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SECURITIES AND EXCHANGE COMMISSION
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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) |
Large accelerated filero | Accelerated filero | Non-accelerated filerþ | Smaller reporting Companyo |
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Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Table of Contents
(unaudited)
September 27, | December 29, | |||||||
2008 | 2007 | |||||||
(Dollars in thousands) | ||||||||
ASSETS (Note 4) | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 3,546 | $ | 3,369 | ||||
Accounts and notes receivable, less allowance for doubtful accounts of $503,000 and $498,000 | 8,848 | 8,825 | ||||||
Inventories | 2,814 | 2,441 | ||||||
Prepaid expenses and other | 1,238 | 1,283 | ||||||
Deferred tax asset | 62 | 62 | ||||||
Total current assets | 16,508 | 15,980 | ||||||
Property and equipment, net (Note 2) | 4,896 | 4,356 | ||||||
Goodwill (Note 2) | 68,405 | 63,134 | ||||||
Intangible assets, net (Note 2 and 3) | 35,378 | 16,165 | ||||||
Deposits and other | 819 | 691 | ||||||
Restricted cash and cash equivalents | 216 | 216 | ||||||
Total Assets | $ | 126,222 | $ | 100,542 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 15,051 | $ | 12,467 | ||||
Accrued expenses | 3,060 | 2,523 | ||||||
Accrued salaries and other compensation | 3,572 | 3,521 | ||||||
Current maturities of long-term debt | 19,350 | 10,746 | ||||||
Current maturities of subordinated notes, net of debt discount of $60,000 in 2007 | — | 1,480 | ||||||
Dividends payable | 34 | 34 | ||||||
Minority interest in net income of consolidated joint venture, currently payable | 1,636 | 1,221 | ||||||
Total current liabilities | 42,703 | 31,992 | ||||||
Long-term debt (Notes 4 and 7) | 50,177 | 36,499 | ||||||
Deferred income taxes | 7,299 | 6,462 | ||||||
Total long-term liabilities | 57,476 | 42,961 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity (Note 8) | ||||||||
Preferred stock (aggregate liquidation preference $2,330,000, $1 par, 7,500,000 shares authorized) | ||||||||
Series H Junior Participating (none outstanding) | — | — | ||||||
Series J (233 shares outstanding) | — | — | ||||||
Total preferred stock | — | — | ||||||
Common stock: $0.10 par; 75,000,000 shares authorized 38,424,915 and 38,325,414 shares issued | 3,842 | 3,833 | ||||||
Stock subscription | — | (412 | ) | |||||
Additional paid-in capital | 133,624 | 133,261 | ||||||
Accumulated deficit | (113,589 | ) | (113,076 | ) | ||||
Accumulated other comprehensive income | 4,651 | 4,468 | ||||||
Treasury stock, at cost: 523,662 common shares | (2,485 | ) | (2,485 | ) | ||||
Total Stockholders’ Equity | 26,043 | 25,589 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 126,222 | $ | 100,542 | ||||
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Nine Months Ended September 27, 2008 and September 29, 2007
(unaudited)
September 27, | September 29, | |||||||
2008 | 2007 | |||||||
(Dollars in thousands, except per | ||||||||
share amounts) | ||||||||
Net revenues | ||||||||
Hearing aids and other products | $ | 81,640 | $ | 70,107 | ||||
Services | 5,890 | 5,178 | ||||||
Total net revenues | 87,530 | 75,285 | ||||||
Operating costs and expenses | ||||||||
Hearing aids and other products (Note 4) | 23,541 | 18,576 | ||||||
Services | 1,793 | 1,531 | ||||||
Total cost of products sold and services | 25,334 | 20,107 | ||||||
Center operating expenses | 42,999 | 37,316 | ||||||
General and administrative expenses (Notes 1 and 8) | 11,664 | 11,306 | ||||||
Depreciation and amortization | 1,922 | 1,597 | ||||||
Total operating costs and expenses | 81,919 | 70,326 | ||||||
Income from operations | 5,611 | 4,959 | ||||||
Non-operating income (expense): | ||||||||
Interest income | 29 | 106 | ||||||
Interest expense (Notes 2, 3, 4, 5 and 6) | (4,060 | ) | (6,707 | ) | ||||
Income (loss) from continuing operations before income tax expense and minority interest in income of consolidated joint venture | 1,580 | (1,642 | ) | |||||
Income tax expense | (815 | ) | (634 | ) | ||||
Minority interest in income of consolidated joint venture | (1,174 | ) | (1,077 | ) | ||||
Net loss | (409 | ) | (3,353 | ) | ||||
Dividends on preferred stock | (104 | ) | (103 | ) | ||||
Net loss applicable to common stockholders | $ | (513 | ) | $ | (3,456 | ) | ||
Net loss applicable to common stockholders per common share – basic and diluted | $ | (0.01 | ) | $ | (0.10 | ) | ||
Weighted average number of shares of common stock outstanding – basic and diluted | 38,501 | 35,860 | ||||||
