##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 28, 2009
 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 001-11655
 HearUSA, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2748248(State of Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code (561) 478-8770
 Former Name, Former Address and Former Fiscal Year,
 if Changed Since Last Report
 Indicate by check þ 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 þ No o
 Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, and accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange act. (Check one):
 Large accelerated filero
    
    Accelerated filero
    
    Non-accelerated filero
    
    Smaller reporting Companyþ
 Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
 On May 7, 2009, 44,339,819 shares of the Registrants Common Stock and 497,145 exchangeable shares
of HEARx Canada, Inc. were outstanding.




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##### 



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets
March 28, 2009 and December 27, 2008
    
    
    3Consolidated Statements of Operations
Three months ended March 28, 2009 and March 29, 2008
    
    
    4Consolidated Statements of Cash Flows
Three months ended March 28, 2009 and March 29, 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    34Signatures
    
    
    35Exhibit 31.1Exhibit 31.2Exhibit 32




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Part I  Financial Information
 
 Item 1. Financial Statements
 HearUSA, Inc.
 
 Consolidated Balance Sheets
  March 28,
    
    
    December 27,2009
    
    
    2008(Dollars in thousands,
except for par values)ASSETS (Notes 3 and 9)Current assetsCash and cash equivalents
    
    $
    3,084
    
    
    $
    3,553Accounts and notes receivable, less allowance for
doubtful accounts of $552 and $506
    
    
    7,050
    
    
    
    7,371Inventories
    
    
    1,669
    
    
    
    1,682Prepaid expenses and other
    
    
    893
    
    
    
    502Total current assets
    
    
    12,696
    
    
    
    13,108Property and equipment, net (Note 2)
    
    
    5,140
    
    
    
    4,876Goodwill (Note 2)
    
    
    67,869
    
    
    
    65,953Intangible assets, net (Note 2)
    
    
    15,673
    
    
    
    15,630Deposits and other
    
    
    838
    
    
    
    810Restricted cash and cash equivalents
    
    
    224
    
    
    
    224Total Assets
    
    $
    102,440
    
    
    $
    100,601LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    8,269
    
    
    $
    5,011Accrued expenses
    
    
    2,611
    
    
    
    3,208Accrued salaries and other compensation
    
    
    3,429
    
    
    
    3,713Current maturities of long-term debt
    
    
    7,214
    
    
    
    6,915Dividends payable
    
    
    35
    
    
    
    34Total current liabilities
    
    
    21,558
    
    
    
    18,881Long-term debt (Notes 3 and 6)
    
    
    48,474
    
    
    
    49,099Deferred income taxes
    
    
    7,519
    
    
    
    7,284Total long-term liabilities
    
    
    55,993
    
    
    
    56,383Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity (Note 7)Preferred stock (aggregate liquidation
preference $2,330, $1 par, 7,500,000 shares
authorized)Series H Junior Participating (none outstanding)
    
    
    
    
    
    
    Series J (233 shares outstanding)
    
    
    
    
    
    
    Total preferred stock
    
    
    
    
    
    
    Common stock: $.10 par; 75,000,000 shares
authorized 44,861,290 and 44,828,384 shares
issued
    
    
    4,486
    
    
    
    4,483Additional paid-in capital
    
    
    137,108
    
    
    
    136,924Accumulated deficit
    
    
    (116,880
    )
    
    
    (116,360
    )Accumulated other comprehensive income
    
    
    1,019
    
    
    
    1,249Treasury stock, at cost: 523,662 common shares
    
    
    (2,485
    )
    
    
    (2,485
    )Noncontrolling interest
    
    
    1,641
    
    
    
    1,526Total
Stockholders Equity
    
    
    24,889
    
    
    
    25,337Total Liabilities and Stockholders Equity
    
    $
    102,440
    
    
    $
    100,601
 See accompanying notes to consolidated financial statements
  3




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HearUSA, Inc
 
 Consolidated Statements of Operations
 (unaudited)
 March 28,
    
    
    March 29,2009
    
    
    2008(Dollars in thousands,
except per share amounts)Net revenuesHearing aids and other products
    
