Income
before provision of income taxes
|
|
$ |
726 |
|
|
|
|
|
|
Income
tax expense
|
|
|
41 |
|
|
|
|
|
|
Income
from discontinued operations
|
|
$ |
685 |
|
|
|
|
|
|
Income
from discontinued operations – basic and diluted
|
|
$ |
0.02 |
|
3.
Long-term Debt
Long-term
debt consists of the following:
|
|
March
27,
|
|
|
December
26,
|
|
Dollars
in thousands
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Notes
payable to Siemens
|
|
|
|
|
|
|
Tranche
B
|
|
$ |
4,413 |
|
|
$ |
4,387 |
|
Tranche
C
|
|
|
30,281 |
|
|
|
30,870 |
|
Total
notes payable to Siemens
|
|
|
34,694 |
|
|
|
35,257 |
|
Notes
payable from business acquisitions and other
|
|
|
5,911 |
|
|
|
6,865 |
|
|
|
|
40,605 |
|
|
|
42,122 |
|
Less
current maturities
|
|
|
5,791 |
|
|
|
5,983 |
|
|
|
$ |
34,814 |
|
|
$ |
36,139 |
|
The
approximate aggregate maturities of principal on long-term debt obligations, net
of discounts are as follows (dollars in thousands):
For the
twelve months ended March:
2011
|
|
$ |
5,965 |
|
2012
|
|
|
4,448 |
|
2013
|
|
|
2,879 |
|
2014
|
|
|
2,484 |
|
2015
and thereafter
|
|
|
25,069 |
|
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
Notes payable to
Siemens
The
Company has entered into credit, supply, investor rights and security agreements
with Siemens Hearing Instruments, Inc. (“Siemens”). The term of the
current agreements extends to February 2015.
Pursuant
to these agreements, Siemens has extended to the Company a $50 million
credit facility and the Company has agreed to purchase at least 90% of its
hearing aid purchases from Siemens and its affiliates. If the 90% minimum
purchase requirement is met, the Company earns rebates which are then used to
liquidate principal and interest payments due under the credit
agreement.
Amended Credit
Agreement
The
credit agreement, as amended in December 2008, includes a revolving credit
facility of $50 million that bears interest at 9.5%, matures in February
2015 and is secured by substantially all of the Company’s assets. Amounts
available to be borrowed under the credit facility are to be used solely for
acquisitions unless otherwise approved by Siemens. Borrowings under the
credit facility are accessed through Tranche B and Tranche C. Borrowing
for acquisitions under Tranche B is generally based upon a formula equal to 1/3
of 70% of the acquisition target’s trailing 12 months revenues, and any
amount greater than that may be borrowed under Tranche C with Siemens’ approval.
Principal borrowed under Tranche B was repaid quarterly at a rate of $65 per
Siemens unit purchased by the acquired businesses through September 2009.
In October 2009, the parties agreed to reduce the rebate to a rate of $50, per
Siemens’ unit purchased by the acquired businesses in exchange for more
favorable pricing. Principal borrowed under Tranche C is repaid at $500,000 per
quarter. The required quarterly principal and interest payments on Tranches B
and C are forgiven by Siemens through rebate credits of similar amounts as long
as 90% of hearing aid units purchased by the Company are Siemens’
products. Amounts not forgiven through rebate credits are payable in cash
each quarter. The Company has met the minimum purchase requirements of the
arrangement since inception of the arrangement with Siemens.
The
credit agreement requires that the Company reduce the principal balance by
making annual payments in an amount equal to 20% of Excess Cash Flow (as defined
in the credit agreement), and by paying Siemens 50% of the proceeds of any net
asset sales (as defined) and 25% of proceeds from any equity offerings the
Company may complete. The Company did not have any Excess Cash Flow (as defined)
in the first quarter of 2010 or fiscal 2009. In 2009 the Company paid
Siemens approximately $8.1 million of the proceeds received from the sale of the
Company’s Canadian operations in 2009.
The
credit facility also 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 Company’s business, the incurrence of
indebtedness, merger or sale of assets, the modification of material agreements,
changes in capital structure and making certain payments. If the Company
cannot maintain compliance with the covenants, Siemens may terminate future
funding under the credit agreement and declare all then outstanding amounts
under the agreement immediately due and payable. At March 27, 2010 the
Company was in compliance with the Siemens loan covenants.
Amended Supply
Agreement
The
supply agreement as amended in December 2008 extends to February 2015 and
requires the Company to purchase at least 90% of its hearing aid purchases from
Siemens and its affiliates. The 90% requirement is computed on a
cumulative four consecutive quarters. The Company has met the minimum purchase
requirements of the supply agreement since inception of the arrangement with
Siemens. Approximately $42.5 million has been rebated since the
Company entered into this arrangement in December 2001.
Additional
quarterly volume rebates of $156,250, $312,500 or $468,750 can be earned by
meeting certain quarterly volume tests. These rebates reduce the principal due
on the credit facility. Additional volume rebates of $156,250 were recorded in
each of the first quarters of 2010 and 2009.
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
All
rebates earned are accounted for as a reduction of cost of products
sold.
The
following table summarizes the rebate structure:
|
|
Calculation of Pro forma Rebates to HearUSA when at least 90% of
Units Purchased are from Siemens (1)
|
|
|
|
Quarterly Siemens Unit Sales Compared to Prior Years' Comparable Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90% but
< 95%
|
|
|
95% to
100%
|
|
|
>
100% < 125%
|
|
|
125%
and >
|
|
Acquisition
rebate (2)
|
|
$50/
unit
|
|
|
$50/
unit
|
|
|
$50/
unit
|
|
|
$50/
unit
|
|
|
|
Plus
|
|
|
Plus
|
|
|
Plus
|
|
|
Plus
|
|
Notes
payable rebate
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
|
$ |
500,000 |
|
Additional
volume rebate
|
|
|
- |
|
|
|
156,250 |
|
|
|
312,500 |
|
|
|
468,750 |
|
Interest
forgiveness rebate (3)
|
|
|
1,187,500 |
|
|
|
1,187,500 |
|
|
|
1,187,500 |
|
|
|
1,187,500 |
|
|
|
$ |
1,687,500 |
|
|
$ |
1,843,750 |
|
|
$ |
2,000,000 |
|
|
$ |
2,156,250 |
|
(1)
Calculated using trailing twelve month units purchased by the
Company
(2)
Siemens units purchased by acquired businesses ($65 per unit through September
2009 and $50 per unit thereafter)
(3)
Assuming the $50 million of the line of credit is fully utilized
The
following table shows the rebates received from Siemens pursuant to the supply
agreement during each of the following periods:
|
|
Quarters Ended
|
|
(Dollars in thousands)
|
|
March 27,
2010
|
|
|
March 28,
2009
|
|
|
|
|
|
|
|
|
Portion
applied against quarterly principal payments
|
|
$ |
764 |
|
|
$ |
835 |
|
Portion
applied against quarterly interest payments
|
|
|
825 |
|
|
|
1,085 |
|
|
|
$ |
1,589 |
|
|
$ |
1,920 |
|
The
supply agreement may be terminated by either party upon a material breach of the
agreement by the other party. In addition, HearUSA may terminate the
supply agreement in the event Siemens acquires a business which is directly
competitive to the business of the Company. Termination of the supply
agreement or a material breach of the supply agreement may be deemed to be a
breach of the credit agreement and Siemens would have the right to declare all
amounts outstanding under the credit facility immediately due and payable.