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Three Months Ended September 27, 2008 and September 29, 2007
(unaudited)
September 27, | September 29, | |||||||
2008 | 2007 | |||||||
(Dollars in thousands, except per | ||||||||
share amounts) | ||||||||
Net revenues | ||||||||
Hearing aids and other products | $ | 26,740 | $ | 25,050 | ||||
Services | 1,977 | 1,812 | ||||||
Total net revenues | 28,717 | 26,862 | ||||||
Operating costs and expenses | ||||||||
Hearing aids and other products (Note 4) | 7,448 | 6,807 | ||||||
Services | 638 | 499 | ||||||
Total cost of products sold and services | 8,086 | 7,306 | ||||||
Center operating expenses | 14,424 | 12,585 | ||||||
General and administrative expenses (Notes 1 and 8) | 3,275 | 3,890 | ||||||
Depreciation and amortization | 635 | 572 | ||||||
Total operating costs and expenses | 26,420 | 24,353 | ||||||
Income from operations | 2,297 | 2,509 | ||||||
Non-operating income (expense): | ||||||||
Interest income | 7 | 21 | ||||||
Interest expense (Notes 2, 3, 4, 5 and 6) | (1,566 | ) | (1,330 | ) | ||||
Income from continuing operations before income tax expense and minority interest in income of consolidated joint venture | 738 | 1,200 | ||||||
Income tax expense | (296 | ) | (284 | ) | ||||
Minority interest in income of consolidated joint venture | (482 | ) | (394 | ) | ||||
Net income (loss) | (40 | ) | 522 | |||||
Dividends on preferred stock | (35 | ) | (34 | ) | ||||
Net income (loss) applicable to common stockholders | $ | (75 | ) | $ | 488 | |||
Net income (loss) applicable to common stockholders per common share – basic | $ | (0.00 | ) | $ | 0.01 | |||
Net income (loss) applicable to common stockholders per common share – diluted | $ | (0.00 | ) | $ | 0.01 | |||
Weighted average number of shares of common stock outstanding – basic | 38,408 | 37,950 | ||||||
Weighted average number of shares of common stock outstanding –diluted | 38,408 | 46,415 | ||||||
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Nine Months Ended September 27, 2008 and September 29, 2007
(unaudited)
September 27, | September 29, | |||||||
2008 | 2007 | |||||||
(Dollars in thousands) | ||||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (409 | ) | $ | (3,353 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Debt discount amortization | 192 | 1,958 | ||||||
Interest on reduction of warrant exercise price | — | 1,371 | ||||||
Depreciation and amortization | 1,922 | 1,597 | ||||||
Employee and director stock-based compensation | 607 | 386 | ||||||
Provision for doubtful accounts | 396 | 372 | ||||||
Minority interest in income of Joint Venture | 1,174 | 1,077 | ||||||
Deferred income tax expense | 815 | 625 | ||||||
Interest on discounted notes payable | 355 | — | ||||||
Interest on discounted long-term contractual commitment to AARP | 260 | — | ||||||
Consulting stock-based compensation | 33 | 128 | ||||||
Loss on disposition of property and equipment | 70 | — | ||||||
Principal payments on long-term debt made through rebate credits | (2,996 | ) | (3,521 | ) | ||||
Other | (200 | ) | (2 | ) | ||||
(Increase) decrease in: | ||||||||
Accounts and notes receivable | (453 | ) | (1,273 | ) | ||||
Inventories | (342 | ) | 202 | |||||
Prepaid expenses and other | (44 | ) | 501 | |||||
Increase in: | ||||||||
Accounts payable and accrued expenses | 5,886 | 485 | ||||||
Accrued salaries and other compensation | 41 | 212 | ||||||
Net cash provided by operating activities | 7,307 | 765 | ||||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (1,192 | ) | (551 | ) | ||||
Business acquisitions | (3,551 | ) | (3,844 | ) | ||||
Net cash used in investing activities | (4,743 | ) | (4,395 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of long-term debt | 3,408 | 8,891 | ||||||
Principal payments on long-term debt | (3,620 | ) | (2,728 | ) | ||||
Principal payments on convertible subordinated notes | — | (784 | ) | |||||
Principal payments on subordinated notes | (1,540 | ) | (1,320 | ) | ||||
Proceeds from the exercise of warrants | — | 1,734 | ||||||
Proceeds from the exercise of employee options | 146 | 17 | ||||||
Dividends paid on preferred stock | (104 | ) | (103 | ) | ||||
Distributions paid to minority interest | (759 | ) | (890 | ) | ||||
Net cash provided by (used in) financing activities | (2,469 | ) | 4,817 | |||||
Effects of exchange rate changes on cash | 82 | 13 | ||||||
Net increase in cash and cash equivalents | 177 | 1,200 | ||||||
Cash and cash equivalents at the beginning of period | 3,369 | 2,326 | ||||||
