##### 



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 September 29, 2007
 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 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 1250 Northpoint Parkway, West Palm Beach, Florida
    
    33407(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code (561) 478-8770
 
 Former Name, Former Address and Former Fiscal Year,
 if Changed Since Last Report
 Indicate by check 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 is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and non-accelerated
filer in Rule 12b-2 of the Exchange act. (Check one):
 Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ
 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 November 5, 2007, 37,794,457 shares of the Registrants Common Stock and 603,461 exchangeable
shares of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets
September 29, 2007 and December 30, 2006
    
    
    3Consolidated Statements of Operations
Nine months ended September 29, 2007 and September 30, 2006
    
    
    4Consolidated Statements of Operations
Three months ended September 29, 2007 and September 30, 2006
    
    
    5Consolidated Statements of Cash Flows
Nine months ended September 29, 2007 and September 30, 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    33Signatures
    
    
    35
 2




---



##### 



Part I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
Consolidated Balance Sheets
(unaudited)
 September 29,
    
    
    December 30,ASSETS (Note 3)
    
    2007
    
    
    2006(Dollars in thousands)Current assetsCash and cash equivalents
    
    $
    3,526
    
    
    $
    2,326Accounts and notes receivable, less allowance for
doubtful accounts of $505,497 and $434,098
    
    
    8,851
    
    
    
    7,591Inventories
    
    
    2,209
    
    
    
    2,371Prepaid expenses and other
    
    
    986
    
    
    
    1,400Deferred tax asset
    
    
    78
    
    
    
    67Total current assets
    
    
    15,650
    
    
    
    13,755Property and equipment, net (Note 2)
    
    
    4,176
    
    
    
    3,878Goodwill (Note 2)
    
    
    57,465
    
    
    
    50,970Intangible assets, net (Note 2)
    
    
    15,766
    
    
    
    13,592Deposits and other
    
    
    705
    
    
    
    876Restricted cash and cash equivalents
    
    
    209
    
    
    
    205Total Assets
    
    $
    93,971
    
    
    $
    83,276LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    11,016
    
    
    $
    10,463Accrued expenses
    
    
    2,929
    
    
    
    2,509Accrued compensation
    
    
    3,069
    
    
    
    2,826Current maturities of long-term debt
    
    
    6,471
    
    
    
    8,391Current maturities of convertible subordinated notes, net of debt discount of
$1,263,003 in 2006
    
    
    
    
    
    
    2,487Current maturities of subordinated notes, net of debt discount of $134,169 and $452,228
    
    
    1,845
    
    
    
    1,308Dividends payable
    
    
    34
    
    
    
    34Minority interest in net income of consolidated joint venture, currently payable
    
    
    820
    
    
    
    633Total current liabilities
    
    
    26,184
    
    
    
    28,651Long-term debt (Notes 2 and 3)
    
    
    37,252
    
    
    
    28,599Deferred income taxes
    
    
    5,948
    
    
    
    5,234Convertible subordinated notes, net of debt discount of $217,923 in 2006 (Note 4)
    
    
    
    
    
    
    2,282Subordinated notes, net of debt discount of $60,123 in 2006 (Note 5)
    
    
    
    
    
    
    1,480Warrant liability (Note 5)
    
    
    
    
    
    
    110Total long-term liabilities
    
    
    43,200
    
    
    
    37,705Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity (Note 6 and 7)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: $.10 par; 75,000,000 shares authorized
37,870,451 and 32,029,750 shares issued
    
    
    3,787
    
    
    
    3,203Stock subscription
    
    
    (412
    )
    
    
    (412
    )Additional paid-in capital
    
    
    132,499
    
    
    
    123,972Accumulated deficit
    
    
    (112,977
    )
    
    
    (109,521
    )Accumulated other comprehensive income
    
    
    4,175
    
    
    
    2,163Treasury stock, at cost:523,662 common shares
    
    
    (2,485
    )
    
    
    (2,485
    )Total Stockholders Equity
    
    
    24,587
    
    
    
    16,920Total Liabilities and Stockholders Equity
    
    $
    93,971
    
    
    $
    83,276
 See accompanying notes to the consolidated financial statements
 3




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Nine Months Ended September 29, 2007 and September 29, 2006
(unaudited)
 September 29,
    
    
    September 30,2007
    
    
    2006(Dollars in thousands, except pershare amounts)Net revenuesHearing aids and other products
    
    $
    70,107
    
    
    $
    61,554Services
    
    
    5,178
    
    
    
    4,397Total net revenues
    
    
    75,285
    
    
    
    65,951Operating costs and expensesHearing aids and other products (Note 3)
    
    
    18,576
    
    
    
    18,677Services
    
    
    1,531
    
    
    