Termination of the supply agreement could have a material adverse effect on the
Company’s financial condition and continued operations.
Amended Investor Rights
Agreement
Pursuant
to the amended investor rights agreement, the Company granted
Siemens:
|
·
|
Resale
registration rights covering the 6.4 million shares of common stock
acquired by Siemens on December 23, 2008 under the Siemens Purchase
Agreement. The Company completed the registration of these shares for
resale in the second quarter of
2009.
|
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
|
·
|
Certain
rights of first refusal in the event the Company chooses to issue equity
or if there is a change of control transaction involving a person in the
hearing aid industry for a period of 18 months following the December 23,
2008 amendment. Thereafter Siemens will have a more limited right of
first refusal and preemptive rights for the term of the
agreement.
|
|
·
|
The
rights to have a representative of Siemens attend meetings of the Board of
Directors of the Company as a nonvoting
observer.
|
A willful
breach of the Company’s resale registration obligations under the investor
rights agreement may be deemed to be a breach of the credit agreement and
Siemens would have the right to declare all amounts outstanding under the credit
facility immediately due and payable.
Notes payable from business
acquisitions and other
Notes
payable from business acquisitions and other are primarily notes payable related
to acquisitions of hearing care centers and total approximately
$5.1 million and $5.9 million at March 27, 2010 and December 26, 2009,
respectively. They have a face value of $5.3 million and $6.2 million at
March 27, 2010 and December 26, 2009, respectively and are payable in monthly or
quarterly installments of principal and interest varying from $3,000 to $83,000
over periods varying from two to five years, bearing interest at rates
varying from 5% to 7%. The notes have been discounted using market rates ranging
from 9.5% to 10%. The discount is being accreted over the term of the notes on
an effective interest method. Accreted discount of $54,000 and $93,000 has
been included in interest expense in the quarters ended March 27, 2010 and March
28, 2009.
Other
notes payable relate mostly to capital leases totaling approximately $856,000
and $954,000 at March 27, 2010 and December 26, 2009, respectively, payable in
monthly or quarterly installments varying from $400 to $10,000 over periods
varying from one to five years and bear interest at rates varying from 4.6%
to 16.7%.
4.
Noncontrolling Interest
The
Company accounts and reports for noncontrolling interests in partially owned
consolidated subsidiaries and the loss of control of subsidiaries under FASB ASC
810-10, “Consolidations.” The guidance requires that: (1) a noncontrolling
interest, previously referred to as minority interest, is to be reported as part
of equity in the consolidated financial statements; (2) losses are to be
allocated to a noncontrolling interest even when such allocation might result in
a deficit balance, thereby reducing the losses attributed to the controlling
interest; (3) changes in ownership interest are to be treated as equity
transactions if control is maintained; (4) changes in ownership interest
resulting in a gain or loss are to be recognized in earnings if control is
gained or lost; and (5) in a business combination the noncontrolling interest’s
share of net assets acquired is to be recorded at fair value, plus its share of
goodwill.
A
reconciliation of noncontrolling interest of our subsidiary HEARx West, LLC for
the quarter ended March 27, 2010 is as follows:
|
|
Amount
(thousands)
|
|
Balance
at December 26, 2009
|
|
$ |
2,070 |
|
Joint
venture earnings
|
|
|
74 |
|
Dividends
to joint venture partners
|
|
|
- |
|
Balance
at March 27, 2010
|
|
$ |
2,144 |
|
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
5.
Fair Value
As of
March 27, 2010 and December 26, 2009, the fair value of the Company’s long-term
debt is estimated at approximately $40.6 million and $43.3 million,
respectively, based on discounted cash flows and the application of the fair
value interest rates applied to the expected cash flows, which is consistent
with its carrying value. The Company has determined that the long-term debt is
defined as Level 2 in the fair value hierarchy. Fair value estimates are made at
a specific point in time, based on relevant market information about the
financial instrument.
The book
values of cash equivalents, accounts receivable and accounts payable approximate
their respective fair values due to the short-term nature of these instruments.
These are Level 1 in the fair value hierarchy.
The
inputs used in measuring fair value into the fair value hierarchy are as
follows:
|
Level
1
|
Quoted
prices (unadjusted) in active markets for identical assets or
liabilities;
|
|
Level
2
|
Inputs
other than quoted prices included in Level 1 that are either directly or
indirectly observable;
|
|
Level
3
|
Unobservable
inputs in which little or no market activity exists, therefore requiring
an entity to develop its own assumptions about the assumptions that market
participants would use in pricing.
|
Assets or
liabilities that have recurring fair value measurements are shown below as of
March 27, 2010 (in thousands):
Description
|
|
Total as of
March 27, 2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
marketable securities
|
|
$ |
3,606 |
|
|
$ |
3,606 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability included in accounts payable
|
|
$ |
188 |
|
|
$ |
- |
|
|
$ |
188 |
|
The
Company’s short-term marketable securities primarily consist of money market
mutual funds invested in U.S. treasury securities generally maturing in three
months or less. These securities are classified as available for sale. There was
no unrealized gain or loss as of or for the quarter ended March 27,
2010.
There are
no assets or liabilities measured at fair value on a non-recurring basis during
the first quarter of 2010.
The fair
value of financial instruments represents the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. Fair value estimates are made at a specific
point in time, based on relevant market information about the financial
instrument. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment, and therefore cannot be determined with
precision. The assumptions used have a significant effect on the estimated
amounts reported.
Effective
December 28, 2008 we adopted guidance related to determining whether an
instrument or embedded feature is indexed to an entity’s own stock. This
guidance applies to any freestanding financial instruments or embedded features
that have the characteristics of a derivative and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock. As a
result of adopting this accounting guidance, outstanding common stock purchase
warrants to purchase 200,000 common shares that were previously treated as
equity pursuant to the derivative treatment exemption, were no longer afforded
equity treatment. These warrants have an exercise price of $0.60 per share and
expire on October 1, 2010. As such, effective December 28, 2008 we reclassified
the fair value of these common stock purchase warrants, which have exercise
price reset features, from equity to liability status as if these warrants were
treated as a derivative liability since their date of issue in December 2003. On
December 28, 2008, we reclassified from additional paid-in capital, as a
cumulative effect adjustment, $56,000 to beginning accumulated deficit and
$52,000 to a warrant liability to recognize the fair value of these warrants on
such date. The fair value of these common stock purchase warrants decreased from
$222,000 as of December 26, 2009 to $188,000 as of March 27, 2010. We recognized
a gain of $34,000 for the change in the fair value of these warrants for the
quarter ended March 27, 2010.
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
These
common stock purchase warrants were initially issued in connection with our
December 2003 issuance of convertible debt, which was subsequently paid. The
common stock purchase warrants were not issued with the intent of effectively
hedging any future cash flow, fair value of any asset, liability or any net
investment in a foreign operation. The warrants do not qualify for hedge
accounting, and as such, all changes in the fair value of these warrants are
recognized currently in earnings until such time as the warrants are exercised
or expire.
