| HEARUSA INC Item 1A Risk Factors This Annual Report on Form 10-K, including the management discussion and analysis set out below, contains or incorporates a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act Exchange of 1934 |
| These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions |
| Any statements that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this report as well as the risk factors set forth below |
| The statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict |
| The risks and uncertainties described below are not the only ones facing us |
| Additional risks and uncertainties that we are unaware of may become important factors that affect us |
| If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected |
| HearUSA has incurred net losses in each year since its organization, and its accumulated deficit at December 31, 2005 was dlra103cmam774cmam422 |
| We expect quarterly and annual operating results to fluctuate, depending primarily on the following factors: • Timing of product sales; • Level of consumer demand for our products; • Timing and success of new centers and acquired centers; • Timing and amounts of payments by health insurance and managed care organizations |
| There can be no assurance that HearUSA will achieve profitability in the near or long term or ever |
| We may not effectively compete in the hearing care industry |
| The hearing care industry is highly fragmented and barriers to entry are low |
| Approximately 11cmam000 practitioners provide testing and dispense products and services that compete with those sold and provided by HearUSA We also compete with small retailers, as well as large networks of franchisees and distributors established by larger companies, such as those manufacturing and selling Miracle Ear and Beltone products |
| Some of the larger companies have far greater resources than HearUSA and could expand and/or change their operations to capture the market targeted by HearUSA Large discount retailers, such as Costco Wholesale Corporation, also sell hearing aids and present a competitive threat in our markets |
| In addition, it is possible that the hearing care market could be effectively consolidated by the establishment of cooperatives, alliances or associations that could compete more successfully for the market targeted by us |
| 10 _________________________________________________________________ We are dependent on manufacturers who may not perform |
| HearUSA is not a hearing aid manufacturer |
| We rely on major manufacturers to supply our hearing aids and to supply hearing enhancement devices |
| A significant disruption in supply from any or all of these manufacturers could materially adversely affect our business |
| Our strategic and financial relationship with Siemens Hearing Instruments, Inc |
| requires us to purchase from Siemens a certain portion of our requirements of hearing aids at specified prices for a period of five years |
| Although Siemens is the world’s largest manufacturer of hearing devices, there can be no assurance that Siemens’ technology and product line will remain desirable in the marketplace |
| Furthermore, if Siemens’ manufacturing capacity cannot keep pace with the demand of HearUSA and other customers, our business may be adversely affected |
| We rely on qualified audiologists, without whom our business may be adversely affected |
| HearUSA currently employs approximately 180 licensed hearing professionals, of whom approximately 118 are audiologists, 25 are AUD (Doctors in Audiology) and 37 are licensed hearing aid specialists |
| If we are not able to attract and retain qualified audiologists, we will be less able to compete with networks of hearing aid retailers or with the independent audiologists who also sell hearing aids and our business may be adversely affected |
| We may not be able to maintain existing agreements or enter into new agreements with health insurance and managed care organizations, which may result in reduced revenues |
| HearUSA enters into provider agreements with health insurance companies and managed care organizations for the furnishing of hearing care in exchange for fees |
| The terms of most of these agreements are to be renegotiated annually, and these agreements may be terminated by either party, usually on 90 days or less notice at any time |
| There is no certainty that we will be able to maintain these agreements on favorable terms or at all |
| If we cannot maintain these contractual arrangements or enter into new arrangements, there will be a material adverse effect on our revenues and results of operations |
| In addition, the early termination of or failure to renew the agreements that provide for payment to HearUSA on a per-patient-per-month basis would cause us to lower our estimates of revenues to be received over the life of the agreements |
| This could have a material adverse effect on our results of operations |
| We depend on our joint venture for our California operations and may not be able to attract sufficient patients to our California centers without it |
| HEARx West LLC, our joint venture with Kaiser Permanente, operates 23 full-service centers in California as well as two satellite locations in Kaiser facilities |
| Since their inception, HEARx West centers have derived approximately two-thirds of their revenues from sales to Kaiser Permanente members, including revenues through an agreement between the joint venture and Kaiser Permanente’s California division servicing its hearing benefited membership |
| If Kaiser Permanente does not perform its obligations under the agreement, or if the agreement is not renewed upon expiration, the loss of Kaiser patients in the HEARx West centers would adversely affect our business |
| In addition, HEARx West centers would be adversely affected by the loss of the ability to market to Kaiser members and promote the business within Kaiser’s medical centers, including the referral of potential customers by Kaiser |
| We rely on the efforts and success of managed care companies that may not be achieved or sustained |
| Many managed care organizations, including some of those with whom we have contracts, have experienced and are continuing to experience significant difficulties arising from the widespread growth and reach of available plans and benefits |
| If the managed care organizations are unable to attract and retain covered members in our geographic markets, we may be unable to sustain the 11 _________________________________________________________________ operations of our centers in those geographic areas |