    1,298Total cost of products sold and services
    
    
    20,107
    
    
    
    19,975Center operating expenses
    
    
    37,316
    
    
    
    30,663General and administrative expenses (Notes 1 and 7)
    
    
    11,306
    
    
    
    10,127Depreciation and amortization
    
    
    1,597
    
    
    
    1,477Total operating costs and expenses
    
    
    70,326
    
    
    
    62,242Income from operations
    
    
    4,959
    
    
    
    3,709Non-operating income (expenses):Gain from insurance proceeds
    
    
    
    
    
    
    203Interest income
    
    
    106
    
    
    
    110Interest expense (Notes 2, 3, 4 and 5)
    
    
    (6,707
    )
    
    
    (4,436
    )Loss before income tax expense and minority interest in income of consolidated
joint venture
    
    
    (1,642
    )
    
    
    (414
    )Income tax expense
    
    
    (634
    )
    
    
    (838
    )Minority interest in income of consolidated joint venture
    
    
    (1,077
    )
    
    
    (384
    )Net loss
    
    
    (3,353
    )
    
    
    (1,636
    )Dividends on preferred stock
    
    
    (103
    )
    
    
    (103
    )Net loss applicable to common stockholders
    
    $
    (3,456
    )
    
    $
    (1,739
    )Net loss applicable to common stockholders per common share  basic and diluted
    
    $
    (0.10
    )
    
    $
    (0.05
    )Weighted average number of shares of common stock outstanding  basic and diluted
    
    
    35,860
    
    
    
    32,212
 See accompanying notes to the consolidated financial statements
 4




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended September 29, 2007 and September 30, 2006
(unaudited)
 September 29,
    
    
    September 30,2007
    
    
    2006(Dollars in thousands, exceptper share amounts)Net revenuesHearing aids and other products
    
    $
    25,050
    
    
    $
    20,519Services
    
    
    1,812
    
    
    
    1,523Total net revenues
    
    
    26,862
    
    
    
    22,042Operating costs and expensesHearing aids and other products (Note 3)
    
    
    6,807
    
    
    
    6,491Services
    
    
    499
    
    
    
    511Total cost of products sold and services
    
    
    7,306
    
    
    
    7,002Center operating expenses
    
    
    12,585
    
    
    
    10,598General and administrative expenses (Notes 1 and 7)
    
    
    3,890
    
    
    
    3,540Depreciation and amortization
    
    
    572
    
    
    
    497Total operating costs and expenses
    
    
    24,353
    
    
    
    21,637Income from operations
    
    
    2,509
    
    
    
    405Non-operating income (expenses):Gain from insurance proceeds
    
    
    
    
    
    
    146Interest income
    
    
    21
    
    
    
    19Interest expense (Notes 2, 3, 4 and 5)
    
    
    (1,330
    )
    
    
    (1,638
    )Income (loss) before income tax expense and minority interest in income of
consolidated joint venture
    
    
    1,200
    
    
    
    (1,068
    )Income tax expense
    
    
    (284
    )
    
    
    (257
    )Minority interest in income of consolidated joint venture
    
    
    (394
    )
    
    
    (322
    )Net income (loss)
    
    
    522
    
    
    
    (1,647
    )Dividends on preferred stock
    
    
    (34
    )
    
    
    (34
    )Net income (loss) applicable to common stockholders
    
    $
    488
    
    
    $
    (1,681
    )Net income (loss) applicable to common stockholders per common share  basic
    
    $
    0.01
    
    
    $
    (0.05
    )Net
income (loss) applicable to common stockholders per common share  diluted
    
    $
    0.01
    
    
    $
    (0.05
    )Weighted average number of shares of common stock outstanding  basic
    
    
    37,950
    
    
    
    32,260Weighted average number of shares of common stock outstanding  diluted
    
    
    46,415
    
    
    
    32,260
 See accompanying notes to the consolidated financial statements
 5




---



##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 29, 2007 and September 30, 2006
(unaudited)
 September 29,
    
    
    September 30,2007
    
    
    2006(Dollars in thousands)Cash flows from operating activitiesNet loss
    
    $
    (3,353
    )
    
    $
    (1,636
    )Adjustments to reconcile net loss to net cash provided by operating activities:Debt discount amortization
    
    
    1,958
    
    
    
    1,978Interest on reduction of warrant exercise price
    
    
    1,371
    
    
    
    Depreciation and amortization
    
    
    1,597
    
    
    
    1,477Interest on Siemens Tranche C
    
    
    
    
    
    
    997Employee stock-based compensation
    
    
    386
    
    
    
    721Provision for doubtful accounts
    
    
    372
    
    
    
    271Deferred income tax expense
    
    
    625
    
    
    
