HEARUSA INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


[ X ]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2002

	OR

[ ]		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 0-16453

HearUSA, Inc.

Exact Name of Registrant as Specified in Its Charter


Delaware		22-2748248

(State of Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1250 Northpoint Parkway, West Palm Beach, Florida		33407

(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code (561) 478-8770

HEARx Ltd.

Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report

Indicate by check ü 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 ü No

On November 6, 2002, 22,182,743 shares of the Registrant’s Common Stock were outstanding.

INDEX


				Page

PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements:

	Consolidated Balance Sheets				3
			September 28, 2002 and December 29, 2001

	Consolidated Statements of Operations				4
			Nine months ended September 28, 2002 and September 29, 2001

	Consolidated Statements of Operations				5
			Three months ended September 28, 2002 and September 29, 2001

	Consolidated Statements of Cash Flows				6
			Nine months ended September 28, 2002 and September 29, 2001

	Notes to Consolidated Financial Statements				7 - 13

	Item 2. Management’s Discussion and Analysis of Financial Condition				14 - 21
		and Results of Operations

	Item 3. Quantitative and Qualitative Disclosure about Market Risk				22

	Item 4. Controls and Procedures				22

PART II. OTHER INFORMATION

	Item 6. Exhibits and Reports on Form 8-K				23 - 24

			Signatures		25

HearUSA, Inc.
Consolidated Balance Sheets

ASSETS


					September 28,			December 29,
					2002			2001
					(unaudited)			(audited)

Current assets:
	Cash and cash equivalents				$	3,371,929		$	5,561,608
	Investment securities					150,000			150,000
	Accounts and notes receivable, less allowance for doubtful accounts of $1,309,425 and $185,814					7,918,058			3,965,491
	Inventories					1,173,223			504,762
	Prepaid expenses and other					537,697			855,052

				Total current assets		13,150,907			11,036,913
Property and equipment – net						7,882,917			6,835,643
Note receivable Note 3						—			700,000
Intangibles, net (Notes 4 and 6)						44,643,382			1,422,469
Deposits and other						407,576			1,346,497

					$	66,084,782		$	21,341,522

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
		Accounts payable and accrued expenses			$	14,949,120		$	6,871,124
		Accrued salaries and other compensation				1,412,370			890,985
		Current maturities of long term debt				3,746,843			2,492,313
		Dividends payable				1,265,678			1,521,053

				Total current liabilities		21,374,011			11,775,475

Long term debt, less current maturities						23,456,241			8,750,999

Commitments and contingencies						—			—
Stockholders’ equity):
	Preferred stock:
			(Aggregate liquidation preference $5,829,445 and $8,628,053) $1 par ,5,000,000 and 2,000,000 shares authorized
				Series J (233 & 233 shares outstanding)		233			233
				Series H Junior Participating (0 shares outstanding)		—			—
				1998 Convertible (4,563 & 4,777 shares outstanding)		4,563			4,777

				Total preferred stock		4,796			5,010
		Common stock: $.10 par; 50,000,000 and 20,000,000 shares authorized;
			22,192,486 and 14,559,403 shares issued (Notes 2 and 6)			2,219,249			1,455,940
			Stock subscription			(412,500	)		(412,500	)
		Additional paid-in capital				117,034,006			91,438,475
		Accumulated deficit				(95,593,579	)		(89,188,436	)
		Accumulated other comprehensive income (Note 1)				485,999			—
		Treasury stock, at cost:518,660 & 518,660 common shares				(2,483,441	)		(2,483,441	)

				Total stockholders’ equity		21,254,530			815,048

					$	66,084,782		$	21,341,522

See accompanying notes to the consolidated financial statements

HearUSA, Inc.
Consolidated Statements of Operations
Nine Months Ended September 28, 2002 and September 29, 2001


			September 28,			September 29,
			2002			2001

			(unaudited)			(unaudited)
Net Revenues			$	41,726,834		$	36,200,176

Operating costs and expenses:
	Cost of products sold			12,533,920			11,406,377
	Center operating expenses			23,167,869			21,711,624
	General and administrative expenses			8,348,944			7,606,356
	Depreciation and amortization			1,816,923			1,850,523

		Total operating costs and expenses		45,867,656			42,574,880

Loss from operations				(4,140,822	)		(6,374,704	)
Non-operating income (expense):
Interest income				107,125			174,784
Interest expense				(1,199,264	)		(417,325	)
Other income				5,671			—

Loss before equity in loss of affiliated company				(5,227,290	)		(6,617,245	)
Equity in loss of affiliated company				(630,801	)		—

Net loss				(5,858,091	)		(6,617,245	)
Dividends on preferred stock				(547,052	)		(649,237	)

Net loss applicable to common stockholders			$	(6,405,143	)	$	(7,266,482	)

Net loss per common share — basic and diluted			$	(0.32	)	$	(0.56	)

Weighted average number of shares of common stock outstanding (Note 1)				19,862,681			12,938,350

See accompanying notes to the consolidated financial statements

HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended September 28, 2002 and September 29, 2001


			September 28,			September 29,
			2002			2001

			(unaudited)			(unaudited)
Net Revenues			$	17,055,786		$	12,370,797

Operating costs and expenses:
	Cost of products sold			5,843,351			3,553,017
	Center operating expenses			9,623,999			6,523,762
	General and administrative expenses			3,484,090			2,437,309
	Depreciation and amortization			776,188			586,542

		Total operating costs and expenses		19,727,628			13,100,630

Loss from operations				(2,671,842	)		(729,833	)
Non-operating income (expense):
Interest income				14,373			73,920
Interest expense				(575,639	)		(242,188	)
Other income				5,671			—

