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| EAR > SEC Filings for EAR > Form 10-K on 27-Mar-2009 | All Recent SEC Filings |
27-Mar-2009
Annual Report
Revenues
Revenues 2008 2007 Change % Change
Hearing aids and other products $ 104,392 $ 95,936 $ 8,456 8.8 %
Services 7,596 6,868 728 10.6 %
Total net revenues $ 111,988 $ 102,804 $ 9,184 8.9 %
2008 2007 Change % Change (3)
Revenues from centers acquired in
2007 (1) $ 5,127 $ - $ 5,127 5.0 %
Revenues from centers acquired in
2008 4,670 - 4,670 4.5 %
Revenues from acquired centers 9,797 - 9,797 9.5 %
Revenues from comparable centers
(2) 102,191 102,804 (613 ) (0.6 )%
Total net revenues $ 111,988 $ 102,804 $ 9,184 8.9 %
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(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.
The $9.2 million or 8.9% increase in net revenue over 2007 is principally a
result of revenues from acquired centers of approximately $9.8 million. Organic
revenue increased during the first half but declined in the later part 2008 as a
result of worsening economic conditions. The average selling price of units sold
in 2008 increased by 2.6% primarily due to a different mix of products resulting
from patients selecting higher technology hearing aids.
The number of hearing aids sold in 2008 increased 6.3% over 2007 primarily as a
result of acquired centers.
Cost of Products Sold and Services Cost of products sold and services 2008 2007 Change % Hearing aids and other products $ 30,171 $ 26,017 $ 4,154 16.0 % Services 2,311 2,088 223 10.7 % Total cost of products sold and services $ 32,482 $ 28,105 $ 4,377 15.60 % Percent of total net revenues 29.0 % 27.3 % 1.7 % 6.2 % |
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 6 - Long-term Debt, Notes to Consolidated Financial Statements included herein):
Rebate credits included above 2008 2007 Change % Base required payments on Tranche C forgiven $ 3,099 $ 3,945 $ (846 ) (21.4 )% Required payments of $65 per Siemens unit from acquired centers on Tranche B forgiven 684 546 138 25.3 % Interest expense on Tranches B and C forgiven 2,832 2,696 136 5.0 % Total rebate credits $ 6,615 $ 7,187 $ (572 ) (8.0 )% Percent of total net revenues 5.9 % 7.0 % (1.1 )% (15.7 )% |
Cost of products sold as a percent of total net revenues before the impact of the Siemens rebate credits was 34.9% in 2008 and 34.3% 2007.
Expenses
Operating expenses 2008 2007 Change %
Center operating expenses $ 57,450 $ 50,401 $ 7,049 14.0 %
Percent of total net revenues 51.3 % 49.0 % 2.3 % 4.7 %
General and administrative expenses $ 15,176 $ 15,227 $ (51 ) (0.3 )%
Percent of total net revenues 13.6 % 14.8 % (1.2 )% (8.1 )%
Depreciation and amortization $ 2,963 $ 2,248 $ 715 31.8 %
Percent of total net revenues 2.6 % 2.2 % 0.4 % 18.2 %
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The increase in center operating expenses in 2008 is mainly attributable to
additional expenses of approximately $5.2 million related to acquired centers
owned less than twelve months. The remaining increase of approximately
$1.8 million is attributable to expenses of $407,000 in the implementation of
the AARP program, $339,000 related to incentive compensation, $282,000 related
to increased regional management expenses, increases in gross marketing costs of
approximately $689,000 and $235,000 of severance costs. These were partially
offset by increases in advertising reimbursements from Siemens of approximately
$688,000. Center operating expenses as a percent of total net revenues increased
from 49.0% in 2007 to 51.3% in 2008 principally as a result of the decrease in
organic sales, higher operating expenses as a percentage of revenue of acquired
centers, AARP program implementation costs and costs associated with the
expiring Don Shula marketing campaign of approximately $565,000. The operating
expenses of the acquired centers were 53.2% of the related net revenues during
2008.
General and administrative expenses decreased by approximately $51,000 in 2008
as compared to 2007. The decrease in general and administrative expenses is
attributable to decreases in professional fees of approximately $132,000 and the
benefit of vendor rebates of $200,000 recorded in reduction of communication
expense. These were partially offset by increases in employee and director
stock-based compensation expense of approximately $255,000. Included in general
and administrative expense in 2008 and 2007 are $811,000 and $518,000,
respectively, of severance costs.
Depreciation was $1.5 million in 2008 and $1.4 million in 2007. Amortization
expense was $1.5 million in the 2008 and $896,000 in 2007. The increase in
amortization expense is primarily the result of amortization of the AARP license
agreement of approximately $391,000.