    687Consulting stock-based compensation
    
    
    128
    
    
    
    21Principal payments on long-term debt made through rebate credits
    
    
    (3,521
    )
    
    
    (2,276
    )Minority interest in income of consolidated subsidiary
    
    
    1,077
    
    
    
    384Decrease in fair value of warrant liability
    
    
    
    
    
    
    (250
    )Other
    
    
    (2
    )
    
    
    (Increase) decrease in:Accounts and notes receivable
    
    
    (1,273
    )
    
    
    (998
    )Inventories
    
    
    202
    
    
    
    (1,036
    )Prepaid expenses and other
    
    
    501
    
    
    
    696Increase (decrease) in:Accounts payable and accrued expenses
    
    
    485
    
    
    
    1,770Accrued salaries and other compensation
    
    
    212
    
    
    
    (308
    )Net cash provided by operating activities
    
    
    765
    
    
    
    2,498Cash flows from investing activitiesPurchase of property and equipment
    
    
    (551
    )
    
    
    (1,069
    )Business acquisitions
    
    
    (3,844
    )
    
    
    (6,648
    )Proceeds from redemption of certificates of deposit
    
    
    
    
    
    
    226Net cash used in investing activities
    
    
    (4,395
    )
    
    
    (7,491
    )Cash flows from financing activitiesProceeds from issuance of long-term debt, net of financing cost
    
    
    8,891
    
    
    
    5,208Principal payments on long-term debt
    
    
    (2,728
    )
    
    
    (2,146
    )Principal payments on convertible subordinated notes
    
    
    (784
    )
    
    
    (1,250
    )Principal payments on subordinated notes
    
    
    (1,320
    )
    
    
    (1,320
    )Proceeds from the exercise of warrants
    
    
    1,734
    
    
    
    Proceeds from the exercise of employee options
    
    
    17
    
    
    
    Dividends paid on preferred stock
    
    
    (103
    )
    
    
    (104
    )Distributions paid to minority interest
    
    
    (890
    )
    
    
    Net cash provided by financing activities
    
    
    4,817
    
    
    
    388Effects of exchange rate changes on cash
    
    
    13
    
    
    
    (10
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,200
    
    
    
    (4,615
    )Cash and cash equivalents at the beginning of period
    
    
    2,326
    
    
    
    6,707Cash and cash equivalents at the end of period
    
    $
    3,526
    
    
    $
    2,092Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    1,169
    
    
    $
    1,015Cash paid for income taxes
    
    $
    
    
    
    $
    97Supplemental schedule of non-cash investing and financing activities:Principal payments on long-term debt made through rebate credits
    
    $
    (3,521
    )
    
    $
    (2,276
    )Issuance of notes payable in exchange for business acquisitions
    
    $
    3,540
    
    
    $
    5,460Issuance of capital lease in exchange for property and equipment
    
    $
    416
    
    
    $
    
 See accompanying notes to consolidated financial statements
 6




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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
  7




---



##### 



Comprehensive income (loss)
   Nine Months Ended
    
    Three Months EndedSeptember 29,
    
    September 30,
    
    September 29,
    
    September 30,Dollars in thousands
    
    2007
    
    2006
    
    2007
    
    2006Net income (loss) for the period
    
    $
    (3,456
    )
    
    $
    (1,739
    )
    
    $
    488
    
    
    $
    (1,681
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    2,012
    
    
    
    (186
    )
    
    
    915
    
    
    
    (664
    )Comprehensive income (loss) for the period
    
    $
    (1,444
    )
    
    $
    (1,925
    )
    
    $
    1,403
    
    
    $
    (2,345
    )
 Recent Accounting Pronouncements
  
 2. Business Acquisitions
  8




---



##### 



Nine Months Ended
    
    Three Months EndedDollars in thousands, except per share amounts
    
    September 29, 2007
    
    September 29, 2007Total revenue
    
    $
    77,519
    
    
    $
    27,220Net loss applicable to common stockholders
    
    $
    (3,101
    )
    
    $
    517Net loss applicable to common stockholders per share  basic
    
    $
    (0.09
    )
    
    $
    0.01Net loss applicable to common stockholders per share  diluted
    
    $
    (0.09
    )
    
    $
    0.01
 3. Long-term Debt (also see Notes 4 and 5)
  September
    
    
    DecemberDollars in thousands
    

29, 2007
    
    

30, 2006Notes payable to SiemensTranche B
    
    $
    4,685
    
    
    $
    3,543Tranche C
    
    
    23,137
    
    
    
    23,997Tranche D
    
    
    7,200
    
    
    
    2,200Tranche E
    
    
    
    
    
    
    Total notes payable to Siemens
    
    
    35,022
    
    
    