| We will close centers where warranted and such closures could have a material adverse effect on us |
| We may not be able to maintain JCAHO accreditation, and our revenues may suffer |
| HearUSA has a three-year accreditation from the Joint Committee on Accreditation of Healthcare Organizations (JCAHO) that extends to 2008 |
| This status distinguishes HearUSA from other hearing care providers and is widely used in our marketing efforts |
| If we are not able to maintain our accredited status, we will not be able to distinguish HearUSA on this basis and our revenues may suffer |
| Also, there is no assurance that HearUSA can achieve JCAHO accreditation for acquired centers or the network business |
| We are exposed to potential product and professional liability that could adversely affect us if a successful claim is made in excess of insurance policy limits |
| In the ordinary course of its business, HearUSA may be subject to product and professional liability claims alleging that products sold or services provided by the company failed or had adverse effects |
| We maintain liability insurance at a level which we believe to be adequate |
| A successful claim in excess of the policy limits of the liability insurance could materially adversely affect our business |
| As the distributor of products manufactured by others, we believe we would properly have recourse against the manufacturer in the event of a product liability claim |
| There can be no assurance, however, that recourse against a manufacturer by HearUSA would be successful, or that any manufacturer will maintain adequate insurance or otherwise be able to pay such liability |
| Risks Relating to HearUSA Common Stock The price of our common stock is volatile and could decline |
| The price of HearUSA common stock could fluctuate significantly, and you may be unable to sell your shares at a profit |
| There are significant price and volume fluctuations in the market generally that may be unrelated to our operating performance, but which nonetheless may adversely affect the market price for HearUSA common stock |
| The price of our common stock could change suddenly due to factors such as: • the amount of our cash resources and ability to obtain additional funding; • economic conditions in markets we are targeting; • fluctuations in operating results; • changes in government regulation of the healthcare industry; • failure to meet estimates or expectations of the market; and • rate of acceptance of hearing aid products in the geographic markets we are targeting |
| Any of these conditions may cause the price of HearUSA common stock to fall, which may reduce business and financing opportunities available to us and reduce your ability to sell your shares at a profit, or at all |
| 12 _________________________________________________________________ HearUSA might fail to maintain a listing for its common stock on the American Stock Exchange, making it more difficult for stockholders to dispose of or to obtain accurate quotations as to the value of their HearUSA stock |
| HearUSA common stock is presently listed on the American Stock Exchange |
| The American Stock Exchange will consider delisting a company’s securities if, among other things, • the company fails to maintain stockholder’s equity of at least dlra2cmam000cmam000 if the company has sustained losses from continuing operations or net losses in two of its three most recent fiscal years; • the company fails to maintain stockholder’s equity of dlra4cmam000cmam000 if the company has sustained losses from continuing operations or net losses in three of its four most recent fiscal years; or • the company has sustained losses from continuing operations or net losses in its five most recent fiscal years |
| HearUSA may not be able to maintain its listing on the American Stock Exchange, and there may be no public market for the HearUSA common stock |
| In the event the HearUSA common stock were delisted from the American Stock Exchange, trading, if any, in the common stock would be conducted in the over-the-counter market |
| As a result, you would likely find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, your HearUSA common stock |
| If “penny stock” regulations apply to HearUSA common stock, you may not be able to sell or dispose of your shares |
| If HearUSA common stock were delisted from the American Stock Exchange, the “penny stock” regulations of the Securities and Exchange Commission might apply to transactions in the common stock |
| A “penny stock” generally includes any over-the-counter equity security that has a market price of less than dlra5dtta00 per share |
| The Commission regulations require the delivery, prior to any transaction in a penny stock, of a disclosure schedule prescribed by the Commission relating to the penny stock |
| A broker-dealer effecting transactions in penny stocks must make disclosures, including disclosure of commissions, and provide monthly statements to the customer with information on the limited market in penny stocks |
| These requirements may discourage broker-dealers from effecting transactions in penny stocks |
| If the penny stock regulations were to become applicable to transactions in shares of HearUSA common stock, they could adversely affect your ability to sell or otherwise dispose of your shares |
| Conversion of outstanding HearUSA convertible subordinated notes and exercise of outstanding HearUSA options and warrants could cause substantial dilution |
| As of December 31, 2005, outstanding convertible subordinated notes, warrants and options of HearUSA included: • dlra7dtta5 million in convertible subordinated notes, convertible into approximately 4cmam285cmam715 shares of common stock, assuming any interest is paid in cash; • Warrants to purchase approximately 5cmam114cmam853 shares of common stock and • Options to purchase approximately 5cmam511cmam070 shares of common stock |
| To the extent outstanding subordinated notes are converted, options or warrants are exercised or additional shares of capital stock are issued, stockholders will incur additional dilution |
| 13 _________________________________________________________________ Future sales of shares may depress the price of HearUSA common stock |
| If substantial stockholders sell shares of HearUSA common stock into the public market, or investors become concerned that substantial sales might occur, the market price of HearUSA common stock could decrease |