These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the Black-Scholes
option pricing model using the following assumptions:
|
|
March
27,
|
|
|
|
2010
|
|
Risk
free interest rate
|
|
|
0.4 |
% |
Expected
life in years
|
|
|
0.5 |
|
Expected
volatility
|
|
|
54 |
% |
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using daily pricing observations for recent periods that correspond
to the last twelve months. We believe this method produces an estimate that is
representative of our expectations of future volatility over the expected term
of these warrants. We currently have no reason to believe future volatility over
the expected remaining life of these warrants is likely to differ materially
from historical volatility. The expected life is based on the remaining term of
the warrants. The risk-free interest rate is based on one year U.S. Treasury
note rates.
6.
Stock-based Compensation
Under the
terms of the Company’s equity compensation plans, officers, certain other
employees and non-employee directors may be granted options to purchase the
Company’s common stock at a price equal to the closing price of the Company’s
common stock on the date the option is granted as well as restricted stock and
restricted stock units. We recognize stock-based compensation expense based on
the estimated grant date fair value using a Black-Scholes valuation model.
Stock-based compensation expense is included in general and administrative
expenses and totaled approximately $218,000 and $190,000 (of which approximately
$20,000 and $13,000 relates to restricted stock units) in the first quarter of
2010 and 2009, respectively.
In the
first quarter of 2010, the Company granted 433,750 options at an exercise price
of $1.35. These options vest ratably over the next four
years.
The
expected term of the options represents the estimated period of time from grant
until exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. Expected stock price volatility is based on
historical volatility of our stock for a period of at least equal to the
expected term. The risk-free interest rate is based on the implied yield
available on United States Treasury zero-coupon issues with an equivalent
remaining term. We have not paid dividends in the past and do not plan to
pay any dividends in the foreseeable future.
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
Stock-based payment award
activity
The
following table provides additional information regarding options outstanding
and options that were exercisable as of March 27, 2010 (options and intrinsic
value in thousands):
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
Contractual
Term
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
(in years)
|
|
Intrinsic Value
|
|
Outstanding
at December 26, 2009
|
|
|
6,267 |
|
|
$ |
1.16 |
|
|
|
|
- |
|
Granted
|
|
|
434 |
|
|
|
1.35 |
|
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
Forfeited/expired/cancelled
|
|
|
(3 |
) |
|
|
5.48 |
|
|
|
|
- |
|
Outstanding
at March 27, 2010
|
|
|
6,698 |
|
|
$ |
1.17 |
|
6.03
|
|
$ |
2,867 |
|
Exercisable
at March 27, 2010
|
|
|
4,338 |
|
|
$ |
1.15 |
|
4.50
|
|
$ |
1,968 |
|
The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of our common stock for the
options that were in-the-money at March 27, 2010. There was approximately $2.0
million of total unrecognized compensation cost related to share-based
compensation under our stock award plans as of March 27, 2010. That cost is
expected to be recognized over the remaining average life of 6 years as of March
27, 2010. At March 27, 2010, the aggregate intrinsic value of the employee and
non-employee director options outstanding and exercisable was approximately $2.9
million, of which $166,000 is non-employee director aggregate intrinsic
value.
A summary
of the status and changes in our non-vested options related to our equity
incentive plans as of and during the three months ended March 27, 2010 is
presented below:
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Grant- Date
|
|
|
|
Shares
(in thousands)
|
|
|
Fair
Value
|
|
Non-vested
at December 26, 2009
|
|
|
2,152 |
|
|
$ |
1.10 |
|
Granted
|
|
|
434 |
|
|
|
1.14 |
|
Vested
|
|
|
(226 |
) |
|
|
0.53 |
|
Forfeited
unvested
|
|
|
- |
|
|
|
- |
|
Non-vested
at March 27, 2010
|
|
|
2,360 |
|
|
$ |
1.20 |
|
Restricted stock
units
The
Company began granting restricted stock units pursuant to its 2002 Flexible
Stock Plan and Amended and Restated 2007 Incentive Compensation Plan in 2008.
Restricted stock units are awards that, upon vesting, will result in the
delivery to the holder shares of the Company’s common stock. Some restricted
stock units are service based and vest ratably over a period of time, and some
are performance-based and subject to forfeiture if certain performance criteria
are not met.
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
In the
first quarter of 2010, 318,750 performance-based restricted stock units were
granted. The company did not record stock-based compensation for these
awards in the first quarter of 2010 because it was not probable that the
performance measurements would be met. No restricted stock units were
granted in the first quarter of 2009.
Using the
most probable award, the company recorded approximately $20,000 and $13,000 in
stock-based compensation expense which is included in total stock-based
compensation expense of approximately $218,000 and $190,000 in the first quarter
of 2010 and 2009, respectively.
A summary
of the Company’s restricted stock unit activity and related information for the
quarter ended March 27, 2010 is as follows:
|
|
Service-based
|
|
|
|
|
|
|
Restricted Stock Units
(1)
|
|
|
Performance-based Restricted Stock Units (1)
|
|
Outstanding
Balance at December 26, 2009
|
|
|
91,000 |
|
|
|
190,000 |
|
Awarded
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
(45,500 |
) |
|
|
- |
|
Forfeited/Expired/Cancelled
|
|
|
- |
|
|
|
(3,000 |
) |
Outstanding
at March 27, 2010
|
|
|
45,500 |
|
|
|
187,000 |
|
(1)
|
Each
stock unit represents the fair market value of one share of common
stock.
|
The fair
value of the 45,500 shares vested during 2010 was approximately $41,000. The
weighted average grant-date fair value per share for the restricted stock units
was $1.00 with a weighted average remaining contractual term of 2.0 years at
March 27, 2010.
7.
Segments
As the
Company’s business has changed the segments reviewed by the Company’s chief
operating decision maker have changed. The E-Commerce segment is no longer
considered a separate segment of the Company and has been integrated into the
Centers segment. The 2009 summary has been reclassified to reflect these
changes.
The
following operating segments represent identifiable components of the Company
for which separate financial information is available. The following table
represents key financial information for each of the Company’s business
segments, which include the operation and management of centers; and the
establishment, maintenance and support of an affiliated network of independent
providers. The centers offer people afflicted with hearing loss a complete range
of services and products, including diagnostic audiological testing and the
latest technology in hearing aids and listening devices to improve their quality
of life. The network, unlike the Company-owned centers, is comprised of hearing
care practices owned by independent audiologists. The network revenues are
mainly derived from administrative fees paid by employer groups, health insurers
and benefit sponsors to administer their benefit programs as well as maintain
the affiliated provider network. Since the sale of the Company’s Canadian
operations in April 2009, all of the Company’s business units are located in the
United States.
