##### 



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 endedJune 30, 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
    
    (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 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 July 27, 2007, 37,189,957 shares of the Registrants Common Stock and 760,461 exchangeable
shares of HEARx Canada, Inc. were outstanding.




---



##### 



INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets
June 30, 2007 and December 30, 2006
    
    
    3Consolidated Statements of Operations
Six months ended June 30, 2007 and July 1, 2006
    
    
    4Consolidated Statements of Operations
Three months ended June 30, 2007 and July 1, 2006
    
    
    5Consolidated Statements of Cash Flows
Six months ended June 30, 2007 and July 1, 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 2.
    
    Unregistered Sales of Equity
Securities and Use of Proceeds
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 6.
    
    Exhibits
    
    
    33Signatures
    
    
    34
 2




---



##### 



Part I  Financial Information
 Item 1. Financial Statements
 HearUSA, Inc.
Consolidated Balance Sheets
(unaudited)
 June 30,
    
    
    December 30,2007
    
    
    2006(Dollars in thousands)ASSETS (Note 3)Current assetsCash and cash equivalents
    
    $
    3,210
    
    
    $
    2,326Accounts and notes receivable, less allowance for
doubtful accounts of $426,469 and $434,098
    
    
    7,551
    
    
    
    7,591Inventories
    
    
    2,460
    
    
    
    2,371Prepaid expenses and other
    
    
    1,822
    
    
    
    1,400Deferred tax asset
    
    
    73
    
    
    
    67Total current assets
    
    
    15,116
    
    
    
    13,755Property and equipment, net (Note 2)
    
    
    4,096
    
    
    
    3,878Goodwill (Note 2)
    
    
    54,726
    
    
    
    50,970Intangible assets, net (Note 2)
    
    
    14,919
    
    
    
    13,592Deposits and other
    
    
    710
    
    
    
    876Restricted cash and cash equivalents
    
    
    209
    
    
    
    205Total Assets
    
    $
    89,776
    
    
    $
    83,276LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    8,874
    
    
    $
    10,463Accrued expenses
    
    
    3,480
    
    
    
    2,509Accrued compensation
    
    
    2,926
    
    
    
    2,826Current maturities of long-term debt
    
    
    11,688
    
    
    
    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 $234,223 and $452,228
    
    
    1,526
    
    
    
    1,308Dividends payable
    
    
    34
    
    
    
    34Minority interest in net income of consolidated joint venture, currently payable
    
    
    737
    
    
    
    633Total current liabilities
    
    
    29,265
    
    
    
    28,651Long-term debt (Notes 2 and 3)
    
    
    31,157
    
    
    
    28,599Deferred income taxes
    
    
    5,624
    
    
    
    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)
    
    
    660
    
    
    
    1,480Warrant liability (Note 5)
    
    
    
    
    
    
    110Total long-term liabilities
    
    
    37,441
    
    
    
    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
37,710,000 and 32,029,750 shares issued
    
    
    3,771
    
    
    
    3,203Stock subscription
    
    
    (412
    )
    
    
    (412
    )Additional paid-in capital
    
    
    132,394
    
    
    
    123,972Accumulated deficit
    
    
    (113,458
    )
    
    
    (109,521
    )Accumulated other comprehensive income
    
    
    3,260
    
    
    
    2,163Treasury stock, at cost:523,662 common shares
    
    
    (2,485
    )
    
    
    (2,485
    )Total Stockholders Equity
    
    
    23,070
    
    
    
    16,920Total Liabilities and Stockholders Equity
    
    $
    89,776
    
    
    $
    83,276
 See accompanying notes to the consolidated financial statements
 3




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Six Months Ended June 30, 2007 and July 1, 2006
(unaudited)
 June 30,
    
    
    July 1,2007
    
    
    2006(Dollars in thousands, except pershare amounts)Net revenuesHearing aids and other products
    
    $
    45,107
    
    
    $
    41,032Services
    
    
    3,367
    
    
    
    2,877Total net revenues
    
    
    48,474
    
    
    
    43,909Operating costs and expensesHearing aids and other products (Note 3)
    
    
    11,789
    
    
    
    12,189Services
    
    
    1,032
    
    
    
    787Total cost of products sold and services
    
    
    12,821
    
    
    
    12,976Center operating expenses
    
    
    24,742
    
    
    
    20,065General and administrative expenses (Notes 1 and 7)
    
    
    7,425
    
    
    