Cash and cash equivalents at the end of period | $ | 3,546 | $ | 3,526 | ||||
Supplemental disclosure of cash flows information: | ||||||||
Cash paid for interest | $ | 647 | $ | 1,169 | ||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Principal payments on long-term debt made through rebate credits | $ | (2,996 | ) | $ | (3,521 | ) | ||
Issuance of notes payable in exchange for business acquisitions | $ | 2,976 | $ | 3,540 | ||||
Long-term contractual commitment to AARP in exchange for intellectual property | $ | 19,533 | $ | — | ||||
Issuance of capital lease in exchange for property and equipment | $ | 223 | $ | 416 | ||||
Purchase of equipment with volume discount credit | $ | 200 | $ | — | ||||
Conversion of accounts payable to notes payable | $ | 2,843 | $ | — | ||||
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1. | Description of the Company and Summary of Significant Accounting Policies |
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Notes to Consolidated Financial Statements
Nine Months Ended | Three Months Ended | |||||||||||||||
September 27, | September 29, | September 27, | September 29, | |||||||||||||
Dollars in thousands | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net income (loss) for the period, applicable to common stockholders | $ | (513 | ) | $ | (3,456 | ) | $ | (75 | ) | $ | 488 | |||||
Foreign currency translation adjustments | (183 | ) | 2,012 | (319 | ) | 915 | ||||||||||
Comprehensive income (loss) for the period | $ | (696 | ) | $ | (1,444 | ) | $ | (394 | ) | $ | 1,403 | |||||
2. | Business Acquisitions |
Nine Months Ended | Three Months Ended | |||||||
Dollars in thousands, except per share amounts | September 27, 2008 | September 27, 2008 | ||||||
Total revenue | $ | 89,266 | $ | 29,331 | ||||
Net income (loss) applicable to common stockholders | $ | (369 | ) | $ | (35 | ) | ||
Net income (loss) applicable to common stockholders per share – basic | $ | (0.01 | ) | $ | (0.00 | ) | ||
Net income (loss ) applicable to common stockholders per share –diluted | $ | (0.01 | ) | $ | (0.00 | ) | ||
3. | Intangible- AARP License Agreement (Note 4) |
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Notes to Consolidated Financial Statements
4. | Long-term Debt (Notes 5 and 6) |
September 27, | December 29, | |||||||
Dollars in thousands | 2008 | 2007 | ||||||
Notes payable to Siemens Tranche B | $ | 5,268 | $ | 5,403 | ||||
Tranche C | 23,685 | 23,670 | ||||||
Tranche D | 8,361 | 7,895 | ||||||
Tranche E | 2,907 | — | ||||||
Total notes payable to Siemens | 40,221 | 36,968 | ||||||
Long-term contractual commitment to AARP | 19,533 | — | ||||||
Notes payable from business acquisitions and other | 9,773 | 10,277 | ||||||
69,527 | 47,245 | |||||||
Less current maturities | 19,350 | 10,746 | ||||||
$ | 50,177 | $ | 36,499 | |||||
Total | Siemens | AARP | Other | |||||||||||||
2009 | $ | 19,350 | $ | 9,490 | $ | 5,857 | $ | 4,003 | ||||||||
2010 | 12,118 | 2,382 | 6,499 | 3,237 | ||||||||||||
2011 | 11,310 | 2,382 | 7,177 | 1,751 | ||||||||||||
2012 | 3,122 | 2,361 | — | 761 | ||||||||||||
2013 | 23,627 | 23,606 | — | 21 |
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Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
Nine Months Ended | Three Months Ended | |||||||||||||||
September 27, | September 29, | September 27, | September 29, | |||||||||||||
Dollars in thousands | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Portion applied against quarterly principal payments | $ | 2,996 | $ | 3,521 | $ | 1,017 | $ | 1,183 | ||||||||
Portion applied against quarterly interest payments | 2,104 | 2,006 | 716 | 688 | ||||||||||||
$ | 5,100 | $ | 5,527 | $ | 1,733 | $ | 1,871 | |||||||||
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Notes to Consolidated Financial Statements
5. | Convertible Subordinated Notes |
6. | Subordinated Notes and Warrant Liability |
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Notes to Consolidated Financial Statements
7. | Fair Value |
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. |
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Notes to Consolidated Financial Statements
8. | Stockholders’ Equity |
A. | Common Stock |
B. | Stock Subscription |
9. | Stock-based Compensation |
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Notes to Consolidated Financial Statements
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Remaining | ||||||||||||||||
Weighted | Contractual | |||||||||||||||
Average | Term | Aggregate | ||||||||||||||
Shares | Exercise Price | (in years) | Intrinsic Value | |||||||||||||