Interest Expense
Interest expense 2008 2007 Change %
Notes payable from business
acquisitions and others (1) $ 978 $ 642 $ 336 52.3 %
Long-term contractual commitment to
AARP (2) 763 - 763 100.0 %
Siemens Tranches B and C (3) 2,832 2,696 136 5.0 %
Siemens Tranche D and E 935 691 244 35.3 %
2003 Convertible Subordinated Notes
(4) - 3,168 (3,168 ) (100.0 )%
2005 Subordinated Notes (5) 247 825 (578 ) (70.1 )%
Total interest expense $ 5,755 $ 8,022 $ (2,267 ) (28.3 )%
2008 2007 Change %
Total cash interest expense (6) $ 1,617 $ 1,703 $ (86 ) (5.0 )%
Total non-cash interest expense (7) 4,138 6,319 (2,181 ) (34.5 )%
Total interest expense $ 5,755 $ 8,022 $ (2,267 ) (28.3 )%
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(1) Includes $421,000 and $117,000 in 2008 and 2007, 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 6 - Long-term Debt, Notes to Consolidated Financial Statements included herein).
(2) Includes $763,000 of non-cash interest expense related to recording of long-term contractual commitment to AARP at its present value by discounting future payments to market rate of interest (see Note 6 - 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 the cost of products sold (see Note 6 - Long-term Debt, Notes to Consolidated Financial Statements included herein and Liquidity and Capital Resources, below).
(4) Includes $3.0 million in 2007 of non-cash debt discount amortization (see Note 7 - Convertible Subordinated Notes, Notes to Consolidated Financial Statements included herein).
(5) Includes $192,000 and $496,000 in 2008 and 2007, respectively, of non-cash debt discount amortization (see Note 8 - 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 on the Siemens on 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, Siemens Tranches B and C loans, the non-cash interest imputed to the 2005 Subordinated Notes and the 2003 Convertible Subordinated Notes in 2007 related to the debt discount amortization.
The decrease in interest expense in 2008 is attributable to conversion in common
shares of the convertible subordinated notes in April of 2007 and the repayment
of the 2005 subordinated notes in August of 2008.
Gain on Restructuring of Contract
On August 8, 2008, HearUSA, Inc. (the "Company") entered into a Hearing Care
Program Services Agreement with American Association of Retired Persons
("AARP"), Inc. and AARP Services, Inc. (the "Services Agreement"), and an AARP
License Agreement with AARP, Inc. (the "License Agreement"), pursuant to which
the Company will provide an AARP-branded discount hearing care program to AARP
members.
Under the Services Agreement, the Company has agreed to provide to AARP members
discounts on hearing aids and related services, through the Company's
company-owned centers and independent network of hearing care providers. The
Company will allocate $4.4 million annually to promote the AARP program to AARP
members and the general public, and will contribute 9.25% of that amount to
AARP's marketing cooperative. The Company will also contribute $500,000 annually
to fund an AARP sponsored education campaign to educate and promote hearing loss
awareness and prevention to AARP members and the general public. The Company has
also committed, in cooperation with AARP, to donate a number of hearing aids
annually to be distributed free of charge to economically disadvantaged
individuals who have experienced hearing loss. The Company was to begin the
program with AARP December 1, 2008. The Services Agreement has an initial term
of three years ending in December 1, 2011. At the end of the initial three year
term, the Company has an option to extend the term of the Services Agreement for
an additional two year period.
Pursuant to the License Agreement, AARP granted the Company a limited license to
use the AARP name and related trade and service marks in connection with the
operation and administration of the AARP program, including the advertising and
promotion of the program. The Company originally agreed to pay AARP a fixed
annual royalty of $7.6 million for each year of the initial three year term of
the AARP license. This provision was eliminated in the December 2008 amendment.
In accordance with SFAS 142 "Goodwill and Other Intangibles", the intangible was
recorded at approximately $19.3 million based on the fair value of the payments
on the date of issuance using an imputed interest rate of 10%.
In 2008, the Company recorded non-cash interest expense of approximately
$763,000 and amortization expense of approximately $391,000 related to the
long-term contractual commitment to AARP and corresponding intangible asset.
On December 22, 2008, AARP and the Company amended the License Agreement to
restructure the payment terms of the agreement and eliminated the required
annual royalty payment. The Company is no longer contractually committed to pay
the $7.6 million annual royalty payment. Accordingly the Company wrote off the
remaining contractual liability of approximately $20.0 million and the balance
of intangible asset of approximately $19.1 million and recorded a corresponding
gain on the restructuring of the AARP agreement of approximately $981,000. The
Company is currently in negotiations with AARP for restructuring the royalty
compensation provision.