    $
    24,128
    
    
    $
    26,680Services
    
    
    1,947
    
    
    
    2,008Total net revenues
    
    
    26,075
    
    
    
    28,688Operating costs and expensesHearing aids and other products (Note 3)
    
    
    6,623
    
    
    
    7,588Services
    
    
    545
    
    
    
    545Total cost of products sold and services excluding depreciation and amortization
    
    
    7,168
    
    
    
    8,133Center operating expenses
    
    
    12,950
    
    
    
    14,023General and administrative expenses (Note 7)
    
    
    4,077
    
    
    
    4,759Depreciation and amortization
    
    
    648
    
    
    
    662Total operating costs and expenses
    
    
    24,843
    
    
    
    27,577Income from operations
    
    
    1,232
    
    
    
    1,111Non-operating income (expenses)Interest income
    
    
    
    
    
    
    16Interest expense (Notes 2, 3 and 4)
    
    
    (1,351
    )
    
    
    (1,241
    )Loss from continuing operations before income tax expense
    
    
    (119
    )
    
    
    (114
    )Income tax expense
    
    
    (251
    )
    
    
    (200
    )Net loss
    
    
    (370
    )
    
    
    (314
    )Net income
attributable to noncontrolling interest
    
    
    (115
    )
    
    
    (336
    )Net loss  controlling interest
    
    
    (485
    )
    
    
    (650
    )Dividends on preferred stock
    
    
    (35
    )
    
    
    (35
    )Net loss  controlling interest applicable to common stockholders
    
    $
    (520
    )
    
    $
    (685
    )Net loss  controlling interest applicable to common stockholders per common
share  basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted average number of shares of common stock outstanding  basic and
diluted
    
    
    44,818
    
    
    
    38,588
 See accompanying notes to consolidated financial statements
  4




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HearUSA, Inc.
 
 Consolidated Statements of Cash Flows
 Three Months Ended March 28, 2009 and March 29, 2008
  March 28,
    
    
    March 29,2009
    
    
    2008(Dollars in thousands)Cash flows from operating activitiesNet loss
    
    $
    (370
    )
    
    $
    (314
    )Adjustments to reconcile net loss to net cash provided by operating activities:Debt discount amortization
    
    
    
    
    
    
    105Depreciation and amortization
    
    
    648
    
    
    
    662Employee and director stock-based compensation
    
    
    190
    
    
    
    222Provision for doubtful accounts
    
    
    147
    
    
    
    120Deferred income tax expense
    
    
    251
    
    
    
    200Interest on discounted notes payable
    
    
    93
    
    
    
    134Principal payments on long-term debt made through rebate credits
    
    
    (835
    )
    
    
    (991
    )Other
    
    
    2
    
    
    
    67(Increase) decrease in:Accounts and notes receivable
    
    
    93
    
    
    
    (885
    )Inventories
    
    
    11
    
    
    
    (73
    )Prepaid expenses and other
    
    
    (226
    )
    
    
    (224
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    2,694
    
    
    
    3,119Accrued salaries and other compensation
    
    
    (280
    )
    
    
    446Net cash provided by operating activities
    
    
    2,418
    
    
    
    2,588Cash flows from investing activitiesPurchase of property and equipment
    
    
    (339
    )
    
    
    (311
    )Business acquisitions
    
    
    (1,341
    )
    
    
    (683
    )Net cash used in investing activities
    
    
    (1,680
    )
    
    
    (994
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    
    
    
    
    779Principal payments on long-term debt
    
    
    (1,210
    )
    
    
    (1,306
    )Principal payments on subordinated notes
    
    
    
    
    
    
    (440
    )Proceeds from the exercise of employee options
    
    
    
    
    
    
    129Dividends paid on preferred stock
    
    
    (35
    )
    
    
    (35
    )Dividends on
noncontrolling interest
    
    
    
    
    