    6,588Depreciation and amortization
    
    
    1,025
    
    
    
    980Total operating costs and expenses
    
    
    46,013
    
    
    
    40,609Income from operations
    
    
    2,461
    
    
    
    3,300Non-operating income (expenses):Gain from insurance proceeds
    
    
    
    
    
    
    57Interest income
    
    
    84
    
    
    
    91Interest expense (Notes 2, 3, 4 and 5)
    
    
    (5,377
    )
    
    
    (2,798
    )Income
(loss) before income tax expense and minority interest in income of consolidated
joint venture
    
    
    (2,832
    )
    
    
    650Income tax expense
    
    
    (352
    )
    
    
    (577
    )Minority interest in income of consolidated joint venture
    
    
    (683
    )
    
    
    (62
    )Net income (loss)
    
    
    (3,867
    )
    
    
    11Dividends on preferred stock
    
    
    (70
    )
    
    
    (70
    )Net loss applicable to common stockholders
    
    $
    (3,937
    )
    
    $
    (59
    )Net loss applicable to common stockholders per common share  basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.00
    )Weighted average number of shares of common stock outstanding  basic and diluted
    
    
    34,815
    
    
    
    32,188
 See accompanying notes to the consolidated financial statements
 4




---



##### 



HearUSA, Inc.
Consolidated Statements of Operations
Three Months Ended June 30, 2007 and July 1, 2006
(unaudited)
 June 30,
    
    
    July 1,2007
    
    
    2006(Dollars in thousands, except pershare amounts)Net revenuesHearing aids and other products
    
    $
    23,166
    
    
    $
    20,838Services
    
    
    1,754
    
    
    
    1,419Total net revenues
    
    
    24,920
    
    
    
    22,257Operating costs and expensesHearing aids and other products (Note 3)
    
    
    6,062
    
    
    
    6,076Services
    
    
    556
    
    
    
    414Total cost of products sold and services
    
    
    6,618
    
    
    
    6,490Center operating expenses
    
    
    13,143
    
    
    
    10,301General and administrative expenses (Notes 1 and 7)
    
    
    3,813
    
    
    
    3,349Depreciation and amortization
    
    
    536
    
    
    
    488Total operating costs and expenses
    
    
    24,110
    
    
    
    20,628Income from operations
    
    
    810
    
    
    
    1,629Non-operating income (expenses):Interest income
    
    
    37
    
    
    
    52Interest expense (Notes 2, 3, 4 and 5)
    
    
    (3,697
    )
    
    
    (1,371
    )Income (loss) before income tax expense and minority interest in income of consolidated
joint venture
    
    
    (2,850
    )
    
    
    310Income tax expense
    
    
    (206
    )
    
    
    (313
    )Minority interest in income of consolidated joint venture
    
    
    (259
    )
    
    
    (62
    )Net loss
    
    
    (3,315
    )
    
    
    (65
    )Dividends on preferred stock
    
    
    (36
    )
    
    
    (35
    )Net loss applicable to common stockholders
    
    $
    (3,351
    )
    
    $
    (100
    )Net loss applicable to common stockholders per common share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.00
    )Weighted average number of shares of common stock outstanding  basic and diluted
    
    
    37,358
    
    
    
    32,216
 See accompanying notes to the consolidated financial statements
 5




---



##### 



HearUSA, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007 and July 1, 2006
(unaudited)
 June 30,
    
    
    July 1,2007
    
    
    2006(Dollars in thousands)Cash flows from operating activitiesNet income (loss)
    
    $
    (3,867
    )
    
    $
    11Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:Debt discount amortization
    
    
    1,783
    
    
    
    1,380Interest on reduction of warrant exercise price
    
    
    1,371
    
    
    
    Depreciation and amortization
    
    
    1,025
    
    
    
    980Interest on Siemens Tranche C
    
    
    
    
    
    
    620Employee stock-based compensation
    
    
    278
    
    
    
    474Provision for doubtful accounts
    
    
    205
    
    
    
    174Deferred income tax expense
    
    
    352
    
    
    
    515Consulting stock-based compensation
    
    
    115
    
    
    
    13Loss on disposition of property and equipment
    
    
    
    
    
    
    9Principal payments on long-term debt made through rebate credits
    
    
    (2,343
    )
    
    
    (1,473
    )Minority
interest in income of consolidated joint venture
    
    
    683
    
    
    
    62Decrease in fair value of warrant liability
    
    
    
    
    