    29,740Notes payable from business acquisitions and others
    
    
    8,701
    
    
    
    7,250Total debt
    
    
    43,723
    
    
    
    36,990Less current maturities
    
    
    6,471
    
    
    
    8,391Long-term debt
    
    $
    37,252
    
    
    $
    28,599
  Dollars in thousands
    
    Amount2007 (remainder)
    
    $
    1,8362008
    
    
    10,2322009
    
    
    5,1552010
    
    
    3,9592011
    
    
    2,840Thereafter
    
    
    19,701
 Notes payable to Siemens
   9




---



##### 



Nine months ended
    
    
    Three months endedSeptember 29,
    
    
    September
    
    
    September 29,
    
    
    SeptemberDollars in thousands
    
    2007
    
    
    30, 2006
    
    
    2007
    
    
    30, 2006Portion applied against quarterly principal payments
    
    $
    3,521
    
    
    $
    2,276
    
    
    $
    1,183
    
    
    $
    803Portion applied against quarterly interest payments
    
    
    2,006
    
    
    
    178
    
    
    
    688
    
    
    
    68$
    5,527
    
    
    $
    2,454
    
    
    $
    1,871
    
    
    $
    871
   10




---



##### 



Notes payable from business acquisitions and other
  11




---



##### 



4. Convertible Subordinated Notes
     5. Subordinated Notes and Warrant Liability
   12




---



##### 



6. Stockholders Equity
 Common stock
  7. Stock-based Compensation
  13




---



##### 



Stock-based Payment Award Activity
  WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual Term
    
    AggregateShares
    
    Exercise
    
    (in years)
    
    Intrinsic ValueOutstanding at December 30, 2006
    
    
    5,373
    
    
    $
    1.31Granted
    
    
    630
    
    
    $
    1.47Exercised
    
    
    (25
    )
    
    $
    0.67
    
    
    
    
    
    
    $
    23,063Forfeited/expired/cancelled
    
    
    (143
    )
    
    $
    3.48Outstanding at September 29, 2007
    
    
    5,835
    
    
    $
    1.28
    
    
    
    6.44
    
    
    $
    2,756Exercisable September 29, 2007
    
    
    4,213
    
    
    $
    1.23
    
    
    
    5.68
    
    
    $
    2,425
   Weighted AverageGrant-DateShares
    
    
    Fair ValueNon-vested at December 30, 2006
    
    
    2,211
    
    
    $
    1.25Granted
    
    
    630
    
    
    $
    1.47Vested
    
    
    (1,115
    )
    
    $
    1.23Forfeited unvested
    
    
    (103
    )
    
    $
    1.92Non-vested at September 29, 2007
    
    
    1,623
    
    
    $
    1.28
 9. Segments
  14




---



##### 



Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalFor the nine months ended:Hearing aids and other products revenuesSeptember 29, 2007
    
    $
    70,019
    
    
    $
    88
    
    
    
    
    
    
    
    
    
    
    $
    70,107September 30, 2006
    
    $
    61,504
    
    
    $
    50
    
    
    
    
    
    
    
    
    
    
    $
    61,554Service revenuesSeptember 29, 2007
    
    $
    3,996
    
    
    
    
    
    
    $
    1,182
    
    
    
    
    
    
    $
    5,178September 30, 2006
    
    $
    3,275
    
    
    
    
    
    
    $
    1,122
    
    
    
    
    
    
    $
    4,397Income (loss) from operationsSeptember 29, 2007
    
    $
    15,741
    
    
    $
    (30
    )
    
    $
    826
    
    
    $
    (11,578
    )
    
    $
    4,959September 30, 2006
    
    $
    13,461
    
    
    $
    (110
    )
    
    $
    631
    
    
    $
    (10,273
    )
    
    $
    3,709As of and for the nine months ended:September 29, 2007Depreciation and
amortization
    
    $
    1,323
    
    
    
    
    
    
    $
    39
    
    
    $
    233
    
    
    $
    1,597Total assets
    
    $
    75,580
    
    
    
    
    
    
    $
    923
    
    
    $
    17,528
    
    
    $
    94,031Capital expenditures
    
    $
    460
    
    
    
    
    
    
    
    
    
    
    $
    91
    
    
    $
    551September 30, 2006Depreciation and
amortization
    
    $
    1,328
    
    
    
    
    
    
    $
    3
    
    
    $
    146
    
    
    $
    1,477Total assets
    
    $
    66,214
    
    
    
    
    
    
    $
    931
    
    
    $
    12,298
    
    
    $
    79,443Capital expenditures
    
    $
    580
    
    
    
    
    
    
    
    
    