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
The
following is the Company’s segment information:
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Network
|
|
|
Corporate
|
|
|
Total
|
|
Hearing
aids and other products revenues
|
|
|
|
|
|
|
|
|
3
months ended March 27, 2010
|
|
$ |
17,980 |
|
|
$ |
13 |
|
|
$ |
- |
|
|
$ |
17,993 |
|
3
months ended March 28, 2009
|
|
$ |
20,907 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
20,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
months ended March 27, 2010
|
|
$ |
1,156 |
|
|
$ |
156 |
|
|
$ |
288 |
|
|
$ |
1,600 |
|
3
months ended March 28, 2009
|
|
$ |
1,220 |
|
|
$ |
595 |
|
|
$ |
- |
|
|
$ |
1,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
months ended March 27, 2010
|
|
$ |
3,011 |
|
|
$ |
(546 |
) |
|
$ |
(3,860 |
) |
|
$ |
(1,395 |
) |
3
months ended March 28, 2009
|
|
$ |
4,328 |
|
|
$ |
315 |
|
|
$ |
(4,152 |
) |
|
$ |
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
months ended March 27, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
434 |
|
|
$ |
4 |
|
|
$ |
132 |
|
|
$ |
570 |
|
Total
assets
|
|
$ |
66,017 |
|
|
$ |
897 |
|
|
$ |
18,700 |
|
|
$ |
85,614 |
|
Capital
expenditures
|
|
$ |
51 |
|
|
|
- |
|
|
$ |
29 |
|
|
$ |
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
months ended March 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
412 |
|
|
$ |
- |
|
|
$ |
138 |
|
|
$ |
550 |
|
Total
assets (1)
|
|
$ |
86,209 |
|
|
$ |
935 |
|
|
$ |
15,296 |
|
|
$ |
102,440 |
|
Capital
expenditures
|
|
$ |
339 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
339 |
|
|
(1)
|
Includes
assets disposed of in the sale of the Company’s Canadian operations of
approximately $15.9 million
|
|
(2)
|
Amounts
in 2009 were reclassified for purposes of reporting
E-Commerce’s integration into the Centers
segment.
|
Hearing
aids and other products revenues consisted of the following:
|
|
Three months ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2010
|
|
|
2009
|
|
Hearing
aid revenues
|
|
|
96.6 |
% |
|
|
97.0 |
% |
Other
products revenues
|
|
|
3.4 |
% |
|
|
3.0 |
% |
Services
revenues consisted of the following:
|
|
Three
months ended
|
|
|
|
March
27,
|
|
|
March
28,
|
|
|
|
|
10 |
|
|
2009
|
|
Hearing
aid repairs
|
|
|
49.0 |
% |
|
|
46.4 |
% |
Testing
and other income
|
|
|
51.0 |
% |
|
|
53.6 |
% |
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
Income
(loss) from operations at the segment level is computed before the following,
the sum of which is included in the column “Corporate” as loss from
operations:
|
|
Three
months ended
|
|
|
|
March
27,
|
|
|
March
28,
|
|
Dollars in thousands
|
|
2010
|
|
|
2009
|
|
Contract
service revenue on Canadian support agreement
|
|
$ |
(288 |
) |
|
$ |
- |
|
General
and administrative expense
|
|
|
4,016 |
|
|
|
4,014 |
|
Corporate
depreciation and amortization
|
|
|
132 |
|
|
|
138 |
|
Corporate
loss from operations
|
|
$ |
3,860 |
|
|
$ |
4,152 |
|
8.
Liquidity
The
Company used approximately $3.1 million for operating activities during the
quarter ended March 27, 2010 primarily as a result of the net loss of $2.5
million and the payment of $1.9 million in Canadian income taxes.
Cash,
cash equivalents and short term marketable securities totaled approximately $7.1
million as of March 27, 2010. Approximately $2.5 million of the
current maturities of long-term debt to Siemens may be repaid through rebate
credits. During the quarter ended March 27, 2010, the Company has utilized
approximately $1.6 million in cash to pay the Siemens trade payables under
accelerated terms to take advantage of trade discounts. The Siemens trade
payables can convert to normal terms at the Company’s option.
The
Company believes that current cash and cash equivalents, cash generated at
current net revenue levels and acquisition financing provided by its strategic
partner, Siemens, will be sufficient to support the Company’s operating and
investing activities through the next twelve months. However, there can be
no assurance that the Company can maintain compliance with the 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 the cash, cash
equivalents and cash flow from operations will be sufficient. 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 also is continuing its aggressive cost
controls.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
January 2010, the Financial Accounting Standards Board (the “FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about
Fair Value Measurements” (ASU 2010-06”). ASU 2010-06 amends the guidance on fair
value measurement disclosures to add new requirements for disclosures about
transfers into and out of the Level 1 and 2 categories in the fair value
measurement hierarchy, and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. The amended
guidance also clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair
value. The new requirements for disclosures and clarifications of existing
disclosures were effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activities in Level 3 fair
value measurements, which are effective for interim and annual reporting periods
beginning after December 15, 2010. The adoption of this amended guidance has not
required significant additional disclosures by the Company.
HearUSA,
Inc
Notes to
Consolidated Financial Statements
(unaudited)
In June
2009, the FASB issued guidance for determining the primary beneficiary of a
variable interest entity (“VIE”). In December 2009, the FASB issued ASU 2009-17,
“Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities” (“ASU 2009-17”). ASU 2009-17 provides amendments to ASC 810
to reflect the revised guidance. The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a VIE with an approach
focused on identifying which reporting entity has the power to direct the
activities of a VIE that most significantly impact the entity’s economic
performance and (i) the obligation to absorb losses of the entity or (ii) the
right to receive benefits from the entity. The amendments in ASU 2009-17 also
require additional disclosures about a reporting entity’s involvement with VIEs.
ASU 2009-17 is effective for annual reporting periods beginning after November
15, 2009. We do not anticipate that the adoption of this guidance will have a
material impact on our financial position and results of operations or require
additional disclosures.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking
Statements
This Form 10-Q and, in particular,
this management’s 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. These statements include those relating to the
Company’s belief that current cash and cash equivalents, cash generated at
current net revenue levels and acquisition financing provided by its strategic
partner, Siemens, will be sufficient to support the Company’s operating and
investing activities through the next twelve months; that second quarter
revenues will return to levels achieved in the third and fourth quarters of
2009; that HearUSA plans to roll out the AARP Hearing Care Program to its
national network of more than 2,000 independent hearing care providers during
the course of 2010; and that by the end of the year, the AARP program is
expected to be available to 60 to 70 percent of the nearily 40 million AARP
members across the nation by the end of the year. These forward-looking
statements are based on current expectations, estimates, forecasts and
projections about the industry and markets in which we operate and management’s
beliefs and assumptions. 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. The statements
are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict, including those
risks described in this report and in the Company’s annual report on Form 10-K
for fiscal 2009 filed with the Securities and Exchange
Commission.
General
In the
first quarter of 2010, the Company’s revenues were impacted by changes to
insurance and managed care contracts. HearUSA has over 400 provider agreements
with health insurance companies and managed care organizations. The terms of
most of these agreements are to be renegotiated annually, and these agreements
may be terminated by either party, usually on 90 days or less notice at any
time. Some of these insurance and managed care organizations decided to limit or
eliminate hearing care benefits beginning in 2010 in anticipation of government
spending cuts related to healthcare reform. As a
result, the Company’s revenues from insurance and managed care contracts
decreased in the first quarter of 2010 compared to the first quarter of
2009. The Company implemented a number of plans and strategies to replace
the revenues lost, including increased marketing to its existing insurance base
and private pay customers. The Company also increased the marketing of the
AARP program in Florida and New Jersey and expanded the program to HearUSA
centers in New York, Massachusetts, Ohio, Michigan, Missouri, North Carolina and
Pennsylvania on February 1, 2010. The AARP program was initially made
available to AARP members in Florida and New Jersey on October 1,
2009.
These
efforts helped recapture most of the lost insurance business by the end of the
first quarter as March 2010 revenues were slightly below December and September
2009, the most recent comparable 5 week months. April 2010 revenues
exceeded January 2010 by more than 18% and the Company expects second quarter
2010 revenues to return to the levels achieved in the third and fourth quarters
of 2009.