    
    (317
    )Other
    
    
    (5
    )
    
    
    (14
    )(Increase) decrease in:Accounts and notes receivable
    
    
    (51
    )
    
    
    134Inventories
    
    
    (78
    )
    
    
    (1,208
    )Prepaid expenses and other
    
    
    (361
    )
    
    
    (4
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (866
    )
    
    
    272Accrued salaries and other compensation
    
    
    89
    
    
    
    24Net cash provided by (used in) operating activities
    
    
    (1,670
    )
    
    
    1,652Cash flows from investing activitiesPurchase of property and equipment
    
    
    (154
    )
    
    
    (564
    )Business acquisitions
    
    
    (2,392
    )
    
    
    (4,910
    )Net cash used in investing activities
    
    
    (2,546
    )
    
    
    (5,474
    )Cash flows from financing activitiesProceeds from issuance of long-term debt, net of financing cost
    
    
    7,231
    
    
    
    3,165Principal payments on long-term debt
    
    
    (1,629
    )
    
    
    (1,445
    )Principal payments on convertible subordinated notes
    
    
    (784
    )
    
    
    (1,250
    )Principal payments on subordinated notes
    
    
    (880
    )
    
    
    (880
    )Proceeds from the exercise of warrants
    
    
    1,734
    
    
    
    Proceeds from the exercise of employee options
    
    
    17
    
    
    
    Dividends paid on preferred stock
    
    
    (70
    )
    
    
    (70
    )Distributions paid to minority interest
    
    
    (579
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    5,040
    
    
    
    (480
    )Effects of exchange rate changes on cash
    
    
    60
    
    
    
    (20
    )Net increase (decrease) in cash and cash equivalents
    
    
    884
    
    
    
    (4,322
    )Cash and cash equivalents at the beginning of period
    
    
    2,326
    
    
    
    6,707Cash and cash equivalents at the end of period
    
    $
    3,210
    
    
    $
    2,385Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    853
    
    
    $
    773Supplemental schedule of non-cash investing and financing activities:Principal payments on long-term debt made through rebate credits
    
    $
    (2,343
    )
    
    $
    (1,473
    )Issuance of notes payable in exchange for business acquisitions
    
    $
    2,280
    
    
    $
    4,640Issuance of capital lease in exchange for property and equipment
    
    $
    328
    
    
    $
    
 See accompanying notes to consolidated financial statements
 6




---



##### 



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)
   Six Months Ended
    
    Three Months EndedDollars in thousands
    
    June 30, 2007
    
    July 1, 2006
    
    June 30, 2007
    
    July 1, 2006Net income (loss) for the period
    
    $
    (3,867
    )
    
    $
    11
    
    
    $
    (3,315
    )
    
    $
    (65
    )Other comprehensive income:Foreign currency translation adjustments
    
    
    1,097
    
    
    
    429
    
    
    
    981
    
    
    
    454Comprehensive income (loss) for the
period
    
    $
    (2,770
    )
    
    $
    440
    
    
    $
    (2,334
    )
    
    $
    389
 Reclassifications
  Recent
Accounting Pronouncements
     2. Business Acquisitions
  8




---



##### 



Six Months Ended
    
    Three Months EndedDollars in thousands, except per share amounts
    
    June 30, 2007
    
    June 30, 2007Total revenue
    
    $
    49,562
    
    
    $
    25,217Net loss applicable to common stockholders
    
    $
    (3,303
    )
    
    $
    (3,823
    )Net loss applicable to common stockholders per share  basic and diluted
    
    $
    (0.10
    )
    
    $
    (0.10
    )
 3. Long-term Debt (also see Notes 4 and 5)
  June 30,
    
    
    December 30,Dollars in thousands
    
    2007
    
    
    2006Notes payable to SiemensTranche B
    
    $
    4,123
    
    
    $
    3,543Tranche C
    
    
    23,323
    
    
    
    23,997Tranche D
    
    
    7,200
    
    
    
    2,200Total notes payable to Siemens
    
    
    34,646
    
    
    
    29,740Notes payable from business acquisitions and others
    
    
    8,199
    
    
    
    7,250Total debt
    
    
    42,845
    
    
    
    36,990Less current maturities
    
    
    11,688
    
    
    
    8,391Long-term debt
    
    $
    31,157
    
    
    $
    28,599
  Dollars in thousands
    
    Amount2007 (remainder)
    