    
    (591
    )Net cash used in financing activities
    
    
    (1,245
    )
    
    
    (1,464
    )Effects of exchange rate changes on cash
    
    
    38
    
    
    
    98Net (decrease) increase in cash and cash equivalents
    
    
    (469
    )
    
    
    228Cash and cash equivalents at the beginning of period
    
    
    3,553
    
    
    
    3,369Cash and cash equivalents at the end of period
    
    $
    3,084
    
    
    $
    3,597Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    156
    
    
    $
    270Supplemental schedule of non-cash investing and financing activities:Principal payments on long-term debt made through rebate credits
    
    $
    (835
    )
    
    $
    (991
    )Issuance of notes payable in exchange for business acquisitions
    
    $
    1,217
    
    
    $
    472Issuance of capital lease in exchange for property and equipment
    
    $
    254
    
    
    $
    Conversion of accounts payable to notes payable
    
    $
    
    
    
    $
    1,543
 See accompanying notes to consolidated financial statements
  5




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1. Description of the Company and Summary of Significant Accounting Policies
 The Company
  Basis of Consolidation
    Net income (loss) applicable to common stockholders per common share
   6




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Comprehensive income (loss)
   Three Months EndedMarch 28,
    
    
    March 29,Dollars in thousands
    
    2009
    
    
    2008Net loss for the period
    
    $
    (370
    )
    
    $
    (314
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (230
    )
    
    
    (11
    )Comprehensive loss for the period
    
    $
    (600
    )
    
    $
    (325
    )
 2.
Business Acquisitions and goodwill impairment
    7




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
    
    The Companys stock is thinly traded;
    
    The decline in the Companys stock price during 2008 is not directly correlated to a
change in the overall operating performance of the Company; and
    
    Previously unseen pressures are in place given the global financial and economic crisis.
  8




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3. Long-term Debt
  March 28,
    
    
    December 27,Dollars in thousands
    
    2009
    
    
    2008Notes payable to SiemensTranche B
    
    $
    5,374
    
    
    $
    5,552Tranche C
    
    
    40,454
    
    
    
    41,109Total notes payable to Siemens
    
    
    45,828
    
    
    
    46,661Notes payable from business acquisitions and other
    
    
    9,860
    
    
    
    9,35355,688
    
    
    
    56,014Less current maturities
    
    
    7,214
    
    
    
    6,915$
    48,474
    
    
    $
    49,099
   2010
    
    $
    7,2142011
    
    
    5,5922012
    
    
    4,6352013
    
    
    3,0072014 and thereafter
    
    
    35,240
 Notes payable to Siemens
   9




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
    
    The previous amendment of the Credit Agreement called for cash
payments of $7.2 million in December 2008 on Tranches D and E and
quarterly principal payments of $500,000 on Tranche C. The Amendment
transferred the amounts due under Tranches D and E to Tranche C.
Providing the Company meets the purchase requirements in the Supply
Agreement, all repayments on both Tranches can now be
self-liquidating with the rebates.
    
    Approximately $3.8 million of outstanding debt under the supply
agreement was converted into 6.4 million shares of the Companys
Common Stock at a conversion price of $0.60 per share. The equity conversion
provisions of the credit agreement were eliminated from the Credit
Agreement.
    
    An additional $6.2 million of debt under the supply agreement was
converted into long-term indebtedness under Tranche C.
    
    The maturity date of the credit and supply agreement was extended an
additional two years, to February, 2015.
    
    Siemens was granted a right of first refusal for all new issuances of
equity (except issuances pursuant to employee compensation plans and
pursuant to warrants outstanding on the date of the Amendments) for a
period of 18 months and thereafter a more limited right of first
refusal and preemptive rights for the life of the investor rights
agreement.
    