Outstanding at December 29, 2007 | 5,158 | $ | 1.28 | — | ||||||||||||
Granted | 970 | $ | 1.67 | |||||||||||||
Exercised | (210 | ) | $ | 0.69 | $ | 143 | ||||||||||
Forfeited/expired/cancelled | (490 | ) | 2.07 | — | ||||||||||||
Outstanding at September 27, 2008 | 5,428 | $ | 1.30 | 6.41 | $ | 1,003 | ||||||||||
Exercisable at September 27, 2008 | 3,773 | $ | 1.18 | 5.14 | $ | 1,002 | ||||||||||
Weighted | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Shares | Fair Value | |||||||
Non-vested at December 29, 2007 | 1,460 | $ | 1.44 | |||||
Granted | 970 | $ | 1.67 | |||||
Vested | (775 | ) | $ | 1.42 | ||||
Forfeited unvested | — | — | ||||||
Non-vested at September 27, 2008 | 1,655 | $ | 1.58 | |||||
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Notes to Consolidated Financial Statements
Restricted Stock Units (1) | ||||
Outstanding at December 29, 2007 | — | |||
Awarded | 482,000 | |||
Vested | — | |||
Cancelled | — | |||
Outstanding at September 27, 2008 | 482,000 | |||
(1) | Each stock unit represents the one share of common stock. |
10. | Segments |
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Notes to Consolidated Financial Statements
Dollars in thousands | Centers | E-commerce | Network | Corporate | Total | |||||||||||||||
Hearing aids and other product revenues | ||||||||||||||||||||
9 months ended September 27, 2008 | $ | 81,560 | $ | 80 | — | — | $ | 81,640 | ||||||||||||
9 months ended September 29, 2007 | $ | 70,019 | $ | 88 | — | — | $ | 70,107 | ||||||||||||
Service revenues | ||||||||||||||||||||
9 months ended September 27, 2008 | $ | 4,396 | $ | — | $ | 1,494 | — | $ | 5,890 | |||||||||||
9 months ended September 29, 2007 | $ | 3,996 | $ | — | $ | 1,182 | — | $ | 5,178 | |||||||||||
Income (loss) from operations | ||||||||||||||||||||
9 months ended September 27, 2008 | $ | 16,871 | $ | (115 | ) | $ | 850 | $ | (11,995 | ) | $ | 5,611 | ||||||||
9 months ended September 29, 2007 | $ | 15,741 | $ | (30 | ) | $ | 826 | $ | (11,578 | ) | $ | 4,959 | ||||||||
9 months ended September 27, 2008 | ||||||||||||||||||||
Depreciation and amortization | $ | 1,591 | — | $ | — | $ | 331 | $ | 1,922 | |||||||||||
Total assets | $ | 67,963 | — | $ | 20,193 | $ | 38,066 | $ | 126,222 | |||||||||||
Capital expenditures | $ | 1,080 | — | — | $ | 112 | $ | 1,192 | ||||||||||||
9 months ended September 29, 2007 | ||||||||||||||||||||
Depreciation and amortization | $ | 1,325 | — | $ | 39 | $ | 233 | $ | 1.597 | |||||||||||
Total assets | $ | 75,520 | — | $ | 923 | $ | 17,528 | $ | 93,971 | |||||||||||
Capital expenditures | $ | 460 | — | — | $ | 91 | $ | 551 |
Nine months ended | ||||||||
September 27, | September 29, | |||||||
2008 | 2007 | |||||||
Hearing aid revenues | 95.5 | % | 95.4 | % | ||||
Other product revenues | 4.5 | % | 4.6 | % |
Nine months ended | ||||||||
September 27, | September 29, | |||||||
2008 | 2007 | |||||||
Hearing aid repairs | 47.6 | % | 49.5 | % | ||||
Testing and other income | 52.4 | % | 50.5 | % |
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Notes to Consolidated Financial Statements
Nine months ended | ||||||||
September 27, | September 29, | |||||||
Dollars in thousands | 2008 | 2007 | ||||||
General and administrative expense | $ | 11,664 | $ | 11,306 | ||||
Corporate depreciation and amortization | 331 | 272 | ||||||
Corporate loss from operations | $ | 11,995 | $ | 11,578 | ||||
United States | Canada | United States | Canada | |||||||||||||
Dollars in thousands | 2008 | 2008 | 2007 | 2007 | ||||||||||||
Hearing aid and other products revenues | $ | 69,241 | $ | 12,399 | $ | 61,097 | $ | 9,010 | ||||||||
Service revenues | 5,389 | 501 | 4,768 | 410 | ||||||||||||
Long-lived assets | 61,059 | 13,278 | 50,867 | 11,688 | ||||||||||||
Total assets | 105,796 | 20,426 | 75,323 | 18,648 |
11. | Liquidity |
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Notes to Consolidated Financial Statements
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Dollars in thousands | 2008 | 2007 | Change | % Change | ||||||||||||
Hearing aids and other products | $ | 26,740 | $ | 25,050 | $ | 1,690 | 6.7 | % | ||||||||
Services | 1,977 | 1,812 | 165 | 9.1 | % | |||||||||||
Total net revenues | $ | 28,717 | $ | 26,862 | $ | 1,855 | 6.9 | % | ||||||||
2008 | 2007 | Change | % Change (3) | |||||||||||||
Revenues from centers acquired in 2007 (1) | $ | 1,194 | $ | — | $ | 1,194 | 4.4 | % | ||||||||
Revenues from centers acquired in 2008 | 1,261 | — | 1,261 | 4.7 | % | |||||||||||