    
    $
    489
    
    
    $
    1,069
  Nine months ended2007
    
    2006Hearing aid revenues
    
    
    95.4
    %
    
    
    95.9
    %Other products revenues
    
    
    4.6
    %
    
    
    4.1
    %
  Nine months ended2007
    
    2006Hearing aid repairs
    
    
    49.5
    %
    
    
    52.4
    %Testing and other income
    
    
    50.5
    %
    
    
    47.6
    %
  Nine months ended2007
    
    2006General and administrative expenses
    
    $
    (11,306
    )
    
    $
    (10,127
    )Deprecation and amortization
    
    $
    (272
    )
    
    $
    (146
    )Corporate loss from operations
    
    $
    (11,578
    )
    
    $
    (10,273
    )
 15




---



##### 



United States
    
    
    Canada
    
    
    United States
    
    
    Canada2007
    
    
    2007
    
    
    2006
    
    
    2006$
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    61,097
    
    
    
    9,010
    
    
    
    54,596
    
    
    
    6,958Service revenues
    
    
    4,768
    
    
    
    410
    
    
    
    4,076
    
    
    
    321Long-lived assets
    
    
    62,915
    
    
    
    15,406
    
    
    
    54,682
    
    
    
    11,336Total assets
    
    
    75,323
    
    
    
    18,648
    
    
    
    65,856
    
    
    
    13,587
 10. Income Taxes
 Uncertain Income Tax Positions
        Other Income Tax Disclosures
  16




---



##### 



17




---



##### 



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; belief that the Company is in line to achieve its revenues growth objective
for the year of 15% to 20% and revenues target of $102 million to $107 million in 2007;
expectations that the positive trend in average selling prices and comparable center revenues will
continue for the remainder of the year, that the new Coach Shula TV campaign will continue showing
benefits in the fourth quarter of 2007 to return to historical marketing cost levels, for the
balance of the year, the new compensation program should have a positive impact on the Companys
average unit selling price and that the Company will continue to see increase in revenues from the
centers acquired within the last twelve months; expectation that in the remainder of 2007 the total
cost of products sold before the Siemens rebate credits as a percent of total net revenues will be
consistent with the first nine months of 2007; expectation that in the remainder of 2007 the
Siemens rebate credit in absolute dollars will remain consistent with the first nine months of 2007;
expectation that additional center operating expenses due to acquisitions should be consistent with
the current center operating expenses when looked at as a percent of total net revenues,
expectations that the general and administrative expenses for the reminder of the year to be
consistent with the first nine months of the year when looked at in dollars and excluding the
professional fees related to the restatement; expectations that income from operations, in
percentage of total net revenues to be in the 7% and 9% range for the remainder of the year and
long-term objective to reach an income from operations, in percent of total net revenues, of 10% to
12%. 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, and those risks described in the Companys annual report
on Form 10-K for fiscal year 2006 filed with the Securities and Exchange Commission.
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
   18




---



##### 



RESULTS OF OPERATIONS
 For the three months ended September 29, 2007 compared to the three months ended September 30,
2006
 Revenues
 Revenues (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    25,050
    
    
    $
    20,519
    
    
    $
    4,531
    
    
    
    22.1
    %Services
    
    
    1,812
    
    
    
    1,523
    
    
    
    289
    
    
    
    19.0
    %Total net revenues
    
    $
    26,862
    
    
    $
    22,042
    
    
    $
    4,820
    
    
    
    21.9
    %2007
    
    
    2006
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2006 (1)
    
    $
    1,416
    
    
    $
    
    
    
    $
    1,416
    
    
    
    6.4
    %Revenues from centers acquired in 2007
    
    
    1,896
    
    
    
    
    
    
    
    1,896
    
    
    
    8.6
    %Total Revenues from acquired centers
    
    $
    3,312
    
    
    $
    
    
    
    $
    3,312
    
    
    
    15.0
    %Revenues from comparable centers (2)
    
    $
    23,550
    
    
    $
    22,042
    
    
    $
    1,508
    
    
    
    6.9
    %Total net revenues
    
    $
    26,862
    
    
    $
    22,042
    
    
    $
    4,820
    
    
    
    21.9
    %
 (1)
    
    Represents that portion of revenues from the 2006 acquired centers recognized for those
acquisitions that had less than one full quarter of revenues recorded in the third quarter
2006 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 third quarter 2006 net revenues.
    19




---



##### 



Cost of Products Sold and Services
 Cost of products sold and services (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    6,807
    
    
    $
    6,491
    
    
    $
    316
    
    
    
    4.9
    %Services
    
    
    499
    
    
    
    511
    
    
    
    (12
    )
    
    
    (2.3
    )%Total cost of products sold and services
    
    $
    7,306
    
    
    $
    7,002
    
    
    $
    304
    
    
    