    The Company will invite a representative of Siemens to attend meetings
of the Board in a nonvoting observer capacity.
 Financing and rebate arrangement
    10




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Rebate credits on product sales
    Three months endedMarch 28,
    
    
    March 29,Dollars in thousands
    
    2009
    
    
    2008Portion applied against quarterly principal payments
    
    $
    835
    
    
    $
    991Portion applied against quarterly interest payments
    
    
    1,085
    
    
    
    698$
    1,920
    
    
    $
    1,689
 Investor and other rights arrangement
    11




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Notes payable from business acquisitions and other
  4. Subordinated Notes and Warrants
   5. Noncontrolling Interest
    Amount(thousands)Balance at December 28, 2008
    
    $
    1,526Joint venture earnings
    
    
    115Dividends to joint venture partners
    
    
    Balance at March 28, 2009
    
    $
    1,641
  12




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6. 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.
    7. Stock-based Compensation
   Three Months EndedMarch 28, 2009Risk free interest rate
    
    
    2.78
    %Expected life in years
    
    
    10Expected volatility
    
    
    85
    %Weighted average exercise price
    
    $
    0.53
    13




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Stock-based payment award activity
  WeightedAverageRemainingWeighted
    
    
    ContractualAverage
    
    
    Term
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    (in years)
    
    
    Intrinsic ValueOutstanding at December 27, 2008
    
    
    5,356
    
    
    $
    1.30
    
    
    
    
    
    
    
    Granted
    
    
    800
    
    
    
    0.53Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/expired/cancelled
    
    
    (111
    )
    
    
    1.62
    
    
    
    
    
    
    
    Outstanding at March 28, 2009
    
    
    6,045
    
    
    $
    1.19
    
    
    
    6.43
    
    
    $
    108Exercisable at March 28, 2009
    
    
    3,693
    
    
    $
    1.17
    
    
    
    4.62
    
    
    $
    108
   WeightedAverageGrant-DateShares
    
    
    Fair(in thousands)
    
    
    ValueNon-vested at December 27, 2008
    
    
    1,552
    
    
    $
    1.59Granted
    
    
    800
    
    
    $
    0.53Vested
    
    
    
    
    
    
    Forfeited unvested
    
    
    
    
    
    
    Non-vested at March 28, 2009
    
    
    2,352
    
    
    $
    1.23
 Restricted stock units
   14




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Service-based
    
    
    Performance-BasedRestricted Stock Units (1)
    
    
    Restricted Stock Units (1)Outstanding at December 27, 2008
    
    
    136,500


    
    230,333Awarded
    
    
    


    
    Vested
    
    
    (45,500
    )

    
    Forfeited
    
    



    
    (230,333
    )Outstanding at March 28, 2009
    
    
    91,000


    
    
 (1)
    
    Each stock unit represents the fair market value of one share of common stock.  8. Segments
   15




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Dollars in thousands
    
    Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalHearing aids and
other products revenues3 months ended March 28, 2009
    
    $
    24,111
    
    
    $
    17
    
    
    
    
    
    
    
    
    
    
    $
    24,1283 months ended March 29, 2008
    
    $
    26,651
    
    
    $
    29
    
    
    
    
    
    
    
    
    
    
    $
    26,680Service revenues3 months ended March 28, 2009
    
    $
    1,352
    
    
    $
    
    
    
    $
    595
    
    
    
    
    
    
    $
    1,9473 months ended March 29, 2008
    
    $
    1,383
    
    
    $
    
    
    
    $
    625
    
    
    
    
    
    
    $
    2,008Income (loss) from operations3 months ended March 28, 2009
    
    $
    5,160
    
    
    $
    (28
    )
    
    $
    315
    
    
    $
    (4,215
    )
    
    $
    1,2323 months ended March 29, 2008
    
    $
    5,519
    
    
    $
    (50
    )
    
    $
    514
    
    
    $
    (4,872
    )
    
    $
    1,1113 months ended March 28, 2009Depreciation and
amortization
    
    $
    510
    
    
    
    
    
    
    $
    
    
    
    $
    138
    
    
    $
    648Total assets
    
    $
    86,209
    
    
    
    
    
    
    $
    935
    
    
    $
    15,296
    
    
    $
    102,440Capital expenditures
    
    $
    339
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    3393 months ended March 29, 2008Depreciation and
amortization
    