Revenues from acquired centers | 2,455 | — | 2,455 | 9.1 | % | |||||||||||
Revenues from comparable centers (2) | 26,262 | 26,862 | (600 | ) | (2.2 | )% | ||||||||||
Total net revenues | $ | 28,717 | $ | 26,862 | $ | 1,855 | 6.9 | % | ||||||||
(1) | Represents that portion of revenues from the 2007 acquired centers recognized for those acquisitions that had less than one full year of revenues recorded in 2007 due to the timing of their acquisition. | |
(2) | Also includes revenues from the network business segment as well as the impact of fluctuation of the Canadian exchange rate. | |
(3) | The revenues from acquired centers percentage changes are calculated by dividing those revenues by the total of 2007 total net revenues. |
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Dollars in thousands | 2008 | 2007 | Change | % | ||||||||||||
Hearing aids and other products | $ | 7,448 | $ | 6,807 | $ | 641 | 9.4 | % | ||||||||
Services | 638 | 499 | 139 | 27.9 | % | |||||||||||
Total cost of products sold and services | $ | 8,086 | $ | 7,306 | $ | 780 | 10.7 | % | ||||||||
Percent of total net revenues | 28.2 | % | 27.2 | % | 1.0 | % | 3.7 | % | ||||||||
2008 | 2007 | Change | % | |||||||||||||
Base required payments on Tranche C forgiven | $ | 813 | $ | 1,043 | $ | (230 | ) | (22.1 | )% | |||||||
Required payments of $65 per Siemens unit from acquired centers on Tranche B forgiven | 204 | 140 | 64 | 45.7 | % | |||||||||||
Interest expense on Tranches B and C forgiven | 716 | 688 | 28 | 4.1 | % | |||||||||||
Total rebate credits | $ | 1,733 | $ | 1,871 | $ | (138 | ) | (7.4 | )% | |||||||
Percent of total net revenues | 6.0 | % | 7.0 | % | (1.0 | )% | (14.3 | )% | ||||||||
Dollars in thousands | 2008 | 2007 | Change | % | ||||||||||||
Center operating expenses | $ | 14,424 | $ | 12,585 | $ | 1,839 | 14.6 | % | ||||||||
Percent of total net revenues | 50.2 | % | 46.9 | % | 3.3 | % | 7.0 | % | ||||||||
General and administrative expenses | $ | 3,275 | $ | 3,890 | $ | (615 | ) | (15.8 | )% | |||||||
Percent of total net revenues | 11.4 | % | 14.5 | % | (3.1 | )% | (21.4 | )% | ||||||||
Depreciation and amortization | $ | 635 | $ | 572 | $ | 63 | 11.0 | % | ||||||||
Percent of total net revenues | 2.2 | % | 2.1 | % | 0.1 | % | 4.8 | % | ||||||||
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Dollars in thousands | 2008 | 2007 | Change | % | ||||||||||||
Notes payable from business acquisitions and others (1) | $ | 262 | $ | 137 | $ | 125 | 91.2 | % | ||||||||
Long-term contractual commitment to AARP (2) | 260 | — | 260 | 100.0 | % | |||||||||||
Siemens Tranches B and C – interest forgiven (3) | 716 | 688 | 28 | 4.1 | % | |||||||||||
Siemens Tranches D and E | 289 | 335 | (46 | ) | (13.7 | )% | ||||||||||
2005 Subordinated Notes (4) | 39 | 170 | (131 | ) | (77.1 | )% | ||||||||||
Total interest expense | $ | 1,566 | $ | 1,330 | $ | 236 | 17.7 | % | ||||||||
2008 | 2007 | Change | % | |||||||||||||
Total cash interest expense (5) | $ | 494 | $ | 529 | $ | (35 | ) | (6.6 | )% | |||||||
Total non-cash interest expense (6) | 1,072 | 801 | 271 | 33.8 | % | |||||||||||
Total interest expense | $ | 1,566 | $ | 1,330 | $ | 236 | 17.7 | % | ||||||||
(1) | Includes $84,000 in 2008 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 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein). | |
(2) | Includes $260,000 in 2008 of non-cash interest expense related to the recording of long-term contractual commitment to AARP at its present value by discounting future payments to market rate of interest (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein). | |
(3) | The interest expense on Tranches B and C is forgiven by Siemens as long as the minimum purchase requirements are met and a corresponding rebate credit is recorded as a reduction of cost of products sold (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein and Liquidity and Capital Resources, below). | |
(4) | Includes $12,000 in 2008 and $113,000 in 2007 of non-cash debt discount amortization (see Note 6 – Subordinated Notes and Warrant Liability, Notes to Consolidated Financial Statements included herein). | |
(5) | Represents the sum of the cash interest portion paid on the notes payable for business acquisitions and others, the cash interest paid to Siemens on the Siemens Tranches D and E loans, Subordinated Notes and the cash portion paid on the Convertible Subordinated in 2007. | |
(6) | 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, long-term contractual commitment to AARP at its present value by discounting future payments to market rate of interest, Tranches B and C, the non-cash interest imputed to the 2005 Subordinated Notes and the 2003 Convertible Subordinated Notes in 2007 related to the debt discount amortization. |
