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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 27, 2003            

OR

o   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
Incorporation or Organization)		   (I.R.S. Employer
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       

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

     Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days     Yes     ü          No           

     Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes             
No     ü      

On October 31, 2003, 30,423,636 shares of the Registrant’s Common Stock were outstanding, including 1,876,370 exchangeable shares of HEARx Canada, Inc.

 

 

INDEX

         
        Page
       
PART I.   FINANCIAL INFORMATION 
 
  Item 1.  Financial Statements:     
 
  Consolidated Balance Sheets    
    September 27, 2003 and December 28, 2002   3
 
  Consolidated Statements of Operations    
    Nine months ended September 27, 2003 and September 28, 2002   4
 
  Consolidated Statements of Operations    
    Three months ended September 27, 2003 and September 28, 2002   5
 
  Consolidated Statements of Cash Flows    
    Nine months ended September 27, 2003 and September 28, 2002   6-7
 
  Notes to Consolidated Financial Statements   7-14
 
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations    15-21
 
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk   22
 
  Item 4: Controls and Procedures   22
 
PART II.    OTHER INFORMATION  
 
  Item 2.  Changes in Securities and Use of Proceeds   23
 
Item 6.  Exhibits and Reports on Form 8-K   23-26
 
Signatures   27
 
Exhibit Index   28

2

 

Part I — Financial Information

Item 1. Financial Statements

HearUSA, Inc.
consolidated Balance Sheets
ASSETS

                         
            September 27,   December 28,
            2003   2002
           
 
            (unaudited)   (audited)
Current assets:
                
   
Cash and cash equivalents
   $ 3,615,305     $ 2,410,023  
   
Investment securities
     435,000       435,000  
   
Accounts and notes receivable, less allowance for doubtful accounts of $550,706 and $587,322
     7,249,226       5,963,677  
   
Inventories
     1,075,620       945,743  
   
Prepaid expenses and other
     416,361       889,197  
   
Assets of discontinued operations (Note 1)
     —       1,472,849  
       
Total current assets
     12,791,512       12,116,489  
Property and equipment – net
     5,428,462       6,910,966  
Intangibles, net (Note 4)
     43,846,428       44,211,588  
Deposits and other
     400,456       482,982  
Other assets of discontinued operations (Note 1)
     —       1,143,783  
 
    
     
 
 
   $ 62,466,858     $ 64,865,808  
 
    
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
                
   
Accounts payable
   $ 9,184,765     $ 9,675,004  
   
Accrued expenses
     2,716,787       4,665,547  
   
Accrued salaries and other compensation
     1,105,998       1,868,772  
   
Current maturities of long term debt
     4,245,124       4,017,007  
   
Dividends payable
     1,315,339       1,215,167  
   
Liabilities of discontinued operations (Note 1)
     —       906,364  
 
    
     
 
       
Total current liabilities
     18,568,013       22,347,861  
 
    
     
 
Long term debt, less current maturities
     23,526,265       21,971,499  
 
    
     
 
Long term debt, less current maturities of discontinued operations
     —       110,890  
Commitments and contingencies (Note 6)
     —       —  
Mandatorily redeemable convertible preferred stock (Note 2)
     4,563,000       —  
 
    
         
Stockholders’ equity:
                
Preferred stock (Note 2):
                
   
(Aggregate liquidation preference $2,330,000 and $8,108,167) $1 par, 5,000,000 shares authorized
                
     
Series J (233 shares outstanding)
     233       233  
       
Series H Junior Participating (0 shares outstanding)
     —       —  
       
1998 Convertible (0 and 4,563 shares outstanding)
     —       4,563  
 
    
     
 
       
Total preferred stock
     233       4,796  
   
Common stock: $.10 par; 50,000,000 shares authorized 28,891,355 and 24,457,055 shares issued
     2,889,135       2,445,705  
   
Stock subscription
     (412,500 )     (412,500 )
   
Additional paid-in capital
     112,199,322       117,314,681  
   
Accumulated deficit
     (96,463,495 )     (96,765,446 )
   
Accumulated other comprehensive income – currency translation adjustment (Note 1)
     82,026       331,763  
   
Treasury stock, at cost:523,662 & 518,660 common shares
     (2,485,141 )     (2,483,441 )
 
    
     
 
       