    4.3
    %Percent of total net revenues
    
    
    27.2
    %
    
    
    31.8
    %
    
    
    (4.6
    )%
    
    
    (14.4
    )%
  Siemens rebate credits included above (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Base required payments on Tranches A and C forgiven
    
    $
    1,043
    
    
    $
    730
    
    
    $
    313
    
    
    
    42.9
    %Required payments of $65 per Siemens unit from acquired
centers on Tranche B forgiven
    
    
    140
    
    
    
    73
    
    
    
    67
    
    
    
    91.8
    %Interest expense on Tranches A, B and C forgiven
    
    
    688
    
    
    
    68
    
    
    
    620
    
    
    
    911.8
    %Total Siemens rebate credits
    
    $
    1,871
    
    
    $
    871
    
    
    $
    1,000
    
    
    
    114.8
    %Percent of total net revenues
    
    
    7.0
    %
    
    
    4.0
    %
    
    
    3.0
    %
    
    
    75.0
    %
   Expenses
 Operating expenses (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Center operating expenses
    
    $
    12,585
    
    
    $
    10,598
    
    
    $
    1,987
    
    
    
    18.8
    %Percent of total net revenues
    
    
    46.9
    %
    
    
    48.1
    %
    
    
    (1.2
    )%
    
    
    (2.5
    )%General and administrative expenses
    
    $
    3,890
    
    
    $
    3,540
    
    
    $
    350
    
    
    
    9.9
    %Percent of total net revenues
    
    
    14.5
    %
    
    
    16.1
    %
    
    
    (1.6
    )%
    
    
    (9.9
    )%Depreciation and amortization
    
    $
    572
    
    
    $
    497
    
    
    $
    75
    
    
    
    15.1
    %%Percent of total net revenues
    
    
    2.1
    %
    
    
    2.3
    %
    
    
    (0.2
    )%
    
    
    (8.7
    )
  20




---



##### 



Income from Operations
   Interest Expense
 Interest expense (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Notes payable from business acquisitions and others
    
    $
    137
    
    
    $
    128
    
    
    $
    9
    
    
    
    7.0
    %Siemens Tranche C2  Interest paid with monthly payments
    
    
    
    
    
    
    113
    
    
    
    (113
    )
    
    
    (100.0
    )%Siemens Tranches C1 and C3  accrued interest added to
loan balance
    
    
    
    
    
    
    331
    
    
    
    (331
    )
    
    
    (100.0
    )%Siemens Tranches A, B and C  interest forgiven
    
    
    688
    
    
    
    68
    
    
    
    620
    
    
    
    911.8
    %Siemens Tranche D-paid monthly
    
    
    335
    
    
    
    
    
    
    
    335
    
    
    
    2003 Convertible Subordinated Notes (1)
    
    
    
    
    
    
    605
    
    
    
    (605
    )
    
    
    (100.0
    )%2005 Subordinated Notes (2)
    
    
    170
    
    
    
    326
    
    
    
    (156
    )
    
    
    (47.9
    )%Warrant liability change in value (3)
    
    
    
    
    
    
    67
    
    
    
    (67
    )
    
    
    (100.0
    )%Total interest expense
    
    $
    1,330
    
    
    $
    1,638
    
    
    $
    (308
    )
    
    
    (18.8
    )%
 (1)
    
    Includes $427,000 in 2006 of non-cash prepaid fees, debt discount amortization and deemed
dividend.
  (3)
    
    Relates to the change in value of the warrants related to the 2003 Subordinated Notes and is
a non-cash item.
  21




---



##### 



Income Taxes
   Minority Interest
  Net
Income (Loss) Applicable to Common Stockholders
  For the nine months ended September 30, 2007 compared to the nine months ended September 30,
2006
 Revenues
 Revenues (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    70,107
    
    
    $
    61,554
    
    
    $
    8,553
    
    
    
    13.9
    %Services
    
    
    5,178
    
    
    
    4,397
    
    
    
    781
    
    
    
    17.8
    %Total net revenues
    
    $
    75,285
    
    
    $
    65,951
    
    
    $
    9,334
    
    
    
    14.2
    %2007
    
    
    2006
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2006 (1)
    
    
    6,851
    
    
    $
    
    
    
    $
    6,851
    
    
    
    10.4
    %Revenues from centers acquired in 2007
    
    
    3,231
    
    
    
    
    
    
    
    3,231
    
    
    
    4.9
    %Total Revenues from acquired centers
    
    $
    10,082
    
    
    $
    
    
    
    $
    10,082
    
    
    
    15.3
    %Revenues from comparable centers (2)
    
    $
    65,203
    
    
    $
    65,951
    
    
    $
    (748
    )
    