    $
    549
    
    
    
    
    
    
    $
    
    
    
    $
    113
    
    
    $
    662Total assets
    
    $
    82,430
    
    
    
    
    
    
    $
    933
    
    
    $
    18,823
    
    
    $
    102,186Capital expenditures
    
    $
    276
    
    
    
    
    
    
    
    
    
    
    $
    35
    
    
    $
    311
  Three months endedMarch 28,
    
    
    March 29,2009
    
    
    2008Hearing aid revenues
    
    
    95.0
    %
    
    
    95.4
    %Other products revenues
    
    
    5.0
    %
    
    
    4.6
    %
  Three months endedMarch 28,
    
    
    March 29,2009
    
    
    2008Hearing aid repairs
    
    
    46.5
    %
    
    
    44.1
    %Testing and other income
    
    
    53.5
    %
    
    
    55.9
    %
  Three months endedMarch 28,
    
    
    March 29,Dollars in thousands
    
    2009
    
    
    2008General and administrative expense
    
    $
    4,077
    
    
    $
    4,759Corporate depreciation and amortization
    
    
    138
    
    
    
    113Corporate loss from operations
    
    $
    4,215
    
    
    $
    4,872
  16




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United States
    
    
    Canada
    
    
    United States
    
    
    CanadaDollars in thousands
    
    2009
    
    
    2009
    
    
    2008
    
    
    2008Hearing aid and other products revenues
    
    $
    20,907
    
    
    $
    3,221
    
    
    $
    22,919
    
    
    $
    3,761Service revenues
    
    
    1,815
    
    
    
    132
    
    
    
    1,841
    
    
    
    167Long-lived assets
    
    
    76,462
    
    
    
    13,282
    
    
    
    68,740
    
    
    
    16,293Total assets
    
    
    86,502
    
    
    
    15,938
    
    
    
    82,573
    
    
    
    19,613
 9. Subsequent event
        17




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March 28,2009Current Assets
    
    $
    2,571Property and equipment
    
    
    455Goodwill
    
    
    16,747Intangible assets, net
    
    
    2,685Current liabilities
    
    
    108Deferred income taxes
    
    
    1,126
 10. Liquidity
     18




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RECENT ACCOUNTING PRONOUNCEMENTS
     19




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Forward Looking Statements
 This Form 10-Q and, in particular, this managements discussion and analysis contain or incorporate
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 of 1934. These statements include those relating to the
Companys belief that its current cash and cash equivalents and cash flow from operations at
current net revenue levels will be sufficient to support the Companys operational needs through
the next twelve months; expectation that its cost saving measures will
achieve a total cost savings of more than $8.0 million on an
annualized basis; and its expectation concerning the proceeds from the
Canadian sale transaction. 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. The statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict, including those risks
described in this report and in the Companys annual report on Form 10-K for fiscal 2008 filed with the Securities and
Exchange Commission.
 RECENT DEVELOPMENTS
        
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 RESULTS OF OPERATIONS
 For the three months ended March 28, 2009 compared to the three months ended March 29, 2008
 Revenues
 Dollars in thousands
    
    2009
    
    
    2008
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    24,128
    
    
    $
    26,680
    
    
    $
    (2,552
    )
    
    
    (9.6
    )%Services
    
    
    1,947
    
    
    
    2,008
    
    
    
    (61
    )
    
    
    (3.0
    )%Total net revenues
    
    $
    26,075
    
    
    $
    28,688
    
    
    $
    (2,613
    )
    
    
    (9.1
    )%
 2009
    
    
    2008
    
    
    Change
    
    
    % ChangeRevenues from centers acquired in 2008 (1)
    
    $
    1,514
    
    
    $
    
    
    
    $
    1,514
    
    
    
    5.3
    %Revenues from centers acquired in 2009
    
    
    235
    
    
    
    
    
    
    
    235
    
    
    