Total stockholders’ equity
     15,809,580       20,435,558  
 
    
     
 
 
   $ 62,466,858     $ 64,865,808  
 
    
     
 

See accompanying notes to the consolidated financial statements

3

 

HearUSA, Inc.
Consolidated Statements of Operations
Nine Months Ended September 27, 2003 and September 28, 2002

                     
        September 27,   September 28,
        2003   2002
       
 
        (unaudited)   (unaudited)
       
 
Net Revenues
   $ 53,664,664     $ 40,553,650  
 
    
     
 
Operating costs and expenses:
                
 
Cost of products sold
     15,202,201       11,791,342  
 
Center operating expenses
     26,062,405       22,933,432  
 
General and administrative expenses
     7,529,998       7,969,563  
 
Depreciation and amortization
     2,334,585       1,777,168  
 
    
     
 
   
Total operating costs and expenses
     51,129,189       44,471,505  
 
    
     
 
Income (loss) from operations
     2,535,475       (3,917,855 )
Non-operating income (expense):
                
Interest income
     16,701       107,125  
Interest expense
     (1,608,717 )     (1,196,025 )
Other income
             5,671  
 
    
     
 
Income (loss) before equity in loss of affiliated company
     943,459       (5,001,084 )
Equity in loss of affiliated company
     —       (630,801 )
 
    
     
 
Income (loss ) from continuing operations
     943,459       (5,631,885 )
Discontinued operations
                
Loss from discontinued operations –(including loss on disposal of $105,296 and $0)
     (201,536 )     (226,206 )
 
    
     
 
Net income (loss) before dividends on preferred stock
     741,923       (5,858,091 )
Dividends on preferred stock
     (439,972 )     (547,052 )
 
    
     
 
Net income (loss) applicable to common stockholders
   $ 301,951     $ (6,405,143 )
 
    
     
 
Net income (loss) per common share — basic
   $ 0.01     $ (0.32 )
 
    
     
 
Net income (loss) per common share — diluted
   $ 0.01     $ (0.32 )
 
    
     
 
Weighted average number of shares of Common stock outstanding:
                
 
Basic
     30,424,466       19,862,681  
 
    
     
 
 
Diluted
     48,191,168       19,862,681  
 
    
     
 

See accompanying notes to the consolidated financial statements

4

 

HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended September 27, 2003 and September 28, 2002

                     
        September 27,   September 28,
        2003   2002
       
 
        (unaudited)   (unaudited)
Net Revenues
   $ 17,276,558     $ 15,882,602  
 
    
     
 
Operating costs and expenses:
                
 
Cost of products sold
     4,745,705       5,100,773  
 
Center operating expenses
     8,927,598       9,389,563  
 
General and administrative expenses
     2,657,870       3,104,708  
 
Depreciation and amortization
     700,011       736,433  
 
    
     
 
   
Total operating costs and expenses
     17,031,184       18,331,477  
 
    
     
 
Income (loss) from operations
     245,374       (2,448,875 )
Non-operating income (expense):
                
Interest income
     4,740       14,373  
Interest expense
     (493,179 )     (572,400 )
Other income
             5,671  
 
    
     
 
Loss from continuing operations
     (243,065 )     (3,001,231 )
 
Discontinued operations
                
Loss from discontinued operations
     (3,830 )     (226,206 )
 
    
     
 
Loss before dividends on preferred stock
     (246,895 )     (3,227,437 )
 
Dividends on preferred stock
     (142,547 )     (236,347 )
 
    
     
 
Net loss applicable to common stockholders
   $ (389,442 )   $ (3,463,784 )
 
    
     
 
Net loss per common share — basic
   $ (0.01 )   $ (0.12 )
 
    
     
 
Net loss per common share — diluted
   $ (0.01 )   $ (0.12 )
 
    
     
 
Weighted average number of shares of Common stock outstanding:
                
 
Basic
     30,423,652       29,990,582  
 
    
     
 
 
Diluted
     30,423,652       29,990,582  
 
    
     
 

See accompanying notes to the consolidated financial statements

5

 

HearUSA, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 27, 2003 and September 28, 2002

                     
        September 27, 2003   September 28, 2002
       
 
        (unaudited)   (unaudited)
Cash flows from operating activities:
                
Net income(loss)
   $ 741,923     $ (5,858,091 )
 