Income Taxes
The Company has net operating loss carryforwards of approximately $59.1 million
for U.S. income tax purposes. In addition, 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 purposes have been
offset by a valuation allowance because it was determined that these assets were
not likely to be realized. The deferred tax assets for Canadian tax purposes are
recorded as a reduction of the deferred income tax liability on the Company's
balance sheet and were approximately $881,000 at December 27, 2008 and $777,000
at December 29, 2007.
During 2008, the Company recorded a deferred tax expense of approximately
$1.1 million compared to approximately $769,000 in 2007 related to estimated
taxable income generated by the Canadian operations and the estimated deduction
of tax deductible goodwill from its US operations. The deferred income tax
expense related to the Canadian operations of approximately $220,000 is due to
the estimated utilization of deferred tax benefit previously recorded. The
additional deferred income tax expense of approximately $831,000 in 2008 and
$595,000 in 2007 was recorded because it cannot be offset by other temporary
differences as it relates to infinite-lived assets and the future timing of the
reversal of the liability is unknown. Deferred income tax expense will continue
to be recorded for these two items as long as the Canadian operations generate
taxable income and/or tax deductible goodwill exist for US tax purposes. Tax
deductible goodwill with a balance of approximately $33.2 million at
December 27, 2008, is expected to increase as we continue to purchase the assets
of businesses.
Minority Interest
The Company's fifty percent owned joint venture; HEARx West generated net income
of approximately $2.5 million and $3.0 million during 2008 and 2007,
respectively. The Company records 50% of the venture's net income as minority
interest in the income of a joint venture in the Company's consolidated
statements of operations. The minority interest for 2008 and 2007 was
approximately $1.3 million and $1.5 million, respectively.
2007 compared to 2006 (in thousands of dollars)
Revenues
Revenues 2007 2006 Change % Change
Hearing aids and other products $ 95,936 $ 82,820 $ 13,116 15.8 %
Services 6,868 5,966 902 15.1 %
Total net revenues $ 102,804 $ 88,786 $ 14,018 15.8 %
2007 2006 Change % Change (3)
Revenues from centers acquired in
2006 (1) $ 8,193 $ $ 8,193 9.2 %
Revenues from centers acquired in
2007 4,600 - 4,600 5.2 %
Total Revenues from acquired
centers 12,793 - 12,793 14.4 %
Revenues from comparable centers
(2) 90,011 88,786 1,225 1.4 %
Total net revenues $ 102,804 $ 88,786 $ 14,018 15.8 %
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(1) Represents that portion of revenue from the 2006 acquired centers recognized for those acquisitions that had less than one full year of revenues recorded in 2006 due to the timing of their acquisition.
(2) 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 them by the total 2006 net revenues.
The $14.0 million or 15.8% increase in net revenues over 2006 is principally a
result of revenues from acquired centers which generated approximately
$12.8 million or 14.4% over 2006 revenues and a slight increase in revenues from
comparable centers of approximately 1.4% above the 2006 total net revenue level.
The comparable centers total net revenues also include a favorable impact of
$736,000 related to fluctuations in the Canadian exchange rate from 2006 to
2007.
The number of hearing aids sold over 2006 increased by 4.9% and was primarily
the result of an increase of 7.9% from acquired centers which was offset by a
decrease in the number of hearing aids sold in comparable centers. The impact of
the decrease in the number of hearing aids sold from comparable centers was
offset by an increase in the average unit selling price of 9.8% over 2006 the
average unit selling price. The increase in average unit selling price is
primarily due to a different mix of products resulting from patients selecting
higher technology hearing aids. The decrease in the number of units sold is in
part attributable to lower volume of Florida Medicaid business. Service revenues
increased approximately $902,000, or 15.1%, over 2006 consistent with the
increase in hearing aid revenues.