    0.8
    %Revenues from acquired centers
    
    
    1,749
    
    
    
    
    
    
    
    1,749
    
    
    
    6.1
    %Revenues from comparable centers (2)
    
    
    24,326
    
    
    
    28,688
    
    
    
    (4,362
    )
    
    
    (15.2
    )%Total net revenues
    
    $
    26,075
    
    
    $
    28,688
    
    
    $
    (2,613
    )
    
    
    (9.1
    )%
 (1)
    
    Represents that portion of revenues from the 2008 acquired centers recognized for those
acquisitions that had less than one full year of revenues recorded in 2008 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.   20




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##### Table of Contents



Cost of Products Sold and Services
 Dollars in thousands
    
    2009
    
    
    2008
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    6,623
    
    
    $
    7,588
    
    
    $
    (965
    )
    
    
    (12.7
    )%Services
    
    
    545
    
    
    
    545
    
    
    
    
    
    
    
    0.0
    %Total cost of products sold and services
    
    $
    7,168
    
    
    $
    8,133
    
    
    $
    (965
    )
    
    
    (11.9
    )%Percent of total net revenues
    
    
    27.5
    %
    
    
    28.3
    %
    
    
    (0.9
    )%
    
    
    (3.0
    )%
  2009
    
    
    2008
    
    
    Change
    
    
    %Base required payments on Tranche C forgiven
    
    $
    656
    
    
    $
    818
    
    
    $
    (162
    )
    
    
    (19.8
    )%Required payments of $65 per Siemens unit
from acquired centers on Tranche B forgiven
    
    
    179
    
    
    
    173
    
    
    
    6
    
    
    
    3.5
    %Interest on Tranches B and C forgiven
    
    
    1,085
    
    
    
    698
    
    
    
    387
    
    
    
    55.4
    %Total rebate credits
    
    $
    1,920
    
    
    $
    1,689
    
    
    $
    231
    
    
    
    13.7
    %Percent of total net revenues
    
    
    7.4
    %
    
    
    5.9
    %
    
    
    1.5
    %
    
    
    25.4
    %
   Expenses
 Dollars in thousands
    
    2009
    
    
    2008
    
    
    Change
    
    
    %Center operating expenses
    
    $
    12,950
    
    
    $
    14,023
    
    
    $
    (1,073
    )
    
    
    (7.7
    )%Percent of total net revenues
    
    
    49.9
    %
    
    
    48.9
    %
    
    
    1.0
    %
    
    
    2.0
    %General and administrative expenses
    
    $
    4,077
    
    
    $
    4,759
    
    
    $
    (682
    )
    
    
    (14.3
    )%Percent of total net revenues
    
    
    15.7
    %
    
    
    16.6
    %
    
    
    (0.9
    )%
    
    
    (5.4
    )%Depreciation and amortization
    
    $
    648
    
    
    $
    662
    
    
    $
    (14
    )
    
    
    (2.1
    )%Percent of total net revenues
    
    
    2.5
    %
    
    
    2.3
    %
    
    
    0.2
    %
    
    
    8.7
    %
      21




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##### Table of Contents



Interest Expense
 Dollars in thousands
    
    2009
    
    
    2008
    
    
    Change
    
    
    %Notes payable from business acquisitions and others (1)
    
    $
    266
    
    
    $
    242
    
    
    $
    24
    
    
    
    9.9
    %Siemens Tranches B and C  interest forgiven (2)
    
    
    1,085
    
    
    
    698
    
    
    
    387
    
    
    
    55.4
    %Siemens Tranche D
    
    
    
    
    
    
    180
    
    
    
    (180
    )
    
    
    (100.0
    )%2005 Subordinated Notes (3)
    
    
    
    
    
    
    121
    
    
    
    (121
    )
    
    
    (100.0
    )%Total interest expense
    
    $
    1,351
    
    
    $
    1,241
    
    
    $
    110
    
    
    
    8.9
    %
 2009
    
    
    2008
    
    
    Change
    
    
    %Total cash interest expense (4)
    