    $
    9,5012008
    
    
    6,6602009
    
    
    5,7192010
    
    
    4,5662011
    
    
    3,754Thereafter
    
    
    12,645
 Notes payable to Siemens
    9




---



##### 



Six months ended
    
    
    Three months endedDollars in thousands
    
    June 30, 2007
    
    
    July 1, 2006
    
    
    June 30, 2007
    
    
    July 1, 2006Portion applied against quarterly principal payments
    
    $
    2,343
    
    
    $
    1,473
    
    
    $
    1,183
    
    
    $
    743Portion applied against quarterly interest payments
    
    
    1,313
    
    
    
    110
    
    
    
    672
    
    
    
    63$
    3,656
    
    
    $
    1,583
    
    
    $
    1,855
    
    
    $
    806
       10




---



##### 



Notes payable from business acquisitions and other
  4. Convertible Subordinated Notes
    11




---



##### 



5. Subordinated Notes and Warrant Liability
    12




---



##### 



6. Stockholders Equity
 Common stock
  7. Stock-based Compensation
  Stock-based Payment Award Activity
  WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual Term
    
    AggregateShares
    
    Exercise
    
    (in years)
    
    Intrinsic ValueOutstanding at December 30, 2006
    
    
    5,318
    
    
    $
    1.30Granted
    
    
    
    
    
    $
    Exercised
    
    
    (25
    )
    
    $
    0.67Forfeited/expired/cancelled
    
    
    (38
    )
    
    $
    7.11Outstanding at June 30, 2007
    
    
    5,255
    
    
    $
    1.26
    
    
    
    6.40
    
    
    $
    2,894Exercisable June 30, 2007
    
    
    3,563
    
    
    $
    1.19
    
    
    
    5.84
    
    
    $
    2,411
  13




---



##### 



Weighted AverageGrant-DateShares
    
    
    Fair ValueNon-vested at December 30, 2006
    
    
    2,211
    
    
    $
    1.25Granted
    
    
    Vested
    
    
    (515
    )
    
    $
    1.19Forfeited unvested
    
    
    (3
    )
    
    $
    1.74Non-vested at June 30, 2007
    
    
    1,693
    
    
    $
    1.26
 9. Segments
   Centers
    
    
    E-commerce
    
    
    Network
    
    
    Corporate
    
    
    TotalFor the six months ended:Hearing aids and other products revenuesJune 30, 2007
    
    $
    45,047
    
    
    $
    60
    
    
    
    
    
    
    
    
    
    
    $
    45,107July 1, 2006
    
    $
    41,014
    
    
    $
    18
    
    
    
    
    
    
    
    
    
    
    $
    41,032Service revenuesJune 30, 2007
    
    $
    2,590
    
    
    
    
    
    
    $
    777
    
    
    
    
    
    
    $
    3,367July 1, 2006
    
    $
    2,121
    
    
    
    
    
    
    $
    756
    
    
    
    
    
    
    $
    2,877Income (loss) from operationsJune 30, 2007
    
    $
    9,567
    
    
    $
    (54
    )
    
    $
    543
    
    
    $
    (7,595
    )
    
    $
    2,461July 1, 2006
    
    $
    9,695
    
    
    $
    (99
    )
    
    $
    392
    
    
    $
    (6,688
    )
    
    $
    3,300As of and for the six months ended:June 30, 2007Depreciation and
amortization
    
    $
    853
    
    
    
    
    
    
    $
    1
    
    
    $
    171
    
    
    $
    1,025Total assets
    
    $
    71,811
    
    
    
    
    
    
    $
    936
    
    
    $
    17,029
    
    
    $
    89,776Capital expenditures
    
    $
    108
    
    
    
    
    
    
    
    
    
    
    $
    86
    
    
    $
    194July 1, 2006Depreciation and
amortization
    
    $
    878
    
    
    
    
    
    
    $
    2
    
    
    $
    100
    
    
    $
    980Total assets
    
    $
    61,573
    
    
    
    
    
    
    $
    1,105
    
    
    $
    14,461
    
    
    $
    77,139Capital expenditures
    
    $
    476
    
    
    
    
    
    
    
    
    
    
    $
    88
    
    
    $
    564
 14




---



##### 



Six months ended2007
    
    2006Hearing aid revenues
    
    
    95.4
    %
    
    
    96.0
    %Other products revenues
    
    
    4.6
    %
    
    
    4.0
    %
  Six months ended2007
    
    2006Hearing aid repairs
    
    
    49.2
    %
    
    
    51.7
    %Testing and other income
    
    
    50.8
    %
    
    
    48.3
    %
  Six months ended2007
    
    2006General and administrative expenses
    
    $
    (7,424
    )
    