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Dollars in thousands | 2008 | 2007 | Change | % Change | ||||||||||||
Hearing aids and other products | $ | 81,640 | $ | 70,107 | $ | 11,533 | 16.5 | % | ||||||||
Services | 5,890 | 5,178 | 712 | 13.8 | % | |||||||||||
Total net revenues | $ | 87,530 | $ | 75,285 | $ | 12,245 | 16.3 | % | ||||||||
2008 | 2007 | Change | % Change (3) | |||||||||||||
Revenues from centers acquired in 2007 (1) | $ | 6,027 | $ | — | $ | 6,027 | 8.0 | % | ||||||||
Revenues from centers acquired in 2008 | 2,004 | — | 2,004 | 2.7 | % | |||||||||||
Revenues from acquired centers | 8,031 | — | 8,031 | 10.7 | % | |||||||||||
Revenues from comparable centers (2) | 79,499 | 75,285 | 4,214 | 5.6 | % | |||||||||||
Total net revenues | $ | 87,530 | $ | 75,285 | $ | 12,245 | 16.3 | % | ||||||||
(1) | Represents that portion of revenues from the 2007 acquired centers recognized for those acquisitions that had less than one full year of revenues recorded in 2007 due to the timing of their acquisition. | |
(2) | Also includes revenues from the network business segment as well as the impact of fluctuation of the Canadian exchange rate. | |
(3) | The revenues from acquired centers percentage changes are calculated by dividing those revenues by the total of 2007 net revenues. |
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Dollars in thousands | 2008 | 2007 | Change | % | ||||||||||||
Hearing aids and other products | $ | 23,541 | $ | 18,576 | $ | 4,965 | 26.7 | % | ||||||||
Services | 1,793 | 1,531 | 262 | 17.1 | % | |||||||||||
Total cost of products sold and services | $ | 25,334 | $ | 20,107 | $ | 5,227 | 26.0 | % | ||||||||
Percent of total net revenues | 28.9 | % | 26.7 | % | 2.2 | % | 8.2 | % | ||||||||
2008 | 2007 | Change | % | |||||||||||||
Base required payments on Tranche C forgiven | $ | 2,443 | $ | 3,127 | $ | (684 | ) | (21.9 | )% | |||||||
Required payments of $65 per Siemens unit from acquired centers on Tranche B forgiven | 553 | 394 | 159 | 40.4 | % | |||||||||||
Interest expense on Tranches B and C forgiven | 2,104 | 2,006 | 98 | 4.9 | % | |||||||||||
Total rebate credits | $ | 5,100 | $ | 5,527 | $ | (427 | ) | (7.7 | )% | |||||||
Percent of total net revenues | 5.8 | % | 7.3 | % | (1.5 | )% | (20.5 | )% | ||||||||
Dollars in thousands | 2008 | 2007 | Change | % | ||||||||||||
Center operating expenses | $ | 42,999 | $ | 37,316 | $ | 5,683 | 15.2 | % | ||||||||
Percent of total net revenues | 49.1 | % | 49.6 | % | (0.5 | )% | (1.0 | )% | ||||||||
General and administrative expenses | $ | 11,664 | $ | 11,306 | $ | 358 | 3.2 | % | ||||||||
Percent of total net revenues | 13.3 | % | 15.0 | % | (1.7 | )% | (11.3 | )% | ||||||||
Depreciation and amortization | $ | 1,922 | $ | 1,597 | 325 | 20.4 | % | |||||||||
Percent of total net revenues | 2.2 | % | 2.1 | % | 0.1 | % | 4.8 | % | ||||||||
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Dollars in thousands | 2008 | 2007 | Change | % | ||||||||||||
Notes payable from business acquisitions and others (1) | $ | 737 | $ | 368 | $ | 369 | 100.3 | % | ||||||||
Long-term contractual commitment to AARP (2) | 260 | — | 260 | 100.0 | % | |||||||||||
Siemens Tranches B and C interest (3) | 2,104 | 2,006 | 98 | 4.9 | % | |||||||||||
Siemens Tranches D and E | 712 | 512 | 200 | 39.1 | % | |||||||||||
2003 Convertible Subordinated Notes (4) | — | 3,153 | (3,153 | ) | (100.0 | )% | ||||||||||
2005 Subordinated Notes (5) | 247 | 668 | (421 | ) | (63.0 | )% | ||||||||||
Total interest expense | $ | 4,060 | $ | 6,707 | $ | (2,647 | ) | (39.5 | )% | |||||||
2008 | 2007 | Change | % | |||||||||||||
Total cash interest expense (6) | $ | 1,302 | $ | 1,281 | $ | 21 | 1.5 | % | ||||||||
Total non-cash interest expense (7) | 2,758 | 5,426 | (2,672 | ) | (49.1 | )% | ||||||||||
Total interest expense | $ | 4,060 | $ | 6,707 | $ | (2,647 | ) | (39.5 | )% | |||||||
(1) | Includes $328000 in 2008 of non-cash interest expense related to recording of notes and long-term contractual commitment to AARP at their present value by discounting future payments to market rate of interest (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein). | |
(2) | Includes $260,000 in 2008 of non-cash interest expense related to the recording of long-term contractual commitment to AARP at its present value by discounting future payments to market rate of interest (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein). | |