    $
    173
    
    
    $
    340
    
    
    $
    (167
    )
    
    
    (49.1
    )%Total non-cash interest expense (5)
    
    
    1,178
    
    
    
    901
    
    
    
    277
    
    
    
    30.7
    %Total interest expense
    
    $
    1,351
    
    
    $
    1,241
    
    
    $
    110
    
    
    
    8.9
    %
 (1)
    
    Includes $93,000 and $134,000 in the first quarter of 2009 and 2008, 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 3  Long-term Debt, Notes to Consolidated
Financial Statements included herein).(2)
    
    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 in reduction of
the cost of products sold (see Note 3  Long-term Debt, Notes to Consolidated Financial
Statements included herein and Liquidity and Capital Resources, below).(3)
    
    Includes $69,000 in 2008 of non-cash debt discount amortization (see Note 4  Subordinated
Notes and Warrant, Notes to Consolidated Financial Statements included herein).(4)
    
    Represents the sum of the cash interest portion paid on the notes payable for business
acquisitions and others and the cash interest paid to Siemens on the Siemens Trance D loans(5)
    
    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, Tranches B and C and 2005 Subordinated Notes related to the debt discount
amortization.  Income Taxes
     22




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##### Table of Contents



Net
Income attributable to noncontrolling interest
  LIQUIDITY AND CAPITAL RESOURCES
 Siemens Transaction
    
    
    The previous amendment of the Credit Agreement called for cash
payments of $7.2 million in December 2008 on Tranches D and E and
quarterly principal payments of $500,000 on Tranche C. The Amendment
transferred the amounts due under Tranches D and E to Tranche C.
Providing the Company meets the purchase requirements in the Supply
Agreement, all repayments on both Tranches can now be
self-liquidating with the rebates.
    
    Approximately $3.8 million of outstanding debt under the supply
agreement was converted into 6.4 million shares of the Companys
Common Stock at a conversion price of $0.60 per share. The equity conversion
provisions of the credit agreement were eliminated from the Credit
Agreement.
    
    An additional $6.2 million of debt under the supply agreement was
converted into long-term indebtedness under Tranche C.
    
    The maturity date of the credit and supply agreement was extended an
additional two years, to February, 2015.
    
    Siemens was granted a right of first refusal for all new issuances of
equity (except issuances pursuant to employee compensation plans and
pursuant to warrants outstanding on the date of the Amendments) for a
period of 18 months and thereafter a more limited right of first
refusal and preemptive rights for the life of the investor rights
agreement.
    
    The Company will invite a representative of Siemens to attend meetings
of the Board in a nonvoting observer capacity.
  23




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##### Table of Contents



Financing and rebate arrangement
   Rebate credits on product sales
    Calculation of Pro forma Rebates to HearUSA when at least 90% ofUnits
Sold in the U.S. are from Siemens (1)Quarterly
Siemens Unit Sales Compared to Prior Years Comparable Quarters90% but < 95%
    
    
    95% to 100%
    
    
    > 100% < 125%
    
    
    125% and >Tranche B Rebate (2)
    
$
    65/ unit
    
    
$
    65/ unit
    
    
$
    65/ unit
    
    
$
    65/ unitPlus
    
    

    Plus
    
    

    Plus
    
    

    PlusTranche C Rebate
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    500,000Additional Volume Rebate
    
    
    
    
    
    
    156,250
    
    
    
    312,500
    
    
    
    468,750Interest Forgiveness Rebate (3)
    
    
    1,187,500
    
    
    
    1,187,500
    
    
    
    1,187,500
    
    
    
    1,187,500$
    1,687,500
    
    
    $
    1,843,750
    
    
    $
    2,000,000
    
    
    $
    2,156,250
 (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 $50 million portion of the line of credit is fully utilized  24




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##### Table of Contents



Investor and other rights arrangement
   Working Capital
   Cash Flows
     25




---



##### Table of Contents



Contractual Obligations
  Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    years$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Contractual obligationsLong-term debt (1 and 3)
    