    $
    (6,588
    )Deprecation and amortization
    
    $
    (171
    )
    
    $
    (100
    )Corporate loss from operations
    
    $
    (7,595
    )
    
    $
    (6,688
    )
   United States
    
    
    Canada
    
    
    United States
    
    
    Canada2007
    
    
    2007
    
    
    2006
    
    
    2006$
    
    
    $
    
    
    $
    
    
    $Hearing aid and
other product
revenues
    
    
    39,641
    
    
    
    5,466
    
    
    
    36,373
    
    
    
    4,659Service revenues
    
    
    3,103
    
    
    
    264
    
    
    
    2,669
    
    
    
    209Long-lived assets
    
    
    60,195
    
    
    
    14,465
    
    
    
    52,396
    
    
    
    11,464Total assets
    
    
    72,954
    
    
    
    16,822
    
    
    
    63,472
    
    
    
    13,667
 10. Income Taxes
 Uncertain Income Tax Positions
    15




---



##### 



Other Income Tax Disclosures
   16




---



##### 



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 negative trend in average selling prices and comparable
center revenues will not continue for the remainder of the year, that the new Coach Shula TV
campaign will start showing benefits in the third and 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 six months of 2007;
expectation that in the remainder of 2007 the Siemens rebate credit in absolute dollar will remain
consistent with the first six 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 half of the
year when looked at in dollars; expectation to achieve the 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 2006 filed with the Securities and Exchange
Commission.
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
   17




---



##### 



RESULTS OF OPERATIONS
 For the three months ended June 30, 2007 compared to the three months ended July 1, 2006
 Revenues
 Revenues (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    23,166
    
    
    $
    20,838
    
    
    $
    2,328
    
    
    
    11.2
    %Services
    
    
    1,754
    
    
    
    1,419
    
    
    
    335
    
    
    
    23.6
    %Total net revenues
    
    $
    24,920
    
    
    $
    22,257
    
    
    $
    2,663
    
    
    
    12.0
    %
 2007
    
    
    2006
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2006 (1)
    
    $
    3,054
    
    
    $
    
    
    
    $
    3,054
    
    
    
    13.7
    %Revenues from centers acquired in 2007
    
    
    686
    
    
    
    
    
    
    
    686
    
    
    
    3.1
    %Total Revenues from acquired centers
    
    $
    3,740
    
    
    $
    
    
    
    $
    3,740
    
    
    
    16.8
    %Revenues from comparable centers (2)
    
    $
    21,180
    
    
    $
    22,257
    
    
    $
    (1,077
    )
    
    
    (4.8
    )%Total net revenues
    
    $
    24,920
    
    
    $
    22,257
    
    
    $
    2,663
    
    
    
    12.0
    %
 (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 second 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 second quarter 2006 net revenues.
     18




---



##### 



Cost of Products Sold and Services
 Cost of products sold and services (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    6,062
    
    
    $
    6,076
    
    
    $
    (14
    )
    
    
    (0.2
    )%Services
    
    
    556
    
    
    
    414
    
    
    
    142
    
    
    
    34.3
    %Total cost of products sold and services
    
    $
    6,618
    
    
    $
    6,490
    
    
    $
    128
    
    
    
    2.0
    %Percent of total net revenues
    
    
    26.6
    %
    
    
    29.2
    %
    
    
    (2.6
    )%
    
    
    (8.9
    )%
  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
    
    
    
    13
    
    
    
    126
    
    
    
    900.0
    %Interest expense on Tranches A, B and C forgiven
    
    
    672
    
    
    
    63
    
    
    
    609
    
    
    
    966.7
    %Total Siemens rebate credits
    
    $
    1,855
    
    
    $
    806
    
    
    $
    1,048
    
    
    
    129.9
    %Percent of total net revenues
    
    
    7.4
    %
    
    
    3.6
    %
    
    
    3.8
    %
    
    
    105.6
    %
  Expenses
 Operating expenses (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Center operating expenses
    
    $
    13,143
    
    
    $
    10,301
    
    
    $
    2,842
    
    
    
    27.6
    %Percent of total net revenues
    
    
    52.7
    %
    
    
    46.3
    %
    
    
    6.4
    %
    
    
    13.8
    %General and administrative expenses
    
    $
    3,813
    
    
    $
    3,349
    
    
    $
    464
    
    
    