(3) | The interest expense on Tranches B and C is forgiven by Siemens as long as the minimum purchase requirements are met and a corresponding rebate credit is recorded as a reduction of cost of products sold (see Note 4 – Long-term Debt, Notes to Consolidated Financial Statements included herein and Liquidity and Capital Resources, below). | |
(4) | Includes $2.9 million in 2007 of non-cash debt discount amortization (see Note 5 – Convertible Subordinated Notes, Notes to Consolidated Financial Statements included herein). | |
(5) | Includes $121,000 in 2008 and $292,000 in 2007 of non-cash debt discount amortization (see Note 6 – Subordinated Notes and Warrant Liability, Notes to Consolidated Financial Statements included herein). | |
(6) | Represents the sum of the cash interest portion paid on the notes payable for business acquisitions and others, the cash interest paid to Siemens on the Siemens Tranches D and E loans, Subordinated Notes and the cash portion paid on the Convertible Subordinated in 2007. | |
(7) | 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, long-term contractual commitment to AARP at its present value by discounting future payments to market rate of interest, Tranches B and C, the non-cash interest imputed to the 2005 Subordinated Notes and the 2003 Convertible Subordinated Notes in 2007 related to the debt discount amortization. |
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Calculation of Pro forma Rebates to HearUSA when at least 90% of | ||||||||||||||||
Units Sold are from Siemens (1) | ||||||||||||||||
Quarterly Siemens Unit Sales Compared to Prior Years’ Comparable Quarter | ||||||||||||||||
90% but < 95 | % | 95% to 100 | % | > 100% < 125 | % | 125% and > | ||||||||||
Tranche B Rebate (2) | $ | 65/ unit | $ | 65/ unit | $ | 65/ unit | $ | 65/ unit | ||||||||
Plus | Plus | Plus | Plus | |||||||||||||
Tranche C Rebate | $ | 500,000 | $ | 500,000 | $ | 500,000 | $ | 500,000 | ||||||||
Additional Volume Rebate | — | 156,250 | 312,500 | 468,750 | ||||||||||||
Interest Forgiveness Rebate (3) | 712,500 | 712,500 | 712,500 | 712,500 | ||||||||||||
$ | 1,212,500 | $ | 1,368,750 | $ | 1,525,000 | $ | 1,681,250 | |||||||||
(1) | Calculated using trailing twelve month units sold by the Company | |
(2) | Siemens units sold by acquired businesses ($65 per unit) | |
(3) | Assuming the first $30 million portion of the line of credit is fully utilized |
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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) | 50,599 | 13,816 | 9,996 | 26,787 | — | |||||||||||||||
Interest to be paid on long-term debt (2 and 3) | 12,926 | 3,731 | 5,880 | 3,315 | — | |||||||||||||||
Operating leases | 19.334 | 6,487 | 8,807 | 2,916 | 1,124 | |||||||||||||||
Employment agreements | 4,789 | 2,509 | 2,280 | — | — | |||||||||||||||
Purchase obligations (4) | 3,992 | 596 | 2,489 | 907 | — | |||||||||||||||
Long-term contractual commitment to AARP (5) | 22,800 | 7,600 | 15,200 | — | — | |||||||||||||||
Total contractual cash obligations | 114,440 | 34,739 | 44,652 | 33,925 | 1,124 | |||||||||||||||
(1) | Approximately $29.0 million can be repaid through rebate credits from Siemens, including $2.4 million in less than 1 year and $4.8 million in years 1-3 and $21.8 million in years 4-5. | |
(2) | Interest on long-term debt includes the interest on the new Tranches B and C that can be repaid through rebate credits from Siemens pursuant to the Amended and Restated Credit Agreement, including $2.6 million in less than 1 year and $4.6 million in years 1-3 and $2.7 in years 4-5. Interest repaid through preferred pricing reductions was $2.0 million in 2007. (See Note 4 – 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 4 – Long-Term Debt, Notes to Consolidated Financial Statements included herein). | |
(4) | Purchase obligations includes the contractual commitment to AARP for campaigns to educate and promote hearing loss awareness and prevention Members and the contractual commitment to AARP for public marketing funds for the AARP Health Care Options General Program, including $2.3 million in years 1-3 and $907,000 in years 4-5. | |
(5) | Payments on the long-term contractual commitment to AARP is based on cash payments and not the fair value of the discounted contractual commitment (See Note 3 – Long-Term Debt, Notes to Consolidated Financial Statements included herein). |
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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.