Net loss				(3,227,437	)		(898,101	)
Dividends on preferred stock				(236,347	)		(259,622	)

Net loss applicable to common stockholders			$	(3,463,784	)	$	(1,157,723	)

Net loss per common share — basic and diluted			$	(0.12	)	$	(0.09	)

Weighted average number of shares of common stock outstanding (Note 1)				29,990,582			13,298,409

See accompanying notes to the consolidated financial statements

HearUSA, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 28, 2002 and September 29, 2001


				2002			2001

				(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss				$	(5,858,091	)	$	(6,617,245	)
Adjustments to reconcile net loss to net cash Provided/(used) by operating activities:
		Depreciation and amortization			1,816,923			1,850,523
		Provision for doubtful accounts			121,276			74,773
		Loss on disposition of equipment			153,137			91,176
		Equity in loss of affiliated company			630,801			—
		Compensation expense from issuance of capital stock			40,250			—
Changes in assets and liabilities net of effects from purchase of Helix:
(Increase) decrease in:
		Accounts receivable			228,084			697,914
		Inventories			108,141			(27,812	)
		Prepaid expenses			375,816			(684,263	)
Increase (decrease) in:
			Accounts payable		1,517,504			(212,318	)
			Accrued salaries and other		521,385			(545,148	)

Net cash provided/(used) in operating activities					(344,774	)		(5,372,400	)

Cash flows from investing activities:
		Purchase of property and equipment			(428,053	)		(1,200,504	)
		Proceeds from sale of property and equipment			—			600
		Purchase of investment securities			(5,257,524	)		(9,124,537	)
		Proceeds from the sale of mature investments			5,257,524			5,966,475
		Issuance of note receivable and advance to Helix pre-combination net of cash acquired of $1,162,803			(8,384,122	)		—
		Purchase of pre-combination investment in Helix			(2,000,000	)		—
	Cost of business combination				(1,568,742	)		—

Net cash used by investing activities					(12,380,917	)		(4,357,966	)


Cash flows from financing activities:

Proceeds from issuance of long-term debt					13,123,095			7,500,000
Principal payments:
		Long-term debt			(3,020,656	)		(470,473	)
Proceeds from the issuance of common stock					1,500,000			—
Proceeds from the issuance of employee stock options					—			70
Dividends paid on preferred stock					(715,334	)		—
Redemption of preferred stock					(351,093	)		—

Net cash provided by financing activities					10,536,012			7,029,597

Net decrease in cash and cash equivalents					(2,189,679	)		(2,700,769	)

Cash and cash equivalents at beginning of period					5,561,608			4,250,413

Cash and cash equivalents at end of period				$	3,371,929		$	1,549,644

See accompanying notes to the consolidated financial statements

HearUSA, Inc
Notes to Consolidated Financial Statements
(unaudited)

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 September 28, 2002 are not necessarily indicative of the results that may be expected for the year ending December 28, 2002. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K, as amended for the year ended December 29, 2001.

1. Summary of Significant Accounting Policies

Helix Transaction

On July 27, 2001, HEARx Ltd. and Helix Hearing Care of America Corp., a Canadian corporation (“Helix”), signed a definitive merger agreement, which was subsequently amended and restated as of November 6, 2001. Helix owns or manages 126 hearing healthcare clinics located in Massachusetts, New York, Ohio, Michigan, Wisconsin, Minnesota, Washington and Missouri as well as in the Provinces of Ontario and Quebec. The transaction was approved by the stockholders of both HEARx and Helix on June 26, 2002 and by the Canadian courts on June 28, 2002. The transaction closed on July 11, 2002, and is effective June 30, 2002,the first day of the Company’s third quarter of 2002, for financial reporting purposes. In connection with the completion of the business combination, on July 8, 2002 the Company changed its name from HEARx Ltd. to HearUSA, Inc. and increased its authorized capital. The Company’s common stock continues to trade on the American Stock Exchange under the symbol “EAR”. See Notes 3 and 6, which describe certain significant transactions between the Company and Helix.

As of September 28, 2002, 8,477,294 exchangeable shares of HEARx Canada, Inc., an indirect subsidiary of the Company, were issued or will be issued to certain former common shareholders of Helix in connection with the combination. Each exchangeable share of HEARx Canada, Inc. is exchangeable for one share of the Company’s common stock. The exchangeable shares are traded on the Toronto Stock Exchange under the symbol “HUX”.

Earnings Per Share

For purposes of computing net loss per common share – basic and diluted, for the three and nine months ended September 28, 2002, the weighted average number of shares of common stock outstanding includes the effect of the 8,477,294 exchangeable shares of HEARx Canada, Inc. described above, as if they were outstanding common stock of the Company on June 30, 2002, the effective date of the combination for financial reporting purposes.

Investment in Affiliated Company

Prior to the closing of the combination with Helix, the Company owned approximately 10.5 percent of the common stock of Helix. The Company accounted for this investment using the equity method because the Company had the ability to exercise significant influence over the operational and financial policies of Helix as a result of the terms of the merger agreement with Helix and the use of certain proceeds of the Company’s credit facility with Siemens Hearing Instruments, Inc. (“Siemens”) to repay certain debts of Helix. Under the

HearUSA, Inc
Notes to Consolidated Financial Statements
(unaudited)

equity method, the Company recorded its proportionate share of profits and losses of the affiliated company based on its percentage interest in the affiliated company.

Comprehensive Income (Loss)

Comprehensive income 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 represents a foreign currency translation adjustment. Comprehensive (loss) and the components of other comprehensive income are as follows:

Nine Months Ended

Three Months Ended

September 28,

September 29,

September 28,

September 29,

2002

2001

2002

2001

Comprehensive (loss):