Loss from discontinued operations
     201,536       —  
 
    
     
 
Net income (loss) from continuing operations
     943,459       (5,858,091 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                
   
Depreciation and amortization
     2,335,085       1,816,923  
   
Provision for doubtful accounts
     591,663       121,276  
   
Loss on disposition of equipment
     1,563       153,137  
   
Equity loss in affiliated company
     —       630,801  
   
Compensation expense from the issuance of capital stock
     —       40,250  
Changes in assets and liabilities:
                
(Increase) decrease in:
                
   
Accounts and notes receivable
     (1,261,040 )     228,084  
   
Inventories
     (135,218 )     108,141  
   
Prepaid expenses and other
     526,216       375,816  
Increase (decrease) in:
                
   
Accounts payable
     (546,318 )     1,517,504  
   
Accrued salaries and other
     (1,699,867 )     521,385  
 
    
     
 
Net cash provided/(used) by continuing operations
     755,543       (344,774 )
Net cash used by discontinued operations
     (372,098 )     —  
 
    
     
 
Net cash provided/(used) by operating activities
     383,445       (344,774 )
 
    
     
 
Cash flow from investing activities:
                
   
Purchase of property and equipment
     (215,079 )     (428,053 )
   
Proceeds from the sale of discontinued operations
     1,164,667       —  
   
Capital expenditure from discontinued operations
     (8,196 )     —  
   
Purchase of investment securities
     —       (5,257,524 )
   
Proceeds from the sale of mature investments
             5,257,524  
   
Issuance of note receivable in affliated company
     —       (8,384,122 )
   
Purchase of pre-combination investment in Helix
     —       (2,000,000 )
   
Cost of business combination
     —       (1,568,742 )
 
    
     
 
Net cash provided/(used) in investing activities
     941,392       (12,380,917 )
 
    
     
 
Cash flows from financing activities:
                
   
Proceeds from issuance of:
                
   
Long-term debt
     3,500,000       13,123,095  
   
Principal payments of debt of discontinued operations
     (29,822 )     —  
   
Principal payments: Long-term debt
     (3,152,046 )     (3,020,656 )
   
Purchase of treasury stock
     (1,700 )     —  
   
Redemption of preferred stock, net of costs
     (153,757 )     (351,093 )
   
Proceeds from issuance of employee stock options
     15       —  
   
Proceeds from issuance of capital stock
     40,250       1,500,000  
   
Dividends on preferred stock
     (339,800 )     (715,334 )
 
    
     
 
Net cash (used)/provided by financing activities
     (136,860 )     10,536,012  
 
    
     
 
Effects of exchange rate changes on cash
     17,305       —  
 
    
     
 
Net increase (decrease) in cash and cash equivalents
     1,205,282       (2,189,679 )
Cash and cash equivalents at beginning of period
     2,410,023       5,561,608  
 
    
     
 
Cash and cash equivalents at end of period
   $ 3,615,305     $ 3,371,929  
 
    
     
 
Supplemental disclosure of non-cash investing and financing activities:
                
   
Purchase of investment in affiliated company by exchanging notes receivable from affiliated company
   $ —     $ 2,700,000  

See accompanying notes to the consolidated financial statements

6

 

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 27, 2003 are not necessarily indicative of the results that may be expected for the year ending December 27, 2003. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 28, 2002.

1.     Summary of Significant Accounting Policies

Helix Transaction

On July 27, 2001, the Company 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 owned or managed, prior to the combination, 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 the Company and Helix on June 26, 2002 and by the Canadian courts on June 28, 2002. The transaction closed on July 11, 2002, and was effective June 30, 2002, the first day of the Company’s third quarter of 2002, for financial reporting purposes.

As of September 27, 2003, 2,055,943 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. These exchangeable shares are traded on the Toronto Stock Exchange under the symbol “HUX”.

Discontinued Operations

On July 15, 2003, the Company sold 100% of the shares of the Company’s three subsidiaries and selected assets associated with the management of the centers located in the Canadian Province of Quebec, to Forget & Sauve, Audioprothesistes, S.E.N.C. (“Forget & Sauve”) and 6068065 Canada Inc., private entities owned and controlled by Steve Forget, a former Helix officer and director. Mr. Forget served as an officer of HearUSA until October 2002 and as a director until May 2003. The sale agreement provided for total payments to the Compa