    13.9
    %Percent of total net revenues
    
    
    15.3
    %
    
    
    15.0
    %
    
    
    0.3
    %
    
    
    2.0
    %Depreciation and amortization
    
    $
    536
    
    
    $
    488
    
    
    $
    48
    
    
    
    9.8
    %Percent of total net revenues
    
    
    2.2
    %
    
    
    2.2
    %
    
    
    0.0
    %
    
    
    0.0
    %
  19




---



##### 



Income from Operations
  Interest Expense
 Interest expense (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Notes payable from business acquisitions and others
    
    $
    140
    
    
    $
    29
    
    
    $
    111
    
    
    
    382.8
    %Siemens Tranche C2  Interest paid with monthly payments
    
    
    
    
    
    
    118
    
    
    
    (118
    )
    
    
    Siemens Tranches C1 and C3  accrued interest added to
loan balance
    
    
    
    
    
    
    324
    
    
    
    (324
    )
    
    
    Siemens Tranches A, B and C  interest forgiven
    
    
    672
    
    
    
    63
    
    
    
    609
    
    
    
    966.7
    %Siemens Tranche D-paid monthly
    
    
    117
    
    
    
    
    
    
    
    117
    
    
    
    100.0
    %2003 Convertible Subordinated Notes (1)
    
    
    2,561
    
    
    
    640
    
    
    
    1,921
    
    
    
    300.2
    %2005 Subordinated Notes (2)
    
    
    207
    
    
    
    342
    
    
    
    (135
    )
    
    
    (39.5
    )%Warrant liability change in value (3)
    
    
    
    
    
    
    (145
    )
    
    
    145
    
    
    
    Total interest expense
    
    $
    3,697
    
    
    $
    1,371
    
    
    $
    2,326
    
    
    
    169.7
    %
 (1)
    
    Includes $2.6 million in 2007 and $530,000 in 2006 of non-cash prepaid fees, debt discount
amortization and deemed dividend.(2)
    
    Includes $135,100 in 2007 and $223,000 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.
  20




---



##### 



Income Taxes
   Minority Interest
  Net Loss Applicable to Common Stockholders
  For the six months ended June 30, 2007 compared to the six
months ended July 1, 2006
 Revenues
 Revenues (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    % ChangeHearing aids and other products
    
    $
    45,107
    
    
    $
    41,032
    
    
    $
    4,075
    
    
    
    9.9
    %Services
    
    
    3,367
    
    
    
    2,877
    
    
    
    490
    
    
    
    17.0
    %Total net revenues
    
    $
    48,474
    
    
    $
    43,909
    
    
    $
    4,565
    
    
    
    10.4
    %
 2007
    
    
    2006
    
    
    Change
    
    
    % Change (3)Revenues from centers acquired in 2006 (1)
    
    $
    6,224
    
    
    $
    
    
    
    $
    6,224
    
    
    
    14.2
    %Revenues from centers acquired in 2007
    
    
    1,010
    
    
    
    
    
    
    
    1,010
    
    
    
    2.3
    %Total Revenues from acquired centers
    
    $
    7,234
    
    
    $
    
    
    
    $
    7,234
    
    
    
    16.5
    %Revenues from comparable centers (2)
    
    $
    41,240
    
    
    $
    43,909
    
    
    $
    (2,669
    )
    
    
    (6.1
    )%Total net revenues
    
    $
    48,474
    
    
    $
    43,909
    
    
    $
    4,565
    
    
    
    10.4
    %
 (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 six
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 six months of 2006 net revenues.
 21




---



##### 



Cost of Products Sold and Services
 Cost of products sold and services (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Hearing aids and other products
    
    $
    11,789
    
    
    $
    12,189
    
    
    $
    (400
    )
    
    
    (3.3
    )%Services
    
    
    1,032
    
    
    
    787
    
    
    
    245
    
    
    
    31.1
    %Total cost of products sold and services
    
    $
    12,821
    
    
    $
    12,976
    
    
    $
    (155
    )
    
    
    (1.2
    )%Percent of total net revenues
    
    
    26.4
    %
    
    
    29.6
    %
    
    
    (3.2
    )%
    
    
    (10.8
    )%
  22




---



##### 



Siemens rebate credits included above (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Base required payments on Tranches A and C forgiven
    
    $
    2,085
    
    
    $
    1,460
    
    
    $
    625
    
    
    