RESULTS
OF OPERATIONS
For the three months ended
March 27, 2010 compared to the three months ended March 28,
2009
Revenues
Dollars
in thousands
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
Hearing
aids and other products
|
|
$ |
17,993 |
|
|
$ |
20,907 |
|
|
$ |
(2,914 |
) |
|
|
(13.9 |
)% |
Services
|
|
|
1,600 |
|
|
|
1,815 |
|
|
|
(215 |
) |
|
|
(11.8 |
)% |
Total
net revenues
|
|
$ |
19,593 |
|
|
$ |
22,722 |
|
|
$ |
(3,129 |
) |
|
|
(13.8 |
)% |
The $3.1
million or 13.8% decrease in net revenue from the first quarter 2009 is
principally a result of a loss of revenue related to a number of
insurance plans eliminating, changing or limiting their hearing care
benefits. The Company implemented a number of plans and
strategies to replace the revenues lost, including increased marketing to its
existing insurance base and private pay customers. The Company also
increased the marketing of the AARP program in Florida and New Jersey and
expanded the program to HearUSA centers in New York, Massachusetts, Ohio,
Michigan, Missouri, North Carolina and Pennsylvania on February 1, 2010.
The AARP program was initially made available to AARP members in Florida and New
Jersey on October 1, 2009.
These efforts
helped recapture most of the lost insurance business by the end of the first
quarter as March 2010 revenues were slightly below December and September 2009,
the most recent comparable 5 week months. April 2010 revenues exceeded
January 2010 by more than 18% and the Company expects second quarter 2010
revenues to return to the levels achieved in the third and fourth quarters of
2009.
Cost
of Products Sold and Services
Dollars
in thousands
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
|
|
Hearing
aids and other products
|
|
$ |
4,576 |
|
|
$ |
5,379 |
|
|
$ |
(803 |
) |
|
|
(14.9 |
)% |
Services
|
|
|
424 |
|
|
|
502 |
|
|
|
(78 |
) |
|
|
(15.5 |
)% |
Total
cost of products sold and services
|
|
$ |
5,000 |
|
|
$ |
5,881 |
|
|
$ |
(881 |
) |
|
|
(15.0 |
)% |
Percent
of total net revenues
|
|
|
25.5 |
% |
|
|
25.9 |
% |
|
|
(0.4 |
)% |
|
|
(1.5 |
)% |
The cost
of products sold includes the effect of rebate credits pursuant to our
agreements with Siemens.
The
following table reflects the components of the rebate credits which are included
in the above cost of products sold for hearing aids (see Note 3 – Long-term
Debt, Notes to Consolidated Financial Statements included herein):
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
|
|
Rebates
offsetting base required payments on Tranche C
|
|
$ |
500 |
|
|
$ |
500 |
|
|
$ |
- |
|
|
|
- |
|
Volume
rebates used to reduce Tranche C principal
|
|
|
156 |
|
|
|
156 |
|
|
|
- |
|
|
|
- |
|
Rebates
offsetting required payments on Tranche B for purchases made by acquired
centers
|
|
|
108 |
|
|
|
179 |
|
|
|
(71 |
) |
|
|
(39.7 |
)% |
Rebates
offsetting interest on Tranches B and C
|
|
|
825 |
|
|
|
1,085 |
|
|
|
(260 |
) |
|
|
(24.0 |
)% |
Total
rebate credits
|
|
$ |
1,589 |
|
|
$ |
1,920 |
|
|
$ |
(331 |
) |
|
|
(17.2 |
)% |
Percent
of total net revenues
|
|
|
8.1 |
% |
|
|
8.4 |
% |
|
|
(0.3 |
)% |
|
|
(3.6 |
)% |
The
$71,000 reduction in volume rebates earned was due to a decrease in the rebates
per unit from $65 to $50 and a decline in Siemens units purchased. The rebates
per unit were decreased in exchange for better overall pricing. The
$260,000 decrease in interest forgiven is due to a decrease in Siemens
indebtedness resulting from the repayment of approximately $8.1 million from the
proceeds of the sale of the Canadian operations in 2009. Cost of products sold
as a percent of total net revenues before the impact of the Siemens rebate
credits was 34.1% in the first quarter of 2010 compared to 34.3% in the first
quarter of 2009.
Expenses
Dollars
in thousands
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
|
|
Center
operating expenses
|
|
$ |
11,402 |
|
|
$ |
11,786 |
|
|
$ |
(384 |
) |
|
|
(3.3 |
)% |
Percent
of total net revenues
|
|
|
58.2 |
% |
|
|
51.9 |
% |
|
|
6.3 |
% |
|
|
12.1 |
% |
General
and administrative expenses
|
|
$ |
4,016 |
|
|
$ |
4,014 |
|
|
$ |
2 |
|
|
|
- |
|
Percent
of total net revenues
|
|
|
20.5 |
% |
|
|
17.7 |
% |
|
|
2.8 |
% |
|
|
15.8 |
% |
Depreciation
and amortization
|
|
$ |
570 |
|
|
$ |
550 |
|
|
$ |
20 |
|
|
|
3.6 |
% |
Percent
of total net revenues
|
|
|
2.9 |
% |
|
|
2.4 |
% |
|
|
0.5 |
% |
|
|
20.8 |
% |
The
$384,000 decrease in center operating expenses in the first quarter of 2010 as
compared with the first quarter of 2009 is primarily attributable to reductions
of approximately $477,000 in gross marketing costs, $216,000 in staffing costs
and $154,000 in other center operating expenses. Incentive compensation also
decreased by approximately $126,000 as a result of the decline in revenues.
These decreases were partially offset by an increase of approximately $498,000
of costs related to our AARP program for payment of
royalties, advertising and other costs. Total AARP costs in the first
quarter of 2010 were approximately $588,000.
General
and administrative expenses in the first quarter of 2010 remained relatively
unchanged from the first quarter of 2009.
Interest
Expense
Dollars
in thousands
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
|
|
Notes
payable from business acquisitions and others (1)
|
|
$ |
124 |
|
|
$ |
252 |
|
|
$ |
(128 |
) |
|
|
(50.8 |
)% |
Siemens
Tranches B and C – interest forgiven (2)
|
|
|
825 |
|
|
|
1,085 |
|
|
|
(260 |
) |
|
|
(24.0 |
)% |
Total
interest expense
|
|
$ |
949 |
|
|
$ |
1,337 |
|
|
$ |
(388 |
) |
|
|
(29.0 |
)% |
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
%
|
|
Total
cash interest expense (3)
|
|
$ |
103 |
|
|
$ |
158 |
|
|
$ |
(55 |
) |
|
|
(34.8 |
)% |
Total
non-cash interest expense (4)
|
|
|
846 |
|
|
|
1,179 |
|
|
|
(333 |
) |
|
|
(28.2 |
)% |
Total
interest expense
|
|
$ |
949 |
|
|
$ |
1,337 |
|
|
$ |
(388 |
) |
|
|
(29.0 |
)% |
(1)
|
Includes
$54,000 and $94,000 in the first quarter of 2010 and 2009, respectively,
of non-cash interest expense related to recording of notes at their
present value by discounting future payments to market rate of interest
(see Note 3 – Long-term Debt, Notes to Consolidated Financial Statements
included herein) and
$34,000 reduction of non-cash interest expense in 2010 related to
recording warrants at their estimated fair
value.
|
(2)
|
The
interest expense on Tranches B and C is forgiven by Siemens as long as the
supply agreement minimum purchase requirements are met and a corresponding
rebate credit is recorded in reduction of the cost of products sold (see
Note 3 – Long-term Debt, Notes to Consolidated Financial Statements and
Liquidity and Capital Resources, include
herein).
|
(3)
|
Represents
the sum of the cash interest portion paid on the notes payable for
business acquisitions and others.
|
(4)
|
Represents
the sum of the non-cash interest expense related to recording the notes
payable for business acquisitions at their present value by discounting
future payments to market rate of interest and
interest on Siemens Tranches B and C offset by
rebates.
|
The
decrease in interest expense in the first quarter of 2010 is attributable to
decreases in the Siemens loan balances following the repayment of approximately
$8.1 million from the proceeds of the sale of the Canadian operations in 2009
and approximately $4 million in scheduled debt payments which were
forgiven.