Cost of Products Sold and Services Cost of products sold and services 2007 2006 Change % Hearing aids and other products $ 26,017 $ 24,942 $ 1,075 4.3 % Services 2,088 1,761 327 18.6 % Total cost of products sold and services $ 28,105 $ 26,703 $ 1,402 5.3 % |
Percent of total net revenues 27.3 % 30.1 % (2.8 )% (9.3 )%
The cost of products sold as reflected above includes the effect of the rebate credits pursuant to our agreements with Siemens. The following table reflects the components of the rebate credits which are included in the above costs of products sold for hearing aids (see Note 6 - Long-term Debt, Notes to Consolidated Financial Statements included herein):
Rebate Credits included above 2007 2006 Change % Base required payments on Tranches C forgiven $ 3,945 $ 2,922 $ 1,023 35.0 % Required payments of $65 per Siemens unit from acquired centers on Tranche B forgiven 546 190 356 187.4 % Interest expense on Tranches B and C forgiven 2,696 626 2,070 330.7 % Total rebate credits $ 7,187 $ 3,738 $ 3,449 92.3 % Percent of total net revenues 7.0 % 4.2 % 2.8 % 66.7 % |
The decrease of total cost of products sold and services as a percentage of total net revenue, is due to the additional Siemens rebate credits provided for in the new agreements signed in December 2006. Cost of products sold as a percent of total revenues before the impact of the Siemens rebate credits were 34.3% in both 2007 and 2006.
The base required payment on Siemens Tranche C subject to the rebate credits was
reduced from $730,000 to $500,000 per quarter beginning in the fourth quarter of
2007 (see Note 6 - Long-term Debt, Notes to Consolidated Financial Statements
included herein).
Expenses
Operating expenses 2007 2006 Change %
Center operating expenses $ 50,401 $ 42,281 $ 8,120 19.2 %
Percent of total net revenues 49.0 % 47.6 % 1.4 % 2.9 %
General and administrative expenses $ 15,227 $ 14,005 $ 1,222 8.7 %
Percent of total net revenues 14.8 % 15.8 % (1.0 )% (6.3 )%
Depreciation and amortization $ 2,248 $ 1,988 $ 260 13.1 %
Percent of total net revenues 2.2 % 2.2 % 0.0 % 0.0 %
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The increase in center operating expenses in 2007 is mainly attributable to
additional expenses of approximately $5.3 million related to the centers
acquired and owned for less than twelve months during the year. The remaining
increase relates to an increase in incentive compensation of approximately
$277,000 associated with additional net revenues, an investment in marketing
expense related to the television campaign launched in the second quarter of
2007 of approximately $700,000 and other normal annual increases. As a percent
of total net revenues, however, they increased from 47.6% in 2006 to 49.0% in
2007. This increase is mostly attributable to the investment in marketing
discussed above and to the fact that the increase in comparable centers revenues
from one year to another of 1.5% was lower than the normal annual percentage
increase in center operating expenses. Center operating expenses related to
acquired centers of 42% of related total net revenues, were in line with
management expectations.
General and administrative expenses increased by approximately $1.2 million in
2007 as compared to the same period of 2006. The increase in general and
administrative expenses is primarily attributable to charges due to employee
severances in the amount of $518,000 and the cost of professional services
related to restatement of prior year financial statements of approximately
$200,000, and due to increases in business interruption and directors' and
officers' insurance premium of approximately $283,000 as well as to normal
annual increases of the general and administrative expenses. These increases
were partially offset by a decrease in the non-cash stock-based compensation
expenses of approximately $370,000.
Depreciation and amortization expense increased by approximately $260,000 in
2007 compared to the same period in 2006. Depreciation was $1.3 million in the
2007 and $1.2 million in 2006. Amortization expense was $896,000 in 2007 and
$815,000 in 2006. Most of the amortization expense comes from the amortization
of intangible assets related to the acquisitions made by the Company.
Interest Expense
Interest expense 2007 2006 Change %
Notes payable from business acquisitions and others (1) $ 642 $ 264 $ 371 140.5 %
Siemens Tranche C2 - Interest paid with monthly
payments (2) - 345 (345 ) (100.0 )%
Siemens Tranches C1 and C3 - accrued interest added to
loan balance (2) - 1,130 (1,130 ) (100.0 )%
Siemens Tranches A, B and C - interest forgiven (3) 2,696 626 2,077 331.8 %
Siemens Tranche D 691 - 691 -
2003 Convertible Subordinated Notes (4) 3,168 2,556 612 23.9 %
2005 Subordinated Notes (5) 825 1,361 (536 ) (39.4 )%
Warrant liability change in value (6) (319 ) 319 (100.0 )%
Total interest expense $ 8,022 $ 5,963 $ 2,059 34.5 %
2007 2006 Change %
Total cash interest expense (7) $ 1,703 $ 2,962 $ (1,266 ) (42.7 )%
Total non-cash interest expense (8) 6,319 3,001 3,325 110.8 %
Total interest expense $ 8,022 $ 5,963 $ 2,059 34.5 %
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(1) Includes $117,000 of non-cash interest expense . . .
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