    
    (1.1
    )%Total net revenues
    
    $
    75,285
    
    
    $
    65,951
    
    
    $
    9,334
    
    
    
    14.2
    %
 (1)
    
    Represents that portion of revenues from the 2006 acquired centers recognized for those
acquisitions that had less than one full quarter of revenues recorded in the first nine
months of 2006 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 first nine months of 2006 net revenues.
 22




---



##### 



Cost of Products Sold and Services
 Cost of products sold and services (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    18,576
    
    
    $
    18,677
    
    
    $
    (101
    )
    
    
    (0.5
    )%Services
    
    
    1,531
    
    
    
    1,298
    
    
    
    233
    
    
    
    17.9
    %Total cost of products sold and services
    
    $
    20,107
    
    
    $
    19,975
    
    
    $
    132
    
    
    
    0.7
    %Percent of total net revenues
    
    
    26.7
    %
    
    
    30.3
    %
    
    
    (3.6
    )%
    
    
    (11.9
    )%
  Siemens rebate credits included above (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Base required payments on Tranches A and C forgiven
    
    $
    3,127
    
    
    $
    2,190
    
    
    $
    937
    
    
    
    42.8
    %Required payments of $65 per Siemens unit from acquired
centers on Tranche B forgiven
    
    
    394
    
    
    
    86
    
    
    
    308
    
    
    
    358.1
    %Interest expense on Tranches A, B and C forgiven
    
    
    2,006
    
    
    
    178
    
    
    
    1,828
    
    
    
    1,027.1
    %Total Siemens rebate credits
    
    $
    5,527
    
    
    $
    2,454
    
    
    $
    3,073
    
    
    
    125.2
    %Percent of total net revenues
    
    
    7.3
    %
    
    
    3.7
    %
    
    
    3.6
    %
    
    
    97.3
    %
  Expenses
 Operating expenses (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Center operating expenses
    
    $
    37,316
    
    
    $
    30,663
    
    
    $
    6,653
    
    
    
    21.7
    %Percent of total net revenues
    
    
    49.6
    %
    
    
    46.5
    %
    
    
    3.1
    %
    
    
    6.7
    %General and administrative expenses
    
    $
    11,306
    
    
    $
    10,127
    
    
    $
    1,179
    
    
    
    11.6
    %Percent of total net revenues
    
    
    15.0
    %
    
    
    15.4
    %
    
    
    (0.4
    )%
    
    
    (2.6
    )%Depreciation and amortization
    
    $
    1,597
    
    
    $
    1,477
    
    
    $
    120
    
    
    
    8.1
    %Percent of total net revenues
    
    
    2.1
    %
    
    
    2.2
    %
    
    
    (0.1
    )%
    
    
    (4.5
    )%
 23




---



##### 



Income from Operations
  Interest Expense
 Interest expense (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Notes payable from business acquisitions and others
    
    $
    368
    
    
    $
    197
    
    
    $
    159
    
    
    
    86.8
    %Siemens Tranche C2  Interest paid with monthly payments
    
    
    
    
    
    
    320
    
    
    
    (320
    )
    
    
    (100.0
    )%Siemens Tranches C1 and C3  accrued interest added to
loan balance
    
    
    
    
    
    
    951
    
    
    
    (951
    )
    
    
    (100.0
    )%Siemens Tranches A, B and C  interest forgiven
    
    
    2,006
    
    
    
    190
    
    
    
    1,816
    
    
    
    955.8
    %Siemens Tranche D-paid monthly
    
    
    512
    
    
    
    
    
    
    
    512
    
    
    
    2003 Convertible Subordinated Notes (1)
    
    
    3,153
    
    
    
    1,950
    
    
    
    1,213
    
    
    
    61.7
    %2005 Subordinated Notes (2)
    
    
    668
    
    
    
    1,078
    
    
    
    (410
    )
    
    
    (38.0
    )%Warrant liability change in value (3)
    
    
    
    
    
    
    (250
    )
    
    
    250
    
    
    
    (100.0
    )%Total interest expense
    
    $
    6,707
    
    
    $
    4,436
    
    
    $
    2,271
    
    
    
    51.2
    %
 (1)
    
    Includes $2.6 million in 2007 and $1.4 million in 2006 of non-cash prepaid fees, debt
discount amortization and deemed dividend.
 (2)
    
    Includes $405,000 in 2007 and $670,000 in 2006 of non-cash debt discount amortization.
 (3)
    
    Relates to the change in value of the warrants related to the 2003 Subordinated Notes and is
a non-cash item.
  24




---



##### 



Income Taxes
   Minority Interest
  Net Income/Loss Applicable to Common Stockholders
  LIQUIDITY AND CAPITAL RESOURCES
 Siemens Transaction
  25