    
    56,217
    
    
    
    7,445
    
    
    
    10,525
    
    
    
    5,546
    
    
    
    32,701Subtotal of obligations recorded on balance sheet
    
    
    56,217
    
    
    
    7,445
    
    
    
    10,525
    
    
    
    5,546
    
    
    
    32,701Interest to be paid on long-term debt (2 and 3)
    
    
    23,192
    
    
    
    4,788
    
    
    
    8,158
    
    
    
    6,829
    
    
    
    3,417Operating leases
    
    
    18,946
    
    
    
    6,672
    
    
    
    8,599
    
    
    
    2,826
    
    
    
    849Employment agreements
    
    
    4,135
    
    
    
    2,307
    
    
    
    1,734
    
    
    
    94
    
    
    
    Purchase obligations (4)
    
    
    3,711
    
    
    
    3,306
    
    
    
    405
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    106,201
    
    
    
    24,518
    
    
    
    29,421
    
    
    
    15,295
    
    
    
    36,967
 (1)
    
    Approximately $45.8 million can be repaid through rebate credits from Siemens, including $2.7
million in less than 1 year and $5.4 million in years 1-3, $5.0 million in years 4-5 and $32.7
million in more than 5 years.(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 $4.3 million in less than 1 year and $7.8 million in years 1-3, $6.8 million in
years 4-5 and $3.4 million in more than 5 years. Interest repaid through preferred pricing
reductions was $1.1 million in the first quarter of 2009. (See Note 3  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 3  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 and the contractual commitment to AARP for
public marketing funds for the AARP Health Care Options General Program, including $2.7
million in less than 1 year.  26




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  Business acquisitions and goodwill
      27




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##### Table of Contents




    
    The Companys stock is thinly traded;
 
    
    The decline in the Companys stock price during 2008 is not directly correlated to a
change in the overall operating performance of the Company; and
 
    
    Previously unseen pressures are in place given the global financial and economic crisis.
   Revenue recognition
  
   28




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##### Table of Contents



Allowance for doubtful accounts
   Sales returns
   29




---



##### Table of Contents



Vendor rebates
  Marketing allowances
  Impairment of long-lived assets
  Stock-based compensation
 Share-Based Payment
  Income taxes
     30




---



##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
   
  31




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure About Market Risk
  Fixed Rate
    
    
    Variable Rate9.5%
    
    
    5% to 16%Due February 2015
    
    
    Other
    
    
    Total$
    
    
    $
    
    
    $(000s)
    
    
    (000s)
    
    
    (000s)2009
    
    
    (2,535
    )
    
    
    (3,451
    )
    
    
    (5,986
    )2010
    
    
    (2,707
    )
    
    
    (3,285
    )
    
    
    (5,992
    )2011
    
    
    (2,683
    )
    
    
    (2,416
    )
    
    
    (5,099
    )2012
    
    
    (2,606
    )
    
    
    (554
    )
    
    
    (3,160
    )2013
    
    
    (2,496
    )
    
    
    (154
    )
    
    
    (2,650
    )Thereafter
    
    
    (32,801
    )
    
    
    
    
    
    
    (32,801
    )Total
    
    
    (45,828
    )
    
    
    (9,860
    )
    
    
    (55,688
    )Estimated fair value
    
    
    (45,828
    )
    
    
    (9,860
    )
    
    
    (55,688
    )
  32




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##### Table of Contents



Item 4. Controls and Procedures
    33




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##### Table of Contents



Part II Other Information
 
 Item 6. Exhibits
 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).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)).31.1
    
    
    CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  34




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##### Table of Contents



SIGNATURES
  HearUSA Inc.(Registrant)May 12, 2009/s/ Stephen J. HansbroughStephen J. HansbroughChairman and Chief Executive OfficerHearUSA, Inc./s/ Francisco PuñalFrancisco PuñalSenior Vice President and Chief Financial OfficerHearUSA, Inc.
  35




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    
    CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    CEO and CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  36