Income
Taxes
The
Company has net operating loss carryforwards of approximately $47.4 million for
U.S. income tax purposes. The Company has temporary differences between the
financial statement and tax reporting arising primarily from differences in the
amortization of intangible assets and goodwill and depreciation of fixed assets.
The deferred tax assets for US income tax purposes have been offset by a
valuation allowance because it was determined that these assets were not likely
to be realized. During the first quarter of 2010, the Company recorded a
deferred tax expense of approximately $220,000 compared to approximately
$210,000 in the first quarter of 2009 related to the estimated deduction of tax
deductible goodwill from its US operations. The deferred income tax expense was
recorded because it cannot be offset by temporary differences as it relates to
infinite-lived assets and the timing of reversing the liability is unknown.
Deferred income tax expense will continue to be recorded until the tax
deductible goodwill is fully amortized.
Net
Income (Loss) attributable to noncontrolling interest
During
the first quarter of 2010 and 2009, the Company’s 50% owned joint venture, HEARx
West, LLC generated net income of approximately $163,000 and $230,000,
respectively. The Company records 50% of the venture’s net income as net income
attributable to noncontrolling interest in the income of a joint venture in the
Company’s consolidated statements of operations. The net income attributable to
noncontrolling interest for the first quarter of 2010 and 2009 was approximately
$74,000 and $115,000, respectively.
Discontinued
Operations
On April
27, 2009, the Company sold the assets of Helix Hearing Care of America Corp. and
the stock of 3371727 Canada Inc., both indirect wholly owned subsidiaries of the
Company, for cash consideration of approximately $23.1 million U.S.
dollars. This sale resulted in a gain on sale of approximately $931,000,
net of applicable tax, for the year ended December 26, 2009.
The
Company had income from discontinued operations of $685,000 during the first
quarter of 2009.
LIQUIDITY
AND CAPITAL RESOURCES
Working
Capital
The
Company used approximately $3.1 million for operating activities during the
quarter ended March 27, 2010 primarily as a result of the net loss of $2.5
million and the payment of $1.9 million in Canadian income taxes.
Cash,
cash equivalents and short term marketable securities totaled approximately $7.1
million as of March 27, 2010. Approximately $2.5 million of the
current maturities of long-term debt to Siemens may be repaid through rebate
credits. During the quarter ended March 27, 2010, the Company has utilized
approximately $1.6 million in cash to pay the Siemens trade payables under
accelerated terms to take advantage of trade discounts. The Siemens trade
payables can convert to normal terms at the Company’s option.
Cash
Flows
Net cash
used by operating activities in the first quarter of 2010 was approximately $3.1
million compared to cash provided by operating activities of approximately $2.4
million in the first quarter of 2009. The $3.1 million used in 2010
includes the impact of payment of the Siemens trade payables on 30 day terms
which began in late 2009. The 30 day reduction in terms allowed the
Company to earn early payment discounts but decreased cash flow by approximately
$1.6 million. The Company can return to 60 day terms at
anytime.
During
the first quarter of 2010, cash of approximately $80,000 was used to purchase
equipment and software and $500,000 of cash was provided by the net proceeds
from the sale of marketable securities.
In the
first quarter of 2010, proceeds of approximately $200,000 were received from the
issuance of long-term debt and subsequently used to complete an acquisition of
centers in May 2010. Funds of approximately $1.0 million were used to repay
long-term debt.
The
Company believes that current cash and cash equivalents, cash generated at
current net revenue levels and acquisition financing provided by its strategic
partner, Siemens, will be sufficient to support the Company’s operating and
investing activities through the next twelve months. However, there can be
no assurance that the Company can maintain compliance with the 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 the cash, cash
equivalents and cash flow from operations will be sufficient. 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 also is continuing its aggressive cost
controls.
Contractual
Obligations
Below is
a chart setting forth the Company’s contractual cash payment obligations, which
have been aggregated to facilitate a basic understanding of the Company’s
liquidity as of March 27, 2010.
|
|
Payments due by period
(000’s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than
1
|
|
|
|
1
– 3 |
|
|
|
4
– 5 |
|
|
Than
5
|
|
Contractual
obligations
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
Years
|
|
|
years
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Long-term
debt (1 and 3)
|
|
|
40,845 |
|
|
|
5,965 |
|
|
|
7,327 |
|
|
|
27,553 |
|
|
|
- |
|
Subtotal
of obligations recorded on balance sheet
|
|
|
40,845 |
|
|
|
5,965 |
|
|
|
7,327 |
|
|
|
27,553 |
|
|
|
- |
|
Interest
to be paid on long-term debt (2 and 3)
|
|
|
13,868 |
|
|
|
3,498 |
|
|
|
5,812 |
|
|
|
4,558 |
|
|
|
- |
|
Operating
leases
|
|
|
16,000 |
|
|
|
6,249 |
|
|
|
6,403 |
|
|
|
2,706 |
|
|
|
642 |
|
Employment
agreements
|
|
|
3,923 |
|
|
|
1,904 |
|
|
|
2,019 |
|
|
|
- |
|
|
|
- |
|
Purchase
obligations (4)
|
|
|
3,141 |
|
|
|
1,324 |
|
|
|
1,817 |
|
|
|
- |
|
|
|
- |
|
Total
contractual cash obligations
|
|
|
77,777 |
|
|
|
18,940 |
|
|
|
23,378 |
|
|
|
34,817 |
|
|
|
642 |
|
(1)
|
Approximately
$34.7 million can be repaid through rebate credits from Siemens, including
$2.5 million in less than 1 year and $4.8 million in years 1-3 and $27.4
million in years 4-5.
|
(2)
|
Interest
on long-term debt includes the interest on Tranches B and C that can be
repaid through rebate credits from Siemens, including $3.2 million in less
than 1 year and $5.7 million in years 1-3 and $4.6 million in years
4-5. Interest repaid through preferred pricing reductions was
$825,000 in the first quarter of 2010. (See Note 3 – Long-Term Debt, Notes
to Consolidated Financial Statements included
herein).
|
(3)
|
Principal
and interest payments on long-term debt is based on cash payments and not
the fair value of the discounted notes (See Note 3 – Long-Term Debt, Notes
to Consolidated Financial Statements included
herein.)
|
(4)
|
Purchase obligations includes the
contractual commitment for AARP campaigns to educate and promote hearing
loss awareness and prevention and the contractual commitment to AARP for
public marketing funds for the AARP Health Care Options General Program,
including $900,000 in less than 1
year.
|
CRITICAL
ACCOUNTING POLICIES
Management
believes the following critical accounting policies affect the significant
judgments and estimates used in the preparation of the consolidated financial
statements:
Goodwill
The
Company evaluates goodwill and certain intangible assets with indefinite lives
not being amortized for impairment annually or more frequently if impairment
indicators arise. Indicators at the Company include but are not limited to:
sustained operating losses or a trend of poor operating performance, a decrease
in the company’s market capitalization below its book value and an expectation
that a reporting unit will be sold or otherwise disposed of. If one or
more indicators of impairment exist, the Company performs an evaluation to
identify potential impairments. If impairment is identified, the Company
measures and records the amount of impairment losses. The Company performs this
annual analysis on the first day of its fourth quarter.