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Fixed Rate | Variable Rate | |||||||||||
9.5% | 5% to 13.9% | |||||||||||
Due February 2013 | Other | Total | ||||||||||
$ | $ | $ | ||||||||||
(000’s) | (000’s) | (000’s) | ||||||||||
2008 | (7,704 | ) | (518 | ) | (8,222 | ) | ||||||
2009 | (2,385 | ) | (11,921 | ) | (14,306 | ) | ||||||
2010 | (2,385 | ) | (9,392 | ) | (11,777 | ) | ||||||
2011 | (2,385 | ) | (7,160 | ) | (9,545 | ) | ||||||
2012 | (2,346 | ) | (303 | ) | (2,649 | ) | ||||||
2013 | (23,016 | ) | (12 | ) | (23,028 | ) | ||||||
Total | (40,221 | ) | (29,306 | ) | (69,527 | ) | ||||||
Estimated fair value | (40,221 | ) | (29,306 | ) | (69,527 | ) | ||||||
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Item 1A. Risk Factors
We have updated our risk factors as stated below to address the effect of current economic conditions on our business.
Economic and other circumstances could materially adversely affect the Company as depressed consumer spending adversely affects Company sales.
The Company’s operations and performance depend significantly on economic conditions and their impact on levels of consumer spending, which have recently deteriorated in the United States and Canada, and may remain depressed for the foreseeable future. For example, some of the factors that could influence the levels of consumer spending include continuing increases in fuel and other energy costs, levels of employment, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for the Company’s products, financial condition and operating results.
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)). | |||
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)). | |||
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 | Amended and Restated By-Laws of HearUSA, Inc. (effective May 9, 2005) (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed May 13, 2005). | |||
4.1 | Amended and Restated Rights Agreement, dated July 11, 2002 between HEARx and the Rights Agent, which includes an amendment to the Certificate of Designations, Preferences and Rights of the Company’s 1999 Series H Junior Participating Preferred Stock (incorporated herein by reference to Exhibit 4.9.1 to the Company’s Joint Proxy/Prospectus on Form S-4 (Reg. No. 333-73022)). | |||
4.2 | Form of Support Agreement among HEARx Ltd., HEARx Canada, Inc. and HEARx Acquisition ULC (incorporated herein by reference to Exhibit 99.3 to the Company’s Joint Proxy Statement/Prospectus on Form S-4 (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). |
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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 9.1 to the Company’s Joint Proxy Statement/Prospectus on Form S-4 (Reg. No. 333-73022)). | |||
10.1 | Hearing Care Program Services Agreement by and among HearUSA, Inc., AARP, Inc. and AARP Services, Inc. dated August 8, 2008. | |||
10.2 | AARP License Agreement by and between HearUSA, Inc. and AARP, Inc. dated August 8, 2008. | |||
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 |
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HearUSA Inc. (Registrant) | ||||
November 10, 2008 | ||||
/s/ Stephen J. Hansbrough | ||||
Stephen J. Hansbrough | ||||
Chairman and Chief Executive Officer HearUSA, Inc. | ||||
/s/ Gino Chouinard | ||||
Gino Chouinard | ||||
President and Chief Financial Officer HearUSA, Inc. |
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Exhibit | ||||
No. | Description | |||
10.1 | Hearing Care Program Services Agreement by and among HearUSA, Inc., AARP, Inc. and AARP Services, Inc. dated August 8, 2008. | |||
10.2 | AARP License Agreement by and between HearUSA, Inc. and AARP, Inc. dated August 8, 2008. | |||
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 |
40