---



##### 



26




---



##### 



Working Capital
  27




---



##### 



Cash Flows
      Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    yearsLong-term debt (1)
    
    $
    43,723
    
    
    $
    6,471
    
    
    $
    13,882
    
    
    $
    5,555
    
    
    $
    17,815Subordinated notes
    
    
    1,980
    
    
    
    1,980
    
    
    
    
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    45,703
    
    
    
    8,451
    
    
    
    13,882
    
    
    
    5,555
    
    
    
    17,815Interest to be paid on long-term debt (2)
    
    
    13,380
    
    
    
    3,626
    
    
    
    5,278
    
    
    
    3,906
    
    
    
    570Interest to be paid on subordinated notes
    
    
    76
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    19,633
    
    
    
    5,846
    
    
    
    8,765
    
    
    
    3,389
    
    
    
    1,633Employment agreements
    
    
    3,997
    
    
    
    2,039
    
    
    
    1,958
    
    
    
    
    
    
    
    Purchase obligations
    
    
    300
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    83,089
    
    
    $
    20,388
    
    
    $
    29,883
    
    
    $
    12,850
    
    
    $
    20,018
 
 (1)
    
    Approximately $27.8 million can be repaid through preferred pricing reductions from Siemens,
including $2.6 million in less than 1 year and
$5.3 million in years 2-3, $5.1 million in
years 4-5 and $14.8 million in more than 5 years.
 (2)
    
    Interest on long-term debt includes the interest on the new Tranches A, B and C that can be
repaid through rebate credits reductions from Siemens pursuant to the Amended and Restated
Credit Agreement, including $2.5 million in less than
1 year and $4.3 million in years 2-3, $3.3 in years 4-5 and $473,000 in more than 5 years. Interest repaid through preferred
pricing reductions was $2.0 million in the first nine months of 2007. (See Note 3  Long-Term
Debt, Notes to Consolidated Financial Statements included herein).
 28




---



##### 



CRITICAL ACCOUNTING POLICIES
  Goodwill
  Revenue recognition
   Allowance for doubtful accounts
  29




---



##### 



Sales returns
  Vendor Rebates
  Marketing Allowances
  Impairment of Long-Lived Assets
  Stock-based compensation
 Share-Based Payment
  30




---



##### 



Income taxes
 Accounting for Income Taxes
  RECENT ACCOUNTING PRONOUNCEMENTS
  
 31




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Fixed Rate
    
    
    Total9.5%
    
    
    9.5% note
    
    
    7%due January
    
    
    Due January
    
    
    Due August2013
    
    
    2013
    
    
    2008
    
    
    Other$
    
    
    
    
    
    $
    
    
    $
    
    
    $(000s)
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)2007
    
    
    
    (660
    )
    
    
    
    
    
    
    (440
    )
    
    
    (1,176
    )
    
    
    (2,276
    )2008
    
    
    
    (2,629
    )
    
    
    (4,200
    )
    
    
    (1,540
    )
    
    
    (3,403
    )
    
    
    (11,772
    )2009
    
    
    
    (2,629
    )
    
    
    
    
    
    
    
    
    
    
    (2,526
    )
    
    
    (5,155
    )2010
    
    
    
    (2,622
    )
    
    
    
    
    
    
    
    
    
    
    (1,337
    )
    
    
    (3,959
    )2011
    
    
    
    (2,580
    )
    
    
    
    
    
    
    
    
    
    
    (260
    )
    
    
    (2,840
    )2012
    
    
    
    (16,701
    )
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    (19,701
    )2013Total
    
    
    (27,821
    )
    
    
    (7,200
    )
    
    
    (1,980
    )
    
    
    (8,702
    )
    
    
    (45,703
    )Estimated fair value
    
    
    (27,540
    )
    
    
    (7,200
    )
    
    
    (1,970
    )
    
    
    (8,230
    )
    
    
    (44,940
    )
 Item 4. Controls and Procedures
   32




---



##### 



Part II Other Information
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  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, filed August 8, 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).
 33




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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
    
    Second Amendment to the Credit
Agreement and First Amendment to Investor Rights Agreement and Supply
Agreement dated September 28, 2007 between HearUSA, Inc. and
Siemens Hearing Instruments, Inc. (incorporated herein by reference
to Exhibit 10.1 to the Companys Current Report of Form 8-K,
filed October 4, 2007).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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SIGNATURES
  HearUSA Inc.
(Registrant)November 13, 2007
    /s/ Stephen J. HansbroughStephen J. HansbroughPresident/Chief Executive Officer

HearUSA, Inc./s/ Gino ChouinardGino ChouinardEVP/Chief Financial Officer

HearUSA, Inc. 35