| Such a decrease could make it difficult for HearUSA to raise capital by selling stock or to pay for acquisitions using stock |
| In addition, HearUSA employees hold a significant number of options to purchase shares, many of which are presently exercisable |
| Employees may exercise their options and sell shares soon after such options become exercisable, particularly if they need to raise funds to pay for the exercise of such options or to satisfy tax liabilities that they may incur in connection with exercising their options |
| Because of the HearUSA rights agreement and the related rights plan for the exchangeable shares, a third party may be discouraged from making a takeover offer which could be beneficial to HearUSA and its stockholders |
| HearUSA has entered into a rights agreement with The Bank of New York, as rights agent |
| issued in connection with the acquisition of Helix |
| The rights agreements contain provisions that could delay or prevent a third party from acquiring HearUSA or replacing members of the HearUSA board of directors, even if the acquisition or the replacements would be beneficial to HearUSA stockholders |
| The rights agreements could also result in reducing the price that certain investors might be willing to pay for shares of the common stock of HearUSA and making the market price lower than it would be without the rights agreement |
| Because HearUSA stockholders do not receive dividends, stockholders must rely on stock appreciation for any return on their investment in HearUSA We have never declared or paid cash dividends on any of our capital stock |
| Payment of dividends is restricted pursuant to our agreement with Siemens |
| We currently intend to retain any earnings for future growth and, therefore, do not anticipate paying cash dividends in the future |
| As a result, only appreciation of the price of HearUSA common stock will provide a return to investors who purchase or acquire common stock |
| Other Risks Relating to the Business of HearUSA We may not be able to access funds under our credit facility with Siemens if we cannot maintain compliance with the restrictive covenants contained therein and in our supply agreement with Siemens |
| On February 10, 2006, HearUSA and Siemens Hearing Instruments Inc |
| entered into an amended and restated credit agreement pursuant to which HearUSA obtained a dlra26 million secured credit facility from Siemens, replacing the 2001 credit facility extended to the Company by Siemens |
| As of December 31, 2005, an aggregate of dlra23dtta1 million in loans was outstanding under the credit facility |
| To continue to access the credit facility, we are required to comply with the terms of the amended credit facility, including compliance with restrictive covenants |
| There can be no assurance that we will be able to comply with these restrictive covenants in the future and, accordingly, may be unable to access the funds provided under the credit facility |
| If we are unable to comply with these restrictive covenants, we may be found in default by Siemens and face other penalties under the credit agreement |
| In addition, we have entered into an amended and restated supply agreement with Siemens, which imposes certain purchase requirements on us |
| If we fail to comply with the supply agreement, Siemens may declare us in default of the credit agreement and all loans would be immediately due and payable |
| 14 _________________________________________________________________ We may not be able to obtain additional capital on reasonable terms, or at all, to fund our operations |
| If capital requirements vary from those currently planned or losses are greater than expected, HearUSA may require additional financing |
| If additional funds are raised through the issuance of convertible debt or equity securities, the percentage ownership of existing stockholders may be diluted, the securities issued may have rights and preferences senior to those of stockholders, and the terms of the securities may impose restrictions on operations |
| If adequate funds are not available on reasonable terms, or at all, we will be unable to take advantage of future opportunities to develop or enhance our business or respond to competitive pressures and possibly even to remain in business |
| Future acquisitions or investments could negatively affect our operations and financial results or dilute the ownership percentage of our stockholders |
| We have initiated a strategic acquisition program |
| We may have to devote substantial time and resources in order to complete potential acquisitions |
| We may not identify or complete acquisitions in a timely manner, on a cost-effective basis, or at all |
| Acquired operations may not be effectively integrated into our operations and may fail |
| In the event of any future acquisitions, HearUSA could: • issue additional stock that would further dilute our current stockholders’ percentage ownership; • incur debt; • assume unknown or contingent liabilities; or • experience negative effects on reported operating results from acquisition-related charges and amortization of acquired technology, goodwill and other intangibles |
| These transactions involve numerous risks that could harm operating results and cause the price of HearUSA common stock price to decline, including: • potential loss of key employees of acquired organizations; • problems integrating the acquired business, including its information systems and personnel; • unanticipated costs that may harm operating results; • diversion of management’s attention from business concerns; and • adverse effects on existing business relationships with customers |
| Any of these risks could harm the business and operating results of HearUSA Increased exposure to currency fluctuations could have adverse effects on our reported earnings |
| Most of HearUSA’s revenues and expenses are denominated in US dollars |
| Some of our revenues and expenses are denominated in Canadian dollars and, therefore, we are exposed to fluctuations in the Canadian dollar |
| As a result, our earnings will be affected by increases or decreases in the Canadian dollar |
| Increases in the value of the Canadian dollar versus the US dollar would tend to increase reported earnings (or reduce losses) in US dollar terms, and decreases in the value of the Canadian dollar versus the US dollar would tend to reduce reported earnings (or increase losses) |