    42.8
    %Required payments of $65 per Siemens unit from acquired
centers on Tranche B forgiven
    
    
    258
    
    
    
    13
    
    
    
    245
    
    
    
    1884.6
    %Interest expense on Tranches A, B and C forgiven
    
    
    1,313
    
    
    
    110
    
    
    
    1,203
    
    
    
    1093.6
    %Total Siemens rebate credits
    
    $
    3,656
    
    
    $
    1,583
    
    
    $
    2,073
    
    
    
    131.0
    %Percent of total net revenues
    
    
    7.5
    %
    
    
    3.6
    %
    
    
    3.9
    %
    
    
    108.3
    %
  Expenses
 Operating expenses (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Center operating expenses
    
    $
    24,742
    
    
    $
    20,065
    
    
    $
    4,677
    
    
    
    23.3
    %Percent of total net revenues
    
    
    51.0
    %
    
    
    45.7
    %
    
    
    5.3
    %
    
    
    11.6
    %General and administrative expenses
    
    $
    7,425
    
    
    $
    6,588
    
    
    $
    837
    
    
    
    12.7
    %Percent of total net revenues
    
    
    15.3
    %
    
    
    15.0
    %
    
    
    0.3
    %
    
    
    2.0
    %Depreciation and amortization
    
    $
    1,025
    
    
    $
    980
    
    
    $
    45
    
    
    
    4.6
    %Percent of total net revenues
    
    
    2.1
    %
    
    
    2.2
    %
    
    
    (0.1
    )%
    
    
    (4.5
    )%
    Income from Operations
  23




---



##### 



Interest Expense
 Interest expense (dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %Notes payable from business acquisitions and others
    
    $
    278
    
    
    $
    81
    
    
    $
    197
    
    
    
    243.2
    %Siemens Tranche C2  Interest paid with monthly payments
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    Siemens Tranches C1 and C3  accrued interest added to
loan balance
    
    
    
    
    
    
    620
    
    
    
    (620
    )
    
    
    Siemens Tranches A, B and C  interest forgiven
    
    
    1,313
    
    
    
    110
    
    
    
    1,203
    
    
    
    1093.6
    %Siemens Tranche D-paid monthly
    
    
    176
    
    
    
    
    
    
    
    176
    
    
    
    100.0
    %2003 Convertible Subordinated Notes (1)
    
    
    3,163
    
    
    
    1,345
    
    
    
    1,818
    
    
    
    135.2
    %2005 Subordinated Notes (2)
    
    
    447
    
    
    
    752
    
    
    
    (305
    )
    
    
    (40.6
    )%Warrant liability change in value (3)
    
    
    
    
    
    
    (317
    )
    
    
    317
    
    
    
    Total interest expense
    
    $
    5,377
    
    
    $
    2,798
    
    
    $
    2,579
    
    
    
    92.2
    %
 (1)
    
    Includes $2.6 million in 2007 and $911,000 in 2006 of non-cash prepaid fees, debt discount
amortization and deemed dividend.(2)
    
    Includes $292,100 in 2007 and $469,000 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.
  Income Taxes
   24




---



##### 



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




---



##### 



26




---



##### 



Working Capital
   Cash Flows
     27




---



##### 



Payments due by period (000s)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    4  5
    
    
    Than 5Contractual obligations
    
    Total
    
    
    year
    
    
    years
    
    
    Years
    
    
    yearsLong-term debt (1)
    
    $
    42,845
    
    
    $
    11,688
    
    
    $
    11,299
    
    
    $
    7,610
    
    
    $
    12,248Subordinated notes
    
    
    2,420
    
    
    
    1,760
    
    
    
    660
    
    
    
    
    
    
    
    Subtotal of obligations recorded on balance sheet
    
    
    45,265
    
    
    
    13,448
    
    
    
    11,959
    
    
    
    7,610
    
    
    
    12,248Interest to be paid on long-term debt (2)
    
    
    1,616
    
    
    
    638
    
    
    
    571
    
    
    
    311
    
    
    
    96Interest to be paid on subordinated notes
    
    
    116
    
    
    
    113
    
    
    
    3
    
    
    
    
    
    
    
    Operating leases
    
    
    18,571
    
    
    
    5,593
    
    
    
    8,277
    
    
    
    3,145
    
    
    
    1,556Employment agreements
    
    
    4,420
    
    
    
    2,177
    
    
    