A
two-step impairment test is performed on goodwill. In order to do this,
management applied judgment in determining its "reporting units", which
represent distinct parts of the Company’s business. As of March 27, 2010,
the reporting units determined by management are the centers and the network.
The definition of the reporting units affects the Company’s goodwill impairment
assessments. In the first step, the Company compares the fair value of each
reporting unit to its carrying value. Calculating the fair value of the
reporting units requires significant estimates and long-term assumptions.
The Company utilized an independent appraisal firm to test goodwill for
impairment as of the first day of the Company’s fourth quarter during 2009 and
2008, and each of these tests indicated no impairment. The Company
estimates the fair value of its reporting units by applying a weighted average
of two methods: quoted market price and discounted cash flow.
If the
carrying value of the reporting unit exceeds its fair value, additional steps
are required to calculate an impairment charge. The second step of the goodwill
impairment test compares the implied fair value of the reporting unit’s goodwill
with the carrying value of the goodwill. If the carrying amount of the
reporting unit’s goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. The
implied fair value of goodwill is the fair value of the reporting unit allocated
to all of the assets and liabilities of that unit as if the reporting unit had
been acquired in a business combination and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit. 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.
Judgments
regarding the existence of impairment indicators are based on legal factors,
market conditions and operational performance of the acquired businesses. Future
events could cause us to conclude that impairment indicators exist and that
goodwill associated with the acquired businesses is impaired. Additionally, as
the valuation of identifiable goodwill requires significant estimates and
judgment about future performance, cash flows and fair value, our future results
could be affected if these current estimates of future performance and fair
value change. Any resulting impairment loss could have a material adverse impact
on our financial condition and results of operations.
Revenue
recognition
HearUSA
has company-owned centers in its core markets and a network of affiliated
providers who provide products and services to customers that are located
outside its core markets. HearUSA enters into provider agreements
with benefit providers (third party payors such as insurance companies, managed
care companies, employer groups, etc.) under (a) a discount arrangement on
products and service; (b) a fee for service arrangement; and (c) a per capita
basis or capitation arrangement, which is a fixed per member per month fee
received from the benefit providers.
All
contracts are for one calendar year and are usually cancelable with ninety days
or less notice by either party. Under the discount arrangements, the
Company provides the products and services to the eligible members of a benefit
provider at a pre-determined discount or customary price and the member pays the
Company directly for the products and services. Under the fee for service
arrangements, the Company provides the products and services to the eligible
members at its customary price less the benefit they are allowed (a specific
dollar amount), which the member pays directly to the Company. The Company
then bills the benefit provider the agreed upon benefit for the
service.
Under the
capitation agreements, the Company agrees with the benefit provider to provide
their eligible members with a pre-determined discount. Revenue under
capitation agreements is derived from the sales of products and services to
members of the plan and from a capitation fee paid to the Company by the benefit
provider at the beginning of each month. The members that are purchasing
products and services pay the customary price less the pre-determined
discount. This revenue from the sales of products to these members
is recorded at the customary price less applicable discount in the period that
the product is delivered. The direct expenses consisting primarily of the
cost of goods sold and commissions on sales are recorded in the same period.
Other indirect operating expenses are recorded in the period which they are
incurred.
The
capitation fee revenue is calculated based on the total members in the benefit
provider’s plan at the beginning of each month and is non-refundable. Only
a small percentage of these members may ever purchase product or services from
the Company. The capitation fee revenue is earned as a result of agreeing
to provide services to members without regard to the actual amount of service
provided. That revenue is recorded monthly in the period that the Company
has agreed to see any eligible members.
The
Company records each transaction at its customary price for the three types of
arrangements, less any applicable discounts from the arrangements in the center
business segment. The products sold are recorded under the hearing aids
and other products line item and the services are recorded under the service
line item on the consolidated statement of operations. Revenue and expense
are recorded when the product has been delivered, net of an estimate for return
allowances. Revenue and expense from services and repairs are recorded when the
services or repairs have been performed. Capitation revenue is recorded as
revenue from hearing aids since it relates to the discount given to the
members.
Revenues
are considered earned by the Company at the time delivery of product or services
have been provided to its customers (when the Company is entitled to the
benefits of the revenues).
When the
arrangements are related to members of benefit providers that are located
outside the Company-owned centers’ territories, the revenues generated under
these arrangements are included under the network business segment. The
Company records a receivable for the amounts due from the benefit providers and
a payable for the amounts owed to the affiliated providers. The Company
only pays the affiliated provider when the funds are received from the benefit
provider. The Company records revenue equal to the minimal fee for
processing and administrative fees. The costs associated
with these services are operating costs, mostly for the labor of the network
support staff and are recorded when incurred.
No
contract costs are capitalized by the Company.
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 customer's 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 allowance for doubtful accounts. Then a specific percent per
plan and per aging categories is applied against the remaining receivables to
estimate the needed allowance. Any change in the percent assumptions per
plan and aging categories results in a change in the allowance for doubtful
accounts. For example, an increase of 10% in the percent applied against
the remaining receivables would increase the allowance for doubtful accounts by
approximately $41,000.
Sales
returns
The
Company offers all its customers a full 30-day return period or the return
period applicable to state guidelines. For patients who participate in the
family hearing counseling program, the return period is extended to 60
days. Under the AARP program, patients who are members of AARP have a
return period of 90 days if the patient is dissatisfied with the product.
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.
Impairment of Long-Lived
Assets
Long-lived
assets are subject to a review for impairment if events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the future undiscounted cash flows generated by an asset or
asset group is less than its carrying amount, it is considered to be impaired
and would be written down to its fair value. Currently we have not experienced
any events that would indicate a potential impairment of these assets, but if
circumstances change we could be required to record a loss for the impairment of
long-lived assets.
Stock-based
compensation
Share-based
payments are accounted for using fair value in accordance with applicable
generally accepted accounting principles. To determine the fair value of
our stock option awards, we use the Black-Scholes option pricing model, which
requires management to apply judgment and make assumptions to determine the fair
value of our awards. These assumptions include estimating the length of time
employees will retain their vested stock options before exercising them (the
“expected term”), the estimated volatility of the price of our common stock over
the expected term and an estimate of the number of options that will ultimately
be forfeited.
The
expected term is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. Expected stock price volatility is based on a
historical volatility of our common stock for a period at least equal to the
expected term. Estimated forfeitures are calculated based on historical
experience. Changes in these assumptions can materially affect the estimate of
the fair value of our share-based payments and the related amount recognized in
our Consolidated Financial Statements.