    2,154
    
    
    
    89
    
    
    
    Purchase obligations
    
    
    548
    
    
    
    536
    
    
    
    12
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    70,536
    
    
    $
    22,505
    
    
    $
    22,976
    
    
    $
    11,155
    
    
    $
    13,900
 (1)
    
    Approximately $18.6 million can be repaid through preferred pricing reductions from
Siemens, including $3.6 million in less than 1 year and $7.1 million in years 1-3, $7.1
million in years 4-5 and $800,000 in more than 5 years.(2)
    
    Interest on long-term debt excludes the interest on the new Tranches A, B and C that can be
repaid through preferred pricing reductions from Siemens pursuant to the Amended and Restated
Credit Agreement. Interest repaid through preferred pricing reductions was $1.3 million in
the first six months of 2007. (See Note 4a  Long-Term Debt, Notes to Consolidated Financial
Statements included herein).
 CRITICAL ACCOUNTING POLICIES
  Goodwill
  28




---



##### 



Revenue recognition
   Allowance for doubtful accounts
   Sales returns
  Impairment of Long-Lived Assets
  Stock-based compensation
 Share-Based Payment
 29




---



##### 



Income taxes
 Accounting for Income Taxes
  RECENT ACCOUNTING PRONOUNCEMENTS
   "
  30




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Fixed Rate
    
    
    
    Total9.5%
    
    
    
    5% note
    
    
    7%due January
    
    
    
    Due January
    
    
    Due August2013
    
    
    
    2013
    
    
    2008
    
    
    Other$
    
    
    
    
    
    
    
    $
    
    
    $
    
    
    
    $(000s)
    
    
    
    (000s)
    
    
    (000s)
    
    
    (000s)
    
    
    
    (000s)2007
    
    
    
    (3,290
    )
    
    
    
    (4,200
    )
    
    
    (880
    )
    
    
    (2,011
    )
    
    
    
    (10,381
    )2008
    
    
    
    (3,628
    )
    
    
    
    (3,000
    )
    
    
    (1,540
    )
    
    
    (3,033
    )
    
    
    
    (11,201
    )2009
    
    
    
    (3,628
    )
    
    
    
    
    
    
    
    
    
    
    
    (2,091
    )
    
    
    
    (5,719
    )2010
    
    
    
    (3,628
    )
    
    
    
    
    
    
    
    
    
    
    
    (939
    )
    
    
    
    (4,567
    )2011
    
    
    
    (3,628
    )
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    
    (3,754
    )2012
    
    
    
    (9,643
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,643
    )2013Total
    
    
    
    (27,445
    )
    
    
    
    (7,200
    )
    
    
    (2,420
    )
    
    
    (8,200
    )
    
    
    
    (45,265
    )Estimated fair value
    
    
    
    (27,540
    )
    
    
    
    (7,200
    )
    
    
    (2,410
    )
    
    
    (8,230
    )
    
    
    
    (45,380
    )
 Item 4. Controls and Procedures
   31




---



##### 



Part II Other Information
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 4. Submission of Matters to a Vote of Security Holders
   Against/Nominee
    
    For
    
    WithheldPaul A. Brown, M. D.
    
    
    30,184,539
    
    
    
    7,699,969Stephen J. Hansbrough
    
    
    30,283,044
    
    
    
    7,601,464Thomas W. Archibald
    
    
    29,933,608
    
    
    
    7,950,900David J. McLachlan
    
    
    29,929,178
    
    
    
    7,955,330Joseph L. Gitterman III
    
    
    29,925,862
    
    
    
    7,958,646Michel Labadie
    
    
    29,932,108
    
    
    
    7,952,400Bruce N. Bagni
    
    
    29,933,248
    
    
    
    7,951,260
  For
    
    Against
    
    Abstain17,969,542
    
    12,570,023
    
    116,820
 32




---



##### 



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).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
    
    Form of 2003 Convertible Subordinated Notes Conversion Agreement, dated as of April 9,
2007, between HearUSA, Inc. and investors in the Companys December 2003 private
placement pursuant to that Purchase Agreement dated as of December 18, 2003.31.1
    
    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
 33




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SIGNATURES
  August 13, 2007
    HearUSA Inc.
(Registrant)/s/Stephen J. HansbroughStephen J. HansbroughPresident/Chief Executive OfficerHearUSA, Inc./s/Gino ChouinardGino ChouinardEVP/Chief Financial Officer
HearUSA, Inc. 34