Income
taxes
Income
taxes are calculated using the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized based on the difference
between the carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates. A valuation allowance is established against the
deferred tax assets when it is more likely than not that some portion or all of
the deferred taxes may not be realized.
Both the
calculation of the deferred tax assets and liabilities, as well as the decision
to establish a valuation allowance requires management to make estimates and
assumptions. Although we do not believe there is a reasonable likelihood that
there will be a material change in the estimates and assumptions used, if actual
results are not consistent with the estimates and assumptions, the balances of
the deferred tax assets, liabilities and valuation allowance could be
significantly different.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
January 2010, the Financial Accounting Standards Board (the “FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about
Fair Value Measurements” (ASU 2010-06”). ASU 2010-06 amends the guidance on fair
value measurement disclosures to add new requirements for disclosures about
transfers into and out of the Level 1 and 2 categories in the fair value
measurement hierarchy, and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. The amended
guidance also clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair
value. The new requirements for disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activities in Level 3 fair
value measurements, which are effective for interim and annual reporting periods
beginning after December 15, 2010. The adoption of this guidance did not require
significant additional disclosures by the Company.
In June
2009, the FASB issued guidance for determining the primary beneficiary of a
variable interest entity (“VIE”). In December 2009, the FASB issued ASU 2009-17,
“Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities” (“ASU 2009-17”). ASU 2009-17 provides amendments to ASC 810
to reflect the revised guidance. The amendments in ASU 2009-17 replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a VIE with an approach
focused on identifying which reporting entity has the power to direct the
activities of a VIE that most significantly impact the entity’s economic
performance and (i) the obligation to absorb losses of the entity or (ii) the
right to receive benefits from the entity. The amendments in ASU 2009-17 also
require additional disclosures about a reporting entity’s involvement with VIEs.
ASU 2009-17 is effective for annual reporting periods beginning after November
15, 2009. We do not anticipate that the adoption of this guidance will have a
material impact on our financial position and results of operations or require
additional disclosures.
Item
3.
|
Quantitative and
Qualitative Disclosure About Market
Risk
|
The
Company does not engage in derivative transactions. Differences in the fair
value of investment securities are not material; therefore, the related market
risk is not significant. The Company’s exposure to market risk for changes in
interest rates relates primarily to the Company’s long-term debt. The
following table presents the Company’s financial instruments for which fair
value and cash flows are subject to changing market interest rates:
|
|
Fixed Rate
|
|
|
Variable Rate
|
|
|
Total
|
|
|
|
9.5%
|
|
|
4.6% to 16.7%
|
|
|
|
|
|
|
Due February 2015
|
|
|
Other
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
(000’s)
|
|
|
(000’s)
|
|
|
(000’s)
|
|
2010
|
|
|
(1,840 |
) |
|
|
(2,697 |
) |
|
|
(4,537 |
) |
2011
|
|
|
(2,442 |
) |
|
|
(2,479 |
) |
|
|
(4,921 |
) |
2012
|
|
|
(2,411 |
) |
|
|
(745 |
) |
|
|
(3,156 |
) |
2013
|
|
|
(2,364 |
) |
|
|
(188 |
) |
|
|
(2,552 |
) |
2014
|
|
|
(2,332 |
) |
|
|
(42 |
) |
|
|
(2,374 |
) |
Thereafter
|
|
|
(23,305 |
) |
|
|
- |
|
|
|
(23,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(34,694 |
) |
|
|
(6,151 |
) |
|
|
(40,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair value
|
|
|
(34,694 |
) |
|
|
(5,911 |
) |
|
|
(40,605 |
) |
Item
4.
|
Controls
and Procedures
|
The
Company’s management, with the participation of the Company’s chief executive
officer and chief financial officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act) as of March 27, 2010. The
Company’s chief executive officer and chief financial officer concluded that, as
of March 27, 2010, the Company’s disclosure controls and procedures were
effective.
No change
in the Company’s internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the
fiscal quarter ended March 27, 2010 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
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 Company’s 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 Company’s
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 Company’s 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 Company’s
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 Company’s Current Report on Form 8-K, filed July 17,
2002 (File No. 001-11655)).
|
3.5
|
|
Certificate
of Designations, Preferences and Rights of the Company’s 1999 Series H
Junior Participating Preferred Stock (incorporated herein by reference to
Exhibit 4 to the Company’s Current Report on Form 8-K, filed December 17,
1999 (File No. 001-11655)).
|
3.6
|
|
Certificate
of Designations, Preferences and Rights of the Company’s Special Voting
Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the
Company’s 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 Company’s 1999 Series H Junior Participating
Preferred Stock (incorporated herein by reference to Exhibit 4
to the Company’s Current Report on Form 8-K, filed July 17, 2002 (File No.
001-11655)).
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3.8
|
|
Certificate
of Designations, Preferences and Rights of the Company’s 1998-E
Convertible Preferred Stock (incorporated herein by reference to Exhibit
4.1 to the Company’s Current Report on Form 8-K, filed August 28, 2003
(File No. 001-11655)).
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3.9
|
|
Amendment
of Restated Certificate of Incorporation (increasing authorized capital)
(incorporated herein by reference to Exhibit 3.9 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 26,
2004).
|
3.10
|
|
Amendment
to Certificate of Designation of Series H Junior Participating Preferred
Stock of HearUSA, Inc. (increasing the number of authorized series H
Shares (incorporated herein by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K, filed November 17,
2009)).
|
3.11
|
|
Amended
and Restated By-Laws of HearUSA, Inc. (effective October 16, 2009)
(incorporated herein by reference to the Company’s Report Filed on Form
8-K, filed October 27, 2009).
|
4.1
|
|
Amended
and Restated Rights Agreement, November 16, 2009 between the Company and
American Stock Transfer and Trust Company LLC, as Rights Agent
(incorporated herein by reference to Exhibit 4.4 to the Company’s Current
Report on Form 8-K, filed November 17, 2009).
|
4.2
|
|
Form
of Support Agreement among HEARx Ltd., HEARx Canada, Inc. and HEARx
Acquisition ULC (incorporated herein by reference to Annex D in the
Company’s Joint Proxy Statement/Prospectus on Form S-4 as filed May 28,
2002 (Reg No. 333-73022)).
|
4.3
|
|
Form
of 2003 Convertible Subordinated Note due November 30, 2008 (incorporated
herein by reference to Exhibit 4.1 to the Company’s Current Report on Form
8-K, filed December 31,
2003).
|
9.1
|
|
Form
of Voting and Exchange Trust Agreement among HearUSA, Inc., HEARx Canada,
Inc and HEARx Acquisition ULC and ComputerShare Trust Company of Canada
(incorporated herein by reference to Exhibit 9.1Annex C in the Company’s
Joint Proxy Statement/Prospectus on Form S-4 as filed May 28, 2002 (Reg.
No. 333-73022)).
|
31.1
|
|
CEO
Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
|
CFO
Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32
|
|
CEO
and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
SIGNATURES
Pursuant
to the requirements 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.
|
HearUSA
Inc.
|
|
(Registrant)
|
|
|
May
11, 2010
|
|
|
|
|
/s/Stephen J. Hansbrough
|
|
Stephen
J. Hansbrough
|
|
Chairman
and Chief Executive Officer
|
|
HearUSA,
Inc.
|
|
|
|
/s/Francisco Puñal
|
|
Francisco
Puñal
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
|
HearUSA,
Inc.
|